We are asking our
stockholders to approve an amendment (the “Plan Amendment”) to the Company’s 2003 Long-Term Stock Incentive Plan (as amended and restated through January 27,
2018 and further amended effective April 10, 2019, the “Incentive Plan”), to amend the Incentive Plan to increase the number of shares of Common Stock reserved for issuance under the Incentive Plan by 4,800,000 shares of Common Stock. Currently, a maximum of 19,550,000 shares of Common Stock are reserved for awards under the Incentive Plan, of which 6,829,356 shares remain available for future grants
as of April 15, 2020. Accordingly, if our stockholders approve the Plan Amendment, a total of
24,350,000 shares of Common Stock will be available for grant as awards under the Incentive Plan. No
other changes to the Incentive Plan are proposed. If our stockholders do not approve the Plan Amendment, the Incentive Plan will remain in effect in its current form, and no shares will be added to the number reserved for future grants.
Our Board approved the Plan Amendment as
of April 24, 2020, subject to
approval by our stockholders. Our stockholders originally approved the Incentive Plan at the annual meeting of stockholders held on March 14, 2003, and our stockholders approved amended and restated plans at the annual meetings of stockholders
held on March 12, 2008, February 19, 2010, February 26, 2013, and February 28, 2018, and a further amendment
at the annual meeting of stockholders held on May 23, 2019. The Plan Amendment and the full text of the
Incentive Plan are set forth in Annexes A and B, respectively to this proxy statement, which are hereby
incorporated by reference into this discussion (and the discussion in this proposal is qualified in its entirety by the full text of the Plan Amendment and the Incentive Plan).
At last year’s annual meeting of stockholders, our stockholders approved an amendment increasing the number of
shares available under the Incentive Plan by 6,200,000 shares of Common Stock, which the Company then
estimated would provide sufficient shares for our equity compensation program needs for approximately two years after the effective date of the amendment, including awards made in connection with future corporate transactions. Subsequent to stockholder approval of that
share increase, movement in the price
of our Common Stock, among other factors,
has resulted in a larger allocation of shares reserved under the Incentive Plan than
previously anticipated, because the number of restricted stock units, performance share units and options granted under the plan each year is determined by reference to the value
of a share of our Common Stock. As a result, additional shares are needed to maintain our equity
compensation program under the Incentive Plan.
If stockholders do not approve the amendment to the
Incentive Plan, we expect the number of shares reserved for awards to be substantially depleted by the end of
the 2021 fiscal year. Moreover, based on the historic burn rate as calculated below and our expectations for upcoming grants, we do not expect the number of our currently
available awards to be sufficient to fulfill the needs for our fiscal year 2021 annual grants.
Our Board believes the additional 4,800,000 shares that would be available for grant
under the Incentive Plan, if the Plan Amendment is approved, would provide sufficient shares for our equity compensation program needs, including awards that may be made in connection with future corporate transactions, for approximately two years after the effective date of the Plan Amendment. This estimate is based on our burn rate, as described below, taking into account potential shares needed to settle outstanding performance share unit grants and anticipated budgeted aggregate
annual equity grant value and mix (although actual grants could be materially different from this estimate). In addition, because the number of long-term incentive awards granted under the Incentive Plan in each fiscal year is determined by reference to the value of a share of our Common Stock, changes in the value of our stock price, which
cannot be reliably forecasted, may meaningfully impact the number of shares required to meet our equity compensation program needs.
The Board considered various aspects of our
equity compensation program under the Incentive Plan in approving the Plan Amendment, including the number of shares reserved under the Incentive Plan, the number of shares currently available for awards under the Incentive Plan, the Company’s
historic grant practices and expectations for future grants, the cost of issuing additional shares, the impact of share dilution on our existing shareholders and the central role of equity-based incentive compensation in our executive compensation
program. The Board believes that the proposed increase in the number of shares available for issuance under the Incentive Plan is necessary for retaining the flexibility to grant equity-based incentive compensation at optimal levels
to
motivate and reward the Company’s employees for their contributions to the success of the Company and the growth in value of our stock, and to support the continued growth of the Company
through potential future acquisition transactions.
If the Plan Amendment is not approved by our
stockholders, our future ability to issue equity-based awards will be limited. As a result, our ability to align employee compensation with stockholders would be constrained. In addition, the inability to maintain our equity award
program could impede our ability to attract and retain qualified employees and, under current accounting rules, result in increased volatility of reported earnings if it is necessary to replace stock-settled awards with cash-settled
awards.
Incentive Plan Share Utilization Rate and Overhang
Following is a calculation of our share utilization or burn rate over the last three fiscal years and the Transition
Period:
|
FY 2019(1)
|
Transition Period(2)
|
FY 2018
|
FY 2017
|
(a) Restricted shares, restricted stock units and performance stock units granted(1)
|
778,673
|
2,599,164
|
690,805
|
705,765
|
(b) Shares underlying options granted(1)
|
359,873
|
3,082,175
|
—
|
10,424
|
(c) Net increase in diluted shares due to
equity awards (a+b)(2)
|
1,138,546
|
5,681,339
|
690,805
|
716,189
|
(d) Weighted-average basic shares outstanding
|
125,576,000
|
107,813,000
|
66,260,000
|
70,629,000
|
(e) Burn rate (c/d)(3)
|
.91%
|
5.27%
|
1.04%
|
1.01%
|
(1) As a
result of the Merger and the Fiscal Year Change, our Named Executive Officers did not receive an annual grant of long-term incentive awards during Fiscal 2019. (see “Compensation Discussion & Analysis — Long-Term Incentive
Compensation —Long-Term Incentive Awards Granted to NEOs in 2019).
(2) Includes Founders Awards (see “Compensation Discussion & Analysis — Long-Term Incentive Compensation — Long-Term Incentive Awards Granted in the Transition Period to
NEOs — Founders Awards”). In order to better align the goals of the Company’s management team and provide a unified incentive structure, the Company, in consultation with FW Cook, determined that our 2019 annual grant of
long-term incentives to our key executive officers should be combined with the Founders Awards granted to these individuals.
(3) Reflects the gross number of shares underlying awards made to employees during the respective year (or portion thereof in the case of the Transition Period).
(4) Not adjusted for forfeitures, withholding and expirations (which would reduce burn rate if
taken into account).
The Board recognizes that the increase in the number of shares under the Incentive
Plan will result in additional dilution or “overhang” for our stockholders. As commonly calculated, the total potential overhang resulting from the Plan Amendment would be approximately 13.3%, with the incremental overhang resulting from the share increase equal to approximately 2.96%. This overhang is calculated as follows, in each case as of the record date of April 15, 2020:
(a)
|
Incremental Share Request Subject to Shareholder Approval
|
4,800,000
|
(b)
|
Shares underlying outstanding awards(1)
|
7,700,879
|
(c)
|
Shares currently
available under the 2003 Long-Term Stock Incentive Plan
|
6,829,356
|
(d)
|
Total shares authorized for, or outstanding
under, equity awards (a + b + c)
|
19,330,235
|
(e)
|
Total shares
outstanding
|
126,142,313
|
(f)
|
Fully
Diluted Overhang (d/(d+e))
|
13.3%
|
(1) Of such shares, 3,531,102 are underlying option awards.
We note that the number of shares remaining available for grant as described above differs from those reported below under Equity Compensation Plan Information, because that information,
required by SEC disclosure rules, is dated as of December 31, 2019, and therefore does not take into
account year-to-date grants for 2020.
The following table includes information regarding all outstanding equity awards (i.e., awards under the Incentive
Plan, awards under any predecessor plans and certain awards granted as inducement/make-whole awards on a
non-plan basis) and shares available for future awards under the Incentive Plan as of April 15, 2020 (and
without giving effect to the Plan Amendment under this Proposal No. 4):
Total shares
underlying outstanding options and warrants
|
3,531,102
|
Weighted average exercise price of outstanding
options and warrants
|
9.24
|
Weighted average
remaining contractual life of outstanding options and warrants
|
12.13
|
Total shares subject to outstanding, unvested
full-value awards
|
4,169,777
|
Total shares
currently available for grant
|
6,829,356
|
Governance Highlights of the Incentive Plan
The Incentive Plan incorporates certain compensation governance provisions that reflect best practices. These provisions are not impacted by the Plan Amendment, and include:
-
No payment of dividends, dividend equivalents and other distributions in respect of unvested stock-based awards;
-
Minimum 100% fair market value exercise price
for options and stock appreciation rights;
-
No repricing of options or stock appreciation rights and no buyout of underwater options or stock appreciation rights without stockholder approval;
-
No dividend equivalents on options or stock
appreciation rights;
-
No
“liberal” share recycling of any awards;
-
No evergreen provision;
-
No “liberal” change in control definition;
-
No excise tax gross-up on change in control
benefits; and
-
Clawback
provisions.
Summary of the Incentive Plan
The following summary of the Incentive Plan is qualified by reference to the full text thereof, which is attached as Annex B to this proxy statement. The Incentive Plan’s primary purpose is to promote
the success of our business by serving as a means to attract and retain qualified personnel, provide additional incentives to employees, directors and consultants, increase participants’ interest in our welfare.
General
The Compensation Committee of our Board administers the Incentive Plan. In the future, the Board or other
committees may be allocated some or all of the Compensation Committee’s duties. The Compensation Committee
consists solely of two or more directors who are independent in accordance with Rule 16b-3 under the Securities Exchange Act and, to the extent required, with the Internal Revenue Code, or “Code”. The Compensation Committee is authorized to:
-
interpret the Incentive Plan and all
awards;
-
establish and amend rules
and regulations for the Incentive Plan’s operation;
-
select recipients of awards;
-
determine the form, amount and other terms and conditions of awards;
-
modify or waive restrictions on
awards;
-
amend awards;
and
-
grant extensions and accelerate
awards.
Our officers and other employees, directors and consultants, in addition to those of our
subsidiaries, are eligible to be selected to participate in the Incentive Plan. Incentive stock options may be granted only to our employees and employees of our subsidiaries in which we own directly or indirectly more than a 50% voting equity
interest. The Compensation Committee has the sole discretion to select participants from among the eligible persons. As of December 31, 2019, the Company had 11 non-employee directors, 8 officers,
approximately 144 employees and consultants or other service providers to the Company who are, in each case,
eligible to participate in the Incentive Plan.
Before giving effect to the Plan Amendment, the aggregate
number of shares of Common Stock which may be issued under the Incentive Plan with respect to awards may not exceed 19,550,000. The Plan Amendment would increase this number of shares by 4,800,000 to 24,350,000. No awards relating to any of
these additional shares will be granted unless our stockholders approve the Plan Amendment. The proposed 24,350,000 share limit (giving effect to the Plan Amendment) is subject to adjustment for certain transactions affecting the Common Stock. Each share issued pursuant to awards under the Incentive
Plan (whether issued prior to or following the date of stockholder approval of the Plan Amendment) will be counted against the share limit as one full share. If an award is cancelled, forfeited, or expires unexercised, the number of shares of
Common Stock under such award will be added back to the shares available for grant under the Incentive Plan. The number of shares available for grant under the Incentive Plan shall not be increased by (a) any shares not issued or delivered as
a result of a net settlement of an award, (b) any shares withheld to pay an exercise price or withholding taxes related to an award, or (c) shares of our Common Stock repurchased on the open market with the proceeds of an option exercise.
No individual may be granted, in any fiscal year, awards under the Incentive Plan covering or relating to an
aggregate of more than 3,000,000 shares of our Common Stock and no individual shall receive payment for cash awards made under the Incentive Plan during any fiscal year aggregating in excess of $3,000,000. In addition, no non-employee director
of the Company may be granted, in any fiscal year, cash and non-cash compensation with an aggregate value in excess of $500,000.
The Incentive Plan provides for the grant of:
-
stock options, including incentive stock
options and nonqualified stock options;
-
stock appreciation rights, in tandem with stock options or freestanding;
-
restricted stock awards;
-
restricted stock unit awards;
-
performance share awards;
-
phantom stock awards; and
-
cash awards.
The Compensation Committee may grant awards individually, in combination, or in tandem. The Compensation
Committee may also authorize the assumption of awards granted by other entities that are acquired by us or otherwise.
All awards will be evidenced by award agreements, as determined by the Compensation Committee. The award will be effective on the date of grant unless the Compensation Committee
specifies otherwise.
The exercise or measurement price will be at least equal to the fair market value of
our Common Stock. The fair market value generally is determined to be the closing sales price quoted on the NYSE on the day of the grant of the award.
Awards will normally terminate on the earlier of (i) ten years from the date of grant, (ii) 30 days after termination of employment or service for a reason other than death, disability or
retirement, (iii) one year after death or (iv) one year (for incentive stock options) or five years (for other awards) after disability or retirement.
Awards are non-transferable except by disposition on death or to certain family members, trusts and other family entities as the Compensation Committee may approve.
Awards may be paid in cash, shares of our Common Stock or a combination, in a lump sum or installments, as determined
by the Compensation Committee.
A participant’s breach of the terms of the Incentive Plan or the
award agreement will result in a forfeiture of the award.
Options
Options granted under the Incentive Plan may be:
-
incentive stock options, as defined in the
Code; or
-
nonqualified options,
which do not qualify for treatment as incentive stock options.
The Compensation Committee
selects the recipients of options and sets the terms of the options, including:
-
the number of shares for which an option is
granted;
-
the term of the option;
and
-
the time(s) when the option can
be exercised.
The Compensation Committee determines how an option may be exercised, whether for
cash or securities. The exercise price of an option may not be less than the fair market value of a share of our Common Stock on the grant date, and the option term may be no longer than ten years. Arrangements may also be made, if
permitted by law, for same-day-sale and margin account transactions through FINRA dealers. The fair market value of Common Stock an employee may purchase during any calendar
year by exercise of incentive stock options is limited to $100,000. No dividends, dividend equivalents or other distributions are payable in respect of options until the
options are exercised and settled into shares of our Common Stock.
An option agreement or the Compensation Committee’s procedures may set forth conditions respecting
the exercise of an option. The Compensation Committee may in its discretion waive any condition respecting the exercise of any option and may accelerate the time at which any option is exercisable.
Stock Appreciation Rights
A stock appreciation right is a grant entitling the participant to receive an amount in cash or shares of Common
Stock or a combination thereof, as the Compensation Committee may determine, in an amount equal to the increase in the fair market value between the grant and exercise dates of the shares of Common Stock with respect to which the stock appreciation
right is exercised. The exercise price of a stock appreciation right may not be less than the fair market value of a share of our Common Stock on the grant date, and the term of a stock appreciation right may be no longer than ten years.
Stock appreciation rights may be granted separately or in tandem with the grant of an option.
A stock
appreciation right granted in tandem with a nonqualified option may be granted either at or after the time of the grant of the nonqualified option. A stock appreciation right granted in tandem with an incentive stock option may be granted only
at the time of the grant of the incentive stock option. A stock appreciation right granted in tandem with an option terminates and is no longer exercisable upon the termination or exercise of the related option. The Compensation
Committee may set the terms and conditions of stock appreciation rights, subject to the limitations set forth in the Incentive Plan. At any time it may accelerate the exercisability of any stock appreciation right and otherwise waive or amend
any conditions to the grant of a stock appreciation right.
Restricted Stock
A restricted stock grant entitles the recipient to acquire, at no cost or for a purchase price determined by the Compensation Committee on the date of the grant, shares of our Common Stock
subject to such restrictions and conditions as the Compensation Committee may determine at the time of the grant. The recipient may have all the rights of a stockholder with respect to the restricted stock. These rights include voting
and dividend rights, and they are effective as soon as:
-
restricted stock is granted (or upon payment of
the purchase price for restricted stock); and
-
issuance of the restricted stock is recorded by our transfer agent.
Any restricted shares cease to be restricted stock and will be deemed “vested” after the lapse of all restrictions. Restrictions lapse, and restricted stock becomes vested,
ratably over a specified period of time or upon the participant’s death, disability or retirement, the occurrence of a change in control (in certain circumstances), or other appropriate event as determined by the Compensation
Committee.
A participant will have the right to vote the shares of Common Stock, except that unless
otherwise provided in an award agreement, the participant will not be entitled to delivery of the Common Stock until all restrictions lapse.
If a participant’s employment or service is terminated for any reason prior to shares of restricted stock becoming vested, we have the right, in the discretion of the Compensation
Committee, to:
-
repurchase the unvested shares at their purchase price; or
-
require forfeiture of those shares if acquired
at no cost.
Restricted Stock Unit
Awards
A restricted stock unit award is an award denominated in units evidencing the right to receive
shares of our Common Stock, subject to vesting or such other terms and conditions as determined by the Compensation Committee. Prior to vesting, the recipient has no voting or dividend rights with respect to the shares evidenced by a
restricted stock unit award, however, the Compensation Committee may award cash dividend equivalents with
respect to a restricted stock unit award. Upon vesting or satisfaction of any other conditions established by the Compensation Committee, the recipient of a restricted stock unit award
becomes entitled to receive a share of our Common Stock with respect to each restricted stock unit.
Performance Share Awards
The Compensation Committee may grant performance share awards, which are rights to receive shares of our Common Stock
or their cash equivalent based on the attainment of pre-established performance goals and such other conditions, restrictions and contingencies as the Compensation Committee may determine. Performance measures may include future performance by
the grantee, us or any subsidiary, division or department.
Payment will be made after the performance
period based on the achievement of the performance measures as determined by the Compensation Committee.
Phantom Stock Awards
The Compensation Committee may grant phantom stock awards, which are rights to receive the fair market value of shares of our Common Stock, or the increase in the fair market value, during a
period of time. The award may vest over a period of time specified by the Compensation Committee. Payment will be made following the prescribed period and may be made in cash, shares of our Common Stock or a combination as the
Compensation Committee determines.
Cash
Awards
The Compensation Committee may grant cash awards, which are bonuses paid in cash that are based
solely upon the attainment of one or more performance goals that have been established by the Compensation Committee. The terms, conditions and limitations applicable to any cash awards will be determined by the Compensation
Committee.
Performance Awards
At the discretion of the Compensation Committee, any of the above-described awards may be designated a performance
award. Cash awards may only be designated as performance awards. Performance awards will be contingent upon performance measures applicable to a particular period, as established by the Compensation Committee, based upon any one or more
of the following:
-
revenue or increased revenue;
-
net income measures (including, but not limited to, income after capital costs, economic profit and income before or after taxes);
-
profit measures (including, but not limited to,
gross profit, operating profit, net profit before taxes and adjusted pre-tax profit);
-
stock price measures (including, but not limited to, growth measures and total stockholder return);
-
price per share of Common Stock;
-
market share;
-
earnings;
-
earnings per share or adjusted earnings per
share (actual or growth in);
-
earnings before interest, taxes, depreciation
and amortization (EBITDA);
-
earnings before interest and taxes
(EBIT);
-
economic value added (or an
equivalent metric);
-
market value
added;
-
debt to equity
ratio;
-
cash flow measures
(including, but not limited to, cash flow return on capital, cash flow return on tangible capital, net cash flow and net cash flow before financing activities);
-
return measures (including, but not limited to,
return on equity, return on assets, return on capital, risk-adjusted return on capital, return on investors’ capital and return on average equity);
-
operating measures (including operating income,
funds from operations, cash from operations, after-tax operating income, sales volumes, production volumes and production efficiency);
-
expense measures (including, but not limited
to, overhead costs and general and administrative expense);
-
changes in working capital;
-
margins;
-
stockholder value;
-
total stockholder return;
-
proceeds from dispositions;
-
total market value;
-
customer satisfaction or growth;
-
employee satisfaction; and
-
corporate values measures (including ethics compliance, environmental and safety).
Such performance measures may apply to the grantee, to one or more business units, divisions or subsidiaries of the Company or the applicable sector of the Company, or to the Company as a
whole. Goals may also be based upon performance relative to a peer group of companies. The Compensation Committee may select other criteria not included in the
preceding list, and may modify or waive the performance goals or conditions to the granting or vesting of a performance award.
