We are asking our stockholders to approve an amendment (the “Plan Amendment”) to the Company’s 2003 Long-Term Stock Incentive Plan (as amended and restated through January 27, 2018 and further amended effective April 10, 2019, the “Incentive Plan”), to amend the Incentive Plan to increase the number of shares of Common Stock reserved for issuance under the Incentive Plan by 4,800,000 shares of Common Stock.  Currently, a maximum of 19,550,000 shares of Common Stock are reserved for awards under the Incentive Plan, of which 6,829,356 shares remain available for future grants as of April 15, 2020.  Accordingly, if our stockholders approve the Plan Amendment, a total of 24,350,000 shares of Common Stock will be available for grant as awards under the Incentive Plan.  No other changes to the Incentive Plan are proposed.  If our stockholders do not approve the Plan Amendment, the Incentive Plan will remain in effect in its current form, and no shares will be added to the number reserved for future grants.

Our Board approved the Plan Amendment as of April 24, 2020, subject to approval by our stockholders.  Our stockholders originally approved the Incentive Plan at the annual meeting of stockholders held on March 14, 2003, and our stockholders approved amended and restated plans at the annual meetings of stockholders held on March 12, 2008, February 19, 2010, February 26, 2013, and February 28, 2018, and a further amendment at the annual meeting of stockholders held on May 23, 2019.  The Plan Amendment and the full text of the Incentive Plan are set forth in Annexes A and B, respectively to this proxy statement, which are hereby incorporated by reference into this discussion (and the discussion in this proposal is qualified in its entirety by the full text of the Plan Amendment and the Incentive Plan).

At last year’s annual meeting of stockholders, our stockholders approved an amendment increasing the number of shares available under the Incentive Plan by 6,200,000 shares of Common Stock, which the Company then estimated would provide sufficient shares for our equity compensation program needs for approximately two years after the effective date of the amendment, including awards made in connection with future corporate transactions.  Subsequent to stockholder approval of that share increase, movement in the price of our Common Stock, among other factors, has resulted in a larger allocation of shares reserved under the Incentive Plan than previously anticipated, because the number of restricted stock units, performance share units and options granted under the plan each year is determined by reference to the value of a share of our Common Stock.  As a result, additional shares are needed to maintain our equity compensation program under the Incentive Plan.

If stockholders do not approve the amendment to the Incentive Plan, we expect the number of shares reserved for awards to be substantially depleted by the end of the 2021 fiscal year.  Moreover, based on the historic burn rate as calculated below and our expectations for upcoming grants, we do not expect the number of our currently available awards to be sufficient to fulfill the needs for our fiscal year 2021 annual grants.

Our Board believes the additional 4,800,000 shares that would be available for grant under the Incentive Plan, if the Plan Amendment is approved, would provide sufficient shares for our equity compensation program needs, including awards that may be made in connection with future corporate transactions, for approximately two years after the effective date of the Plan Amendment.  This estimate is based on our burn rate, as described below, taking into account potential shares needed to settle outstanding performance share unit grants and anticipated budgeted aggregate annual equity grant value and mix (although actual grants could be materially different from this estimate).  In addition, because the number of long-term incentive awards granted under the Incentive Plan in each fiscal year is determined by reference to the value of a share of our Common Stock, changes in the value of our stock price, which cannot be reliably forecasted, may meaningfully impact the number of shares required to meet our equity compensation program needs.

The Board considered various aspects of our equity compensation program under the Incentive Plan in approving the Plan Amendment, including the number of shares reserved under the Incentive Plan, the number of shares currently available for awards under the Incentive Plan, the Company’s historic grant practices and expectations for future grants, the cost of issuing additional shares, the impact of share dilution on our existing shareholders and the central role of equity-based incentive compensation in our executive compensation program.  The Board believes that the proposed increase in the number of shares available for issuance under the Incentive Plan is necessary for retaining the flexibility to grant equity-based incentive compensation at optimal levels to

motivate and reward the Company’s employees for their contributions to the success of the Company and the growth in value of our stock, and to support the continued growth of the Company through potential future acquisition transactions.

If the Plan Amendment is not approved by our stockholders, our future ability to issue equity-based awards will be limited.  As a result, our ability to align employee compensation with stockholders would be constrained.  In addition, the inability to maintain our equity award program could impede our ability to attract and retain qualified employees and, under current accounting rules, result in increased volatility of reported earnings if it is necessary to replace stock-settled awards with cash-settled awards.

(1)              Of such shares, 3,531,102 are underlying option awards.

We note that the number of shares remaining available for grant as described above differs from those reported below under Equity Compensation Plan Information, because that information, required by SEC disclosure rules, is dated as of December 31, 2019, and therefore does not take into account year-to-date grants for 2020.

The following table includes information regarding all outstanding equity awards (i.e., awards under the Incentive Plan, awards under any predecessor plans and certain awards granted as inducement/make-whole awards on a non-plan basis) and shares available for future awards under the Incentive Plan as of April 15, 2020 (and without giving effect to the Plan Amendment under this Proposal No. 4):

Governance Highlights of the Incentive Plan

The Incentive Plan incorporates certain compensation governance provisions that reflect best practices.  These provisions are not impacted by the Plan Amendment, and include:

• No payment of dividends, dividend equivalents and other distributions in respect of unvested stock-based awards;
• Minimum 100% fair market value exercise price for options and stock appreciation rights;
• No repricing of options or stock appreciation rights and no buyout of underwater options or stock appreciation rights without stockholder approval;
• No dividend equivalents on options or stock appreciation rights;
• No “liberal” share recycling of any awards;
• No evergreen provision;
• No “liberal” change in control definition;
• No excise tax gross-up on change in control benefits; and
• Clawback provisions.

Summary of the Incentive Plan

The following summary of the Incentive Plan is qualified by reference to the full text thereof, which is attached as Annex B to this proxy statement.  The Incentive Plan’s primary purpose is to promote the success of our business by serving as a means to attract and retain qualified personnel, provide additional incentives to employees, directors and consultants, increase participants’ interest in our welfare.

General

The Compensation Committee of our Board administers the Incentive Plan.  In the future, the Board or other committees may be allocated some or all of the Compensation Committee’s duties.  The Compensation Committee

consists solely of two or more directors who are independent in accordance with Rule 16b-3 under the Securities Exchange Act and, to the extent required, with the Internal Revenue Code, or “Code”.  The Compensation Committee is authorized to:

• interpret the Incentive Plan and all awards;
• establish and amend rules and regulations for the Incentive Plan’s operation;
• select recipients of awards;
• determine the form, amount and other terms and conditions of awards;
• modify or waive restrictions on awards;
• amend awards; and
• grant extensions and accelerate awards.

Our officers and other employees, directors and consultants, in addition to those of our subsidiaries, are eligible to be selected to participate in the Incentive Plan.  Incentive stock options may be granted only to our employees and employees of our subsidiaries in which we own directly or indirectly more than a 50% voting equity interest.  The Compensation Committee has the sole discretion to select participants from among the eligible persons.  As of December 31, 2019, the Company had 11 non-employee directors, 8 officers, approximately 144 employees and consultants or other service providers to the Company who are, in each case, eligible to participate in the Incentive Plan.

Before giving effect to the Plan Amendment, the aggregate number of shares of Common Stock which may be issued under the Incentive Plan with respect to awards may not exceed 19,550,000.  The Plan Amendment would increase this number of shares by 4,800,000 to 24,350,000.  No awards relating to any of these additional shares will be granted unless our stockholders approve the Plan Amendment.  The proposed 24,350,000 share limit (giving effect to the Plan Amendment) is subject to adjustment for certain transactions affecting the Common Stock.  Each share issued pursuant to awards under the Incentive Plan (whether issued prior to or following the date of stockholder approval of the Plan Amendment) will be counted against the share limit as one full share.  If an award is cancelled, forfeited, or expires unexercised, the number of shares of Common Stock under such award will be added back to the shares available for grant under the Incentive Plan.  The number of shares available for grant under the Incentive Plan shall not be increased by (a) any shares not issued or delivered as a result of a net settlement of an award, (b) any shares withheld to pay an exercise price or withholding taxes related to an award, or (c) shares of our Common Stock repurchased on the open market with the proceeds of an option exercise.

No individual may be granted, in any fiscal year, awards under the Incentive Plan covering or relating to an aggregate of more than 3,000,000 shares of our Common Stock and no individual shall receive payment for cash awards made under the Incentive Plan during any fiscal year aggregating in excess of $3,000,000.  In addition, no non-employee director of the Company may be granted, in any fiscal year, cash and non-cash compensation with an aggregate value in excess of $500,000.

