During fiscal 2018, the members of the Compensation Committee included Dr. Livingstone (chair), Mr. Quinn, and Mr. Sweezey. None of the members of the Compensation Committee were at any time during fiscal 2018 an officer or employee of the Company. None of our executive officers serve as a member of the board of directors or a compensation committee of any entity that has one or more executive officers serving as a member of our Board or Compensation Committee.
The following sets forth certain information regarding the Company’s senior management. Information pertaining to Mr. Armes, who is both Chairman of the Board and an executive officer of the Company, is presented above under “Board of Directors—Biographical Information—Nominees to Serve a Term Expiring at the 2019 Annual Meeting of Stockholders.”
Name
|
Age
|
Position With the Company
|
Joseph B. Armes*
|
56
|
Chairman, CEO & President
|
Gregg W. Branning*
|
57
|
Executive VP, CFO
|
Luke E. Alverson*
|
40
|
Senior VP, General Counsel and Secretary
|
Craig J. Foster
|
52
|
Senior VP & GM, Specialty Chemicals
|
Don J. Sullivan
|
55
|
Senior VP & GM, Industrial Products
|
*
Denotes executive officer
|
Gregg
W.
Branning
has
served as Executive Vice President and Chief Financial Officer since June 2016. From September 2012 to March 2016, he served as Senior Vice President, Chief Financial Officer and Secretary of Myers Industries, Inc., a polymer products manufacturer. From December 2008 to August 2012, he served as Vice President Finance and Chief Financial Officer for Thomson Industries, a subsidiary of Danaher Corporation.
Luke
E.
Alverson
has served as Senior Vice President, General Counsel and Secretary since February 2016. From May 2008 to February 2016, he held roles of increasing responsibility with Flowserve Corporation, a leading global manufacturer of fluid motion control products and provider of related services, serving most recently as Vice President, Corporate Legal Services and Assistant Secretary. Prior to 2008, Mr. Alverson was associated with the law firms of Vinson & Elkins, LLP in Dallas, Texas, and Hallett & Perrin, P.C., in Dallas, Texas.
Craig
J.
Foster
has served as Senior Vice President & General Manager, Specialty Chemicals since January 2016. From June 2015 to August 2015, Mr. Foster was Vice President and General Manager, Elastomers Division, at Zeon Chemicals, a Japanese specialty chemicals company. From 1995 to June 2015, he served in positions of increasing responsibility with Flint Group, a specialty chemicals company serving the food packaging and publications industries, where he was most recently regional president of China and India, president of Print Media EMA and president of pigments, chips and resins. While at Flint Group, Mr. Foster also served as the functional executive responsible for the global operations of the company. Prior to his time at Flint, Mr. Foster served as purchasing supervisor at Akzo Nobel Coatings and also served in the U.S. Navy within the Nuclear Submarine Force and the Naval Mobile Construction Force.
Don
J.
Sullivan
has served as Senior Vice President & General Manager, Industrial Products since January 2016. From May 2015 to January 2016, Mr. Sullivan was the Chief Operating Officer for RectorSeal, one of the Company’s operating subsidiaries. From October 2010 to April 2015, he served as Division President of Goodman Global, a member of the Daikin Group, a leading global HVAC manufacturer. Prior to 2005, Mr. Sullivan held a variety of management positions at Carrier Corporation, a leading heating, air-conditioning and refrigeration solutions company, including sales, product management and general management.
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Compensation Discussion and Analysis
Table
of
Contents
Introduction
The following sections contain our Compensation Discussion and Analysis (“CD&A”). This CD&A provides an overview and analysis of our executive compensation program and policies and the material compensation decisions we have made for our principal executive officer, our principal financial officer and our other executive officers named in the “Summary Compensation Table” on page 38. We refer to this group of executive officers collectively as our “Named Executive Officers” throughout this document. During fiscal year ended March 31, 2018 (“fiscal 2018”), our Named Executive Officers were:
■
Joseph
B.
Armes,
Chairman, Chief Executive Officer (“CEO”) and President (principal executive officer);
■
Gregg
W.
Branning
, Executive Vice President and Chief Financial Officer (“CFO”) (principal financial officer);
■
Luke
E.
Alverson
, Senior Vice President, General Counsel & Secretary; and
■
Christopher
J.
Mudd,
former
President and Chief Operating Officer, whose employment with the Company ended February 28, 2018.
Fiscal 2017 Executive Compensation Vote
At last year’s annual meeting, we conducted a stockholder vote to approve the compensation of our Named Executive Officers for fiscal 2017. Fiscal 2017 was our first full fiscal year following our spin-off from Capital Southwest Corporation (“CSWC”) in September 2015 (the “Spin-Off”). Last year, 84.0% of the votes cast in the executive compensation vote were voted in favor of the compensation of our Named Executive Officers as described in our 2017 proxy statement. In consideration of the results, the Compensation Committee acknowledged the increased support received from our stockholders and also continued its ongoing engagement with our stockholders to review and receive feedback on certain elements of our executive compensation program. As a result of this engagement, the Compensation Committee made certain modifications to our executive compensation program for fiscal 2018 and fiscal 2019 as described below.
Executive Compensation Program Changes for Fiscal 2018
The Compensation Committee is committed to continuously evaluating our executive compensation program, with a focus on the best interests of our stockholders and the Company and sound compensation practices, as our Company matures and establishes its performance as an independent, publicly traded company. The Compensation Committee conducted an annual review of our executive compensation program and policies in May 2017, the first quarter of fiscal 2018.
Prior to the Compensation Committee’s annual executive compensation review, during each of its meetings in fiscal 2017, the Compensation Committee reviewed and discussed the Company’s compensation philosophy and elements of the executive compensation program. Throughout fiscal 2017, the Compensation Committee engaged with stockholders regarding our executive compensation program.
Supported by stockholder feedback, the Compensation Committee evaluated all elements of our compensation program for fiscal 2018, in consultation with
Longnecker & Associates, the Compensation Committee’s independent compensation consultants (“Longnecker”), and management. As a result of this evaluation, the Compensation Committee made changes to the Company’s executive compensation program for fiscal 2018, which are summarized below and discussed in additional detail throughout this CD&A.
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Fiscal 2018 Annual Incentive Program Changes
The Compensation Committee made three changes to the annual incentive program (“AIP”) design for fiscal 2018, relating to the performance measures, the weighting of the performance measures, and the performance levels within the AIP.
For fiscal 2018, earnings before interest, taxes, depreciation and amortization (“EBITDA”) was replaced with consolidated operating income (“Operating Income”) as the primary financial performance measure for the AIP. Additionally, the financial measure weighting was increased from fiscal 2017’s 60% of total AIP to 70% of total AIP. The two individual performance metrics, which for fiscal 2017 were together weighted at 40% of total AIP, was restructured and reduced, and the remaining 30% of total AIP was allocated to qualitative individual performance.
Fiscal 2017 AIP Performance Measures
|
Weighting
|
|
|
|
EBITDA
|
60.0%
|
|
Fiscal 2018 AIP Performance Measures
|
Weighting
|
Individual Performance Metrics:
|
|
|
Consolidated Operating Income
|
70.0%
|
Quantitative Performance
|
20.0%
|
Qualitative Individual Performance
|
30.0%
|
Qualitative Performance
|
20.0%
|
|
TOTAL
|
100.0%
|
TOTAL
|
100.0%
|
|
|
|
The Compensation Committee believes that by increasing the weighting of the financial performance measure and decreasing the weighting of individual performance measures, which could be viewed as discretionary, more emphasis is placed on objective performance criteria, consistent with our compensation philosophy and objectives. At the same time, the Compensation Committee continues to believe that the AIP should have non-financial, non-formulaic elements that allow discretionary positive or negative compensation adjustment based on qualitative performance assessments, consistent with our Company’s culture.
Concerning the financial performance metric, the Compensation Committee evaluated several metrics consistent with the desire to promote our annual operating budget and increase stockholder value. Based on this analysis, the Compensation Committee determined that Operating Income, which is a U.S. GAAP financial measure, is an appropriate and more direct measure of the Company’s annual operating results and earnings performance as an integrated industrial manufacturing company.