Provisions Relating to a Change in Control, Death, Disability and Retirement
The Incentive Plan provides certain benefits in the event of a change in control, including accelerated vesting and
payment if awards are not assumed, substituted or continued by a successor or as may otherwise be determined by the Compensation Committee. A change in control is deemed to have occurred if:
-
any person acquires beneficial ownership of 25% or more of our voting securities, unless the acquisition was not entered
into for the purpose of, and does not have the effect of, changing or influencing the control of, the Company;
-
as a result of, or in connection with, a tender
or exchange offer, merger or other business combination, there is a change in the composition of a majority of our Board; or
-
we merge or consolidate with, or transfer
substantially all of our assets to, another corporation, after which less than 50% of the voting securities of us or the surviving entity outstanding immediately thereafter is owned by our former stockholders; or a tender or exchange offer results
in the acquisition of 30% or more of our outstanding voting securities.
However, a change in
control would not be deemed to occur if a person that already controls us acquires more of our voting securities. Upon the occurrence of a change in control in which awards are not honored, assumed, continued, substituted or replaced, or a
participant’s death, disability or retirement, all outstanding awards will immediately vest or become exercisable or payable, and all forfeiture restrictions will lapse, unless the related agreements provide otherwise.
Limitation on Payment of Dividends and Dividend
Equivalents
Notwithstanding anything to the contrary, during the period of restriction of shares of
restricted stock, and prior to the vesting and settlement of restricted stock unit awards and performance share awards, all dividends and dividend equivalents or other distributions paid with respect to such awards will be retained by the
Company. Such dividends and dividend equivalents or other distributions will revert to the Company if the awards revert to the Company or are not settled into shares of our Common Stock. Upon the expiration of the period of restriction
or upon settlement, all such dividends and dividend equivalents or other distributions made on such awards and retained by the Company will be paid, without interest, to the relevant participant. No dividends, dividend equivalents or other
distributions are payable in respect of options, stock appreciation rights or phantom stock awards until the options are exercised and settled into shares of our Common Stock.
Other Modifications
In the event of specified changes in our capital structure, the Compensation Committee will have the power to adjust
the number and kind of shares authorized by the Incentive Plan (including any limitations on individual awards) and the number, option price or kinds of shares covered by outstanding awards. The Compensation Committee will also have the power
to make other appropriate adjustments to awards under the Incentive Plan.
No Repricing of Options or Stock Appreciation Rights
Outstanding options and stock appreciation rights may not be amended to reduce their exercise price, or cancelled in exchange for cash or other awards with an exercise price that is less than
the exercise price of the original options or stock appreciation rights, or otherwise be subject to any action that would be treated as a repricing, without stockholder approval.
Awards Subject to Clawback Policy
Awards under the Incentive Plan are subject to the Company’s Clawback Policy and any successor policy that the
Company may adopt in the future. As such, they may be subject to the requirement that the awards be repaid to the Company after they have been distributed to the participant. See “Compensation Discussion & Analysis —
Compensation Philosophy and Objectives of Cornerstone’s Compensation Program.”
Federal Income Tax Consequences
The Code provides that a participant receiving a nonqualified option ordinarily does not realize taxable income upon the grant of the option. A participant does, however, realize
compensation income taxed at ordinary income tax rates upon the exercise of a nonqualified option to the extent that the fair market value of the Common Stock on the date of exercise exceeds the option price. Subject to the discussion under
“— Certain Tax Code Limitations on Deductibility” below, we are entitled to a federal income tax deduction for compensation in an amount equal to the ordinary income so realized by the participant. When the participant sells
the shares acquired pursuant to a
nonqualified option, any gain or loss will be capital gain or loss. This assumes that the shares represent a capital asset in the participant’s hands, although there will be no tax
consequences for us.
The grant of an incentive stock option does not result in taxable income to a
participant. The exercise of an incentive stock option also does not result in taxable income, provided that the circumstances satisfy the employment requirements in the Code. However, the exercise of an incentive stock option may give
rise to alternative minimum tax liability for the participant. In addition, if the participant does not dispose of the Common Stock acquired upon exercise of an incentive stock option during the statutory holding period, then any gain or loss
upon subsequent sale of the Common Stock will be a long-term capital gain or loss. This assumes that the shares represent a capital asset in the participant’s hands.
The statutory holding period lasts until the later of:
-
two years from the date the option is granted; or
-
one year from the date the Common Stock is
transferred to the participant pursuant to the exercise of the option.
If the employment and
statutory holding period requirements are satisfied, we may not claim any federal income tax deduction upon either the exercise of the incentive stock option or the subsequent sale of the Common Stock received upon exercise. If these
requirements are not satisfied (a “disqualifying disposition”), the amount of ordinary income taxable to the participant is the lesser of:
-
the fair market value of the Common Stock on
the date of exercise minus the option price; or
-
the amount realized on disposition minus the option price.
Any excess is long-term or short-term capital gain or loss, assuming the shares represent a capital asset in the participant’s hands. Subject to the discussion under “Certain
Tax Code Limitations on Deductibility” below, in the case of a disqualifying disposition, we are entitled to a federal income tax deduction in an amount equal to the ordinary income realized by the participant.
The exercise of an option through the exchange of previously acquired stock will generally be treated as a
non-taxable like-kind exchange as to the number of shares given up and the identical number of shares received under the option. That number of shares will take the same tax basis and, for capital gain purposes, the same holding period as the
shares that are given up. The value of the shares received upon such an exchange which are in excess of the number given up will be taxed to the participant at the time of the exercise as ordinary income, taxed as compensation. The
excess shares will have a new holding period for capital gains purposes and a tax basis equal to the value of such shares determined at the time of exercise. If the tendered shares were acquired through the prior exercise of an incentive stock
option and do not satisfy the statutory two-year and one-year holding periods (“disqualified shares”), then the tender will result in compensation income to the optionee taxed as ordinary income equal to the excess of the fair market
value of the disqualified shares, determined when the prior incentive stock option was exercised, over the exercise price of the disqualified shares. The optionee will increase his tax basis in the number of shares received on exercise equal
to the number of shares of disqualified shares tendered by the amount of compensation income recognized by the optionee with respect to the disqualified shares. Generally, the federal income tax consequences to the optionee are similar to
those described above relating to the exercise of an option through the exchange of non-disqualified shares.
If an optionee exercises an option through the cashless exercise method by authorizing a broker designated by Cornerstone to sell a specified number of the shares to be acquired through the option exercise having a market value
equal to the sum of the option exercise plus any transaction costs (the “cashless shares”), the optionee should be treated as constructively receiving the full amount of option shares, followed immediately by a sale of the cashless
shares by the optionee. In the case of an incentive stock option, the cashless exercise method would result in the cashless shares becoming disqualified shares and taxed in a manner described above for disqualified shares.
In the case of a nonqualified option, the cashless exercise method would result in compensation income
to the optionee with respect to both the cashless shares and remaining option shares as discussed above relating to nonqualified options. Since the optionee’s tax basis in the cashless shares that are deemed received and simultaneously
sold on exercise of the option is equal to the sum of the exercise price and the compensation to the optionee, no additional gain should be recognized by the optionee upon the deemed sale of the cashless shares.
Under Section 83(b) of the Code, an employee may elect to include in ordinary income, as compensation at the time
restricted stock is first issued, the excess of the fair market value of the stock at the time of issuance over the amount paid, if any, by the employee. In this event, any subsequent change in the value of the shares will be recognized for
tax purposes as capital gain or loss upon disposition of the shares, assuming that the shares represent a capital asset in the hands of the employee. An employee makes a Section 83(b) election by filing the election with the IRS no later than
30 days after the restricted stock is transferred to the employee. If a Section 83 (b) election is properly made, the employee will not be entitled to any loss deduction if the shares with respect to which a Section 83(b) election was made are
later forfeited. Unless a Section 83(b) election is made, no taxable income will generally be recognized by the recipient of a restricted stock award until the shares are no longer subject to the restrictions or the risk of forfeiture.
When either the restrictions or the risk of forfeiture lapses, the employee will recognize ordinary income, taxable as compensation, in an amount equal to the excess of the fair market value of the Common Stock on the date of lapse over the amount
paid, if any, by the employee for the stock.
Generally, an employee will not recognize any taxable income
upon the grant of stock appreciation rights, performance shares, RSUs, phantom stock or a cash award. At the time the employee receives the payment for the stock appreciation right, performance shares, RSUs, phantom stock or cash award, the
fair market value of shares of Common Stock or the amount of any cash received in payment for such awards generally is taxable to the employee as ordinary income.
Subject to the discussion under “Certain Tax Code Limitations on Deductibility” below, we or one of our subsidiaries will be entitled to a deduction for federal income tax purposes
at the same time and in the same amount that an employee recognizes ordinary income from awards under the Incentive Plan.
The exercisability of an option or a stock appreciation right, the payment of performance share or phantom stock awards or the elimination of restrictions on restricted stock, may be
accelerated, and special cash settlement rights may be triggered and exercised, as a result of a change in control. If any of the foregoing occurs, all or a portion of the value of the relevant award at that time may be a parachute payment,
discussed under “Golden Parachute Tax and Code Section 280G” below. This is relevant for determining whether a 20% excise tax (in addition to income tax otherwise owed) is payable by the participant as a result of the receipt of an
excess parachute payment pursuant to the Code. We will not be entitled to a deduction for that portion of any parachute payment which is subject to the excise tax.
Certain Tax Code Limitations on
Deductibility
Section 162(m) of the Internal Revenue Code imposes a $1 million limit on the amount that a
public company may deduct each year for compensation paid to “covered employees,” which includes compensation under the Incentive Plan. Please see
“Compensation Discussion & Analysis — Deductibility of Compensation” for more information regarding Section 162(m) of the Code.
Golden Parachute Tax and Code Section 280G
The Incentive Plan may, in certain circumstances, provide for immediate vesting of all then outstanding unvested
awards upon a change in control. If the vesting of the award is accelerated as the result of a change in control, all or a portion of the value of the award at that time might be a “parachute payment” under Section 280G of the Code
for certain employees. Section 280G of the Code generally provides that if compensation received by the grantee that is contingent on a change in control equals or exceeds three times the grantee’s average annual compensation for the
five taxable years preceding the change in control (a “parachute payment”), the Company will not be entitled to a deduction, and the recipient will be subject to a 20% excise tax with respect to that portion of the parachute payment in
excess of the grantee’s average annual compensation. Section 280G of the Code generally applies to employees or other individuals who perform services for the Company if, within the 12-month period
preceding the change in control, the individual is an officer of the Company, a stockholder owning more than 1% of the stock of the Company, or a member of the group consisting of the lesser
of the highest paid 1% of the employees of the Company or the highest paid 250 employees of the Company.
Additional Medicare Tax
An employee will also be subject to a 3.8% tax on the lesser of (i) the recipient’s “net investment income” for the relevant taxable year and (ii) the excess of the
recipient’s modified adjusted gross income for the taxable year over a certain threshold (between $125,000 and $250,000, depending on the recipient’s circumstances). The recipient’s net investment income generally includes
net gains from the disposition of shares. Employees are urged to consult their tax advisors regarding the applicability of this Medicare tax to their income and gains in respect of their investment in the shares.
Code Section 409A
The Incentive Plan permits the grant of various types of incentive awards that may or may not be exempt from Section
409A of the Code. If an award is subject to Section 409A, and if the requirements of Section 409A are not met, the award could be subject to tax at an earlier time than described above and could be subject to additional taxes and
penalties. We intend that awards under the Incentive Plan either be exempt from, or satisfy the requirements of, Section 409A and the Incentive Plan is intended to be administered and interpreted in accordance with Section 409A.
THE ABOVE SUMMARY OF THE EXPECTED EFFECT OF THE FEDERAL INCOME TAX UPON PARTICIPANTS IN THE INCENTIVE PLAN IS NOT
COMPLETE, AND WE RECOMMEND THAT THE PARTICIPANTS CONSULT THEIR OWN TAX ADVISORS FOR COUNSELING. MOREOVER, THE ABOVE SUMMARY IS BASED UPON CURRENT FEDERAL INCOME TAX LAWS, WHICH ARE SUBJECT TO CHANGE. THE TAX TREATMENT UNDER FOREIGN,
STATE OR LOCAL LAW IS NOT COVERED IN THE ABOVE SUMMARY.
New Plan
Benefits
Awards under the Incentive Plan, as amended by Plan Amendment, will remain subject to the
Compensation Committee’s discretion. As a result, we cannot determine the number or type of awards that will be granted to any participant under the Incentive Plan for
the 2020 fiscal year or in subsequent fiscal years. As described further below under Compensation
Discussion & Analysis — Long-Term Incentive Compensation —Long-Term Incentive Awards Granted to NEOs in 2019, as a result of the Merger and the Fiscal Year Change, our Named Executive Officers did not receive an annual grant of
long-term incentive awards during Fiscal 2019. The stock options, RSUs and PSUs granted under the Incentive Plan for our 2018 fiscal year and the Transition Period, which
would not have changed if the Plan Amendment had been in place during those time periods, were as follows:
Name and Position
|
Dollar Value
($)(1)
|
Number of Shares
Under Awards
|
James S.
Metcalf
|
6,762,461
|
549,250
|
Shawn K. Poe
|
3,320,714
|
273,085
|
Donald R.
Riley
|
6,798,367
|
482,709
|
Katy K. Theroux
|
3,152,690
|
242,084
|
John L.
Buckley
|
4,045,292
|
332,672
|
Current executive officers as a
group
|
32,099,617
|
2,522,164
|
Current
non-employee directors as a group
|
1,764,976
|
123,878
|
Employees and other service providers (other than executive officers) as a group
|
48,187,462
|
3,726,102
|
(1) Dollar value reflects the gross number of stock options, RSUs and PSUs granted by the Company, multiplied by the closing price per share of our Common Stock on the applicable grant
date. PSUs are based on assumed target performance. The amounts reported in the “Option
Awards” column reflect the aggregate grant date fair value of the option awards, computed in accordance with FASB ASC Topic 718. See Note 7 of the consolidated
financial statements in Cornerstone’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2020 for additional detail regarding assumptions underlying the valuation of equity awards of options.
EQUITY COMPENSATION PLAN INFORMATION
The following sets forth information relating to our equity compensation plans as of December 31, 2019:
Plan Category
|
|
Number of
securities to be issued upon exercise of outstanding options, warrants and rights
(a)
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
|
Number of
securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
|
Equity compensation plans approved by security holders
|
|
3,089,444
(1)
|
|
$ 10.40
|
|
9,256,894
|
|
Equity compensation plans not approved by
security holders
|
|
2,289,295
(2)
|
|
$ 12.16
|
|
—
|
|
Total
|
|
5,378,739
(3)
|
|
$ 11.22
|
|
9,256,894
|
|
(1) Includes 1,520,607 shares subject to outstanding stock options, 1,189,443 shares subject to outstanding RSUs and
379,394 shares subject
to outstanding PSUs based on assumed target performance.
(2) Represents
1,327,653 shares subject to outstanding stock options, 629,745 shares subject to
outstanding RSUs and 331,897 shares subject to outstanding PSUs based on assumed target
performance granted to legacy Ply Gem employees as Founders Awards in November 2018. The Founders Awards granted to legacy Ply Gem employees are “employment inducement
awards” as described in the employment inducement exemption to New York Stock Exchange Rule 303A.08 (see “Compensation Discussion & Analysis — Long-Term Incentive Compensation — Long-Term
Incentive Awards Granted in Fiscal 2018 to NEOs — Founders
Awards”).
(3) The weighted average remaining contractual life of outstanding options is 8.7 years.
Vote Required
In accordance
with NYSE rules, approval of Proposal 4 requires the affirmative vote of a majority of the votes
cast on the proposal provided that the total votes cast on the proposal represent over 50% of the stock entitled to vote on the proposal. Abstentions have the same effect as a vote against this proposal. Broker non-votes
could impair our ability to satisfy the NYSE requirement that the total votes cast on this proposal represent over 50% of the stock entitled to vote on this proposal.
Recommendation of Our Board of Directors
OUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE PROPOSAL TO ADOPT
THE AMENDMENT TO THE INCENTIVE PLAN.
MANAGEMENT
Our current executive officers are as follows:
Name
|
Position
|
James S. Metcalf
|
Chairman and Chief
Executive Officer
|
Brian P. Boyle
|
Senior Vice President, Chief Accounting Officer
and Treasurer
|
John L. Buckley
|
President, Siding
Business Unit — Residential
|
Jeffrey S. Lee
|
Executive Vice President, Chief Financial Officer
|
Todd R. Moore
|
Executive Vice
President, Chief Legal, Risk & Compliance Officer and Corporate Secretary
|
Arthur W. Steinhafel
|
President, U.S. Windows Business Unit —
Residential
|
Katy K. Theroux
|
Executive Vice
President, Chief Human Resources Officer
|
Information concerning the business
experience of Mr. James S. Metcalf is provided under the section titled “Proposal 1:
Election of Directors.”
Brian P. Boyle, age 47, has served as Senior Vice President, Chief Accounting Officer and Treasurer since November 16,
2018. Mr. Boyle was Ply Gem Industries, Inc.’s Chief Accounting Officer and Treasurer from 2016 until November 16, 2018. Prior to this role, Mr. Boyle served as Ply Gem’s Corporate Controller from
2008 to 2016 participating in Ply Gem’s initial public offering process in 2013. Prior to joining Ply Gem, Mr. Boyle was a senior manager in the audit practice with PricewaterhouseCoopers LLP in
Raleigh, NC working predominantly with manufacturing clients. Mr. Boyle graduated from the University of North Carolina-Chapel Hill in 1995 with a BSBA and a Master of Accounting.
John L.
Buckley, age 54, has served as our President, Siding Business Unit —
Residential (formerly known as the Siding Division) since November 16, 2018. Prior to that, Mr. Buckley served as Ply Gem Industries, Inc.’s President of Siding, Fencing and Stone group from 2012 until November 16,
2018. Mr. Buckley joined Ply Gem in 1999, and prior to his appointment as President of the Siding, Fencing and Stone group he had served as Senior Vice President of Sales for Ply Gem’s siding and accessories
subsidiaries. Prior to joining Ply Gem, Mr. Buckley worked for CertainTeed from 1991 to 1999, holding a variety of sales management positions. Mr. Buckley currently serves as the Chairman of the VSI Board of
Directors and Chairman of the VSI Steering Committee and Primary Marketing Committee. Mr. Buckley received a BA in communications from the University of Michigan in 1986, and a MSA from Madonna University in
1991.
Jeffrey S. Lee, age 51, has served as Executive Vice President, Chief Financial Officer since June 17, 2019. Mr. Lee was employed by Wilsonart International Holdings LLC
(“Wilsonart”) from 2014 to 2019, where he served as Vice President and Chief Financial Officer and was responsible for the accounting and finance functions as well as providing overall financial guidance and
support for the company. Prior to joining Wilsonart, Mr. Lee served as Senior Vice President, Chief Financial Officer for Contech LLC from 2007 to 2014 and was responsible for the accounting, finance and information
technology functions. Mr. Lee has a B.S. from University of Utah in Accounting and an M.B.A. from Duke Fuqua School of Business.
Todd R. Moore,
age 59, has served as our Executive Vice President, Chief Legal, Risk & Compliance Officer and Corporate Secretary since May 2017. Mr. Moore served as our
Executive Vice President and General Counsel from December 2007 to May 2017, and as our Vice President and General Counsel from March 2003 to December 2007. Mr. Moore has served as a Vice President and General Counsel of all Cornerstone
divisions since January 1999 and as our Corporate Secretary since March 2005. Before joining Cornerstone in January 1999, Mr. Moore was a partner in the Trial Section of Gardere Wynne Sewell LLP, a law firm based in Texas. Mr. Moore has
a B.A. in Political Science from Southern Methodist University and a J.D. from the University of Tulsa College of Law. He is licensed to practice law in the State of Texas.
Arthur W.
Steinhafel, age 50, has served as President, U.S. Windows Business Unit
— Residential (formerly known as the U.S. Windows Division) since November 16, 2018. Prior to that, Mr. Steinhafel served as Ply Gem
Industries, Inc.’s President of U.S. Windows and Doors group from 2013 to November 15, 2018.
Mr. Steinhafel joined Ply Gem in 2010, and prior to his appointment to President of the Ply
Gem’s U.S. Window and Door group had served as Senior Vice President of Sales for Ply Gem’s U.S. Window and Door group. Prior to joining Ply Gem, Mr. Steinhafel worked for Atrium Windows from 2008 to 2010
as President of the Central Region and for Peachtree Window Companies in various capacities from 1999 to 2007. Mr. Steinhafel received a BS in Industrial Technology from the University of Wisconsin-Stout in
1992.
