COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis (“CD&A") is organized into eight sections:
INTRODUCTION
This CD&A provides information about the material components of our executive compensation programs for our Named Executive Officers ("NEOs"), whose compensation is set forth in the 2017 Summary Compensation Table and other compensation tables contained in this Proxy Statement:
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Scott L. Thompson, Chairman, President and Chief Executive Officer ("CEO");
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Bhaskar Rao, Executive Vice President and Chief Financial Officer ("CFO");
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Richard W. Anderson, Executive Vice President and President, North America;
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David Montgomery, Executive Vice President and President, International;
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Scott J. Vollet, Executive Vice President, Global Operations;
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Barry A. Hytinen, former Executive Vice President and CFO; and
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Jay G. Spenchian, former Executive Vice President and Chief Marketing Officer.
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We had several changes in our senior leadership team in 2017 and early 2018. H. Clifford Buster, III joined the Company in September 2017 as Executive Vice President, Direct to Consumer, North America. Bhaskar Rao was promoted to Executive Vice President and CFO effective October 13, 2017. Prior to that he was serving as Senior Vice President, Finance and Chief Accounting Officer. During 2017, Scott J. Vollet served as Senior Vice President, Global Operations and effective January 1, 2018 was promoted to Executive Vice President, Global Operations. As discussed later in this CD&A, Jay G. Spenchian, our former Executive Vice President and Chief Marketing Officer, left the Company effective February 28, 2017, and Barry A. Hytinen, our former Executive Vice President and CFO, left the Company effective October 13, 2017. Although Mr. Spenchian and Mr. Hytinen are NEOs for 2017 for purposes of SEC rules, they are not subject to our current executive compensation program and did not participate in certain portions of the fiscal 2017 program. Accordingly, in order to preserve an accurate description of our executive compensation programs, references in this CD&A to “executives” or “NEOs” are intended to exclude Mr. Spenchian and Mr. Hytinen unless otherwise noted. For a discussion of the 2017 compensation for Mr. Spenchian and Mr. Hytinen, please refer to the subsection of this CD&A titled "2017 Compensation for Former Named Executive Officers."
In response to direct stockholder feedback during a proxy contest in connection with our 2015 Annual Meeting of Stockholders, our Board of Directors effected several management and compensation changes. These changes included: (i) the recruitment of a highly experienced CEO with a strong record of shareholder value creation, (ii) a realignment of strategy to emphasize profit growth as opposed to sales growth and (iii) a more focused compensation structure that includes an aspirational long-term earnings target that would reward management for delivering exceptional outcomes for shareholders. In addition, in order to create a more focused, efficient management structure, since May 2015 we have streamlined our Board of Directors and refreshed the composition of our Board (with eight Directors leaving the Board and four new Directors joining the Board) and significantly reduced the size of our senior management team. Our executive compensation program resulting from these changes is designed to attract, motivate and retain the leaders of our business. By rewarding our executives for Company performance and execution of key business plans and strategies, our compensation program creates long-term value for our stockholders. This CD&A explains how the Compensation Committee of the Board of Directors made compensation decisions in 2017 and 2018 for our NEOs.
BUSINESS SUMMARY
2017 Key Business Highlights
We develop, manufacture and market bedding products, which we sell globally. Our long-term strategy is to drive earnings growth. Our original key initiatives for 2017 included developing the best bedding products, investing in our brands, expanding our North America business segment margins while maintaining market share, growing our market share in our International business segment and optimizing our worldwide distribution.
During the week of January 23, 2017, we were unexpectedly notified by the senior management of Mattress Firm, Inc. ("Mattress Firm") and representatives of Steinhoff International Holdings Ltd., its parent company, of Mattress Firm's intent to terminate its business relationship with us if we did not agree to considerable changes to our agreements with Mattress Firm, including significant economic concessions. Mattress Firm was a customer within the North America segment and was our largest customer in 2016. Mattress Firm represented 21.4% of our sales for the year ended December 31, 2016. We engaged in discussions to facilitate a mutually agreeable supply arrangement with Mattress Firm. However, we were unable to reach an agreement, and on January 27, 2017, we issued formal termination notices for the sale of all of our products to Mattress Firm, and after a transition period the business relationship ended on April 3, 2017. Following the termination of the Mattress Firm relationship, our key initiatives for 2017 were expanded to include recapturing market share and net sales in the United States.
During 2017, we took steps to manage our cost structure as a result of the termination of the business relationship with Mattress Firm, but in 2017 we managed our business and costs with the primary goal of recapturing market share and net sales, and we expect this will continue in 2018. While the loss of the Mattress Firm relationship had a material impact on our operating results in 2017, we believe the termination of the business relationship is in the long-term interests of our stockholders. However, the Compensation Committee also recognized that the event was highly disruptive to outstanding incentive programs with stretch performance targets that were approved based on the assumption that the Mattress Firm relationship would continue through the performance period. Incentive programs negatively impacted by the termination event include our 2017 annual incentive program, as the performance goals were approved prior to the termination of the relationship, and our “aspirational” grants of performance restricted stock units (“PRSUs”) in 2015 with very challenging performance targets for 2017 and 2018. As a result, the Compensation Committee took action to ensure the executive team, including the NEOs, remained motivated and committed to the successful achievement of the Company’s key initiatives. The actions taken by the Compensation Committee are discussed in greater detail throughout this CD&A and the supporting rationale for the decisions is provided under “2017 Compensation Actions - Rationale for Key Compensation Decisions in 2017” below.
Our net sales decreased 12.0% in 2017 as compared to 2016, driven primarily by the termination of the Mattress Firm relationship. Excluding Mattress Firm, our North America net sales increased $176.6 million, or 9.3%, driven by growth across all of our brands as part of our sales recapture strategy. Our net sales to Mattress Firm decreased by $572.9 million in 2017 as compared to 2016, and this net sales decrease drove many of our other performance metrics for 2017. Net income decreased by 20.3% to $152.7 million, earnings before interest, taxes, depreciation and amortization (“EBITDA”), a non-GAAP financial measure, decreased 20.5% to $403.0 million, and adjusted EBITDA, a non-GAAP financial measure, decreased by 14.0% to $448.5 million.
We provide information regarding EBITDA and Adjusted EBITDA, which are not recognized terms under GAAP and do not purport to be alternatives to net income as a measure of operating performance. For more information about these non-GAAP financial measures, including reconciliations to GAAP information, please refer to
Appendix A
to this Proxy Statement.
2017 Say on Pay Vote Results and Stockholder Outreach
Our executive compensation program received stockholder support and was approved on an advisory basis by approximately 88% of the votes present or represented and entitled to vote at the 2017 Annual Meeting of Stockholders, which was an improvement from the approximately 77% approval received at the 2016 meeting. Members of our management and Board of Directors periodically conduct outreach, either in person or by telephone, with stockholders owning more than a majority of our outstanding stock, including discussions regarding compensation issues. The Compensation Committee will continue to consider future feedback from stockholders and other stakeholders while ensuring the executive compensation program continues to support our business and talent management objectives and strategic priorities.
OUR COMPENSATION PROGRAM
Compensation Best Practices
Our compensation program features specific elements designed to align executive compensation with long-term stockholder interests. We also strive to reflect and implement compensation design and governance best practices in our program. These practices include:
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What We Do
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What We Don't Do
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Emphasize incentive-based compensation to align pay with performance
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Permit stock option repricing without stockholder approval
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Place primary emphasis on equity-based compensation to align executive and stockholder interests
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Provide uncapped incentive award opportunities
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Tie performance-based incentives to metrics that drive the leadership team and other employees to accomplish our most important business goals
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Permit stock hedging or stock pledging activities
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Subject executives to stock ownership guidelines and holding requirements, which were amended in 2016 to increase the ownership requirement for the CEO and members of the Board of Directors
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Provide for multi-year pay guarantees within employment agreements
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Maintain a Clawback Policy allowing for the recovery of excess compensation resulting from a material financial restatement and fraud, willful misconduct or gross negligence
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Maintain single trigger vesting provisions in the event of a change of control for cash severance or equity award vesting acceleration
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Use tally sheets and other analytical tools to assess executive compensation
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Provide excessive perquisites or benefits to our NEOs.
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Engage an independent compensation consultant to advise the Compensation Committee
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CEO Annualized Compensation Values and Pay-for-Performance Alignment
Our compensation program is designed to align the interests of our NEOs, including our CEO, with our stockholders. We set challenging performance goals and are committed to aligning pay with performance. Mr. Thompson’s compensation package, which was established as part of an extensive recruiting process in 2015, includes a number of special awards to attract, retain, and motivate a highly experienced CEO with an exceptional record of shareholder value creation. Because amounts reported for 2017 in the Summary Compensation Table or the footnotes do not reflect the entire value of certain multi-year awards made in 2015 and 2016, and includes the full value of a special stock option award made in 2017 that vests over four years, the amounts presented for 2017 are not indicative of annualized pay opportunities considered by the Compensation Committee. The table below summarizes Mr. Thompson’s annualized total compensation opportunity, recognizing that a number of awards made in 2015, 2016 and 2017 were special grants. It should also be noted that, as a result of the 2015 Matching PRSU Grant offered to Mr. Thompson in connection with his hire, and the 2016 Matching PRSU Grant offered to Mr. Thompson and the Company's other executive officers, he has invested approximately $8 million in cash in the Company's common stock, significantly aligning his interests with those of the Company's stockholders.
The fiscal year 2017 total direct compensation for Mr. Thompson as reported in the Summary Compensation Table was significantly larger than the annualized target total direct compensation, at approximately 122% of annualized total target direct compensation. However, total realizable compensation (that is, potential actual pay delivery) for 2017 was significantly less than both total direct compensation and annualized target total direct compensation, at approximately 79% of the annualized target total direct compensation and approximately 65% of total direct compensation, which aligns with the Company’s below target performance during the year.
