SUMMARY OF FISCAL 2018 COMPENSATION CHANGES FOR OUR NAMED EXECUTIVE OFFICERS
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Compensation
Category
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Changes We Made
in Fiscal 2018
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Why We Made
These Changes
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Base Salary
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3.25% increase for each of our named executive officers.
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Same increase given to salaried associates throughout the Company in recognition of successful performance. The Committee determined that the performance of our named executive officers warranted this increase. See pages 30 to 31 for more detail.
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Annual Incentive Bonus
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109.7% payout versus an 42.2% payout in fiscal 2017.
Adjusted pre-tax income used as the bonus performance measure.
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Based on Company performance measured against the pre-determined adjusted pre-tax income target set at the beginning of fiscal 2018. See pages 31 to 32 for more detail.
The Committee changed the bonus performance measure to better align bonus performance with factors within the control of our NEOs. See page 32 for more detail.
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Long-Term Equity Award
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No change in the annual awards to our named executive officers.
Diluted earnings per share, adjusted to exclude income tax, used as the performance measure for performance stock unit (“PSU”) grants.
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The annual awards to our named executive officers were maintained at prior year levels, which the Committee believed continued to provide competitive pay opportunities for them.
The Committee changed the PSU performance measure to better align PSU performance with factors within the control of our NEOs. See page 34 for more detail.
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Following the federal corporate tax law changes enacted at the end of 2017, CarMax paid a “thank you” bonus to employees who were not otherwise bonus eligible. The “thank you” bonus was a one-time payment, totaling $8.0 million, made to 20,207 employees. Relatedly, the Company made a one-time discretionary payment to each of the 1,291 employees in the CarMax annual bonus program, including our NEOs, to offset the impact the “thank you” bonus had on the fiscal 2018 bonus performance measure. The one-time bonus payment to NEOs was approved by the Committee and is discussed in more detail on page 33.
CarMax believes strongly in its pay-for-performance philosophy. In fiscal 2018, an average of 81% of the target total direct compensation of our named executive officers was attributable to annual incentive bonus and long-term equity award compensation and therefore directly tied to CarMax performance. Compensation mix is discussed in more detail on page 35.
How We Make Compensation Decisions
The Compensation and Personnel Committee oversees our executive and director compensation programs and determines all executive officer and director compensation.
COMPENSATION PHILOSOPHY AND OBJECTIVES
CarMax has a pay-for-performance philosophy. The Committee believes that the best way to implement this philosophy is by tying a significant portion of our executives’ total direct compensation to the attainment of both annual financial goals and multi-year stock price appreciation.
The Committee has established the following objectives for our executive compensation program:
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Align the interests of executive officers with the financial interests of our shareholders.
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Encourage the achievement of our key strategic, operational and financial goals.
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Link incentive compensation to Company and stock price performance, which the Committee believes promotes a unified vision for senior management and creates common motivation among our executives.
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Attract, retain and motivate executives with the talent necessary to drive our long-term success.
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Provide the Committee the flexibility to respond to the continually changing environment in which we operate.
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The key elements of our executive compensation program are base salaries, annual incentive bonuses and long-term equity awards. The Committee generally makes determinations regarding long-term equity awards, base salaries and annual incentive bonuses at its March and April meetings. The Committee makes decisions regarding each element of pay to further the objectives described above. The specific ways in which each element of compensation supports these objectives are described beginning on page 30.
The Committee recognizes the impact that an adjustment to one element of compensation may have on other elements. For example, an increase in an officer’s base salary will result in a larger target annual incentive amount since that amount is determined as a percentage of base salary. Although the Committee considers these relationships between the various elements of compensation - and also considers each executive officer’s total compensation - decisions regarding any one element of compensation are not determinative of decisions regarding other elements.
The Committee generally considers the value of stock-based compensation as an element of our executive compensation program at the time of grant of an equity award, not at the time of exercise or vesting. Accordingly, the Committee does not consider the realized value of long-term equity compensation when designing and evaluating our executive compensation program.
COMPENSATION CONSULTANT
The Committee engages a compensation consultant, which it uses to obtain access to independent compensation data, analysis and advice. The Committee retained Frederic W. Cook & Co., Inc. (“FWC”) to assist it while making decisions regarding the compensation of our executive officers for fiscal 2018. In May 2017, the Committee engaged Semler Brossy Consulting Group, LLC (“SBCG”) as its compensation consultant, replacing FWC. Under its charter, the Committee has the sole authority to hire, oversee and terminate compensation consultants, as well as to approve compensation consultant fees and any other terms of the engagement.
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The Committee has retained an independent compensation consultant.
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Committee members have direct access to the compensation consultant without going through management. Neither FWC nor SBCG provided services to CarMax other than those it provided to the Committee.
