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Item 5.02
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Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements
of Certain Officers.
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2020 Executive Officer Base Salaries
The Compensation Committee and the Board
of Directors of Communications Systems, Inc. (“the Company”) approved adjustments to annual base salaries for the following
executive officers (who are expected to be among the Company’s three highest paid executives in 2020) in the amounts respectively
indicated effective January 1, 2020:
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Executive Officer and Title
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2020 Base Salary
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% increase over 2019
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Roger H. D. Lacey
Chairman and CEO
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$
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120,000
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20
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%
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Mark D. Fandrich
Chief Financial Officer and
Chief Operating Officer
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$
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265,860
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5
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%
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Scott Fluegge
President & General Manager,
JDL Technologies, Inc.
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$
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225,363
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3
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%
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Grant of 2020 Awards Under the Annual Bonus Plan
On May 6, 2020, pursuant to the
Company’s Annual Bonus Plan (“2020 Bonus Plan”), the Compensation Committee determined, and the Company’s
Board ratified and approved, awards to the three executive officers listed in the table below (the “Named Executive Officers”)
representing the opportunity to earn cash bonuses based on 2020 financial performance.
The Compensation Committee has set annual
“minimum,” “target” and “maximum” performance goals under the 2020 Bonus Plan for the Company
and for the Company’ JDL Technologies, Inc. business. The CEO (Lacey and CFO (Fandrich) will earn their bonus based on overall
company performance. The Named Executive that leads a business unit (Fluegge) has the opportunity to earn a bonus based on achievement
of goals determined for the JDL business. Any bonuses earned will be paid out approximately 75 days after year end
The target and maximum bonus each Named
Executive Officer may potentially earn under the 2020 Bonus Plan is based upon a percentage of his base salary. Under
the 2020 Bonus Plan, in general, the maximum bonus that may be paid to any Named Executive Officer may not exceed approximately
150% of the bonus opportunity at target even if financial performance exceeds the maximum goal.
Named Executives Officers must be employed
by the Company as of the end of the year to receive payout of any bonus earned for that period, unless termination of employment
is due to death, disability or follows a change of control. The Compensation Committee must approve bonuses paid to the Named Executive
Officers before payment.
The following table shows potential bonus
amounts as a percentage of salary that may be earned by the Named Executive Officer for performance under the 2020 Bonus Plan upon
achievement of their respective performance goals at target and maximum levels of performance. Under the 2020 Bonus Plan, achievement
in relation to performance goals below the target level will result in a decreasing bonus, and if achievement fails to meet the
minimum performance goals, the Named Executive will not be entitled to any bonus.
Executive Officer Name & Title
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Cash Bonus Payable if
Target Goals Achieved
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Cash Bonus Payable if
Maximum Goals
Achieved
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Roger H. D. Lacey
Chairman and CEO
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$
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78,000
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$
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117,000
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Mark D. Fandrich
Chief Financial Officer and
Chief Operating Officer
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$
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132,930
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$
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199,395
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Scott Fluegge
President & General Manager
JDL Technologies, Inc.
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$
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78,877
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$
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118,315
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Grant of Awards under the Long Term Incentive Plan
On May 6, 2020, the Company’s Compensation
Committee determined, and the Company’s Board ratified and approved, the overall design and other features of the Company’s
long-term incentive compensation awards for 2020.
Given the continuing uncertainty about
the effect the COVID-19 pandemic will have on the Company’s 2020-2022, the Company used a combination of time-vesting (i)
restricted stock units, (ii) stock options and (iii) cash awards rather than the traditional rather than the performance stock
units (“PSUs”) the Company used for the three-year plans beginning in 2016, 2017 and 2018, which were based primarily
on the operating results of the Company’s operating subsidiaries. The 2020-2022 LTIP is focused retaining key
employees and taking advantage of strategic opportunities that may present themselves.