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Supplemental Table of Pro-Forma
Annualized Target Total Direct Compensation Value and Realizable Pay Comparisons for Mr. Thompson
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Compensation Element
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FY 2017($)
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Annualized Target ($)
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2017 Total Realizable Compensation ($)
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Base Salary
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1,100,000
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1,100,000
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1,100,000
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Annual Incentive
(2)
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1,375,000
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1,375,000
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1,375,000
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2015 Sign-On Bonus
(One-Time Hiring Award)
(3)
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686,695
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686,695
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2015 Performance-Based Matching PRSU Grant (Special Hiring Award)
(4)
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1,717,063
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1,456,207
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2015 Aspirational PRSU Grant
(Special Grant)
(5)
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—
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(6)
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—
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2016 Performance-Based PRSU Matching Grant (Special Grant)
(7)
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636,315
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644,077
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2017 Restricted Stock Grant
(8)
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7,000,000
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7,000,000
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6,314,074
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2017 Stock Option Grant (Special Grant)
(9)
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8,423,616
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2,105,904
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—
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2017 Performance-Based PRSU Grant
(Special Grant)
(10)
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—
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(11)
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—
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(11)
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—
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Total Direct Compensation
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17,898,616
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14,620,977
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11,576,053
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(1)
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2017 base salary was $1,100,000. This reflected no increase from 2016.
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(2)
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Target award opportunity equal to 125% of salary. This reflected no increase from 2016. For 2017 Mr. Thompson received an annual bonus of $1,375,000, or 100% of his target bonus of $1,375,000.
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(3)
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Reflects a $1.6 million one-time signing bonus paid in 2015. If Mr. Thompson had voluntarily terminated his employment (other than for Good Reason) prior to December 31, 2017, he would have been required to repay a pro-rated portion of the signing bonus to the Company. Annualized over 2.33 years.
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(4)
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In September 2015, Mr. Thompson purchased $5 million of Company stock and received a matching grant of 69,686 PRSUs that vest in three annual installments subject to meeting a requirement for positive pre-tax income for 2016, which was met. For the annualized value, the value at the date of grant is annualized over the vesting period. For the 2017 total realizable compensation, the value is calculated by multiplying one-third of the grant, or 23,228.7 shares, by $62.69, the closing price of the common stock on December 29, 2017 (the last trading day of 2017).
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(5)
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This grant of 620,000 PRSUs runs through 2017 (or 2018 with a reduced award opportunity) and is tied to an aspirational performance goal of achieving more than $650 million in Adjusted EBITDA for 2017 or 2018. At the time of grant, the Compensation Committee believed these were challenging performance hurdles and, if achieved, would likely result in significant stockholder value creation. Because the performance requirement for vesting was so challenging, at the time of grant these shares were not expected to vest; therefore, no value attributable to these PRSUs is included in the Summary Compensation Table. The Company did not meet the performance target for 2017 and accordingly two-thirds of the PRSU award has expired without vesting. In addition, the Compensation Committee does not believe that the Company will achieve the performance target for 2018 and accordingly the remaining PRSUs are not expected to vest and no longer serve as a meaningful incentive tool.
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(6)
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Amount shown represents the grant date fair value, based on the probable outcome of the performance conditions as of the grant date computed in accordance with the stock-based compensation accounting rules (FASB ASC Topic 718). For a discussion of our accounting treatment for these aspirational PRSU grants, please refer to Note 11 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017. For informational purposes, assuming that we had achieved more than $650 million in Adjusted EBITDA for 2017, the grant date fair value would have been $44,485,000, calculated by multiplying the maximum number of shares issuable under the PRSUs (620,000) by the price on the grant date ($71.75).
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(7)
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In February 2016, the Compensation Committee approved a special incentive program for senior management pursuant to which the Company would issue PRSUs to match open market stock purchases made by the executives, up to a cap. These PRSUs vest over a 5-year period subject to meeting a requirement for positive profits for 2016, which was met. Mr. Thompson received 51,370 PRSUs to match the purchase of 51,370 shares in the open market for a total purchase price of $2,999,995. For the annualized value, the grant date value is annualized over the vesting period. For the 2017 total realizable compensation, the value is calculated based on one-fifth of the total shares, or 10,274, multiplied by $62.69, the closing price of the common stock on December 29, 2017 (the last trading day of 2017).
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(8)
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In January 2017 the Company granted restricted stock units (“RSUs”) for 100,719 shares, vesting over 4 years, subject to meeting a requirement of positive profits for 2017 which was met. The annualized value is based on the fair market value on the date of grant. For the total realizable compensation, the value is calculated by multiplying 100,719 by $62.69, the closing price of the common stock on December 29, 2017 (the last trading day of 2017).
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(9)
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In January 2017, the Company granted stock options to acquire 339,476 shares, vesting over four years, at an exercise price of $69.50, and these stock options will only have value if our stock price appreciates between the grant date and time of exercise. For the annualized value, the value at the date of grant is annualized over the vesting period. For the 2017 total realizable compensation calculation, no value is shown because the exercise price of $69.50 exceeds the closing price of the common stock on December 29, 2017 (the last trading day of 2017).
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(10)
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This grant of 620,000 PRSUs is tied to an aspirational performance goal of achieving between $600 and $650 million in Adjusted EBITDA during any four consecutive quarter period ending between March 31, 2018 and December 31, 2019 (the “First Designated Period”) or ending between March 31, 2020 and December 31, 2020 (the “Second Designated Period”), with only half of the award available if the target is not met in the First Designated Period but is met in the Second Designated Period. At the time of grant, the Compensation Committee believed these were challenging performance hurdles and, if achieved, would likely result in significant stockholder value creation. Because the performance requirement for vesting is so challenging, at the time of grant these shares were not expected to vest; therefore, no value attributable to these PRSUs is included in the Summary Compensation Table.
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(11)
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Amount shown represents the grant date fair value, based on the probable outcome of the performance conditions as of the grant date computed in accordance with the stock-based compensation accounting rules (FASB ASC Topic 718). For a discussion of our accounting treatment for these aspirational PRSU grants, please refer to Note 11 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017. For informational purposes, assuming that we achieve more than $650 million in Adjusted EBITDA during the First Designated Period, the grant date fair value would be $36,927,200, calculated by multiplying the maximum number of shares issuable under the PRSUs (620,000) by the price on the grant date ($59.56).
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(12)
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Does not include value of aspirational PRSU grants, as described in Note 6 and Note 11.
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Roles of the Committee, Compensation Consultant and Management
The Compensation Committee is comprised solely of independent directors and is responsible for determining the compensation of our CEO and other NEOs. The Compensation Committee's composition has changed significantly since 2015 in connection with the significant change in the composition of the Board in 2015 and 2016 and the Company's transition to a smaller Board in 2016. The Compensation Committee is currently comprised of Messrs. Luther (Chair), Nabi and Neu. Mr. Nabi joined the Compensation Committee in May 2015, Mr. Neu joined the Compensation Committee in February 2016, and Mr. Luther joined the Compensation Committee (as Chair) in May 2016.
The Compensation Committee receives assistance during its evaluation process from: (1) Frederic W. Cook & Co., Inc. ("F.W. Cook"), the Compensation Committee’s independent consultant; and (2) our CEO and internal compensation staff, led by our Senior Vice President, Human Resources. F.W. Cook has been retained by and reports directly to the Compensation Committee; it does not have any other consulting engagements with management. F.W. Cook, at the Compensation Committee’s request, regularly provides independent advice on current trends in compensation design, and provides executive compensation benchmark data and compensation program proposals to assist in evaluating and setting the overall structure of our executive compensation program and the compensation levels of our NEOs.
The Compensation Committee reviews and evaluates the CEO’s performance and determines and approves the CEO’s compensation. The Compensation Committee also reviews, with input from the CEO, the performance of the executive vice presidents (the "EVPs") and senior vice presidents ("SVPs") and determines and approves the compensation for the EVPs and SVPs. Our CEO reviews the compensation of the other executive officers annually and makes recommendations to the Compensation Committee regarding base salary, annual incentive and long-term incentive compensation plans.
Peer Group
Our Compensation Committee examines competitive peer group and survey information, compiled by F.W. Cook, as one of many factors to assist in determining base salary, annual incentive compensation and stock-based long-term equity awards. In addition to market data, the Compensation Committee considers factors such as individual performance, internal equity among executives, promotion potential and retention risk in determining total compensation for our NEOs. The Compensation Committee periodically benchmarks our executive compensation against the compensation paid to executives at a peer group of publicly-traded companies of similar size and in similar industries to the Company (the "Peer Group") to obtain a general understanding of current compensation practices. The 19 companies currently comprising the Peer Group provide a useful comparison to the Company based, among other things, on their similarity in size, revenues, market capitalization, EBITDA, scope of operations and branded consumer product focus. The Compensation Committee periodically evaluates the appropriateness of the size and composition of the Peer Group, and makes changes to its membership in response to mergers and acquisitions and changes in organizational comparability. In 2017 the Peer Group was changed: to remove Dorel Industries and Fossil Group, which were below the targeted market capitalization range used by the Compensation Committee, and Mohawk Industries which was above the market capitalization range; to delete Harman International and Lexmark International, which were acquired; and to add RH (f/k/a Restoration Hardware), which met the revenue, market capitalization and business comparability criteria used by the Compensation Committee.
The Peer Group companies are listed below:
2017 Peer Group
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Brunswick Corporation (BC)
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Herman Miller, Inc. (MLHR)
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Steelcase Inc. (SCS)
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Carter's, Inc. (CRI)
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La-Z-Boy Incorporated (LZB)
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Tupperware Brands Corporation (TUP)
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Columbia Sportswear Company (COLM)
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Leggett & Platt, Incorporated (LEG)
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Under Armour, Inc. (UA)
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Deckers Outdoor Corporation (DECK)
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lululemon athletica inc. (LULU)
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Williams-Sonoma, Inc. (WSM)
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Gildan Activewear Inc. (DII/A)
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Polaris Industries Inc. (PII)
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Wolverine World Wide, Inc. (WWW)
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Hanesbrands Inc. (HBI)
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RH (RH)
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Hasbro, Inc. (HAS)
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Sleep Number Corporation (SNBR)
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Tally Sheets
In addition to considering compensation levels for the Peer Group, the Compensation Committee also considers information contained in total compensation tally sheets for each NEO. The Compensation Committee uses tally sheets to evaluate accumulated equity value and total compensation opportunities. The tally sheets summarize each component of compensation, including base salary, annual incentive plan payout, vested and unvested long-term incentive plan awards, 401(k) company
contributions, health and welfare benefits, perquisites and potential payments in the event of termination of employment under various scenarios.