Concerning performance levels, the threshold performance level for the financial performance measure was increased from 70% of target to 75% of target. Additionally, the maximum performance level for the financial performance measure was decreased from 150% of target to 125% of target. By raising the threshold and lowering the maximum performance levels, it both enhanced the rigor of the AIP, making a minimum payout under the AIP more difficult to obtain, and created a more realistic incentive to drive above-target financial results for stockholders’ benefit. Additionally, the Compensation Committee believes these revised threshold and maximum performance levels for the financial performance measure are more in line with general market practices for companies of our size and in our industries.
Fiscal 2017 EBITDA Performance Scale
|
|
Fiscal 2018 Operating Income Performance Scale
|
Company Performance
|
% Payout Score
|
|
Company Performance
|
% Payout Score
|
150% of Plan or Higher (maximum)
|
|
200.0%
|
|
125% of Plan or Higher (maximum)
|
|
200.0%
|
100% of Plan (target)
|
|
100.0%
|
100% of Plan (target)
|
|
100.0%
|
70% of Plan (threshold)
|
|
50.0%
|
|
75% of Plan (threshold)
|
|
50.0%
|
< 70% of Plan
|
|
0.0%
|
|
< 75% of Plan
|
|
0.0%
|
Fiscal 2018 Long-Term Incentive Program Changes
The Compensation Committee made two changes to the long-term incentive program (“LTIP”) design for fiscal 2018, both relating to performance share awards, which comprise approximately 50% of each Named Executive Officer’s total LTIP opportunity.
In July 2016, the Company was added to the Russell 2000 and 3000 indexes. With this inclusion, the Compensation Committee decided to transition the external benchmark used for total shareholder return (“TSR”) measurement, which is the performance metric used for our performance share awards, away from the “benchmark peer group” to the Russell 2000 index. The Compensation Committee believes that the use of an index in which the Company is a member is a more objective and transparent benchmark for measuring relative TSR.
Additionally, the Compensation Committee modified the vesting schedule for performance share awards to bring the vesting schedule more in line with general market practices. Beginning with fiscal 2018 performance share awards, a relative TSR ranking of the Company at or above the 80
th
percentile of the Russell 2000 Index will result in a payout score of 200%. The Compensation Committee also added a qualifier on the payout that limits the maximum payout to 100% of target if the Company’s TSR is negative over the performance period, irrespective of the
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Company’s TSR compared to the Russell 2000. The LTIP changes are represented in the following table:
Fiscal 2017 Performance Share Awards
|
|
Fiscal 2018 Performance Share Awards
|
Company TSR Ranking v.
the Benchmark Peer Group
|
% Payout Score
|
|
Company TSR Ranking v.
Russell 2000 Index
|
% Payout Score
|
First Quartile
|
100%
|
|
≥
|
80
th
percentile
|
200%
|
Second Quartile
|
75%
|
|
70
th
percentile
|
150%
|
Third Quartile
|
50%
|
|
|
50
th
percentile
(maximum
if
TSR
is
negative)
|
100%
|
Fourth Quartile
|
0%
|
|
|
30
th
percentile
|
50%
|
|
|
|
<
|
30
th
percentile
|
0%
|
Executive Compensation Program Changes for Fiscal 2019
Following the Compensation Committee’s review of our executive compensation program throughout fiscal 2018, the Compensation Committee made further enhancements to the program for fiscal 2019. While this CD&A discusses our executive compensation program for fiscal 2018, fiscal 2019 changes are summarized below and will be discussed in further detail in our proxy statement for the 2019 annual meeting of stockholders.
Building on the changes to the fiscal 2018 AIP design, the Compensation Committee made changes to the AIP design for fiscal 2019. These changes related to the performance measures used and the weighting of the performance measures in determining payout. For fiscal 2019, the AIP will include operating cash flow as a second financial performance metric, at a 15% weighting, to complement the existing Operating Income performance metric, updated to a 60% weighting. Together, these two financial metrics represent 75% of total AIP, an increase from a financial metric weight of 70% for fiscal 2018. In turn, the weighting of the individual performance element of the AIP has been reduced to 25% of total AIP, a decrease from 30% for fiscal 2018.
Fiscal 2018 AIP Performance Measures
|
Weighting
|
|
Fiscal 2019 AIP Performance Measures
|
Weighting
|
Consolidated Operating Income
|
70.0%
|
|
Consolidated Operating Income
|
60.0%
|
Qualitative Individual Performance
|
30.0%
|
|
Operating Cash Flow
|
15.0%
|
TOTAL
|
100.0%
|
Qualitative Individual Performance
|
25.0%
|
|
|
|
TOTAL
|
100.0%
|
The Compensation Committee believes that continuing to place increased emphasis on objective, financial performance measures, balanced by non-financial, non-formulaic elements that allow for qualitative performance assessments, is consistent with our compensation philosophy. Additionally, the Compensation Committee recognizes that the ability to measure the Company’s financial performance and operational health is limited when using a single financial metric. In selecting a second financial metric to complement the Operating Income metric, the Compensation Committee recognized that the ability of our operations to generate cash and more efficiently manage working capital levels is important to stockholders and overall organizational health. To this end, the Compensation Committee selected operating cash flow, a U.S. GAAP financial measure, to measure the Company’s cash flow generation and working capital management and to incentivize management to further optimize financial performance.
Strategic Realignment
In February 2018, the Company announced a strategic repositioning to enhance its operating results and simplify its operating structure. This strategic repositioning included several key actions:
■
The Company initiated a plan to sell its Coatings business (primarily consisting of the Strathmore Products business), the revenues of which were approximately one-third of the former Coatings, Sealants & Adhesives (“CS&A”) segment. In connection with this plan, the assets comprising the Coatings business were reclassified as held for sale and presented as discontinued operations in the third quarter of fiscal 2018. This action also resulted in a one-time, non-cash asset impairment charge recognized under applicable accounting rules within discontinued operations.
■
The Company condensed its three reportable segments into two: Industrial Products and Specialty Chemicals. As a result, the Sealants and Adhesives businesses, which were part of the former CS&A segment, were integrated into the Specialty Chemicals segment, to better align our resources to support our ongoing business strategy.
■
The Company optimized its operational leadership structure, resulting in Mr. Mudd departing the Company in February 2018, and the Company’s operations leadership reporting directly to Mr. Armes.
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These strategic actions and the related accounting treatment impacted the calculation of AIP awards for fiscal 2018 as described in further detail below under “—Elements of the Executive Compensation Program—Annual Incentive Program—Measuring and Determining AIP Payout”.
Pay for Performance
The Compensation Committee, which is made up entirely of independent directors, determines the total amount and appropriate mix of compensation for our Named Executive Officers. We believe that our compensation program is designed to align pay with the level of performance generated, with incentive compensation representing the majority of total compensation. Accordingly, for fiscal 2018, the CEO had 81.1% of his target pay “at risk,” or dependent upon both the Company’s and his individual performance, and the other Named Executive Officers had on average 67.1% of their target pay “at risk”.
As discussed in more detail under “—Elements of the Executive Compensation Program—Annual Incentive Program”, our Named Executive Officers are eligible to receive a cash incentive payment based upon the Company’s financial performance against pre-established goals. Based on our fiscal 2018 results, the Company achieved 89% of our established Operating Income goal. This resulted in an annual incentive award payout of 78% of target for our Named Executive Officers with respect to the Operating Income metric, reflecting our pay for performance philosophy.
As discussed in more detail under “—Elements of the Executive Compensation Program—Long Term Incentives,” our Named Executive Officers, as well as other Company employees, are eligible to receive equity awards that vest based upon the Company’s financial performance against pre-established goals. For the fiscal 2018 – fiscal 2020 performance period, our Named Executive Officers received a portion of their equity incentive compensation in the form of performance shares, which vest, if at all, based on the Company’s TSR compared to the TSR of the Russell 2000 Index. The performance period for these awards has yet to be completed, so no vesting has occurred.