Each Named Executive Officer received
(i) 50% of the dollar value of his Total Opportunity as an award of RSUs (determined as set forth below), (ii) 25% of the dollar
value of his Total Opportunity as an award of stock options (determined as set forth below) and (iii) 25% of his or her Target
Opportunity as a Deferred Cash Award (as defined below).
The number of RSUs awarded to each individual
was determined by (i) calculating the average price of the Company’s common stock over the 20 business-day-period beginning
April 8, 2020 and ending May 6, 2020 (the “Average Price”) and (ii) dividing the dollar value of that person’s
respective Total Opportunity or Target Opportunity that is allocated to the RSU award by the Average Price. The RSUs awarded under
this plan will vest in one-third increments on the first, second and third anniversaries of May 6, 2020. The RSUs will earn and
accrue the equivalent of the amounts paid in cash dividends to the Company’s shareholders from and after the effective date
of the RSU award that will be payable when the RSUs vest.
The number of stock options awarded to
each eligible individual was determined by dividing the dollar value of that person’s Total Opportunity that is allocated
to the stock option award by $1.76, based on the current Black Scholes valuation model. These stock options were granted as of
May 6, 2020, with the exercise price of the stock options equal be the closing price of the Company’s stock on May 6, 2020.
The options will vest in 25% increments on the first, second, third and fourth anniversaries of May 6, 2020 and expire May 6, 2027.
The number of stock options awarded to each eligible individual was determined by dividing the dollar value of such person’s
Total Opportunity that is allocated to the stock option award by $1.76, based on the current Black Scholes valuation model.
Each Deferred Cash Award is an “Other
Award” under Section 7.7 of the 2011 Executive Incentive Compensation Plan. Deferred Cash Awards will vest in full on May
6, 2022 and amounts payable under the Deferred Cash Awards will be paid immediately on or immediately after May 6, 2022
The following table shows the dollar
value of the LTIC Performance Award to each of the Named Executives that could result in the issuance of shares of Company common
stock and payment of cash after the end of the 2020-2022.
The Committee first determined that
the following NEOs would be awarded the total opportunities for long term executive compensation as a percentage of their respective
base compensation as follows:
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Long Term Opportunity in Dollars(1)
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Allocation of Long Term Opportunity in Dollars to Restricted Stock Units and Stock Options
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2020 Base
Salary
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% Base
Salary
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Grant Date Dollar
Value
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Value of LTI Opportunity Allocated to Restricted
Stock Units
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Shares Covered by Restricted
Stock Units(2)
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Value of LTI Opportunity Allocated to Stock Options
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Shares Covered by Option Grant(3)
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Value of LTI Opportunity Allocated to Cash
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Mr. Lacey
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$
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120,000
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206
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%
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$
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247,500
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$
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123,750
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23,798
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$
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61,875
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35,095
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$
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61,875
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Mr. Fandrich
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$
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265,860
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50
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%
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$
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132,930
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$
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66,465
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12,782
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$
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33,233
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18,849
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$
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33,233
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Mr. Fluegge
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$
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225,363
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40
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%
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$
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90,145
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$
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45,073
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8,668
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$
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22,536
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12,782
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$
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22,536
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___________________________
(1)
Allocated 75% to LTI Awards and 25% to Stock Options as presented, respectively, in the last
five columns.
(2)
The number of RSUs was determined by dividing the dollar value of the LTI Opportunity Allocated
to Restricted Stock Units by the 20 business day average price of the Company’s stock beginning 20 business-day-period beginning
April 8, 2020 and ending May 6, 2020 These vest over a three-year period.
(3)
We determined the number of shares covered by Stock Options granted to each Named Executive
Officer in 2020 by dividing of the dollar value of the LTI Opportunity Allocated to Stock Options for each executive as discussed
above by a Black-Scholes value of $1.76. The exercise price of each option is $5.39 (the closing market price on May 6, 2020) and,
each option vests 25% each year beginning May 6, 2021 and expires May 6, 2027.
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