APEI American Public Education Inc

2019 DIRECTOR COMPENSATION

Our non-employee director compensation policy was established and is periodically revised following consultation with Willis Towers Watson. In December 2016, Willis Towers Watson presented to the MDC Committee information on non-employee director compensation, providing comparative information on the same peer group that the MDC Committee uses for executive compensation, as well as general industry levels. Following consultation with Willis Towers Watson, the MDC Committee recommended, and the Board approved, increases in director compensation, effective as of January 1, 2017. The Board determined that these increases were appropriate because the annual compensation for the Company’s non-employee directors was previously near the bottom of our peer group and below the median of the general industry survey prepared by Willis Towers Watson. The Board also considered that there had not been any increases to director compensation for three years. After consultation with Willis Towers Watson that confirmed that director compensation was well within the median range for an organization of our size and scope that there had been no changes in the market that would suggest the Committee consider changing director compensation, no changes were made to director compensation for 2019, except to set the compensation for the position of Vice-Chairperson of the Board of Directors.

Pursuant to the non-employee director compensation policy, for 2019, directors received an annual retainer of $60,000. The chairs of the Audit, Compensation, and Nominating and Corporate Governance Committees received additional annual retainers of $15,000, $10,000 and $8,000, respectively. The non-employee Chairperson of the Board received an additional annual retainer of $50,000 and the non-employee Vice-Chairperson of the Board received an additional annual retainer of $15,000. The Chairperson is not entitled to receive any additional annual retainers for also serving as chair of any of the Board’s standing committees.

The annual retainers are payable in quarterly installments, and each director may, before the beginning of the applicable year, elect to receive his or her annual retainer in common stock having the same value as the portion of the annual retainer to be paid, calculated as of the close of business on the first business day of the year. In connection with our annual meeting of stockholders, our non-employee director compensation policy for 2019 also provided for an annual grant to each director of restricted stock having a value of $75,000 on the grant date. The restricted stock grant vests on the earlier of the one-year anniversary of the date of grant or immediately prior to the next year’s annual meeting of stockholders.

We also reimburse all directors for travel and other necessary business expenses incurred in the performance of their services for us and extend coverage to them under the directors’ and officers’ indemnity insurance policies.

Some directors may also be asked to serve as a representative of the Board on the board of one of our wholly owned subsidiaries or in entities in which we have invested. A non-employee director who serves on the board of one of our wholly owned subsidiaries as a representative of the Board receives a payment of $2,500 ($3,000 for a director serving as chair) per in-person meeting, or $750 ($1,000 for a director serving as chair) for telephonic meetings, but with no more than one payment per day.

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The following table sets forth information regarding compensation earned by our non-employee directors during 2019:

(1)  See the Summary Compensation Table in the “Compensation Tables and Disclosures” section of this Proxy Statement for disclosure related to each of Ms. Selden and Dr. Boston, each of whom is one of our named executive officers.

(2)  For MG (Ret) Fast, amount includes $16,000 received as compensation for her service at the request of the APEI Board of Directors as Chairperson of the Board of APEI’s subsidiary National Education Seminars, Inc., which operates as HCN. This $16,000 was paid by National Education Seminars, Inc. Mr. Landon elected to receive 50% and Ms. Halle elected to receive 10% of their respective 2019 annual retainers in fully vested shares of common stock, and received a total of 1,233 and 272 shares, respectively.

(3)  The aggregate grant date fair value of the restricted stock awards in 2019 was $30.38, as computed in accordance with FASB ASC Topic 718. MG (Ret) Fast elected to defer receipt of the vested shares until the earlier of the date of separation from service and June 1, 2022.

As of December 31, 2019, there were no exercisable or unexercisable option awards held by our current non-employee directors. The aggregate number of unvested stock awards outstanding held as of that date by our current non-employee directors were as follows:

Following consultation with Willis Towers Watson, including consideration of market trends, the Board approved increases in director compensation for 2020. Specifically, the Board increased the annual retainer to $70,000 and the value of the annual restricted stock grant to $80,000.

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PROPOSAL NO. 2
AMENDMENT TO AMERICAN PUBLIC EDUCATION, INC. 2017 OMNIBUS INCENTIVE PLAN

We are asking our stockholders to consider and to approve adoption of amendment number one (the “Plan Amendment”) to the American Public Education, Inc. 2017 Omnibus Incentive Plan (the “2017 Plan”) to increase the number of shares authorized for issuance under the 2017 Plan by 1,425,000 shares and to extend the term to May 15, 2030, as well as to clarify limitations on repricing.

On March 30, 2020, upon the recommendation of our Management Development & Compensation (“MDC”) Committee, our Board unanimously approved the Plan Amendment subject to the approval of the Plan Amendment by our stockholders at this Annual Meeting.

The 2017 Plan was originally approved by stockholders and became effective on May 12, 2017 (the “Original Effective Date”). The Board recommends that stockholders approve the Plan Amendment because the 2017 Plan (as amended, the “Amended Plan”) is important to our continued growth and success and is required for us to be able to continue to make equity awards to key persons in a size that the Board believes necessary to accomplish our goals. If stockholders do not approve the Plan Amendment, the shares available for future awards under the 2017 Plan will soon be exhausted, and we will be unable to issue equity awards and would be reliant on cash awards. An inability to grant equity-based awards would have significant negative consequences to us and our stockholders including the following:

The purpose of the Amended Plan is to (i) provide incentives to eligible persons to contribute to the success of the Company and to operate and manage our business in a manner that will provide for the long-term growth and profitability of the Company and that will benefit our stockholders and other important stakeholders, and (ii) provide a means of recruiting, rewarding, and retaining key personnel. To this end, the Amended Plan provides for the grant of options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”) (including deferred stock units), unrestricted stock, dividend equivalent rights, performance shares and other performance-based awards, other equity-based awards, and cash bonus awards.

Notable Features of the Amended Plan

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Summary of the Material Terms of the Amended Plan

A summary of the material terms of the Amended Plan is set forth below. This summary is qualified in its entirety by reference to the 2017 Plan and the Plan Amendment. The 2017 Plan is filed as Exhibit 10.1 to our Current Report on Form 8-K filed on May 15, 2017 and the Plan Amendment is attached as Annex A to this Proxy Statement. Both the 2017 Plan and the Plan Amendment are incorporated by reference into this proposal. We encourage stockholders to read and refer to the 2017 Plan and the Plan Amendment for a more complete description of the Amended Plan.

Effective Date; Term. If the Plan Amendment is approved by our stockholders at the annual meeting, the Amended Plan will become effective as of the date of the Annual Meeting (the “Effective Date”), and unless terminated sooner in accordance with the terms of the Amended Plan or extended with stockholder approval, the Amended Plan will terminate on May 15, 2030.

Administration of the Amended Plan. The Amended Plan generally will be administered by a committee, which we refer to as the “Committee,” consisting of two or more directors of the Company. Each such director will be required to qualify as a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act and, for so long as our common stock is listed on Nasdaq, an “independent director” under the Nasdaq listing rules. The Committee initially will be the MDC Committee and may be a subcommittee of the MDC Committee that satisfies the foregoing requirements.

The Board will also be authorized to appoint one or more committees of the Board consisting of one or more directors of the Company who need not meet the independence requirements above for certain limited purposes permitted by the Amended Plan, and to the extent permitted by applicable law, the Committee will be authorized to delegate authority to the President and Chief Executive Officer of the Company and/or any other officers of the Company for certain limited purposes permitted by the Amended Plan. The Board will retain the authority under the Amended Plan to exercise any or all of the powers and authorities related to the administration and implementation of the Amended Plan. References below to the Committee include a reference to the Board or another committee appointed by the Board for those periods in which the Board or such other committee appointed by the Board is acting.

Except where the authority to act on such matters is specifically reserved to the Board under the Amended Plan or applicable law, the Committee will have full power and authority to interpret and construe all provisions of the Amended Plan, any award, and any award agreement, and take all actions and to make all determinations required or provided for under the Amended Plan, any award, and any award agreement, including the authority to:

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Types of Awards. The Amended Plan provides for the grant of options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”) (including deferred stock units), unrestricted stock, dividend equivalent rights, performance shares and other performance-based awards, other equity-based awards, and cash bonus awards.

Eligibility. All of our employees and the employees of our subsidiaries and affiliates are eligible to receive awards under the Amended Plan. In addition, our non-employee directors and consultants and advisors who perform services for us and our subsidiaries and affiliates may receive awards under the Amended Plan, other than incentive stock options. As of March 19, 2020, there were six non-employee directors and 2,843 employees of the Company and our subsidiaries who would be eligible to participate in the Amended Plan.

Shares Reserved for Issuance. The maximum number of shares of common stock that may be issued under the Amended Plan (the “share limit”) following the Effective Date will be equal to the sum of (i) the 1,425,000 shares of our common stock that are the subject of the Plan Amendment, plus the number of shares that were eligible to be issued under the 2017 Plan as of the Original Effective Date, which included 1,675,000 shares of our common stock (or a total of 3,100,000 shares), plus (ii) the number of shares of our common stock available for future awards under the 2011 Plan as of the Original Effective Date (less the actual number of shares of our common stock issued, if any, in excess of the target number of shares of common stock upon settlement of the outstanding performance-based deferred stock units under the 2011 Plan), which was 246,577 shares of our common stock, plus (iii) the number of shares of our common stock related to awards outstanding under the 2011 Plan and any other Prior Plans (as defined in the 2017 Plan) as of the Original Effective Date that thereafter terminated or terminate by expiration or forfeiture, cancellation, or otherwise without the issuance of such shares of common stock. The maximum number of shares of our common stock available for issuance pursuant to incentive stock options granted under the Plan will be the same as the number of shares of our common stock reserved for issuance under the Amended Plan. The shares of our common stock that be issued under the Amended Plan may be authorized and unissued shares of our common stock, treasury shares, or any combination of the foregoing.

Share Usage. Shares of our common stock that are subject to awards of options or SARs will be counted against the share limit as one share for every one share subject to the award. Any shares of our common stock that are subject to awards other than options or SARs will be counted against the share limit as 1.69 shares for every one share subject to the award. The number of shares subject to any SARs awarded under the Amended Plan will be counted against the share limit regardless of the number of shares actually issued to settle the SARs upon exercise, and at least the target number of shares issuable under a performance-based award will be counted against the share limit as of the grant date but such number will be adjusted to equal the actual number of shares issued upon settlement of the performance-based award to the extent different from such number of shares. If any awards terminate, expire, or are canceled, forfeited, exchanged, or surrendered without having been exercised or paid or if any awards are forfeited or expire or otherwise terminate without the delivery of any shares of our common stock or are settled in cash in lieu of shares of our common stock, the shares subject to such awards will again be available for purposes of the Amended Plan, in the same amount as such shares were counted against the Amended Plan’s share limit or, if applicable, the share limits set forth in the applicable Prior Plan. The share limit, however, will not be increased by the number of shares of our common stock (i) tendered, withheld, or subject to an award surrendered in connection with the exercise of an option, (ii) that were not issued upon the net settlement or net exercise of a stock-settled SAR, (iii) deducted or delivered from payment of an award in connection with the Company’s tax withholding obligations, or (iv) purchased by the Company with proceeds from option exercises.