The Committee assesses its compensation consultant’s independence annually. It assessed FWC’s independence in April 2016 and 2017, under SEC and NYSE standards and concluded that FWC was independent.
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In June 2017, at its first meeting following the engagement of SBCG, the Committee assessed SBCG’s independence under SEC and NYSE standards and concluded that it was independent.
The Committee considers, among other factors:
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whether the consultant provided other services to CarMax;
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the amount of fees paid by CarMax to the consultant as a percentage of the consultant’s total revenue;
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the consultant’s policies and procedures designed to prevent conflicts of interest;
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any business or personal relationship between the individuals advising the Committee and any Committee member;
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any CarMax stock owned by the individuals advising the Committee; and
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any business or personal relationship between the individuals advising the Committee, or the consultant itself, and an executive officer of CarMax.
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The Committee’s compensation consultant frequently attends Committee meetings and provides analysis and recommendations that inform the Committee’s decisions. FWC assisted the Committee in fiscal 2018 by analyzing and providing recommendations with regard to total direct compensation for the Company’s CEO and executive and senior vice presidents.
FWC also assisted the Committee in setting appropriate performance criteria for the Company’s equity and bonus programs and by providing general compensation advice. Following its engagement, SBCG provided general compensation advice throughout the remainder of fiscal 2018, including analysis related to the composition of our peer group and non-employee director pay.
MANAGEMENT’S ROLE
Although management does not have any decision-making authority regarding executive compensation, management assists the Committee by recommending base salary levels, annual incentive bonus objectives and targets, and individual long-term equity awards for executives other than the CEO. Management also assists the Committee with the preparation of meeting agendas and prepares materials for those meetings as directed by the Committee.
The Committee has not delegated any authority with respect to the compensation of our executive officers and directors. The Committee, however, has delegated limited authority to our CEO and CFO to grant long-term equity awards to our non-executive officers between regularly scheduled Committee meetings in an amount not to exceed 75,000 shares or units. These awards are subject to our Employee Equity Grant Policy, which is available under the “Corporate Governance” link at investors.carmax.com. The Committee’s practice is to review and ratify any such grant at its next regularly scheduled meeting.
Notwithstanding the Committee’s use of outside advisers and management’s participation in the executive compensation process, the Committee makes all executive compensation decisions using its own independent judgment.
CONSIDERATION OF THE MOST RECENT ADVISORY “SAY-ON-PAY” VOTE
At the 2017 annual shareholders meeting, our shareholders approved our executive compensation program, with more than 87% of the votes cast in favor of the program. This represented a significant majority of our shareholders and the Committee was pleased with the response. However, the vote was somewhat lower than in recent years (96%, 97%, and 91% in 2016, 2015, and 2014, respectively). The Committee has not materially changed the structure of our executive compensation program as a consequence of this vote, but continues to actively monitor shareholder feedback and support of the Company’s pay practices.
PEER GROUP
Each year, the Committee reviews market compensation data provided by its independent consultant to determine whether the compensation opportunities of the named executive officers are appropriate and competitive.
The Committee used the following peer group of companies to benchmark the fiscal 2018 compensation disclosed in this proxy statement. The Committee selected this peer group in June 2016 based on an analysis by FWC and the Committee’s independent judgment. These peers fell within a reasonable range (both above and below CarMax) of comparative factors such as revenue, market capitalization, net income, revenue growth, assets and one- and three-year total shareholder return. These peers are generally “big box” retailers, specialty auto retailers or direct competitors.
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Advance Auto Parts, Inc.
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Hertz Global Holdings, Inc.
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AutoNation, Inc.
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Kohl’s Corporation
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AutoZone, Inc.
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Lowe’s Companies, Inc.
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Avis Budget Group, Inc.
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Macy’s, Inc.
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Dick’s Sporting Goods, Inc.
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Ross Stores, Inc.
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Dollar General Corporation
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The Sherwin-Williams Company
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eBay Inc.
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Southwest Airlines Co.
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The Gap, Inc.
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Staples, Inc.
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Genuine Parts Company
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Tractor Supply Company
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As noted in our fiscal 2017 proxy, the Committee removed Family Dollar Stores from the Company’s peer group in June 2016 based on the acquisition of Family Dollar Stores by Dollar Tree, Inc. Otherwise, the peer group selected in June 2016 was the same as the peer group specified above.
In preparation for fiscal 2019 compensation decisions, the Committee re-evaluated this peer group in October 2017 based on an analysis by SBCG and the Committee’s independent judgment. With some exceptions, the Committee determined that the peer
group remained appropriate, with the peers continuing to fall within a reasonable range (both above and below CarMax) of comparative factors such as revenue, market capitalization, net income, revenue growth, assets and one- and three-year total shareholder return. However, the Committee removed Avis Budget Group, Inc. and Hertz Global Holdings, Inc. because significant market capitalization declines diminished their comparability to CarMax. Staples, Inc. was also removed from the peer group following its acquisition by a private equity group. To replace these peers, the Committee added Best Buy Co., Inc., The TJX Companies, Inc., Dollar Tree, Inc., and L Brands, Inc. to its peer group. Like the other companies in our peer group, each of these new peer group members falls within a reasonable range (both above and below CarMax) of the comparative factors noted above. The Committee will use this revised peer group to benchmark compensation practices for fiscal year 2019.
