The Nominating/Corporate Governance Committee is responsible for reviewing the compensation of the Board of Directors. Compensation for the independent directors of our Board of Directors during 2017 consisted of an annual cash retainer and an additional cash retainer for acting as the Non-Executive Chairman or Chairperson of one of the committees of our Board of Directors as set forth below. In addition, each independent director receives an annual equity retainer based on a fixed number of shares provided for in the 2012 Incentive Award Plan. Lastly, independent directors received Board of Director and committee meeting fees of $1,000 per meeting attended in person and $500 for telephonic attendance.
Our directors received the following aggregate amounts of compensation for the year ended December 31, 2017:
The 2012 Incentive Award Plan provides that upon the initial election to our Board of Directors, and at each annual meeting of stockholders thereafter, if the director continues to serve as a director after the meeting, each non-employee director is automatically granted 4,000 shares of restricted stock. This annual equity grant of 4,000 shares is specifically provided for in the 2012 Incentive Award Plan, which has been approved by our stockholders. The vesting schedule for restricted shares granted to non-employee directors is as follows and is subject to the director’s continued service through each applicable vesting date:
In November 2017, the Nominating/Corporate Governance Committee reviewed a report it received from FPL on director compensation. Based on its review, the Nominating/Corporate Governance Committee recommended a revised compensation plan to better align director compensation with market practices. The Board of Directors subsequently approved the plan. Compensation for the independent directors of our Board of Directors for 2018 will consist of a base annual cash retainer, plus additional cash retainers for service as the Non-Executive Chairman or Chairperson of one of the committees of our Board of Directors in amounts as set forth below. Each independent director will continue to receive an annual equity retainer based on a fixed number of shares provided for in the 2012 Incentive Award Plan. There will no longer be Board of Director and committee meeting fees for attendance.
The members of our Board of Directors are also entitled to reimbursement of their travel expenses incurred in connection with attendance at Board of Director and committee meetings and conferences. Additionally, the members of our Board of Directors are reimbursed for expenses incurred in connection with attending continuing education programs to assist them in remaining abreast of developments in corporate governance and other critical issues relating to the operation of public company boards.
Our non-employee directors are subject to stock ownership guidelines. Under these guidelines, each non-employee director will be required, within five years of January 1, 2013, to hold stock valued at no less than five times the amount of the annual cash retainer paid to such director for service as a member of the Board of Directors, without reference to committee service. The current stock ownership goal for each of our non-employee directors is five times their annual cash retainers as of December 31, 2017 of $15,000, or $75,000, divided by the closing price of our common stock as of December 29, 2017 of $57.02, which equals a minimum share ownership requirement of 1,315 shares.
All vested and unvested restricted stock awards qualify towards satisfaction of the requirement. For any new director, compliance with the guidelines will be required within five years after being elected to the Board of Directors. As of December 31, 2017, each director subject to the guidelines met or exceeded the stock ownership requirements.
Executive Compensation
Compensation Discussion and Analysis
This section discusses the compensation policies and programs for the following executive officers of the company (the named executive officers or NEOs):
NAME
|
CURRENT TITLE
|
John P. Case
|
Chief Executive Officer
|
Sumit Roy
|
President and Chief Operating Officer
|
Paul M. Meurer
|
Executive Vice President, Chief Financial Officer and Treasurer
|
Michael R. Pfeiffer
|
Executive Vice President, General Counsel and Secretary
|
Neil M. Abraham
|
Executive Vice President, Chief Investment Officer
|
Executive Summary
The primary objectives of our compensation program are to:
|
ü
|
Align the interests of management with those of stockholders;
|
|
ü
|
Link executive compensation to the company’s short-term and long-term performance; and
|
|
ü
|
Attract, motivate and retain highly qualified executive officers through competitive compensation arrangements.
|
We continue to adhere to best in class compensation and corporate governance practices as set forth in the following table:
WHAT WE DO:
|
|
WHAT WE DO NOT DO:
|
ü
|
DO align pay to performance by linking a substantial portion of compensation to the achievement of predefined performance metrics that drive stockholder value creation
|
|
X
|
Do NOT allow for uncapped award opportunities
|
ü
|
DO cap payouts for awards under our Short-Term Incentive Program (STIP) and our Long-Term Incentive Program (LTIP)
|
|
X
|
Do NOT provide any perquisites to our named executive officers
|
ü
|
DO set meaningful and measurable performance goals at the beginning of the performance period and evaluate such performance over both an annual and multi-year period on a relative basis
|
|
X
|
Do NOT permit executives officers or directors to pledge or hedge our securities
|
ü
|
DO maintain stock ownership requirements for our directors, CEO, and other named executive officers
|
|
X
|
Do NOT incentivize excessive risk taking
|
ü
|
DO perform an annual compensation risk assessment to ensure our compensation programs and policies do not encourage excessive risk taking behavior
|
|
X
|
Do NOT pay accrued dividends on performance shares unless and until they vest
|
ü
|
DO allow for the Board to “clawback” incentive compensation in the event of certain financial restatements or incentive miscalculations
|
|
X
|
Do NOT provide our named executive officers with tax gross-ups on perquisites or other benefits
|
ü
|
DO employ the services of an independent compensation consultant that reports to the Board of Directors
|
|
X
|
Do NOT provide for excise tax gross ups
|
ü
|
DO grant performance-based equity, which is at-risk and not guaranteed
|
|
X
|
Do NOT provide supplemental or other retirement plans, other than a 401(k) plan
|
Realty Income
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2018 Proxy Statement
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23
|
Executive Compensation
2017 Performance
It is important to review and acknowledge the company’s performance results for the year and management’s execution of our strategy to support and grow monthly dividends for our stockholders. We focus on the following key areas when executing our strategy:
Continued our disciplined acquisition strategy, targeting well-located, freestanding, singe-tenant commercial properties at favorable risk-adjusted returns.
|
|
ü
|
We sourced $30.4 billion in real estate acquisition opportunities, and remained selective in our investment strategy, acquiring $1.52 billion, just 5% of the amount sourced.
|
|
ü
|
We remained committed to diversifying our portfolio by tenant industry, geography, and a certain extent property type, while maintaining excellent credit quality in the portfolio. As of December 31, 2017, 46% of our annualized rental revenue was generated from investment-grade tenants.
