Certain Relationships and Related Person Transactions
Our Corporate Governance Guidelines address, among other things, the consideration and approval of any related person transactions. Under these
Governance Guidelines, any related person transaction that would require disclosure by us under Item 404(a) of Regulation S-K of the rules and regulations of the SEC, including those
with respect to a director, a nominee for director or an executive officer, must be reviewed and approved or ratified by the Nominating Committee, excluding any director(s) interested in such
transaction. Any such related person transactions will only be approved or ratified if the Nominating Committee determines that such transaction will not impair the involved person(s)' service to, and
exercise of judgment on behalf of, the Company, or otherwise create a conflict of interest that would be detrimental to the Company.
Mark
N. Diker, our Chairman's son, has served as a director of Cantel since October 18, 2007. Because of such family relationship, he is not treated as an independent director.
During fiscal year 2016, Mr. Mark Diker's total compensation was approximately $50,000 and he was awarded 747 restricted shares under the 2016 Plan in connection with his directorship at
Cantel.
Other
than compensation paid to our executive officers and directors and disclosed in this Proxy Statement or otherwise approved by our Compensation Committee or Board, we did not engage
in any related person transactions in fiscal year 2016.
BOARD MATTERS; COMMITTEES
Board Meetings and Attendance of Directors
The Board held six meetings, four regular meetings and two special meetings, during fiscal year 2016. During fiscal year 2016, each of the
directors attended 75% or more of the combined total meetings of the Board and the respective committees on which he or she served. Directors are required to make every reasonable effort to attend the
Annual Meeting of Stockholders. All nine individuals then serving as members of the Board attended our last Annual Meeting of Stockholders.
Director Independence
In determining independence pursuant to NYSE standards, each year the Board affirmatively determines whether directors have a direct or indirect
material relationship with the Company that may interfere with their ability to exercise their independence from the Company. When assessing the materiality of a director's relationship with the
Company, the Board considers all relevant facts and circumstances, not merely from the director's standpoint, but from that of the persons or organizations with which the director has an affiliation.
Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships. The Board has affirmatively determined that the following five
directors have no material relationship with us and are independent within the meaning of Rule 10A-3 of the Exchange Act and within the NYSE definition of "independence": Alan R. Batkin, Ann E.
Berman, Laura L. Forese, George L. Fotiades and Ronnie Myers. In addition, the Board has determined that Anthony B. Evnin would, if elected at the meeting, also meet applicable independence
definitions. Our Board has also concluded that none of these directors possessed the objective relationships set forth in the NYSE listing standards that prevent independence. None of our independent
directors has any relationship with the Company other than his or her service as a director and on committees of the Board. Independent directors receive no compensation from us for service on the
Board or the Committees other than directors' fees and equity grants under our 2016 Plan.
13
Executive Sessions; Presiding Director
As required by the NYSE listing standards, our non-management directors meet in executive sessions at which only non-management directors are
present on a periodic basis, generally following meetings of the full board of directors. Meetings of non-management directors are generally followed by meetings of the independent directors.
Mr. Batkin serves as the presiding independent director (Presiding Director) and is the chairperson for all non-management and independent director meetings. He has been selected by our
non-management directors to serve in such position each year since December 2004. In addition, Mr. Fotiades, in his capacity as Vice Chairman of the Board, performs certain responsibilities
sometimes attributable to a presiding or lead director, particularly with respect to helping build and maintain a productive relationship between the Chairman and the CEO as well as the Board and the
CEO.
Communications with Directors; Hotline
You may contact the entire Board, any Committee, the Presiding Director or any other non-management directors as a group or any individual
director by visiting www.cantelmedical.alertline.com, or by calling our toll-free Hotline at 1-800-826-6762 (for calls originated within the United States or Canada). For calls originated outside the
United States and Canada, the toll-free Hotline number is 1-800-714-4152; please visit our website identified below or the AT&T website http://www.business.att.com/bt/access.jsp for international
access codes required for calls originated outside the United States and Canada. An outside vendor collects all reports or complaints and delivers them to our General Counsel and Chief Compliance
Officer, who, in appropriate cases, forwards them to the Audit Committee and/or the appropriate director or group of directors or member of management. You are also welcome to communicate directly
with the Board at the meeting. Additional information regarding the Hotline can be found by clicking on the "Corporate Governance" link in the "Investor Relations" section of our website at
www.cantelmedical.com.
Committees
The Board has three standing committees: the Audit Committee, the Compensation Committee, and the Nominating Committee. All members of the Audit
Committee, the Compensation Committee, and the Nominating Committee are independent directors within the definition in the NYSE listing standards and Rule 10A-3 of the Exchange Act. Each of the
Committees has the authority to retain independent advisors and consultants, with all fees and expenses to be paid by us. The Board-approved charters of each of the Committees can be found by clicking
on the "Corporate Governance" link in the "Investor Relations" section of our website at www.cantelmedical.com or (free of charge) by sending a written request to Cantel Medical Corp., 150 Clove Road,
Little Falls, NJ 07424, Attn: Secretary.
Audit Committee.
The Audit Committee is composed of Ms. Berman (Chair) and Messrs. Batkin and Fotiades. All of the
Audit Committee
members are financially literate, and at least one member has accounting and financial management expertise. The Board has determined that Ms. Berman qualifies as an "audit committee financial
expert" for purposes of the federal securities laws. Ms. Berman developed such qualifications through her skills as a CPA and her service as a Vice President of Finance and CFO of Harvard
University.
The
Audit Committee performs the following functions: (1) assisting the Board in fulfilling its oversight responsibilities with respect to (a) the integrity of our
financial statements, (b) our compliance with legal and regulatory requirements, (c) the independent registered public accounting firm's qualifications and independence, and
(d) the performance of our internal audit function and independent registered public accounting firm and (2) preparing a report in accordance with the rules of the SEC to be included in
our annual proxy statement.
14
The
Audit Committee held five meetings during fiscal year 2016, of which four were meetings held prior to the filing of our Quarterly Reports on Form 10-Q or Annual Report on
Form 10-K for the primary purpose of reviewing such reports and the quarterly financial closing process.