In addition to the peer group, the Committee uses broader survey data to benchmark compensation practices. In fiscal 2018, the Committee considered three national surveys produced by Equilar, Towers Watson and Mercer with a focus on executives within the retail/wholesale and automotive industries.
The Committee considers a blend of peer group data and broader survey data in benchmarking compensation. The Committee believes that this mix of data provides the most comprehensive view of executive compensation practices at companies against whom we compete for talent and allows the Committee to ensure that CarMax continues to provide appropriate and competitive compensation. This mix of data also allows the Committee to obtain broader market context with regard to certain positions that may not exist in a comparable form at every company in our peer group or that may not be classified as a named executive officer at every company in our peer group.
The Committee generally uses the 50
th
percentile of the blended peer/survey data as a reference in setting the base salaries and target annual incentive bonus opportunities of our named executive officers. The Committee uses long-term equity awards that are tied to objective performance metrics to further reward executive officers when CarMax performs well. If the Company delivers sustained performance gains, these long-term equity awards are targeted to provide an opportunity for total direct compensation beyond the median of the blended peer/survey data.
The Committee uses peer group and broader survey data as one of many factors in making compensation decisions. Other factors include individual performance, Company performance, tenure, internal pay equity and succession planning.
What We Pay and Why: Elements of Compensation
The key elements of compensation for our named executive officers are base salary, an annual incentive bonus and long-term equity awards. Together, these elements, in addition to the one-time discretionary bonus payment (described on page 33), make up total direct compensation.
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Base Salary
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+
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Annual Incentive
Bonus
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+
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Long-Term Equity Awards
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=
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Total Direct Compensation
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This section describes these elements and details the amounts of each earned by our named executive officers in fiscal 2018.
BASE SALARY
We pay competitive base salaries to retain key officers and attract the new talent necessary for our long-term success. An executive officer’s base salary generally reflects the officer’s responsibilities, tenure and job performance, as well as the market for the officer’s services. The Committee reviews officer base salaries every year, generally in March or April. When the Committee reviews base salaries, it considers the reports and advice provided by its independent compensation consultant and the peer group and survey data described above, as well as the recommendations provided by our CEO (except when setting the CEO’s base salary).
At the beginning of fiscal 2018, the Committee approved the following base salary adjustments.
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Name
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Prior Base Salary
($)
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Fiscal 2018 Base Salary
($)
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Percentage Increase
(%)
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William D. Nash
(a)
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1,000,000
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1,032,500
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3.25
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Thomas W. Reedy
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700,000
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722,750
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3.25
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William C. Wood
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700,000
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722,750
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3.25
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Edwin J. Hill
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600,000
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619,500
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3.25
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Eric M. Margolin
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575,000
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593,688
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3.25
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(a)
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Mr. Nash’s prior base salary represents the base salary set by the Committee at the time of his promotion to CEO on September 1, 2016. For the portion of fiscal 2017 prior to his promotion to CEO, his base salary was $800,000.
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The Committee increased Mr. Nash’s salary by 3.25% and approved Mr. Nash’s recommendation to increase the base salaries for each of the other named executive officers by 3.25%. These increases were based on the individual contributions that each named executive officer made to CarMax’s performance in fiscal 2017 and were consistent with the base salary increases awarded generally to our salaried associates.
ANNUAL INCENTIVE BONUS
We pay annual incentive bonuses to drive the achievement of CarMax’s financial goals. The amount of the incentive bonus depends on our performance as measured against objective performance goals established by the Committee at the beginning of each fiscal year. Bonuses are not guaranteed.
We calculate bonuses using the following formula:
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Base Salary
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x
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Target Percentage of
Base Salary
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x
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Performance Adjustment
Factor
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=
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Annual Incentive Bonus
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Base salaries, which are the first component of this formula, are discussed above. The “target percentage of base salary” is an individual’s incentive bonus target expressed as a percentage of base salary. This percentage differs among our named executive officers depending on their level of responsibility and is set forth in a written agreement between each officer and the Company. Each named executive officer’s target percentage is listed in the table on page 32.
The last component of the bonus formula – the “performance adjustment factor” – is a percentage representing the Company’s success in meeting the performance goals set by the Committee at the beginning of each fiscal year.
The following chart describes how the Committee applied this formula in fiscal 2018.