Compensation Objectives
Each element of our compensation program is designed to attract, motivate and retain our management talent and to reward management for strong Company performance and successful execution of key business plans and strategies. We believe that our compensation philosophy aligns management incentives with the long-term interests of our stockholders.
Compensation Components
The principal components of compensation for our NEOs include the following:
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Pay Element
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Purpose
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Description
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Link to Performance
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Annual Base Salary
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To attract and retain leadership talent and to provide a competitive base of compensation that recognizes the executive’s skills, experience and responsibilities in the position.
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Fixed, non-variable cash compensation.
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Base salary levels are based on a number of factors including each individual’s time and sustained performance in a role, internal equity considerations, and succession planning considerations among other factors.
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Annual Incentive Plan (AIP) Awards
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To provide executives with a clear financial incentive to achieve critical short-term financial and operating targets or strategic initiatives.
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Variable annual cash incentive with payout based on Company and individual performance over the fiscal year.
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Annual incentive opportunity is targeted at a competitive level, generally near the market median for each executive. The actual incentive award payout is based on the achievement of the performance criteria and can range from 0% to 200% of target payout. 100% of the FY 2017 AIP payout opportunity was based on the Company's Adjusted EBITDA for 2017. Using a Company-wide performance goal based on Adjusted EBITDA promotes collaboration and focuses the entire Company on a goal that strongly correlates with stockholder value creation.
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Annual Long-Term Incentive Awards
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To align a significant portion of executive compensation to the Company's long-term operational performance as well as share price appreciation and total stockholder return. This component serves to motivate and retain executive talent.
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Annual grants of stock options, PRSUs, and/or restricted stock.
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The Company has granted annual Long-Term Incentive Plan ("LTIP") awards in the form of stock options, PRSUs and restricted stock units ("RSUs"). Stock options have value only if and to the extent our share price increases from the date of grant to the time of exercise.
PRSUs are granted to reward participants for the successful achievement of annual or multi-year performance objectives, using a currency (common stock) that is strongly aligned with stockholder interests.
RSUs are granted primarily to enhance retention and reinforce an ownership mentality through enhanced equity stakes.
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Special Long-Term Incentive Awards
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To provide executives with an above market incentive only if significant shareholder value is created or to motivate executives to make significant personal investments in the Company to further executive alignment with other shareholders.
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Aspirational performance equity awards and matching awards.
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Aspirational awards are earned only if there is significant, above-market improvement in performance over a defined period of time.
Matching awards are granted primarily to enhance retention and encourage significant ownership of the Company's common stock by the executive officers. Since inception of the matching awards, the Company's current executive officers have invested approximately $11 million in the Company's common stock.
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Overall, the Compensation Committee seeks to strike a balance among the three ongoing components of salary, annual cash bonus and annual equity awards, and also provide special equity grants from time to time that create additional significant incentives for exceptional performance, require management to make significant long-term cash investment in our common stock or address specific retention or incentive issues, with an emphasis on ensuring that a majority of the total potential compensation for the Company’s executive officers is significantly at risk and tied to overall Company performance.
2017 Target Compensation Mix
The charts below show that most of our NEOs’ target pay mix (excluding special grants and sign-on bonuses) is variable and at risk. For the CEO, 88% of the 2017 target annualized compensation was provided in the form of annual and long-term incentives (see “Our Compensation Program - CEO Annualized Compensation Values and Pay-for-Performance Alignment - Supplemental Table of Pro-Forma Annualized Target Total Direct Compensation Value and Realizable Pay Comparison for Mr. Thompson” for a description of the elements included in Mr. Thompson’s compensation). For the other NEOs, annual and long-term incentives made up 75% of the total target pay mix. The proportions of each pay component shown below may change in the future based on market or performance considerations.
Inclusion of special long-term incentive awards would attribute a greater portion of the mix towards variable and at risk pay, which is not reflective of the regular annual target compensation program. Therefore, special long-term incentive awards are excluded from the charts below:
2017 COMPENSATION ACTIONS
This section summarizes the actions taken by the Compensation Committee for 2017.
Rationale for Key Compensation Decisions in 2017
Our compensation program is designed to align the interests of our NEOs, including our CEO, with our stockholders. We set challenging performance goals and are committed to aligning pay with performance. Mr. Thompson’s compensation package, which was established as part of an extensive recruiting process in 2015, includes a number of special awards to attract, retain, and motivate a highly experienced CEO candidate with an exceptional record of stockholder value creation. Our overall approach to compensation over the last few years has been to target salary and annual cash bonus opportunity at the market median for our Peer Group, with higher levels for our CEO based on the terms set when he joined us in 2015. We have set our annual equity incentive compensation at a level higher than the median for our Peer Group, because we believe tying more of the overall compensation to equity incentives enhances alignment with the interests of our stockholders. Our equity incentive grants have included both annual regular grants and special grants, including “aspirational” PRSU grants that provide for extraordinary compensation to be paid only if extraordinary performance goals are achieved. In addition, as a result of the unexpected termination of our relationship with our largest customer, Mattress Firm, we made certain changes to our compensation packages to reflect the new business environment and to retain and motivate our senior management team for the remainder of 2017 and beyond. We recognize that some aspects of our approach to compensation and our decisions on 2017 compensation may not be consistent with the standards advocated by certain influential proxy advisory firms, but we believe our approach and the decisions we have made were necessary and appropriate for our business and in the best interests of our stockholders. Based on feedback we received from many stockholders on our compensation program during 2017, and the approval of our compensation program at our 2017 Annual Meeting by holders of 88% of the shares present or entitled to vote, we believe our stockholders understand and strongly support our overall compensation strategy. Specific elements of our compensation package and decisions made during 2017 are discussed below.
Salary
. Mr. Thompson’s annual salary was set by his employment agreement when he joined us in 2015, and has not increased since then. For other NEOs, we generally target the market median. Our NEOs did not receive any increase in base salary for 2016 or 2017, other than in connection with promotions. We intentionally keep year-over-year changes in salary modest because base salary is not a key driver of our pay-for-performance strategy.
Annual Incentive Plan
. In December 2016, we adopted a challenging Company-wide Adjusted EBITDA target for the 2017 AIP, which assumed the continuation of the Mattress Firm relationship. The 2017 AIP required growth of 8.3% in Adjusted EBITDA, compared to the Company’s Adjusted EBITDA for 2016, to pay out at 100% of the target bonus, and 17.9% growth to
pay out at 200% of the target bonus. However, the termination of the Mattress Firm relationship suddenly and unexpectedly eliminated the likelihood of earning any bonus under the approved 2017 target performance goal. The Compensation Committee discussed the potential impact of the terminated relationship on near-term results, and whether the current incentive programs served to effectively retain and motivate executives and other employees given the uncertainty created by the loss of the Mattress Firm relationship. As a result of this discussion, the Compensation Committee fully recognized that the recently-approved 2017 AIP no longer served as a meaningful performance incentive for the remainder of the year based on the original Adjusted EBITDA goal. As part of this discussion, the Compensation Committee took into account the feedback from certain stockholders who expressed support for revising certain programs as necessary to reflect the updated business plan. The Compensation Committee considered resetting the performance goals for the year, however, in light of the difficulty in forecasting with any precision the level of sales recapture the Company would achieve by the end of the year, the Compensation Committee did not believe it was possible in the first quarter of 2017 to create a new Adjusted EBITDA goal that would serve as an effective incentive tool.
As a result, in March 2017, the Compensation Committee exercised its authority under the terms of the 2017 AIP to make adjustments for extraordinary events and provided assurances to all participants other than the CEO that bonuses would be paid at 100% of the target bonus opportunity in order to sustain employee morale and a create a near-term retention incentive during a period of uncertainty. In coming to this decision, the Compensation Committee concluded that because of the loss of Mattress Firm as a customer and the resulting changes in the short-term outlook for the business, it was very important for the Company and its stockholders that the senior executives and other employees have in place both significant retention incentives and significant incentives to address the issues created by the termination of the contracts with Mattress Firm. In addition, it was also very important to incent the management team to improve the Company's long-term financial performance, including taking steps that may adversely affect financial results for 2017, but would be in the long-term best interests of the Company and its stockholders. As part of this decision-making process, the Compensation Committee also reaffirmed its support of management’s decision not to agree to the significant economic concessions requested by Mattress Firm, and acknowledged that the decision was in the long-term best interests of our stockholders.
In March 2018, the Compensation Committee approved a bonus payment for the CEO at 100% of his target amount based on the authority reserved for the Compensation Committee under the 2017 AIP to make adjustments for extraordinary events, such as the Mattress Firm termination. The Compensation Committee’s action was based on their view that Mr. Thompson had delivered extraordinary performance in 2017, including his effective leadership in repositioning the Company in response to the Mattress Firm termination, leading the Company’s efforts to recapture sales in 2017 with wholesale sales in North America, excluding Mattress Firm, increasing 9.3% over 2016 and direct sales in North America increasing 107.5% over 2016. In addition, the Compensation Committee considered Mr. Thompson’s strong organizational changes and continued improvement in the Company’s manufacturing operations during 2017.
Equity Incentive Grants
. We have granted annual LTIP awards in the form of stock options, PRSUs and RSUs and the form and mix of these awards has varied from year to year depending on the particular issues and concerns at the time. In early January 2017, the Compensation Committee chose to grant RSUs under the regular annual LTIP to balance the outstanding performance-based 2015 Aspirational PRSUs (as discussed below under "2015 Aspirational Grants") and to enhance retention and an ownership mentality by enhancing equity stakes.
At the same time, which was prior to the notice from the Mattress Firm representatives of their intent to terminate the relationship, the Compensation Committee granted special stock option grants to certain members of our management team, including the NEOs, to recognize significant improvements in the Company’s operations and profitability since September 2015, including the cost savings resulting from the smaller management team created as part of senior management’s efforts to develop a more streamlined management structure. The Compensation Committee chose to make these awards in the form of stock options such that these special grants will only have value if and to the extent our stock price increases over time. These stock options have an exercise price at fair market value at the time of grant, and following the termination of the Mattress Firm relationship, the special grant stock options fell underwater (that is, stock price fell below the option exercise price) and remained underwater through the remainder of 2017 and through the date of this Proxy Statement.