Compensation Committee.
The Compensation Committee is composed of Messrs. Batkin (Chairman) and
Cohen and Dr. Forese. The Board will select a replacement for Mr. Cohen shortly following the meeting. The Compensation Committee performs the following functions: (1) discharging
the Board's responsibilities relating to compensation of our executive officers; (2) producing an annual report on executive compensation for inclusion in our proxy statement in accordance with
applicable rules and regulations; and (3) administering our equity incentive plans in accordance with the terms of such plans. The Compensation Committee held four meetings during fiscal year
2016. In discharging its responsibilities, the Compensation Committee, among other things, evaluates the CEO's performance and determines and approves the CEO's compensation level based on such
evaluation. The Compensation Committee also determines and approves the compensation of other executive officers. The CEO makes recommendations to the Compensation Committee regarding the amount and
form of his compensation and the compensation of our other executive officers. Neither our management nor the Compensation Committee retained any compensation consultants with respect to fiscal year
2016 compensation. However, Frederic W. Cook & Co. (FW Cook), an independent compensation consultant was retained directly by the Compensation Committee to provide advice with respect to
executive compensation for fiscal year 2017 as well as CEO transition activities related to the retirement of our CEO on July 31, 2016. FW Cook's primary responsibility was to review our
existing annual and long-term incentive plan designs and provide advice to the Compensation Committee on refinements and modifications to the plans in preparation for fiscal year 2017.
Compensation Committee Interlocks and Insider Participation.
None of the directors who served on the Compensation Committee
during fiscal year 2016
is or has been an officer or employee of the Company or had any relationship that is required to be disclosed as a transaction with a related person. During fiscal year 2016, none of our executive
officers served as a member of the board of directors or compensation committee of any entity that has one or more executive officers who serve on our Board or our Compensation Committee.
Nominating Committee.
The Nominating Committee is composed of Mr. Fotiades (Chairman), Dr. Forese, Mr. Slovin and
Dr. Myers. The Nominating Committee performs the following functions: (1) identifying individuals qualified to become Board members, consistent with criteria approved by the Board and
recommending that the Board select the director nominees for the next Annual Meeting of Stockholders; (2) developing and recommending to the Board the Corporate Governance Guidelines;
(3) overseeing evaluation of the Board and management and (4) reviewing and assessing the compensation paid to members of the Board and its committees. The Nominating Committee held one
meeting during fiscal year 2016.
Board Leadership Structure
The CEO and Chairman roles at Cantel are separated between Jorgen B. Hansen (who assumed the CEO role on August 1, 2016) and Charles M.
Diker, respectively, in recognition of
their differing responsibilities. The CEO is responsible for leading the organization's day-to-day performance, executing the Company's strategies and ensuring the success of our acquisition program.
The Chairman is responsible for advising the CEO, collaborating on acquisitions, and presiding over meetings of the Board. In addition, the Chairman and the CEO have principal responsibility for
setting the strategic direction of the Company. Although we do not have a formal policy regarding whether the offices of Chairman and CEO should be separate, our Board believes that the existing
leadership structure, with the separation of the Chairman of the Board and CEO roles, enhances the accountability of the CEO to the Board and strengthens the Board's independence from management. In
addition, the Board
15
believes
that having a separate Chairman creates an environment that is more conducive to the objective evaluation and oversight of management's performance, increasing management accountability, and
improving the ability of the Board to monitor whether management's actions are in the best interests of the Company and our stockholders.
Board Role in Risk Oversight
The Board, through its Audit Committee, is responsible for oversight of the Company's management of enterprise risks. Cantel's senior management
is responsible for the Company's risk management process and the day-to-day supervision and mitigation of enterprise risks. Management of the Company advises the Audit Committee and Board on areas of
material Company risk, including strategic, operational, financial, legal and regulatory risks. We do not believe our Board's oversight of risk influences our leadership structure, though we believe
our leadership structure helps mitigate risk by separating oversight of our day-to-day business from the oversight of our Board.
Selection of Nominees for Election to the Board
The Nominating Committee has established a process for identifying and evaluating nominees for director. Although the Nominating Committee will
consider nominees recommended by stockholders, the Nominating Committee believes that the process it utilizes to identify and evaluate nominees for director is designed to produce nominees that
possess the educational, professional, business and personal attributes that are best suited to further our purposes.
Any interested person may recommend a nominee by submitting the nomination, together with appropriate biographical information, to the Nominating Committee, c/o Cantel Medical Corp., 150 Clove Road,
Little Falls, NJ 07424, Attn: Secretary. All recommended candidates will be considered using the criteria set forth in our Corporate Governance Guidelines.
The
Nominating Committee will consider, among other things, the following factors to evaluate recommended nominees: the Board's current composition, including expertise, diversity,
balance of management and non-management directors, independence and other qualifications required or recommended by applicable laws, rules and regulations (including NYSE requirements) and company
policies or procedures. Although the Board considers diversity as a factor to be considered in identifying and evaluating nominees, it does not have any formal policy with respect to diversity. The
Nominating Committee will also consider the general qualifications of potential nominees, including, but not limited to personal integrity; concern for Cantel's success and welfare; experience at
strategy/policy setting level; high-level leadership experience in business or administrative activity; breadth of knowledge about issues affecting Cantel; an ability to work effectively with others;
sufficient time to devote to the Company; and freedom from conflicts of interests.
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EXECUTIVE OFFICERS OF CANTEL
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Name
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Age
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Position
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Charles M. Diker
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81
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Chairman of the Board and member of Office of the Chairman
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Jorgen B. Hansen
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49
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President, CEO and member of Office of the Chairman
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Peter G. Clifford
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46
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Executive Vice President, CFO and member of Office of the Chairman
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Eric W. Nodiff
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59
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Executive Vice President, General Counsel, Secretary and member of Office of the Chairman
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Seth M. Yellin
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42
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Executive Vice President, Strategy and Corporate Development and member of Office of the Chairman
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Steven C. Anaya
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46
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Senior Vice President and Chief Accounting Officer
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Set
forth below is certain biographical information concerning our current executive officers who are not also directors:
Mr. Clifford
has served as Executive Vice President and CFO of the Company since March 2015. Prior to joining the Company, Mr. Clifford served in various financial
positions with increasing responsibility for over twenty years. For more than five years prior to joining the Company, he was Group Vice President of Operations Finance and Information Technology for
IDEX Corporation.