|
Actively managed our portfolio to further enhance stockholder value
|
|
ü
|
We achieved a high level of year-end occupancy of 98.4%, matching our 10-year high for year-end occupancy.
|
|
ü
|
We recaptured 106% of expiring rent on properties released during the year.
|
|
ü
|
We disposed of $166 million of non-strategic assets and redeployed that capital into properties that better fit our investment strategy.
|
Maintained a conservative balance sheet
|
|
ü
|
We ended the year with a fixed charge coverage ratio of 4.8x, increasing our coverage by 60 basis points compared to last year.
|
|
ü
|
We ended the year with a Debt-to-EBITDA ratio of 5.5x, reducing our leverage by 20 basis points compared to last year.*
|
|
ü
|
Our conservative balance sheet was recognized, among other factors, with Moody’s Investor Service upgrade of our credit rating to “A3”.
|
*
For a calculation of Debt-to-EBITDA, see page 48 of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 22, 2018, which also includes a Generally Accepted Accounting Principles (GAAP) reconciliation of this non-GAAP measure.
The company’s positive performance results, and successful execution of our strategy are significant contributors in determining the compensation awarded to our executives. Our compensation program is structured to effectively link compensation to the achievement of certain company performance metrics in order to create alignment with the interests of our stockholders. We believe our performance in 2017 demonstrates the effectiveness over time of the execution of our strategic business plan and the alignment of our compensation program with our philosophy of rewarding executives for enhancing long-term stockholder value.
Strategic Planning
Our goal is to continue managing the company in a manner that supports sustainable, long-term value creation for stockholders. The Board of Directors frequently reviews and discusses the company’s strategy as part of regularly scheduled Board meetings. The discussions allow the Board to assess further potential opportunities and threats to the business and properly position the company to continue to perform in the future. The company’s named executive officers and additional members of management, including the company’s in-house research department, participate in the discussions on topics such as e-commerce and other disruptive technologies, changing demographics, the macroeconomic and political landscape, and their implications for our company. From time to time, experts on various topics are invited to the discussions to challenge thinking and invite healthy discourse at the meetings. The company also supports the Board’s participation at various conferences and speaking engagements in order to introduce new topics and materials for discussion and further broaden long-term views on the business. We will continue to incorporate similar strategic reviews in our Board meetings and strive to stay in front of emerging trends by making adjustments to our strategy as needed.
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Realty Income
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2018 Proxy Statement
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Executive Compensation
Favorable Say-on-Pay Vote
We provide our stockholders with an annual advisory “say-on-pay” vote on the compensation of named executive officers. Our stockholders continue to express substantial support for the compensation of our named executive officers, with above 94% of the votes cast approving the advisory say-on-pay vote during each of the last five years. This continued support of our compensation program, as demonstrated below, reflects a strong alignment with the company’s performance and long-term value creation for our stockholders.
Stockholder Engagement
During 2017, we continued to engage and interact with our stockholders through various means of communication, including in-person meetings, conferences, phone calls and emails. We believe engaging with our stockholders on an ongoing basis is important to understand what is important to them and ensure best practices.
Our outreach efforts for this proxy season included reaching out to our 30 largest stockholders, collectively representing approximately 50% of shares outstanding as of September 30, 2017. During our conversations with them, we discussed various topics including their views on executive compensation and governance best practices. In general, stockholders were satisfied with our current programs, as evidenced by our approval percentages above. Any consistent themes from this stockholder commentary are reported regularly to our Nominating/Corporate Governance Committee, Compensation Committee, and Board of Directors. This dialogue allows our Directors to hear what is most important to our stockholders and share perspectives on our compensation and governance processes. The Board considers the input provided by our stockholders and our advisors as it reviews and considers enhancements to its processes and disclosures.
Compensation Process
In addition to say-on-pay results and feedback from stockholders, the Compensation Committee also considers other factors in evaluating our executive compensation programs, including but not limited to:
|
·
|
The Compensation Committee’s assessment of the alignment of our compensation program with our financial and operational objectives;
|
|
·
|
Retention and recognition of individual contribution towards our performance;
|
|
·
|
Recommendations provided by its independent consultant; and
|
|
·
|
A review of peer data.
|
Each factor is evaluated in the context of the Compensation Committee’s responsibility to act in the company’s best interests.
Compensation Consultant
In 2017, the Compensation Committee retained FPL Associates, L.P. (FPL), a nationally-known independent executive compensation and benefits consulting firm specializing in real estate companies, to provide general executive compensation consulting services. In addition, the consultant performs special executive compensation projects and consulting services, as directed by the Compensation Committee.
Realty Income
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2018 Proxy Statement
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25
|
Executive Compensation
The consulting services provided by FPL include:
|
ü
|
Evaluating the current compensation program design and guidelines for named executive officers and assisting in structuring a compensation program that meets the objectives outlined by the Compensation Committee;
|
|
ü
|
Providing peer information to assist the Compensation Committee in selecting the appropriate peer group;
|
|
ü
|
Benchmarking the compensation for the named executive officers against the appropriate peer group;
|
|
ü
|
Identifying the appropriate mix between compensation components, including base salary, annual incentives, and short-term and long-term incentive compensation to ensure proper incentive alignment;
|
|
ü
|
Discussing market-based incentive programs, including performance metrics and target, within the peer group companies, and providing guidance and recommendations for modifications to program elements to ensure competitiveness; and
|
|
ü
|
Reviewing an overview of industry trends related to human capital across the entire real estate industry.
|
FPL reports to the Compensation Committee and works with management as directed by the Compensation Committee. The Compensation Committee retains the right to terminate or replace FPL at any time. Pursuant to the Compensation Committee’s charter, the Compensation Committee has the power to engage other consultants and advisors as required.
Through review and consultation with FPL, the Compensation Committee assessed the independence of FPL in light of, among other factors, the independence factors established by the NYSE. As a result of this assessment, the Compensation Committee has determined that FPL’s work raised no conflict of interest currently or during the year ended December 31, 2017.