In August 2017, in light of the revised business outlook for 2017 as a result of the Mattress Firm termination, and the conclusion by the Compensation Committee that the prior 2015 Aspirational PRSUs had served as an effective incentive tool even though none of these PRSUs are likely to vest, and taking into account feedback from certain stockholders that the Company needed to implement new incentives in light of the Company’s changed environment, the Company adopted a new 2017 Aspirational PRSU program. Similar to the prior 2015 Aspirational PRSUs, the Compensation Committee designed the award to require an extraordinary level of performance from the management team in order to be earned. If the extraordinary performance is not achieved, the award will forfeit similar to the expected outcome for the prior 2015 Aspirational PRSUs. It is expected that the achievement of the targeted level of performance would create significant value for our stockholders. As such, the Compensation Committee believes that these aspirational PRSUs serve as an important part of our pay-for-performance model and the overall compensation strategy.
Our equity incentive practices are described in greater detail below.
Base Salary
Each of our NEOs' base salary is established pursuant to his employment agreement. On average, 2017 base salaries for our NEOs were targeted at the market median. The table below summarizes the annualized salary changes during the year:
|
|
|
|
|
Named Executive Officer
|
2016 Annual Salary
|
2017 Annual Salary
|
Increase (%)
|
Scott L. Thompson
|
$1,100,000
|
$1,100,000
|
—
|
Bhaskar Rao
(1)
|
Not in Role in 2016
|
$ 430,000
|
New Role
|
Richard W. Anderson
|
$ 441,000
|
$ 441,000
|
—
|
David Montgomery
|
£ 298,576
|
£ 298,576
|
—
|
Scott J. Vollet
(2)
|
$ 324,450
|
$ 324,450
|
—
|
|
|
|
(1)
|
Mr. Rao was promoted to CFO during 2017. Amount shown for 2017 represents his annualized salary at the end of 2017. His annualized salary for his previous role was $324,500.
|
(2)
|
Mr. Vollet served as Senior Vice President, Global Operations during 2017 prior to being promoted to Executive Vice President, Global Operations in 2018. Amount shown represents his salary for his prior role.
|
Mr. Rao received an increase in base salary during 2017 in connection with his promotion to CFO during 2017. No other NEO received an increase in salary for 2017.
2017 Annual Incentive Program
Our annual incentive program ("AIP") ensures that a significant portion of each NEO’s annual compensation is at risk and dependent on overall Company performance. The program provides NEOs a clear financial incentive to achieve critical short-term financial and operating targets or strategic initiatives. The Compensation Committee is responsible for administering the AIP pursuant to the terms of our Second Amended and Restated Annual Incentive Bonus Plan for Senior Executives (the "2015 Annual Incentive Plan") which was approved by our stockholders in May 2015. The 2015 Annual Incentive Plan provides for cash-based performance awards, including awards intended to qualify as performance compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended ("Code").
The design and purpose of the AIP are to focus the NEOs on behaviors that support our overall performance and success. The goals are set with a reasonable level of difficulty that requires the Company and NEOs to perform at a high level in order to meet the goals and objectives. The attainment of these goals and objectives is not assured. Payouts in any year above 100% (target level) indicate significant accomplishment with performance above expectation.
On average, target bonus opportunities for our NEOs were targeted at the market median. The following table sets forth the targeted annual incentive levels for each NEO in 2017, shown as a percentage of his annual base salary at year-end, along with the maximum potential incentive opportunity:
|
|
|
|
|
Named Executive Officer
|
Target Award as a % of
Salary
|
Target Award ($)
|
Maximum Award as a %
of Salary
|
Scott L. Thompson
|
125%
|
$1,375,000
|
250%
|
Bhaskar Rao
|
50% / 70%
(1)
|
$ 126,688 / 65,973
|
100% / 140%
|
Richard W. Anderson
|
70%
|
$ 308,700
|
140%
|
David Montgomery
|
70%
|
£ 209,003
|
140%
|
Scott J. Vollet
|
50%
|
$ 162,225
|
100%
|
|
|
|
(1)
|
In light of Mr. Rao’s promotion to CFO effective October 13, 2017, (i) the amount of Mr. Rao’s target bonus for 2017 with respect to the period up to October 13, 2017 was based on 50% of his base salary paid with respect to the period from January 1, 2017 to October 13, 2017 and (ii) the amount of Mr. Rao’s target bonus for 2017 with respect to the period from October 13, 2017 through December 31, 2017 was based on 70% of his base salary paid with respect to such period.
|
Messrs. Thompson, Anderson, Montgomery and Vollet received the same target bonus for 2017 as in 2016. Mr. Rao’s target bonus for 2017 was increased as described above to reflect his promotion to CFO during 2017.
Company-wide Adjusted EBITDA was selected as the sole performance metric for the 2017 AIP, consistent with the change made by the Compensation Committee in 2016 to simplify the program design by eliminating multiple goals and different goals for different groups, and to eliminate subjective goals, and promote collaboration. The Compensation Committee believes that Adjusted EBITDA strongly correlates with long-term stockholder value creation. Performance was required to be measured with no adjustment for currency fluctuations, consistent with the Company’s financial statements, to further align executive and stockholder interests. In order to ensure that our AIP complies with Section 162(m) of the Code, the Company must meet a threshold goal of positive profits in order for any annual incentive to be earned for 2017 by our NEOs. If this threshold goal is achieved, then each NEO's potential annual incentive bonus will become earned at the maximum bonus payable, subject to the exercise by the Compensation Committee of its authority to reduce (but not increase) the actual amount of the incentive bonus payable. In addition, the Compensation Committee is authorized to make adjustments to reflect extraordinary events not contemplated by the budget approved by the Board in December 2016 (but no adjustment may be made with respect to the threshold goal adopted for Section 162(m) purposes).
The 2017 AIP required growth of 8.3% in Adjusted EBITDA, compared to the Company’s Adjusted EBITDA for 2016, to pay out at 100% of the target bonus, and 17.9% growth to pay out at 200% of the target bonus. However, the termination of the Mattress Firm relationship suddenly and unexpectedly eliminated the likelihood of earning any bonus under the approved 2017 target performance goal. The Compensation Committee discussed the potential impact of the terminated relationship on near-term results, and whether the current incentive programs served to effectively retain and motivate executives and other employees given the uncertainty created by the loss of the Mattress Firm relationship. As a result of this discussion, the Compensation Committee fully recognized that the recently-approved 2017 AIP no longer served as a meaningful performance incentive for the remainder of the year based on the original Adjusted EBITDA goal. As part of this discussion the Compensation Committee took into account the feedback from certain stockholders who expressed support for revising certain programs as necessary to reflect the updated business plan. The Compensation Committee considered resetting the performance goals for that year, however, in light of the difficulty in forecasting with any precision the level of sales recapture the Company would achieve by the end of the year, the Compensation Committee did not believe it was possible in the first quarter of 2017 to create a new Adjusted EBITDA goal that would serve as an effective incentive tool. The Compensation Committee concluded that because of the loss of Mattress Firm as a customer and the resulting changes in the short-term outlook for the business, it was very important for the Company and its stockholders that the senior executives and other employees have in place both significant retention incentives and significant incentives to address the issues created by the termination of the contracts with Mattress Firm. In addition, it was also very important to incent the management team to improve the Company's long-term financial performance, including taking steps that may adversely affect financial results for 2017, but would be in the long-term best interests of the Company and its stockholders. Accordingly, and at the request of the CEO that the Compensation Committee provide assurances to participants in the 2017 AIP other than the CEO, and pursuant to the discretion reserved under the 2017 AIP to make adjustments for extraordinary events, the Compensation Committee committed that the bonuses paid under the 2017 AIP would be paid at least at 100% of target (other than for the CEO) to retain and focus the executive team and key employees during this transitional period. The commitment for a payout at target did not affect the requirement for NEOs to meet the Section 162(m) threshold test described above and did not apply to the CEO, who remained subject to the 2017 AIP as originally adopted, including the exercise by the Compensation Committee of its discretion as described above.
In March 2018, the Compensation Committee determined that the Company had met the Section 162(m) threshold test of positive profits for 2017, without any adjustments for the Mattress Firm termination. Accordingly, based on the commitment made in March 2017 as described above, the Compensation Committee approved payouts under the 2017 AIP at 100% of target value for all participants other than the CEO. With respect to the CEO, in March 2018 the Compensation Committee reviewed the CEO’s performance for 2017, including the significant progress made in responding to the termination of the Mattress Firm relationship, and concluded it was appropriate to exercise the discretion reserved under the 2017 AIP for extraordinary events and make adjustments for the Mattress Firm termination. However, the Compensation Committee also determined that it was not possible to determine what Adjusted EBITDA would have been in the absence of the termination of Mattress Firm. In light of the inability to calculate specific adjustments, the Compensation Committee considered Mr. Thompson’s overall performance for 2017. The Compensation Committee determined that Mr. Thompson had delivered extraordinary performance in 2017, including his effective leadership in repositioning the Company in response to the Mattress Firm termination, leading the Company’s efforts to recapture sales in 2017 with wholesale sales in North America increasing 9.3% over 2016 and direct sales in North America increasing 107.5% over 2016. In addition, the Compensation Committee considered Mr. Thompson’s strong organizational changes and continued improvement in the Company’s manufacturing operations during 2017. Based on its evaluation, the Compensation Committee determined that the appropriate adjustment was to approve a payout for the CEO under the 2017 AIP at 100% of target value.
Based on this performance, each of our NEOs received a bonus payment as set forth below:
|
|
|
|
|
Named Executive Officer
|
2017 Target
|
Percentage of Overall Incentive Target
|
2017 Actual Payout
|
Scott L. Thompson
|
$1,375,000
|
100%
|
$1,375,000
|
Bhaskar Rao
(1)
|
$ 192,661
|
100%
|
$ 192,661
|
Richard W. Anderson
|
$ 308,700
|
100%
|
$ 308,700
|
David Montgomery
|
£ 209,003
|
100%
|
£ 209,003
|
Scott J. Vollet
|
$ 162,225
|
100%
|
$ 162,225
|
(1) In light of Mr. Rao’s promotion to CFO effective October 13, 2017, (i) the amount of Mr. Rao’s target bonus for 2017 with respect to the period up to October 13, 2017 was based on 50% of his base salary paid with respect to the period from January 1, 2017 to October 13, 2017 and (ii) the amount of Mr. Rao’s target bonus for 2017 with respect to the period from October 13, 2017 through December 31, 2017 was based on 70% of his base salary paid with respect to such period.