Mr. Nodiff
has served as Executive Vice President and General Counsel since November 2014. Prior thereto, from January 2005 through November 2014, he served as Senior Vice
President and General Counsel. He has also served as Secretary since January 2009.
Mr. Yellin
has served as Executive Vice President, Strategy and Corporate Development of the Company since September 2016. Prior thereto, from March 2013 to September 2016, he
served as Senior Vice PresidentCorporate Development, and from April 2012 through March 2013, he served as Vice PresidentCorporate Development. From January 2011 through
January 2012, Mr. Yellin was an analyst in the Medical Devices & Life Science Tools segment of Citadel Asset Management and from May 2009 through January 2011 he served as Managing
Director, Senior Health Care Analyst at Millennium Partners.
Mr. Anaya,
who has been employed by us in various capacities since March 2002, has served as a Senior Vice President and Chief Accounting Officer of the Company since November
2014. He previously served as Vice President and Controller. Mr. Anaya is a CPA and a chartered global management accountant (CGMA).
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COMPENSATION DISCUSSION AND ANALYSIS
Executive Summary
This Compensation Discussion and Analysis (CD&A) describes our executive compensation philosophy and program, the compensation decisions made
under this program and the specific factors we considered in making those decisions. This CD&A focuses on the compensation of our "Named Executive Officers" (NEOs) for fiscal year 2016, who
were:
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Charles M. DikerChairman of the Board
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Andrew A. KrakauerCEO (who retired as CEO and a director on July 31, 2016)
-
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Jorgen B. HansenPresident and COO (who was promoted to President and CEO, and appointed to the Board of Directors, on
August 1, 2016)
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Peter G. CliffordExecutive Vice President and CFO
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Eric W. NodiffExecutive Vice President, General Counsel and Secretary
All
of the NEOs served as members of the Office of the Chairman through July 31, 2016. Mr. Krakauer ceased serving in such position upon his retirement as CEO.
-
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Fiscal Year 2016 Performance Highlights; Non-GAAP financial measures
Fiscal
year 2016 was a very successful year for the Company as we significantly improved every key financial performance metric. We delivered record top and bottom line performance and
improved cash flows, while investing strategically in the business and closing three acquisitions. Performance highlights included the following:
-
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Net sales increased 17.7% to a record $664,755,000.
-
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Net income under generally accepted accounting principles (GAAP) increased by 25.0% to $59,953,000 from $47,953,000.
-
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Diluted EPS increased by 25.2% to $1.44 from $1.15.
-
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Adjusted (non-GAAP) diluted EPS increased by 21.5% to $1.75 from $1.44.
-
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How Pay Was Tied to the Company's Performance in Fiscal Year 2016
Historically,
our annual cash incentive awards have been the only form of executive compensation directly tied to performance. As discussed below, payment of cash incentive awards are
tied to our non-GAAP earnings per share (EPS). Our fiscal year 2016 results and compensation decisions illustrate that our pay-for-performance philosophy works as intended, with incentive-based cash
bonuses being driven by performance. In alignment with our pay-for-performance philosophy, the annual incentive payout for each of our NEOs was above target due to the Company's strong non-GAAP EPS
compared to the targets established at the beginning of the fiscal year. The Company's non-GAAP EPS performance significantly exceeded the fiscal year 2016 target.
-
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Change in Compensation Approach for Fiscal Year 2017Increased Tie to Company's
Performance
Prior
to fiscal year 2016, annual cash incentive awards and long-term equity awards were granted in October following the end of each fiscal year based on targets established at the
beginning of the fiscal year (as described below). For example, in October 2015 following fiscal year 2015, executives were paid cash bonuses and issued restricted stock awards based on targets
established in the beginning of
fiscal year 2015. However, in the beginning of fiscal year 2016, the Compensation Committee modified its compensation approach. It decided that commencing with fiscal year 2017, the Company
18
would
further the alignment of pay with performance by delivering an increased portion of executive pay through "at-risk" variable incentive awards that help ensure that realized pay is tied to
attainment of critical operational goals and sustainable appreciation in stockholder value. The Compensation Committee agreed that equity awards would be granted in October at the beginning of each
fiscal year (not in the October following the end of the prior fiscal year, as had been the historical practice) and, for the first time, granted performance-based equity grants. As described below,
the fiscal year 2017 performance-based equity awards are tied to achievement of fiscal year 2017 budgeted revenue and the 3-year relative total stockholder return (TSR) performance as measured against
the S&P Healthcare Equipment Index. Therefore, while equity grants were made to executives in October 2016 (consistent with prior years), such grants were attributable to fiscal year 2017 rather than
fiscal year 2016.
In
addition, commencing with fiscal year 2017, the Compensation Committee adopted a compensation program with established award targets and performance targets such that it would have
limited discretion in making bonus awards to ensure deductibility of executive compensation in excess of one million dollars under Internal Revenue Code (the Code) Section 162(m)
(Section 162(m)).
-
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Compensation Philosophy and Objectives
The
approach to our compensation is designed to accomplish the following objectives:
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Pay-for-Performance.
To reward
performance that drives the achievement of the Company's short- and long-term goals and, ultimately, stockholder value. As mentioned above, our pay-for-performance orientation is significantly
increasing in fiscal year 2017.
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Align Management and Stockholder
Interests.
To align the interests of our executive officers with our stockholders by using long-term, equity-based incentives, maintaining stock
ownership and retention guidelines that encourage a culture of ownership, and rewarding executive officers for sustained and superior Company performance as measured by operating results and TSR.
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Attract, Retain, and Motivate Talented
Executives.
To compete and provide incentives for talented, high-performing executives.
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Address Risk-Management
Considerations.