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Limits on Awards. The maximum number of shares of our common stock subject to options or SARs that may be granted under the Amended Plan to any person (other than a non-employee director) in a calendar year is 275,000 shares. The maximum number of shares subject to awards other than options or SARs that are stock-denominated and are either stock- or cash-settled that may be granted under the Amended Plan to any person (other than a non-employee director) in a calendar year is 275,000 shares. The maximum amount that may be paid as a cash-denominated performance-based award (whether or not cash-settled) for a performance period of 12 months or less in a calendar year to any person is $2 million, and the maximum amount that may be paid as a cash-denominated performance-based award (whether or not cash-settled) in respect of a performance period in excess of twelve months to any person is $3 million.

Non-Employee Director Compensation Limits. The maximum total compensation (including cash payments and the aggregate grant date fair market value of shares of our common stock that may be granted under the Amended Plan) that may be paid to or granted in a calendar year to a non-employee director of the Company is $500,000. The foregoing limitation, however, will not apply to the extent that a non-employee director has been or becomes an employee of the Company during the calendar year.

Adjustments. The number and kinds of shares of common stock for which awards may be made under the Amended Plan, including the share limit and the individual share limits described above, will be adjusted proportionately and accordingly by the Committee if the number of outstanding shares of our common stock is increased or decreased or the shares of our common stock are changed into or exchanged for a different number of shares or kind of capital stock or other securities of the Company on account of any recapitalization, reclassification, stock split, reverse stock split, spin-off, combination of stock, exchange of stock, stock dividend, or other distribution payable in capital stock, or other increase or decrease in shares of common stock effected without receipt of consideration by the Company.

Fair Market Value Determination. For so long as our common stock remains listed on Nasdaq (or listed on any other established securities exchange or traded on any other securities market), the fair market value of a share of our common stock will be the closing price for a share as quoted on such exchange or market for such date. If there is no reported closing price on such date, the fair market value of a share of our common stock will be the closing price of the common stock on the next preceding date for which such quotation exists. If our common stock is not listed on an established securities exchange or traded on an established securities market, the Committee will determine the fair market value by the reasonable application of a reasonable valuation method, in a manner consistent with Section 409A of the Code. On March 19, 2020, the closing price of our common stock as reported on Nasdaq was $24.20 per share.

Options. The Amended Plan authorizes our Committee to grant incentive stock options (as defined in Section 422 of the Code) and options that do not qualify as incentive stock options (“nonqualified options”). To the extent that the aggregate fair market value of shares of our common stock determined on the grant date with respect to which incentive stock options are exercisable for the first time during any calendar year exceeds $100,000, the option will be treated as a nonqualified option. The exercise price of each option will be determined by the Committee, provided that the per share exercise price will be equal to or greater than 100% of the fair market value of a share of our common stock on the grant date. If we were to grant incentive stock options to any 10 percent stockholder, the per share exercise price will not be less than 110% of the fair market value of a share of our common stock on the grant date.

The term of an option cannot exceed ten years from the grant date. If we were to grant incentive stock options to any 10 percent stockholder, the term cannot exceed five years from the grant date. The Committee determines at what time or times each option may be exercised and the period of time, if any, after retirement, death, disability, or termination of employment during which options may be exercised. Options may be made exercisable in installments. The vesting and exercisability of options may be accelerated by the Committee. Awards of options are nontransferable, except (i) for transfers by will or the laws of descent and distribution or (ii) if authorized in the applicable award agreement, for transfers of nonqualified options, not for value, to family members pursuant to the terms and conditions of the Amended Plan.

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If on the day preceding the date on which an option would otherwise terminate, the aggregate fair market value of the shares of our common stock underlying the option is greater than the aggregate exercise price of such option, the Company will, prior to the termination of such option and without any action being taken on the part of the grantee, consider such option to have been exercised by the grantee. In such case, the Company will deduct from the shares of our common stock deliverable to the grantee upon such exercise the number of shares of our common stock necessary to satisfy payment of the aggregate exercise price and all withholding obligations.

Stock Appreciation Rights. The Amended Plan authorizes the Committee to grant SARs that provide the grantee with the right to receive, upon exercise of the SARs, cash, shares of our common stock, or a combination of the foregoing. The amount that the recipient will receive upon exercise of a SAR generally will equal the excess of the fair market value of a share of our common stock on the date of exercise over the SAR’s per share exercise price, which must be equal to or greater than 100% of the fair market value of a share of our common stock on the grant date. SARs will become exercisable in accordance with terms determined by our Committee. Stock appreciation rights may be granted in tandem with an option grant or independently from an option grant. The term of a SAR cannot exceed ten years from the grant date. Awards of SARs are nontransferable, except (i) for transfers by will or the laws of descent and distribution or (ii) if authorized in the applicable award agreement, not for value, to family members pursuant to the terms and conditions of the Amended Plan.

If on the day preceding the date on which a grantee’s SARs would otherwise terminate, the aggregate fair market value of shares of our common stock underlying the SARs is greater than the aggregate exercise price of such SARs, the Company will, prior to the termination of such SARs and without any action being taken on the part of the grantee, consider the SARs to have been exercised by the grantee. In such case, the Company will deduct from the shares of our common stock deliverable to the grantee upon such exercise the number of shares of our common stock necessary to satisfy payment of the aggregate exercise price and all withholding obligations.

Restricted Stock and Restricted Stock Units. The Amended Plan also authorizes the Committee to grant restricted stock and RSUs (including deferred stock units). Subject to the provisions of the Amended Plan, the Committee will determine the terms and conditions of each award of restricted stock and RSUs, including the restricted period for all or a portion of the award, the restrictions applicable to the award, and the purchase price (if any) for the shares of our common stock subject to the award. Restricted stock and RSUs may vest solely by the passage of time and/or pursuant to achievement of performance goals, and the restrictions and/or the restricted period may differ with respect to each award of restricted stock and RSUs. During the period, if any, when shares of restricted stock and RSUs are non-transferable or forfeitable or prior to the satisfaction of any other restrictions prescribed by the Committee, a grantee is prohibited from selling, transferring, assigning, pledging, or otherwise encumbering or disposing of his or her shares of restricted stock or RSUs.

A grantee of restricted stock will have all the rights of a stockholder, including the right to vote the shares and receive dividends or distributions on the shares, except to the extent limited by the Committee or the Amended Plan. Grantees of RSUs will have no voting or dividend rights or other rights associated with share ownership, although the Committee may award dividend equivalent rights on such units. Grantees will not vest in dividends paid on unvested shares of restricted stock or in dividend equivalent rights paid on unvested RSUs if and until the underlying awards vest.

Unrestricted Stock. The Amended Plan authorizes the Committee to grant shares of unrestricted stock. Shares of unrestricted stock are free of any restrictions, and a grantee of shares of unrestricted stock will have all the rights of a stockholder, including the right to vote the shares and receive dividends or distributions on the shares, as of the grant date.

HIGHER EDUCATION THAT MAKES A DIFFERENCE

Dividend Equivalent Rights. The Amended Plan authorizes the Committee to grant dividend equivalent rights, which are rights entitling the grantee to receive credits for dividends or distributions that would be paid if the grantee had held a specified number of shares of our common stock underlying the right. The Committee may grant dividend equivalent rights to a grantee in connection with an award under the Amended Plan, or without regard to any other award, except that no dividend equivalent rights may be granted in connection with, or related to, an option or SAR. Dividend equivalent rights may be settled in cash, shares of our common stock, or a combination of the foregoing, in a single installment or in multiple installments, as determined by the Committee. A dividend equivalent right granted as a component of another award may not vest or become payable until the underlying award vests.

Performance-Based Awards. The Amended Plan authorizes the Committee to grant performance-based awards, ultimately payable in shares of our common stock or cash, in such amounts and upon such terms as determined by the Committee, pursuant to which awards will vest based on the attainment of performance goals established by the Committee. Each grant of a performance-based award will have an initial cash value or an actual or target number of shares of our common stock that is established by the Committee at the grant date. The Committee may set performance goals in its discretion that, depending on the extent to which they are met, will determine the value and/or number of shares of our common stock subject to a performance-based award that will be paid out to a grantee, and the Committee will establish the performance periods for these performance-based awards.

The 2017 Plan was designed to permit the Committee to grant awards that would qualify as performance-based compensation for purposes of Section 162(m) of the Code, though it was not required under the 2017 Plan that awards qualify for this exception. Section 162(m) of the Code limits publicly-held companies, such as the Company, to an annual deduction for U.S. federal income tax purposes of $1 million for compensation paid to each of their covered employees, as determined in accordance with Section 162(m) of the Code. Historically, so-called, “performance-based compensation” was excluded from the $1 million limitation. As described in more detail below under “Deductibility of Executive Compensation”, new grants made under the Amended Plan will be subject to the $1 million deductibility limit of Section 162(m) of the Code.

Other Equity-Based Awards. The Amended Plan authorizes the Committee to grant other types of equity-based awards. Other equity-based awards are payable in cash, shares of our common stock or other equity, or a combination of the foregoing, and may be restricted or unrestricted, as determined by our Committee. The terms and conditions that apply to other equity-based awards are determined by the Committee.

Forms of Payment. The exercise price for any option or the purchase price (if any) for restricted stock or RSUs is generally payable (i) in cash or cash equivalents, (ii) to the extent the award agreement provides, by the surrender of shares of our common stock (or attestation of ownership of shares of our common stock) with an aggregate fair market value, on the date of such surrender, of the exercise price or purchase price, (iii) to the extent permissible by applicable law and to the extent the award agreement provides, by payment through a broker in accordance with procedures set forth by the Company, or (iv) to the extent the award agreement provides and/or unless otherwise specified in an award agreement, any other form permissible by applicable law, including net exercise or net settlement and service rendered to the Company or our affiliates.

Corporate Transaction. If the Company experiences a “corporate transaction” in which awards will not be assumed or continued by the surviving entity: (i) immediately before the corporate transaction, except for performance-based awards, all restricted stock, RSUs (including deferred stock units), and dividend equivalent rights will vest, and all shares of common stock and/or cash subject to such awards will be delivered, and (ii) at the Committee’s discretion, (a) all options and SARs will become exercisable at least 15 days before the corporate transaction and terminate if unexercised upon the consummation of the corporate transaction, and/or (b) all options, SARs, restricted stock, RSUs, and dividend equivalent rights will be terminated and cashed out or redeemed for securities of equivalent value. Performance-based awards will vest (i) if less than half the performance period has lapsed, at target level and (ii) if more than half the performance period has lapsed, based on actual performance if determinable or, if not determinable, at target level, and in each case then will be treated in accordance with the foregoing sentence. Other equity-based awards will be governed by the terms of the applicable award agreement.

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If the Company experiences a “corporate transaction” in which awards will be assumed or continued by the surviving entity: (i) the awards will adjusted as appropriate as to the number of shares and type of capital stock to which the awards relate and, for options and SARs, as to the exercise price, and (ii) if the grantee’s service is terminated without “cause” (as defined in the Amended Plan) within one year following the consummation of such corporate transaction, the grantee’s award will be fully vested and may be exercised in full, to the extent applicable, beginning on the date of such termination and for the one-year period immediately following such termination or for such longer period as the Committee shall determine.