For the October 1, 2015 to March 31, 2018 performance period, our Named Executive Officers at the time received a portion of their equity incentive compensation in the form of performance shares, which vest, if at all, based on the Company’s TSR compared to that of a defined peer group. The peer group is described in more detail under “—Executive Compensation Program Objectives and Principles—Performance-Based Incentive Compensation Should Have External Benchmarks”. For the October 1, 2015 to March 31, 2018 performance period,
the
Company’s
TSR
was
53.8%
, which ranked 11 among the 20 members of the peer group. This resulted in the performance shares awarded for that performance period
vesting
at
70%
of
target
. This result is consistent with our emphasis on long-term stockholder value creation and the achievement of benchmarked performance goals, which are described in more detail throughout this CD&A.
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Compensation Objectives and Core Elements
Our key executive compensation objectives are to align the long-term interests of our executives with those of our stockholders, reward current performance, drive future performance and attract and retain key leaders. In pursuing these objectives, the Compensation Committee uses certain guiding principles in designing the elements of the executive compensation program.
Consistent with these principles, the core elements of our executive compensation program in fiscal 2018 consisted of:
The Compensation Committee maintains a thoughtful approach to our executive compensation program design and governance practices. The below table summarizes these design practices.
What We Do
|
What We Don’t Do
|
|
Promote a strong pay for performance plan design
|
|
No hedging, pledging, or short sales of stock
|
|
Regularly benchmark executive compensation against peers of comparable size, complexity, and industry
|
|
No change in control excise tax gross-ups
|
|
Maintain meaningful stock ownership guidelines for our directors and executive officers
|
|
No option repricing without stockholder approval
|
|
Have double trigger requirements on cash payments upon a change in control
|
|
No perquisites offered, other than those generally provided to all employees
|
|
Conduct an annual compensation risk review
|
|
No dividends paid and no voting rights on unvested performance-based equity awards
|
|
Provide reasonable and standardized benefits upon severance
or change in control
|
|
No duplication of metrics in annual and long-term incentive plans
|
|
Engage an independent compensation consultant
|
|
No supplemental executive retirement plans
|
|
Maintain an incentive compensation “clawback” policy
|
|
|
This CD&A is intended to help readers understand the detailed information in our executive compensation tables by analyzing the data in the tables in the context of our overall compensation program. To assist, this CD&A is organized in the following sections:
■
Oversight
of
the
Executive
Compensation
Program
—
This section describes the roles and responsibilities of the Compensation Committee and the Compensation Committee’s independent compensation consultant.
■
Executive
Compensation
Program
Objectives
and
Principles
—
This section describes the objectives that guide our compensation programs and discusses the individual principles the Compensation Committee has established to drive our achievement of those objectives. This includes how compensation is benchmarked to market reference points.
■
Elements
of
the
Executive
Compensation
Program
—
This section discusses the individual elements of our compensation program for the Named Executive Officers, including base salary, annual cash incentive opportunity, long-term equity incentives (including stock ownership requirements), and severance, change-in-control and certain other benefits.
■
Additional
Executive
Compensation
Information
—
This section includes an overview of other important executive compensation programs and policies, including employment agreements and specific discussion of the CEO’s compensation in fiscal 2018.
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The Compensation Committee administers our executive compensation program. Consistent with NASDAQ corporate governance requirements, the Compensation Committee is composed entirely of independent, non-employee members of the Board. The Compensation Committee has overall responsibility for setting the compensation for our CEO and Named Executive Officers.
The Compensation Committee has retained Longnecker as its independent executive compensation consultant. Longnecker
assists and advises the Compensation Committee on certain aspects of our executive compensation program, and it provides no other services to the Company. The services it provides include:
■
providing and analyzing competitive market compensation data;
■
analyzing the effectiveness of executive compensation programs and making recommendations, as appropriate;
■
analyzing the appropriateness of the compensation comparator group (discussed below); and
■
evaluating how well our compensation programs adhere to the philosophies and principles stated below under “—Executive Compensation Program Objectives and Principles.”
The Compensation Committee is also responsible for reviewing management succession plans and for recommending changes in director compensation to the Board. The Compensation Committee periodically reviews the organizational design, management development plans and managerial capabilities of the Company. The Compensation Committee also prepares and issues the Compensation & Talent Development Committee Report included in this proxy statement.
Our key compensation objectives are to align the long-term interests of our executives with those of our stockholders, reward current performance, drive future performance and attract and retain key leaders. While the individual compensation elements may differ, the design of the executive compensation program is generally based on the same objectives as the overall compensation program provided to all Company employees. The Compensation Committee has established the following principles, which are meant to accomplish these compensation objectives and guide the design and administration of specific plans, agreements and arrangements for our Named Executive Officers.
Compensation Should be Primarily Performance-Based
The Compensation Committee believes that a significant portion of our executives’ total compensation should be “at risk” based on how well the Company performs compared to our business objectives and how well an executive performs individually. To accomplish this, the Compensation Committee uses a variety of targeted, performance-based compensation vehicles that promote our annual operating budget and long-term business strategy, build long-term stockholder value and discourage excessive risk-taking.
The Compensation Committee believes that there should be a strong correlation between executive pay and performance. So, in years when Company and individual performance exceeds established objectives, executive officers should be paid more than 100% of the established target award. Conversely, when Company and individual performance does not meet established objectives, incentive award payments should be less than 100% of the established target level or eliminated altogether if performance is below threshold performance levels.
The Compensation Committee also believes that how executive officers accomplish objectives is important to the Company’s culture and relevant to long-term performance. Purely formulaic incentive plans do not account for these qualitative assessments and can work against the Company’s and stockholders’ best interests. As such, the Compensation Committee believes that it should have an element of discretion to adjust executive compensation to reflect individual, qualitative performance.
Performance-Based Incentive Compensation Should Have External Benchmarks
The Compensation Committee believes that the use of internal performance metrics alone does not create a full picture of Company performance. Accordingly, the performance-based element of our executive compensation program also emphasizes and evaluates the Company’s performance relative to an external benchmark. For fiscal 2018 performance share awards, the external benchmark consisted of the Russell 2000 Index. The external benchmark serves as a means to evaluate, on a comparative basis, how well we deliver results that build long-term stockholder value, which in turn allows us to better establish the performance expectations of senior management in leading the Company. The Compensation Committee believes the use of the Russell 2000 Index for TSR benchmarking purposes is appropriate due to the Company’s inclusion in the index, and that it is a more objective and transparent comparator group for the Company’s performance-based equity awards.
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For the fiscal 2017 and prior year performance share awards, the external benchmark consisted of a group of specialty chemical and industrial manufacturers. Our external comparison group used for these awards consisted of the following companies:
Flotek
Industries
Inc.
|
Landec
Corp.
|
Methode
Electronics
|
NN
Inc.
|
Tredegar
Corp.
|
Chase
Corp.
|
Astec
Industries
|
WD-40
Company
|
CTS
Corp.
|
Orbotech
Ltd.
|
Koppers
Holdings
|
Futurefuel
Corp.
|
Columbus
McKinnon
Corp.
|
Kraton
Performance
Polymers
|
OMNOVA
Solutions
|
Gorman-Rupp
Company
|
Innospec
Inc.
|
Quaker
Chemical
|
Littelfuse,
Inc.
|
LSB
Industries
|
The process for establishing this external benchmark group began by identifying publicly traded manufacturing companies with a market capitalization of less than $2 billion. From this group of identified companies, the list was distilled by removing those companies that do not conduct business on a business-to-business basis. The list was then distilled further by removing those companies that do not manufacture and sell products falling into, or complimentary with, the Company’s industrial, specialty chemicals or coatings, sealants and adhesives products and markets. This process produced the list of companies identified above.
Compensation Levels Should be Market Competitive
The Compensation Committee reviews relevant market compensation survey data to evaluate the market competitiveness of our executive compensation program. This furthers the goals of encouraging building long-term stockholder value and attracting and retaining executive talent. The Compensation Committee uses survey data gathered by Longnecker, which consists of compensation data for comparable executive positions within a group of comparable industrial products and specialty chemicals companies, as well as compensation data from the market generally. The Compensation Committee recognizes that potential candidates for qualified executives, as well as market opportunities for our current executives, are not limited to companies in our industry sectors.