To motivate our executives to pursue objectives that create long-term stockholder value and discourage behavior that could lead
to unnecessary or excessive risk-taking inconsistent with our strategic and financial objectives, by providing a certain amount of fixed pay and balancing our executives' at-risk pay between
short-term (one-year) and long-term (three-year) performance horizons, using a variety of financial and other performance metrics.
-
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Support Financial Efficiency.
To
help ensure that payouts under our cash-based and equity-based incentive awards are appropriately supported by performance and to allow the Compensation Committee to design these awards in a way that
is intended to be treated as performance-based compensation that is tax deductible by the Company under Section 162(m), as appropriate.
What the Company's Compensation Program is Designed to Reward
The Company's business plan emphasizes growth through the expansion of existing operations (i.e., organic growth) and the addition of new
products through acquisitions and product development. This strategy is advanced by identifying and acquiring businesses; effectively integrating acquired operations, personnel, products and
technologies into the organization; retaining and motivating key personnel throughout the Company; attracting and retaining customers; and encouraging new product development. In addition, the Company
relies on its executives to sustain and efficiently manage current businesses while adapting and growing its business segments in response to the ever-changing competitive landscape, and, in general,
to maximize stockholder value. The compensation program is
19
designed
to reward the NEOs for successfully managing these tasks, increasing earnings of the Company, and creating stockholder value.
The
abilities and performance of the Company's executives are critical to the Company's long-term success, and the objectives of the compensation program are designed to complement each
other by balancing the Company's interest in achieving both its short-term and long-term goals. Base salary and incentive-based cash bonuses are paid to reward performance and the achievement of
short-term objectives and equity awards are used to align the executives' interests with the long-term success of the Company and to attract and retain executives.
Responsibilities in Setting Executive Compensation
The Compensation Committee has responsibility for determining executive compensation. The Compensation Committee is made up entirely of
independent directors as defined by our Governance Guidelines and NYSE listing standards. It regularly reviews the design and implementation of our executive compensation program and reports on its
discussions and actions to the Board. In particular, the Compensation Committee (i) oversees our executive compensation program, (ii) approves the performance goals for our NEOs,
evaluates results against those targets each year, and determines and approves the compensation of our CEO and our other NEOs, as well as any other executive officer of the Company as well as division
and regional presidents, and (iii) makes recommendations to the Board with respect to the structure of overall incentive and equity-based plans. The Compensation Committee makes its
determinations regarding executive compensation after consulting with the Chairman and the CEO and, if retained, the Compensation Committee's independent compensation consultant (as further described
below), and its decisions are based on a variety of factors, including the Company's performance, individual executives' performance, and input and recommendations from the Chairman and the CEO.
Individual performance is evaluated primarily based on the consolidated performance of the Company, and, in the case of division and regional presidents, on the business or operations for which the
executive is responsible, the individual's skill set relative to industry peers, overall experience and time in the position, the critical nature of the individual's role, difficulty of replacement,
expected future contributions, readiness for promotion to a higher level, role relative to that of other executive officers, and, in the case of externally recruited NEOs, compensation earned with a
prior employer. NEOs do not have a role in the determination of their own compensation, but the Chairman of the Board and the CEO do discuss their compensation with the Compensation Committee.
Following the Compensation Committee's determination of the Chairman's annual equity award and other compensation, the Board is requested to consider and ratify such compensation. The Compensation
Committee currently consists of Mr. Batkin (Chairman), Mr. Cohen and Dr. Forese. Since Mr. Cohen is not renominated as a director, the Board will select a replacement for
Mr. Cohen on the Compensation Committee promptly following the meeting.
Role of Compensation Data and Independent Consulting Firm
The Compensation Committee did not utilize any specific survey data or benchmarking with respect to fiscal year 2016 compensation of the CEO or
any of the other NEOs, though it has in the past and may do so in the future. Instead, the Compensation Committee relied on its own analyses and processes described herein in setting fiscal year 2016
compensation for the NEOs.
Although
the Compensation Committee did not retain any independent consulting firm to provide advice with respect to executive compensation for fiscal year 2016, it retained FW Cook as
an independent compensation consultant to provide advice with respect to executive compensation for fiscal year 2017. FW Cook's primary responsibility was to review our existing annual and long-term
incentive plan designs and provide advice to the Compensation Committee on refinements and modifications to the plans in preparation for fiscal year 2017. The Compensation Committee also
20
retained
FW Cook with respect to the compensation-related aspects of our CEO transition, which took place at the end of FY 2016.
The
Committee has assessed the independence of FW Cook pursuant to the New York Stock Exchange listing standards and SEC rules and is not aware of any conflict of interest that would
prevent FW Cook from providing independent advice to the Committee concerning executive compensation matters.
Elements of the Compensation Program; Why the Compensation Committee Chose Each Element and How Each
Relates to the Company's Objectives
The two principal elements comprising executive compensation are cash and equity awards. The cash element is divided into base salary and annual
cash incentives. The equity element historically consisted of restricted stock awards (subject to a risk of forfeiture) and, with respect to Mr. Diker, stock options, under the Company's 2006
Plan or 2016 Plan. These elements
complemented each other and gave the Compensation Committee flexibility to create compensation packages that provided short and long-term incentives in line with the Company's approach to
compensation. Such approach was designed to provide the executive sufficient cash to be competitive with other employment opportunities, while at the same time providing the executive with an
incentive to build stockholder value by aligning the executive's interests with those of our stockholders.
Prior
to fiscal year 2016, cash awards and equity awards were granted each October following the end of the fiscal year based on targets established at the beginning of the fiscal year
(as described below). However, as described above in the executive summary, in the beginning of fiscal year 2016, the Compensation Committee decided that commencing with fiscal year 2017, equity
awards would be granted at the beginning of the fiscal year and would include (for the first time) performance-based equity grants, as described below, in addition to strictly time-based equity
grants. Therefore, while equity grants were made to executives in October 2016, such grants were attributable to fiscal year 2017 rather than fiscal year 2016.