Katy K. Theroux,
age 51, has served as our Executive Vice President, Chief Human Resources Officer since November
2018. Ms. Theroux served as our Executive Vice President, Corporate Marketing and Chief Human Resources Officer from July 2017 to November 2018, and as our Vice President, Chief Human Resources officer from September 2014 to June 2017.
Before joining Cornerstone, Ms. Theroux was employed by 1WORLDSYNC, where she served as Chief Marketing and Administrative Officer from 2012 to 2013, and was responsible for the integration of two
multinational technology services companies. Prior to joining 1WORLDSYNC, Ms. Theroux served as Senior Vice President, Customer Engagement & Solutions for its parent, GS1 US and 1SYNC from
2007 to 2012, and was responsible for customer support, marketing, human resources and facilities shared services for all operating units. Ms. Theroux also served as its Chief Human Resources Officer from
2006 to 2012. Ms. Theroux served as Chairman of the Board of Peirce
College until June 2015. Ms. Theroux has a B.S. from Syracuse University and an M.B.A. from Saint Peter’s University.
Introduction
This Compensation Discussion &
Analysis (“CD&A”) provides information regarding Cornerstone’s compensation programs for our Chief Executive Officer (“CEO”), our Chief Financial Officer (“CFO”), our former CFO, and our
three other most highly compensated executive officers during fiscal year ended December 31,
2019 (“Fiscal 2019”).
Throughout this discussion, the following individuals are referred to
collectively as the “Named Executive Officers” or “NEOs” and are included in the Summary Compensation Table that follows this discussion:
-
James S. Metcalf, Chairman and Chief Executive
Officer;
-
Jeffrey S. Lee, Executive Vice President, Chief Financial Officer;
-
Shawn K. Poe, Former Chief Financial
Officer;
-
Donald R. Riley, former
Chief Executive Officer, Commercial Business Unit and Head of Supply Chain & Technology;
-
Katy K. Theroux, Executive Vice President, Chief Human Resources Officer; and
-
John L. Buckley, President, Siding Business
Unit — Residential
Summary of Compensation Matters for Fiscal 2019
This CD&A describes
our Named Executive Officers’ compensation during Fiscal 2019. During Fiscal 2019, the following events occurred:
-
The Company granted equity awards to certain
key employees considered critical to the success of the combined company, including certain of our NEOs,
which consisted of options, RSUs and PSUs. See “Executive Compensation” — Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table — Fiscal 2019.”
-
Mr. Poe resigned as the Company’s CFO, effective as of May 31, 2019. On June 3, 2019, the Company appointed Mr. Lee as its Executive Vice President and Chief Financial Officer, effective June 17, 2019. In connection with this appointment, the Company entered into an employment agreement
with Mr. Lee. For a description of the material terms of the employment agreement and for a discussion of enhanced severance benefits upon a termination in connection with a change in control of the Company, see “Compensation Discussion
& Analysis — Other Compensation — Termination and Change in Control Agreements.”
On February 10,
2020, following the end of Fiscal 2019, Donald R. Riley ceased to serve as Chief Executive
Officer of the Commercial Business Unit and Head of Supply Chain and Technology of the Company. Both positions were eliminated consistent with the previously announced merger integration synergies and cost reduction initiatives implemented in connection with the merger between NCI Building Systems, Inc. and Ply Gem
Parent, LLC (“Ply Gem”) which was consummated on November 16, 2018 (the “Merger”), resulting in the formation of the Company as it is presently constituted.
At our most recent shareholder advisory vote on executive
compensation at our 2019 Annual Meeting, more than 99% of the votes cast on the advisory “say-on-pay” resolution were voted in favor of the compensation philosophy, policies and procedures and the compensation
of the NEOs as disclosed in our 2019 proxy statement. The Compensation Committee viewed the result of this advisory vote as strongly supportive of our pay-for-performance philosophy. Our Compensation Committee continually
evaluates Cornerstone’s compensation
practices so as to best align the interests of our senior executives and our
stockholders and will continue to do so such that they remain aligned with our compensation objectives. Our Board, Compensation Committee and management team all value the opinions of our stockholders and are committed to considering their
opinions in making these important decisions. In light of these results, the Compensation Committee maintained many of our existing executive compensation programs during Fiscal 2019, and made such changes to the long-term
incentive compensation program that the Compensation Committee determined were necessary to align the goals of the Company’s management team and continue to provide a unified incentive structure following the Merger. See
“Compensation Discussion & Analysis — Long-Term Incentive Compensation.”
The compensation decisions described in this proxy statement were generally made prior to the global outbreak of
COVID-19 and the resulting disruptions to markets in which the Company operates. The Compensation Committee expects to monitor the impact of the pandemic on our industry and the Company, and will continue to review and consider
the Company’s compensation arrangements, including any such changes that it determines to be advisable as a result of COVID-19 and its impact on our business.
Compensation Philosophy and Objectives of Cornerstone’s Compensation
Program
Our executive compensation philosophy remains that executive pay should be linked to the
performance of Cornerstone and the individual executives. Our Compensation Committee has established the following objectives for our executive compensation programs:
-
attract, retain and motivate exceptional
executives;
-
reward performance
measured against established goals;
-
provide incentives for future performance;
and
-
align executives’
long-term interests with the interests of our stockholders.
In support of these goals, we designed
our compensation programs to reward excellent short-term performance and to encourage executives’ commitment to Cornerstone’s long-term, strategic business goals. Long-term incentives balance the emphasis on long-term versus
short-term business objectives and reinforce that one should not be achieved at the expense of the other. We believe that long-term incentive compensation helps to further Cornerstone’s compensation objectives, including the
retention of high-performing, experienced executives whose interests are strongly aligned with the interests of stockholders. Further, a multi-year vesting period for grants of restricted stock or RSUs, stock options and PSUs helps to ensure
that the value received by executives depends on the strong financial and stock price performance of Cornerstone over time. We balance short- and long-term compensation through salary and performance bonuses, and the grant of restricted stock
or RSUs, stock options, and PSUs, respectively. Our goal is to increase the proportion of long-term compensation as an executive’s responsibility and accountability for
Company results increases.
Cornerstone has a clawback policy (the “Clawback Policy”) designed to better align our compensation practices with our stockholders’ interests by providing a mechanism to
recover incentive compensation that is based on inaccurate financial information. Our Clawback Policy, which covers all current and former executive officers (including the NEOs), allows for recovery of cash, equity or other incentive
compensation in the event Cornerstone is required to prepare a material financial restatement due to noncompliance with any financial reporting requirement under the U.S. securities laws, where the noncompliance is the result of misconduct.
The Clawback Policy applies to all incentive compensation that is earned or vested after the date the policy was adopted (regardless of when granted) and which is determined in whole or in part based on application of performance measures.
Upon a determination that the Clawback Policy will be applied, the Board may recover up to the excess of the amount of the compensation actually received by a covered officer over the amount that would have been received if the restatement had not
occurred, for the three completed fiscal years preceding the fiscal year in which the Board determines the restatement is necessary. The Board, with input from the Compensation Committee and the Audit Committee, has sole
discretion to determine whether and how to apply the Clawback Policy. In determining whether to recover compensation, the Board may take into account any and all factors that it determines to be
appropriate and relevant under the circumstances, including the likelihood and costs of recovery,
compliance with applicable law, the ability of the executive officer to repay such amount, the tax consequences of the original payment and/or the recoupment to the executive officer (including whether recoupment shall be on a pre-tax or post-tax
basis), and any other potentially adverse consequences for the Company or the executive officer arising from seeking enforcement of the policy.
To further align the interests of our senior management team with those of our stockholders, we have also implemented stock ownership guidelines under which
each of our NEOs is expected to acquire and hold a number of shares of our common stock having a value equal
to a multiple of his or her annual salary. See “Compensation Discussion & Analysis — Stock Ownership Guidelines.”
We also have an “anti-hedging” policy, which prohibits our executive officers and non-employee directors from engaging in transactions designed to hedge the economic risks
associated with ownership of Company securities, and from pledging Company securities as collateral for loans. For purposes of this policy, securities held by CD&R, LLC and its affiliated investment funds are not considered to be owned or
held by a non-employee director who is affiliated with CD&R, LLC.
Determination
and Administration of Compensation Programs and Amounts
Decisions regarding executive compensation are based primarily on the
assessment by the Compensation Committee of each Named Executive Officer’s leadership and operational
performance, and potential to enhance long-term value to Cornerstone’s stockholders. Since February 2015, the Compensation Committee has retained a compensation consultant, Frederic W.
Cook & Co. (“FW Cook”), to assist it in its comprehensive review of Cornerstone’s executive compensation program. During Fiscal 2019, FW Cook continued to advise the Compensation Committee regarding
compensation packages for new hires and promotions and other governance related matters, as well as our director compensation arrangements (see “Executive Compensation — Compensation of Directors”). The Compensation Committee
also relies on its judgment, prior experience, and the judgment of our CEO, Mr. Metcalf, about each individual Named Executive Officer in determining the amount and combination of compensation elements and whether each payment or award appropriately
encourages and rewards performance. Key factors considered by the Compensation Committee in this regard include:
-
actual performance compared to pre-established
financial, operational and strategic goals for Cornerstone and the Named Executive Officer’s reporting unit;
-
the nature, scope and level of the Named
Executive Officer’s responsibilities;
-
individual contribution to Cornerstone’s financial results, particularly with respect to key measures such as cash flow, revenue, earnings and return on assets
(“ROA”);
-
effectiveness
in leading our initiatives to enhance quality and value provided to customers; and
-
individual contribution to a culture of honesty, integrity and compliance with our Code of Business Conduct and Ethics and applicable laws.
The Compensation Committee also considered each Named Executive Officer’s current salary and prior-year bonus, if any, the
appropriate balance between incentives for long-term and short-term performance, and internal “pay equity” — in other words, the relative differences in compensation among the executive officers.
Role of Management and Independent Advisors
The Compensation Committee meets regularly in separate executive sessions without management personnel present and also requests
periodically that our officers or employees attend meetings. During Fiscal 2019,
Mr. Metcalf and other senior executives attended certain Compensation Committee meetings at the
committee’s request to advise the committee regarding our performance and to recommend proposed modifications to our compensation and benefits. Our management, under the leadership of our CEO, plays an important role in
establishing and maintaining our Named Executive Officer compensation programs. Management’s role includes recommending plans and programs to the Compensation Committee,
implementing the Compensation Committee’s decisions regarding the plans and programs and assisting and administering plans in support of the Compensation Committee. The Compensation Committee also relied to a certain extent on Mr.
Metcalf’s evaluations of other Named Executive Officers whose day-to-day performance was not as visible to the committee as it was to Mr. Metcalf.
The Compensation Committee’s charter provides that it
may retain advisors, including compensation consultants, in its sole discretion. The Compensation Committee has assessed the independence of FW Cook pursuant to SEC and NYSE rules and has determined that FW Cook does not have any economic
interest or other relationship that would create a conflict with its services to the Compensation Committee.
In assessing compensation elements and making compensation decisions for our executive officers, our Compensation Committee considers the executive compensation practices of a peer group of
companies of similar size to the Company in related industries. As disclosed in the Transition Period CD&A, our Compensation Committee substantially updated the compensation peer group in November 2018 with the assistance of FW Cook in
order to reflect changes to the Company’s size, projected revenue and scope of business resulting from the Merger. The following peer group was used in making compensation decisions for our NEOs during Fiscal
2019:
A. O. Smith Corporation
|
HD Supply Holdings, Inc.
|
Universal Forest Products, Inc.
|
Beacon Roofing Supply, Inc.
|
JELD-WEN Holding, Inc.
|
Valmont Industries, Inc.
|
BMC Stock Holdings, Inc.
|
Lennox International, Inc.
|
Vulcan Materials Company
|
Builders FirstSource, Inc.
|
Martin Marietta Materials, Inc.
|
WESCO International, Inc.
|
EMCOR Group, Inc.
|
Masco Corporation
|
|
Fortune Brands Home & Security, Inc.
|
Owens Corning
|
|
Following the Merger, the Company fell near the median of the peer group in terms of size, projected revenue, operating income, and net
income, and below the twenty-fifth percentile in terms of market capitalization.
Based on (1) FW Cook’s Fiscal 2019 report, (2) discussions with and
recommendations by Mr. Metcalf during Fiscal 2019 and (3) our
pay-for-performance policies, the Compensation Committee determined to largely maintain our existing executive on programs during Fiscal 2019. However, as a result of the Merger and the Fiscal Year Change, our Named Executive Officers did not receive an
annual grant of long-term incentive awards during Fiscal 2019 (see “Compensation
Discussion & Analysis — Long-Term Incentive Compensation —Long-Term Incentive Awards Granted to NEOs in 2019).
In addition, our Compensation Committee has reviewed our compensation policies as generally applicable to our employees and believes that
our policies do not encourage excessive and unnecessary risk-taking. See “Corporate Governance––Risk Analysis of Our Compensation Plans.”
Elements of
Executive Compensation
The principal elements of compensation provided to our NEOs consist of a base salary supplemented with the opportunity to earn a bonus under Cornerstone’s annual cash
bonus program (the “Bonus Program”) and long-term incentive compensation under the Cornerstone Building Brands, Inc. 2003 Long-Term Stock Incentive Plan, as Amended and Restated effective January 27, 2018 and further amended
effective April 10, 2019 (the “Incentive Plan”).
Base
Salary
The Compensation Committee annually reviews base salaries and makes adjustments in light of competitive data regarding
a peer group of companies as well as a Named Executive Officer’s responsibilities, experience and
performance levels relative to other executives and the potential for making significant contributions in the future, to
ensure that salary levels remain appropriate and competitive. Because
the rate of any increase in base salary levels helps to provide incentives for continuous improvement in individual performance, we view individual factors as more significant than overall company performance in a particular year when determining
base salary levels. Base salary also provides the foundation for calculating other benefits such as annual cash bonus and discretionary and restoration matching under the Deferred Compensation Plan and 401(k) plan so the
executive’s individual performance has a significant impact on both salary and the benefits derived from salary.
As described in the Transition Period CD&A, certain of our NEOs received increases in base salary during the Transition Period based on a review of market data provided by FW Cook and in
light of increased responsibilities resulting from the Merger. None of our NEOs received an increase in base salary during Fiscal 2019.
Named Executive Officer
|
Fiscal
2019
Base
Salary(1)
|
James S. Metcalf
|
|
$
|
1,100,000
|
|
Jeffrey S. Lee
|
|
$
|
560,000
|
(2)
|
Shawn K. Poe
|
|
$
|
525,000
|
|
Donald R. Riley
|
|
$
|
900,000
|
|
Katy K. Theroux
|
|
$
|
450,000
|
|
John L. Buckley
|
|
$
|
500,000
|
|
(1)
Reflects annual rate of base salary.
(2)
In February 2020, the
Compensation Committee approved an increase in Mr. Lee’s base salary to $600,000 for Fiscal 2020. As of the date hereof, no other NEO has received a salary increase in Fiscal 2020.
Annual Bonus
Short-term annual
cash incentive compensation is provided through our Bonus Program, under which annual cash bonuses may be paid to executives to reward their contributions to our business during the year. In Fiscal 2014, our stockholders approved
our Senior Executive Bonus Plan, which continues to remain in effect.
Except with respect to Mr. Buckley,
the Company’s Adjusted EBITDA was the sole performance criterion on which annual bonuses for our NEOs were based for Fiscal 2019. Mr. Buckley’s performance
criteria were based 50% on the Adjusted EBITDA for the Company and 50% on Adjusted
EBITDA for the Siding business
unit. Our Compensation Committee believes that EBITDA is the most important driver of value and that
having EBITDA performance criteria creates a strong link between individual contribution and Company performance. For these purposes, “Adjusted EBITDA”
excludes restructuring and impairment charges, strategic development and acquisition related costs, loss or gain on disposition of business, acceleration of CEO retirement
benefits, gain on insurance recovery, non-cash gain on foreign currency transactions, loss on extinguishment of debt, non-cash charges of purchase price allocation to inventory, customer inventory buybacks, and share-based compensation.
In Fiscal 2019, each NEO was
assigned a target annual bonus equal to a percentage of his or her base salary, as set forth in the table below. The target annual bonus was equal to
135% of base salary for Mr. Metcalf, 100% of base salary for Mr. Riley,
80% of base salary for Mr. Lee (subject to a minimum payment of $400,000 for 2019, pursuant to the terms of his employment agreement) and 75% of base salary for all other Named Executive Officers.
See “Executive
Compensation — Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.”
As described in our
2019 proxy statement,
as a result of the Merger and the Fiscal Year Change, our Named Executive Officers (other than former Ply Gem executives, including Mr. Buckley and Mr. Poe) did not receive an
annual bonus payment during 2019 in respect of the Transition Period. Instead, cash bonuses for the Transition Period were included in our Fiscal 2019
annual bonus program with amounts determined based on our Fiscal 2019 bonus criteria, and the amounts payable were determined and paid to these participants in 2020 at the same time as the Fiscal 2019 bonuses were paid.
Named Executive Officer
|
|
Fiscal 2019
Base Salary
|
|
|
Fiscal 2019
Target Bonus
|
|
|
Transition Period
Target Bonus
|
|
James S. Metcalf
|
|
|
$
|
1,100,000
|
|
|
|
$
|
1,485,000
|
|
|
|
$
|
212,143
|
|
Jeffrey S. Lee
|
|
|
$
|
560,000
|
|
|
|
$
|
448,000
|
|
|
|
$
|
—
|
|
Shawn K.
Poe
|
|
|
$
|
525,000
|
|
|
|
$
|
393,750
|
|
|
|
$
|
—
|
|
Donald R. Riley
|
|
|
$
|
900,000
|
|
|
|
$
|
900,000
|
|
|
|
$
|
150,043
|
|
Katy K.
Theroux
|
|
|
$
|
450,000
|
|
|
|
$
|
337,500
|
|
|
|
$
|
48,214
|
|
John L. Buckley
|
|
|
$
|
500,000
|
|
|
|
$
|
375,000
|
|
|
|
$
|
—
|
|
Under the Fiscal 2019 Bonus Program, in order for any bonuses to be paid, Adjusted EBITDA must equal or exceed 85% of the performance goal set by our Compensation Committee. For
performance above this 85% threshold, payments under the Bonus Program are made as follows:
•
|
If Adjusted EBITDA equals 75% of the performance goal, 45% of the target annual bonus will be paid to each NEO.
|
|
|
•
|
If Adjusted EBITDA equals 100% of the performance goal, 100% of the target annual bonus will be paid to each NEO.
|
|
|
•
|
If Adjusted EBITDA equals 125% of the performance goal, 200% of the target annual bonus will be paid to each NEO (which 200% amount is also the maximum
bonus level that may be paid under the Bonus Program).
|
Adjusted EBITDA performance between these three levels is determined by linear interpolation. Total annual bonuses for all employees, including non-management employees, may not exceed
15% of Cornerstone’s adjusted pre-tax profit for Fiscal 2019, calculated in
accordance with the Bonus Program, before accrual for bonuses and before share-based compensation expense under the Incentive Plan, and may also not exceed the maximum amounts payable under the Senior Executive Bonus Plan.
For Fiscal 2019, Cornerstone achieved Adjusted EBITDA of $583.6 million against target Adjusted EBITDA of
$664.8
million. This achievement level corresponded to a bonus payout at 55% of target bonus levels for Mr. Metcalf, Mr. Lee, Mr., Riley, and Ms. Theroux. Mr. Lee’s bonus was subject to proration for the portion of Fiscal 2019 during which he was employed by the Company, but was further adjusted to the minimum payment of
$400,000 for Fiscal 2019 pursuant to the terms of his employment agreement. The Siding Business Unit achieved an Adjusted EBITDA of
$184.2 million against a target of $184.0 million, which, combined with Company Adjusted EBITDA performance, resulted in a bonus payout at 78% of target for Mr. Buckley.
The Compensation Committee did not exercise any discretion to increase or decrease these payout levels, resulting in the bonuses shown in the following table.
Named Executive Officer
|
|
Fiscal 2019
Bonus
Earned
|
|
|
Transition Period Bonus Earned
|
|
James S. Metcalf
|
|
|
$
|
820,041
|
|
|
|
$
|
136,673
|
|
Jeffrey S. Lee(1)
|
|
|
$
|
400,000
|
|
|
|
$
|
—
|
|
Shawn K.