Peer Group Data
The Compensation Committee uses comparison data from various companies it considers peers as a guide in its review and determination of base salaries, cash payments, equity awards, and long-term performance awards. Prior to approving the 2017 incentive compensation program the Compensation Committee reviewed peer group data to assist in its determination of total target direct compensation (on an aggregate and individual basis), as well as the appropriate mix of equity versus cash, short-term versus long-term, and performance-based versus time-based awards to be paid or granted for 2017 performance. The Compensation Committee evaluates whether the compensation elements and levels that are provided to our named executive officers are generally appropriate relative to the compensation elements and levels provided to their counterparts at peer companies, in light of our performance relative to peers and in light of each named executive officer’s contribution to performance. This approach allows us to respond to competitive dynamics in the market and provides us with the flexibility to maintain and enhance our named executive officers’ engagement, focus, and motivation.
2017 Peer Group for 2017 Compensation Decisions
The Compensation Committee with the help of FPL periodically reviews the composition of our peer group and the criteria and data used in compiling our peer group to ensure that each company’s size and operations remain comparable to ours. The Compensation Committee met in January 2017 to review the peer group to be used for 2017 compensation decisions (2017 Peer Group) and decided to make the following modifications to the 2017 Peer Group, as recommended by FPL:
Given our company’s continued growth during 2016, the Compensation Committee determined that substitutions were warranted to ensure that our total and equity market capitalization remained near the median of the peer group for 2017. Boston Properties, Inc., Ventas, Inc. and Vornado Realty Trust were added to incorporate additional best-in-class S&P 500 REITs that were slightly larger in size in terms of both total and equity market capitalization. DDR Corp. and SL Green Realty Corp. were removed based on relative size and additional factors described below.
Our 2017 Peer Group consists of the following 18 public real estate companies:
2017 PEER GROUP
|
Avalon Bay Communities, Inc.
|
National Retail Properties, Inc.*
|
Boston Properties, Inc.
|
Spirit Realty Capital, Inc.*
|
Digital Realty Trust, Inc.
|
The Macerich Company
|
Equinix, Inc.
|
UDR, Inc.
|
Essex Property Trust, Inc.
|
Ventas, Inc.
|
Federal Realty Investment Trust
|
VEREIT, Inc.*
|
HCP, Inc.
|
Vornado Realty Trust
|
Host Hotels & Resorts, Inc.
|
W.P. Carey, Inc.*
|
Kimco Realty Corporation
|
Welltower, Inc.
|
*
Denotes a net lease peer
26
|
Realty Income
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2018 Proxy Statement
|
Executive Compensation
The companies in our 2017 Peer Group focus on a variety of asset classes with similar lease types, and those that are similar to us in size in terms of total market capitalization (common and preferred stock, partnership units convertible into stock and long and short-term debt) and equity market capitalization (common stock and convertible partnership units). The Compensation Committee believes that total market and equity market capitalization are the most relevant indicators of size for real estate companies, acknowledging that other industries may use different indicators like revenue. The companies were selected so that our total and equity market capitalization remained near the median of the peer group. All companies selected were less than 2 times our size based on total market capitalization.
2017 Peer Group Comparison
(1)
(in billions)
|
(1)
|
As of December 31, 2016, the 2017 Peer Group had total market capitalization ranging from approximately $8.9 billion to $32.3 billion, placing us in the 53
rd
percentile of our peer group. In terms of equity market capitalization, we were in the 56
th
percentile of our peer group.
|
The Compensation Committee evaluates our peer group periodically and may make adjustments to this peer group to reflect changes in the size or operations of the company or our peers.
Management Involvement
In setting compensation for named executive officers, the Compensation Committee solicits input from the CEO concerning each of the other named executive officers other than himself. In addition, from time to time, the Compensation Committee will direct management to work with the Compensation Committee’s consultant in providing proposals, program design, and compensation recommendations. Each year, the CEO provides the Compensation Committee with a report of the company’s operating and financial results for the past fiscal year relative to the company’s performance metrics. He also discusses his personal assessment of individual performance of each of the other named executive officers. In addition, at the request of the Compensation Committee, the CEO makes recommendations regarding salary and incentive compensation awards for each named executive officer other than himself. The Compensation Committee considers these recommendations and other factors as discussed above in making the final determinations.
Elements of Compensation
In structuring executive compensation, the Compensation Committee considers how each component of compensation motivates performance, promotes retention, and creates long-term stockholder value. Base salaries are primarily intended to attract and retain highly qualified executives and to reward them for their continued service. Annual incentive cash payments, equity awards, and long-term performance shares are designed to (i) directly reward performance, (ii) achieve specific strategic and operating objectives, and (iii) provide incentives to create long-term stockholder value. All of our equity incentives are intended primarily to align named executive officers’ long-term interests with stockholders’ long-term interests although we believe they also play a role in helping us reward performance, attract, and retain top executives.
Realty Income
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2018 Proxy Statement
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27
|
Executive Compensation
The following table outlines the primary elements of our 2017 executive compensation program:
ELEMENT
|
OBJECTIVE SERVED
|
Base Salary
|
Fixed base pay rewards performance of core job duties and recognizes individual achievements, contributions, and experience.
|
Short-term Incentive Program
|
Variable cash compensation motivates each executive to achieve our short-term corporate operating and financial goals, rewards personal performance, align the interests of executives with stockholders, and facilitates executive retention.
|
Long-term Incentive Program
|
Variable equity compensation motivates executives to achieve long-term financial goals, such as relative total stockholder return, balance sheet strength, and consistency of our dividend.
|
Equity Based Incentive Awards – Restricted Shares (Time-Based)
|
Fixed equity compensation that vests over future periods fosters retention and aligns the named executive officers’ interest with the long-term interests of our stockholders.
|
Incentive Programs and Performance Metrics
In February 2017, following consultation with and based on the recommendations of FPL, the Compensation Committee approved changes to the design of the STIP and LTIP programs applicable to the company’s NEOs for 2017. While the Compensation Committee preserved much of the previous incentive compensation program in terms of the categories used to measure performance, they recalibrated the mix of cash versus equity targeted under the programs and increased each named executive officers’ total target compensation, to collectively better align with median levels of peer compensation. Consistent with peer compensation practices, the Compensation Committee also adjusted the bandwidth of earnings potential above target, with an increased maximum payout of 200% of target, and a corresponding level of enhanced rigor to achieve maximum performance to further motivate and reward outstanding performance. These changes resulted in (i) increased total target compensation for each NEO from the 2016 levels, (ii) a reduction in the target bonus opportunity in the STIP, now awarded in cash, and (iii) a greater proportion of 2017 total target compensation tied to long-term performance objectives, awarded in equity. The impact of these changes is a shift in the composition of the program which is now weighted heavier in equity, along with a greater portion of compensation tied to long-term, three-year performance.