2017 Annual Long-Term Incentive Grants (Regular Annual Grants)
Members of senior management, including our NEOs, are eligible to receive equity compensation awards under our equity incentive plans. As previously discussed, we believe that providing equity awards as a component of compensation for senior managers aligns the interests of management with the interests of our stockholders and provides an additional method of compensation where the return is directly tied to stockholders’ return on their investment. Our practice in recent years prior to 2016 had been to grant multiple forms of long-term incentive awards, each intended to accomplish different objectives. Similar to 2016, the annual LTIP grants for 2017 were in the form of RSUs vesting over four years. The Compensation Committee chose to use RSUs as a balance to the outstanding performance-based special awards and to enhance retention and an ownership mentality by enhancing equity stakes. The RSUs awarded to our NEOs were also subject to satisfaction of a performance test for Section 162(m) purposes of “positive profits” for 2017, which was met. The Compensation Committee reserves the right to adjust the target award mix from year to year, as deemed appropriate.
The Compensation Committee approved targeted equity values for each of our NEOs in early 2017. Mr. Thompson did not receive an annual equity grant in 2016 because his original equity grants made in September 2015 when he became CEO were intended to cover both 2015 and 2016. For 2017, the Compensation Committee determined that the target equity value for Mr. Thompson’s annual grant should be set at $7,000,000, which is in the top quartile of the market in light of his strong performance and the need to retain and motivate a highly experienced CEO with an exceptional record of shareholder value creation. For Messrs. Anderson, Montgomery and Vollet, the target value of the 2017 annual equity grants remained at the same level as the 2016 annual equity grants. For Mr. Rao, his target annual equity grant was increased for 2017 to $975,000 to reflect his promotion to CFO during 2017.
The following table summarizes the 2017 annual grants to the NEOs:
|
|
|
|
|
|
Named Executive Officer
|
2017 LTIP Grant Date Fair Value ($)
(1)
|
# of RSUs
|
Scott L. Thompson
|
7,000,000
|
|
100,719
|
|
Bhaskar Rao
(2)
|
975,000
|
|
14,847
|
|
Richard W. Anderson
|
975,000
|
|
14,029
|
|
David Montgomery
|
1,100,000
|
|
15,827
|
|
Scott J. Vollet
|
500,000
|
|
7,194
|
|
|
|
|
(1)
|
The grant date fair value is based on $69.50, the closing price of the Company’s common stock on January 5, 2017, the grant date.
|
(2)
|
Prior to his promotion to CFO, Mr. Rao received RSUs for 2,878 shares, having a value of $200,000 as of the date of grant. In connection with Mr. Rao’s promotion to CFO effective October 13, 2017, the Company made an additional annual grant to Mr. Rao in October 2017 of RSUs for 11,969 shares, having a value of $775,000 as of the date of grant, and vesting over 4 years.
|
2017 Special Long-Term Incentive Grants
In early 2017, prior to the notice from the Mattress Firm representatives of their intent to terminate the relationship, our Compensation Committee also approved a special grant for members of management. These special grants were awarded both to create additional incentives for the senior management team and to recognize significant improvements in the Company’s operations and profitability since September 2015 and the cost savings resulting from a 33% reduction in the size of the management team as part of senior management’s efforts to develop a more streamlined management structure. The regular annual grant was made in the form of RSUs to balance the outstanding performance-based 2015 Aspirational PRSUs and to enhance retention and an ownership mentality by enhancing executive ownership of the Company’s common stock. The special grant to the NEOs was in the form of stock options vesting over four years. The Compensation Committee chose to make these awards in the form of stock options because these special grants will only have value if and to the extent our stock price increases over time, and also to
distinguish the grants from the regular annual grants made in the form of RSUs. In addition, in order to maximize the retentive effect of these grants, if the employee leaves for any reason before the end of four years, all of the unvested equity awards will terminate. Although these stock options had an exercise price at fair market value at the time of grant, following the termination of the Mattress Firm relationship, the special grant stock options fell underwater (that is, stock price fell below the option exercise price) and remained underwater through the remainder of 2017 and through the date of this Proxy Statement, which has significantly diminished the current incentive impact of these special grants.
The following table summarizes the 2017 special grants to the NEOs:
|
|
|
|
|
|
|
|
Named Executive Officer
|
2017 LTIP Grant Date
Fair Value ($)
(1)
|
# of Stock Options
|
Exercise Price($)
|
Scott L. Thompson
|
8,423,616
|
|
339,476
|
|
69.50
|
|
Bhaskar Rao
|
601,680
|
|
24,248
|
|
69.50
|
|
Richard W. Anderson
|
1,173,285
|
|
47,284
|
|
69.50
|
|
David Montgomery
|
1,323,705
|
|
53,346
|
|
69.50
|
|
Scott J. Vollet
|
601,680
|
|
24,248
|
|
69.50
|
|
|
|
|
|
(1
|
)
|
The grant date fair value is based on the Black-Scholes value determined as of January 5, 2017, the grant date.
|
The long-term incentive grant values determined by the Compensation Committee and the Board are consistent with our compensation philosophy as discussed above.
2015 Aspirational Grants
To further encourage significant increases in profitable growth and stockholder value creation, in 2015 the Board of Directors established an aspirational objective for the Company to achieve more than $650 million in Adjusted EBITDA for 2017. To achieve this aspirational objective, the Company would need to increase its Adjusted EBITDA by nearly $200 million, or more than 40%, above the Company’s Adjusted EBITDA of $455 million for 2015. To further align executive and stockholder interests, Adjusted EBITDA is measured with no adjustment for currency fluctuations, consistent with the Company’s financial statements. To reinforce this objective and encourage “aspirational pay for aspirational performance,” the Compensation Committee approved special aspirational PRSU grants for a group of senior executives, including our NEOs, as described below.
In September 2015, the Compensation Committee established an initial compensation package for Mr. Thompson that places primary emphasis on a grant of aspirational PRSUs (the "2015 Aspirational PRSUs"). Other senior executives received 2015 Aspirational PRSUs in October and December 2015. Grant date values for this special award were set well above regular target long-term incentive award levels, given the plan’s aspirational goals, which the Compensation Committee believed were extremely challenging performance hurdles that, if achieved, would likely have resulted in significant stockholder value creation. Because the performance requirement for vesting was so challenging, at the time of grant these shares were not expected to vest; therefore, no value attributable to these PRSUs is included in the Summary Compensation Table. To earn the full grant, the Company’s Adjusted EBITDA was required to exceed $650 million in 2017. If this hurdle was not met in 2017 but is achieved in 2018, participants will earn one-third of the grant, with the remaining portion forfeited. No PRSUs will be earned if the hurdle is not met for 2017 or 2018. Participants must also remain employed with the Company through the entire performance period to earn the award. The aspirational PRSU grants to the NEOs are shown in the following table:
|
|
|
|
|
|
|
|
Named Executive Officer
|
# of Aspirational PRSUs
|
# of Aspirational PRSUs Forfeited for Missing Hurdle in 2017
|
# of Aspirational PRSUs Earned if Hurdle Met in 2018
|
Scott L. Thompson
|
620,000
|
|
(413,333
|
)
|
206,667
|
|
Bhaskar Rao
|
20,000
|
|
(13,333
|
)
|
6,667
|
|
Richard W. Anderson
|
80,000
|
|
(53,333
|
)
|
26,667
|
|
David Montgomery
|
125,000
|
|
(83,333
|
)
|
41,667
|
|
Scott J. Vollet
|
20,000
|
|
(13,333)
|
|
6,667
|
|
The Company did not meet the Adjusted EBITDA target for 2017 and accordingly two-thirds of these 2015 Aspirational PRSUs have been forfeited. In addition, in light of the impact from the termination of the Mattress Firm relationship as described above, the Compensation Committee does not believe that the Adjusted EBITDA target will be met in 2018, and accordingly the remaining 2015 Aspirational PRSUs will not vest and no longer serve as a meaningful incentive tool. However, even though none
of these 2015 Aspirational PRSUs are likely to vest, the Compensation Committee believes that, prior to the termination of the Mattress Firm relationship, the 2015 Aspirational PRSUs served as a powerful incentive tool across the whole management team.
2017 Aspirational Grants
In August 2017, in light of the revised business outlook for 2017 as a result of the Mattress Firm termination and taking into account feedback from certain stockholders that the Company needed to implement new incentives in light of the Company's changed environment, the Company granted executive officers and certain members of management approximately 1.5 million new PRSUs that vest if the Company achieves a certain level of Adjusted EBITDA during four consecutive fiscal quarters as described below (the "2017 Aspirational PRSUs").
Purpose and Benefits of the 2017 Aspirational PRSUs.
The Compensation Committee granted the 2017 Aspirational PRSUs based upon challenging performance hurdles that, if achieved, would likely result in significant stockholder value creation. The purposes and benefits of the 2017 Aspirational PRSUs include the following:
|
|
•
|
To further encourage significant increases in profitable growth and stockholder value creation;
|
|
|
•
|
To encourage “aspirational pay for aspirational performance;” and
|
|
|
•
|
To further align management and stockholder interests.
|
Summary of Vesting and Performance Targets.
The 2017 Aspirational PRSUs will vest in accordance with a formula related to the Company’s Adjusted EBITDA, as measured over any four consecutive fiscal quarters (each a “Four Quarter Period”) during two separate measurement periods. The first measurement period consists of the fiscal quarters ending March 31, 2018 through December 31, 2019 (the "First Designated Period"). The second measurement period consists of the fiscal quarters ending March 31, 2020 through December 31, 2020 (the "Second Designated Period"). In order to earn the full amount of these PRSUs, we will be required to grow our Adjusted EBITDA by the end of the First Designated Period by more than $200 million as compared to the $448.5 million in Adjusted EBITDA for 2017.
Adjusted EBITDA is defined as the Company’s "Consolidated EBITDA" as such term is defined in the Company’s current senior secured credit facility.