In summary, a “corporate transaction” occurs under the Amended Plan if:

Amendment, Suspension, and Termination. Our Board may amend, suspend, or terminate the Amended Plan at any time; provided that no amendment, suspension, or termination may impair the rights or obligations under outstanding awards, without the consent of the grantee. Our stockholders must approve any amendment to the Amended Plan to the extent determined by the Board or if such approval is required under applicable law (including Nasdaq rules). Our stockholders also must approve any amendment that changes the no re-pricing rules, the option exercise price rules, or the SAR exercise price rules.

No Repricing. Except in connection with certain corporate transactions involving the Company, we may not: (i) amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs; (ii) cancel or assume outstanding options or SARs in exchange for or substitution of options or SARs with an exercise price that is less than the exercise price of the original options or SARs; or (iii) cancel or assume outstanding options or SARs with an exercise price above the then-current fair market value in exchange or substitution for cash, awards, or other securities, in each case, unless such action (a) is subject to and approved by our stockholders or (b) would not be deemed to be a repricing under the rules of Nasdaq or any established stock exchange or securities market on which our common stock is listed or publicly traded.

Summary of U.S. Federal Income Tax Consequences

The U.S. federal income tax consequences of awards under the Amended Plan for grantees and the Company will depend on the type of award granted. The following summary description of U.S. federal income tax consequences is intended only for the general information of our stockholders. A grantee on an award under the Amended Plan should not rely on this description and instead should consult his or her own tax advisor.

Incentive Stock Options. The grant of an incentive stock option will not be a taxable event for the grantee or the Company. A grantee will not recognize taxable income upon exercise of an incentive stock option (except that the alternative minimum tax may apply), and any gain or loss realized upon a disposition of our common stock received pursuant to the exercise of an incentive stock option will be taxed as long-term capital gain or loss if the grantee holds the shares of our common stock for at least two years after the date of grant and for one year after the date of exercise (the “holding period requirement”). We will not be entitled to a business expense deduction with respect to an incentive stock option, except as discussed below.

HIGHER EDUCATION THAT MAKES A DIFFERENCE

For the exercise of an incentive stock option to qualify for the foregoing tax treatment, the grantee generally must be our employee or an employee of one of our direct corporate subsidiaries from the date the incentive stock option is granted through a date within three months before the date of exercise of the option.

If all of the foregoing requirements are met except the holding period requirement mentioned above, the grantee will recognize ordinary income upon the disposition of the shares of our common stock in an amount generally equal to the excess of the fair market value of the common stock at the time the option was exercised over the option’s exercise price (but not in excess of the gain realized on the sale). The balance of the realized gain, if any, will be capital gain. We will be allowed a business expense deduction to the extent the grantee recognizes ordinary income, subject to with the limitations imposed by Section 162(m) of the Code and to our compliance with certain reporting requirements.

Nonqualified Options. The grant of a nonqualified option will not be a taxable event for the grantee or the Company. Upon exercising a nonqualified option, a grantee will recognize ordinary income in an amount equal to the difference between the option’s exercise price and the fair market value of the common stock on the date of exercise. Upon a subsequent sale or exchange of shares acquired pursuant to the exercise of a nonqualified option, the grantee will have taxable capital gain or loss, measured by the difference between the amount realized on the disposition and the tax basis of the shares of our common stock (generally, the amount paid for the shares plus the amount treated as ordinary income at the time the option was exercised). Capital gain or loss will be long-term if the grantee has held the shares for more than one year. Otherwise, the capital gain or loss will be short-term.

If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income, subject to the limitations imposed by Section 162(m) of the Code.

A grantee who has transferred a nonqualified option to a family member by gift will realize taxable income at the time the nonqualified option is exercised by the family member. The grantee will be subject to withholding of income and employment taxes at that time. The family member’s tax basis in the shares of our common stock will be the fair market value of the shares of common stock on the date the nonqualified option is exercised. The transfer of vested nonqualified options will be treated as a completed gift for gift and estate tax purposes. Once the gift is completed, neither the transferred options nor the shares acquired on exercise of the transferred options will be includable in the grantee’s estate for estate tax purposes.

In the event a grantee transfers a nonqualified option to his or her ex-spouse incident to the grantee’s divorce, neither the grantee nor the ex-spouse will recognize any taxable income at the time of the transfer. In general, a transfer is made “incident to divorce” if the transfer occurs within one year after the marriage ends or if it is related to the end of the marriage (for example, if the transfer is made pursuant to a divorce order or settlement agreement). Upon the subsequent exercise of such nonqualified option by the ex-spouse, the ex-spouse will recognize taxable income in an amount equal to the difference between the option’s exercise price and the fair market value of the common stock at the time of exercise. Any distribution to the ex-spouse as a result of the exercise of the option will be subject to employment and income tax withholding at that time.

Stock Appreciation Rights. The grant of a SAR will not be a taxable event for the grantee or the Company. Upon exercising a SAR, a grantee will recognize ordinary income in an amount equal to the difference between the SAR’s exercise price and the fair market value of the common stock on the date of exercise. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income, subject to the limitations imposed by Section 162(m) of the Code.

	Higher Education That makes a difference

Restricted Stock. A grantee who is awarded restricted stock will not recognize any taxable income for U.S. federal income tax purposes in the year of the award, provided that the shares of common stock are subject to restrictions (that is, the shares of restricted stock are nontransferable and subject to a substantial risk of forfeiture). However, the grantee may elect under Section 83(b) of the Code to recognize compensation income in the year of the award in an amount equal to the fair market value of the common stock on the date of the award (less the purchase price, if any), determined without regard to the restrictions. If the grantee does not make such Section 83(b) election, the fair market value of the common stock on the date the restrictions lapse (less the purchase price, if any) will be treated as compensation income to the grantee and will be taxable in the year the restrictions lapse, and dividends paid while the common stock is subject to restrictions will be subject to withholding taxes. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income, subject to the limitations imposed by Section 162(m) of the Code.

Restricted Stock Units. The grant of restricted stock units (including deferred stock units) will not be a taxable event for the grantee or the Company. A grantee who receives restricted stock units will recognize ordinary income in an amount equal to the fair market value of the shares issued, or in the case of a cash-settled award, the amount of the cash payment made, to such grantee at the end of the restriction period or, if later, the payment date. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income, subject to the limitations imposed by Section 162(m) of the Code.

Unrestricted Stock. The grant of unrestricted stock is a taxable event for the grantee. A grantee who receives shares of unrestricted stock will recognize ordinary income on the grant date in an amount equal to the fair market value of the shares issued, reduced by the amount, if any, paid for such shares. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income, subject to the limitations imposed by Section 162(m) of the Code. Upon a subsequent sale or exchange of shares of unrestricted stock, the grantee will have taxable capital gain or loss, measured by the difference between the amount realized on the disposition and the tax basis of the shares of our common stock (generally, the amount paid for the shares plus the amount treated as ordinary income on the grant date). Capital gain or loss will be long-term if the grantee has held the shares for more than one year. Otherwise, the capital gain or loss will be short-term.

Dividend Equivalent Rights. The grant of dividend equivalent rights will not be a taxable event for the grantee or the Company. A grantee who receives dividend equivalent rights will recognize ordinary income on the date of payment in the amount distributed to the grantee pursuant to the award. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income, subject to the limitations imposed by Section 162(m) of the Code.

Cash Awards. The grant of a cash award will not be a taxable event for the grantee or the Company. A grantee who receives a cash payment in respect of a cash award will recognize ordinary income on the date of payment in the amount paid to the grantee pursuant to the award. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income, subject to the limitations imposed by Section 162(m) of the Code.

Section 280G of the Code. To the extent payments which are contingent on a change in control are determined to exceed certain limitations, such payments may be subject to a 20% excise tax, and the Company’s deduction with respect to the associated compensation expense may be disallowed in whole or in part. The Amended Plan includes a Section 280G “best after tax” provision, meaning, if any of the payments under the Amended Plan or otherwise would constitute parachute payments within the meaning of Section 280G of the Code and would be subject to the excise tax imposed under Section 4999 of the Code, the payments will be reduced by the amount required to avoid the excise tax if such a reduction would give the grantee a better after-tax result than if the grantee received the payments in full.

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Deductibility of Executive Compensation. Generally, Section 162(m) of the Code disallows public companies a tax deduction for federal income tax purposes of remuneration in excess of $1 million paid to so-called “covered employees,” which includes the chief executive officer, chief financial officer, and certain other highly-compensated executive officers, and individuals who formerly held these positions.

In approving the amount and form of compensation for our named executive officers, the MDC Committee considers all elements of our cost of providing such compensation, including the potential impact of Section 162(m) of the Code. The MDC Committee has in the past approved, and expects that in the future it will approve, compensation for our named executive officers that is not deductible for federal income tax purposes when it believes that such compensation is in the best interests of the Company and our stockholders.

(1) Assumes awards will be earned at target. Up to 93,214 shares could be issued if earned at the maximum performance level.

New Awards

The awards, if any, that will be made to eligible grantees under the Amended Plan are subject to the discretion of the MDC Committee, and thus we cannot currently determine the benefits or number of shares subject to awards that may be granted in the future to eligible grantees under the Amended Plan. For more information on the awards granted under the 2017 Plan to our named executive officers in 2019, see the section above entitled “2019 Outstanding Equity Awards at Fiscal Year-End.” For more information on the awards granted under the 2017 Plan to our directors in 2019, see the section above entitled “Director Compensation.”

Registration with the SEC

If the Plan Amendment is approved by our stockholders, we intend to file a Registration Statement on Form S-8 relating to the Amended Plan with the SEC pursuant to the Securities Act.

THE BOARD RECOMMENDS A VOTE FOR THE AMENDMENT TO THE 2017 PLAN.

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PROPOSAL NO. 3
AMENDMENT TO AMERICAN PUBLIC EDUCATION, INC.
Employee Stock Purchase Plan

Overview

We are asking our stockholders to approve an amendment (the “ESPP Amendment”) to our Employee Stock Purchase Plan (the “ESPP”) to increase the number of shares of the Company’s common stock available for issuance under the plan by 100,000 shares and extend the term of the ESPP to May 15, 2030.

The Company adopted the ESPP in November 2007 and implemented the plan effective July 1, 2008. Effective June 13, 2014, the plan was amended to increase the aggregate number of shares that may be made available for purchase thereunder to 200,000, extend the term of the ESPP to March 7, 2024, and make other administrative changes (the “Prior Amendment”).

The purpose of the ESPP is to enable eligible employees to purchase shares of our common stock through payroll deductions in order to provide them with the opportunity to increase their interest in our growth and success and encourage employees to remain employed by us. Eligible employees may purchase shares of the Company’s common stock, subject to certain limitations, at a reduced price based on fair market value.

The ESPP is an important component of the benefits package that we offer to our employees. We believe that it plays an important role in aligning the interests of employees and stockholders in the long-term success of the Company. The Board believes it is in the best interest of the Company and our stockholders that the ESPP Amendment be approved so that that the ESPP will continue to have a positive impact on employee recruitment, retention, and motivation and so we may continue to promote employee participation in the ESPP.