CEO
2016 Cash vs Equity Mix CEO 2017 Cash vs Equity Mix
To effectuate these changes to the 2017 program, the company and Mr. Case entered into an amendment to Mr. Case’s employment agreement which provided for the following:
|
ü
|
Reduced Mr. Case’s targeted annual cash performance bonus from no less than 200% of his base salary to no less than 150% of his base salary, and
|
|
ü
|
Removed the provision which required that no less than 50% of his annual equity awards be in the form of time-based awards.
|
Each year, the Compensation Committee, with input from FPL, reviews the metrics underlying the short-term and long-term incentive programs, and considers various industry performance indicators, including GAAP and non-GAAP earnings metrics. The Compensation Committee believes that the current mix of operational, liquidity, and financial earning metrics used for the 2017 performance year align with our strategy to attain long-term financial stability that will support sustained cash flows beneficial to our stockholders.
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Realty Income
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2018 Proxy Statement
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Executive Compensation
Total Target Direct Compensation
The Compensation Committee worked with FPL, the Compensation Committee’s independent consultant, to determine the levels of total target direct compensation to achieve the appropriate balance between (i) cash and equity compensation, (ii) long-term and short-term compensation, (iii) performance-based and time-based equity, and (iv) fixed and variable compensation. As an initial reference point, the Committee reviewed the median benchmark of each executive as well as the aggregate level of total target direct compensation. This process allows the Committee to ensure pay is competitive for the individual and account for their tenure and experience, as well as ensure that the total amount for our executive team is reasonable. The Compensation Committee reviewed the median and aggregate total target direct compensation within our peer group based on market data provided in January 2017 by FPL. When establishing total target direct compensation levels for each named executive officer, the Compensation Committee gave consideration and special emphasis to individuals’ personal contributions to the organization, as well as skill sets, qualifications, and experience, seeking to incentivize high performing named executive officers with competitive pay, consistent with peer group median compensation levels. After review and consideration, the Compensation Committee approved the following total target direct compensation and structure for 2017 compensation. Total target direct compensation for 2017 was composed of (i) base salary, (ii) target annual short-term incentive opportunity (awarded in cash), (iii) performance shares, and (iv) the annual grant of restricted shares. In the aggregate, the 2017 total target direct compensation established for the named executive officers approximated the estimated peer group median. Additionally, Mr. Case’s 2017 total target direct compensation approximated the estimated 2017 peer group median.
TOTAL TARGET DIRECT COMPENSATION
|
EXECUTIVE
|
2016
|
2017
|
John P. Case
|
$
|
6,250,000
|
$
|
7,025,000
|
Sumit Roy
|
|
3,000,000
|
|
3,500,000
|
Paul M. Meurer
|
|
2,100,000
|
|
2,250,000
|
Michael R. Pfeiffer
|
|
1,500,000
|
|
1,750,000
|
Neil M. Abraham
|
|
1,250,000
|
|
1,600,000
|
Total
|
$
|
14,100,000
|
$
|
16,125,000
|
For our CEO, the Compensation Committee used the following structure for determining the various elements of direct compensation payable for 2017:
Set forth below is a table that illustrates the application of the structure for 2017 compensation decisions for our CEO.
CEO ANNUAL CASH
|
CEO ANNUAL EQUITY
|
CEO TOTAL
|
ANNUAL
SALARY
|
TARGET STIP
CASH AWARD
|
TARGET LTIP
PERFORMANCE
SHARES
|
ANNUAL
RESTRICTED
SHARES
|
TOTAL TARGET
DIRECT
COMPENSATION
|
$925,000
|
$1,600,000
|
$3,500,000
|
$1,000,000
|
$7,025,000
|
Realty Income
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2018 Proxy Statement
|
29
|
Executive Compensation
CEO Total Target Direct Compensation
The Compensation Committee believes that a significant portion of executive compensation should be at-risk and tied to our performance in order to best align management’s interests with those of our stockholders. In 2017, approximately 73% of our CEO’s total target direct compensation consisted of compensation that is at-risk based on achievement of certain objective performance metrics. Similar guiding principles were used for our other named executive officers, resulting in comparable percentages of at-risk compensation.
General Note to Discussion of Pay Components
Some of the components of 2017 compensation disclosed in the following sections of this “Compensation Discussion and Analysis” section differ from the Summary Compensation Table on page 38. SEC rules require that the Summary Compensation Table include equity compensation in the year granted, while in our case, the Compensation Committee awards time-based restricted stock equity compensation after the performance year, upon the successful completion of the external year-end audit process. Therefore, time-based equity awards granted in February 2017 for the 2016 performance year are shown in the Summary Compensation Table as 2017 compensation. As discussed above, the 2017 incentive program is weighted heavier in long-term performance shares which were also granted in February 2017. This resulted in the largest components of equity compensation for the 2016 and 2017 performance years included in 2017 stock awards in the Summary Compensation Table. The time-based restricted stock equity awards for 2017 discussed in the following sections for all named executive officers will be included in the Summary Compensation Table in next year’s proxy statement.
Base Salaries
In connection with its review of fiscal 2016 performance, and in consideration of the increased responsibilities that come with the continued growth of the company, the Compensation Committee decided to increase the base salaries paid to all of our named executive officers commencing on January 1, 2017. When making its decision to increase 2017 salaries, the Compensation Committee sought to incentivize high performing named executive officers with competitive pay, consistent with peer group median compensation levels. The 2016 and 2017 base salaries are reflected in the table below.