The Incentive Plan provides for the grant of:

• stock options, including incentive stock options and nonqualified stock options;
• stock appreciation rights, in tandem with stock options or freestanding;
• restricted stock awards;
• restricted stock unit awards;

• performance share awards;
• phantom stock awards; and
• cash awards.

The Compensation Committee may grant awards individually, in combination, or in tandem.  The Compensation Committee may also authorize the assumption of awards granted by other entities that are acquired by us or otherwise.

All awards will be evidenced by award agreements, as determined by the Compensation Committee.  The award will be effective on the date of grant unless the Compensation Committee specifies otherwise.

The exercise or measurement price will be at least equal to the fair market value of our Common Stock.  The fair market value generally is determined to be the closing sales price quoted on the NYSE on the day of the grant of the award.

Awards will normally terminate on the earlier of (i) ten years from the date of grant, (ii) 30 days after termination of employment or service for a reason other than death, disability or retirement, (iii) one year after death or (iv) one year (for incentive stock options) or five years (for other awards) after disability or retirement.

Awards are non-transferable except by disposition on death or to certain family members, trusts and other family entities as the Compensation Committee may approve.

Awards may be paid in cash, shares of our Common Stock or a combination, in a lump sum or installments, as determined by the Compensation Committee.

A participant’s breach of the terms of the Incentive Plan or the award agreement will result in a forfeiture of the award.

Options

Options granted under the Incentive Plan may be:

• incentive stock options, as defined in the Code; or
• nonqualified options, which do not qualify for treatment as incentive stock options. 

The Compensation Committee selects the recipients of options and sets the terms of the options, including:

• the number of shares for which an option is granted;
• the term of the option; and
• the time(s) when the option can be exercised.

The Compensation Committee determines how an option may be exercised, whether for cash or securities.  The exercise price of an option may not be less than the fair market value of a share of our Common Stock on the grant date, and the option term may be no longer than ten years.  Arrangements may also be made, if permitted by law, for same-day-sale and margin account transactions through FINRA dealers.  The fair market value of Common Stock an employee may purchase during any calendar year by exercise of incentive stock options is limited to $100,000.  No dividends, dividend equivalents or other distributions are payable in respect of options until the options are exercised and settled into shares of our Common Stock.

An option agreement or the Compensation Committee’s procedures may set forth conditions respecting the exercise of an option.  The Compensation Committee may in its discretion waive any condition respecting the exercise of any option and may accelerate the time at which any option is exercisable.

Stock Appreciation Rights

A stock appreciation right is a grant entitling the participant to receive an amount in cash or shares of Common Stock or a combination thereof, as the Compensation Committee may determine, in an amount equal to the increase in the fair market value between the grant and exercise dates of the shares of Common Stock with respect to which the stock appreciation right is exercised.  The exercise price of a stock appreciation right may not be less than the fair market value of a share of our Common Stock on the grant date, and the term of a stock appreciation right may be no longer than ten years.  Stock appreciation rights may be granted separately or in tandem with the grant of an option.

A stock appreciation right granted in tandem with a nonqualified option may be granted either at or after the time of the grant of the nonqualified option.  A stock appreciation right granted in tandem with an incentive stock option may be granted only at the time of the grant of the incentive stock option.  A stock appreciation right granted in tandem with an option terminates and is no longer exercisable upon the termination or exercise of the related option.  The Compensation Committee may set the terms and conditions of stock appreciation rights, subject to the limitations set forth in the Incentive Plan.  At any time it may accelerate the exercisability of any stock appreciation right and otherwise waive or amend any conditions to the grant of a stock appreciation right.

Restricted Stock

A restricted stock grant entitles the recipient to acquire, at no cost or for a purchase price determined by the Compensation Committee on the date of the grant, shares of our Common Stock subject to such restrictions and conditions as the Compensation Committee may determine at the time of the grant.  The recipient may have all the rights of a stockholder with respect to the restricted stock.  These rights include voting and dividend rights, and they are effective as soon as:

• restricted stock is granted (or upon payment of the purchase price for restricted stock); and
• issuance of the restricted stock is recorded by our transfer agent.

Any restricted shares cease to be restricted stock and will be deemed “vested” after the lapse of all restrictions.  Restrictions lapse, and restricted stock becomes vested, ratably over a specified period of time or upon the participant’s death, disability or retirement, the occurrence of a change in control (in certain circumstances), or other appropriate event as determined by the Compensation Committee.

A participant will have the right to vote the shares of Common Stock, except that unless otherwise provided in an award agreement, the participant will not be entitled to delivery of the Common Stock until all restrictions lapse.

If a participant’s employment or service is terminated for any reason prior to shares of restricted stock becoming vested, we have the right, in the discretion of the Compensation Committee, to:

• repurchase the unvested shares at their purchase price; or
• require forfeiture of those shares if acquired at no cost.

Restricted Stock Unit Awards

A restricted stock unit award is an award denominated in units evidencing the right to receive shares of our Common Stock, subject to vesting or such other terms and conditions as determined by the Compensation Committee.  Prior to vesting, the recipient has no voting or dividend rights with respect to the shares evidenced by a restricted stock unit award, however, the Compensation Committee may award cash dividend equivalents with

respect to a restricted stock unit award.  Upon vesting or satisfaction of any other conditions established by the Compensation Committee, the recipient of a restricted stock unit award becomes entitled to receive a share of our Common Stock with respect to each restricted stock unit.

Performance Share Awards

The Compensation Committee may grant performance share awards, which are rights to receive shares of our Common Stock or their cash equivalent based on the attainment of pre-established performance goals and such other conditions, restrictions and contingencies as the Compensation Committee may determine.  Performance measures may include future performance by the grantee, us or any subsidiary, division or department.

Payment will be made after the performance period based on the achievement of the performance measures as determined by the Compensation Committee.

Phantom Stock Awards

The Compensation Committee may grant phantom stock awards, which are rights to receive the fair market value of shares of our Common Stock, or the increase in the fair market value, during a period of time.  The award may vest over a period of time specified by the Compensation Committee.  Payment will be made following the prescribed period and may be made in cash, shares of our Common Stock or a combination as the Compensation Committee determines.

Cash Awards

The Compensation Committee may grant cash awards, which are bonuses paid in cash that are based solely upon the attainment of one or more performance goals that have been established by the Compensation Committee.  The terms, conditions and limitations applicable to any cash awards will be determined by the Compensation Committee.

Performance Awards

At the discretion of the Compensation Committee, any of the above-described awards may be designated a performance award.  Cash awards may only be designated as performance awards.  Performance awards will be contingent upon performance measures applicable to a particular period, as established by the Compensation Committee, based upon any one or more of the following:

• revenue or increased revenue;
• net income measures (including, but not limited to, income after capital costs, economic profit and income before or after taxes);
• profit measures (including, but not limited to, gross profit, operating profit, net profit before taxes and adjusted pre-tax profit);
• stock price measures (including, but not limited to, growth measures and total stockholder return);
• price per share of Common Stock;
• market share;
• earnings;
• earnings per share or adjusted earnings per share (actual or growth in);
• earnings before interest, taxes, depreciation and amortization (EBITDA);

• earnings before interest and taxes (EBIT);
• economic value added (or an equivalent metric);
• market value added;
• debt to equity ratio;
• cash flow measures (including, but not limited to, cash flow return on capital, cash flow return on tangible capital, net cash flow and net cash flow before financing activities);
• return measures (including, but not limited to, return on equity, return on assets, return on capital, risk-adjusted return on capital, return on investors’ capital and return on average equity);
• operating measures (including operating income, funds from operations, cash from operations, after-tax operating income, sales volumes, production volumes and production efficiency);
• expense measures (including, but not limited to, overhead costs and general and administrative expense);
• changes in working capital;
• margins;
• stockholder value;
• total stockholder return;
• proceeds from dispositions;
• total market value;
• customer satisfaction or growth;
• employee satisfaction; and
• corporate values measures (including ethics compliance, environmental and safety).

Such performance measures may apply to the grantee, to one or more business units, divisions or subsidiaries of the Company or the applicable sector of the Company, or to the Company as a whole.  Goals may also be based upon performance relative to a peer group of companies.  The Compensation Committee may select other criteria not included in the preceding list, and may modify or waive the performance goals or conditions to the granting or vesting of a performance award.

Provisions Relating to a Change in Control, Death, Disability and Retirement

The Incentive Plan provides certain benefits in the event of a change in control, including accelerated vesting and payment if awards are not assumed, substituted or continued by a successor or as may otherwise be determined by the Compensation Committee.  A change in control is deemed to have occurred if:

• any person acquires beneficial ownership of 25% or more of our voting securities, unless the acquisition was not entered into for the purpose of, and does not have the effect of, changing or influencing the control of, the Company;

• as a result of, or in connection with, a tender or exchange offer, merger or other business combination, there is a change in the composition of a majority of our Board; or
• we merge or consolidate with, or transfer substantially all of our assets to, another corporation, after which less than 50% of the voting securities of us or the surviving entity outstanding immediately thereafter is owned by our former stockholders; or a tender or exchange offer results in the acquisition of 30% or more of our outstanding voting securities.