Poe
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Donald R. Riley
|
|
|
$
|
527,101
|
|
|
|
$
|
87,850
|
|
Katy K.
Theroux
|
|
|
$
|
186,373
|
|
|
|
$
|
31,062
|
|
John L. Buckley
|
|
|
$
|
300,375
|
|
|
|
$
|
—
|
|
(1)
In February 2020, the Company approved an increase in Mr. Lee’s bonus target from
80% to 90% of base salary. No other NEO has received an increase to target
bonus percentage during 2020.
In March 2020, the Company approved changes to the performance metrics
and achievement and payout ranges for its Fiscal 2020 Bonus Program. In Fiscal 2020, the performance criteria for annual bonuses for our NEOs who hold executive-level positions will be based
80% on the Company’s Adjusted EBITDA and 20% on the Company’s working capital. The performance criteria for NEOs who are business unit presidents will be based 40% on the Company’s Adjusted
EBITDA, 40% on the business unit’s Adjusted EBITDA and 20% on business unit working capital. The payout for threshold levels of achievement
will be reduced from 50%
(which was the payout for threshold levels of achievement under the Fiscal 2019 Bonus
Program) to 45%, while the payout for maximum achievement remains at 200%.
Our Company believes that these changes will keep employees focused on the most important performance measures and gain trust in the Company’s compensation practices.
Under the Fiscal 2020 Bonus Program, in order for
any bonuses to be paid, Adjusted EBITDA must equal or exceed the greater of the prior year Adjusted EBITDA
and be at least 85% of the
target Adjusted EBITDA. In
addition, if the Adjusted EBITDA target is not met, payout for working capital achievement may not exceed target levels.
In
addition to the annual bonuses under the Fiscal 2019 Bonus Program, the Company made a one-time cash bonus payment of $25,000 to Mr. Lee in connection with his commencement of employment as our CFO, and a one-time cash bonus payment of $337,500 to Ms. Theroux in recognition of the increased
demands of time, attention and work and increased responsibilities following the Merger. See
“Executive Compensation” — Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table — Fiscal 2019.”
Long-Term Incentive Compensation
Generally
Our long-term incentive compensation is provided under the Incentive Plan, a stockholder-approved equity-based compensation plan that allows Cornerstone to grant a variety of awards, including
stock options, restricted stock, RSUs, stock appreciation rights, performance share awards, phantom stock awards and performance-based and other cash awards.
We believe that equity awards to our Named Executive Officers must be sufficient in size to provide a strong, long-term performance and retention incentive for executives and to increase their vested interest in Cornerstone. The value of the
equity awards granted to Named Executive Officers is based on individual performance assessments of each of the Named Executive Officers as well as other members of executive management.
In connection with the Merger and the Fiscal Year Change, the Company granted long-term incentive awards consisting of stock options, RSUs and PSUs in November 2018, and changed the timing of
its subsequent annual grants of long-term incentive awards from December to March of each year. As a result, our Named Executive Officers did not receive an annual grant of long-term incentive awards during Fiscal 2019. The Company instead made our annual grant of long-term incentive awards on March 15, 2020, following the end of our 2019 fiscal year, the Company granted long-term incentive awards that consisted of stock options, RSUs and PSUs. See “Long-Term Incentive Compensation
— Long-Term Incentive Awards Granted to NEOs in 2020.” In addition, Mr. Lee and Ms. Theroux each received a one-time grant of equity awards during 2019. See “Long-Term Incentive
Compensation — Long-Term Incentive Awards Granted to NEOs in 2019.”
Long-Term Incentive Awards Granted to NEOs in 2019
As described above, as a result of the Merger and the Fiscal Year Change, our Named Executive Officers did not receive an annual grant of long-term incentive awards during Fiscal
2019.
In June 2019, in connection with his commencement of employment as our CFO and pursuant to the terms of his
employment agreement, the Compensation Committee approved an initial grant of long-term incentive awards to
Mr. Lee having a grant date fair market value of $1,500,000, consisting of 124,224 RSUs, 62,112 PSUs, and 294,118 options to acquire Common Stock. The Compensation Committee determined the amount of Mr. Lee’s overall compensation, including the initial equity
grant, based on a review of
compensation for executives with
comparable experience as well as other considerations, including equity Mr. Lee forfeited as a result of his resignation from his prior
employer.
In August 2019, in recognition of the increased demands of time, attention and work and increased responsibilities
following the Merger, our Compensation Committee approved a one-time grant of 110,565 RSUs to Ms. Theroux, having a grant date fair market value of $450,000. The RSUs granted to Ms. Theroux vest on the second anniversary of the date of grant, subject to continued employment with the Company. The RSUs granted to Mr. Lee vest in five equal installments beginning on the date of grant, subject to continued employment with the Company. The options granted to Mr. Lee have a
10-year term and an exercise price of $4.83, which was the fair market value of a share of Common Stock on the date of grant. The PSUs granted to Mr. Lee represent the right to acquire a number of shares of the
Company’s common stock to be determined based upon the achievement of performance metrics as measured during the three years following the grant date, subject
to his continued employment with the Company. See “Executive Compensation” — Narrative to the Summary Compensation Table and Grants of Plan-Based Awards
Table — Fiscal 2019.”
Long-Term Incentive Awards Granted to NEOs in 2020
In March 2020, our Compensation Committee made a grant of long-term incentives to our NEOs, referred to below as the “FY 2020 Awards.” Prior to the Fiscal Year Change, long-term incentive grants were typically made in December of each year, which had been the first quarter of our fiscal year. We have continued our practice of making annual long-term incentive grants during the first quarter of
the fiscal year following the Fiscal Year Change.
The FY
2020 Awards consist of (i) options to purchase shares of the Company’s common stock with a per share exercise price of $4.52, which was the fair market value of a share of Common Stock on the date of grant, and having a 10-year term (the “Options”), (ii) RSUs, each representing the right to acquire on
vesting one share of the Company’s common stock, and (iii) PSUs, each representing the right to acquire a number of shares of the Company’s common stock to be determined based upon the achievement of performance metrics as
measured during the three years following the grant date, subject to the grantee’s continued employment with the Company. The number of Options, RSUs and PSUs
granted to each NEO was determined based on the average closing price of the Company’s Common Stock for the 30 days preceding the grant date, with Options representing
30% of the total value, RSUs representing 20% of the total value, and PSUs representing 50% of the total value of each grant. We
believe that the combination of Options, RSUs and PSUs, and their accompanying vesting schedules, will align the interests of our NEOs and
shareholders, and help us retain executives who are critical to the successful execution of our business
strategy.
The number of FY 2020 Awards granted to each NEO is set forth in the following table:
Named Executive Officer
|
|
Number of Options Units Granted
|
|
Number of Performance Share Units Granted
|
|
Number of Restricted Stock Units Granted
|
James S. Metcalf
|
|
424,528
|
|
306,123
|
|
122,449
|
Jeffrey S. Lee(a)
|
|
141,509
|
|
102,041
|
|
40,817
|
Katy K.
Theroux
|
|
66,038
|
|
47,620
|
|
19,048
|
John L. Buckley
|
|
35,377
|
|
25,511
|
|
10,205
|
(a)
Pursuant to the terms of his employment agreement, Mr. Lee was entitled to an annual long-term incentive grant for 2020 having a total fair market
value equal to $1,500,000, comprised of the same combination of equity awards, granted at the same time and having the same terms and conditions as the equity awards granted to other senior executives of the Company in 2020. For a description of the material terms of the employment agreement and for a discussion of enhanced severance benefits upon a termination in connection with a change in
control of the Company, see “Compensation Discussion & Analysis — Other Compensation — Termination and Change in Control Agreements.”
Retirement Benefits
Our executive officers, including our NEOs, are eligible to participate in our tax-qualified 401(k) plan. In addition,
we believe that benefit programs that address the unique circumstances of executives in light of limitations imposed on benefits payable from qualified welfare, profit-sharing and retirement plans are critical in attracting and retaining quality
executives. Therefore, we have adopted a Deferred Compensation Plan (“DCP”) that allows key
employees to defer a portion of their annual salary and annual cash bonus, subject to certain specified maximum deferral amounts. Common Stock is also an investment option for certain of our executive officers. Amounts deferred into the
Common Stock fund remain invested in the Common Stock fund until distribution. See “Executive Compensation — Nonqualified Deferred Compensation” for additional details regarding the terms of the DCP.
Other Compensation
Termination and Change in Control Agreements
Certain compensation arrangements of Cornerstone include provisions providing for special payments or benefits upon specified termination events or the occurrence of a change in control of Cornerstone. However, these arrangements do not include “gross-ups”
for golden parachute excise taxes or other taxes. We believe that these termination and change in control benefits provide our Named Executive Officers an incentive to act in the stockholders’ best interests during a takeover despite the
risk of losing their jobs or a significant change in the nature of their benefits and responsibilities. We also believe that, in some cases, our termination and change in control benefits are necessary to attract and retain certain
executives. For a description of the terms of the employment agreements, consulting agreement and equity awards, see “Executive Compensation — Potential Payments upon Termination or Change in Control.”
The Company has entered into employment agreements with each of its NEOs, other than Mr. Buckley. As described above,
Mr. Poe and Mr. Riley are no longer employees of the Company. The descriptions herein pertain to their
employment agreements as in effect during Fiscal 2019. Except for the agreement with Mr.
Metcalf, the term of each
NEO’s employment agreement runs for a period of two years, subject to automatic
one-year extensions thereafter, unless either party gives notice of non-renewal. The initial term of Mr. Metcalf’s agreement will expire on November 16,
2021, subject to automatic one-year extensions thereafter, unless either party gives a one year notice of
non-renewal. The employment agreements provide for severance payments and termination benefits upon a future termination of an NEO’s employment that is a qualifying termination (i.e., upon termination by
the Company without “cause” or by the employee with “good reason”), both prior to and following a change in control of the Company. Severance
payments and termination benefits are also payable upon a qualifying termination of an NEO that does not occur during a potential change in control period or within two years following a change in control of the Company.
Where a qualifying termination occurs, other than during a potential change in control period or within two years following a change in control
of the Company, each employment agreement provides for (1) payment of one times (two times, in the case of Messrs. Metcalf, Poe, and Riley) the NEO’s then-current base salary (at the highest annualized rate in effect during the one-year period
immediately preceding the date of termination, in the case of Mr. Poe), payable in equal installments on regular payroll dates over the course of the one-year period (two-year period, in the case of Messrs. Metcalf and Poe) immediately following the date of termination, (2) a prorated annual bonus based on actual performance in the year of termination, (3)
twelve months of continued COBRA coverage (in the case of Messrs. Metcalf and Riley, a lump sum cash payment equal to eighteen months of the premium cost of family
medical coverage at the active-employee rate) and (4) in the case of Mr. Metcalf, payment of two times his target annual bonus, payable in equal installments on regular payroll dates over the course of the
two-year period immediately following the date of termination (each, a “Qualifying Termination Severance Package”).
In the case of Mr. Poe, the employment agreement provided for the Qualifying Termination Severance Package upon a
qualifying termination occurring prior to November 16, 2020, except that (1) the base salary payment was payable in a lump sum, (2) the COBRA coverage
was for a period of eighteen months, and (3) Mr. Poe was entitled to an additional
lump-sum payment equal to two times his target annual bonus.
Where a qualifying termination occurs during a potential change in control period or within two years following a change in control of the Company, Mr. Metcalf’s employment agreement
provides for his Qualifying Termination Severance Package, except that the target bonus payment is instead equal to three times his target bonus, and each of the base salary and target bonus payments are to be paid to the maximum extent permitted under Section 409A of the Internal Revenue Code in a lump sum (with any
remainder paid in installments over two years). In the case of Mr. Riley, his employment agreement provided for his Qualifying Termination Severance Package, except that he was entitled to a payment equal to the sum of two times his base salary, plus three times his target annual bonus. In the case of Mr. Lee and Ms. Theroux, their employment agreements provide for (1) the same cash severance payment as is payable upon a qualifying termination prior to a change in control (except that, to the maximum extent practicable, such
payment is to be made in a lump sum), (2) an additional lump-sum cash severance payment in an amount equal to the sum of (x) one times the NEO’s
then-current base salary and (y) two times the NEO’s target annual bonus for the fiscal year in which the termination occurs, (3) a pro-rated annual bonus payment based on actual performance in the year of termination and
(4) an additional six months of continued COBRA coverage.
For purposes of the employment agreements,
“change in control” means (A) any person who becomes the beneficial owner of 25% or more of the combined voting power of Cornerstone, (B) as a result of, or in connection with, a tender or exchange offer, merger or other
business combination, persons who were directors immediately before the transaction cease to constitute the majority of Cornerstone’s Board of Directors, (C) Cornerstone is merged or consolidated with another company or transfers substantially
all of its assets to another company and, as a result, either (i) less than 50% of the outstanding voting securities of the resulting company are owned in the aggregate by former Cornerstone stockholders or (ii) 50% or more
of the outstanding voting securities of the resulting company continue to be owned in the aggregate by former Cornerstone stockholders but other than in substantially the same relative proportions as immediately prior to the transaction, or (D) a
tender or exchange offer is made for 25% or more of the combined voting power of Cornerstone. To the extent payments to a Named Executive Officer under an employment agreement constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code,
the payments to be received by the officer may be reduced to the extent a reduction in the payment amount would put the officer in a better after-tax position than he or she would be in if the excise tax under Section 4999 were imposed
on such payments.
The Merger was a change in control for purposes of the employment agreements with Mr. Riley and Ms.
Theroux. Therefore, if Ms. Theroux experiences a qualifying termination prior to November 16, 2020, then she will be entitled to enhanced change in control severance as described above. Because Mr. Riley’s employment ended in a
qualifying termination that occurred prior to November 16, 2020, he received the enhanced change in control severance benefits described above, and the vesting of his outstanding RSUs and PSUs described below, upon his termination from the Company
in February 2020.
In addition to the change in control arrangements described above, outstanding shares of restricted stock,
RSUs, options and PSUs granted to the Named Executive Officers, including RSUs and PSUs held by our NEOs, may vest in connection with certain termination events during the two years following the effective time of the Merger or in
connection with a subsequent change in control of the Company (see “Executive Compensation — Potential Payments upon Termination or Change in Control — Equity Incentive Awards”).
Perquisites and Personal Benefits
We offer only de minimis perquisites or personal benefits.
Gross-Ups
With the exception of limited, one-time tax indemnification in connection with the incurrence of relocation expenses under
our relocation policy, Cornerstone does not provide for any tax assistance or “gross-ups” for any of its executives.
CEO Compensation
The Compensation Committee is directly responsible for determining the salary level of the CEO and all awards and
grants to the CEO under the Bonus Program, Incentive Plan and the DCP. In November 2018, the Company entered into an employment agreement with our CEO, Mr. Metcalf, in connection with his appointment as Chairman and Chief Executive. During Fiscal 2019, 41.7% of the compensation of Mr. Metcalf was
“at-risk,” meaning it was comprised of long- and short-term incentive equity awards and our Bonus Program, none of which are guaranteed to be paid. The
percentage of Mr. Metcalf’s compensation that was “at-risk” in Fiscal 2019 reflects a number of factors, including that he did not receive an annual grant of long-term incentive awards during Fiscal 2019 (see “Compensation
Discussion & Analysis — Long-Term Incentive Compensation —Long-Term Incentive Awards Granted to NEOs in 2019). If the long-term incentive awards
granted to Mr. Metcalf during the Transition Period had instead been granted during Fiscal 2019, the percentage of Mr. Metcalf’s compensation that was “at-risk” would have been approximately 82%. Mr. Metcalf’s overall
compensation package has also been set at a level that we believe provides appropriate differentiation between CEO compensation and the compensation of other executive officers hired from time to time. Information on Fiscal 2019
compensation for Mr. Metcalf is set forth in the compensation tables following this CD&A.
Deductibility of Compensation
Section 162(m) of the Internal Revenue Code (“Section 162(m)”) imposes a
$1 million limit on the amount that a public company may deduct each year for compensation paid to “covered employees.” Covered employees generally
consist of our CEO, CFO, and each of the next three highest compensated officers for the taxable year, without regard to whether such executive officers are serving at the end of the taxable year, and
anyone who previously has been a covered employee for any taxable year beginning after December 31, 2016.
While Cornerstone seeks to take advantage of favorable tax treatment for executive compensation where appropriate, we
believe that the primary drivers for determining the amount and form of executive compensation must be the retention and motivation of superior executive talent.
We will continue to review Cornerstone’s executive compensation practices and will seek to preserve tax deductions for executive compensation to the extent consistent with our objective
of providing compensation arrangements necessary and appropriate to foster achievement of Cornerstone’s business goals, although the Company reserves the right to grant and pay compensation that is not tax deductible should the Company determine that doing so will better meet Cornerstone’s
objectives.
Stock Ownership Guidelines
In November 2016, our Board approved the Cornerstone Building Brands, Inc. Executive Stock Ownership Guidelines,
which were further amended in August 2017. Pursuant to the stock ownership guidelines, certain of our executives, including our NEOs, and non-employee directors are
expected to acquire and hold a certain level of our common stock based on a multiple of salary or cash
retainer, as applicable. The stock ownership guidelines were developed with the assistance of FW Cook and were adopted to further align the interests of our senior management team with those of our stockholders.
Under the stock ownership guidelines, each of our NEOs is expected to acquire and hold a number of shares of our common stock having a value equal to a multiple of his or her
annual salary as set forth in the table below. The number of shares required to be held by each NEO will be calculated based on his or her annual salary as of the Annual Meeting of the Stockholders and the average of our month-end closing
stock prices throughout the previous fiscal year.
Covered Person
|
|
Multiple of Salary
|
Chief Executive Officer
|
|
5x
|
President
|
|
2x
|
Chief Financial Officer
|
|
2x
|
Other
Executive Vice Presidents and Vice Presidents
|
|
1x
|
Under the stock ownership guidelines, the required holdings do not have to be met within a
specified period of time. However, until the required number of shares is attained, upon (i) the exercise of stock options, (ii) the settlement of performance shares and (iii) the vesting of restricted shares, our NEOs must retain the number
of shares received upon the occurrence of these events having a value equal to 50% of the after-tax profit realized upon the occurrence of these events. Once the required number of shares is attained, compensation increases and
changes in stock price will no longer have an effect on holding requirements and retention guidelines. As long as the executive continues to hold the required number of shares, he or she will be in compliance with the stock ownership
guidelines. Finally, under the stock ownership guidelines, any sale of shares by covered executives and directors, including our NEOs, must be reviewed by our legal department to ensure continued compliance with the guidelines.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During Fiscal 2019, no member of the Compensation Committee served as an executive officer of the Company, and, except as
described in “Transactions with Related Persons” below, no such person had any relationship with the Company requiring disclosure herein During Fiscal 2019, there were no Compensation Committee interlocks with other companies.
COMPENSATION COMMITTEE REPORT
The Compensation
Committee has reviewed and discussed the above CD&A with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the CD&A be included in this proxy statement.
KATHLEEN J. AFFELDT (Chair)
GEORGE L. BALL
WILBERT W. JAMES, JR.
JOHN KRENICKI
NATHAN K. SLEEPER
J.L. ZREBIEC
Fiscal 2019 Summary Compensation Table
The following table shows information regarding the total compensation paid to the Named Executive Officers for each of our last
three completed fiscal years and the Transition Period. The compensation reflected for each individual was for their services provided in all capacities to
us.