NAMED EXECUTIVE
|
|
SALARIES FOR FISCAL YEAR
|
OFFICER
|
PRINCIPAL POSITION IN 2017
|
|
|
2016
|
|
2017
|
John P. Case
|
Chief Executive Officer
|
|
$875,000
|
$925,000
|
Sumit Roy
|
President,
Chief Operating Officer
|
|
525,000
|
550,000
|
Paul M. Meurer
|
Executive Vice President,
Chief Financial Officer and Treasurer
|
|
450,000
|
475,000
|
Michael R. Pfeiffer
|
Executive Vice President,
General Counsel and Secretary
|
|
420,000
|
450,000
|
Neil M. Abraham
|
Executive Vice President,
Chief Investment Officer
|
|
335,000
|
375,000
|
30
|
Realty Income
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2018 Proxy Statement
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Executive Compensation
Short-Term Incentive Program (STIP)
During February 2017, the Compensation Committee approved the 2017 STIP, which is structured so that the named executive officers’ annual incentive awards closely align with the company’s operating and financial performance. The components of the 2017 STIP were as follows:
Objective Company Performance Criteria – Weighted 70%
|
Individual Performance – Weighted 30%
|
ü
All of the compensation awarded under this program was at-risk.
|
ü
No compensation was awarded for below-threshold performance and maximum payouts were capped at 200% of target.
|
ü
Awards were paid entirely in the form of cash.
|
Objective Company Performance Criteria—70%
The company performance criteria, weightings, and amounts that can be earned under the 2017 STIP, in addition to our actual performance and amounts earned for 2017 performance, are set forth in the following table:
PERFORMANCE GOALS
|
WEIGHTING
|
THRESHOLD
50%
|
TARGET
100%
|
MAXIMUM
200%
|
2017
ACTUAL
|
2017 %
EARNED
(2)
|
AFFO per share
(1)
|
40%
|
$2.95
|
$3.02
|
$3.10
|
$3.06
|
150%
|
Fixed charge coverage ratio
|
20%
|
3.0x
|
3.3x
|
3.7x
|
4.8x
|
200%
|
Portfolio occupancy
|
10%
|
96.75%
|
98.00%
|
98.70%
|
98.40%
|
157%
|
Total Weighted Payout Prior to Individual Performance
|
|
|
165%
|
|
(1)
|
AFFO per share is defined as Funds from Operations adjusted for unique revenue and expense items, which we believe are not as pertinent to the measurement of our ongoing operating performance, and is consistent with the presentation of AFFO in our public SEC filings. Refer to page 50 of the company’s most recently filed 10-K for a reconciliation of AFFO to net income.
|
|
(2)
|
The Compensation Committee used interpolation for results between threshold and maximum criteria. Performance in excess of maximum goals was capped at 200% of target payout for that measure.
|
The Compensation Committee believes these annual targeted operating and financial goals align with our strategy to attain long-term financial stability that will support sustained cash flows beneficial to our stockholders. The goals for the AFFO per share metric were increased from 2016 with the maximum payout exceeding the top end of the company’s AFFO per share earnings guidance range for 2017. The target goals for the fixed charge coverage ratio, a liquidity metric, and portfolio occupancy, an operational metric, remained unchanged, with a slight increase in the maximum goal for portfolio occupancy. These goals are established each year after reviewing the company’s financial and operating projections, including the level of upcoming lease expirations. For these two metrics, the company achieved record-high results to attain at or near maximum payouts, including in 2017 when we matched our 10-year high year-end occupancy rate and achieved a record-high fixed charge coverage ratio. Accordingly, the Compensation Committee believes that these goals remain rigorous, requiring the company to manage its capital structure thoughtfully, successfully access the capital markets, and actively resolve lease rollover to achieve payouts in excess of target for these metrics.
Individual Performance – 30%
As a component of the STIP, individual performance is used by the Compensation Committee to reward individual goals achieved. The Compensation Committee used the following process to establish individual performance goals and assess individual performance at the end of the performance year.
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31
|
Executive Compensation
|
ü
|
At the beginning of 2017, our Compensation Committee worked with the CEO to formulate his individual performance objectives for the year and reviewed with the CEO the performance objectives for the other named executive officers.
|
|
ü
|
In November 2017, the Compensation Committee reviewed the individual performance objectives.
|
|
ü
|
The CEO evaluated each named executive officer’s performance, other than his own, and recommended to the Compensation Committee the percentages that should be earned under this individual performance component.
|
|
ü
|
The Compensation Committee engaged in a discussion with the CEO regarding his recommendations and his assessments and made the final determination regarding this metric.
|
|
ü
|
The Compensation Committee engaged in a review of the CEO’s performance as it relates to the company’s performance, as well as the state of our industry and market competitive practices, in determining the percentage that the CEO earned under this individual performance component.
|
The Compensation Committee incorporated the recommendations provided by the CEO for the individual performance percentages for the named executive officers other than himself. The percentages earned under the individual performance metric and the material factors considered are set forth below.
John P. Case—200%
Mr. Case successfully executed our business plan, leading the company to favorable financial and operating results. Under his leadership, AFFO per share increased 6.3%, substantially above our long-term average earnings growth rate, which allowed us to increase our dividends paid per common share by 5.6% in 2017. He also effectively led the senior management team in the achievement of their objectives in all areas of the business. Throughout the year, Mr. Case actively engaged with stockholders and other constituencies to communicate the company’s results and strategic vision. He continues to play a key role in our Board’s ongoing strategic reviews in order to properly position the company to continue to perform in the future. Additionally, Mr. Case leverages his leadership and involvement in other related organizations, such as the Executive Board of NAREIT and President’s Council of The Real Estate Roundtable, to further develop the company’s reputation in the broader real estate industry. The Compensation Committee determined that his performance well-exceeded his objectives.
Sumit Roy—200%
Mr. Roy executed our operational strategy during the year by remaining focused on optimizing efficiencies throughout the organization. In 2017, our general and administrative expense as a percentage of rental revenue was 5.0%, the lowest amongst our peers in the net lease sector. He continues to capitalize on the scalability of our business model while ensuring the appropriate resources and structure are in place to effectively position the company for its continued growth. Additionally, he chairs our Investment Committee, and he oversaw the active management of our existing portfolio to maximize value by achieving high occupancy, above-average re-leasing rates, and strategically selling non-core assets. The Compensation Committee determined that his performance well-exceeded his objectives.