The formula for the First Designated Period is illustrated in the chart below:
|
|
|
Adjusted EBITDA
|
Percentage of 2017 Aspirational PRSUs That Will Vest
|
≥ $650 million
|
100%
|
> $600 million and < $650 million
|
Prorated between 66% and 100%
|
$600 million
|
66%
|
< $600 million
|
0%
|
If any 2017 Aspirational PRSUs vest during the First Designated Period, then the right to earn any additional 2017 Aspirational PRSUs through future performance will terminate. However, if the Company does not achieve Adjusted EBITDA equal to or exceeding $600 million for any Four Quarter Period during the First Designated Period, then 50% of the 2017 Aspirational PRSUs will remain available for vesting during any Four Quarter Period within the Second Designated Period, and the right to earn the remaining 50% of the 2017 Aspirational PRSUs will terminate. However, 2017 Aspirational PRSUs that may no longer be earned through performance pursuant to this paragraph may in the future be converted into time-based vesting RSUs upon a change of control as described below.
If no 2017 Aspirational PRSUs vest as a result of performance for the First Designated Period, and accordingly, up to 50% of the 2017 Aspirational PRSUs are available to be earned based on performance in the Second Designated Period as described above, the formula for the Second Designated Period is illustrated in the chart below:
|
|
|
Adjusted EBITDA
|
Percentage of 2017 Aspirational PRSUs That Will Vest
|
≥ $650 million
|
50%
|
> $600 million and < $650 million
|
Prorated between 33% and 50%
|
$600 million
|
33%
|
< $600 million
|
0%
|
Forfeiture of Aspirational Awards.
If the Company does not achieve Adjusted EBITDA equal to or exceeding $600 million for any Four Quarter Period during either the First Designated Period or the Second Designated Period, then none of the 2017 Aspirational PRSUs will vest, but they may still be issuable as RSUs in the event of a change of control as described below.
Generally, if the employment of an employee receiving 2017 Aspirational PRSUs terminates for any reason on or before December 31, 2019 with respect to any 2017 Aspirational PRSUs available to be earned during the First Designated Period or Second Designated Period, or after December 31, 2019 and on or before December 31, 2020 with respect to any 2017 Aspirational PRSUs available to be earned during the Second Designated Period, all of the 2017 Aspirational PRSUs awarded to that employee will be forfeited, subject to certain exceptions set forth in the award agreements for death, disability, termination by the Company other than "for cause" or termination by the employee for “good reason,” in each case after the Company has met the minimum performance metrics for any Four Quarter Period within the First Designated Period or Second Designated Period, as applicable.
Change of Control.
Immediately upon a change of control, all outstanding 2017 Aspirational PRSUs that have not been previously vested and paid or are not then vested and payable, including any 2017 Aspirational PRSUs that were no longer available to be earned based on performance as described above, if any, will convert to time-based vesting RSUs that will vest on December 31, 2020, subject to the applicable employee’s continued employment with the Company and its affiliates. The amount of RSUs issuable to any employee upon a change in control occurring before December 31, 2018 will be reduced by any RSUs issuable to such employee under the 2015 Aspiration PRSUs. The effect of these provisions is that on a change of control occurring on or before December 31, 2020, any employee satisfying the eligibility requirements will receive RSUs equal to the total size of the original 2017 Aspirational PRSU less any PRSUs previously vested and paid based on performance.
Grant date values for this special award were set well above regular target long-term incentive award levels, given the plan’s aspirational goals, which the Compensation Committee believes are challenging performance hurdles that, if achieved, would likely result in significant stockholder value creation. In order to earn the full amount of the 2017 Aspirational PRSUs, the Company will need to increase its Adjusted EBITDA during the First Designated Period by more than $200 million above its Adjusted EBITDA of $448.5 million for 2017. Because the performance requirement for vesting is so challenging, at the time of grant these shares were not expected to vest; therefore, no value attributable to these PRSUs is included in the Summary Compensation Table. The 2017 Aspirational PRSU grants to the NEOs are shown in the following table:
|
|
|
|
|
|
Named Executive Officer
|
Maximum Number of Aspirational PRSUs Earned for Meeting Hurdle in First Designated Period
|
Maximum Number of Aspirational PRSUs Earned for Meeting Hurdle in Second Designated Period
(3)
|
Scott L. Thompson
|
620,000
|
|
310,000
|
|
Bhaskar Rao
(1)
|
100,000
|
|
50,000
|
|
Richard W. Anderson
|
135,000
|
|
67,500
|
|
David Montgomery
|
135,000
|
|
67,500
|
|
Scott J. Vollet
(2)
|
50,000
|
|
25,000
|
|
|
|
|
(1)
|
Includes 50,000 2017 Aspirational PRSUs granted in August 2017 and an additional 50,000 2017 Aspirational PRSUs granted in October 2017 in connection with Mr. Rao’s promotion to CFO.
|
(2)
|
Mr. Vollet was granted an additional 50,000 2017 Aspirational PRSUs in February 2018 in connection with his promotion to EVP, Global Operations.
|
(3)
|
If no 2017 Aspirational PRSUs vest as a result of performance for the First Designated Period, up to 50% of the 2017 Aspirational PRSUs are available to be earned based on performance in the Second Designated Period.
|
The Compensation Committee believes that the 2017 Aspirational PRSUs, by providing extraordinary compensation for extraordinary performance, will serve as a significant incentive tool over the next 3 years. The Compensation Committee does not expect that it will adopt a new aspirational PRSU program covering any period prior to December 31, 2020, and during that period, the 2017 Aspirational PRSUs will serve as a significant component of the NEOs’ at-risk performance-based compensation.
Amendment to Thompson Agreements
In November 2017, the Company entered into a First Amendment to Employment and Non-Competition Agreement (the “Thompson Amendment”) with Mr. Thompson that amended his Employment and Non-Competition Agreement dated September 4, 2015 (the “Thompson Employment Agreement”). The Company entered into the Thompson Amendment to ensure that the Company would retain Mr. Thompson past December 31, 2018, and to provide Mr. Thompson additional flexibility regarding his primary place of work. The Company's significant operations are now located in over 25 locations across North America and in over 100 countries across the world, and we derive over 30% of our EBITDA from our international operations, requiring significant flexibility and travel by Mr. Thompson. The Company entered into the amendments to the Thompson Award Agreements (as defined below) both to provide a more objective and ascertainable definition of “Retirement” and to provide the Compensation Committee with additional flexibility to determine whether and how much of any unvested award should continue to vest (which could be more or less than the amount originally provided in the Thompson Award Agreements prior to these amendments). None of these amendments for Mr. Thompson applied to the outstanding special awards including the 2015 Aspirational PRSUs and 2017 Aspirational PRSUs, in which the Approved Retirement provisions only apply in limited circumstances after a change of control, or the special grant of stock options made in January 2017, which contain no “Approved Retirement” provisions because of the more stringent vesting requirements in these special grants.
Specifically, the Thompson Amendment (i) provides for an extension of the initial term of the Thompson Employment Agreement from December 31, 2018 to December 31, 2021, (ii) provides that Mr. Thompson may make his primary place of employment in any metropolitan area in the United States where the Company has an office, including Lexington, Kentucky, Trinity, North Carolina or Dallas, Texas and (iii) requires the amendment of six outstanding equity award agreements relating to his September 2015 grants of 310,000 stock options, 118,000 RSUs, and 69,686 matching PRSUs, his grants in March 2016 and May 2016 of a total of 51,370 matching PRSUs, and his January 2017 grant of 100,719 RSUs (collectively, the "Thompson Award Agreements"). The amendments to the Thompson Award Agreements (i) added an objective definition of “Retirement” based on being at least 55 years old and meeting a requirement that the sum of age plus years of service be at least 60 and (ii) provided the Compensation Committee with additional discretion to determine whether all, part or none of the outstanding unvested equity awards should remain outstanding and continue to vest upon “Retirement” (as defined in the amended Thompson Award Agreements) approved by the Compensation Committee as an “Approved Retirement”. Prior to these amendments the Thompson Award Agreements defined “Retirement” by reference to the Company’s retirement policies, which did not provide a readily ascertainable standard for this term. In addition, the Thompson Award Agreements provided that upon an Approved Retirement a fixed amount (or fixed formula) of unvested awards would remain outstanding and continue to vest. The Thompson Amendment also confirmed that the Company intended to enter into similar amendments with other members of management holding equity awards with similar terms.
Amendments to Equity Award Agreements For Other NEOs
In December 2017, the Compensation Committee approved amendments to equity award agreements ("EVP Award Agreements") with members of its senior management, including the following NEOs: Rick Anderson, David Montgomery, Bhaskar Rao and Scott Vollet. The amendments to the EVP Award Agreements provide the Compensation Committee with additional discretion to determine whether all, part or none of the outstanding unvested equity awards should remain outstanding and continue to vest upon any "Retirement" (as defined in the amended EVP Award Agreements) approved by the Compensation Committee as an "Approved Retirement. " These amendments to the EVP Award Agreements are similar to the amendments to the Thompson Award Agreements described above.
The award agreements amended are listed below (the "EVP Award Agreements"):
|
|
|
Type of EVP Award Agreement
|
Applicable EVPs
|
RSU Award Agreement, dated October 13, 2017
|
Rao
|
RSU Award Agreement, dated January 5, 2017
|
Anderson, Montgomery, Rao, Vollet
|
Matching Performance Restricted Stock Unit Award Agreement, dated between March 18, 2016 and June 10, 2016
|
Anderson, Rao, Vollet
|
Stock Option Agreement, dated February 27, 2015
|
Anderson, Montgomery, Rao, Vollet
|
RSU Award Agreement, dated February 11, 2016
|
Anderson, Montgomery, Rao, Vollet
|
2018 COMPENSATION ACTIONS
Set forth below is a brief summary of the compensation decisions made by the Compensation Committee in late December 2017 and early 2018 relating to compensation for 2018.