Currently, the aggregate number of shares of common stock that may be made available for purchase by participating employees under the ESPP is 200,000. If the ESPP Amendment is approved, the aggregate number of shares of common stock that may be made available for purchase will be immediately increased to 300,000 following the Annual Meeting. The ESPP Amendment would also extend the ESPP’s termination date from March 7, 2024 to May 15, 2030.  

The ESPP Amendment was approved by the Board on March 30, 2020, but will not be effective unless and until it is approved by the Company’s stockholders. Stockholders should refer to Annex B of this proxy statement for the full text of the ESPP Amendment. The following summary of the principal features of the ESPP is qualified in its entirety by reference to the full text of the ESPP, which was included as Exhibit 10.10 to our Registration Statement on Form S-1/A filed with the SEC on October 26, 2007, as amended by the Prior Amendment, which was filed as Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on June 17, 2014, each of which is incorporated herein by reference. We encourage stockholders to read and refer to the ESPP, the Prior Amendment, and the ESPP Amendment for a more complete description.

Summary of the Employee Stock Purchase Plan

Administration

The Board has the power and authority to administer the ESPP. In accordance with the terms of the plan, the Board has delegated this power and authority to the MDC Committee.

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Shares Reserved

The shares of common stock issuable under the ESPP may be authorized but unissued shares, treasury shares, or shares purchased on the open market. In the event there is any increase or decrease in our common stock without receipt of consideration by us (for instance, by a recapitalization or stock split), there will be a proportionate adjustment to the number and kinds of shares that may be purchased under the plan.

There were initially 100,000 shares of common stock available for purchase under the ESPP. On June 13, 2014, the Company’s stockholders approved a 100,000 share increase in the number of shares of common stock available for issuance under the ESPP. As of March 19, 2020, 12,747 shares remained available for purchase under the plan. Assuming the ESPP Amendment is approved by the stockholders at the Annual Meeting, 100,000 additional shares would be added and, based on the shares that remained available as of March 19, 2020, there would be 112,747 shares (approximately 0.7% of the Company’s outstanding shares as of the Record Date) available for purchase under the ESPP immediately following the Annual Meeting.

Eligibility

All of our employees and the employees of our participating subsidiaries may participate in the ESPP except the following, who are ineligible to participate: (i) an employee who has been employed for less than one month as of the beginning of the offering period; (ii) an employee whose customary employment is for less than five months in any calendar year; (iii) an employee whose customary employment is 20 hours or less per week; and (iv) an employee who, after exercising his or her rights to purchase stock under the ESPP, would own stock (including stock that may be acquired under any outstanding options) representing five percent or more of the total combined voting power of all classes of our stock. An employee must be employed on the last day of the offering period in order to acquire stock under the ESPP unless the employee has died or become disabled, been laid off or is on an approved leave of absence. As of March 19, 2020, there were approximately 2,843 employees eligible to participate in the ESPP.

Participation

To participate in the ESPP, an eligible employee may authorize (i) payment of the purchase price for shares purchased under the plan by payroll deductions and, if authorized by the MDC Committee, payment by means of periodic cash payments, and (ii) the purchase of shares of common stock for the employee’s account. Enrollment becomes effective upon the first day of a quarterly offering period and the right to purchase shares is deemed granted to participating employees as of the first trading day of each quarterly offering period.

Offering Periods

The MDC Committee has determined that the offering period will be quarterly.

Purchase Price and Limits

Unless otherwise determined by our MDC Committee, the purchase price for each share may not be less than 85% of the fair market value of our common stock on the first trading day of the offering period or the day on which the shares are purchased, whichever is lower. No employee may purchase common stock in any calendar year under the plan having an aggregate fair market value in excess of $25,000, determined as of the first trading date of the offering period. An employee may not during any offering period increase his or her percentage of payroll deduction or contribution for that offering period, nor may an employee withdraw any contributed funds other than by terminating participation in the ESPP.

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Amendment and Termination of ESPP

The Board may amend the ESPP in any respect; provided, however, that without approval of our stockholders, no amendment shall be made (i) increasing the number of shares that may be made available for purchase under the plan or (ii) changing the eligibility requirements for participating in the plan. No amendment may be made to the ESPP that impairs the vested rights of participating employees. The Board may terminate the plan at any time and for any reason or for no reason, provided that such termination shall not impair any rights of participants that have vested at the time of termination.

The ESPP currently provides that the plan will terminate at the earlier of (i) March 27, 2024 and (ii) when there are no longer any shares of common stock available for purchase under the plan. Assuming the amendment is approved by the stockholders at the Annual Meeting, the ESPP will terminate at the earlier of (i) May 15, 2030 and (ii) when there are no longer any shares of common stock available for purchase under the plan.

Termination of Employment

If a participating employee leaves the employ of the Company for any reason other than certain qualifying leaves of absence, prior to the last day of the purchase period, the employee’s option to purchase will terminate and the amount in the employee’s account is returned to the employee or the employee’s beneficiary or estate.

Reorganizations

Upon a reorganization in which we are not the surviving corporation or a sale of assets or stock, the ESPP and all rights outstanding shall terminate, except to the extent provision is made in writing in connection with such transaction for the continuation or assumption of the plan, or for the substitution of the rights under the plan with rights covering the stock of the successor corporation.

Rule 16b-3

Transactions under the ESPP are intended to comply with all applicable conditions of Rule 16b-3 under the Securities Exchange Act of 1934 or any successor provision.

U.S. Federal Income Tax Consequences

The ESPP, and the rights of participant employees to make purchases thereunder, qualify for treatment under the provisions of Sections 421 and 423 of the Internal Revenue Code. Under these provisions, no income will be taxable to a participant until the shares purchased under the ESPP are sold or otherwise disposed of.

Upon sale or other disposition of the shares, the participant will generally be subject to tax and the amount of the tax will depend upon the holding period. If the shares are sold or otherwise disposed of more than two years from the first day of the relevant offering period (and more than one year from the date the shares are purchased), then the participant generally will recognize ordinary income measured as the lesser of:

(i)        the excess of the fair market value of the shares at the time of such sale or disposition over the purchase price, or

(ii)       an amount equal to 15% of the fair market value of the shares as of the first day of the applicable offering period.

Any additional gain would be treated as long-term capital gain.

If the shares are sold or otherwise disposed of before the expiration of this holding period, the participant will recognize ordinary income generally measured as the excess of the fair market value of the shares on the date the shares are purchased over the purchase price. Any additional gain or loss on such sale or disposition will be long-term or short-term capital gain or loss, depending on the holding period.

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The Company is not entitled to a deduction for amounts taxed as ordinary income or capital gain to a participant except to the extent ordinary income is recognized by participants upon a sale or disposition of shares prior to the expiration of the holding period(s) described above. In all other cases, no deduction is allowed to the Company.

The foregoing tax discussion is a general description of certain expected federal income tax results under current law. No attempt has been made to address any state, local, foreign or estate and gift tax consequences that may arise in connection with participation in the ESPP.

New Awards

The amounts that may be received under the ESPP in the future are not determinable because participation in the ESPP is voluntary and the number of shares that may be purchased depends in part on the market value of our common stock.

Registration with the SEC

If the amendment to the ESPP is approved by our stockholders, we intend to file a Registration Statement on Form S-8 relating to the Amended Plan with the SEC pursuant to the Securities Act.

THE BOARD RECOMMENDS A VOTE FOR THE AMENDMENT TO THE ESPP.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis 

EXECUTIVE SUMMARY  

This Compensation Discussion and Analysis describes our executive compensation program and decisions for 2019. This section details the compensation framework applied by the Management Development & Compensation Committee (the “MDC Committee”) and, in particular, our compensation philosophy and objectives, elements of compensation, compensation decisions, and the link between executive compensation and performance. Our named executive officers (“NEOs”) for 2019 are:

Consistent with the design of our executive compensation program, the compensation realized by most of our NEOs was significantly lower in 2019 than in 2018 as a result of challenges at Hondros College of Nursing that affected our consolidated financial results. While Hondros College of Nursing’s financial performance was well below our expectations, the performance at APUS, which is reflected in our APEI segment, exceeded our targeted expectations, and that positively impacted the realized compensation for our NEOs. For example, the compensation under our annual incentive plan for Dr. Boston (who served as our Chief Executive Officer for most of the year and was President of APUS for the entire year) was approximately 28% of his target opportunity. The performance-based deferred stock units (“PSUs”) we granted in 2019, which used adjusted EBITDA and revenue as performance measures, paid out solely for the revenue portion at 19.25% of the target opportunity.

Building on a Strong Foundation

APEI provides online and on-campus postsecondary education through two subsidiary institutions. APUS provides online postsecondary education to approximately 81,000 adult learners (as of December 31, 2019) and has a history of serving the academic needs of the military, military-affiliated and public service communities. National Education Seminars, Inc., which we refer to as Hondros College of Nursing (“HCN”), provides nursing education to approximately 1,600 students (as of December 31, 2019) across five campuses in Ohio.

While we faced a challenging environment at HCN in 2019, APUS exceeded our targeted expectations and experienced its lowest year-over-year rate of decline in net course registrations since 2013. We believe that this improvement at APUS reflects the leadership of our named executive officers and provides a foundation for future success.

As we endeavor to execute on our mission of helping students maximize their return on educational investment, APEI is committed to remaining successful during a period of growing competition and challenges in for-profit education. We continue to focus on driving improvements in our core services — focusing on academic quality, student outcomes, and the learning experience — not only to potentially reach more students and improve our business results, but also to enroll students with greater college readiness on average and help them achieve success. Strong and motivated leadership is and will be critical to achieving our goals.

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2019 Compensation Mix

The charts below show the breakdown of the components of Dr. Boston’s initial target compensation for 2019, as he was the Chief Executive Officer serving at the beginning of 2019, as well the target compensation for our other NEOs serving at the beginning of the year. As discussed in the overview section below, the breakdown of target compensation opportunity reflects our focus on variable compensation tied to performance, with our former CEO’s fixed base salary representing only 22% of total compensation opportunity when set at the beginning of 2019, with annual and long-term incentives tied to financial, individual, and equity performance representing the remainder. While this Compensation Discussion and Analysis does not cover 2020 compensation matters, Ms. Selden’s 2020 target compensation opportunities reflect a similar approach, with her total 2020 target compensation being comprised of the same elements and percentages as our former CEO’s 2019 total target compensation.

COMPENSATION PROGRAM OVERVIEW  

Compensation Program Philosophy and Objectives

Our compensation programs for our NEOs are designed to attract, incentivize, retain, and reward the talent that we need to maintain and strengthen our position in higher education and to achieve our business objectives, as well as to hold our executives accountable for our actual business performance.

Elements of our Compensation Program Philosophy
Variable Cash Compensation		We believe in using variable cash compensation to motivate and reward performance for our NEOs.
Focus on Corporate Goals		We strive to provide compensation that is directly related to the achievement of our corporate goals, which we measure through financial earnings, individual management objectives, and adjusted EBITDA and revenue goals.
Carefully Monitor External Market Practices		We monitor market practices so that our programs reflect the realities of the competitive market to ensure we are paying for performance. At the same time, we must also ensure we can attract the top talent necessary to drive results through our diversified business strategy.