Paul M. Meurer—150%
Mr. Meurer was instrumental in the company accessing the capital markets in 2017, raising approximately $1.4 billion in equity capital and issuing $2.0 billion in unsecured bonds. He led the execution of the company’s capital raising effort, which helped fund our acquisitions activity, reduce our leverage, and extend the average term on our debt. In 2017, Moody’s Investors Service raised our corporate credit rating on our senior unsecured notes and bonds to “A3” giving us the highest credit rating in the net lease sector. The Compensation Committee determined that his performance exceeded his objectives.
32
|
Realty Income
|
2018 Proxy Statement
|
Executive Compensation
Michael R. Pfeiffer—100%
Mr. Pfeiffer successfully provided oversight and legal expertise for the $1.5 billion of acquisitions closed during the year, and the approximate $3.4 billion of combined equity and long-term debt capital raised. He also continued to enhance the company’s risk management oversight and streamline the internal legal processes to ensure efficiency. The Compensation Committee determined that his performance met his objectives.
Neil M. Abraham—100%
Mr. Abraham successfully executed our investment and research strategy during the year. In 2017, we invested $1.5 billion in high-quality real estate properties at attractive yields. We achieved this level of acquisitions while remaining selective and disciplined with our investment strategy, acquiring just 5% of the $30.4 billion of acquisition opportunities sourced. The Compensation Committee determined that his performance met his objectives.
The incentive opportunities and the total actual incentive award earned by each named executive officer for 2017 under the STIP are set forth in the table below. Our CEO’s 2017 target incentive opportunity was established based on the total target direct compensation structure outlined on page 29. For our other named executive officers, the target incentive opportunities were intended to be between 23% and 26% of each individual’s 2017 total target direct compensation level. The earned incentive award was paid in cash in February 2018.
2017 Incentive Opportunities and Earned Incentive Compensation under the STIP
|
INCENTIVE OPPORTUNITY
|
EARNED INCENTIVE COMPENSATION
|
NAMED
EXECUTIVE
OFFICER
|
TARGET
ANNUAL
INCENTIVE
(1)
|
MAXIMUM
ANNUAL
INCENTIVE
(1)
|
PERCENTAGE
OF MAXIMUM
EARNED
(2)
|
ACTUAL 2017
INCENTIVE
EARNED
|
|
John P. Case
|
$1,600,000
|
$3,200,000
|
87.9%
|
$2,811,429
|
|
Sumit Roy
|
825,000
|
1,650,000
|
87.9%
|
1,449,643
|
|
Paul M. Meurer
|
593,750
|
1,187,500
|
80.4%
|
954,241
|
|
Michael R. Pfeiffer
|
450,000
|
900,000
|
72.9%
|
655,714
|
|
Neil M. Abraham
|
375,000
|
750,000
|
72.9%
|
546,429
|
|
(1)
|
The maximum annual incentive is equal to 200% of target, and threshold annual incentive is equal to 50% of target. No compensation is awarded for below-threshold performance.
|
(2)
|
Captures the weighted average percentage achieved based on the company performance criteria and the individual performance criteria.
|
Long-Term Incentive Program (LTIP)
During February 2017, the Compensation Committee approved the grant of 2017-2019 performance shares to each named executive officer. The following is a summary of the key metrics criteria and terms:
Relative TSR Performance – Weighted 71%
Debt-to-EBITDA Ratio – Weighted 13%
Dividend per share Growth Rate – Weighted 16%
|
ü
|
Long-term performance shares were awarded in February 2017 and will be earned based on our performance over the three-year period from January 2017 to December 2019.
|
|
ü
|
No compensation is awarded for below-threshold performance and maximum goals are capped at 200% of target.
|
|
ü
|
50% of the performance shares earned based on the achievement of the performance goals during the 2017-2019 performance period will vest on January 1, 2020, and the remaining 50% will vest on January 1, 2021, subject to continued service with the company. Performance shares not earned as a result of the failure to achieve the applicable performance goals will be forfeited.
|
|
ü
|
The performance shares provide for a cash payment following vesting equal to the aggregate cash dividends that would have been paid on the total number of performance shares earned, if any, as if the shares had been outstanding from January 1, 2017 through the date on which the shares are issued.
|
Realty Income
|
2018 Proxy Statement
|
33
|
Executive Compensation
Specifically, the performance measures and weightings for the 2017-2019 performance shares are based on the following objective performance measures, each of which are measured over the three-year performance period:
PERFORMANCE GOALS
|
WEIGHTING
|
THRESHOLD
50%
(1)
|
TARGET
100%
|
MAXIMUM
200%
(1)
|
TSR position within MSCI US REIT Index
(2)
|
45%
|
35
th
Percentile
|
55
th
Percentile
|
80
th
Percentile
(or greater)
|
TSR position within J.P. Morgan Net Lease Peer Group
(2)
|
26%
|
35
th
Percentile
|
55
th
Percentile
|
80
th
Percentile
(or greater)
|
Debt-to-EBITDA Ratio
|
13%
|
6.3x
|
6.0x
|
5.5x
(or less)
|
Dividend per share Growth Rate
|
16%
|
2.0%
|
6.0%
|
12.0%
|
(1)
|
The maximum number of performance shares earned is equal to 200% of target, and threshold annual incentive is equal to 50% of target, with linear interpolation between threshold and maximum. No shares are earned for below-threshold performance.
|
(2)
|
TSR is calculated by comparing the trailing 20-trade-day average stock price at the end of the performance period, assuming contemporaneous reinvestment of dividends, to the closing stock price on December 31, 2016.
|
We are a member of the MSCI US REIT Index, which is a broad REIT index, and the J.P. Morgan Net Lease Peer Group. Both indices are used to measure performance between REITs within and across the subsectors. The Compensation Committee selected the J.P. Morgan Net Lease Peer Group, a group of peers categorized as “triple net lease REITs” included in the J.P. Morgan REIT database published by J.P. Morgan North American Equity Research, in order to provide a set of companies that are more comparable to Realty Income in terms of lease type. There are many ways to compare our performance to each of these indices. The Compensation Committee analyzed the various methods and determined that comparisons on a percentile basis, was widely used in the marketplace and appropriate for evaluating our performance during the 2017-2019 performance period. The Compensation Committee believes that these goals remain rigorous, specifically the relative TSR metrics which require the company to outperform the indices to even achieve payouts at target. The Debt-to-EBITDA ratio and dividend per share growth rate metrics require the company to manage its capital structure thoughtfully, and increase earnings to support the payment of monthly dividend in order to achieve payouts in excess of target for these metrics.