The group of companies used by Longnecker for purposes of evaluating comparable executive compensation data consists of the following companies:
CIRCOR
International,
Inc.
|
Flotek
Industries,
Inc.
|
KMG
Chemicals,
Inc.
|
OMNOVA
Solutions
Inc.
|
Columbus
McKinnon
Corp.
|
FutureFuel
Corp.
|
Koppers
Holdings
Inc.
|
Tredegar
Corporation
|
CTS
Corporation
|
Hawkins,
Inc.
|
NN,
Inc.
|
TriMas
Corporation
|
ESCO
Technologies
Inc.
|
|
|
|
This comparator group of companies was selected using a two-step process using objective criteria and financial parameters. For the objective criteria, a list of potential comparator companies was identified by using: industrial classifications that include industrial machinery, manufacturing and/or specialty chemicals; public operating companies traded on all U.S. exchanges; and geographic locations in the U.S. with international operations. After this list of potential companies was identified, a financial metric filter was applied using revenues, assets, market capitalization, enterprise value, net income and EBITDA, along with gross and operating margin profiles. Companies that did not have at least a majority of these financial metrics falling within 0.5x and 3.0x of the Company’s metrics were excluded. This process produced the list of companies identified above.
The Compensation Committee uses the survey data from Longnecker and the broader market to benchmark our executives’ base salary, annual bonus opportunities, total target cash compensation, long-term incentive compensation and total target compensation. Additionally, the Compensation Committee uses the survey data to evaluate how, for each executive position, the Compensation Committee’s actions are appropriate, reasonable and consistent with the Company’s philosophy, practices and policies.
To promote performance-weighted target compensation, base salaries for our executives are generally set below the 50
th
percentile of benchmarked compensation data to prudently manage fixed compensation costs. In turn, target annual incentive opportunities and long-term incentive compensation targets are both generally set at levels above the 50
th
percentile opportunity of the benchmarked compensation data, with the objective of setting total target compensation at or slightly above the market median. In doing this, the Compensation Committee seeks to balance a heavier performance-focused structure with the Company’s interests in maintaining market competitive realized compensation. Actual realized compensation varies and is determined by performance against these pre-established measures and objectives.
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Incentive Compensation Should Represent the Majority of Total Compensation
The Compensation Committee believes that the proportion of an executive’s total compensation that is “at risk” based on individual, business segment, function and/or corporate performance should increase in line with the scope and level of the executive’s business responsibilities. Accordingly, for fiscal 2018, on average 70.6% of the total target compensation of the Named Executive Officers was dependent upon our stock price, our financial performance and individual performance. The Compensation Committee believes that the CEO’s “at risk” compensation should be a higher percentage of total target compensation compared to the other Named Executive Officers in light of the position’s strategic focus and leadership responsibilities. The following table shows the percentage of each Named Executive Officer’s total target compensation for fiscal 2018 that was at risk under the existing program.
Named Executive Officer
|
Percent of Fiscal 2018
Target Pay “At Risk”
(1)
|
Joseph
B.
Armes
|
81.1%
|
Gregg
W.
Branning
|
70.0%
|
Luke
E.
Alverson
|
57.4%
|
Christopher
J.
Mudd
(2)
|
70.0%
|
(1)
Calculated by dividing (i) the sum of the annual incentive opportunity and target long-term incentive opportunity by (ii) the sum of the annual incentive opportunity, target long-term incentive opportunity and base salary.
|
(2)
Mr. Mudd’s employment ended February 28, 2018.
|
Incentive Compensation Should Balance Short-Term and Long-Term Performance
The Compensation Committee believes that executive compensation should be linked to building long-term stockholder value while remaining consistent with our business objectives. Our executive compensation program addresses this by including long-term incentives in the form of equity-based awards, such as performance shares and restricted stock, which ties realized compensation to the performance of the Company’s common stock. As discussed in further detail below, we have also established minimum stock ownership requirements for our executives. In fiscal 2018, our long-term incentive awards for the Named Executive Officers were equally weighted between:
■
performance shares, which generally vest at the expiration of a three-year performance period based on the Company’s TSR performance compared to an external benchmark; and
■
restricted stock, which vests ratably over time.
The Compensation Committee believes that this long-term incentive mix appropriately encourages long-term equity ownership, promotes a balance between stock-based and financial-based achievements, and aligns the interests of the Named Executive Officers with the Company’s risk profile and the interests of our stockholders. The Company does not currently grant stock options as part of its compensation program.
The Compensation Committee also recognizes that, while stock prices generally correlate to corporate performance over the long-term, other factors may significantly affect stock prices at any point in time. These factors include general economic conditions, industry business cycles, and varying attitudes among investors toward the stock market in general and toward specific industries and/or companies in particular. The influence of these factors makes performance of the Company’s common stock alone an incomplete measure of the Company’s performance. Accordingly, the base salary and annual cash incentive opportunity compensation components emphasize current or short-term corporate performance, as well as the realization of defined business and financial objectives.
The Executive Compensation Program Should be Reviewed Annually for Effectiveness
At the first regular Compensation Committee meeting following our fiscal year end, the Compensation Committee conducts a comprehensive review of all components of our executive compensation program. This review is done with the input of Longnecker and in light of evolving market practices in the general industry, external regulatory requirements, the competitive market for executives, our business objectives and our executive compensation philosophy. In conducting its review, the Compensation Committee reviews information related to each executive officer’s income and benefits, including base salary, target incentives and retirement, health and welfare benefits.
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Overview
The primary elements of the Company’s executive compensation program in fiscal 2018 are shown in the following table and are discussed in detail below:
Component
|
Form
|
Description
|
Base Salary
|
Cash
|
Fixed cash compensation based on responsibilities of the position; generally set at levels below the 50th percentile of companies within a comparator company group and the broader market
|
Annual Incentive
|
Performance
Cash
Award
|
Annual cash incentive for Company achievement of pre-determined financial and individual performance metrics; payment ranges from 0% to 200% of target award
|
Long-Term Equity Incentive
|
Performance
Shares
(50%
of
total
grant
value)
|
Cliff vests at end of a three-year period at 0% to 200% of award value based on TSR performance against the Russell 2000 Index; no voting rights and not eligible to receive dividends (if any) until vesting
|
Restricted
Stock
(50%
of
total
grant
value)
|
Vests ratably over a three-year period, has voting rights and eligible to receive dividends
(if any) from date of grant
|
Other
|
Health,
Welfare
and
Retirement
Programs
|
Executives participate in the same benefit programs offered to other salaried employees, including:
■
Employee Stock Ownership Plan — funded with discretionary contributions, available to U.S. employees
■
Qualified 401(k) Plan — available to U.S. employees; the Company contributes 3% of salary to the plan and matches 100% of pre-tax contributions up to 6% of salary
|
Severance
Benefits
|
Standardized benefits for executive officers in the event of termination without cause by the Company or for good reason by the executive
|
Change-in-Control
Benefits
|
Standardized “double trigger” severance benefits for executive officers in the event of termination following a change in control
|
Other
Benefits
|
No perquisites offered, other than those generally provided to all employees
|
The Compensation Committee’s process of reviewing the executive compensation program and setting compensation levels for our Named Executive Officers involves several components. During the first quarter of each fiscal year, the Compensation Committee reviews each Named Executive Officer’s total compensation. The Compensation Committee members also meet regularly with the Named Executive Officers at various times during the year, both formally within Board meetings and informally outside of Board meetings, allowing the Compensation Committee to assess directly each Named Executive Officer’s performance.
In setting the CEO’s compensation, the Compensation Committee considers the results of the Board’s review of the CEO’s performance with all independent Board members. This process includes the independent Board members individually and collectively presenting their assessment, and the CEO providing his assessment, of his performance.
In addition, the CEO annually presents an evaluation of each other Named Executive Officer to the Compensation Committee, which includes a review of each officer’s contributions and performance over the past year, strengths, weaknesses, development plans and succession potential. The CEO also presents compensation recommendations for each Named Executive Officer for the Compensation Committee’s consideration. Following this presentation and a benchmarking review for pay, the Compensation Committee makes its own assessments and determines compensation amounts for each other Named Executive Officer with respect to each of the elements in the Company’s executive compensation program as described below.