Name & Principal Position
|
|
Year(a)
|
|
Salary
($)(b)
|
|
Bonus
($)(c)
|
|
Stock Awards
($)(d)
|
|
Option Awards
($)(e)
|
|
Non-Equity Incentive Plan Compensation
($)(f)
|
|
All Other Compensation
($)(g)
|
|
Total($)
|
James S. Metcalf
Chairman and Chief Executive Officer(h)
|
|
2019
2MO 18
|
|
1,100,000
110,000
|
|
—
600,000
|
|
—
2,804,219
|
|
—
1,595,765
|
|
820,041
136,673
|
|
47,063
—
|
|
1,967,104
5,246,657
|
Jeffrey S. Lee
Executive Vice President, Chief Financial Officer(h)
|
|
2019
|
|
280,000
|
|
25,000
|
|
900,000
|
|
1,420,590
|
|
400,000
|
|
1,939,385
|
|
4,964,975
|
Donald R. Riley
Former President and Chief Executive
Officer
|
|
2019
2MO 18
|
|
900,000
130,385
|
|
—
—
|
|
—
1,869,467
|
|
—
1,063,847
|
|
527,101
87,850
|
|
365,942
221
|
|
1,793,043
3,151,770
|
|
2018
|
|
750,000
|
|
—
|
|
2,436,246
|
|
—
|
|
789,000
|
|
43,620
|
|
4,018,866
|
|
2017
|
|
594,231
|
|
250,000
|
|
1,203,286
|
|
—
|
|
434,044
|
|
30,253
|
|
2,511,814
|
Shawn K. Poe
Former Chief Financial Officer(h)
|
|
2019
2MO 18
|
|
292,788
100,962
|
|
—
—
|
|
—
1,423,158
|
|
—
809,864
|
|
—
—
|
|
11,452
4,206
|
|
304,240
2,338,190
|
John L.
Buckley
President, Siding Business Unit – Residential(h)
|
|
2019
2MO 18
|
|
500,000
96,154
|
|
—
—
|
|
—
1,733,688
|
|
—
986,576
|
|
257,464
42,911
|
|
22,800
4,177
|
|
780,264
2,863,506
|
Katy K. Theroux
Executive Vice President, Corporate Marketing and Chief Human Resources Officer
|
|
2019
2MO 18
|
|
450,000
66,538
|
|
337,500
—
|
|
450,000
1,116,216
|
|
—
635,196
|
|
186,373
31,062
|
|
10,145
543
|
|
1,434,018
1,849,555
|
|
2018
|
|
400,000
|
|
—
|
|
548,176
|
|
—
|
|
315,600
|
|
9,251
|
|
1,273,027
|
|
2017
|
|
372,404
|
|
—
|
|
509,158
|
|
—
|
|
186,639
|
|
8,108
|
|
1,076,309
|
(a) “2MO 18” refers to the Transition Period (October 29 to December 31, 2018). Amounts for the Transition Period are not annualized and reflect actual
amounts earned during such period.
(b) The amounts reported in the “Salary” column are calculated by taking into account the NEOs’ increases in base salary in the Transition Period, Fiscal 2018, and
Fiscal 2017. For Mr. Lee, the amount reflects a partial year of salary for Fiscal 2019.
(c) The amounts reported in the “Bonus” column reflect, for the Fiscal Year specified: (i) for Mr. Metcalf, a one-time $600,000 signing bonus in connection with his
appointment as Chairman and CEO; (ii) for Mr. Lee, a one-time $25,000 cash signing bonus for Fiscal 2019 in connection with his appointment as CFO; (iii) for Mr. Riley, a one-time
$250,000 cash promotion bonus for Fiscal 2017 in connection with his appointment as CEO; and (iv) for Ms. Theroux, a one-time $337,500 special cash performance award.
(d) The amounts reported in the “Stock Awards” column reflects the aggregate grant date fair value of the awards granted under our Incentive Plan in the relevant fiscal years and as
Founders Awards in November 2018 in connection with the Merger, computed in accordance with FASB ASC Topic 718. See Note 7 of the consolidated financial statements in Cornerstone’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2020 for additional detail regarding assumptions underlying the
valuation of equity awards of RSUs and PSUs. In addition, for Ms. Theroux, the amount reflects a one-time award of RSUs granted during Fiscal 2019, and for Mr. Lee, the amount reflects an initial award of RSUs and PSUs granted during Fiscal 2019. See “Compensation Discussion & Analysis — Long-Term Incentive Compensation.”
(e) The amounts reported in the “Option Awards” column reflect the aggregate grant date fair value of the option awards, computed in accordance with FASB ASC Topic
718. See Note 7 of the consolidated financial statements in Cornerstone’s Annual Report on Form 10-K for the fiscal year ended December 31,
2020 for additional detail regarding assumptions underlying the valuation of equity awards of options.
For Mr. Lee, the Fiscal Year 2019 amount reflects his initial grant of long-term incentive awards in connection with his commencement of employment. See “Compensation Discussion & Analysis — Long-Term Incentive Compensation.”
(f) As described in our
2019 proxy statement, as a result of the Merger and the Fiscal Year Change, our Named Executive Officers did not receive an annual bonus
payment during 2019 in respect of the Transition Period. Instead, cash bonuses for the Transition Period were included in our Fiscal 2019 annual bonus program with amounts determined based on our Fiscal 2019 bonus
criteria, and the amounts payable were determined and paid to these participants in 2020 at the same time as the Fiscal 2019 bonuses were paid.
(g) The “All Other
Compensation” column includes Cornerstone 401(k) matching contributions and DCP contributions with respect to the named executive officers described below and the taxable value of a life insurance benefit. See
“Executive Compensation — Nonqualified Deferred Compensation” The amounts in this
column for Fiscal
2019 also
reflect relocation expenses of
$14,617 for Mr. Lee,
$350,952 for Mr. Riley, and $23,773 for
Mr. Metcalf. Consistent with the Company’s relocation policy, these amounts include tax gross-ups of
approximately $7,675 for Mr. Lee, $184,250 for Mr. Riley, and
$12,480 for Mr. Metcalf. For Mr. Lee, the amount for Fiscal 2019 also reflects a home buyout under the Company’s relocation policy, pursuant to which the Company purchased his home through a third party relocation firm for a cost of $1,924,149, including expenses related to the purchase,
which the Company intends to resell in accordance with the policy.
(h) Messrs. Buckley, Lee, Metcalf, and Poe were not Named Executive Officers in Fiscal 2018 or Fiscal 2017.
Fiscal 2019 Grants of Plan-Based Awards Table
The following table sets forth information concerning grants of plan-based awards to each of the Named Executive Officers under the Bonus Program and the Incentive Plan during Fiscal
2019.
|
|
|
|
|
|
Estimated Future Payouts Under Non- Equity Incentive Plan
Awards(a)
|
|
Estimated Future Payouts Under Equity Incentive Plan Awards
|
|
All Other Stock Awards; Number of Shares of Stock or Units
(#)
|
|
All Other Option Awards: Number of Securities Underlying Options
(#)
|
|
Exercise or Base Price of Option Awards ($/Sh)
|
|
Grant Date Fair Value of Stock and Option Awards
($)(b)
|
Name
|
|
Grant Date
|
|
Award Type
|
|
Threshold ($)
|
|
Target ($)
|
|
Maximum ($)
|
|
Threshold (#)
|
|
Target (#)
|
|
Maximum (#)
|
Mr. Metcalf
|
|
|
|
Bonus Program
|
|
668,250
|
|
1,485,000
|
|
2,970,000
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
Mr. Lee
|
|
|
|
Bonus Program
|
|
400,000
|
|
448,000
|
|
896,000
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
6/17/2019
|
|
RSU
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
124,224
|
|
—
|
|
—
|
|
600,002
|
|
|
6/17/2019
|
|
PSU
|
|
—
|
|
—
|
|
—
|
|
21,740
|
|
62,112
|
|
124,224
|
|
—
|
|
—
|
|
—
|
|
300,001
|
|
|
6/17/2019
|
|
Option
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
294,118
|
|
4.83
|
|
600,001
|
Mr. Riley
|
|
|
|
Bonus Program
|
|
405,000
|
|
900,000
|
|
1,800,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
Mr. Poe
|
|
|
|
Bonus Program
|
|
177,188
|
|
393,750
|
|
787,500
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
Mr. Buckley
|
|
|
|
Bonus Program
|
|
168,750
|
|
375,000
|
|
750,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
Ms. Theroux
|
|
|
|
Bonus Program
|
|
151,875
|
|
337,500
|
|
675,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
8/9/2019
|
|
RSU
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
110,565
|
|
—
|
|
—
|
|
450,000
|
(a) Represents threshold, target and maximum amounts
potentially payable under Cornerstone’s Bonus Program for Fiscal 2019. See “Compensation Discussion & Analysis — Annual Bonus.”
Mr. Lee’s Fiscal 2019 bonus was subject to a minimum payment of $400,000 pursuant to the terms of his employment agreement.
(b) The grant date fair value of plan-based awards of RSUs and PSUs granted to Mr. Lee is based on a price per share of $4.83, which was our closing stock price on June 17, 2019.
In addition, the grant date fair value of RSUs granted to Ms. Theroux is based on a price per share of $4.07, which was our closing stock price on August 9, 2019.
(c) The amounts
reported in the “Grant Date Fair Value of Stock and Option Awards” column reflect the aggregate
grant date fair value of the awards granted under our Incentive Plan during Fiscal 2019, computed in accordance with FASB ASC Topic 718. See Note 7 of the consolidated financial statements in
Cornerstone’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 for additional
detail regarding assumptions underlying the valuation of equity awards.
Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table
Employment Agreements
The
Company has entered into employment agreements with each of its NEOs, other than Mr. Buckley. For a
description of the material terms of the employment agreements and for a discussion of enhanced severance benefits upon certain terminations in connection with a change in control of the Company, see “Compensation Discussion & Analysis
— Other Compensation — Termination and Change in Control Agreements.”
Fiscal 2019 Bonus Program
Our short-term incentive compensation program for our Named Executive Officers for Fiscal 2019 was
dependent upon our attainment of a specified level of Company Adjusted EBITDA, Company and business unit Adjusted EBITDA or Company and business unit Adjusted EBITDA and
personal objectives. The amount payable to a recipient of a Fiscal 2019 award under the Bonus Program is determined based on the applicable Adjusted EBITDA levels actually attained by us for Fiscal
2019, and is
equal to a specified percentage of the recipient’s base salary. For Fiscal
2019, our Compensation Committee did not exercise any discretion to increase or
reduce bonuses otherwise payable by reason of the applicable performance criteria. See “Compensation Discussion & Analysis — Annual Bonus” for additional information.
Fiscal 2019 Long-Term Incentive
Awards
As described above, as a result of the Merger and the Fiscal Year Change, our Named Executive Officers did not receive an annual grant of long-term incentive awards during Fiscal
2019.
In June 2019, our Compensation Committee approved an initial award to Mr. Lee, including a grant of 124,224 RSUs, 294,118 options and 62,112 PSUs in connection with his commencement of employment.
In August 2019, our Compensation Committee also approved a special award to Ms. Theroux, including a grant of 110,565
RSUs. See “Compensation
Discussion & Analysis — Long-Term Incentive Compensation — Long-Term Incentive Awards Granted to NEOs in Fiscal 2019.”
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information concerning unexercised stock options and unvested restricted stock, RSUs
and PSUs held by each of our Named Executive Officers as of December 31, 2019.
Option Awards
|
|
Stock Awards
|
Name
|
|
Number of Securities Underlying Unexercised Options Exercisable
(#)(a)
|
|
Number of Securities Underlying Unexercised Options Unexercisable
(#)
|
|
Option Exercise Price
($)
|
|
Option Expiration Date
|
|
Grant Award Date
|
|
Number of Shares or Units of Stock That Have Not Vested
(#)(b)
|
|
Market Value of Shares or Units of Stock That Have Not Vested
($)(c)
|
|
Equity Incentive Plan Awards: Number of Unearned Shares, Units or
Other Rights That Have Not Vested
(#)(d)
|
|
Equity Incentive Plan Awards: Market or Payout Value of Unearned
Shares, Units or Other Rights That Have Not Vested
($)(e)
|
Mr. Metcalf
|
|
61,496
|
|
245,985
|
|
12.16
|
|
11/13/28
|
|
11/16/18
|
|
122,992
|
|
1,046,662
|
|
76,870
|
|
654,164
|
Mr. Lee
|
|
58,823
|
|
235,295
|
|
4.83
|
|
06/14/29
|
|
06/17/19
|
|
99,380
|
|
845,724
|
|
62,112
|
|
528,573
|
Mr. Poe
|
|
—
|
|
—
|
|
12.16
|
|
11/13/28
|
|
11/16/18
|
|
—
|
|
—
|
|
—
|
|
—
|
Mr. Riley
|
|
—
|
|
—
|
|
—
|
|
—
|
|
07/01/17
|
|
7,685
|
|
65,399
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
12/15/17
|
|
16,862
|
|
143,496
|
|
59,511
|
|
506,439
|
|
|
40,997
|
|
163,991
|
|
12.16
|
|
11/13/28
|
|
11/16/18
|
|
81,995
|
|
697,777
|
|
51,246
|
|
436,103
|
Mr. Buckley
|
|
38,019
|
|
152,080
|
|
12.16
|
|
11/13/28
|
|
11/16/18
|
|
76,040
|
|
647,100
|
|
47,524
|
|
404,429
|
Ms. Theroux
|
|
—
|
|
—
|
|
—
|
|
—
|
|
07/01/17
|
|
1,997
|
|
16,994
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
12/15/17
|
|
3,795
|
|
32,295
|
|
13,390
|
|
113,949
|
|
|
24,478
|
|
97,915
|
|
12.16
|
|
11/13/28
|
|
11/16/18
|
|
48,957
|
|
416,624
|
|
30,598
|
|
260,389
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
08/09/19
|
|
110,565
|
|
940,908
|
|
—
|
|
—
|
(a) All exercisable stock options previously granted (i) have an exercise price not less than the closing price of
Cornerstone’s Common Stock on the grant date, (ii) became exercisable with respect to 25% of
the total option shares each year, starting on the first anniversary of the grant date, and (iii) were granted for a term of 10 years. Additional terms governing the stock option awards are described in the narrative above
entitled “Executive Compensation — Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table — Restricted Stock and Restricted Stock Unit Awards and Stock Options.”
(b) Reflects the Founders Awards and FY 2018 and FY 2017 Awards granted to the Named Executive Officers on November 16, 2018 and December 15, 2017, respectively and (2) one-time awards of restricted stock granted in July
2017 to Mr. Riley and Ms. Theroux, restricted stock units and performance share units granted in June 2019 to
Mr. Lee and restricted stock units granted in August 2019 to Ms. Theroux. For a description of the
vesting of these awards, see “Compensation Discussion & Analysis — Long-Term Incentive Compensation.”
(c) This column represents the
closing price of our Common Stock on December 31, 2019, the last business day of Fiscal 2019, which is $8.51, multiplied by the number of shares of restricted stock.
(d) This column represents the performance unit award portion of the Founders Awards and FY 2018 and FY 2017 Awards granted to the Named Executive Officers, determined
assuming the target level of performance is achieved.
(e) This column represents the closing price of our Common Stock on December 31, 2019, the last business
day of Fiscal 2019, which is $8.51, multiplied by the number of shares underlying the PSUs, determined assuming the target level of performance is achieved.
Option Exercises and Stock Vested
The following table sets forth information concerning the exercise of options and vesting of RSUs and PSUs of each of
our Named Executive Officers during Fiscal 2019:
|
|
Option Awards
|
|
Stock Awards
|
|
Name
|
|
Number of Shares Acquired on Exercise (#)
|
|
Value Realized on
Exercise
($)(a)
|
|
Number of Shares Acquired on Vesting (#)
|
|
Value Realized
on Vesting
($)(b)
|
Mr. Metcalf
|
|
—
|
|
—
|
|
30,748
|
|
|
212,776
|
|
Mr. Lee
|
|
—
|
|
—
|
|
24,844
|
|
|
171,920
|
|
Mr. Riley
|
|
—
|
|
—
|
|
76,656
|
|
|
604,972
|
|
Mr. Poe
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
Mr. Buckley
|
|
—
|
|
—
|
|
19,009
|
|
|
131,542
|
|
Ms. Theroux
|
|
—
|
|
—
|
|
33,971
|
|
|
266,652
|
|
(a) The value realized on exercise represents the difference between the market value of our common stock at the time the applicable option was exercised and the exercise price of the
option.
(b) This column represents the closing price of our common stock on November 15, 2019 or December 14, 2019 (whichever is the day before the vesting date of the applicable award) multiplied by the number of shares of our common stock covered by such award.
Pension Benefits
We do not sponsor or maintain any plans that provide for specified retirement payments or benefits, such as
tax-qualified defined benefit plans or supplemental executive retirement plans, for our Named Executive Officers.
Nonqualified Deferred Compensation
Certain of our employees and non-employee directors of Cornerstone
selected by the Compensation Committee are eligible to participate in the Company’s Deferred Compensation Plan. The DCP is a nonqualified retirement plan created to provide
specified benefits to our highly compensated employees and directors. The DCP allows employees to defer
up to 80% of their annual salaries and up to 90% of their annual cash bonuses, and allows Cornerstone’s non-employee directors to defer up to 100% of their annual fees and meeting attendance fees, until a
specified date in the future, including at or after retirement. None of our NEOs participated in the DCP during Fiscal 2019.
Potential
Payments upon Termination or Change in Control
We describe below certain payments and benefits that would
be received by our Named Executive Officers upon specified terminations of their employment, and upon a change in control of us, under the employment agreements to which we and our Named Executive Officers are parties, as well as under our Incentive
Plan and the outstanding equity awards as of the end of Fiscal 2019.
Employment Agreements
Each Named Executive Officer, other than Mr. Buckley, has (or during Fiscal 2019 had) an employment agreement with the Company providing for severance payments and termination
benefits upon a termination of a Named Executive Officer’s employment by the Company without “cause” or by the Named Executive Officer for “good reason,” both prior to and following a change in control of the
Company. For a description of the severance benefits to which Named Executive Officers are entitled under the employment agreements, see “Compensation Discussion & Analysis — Other Compensation — Termination and Change in
Control Agreements.”
Equity Incentive
Awards
FY 2017 Awards and FY 2018
Awards
Upon a change in control (as defined above), the FY 2017 Awards and FY
2018 Awards provide that they will be assumed or replaced by economically equivalent alternative awards, and, further, that these awards are intended to fully vest only to the extent that they are not assumed or replaced with
alternative awards. The terms of any alternative award must be at least as favorable as the terms of the award being replaced (including an equal or better vesting schedule and, in the case of stock options, an identical or better method of
exercise) and must provide for full acceleration in the event that the grantee is terminated by the successor without cause or by the award holder with good reason within two years following the change in control with respect to which
the alternative award was granted.
Transition Period Awards and FY
2019 Awards
Upon a change in control (as defined above), the awards granted during the
Transition Period (the “Founders Awards”) provide that they will be assumed or replaced by economically equivalent alternative awards, and, further, that these awards are intended to fully vest only to the extent that they are not
assumed or replaced with alternative awards. The terms of any alternative award must be at least as favorable as the terms of the award being replaced (including an equal or better vesting schedule and, in the case of stock options, an
identical or better method of exercise) and must provide for full acceleration in the event that the grantee is terminated by the successor without cause or by the award holder with good reason within two years following the change in
control with respect to which the alternative award was granted. The RSUs, PSUs and options granted to Mr. Lee have the same terms as the Founders Awards. The RSUs granted to Ms. Theroux vest on the second anniversary of the date of
grant, subject to continued employment with the Company.
Quantification of Payments
Termination Payments (unrelated to a Change in Control)
The following table estimates the value of the payments and benefits that each of our Named Executive Officers would receive if his or her employment terminated on December 31, 2019 (the last
business day of Fiscal 2019) under the circumstances shown and making the following assumptions, and for whom the table instead reflects the actual payments and benefits received in connection with their departure. Mr. Poe resigned without “cause” during 2019, as a result of which he did not receive any severance payments or benefits. For Mr. Riley, the actual amount of compensation received or receivable as a result of his termination following Fiscal 2019 is reported below under “Change in Control Payments.” The actual payments received or receivable by Mr. Poe and Mr.
Riley are described under “Compensation Discussion & Analysis — Other Compensation — Termination and Change in Control
Agreements.” The table excludes (i) amounts accrued through the end of Fiscal 2019 that would be paid in the normal course of continued employment, such as accrued but unpaid salary, (ii)
benefits generally available to all of our salaried employees, and (iii) stock options with a strike price below the closing stock price on December 31, 2019. The amounts reflected for the acceleration of the FY 2017 Awards, FY
2018 Awards and Transition Period awards assume that these awards would be settled at target levels. The amounts disclosed assume that the price of our Common Stock was $8.51, which was the closing price of our stock
on December 31, 2019. Therefore, such amounts and disclosures should be considered “forward looking statements.”