The long-term performance shares granted in February 2017 to our named executive officers are as follows:
NAMED EXECUTIVE OFFICER
|
PERFORMANCE SHARE
TARGET DOLLAR VALUE
|
PERFORMANCE SHARES
GRANTED AT TARGET
(1)
|
John P. Case
|
$3,500,000
|
52,846
|
Sumit Roy
|
1,652,778
|
24,955
|
Paul M. Meurer
|
918,750
|
13,872
|
Michael R. Pfeiffer
|
661,111
|
9,982
|
Neil M. Abraham
|
661,111
|
9,982
|
(1)
|
The number of performance shares granted at target value reflect the grant date fair value of $68.75 per share (excluding the dividend equivalent rights), using a multifactor Monte Carlo simulation model for the market conditions associated with the TSR performance goals, valued at $47.61 per share, plus $21.14 per share for the two performance conditions of debt-to-EBITDA ratio and dividend growth rate.
|
Time-Based Restricted Shares
The Compensation Committee grants restricted share awards on an annual basis, which are designed to: (i) increase the named executive officers’ common stock ownership, (ii) motivate our named executive officers to improve long-term common stock price performance, (iii) align the named executive officers’ interests with the interests of stockholders, and (iv) operate as a retention mechanism for key members of management.
In connection with the determination of the 2017 compensation program, the Compensation Committee proposed initial 2017 annual restricted share award values to be granted in February 2018. The proposed annual award values for all NEOs were reviewed and approved on February 16, 2018 and will vest evenly over four years commencing on January 1 of the year following the grant. The time-based restricted shares granted are as follows:
34
|
Realty Income
|
2018 Proxy Statement
|
Executive Compensation
NAMED EXECUTIVE OFFICER
|
RESTRICTED SHARE
DOLLAR VALUE
|
ANNUAL RESTRICTED
SHARES GRANTED
(1)
|
John P. Case
|
$1,000,000
|
20,016
|
Sumit Roy
|
472,222
|
9,452
|
Paul M. Meurer
|
262,500
|
5,254
|
Michael R. Pfeiffer
(2)
|
188,889
|
3,780
|
Neil M. Abraham
|
188,889
|
3,780
|
(1)
|
Annual restricted shares reflect the actual number of shares that were granted by the Compensation Committee on February 16, 2018 for all NEOs. The number of annual restricted shares was calculated by dividing the dollar value authorized by the Compensation Committee by the closing price of our common stock on the date of grant, February 16, 2018, of $49.96, and rounded down to the nearest whole number.
|
(2)
|
Given that Mr. Pfeiffer is retirement eligible prior to the final vesting date of shares granted, he was granted restricted share units (RSUs) instead of restricted shares in order to preserve the deferral of his income taxation until the issuance of the shares to him upon vesting.
|
2015 LTIP Award Payout
In February 2018, the Compensation Committee certified percentage achievement for the 2015-2017 performance shares that were granted in February 2015, based on our performance relative to the following metrics during the three-year performance period ending December 31, 2017:
PERFORMANCE GOALS
|
WEIGHTING
|
THRESHOLD
50%
|
TARGET
100%
|
MAXIMUM
150%
|
2017
ACTUAL
|
%
EARNED
|
TSR position within MSCI US REIT Index
|
50%
|
35
th
Percentile
|
55
th
Percentile
|
75
th
Percentile
(or greater)
|
71
st
Percentile
|
140.3%
|
TSR less TSR of the NAREIT Freestanding Index
|
20%
|
−150 bps
|
+75 bps
|
+300 bps
(or greater)
|
+225 bps
|
133.4%
|
Debt-to-EBITDA Ratio
|
10%
|
6.3x
|
6.0x
|
5.5x
(or less)
|
5.5x
|
150%
|
Dividend Per Share Growth Rate
|
20%
|
2%
|
6%
|
10%
|
15.3%
|
150%
|
For purposes of these metrics, TSR was calculated by comparing the trailing 20-trade-day average stock price at the end of the performance period, December 31, 2017, assuming contemporaneous reinvestment of dividends, to the closing stock price on December 31, 2014. Based on achievement above target performance levels for all metrics, each named executive officer received 141.8% of the target shares granted. Fifty percent of the performance shares earned were issued as common stock that immediately vested. The remaining fifty percent are units subject to time vesting through January 1, 2019. The following table sets forth the performance shares earned by each NEO under the 2015 LTIP. Mr. Abraham did not receive a 2015 LTIP award payout, as he was not an executive officer during that performance year.
NAMED EXECUTIVE OFFICER
|
TARGET PERFORMANCE
SHARES GRANTED
|
PERFORMANCE
SHARES EARNED
|
John P. Case
|
19,230
|
27,270
|
Sumit Roy
|
12,158
|
17,241
|
Paul M. Meurer
|
9,884
|
14,016
|
Michael R. Pfeiffer
|
7,746
|
10,984
|
Restricted Shares Granted in February 2017 for 2016 Performance
Our time-vesting, restricted share and restricted share unit awards are typically granted after fiscal year-end in recognition of the company’s prior year performance under the performance metrics for that year. For a discussion of restricted share awards that were granted in February 2017 under our 2016 STIP and restricted share awards granted in February 2017, which were intended to be compensation for 2016, see pages 30 to 33 of the company’s 2017 Proxy Statement filed with the SEC on April 3, 2017.
Restricted Share Vesting
Our restricted shares and restricted share units typically vest 25% per year on January 1, but are subject to accelerated vesting in the event of retirement, which is defined as a voluntary termination of employment by persons who are at least 60 years of age and who have provided at least ten years of service to the company.
Realty Income
|
2018 Proxy Statement
|
35
|
Executive Compensation
The Compensation Committee believes that this vesting approach is (i) consistent with market practices, (ii) easy to administer, and (iii) preserves the benefit of acceleration, which occurs only upon actual retirement.