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 Executive Compensation Best Practices

Highlighted below are certain executive compensation practices that we employ in order to align executive compensation with stockholder interests. Also listed below are certain compensation practices that we do not employ because we do not believe they would serve our stockholders’ long-term interests

 

What We Do		How We Do It
We Pay for Performance		We tie a significant portion of our executives’ annual compensation opportunity to objective performance metrics and continue to monitor our compensation mix to ensure the performance-based portion is consistent with that of our peers.
We Target Pay Competitively		We seek to target compensation within a competitive range of the market median and only deliver greater compensation when warranted by actual superior performance. Conversely, we deliver lower compensation when performance results do not meet our threshold expectations. We review our compensation and performance alignment compared to our peers annually to understand where our programs are working and where we can continue to make improvements.
We Enforce Executive Stock Ownership Guidelines		Each of our executives is expected to own shares of the Company’s common stock with a value ranging from one to six times the executive’s base salary, depending on position.
We Utilize Meaningful Vesting Conditions for Equity Awards		Equity awards, including performance-based awards, have three-year ratable vesting periods from the date of grant.
We Impose a “Clawback Policy”		We can recover any performance-based cash or equity award where, as a result of an accounting restatement, the performance goals were later determined not to have been achieved. In addition, we can recover equity awards made to an employee in cases where the Company has to prepare an accounting restatement due to the material noncompliance by the Company with financial reporting requirements and the restatement is the result of misconduct that resulted from the employee knowingly having engaged in that misconduct, the employee’s gross negligence, or the employee knowingly or through gross negligence having failed to prevent misconduct.
We Utilize an Independent Compensation Consulting Firm		The MDC Committee utilizes Willis Towers Watson, an independent compensation consulting firm, to assist the Committee in determining compensation.
We Don’t Permit Hedging		We prohibit our directors and employees, including our NEOs, from engaging in short sales, transactions in derivative securities (including put and call options), or other forms of hedging and monetization transactions, such as zero-cost collars, equity swaps, exchange funds, and forward sale contracts, that allow the holder to limit or eliminate the risk of a decrease in the value of our securities.
We Don’t Permit Pledging		We prohibit our directors and officers, including our NEOs, from holding our securities in margin accounts, pledging our securities as collateral or maintaining an automatic rebalance feature in savings plans, deferred compensation, or deferred fee plans, to avoid sales of our securities on behalf of an individual related to margin calls, loan defaults, and automatic rebalances, which may occur when the individual has material nonpublic information about us.
We Don’t Offer Single-Trigger “Change of Control” Payments		For those NEOs who have employment agreements, the agreements provide that in the case of a “change of control” the NEO only receives severance payments in connection with a termination of their employment.
We Don’t Provide Tax Gross-Ups		We do not provide our NEOs with tax gross-up payments for a change of control in employment agreements, or for other benefits.

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Assessing Competitive Practice

For 2019, the MDC Committee continued its prior engagement of Willis Towers Watson as an independent consultant to the Committee, including to assist the Committee with a competitive assessment of base salary, annual incentives, long-term equity incentive and total compensation. For the Committee’s assessment of its compensation program, Willis Towers Watson provides comparative data that includes survey data for each of the NEOs and data from a group of publicly traded companies against which we compare compensation, which we refer to as our peer group. For those executives for whom both survey data and peer group data are available, the MDC Committee uses the survey data for its primary comparisons because we believe, consistent with the advice of Willis Towers Watson, that the survey data is more robust and provides a better comparison for the Company than the peer group data. This is in part because peer group data is more limited and typically cannot be size-adjusted to account for revenue responsibilities.

Consistent with the advice of Willis Towers Watson, when reviewing compensation for executive positions, the MDC Committee generally considers compensation to be competitive if it falls within the following ranges relative to the 50^th percentile of the comparative survey data:

Survey Data and Peer Group

For 2019 compensation decisions, Willis Towers Watson provided data from the following published surveys as a primary source: the 2018 Willis Towers Watson General Industry Executive Compensation Survey Report and the 2017-2018 College and University Professionals Association for Human Resources Administrators in Higher Education Salary Survey. Because of the variance in size among the companies included in the databases for the published surveys, Willis Towers Watson informed the MDC Committee that, to the extent possible, it had assessed the published survey data in the context of APEI’s projected fiscal year 2019 revenue, as revenue responsibility is typically one of the most reliable predictors of executive pay.

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While the MDC Committee uses survey data as the primary source of comparative information, we believe our peer group is still important as a secondary review of the competitive market for executive talent. The companies in our historical peer group were originally selected because the Committee considered them to be similar to and competitive with us in the market for executive talent, and because they are in comparable or related businesses (e.g., focus on secondary education and online access). However, as a result of industry consolidation and other changes, the MDC Committee observed that only five companies remained in the peer group at the end of 2018. As a result, prior to making compensation decisions for 2019, the MDC Committee worked with Willis Towers Watson to reassess its peer group.

In consultation with the MDC Committee, Willis Towers Watson identified potential peer group companies by screening for public companies within the following industries: education services; consumer services; commercial and professional services; and software and services. Willis Towers Watson then applied the following screens to the companies that were selected:

Willis Towers Watson and the MDC Committee then refined the results of the screen to identify potential peers and validate existing peers by evaluating the number of criteria that were met in the screen and the industry focus. As a result of this process, Perdoceo Education Corporation (formerly known as Career Education Corporation), Carriage Services, Inc., GP Strategies Corporation, and K12 Inc. were added to the peer group. At the same time, National American University Holdings, Inc. was removed from the peer group due to its significant business declines. Capella Education Company was also removed from the peer group following its merger in August 2018 with Strayer Education, Inc., which resulted in it being part of the newly combined Strategic Education, Inc. The 2019 peer group consisted of the following companies:

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The review of our peer group for setting initial 2019 compensation only included comparative information for Dr. Boston and Mr. Sunderland because our peer group information did not identify executives for our other NEOs. The MDC Committee took similar information into account when assessing the competition package for Ms. Selden in connection with her appointment.

 ELEMENTS OF COMPENSATION

 

The compensation program for our NEOs is comprised of three elements: base salary; annual incentive cash compensation; and long-term equity incentives.

 

Pay Element	How It Links To Performance
BASE SALARY
●     Regular, fixed element of compensation.   ●     Reviewed annually.   ●     Reflects each NEO’s individual role and responsibility.	●      Informed by the 50th percentile of the survey data received from the MDC Committee’s independent consultant.   ●      Intended to be part of a total compensation package that is competitive.
ANNUAL INCENTIVE CASH COMPENSATION
●     Provides cash incentives for achieving and surpassing corporate goals.   ●     Offers the opportunity for NEOs to earn:   o     annual payments for achievement of earnings targets; and   o      annual payments for satisfaction of MBOs.   ●     Generally structured so that target total cash (base salary plus annual incentives) is competitive with the 50th percentile of the survey data when target performance goals under the annual incentive plan are achieved.	●      Provides compensation for annual performance.   ●      Helps to focus executives on corporate financial, strategic and operational goals, which are expected to lead to increased stockholder value.   ●      This focus is enhanced through an additional  incentive that pays an additional amount to NEOs for superior performance, which is referred to as the stretch portion of the annual incentive plan.
LONG-TERM EQUITY INCENTIVES
●     Annual grants of equity awards comprised of time-based restricted stock units (“RSUs”) and PSUs.   ●      All awards vest over three years.   ●     PSUs tied to 2019 achievement of adjusted EBITDA and revenue.   ●     Generally selected so that total target compensation is competitive with the 50th percentile of the survey data received from the MDC Committee’s independent consultant.   ●     Provides compensation that is tied to longer-term performance.	●      Intended to align the interests of the NEOs with those of our stockholders.   ●      Time-based vesting aids in the retention of NEOs.   ●      Adjusted EBIDTA and revenue performance measures align with metrics that are relevant to the achievement of our long-term strategic goals.   ●      The MDC Committee retains the right to adjust equity awards downward.

 

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 2019 COMPENSATION DECISIONS  

 

In setting base salary, annual incentive cash compensation and long-term equity incentives for 2019, the MDC Committee considered the compensation levels for our NEOs in 2018, the respective performances of each of our NEOs in 2018, and what the Committee believed was required based on the marketplace for executive talent, including based on the information provided by Willis Towers Watson.

 

Base Salary

 

Base salary is an integral part of compensation for our NEOs and is generally set in January of each year, absent other factors, such as promotions or new hires. For 2019, the MDC Committee increased Dr. Boston’s base salary by 2%, resulting in a salary that remained within the competitive range of both the 50th percentile of the survey data and the 50th percentile of our peer group proxy data. The Committee concluded that an increase was appropriate, including after taking into account Dr. Boston’s relatively long tenure at the Company, survey and peer group data, and that Dr. Boston was holding the role of both President and CEO of APEI and President of APUS. The 2.0% increase also reflected the percentage increase generally used at the Company in 2019 for senior leaders who were performing well but did not have a significant change in job responsibilities or other factors that would lead to a more sizable increase. When Dr. Boston ceased to serve as President and CEO of the Company in September 2019 but continued to hold the position of President of APUS, his base salary was decreased from $692,070 to $500,000, which amount was negotiated with Dr. Boston in connection with the leadership transition and was intended to reflect a lower level of responsibility.

 

Each of the other continuing NEOs also received a 2% salary increase. In approving these increases, the Committee considered the contribution and role of each NEO, the other factors described above and the recommendation of our then Chief Executive Officer. In particular, the Committee considered that while Mr. Sunderland’s compensation placed him slightly above the 75th percentile of the survey data and above the 75th percentile of our peer group data, he is a long-serving and highly valued member of our executive team, and his contributions to the Company were expected to be particularly important during 2019 as the Company envisioned a potential leadership change. Mr. Dyberg’s base salary was approximately 5% above the top of the competitive band for the 50th percentile of the survey data, which was generally reflective of the level of base salary that the Company agreed to when he joined the Company in 2018. The base salaries for the other continuing NEOs were consistent with the 50th percentile of the survey data.

 

Ms. Selden was appointed to her position in September 2019, and her base salary was set at that time taking into account the negotiated amount necessary to attract Ms. Selden to the Company, as well as the comparative data presented by Willis Towers Watson, which indicated that her base salary was competitive with the 50th percentile of the survey data.

 

Annual Incentive Cash Compensation

 

We believe annual incentive compensation furthers our compensation philosophy and objectives by focusing our NEOs on corporate strategic, financial, and operational goals. The opportunity for annual incentive compensation for our NEOs is expressed as a percentage of base salary as follows:

 

Position	Target Annual Incentive (as % of Base Salary)
Current and Former President & CEO		90	%
All Other NEOs		50	%

 

These percentages for Ms. Selden, Dr. Boston, Mr. Sunderland, and Mr. Dyberg reflect the minimum percentages set forth in their employment agreements. After considering the survey data and the individual performance of the executives, the MDC Committee believed, in its subjective, but informed, judgment, that the percentages for all continuing NEOs should remain the same for 2019. Ms. Selden’s and Dr. Boston’s annual incentive targets were set at a higher percentage than those of the other NEOs, which is consistent with overall market practice, reflecting that Ms. Selden is our President and CEO and Dr. Boston was in that role when his 2019 compensation opportunity was established.