Name
|
Benefit
|
Termination for Cause
($)
|
Termination Without Cause or by Executive for Good Reason
($)
|
Termination by Executive Without Good Reason
($)
|
|
|
|
Mr.
Metcalf
|
Non-CIC
Severance
|
—
|
6,132,216
|
—
|
—
|
—
|
—
|
|
Transition
Period Award
|
—
|
—
|
—
|
1,295,002
|
—
|
1,295,002
|
|
Life
Insurance
|
—
|
—
|
—
|
—
|
—
|
3,800,000
|
Mr. Lee
|
Non-CIC Severance
|
—
|
974,360
|
—
|
—
|
—
|
—
|
|
Accelerated RSU Vesting
|
—
|
—
|
—
|
845,724
|
—
|
845,724
|
|
Awards Vesting (PSU)
Life Insurance
|
—
—
|
—
—
|
—
—
|
96.416
—
|
—
—
|
96,416
560,000
|
Mr.
Buckley
|
Transition
Period Awards
Life Insurance
|
—
—
|
—
—
|
—
—
|
800,634
—
|
—
—
|
800,634
500,000
|
Ms. Theroux(a)
|
Non-CIC Severance
|
—
|
1,799,887
|
—
|
—
|
—
|
—
|
|
Accelerated FY 2017
|
—
|
163,238
|
—
|
163,238
|
—
|
163,238
|
|
Accelerated FY 2018
|
—
|
—
|
—
|
940,908
|
—
|
940,908
|
|
Transition Period Awards
|
—
|
—
|
—
|
515,475
|
—
|
515,475
|
|
Life Insurance
|
—
|
—
|
—
|
—
|
—
|
450,000
|
(a)
The Merger was a change in control for purposes of Ms.
Theroux’s employment agreement. The severance amount
payable upon a termination without “cause” or by Ms. Theroux for “good reason” therefore reflects severance enhancements equal to an additional $1,127,484 for such terminations occurring within 24 months following a change in control. See “Compensation Discussion & Analysis — Other Compensation — Termination and Change in Control Agreements.”
Change-in-Control Payments
The following table estimates the value of the payments and benefits that each of our Named Executive Officers would
receive if a change in control occurred on December 31, 2019 (the last business day of Fiscal 2019).
The table is intended to provide additional information about the effects of a change in control on the compensation of the Named Executive Officers, and should not be understood to supplement or replace the information provided in the table above,
which represents payments to the Named Executive Officers upon a termination unrelated to a change in control. The Merger was a change in control under the terms of Mr.
Riley’s employment agreement. Therefore, for Mr. Riley, the table sets forth the actual amount of compensation received or receivable as a
result of his termination following Fiscal 2019
(see “Compensation Discussion & Analysis — Other Compensation — Termination and Change in Control
Agreements”). Mr. Poe resigned without
“cause” during 2019, as a result of which he did not receive any severance payments or benefits. Column (A) represents the value of the payments to which each
Named Executive Officer would be entitled upon the occurrence of the change in control, without regard to whether the Named Executive Officer continued to be employed by the Company following a change in control. Column (B) represents the
value of the payments to which each Named Executive Officer would be entitled if the Named Executive Officer’s employment was terminated in connection with the change in control either by the Company without cause or by the Named Executive
Officer for good reason. The payments shown in Column B include the payments in Column A (i.e., the payments in Column (B) are the sum of the “single-trigger” payments shown in Column (A), plus any additional termination benefits
to which the Named Executive Officer would be entitled if he or she were terminated following a change in control). The same exclusions and assumptions applicable to the table in “Narrative to the Summary Compensation Table and Grants of
Plan-Based Awards Table — Quantification of Payments — Termination Payments” were applied to the following table. Accordingly, such amounts and disclosures should be considered “forward looking
statements.”
|
|
(A)
|
(B)
|
Name
|
Benefit
|
|
Change in Control Followed by a Termination Without Cause or by Executive for Good Reason
($)
|
Mr.
Metcalf
|
CIC
Severance
|
—
|
7,617,216
|
|
Transition Period
Awards
|
—
|
1,700,826
|
Mr. Lee
|
CIC Severance
|
—
|
2,437,540
|
|
Transition Period Awards
|
—
|
1,374,297
|
Mr. Riley
|
CIC Severance
|
—
|
5,127,867
|
|
Accelerated RSU
Vesting
|
—
|
208,895
|
|
Accelerated FY 2017 Awards
Vesting (PSU)
|
—
|
506,439
|
Mr. Buckley
|
CIC Severance
|
—
|
300,375
|
|
Transition Period Awards
|
—
|
1,051,530
|
Ms. Theroux
|
CIC
Severance
|
—
|
1,799,887
|
|
Accelerated RSU
Vesting
|
—
|
990,198
|
|
Accelerated FY 2017 Awards
Vesting (PSU)
|
—
|
113,949
|
|
Transition Period
Awards
|
—
|
677,013
|
Pay Ratio Disclosure
Pursuant to Item 402(u) of Regulation S-K and Section 953(b) of the Dodd-Frank Act, presented below is the ratio of the annual total compensation of our CEO, Mr. Metcalf,
to the annual total compensation of our median employee (excluding Mr. Metcalf).
The ratio presented below is a reasonable estimate calculated in a manner consistent with
Item 402(u). The SEC’s rules for identifying the median
employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their
employee populations and compensation practices. As a result,
the pay ratio reported by other companies may not be comparable to the pay ratio reported below, as other companies have different employee populations and compensation practices and may utilize different methodologies, exclusions, estimates, and
assumptions in calculating their own pay ratios.
We identified our median
employee from all full-time and part-time workers who were included as employees on our payroll records as of a determination date of December 31,
2019. The median was identified using base pay, overtime, and
bonuses during Fiscal 2019. International employees’
pay was converted to US dollar equivalents using exchange rates as of the determination date and pay was annualized for any employees hired during the period.
The total compensation earned by Mr. Metcalf during Fiscal 2019 as determined under Item 402 of Regulation S-K, as reported in
the Summary Compensation Table of this proxy statement was $1,976,104. The total compensation earned during the same period as determined under Item 402 of Regulation S-K for our median employee
was $46,453. The ratio of Mr. Metcalf’s total compensation to our median employee’s total compensation for Fiscal 2019 is 43:1.
Compensation of Directors
Directors of Cornerstone who are also employees of Cornerstone do not receive additional compensation for their
service as directors. Non-employee directors of Cornerstone receive compensation in addition to reimbursement for expenses incurred to attend and/or participate in meetings. The following table sets forth a summary of the cash compensation program for our non-employee directors:
Annual Retainer Fee
|
$
|
75,000
|
|
Audit Committee Chair Annual Retainer
Fee
|
$
|
22,500
|
|
Compensation
Committee Chair Annual Retainer Fee
|
$
|
15,500
|
|
Audit Committee Member Annual Retainer
Fee
|
$
|
10,000
|
|
Compensation
Committee Member Annual Retainer Fee
|
$
|
7,500
|
|
Nominating and Corporate Governance
Committee Member Annual Retainer Fee
|
$
|
6,500
|
|
Chair of
Nominating and Corporate Governance Committee
|
$
|
13,500
|
|
Affiliated Transactions Committee Member
Annual Retainer Fee
|
$
|
3,000
|
|
Executive
Committee Member Annual Retainer Fee
|
$
|
3,000
|
|
In addition, through Fiscal 2019, each non-employee
director was entitled to receive a grant of RSUs and/or stock options under the Incentive Plan having an aggregate fair market value of $110,000 on December 15 of each year. These
RSUs generally vest over a one-year period of service, subject to the same acceleration provisions as applied
to the RSUs granted to our NEOs (see “Executive Compensation — Potential Payments upon
Termination or Change in Control — Equity Incentive Awards”). Pursuant to our stock ownership guidelines, our non-employee directors are expected to acquire and hold a number of shares of our common stock having a value equal to
five times (5x) their annual retainer fee. See “Compensation Discussion & Analysis — Stock Ownership Guidelines” for additional information about our stock ownership guidelines. As a result of the Fiscal Year Change, following Fiscal 2019, the annual grant of RSUs and/or stock options to each director will take place on June 15 of each
year.
Our non-employee directors are eligible to participate in our Deferred Compensation Plan and may defer a portion of
their annual and meeting attendance fees, subject to certain specified maximum deferral amounts. See “Executive Compensation — Nonqualified Deferred Compensation” for additional details regarding the terms of the
DCP.
Messrs. Sleeper and Zrebiec assign all of the compensation each would receive for his services as a
director, including any RSUs, to CD&R, LLC.
Fiscal 2019 Director
Compensation Table
The following table provides information concerning the compensation of our
non-employee directors during Fiscal 2019. The Stock Awards were made in respect of Fiscal 2019.
As a result of the Fiscal Year Change, our non-employee directors did not receive an annual grant of
restricted stock awards during Fiscal 2019. Beginning with Fiscal 2020, the annual grant of RSUs and/or stock options to each director will take place on June 15 of each year.
Name
|
Fees Earned or
Paid in Cash
($)(a)(b)
|
Stock Awards
($)(c)
|
Option
Awards
($)(c)
|
All Other
Compensation
($)
|
Total
($)
|
Kathleen J.
Affeldt
|
103,000
|
—
|
—
|
—
|
103,000
|
George L. Ball
|
101,500
|
—
|
—
|
—
|
101,500
|
Gary L.
Forbes
|
103,500
|
—
|
—
|
—
|
103,500
|
John J. Holland
|
94,500
|
—
|
—
|
—
|
94,500
|
Wilbert W. James,
Jr.
|
57,000
|
—
|
—
|
—
|
57,000
|
Daniel Janki
|
58,666
|
—
|
—
|
—
|
58,666
|
Lawrence J.
Kremer
|
32,500
|
—
|
—
|
—
|
32,500
|
John Krenicki
|
99,000
|
—
|
—
|
—
|
99,000
|
George
Martinez
|
88,000
|
—
|
—
|
—
|
88,000
|
Timothy O’Brien
|
81,500
|
—
|
—
|
—
|
81,500
|
Nathan K.
Sleeper
|
85,500
|
—
|
—
|
—
|
85,500
|
Jonathan L. Zrebiec
|
81,750
|
—
|
—
|
—
|
81,750
|
(a) Includes amounts earned during Fiscal 2019 with respect to annual retainer fees, supplemental retainer fees for Committee Chairmen, Board meeting fees and Committee meeting fees for each
non-employee director as more fully explained in the preceding paragraphs.
(b) The amounts reported in the “Fees Earned or Paid in Cash” column for each of Messrs. Sleeper
and Zrebiec represents amounts paid to CD&R, LLC, as assignee of compensation payable to those directors, each of whom is an employee or partner of CD&R, LLC.
(c) As of December 31, 2019, the non-employee
directors held the following outstanding restricted stock awards and stock options: (i) Mr. Forbes (14,163
exercisable Options) and (ii) Mr. Holland (37,259 exercisable Options). Amounts reported for Messrs. Krenicki, Sleeper and Zrebiec represent grants of
restricted Common Stock issued to CD&R, LLC, as assignee of compensation payable to those directors, each of whom is an employee or partner of CD&R, LLC.
Independence and Meetings
On
July 25, 2016, the Company ceased being deemed a “controlled company,” within the meaning in the NYSE Listed Company Manual. Following a one year phase-in, both the Nominating & Corporate Governance Committee and the
Compensation Committee are now entirely comprised of independent directors. As of the date of this proxy statement, the Company’s Board is comprised of a majority of independent directors, as required by the NYSE. For
a description of the transaction resulting in our no longer being deemed a controlled company, please see
“Transactions with Related Persons — CD&R Transactions.”
Our Board determined, after
considering all of the relevant facts and circumstances, that Ms. Affeldt, Mr. Ball, Mr. Forbes, Mr. Holland, Mr. James, Mr. Janki, Mr. Krenicki, Mr. Martinez, Mr.
O’Brien, Mr. Sleeper and Mr. Zrebiec are independent from our management, as
“independence” is defined by the listing standards of the NYSE. For a description of transactions between us and certain members of our Board, please see “Transactions with Related Persons — CD&R
Transactions.”
Our Board met
five times during the fiscal year ended
December 31, 2019. Each of our directors attended 75% or more of the aggregate of the total number of meetings of our Board of Directors held during the period in which he or she was a director and the
total number of meetings held by all board committees on which he or she served during the periods that he or she served. It is our policy to schedule a meeting of our Board of Directors on the date of the Annual Meeting, and we encourage all
of our directors to attend both meetings. All of our then-current directors attended last year’s Annual Meeting.
Our non-management directors meet without the presence of management at regularly scheduled executive sessions. These executive sessions typically occur before or after regularly
scheduled meetings of our Board of Directors. The presiding director of these executive sessions is the Chair of the Nominating and Corporate Governance Committee, if such person is an independent director; otherwise, the Chair of the Audit
Committee serves as presiding director. For information on how you can communicate with our non-management directors, please see “Communications with Our Board.”
Board Committees
Our Board has six standing committees — the Executive Committee, the Audit Committee, the Compensation
Committee, the Nominating and Corporate Governance Committee, the Affiliate Transactions Committee and the Routine Transactions Committee. Below is a table disclosing our Board of Directors and committee compositions as of April 15,
2020.
BOARD AND COMMITTEE APPOINTMENTS
Name
|
Board
|
Class
|
Expiration
|
Audit
|
Compensation
|
Nominating
& Corporate Governance
|
Executive
|
Affiliate Transactions(b)
|
Routine Transactions Committee
|
Kathleen J.
Affeldt
|
Member
|
III
|
2020(a)
|
|
Chair
|
Member
|
Member
|
Member
|
|
George L. Ball
|
Member
|
III
|
2020(a)
|
Member
|
Member
|
|
Member
|
Member
|
Chair
|
Gary L. Forbes
|
Member
|
II
|
2022
|
Chair
|
|
|
Member
|
Member
|
|
John J. Holland
|
Member
|
I
|
2021
|
Member
|
|
Member
|
|
Member
|
|
Wilbert W. James,
Jr.
|
Member
|
I
|
2021
|
|
Member
|
|
|
Member
|
|
Daniel Janki
|
Member
|
I
|
2021
|
Member
|
|
|
|
Member
|
|
John Krenicki
|
Member
|
I
|
2021
|
|
Member
|
Chair
|
Chair
|
|
|
George Martinez
|
Member
|
II
|
2022
|
Member
|
|
|
|
Member
|
|
James S. Metcalf
|
Chairman
|
II
|
2022
|
|
|
|
Member
|
Member
|
Member
|
Timothy O’Brien
|
Member
|
III
|
2020(a)
|
|
|
Member
|
|
|
|
Nathan K. Sleeper
|
Member
|
III
|
2020(a)
|
|
Member
|
|
Member
|
|
|
Jonathan L. Zrebiec
|
Member
|
II
|
2022
|
|
Member
|
|
|
|
Member
|
|
|
(a)
|
|
Ms. Affeldt
and Messrs. Ball, O’Brien and Sleeper are Class
III directors. The Class III directors are to be elected at the Annual Meeting for a term expiring at the Annual Meeting to be held
in 2023.
|
|
|
|
|
(b)
|
|
No chair exists for the Affiliate Transactions Committee.
|
|
|
|
|
Executive
Committee
The Executive Committee is generally authorized to act on behalf of our Board between scheduled
meetings of our Board of Directors, except as provided by the Stockholders Agreement and by our By-Laws, to the fullest extent permitted by Delaware corporate law. However, the Executive Committee does not have the authority to approve
amendments to our charter or By-Laws or specified extraordinary corporate transactions. The Executive Committee operates under a charter adopted by our Board of Directors, a copy of which is available on our website at www.cornerstonebuildingbrands.com under the heading “Investors — Committees & Charters.”
As of the end of Fiscal 2019, the members of the Executive Committee were Mr. Krenicki, Mr. Forbes, Mr. Metcalf, Ms. Affeldt, Mr. Ball and Mr. Sleeper, with Mr. Krenicki serving as
Chairman. The Executive Committee did not meet during the fiscal year ended December 31, 2019.
Audit Committee
The Audit
Committee assists our Board in fulfilling its responsibilities relating to our corporate accounting and reporting practices and the quality and integrity of our financial reports. The Audit Committee assists the Board in monitoring the
integrity of our financial statements, the independence, qualifications and performance of our independent auditors; the performance of our internal audit function, our compliance with legal and regulatory requirements, and the preparation of our
Audit Committee’s report included in our proxy statements. In discharging its duties, our Audit Committee has the authority to retain independent legal, accounting and other advisors and has the sole authority to appoint, retain, replace
or terminate the independent auditor.
As of the end of Fiscal 2019, the members of the Audit Committee were Mr. Ball, Mr. Forbes, Mr. Holland, Mr. Janki and Mr. Martinez, with Mr. Forbes serving as Chairman. The Audit Committee met four times during the fiscal year ended December 31,
2019. The Board appointed Mr. Janki to the Audit
Committee, effective May 23, 2019.
The Audit Committee is composed solely of directors who are not our officers or employees, have the requisite
financial literacy to serve on the Audit Committee, as determined by our Board of Directors, and whom our Board of Directors has determined are “independent” under the listing standards of the NYSE and the rules and regulations of the
SEC, including the heightened independence standards for Audit Committee members under Section 303A.06 of
the NYSE Listed Company Manual, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10A3 promulgated thereunder.
Our Board of Directors, after reviewing all of the relevant facts, circumstances and attributes, has determined that
Mr. Forbes, the Chair of our Audit Committee, is an “audit committee financial expert” as defined by Item 407 (d)(5)(ii) of Regulation S-K.
The Audit Committee operates under a written Audit Committee Charter adopted by our Board of Directors, a copy of which is available on our website at www.cornerstonebuildingbrands.com under the heading “Investors — Committees & Charters.”
Compensation Committee
The Compensation Committee assists our Board in fulfilling its responsibilities relating to our compensation
practices. The Compensation Committee discharges the Board’s responsibilities relating to compensation of directors, officers and senior managers, oversees, evaluates, and advises our Board regarding Cornerstone’s overall
compensation policies and structure, including benefit plans and programs, prepares reports on executive compensation required for inclusion in our proxy statements and discusses these reports with our management. The Compensation Committee is
permitted to delegate its authority on all matters for which it is responsible to subcommittees consisting of one or more members. The Compensation Committee met four
times during the fiscal year ended December 31, 2019.
As of the end of Fiscal 2019, the members of the Compensation Committee were Ms. Affeldt, Mr. Ball, Mr. Krenicki, Mr. James, Mr. Sleeper and Mr. Zrebiec, with Ms. Affeldt
serving as Chairperson. The Board appointed Messrs. James and Zrebiec to the Compensation Committee, effective
May 23, 2020. The Compensation
Committee is composed solely of directors who are not our officers or employees.
The Compensation
Committee operates under a Compensation Committee Charter adopted by our Board, a copy of which is available on our website at www.cornerstonebuildingbrands.com
under the heading “Investors — Committees & Charters.”
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is responsible, subject to and in accordance with the Stockholders Agreement, for identifying or assisting in the identification of, and
recommending qualified candidates to serve on our Board and, subject to and in accordance with the Stockholders Agreement, recommending to our Board the director nominees to be elected by our stockholders at each annual or special meeting. In
addition, the Nominating and Corporate Governance Committee is responsible for developing and advising our Board with respect to guidelines for the governance of Cornerstone, including monitoring compliance with those guidelines, as well as
overseeing succession planning and the evaluation and review of the performance of our Board.
As of the
end of Fiscal 2019, the members of the Nominating and Corporate Governance Committee were Ms. Affeldt, Mr. Holland, Mr. Krenicki and Mr.
O’Brien, with Mr. Krenicki
serving as Chairman. The Nominating and Corporate Governance Committee met four times during the fiscal year ended December
31, 2019.
The Nominating and Corporate Governance Committee operates under a Nominating and Corporate Governance Committee
Charter adopted by our Board, a copy of which is available on our website at www.cornerstonebuildingbrands.com
under the heading “Investors — Committees & Charters.” Our Corporate Governance Guidelines adopted by our Board, a copy of which is available at our website at www.cornerstonebuildingbrands.com under the heading “Investors — Committees & Charters,” include the
criteria our Board believes are important in the selection of director nominees.