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Step One
: Select
Performance Measure
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The Committee determined in April 2017 that the performance goals for fiscal 2018 would be based on our fiscal 2018 adjusted pre-tax income (i.e. earnings before the provision for income tax and interest expense). The Committee believes that this adjusted pre-tax income is a measure of performance that can be directly affected by management decisions and therefore tying performance goals to this adjusted pre-tax income expense aligns management and shareholder interests.
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Step Two
: Select
Performance Targets
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The Committee then established the following adjusted pre-tax income targets for fiscal 2018: $1,062.8 million as the threshold goal; $1,123.4 million as the target goal; $1,179.7 million as the premium goal; and $1,222.2 million as the maximum goal.
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Step Three
: Select
Performance Adjustment
Factors
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The Committee then established the following performance adjustment factors for fiscal 2018:
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25% if the threshold goal of $1,062.8 million was achieved
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100% if the target goal of $1,123.4 million was achieved
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150% if the premium goal of $1,179.7 million was achieved
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200% if the maximum goal of $1,222.2 million was achieved
If the threshold performance goal was not achieved, no incentive bonus would be paid. The performance adjustment factors are determined using straight-line interpolation when our actual performance falls between two performance goals.
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Step Four
: Assess
Performance Against Targets and Determine Payouts
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For fiscal 2018, the Company achieved $1,134.4 million in adjusted pre-tax income, which represents $664.1 million in net earnings less the effect of the $399.5 million income tax provision and $70.7 million in interest expense. The Committee certified CarMax’s adjusted pre-tax income amount in April 2018, yielding a performance adjustment factor of 109.7%. The Committee multiplied this percentage by each named executive officer’s target incentive amount to determine each executive officer’s fiscal 2018 bonus payout.
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The following table shows each named executive officer’s base salary, incentive target percentage of base salary, and target and maximum bonus amounts. The table also shows each officer’s actual fiscal 2018 bonus.
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Name
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Base Salary ($)
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Incentive Target Percentage (%)
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Target Incentive Amount ($)
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Actual Fiscal 2018 Incentive Bonus
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Maximum Incentive Amount ($)
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William D. Nash
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1,032,500
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130
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1,342,250
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1,472,448
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2,684,500
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Thomas W. Reedy
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722,750
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75
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542,063
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594,643
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1,084,126
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William C. Wood
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722,750
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75
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542,063
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594,643
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1,084,126
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Edwin J. Hill
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619,500
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75
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464,625
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509,694
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929,250
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Eric M. Margolin
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593,688
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75
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445,266
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488,457
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890,532
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The Committee sets robust performance targets for our annual incentive plan to drive achievement of CarMax’s financial goals. For the last five fiscal years, our average performance adjustment factor has been 103.9% (109.7%, 42.2%, 67.8%, 179.4%, and 120.6% for fiscal 2018, 2017, 2016, 2015, and 2014 ), meaning that, on average for the past five years, we have paid our named executive officers an annual incentive bonus of 103.9% of their respective target incentive amounts for achievement against the targets established by the Committee.
For fiscal 2018, the Committee determined that no change to the incentive target percentages of our named executive officers was required to maintain an appropriate incentive structure.
The Committee determines all incentive bonuses in accordance with the CarMax, Inc. Annual Performance-Based Bonus Plan (“Bonus Plan”). The Bonus Plan provides that the maximum amount payable to any one individual in any one fiscal year is $5 million. In fiscal 2018, however, the Committee limited the maximum performance adjustment factor to 200%, ensuring that Mr. Nash’s bonus could not exceed
$2,684,500
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The Bonus Plan authorizes the Committee to reduce the amount of any bonus paid to a named executive officer below the amount that otherwise would be payable. The Committee may also decide not to pay a bonus even when performance goals have been satisfied. Under no circumstances, however, may the Committee increase the amount of any bonus payable under the Bonus Plan above the amount that would be payable to an executive upon application of the relevant performance adjustment factor.
ONE-TIME BONUS PAYMENT
Following the federal corporate tax changes enacted at the end of 2017, CarMax paid a “thank you” bonus to employees who were not otherwise bonus eligible. The “thank you” bonus was a one-time payment, totaling $8.0 million, made to 20,207 employees.
Relatedly, the Company made a one-time discretionary payment to each of the approximately 1,291 employees in the CarMax annual bonus program, including the NEOs, to offset the impact the “thank you” bonus had on the fiscal 2018 bonus performance measure. The Committee approved this one-time discretionary payment to the NEOs in order to align treatment of the NEOs with the other Company employees receiving an annual bonus for fiscal 2018, each of whom received this discretionary payment. The following table shows the discretionary bonus amount paid to each NEO.