2018 Base Salary
The CEO did not receive an increase in base pay for 2018. For other members of senior management, the Compensation Committee determined that an approximate 3% increase in base pay was appropriate. This decision was based in part on the guidance from F.W. Cook that on average, due to recent turnover, the base salaries for the senior management team other than the CEO were below the 25th percentile for the Peer Group but the base salary for Mr. Thompson was between the 50th and 75th percentile for the Peer Group. The table set forth below list the base salaries for the NEOs for 2017 and 2018:
|
|
|
|
|
|
Named Executive Officer
|
2017 Annual Salary
|
2018 Annual Salary
|
% Increase
|
Scott L. Thompson
|
$1,100,000
|
$1,100,000
|
—
|
|
Bhaskar Rao
(1)
|
$ 430,000
|
$ 443,000
|
3
|
%
|
Richard W. Anderson
|
$ 441,000
|
$ 454,000
|
3
|
%
|
David Montgomery
|
£ 298,577
|
£ 307,534
|
3
|
%
|
Scott J. Vollet
(2)
|
$ 324,450
|
$ 438,000
|
New Role
|
|
|
|
|
|
(1
|
)
|
Mr. Rao was promoted to CFO during 2017. Amount shown for 2017 represents his annualized salary at the end of 2017.
|
(2
|
)
|
Increase for 2018 reflects promotion from Senior Vice President, Global Operations to Executive Vice President, Global Operations effective January 1, 2018.
|
2018 Annual Incentive Program (2018 AIP)
Company-wide Adjusted EBITDA was selected as the sole performance metric for the 2018 AIP, consistent with the change made by the Compensation Committee in 2016 to simplify the program design by eliminating multiple goals and different goals for different groups, and to eliminate subjective goals, and promote collaboration. The Compensation Committee believes that Adjusted EBITDA strongly correlates with long-term stockholder value creation. Performance will be measured with no adjustment for currency fluctuations, consistent with the Company’s financial statements, to further align executive and stockholder interests. In determining whether or not the Adjusted EBITDA goal has been met, the Compensation Committee is authorized to make adjustments to reflect extraordinary events not contemplated by the budget approved by the Board in December 2017. In light of the elimination by the 2017 tax reform legislation of the exemption under Section 162(m) of the Code for “qualified performance based compensation,” the 2018 AIP does not contain a Section 162(m) threshold performance goal as it is no longer relevant.
No adjustments were made to target annual incentive award opportunities for the NEOs for 2018, except that Mr. Vollet’s target bonus was increased from 50% to 70% of his annual base salary in connection with his promotion to Executive Vice President, Global Operations in January 2018.
2018 Annual Long-Term Incentive Grants (Regular Annual Grants)
The Compensation Committee approved annual long-term incentive awards for each of our NEOs for 2018. The Compensation Committee determined that the majority of the 2018 LTIP grant would continue to be in the form of RSUs. In addition, the Compensation Committee determined to include stock options as part of the long-term incentive mix for 2018 for senior management, including the NEOs.
In choosing to provide a portion of the 2018 grants in the form of RSUs, the Compensation Committee noted that NEOs have a significant amount of their overall equity awards in the form of the 2017 Aspirational PRSUs. The Compensation Committee also noted that RSUs are less dilutive, in terms of overall share usage, than stock options, and may help manage potential stockholder dilution from equity plans. In deciding to award stock options, the Compensation Committee noted that these stock options will only have value if and to the extent our share price increases from the grant date to the time of exercise. The 2018 RSUs and stock vest in four equal annual installments on each of the first four anniversaries of the grant date.
The Compensation Committee approved targeted equity values for each of our NEOs in early 2018. For 2018, the Compensation Committee determined that the grant value for Mr. Thompson’s annual grant of RSUs would be at the same level as his RSU grant in 2017 and the overall LTIP target grant value would remain in the top quartile of the Peer Group in light of his
strong performance and the need to retain and motivate a highly experienced CEO with an exceptional record of shareholder value creation. For Messrs. Anderson, Montgomery, Rao and Vollet, the Compensation Committee determined that the grant value for the 2018 RSU grants would also be set at the same level as the RSU grants for the EVPs in 2017 and generally bring the overall LTIP target grant value for the EVPs to the 75th percentile of the Peer Group in connection with moving away from the use of special long-term incentives going forward, other than the 2017 Aspirational PRSUs and similar subsequent programs.
2017 COMPENSATION FOR FORMER NAMED EXECUTIVE OFFICERS
Departure of Mr. Spenchian
The Company announced on February 16, 2017 that Mr. Spenchian would be leaving the Company effective February 28, 2017. Accordingly, this section contains a discussion of the 2017 compensation paid to Mr. Spenchian, as well as other information relevant to an understanding of how and why the Company paid this compensation.
In setting 2017 compensation for Mr. Spenchian, the Company adopted the same overall design, purposes, objective and other aspects of its pay for performance philosophy as it did in setting 2017 executive compensation for the other NEOs. A brief summary of each component of pay is outlined below.
• Base Salary
: Mr. Spenchian, like the other NEOs other than Mr. Rao, did not receive a salary increase as part of the normal review process in 2017. At the time of his departure, Mr. Spenchian’s annual salary was $440,000.
|
|
•
|
Annual Incentive
: Mr. Spenchian’s 2017 target annual incentive opportunity of 70% of salary was identical to his 2016 target opportunity. Per the terms of his employment agreement, Mr. Spenchian received a pro rata portion of his annual incentive target bonus for 2017, equal to a prorated portion of his base salary based on the number of days of the calendar year prior to the effective date of termination, following his termination by the Company without Cause on February 28, 2017.
|
• Long-term Incentives
: Under the regular annual grant process, on January 5, 2017, Mr. Spenchian received 14,029 RSUs with the same terms as grants to other NEOs as described above under the heading “2017 Compensation Actions - 2017 Annual Long-Term Incentive Grants (Regular Annual Grants)” and a special grant of 47,284 stock options with the same terms as grants to other NEOs under the heading “2017 Compensation Actions - 2017 Special Long-Term Incentive Grants”. Pursuant to the terms of the award agreements, following Mr. Spenchian’s termination by the Company without Cause, the number of RSUs was reduced to 1,169 shares to reflect his partial year of service in 2017, with the remaining RSUs subject to the original performance conditions and vesting schedule, and all of the special grant stock options were forfeited.
Severance Compensation:
|
|
|
|
|
|
Name
|
Benefits and Payments
|
Termination By Company
Without Cause($)
|
Jay G. Spenchian
|
Cash Severance
(1)
|
665,012
|
|
|
Annual Incentive Payment
|
48,942
|
|
|
Acceleration of Equity Awards
(2)
|
660,126
|
|
|
Health and Welfare Continuation
(3)
|
18,465
|
|
|
Reimbursement of Legal Fees and Outplacement Services
|
|
|
|
|
(1)
|
For Mr. Spenchian, the amount presented under Cash Severance for Termination by Company without Cause includes cash severance of $36,667.67 per month for 12 months, consulting fees of $37,500 per month for six months, and payment of accrued but unused vacation.
|
(2)
|
The remaining unvested portion (10,530 RSUs) of Mr. Spenchian’s 10,530 RSUs granted December 14, 2014 became immediately vested as a result of the termination. The number of shares of stock covered by one of the outstanding awards was prorated downward as a result of the termination event, and this award will continue to vest, subject to the original performance conditions where applicable and vesting schedule as described above under “2017 Compensation Actions - 2017 Annual Long-Term Incentive Grants (Regular Annual Grants).” Certain other equity awards of Mr. Spenchian were forfeited as a result of the termination.
|
(3)
|
Mr. Spenchian was eligible to continue to participate in welfare benefit plans offered by the Company for a period of one year following termination without Cause.
|
Departure of Mr. Hytinen
The Company announced on September 25, 2017 that Mr. Hytinen would be leaving the Company effective October 13, 2017 to pursue an opportunity outside the bedding industry. Accordingly, this section contains a discussion of the 2017 compensation paid to Mr. Hytinen, as well as other information relevant to an understanding of how and why the Company paid this compensation.
In setting 2017 compensation for Mr. Hytinen, the Company adopted the same overall design, purposes, objective and other aspects of its pay for performance philosophy as it did in setting 2017 executive compensation for the other NEOs. A brief summary of each component of pay is outlined below.
|
|
•
|
Base Salary
: Mr. Hytinen, like the other NEOs, did not receive a salary increase as part of the normal review process in 2017. At the time of his departure, Mr. Hytinen’s annual salary was $460,000.
|
|
|
•
|
Annual Incentive
: Mr. Hytinen’s 2017 target annual incentive opportunity of 70% of salary was identical to his 2016 target opportunity. Per the terms of his employment agreement, Mr. Hytinen did not receive any annual incentive pay for 2017.
|
|
|
•
|
Long-term Incentives
: Under the regular annual grant process, on January 5, 2017, Mr. Hytinen received 14,029 RSUs and 47,284 stock options with the same terms as grants to other NEOs as described above under the headings “2017 Compensation Actions - 2017 Annual Long-Term Incentive Grants (Regular Annual Grants)” and “2017 Compensation Actions - 2017 Special Long-Term Incentive Grants”. Pursuant to the terms of the award agreements, following Mr. Hytinen’s termination all of these RSUs and stock options were forfeited.
|
|
|
•
|
Aspirational PRSUs
: In August 2017 Mr. Hytinen received a grant of 135,000 2017 Aspirational PRSUs, having the same terms as the grants made to other NEOs as discussed above under “2017 Compensation Actions - 2017 Aspirational PRSUs”. Pursuant to the terms of the award agreements, all of these aspirational PRSUs as well as the 2015 Aspirational PRSUs granted to Mr. Hytinen in 2015 were forfeited.
|
OTHER COMPENSATION-RELATED POLICIES
Executive Stock Ownership Guidelines
Our Board of Directors has adopted minimum stock ownership guidelines for our executive officers and Directors. The principal objective of the guidelines is to enhance the linkage between the interests of stockholders and our executive officers and Directors by requiring a meaningful, minimum level of stock ownership. The current guidelines provide that, within five years of becoming subject to the stock ownership guidelines, our CEO should own shares valued at an amount equal to six times his base salary, and that all other executive officers should own shares valued at an amount equal to three times the executive’s base salary. Our Directors also are required to own, within five years of becoming subject to the stock ownership guidelines, shares valued at an amount equal to five times the Director’s annual cash retainer (excluding any cash retainers paid for any committee or as Chair or Lead Director). Compliance will be determined based on the value of holdings of shares of stock and all vested restricted shares, restricted stock units, deferred stock units, performance units and other vested equity awards (“vested awards”), but do not include any unvested equity awards or vested stock options. The value of holdings of stock and vested awards is based on the average closing price of the Company’s common stock on the NYSE for the most recent period from February 15 through May 14. The number of shares underlying vested awards that may be included in the value of the holdings is calculated net of the number of shares necessary to cover estimated taxes with respect to such vested awards that have not yet become payable. Until the guidelines are met, executive officers and Directors are required to retain at least 50% of the “Net Profit Shares,” as defined below, and will be deemed to be in compliance with the guidelines while they comply with this retention obligation. “Net Profit Shares” means all shares of common stock received on vesting or earn-out of vested awards and shares received on exercise of stock options, in each case net of shares of common stock sold or withheld for payment of the exercise price or to pay any taxes related to the equity awards.
