Item 5.02. Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers; Compensatory Arrangements of Principal Officers.
Executive Compensation
The Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) of the Company has taken the actions described below relating to the compensation of the Company's “named executive officers,” as such term is defined in Item 402(a)(3) of Regulation S-K, as of December 31, 2019 and certain other executive officers of the Company.
The Committee recently approved base salaries, performance measures and target incentive payouts for 2020, and long term equity incentives for the named executive officers and other executive officers of the Company. Base salaries for the named executive officers did not change from 2019 levels.
The Committee approved annual targets and incentive payouts for the Company's named executive officers and other executive officers for fiscal year 2020 under the Company’s Senior Executive Annual Incentive Plan (the “AIP”). Consistent with prior years, the Committee identified two financial performance measures: net sales and adjusted EBIT (excluding equity-based compensation expenses and foreign currency transaction gains and losses), each as determined under the AIP, and assigned a 50% weighting factor to each financial performance goal. The Committee chose to focus on revenue and pretax profits so that our named executive officers and other executive officers would be incentivized to deliver the types of growth that benefit our stockholders, namely increasing sales and profits.
Under the 2020 AIP, the named executive officers can receive cash incentive payments listed in the following table as a percentage of base salaries based upon achievement of the minimum to maximum objectives for both financial performance measures and for individual performance.
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Name
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Target (Financial plus Individual)
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Financial Performance Minimum
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Financial Performance Maximum
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Individual Performance Maximum
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Maximum Award Payout (1)
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Valentin P. Gapontsev, Ph.D.
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110%
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20.63%
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220%
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27.5%
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225%
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Eugene Scherbakov, Ph.D.
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100%
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18.75%
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200%
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25%
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225%
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Timothy P.V. Mammen
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80%
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15.00%
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160%
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20%
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225%
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Angelo P. Lopresti
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80%
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15.00%
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160%
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20%
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225%
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Alexander Ovtchinnikov, Ph.D.
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80%
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15.00%
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160%
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20%
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225%
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(1)
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Maximum award payout is presented as a percentage of the target award including both financial and individual performance targets.
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The Committee may make adjustments under the AIP, including to our overall corporate performance goals, and the ways that our actual performance results are calculated that may cause differences between the numbers used for our performance goals and the numbers reported in our financial statements.
The Committee also approved grants of long term incentives in the form of equity awards. The 2020 equity-based awards consist of service-based restricted stock units (“RSUs”) weighted 50% and performance-based stock units (“PSUs”) weighted 50%. The RSUs vest in four equal annual installments with the first 25% vesting on March 1, 2021. The PSUs vest March 1, 2023, should any PSUs vest at all. Dividends, if any, on shares underlying the PSUs do not vest until the PSUs vest.
The Committee decided to weight the PSUs 50% on relative total stockholder return and 50% on operating cash flow as detailed below. For the PSUs based upon relative total stockholder return, the performance of the Company's stock will be measured against the S&P Composite 1500 Electronic Equipment, Instrument and Components Index. For each 1% that IPG's common stock exceeds the performance of such index for the trailing 60 trading days from the end of the performance measurement period (March 1, 2023) against the comparable period from the beginning of the performance measurement period (March 1, 2020), the grant recipient would receive a 2% increase in the number of shares above target (up to a maximum cap of 200% of the target award). For each 1% below such index’s performance, the grant recipient would receive a 2% decrease in the number of shares (down to zero).
The PSUs based upon operating cash flow will vest based upon the ratio of operating cash flow (“OCF”) to adjusted net income (“ANI”) measured over a three-year performance period starting on January 1, 2020 and ending on December 31, 2022. Annually, the Committee will set a target, threshold and maximum for the ratio of OCF to ANI (the “OCF Ratio”). The
comparison of the actual OCF Ratio to the target ratios for each individual year in the performance period will be averaged to calculate the final award earned. Performance below the target would decrease the award, subject to a minimum performance level below which no PSUs would be earned, and performance above the target would increase the award, subject to a maximum cap of 200% of the target award.
The following table lists the RSUs and PSUs awarded to the named executive officers:
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Name
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Service-Based Restricted Stock
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Performance Stock Units
on Relative Total Stockholder Return
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Performance Stock Units
on Operating Cash Flow Ratio
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Valentin P. Gapontsev, Ph.D.
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—
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—
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—
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Eugene Scherbakov, Ph.D.
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8,139
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4,069
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4,069
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Timothy P.V. Mammen
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5,014
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2,507
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2,507
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Angelo P. Lopresti
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4,223
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2,111
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2,111
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Alexander Ovtchinnikov, Ph.D.
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4,184
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2,092
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2,092
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Historically, Dr. Gapontsev, our Chief Executive Officer, has not received annual grants of stock options, RSUs or PSUs because, as the Company’s founder and the holder of a large number of common stock of the Company, he has the perspective of an owner with a significant financial stake in the Company.
Compensation Plan
Effective February 19, 2020, the Board approved an amendment (the “Amendment”) to the IPG Photonics Corporation Non-Employee Director Compensation Plan (the “Directors Compensation Plan”) to modify the mix of equity to be paid to a non-employee director annually and upon initial election to the Board. The Amendment provides that all director equity compensation will be paid in service-based RSUs. Previously, awards were weighted 50% in service-based RSUs and 50% in service-based stock options. The Amendment did not change the total value of non-employee director compensation paid or the vesting terms.
The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the Directors Compensation Plan, as amended, a copy of which is attached as Exhibit 10.1 to this Current Report on Form 8-K and is incorporated herein by reference.