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Overall, the MDC Committee believes that the proportion of target annual incentive compensation to target total cash compensation (base salary plus target annual incentive pay) for our NEOs should be a relatively high percentage. It is also the Committee’s general intent, as discussed above, that target annual incentives should be structured so that target total cash compensation approximates the 50th percentile of the survey data for achievement of target performance goals under the annual incentive plan. We believe that positioning to be competitive with the 50th percentile is appropriate for target total cash compensation because of the high level of performance that we believe is required from our executives in order for the Company to achieve our performance targets. We believe the high percentage of compensation tied to incentive compensation increases the focus of our NEOs on achieving our performance goals.

 

We further enhance this focus through a stretch incentive that pays an additional amount to our NEOs for superior performance, which we refer to as the stretch portion of the annual incentive plan. This additional amount, if achieved, provides an opportunity to Ms. Selden and Dr. Boston of an additional 45% of each of their respective base salaries (for 135% of base salary in total maximum incentive potential), an opportunity to Mr. Sunderland and Mr. Dyberg of an additional 30% of each of their respective base salaries (for 80% of base salary in total maximum incentive potential), and an opportunity to Mr. Gay and Dr. Smith of an additional 20% of each of their respective base salaries (for 70% of base salary in total maximum incentive potential).

 

Ms. Selden’s employment agreement, described below under “Employment Agreements – Ms. Selden’s Employment Agreement”, provides that her incentive for 2019 would be pro-rated for the portion of the year that she was employed, provided that she would receive no less than $200,000 and no more than $300,000. The MDC Committee agreed to provide a guaranteed minimum bonus for Ms. Selden in light of foregone opportunities under an existing incentive program at her prior employer, as well as part of the overall incentive package to attract her to the Company.

 

The MDC Committee intended that performance under the NEOs’ annual incentive awards at both the target and stretch incentive levels would be based on achieving and surpassing a financial performance goal and achievement of MBOs. We believe that a split among goals is important to reflect our belief that our NEOs should be focused on both an earnings goal and also on specific goals that are relevant to their specific positions and responsibilities and that are largely derived from important strategic and operating plan goals. We believe this split encourages a focus on multiple metrics of performance rather than focusing on one particular metric of performance to the exclusion of others that are also important to our results. For 2019, the Committee determined that the portion of the annual incentive plan focused on financial performance should reflect both the financial performance of the Company, as well as the financial performance of the operating business unit that employs each executive. So, for executives employed at the Company level, the entire financial portion was based on the financial performance of the Company on a consolidated basis, and for executives employed at APUS, including Mr. Gay and Dr. Smith, the financial goal was split so that 25% was based on the Company’s consolidated financial performance and 75% was based on the financial performance of APUS. In designing the program in this manner, the Committee thought it reflected the importance of having executives focus on the business unit in which they were employed, but also to have them keep in mind the larger context of APEI overall.

 

The following charts show the breakdown between the financial goals and the MBO goals for each of our continuing NEOs, including how they relate to the target and stretch portions of each NEOs potential awards. The charts also show the amount of payout for 2019 of each portion of the annual incentive plan. The discussion that follows the charts focuses on the financial goal and the MBO goals. No chart is provided for Ms. Selden, because the MDC Committee did not allocate any portion of her 2019 opportunity to financial goals given that she joined the Company so late in the year.

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	Portion of Annual Incentive Plan	Weighting of Performance Goals	Opportunity	Actual Payout
Dr. Boston	Target award equivalent to 90% of base salary	70% based on financial performance goal	$447,614	$67,142
		20% based on annual MBO goals	$127,980	$95,917
	Stretch award equivalent to 45% of salary	35% based on financial performance goal	$223,807	–
		10% based on annual MBO goals	$63,945	–
			Total Opportunity: $863,255	Total: $163,059

	Portion of Annual Incentive Plan	Weighting of Performance Goals	Opportunity	Actual Payout
Mr. Sunderland	Target award equivalent to 50% of base salary	40% based on financial performance goal	$167,712	$25,157
		10% based on annual MBO goals	$41,928	$38,784
	Stretch award equivalent to 30% of salary	20% based on financial performance goal	$83,856	–
		10% based on annual MBO goals	$41,928	–
			Total Opportunity: $335,425	Total: $63,940

 

	Portion of Annual Incentive Plan	Weighting of Performance Goals	Opportunity	Actual Payout
Mr. Dyberg	Target award equivalent to 50% of base salary	40% based on financial performance goal	$142,800	$35,700
		10% based on	$35,700	$35,700

 

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		annual MBO goals
	Stretch award equivalent to 30% of salary	20% based on financial performance goal	$71,400	–
		10% based on annual MBO goals	$35,700	–
			Total Opportunity: $285,600	Total: $71,400

 

	Portion of Annual Incentive Plan	Weighting of Performance Goals	Opportunity	Actual Payout
Mr. Gay	Target award equivalent to 50% of base salary	30% based on APUS financial performance goal	$87,394	$87,394
		10% based on APEI financial performance goal	$29,131	–
		10% based on annual MBO goals	$29,131	29,131
	Stretch award equivalent to 20% of salary	15% based on APEI financial performance goal	$43,697	$8,193
		5% based on annual MBO goals	$14,566	–
			Total Opportunity: $203,918	Total: $124,718

  

	Portion of Annual Incentive Plan	Weighting of Performance Goals	Opportunity	Actual Payout
Dr. Smith	Target award equivalent to 50% of base salary	30% based on APUS financial performance goal	$90,270	$90,270
		10% based on APEI financial performance goal	$30,090	–

 

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		10% based on annual MBO goals	$30,090	$30,090
	Stretch award equivalent to 20% of salary	15% based on APEI financial performance goal	$45,135	$8,463
		5% based on annual MBO goals	$15,045	–
			Total Opportunity: $210,630	Total: $128,823

 

Financial Performance Goal. For 2019, the MDC Committee continued its practice of providing that the portion of each NEOs annual incentive plan award that relates to financial performance would be based on achieving and surpassing a specified amount of earnings per share (either at the consolidated Company level or at the APUS level) after taking into account any payment under the annual incentive plan.

 

Consolidated Company Financial Performance Metric	Performance Goals
	Threshold			Target			Stretch (Maximum)
Earnings per Diluted Share	$	1.59		$	1.77		$	1.95

 

APUS Financial Performance Metric	Performance Goals
	Threshold			Target			Stretch (Maximum)
Earnings per Diluted Share	$	1.45		$	1.61		$	1.77

 

The MDC Committee specified target earnings for consolidated financial performance and APUS financial performance based on the earnings per share in the Company’s budget when approved by the Board of Directors. For 2019, the Committee also specified that 50% of the target amount would be paid if earnings per share thresholds were attained that reflected 90% achievement of the target levels, which the Committee thought was a level of achievement that would still require effort for the Company to achieve. The Committee determined that it was appropriate to provide an incentive at a threshold level because it would provide an annual incentive that reflected the positive performance of the Company and the contributions of the Company’s employees and NEOs. The Committee provided that the stretch portion of the annual incentive plan related to financial performance would be payable on earnings per share that reflected 110% achievement of the target levels. This level of achievement was viewed as representing exceptional performance for which management should be rewarded. In setting the 90% and 110% levels, the Committee also considered analysis from Willis Towers Watson that reflected that achievement at these levels was neither certain at the threshold level or likely to be achieved at the stretch level.

 

For 2019, we reported earnings per share, on a GAAP basis, of $0.62 per share, which was primarily a result of challenges at Hondros College of Nursing that affected our consolidated financial results. Earnings per share attributable to our performance at APUS was $1.66 per share. As a result of the APUS earnings, Mr. Gay and Dr. Smith earned 100% of the target portion of the annual incentive plan associated with APUS’s financial performance and 43.75% of the stretch portion of the plan associated with APUS’s financial performance.

 

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As a result of the consolidated results, Dr. Boston, Mr. Sunderland and Mr. Dyberg were not entitled to a payment for the financial portion of the annual incentive plan. However, the MDC Committee took into account the strong financial performance at APUS and the important contributions to those results from our executive leaders and our other employees that are employed directly by the Company, and the Committee determined that an adjustment was appropriate. The Committee approved payments to Dr. Boston and Mr. Sunderland that were equivalent to 15% of their target opportunities and to Mr. Dyberg that was equivalent to 25% of his target opportunity.

 

MBO Goals. MBOs are based on company-wide performance goals consistent with our strategic plan for which executives are directly responsible, or to whose success they contribute, and provide personal accountability in addition to rewards for Company performance. However, many MBO targets are shared between executives to reflect that executives must work together to achieve results. By focusing on goals consistent with our strategic plan, the MBOs are intended to focus the executives on goals that will deliver long-term stockholder value. We believe that the MBOs help to keep management from focusing solely on the current year’s financial results, which are covered by other parts of the annual incentive plan, because many of the MBOs represent our view of key actions required to capture future market opportunities and help prepare the Company for continued growth and improvement in the future.

 

In establishing our MBOs for 2019, we set goals that were consistent with our strategic, financial, and operational plans, and were set with the opportunity to pay out minimum, target, and stretch amounts. Achievement at the minimum level represents strong performance and would result in payout of 50% of the target amount, achievement at the target level represents superior performance and would result in payout of the target amount, and achievement at the stretch level represents a level of excellent performance and would result in payout of the target and stretch amounts. When setting the stretch MBO goals, the MDC Committee did not believe that it was likely that an executive would achieve all of his or her MBOs at the stretch level.

 

For 2019, the MDC Committee designed the plan so that no payments would be made to NEOs for MBO performance unless the Company’s consolidated earnings per share was at least $1.00, and that no payments would be made to NEOs for MBO performance above stretch unless the applicable NEO’s business unit achieved at least target for the financial portion of the annual incentive plan. Consistent with the approach for making payments to executives at APEI for the financial portion of the annual incentive plan, the Committee determined to waive the $1.00 minimum requirement, but provided that no NEO would receive a payment above the target level of payments associated with MBO performance.

 

The MDC Committee reached its conclusions for the MBOs for the NEOs other than Ms. Selden and Dr. Boston after discussions with Ms. Selden and Dr. Boston and a review of the Company’s performance. The Committee reached its conclusions with respect to Ms. Selden’s and Dr. Boston in a session without any executives present. The payouts approved by the Committee for the MBOs of the NEOs are set forth in the tables above.

 

Ms. Selden’s MBO Goals. For 2019, the MDC Committee and Ms. Selden established a series of MBOs that were consistent with her role as President and Chief Executive and took into account that she joined the Company with approximately a quarter of the year left. The MBOs were focused on a successful onboarding process, input into the Company’s IT transformation program, establishment of certain operating plans and financial models, succession and talent development, and engagement with the financial markets. The Committee did not expressly measure the MBOs or assign weights to them, and concluded after reviewing the MBOs that Ms. Selden would be entitled to receive an annual incentive payment of $200,000 for her 2019 performance.

 

Dr. Boston’s MBO Goals. The 2019 MBOs for Dr. Boston, consistent with his role as President and CEO of APEI for most of the year and President of APUS for the entire year, are set forth below. The 2019 MBOs for Dr. Boston were not specifically weighted because the Committee wanted greater flexibility in making adjustments, if appropriate, to reflect overall performance.