However, a change in control would not be deemed to occur if a person that already controls us acquires more of our voting securities.  Upon the occurrence of a change in control in which awards are not honored, assumed, continued, substituted or replaced, or a participant’s death, disability or retirement, all outstanding awards will immediately vest or become exercisable or payable, and all forfeiture restrictions will lapse, unless the related agreements provide otherwise.

Limitation on Payment of Dividends and Dividend Equivalents

Notwithstanding anything to the contrary, during the period of restriction of shares of restricted stock, and prior to the vesting and settlement of restricted stock unit awards and performance share awards, all dividends and dividend equivalents or other distributions paid with respect to such awards will be retained by the Company.  Such dividends and dividend equivalents or other distributions will revert to the Company if the awards revert to the Company or are not settled into shares of our Common Stock.  Upon the expiration of the period of restriction or upon settlement, all such dividends and dividend equivalents or other distributions made on such awards and retained by the Company will be paid, without interest, to the relevant participant.  No dividends, dividend equivalents or other distributions are payable in respect of options, stock appreciation rights or phantom stock awards until the options are exercised and settled into shares of our Common Stock.

Other Modifications

In the event of specified changes in our capital structure, the Compensation Committee will have the power to adjust the number and kind of shares authorized by the Incentive Plan (including any limitations on individual awards) and the number, option price or kinds of shares covered by outstanding awards.  The Compensation Committee will also have the power to make other appropriate adjustments to awards under the Incentive Plan.

No Repricing of Options or Stock Appreciation Rights

Outstanding options and stock appreciation rights may not be amended to reduce their exercise price, or cancelled in exchange for cash or other awards with an exercise price that is less than the exercise price of the original options or stock appreciation rights, or otherwise be subject to any action that would be treated as a repricing, without stockholder approval.

Awards Subject to Clawback Policy

Awards under the Incentive Plan are subject to the Company’s Clawback Policy and any successor policy that the Company may adopt in the future.  As such, they may be subject to the requirement that the awards be repaid to the Company after they have been distributed to the participant.  See “Compensation Discussion & Analysis — Compensation Philosophy and Objectives of Cornerstone’s Compensation Program.”

Federal Income Tax Consequences

The Code provides that a participant receiving a nonqualified option ordinarily does not realize taxable income upon the grant of the option.  A participant does, however, realize compensation income taxed at ordinary income tax rates upon the exercise of a nonqualified option to the extent that the fair market value of the Common Stock on the date of exercise exceeds the option price.  Subject to the discussion under “— Certain Tax Code Limitations on Deductibility” below, we are entitled to a federal income tax deduction for compensation in an amount equal to the ordinary income so realized by the participant.  When the participant sells the shares acquired pursuant to a

nonqualified option, any gain or loss will be capital gain or loss.  This assumes that the shares represent a capital asset in the participant’s hands, although there will be no tax consequences for us.

The grant of an incentive stock option does not result in taxable income to a participant.  The exercise of an incentive stock option also does not result in taxable income, provided that the circumstances satisfy the employment requirements in the Code.  However, the exercise of an incentive stock option may give rise to alternative minimum tax liability for the participant.  In addition, if the participant does not dispose of the Common Stock acquired upon exercise of an incentive stock option during the statutory holding period, then any gain or loss upon subsequent sale of the Common Stock will be a long-term capital gain or loss.  This assumes that the shares represent a capital asset in the participant’s hands.

The statutory holding period lasts until the later of:

• two years from the date the option is granted; or
• one year from the date the Common Stock is transferred to the participant pursuant to the exercise of the option.

If the employment and statutory holding period requirements are satisfied, we may not claim any federal income tax deduction upon either the exercise of the incentive stock option or the subsequent sale of the Common Stock received upon exercise.  If these requirements are not satisfied (a “disqualifying disposition”), the amount of ordinary income taxable to the participant is the lesser of:

• the fair market value of the Common Stock on the date of exercise minus the option price; or
• the amount realized on disposition minus the option price.

Any excess is long-term or short-term capital gain or loss, assuming the shares represent a capital asset in the participant’s hands.  Subject to the discussion under “Certain Tax Code Limitations on Deductibility” below, in the case of a disqualifying disposition, we are entitled to a federal income tax deduction in an amount equal to the ordinary income realized by the participant.

The exercise of an option through the exchange of previously acquired stock will generally be treated as a non-taxable like-kind exchange as to the number of shares given up and the identical number of shares received under the option.  That number of shares will take the same tax basis and, for capital gain purposes, the same holding period as the shares that are given up.  The value of the shares received upon such an exchange which are in excess of the number given up will be taxed to the participant at the time of the exercise as ordinary income, taxed as compensation.  The excess shares will have a new holding period for capital gains purposes and a tax basis equal to the value of such shares determined at the time of exercise.  If the tendered shares were acquired through the prior exercise of an incentive stock option and do not satisfy the statutory two-year and one-year holding periods (“disqualified shares”), then the tender will result in compensation income to the optionee taxed as ordinary income equal to the excess of the fair market value of the disqualified shares, determined when the prior incentive stock option was exercised, over the exercise price of the disqualified shares.  The optionee will increase his tax basis in the number of shares received on exercise equal to the number of shares of disqualified shares tendered by the amount of compensation income recognized by the optionee with respect to the disqualified shares.  Generally, the federal income tax consequences to the optionee are similar to those described above relating to the exercise of an option through the exchange of non-disqualified shares.

If an optionee exercises an option through the cashless exercise method by authorizing a broker designated by Cornerstone to sell a specified number of the shares to be acquired through the option exercise having a market value equal to the sum of the option exercise plus any transaction costs (the “cashless shares”), the optionee should be treated as constructively receiving the full amount of option shares, followed immediately by a sale of the cashless shares by the optionee.  In the case of an incentive stock option, the cashless exercise method would result in the cashless shares becoming disqualified shares and taxed in a manner described above for disqualified shares.

In the case of a nonqualified option, the cashless exercise method would result in compensation income to the optionee with respect to both the cashless shares and remaining option shares as discussed above relating to nonqualified options.  Since the optionee’s tax basis in the cashless shares that are deemed received and simultaneously sold on exercise of the option is equal to the sum of the exercise price and the compensation to the optionee, no additional gain should be recognized by the optionee upon the deemed sale of the cashless shares.

Under Section 83(b) of the Code, an employee may elect to include in ordinary income, as compensation at the time restricted stock is first issued, the excess of the fair market value of the stock at the time of issuance over the amount paid, if any, by the employee.  In this event, any subsequent change in the value of the shares will be recognized for tax purposes as capital gain or loss upon disposition of the shares, assuming that the shares represent a capital asset in the hands of the employee.  An employee makes a Section 83(b) election by filing the election with the IRS no later than 30 days after the restricted stock is transferred to the employee.  If a Section 83 (b) election is properly made, the employee will not be entitled to any loss deduction if the shares with respect to which a Section 83(b) election was made are later forfeited.  Unless a Section 83(b) election is made, no taxable income will generally be recognized by the recipient of a restricted stock award until the shares are no longer subject to the restrictions or the risk of forfeiture.  When either the restrictions or the risk of forfeiture lapses, the employee will recognize ordinary income, taxable as compensation, in an amount equal to the excess of the fair market value of the Common Stock on the date of lapse over the amount paid, if any, by the employee for the stock.

Generally, an employee will not recognize any taxable income upon the grant of stock appreciation rights, performance shares, RSUs, phantom stock or a cash award.  At the time the employee receives the payment for the stock appreciation right, performance shares, RSUs, phantom stock or cash award, the fair market value of shares of Common Stock or the amount of any cash received in payment for such awards generally is taxable to the employee as ordinary income.

Subject to the discussion under “Certain Tax Code Limitations on Deductibility” below, we or one of our subsidiaries will be entitled to a deduction for federal income tax purposes at the same time and in the same amount that an employee recognizes ordinary income from awards under the Incentive Plan.

The exercisability of an option or a stock appreciation right, the payment of performance share or phantom stock awards or the elimination of restrictions on restricted stock, may be accelerated, and special cash settlement rights may be triggered and exercised, as a result of a change in control.  If any of the foregoing occurs, all or a portion of the value of the relevant award at that time may be a parachute payment, discussed under “Golden Parachute Tax and Code Section 280G” below.  This is relevant for determining whether a 20% excise tax (in addition to income tax otherwise owed) is payable by the participant as a result of the receipt of an excess parachute payment pursuant to the Code.  We will not be entitled to a deduction for that portion of any parachute payment which is subject to the excise tax.