Base Salary
During the first quarter of each fiscal year, the Compensation Committee reviews and establishes the base salaries of the Named Executive Officers. The Compensation Committee uses base salary market reference points for the Company’s various executive positions developed from the market compensation survey data compiled and prepared by Longnecker. For each Named Executive Officer, the Compensation Committee takes into account the scope of responsibilities, experience and individual performance and then balances these factors against competitive salary practices. The Compensation Committee also considers internal pay equity on an annual basis within the Company with respect to the other executives and references external benchmarks provided by Longnecker. The Compensation Committee does not assign any relative or specific weights to these factors. The Compensation Committee generally manages base salary levels below the 50
th
percentile of benchmarked compensation, in support of our pay-for-performance philosophy and to prudently manage fixed compensation costs.
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Based on the factors discussed above, the Named Executive Officers’ annual base salaries for fiscal 2018 were established as shown in the following table:
Named Executive
Officer
|
Fiscal 2018 Annual
Base Salary
|
Fiscal 2018 Base Salary
Increase %
|
Joseph
B.
Armes
|
$512,500
|
2.5%
|
Gregg
W.
Branning
|
$307,500
|
2.5%
|
Luke
E.
Alverson
|
$281,875
|
2.5%
|
Christopher
J.
Mudd
(1)
|
$350,000
|
6.1%
|
(1)
Mr. Mudd’s employment ended February 28, 2018.
|
The annual base salaries for the Named Executive Officers were established by the Compensation Committee in May 2017. Except for Mr. Mudd, base salaries for the Named Executive Officers were increased by 2.5%, which was generally consistent with levels of merit increases for employees across the Company. Mr. Mudd’s salary was adjusted 6.1% based on competitive pay analysis using survey data and to better align with our compensation philosophy.
The base salaries paid to the Named Executive Officers during fiscal 2018 are shown in the “Summary Compensation Table” under the “Salary” column. Mr. Armes’s base salary and other compensation components in fiscal 2018 are discussed below in further detail under “—Additional Executive Compensation Information—Chief Executive Officer Compensation in 2018.”
Annual Incentive Program
During the first quarter of each year, the Compensation Committee establishes an annual cash incentive opportunity for each Named Executive Officer under the Company’s Annual Incentive Program (“AIP”). At that time, the Compensation Committee approves: (i) an AIP target opportunity for each Named Executive Officer; and (ii) the overall Company performance measures for the fiscal year.
Setting the AIP Target Opportunity
In May 2017, the Compensation Committee established annual cash incentive opportunities under the AIP for the Named Executive Officers. The Compensation Committee sets these targets in consultation with Longnecker and in adherence to our stated executive compensation objectives and principles. As discussed, since we generally seek to set base salaries below the 50
th
percentile of benchmarked compensation, the Compensation Committee generally seeks to set AIP targets above the 50
th
percentile to reach market levels for target total cash compensation. The target annual incentive opportunity for each Named Executive Officer in fiscal 2018 is set forth below:
Named Executive
Officer
|
Fiscal 2018
AIP Target
$
|
Fiscal 2018
AIP Target
%
|
Fiscal 2017
AIP Target
%
|
Joseph
B.
Armes
|
$768,750
|
150%
|
150%
|
Gregg
W.
Branning
|
$307,500
|
100%
|
100%
|
Luke
E.
Alverson
|
$155,031
|
55%
|
50%
|
Christopher
J.
Mudd
(1)
|
$350,000
|
100%
|
100%
|
(1)
Mr. Mudd’s employment ended February 28, 2018.
|
For Mr. Armes, Mr. Mudd and Mr. Branning, no changes were made to target AIP opportunities. Mr. Alverson’s target AIP was increased based on competitive pay analysis and to continue moving his compensation in alignment with our compensation philosophy.
Setting the AIP Performance Measures
The Compensation Committee, working with management and Longnecker, evaluates and approves the Company’s AIP performance measures for each fiscal year. The Compensation Committee sets each Named Executive Officer’s AIP performance measures based on the financial performance of the Company as a whole. This helps ensure that the Named Executive Officers’ primary focus is on setting the overall strategic direction of the Company and achieving overall Company results aligned to support building stockholder value.
The Compensation Committee also believes that individual, non-financial performance metrics should be included in the AIP performance measures. This serves to restrain the influence of formulae and objective factors on incentive pay, which can have detrimental effects on the Company and stockholders when overused. Importantly, non-formulaic metrics provide the Compensation Committee with discretion to adjust compensation upward or downward depending on not only what objectives and goals an executive accomplished in a given year, but how those objectives and goals were met, to ensure behaviors are consistent with our business objectives and core values. As such, the Company’s AIP performance measures and targets, unadjusted for extraordinary events, established for fiscal 2018 were as follows:
Fiscal 2018 Performance Measures
|
Weighting
|
Fiscal 2018
Target
(in millions)
|
Consolidated Operating Income
|
70.0%
|
$
|
52.2
|
Qualitative Individual Performance
|
30.0%
|
|
—
|
The metrics presented in the table above were evaluated using pre-defined internal criteria. The Compensation Committee selected these performance metrics, with input from management, because they support the key strategies that we believe drive sustainable and profitable Company growth (as discussed under “—Executive Compensation Program Objectives and Principles” above).
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On the basis of the foregoing performance metrics, we used the following formula to calculate the AIP payment for fiscal 2018:
The Operating Income metric is determined in accordance with U.S. GAAP. The Compensation Committee may exercise its judgment, within parameters it establishes at the beginning of the year, whether to exclude the effect of certain specified developments that occur during the year in determining performance objectives achievement. Such developments may include unanticipated changes in accounting principles or extraordinary, unusual or unplanned events, such as the effects of restructurings, impairments, reorganizations, acquisitions, or dispositions.
Concerning the discretionary element, at the beginning of the fiscal year, the Compensation Committee establishes specific, objective functional or personal goals for the Named Executive Officers. These goals form the basis for the Compensation Committee’s evaluation of each Named Executive Officer’s performance, which influences the discretionary payment amount.
Where applicable, AIP awards are paid in the first quarter of each fiscal year for the prior year’s performance based upon the Compensation Committee’s assessment of actual performance against the pre-established AIP performance objectives. A more in-depth description of the Compensation Committee’s decisions with respect to the annual incentive awards paid to each Named Executive Officer for fiscal 2018 follows.
Measuring Performance and Determining AIP Payout
At the same time that the Compensation Committee sets AIP performance metrics for a given year, it establishes a payout range for all AIP awards. The payout range ultimately determines the percentage of the target incentive to be paid, with an established maximum amount and a threshold below which no payment will be made. The Company’s achievement of the Operating Income performance metric is objective and calculated as appropriate. The payout percentages for the qualitative individual performance metric are determined by the Compensation Committee based on its officer performance assessment, as discussed above.
Payout Range
The 2018 payout range established for the Operating Income metric was 0% to 200% of the target award opportunity. The actual payout percentage is determined using a matrix that compares the Company’s Operating Income performance against the established performance targets for the year (referred to as “plan”). Payouts for the operating income objective are calculated on a straight-line basis for performance between the applicable performance levels (threshold, target and maximum). The following table shows the percentage of target award that is paid at different levels of Company performance against plan.
Consolidated Operating Income Metric (70% Weight)
|
Company
Performance
|
%
Payout
Score
|
125% of Plan or Higher (maximum)
|
200.0%
|
100% of Plan (target)
|
100.0%
|
89%
of
Plan
(actual
performance)
|
78%
|
75% of Plan (threshold)
|
50.0%
|
<75% of Plan
|
0.0%
|
Fiscal 2018 Performance Measurement
As discussed above under “—Executive Summary—Strategic Realignment”, In February 2018, we announced a strategic repositioning to enhance our operating results, simplify our operating structure, and better align our resources to support our ongoing business strategy.
This significant strategic shift in the Company’s operations, and the resulting non-cash impairment within discontinued operations, were unanticipated when the fiscal 2018 Operating Income target was set, and it affected the determination of the Company’s Operating Income performance against plan as contemplated at the beginning of fiscal 2018. In light of this, and in consultation with Longnecker, the Compensation Committee evaluated the Company’s Operating Income performance for fiscal 2018 using: (1) the Operating Income performance of the Company for the first and second quarters of fiscal 2018 as originally contemplated; and (2) the Operating Income performance of the Company’s continuing operations in the third and fourth quarters of fiscal 2018, the time during which the Coatings business was held for sale and managed separately from the Company’s continuing operations.