Cash
Base salary is the primary fixed element of the Company's compensation program and is used to attract and retain, as well as motivate and
reward, executive officers. In determining the base salary of NEOs, the Compensation Committee considers the experience, skills, knowledge and responsibilities required of the executive officer in his
role, specifically, the functional role of the position, the level of the individual's responsibility, the ability to replace the individual, and if applicable, the base salary of the individual at
his or her prior employment.
Short-term
incentive compensation is an opportunity for executives to receive cash bonuses based on the Company's (or its divisions') annual financial performance. The short-term
incentive compensation is intended to reward performance for the most recently completed fiscal year when financial objectives are achieved and motivate and retain qualified individuals who have the
opportunity to influence future results, advance business objectives, and enhance stockholder value. Likewise, this element of compensation is designed to provide a reduced award or no award when
financial objectives are not achieved. Target amounts for the annual bonus opportunity are historically established within 75 days after the commencement of the fiscal year and are based on
achievement of a financial metric, which in fiscal year 2016 was non-GAAP EPS. The exact annual metric and targets are determined and approved by the Compensation Committee each year. In addition, the
Compensation Committee historically had the flexibility to award additional discretionary bonuses to recognize and reward performance in excess of measurable performance objectives. In fiscal year
2016, as described below, the Compensation Committee exercised such discretion to award such discretionary bonuses. However, for fiscal year 2017, to ensure deductibility of executive compensation in
excess of one million dollars
21
under
Section 162(m), the Compensation Committee approved a compensation program with established award targets and performance targets with limited discretion in making bonus awards.
The
Compensation Committee agreed that for fiscal year 2016, Mr. Diker would be entitled to receive a target bonus of $150,000 if the Company achieved the annual financial
performance targets imposed on executives for fiscal year 2016. However, Mr. Diker is not entitled to any discretionary bonus for over-achievement of the performance objectives.
For
fiscal year 2016, the Compensation Committee established a target level, as a percentage of base salary, for each member of senior management (exclusive of Mr. Diker) for
purposes of determining cash bonuses. Achievement of the target levels was based on attainment of the Company's fiscal year 2016 targeted diluted non-GAAP EPS and, in the case of division CEOs,
budgeted operating income for the applicable division. Factors included in the process of determining senior management target levels, as well as discretionary additional bonuses, were business
performance, scope of responsibilities and accountability, competitive and other industry compensation data, special circumstances and expertise, individual performance, comparison with compensation
of our other senior managers and recommendations of the Chairman of the Board and the CEO.
Equity
The primary purpose of equity grants is to contribute to the motivation of key employees in accomplishing the Company's long-term strategic,
operational and financial objectives as well as stockholder value goals. Equity awards (which may consist of restricted stock, stock options, stock appreciation rights or performance awards) are
granted to NEOs under our 2016 Plan in order to give them an ownership interest in the Company, thereby aligning their interests with those of the stockholders and providing a long-term incentive.
Restricted stock awards consist of awards of the Company's common stock subject to specified vesting restrictions or conditions including, among other things, continued employment with the Company.
Stock options and stock appreciation rights (rights to receive a payment equal to the increase in fair market value of the Company's common stock since the grant date thereof) are equity awards whose
value depends on an increase in the Company's common stock price. For more than the past five years, the Compensation Committee has awarded only restricted stock and no stock options to management,
other than Mr. Diker who, as discussed below, received stock options. Grants of restricted stock have intrinsic value regardless of price appreciation, and may create a stronger alignment of
interests between management and other stockholders. In addition, the Compensation Committee believes that due to their intrinsic value, restricted shares may have a stronger retentive effect on
management than stock options.
During
fiscal year 2016 (in October 2015), restricted stock awards were granted to management under the Company's Long Term Incentive Plan (LTIP), although these awards were deemed
attributable to fiscal year 2015 and described in last year's proxy statement. Following fiscal year 2016 (in October 2016), the LTIP was terminated and restricted stock awards were granted to
management, but such awards, half of which are performance-based restricted stock awards, are deemed attributable to fiscal year 2017. Mr. Diker did not participate in the LTIP but in October
2015 he received stock options and in October 2016 he received a time-based restricted stock award. The awards to Mr. Diker were approved by the Compensation Committee and ratified by the
Board.
The
Compensation Committee has typically imposed time-based vesting conditions on stock options and restricted stock awards because it believes that time-based vesting encourages
recipients of awards to remain employed by the Company and continue to provide services to us, and also encourages recipients to build stockholder value over a long period of time. As with other
issued shares of our common stock, recipients of restricted stock (but not stock options) under our 2016 Plan are entitled to receive dividends we pay on our common stock.
22
Risk in Our NEO Compensation Program
Our Compensation Committee believes that the mix and design of the elements of executive compensation do not encourage management to assume
excessive risks. We believe the base salary levels of our executives mitigate excessive risk-taking behavior by providing reasonable predictability in the level of income earned by each executive and
alleviating pressure on executives to focus exclusively on stock price performance to the detriment of other important business metrics. We also provide a mixture of both short-term and long-term
incentives. With a significant weighting on long-term incentives that are subject to time-based vesting, we believe NEOs' incentives are aligned with those of our stockholders and short-term risk
taking is discouraged. In addition, the performance measures used for short-term incentives are intended to be challenging yet attainable, so that it is more likely than not that the executives will
earn all or a substantial portion of their target bonus annually, which mitigates the potential that our executives will take excessive risks. For fiscal year 2016, we used non-GAAP EPS as the
relevant metric. Also, for fiscal year 2016, short-term incentives in the form of annual performance bonus payouts were established, depending on a NEO's position, at between 55-100% of base salary
for on-target performance. The Compensation Committee believes that extraordinary performance warrants a higher payout but with a cap of 200% of targeted bonus, which mitigates the likelihood that our
executives will take excessive risks. In addition, stock options and restricted stock awards granted to employees generally vest annually over three years, so executives always have a significant
amount of value at stake through unvested awards that could decrease significantly in value if our business is not managed for the long term. The Compensation Committee
further retains discretion to reduce or not pay awards under these plans due to a NEO's misconduct or poor performance.
How the Compensation Committee Chose Amounts and Formulas for Each Element
Base Salary.