Certain Tax Code Limitations on Deductibility

Section 162(m) of the Internal Revenue Code imposes a $1 million limit on the amount that a public company may deduct each year for compensation paid to “covered employees,” which includes compensation under the Incentive Plan.  Please see “Compensation Discussion & Analysis — Deductibility of Compensation” for more information regarding Section 162(m) of the Code.

Golden Parachute Tax and Code Section 280G

The Incentive Plan may, in certain circumstances, provide for immediate vesting of all then outstanding unvested awards upon a change in control.  If the vesting of the award is accelerated as the result of a change in control, all or a portion of the value of the award at that time might be a “parachute payment” under Section 280G of the Code for certain employees.  Section 280G of the Code generally provides that if compensation received by the grantee that is contingent on a change in control equals or exceeds three times the grantee’s average annual compensation for the five taxable years preceding the change in control (a “parachute payment”), the Company will not be entitled to a deduction, and the recipient will be subject to a 20% excise tax with respect to that portion of the parachute payment in excess of the grantee’s average annual compensation.  Section 280G of the Code generally applies to employees or other individuals who perform services for the Company if, within the 12-month period

preceding the change in control, the individual is an officer of the Company, a stockholder owning more than 1% of the stock of the Company, or a member of the group consisting of the lesser of the highest paid 1% of the employees of the Company or the highest paid 250 employees of the Company.

Additional Medicare Tax

An employee will also be subject to a 3.8% tax on the lesser of (i) the recipient’s “net investment income” for the relevant taxable year and (ii) the excess of the recipient’s modified adjusted gross income for the taxable year over a certain threshold (between $125,000 and $250,000, depending on the recipient’s circumstances).  The recipient’s net investment income generally includes net gains from the disposition of shares.  Employees are urged to consult their tax advisors regarding the applicability of this Medicare tax to their income and gains in respect of their investment in the shares.

Code Section 409A

The Incentive Plan permits the grant of various types of incentive awards that may or may not be exempt from Section 409A of the Code.  If an award is subject to Section 409A, and if the requirements of Section 409A are not met, the award could be subject to tax at an earlier time than described above and could be subject to additional taxes and penalties.  We intend that awards under the Incentive Plan either be exempt from, or satisfy the requirements of, Section 409A and the Incentive Plan is intended to be administered and interpreted in accordance with Section 409A.

THE ABOVE SUMMARY OF THE EXPECTED EFFECT OF THE FEDERAL INCOME TAX UPON PARTICIPANTS IN THE INCENTIVE PLAN IS NOT COMPLETE, AND WE RECOMMEND THAT THE PARTICIPANTS CONSULT THEIR OWN TAX ADVISORS FOR COUNSELING.  MOREOVER, THE ABOVE SUMMARY IS BASED UPON CURRENT FEDERAL INCOME TAX LAWS, WHICH ARE SUBJECT TO CHANGE.  THE TAX TREATMENT UNDER FOREIGN, STATE OR LOCAL LAW IS NOT COVERED IN THE ABOVE SUMMARY.

New Plan Benefits

Awards under the Incentive Plan, as amended by Plan Amendment, will remain subject to the Compensation Committee’s discretion.  As a result, we cannot determine the number or type of awards that will be granted to any participant under the Incentive Plan for the 2020 fiscal year or in subsequent fiscal years.  As described further below under Compensation Discussion & Analysis — Long-Term Incentive Compensation —Long-Term Incentive Awards Granted to NEOs in 2019, as a result of the Merger and the Fiscal Year Change, our Named Executive Officers did not receive an annual grant of long-term incentive awards during Fiscal 2019.  The stock options, RSUs and PSUs granted under the Incentive Plan for our 2018 fiscal year and the Transition Period, which would not have changed if the Plan Amendment had been in place during those time periods, were as follows:

(1)   Dollar value reflects the gross number of stock options, RSUs and PSUs granted by the Company, multiplied by the closing price per share of our Common Stock on the applicable grant date.  PSUs are based on assumed target performance.  The amounts reported in the “Option Awards” column reflect the aggregate grant date fair value of the option awards, computed in accordance with FASB ASC Topic 718.  See Note 7 of the consolidated

financial statements in Cornerstone’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for additional detail regarding assumptions underlying the valuation of equity awards of options.

Industries, Inc.’s President of U.S. Windows and Doors group from 2013 to November 15, 2018.  Mr. Steinhafel joined Ply Gem in 2010, and prior to his appointment to President of the Ply Gem’s U.S. Window and Door group had served as Senior Vice President of Sales for Ply Gem’s U.S. Window and Door group.  Prior to joining Ply Gem, Mr. Steinhafel worked for Atrium Windows from 2008 to 2010 as President of the Central Region and for Peachtree Window Companies in various capacities from 1999 to 2007.  Mr. Steinhafel received a BS in Industrial Technology from the University of Wisconsin-Stout in 1992.

Katy K. Theroux, age 51, has served as our Executive Vice President, Chief Human Resources Officer since November 2018.  Ms. Theroux served as our Executive Vice President, Corporate Marketing and Chief Human Resources Officer from July 2017 to November 2018, and as our Vice President, Chief Human Resources officer from September 2014 to June 2017.  Before joining Cornerstone, Ms. Theroux was employed by 1WORLDSYNC, where she served as Chief Marketing and Administrative Officer from 2012 to 2013, and was responsible for the integration of two multinational technology services companies.  Prior to joining 1WORLDSYNC, Ms. Theroux served as Senior Vice President, Customer Engagement & Solutions for its parent, GS1 US and 1SYNC from 2007 to 2012, and was responsible for customer support, marketing, human resources and facilities shared services for all operating units.  Ms. Theroux also served as its Chief Human Resources Officer from 2006 to 2012.  Ms. Theroux served as Chairman of the Board of Peirce College until June 2015.  Ms. Theroux has a B.S. from Syracuse University and an M.B.A. from Saint Peter’s University.

Introduction

This Compensation Discussion & Analysis (“CD&A”) provides information regarding Cornerstone’s compensation programs for our Chief Executive Officer (“CEO”), our Chief Financial Officer (“CFO”), our former CFO, and our three other most highly compensated executive officers during fiscal year ended December 31, 2019 (“Fiscal 2019”).

Throughout this discussion, the following individuals are referred to collectively as the “Named Executive Officers” or “NEOs” and are included in the Summary Compensation Table that follows this discussion:

• James S. Metcalf, Chairman and Chief Executive Officer;
• Jeffrey S. Lee, Executive Vice President, Chief Financial Officer;
• Shawn K. Poe, Former Chief Financial Officer;
• Donald R. Riley, former Chief Executive Officer, Commercial Business Unit and Head of Supply Chain & Technology;
• Katy K. Theroux, Executive Vice President, Chief Human Resources Officer; and
• John L. Buckley, President, Siding Business Unit — Residential

Summary of Compensation Matters for Fiscal 2019

This CD&A describes our Named Executive Officers’ compensation during Fiscal 2019.  During Fiscal 2019, the following events occurred:

• The Company granted equity awards to certain key employees considered critical to the success of the combined company, including certain of our NEOs, which consisted of options, RSUs and PSUs.  See “Executive Compensation” — Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table — Fiscal 2019.”
• Mr. Poe resigned as the Company’s CFO, effective as of May 31, 2019.  On June 3, 2019, the Company appointed Mr. Lee as its Executive Vice President and Chief Financial Officer, effective June 17, 2019.  In connection with this appointment, the Company entered into an employment agreement with Mr. Lee.  For a description of the material terms of the employment agreement and for a discussion of enhanced severance benefits upon a termination in connection with a change in control of the Company, see “Compensation Discussion & Analysis — Other Compensation — Termination and Change in Control Agreements.”

On February 10, 2020, following the end of Fiscal 2019, Donald R. Riley ceased to serve as Chief Executive Officer of the Commercial Business Unit and Head of Supply Chain and Technology of the Company.  Both positions were eliminated consistent with the previously announced merger integration synergies and cost reduction initiatives implemented in connection with the merger between NCI Building Systems, Inc. and Ply Gem Parent, LLC (“Ply Gem”) which was consummated on November 16, 2018 (the “Merger”), resulting in the formation of the Company as it is presently constituted.