Through the first two quarters of fiscal 2018, the Company delivered $27.3 million of Operating Income. In the third and fourth quarters of fiscal 2018, the Company’s continuing operations delivered $18.8 million of Operating Income. This resulted in a total of $46.1 million of Operating Income for purposes of the AIP calculation, or 89% of the original Operating Income plan of $52.2 million, which was left unchanged. Using this data and the Operating Income metric payout formula, the Compensation Committee approved an AIP percentage payout of 78% for the Operating Income metric.
Individual Performance
The qualitative individual performance assessment, which comprises the final 30% of the total AIP target opportunity, is discretionary, and subject to the same 0% to 200% payout range for the Operating Income metric. The amounts awarded to the Named Executive Officers (if any) under the qualitative assessment are influenced by the Compensation Committee’s quantitative performance assessment of the officer and the Company’s performance, ensuring executives are appropriately
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compensated for demonstrating (or not demonstrating) behaviors consistent with our business objectives and core values.
Based on the Compensation Committee’s review of the Named Executive Officers’ qualitative performance, the Compensation Committee approved awards concerning this metric for each Named Executive Officer as shown in the table below. The total annual incentive award earned by each Named Executive Officer for fiscal 2018 is reported in the “Summary Compensation Table” under the “Non-Equity Incentive Plan Compensation” column.
Named Executive
Officer
|
Qualitative Individual
Performance Payment %
(30% Weight)
|
Joseph
B.
Armes
|
200
%
(1)
|
Gregg
W.
Branning
|
85%
|
Luke
E.
Alverson
|
125
%
|
Christopher
J.
Mudd
|
N/A
(2)
|
(1)
See “Chief Executive Officer AIP Payment” discussion that follows.
(2)
Mr. Mudd’s employment ended February 28, 2018, and as such he was not eligible for payment.
|
Chief Executive Officer AIP Payment
Concerning Mr. Armes, the approved 78% payout on the Operating Income performance metric would have resulted in a payment of $420,276 for the Operating Income metric under the AIP. However, the Compensation Committee and Mr. Armes mutually agreed that he would receive no AIP payment regarding the Operating Income metric for fiscal 2018, in light of the strategic repositioning actions taken during the year. As noted in the table above, the Compensation Committee approved a qualitative individual performance payment of $461,250, or 200% of target, on Mr. Armes’ qualitative individual performance assessment, reflecting the Board’s assessment of Mr. Armes’ individual performance during fiscal 2018, including the Board’s recognition of his leadership demonstrated through the strategic repositioning actions taken during fiscal 2018, and his leadership in driving strong organic revenue growth, continued improvements in operational efficiency, and free cash flow generation within the Company’s continuing operations. This resulted in a fiscal 2018 total AIP payment of $461,250 for Mr. Armes, or 60% of his total AIP target amount, which is reported in the “Summary Compensation Table” below.
Long-Term Incentives
Our long-term incentive program (“LTIP”) rewards the Named Executive Officers for the Company’s performance over a period of more than one fiscal year. Our LTIP consists of two components: (1)
performance
shares
and (2)
restricted
stock
. In fiscal 2018, all Named Executive Officers received their long-term incentive awards in these forms. The Compensation Committee may also award one-time equity grants in its discretion from time to time based on performance or other factors.
Determining the Structure of LTIP Awards
As discussed above, the Compensation Committee believes that long-term incentive compensation is essential to retaining and motivating executives. The Compensation Committee further believes that providing our executives with long-term incentives will encourage them to operate the Company’s business with a view towards building long-term stockholder value. Based on these considerations, the Compensation Committee determined that for fiscal 2018, an equity award combination generally consisting of one-half in value of restricted stock, which vests ratably over a three-year period, and one-half in value of performance shares, which cliff vests at the end of a three-year period, would best serve the goals that the Compensation Committee sought to achieve.
Setting the LTIP Target Opportunity
Each year, the Compensation Committee establishes a target long-term incentive opportunity for each Named Executive Officer, which is expressed as a percentage of the executive’s base salary. The LTIP opportunities are set after the Compensation Committee has evaluated the Company’s operating results for the prior year and at the same time that the Company is making its major compensation decisions for the current fiscal year.
In determining the aggregate amount of total awards available for our executives, the Compensation Committee considers both (1) the target dollar value of the long-term incentive package and (2) the package’s potential dilutive effect on the Company’s outstanding shares of common stock. In setting the target dollar value of the long-term incentive packages for each executive, the Compensation Committee considers comparator group and broader market data provided by Longnecker, as previously described. For reasons described above under “—Executive Compensation Program Objectives and Principles—Compensation Levels Should be Market Competitive”, we generally provide long-term incentive awards at target levels above the 50
th
percentile of benchmarked compensation data to help achieve market median levels of total target compensation.
Once the target dollar value is set, the Compensation Committee considers the potential dilutive effect of awards. The Compensation Committee evaluates stockholder dilution based on equity compensation “burn rates,” which refers to the annual rate at which shares are awarded under our equity compensation plan compared to the Company’s outstanding shares of common stock. Generally, the Compensation Committee targets a Company-wide “burn rate” of 1.0% or less for each annual grant of long-term incentive awards for all Company employees.
Based on the criteria described above, the Compensation Committee approved the target LTI opportunities for the Named Executive Officers as set forth in the table below:
Named Executive
Officer
|
2018 LTI
Target In
$
|
2018 LTI
Target as
% of Base
Salary
|
2017 LTI
Target as
% of Base
Salary
|
Joseph
B.
Armes
|
$1,435,000
|
280%
|
280%
|
Gregg
W.
Branning
|
$408,975
|
133%
|
133%
|
Luke
E.
Alverson
|
$225,500
|
80%
|
55%
|
Christopher
J.
Mudd
|
$465,500
|
133%
|
133%
|
The Compensation Committee sets these targets in consultation with Longnecker and in adherence to our stated executive compensation objectives and principles. For Mr. Armes, Mr. Mudd and Mr. Branning, no changes were made to target LTI
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opportunities, as their existing targets were in alignment with our compensation philosophy. Mr. Alverson’s target LTI was increased based on competitive pay analysis and to continue moving his compensation in alignment with our compensation philosophy, consistent with individual performance.
The Compensation Committee has established the practice of annually approving and granting equity awards to LTIP participants at two points during the year: for restricted stock, on or about October 1 of the fiscal year; and for performance shares, on or about the beginning of the fiscal year. The material terms and conditions of these equity awards are determined under the provisions of our existing equity compensation plan. This plan can be found on the Company’s website at
www.cswindustrials.com
under the “Investors — Financial Reports and Filings” section.
The grant date fair value of the performance share and restricted stock awards granted to the Named Executive Officers during fiscal 2018, calculated in accordance with accounting principles generally accepted in the United States (“GAAP”) pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Compensation — Stock Compensation,” are shown in the “Summary Compensation Table” under the “Stock Awards” column and the accompanying footnotes. The actual award values of the equity awards differ from the “grant date fair value” due to the required accounting methodology, as discussed in footnote 2. Additional information on the awards granted in fiscal 2018 is shown in the “2018 Grants of Plan-Based Awards” table.
Performance Share Awards
Performance shares are restricted shares that vest, if at all, based on the Company’s achievement of pre-determined financial metrics, measured over a three-year performance period. Performance share awards in fiscal 2018 were based on TSR performance compared to that of the FTSE Russell 2000 Index, in order to support the Company’s strategic plan to emphasize growth in excess of market levels and align the interest of our executives with the Company’s stockholders. The Compensation Committee believes that these performance-based awards provide a strong incentive for our executives to achieve performance goals over the performance period that advance our business strategies, build long-term stockholder value and encourage executive retention.
These performance-based awards are subject to forfeiture if the executive’s employment is terminated by the Company with cause or by the executive without good reason before the end of the three-year performance period or if the performance goals are not reached. Until vesting, holders of performance shares do not have voting rights, but are entitled to receive dividend accruals, if any.
The performance shares granted in fiscal 2018 will vest, if at all, at the end of fiscal 2021 based on the Company’s achievement of a three-year TSR performance relative to the Russell 2000 Index members’ TSR performance.