Currently the Compensation Committee approves the base salaries of all NEOs; however, the base salary of
Mr. Diker, who provides
services to the Company on a part time basis, is also subject to approval by the Compensation Committee as well as the Board. Annual base salary increases of executives typically occur on
February 1 of each year with additional increases occurring on a case-by-case base to recognize promotions, for market-based adjustments, and the like. For example, on July 31, 2016, the
base salary of Mr. Hansen (then serving as President and COO) was increased upon being promoted to President and CEO. The base salary history of NEOs during fiscal year 2016, as well as the
current base salaries of the NEOs (other than Mr. Krakauer, who resigned as CEO on July 31, 2016 and as employee on October 15, 2016) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NEO
|
|
STARTING FY2016
BASE SALARY
(8/1/15)
|
|
BASE SALARY
2/1/16
|
|
%
IINCREASE
|
|
CURRENT
BASE SALARY
(11/29/16)
|
|
%
INCREASE
|
|
Mr. Diker
|
|
$
|
360,500
|
|
$
|
371,315
|
|
|
3
|
%
|
$
|
371,315
|
|
|
NA
|
|
Mr. Krakauer
|
|
|
669,500
|
|
|
689,585
|
|
|
3
|
%
|
|
NA
|
|
|
NA
|
|
Mr. Hansen
|
|
|
458,674
|
|
|
550,000
|
|
|
20
|
%
|
|
600,000
|
|
|
9
|
%
|
Mr. Clifford
|
|
|
370,000
|
|
|
379,579
|
|
|
3
|
%
|
|
379,579
|
|
|
NA
|
|
Mr. Nodiff
|
|
|
370,000
|
|
|
381,100
|
|
|
3
|
%
|
|
381,100
|
|
|
NA
|
|
Cash Bonuses.
For fiscal year 2016, the Compensation Committee chose non-GAAP diluted EPS as the performance metric for the
target bonus payable to
NEOs, to maintain a focus on increasing stockholder value and driving superior financial performance. The Compensation Committee believes diluted EPS is a key metric in measuring the Company's success
and provides certainty and comparability since it is calculated in accordance with GAAP and audited each year. However, it also recognizes that non-GAAP diluted EPS (as derived from GAAP diluted EPS
but calculated by the Company) is a meaningful metric in making comparisons to our historical operating results and analyzing the underlying performance of our results of operations. We define
non-GAAP diluted EPS
23
as
diluted EPS adjusted to exclude amortization, acquisition related items, significant reorganization and restructuring charges, major tax events and other significant items management deems atypical
or non-operating in nature. For purposes of determining fiscal year 2016 cash incentive awards, we calculated non-GAAP EPS by adjusting diluted GAAP EPS to exclude (i) amortization expense,
(ii) costs associated with the retirement of our CEO, (iii) significant acquisition related items impacting current operating performance in the first nine months of fiscal year 2016
including transaction and integration charges and ongoing fair value adjustments and (iv) the impact of favorable tax legislation in our second quarter of fiscal year 2016. Specifically, at the
beginning of fiscal year 2016, the Compensation Committee established a non-GAAP diluted EPS performance target for fiscal year 2016 of $1.64. This represented a $0.27 increase (20%) over our non-GAAP
diluted EPS for fiscal year 2015.
For
fiscal year 2016 the target incentive award, established as a percentage of base salary of the NEO at the time of the award (and as a fixed dollar amount in the case of
Mr. Diker), were set by the Compensation Committee as follows:
|
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|
|
|
NEO
|
|
TARGET
INCENTIVE
AWARD
|
|
Mr. Diker
|
|
$
|
150,000
|
|
Mr. Krakauer
|
|
|
100
|
%
|
Mr. Hansen
|
|
|
100
|
%
|
Mr. Clifford
|
|
|
55
|
%
|
Mr. Nodiff
|
|
|
55
|
%
|
The
incentive award percentage of Mr. Hansen was increased following fiscal year 2015 from 75% to 100% based on his individual performance and increased responsibility, as well as
the Company's strong fiscal year 2015 performance.
In
fiscal year 2016, the Company's actual diluted non-GAAP EPS of $1.75 exceeded by $0.11 the performance target of $1.64. Therefore, each NEO received his full target incentive award.
In addition, given that the Company surpassed its performance target, which is a condition to the Compensation Committee utilizing its discretion to increase incentive awards over and above the target
incentive awards, the Compensation Committee elected to award additional cash bonuses to our NEOs other than Mr. Diker. The discretionary awards increased the incentive-based awards of each NEO
other than Mr. Diker by 30%. The primary factor considered by the Compensation Committee in determining the discretionary increase was the amount by which our actual diluted non-GAAP EPS
exceeded our performance target. The Compensation Committee also considered revenue and earnings growth, acquisition closings and integrations, and various other metrics as well as the recommendations
of Messrs. Diker and Krakauer. Consideration of such other factors in determining any discretionary bonus increase has been the Compensation Committee's historic approach to ensure that
discretionary awards above the target incentive awards reflect a more holistic evaluation of performance beyond a single metric of non-GAAP EPS performance. Total cash incentive awards to NEOs for
fiscal year 2016 were as follows:
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|
|
|
|
|
|
|
|
|
NEO
|
|
BASE
INCENTIVE
AWARD
|
|
DISCRETIONARY
INCENTIVE
AWARD
|
|
TOTAL
CASH AWARD
|
|
Mr. Diker
|
|
$
|
150,000
|
|
|
NA
|
|
$
|
150,000
|
|
Mr. Krakauer
|
|
$
|
689,585
|
|
$
|
206,876
|
|
$
|
896,461
|
|
Mr. Hansen
|
|
$
|
600,000
|
|
$
|
180,000
|
|
$
|
780,000
|
|
Mr. Clifford
|
|
$
|
208,768
|
|
$
|
62,631
|
|
$
|
271,399
|
|
Mr. Nodiff
|
|
$
|
209,605
|
|
$
|
62,881
|
|
$
|
272,486
|
|
24
Equity Awards.