At our most recent shareholder advisory vote on executive compensation at our 2019 Annual Meeting, more than 99% of the votes cast on the advisory “say-on-pay” resolution were voted in favor of the compensation philosophy, policies and procedures and the compensation of the NEOs as disclosed in our 2019 proxy statement.  The Compensation Committee viewed the result of this advisory vote as strongly supportive of our pay-for-performance philosophy.  Our Compensation Committee continually evaluates Cornerstone’s compensation 

practices so as to best align the interests of our senior executives and our stockholders and will continue to do so such that they remain aligned with our compensation objectives.  Our Board, Compensation Committee and management team all value the opinions of our stockholders and are committed to considering their opinions in making these important decisions.  In light of these results, the Compensation Committee maintained many of our existing executive compensation programs during Fiscal 2019, and made such changes to the long-term incentive compensation program that the Compensation Committee determined were necessary to align the goals of the Company’s management team and continue to provide a unified incentive structure following the Merger.  See “Compensation Discussion & Analysis — Long-Term Incentive Compensation.”

The compensation decisions described in this proxy statement were generally made prior to the global outbreak of COVID-19 and the resulting disruptions to markets in which the Company operates.  The Compensation Committee expects to monitor the impact of the pandemic on our industry and the Company, and will continue to review and consider the Company’s compensation arrangements, including any such changes that it determines to be advisable as a result of COVID-19 and its impact on our business. 

Compensation Philosophy and Objectives of Cornerstone’s Compensation Program

Our executive compensation philosophy remains that executive pay should be linked to the performance of Cornerstone and the individual executives.  Our Compensation Committee has established the following objectives for our executive compensation programs:

• attract, retain and motivate exceptional executives;
• reward performance measured against established goals;
• provide incentives for future performance; and
• align executives’ long-term interests with the interests of our stockholders.

In support of these goals, we designed our compensation programs to reward excellent short-term performance and to encourage executives’ commitment to Cornerstone’s long-term, strategic business goals.  Long-term incentives balance the emphasis on long-term versus short-term business objectives and reinforce that one should not be achieved at the expense of the other.  We believe that long-term incentive compensation helps to further Cornerstone’s compensation objectives, including the retention of high-performing, experienced executives whose interests are strongly aligned with the interests of stockholders.  Further, a multi-year vesting period for grants of restricted stock or RSUs, stock options and PSUs helps to ensure that the value received by executives depends on the strong financial and stock price performance of Cornerstone over time.  We balance short- and long-term compensation through salary and performance bonuses, and the grant of restricted stock or RSUs, stock options, and PSUs, respectively.  Our goal is to increase the proportion of long-term compensation as an executive’s responsibility and accountability for Company results increases.

Cornerstone has a clawback policy (the “Clawback Policy”) designed to better align our compensation practices with our stockholders’ interests by providing a mechanism to recover incentive compensation that is based on inaccurate financial information.  Our Clawback Policy, which covers all current and former executive officers (including the NEOs), allows for recovery of cash, equity or other incentive compensation in the event Cornerstone is required to prepare a material financial restatement due to noncompliance with any financial reporting requirement under the U.S. securities laws, where the noncompliance is the result of misconduct.  The Clawback Policy applies to all incentive compensation that is earned or vested after the date the policy was adopted (regardless of when granted) and which is determined in whole or in part based on application of performance measures.  Upon a determination that the Clawback Policy will be applied, the Board may recover up to the excess of the amount of the compensation actually received by a covered officer over the amount that would have been received if the restatement had not occurred, for the three completed fiscal years preceding the fiscal year in which the Board determines the restatement is necessary.  The Board, with input from the Compensation Committee and the Audit Committee, has sole discretion to determine whether and how to apply the Clawback Policy.  In determining whether to recover compensation, the Board may take into account any and all factors that it determines to be

appropriate and relevant under the circumstances, including the likelihood and costs of recovery, compliance with applicable law, the ability of the executive officer to repay such amount, the tax consequences of the original payment and/or the recoupment to the executive officer (including whether recoupment shall be on a pre-tax or post-tax basis), and any other potentially adverse consequences for the Company or the executive officer arising from seeking enforcement of the policy.

To further align the interests of our senior management team with those of our stockholders, we have also implemented stock ownership guidelines under which each of our NEOs is expected to acquire and hold a number of shares of our common stock having a value equal to a multiple of his or her annual salary.  See “Compensation Discussion & Analysis — Stock Ownership Guidelines.”

We also have an “anti-hedging” policy, which prohibits our executive officers and non-employee directors from engaging in transactions designed to hedge the economic risks associated with ownership of Company securities, and from pledging Company securities as collateral for loans.  For purposes of this policy, securities held by CD&R, LLC and its affiliated investment funds are not considered to be owned or held by a non-employee director who is affiliated with CD&R, LLC.

Determination and Administration of Compensation Programs and Amounts

Decisions regarding executive compensation are based primarily on the assessment by the Compensation Committee of each Named Executive Officer’s leadership and operational performance, and potential to enhance long-term value to Cornerstone’s stockholders.  Since February 2015, the Compensation Committee has retained a compensation consultant, Frederic W. Cook & Co. (“FW Cook”), to assist it in its comprehensive review of Cornerstone’s executive compensation program.  During Fiscal 2019, FW Cook continued to advise the Compensation Committee regarding compensation packages for new hires and promotions and other governance related matters, as well as our director compensation arrangements (see “Executive Compensation — Compensation of Directors”).  The Compensation Committee also relies on its judgment, prior experience, and the judgment of our CEO, Mr. Metcalf, about each individual Named Executive Officer in determining the amount and combination of compensation elements and whether each payment or award appropriately encourages and rewards performance.  Key factors considered by the Compensation Committee in this regard include:

• actual performance compared to pre-established financial, operational and strategic goals for Cornerstone and the Named Executive Officer’s reporting unit;
• the nature, scope and level of the Named Executive Officer’s responsibilities;
• individual contribution to Cornerstone’s financial results, particularly with respect to key measures such as cash flow, revenue, earnings and return on assets (“ROA”);
• effectiveness in leading our initiatives to enhance quality and value provided to customers; and
• individual contribution to a culture of honesty, integrity and compliance with our Code of Business Conduct and Ethics and applicable laws.

The Compensation Committee also considered each Named Executive Officer’s current salary and prior-year bonus, if any, the appropriate balance between incentives for long-term and short-term performance, and internal “pay equity” — in other words, the relative differences in compensation among the executive officers.

Role of Management and Independent Advisors

The Compensation Committee meets regularly in separate executive sessions without management personnel present and also requests periodically that our officers or employees attend meetings.  During Fiscal 2019, Mr. Metcalf and other senior executives attended certain Compensation Committee meetings at the committee’s request to advise the committee regarding our performance and to recommend proposed modifications to our compensation and benefits.  Our management, under the leadership of our CEO, plays an important role in

establishing and maintaining our Named Executive Officer compensation programs.  Management’s role includes recommending plans and programs to the Compensation Committee, implementing the Compensation Committee’s decisions regarding the plans and programs and assisting and administering plans in support of the Compensation Committee.  The Compensation Committee also relied to a certain extent on Mr. Metcalf’s evaluations of other Named Executive Officers whose day-to-day performance was not as visible to the committee as it was to Mr. Metcalf.

The Compensation Committee’s charter provides that it may retain advisors, including compensation consultants, in its sole discretion.  The Compensation Committee has assessed the independence of FW Cook pursuant to SEC and NYSE rules and has determined that FW Cook does not have any economic interest or other relationship that would create a conflict with its services to the Compensation Committee.

In assessing compensation elements and making compensation decisions for our executive officers, our Compensation Committee considers the executive compensation practices of a peer group of companies of similar size to the Company in related industries.  As disclosed in the Transition Period CD&A, our Compensation Committee substantially updated the compensation peer group in November 2018 with the assistance of FW Cook in order to reflect changes to the Company’s size, projected revenue and scope of business resulting from the Merger.  The following peer group was used in making compensation decisions for our NEOs during Fiscal 2019:

Following the Merger, the Company fell near the median of the peer group in terms of size, projected revenue, operating income, and net income, and below the twenty-fifth percentile in terms of market capitalization. 

Based on (1) FW Cook’s Fiscal 2019 report, (2) discussions with and recommendations by Mr. Metcalf during Fiscal 2019 and (3) our pay-for-performance policies, the Compensation Committee determined to largely maintain our existing executive on programs during Fiscal 2019.  However, as a result of the Merger and the Fiscal Year Change, our Named Executive Officers did not receive an annual grant of long-term incentive awards during Fiscal 2019 (see “Compensation Discussion & Analysis — Long-Term Incentive Compensation —Long-Term Incentive Awards Granted to NEOs in 2019).

In addition, our Compensation Committee has reviewed our compensation policies as generally applicable to our employees and believes that our policies do not encourage excessive and unnecessary risk-taking.  See “Corporate Governance––Risk Analysis of Our Compensation Plans.”

ensure that salary levels remain appropriate and competitive.  Because the rate of any increase in base salary levels helps to provide incentives for continuous improvement in individual performance, we view individual factors as more significant than overall company performance in a particular year when determining base salary levels.  Base salary also provides the foundation for calculating other benefits such as annual cash bonus and discretionary and restoration matching under the Deferred Compensation Plan and 401(k) plan so the executive’s individual performance has a significant impact on both salary and the benefits derived from salary.