 

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●

Manage to Budget: Achieve a well-rounded financial performance, including achieving revenue, adjusted EBITDA margin and adjusted EBITDA consistent with the 2019 budget for the entire Company and for each segment of the Company. In evaluating this MBO, the Committee particularly considered the strong returns at APUS, which were offset by the overall financial results for the entire Company and HCN.

 

●

Position APUS for Growth: Deliver on key operating metrics related to enrollment, retention, new start and programmatic accreditation, while advancing the APUS strategic plan and improving academic excellence, including through a focus on graduate programs. In evaluating this MBO, the Committee particularly considered the achievement of strong metrics at APUS and progress on accreditation matters.

 

●

Position Hondros for Growth: Launch an MLT program in additional locations, meet various regulatory and accrediting metrics, and achieve approval for a new campus. In evaluating this MBO, the Committee considered that there were challenges with the MLT program and achieving all metrics, and that approval of a new campus was obtained, albeit with a limited enrollment in the first year.

 

●

Position APEI for the Future: Achieve certain milestones relating to business transactions and related matters. In evaluating this MBO, the Committee considered that while the management team had made significant progress on moving various business transactions and related efforts forward, there were fewer achievements than desired.

 

●

Successfully Implement Shared Services: Provide quality services under the shared services arrangements and accomplish a smooth onboarding of new leadership. In evaluating this MBO, the Committee considered the successful roll out of the shared services model.

 

●

Meet IT Operational and Transformational Goals: Achieve goals approved by the APUS Board of Trustees and APEI Board of Directors for IT operations and transformation, including with respect to cyber security. In evaluating this MBO, the Committee considered the progress made on the IT transformation initiatives.

 

The MDC Committee did not expressly weight the MBOs for Dr. Boston. After reviewing each of the MBOs and considering the overall performance on the matters covered by the MBOs, the Committee concluded that Dr. Boston earned his MBOs at 75% of his target opportunity.

 

Mr. Sunderland’s MBO Goals. The 2019 MBOs for Mr. Sunderland, consistent with his role as our Chief Financial Officer, are set forth below.

 

●

Manage to Budget for the APEI Segment (25% weighting): Achieve a well-rounded financial performance in the APEI segment, including achieving revenue, adjusted EBITDA margin and adjusted EBITDA consistent with the 2019 budget. The Committee concluded that Mr. Sunderland achieved this objective at the minimum level, reflecting the achievement of APUS revenue targets.

   

●

Manage to Budget at HCN (5% weighting): Achieve a well-rounded financial performance ion the HCN segment reflecting revenue, adjusted EBITDA margin and adjusted EBITDA consistent with the 2019 budget. The Committee concluded that Mr. Sunderland did not achieve this objective, reflecting HCN financial performance falling short of each of the performance targets.

 

●

Position APEI for the Future (30% weighting): Fully implement the APEI shared services model, achieve certain milestones relating to business transactions, and enter into a collaboration or partnership arrangement with another company. The Committee concluded that Mr. Sunderland achieved this objective at the target level, reflecting the full implementation of the shares services model and the significant progress made on potential business transactions.

 

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Business Transformation (30% weighting): Select a learning management system with a Board approved implementation plan and budget, select a student information system platform with a Board approved implementation plan and budget, and help ensure adequate resources and focus on IT transformation. The Committee concluded that Mr. Sunderland achieved this objective at the target level, particularly reflecting the progress made with respect to the selection of the learning management system and the Company’s IT transformation.

 

●

Company Values (10% weighting): Maintain the Code of Ethics and highest ethical standards and foster a culture and practice of innovation, quality, and respect. The Committee concluded that Mr. Sunderland achieved this objective at the stretch level, reflecting his leadership and demonstration of our values.

 

As a result of its assessments, the Committee concluded that Mr. Sunderland achieved his MBO performance goals at 92.5% of his target opportunity.

 

Mr. Dyberg’s MBO Goals. The 2019 MBOs for Mr. Dyberg, consistent with his role as our Chief Technology Officer, are set forth below:

 

●

Manage to Budget for the APEI Segment (20% weighting): Achieve a well-rounded financial performance in the APEI segment, including achieving revenue, adjusted EBITDA margin and adjusted EBITDA consistent with the 2019 budget. The Committee concluded that Mr. Dyberg achieved this objective at the minimum level, reflecting the achievement of APUS revenue targets.

 

●

Manage to Budget at HCN (5% weighting): Achieve a well-rounded financial performance ion the HCN segment reflecting revenue, adjusted EBITDA margin and adjusted EBITDA consistent with the 2019 budget. The Committee concluded that Mr. Dyberg did not achieve this objective, reflecting HCN financial performance falling short of each of the performance targets.

 

●

Achieve Academic Excellence (25% weighting): Complete and institutionalize service level agreement reporting and services, deliver on the information technology portions of APUS’s strategic plan, and implement new student information system platforms. The Committee concluded that Mr. Dyberg achieved this objective at the stretch level reflecting that each of the goals were achieved.

 

●

Position APEI for the Future (25% weighting): Integration of a potential acquisition, prepare IT to enable adding an outside shared services customer, complete certain strategic directory, security and privacy initiatives. The Committee concluded that Mr. Dyberg achieved this objective at the stretch level, particularly reflecting that each of the goals was achieved, other than with respect to integration of an acquisition.

 

●

Drive Organizational and Operational Excellence (25% weighting): Fund and hire new positions and execute on specified IT transformation initiatives. The Committee concluded that Mr. Dyberg achieved this objective at between the target and stretch level, particularly reflecting the work done on the IT transformation initiatives.

 

As a result of its assessments, the Committee concluded that Mr. Dyberg achieved his MBO performance goals at 135% of his target opportunity, but in keeping with its decision, it lowered his achievement to 100% of target given the overall APEI financial performance.

 

Mr. Gay’s MBO Goals. The 2019 MBOs for Mr. Gay, consistent with his role as our Senior Vice President and Chief Operations Officer of APUS, are set forth below.

 

●

Manage to Budget for APUS (40% weighting): Achieve a well-rounded financial performance for APUS, including achieving revenue, adjusted EBITDA margin and adjusted EBITDA consistent with the 2019 budget. The Committee concluded that Mr. Gay achieved this objective at the target level, reflecting the achievement of APUS targets.

 

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Advance APUS Strategic Plan (20% weighting): Develop a channel strategy, increase civilian and public sector registrations, increase military registrations from new students, and assist with system implementation to track students. The Committee concluded that Mr. Gay achieved this objective at the stretch level, particularly reflecting his level of achievement on each of the goals.

 

●

Achieve and Maintain Operational Excellence (15% weighting): Successfully complete five key operational objectives relating to admissions, financial aid, a self-study process, operational tracking and lead response times. The Committee concluded that Mr. Gay achieved this objective at the stretch level reflecting his level of achievement of each goal.

 

●

Achieve and Maintain Organizational Excellence (15% weighting): Maintain a culture within APUS consistent with our stated values and where employees enjoy coming to work, and build talent through a talent management plan. The Committee concluded that Mr. Gay achieved this objective at the stretch level, particularly reflecting his leadership and the strong internal culture.

 

●

Meet Timelines for Shared Services (10% weighting): Work with APEI counterparts to refine consistent and thorough reporting for completion of services provided. The Committee concluded that Mr. Gay achieved this objective at the stretch level reflecting the achievement of the stated goals.

 

As a result of its assessments, the Committee concluded that Mr. Gay achieved his MBO performance goals at 130% of his target opportunity, but in keeping with its decision, it lowered his achievement to 100% of target given the overall APEI financial performance.

 

Dr. Smith’s MBO Goals. The 2019 MBOs for Dr. Smith, consistent with his role as our Senior Vice President and Provost of APUS, are set forth below.

 

●

Manage to Budget for APUS (10% weighting): Achieve a well-rounded financial performance for APUS, including achieving revenue, adjusted EBITDA margin and adjusted EBITDA consistent with the 2019 budget. The Committee concluded that Dr. Smith achieved this objective at the target level, reflecting the achievement of APUS targets.

 

●

Differentiate APUS (20% weighting): Increase partnerships with community colleges, propose plans with respect to Doctoral programs and submit changes to key programs to APUS’s accreditor. The Committee concluded that Dr. Smith achieved this objective at the stretch level, particularly reflecting his level of achievement on each of the goals.

 

●

Improve Quality (20% weighting): Addressing retention of graduate students, implement the first phases of the Academic Quality Design framework, and achieve academic advising goals. The Committee concluded that Dr. Smith achieved this objective at the minimum level, particularly reflecting improvements to graduate retention by changing the required course sequencing and implementing the first phase of the Academic Quality Design Framework.

 

●

Competency-Based Education (10% weighting): Address marking and implementation matters for competency based education. The Committee concluded that Dr. Smith achieved this objective at the minimum level, particularly reflecting that progress was made in revising the market evaluation and preparing for delivery based on capabilities.

 

●

Achieve Accreditation Goals (40% weighting): Achieve successful outcomes on institutional accreditation and specified programmatic accreditation, as well as obtaining eligibility for competency based education programs to participate in student aid programs. The Committee concluded that Dr. Smith achieved this objective at the stretch level reflecting that each specified goal was achieved.

 

As a result of its assessments, the Committee concluded that Dr. Smith achieved his MBO performance goals at 115% of his target opportunity, but in keeping with its decision, it lowered his achievement to 100% of target given the overall APEI financial performance.

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Equity Incentives

 

We believe that a significant portion of our NEOs’ total compensation should be in the form of long-term equity incentive awards in order to align the priorities of the NEOs with the interests of our stockholders. In 2019, to further emphasize performance and ensure management’s objectives are aligned with those of our stockholders, the equity awards for our continuing NEOs were split 50% as RSUs and 50% as PSUs. Consistent with historical practice, both the RSUs and PSUs vest in three equal installments on the first three anniversaries of the grant date, subject to achievement of performance metrics for the PSUs.

 

The size of the equity awards were expressed for each continuing NEO as a percentage of base salary. In determining the appropriate percentage and resulting equity incentive grants for our NEOs, the MDC Committee reviewed the comparative survey data provided by Willis Towers Watson. The percentages and resulting sizes for the equity incentive awards were discussed at the same time the Committee met to set the other elements of compensation so that all elements of compensation were set taking into account the total compensation package. The Committee considered the survey data and determined that it would be appropriate to make awards so that total target compensation for our executives did not exceed amounts that would generally be considered competitive with the 50th percentile of the survey data. In setting the percentages, the MDC Committee continued to consider equitable treatment among executives, but recognized that the market for competitive talent varies among executives and that it is appropriate for equity awards to vary among executives.

 

For 2019, the following chart shows the value of the equity awards for each NEO other than Ms. Selden expressed as a percentage of base salary, and also shows the resulting values of the RSUs and PSUs at the target level of performance:

 

		Total Equity Awards		RSUs	RSUs	PSUs	RSUs
Named Executive Officer	Base Salary ($)	Value ($)	% of Salary	Value ($)	Shares	Value ($)	Shares
Dr. Boston	692,070	1,764,236	255	882,118	29,355	882,118	29,355
Mr. Sunderland	419,281	419,138	100	209,569	6,974	209,569	6,974
Mr. Dyberg	357,000	356,874	100	178,437	5,938	178,437	5,938
Mr. Gay	291,312	189,316	65	94,658	3,150	94,658	3,150
Dr. Smith	300,900	165,456	55	82,728	2,753	82,728	2,753

 

After determining the dollar value of equity incentive awards, consistent with its historical practice the Committee calculated the number of shares to be subject to the awards using a 60-day trailing average for the Company’s stock price as of a date shortly before the Committee met to approve the grants. The MDC Committee believes that doing so removes some of the variability that can impact awards if it were to use the stock price on only one date.