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Name
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One-Time Bonus
($)
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William D. Nash
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96,239
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Thomas W. Reedy
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38,866
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William C. Wood
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38,866
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Edwin J. Hill
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33,314
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Eric M. Margolin
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31,926
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LONG-TERM EQUITY AWARDS
We grant long-term equity awards to tie our executives’ long-term compensation directly to CarMax’s stock price and to drive the achievement of our strategic goals. We also believe that long-term equity awards are an important retention tool.
In fiscal 2018, we granted our named executive officers two kinds of long-term equity awards: stock options and performance stock units (“PSUs”). All of our long-term equity grants were made pursuant to the CarMax, Inc. 2002 Stock Incentive Plan (“Stock Incentive Plan”).
In determining the number of options and PSUs to award, the Committee considered the named executive officer’s role at CarMax; benchmarking data; our recent financial performance; the performance of our common stock; the fair market value, expense and dilutive effect of any potential award; succession planning; and the importance of retaining the officer’s services. The Committee solicits the advice of its independent compensation consultant and the opinion of the Company’s CEO
except with respect to the awards to the CEO. The CEO generally gives the Committee an initial recommendation for annual long-term equity awards for the other named executive officers. The Committee reviews this recommendation and makes its own independent determination.
Stock Options
Each option represents the right to purchase one share of our common stock at the exercise, or “strike,” price. The strike price is equal to the volume-weighted average price of our common stock on the grant date. The Committee believes that the use of the volume-weighted average price, as opposed to the closing price, is more representative of the value of the common stock on the grant date because it incorporates all trades made on the grant date.
Our option awards generally vest in 25% increments over four years; that is, one quarter of the options granted vests on the first anniversary of the grant, another quarter vests on the second anniversary, and so forth. The awards expire on the seventh anniversary of the grant date.
We believe that granting stock options supports our pay-for-performance philosophy by aligning management and shareholder interests. If our stock price does not rise, the options have no value. In addition to promoting alignment of management and shareholder interests, the four-year vesting schedule and seven-year exercise term of our options ensures that our executives are appropriately focused on CarMax’s long-term strategic goals. This vesting schedule also operates as a retention tool.
Performance Stock Units
Fiscal 2018 PSU Terms
Depending on the Company’s achievement of performance goals over a three-year period, PSUs represent the right to receive between 0% and 200% of a targeted number of shares of our common stock. For the fiscal 2018 PSUs, the Committee used diluted earnings per share, adjusted to exclude income tax, as the PSU performance measure. The number of shares delivered to each PSU holder will be determined based upon actual three-year cumulative adjusted diluted earnings per share performance compared to pre-determined three-year adjusted diluted earnings per share goals. Specifically, each PSU is multiplied by a percentage that represents the Company’s success in meeting the adjusted diluted earnings per share goals set by the Committee. If the threshold adjusted diluted earnings per share goal is met, each PSU is multiplied by 25%. The target multiplier is 100% and the maximum multiplier is 200%. The multiplier is determined using straight-line interpolation for adjusted diluted earnings per share performance that falls between the threshold and the target or between the target and the maximum. If the threshold performance goal is not achieved, no shares will be paid. PSUs generally vest on the three-year anniversary of the grant date.
The Committee considered PSUs to be a key component of our pay-for-performance philosophy in fiscal 2018 because the PSUs directly tie equity payments to a measure of CarMax’s earnings growth that the Committee believes to be an appropriate reflection of the Company’s performance. In addition, similar to our stock options, a PSU’s multi-year vesting schedule operates as a retention tool and ensures that our executives are appropriately focused on CarMax’s long-term strategic and financial goals.
2015 PSU Performance Goal Achievement
In April 2018, the Committee certified a 46% performance multiplier for the PSUs granted to our NEOs in 2015. The Committee’s determination was based on CarMax’s achievement of adjusted pre-tax income equal to $3.24 billion for the three-year performance period ended February 28, 2018. Under the terms of the 2015 PSU awards, on vesting each NEO received a number of shares of common stock equal to the number of PSUs they held multiplied by 46%. As a result, on the vesting of the 2015 PSUs, Mr. Nash, Mr. Reedy, Mr. Wood, Mr. Hill, and Mr. Margolin were entitled to receive, respectively, 3,076, 3,076, 3,076, 2,287, and 2,287 shares of common stock.
The following table shows the performance metrics for the 2015 PSU awards.
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Threshold
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Actual
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Target
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Maximum
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FY16-FY18 Adjusted Pre-Tax Income
(in thousands)
(a)
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$3,163,901
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$3,243,500
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$3,451,404
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$3,755,911
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Performance Multiplier
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25
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%
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46
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%
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100
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%
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200%
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(a)
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Adjusted pre-tax income is equal to net earnings less the provision for income tax and interest expense. For fiscal 2016 through fiscal 2018, in the aggregate, $3,243.5 million in adjusted pre-tax income represented $1,914.5 million in net earnings less an income tax provision of $1,165.4 million and $163.5 million in interest expense.