Pursuant to and in
accordance with the Stockholders Agreement, for so long as the CD&R Investors own at least 7.5% of the outstanding shares of Common Stock, the CD&R Investors are entitled to nominate for election, fill vacancies and appoint replacements for
a number of Board members in proportion to the CD&R Investors’
percentage beneficial ownership of outstanding Common Stock, but never to exceed one less than the number of independent,
non-CD&R-affiliated directors serving on the Board (the “CD&R Investor Director Number”). At each annual meeting or special meeting of stockholders at which any directors of Cornerstone are to be elected, we will take all
corporate and other actions necessary to cause the applicable CD&R Investors’ nominees or designees to be nominated for election to our Board and we will solicit proxies in favor of the election of such nominees or designees to be elected
at such meeting.
Further, pursuant to and in accordance with the Stockholders Agreement, for so long as
stockholders unaffiliated with the CD&R Investors own in the aggregate at least 7.5% of the voting power of Cornerstone, our Board at all times must be comprised of (i) the Chief Executive Officer of Cornerstone, (ii) such number of CD&R
Investor Directors (as defined in the Stockholders Agreement), not to exceed the CD&R Investor Director Number, (iii) directors who will not be appointed or designated by the CD&R Investors and will be independent of both the CD&R
Investors and Cornerstone (the “Independent Non-CD&R Investor Directors”), and (iv) up to one (1) additional director that is not a CD&R Investor Director or the Chief Executive Officer of Cornerstone (the “Unaffiliated
Shareholder Director”), who upon election would not be an Independent Non-CD&R Investor Director, provided that if the election or appointment of such person would have the effect of reducing the CD&R Investor Director Number, no such
person shall be nominated or appointed without the approval of the CD&R Investor Directors.
Further,
pursuant to the Stockholders Agreement, for so long as the CD&R Investor Voting Interest (as defined in the Stockholders Agreement) is at least 20% of the voting power of Cornerstone, the CD&R Investors are entitled to representation
proportionate to the CD&R Investor Voting Interest (rounded to the nearest whole number) on all committees of the Board, provided that, notwithstanding the foregoing, the CD&R Investors are entitled to have a minimum of one (1) CD&R
Investor Director serving on each committee of the Board, subject to applicable restrictions set forth in the Stockholders Agreement, applicable law and New York Stock Exchange rules.
Pursuant to the Stockholders Agreement, the CD&R Directors who are members of the Nominating and Corporate
Governance Committee (or, if none serve thereon, the remaining CD&R Directors or, if no CD&R Directors remain in office, the CD&R Investors) have the right to designate the CD&R Investor Director(s) to serve as members of a board
committee, and the Unaffiliated Shareholder Directors shall have the right to designate the Unaffiliated Shareholder Director to serve as a member of a committee, in each case in accordance with Section 3.1(e)(i) of the Stockholders
Agreement.
In identifying and evaluating nominees for director other than directors appointed by the
CD&R Investors pursuant to the Stockholders Agreement, the Nominating and Corporate Governance Committee first looks at the overall size and structure of our Board to determine the need to add or remove directors and to determine if there are
any specific qualities or skills that would complement the existing strengths of our Board.
The Board
codified standards for directors in the Board’s Corporate Governance Guidelines and Nominating and Corporate Governance Committee Charter. The Corporate Governance Guidelines provide that our Board of Directors should encompass a diverse
range of talent, skill and expertise sufficient to provide sound and prudent guidance with respect to our operations and interests. The Corporate Governance Guidelines also provide that at all times a majority of the Board must be
“independent directors” as defined from time to time by the listing requirements of the NYSE and any specific requirements established by the Board. Each director also is expected to:
-
exhibit high personal and professional ethics, strength of character, integrity, and values;
-
possess commitment and independence of thought
and judgment;
-
possess education,
experience, intelligence, independence, fairness, practical wisdom and vision to exercise sound, mature judgments;
-
use his or her skills and experiences to
provide independent oversight of our business;
-
possess personality, tact, sensitivity, and perspective to participate in deliberations in a constructive and collegial manner;
-
be willing to devote sufficient time to
carrying out his or her duties and responsibilities effectively;
-
devote the time and effort necessary to learn our business; and
-
represent the long-term interests of all
stockholders.
In addition, our Board has determined that the Board as a whole must have the right
diversity, mix of characteristics and skills for the optimal functioning of its oversight of Cornerstone. To that end, our Board places a premium on its members’ professional experience in positions such as a senior manager, chief
operations officer, chief financial officer, or chief executive officer of a relatively complex organization such as a corporation, university, or foundation. Ultimately, our Board believes it should be comprised of persons with skills in
areas that may include some of the following: finance; manufacturing; sales and markets; strategic planning; development of strategies for sustainability; human resources; safety; legal; international business; and information technology. The
age at the time of election of any nominee for director should be such to assure a minimum of three years of service as a director.
In addition to the targeted skill areas, the Nominating and Corporate Governance Committee looks for a strong record of achievement in key knowledge areas that it believes are critical for
directors to add value to our Board, including:
-
Strategy — knowledge of our business
model, the formulation of corporate strategies, and knowledge of key competitors and global markets;
-
Leadership — skills in coaching senior
executives and the ability to assist the CEO in his development;
-
Organizational Issues — understanding of strategy implementation, change management processes, group effectiveness, and organizational design;
-
Relationships — understanding how to
interact with customers, vendors, governments, investors, financial analysts, and communities in which we operate;
-
Functional — understanding of financial
matters, financial statements and auditing procedures, legal issues, information technology, and marketing; and
-
Ethics — the ability to identify and
raise key ethical issues concerning our activities and senior management as they affect the business community and society.
As part of its periodic self-assessment process, our Board annually determines the diversity of specific skills and experiences necessary for the optimal functioning of our Board in its
oversight of Cornerstone over both the short and long term.
The Corporate Governance Guidelines state our
policy regarding the director selection process that requires the Nominating and Corporate Governance Committee to review the skills and characteristics that the Board seeks in its members individually and in relation to the composition of our Board
as a whole. As part of this process, the Board will assess the skill areas currently represented on our Board and those skill areas represented by directors expected to retire or leave our Board in the near future against the target skill
areas established annually by our Board, as well as recommendations of directors regarding skills that could improve the overall quality and ability of our Board to carry out its function.
The Nominating and Corporate Governance Committee then establishes the specific target skill areas, characteristics
or experiences that are to be the focus of a director search, if necessary. Specific qualities or experiences could include matters such as experience in our industry, financial or technological expertise,
experience in situations comparable to ours (e.g., growth companies, companies that have grown through acquisitions, or companies that have restructured their organizations successfully),
leadership experience and relevant geographical experience. The Board’s current composition reflects diversity in skills and experiences.
The Nominating and Corporate Governance Committee uses multiple sources for identifying and evaluating nominees for directors other than directors appointed by the CD&R Investors pursuant
to the Stockholders Agreement, including referrals from our current directors and management, as well as input from third-party executive search firms. The Chair of the Nominating and Corporate Governance Committee and our Chairman of the
Board will then interview qualified candidates. Qualified candidates are then invited to meet the remaining members of the Nominating and Corporate Governance Committee. The remaining directors also have an opportunity to meet and
interview qualified candidates. The Nominating and Corporate Governance Committee then determines, based on the background information and the information obtained in the interviews, whether to recommend to the Board that a candidate be
nominated to our Board.
The Nominating and Corporate Governance Committee will consider qualified nominees
recommended by stockholders. Stockholders may submit recommendations to the Nominating and Corporate Governance Committee in care of our Chairman of the Board and Corporate Secretary at our address set forth on page one of this proxy statement
in the form and timing provided in our By-Laws. Subject to the requirements of the Stockholders Agreement described above, nominees for director who are recommended by our stockholders will be evaluated in the same manner as any other nominee
for director.
Nominations by stockholders for seats on the Board not required to be filled by the CD&R
Investors’ designees may also be made at an annual meeting of stockholders in the manner provided in our By-Laws. Our By-Laws provide that a stockholder entitled to vote for the election of directors may make nominations of persons for
election to our Board at a meeting of stockholders by complying with required notice procedures. To be timely, nominations must be received at our principal executive offices not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year’s annual meeting. If,
however, the date of the annual meeting is more than 30 days before or more than 70 days after such anniversary date, notice by the stockholder must be delivered not earlier than the close of business on the 120th day prior to the annual meeting and not later than the close of business on the later of the
90th day prior to such annual meeting or the 10 day following the day on which the
public announcement of the date of such meeting is first made by us.
The notice must specify:
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as to each person the stockholder proposes to nominate for election or re-election as a director:
the name, age, business address and residence
address of the person;
the principal occupation or employment of the person;
the class and number of shares of our capital
stock that are owned of record or beneficially by the person on the date of the notice; and
any other information relating to the person that is required to be disclosed in solicitations for proxies with respect to nominees for election as directors pursuant to Section 14 of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”); and
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as to the stockholder giving the
notice:
the name and record address of the stockholder and any other stockholder known by that stockholder to be supporting the nominee; and
the class and number of shares of our capital stock that are owned of record or beneficially by the stockholder making the nomination and by any other supporting stockholders.
We may require that the proposed nominee furnish us with other information as we may reasonably request to assist us
in determining the eligibility of the proposed nominee to serve as a director. At any meeting of stockholders, the presiding officer may disregard the purported nomination of any person not made in compliance with these procedures.
Affiliate Transactions Committee
The Affiliate Transactions Committee is responsible for reviewing, considering and approving certain transactions
between Cornerstone and its controlled affiliates, on the one hand, and the CD&R Investors and their affiliates, on the other hand. This committee is made up of (x) the Unaffiliated Shareholder Directors then in office and (y) one CD&R
Investor Independent Director (as defined in the Stockholders Agreement), if a CD&R Investor Independent Director is then serving on the Board, and otherwise, the Chief Executive Officer of the Company serving as a director on the Board.
As of the end of Fiscal 2019, the members of the Affiliate Transactions Committee were Ms. Affeldt, Mr. Ball, Mr. Forbes, Mr. Holland, Mr.
James, Mr. Janki, Mr. Martinez and Mr. Metcalf. The Board appointed Messrs. James and Janki to the Affiliate Transactions Committee, effective May 23,
2020. The Affiliate Transactions Committee has no chair. The Affiliate Transactions Committee did not meet during the fiscal year ended December 31, 2019.
The Affiliate Transactions Committee operates under an Affiliate Transactions Committee Charter adopted by our Board
of Directors, a copy of which is available on our website at
www.cornerstonebuildingbrands.com under the heading “Investors — Committees & Charters.”
Routine Transactions Committee
On December 12, 2018, the Board delegated certain responsibilities and duties relating to certain matters of
Cornerstone to a Routine Transactions Committee to assist the Board in fulfilling certain of the Board’s oversight responsibilities. The Routine Transactions Committee is responsible for reviewing, considering and approving the following
proposed transactions: (i) expenditures of capital or other assets outside the ordinary course and not part of the annual capital expenditure plan; (ii) mergers or acquisitions; (iii) non-ordinary course asset divestitures; (iv) any non-ordinary
course joint ventures or similar arrangements with third-parties; and (v) certain derivative contracts used for risk management. On February 27, 2019, the Board further delegated to the Routine Transactions Committee the authority to oversee
the Company’s Derivatives Use Policy, which governs the Company’s objectives, policies, procedures and practices to manage exposure to interest rate, currency and commodity risk positions. As of the end of Fiscal 2019, the members of the Routine Transactions Committee are Mr. Ball, Mr. Metcalf and Mr. Zrebiec, with Mr. Ball serving as Chairperson.
Our
Board has adopted Corporate Governance Guidelines to address significant corporate governance issues. A copy of these guidelines is available at our website at www.cornerstonebuildingbrands.com under the heading “Investors — Committees & Charters.” These guidelines
provide a framework for our corporate governance initiatives and cover topics including, but not limited to, director qualification and responsibilities, Board composition, director compensation and management and succession planning. The
Nominating and Corporate Governance Committee is responsible for overseeing and reviewing the guidelines and reporting and recommending to our Board any changes to the guidelines. You may obtain copies of the charters for our Audit Committee,
Compensation Committee, Executive Committee, Affiliate Transactions Committee and our Nominating and Corporate Governance Committee, and our Corporate Governance Guidelines, free of charge, from our website at www.cornerstonebuildingbrands.com under the heading “Investors — Committees & Charters” or by writing to us
at Cornerstone Building Systems, Inc., 5020 Weston Parkway, Suite 400, Cary, North Carolina 27513, Attention: Investor Relations, Tina Beskid.
Our Board has adopted a Code of Business
Conduct and Ethics, which is designed to help officers, directors and employees resolve ethical issues in an increasingly complex business environment. The Code of Business Conduct and Ethics is applicable to all of our officers, directors and
employees, including our principal executive officer, principal financial officer, principal accounting officer or controller and other persons performing similar functions.
The Code of Business Conduct and Ethics covers topics, including but not limited to, conflicts of interest,
confidentiality of information and compliance with laws and regulations. The Code of Business Conduct and Ethics also provides that our directors who are employed by CD&R, LLC or any other affiliate of the CD&R Investors will not be
deemed in violation of our Code of Business Conduct and Ethics as a result of any investment by the CD&R Investors, insofar as such investment, affiliate transaction and information access is not prohibited under the terms of the Company’s
stockholders agreement with the CD&R Investors and is otherwise in accordance with Cornerstone’s Certificate of Incorporation, By-Laws and the laws of the State of Delaware.
Our Code of Business Conduct and Ethics is available, free of charge, on our website, along with other corporate
governance information, at www.cornerstonebuildingbrands.com under the heading “Investors — Committees & Charters.” You may also obtain
a copy by writing to Investor Relations at the address above.
Waivers from our Code of Business Conduct
and Ethics are discouraged, and any waivers from the Code of Business Conduct and Ethics that relate to our principal executive officer, principal financial officer, principal accounting officer or controller and other persons performing similar
functions or any other executive officer or director must be approved by our Nominating and Corporate Governance Committee, which is composed solely of directors whom we believe are independent of management, and will be disclosed to the fullest
extent as required by law and will be posted on our website at
www.cornerstonebuildingbrands.com within four business days of any such waiver.
The Board’s Role in Risk Oversight
One of the Board’s functions is oversight of risk management at Cornerstone. Cornerstone recognizes that
certain risks are inherent in the operation of an integrated manufacturer of metal buildings and metal building components. The Board and management consider “risk” for these purposes to be the possibility that an undesired event
could occur that creates losses or adversely interferes with opportunity gains.
Management is responsible
for the day-to-day management of the risks we face, while the Board, as a whole but primarily through the Audit Committee, oversees and reviews certain aspects of our risk management efforts. Specific risk management activities performed by
management include: identifying and prioritizing risk and risk controls related to significant business activities; monitoring the emergence and onset of certain key risks; and reviewing and determining the sufficiency of risk identification, the
balance of potential risk to potential reward, the appropriate manner in which to control risk, and the support of the programs discussed below and their risk to company strategy. The Board implements its risk oversight responsibilities by
having management provide periodic briefing and informational sessions on the significant voluntary and involuntary risks that the Company faces and
how the Company is seeking to control risk if and when appropriate. In most cases, the Audit Committee of the Board oversees issues related to internal control over financial reporting and the Compensation Committee oversees risks related to compensation programs, as
discussed in greater detail herein. Presentations and other information for the Board and Board committees generally identify and discuss relevant risk and risk control; and the Board members assess and oversee the risks as a part of their
review of the related business, financial, or other activity of the Company.
Risk Analysis of Our Compensation Plans
The Compensation Committee has reviewed our compensation policies as generally applicable to our employees and
believes that our policies do not encourage excessive and unnecessary risk-taking, and that the level of risk that they do encourage is not reasonably likely to have a material adverse effect on Cornerstone.
In Fiscal 2019, members of our management team conducted an assessment of the risks arising from our compensation
policies and practices. The team reviewed and discussed the design features, characteristics, performance metrics at the Company and segment levels and approval mechanisms of total compensation for all employees, including salaries, incentive plans, sales incentives, PSUs and restricted stock unit awards, to
determine whether any of these policies or programs could create risks that are reasonably likely to have a material adverse effect on us.
Our compensation philosophy and culture support the use of base salary, performance-based compensation, and retirement plans that are generally uniform in design and operation throughout
Cornerstone and with all levels of employees. These compensation policies and practices are centrally designed and administered, and are substantially identical between our business divisions. Field sales personnel are paid primarily on
a sales commission basis, but all of our officers are paid under the programs and plans for non-sales employees. In addition, the following specific factors, in particular, reduce the likelihood of excessive risk-taking:
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Our overall compensation levels are competitive with the market.
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Our compensation mix is balanced among (i)
fixed components like salary and benefits, (ii) annual incentives that reward our overall financial performance, business unit financial performance, operational measures and individual performance, and (iii) a portfolio approach for stock awards,
primarily consisting of a mix of service-based and performance-based equity awards.
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An important portion of our executive compensation for our NEOs is tied to how our stock price performs over a period of multiple years. As described in “Compensation Discussion & Analysis” above, 50% of the value of annual grants of long-term incentive awards granted to our NEOs in Fiscal 2018 and Fiscal 2020 consisted of PSUs, which vest depending upon the satisfaction of performance goals through the end of the
specified multi-year performance period. This minimizes the benefit of a temporary spike in stock price and the possibility that an executive would be motivated to create short-term gain in the stock price without regard to long-term
performance.
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The Compensation
Committee has discretion to adjust performance-based awards when it determines that such adjustments would be appropriate based on our interests and the interests of our stockholders.
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Any additions or changes to stock awards or
bonus levels must be approved by Cornerstone’s Executive Vice President, Corporate Marketing and Chief Human Resources Officer, as well as senior management.
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Executive officers are subject to certain
holding requirements and our Clawback Policy, Insider Trading Policy, and policies prohibiting the pledging of Company securities or engaging in hedging transactions involving Company securities owned by our executive officers and non-employee
directors. See “Compensation Discussion & Analysis — Compensation Philosophy and Objectives of Cornerstone’s Compensation Program.”
In summary, although a significant portion of the compensation provided to Named Executive Officers is
performance-based, we believe our compensation programs do not encourage excessive and unnecessary risk taking by executive officers (or other employees) because these programs are designed to encourage employees to remain focused on both our short-
and long-term operational and financial goals. We set performance goals that we believe are reasonable in light of our past performance and market conditions.
Historic restricted stock and stock option awards are subject to time-based vesting conditions, which retain value even in a depressed market, and performance share unit awards are subject to
vesting based on sustained increases in stock price or satisfaction of other performance metrics over performance periods longer than a single year, and so executives are less likely to take unreasonable risks.
With respect to our historic annual equity grants under the Incentive Plan, which included a fixed and variable
component, assuming achievement of at least a minimum level of performance, payouts resulted in some compensation at levels below full target achievement, in lieu of an “all or nothing” approach.
Based on these considerations, the Compensation Committee determined that any risks arising from our compensation
policies and practices are not reasonably likely to have a material adverse effect on us.
Our Board currently combines the role of chairman of the board with the role of chief executive officer, coupled with a Lead Director position to further strengthen the governance
structure. The Board believes this provides an efficient and effective leadership model for Cornerstone at this time. Our Board believes combining the chairman and CEO roles fosters clear accountability, effective decision-making, and
alignment on corporate strategy.
To assure effective independent oversight, the Board has adopted a number
of governance practices, including:
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a strong, independent, clearly defined presiding director role (see below for a full description of the role);
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the opportunity for executive sessions of the
independent directors after every Board meeting; and
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annual performance evaluations of the chairman and CEO by the independent directors.
However, no single leadership model is right for all companies and at all times. The Board recognizes that, depending on the circumstances, other leadership models, such as a separate
independent chairman of the board, might be appropriate in the future. Accordingly, the Board periodically reviews its leadership structure.
The Lead Director recommends to the Board an appropriate process by which a new chairman and chief executive officer will be selected. The Board has no required procedure for executing
this responsibility because it believes that the most appropriate process will depend on the circumstances surrounding each such decision.
A key responsibility of the CEO and our Board of Directors is ensuring that an effective process is in place to provide continuity of leadership over the long term at all levels in
Cornerstone. Each year, succession planning reviews are held at every significant organizational level of Cornerstone, culminating in a full review of senior leadership talent by the independent directors. During this review, the CEO and
the independent directors discuss future candidates for senior leadership positions, succession timing for those positions, and development plans for the highest-potential candidates. This process ensures continuity of leadership over the long
term, and it forms the basis on which we make ongoing leadership assignments. It is a key success factor in managing the long planning and investment lead times of our business.