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 Prior to 2019, the sole performance metric for the PSUs was free cash flow. For 2019, the MDC Committee considered whether it was appropriate to maintain free cash flow as the performance metric under the PSU, or whether there was a more appropriate metric. After consultation with Willis Towers Watson, a review of measures used across the industry and consideration of the Company’s priorities, the Company selected two new measures for 2019. In order to reflect the importance of overall financial performance and also the importance of growth for the Company, the Committee determined to use adjusted EBITDA and revenue as the performance metrics for the PSUs, weighted at 75% and 25%, respectively. This weighting reflected the concern that a greater focus on revenue alone could provide an incentive for our executives to seek to generate additional revenue even if it was at the expense of our overall performance or the quality of students attracted to our institutions. Adjusted EBITDA, which is a non-GAAP measure, is defined as income from operations before income taxes minus interest income plus depreciation and amortization plus stock-based compensation expense plus loss on disposal of assets. Revenue is defined as the Company’s GAAP revenue as reported. The 2019 adjusted EBITDA and revenue goals were based on the Company’s 2019 budget and were set as follows:

 

	Adjusted EBITDA (75% of Target Number of PSUs)		Revenue (25% of Target Number of PSUs)
	Goal	Earnout (As a percentage of Target)	Goal	Earnout (As a percentage of Target)
Maximum	$69.080 million	200%	$315.302 million	200%
Target	$60.070 million	100%	$300.288 million	100%
Threshold	$51.059 million	50%	$270.259 million	50%

 

The threshold level was established at 50% of the target level and the maximum level was set at 200% of the target level in 2019. These numbers reflected the MDC Committee’s view of appropriate performance. For levels of adjusted EBITDA and revenue between the applicable dollar amounts set forth above, the percentage of the award earned would be prorated accordingly. For 2019, adjusted EBITDA did not meet the threshold level, and revenue was $286.3 million, or approximately 76.7% of the target goal, resulting in approximately 19.5% of the target PSU awards being earned. The award earned is further subject to time-based vesting, in order to continue to provide a retention element and to encourage executives to focus on the long-term performance of the Company.

 

Ms. Selden’s Equity Awards. In connection with hiring Ms. Selden, the MDC Committee negotiated initial equity awards with Ms. Selden with a value of approximately $2,000,000, of which $1,400,000 was comprised of RSUs and $600,000 of which was comprised of stock options. In determining to make the equity awards to Ms. Selden and the types of awards to make, the Company took into account what was required to attract her to the Company, the advice of Willis Towers Watson on market practice, the importance of aligning her interests with our stockholders, and the desire for stock appreciation over the long-term. The Committee also considered that while a larger award could have been warranted, given that it intended to grant Ms. Selden a customary annual award several months later in the beginning of 2020, it was not appropriate to grant a larger award at the time of the commencement of her employment. Consistent with our customary practice, the awards to Ms. Selden vest over three-years and were calculated using a trailing 60-day average of the stock price, rather than the grant date stock price.

 

 OTHER COMPENSATION POLICIES AND PRACTICES

 

Employment Agreements and Post-Termination Compensation

 

We have entered into employment agreements with Ms. Selden, Dr. Boston, Mr. Sunderland, and Mr. Dyberg. These agreements provide the executive with severance payments upon certain terminations, including termination without cause, termination by the executive for good reason, or upon certain triggering events following a change of control. The agreements provide for certain payments in connection with a termination of the executives’ employment within 60 days prior to or 356 days following a change of control of the Company, in the case of Ms. Selden, or within 180 days, with respect to the other NEOs. We believe that these agreements were necessary to attract some of our NEOs and help to retain these NEOs due to the prevalence of similar arrangements in the market in which we compete for executives.

 

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In 2013, the MDC Committee requested and received an assessment from Willis Towers Watson on the terms contained in Dr. Boston’s previous employment agreement in comparison to market practice and our peer group. The MDC Committee then negotiated an amendment to Dr. Boston’s employment agreement in 2014, eliminating any reimbursement for excise taxes from the employment agreement. In 2014, the MDC Committee also authorized negotiating an employment agreement with Mr. Sunderland on substantially the same terms as the agreements with our other then-serving NEOs. The MDC Committee determined it was appropriate to have an employment agreement with Mr. Sunderland in an effort to retain Mr. Sunderland, treat him similarly to other executives, and to ensure his agreement would be subject to post-employment non-competition and non-solicitation terms with which he otherwise would not have had to comply. Dr. Boston’s employment agreement was further amended in July 2016 to increase Dr. Boston’s annual incentive opportunity. In 2018, the MDC Committee determined in hiring Mr. Dyberg that it was appropriate and necessary to enter into the employment agreement with Mr. Dyberg. In reaching this conclusion, the MDC Committee took into account that as an Executive Vice President Mr. Dyberg was similarly situated to Mr. Sunderland, that the Company would gain benefits from the agreement, and the negotiations to attract Mr. Dyberg to the Company. In August 2019, we entered into an amended and restated employment agreement (the “Amended Agreement”) with Dr. Boston and an employment agreement with Ms. Selden, each effective September 23, 2019, in connection with Ms. Selden’s appointment as our President and Chief Executive Officer and Dr. Boston’s resulting change in role from President and Chief Executive Officer to President of APUS pending his expected retirement in June 2020. The MDC Committee determined that entering into the employment agreement with Ms. Selden was appropriate in order to attract her to the Company and provide her with employment on terms similar to our other executives and in line with what we concluded were appropriate terms for a Chief Executive Officer for a company of our size and in our industry and commensurate with her responsibilities.

 

In 2017, at the recommendation of the MDC Committee, the Board of Directors of the Company adopted the American Public Education, Inc. Executive Severance Plan (the “Executive Severance Plan”). The MDC Committee recommended the adoption of the Executive Severance Plan in order to provide severance benefits to Senior Vice Presidents of the Company that are designated by the MDC Committee without having to adopt individual employment or severance agreements. The MDC Committee concluded that a severance arrangement for the designated participants was appropriate in order to help retain these executives. In concluding it was appropriate to adopt the Executive Severance Plan, the MDC Committee considered practices in industry generally and among the Company’s peer group, as well as the advice of Willis Towers Watson. The MDC Committee also considered that the Executive Severance Plan requires as a condition to receiving benefits that each participant must comply with covenants not to compete with the Company and our affiliates and not to solicit our employees or those of our affiliates, in each case during the term of employment and for a period of 12 months thereafter. In addition, in order to receiving severance benefits, a participant must agree to release all claims against the Company and our affiliates and their respective officers and directors.

 

For additional information regarding these agreements, including a quantification of benefits that would be received by these officers had termination occurred on December 31, 2019, see the section titled “Potential Payments upon Termination or Change in Control” below.

 

Non-Qualified Deferred Compensation

 

We maintain a non-qualified deferred compensation plan in which our executive officers are permitted to participate. The Internal Revenue Code limits the amount of matching contributions that we can contribute to our traditional 401(k) plan for the benefit of our executives. The deferred compensation plan provides that we will make an annual matching contribution to plan participants in an amount equal to the difference between the matching contribution that the participant would have received under our 401(k) plan if those limitations under the Internal Revenue Code did not apply and the matching contribution that the employee actually received under our 401(k) plan. The balances in the plan are only available for investment in investment options that are also available under our 401(k) plan. We believe that it is fair to provide this plan to our executives because absent the limitations under the Internal Revenue Code, they would have otherwise received these amounts. The plan also permits us, but does not require us to, make additional, discretionary contributions. We did not make any discretionary contributions in 2019.

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Limited Perquisites and No Tax Gross-Ups

 

As an online academic institution, APUS has deans, program directors, faculty members, and others who live at great distance from our headquarters in Charles Town, West Virginia. As a result and because Charles Town has relatively limited options compared to what would be available if our headquarters were in a larger city, APUS has housing available for the use of visitors when they are visiting Charles Town. We allow members of our leadership team the opportunity to also utilize university housing when they are staying overnight in Charles Town, even if that is their principal place of business. In 2019, Dr. Boston took advantage of the housing benefit. In order that Dr. Boston can be more efficient and be able to work on his commute to Charles Town, we also provide Dr. Boston with the opportunity to utilize a car service for travel to and from Charles Town, in addition to other locations.

 

Pursuant to her employment agreement, Ms. Selden will be entitled to receive up to $8,000 per month for one year from September 23, 2019 for temporary lodging expenses and reimbursement for weekly travel from her current residence to the required work location, and up to $75,000 during the calendar year 2020 in incurred relocation expenses, subject to the Company’s relocation policy.

 

We did not provide a gross-up to our NEOs for any personal income taxes they incurred as a result of any of these benefits.

 

Role of Executives in Executive Compensation Decisions

 

Historically, our Chief Executive Officer has recommended to the MDC Committee each element of compensation for all executive officers other than himself or herself, and the MDC Committee determines the target level of compensation for each executive officer.

 

The amount of each element of compensation for our Chief Executive Officer is determined by the MDC Committee. Our Chief Executive Officer does not participate in deliberations relating to her own compensation. None of our other executive officers participates in any deliberations related to the setting of executive compensation, except that Mr. Boston participated in setting executive compensation in 2019 in the context of his role as President of APUS to advise on compensation for executives who are officers of APUS and, more generally, as Chief Executive Officer for most of 2019.

Future Compensation Decisions

Compensation decisions discussed in this Compensation Discussion and Analysis were made prior to the rapidly unfolding recent developments of the COVID-19 pandemic. The MDC Committee continues to monitor impacts of the pandemic on our business, financial results, prospects, employees, and stockholders, and will take these impacts into consideration to the extent appropriate in making future compensation decisions and decisions with respect to 2020 performance.

 

CEO Pay Ratio

 

As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are presenting the ratio of our Chief Executive Officer’s annual total compensation to our median employee’s annual total compensation.

 

In order to identify our median employee for purposes of calculating the ratio, we used the taxable wages for our approximately 2,873 employees other than our Chief Executive Officer as of December 31, 2019 (the “Pay Ratio Date”).

 

The 2019 annual total compensation for our Chief Executive Officer for purposes of the pay ratio disclosure was $3,162,404. In calculating the compensation of our Chief Executive Officer for purposes of the pay ratio disclosure, the Company annualized the compensation provided during fiscal year 2019 to Ms. Selden, who served as Chief Executive Officer on the Pay Ratio Date. In doing so, we used the actual value of Ms. Selden’s sign on bonus and equity awards and the target value of her non-equity incentive plan award.

 

The 2019 annual total compensation for our median employee, who is a part-time faculty member at APUS, was $27,290. The ratio of our Chief Executive Officer’s annual total compensation to our median employee’s total compensation for 2019 is 116 to 1. This ratio was determined using reasonable estimates as permitted by the SEC’s rules and should not be used as a comparison with pay ratios disclosed by other companies.

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