Given that Mr. Pfeiffer is eligible for retirement prior to the end of the vesting period, he was granted RSUs in February 2017 and February 2018 instead of restricted shares in order to preserve the deferral of his income taxation until the issuance of the shares upon vesting. The RSUs have dividend equivalents that pay out concurrently on the payment date of the dividend, regardless of the vested status of the RSUs. This provides the RSUs with the same economic rights as shares of restricted stock, which are entitled to cash dividends on the dividend payment date.
Changes to 2018 Incentive Programs
In February 2018, the Compensation Committee adopted the 2018 STIP and LTIP with the same performance goal categories and substantially similar weightings to those used in the 2017 program. The 2018 Peer Group used for 2018 compensation decisions is consistent with the 2017 Peer Group listed on page 26. Below is the 2018 target incentive opportunity established by the Compensation Committee in February 2018:
NAMED EXECUTIVE
OFFICER
|
2018 BASE
SALARY
|
2018 TARGET
STIP
(1)
|
2018 TARGET
LTIP
(2)
|
2018 TOTAL TARGET COMPENSATION
|
John P. Case
|
$1,000,000
|
$1,850,000
|
$5,300,000
|
$8,150,000
|
Sumit Roy
|
550,000
|
935,000
|
2,315,000
|
3,800,000
|
Paul M. Meurer
|
525,000
|
656,250
|
1,318,750
|
2,500,000
|
Michael R. Pfeiffer
|
450,000
|
500,000
|
850,000
|
1,800,000
|
Neil M. Abraham
|
385,000
|
385,000
|
880,000
|
1,650,000
|
(1)
|
The 2018 STIP will be awarded entirely in cash.
|
(2)
|
The 2018 LTIP consists of awards of performance shares and time-vesting restricted stock or RSUs. Approximately seventy-eight percent of the NEOs’ 2018 LTIP opportunity is in the form of performance shares and twenty-two percent in the form of time-vesting restricted stock or RSUs.
|
Severance and Change in Control Arrangements
Each of the named executive officers has the right to receive severance compensation upon the occurrence of certain events as specified in their employment agreements. In addition, our award agreements provide certain rights in connection with a change of control and certain terminations of employment.
The following is a list of the scenarios under which the named executive officers have rights to receive severance compensation.
ü
|
Qualifying Termination
|
ü
|
Change in Control Termination
|
ü
|
Death
|
ü
|
Disability
|
ü
|
For our CEO, a non-renewal of his employment agreement
|
|
|
Further detail surrounding the payments and benefits upon the occurrence of each scenario can be found in the section titled “Potential Payments Upon Termination or Change in Control” on page 42. The Compensation Committee believes these benefits are reasonable. The payments and benefit levels under the employment agreements did not influence and were not influenced by other elements of compensation. The agreements were designed to help (i) attract and retain key employees, (ii) preserve key employee’s morale and productivity, (iii) align with best practices, and (iv) promote continuity of management in the event of an actual or threatened change in control. These change in control benefits allow executives to assess takeover bids objectively without regard to the potential impact on their individual job security.
Other Benefits and Policies
We provide medical and other benefits to our named executive officers that are similar to those benefits offered to all of our full-time employees, including a 401(k) plan with a matching contribution by the company and coverage under a health and disability insurance program.
Executive Stock Ownership Requirements
Effective January 1, 2013, the Board of Directors implemented stock ownership requirements for the company’s CEO and the other named executive officers to closely align the interests of these individuals with the interests of our stockholders. The minimum share requirement is five times base salary for our CEO, four times base salary for our President, and three times base salary for the other named executive officers using their salary on January 1, 2013 or the date they became subject to the guidelines. Each executive has five years from the later of the date of adoption or date of appointment to an executive-level position to achieve the requirement.
36
|
Realty Income
|
2018 Proxy Statement
|
Executive Compensation
All vested and unvested restricted share and RSU awards qualify towards satisfaction of the requirement. Performance shares do not qualify towards the requirement. Compliance is evaluated on an annual basis as of December 31 of each year. The following table sets forth the requirements for each of our named executive officers:
NAMED EXECUTIVE OFFICER
|
GUIDELINE
|
MINIMUM STOCK
OWNERSHIP
REQUIREMENT
(1)
|
STOCK OWNERSHIP
AS OF
DECEMBER 31, 2017
(2)
|
John P. Case
|
5x base salary
|
87,565
|
191,598
|
Sumit Roy
|
4x base salary
|
39,726
|
84,522
|
Paul M. Meurer
|
3x base salary
|
26,448
|
47,550
|
Michael R. Pfeiffer
|
3x base salary
|
26,448
|
46,686
|
Neil M. Abraham
|
3x base salary
|
18,817
|
14,803
|
|
(1)
|
The requirement for each NEO was determined first in dollars as a multiple of the executive’s annual base salary as of the date they become subject to this requirement, and then by converting such amount to a fixed number of shares based on the company’s average closing common stock price for the 60 trading days prior to such date. An executive’s stock ownership requirement will only be re-established upon a change to a different executive position.
|
|
(2)
|
As of December 31, 2017, all of our named executive officers satisfied their ownership requirements, except for Mr. Abraham, who became subject to the requirements on November 30, 2015 and has until November 30, 2020 to achieve the requirement.
|
Tax Considerations
Section 162(m) of the Code disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1 million in any taxable year for “covered employees.” Prior to the Tax Cuts and Jobs Act of 2017, covered employees generally consisted of our Chief Executive Officer and each of the next three highest compensated officers serving at the end of the taxable year other than our Chief Financial Officer, and compensation that qualified as “performance-based” under Section 162(m) was exempt from this $1 million deduction limitation. As part of the Tax Cuts and Jobs Act of 2017, the ability to rely on this exemption was, with certain limited exceptions, eliminated; in addition, the definition of covered employees was expanded to generally include all named executive officers. The Board, after considering the potential impact of the application of Section 162(m) and future guidance of the new rules, reserves the right to provide compensation to executive officers that may not be tax deductible if it believes providing that compensation is in the best interests of the company and its stockholders.