If an executive officer or Director achieves compliance with these guidelines and then falls out of compliance as of the end of the next measuring period due to changes in the market price of the common stock or an increase in base salary or cash retainer, that person will not be required to purchase shares in order to regain compliance, but will be deemed to be in compliance if going forward he or she retains at least 50% of his or her Net Profit Shares. In addition, if the person falls out of compliance for any other reason that person will be deemed to have remained in compliance if he or she retained at least 50% of his or her Net Profit Shares. The compliance of any Director who is an employee of an institutional stockholder of the Company, and has waived any right to receive compensation as a Director, will be calculated based on the stock ownership of that institutional stockholder and the average annual cash retainer paid to other Directors as of the end of the measurement period. For 2017, all of our executives and Directors were on track to maintain compliance with the minimum stock ownership guidelines.
Anti-Hedging and Anti-Pledging Policy
The Company’s Insider Trading and Confidentiality Policy prohibits employees, executive officers and members of the Board of Directors from hedging or pledging Company securities.
Clawback Policy
In early 2015, we adopted a Clawback Policy that provides that certain performance-based compensation is recoverable from an officer if we determine that an officer has engaged in fraud, willful misconduct or gross negligence that directly caused or otherwise directly contributed to the need for a material restatement of our financial results. Performance-based compensation includes all annual incentives and long-term incentives with performance features based on our financial performance, whether paid in cash or in equity, where the award or size of the award was contingent on such performance. If our Compensation Committee determines, in its reasonable discretion, that any such performance-based compensation would not have been paid or would have been at a lower amount had it been based on the restated financial results, it will report its conclusions to the Board. If the Board determines action is necessary or appropriate, the Board may within 12 months of such a restatement, to the extent permitted by applicable law, seek recoupment from such officer of the portion of such performance-based compensation that is greater than that which would have been awarded or earned had such compensation been calculated on the basis of the restated financial results
.
Other Benefits / Perquisites
We offer a 401(k) plan to all of our eligible U.S. employees, including our senior management and our NEOs other than Mr. Montgomery, who is a citizen of the United Kingdom. The 401(k) plan is designed to allow employees to save for retirement as well as defer current earnings and recognize them later in accordance with statutory regulations when their individual income tax rates may be more beneficial. In 2017, in accordance with the terms of the plan, we matched 100% of the first three percent of each match-eligible participating employee’s salary that is deferred and 50% of the fourth and fifth percent of salary deferred. We made the matching contribution in 2017 for all match-eligible participating employees, including the match-eligible participating NEOs. In addition, the 401(k) plan permits us to provide a discretionary contribution of up to 3% of eligible compensation to eligible participants. We did not provide a discretionary contribution to plan participants for the year ending December 31, 2017 and do not expect to for the year ending December 31, 2018. However, the decision to make the discretionary contribution is at our sole discretion.
We do not offer any other U.S. defined contribution or defined benefit pension plans in which executive officers, including the NEOs, are eligible to participate. There are no alternate plans in place for senior management except for Mr. Montgomery. For more information regarding Mr. Montgomery’s pension benefits see “Potential Payments upon Termination or Change in Control” elsewhere in this Proxy Statement.
We provide reimbursement for financial planning expenses for NEOs of up to $10,000 per year. The program is intended to cover some, if not most, of the expense associated with having a financial advisor and to allow executives more time to focus on business and personal matters. We also provide a car allowance for Mr. Montgomery in the amount of £15,000 pursuant to the terms of his original employment agreement entered into when he joined us in 2003.
We provide the use of corporate aircraft to certain executives in limited circumstances, as discussed in Note 4 to the Summary Compensation Table included elsewhere in this Proxy Statement.
In the aggregate we believe the perquisites we provide are comparable in scope to those who compete with us for executive talent.
We also offer various broad-based employee benefit plans. NEOs participate in these plans on the same terms as eligible, non-executive employees, subject to any legal limits on the amounts that may apply. Our NEOs also receive certain other benefits that are discussed in Note 4 to the Summary Compensation Table.
Employment Agreements
Each of our NEOs is a party to an employment agreement with the Company. These employment agreements provide for severance arrangements in the event of termination of employment in certain circumstances and also provide for non-competition, non-solicitation and confidentiality agreements. These severance arrangements are discussed in more detail below under “Potential Payments upon Termination or Change in Control.” The employment agreements for our NEOs were put in place at the time they either joined the Company at the level of EVP or above or were promoted to EVP of the Company. We believe that these agreements, including the severance provisions, are necessary to allow us to be competitive in recruiting and retaining top talent for executive officer positions. The Compensation Committee believes that the employment agreements in place for its executive officers are appropriate for our needs. However, as part of its analysis of the reasonableness of each individual element of compensation and each NEO’s compensation package as a whole, the Compensation Committee periodically analyzes these arrangements for reasonableness and market competitiveness.
Tax and Accounting Implications
Deductibility of Compensation under Section 162(m) of the Code
Section 162(m) of the Code limits the Company’s annual deduction for certain compensation paid to certain of our executive officers named in the Summary Compensation Table, to $1 million each year unless certain requirements are met. As a result of the U.S. Tax Cuts and Jobs Act of 2017, the exemption from Section 162(m) for certain “qualified performance based compensation” will not apply beginning in 2018, unless it qualifies for transition relief applicable for compensation paid pursuant to a written binding contract that was in effect on November 2, 2017. Many of the annual bonus programs and long term incentive programs created by the Compensation Committee for 2017 and prior years were designed to be exempt from Section 162(m) as “qualified performance based compensation” but, because of the ambiguities and uncertainties as to the interpretation and scope of the transition relief under the legislation repealing Section 162(m) of the Code’s exemption from the deduction limit, no assurance can be given that compensation intended to satisfy the requirements for exemption from Section 162(m) of the Code will, in fact, be deductible. In addition, the loss of this exemption going forward will likely mean that more of the expense related to our compensation programs for senior management will no longer be deductible for U.S. federal tax purposes. Although the Compensation Committee plans to evaluate and limit the impact of Section 162(m) where possible, it believes that the tax deduction is only one of several relevant considerations in setting compensation. Accordingly, where it is deemed necessary and in our best interests to attract and retain executive talent to compete successfully and to motivate such executives to achieve the goals inherent in our business strategy, the Compensation Committee may approve compensation to executive officers which exceeds the limits of deductibility. In this regard, certain portions of the compensation paid to our NEOs for 2017 and subsequent years may not be deductible for federal income tax purposes under Section 162(m) of the Code.
Accounting for Stock-Based Compensation
We account for stock-based payments, including under the 2003 Equity Incentive Plan and the Amended and Restated 2013 Equity Incentive Plan, in accordance with FASB ASC 718, “Stock Compensation.”
OVERALL COMPENSATION APPROACH AND RISK INCENTIVES
The Compensation Committee considers, in establishing and reviewing compensation programs, whether the programs encourage unnecessary or excessive risk taking and has concluded that they do not. Base salaries are fixed in amount and thus do not encourage risk taking. In 2017, employees were also eligible to receive a portion of their total compensation in the form of “at risk” compensation opportunities, including the annual incentive and, for senior managers, the long-term incentive awards. The portion of “at risk” compensation increases as an employee’s level of responsibility within the Company increases. While the annual incentive awards focus on achievement of annual goals, and annual goals may encourage the taking of short-term risks at the expense of long-term results, the Company’s annual incentive program represents only a portion of eligible employees’ total compensation opportunities. In addition, the AIP currently uses a single metric based on Adjusted EBITDA, which is calculated based on the Company’s audited financial results and a set of pre-established objective adjustments, and for senior executives an objective target created solely for Section 162(m) purposes (for incentive programs adopted prior to 2018). The calculations are reviewed by the Company’s independent public accountants. The Compensation Committee believes that the AIP appropriately balances risk and the desire to focus eligible employees on specific short-term goals important to the Company’s success, and that it does not encourage unnecessary or excessive risk taking.
The majority of “at risk” compensation provided to senior managers is in the form of long-term equity awards that help further align senior managers’ interests with those of the Company’s stockholders. The granting of these awards is generally on an annual and therefore overlapping basis, and these grants are subject to multi-year vesting schedules. As described above, a significant portion of long-term equity awards are provided in the form of stock options, RSUs and PRSUs. In addition, the Company also made special grants of aspirational PRSU awards pursuant to an aspirational program implemented in 2015 and a follow-on program implemented in 2017. The ultimate value of the stock option and RSU awards is tied to the Company’s long-term stock price performance, while the value of the PRSU awards is dependent both on the Company’s operating results over a multi-year period and the price performance of our stock. As additional risk mitigating factors, the performance targets for the 2015 Aspirational PRSUs and 2017 Aspirational PRSUs are based on pre-established goals that are based on the Company’s audited (or, in the case of the 2017 Aspirational PRSUs, quarterly) financial results and a set of objective adjustments. The Compensation Committee’s practice is to have the calculations for these awards reviewed by the Company’s independent public accountants. In addition, the 2017 Aspirational PRSUs are based on aspirational performance targets based on rolling four quarter periods ending between March 31, 2018 and December 31, 2020, and the new program has a performance target range ($600-$650 million) rather than a single target threshold ($650 million). Both of these changes may create less of an incentive to take short-term risks at the expense of long-term results. Based on this long-range focus and these other factors, the Compensation Committee believes that these awards do not encourage unnecessary or excessive risk-taking.
As more fully described above, the Company maintains stock ownership guidelines applicable to executive officers and members of the Board of Directors intended to encourage long-term ownership of a significant amount of Tempur Sealy International stock in order to promote a long-term “owner’s” view of our business. The Compensation Committee believes the Company’s compensation programs encourage employees to strive to achieve both the short and long-term goals that are important to the Company’s success without promoting unnecessary or excessive risk taking.