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Fiscal 2018 Long-Term Equity Awards
In fiscal 2018, as noted below, the Committee approved stock option and PSU awards to our named executive officers as part of our annual long-term equity award process.
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Options and PSUs Granted in Fiscal 2018
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Options and PSUs Granted in Fiscal 2017
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Name
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Grant Date Fair Value of
Stock Options ($)
(a)
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Grant Date Fair Value of
PSUs ($)
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Total
Grant Date
Fair Value
($)
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Grant Date Fair Value of
Stock Options ($)
(a)
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Grant Date Fair Value of
PSUs ($)
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Total
Grant Date
Fair Value
($)
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William D. Nash
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3,750,005
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1,249,974
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4,999,979
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4,249,983
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749,977
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4,999,960
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Thomas W. Reedy
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1,455,925
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485,313
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1,941,238
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1,455,917
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485,322
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1,941,239
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William C. Wood
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1,455,925
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485,313
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1,941,238
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1,455,917
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485,322
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1,941,239
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Edwin J. Hill
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1,305,925
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435,281
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1,741,206
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1,305,921
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435,293
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1,741,214
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Eric M. Margolin
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1,305,925
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435,281
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1,741,206
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1,380,365
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360,894
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1,741,259
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(a)
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We grant limited stock appreciation rights (“SARs”) in tandem with each option. The SARs may be exercised only in the event of a change-in-control of the Company. Upon the exercise of the SAR and the surrender of the related option, the officer is entitled to receive an amount equal to the difference between the value of our common stock on the date of exercise and the exercise price of the underlying stock option. No free-standing SARs have been granted.
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The grant date fair value of the annual long-term equity awards provided to all of our named executive officers remained essentially unchanged in fiscal 2018, meaning that approximately the same target economic value was delivered in fiscal 2018 as was delivered in fiscal 2017. The Committee determined based on the blended peer/survey data and its own independent judgment that maintaining equity awards at prior year levels continued to provide competitive pay for our named executive officers. The Committee adjusted the relative proportion of options to PSUs granted to Messrs. Nash and Margolin in fiscal 2018 without changing the target economic value delivered. The resulting allocation, 75% options and 25% PSUs, aligns their fiscal 2018 grant allocation with that granted to the other named executive officers.
COMPENSATION MIX
As our executives assume more responsibility, we generally increase the percentage of their compensation that is performance-based. We do not have a pre-established policy or target for allocation between specific compensation components. The following charts, however, show that the majority of target annual total direct compensation for both our CEO and our other named executive officers as a group is determined by our performance. The following charts and tables reflect the target total direct compensation (base salary, target annual incentive bonus and long-term equity grants) set by the Committee.
The table below illustrates how the target total direct compensation set by the Committee for each of our continuing named executive officers was allocated between performance-based and fixed compensation for fiscal 2018, as well as the breakdown of performance-based compensation that was based on annual and long-term Company performance.
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Percentage of Target Total Direct
Compensation
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Percentage of Target Performance-Based Compensation
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Performance-
Based
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Fixed
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Annual
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Long-
Term
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William D. Nash
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86%
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14%
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21%
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79%
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Thomas W. Reedy
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77%
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23%
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22%
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78%
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William C. Wood
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77%
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23%
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22%
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78%
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Edwin J. Hill
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78%
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22%
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21%
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79%
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Eric M. Margolin
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79%
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21%
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20%
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80%
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ADDITIONAL ELEMENTS OF COMPENSATION
We provide our executive officers the benefits available to CarMax associates generally. We also provide the limited perquisites described below. These benefits and perquisites are intended to be part of a competitive compensation package.
Benefits Available to CarMax Associates Generally
Our executives and our full-time associates generally are eligible for health insurance coverage, life insurance, short- and long-term disability insurance, matching gifts to qualified charitable organizations, and a defined contribution, or 401(k), plan that we refer to as our Retirement Savings Plan.
In addition, executives and CarMax associates who satisfied certain criteria as of December 31, 2008, may be eligible for benefits under our frozen Pension Plan. Additional details regarding these frozen benefits can be found in the “Pension Benefits in Fiscal 2018” table on page 46.
Non-Qualified Retirement Plans
Our executives and other highly-compensated associates are eligible to participate in two non-qualified retirement plans: the Retirement Restoration Plan (“RRP”) and the Executive Deferred Compensation Plan (“EDCP”). A description of these plans can be found in the narrative discussion following the “Nonqualified Deferred Compensation” table on pages 48 and 49. Details regarding the fiscal 2018 contributions to each named executive officer’s RRP and EDCP accounts, as well as the earnings and aggregate balances for those accounts, can be found in the “Nonqualified Deferred Compensation” table on page 48.
In addition to the RRP and the EDCP, executives and other highly compensated CarMax associates who satisfied certain criteria as of December 31, 2008, may be eligible for benefits under our frozen Benefit Restoration Plan.