Prior to the granting of performance share awards, the Compensation Committee establishes a vesting percentage range around each executive’s target long-term incentive opportunity allocated to the performance shares. This vesting percentage range has an established upper limitation and a minimum below which no shares will vest. Similar to AIP awards, the percentage vesting range determines the amount of performance shares that vest relative to the original award amount.
For fiscal 2018, the vesting percentage range established was 0% to 200% of the executives’ respective target long-term incentive opportunity allocated to the performance shares. The vesting of these awards will be calculated by (1) determining the Company’s TSR percentile ranking among the Russell 2000 Index members and (2) multiplying the number of performance shares granted by the applicable interpolated percentage of shares earned as set forth in the following graduated vesting schedule:
Company TSR Performance Ranking v. the
Russell 2000 Index
|
% Payout Score
|
≥ 80
th
percentile
|
|
200%
|
70
th
percentile
|
|
150%
|
50
th
percentile
(maximum
if
TSR
is
negative)
|
|
100%
|
30
th
percentile
|
|
50%
|
< 30
th
percentile
|
|
0%
|
As noted in the above schedule, the performance shares’ vesting schedule contains a limitation on the number of shares that will vest if the Company’s TSR is negative for the applicable performance period. If the Company’s TSR is negative during the performance period, the maximum amount of performance shares that can vest is 100%, even if the Company’s TSR performs above the 50
th
percentile of the Russell 2000 Index.
Restricted Stock Awards
Our restricted stock awards vest ratably over a three-year period to deliver a meaningful long-term incentive that balances risk and potential reward. These awards help executives build ownership in the Company, aligning their interests with stockholders. These awards also serve as an effective retention incentive for our executive officers to remain with the Company and continue high levels of performance. The Compensation Committee considers these awards to be “at risk” compensation, as their current and future value are directly determined by the Company’s stock price and the executive’s continued employment.
Restricted stock awards are only earned if the individual continues to be employed by the Company until the applicable vesting date. During the restriction periods, the Named Executive Officers holding unvested restricted stock are entitled to vote the shares and to receive dividends on the shares, if any, on the same basis as the Company’s stockholders holding unrestricted stock.
Stock Ownership Guidelines and Anti-Hedging
Our executive compensation program provides guidelines for executive ownership of Company common stock, expressed as a multiple of annual base salary. The Compensation Committee believes that this ownership guideline encourages the alignment of executive and stockholder interests by requiring executives to acquire and maintain a meaningful stake in the Company, which promotes the Company’s objective of building long-term stockholder value. Additionally, under the Company’s Insider Trading Policy, which is available on our website at
www.cswindustrials.com
under the “Investors — Corporate Governance” caption, executives are prohibited from pledging stock
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and engaging in transactions (such as trading in options) designed to hedge against the value of the Company’s common stock.
The stock ownership guidelines are designed to maintain stock ownership at levels high enough to indicate management’s commitment to share value appreciation to our stockholders while satisfying an individual executive’s prudent needs for personal asset diversification. The stock ownership requirements are set by the Compensation Committee as a result of a competitive analysis prepared by management, and the requirements are reviewed each year and updated as necessary. The requirements were last reviewed by the Compensation Committee in May 2018.
The Company’s current stock ownership guidelines for the Named Executive Officers and the number of shares needed to satisfy the guidelines are shown in the following table.
Named Executive Officer
|
Ownership Guideline
|
Ownership Guideline at 3/31/2018
(# of Shares)
(1)
|
Current Ownership Against Guidelines
(multiple of salary)
|
Joseph
B.
Armes
|
5 x Annual Base Salary
|
56,881
|
7.8 x
|
Gregg
W.
Branning
|
3 x Annual Base Salary
|
20,477
|
0.4 x
|
Luke
E.
Alverson
|
3 x Annual Base Salary
|
18,771
|
0.5 x
|
Christopher
J.
Mudd
|
3 x Annual Base Salary
|
N/A
(2)
|
N/A
(2)
|
(1)
Based on a price per share of $45.05, the closing price of the Company’s stock on March 29, 2018. Shares have been rounded up to the nearest whole share.
(2)
Amounts are not applicable, as Mr. Mudd’s employment ended February 28, 2018.
|
The stock ownership levels under the guidelines are expected to be achieved within the later of five years from the date the guidelines are first applicable or five years from the executive’s date of appointment. Recognizing the time required to achieve the ownership guidelines, the Compensation Committee approved the establishment of an interim retention requirement. Through this requirement, executives who do not meet the ownership requirement must retain at least 75% of the vested common stock received from equity awards granted from the time the ownership guidelines become applicable, net of any shares used or sold to pay applicable tax withholding. For fiscal 2018, all Named Executive Officers either achieved their required ownership or were in process of attaining their required ownership and were compliant with the guidelines.
The Compensation Committee annually reviews these stock ownership requirements and periodically monitors the executives’ progress toward meeting their respective target ownership levels. Shares held directly by an executive count toward satisfying the requirements. The share equivalent of vested and unexercised stock options also count toward satisfying the stock ownership requirements. Unvested equity awards are not counted toward satisfying the stock ownership requirements.
Recoupment of Incentive Compensation Policy
The Company maintains a
Recoupment of Incentive Compensation Policy (the “Recoupment Policy”), which reinforces our commitment to our business objectives and core values. Under the Recoupment Policy, the Compensation Committee has the ability to recoup certain incentive compensation from an executive, within three years prior, if the Company is required to restate its financial statements. If a restatement occurs, the Compensation Committee can require an executive to reimburse the Company for all incentive compensation where the amount of compensation received was greater than the amount the Compensation Committee believes was actually earned based on the restated financial results.
Legacy Pension Plans
In connection with our Spin-Off, the Company assumed administrative responsibility and liability for CSWC’s pension plans and the benefits payable to employees participating under these plans. The legacy pension plans include a qualified defined benefit, non-contributory retirement plan, as well as a restoration plan that provides benefits to the plan participants in the qualified plan to fulfill the intent of the qualified plan without regard to limitations under the Internal Revenue Code of 1986, as amended (the “Code”). The retirement benefits payable under the legacy pension plans depend on the participant’s years of service under the plans and their final average monthly compensation determined by averaging the five consecutive years of highest compensation prior to retirement.
On January 1, 2015, CSWC closed the legacy pension plans to new participants. At the Spin-Off, the Company froze the legacy pension plans, and future benefits to plan participants ceased to accrue as of that date. Mr. Armes accrued benefits under the legacy plans as part of his prior employment with CSWC. The amount of legacy pension plan benefits attributable to applicable Named Executive Officers as of March 31, 2018 is shown in the “Pension Benefits” table below.
Other Benefits
As previously discussed, the Compensation Committee strives to make our executive compensation program primarily performance-based and, as such, does not provide perquisites for our executive officers other than benefits generally provided to all employees. Our executive compensation program from time to time may provide limited other benefits, which the Compensation Committee determines to be competitive with the level of benefits offered by the companies with which we compete for executive talent, and as such would serve to meet our stated objective of attracting and retaining executive talent. In addition, some of benefits may, in the Compensation Committee’s view, be provided for the Company’s benefit notwithstanding any personal benefit an executive may derive. No such other benefits were provided in fiscal 2018.
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Chief Executive Officer Compensation in Fiscal 2018
The compensation of the CEO was set in a manner consistent with our compensation philosophy and the general compensation objectives and principles discussed above. In the interest of providing stockholders with a better understanding of Mr. Armes’ compensation for fiscal 2018, we are providing the following discussion and analysis.
Employment Agreement
On October 1, 2015, the Company entered into an employment agreement with Mr. Armes regarding his role as the Company’s Chief Executive Officer.
The employment agreement had an initial term of two years. The term of the agreement automatically extends for additional one-year periods unless Mr. Armes’ employment is terminated pursuant to the terms of the employment agreement.
The employment agreement provides that Mr. Armes will serve as Chief Executive Officer of the Company and, for at least the initial term of the employment agreement, serve as Chairman of the Board. Additionally, the Board will nominate Mr. Armes for election to the Board during the term of the employment agreement.