As described in the Transition Period CD&A, certain of our NEOs received increases in base salary during the Transition Period based on a review of market data provided by FW Cook and in light of increased responsibilities resulting from the Merger.  None of our NEOs received an increase in base salary during Fiscal 2019.

(1)        Reflects annual rate of base salary.

(2)        In February 2020, the Compensation Committee approved an increase in Mr. Lee’s base salary to $600,000 for Fiscal 2020.  As of the date hereof, no other NEO has received a salary increase in Fiscal 2020.

Annual Bonus

Short-term annual cash incentive compensation is provided through our Bonus Program, under which annual cash bonuses may be paid to executives to reward their contributions to our business during the year.  In Fiscal 2014, our stockholders approved our Senior Executive Bonus Plan, which continues to remain in effect.

Except with respect to Mr. Buckley, the Company’s Adjusted EBITDA was the sole performance criterion on which annual bonuses for our NEOs were based for Fiscal 2019.  Mr. Buckley’s performance criteria were based 50% on the Adjusted EBITDA for the Company and 50% on Adjusted EBITDA for the Siding business unit.  Our Compensation Committee believes that EBITDA is the most important driver of value and that having EBITDA performance criteria creates a strong link between individual contribution and Company performance. For these purposes, “Adjusted EBITDA” excludes restructuring and impairment charges, strategic development and acquisition related costs, loss or gain on disposition of business, acceleration of CEO retirement benefits, gain on insurance recovery, non-cash gain on foreign currency transactions, loss on extinguishment of debt, non-cash charges of purchase price allocation to inventory, customer inventory buybacks, and share-based compensation. 

In Fiscal 2019, each NEO was assigned a target annual bonus equal to a percentage of his or her base salary, as set forth in the table below. The target annual bonus was equal to 135% of base salary for Mr. Metcalf, 100% of base salary for Mr. Riley, 80% of base salary for Mr. Lee (subject to a minimum payment of $400,000 for 2019, pursuant to the terms of his employment agreement) and 75% of base salary for all other Named Executive Officers. See “Executive Compensation — Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.”  

As described in our 2019 proxy statement, as a result of the Merger and the Fiscal Year Change, our Named Executive Officers (other than former Ply Gem executives, including Mr. Buckley and Mr. Poe) did not receive an annual bonus payment during 2019 in respect of the Transition Period. Instead, cash bonuses for the Transition Period were included in our Fiscal 2019 annual bonus program with amounts determined based on our Fiscal 2019 bonus criteria, and the amounts payable were determined and paid to these participants in 2020 at the same time as the Fiscal 2019 bonuses were paid.

 Under the Fiscal 2019 Bonus Program, in order for any bonuses to be paid, Adjusted EBITDA must equal or exceed 85% of the performance goal set by our Compensation Committee. For performance above this 85% threshold, payments under the Bonus Program are made as follows:

Adjusted EBITDA performance between these three levels is determined by linear interpolation. Total annual bonuses for all employees, including non-management employees, may not exceed 15% of Cornerstone’s adjusted pre-tax profit for Fiscal 2019, calculated in accordance with the Bonus Program, before accrual for bonuses and before share-based compensation expense under the Incentive Plan, and may also not exceed the maximum amounts payable under the Senior Executive Bonus Plan.

For Fiscal 2019, Cornerstone achieved Adjusted EBITDA of $583.6 million against target Adjusted EBITDA of $664.8 million.  This achievement level corresponded to a bonus payout at 55% of target bonus levels for Mr. Metcalf, Mr. Lee, Mr., Riley, and Ms. Theroux.  Mr. Lee’s bonus was subject to proration for the portion of Fiscal 2019 during which he was employed by the Company, but was further adjusted to the minimum payment of $400,000 for Fiscal 2019 pursuant to the terms of his employment agreement.  The Siding Business Unit achieved an Adjusted EBITDA of $184.2 million against a target of $184.0 million, which, combined with Company Adjusted EBITDA performance, resulted in a bonus payout at 78% of target for Mr. Buckley.

The Compensation Committee did not exercise any discretion to increase or decrease these payout levels, resulting in the bonuses shown in the following table.

(1)    In February 2020, the Company approved an increase in Mr. Lee’s bonus target from 80% to 90% of base salary.  No other NEO has received an increase to target bonus percentage during 2020.

In March 2020, the Company approved changes to the performance metrics and achievement and payout ranges for its Fiscal 2020 Bonus Program.  In Fiscal 2020, the performance criteria for annual bonuses for our NEOs who hold executive-level positions will be based 80% on the Company’s Adjusted EBITDA and 20% on the Company’s working capital.  The performance criteria for NEOs who are business unit presidents will be based 40% on the Company’s Adjusted EBITDA, 40% on the business unit’s Adjusted EBITDA and 20% on business unit working capital.  The payout for threshold levels of achievement will be reduced from 50% (which was the payout for threshold levels of achievement under the Fiscal 2019 Bonus Program) to 45%, while the payout for maximum achievement remains at 200%.  Our Company believes that these changes will keep employees focused on the most important performance measures and gain trust in the Company’s compensation practices. 

Under the Fiscal 2020 Bonus Program, in order for any bonuses to be paid, Adjusted EBITDA must equal or exceed the greater of the prior year Adjusted EBITDA and be at least 85% of the target Adjusted EBITDA.  In addition, if the Adjusted EBITDA target is not met, payout for working capital achievement may not exceed target levels.

In addition to the annual bonuses under the Fiscal 2019 Bonus Program, the Company made a one-time cash bonus payment of $25,000 to Mr. Lee in connection with his commencement of employment as our CFO, and a one-time cash bonus payment of $337,500 to Ms. Theroux in recognition of the increased demands of time, attention and work and increased responsibilities following the Merger.  See “Executive Compensation” — Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table — Fiscal 2019.”

Long-Term Incentive Compensation

Generally

Our long-term incentive compensation is provided under the Incentive Plan, a stockholder-approved equity-based compensation plan that allows Cornerstone to grant a variety of awards, including stock options, restricted stock, RSUs, stock appreciation rights, performance share awards, phantom stock awards and performance-based and other cash awards. 

We believe that equity awards to our Named Executive Officers must be sufficient in size to provide a strong, long-term performance and retention incentive for executives and to increase their vested interest in Cornerstone.  The value of the equity awards granted to Named Executive Officers is based on individual performance assessments of each of the Named Executive Officers as well as other members of executive management.

In connection with the Merger and the Fiscal Year Change, the Company granted long-term incentive awards consisting of stock options, RSUs and PSUs in November 2018, and changed the timing of its subsequent annual grants of long-term incentive awards from December to March of each year.  As a result, our Named Executive Officers did not receive an annual grant of long-term incentive awards during Fiscal 2019.  The Company instead made our annual grant of long-term incentive awards on March 15, 2020, following the end of our 2019 fiscal year, the Company granted long-term incentive awards that consisted of stock options, RSUs and PSUs.  See “Long-Term Incentive Compensation — Long-Term Incentive Awards Granted to NEOs in 2020.”  In addition, Mr. Lee and Ms. Theroux each received a one-time grant of equity awards during 2019.  See “Long-Term Incentive Compensation — Long-Term Incentive Awards Granted to NEOs in 2019.”

Long-Term Incentive Awards Granted to NEOs in 2019

As described above, as a result of the Merger and the Fiscal Year Change, our Named Executive Officers did not receive an annual grant of long-term incentive awards during Fiscal 2019.

In June 2019, in connection with his commencement of employment as our CFO and pursuant to the terms of his employment agreement, the Compensation Committee approved an initial grant of long-term incentive awards to Mr. Lee having a grant date fair market value of $1,500,000, consisting of 124,224 RSUs, 62,112 PSUs, and 294,118 options to acquire Common Stock.  The Compensation Committee determined the amount of Mr. Lee’s overall compensation, including the initial equity grant, based on a review of compensation for executives with

comparable experience as well as other considerations, including equity Mr. Lee forfeited as a result of his resignation from his prior employer.

In August 2019, in recognition of the increased demands of time, attention and work and increased responsibilities following the Merger, our Compensation Committee approved a one-time grant of 110,565 RSUs to Ms. Theroux, having a grant date fair market value of $450,000.  The RSUs granted to Ms. Theroux vest on the second anniversary of the date of grant, subject to continued employment with the Company. The RSUs granted to Mr. Lee vest in five equal installments beginning on the date of grant, subject to continued employment with the Company. The options granted to Mr. Lee have a 10-year term and an exercise price of $4.83, which was the fair market value of a share of Common Stock on the date of grant.  The PSUs granted to Mr. Lee represent the right to acquire a number of shares of the Company’s common stock to be determined based upon the achievement of performance metrics as measured during the three years following the grant date, subject to his continued employment with the Company.  See “Executive Compensation” — Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table — Fiscal 2019.”