Additional details regarding these frozen benefits can be found in the “Pension Benefits in Fiscal 2018” table on page 46.
Company Transportation
We provide the use of a CarMax-owned vehicle to each of our named executive officers and to certain other eligible associates. For associates using CarMax-owned vehicles, we bear certain maintenance and insurance costs. We treat the personal use of a Company-owned vehicle as income to the associate. The associate pays the related income taxes.
We encourage our executive officers to use our plane for business travel. Our plane is also available for personal use by Messrs. Nash, Reedy and Wood. Mr. Nash is required to reimburse CarMax for the incremental costs associated with his personal use to the extent that those costs exceed $125,000 in any fiscal year. Messrs. Reedy and Wood are required to reimburse CarMax for the incremental costs associated with their respective personal uses of the plane to the extent that those costs exceed $70,000 in any fiscal year. Our executives bear all income taxes associated with their personal use of the plane.
We do not provide tax gross-ups on any of these transportation benefits.
Tax and Financial Planning Services
We provide a tax and financial planning benefit to our named executive officers. This benefit was valued at $13,660 for fiscal 2018. Officers who forego this benefit may engage their own tax professional at the Company’s expense in an amount up to $10,000 per year. The Committee approved this benefit to reduce the amount of time and attention that our executive officers must spend on personal tax and financial planning, which permits them to focus on their responsibilities to CarMax, and to maximize the financial reward of the compensation that CarMax provides. Officers bear all income taxes associated with these tax and financial planning benefits. We do not provide tax gross-ups on these benefits.
Additional Information
SEVERANCE AGREEMENTS
We have severance agreements with each of our named executive officers. The Committee has determined that these agreements are beneficial to us because they contain restrictive covenants relating to confidential information, non-competition and non-solicitation of our associates. The Committee also believes that these agreements serve as a recruiting tool and better enable our current executives to focus on CarMax’s strategic and operating goals. The agreements provide for severance payments under certain circumstances, which are discussed in more detail under “Potential Payments Upon Termination or Change-in-Control” beginning on page 49. None of the severance agreements provide a guaranteed term of employment, nor do they provide tax gross-ups on any compensation or perquisite.
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Our severance agreements do not provide for a guaranteed term of employment or tax gross-ups.
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Under the terms of the severance agreements, the Committee establishes and approves each named executive officer’s annual base salary, which cannot be less than the minimum base salary set forth in each agreement unless across-the-board reductions in salary are implemented for all of our senior officers. Additionally, the Committee approves the performance measures and payment amounts that determine each named executive officer’s annual incentive bonus under the Bonus Plan.
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The agreements provide further that each named executive officer is eligible to participate in our Stock Incentive Plan and to participate in all other incentive, compensation, benefit and similar plans available to our other executive officers.
Clawback and Forfeiture Provisions
The severance agreements contain a clawback provision. If any named executive officer engages in conduct for which he could be terminated for cause, with certain limitations, and the conduct directly results in the filing of a restatement of any financial statement that was previously filed with the SEC, the named executive officer shall, upon demand by the Company, repay with interest all compensation that was expressly conditioned on the achievement of certain financial results if the restated financial statements would have resulted in a lesser amount being paid.
In addition, at our 2012 annual shareholders meeting, we asked our shareholders to approve amendments to add clawback provisions to both our Bonus Plan and Stock Incentive Plan. Our shareholders approved these provisions, which provide that any award that is subject to recovery under any law, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, will be subject to a clawback as required by such law or any CarMax policy adopted pursuant to such law.
In addition to the clawback provisions discussed above, our equity award agreements contain a forfeiture provision. If a named executive officer is terminated for cause, the officer’s unexercised vested and unvested options, unvested MSUs and unvested PSUs will be forfeited.
Change-in-Control and Severance Benefits
Each severance agreement provides for payments and other benefits in certain circumstances involving a termination of employment, including a termination of employment in connection with a change-in-control. Payments in connection with a change-in-control are subject to a double trigger; that is, the executive is not entitled to payment unless there is both a change-in-control and the executive is subsequently terminated without cause (or resigns for good reason) within a two-year period following the change-in-control. Our executives are not entitled to any severance payments as a result of voluntary termination (outside of the retirement context) or if they are terminated for cause. Detailed information with respect to these payments and benefits can be found under the heading “Potential Payments Upon Termination or Change-in-Control” beginning on page 49.
The Committee believes that these severance benefits encourage the commitment of our named executive officers and ensure that they will be able to devote their full attention and energy to our affairs in the face of potentially disruptive and distracting circumstances. In the event of a potential change-in-control, our named executive officers will be able to analyze and evaluate proposals objectively with a view to the best interests of CarMax and its shareholders and to act as the Board may direct without fear of retribution if a change-in-control occurs. The Committee recognizes that the severance benefits may have the effect of discouraging takeovers and protecting our officers from removal because the severance benefits increase the cost that would be incurred by an acquiring company seeking to replace current management. The Committee believes, however, that the benefit to CarMax and its shareholders outweighs this concern.