Historically, the Compensation Committee has determined the number of shares of stock underlying the equity
awards based upon each
NEO's position and performance during the fiscal year. The Compensation Committee would establish equity award targets at the beginning of the fiscal year for each NEO other than Mr. Diker
based on a percentage of his base salary. Mr. Diker did not participate in the LTIP but received equity awards from time to time following each fiscal year upon the recommendation of the
Compensation Committee and approval of the Board. Historically, all restricted stock awards to NEOs were time-based, subject to vesting in three equal annual installments beginning on the first
anniversary of the grant date. None of the restricted stock awards were performance-based.
October 2015 Equity Awards.
As reported in last year's proxy statement, for the awards to the current NEOs made during
fiscal year 2016 (in October 2015), but were deemed related to fiscal year 2015, the Compensation Committee established the following payment percentages and, as a result, made the grants indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
NEO
|
|
TARGET INCENTIVE
AWARD
|
|
VALUE OF
AWARD
|
|
NUMBER OF
RESTRICTED
SHARES AWARDED
|
|
NUMBER OF
STOCK OPTIONS
AWARDED
|
|
Mr. Diker
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
15,000
|
|
Mr. Krakauer
|
|
$1,500,000 Value
|
|
$
|
1,500,000
|
|
|
27,660
|
|
|
NA
|
|
Mr. Hansen
|
|
110% of Base Salary
|
|
$
|
505,000
|
|
|
9,305
|
|
|
NA
|
|
Mr. Clifford
|
|
100% of Base Salary
|
|
$
|
370,000
|
|
|
6,825
|
|
|
NA
|
|
Mr. Nodiff
|
|
100% of Base Salary
|
|
$
|
370,000
|
|
|
6,825
|
|
|
NA
|
|
The
target incentive equity award percentages and fixed value award (in the case of Mr. Krakauer) were determined by the Compensation Committee to reflect the objectives of the
LTIP and to give effect to the positions, responsibilities and contributions to the Company of each NEO. The percentages also reflect the Compensation Committee's historic view, based on past
analyses, of market-based differences for similarly positioned executives at other companies.
All
of the above grants, awarded on October 12, 2015, were based on the $54.23 closing price of Cantel common stock on the NYSE on October 9, 2015, the first business day
immediately preceding the grant date. In addition, on October 12, 2015 the Compensation Committee awarded Mr. Diker a stock option to purchase 15,000 shares at an exercise price of
$55.36, the closing price of Cantel stock on the NYSE on the date of grant, based on his contributions to the Company and for providing direction and assistance to management during fiscal year 2015.
The
incentive award percentage for Mr. Hansen was increased to 110% from 100% the prior fiscal year in consideration of Mr. Hansen's increased responsibility as President
and for his positive contributions to the Company. Mr. Clifford's award was agreed upon as part of his compensation package upon joining the Company. The incentive award percentage for
Mr. Nodiff for the October 2015 grant was increased to 100% from 85% the prior fiscal year in consideration of his positive contributions to the Company and to match the agreed upon percentage
for Mr. Clifford.
Change in Equity Award ApproachOctober 2016 (Fiscal Year 2017)
Awards
As
outlined above, at the beginning of fiscal year 2016 (October 2015), time-based restricted stock awards were granted to executives to reward them for performance
during the recently completed fiscal year 2015. However, following such grants, the Compensation Committee decided to modify its practice of granting equity awards following each fiscal year. Rather,
it decided that going forward, long-term equity awards would be granted at the beginning of the fiscal year with a portion of such awards performance-related, certain of which would be based on
defined metrics for the current fiscal year. With the advice of FW Cook, the Compensation Committee agreed that for fiscal year 2017, 50% of the equity awards would consist of time-based restricted
stock vesting over 3 years, 25% of the equity
25
awards
would be performance-related restricted stock based on achieving a budgeted fiscal year 2017 revenue target (with a minimum gross margin percentage requirement and a 2-year service-based
vesting tail) and 25% of the equity awards would be performance-related restricted stock based on a
3-year relative TSR performance criterion. The addition of the performance-vesting restricted shares into our long-term incentive program was designed to (i) increase the performance
orientation of our program, (ii) change the focus from a singular measure of performance (i.e., non-GAAP EPS, which is used in determining annual bonus awards), to multi-performance
oriented measures, and (iii) provide additional upside (or downside exposure) to executives in the event high levels of performance (or low levels of performance) are achieved (without
increasing target levels of compensation).
Based
on the foregoing, in October 2016, the Compensation Committee established the following payment percentages for the current NEOs and awarded the equity grants indicated for fiscal
year 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NEO
|
|
TARGET
INCENTIVE
AWARD
|
|
TOTAL
VALUE OF
AWARD
|
|
EQUITY VALUE
TIME-BASED
RESTRICTED
STOCK (50%)
|
|
TIME BASED
RESTRICTED
STOCK
(# SHARES)
|
|
EQUITY VALUE
SALES-BASED
RESTRICTED
STOCK (25%)
|
|
SALES BASED
RESTRICTED
STOCK
(# SHARES)
|
|
EQUITY VALUE
TSR-BASED
RESTRICTED
STOCK (25%)
|
|
TSR BASED
RESTRICTED
STOCK
(# SHARES)
|
|
Charles M. Diker
|
|
NA
|
|
$
|
250,000
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Andrew A. Krakauer(1)
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Jorgen Hansen
|
|
$1,000,000
|
|
$
|
1,000,000
|
|
$
|
500,000
|
|
|
6360
|
|
$
|
250,000
|
|
|
3180
|
|
$
|
250,000
|
|
|
2435
|
|
Peter Clifford
|
|
100% of Base Salary
|
|
$
|
379,579
|
|
$
|
189,790
|
|
|
2415
|
|
$
|
94,895
|
|
|
1210
|
|
$
|
94,895
|
|
|
925
|
|
Eric Nodiff
|
|
100% of Base Salary
|
|
$
|
381,100
|
|
$
|
190,550
|
|
|
2425
|
|
$
|
95,275
|
|
|
1215
|
|
$
|
95,275
|
|
|
930
|
|
-
(1)
-
Mr. Krakauer
retired as CEO on July 31, 2016 and was not granted any equity awards in October 2016.