Base Salary and Incentive Opportunities
Mr. Armes’ employment agreement provides for an annual base salary of not less than $500,000 and an annual incentive award opportunity with a target value equal to 150% of his base salary and a maximum payout at 200% of the target amount. Mr. Armes is also eligible to participate in the Company’s equity-based incentive plans and employee benefits plans, though no specific benefit or amount is provided.
Mr. Armes’ incentive opportunity under the LTIP was established by the Compensation Committee on October 1, 2015, in connection with the Spin-Off as discussed above. His total LTIP incentive opportunity of 280% of his base salary was determined by the Compensation Committee consistent with our compensation programs and principles described above.
Base Salary
During fiscal 2018, Mr. Armes’ base salary was increased by 2.5% to $512,500, which increase was generally consistent with merit increase levels across the Company.
AIP Target and Fiscal 2018 Award
During fiscal 2018, no changes were made to Mr. Armes’ target AIP opportunity of 150% of base salary, as the Compensation Committee determined that this target amount was consistent with our compensation philosophy. Concerning Mr. Armes’ fiscal 2018 AIP award, as discussed above, the Compensation Committee approved a total AIP payout of 60% of target. This included $0 paid under the Operating Income metric (70% of total AIP target, 0% payout) and $461,250 paid under the qualitative individual performance metric (30% of total AIP target, 200% payout).
As discussed in footnote 6 to the “Summary Compensation Table” below, Mr. Armes’ disclosed “Non-Equity Incentive Plan Compensation” amount includes $517,268 expensed by the Company for the final installment of a cash incentive award Mr. Armes was eligible to receive from CSWC under the CSWC Spin-Off Compensation Plan. This amount was paid by CSWC and not the Company, and it is not a part of the Company’s AIP. For a description of the CSWC Spin-Off Compensation Plan, please see the disclosure contained in Company’s proxy statement for the 2016 annual meeting of stockholders, dated July 6, 2016, under “Additional Executive Compensation Information — CSWC Spin Off Compensation Plan”.
LTIP Target and Fiscal 2018 LTIP Awards
During fiscal 2018, no changes were made to Mr. Armes’ target LTIP opportunity of 280% of base salary, as the Compensation Committee determined that this target amount was consistent with our compensation philosophy. Accordingly, Mr. Armes received an award of 19,359 shares of performance shares ($700,000 award value) on April 1, 2017, and 18,046 shares of restricted stock ($717,500 award value) on October 1, 2017. The award value for the performance shares differs from the “grant date fair value” reported in the “Summary Compensation Table” below due to the accounting methodology for determining such amount, as discussed in footnote 2.
Benefits upon Termination
Under Mr. Armes’ employment agreement, if his employment is terminated due to death or disability, Mr. Armes will receive (1) his base salary and any unpaid benefits (including death benefits) through the date of termination, (2) if the date of termination is after the end of a fiscal year but before the Company pays cash bonuses, the cash bonus payment related to the previous year and (3) if the date of termination is before the end of a fiscal year, a prorated cash bonus payment related to the then-current fiscal year. Additionally, all of Mr. Armes’ unvested equity-based awards will immediately vest in full, except for performance-based awards, which will vest upon and to the extent that the performance conditions have been satisfied, and all options will remain exercisable for one year following the date of termination.
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If Mr. Armes’ employment is terminated by the Company without “cause” or by Mr. Armes for “good reason”, Mr. Armes will receive (1) his base salary and any unpaid benefits through the date of termination, (2) a lump sum payment equal to two times the sum of (a) his then-current base salary or such higher base salary that was in effect during the 12 months prior to the date of termination and (b) the greater of his annual bonus for the prior fiscal year or his target bonus for the current year, (3) if the date of termination is after the end of a fiscal year but before the Company pays cash bonuses, the cash bonus payment related to the previous year, (4) if the date of termination is before the end of a fiscal year, a prorated cash bonus payment related to the then-current fiscal year and (5) continued medical and dental insurance for him and his dependents for 24 months following the date of termination. Additionally, all of Mr. Armes’ unvested equity-based awards will immediately vest in full, except for performance-based awards, which will vest upon and to the extent that the performance conditions have been satisfied, and all options will remain exercisable for one year following the date of termination.
If Mr. Armes’ employment is terminated by the Company for “cause” or by Mr. Armes without “good reason”, Mr. Armes will receive only his base salary and any unpaid benefits through the date of termination.
Additionally, Mr. Armes participates in the Company’s Executive Change in Control and Severance Benefit Plan (the “CIC and Severance Plan”). To the extent the provisions of the CIC and Severance Plan are more beneficial to Mr. Armes, such provisions would apply in the applicable termination scenario.
The employment agreement also provides that Mr. Armes will not engage in activities that are competitive with the Company’s business or solicit any key employees of the Company to leave or accept employment with another company for 24 months following the date of termination.
Executive Change in Control and Severance Benefit Plan
The Company maintains the CIC and Severance Plan. The features of this plan are described more fully under “―Potential Payments upon Termination or Change-In-Control―CSW Industrials, Inc. Executive Change in Control and Severance Benefit Plan” below. The Compensation Committee believes that this plan benefits stockholders in providing consistency and transparency in severance benefits if an executive officer’s employment is terminated, and also supports alignment between executive officer and stockholder interests should a transformative transaction arise that is in stockholders’ best interests.
Review and Assessment of Compensation Under Termination Scenarios
The Compensation Committee reviews each Named Executive Officer’s total compensation under several scenarios including a change-in-control of the Company, termination of employment by management and resignation or retirement by the executive. Tally sheets setting forth all of the listed scenarios are prepared by management and reviewed by the Compensation Committee with input from Longnecker. Based on the Compensation Committee’s review of the tally sheets, the Compensation Committee determined that the potential payments that would be provided to the Named Executive Officers were consistent with our executive compensation objectives and principles.
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Annual Executive Compensation Program Review and Compensation Risk
It is the Compensation Committee’s policy to regularly monitor and annually review our executive compensation program to determine, in consultation with Longnecker
,
whether the elements of the program are consistent with our stated executive compensation objectives and principles. Within this determination is an evaluation of whether the Company’s risk management objectives are being met with respect to the executive compensation program and our compensation programs as a whole. If the elements of the program are determined to be inconsistent with our objectives and principles, or if any incentives are determined to encourage risks that are reasonably likely to have a material adverse effect on us, the elements are adjusted as necessary.
The Compensation Committee, in consultation with Longnecker, has concluded that no risks arising from our compensation policies and practices are reasonably likely to have a material adverse effect on the Company. In reaching this conclusion, the Compensation Committee noted that:
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Compensation
elements
are
balanced.
Our compensation program design provides a balanced mix of base salary, annual cash incentive compensation and, for eligible employees, long-term equity incentives, which provides the incentive to perform at high levels and maximize Company performance without focusing exclusively on compensation performance metrics to the detriment of other important business metrics.
■
Metrics
balance
short-term
and
long-term
goals.
Our incentive compensation metrics are balanced between short-term corporate business and financial objectives, namely consolidated operating income for the annual cash incentive opportunity, and long-term stock-based and financial performance objectives, which are effected through an equally weighted mix of restricted stock that generally vests ratably over a three-year period and performance shares that vest at the end of a three-year performance period based on benchmarked TSR performance.
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Individual
performance
is
emphasized.
We place an emphasis on individual, non-financial performance metrics in determining final individual compensation amounts, serving to restrain the influence of formulae and objective factors on incentive pay and providing the Compensation Committee with discretion to adjust compensation downward if behaviors are not consistent with our business objectives and core values.
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Incentive
programs
have
performance
thresholds
and
are
capped.
Both the AIP opportunity and performance share awards have threshold payout levels, which ensure that incentive compensation is reduced or eliminated altogether if minimum performance levels are not achieved, as well as maximum payout levels, which helps avoid excessive total compensation and reduces the incentive to engage in unnecessarily risky behavior.
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Compensation
is
benchmarked.
The Compensation Committee benchmarks compensation against both the benchmark peer group and other compensation data from the broader market to ensure compensation programs are generally consistent with industry practice.
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Executives
have
ownership
guidelines.
Our officers have equity ownership guidelines, which further encourage a long-term focus on sustainable performance and further align our officers’ interests with those of our stockholders, and they are prohibited from pledging stock and engaging in transactions designed to hedge against the value of the Company’s stock.