RISK AND COMPENSATION POLICIES AND PRACTICES
The Compensation and Personnel Committee assesses CarMax’s compensation policies and practices each year to ensure that they do not create risks that are reasonably likely to have a material adverse effect on the Company. In fiscal 2018, management reviewed the compensation policies and practices for all CarMax associates (including store associates, store management, regional leadership teams, home office and CarMax Auto Finance associates, and executive officers). Management then presented a summary of its review at the Committee’s January 2018 meeting. The summary listed each compensation policy or practice applicable to the various groups of CarMax associates, including base salaries, annual incentive bonuses, long-term equity awards, sales bonuses, sales commissions and hourly pay. The summary also listed the potential risks associated with those policies or practices and the tools we employ to mitigate those risks, including the following:
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Annual Incentive Bonuses
: payments made to senior management are: (i) subject to a clawback provision; (ii) capped at 200% of the target incentive bonus amount or at the $5 million plan maximum, whichever is lower; and (iii) only paid when CarMax satisfies the objective metrics determined at the beginning of the year by an independent committee of non-employee directors.
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Long-Term Equity Awards
: equity awards: (i) are approved by an independent committee of non-employee directors; (ii) contain three and four-year vesting provisions; and (iii) for senior management, must be held in compliance with CarMax’s executive stock ownership guidelines.
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Sales Bonuses
: sales bonuses are monitored to ensure that associates are not overpaid based on inflated sales figures. Monitoring tools include: (i) centralized assignment of sales targets; (ii) centralized and non-negotiable vehicle pricing; (iii) electronic reporting of sales from each store to the home office; and (iv) performance of a daily vehicle inventory at each store.
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Hourly Pay
: hourly pay is tracked and managed through a centralized time management and reporting system.
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Following discussion and a review of the summary noted above, the Committee determined that none of our compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the Company.
STOCK OWNERSHIP GUIDELINES
To further align the long-term financial interests of our executives and our shareholders, the Committee has established the following stock ownership guidelines:
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Subject Officers
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Required to Own the Lesser of:
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Chief Executive Officer
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6 x Base Salary or 300,000 shares
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Executive Vice President
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3 x Base Salary or 100,000 shares
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Senior Vice President
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2 x Base Salary or 50,000 shares
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Executives have five years from the date they first become subject to a particular level of stock ownership to meet the corresponding requirement. The Committee measures compliance on an annual basis at the end of each fiscal year. Acceptable forms of ownership include shares owned outright (by the executive or an immediate family member), vested stock options, PSUs and MSUs. Our stock ownership guidelines are available under the “Corporate Governance” link at investors.carmax.com.
As of February 28, 2018, all of our current named executive officers satisfied the ownership guidelines set forth above.
PROHIBITION ON HEDGING AND PLEDGING
We have a policy prohibiting all CarMax associates from engaging in any hedging or pledging transactions involving CarMax stock. This prohibition applies to both our named executive officers and our non-employee directors.
TAX AND ACCOUNTING CONSIDERATIONS
Historically, Section 162(m) of the Internal Revenue Code generally disallowed a tax deduction for compensation over $1 million paid in any fiscal year to the CEO or any of the three other highest paid executive officers (other than the CFO) unless that compensation was performance-based. As a result of the new tax legislation that went into effect on December 22, 2017, the exception for performance-based compensation will not be available for taxable years beginning after December 31, 2017, unless such compensation qualifies for certain transition relief.
The Committee and the Company have taken appropriate actions, to the extent feasible, in an effort to preserve the deductibility of awards previously granted to our executive officers that were designed and intended to be covered by Section 162(m). Despite these actions, certain compensation originally designed to qualify as performance-based under Section 162(m) may not be deductible.
Although the Committee will continue to analyze the impact that Section 162(m) and the potential lack of deduction associated with amounts paid in excess of the deduction limitation may have on the Company, the Committee continues to retain the flexibility to make decisions with respect to the Company’s compensation programs that are based on factors other than Section 162(m) and related tax consequences. The primary function of our executive compensation program is to drive the creation of long-term shareholder value.
Section 409A of the Internal Revenue Code imposes certain requirements on non-qualified deferred compensation, which can include long-term equity awards and severance. CarMax’s executive compensation programs generally are designed to comply with, or be exempt from, the requirements of that section so as to avoid potential adverse tax consequences that may result from non-compliance.
In developing CarMax’s executive compensation programs, the Committee also considers the accounting treatment of, and the expenses associated with, the Company’s long-term equity compensation practices.