As
reflected in the above chart, the Compensation Committee agreed to increase the target incentive award of Mr. Hansen, commencing with the October 2016 equity grants. The
Compensation Committee increased the target incentive awards for restricted stock (inclusive of time-based awards and/or performance awards) to a fixed value of $1,000,000 with respect to fiscal year
2017 (the October 2016 grants) and $1,500,000 with respect to fiscal 2018 (to be issued in October 2017). Because the grants in the chart above are attributable to fiscal year 2017, the chart,
together with detailed explanatory information, will be included in the proxy statement related to next year's annual meeting of stockholders.
Post-Retirement and Other Benefits
Each of Messrs. Hansen, Clifford and Nodiff is party to a severance agreement with the Company that contains certain post-termination
benefits. During fiscal year 2016, in connection with the announcement of his retirement plans, Mr. Krakauer's severance agreement was terminated and replaced with a retirement agreement with
the Company described below that recognized his long service to the Company, the desire to ensure a smooth transition of duties to his successor, and the desire to secure Mr. Krakauer's
consulting services following retirement.
The
Compensation Committee believes that post-termination benefits are an important aspect of an executive compensation program because they allow the Company to better recruit and
retain executive officers by offering competitive compensation packages. Such benefits also allow the executive officers to focus on performance of their duties and eliminate distractions related to
job security concerns. The severance agreements also provide benefits in the event of a change in control of the Company to further align the interests of the executive with those of the stockholders.
These arrangements are primarily intended to maintain the executive's motivation to consummate the sale of the Company in circumstances where such event will maximize stockholder value,
notwithstanding that such transaction may result in the executive's loss of continued employment with the Company. We believe a "double trigger" requiring actual termination following a change of
control rather than simply awarding amounts in the event of a change of control best aligns the NEOs' interests by encouraging them to continue to perform their duties adequately rather than simply
receiving an award for completing a transaction.
26
We
believe that these severance benefits are reasonable and appropriate for our NEOs in light of the anticipated time it takes high-level executives to secure new positions with
responsibilities and compensation that are commensurate with their experience. We do not include "gross-up" provisions in the severance agreements. A more detailed description of our severance
agreements may be found below under the heading "Post Termination Benefits and Change in Control."
Severance
benefits also include the vesting of 100% of the executives' unvested stock options and unvested restricted stock awards and other similar rights in certain circumstances. We
believe that the equity awards granted to our executive officers have been reasonable in amount and that, in the event of a change in control and certain other terminations, it is appropriate that our
executive officers receive the full benefit under their equity compensation awards of the increase in Cantel's value attributable to the performance of the current management team.
The
severance agreements for Messrs. Hansen, Clifford and Nodiff provide equal benefits for each individual, other than with respect to cash severance payable in the event of a
termination in a non-change of control situation (i.e., a termination without cause). In such event, Mr. Hansen is entitled to two times the sum of his base salary and target bonus at
the time of termination and Messrs. Clifford and Nodiff are entitled to 12 months' base salary. We believe that a higher severance formula for our CEO is justified and needed in order to
attract the individual we believe is best suited for the office. Our CEO is the individual the public and our stockholders most closely identify as the face of the Company. He has the greatest
individual impact on our success, and he faces the greatest personal risks when the company takes risks. Finally, we believe that any NEO (other than Mr. Diker) who has 15 years of
employment with the Company should be entitled to additional compensation in the event of a termination of his employment in a non-change in control situation in recognition of his long service to the
Company. Therefore, upon executives (other than the CEO) reaching 15 years' employment, the severance payment of 12 months' base salary described above is increased to 18 months'
base salary.
In
addition to the above benefits, we provide NEOs (other than Mr. Diker): (1) term life insurance equal to one years' base salary, (2) a car allowance equal to $750
a month plus related expenses, (3) an executive physical once every three years (up to $3,500, subject to a gross-up to make this benefit tax neutral), (4) a $7,000 allowance for
disability insurance or long term care insurance and (5) a 401(k) plan match. Messrs. Hansen and Nodiff are also provided allowances for the use of outside car services, particularly for
transportation to and from the Company's New Jersey headquarters. We believe these perquisites and benefits are appropriate as part of a competitive benefits package. Mr. Diker is provided a
401(k) plan match.
Say-on-Pay Vote Response
In evaluating our compensation process for fiscal year 2016, our Compensation Committee generally considered the results of the advisory vote of
our stockholders on the compensation of the executive officers named in our last proxy statement related to our prior annual meeting of stockholders. Our Compensation Committee noted that
approximately 96% of votes cast approved of the compensation of those executive officers as described in our last proxy statement. Our Compensation Committee considered these voting results as
supportive of the Compensation Committee's general executive compensation practices.
Tax Deductibility of Compensation
Section 162(m) limits the deduction a public company is permitted for compensation paid to the chief executive officer and to the four
most highly compensated executive officers other than the chief executive officer. Generally, amounts paid in excess of $1,000,000 to a covered executive cannot be deducted, unless the compensation is
paid pursuant to a plan which is performance related,
27
non-discretionary
and has been approved by stockholders. In its deliberations the Compensation Committee considers ways to maximize deductibility of executive compensation, but through fiscal year
2016 nonetheless retained the discretion to compensate executive officers at levels the Compensation Committee considers commensurate with their responsibilities and achievements. Therefore,
historically the Company did not have a policy that all executive compensation be fully deductible. Portions of Mr. Krakauer's, Mr. Hansen's, Mr. Clifford's and
Mr. Nodiff's fiscal year 2016 compensation are non-deductible. The compensation of all other NEOs is fully deductible. Following fiscal year 2016, the Compensation Committee adopted a policy to
maximize deductions under Section 162(m) that was implemented commencing fiscal year 2017.
It
is important to note, however, that a number of requirements must be met for particular compensation to qualify for deductibility under Section 162(m). Therefore, there can be
no assurance that any compensation awarded will be fully deductible under all circumstances. Also, with the goal of providing a compensation program that enhances stockholder value, the Compensation
Committee reserves flexibility to approve compensation arrangements that are not fully tax deductible by the Company.