In addition, the CEO maintains in place at all times, and reviews with the independent directors, a confidential plan
for the timely and efficient transfer of his or her responsibilities in the event of an emergency or his or her sudden incapacitation or departure.
Any stockholder or interested party who wishes to communicate with our Board or any specific directors, including non-management and independent directors, may write to:
Board of Directors
Cornerstone Building Brands, Inc.
5020 Weston Parkway, Suite 400
Cary, North Carolina 27513
Depending on the subject matter, management will:
-
forward the communication to the director or
directors to whom it is addressed (for example, if the communication received pertains to questions, concerns or complaints regarding accounting, internal accounting controls and auditing matters, it will be forwarded by management to the Chair of
the Audit Committee for review);
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attempt to handle the inquiry directly, for
example where it is a request for information about us or our operations or it is a stock-related matter that does not appear to require direct attention by our Board or an individual director; or
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not forward the communication if it is
primarily commercial in nature or if it relates to an improper or irrelevant topic (in accordance with the explicit instructions of our non-management directors).
At each meeting of our Board, our Chairman of the Board presents a summary of all communications received since the
last meeting of our Board that were not forwarded and makes those communications available to any director on request.
Section 16(a) of the
Exchange Act requires our directors and officers and persons who beneficially own more than 10% of any of our equity securities to file initial reports of ownership and reports of changes in ownership with the SEC. Our employees prepare these
reports for our directors and executive officers who request it on the basis of the information obtained from them and from Cornerstone’s records. Our directors and officers are required by the Exchange Act to furnish us with copies of
all Section 16(a) forms they file.
To the Company’s knowledge, based solely on our review of the
copies of the forms received by us with respect to Fiscal 2019, or written representations from the reporting
persons, we believe that all Section 16(a) executive officers, directors and greater than 10% beneficial stockholders of Cornerstone complied with applicable Section 16(a) requirements during Fiscal 2019; except that one report, covering one transaction, was filed late by Mr. Lee.
Policies and Procedures
The
Nominating and Corporate Governance Committee has approved and adopted a written statement of policy and procedures with respect to related party transactions. This policy covers the review, approval or ratification of transactions between us
and “related parties” (generally, directors, executive officers and employees required to file reports under Section 16 of the Exchange Act and their immediate family members, beneficial owners of 5% or more of any class of our
securities, and any entity in which any such persons are employed, are principals, partners or hold a similar position or in which they have a beneficial interest of 5% or more). The policy covers transactions in which Cornerstone and any
related party are participants in which a related party has a material interest, other than (1) transactions between us and affiliates of CD&R, LLC, which are evaluated by the Affiliate Transactions Committee pursuant to the guidelines in the
Stockholders Agreement, (2) transactions involving less than $25,000
when aggregated with all similar transactions, and (3) certain exceptions for the employment of executive officers, director compensation, employees of the related party and transactions in
which all stockholders receive proportional benefits. The policy generally requires that any related party transaction be approved by the Nominating and Corporate Governance Committee or its Chairman in advance of the consummation or material
amendment of the transaction. Under the policy, prior to entering into a related party transaction, a related party must make full written disclosure of all of the facts and circumstances relating to the transaction to our Chief Financial
Officer or General Counsel, who must assess this information and decide whether it is a related party transaction. If either of the Chief Financial Officer or General Counsel makes this determination, they must submit the transaction to the
Nominating and Corporate Governance Committee or to its Chairman. The Nominating and Corporate Governance Committee or its Chairman will approve such transaction only if, in its good faith determination, it is in, or is not inconsistent with,
the best interests of Cornerstone and its stockholders. In the event a transaction is not identified as a related party transaction in advance, it will be submitted promptly to the Nominating and Corporate Governance Committee or the Chairman
thereof, and such committee or Chair, as the case may be will evaluate the transaction and evaluate all options, including but not limited to ratification, amendment or termination of the transaction. In addition, certain transactions with
related stockholders may be subject to the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”). Section 203 of the DGCL prohibits certain publicly held Delaware corporations from engaging in a business
combination with an interested stockholder for a period of three years following the time such person became an interested stockholder unless the business combination is approved in a specified manner. Generally, an interested stockholder is a
person who, together with its affiliates and associates, owns 15% or more of the corporation’s voting stock, or is affiliated with the corporation and owns or owned 15% of the corporation’s voting stock within three years before the
business combination.
The Affiliate Transactions Committee, which is further described in “Board of
Directors — Board Committees — Affiliate Transactions Committee,” is responsible for reviewing, considering and approving certain transactions between Cornerstone and its controlled affiliates, on the one hand, and the CD&R
Investors and their affiliates, on the other hand. This committee is made up of (x) the Unaffiliated Shareholder Directors then in office and (y) one CD&R Investor Independent Director, if a CD&R Investor Independent Director is then
serving on the Board, and otherwise, the Chief Executive Officer of the Company serving as a director on the Board.
CD&R Transactions
On July
17, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ply Gem and, for certain limited purposes
as set forth in the Merger Agreement, CD&R, in connection with the Merger. Upon consummation of the Merger on November 16, 2018, the Company issued to CD&R Pisces
and the GG Shareholders 39,128,929 and 16,739,403 shares of Common Stock, respectively.
Pursuant to the
terms of the Merger Agreement, on November 16, 2018, the Company entered into the Stockholders Agreement with each of the CD&R Investors and the Golden Gate Investors. Pursuant to the Stockholders Agreement, among other matters, so long as
the CD&R Investors beneficially own at least 7.5% of the outstanding shares of Common Stock, the CD&R Investors are entitled to nominate for election, fill vacancies and appoint replacements for a number of Board members in proportion to the
CD&R Investors’ percentage beneficial ownership of outstanding Common Stock, but never to exceed one less than the number of independent, non-CD&R-affiliated directors serving on the Board. The Stockholders Agreement contains
voting agreements between the Company and each of the Investors, including the requirement that each Investor shall vote all of the shares of Common Stock that it beneficially owns (a) in favor of all director nominees, other than CD&R Investor
Nominees or director nominees proposed by a Golden Gate Investor, nominated by the Board for election by the stockholders of the Company in accordance with the terms of the Stockholders Agreement and the By-Laws, (b) as recommended by the Board, on
any and all (i) proposals relating to or concerning compensation or equity incentives for directors, officers or employees of the Company adopted in the ordinary course of business consistent with past practice, (ii) proposals by stockholders of the
Company, other than a proposal by a CD&R Investor or a Golden Gate Investor, and (iii) proposals the subject matter of which is a CD&R Investor Consent Action (as defined in the Stockholders Agreement), provided that, in respect of clauses
(i) and (iii) only, that the Board’s recommendation is consistent with the CD&R Investors’ exercise of their consent rights provided in the Stockholders Agreement, and (c) not in favor of any transaction constituting, or that would
result in, a Change of Control (as defined in the Stockholders Agreement) that has not been approved by a majority of the Independent Non-CD&R Investor Directors, if the per
share consideration to be received by any CD&R Investor or Golden Gate Investor in connection with such transaction is not equal to, and in the same form as, the per-share consideration to
be received by the shareholders not affiliated with the Investors.
Each CD&R Investor and Golden Gate
Investor will also have preemptive rights to subscribe for any equity securities the Company proposes to issue in accordance with each Investor’s percentage beneficial ownership of Common Stock, subject to customary exceptions. The
CD&R Investors and the Golden Gate Investor Group have each agreed, among other things, that until such time that its percentage beneficial ownership of the outstanding Common Stock falls below 10% and stays below such threshold for a period of
six months, to be subject to standstill, voting and transfer restrictions and limitations, including a prohibition on transferring Common Stock to any third party or group that beneficially owns, or would, after giving effect to such transfer,
beneficially own 10% or more of Common Stock outstanding.
Pursuant to the terms of the Merger
Agreement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”), dated November 16, 2018, with the CD&R Investors and the Golden Gate Investors, pursuant to which the Company granted the
CD&R Investors and the Golden Gate Investors customary demand and piggyback registration rights, including rights to demand registrations and underwritten shelf registration statement offerings with respect to the shares of Common Stock that are
held by the CD&R Investors and the Golden Gate Investors following the consummation of the Merger.
As holders of approximately 49.1% of our outstanding
Common Stock as of the record date, the CD&R Investors will be able to significantly influence matters submitted to stockholders for vote, including the proposals considered in this proxy statement.
As a result of their respective positions with CD&R, LLC and its affiliates, Mr. Krenicki, Mr. Sleeper and
Mr. Zrebiec may be deemed to have
an indirect material interest in certain agreements executed in connection with the Equity Investment and the Merger, including:
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an Indemnification Agreement indemnifying
CD&R and its affiliates against certain liabilities arising out of the transactions with CD&R and certain other liabilities and claims;
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the Merger Agreement;
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the Stockholders Agreement; and
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the Registration Rights Agreement.
For additional information regarding the transactions with CD&R, LLC and the CD&R Investors’
relationship with CD&R, LLC and the above referenced agreements, see “Item 1. Business,” “Item 1A. Risk Factors” and “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as well as Note 13 to our audited financial statements included therein.
Report of the Audit Committee
We have reviewed and discussed with management the audited financial statements contained in Cornerstone Building
Brands, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. We also
have discussed the audited financial statements with Grant Thornton LLP, Cornerstone’s independent
registered public accountants for the fiscal year ended December 31, 2019. Our discussions with Grant Thornton LLP included, among other things, the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board, including the quality of Cornerstone’s
accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements. We also reviewed written disclosures and the letter from Grant Thornton LLP in accordance with applicable requirements of the Public Company Accounting Oversight Board, Grant Thornton LLP’s communications with the Audit Committee concerning independence, and have discussed with
Grant Thornton LLP its independence. Based on those discussions, we are not aware of any relationship
between Grant Thornton LLP and Cornerstone that affects the objectivity or independence of Grant Thornton LLP.
Based on those discussions and review, we recommended to the Board of Directors, and the Board of Directors has approved, that the audited financial statements be included in the Annual Report
on Form 10-K for the fiscal year ended December 31, 2019, for filing with the SEC. We have appointed
Grant Thornton LLP as Cornerstone’s independent auditors for Fiscal 2020, and have submitted the
appointment for stockholder ratification.
We also reviewed and discussed the fees paid to Grant Thornton LLP for the fiscal year ended
December 31, 2019 for audit and non-audit services, which fees and services are described in the proxy
statement under the title “Our Independent Auditors and Fees,” and have determined that the provision of the non-audit services and the fees that we pay for them are compatible with maintaining Grant Thornton LLP’s independence. The Board of Directors recommends that stockholders ratify this selection
at the Annual Meeting.
This report is submitted by the members of the Audit Committee.
GARY L. FORBES (Chair)
GEORGE L. BALL
JOHN J. HOLLAND
DANIEL JANKI
GEORGE MARTINEZ
Our
Independent Registered Public Accounting Firm and Audit Fees
Grant Thornton LLP
served as our independent registered public accountant for Fiscal 2019. Ernst & Young LLP served as
our independent registered public accountants for Fiscal 2018. A representative of Grant Thornton LLP is expected to attend our Annual Meeting and will have the opportunity to make a statement if he so desires and will be available to answer appropriate stockholder questions.
Representatives of Ernst & Young LLP are not expected to attend our Annual Meeting.
Audit Fees. We incurred fees of $2,576,250 during Fiscal 2019 and $931,749 during Fiscal 2018 for Grant Thornton LLP’s independent audit of our annual financial statements, review of the
financial statements contained in our quarterly reports on Form 10-Q and assistance regarding other SEC filings. We incurred fees of $295,000 during Fiscal 2019 and $2,289,285 during Fiscal 2018 for Ernst & Young LLP’s independent audit of
our annual financial statements, review of the financial statements contained in our quarterly reports on Form 10-Q and assistance regarding other SEC filings. All of the audit services provided to us by Grant Thornton LLP and Ernst & Young LLP
during Fiscal 2019 and Fiscal 2018,
respectively, were pre-approved by the Audit Committee.
Audit-Related Fees. We did not incur any audit-related fees
during Fiscal 2019 or 2018.
Tax Fees. We did not incur any tax fees during Fiscal 2019 or 2018.
All Other Fees. We incurred fees of $2,160 during Fiscal
2018 for research tool subscriptions rendered by Ernst & Young LLP. All of the research tool subscriptions provided to us by Ernst & Young LLP during Fiscal 2018 were pre-approved by the Audit Committee.
Pre-Approval Policies and Procedures for Audit and Non-Audit Services
The Audit Committee has developed policies and procedures concerning its pre-approval of the
performance of audit and non-audit services for us by Grant Thornton LLP. These policies and procedures provide that the Audit Committee must pre-approve all audit and permitted non-audit services (including the fees and terms thereof) to be
performed for us by Grant Thornton LLP, subject to the de minimis exception for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act that are approved by the Audit Committee before the completion of the audit. In pre-approving
all audit services and permitted non-audit services, the Audit Committee or a delegated member must consider whether the provision of the permitted non-audit services is compatible with maintaining the independence of Grant Thornton LLP and its
status as our independent auditors.
The Audit Committee has delegated to its members the authority to consider and approve management proposals for the engagement of Grant Thornton LLP to perform certain permitted non-audit
services for fees of up to an aggregate of $25,000 between quarterly meetings of the Audit Committee;
provided that those pre-approvals are presented to the entire Audit Committee at its next regularly scheduled meeting. Management proposals arising between quarterly Audit Committee meetings are presented for pre-approval to the Chair of the Audit
Committee, Mr. Forbes, and in the event of his unavailability, to another member of the Audit Committee.
All of the services performed by Grant Thornton LLP in Fiscal 2019 were approved in advance by the Audit Committee pursuant to the foregoing pre-approval policy and
procedures. Additionally, during Fiscal 2019, Grant Thornton LLP did not provide any services prohibited by the Sarbanes-Oxley Act of 2002.
Stockholder Proposals for the 2021 Annual Meeting
If you wish to present a proposal for inclusion in our proxy material for consideration at our Annual Meeting to be
held in 2021, you must submit the proposal in writing to our Corporate Secretary at the address shown on the
first page of this proxy statement, and we must receive your proposal not later than close of business (5:30 p.m. CDT) on December 30, 2020 (the 120th day prior to April 29, 2021, the anniversary of the date on which this year’s proxy was mailed to you). As the rules of the SEC make
clear, simply submitting a proposal does not guarantee that it will be included. That proposal must comply with Section 8 of Article II of our By-Laws and, if it is to be included in our proxy materials, Rule 14a-8 under the Exchange Act.
Advance Notice Required for Stockholder Nominations and Proposals for the
2021 Annual Meeting
Our By-Laws require timely advance written notice of stockholder nominations of director candidates and of any other
proposals to be presented at an annual meeting of stockholders. Notice will be considered timely for the Annual Meeting of Stockholders to be held in 2021 if it is received not less than 90 nor more than 120 days prior to the first anniversary of the date of the 2020 Annual Meeting of Stockholders. Please refer to the full text of our advance notice by-law provisions for additional information and requirements. A copy of our By-Laws may be
obtained by writing to our Corporate Secretary at the address shown on the first page of this proxy statement. Our By-Laws require our Board or the presiding officer of the Annual Meeting to reject any untimely or non-complying
proposal.
A copy of
our Annual Report to Stockholders, which consists of our Annual Report on Form 10-K for Fiscal 2019, accompanies this proxy statement. These materials do not form part of the material for the solicitation of proxies.
The Form 10-K, which we have filed with the
SEC, is available free of charge on our web site at www.cornerstonebuildingbrands.com and at the SEC’s web site at www.sec.gov.
Upon written request by a stockholder, we will mail, without charge, a copy of our Form 10-K, including the financial statements and financial statement schedules, but
excluding exhibits to the Form 10-K. Exhibits to the Form 10-K are
available upon payment of a reasonable fee, which is limited to our expenses in furnishing the requested exhibits.
We are sending only one copy of our proxy statement and Annual Report to stockholders who share the same last name and address, unless they have notified us that they want to continue
receiving multiple copies. This practice, known as “householding,” is designed to reduce duplicate mailings and save significant printing and postage costs.
If you received a household mailing this year and you would like to have additional copies of our proxy statement and
Annual Report mailed to you or you would like to opt out of this practice for future mailings, we will promptly deliver such additional copies to you if you submit your request to our Investor Relations in writing at 5020 Weston Parkway, Suite 400,
Cary, North Carolina 27513, or call us at (866) 419-0042. You may also contact us in the same manner if you received multiple copies of the Annual Meeting materials and would prefer to receive a single copy in the future.
Our Board
knows of no business other than that described above to be transacted at our Annual Meeting. If other matters requiring a vote of the stockholders arise, the persons designated as proxies will vote the shares of Common Stock represented by the
proxies in accordance with their judgment on those matters.
The information contained in the proxy
statement relating to the occupations and security holdings of our directors and officers and their transactions with us is based upon information received from the individual directors and officers. Unless otherwise indicated, all information
relating to any beneficial owner of more than 5% of any class of our equity securities is based upon information contained in reports filed by that owner with the SEC.
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING
Q: Why are you holding a virtual meeting instead of a physical meeting?
A: Due to concerns regarding the COVID-19 pandemic, and to protect the health and safety of our employees, stockholders and other stakeholders, we have decided that this
year’s Annual Meeting will be a virtual meeting conducted solely online via live webcast.
Q: How do I register for and attend the Annual Meeting?
A:
The Annual Meeting will be a virtual meeting of stockholders conducted solely online via live webcast.
To be admitted to the Annual Meeting’s live webcast, you must register in advance at www.proxydocs.com/CNR prior to the registration deadline of 5:00 p.m.
EDT on May 26, 2020. As part of the registration process, you must enter the control number provided in your proxy card.
After completion of your registration,
further instructions, including a unique link to access the Annual Meeting, will be emailed to you.
You are entitled to participate in the Annual Meeting only if you were a stockholder of record of the Company as of the close of business on the record date of April 15, 2020, or if you hold a valid proxy
for the Annual Meeting. To participate in the Annual Meeting, you will need to review the information
included on your proxy card and the instructions that accompanied your proxy materials.
The Annual Meeting will begin promptly at 10:00 a.m. EDT
on Thursday, May 28, 2020. We encourage you to access the meeting prior to the start time, leaving ample time for the check in.
Q: How do I vote my shares?
A: If you were a stockholder of record at the close of business on April 15, 2020, you may vote at the Annual Meeting, vote by proxy over the telephone, vote by proxy through the Internet or vote by proxy using the proxy card delivered to you. Specific instructions
for voting by each of these methods are included in the proxy card.
Stockholder of Record: Shares Registered in Your Name
If, on April 15, 2020, your shares were registered directly in your name with the Company’s transfer agent, Computershare Trust Company, N.A., then you are a stockholder of record. As a
stockholder of record, you may vote online during the Annual Meeting or vote by proxy using any of the methods noted above. Whether or not you plan to register and attend the Annual Meeting, we urge you to fill out and return the proxy card or vote
by proxy over the telephone or Internet to ensure your vote is counted.
Beneficial Owner: Shares Registered in the Name of a Broker or Bank
If, on April 15, 2020, your
shares were held, not in your name, but rather in an account at a brokerage firm, bank or other similar organization, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you
by that organization. The organization holding your account is considered to be the stockholder of
record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct your broker, bank or other agent regarding how to vote the shares in your account. You are also invited to attend the Annual Meeting. However,
since you are not the stockholder of record, you may not vote your shares at the Annual Meeting unless you request and obtain a valid proxy from your broker, bank or other agent. You must follow the instructions from your broker, bank or other
agent.
By Order of the Board of Directors
/s/ Todd R. Moore
TODD R. MOORE
Executive Vice
President, Chief Legal, Risk &
Compliance Officer and Corporate Secretary
Cary, North Carolina
April 29, 2020
Important Notice Regarding the Availability of
Proxy Materials for the Annual Meeting to Be Held May 28, 2020 via live webcast at www.proxydocs.com/CNR
The Notice of Annual Meeting of Stockholders, our Proxy Statement and our Annual Report to Stockholders are available at www.proxydocs.com/CNR.