Long-Term Incentive Awards Granted to NEOs in 2020

In March 2020, our Compensation Committee made a grant of long-term incentives to our NEOs, referred to below as the “FY 2020 Awards.”  Prior to the Fiscal Year Change, long-term incentive grants were typically made in December of each year, which had been the first quarter of our fiscal year.  We have continued our practice of making annual long-term incentive grants during the first quarter of the fiscal year following the Fiscal Year Change.

The FY 2020 Awards consist of (i) options to purchase shares of the Company’s common stock with a per share exercise price of $4.52, which was the fair market value of a share of Common Stock on the date of grant, and having a 10-year term (the “Options”), (ii) RSUs, each representing the right to acquire on vesting one share of the Company’s common stock, and (iii) PSUs, each representing the right to acquire a number of shares of the Company’s common stock to be determined based upon the achievement of performance metrics as measured during the three years following the grant date, subject to the grantee’s continued employment with the Company. The number of Options, RSUs and PSUs granted to each NEO was determined based on the average closing price of the Company’s Common Stock for the 30 days preceding the grant date, with Options representing 30% of the total value, RSUs representing 20% of the total value, and PSUs representing 50% of the total value of each grant.  We believe that the combination of Options, RSUs and PSUs, and their accompanying vesting schedules, will align the interests of our NEOs and shareholders, and help us retain executives who are critical to the successful execution of our business strategy.

The number of FY 2020 Awards granted to each NEO is set forth in the following table:

(a)              Pursuant to the terms of his employment agreement, Mr. Lee was entitled to an annual long-term incentive grant for 2020 having a total fair market value equal to $1,500,000, comprised of the same combination of equity awards, granted at the same time and having the same terms and conditions as the equity awards granted to other senior executives of the Company in 2020. For a description of the material terms of the employment agreement and for a discussion of enhanced severance benefits upon a termination in connection with a change in control of the Company, see “Compensation Discussion & Analysis — Other Compensation — Termination and Change in Control Agreements.”

Retirement Benefits

Our executive officers, including our NEOs, are eligible to participate in our tax-qualified 401(k) plan.  In addition, we believe that benefit programs that address the unique circumstances of executives in light of limitations imposed on benefits payable from qualified welfare, profit-sharing and retirement plans are critical in attracting and retaining quality executives.  Therefore, we have adopted a Deferred Compensation Plan (“DCP”) that allows key employees to defer a portion of their annual salary and annual cash bonus, subject to certain specified maximum deferral amounts.  Common Stock is also an investment option for certain of our executive officers.  Amounts deferred into the Common Stock fund remain invested in the Common Stock fund until distribution.  See “Executive Compensation — Nonqualified Deferred Compensation” for additional details regarding the terms of the DCP.

Other Compensation

Termination and Change in Control Agreements

Certain compensation arrangements of Cornerstone include provisions providing for special payments or benefits upon specified termination events or the occurrence of a change in control of Cornerstone.  However, these arrangements do not include “gross-ups” for golden parachute excise taxes or other taxes.  We believe that these termination and change in control benefits provide our Named Executive Officers an incentive to act in the stockholders’ best interests during a takeover despite the risk of losing their jobs or a significant change in the nature of their benefits and responsibilities.  We also believe that, in some cases, our termination and change in control benefits are necessary to attract and retain certain executives.  For a description of the terms of the employment agreements, consulting agreement and equity awards, see “Executive Compensation — Potential Payments upon Termination or Change in Control.”

The Company has entered into employment agreements with each of its NEOs, other than Mr. Buckley.  As described above, Mr. Poe and Mr. Riley are no longer employees of the Company.  The descriptions herein pertain to their employment agreements as in effect during Fiscal 2019.  Except for the agreement with Mr. Metcalf, the term of each NEO’s employment agreement runs for a period of two years, subject to automatic one-year extensions thereafter, unless either party gives notice of non-renewal.  The initial term of Mr. Metcalf’s agreement will expire on November 16, 2021, subject to automatic one-year extensions thereafter, unless either party gives a one year notice of non-renewal.  The employment agreements provide for severance payments and termination benefits upon a future termination of an NEO’s employment that is a qualifying termination (i.e., upon termination by the Company without “cause” or by the employee with “good reason”), both prior to and following a change in control of the Company.  Severance payments and termination benefits are also payable upon a qualifying termination of an NEO that does not occur during a potential change in control period or within two years following a change in control of the Company.

Where a qualifying termination occurs, other than during a potential change in control period or within two years following a change in control of the Company, each employment agreement provides for (1) payment of one times (two times, in the case of Messrs. Metcalf, Poe, and Riley) the NEO’s then-current base salary (at the highest annualized rate in effect during the one-year period immediately preceding the date of termination, in the case of Mr. Poe), payable in equal installments on regular payroll dates over the course of the one-year period (two-year period, in the case of Messrs. Metcalf and Poe) immediately following the date of termination, (2) a prorated annual bonus based on actual performance in the year of termination, (3) twelve months of continued COBRA coverage (in the case of Messrs. Metcalf and  Riley, a lump sum cash payment equal to eighteen months of the premium cost of family medical coverage at the active-employee rate) and (4) in the case of Mr. Metcalf, payment of two times his target annual bonus, payable in equal installments on regular payroll dates over the course of the two-year period immediately following the date of termination (each, a “Qualifying Termination Severance Package”).

In the case of Mr. Poe, the employment agreement provided for the Qualifying Termination Severance Package upon a qualifying termination occurring prior to November 16, 2020, except that (1) the base salary payment was payable in a lump sum, (2) the COBRA coverage was for a period of eighteen months, and (3) Mr. Poe was entitled to an additional lump-sum payment equal to two times his target annual bonus.

Where a qualifying termination occurs during a potential change in control period or within two years following a change in control of the Company, Mr. Metcalf’s employment agreement provides for his Qualifying Termination Severance Package, except that the target bonus payment is instead equal to three times his target bonus, and each of the base salary and target bonus payments are to be paid to the maximum extent permitted under Section 409A of the Internal Revenue Code in a lump sum (with any remainder paid in installments over two years).  In the case of Mr. Riley, his employment agreement provided for his Qualifying Termination Severance Package, except that he was entitled to a payment equal to the sum of two times his base salary, plus three times his target annual bonus.  In the case of Mr. Lee and Ms. Theroux, their employment agreements provide for (1) the same cash severance payment as is payable upon a qualifying termination prior to a change in control (except that, to the maximum extent practicable, such payment is to be made in a lump sum), (2) an additional lump-sum cash severance payment in an amount equal to the sum of (x) one times the NEO’s then-current base salary and (y) two times the NEO’s target annual bonus for the fiscal year in which the termination occurs, (3) a pro-rated annual bonus payment based on actual performance in the year of termination and (4) an additional six months of continued COBRA coverage.

For purposes of the employment agreements, “change in control” means (A) any person who becomes the beneficial owner of 25% or more of the combined voting power of Cornerstone, (B) as a result of, or in connection with, a tender or exchange offer, merger or other business combination, persons who were directors immediately before the transaction cease to constitute the majority of Cornerstone’s Board of Directors, (C) Cornerstone is merged or consolidated with another company or transfers substantially all of its assets to another company and, as a result, either (i) less than 50% of the outstanding voting securities of the resulting company are owned in the aggregate by former Cornerstone stockholders or (ii) 50% or more of the outstanding voting securities of the resulting company continue to be owned in the aggregate by former Cornerstone stockholders but other than in substantially the same relative proportions as immediately prior to the transaction, or (D) a tender or exchange offer is made for 25% or more of the combined voting power of Cornerstone.  To the extent payments to a Named Executive Officer under an employment agreement constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code, the payments to be received by the officer may be reduced to the extent a reduction in the payment amount would put the officer in a better after-tax position than he or she would be in if the excise tax under Section 4999 were imposed on such payments.

The Merger was a change in control for purposes of the employment agreements with Mr. Riley and Ms. Theroux.  Therefore, if Ms. Theroux experiences a qualifying termination prior to November 16, 2020, then she will be entitled to enhanced change in control severance as described above.  Because Mr. Riley’s employment ended in a qualifying termination that occurred prior to November 16, 2020, he received the enhanced change in control severance benefits described above, and the vesting of his outstanding RSUs and PSUs described below, upon his termination from the Company in February 2020.

In addition to the change in control arrangements described above, outstanding shares of restricted stock, RSUs, options and PSUs granted to the Named Executive Officers, including RSUs and PSUs held by our NEOs, may vest in connection with certain termination events during the two years following the effective time of the Merger or in connection with a subsequent change in control of the Company  (see “Executive Compensation — Potential Payments upon Termination or Change in Control — Equity Incentive Awards”).

Perquisites and Personal Benefits

We offer only de minimis perquisites or personal benefits. 

Gross-Ups

With the exception of limited, one-time tax indemnification in connection with the incurrence of relocation expenses under our relocation policy, Cornerstone does not provide for any tax assistance or “gross-ups” for any of its executives.

CEO Compensation

The Compensation Committee is directly responsible for determining the salary level of the CEO and all awards and grants to the CEO under the Bonus Program, Incentive Plan and the DCP.  In November 2018, the Company entered into an employment agreement with our CEO, Mr. Metcalf, in connection with his appointment as Chairman and Chief Executive.  During Fiscal 2019, 41.7% of the compensation of Mr. Metcalf was “at-risk,” meaning it was comprised of long- and short-term incentive equity awards and our Bonus Program, none of which are guaranteed to be paid.  The percentage of Mr. Metcalf’s compensation that was “at-risk” in Fiscal 2019 reflects a number of factors, including that he did not receive an annual grant of long-term incentive awards during Fiscal 2019 (see “Compensation Discussion & Analysis — Long-Term Incentive Compensation —Long-Term Incentive Awards Granted to NEOs in 2019).  If the long-term incentive awards granted to Mr. Metcalf during the Transition Period had instead been granted during Fiscal 2019, the percentage of Mr. Metcalf’s compensation that was “at-risk” would have been approximately 82%.  Mr. Metcalf’s overall compensation package has also been set at a level that we believe provides appropriate differentiation between CEO compensation and the compensation of other executive officers hired from time to time.  Information on Fiscal 2019 compensation for Mr. Metcalf is set forth in the compensation tables following this CD&A.

Deductibility of Compensation

Section 162(m) of the Internal Revenue Code (“Section 162(m)”) imposes a $1 million limit on the amount that a public company may deduct each year for compensation paid to “covered employees.”  Covered employees generally consist of our CEO, CFO, and each of the next three highest compensated officers for the taxable year, without regard to whether such executive officers are serving at the end of the taxable year, and anyone who previously has been a covered employee for any taxable year beginning after December 31, 2016.

While Cornerstone seeks to take advantage of favorable tax treatment for executive compensation where appropriate, we believe that the primary drivers for determining the amount and form of executive compensation must be the retention and motivation of superior executive talent.

We will continue to review Cornerstone’s executive compensation practices and will seek to preserve tax deductions for executive compensation to the extent consistent with our objective of providing compensation arrangements necessary and appropriate to foster achievement of Cornerstone’s business goals, although the Company reserves the right to grant and pay compensation that is not tax deductible should the Company determine that doing so will better meet Cornerstone’s objectives.

Stock Ownership Guidelines

In November 2016, our Board approved the Cornerstone Building Brands, Inc. Executive Stock Ownership Guidelines, which were further amended in August 2017.  Pursuant to the stock ownership guidelines, certain of our executives, including our NEOs, and non-employee directors are expected to acquire and hold a certain level of our common stock based on a multiple of salary or cash retainer, as applicable.  The stock ownership guidelines were developed with the assistance of FW Cook and were adopted to further align the interests of our senior management team with those of our stockholders.

Under the stock ownership guidelines, each of our NEOs is expected to acquire and hold a number of shares of our common stock having a value equal to a multiple of his or her annual salary as set forth in the table below.  The number of shares required to be held by each NEO will be calculated based on his or her annual salary as of the Annual Meeting of the Stockholders and the average of our month-end closing stock prices throughout the previous fiscal year.

Under the stock ownership guidelines, the required holdings do not have to be met within a specified period of time.  However, until the required number of shares is attained, upon (i) the exercise of stock options, (ii) the settlement of performance shares and (iii) the vesting of restricted shares, our NEOs must retain the number of shares received upon the occurrence of these events having a value equal to 50% of the after-tax profit realized upon the occurrence of these events.  Once the required number of shares is attained, compensation increases and changes in stock price will no longer have an effect on holding requirements and retention guidelines.  As long as the executive continues to hold the required number of shares, he or she will be in compliance with the stock ownership guidelines.  Finally, under the stock ownership guidelines, any sale of shares by covered executives and directors, including our NEOs, must be reviewed by our legal department to ensure continued compliance with the guidelines.

(a)    “2MO 18” refers to the Transition Period (October 29 to December 31, 2018).  Amounts for the Transition Period are not annualized and reflect actual amounts earned during such period.

(b)    The amounts reported in the “Salary” column are calculated by taking into account the NEOs’ increases in base salary in the Transition Period, Fiscal 2018, and Fiscal 2017.  For Mr. Lee, the amount reflects a partial year of salary for Fiscal 2019. 

(c)    The amounts reported in the “Bonus” column reflect, for the Fiscal Year specified: (i) for Mr. Metcalf, a one-time $600,000 signing bonus in connection with his appointment as Chairman and CEO; (ii) for Mr. Lee, a one-time $25,000 cash signing bonus for Fiscal 2019 in connection with his appointment as CFO; (iii) for Mr. Riley, a one-time $250,000 cash promotion bonus for Fiscal 2017 in connection with his appointment as CEO; and (iv) for Ms. Theroux, a one-time $337,500 special cash performance award.

(d)    The amounts reported in the “Stock Awards” column reflects the aggregate grant date fair value of the awards granted under our Incentive Plan in the relevant fiscal years and as Founders Awards in November 2018 in connection with the Merger, computed in accordance with FASB ASC Topic 718.  See Note 7 of the consolidated financial statements in Cornerstone’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for additional detail regarding assumptions underlying the valuation of equity awards of RSUs and PSUs.  In addition, for Ms. Theroux, the amount reflects a one-time award of RSUs granted during Fiscal 2019, and for Mr. Lee, the amount reflects an initial award of RSUs and PSUs granted during Fiscal 2019.  See “Compensation Discussion & Analysis — Long-Term Incentive Compensation.” 

(e)   The amounts reported in the “Option Awards” column reflect the aggregate grant date fair value of the option awards, computed in accordance with FASB ASC Topic 718.  See Note 7 of the consolidated financial statements in Cornerstone’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for additional detail regarding assumptions underlying the valuation of equity awards of options.  For Mr. Lee, the Fiscal Year 2019 amount reflects his initial grant of long-term incentive awards in connection with his commencement of employment. See “Compensation Discussion & Analysis — Long-Term Incentive Compensation.” 

(f)    As described in our 2019 proxy statement, as a result of the Merger and the Fiscal Year Change, our Named Executive Officers did not receive an annual bonus payment during 2019 in respect of the Transition Period. Instead, cash bonuses for the Transition Period were included in our Fiscal 2019 annual bonus program with amounts determined based on our Fiscal 2019 bonus criteria, and the amounts payable were determined and paid to these participants in 2020 at the same time as the Fiscal 2019 bonuses were paid.

(g)    The “All Other Compensation” column includes Cornerstone 401(k) matching contributions and DCP contributions with respect to the named executive officers described below and the taxable value of a life insurance benefit.  See “Executive Compensation — Nonqualified Deferred Compensation”  The amounts in this column for Fiscal 2019 also reflect relocation expenses of $14,617 for Mr. Lee, $350,952 for Mr. Riley, and $23,773 for Mr. Metcalf.  Consistent with the Company’s relocation policy, these amounts include tax gross-ups of approximately $7,675 for Mr. Lee, $184,250 for Mr. Riley, and $12,480 for Mr. Metcalf.  For Mr. Lee, the amount for Fiscal 2019 also reflects a home buyout under the Company’s relocation policy, pursuant to which the Company purchased his home through a third party relocation firm for a cost of $1,924,149, including expenses related to the purchase, which the Company intends to resell in accordance with the policy.

(h)    Messrs. Buckley, Lee, Metcalf, and Poe were not Named Executive Officers in Fiscal 2018 or Fiscal 2017.

Fiscal 2019 Long-Term Incentive Awards

As described above, as a result of the Merger and the Fiscal Year Change, our Named Executive Officers did not receive an annual grant of long-term incentive awards during Fiscal 2019. In June 2019, our Compensation Committee approved an initial award to Mr. Lee, including a grant of 124,224 RSUs, 294,118 options and 62,112 PSUs in connection with his commencement of employment. In August 2019, our Compensation Committee also approved a special award to Ms. Theroux, including a grant of 110,565 RSUs. See “Compensation Discussion & Analysis — Long-Term Incentive Compensation — Long-Term Incentive Awards Granted to NEOs in Fiscal 2019.”