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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

Filed by the Registrant  ☒                            Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material under §240.14a-12

Lumen Technologies, Inc.
(Name of registrant as specified in its charter)
        
(Name of person(s) filing proxy statement, if other than the registrant)
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  (2)  

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  (3)  

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  (4)  

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Furthering Human Progress

Through Technology

 

 

 

2020 Annual Report

 

2021 Proxy Statement

 


Table of Contents

 

 

 

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR

THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 19, 2021

This proxy statement and related materials are available at www.proxyvote.com.

 

 


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Notice of 2021

annual shareholders meeting

Proxy statement notice

2021 Annual Meeting Information

 

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Date and Time

 

Wednesday

May 19, 2021

12:00 noon CT

 

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Record Date

 

You can vote if you were a shareholder of record at the close of business on March 25, 2021.

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Location

 

virtualshareholdermeeting.com/LUMN2021

 

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Proxy Mail Date

 

April 7, 2021

Proxy voting

Shareholders are invited to attend the live virtual meeting. Even if you expect to attend, we urge you to vote in advance using any of the following methods:

YOUR VOTE IS IMPORTANT TO US. WE URGE YOUR PARTICIPATION.

 

By Internet

 

visit proxyvote.com

     

By phone

 

1-800-690-6903

     

By mail

 

mark, sign, date & return proxy card

     

Live virtual

meeting

 

vote electronically at the virtual annual meeting

Items of business

 

Item

         Board vote
recommendation
   Page reference

1

   Elect the 11 Director nominees named in this proxy statement      FOR    4

2

   Ratify the appointment of KPMG LLP as our independent auditor for 2021      FOR    27

3

   Ratify the amendment to our Amended and Restated NOL Rights Plan described in this proxy statement      FOR    29

4

   Conduct a non-binding advisory vote to approve our executive compensation      FOR    34

5

   Transact other business that may properly come before the annual meeting          

Headquarters:         100 CenturyLink Drive, Monroe, LA 71203

Meeting Details:     See “Frequently Asked Questions” in this proxy statement for further details.

Our 2021 Proxy Statement and Annual Report to Shareholders are available on our website at ir.lumen.com

 

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Stacey W. Goff, Secretary

April 7, 2021


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Table of Contents

 

Table of Contents

 

       

Overview

     Lumen at a Glance      1  
 
             COVID-19 Response      3  
 

1

  Governance      ITEM ONE – ELECTION OF DIRECTORS      4  
     BOARD OF DIRECTORS AND GOVERNANCE      5  
    

Board Composition – Qualifications, Skills and Diversity

  

 

5

 

 
        

Our Director Nominees

     7  
 
        

How Our Board is Evaluated and Selected

     12  
 
        

How Our Board is Organized

     13  
 
        

Our Board’s Responsibilities & Engagement

     16  
 
            

Director Compensation

     23  
 

2

  Audit     

AUDIT COMMITTEE REPORT

     26  
           ITEM TWO – RATIFY KPMG AS OUR 2021 INDEPENDENT AUDITOR      27  
 

3

  NOL Rights Plan        ITEM THREE – RATIFY THE AMENDMENT TO OUR AMENDED & RESTATED NOL RIGHTS PLAN   

 

 

 

29

 

 

 

4

  Compensation      OUR EXECUTIVE OFFICERS      33  
        

ITEM FOUR – ADVISORY VOTE ON EXECUTIVE COMPENSATION – “SAY-ON-PAY”

  

 

34

 

        

Letter from our HRCC Chair

  

 

35

 

        

Compensation Discussion & Analysis

  

 

37

 

        

Section One – Executive Summary

  

 

39

 

 
        

Lumen Business Highlights

     39  
 
        

COVID-19 Pandemic Impact on Pay

     40  
 
        

Shareholder Engagement and 2020 Compensation Enhancements

     40  
        

Section Two – Compensation Philosophy and Oversight

     42  
 
        

Role of Human Resources and Compensation Committee

     42  
 
        

Compensation Objectives and Design

     42  
 
        

Our Pay Elements

     44  
        

Section Three – Pay and Performance Alignment

     47  
 
        

Goal Setting

     47  
 
        

Incentive Program Guidelines

     47  
 
        

Pay Mix

     48  
 
        

Realized and Realizable Pay for Our CEO

     48  

 

 

 

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Section Four – Compensation Design, Awards and Payouts for 2020

     49  
 
        

Target Compensation

     49  
 
        

Salary

     50  
 
        

2020 Short-Term Incentive Program

     50  
 
        

2020 Long-Term Incentive Compensation

     56  
 
        

Performance Periods Ending December 31, 2020

     59  
 
        

Other Benefits

     63  
 

4

 

Compensation

    

Section Five – HRCC Engagement and Compensation Governance

     66  
  con’t     

HRCC Human Capital Resources Priorities

     66  
        

HRCC Executive Compensation Review Process

     67  
 
        

Role of CEO and Management

     67  
 
        

Role of Compensation Consultants

     68  
 
        

Role of Peer Companies

     68  
 
        

Our Governance of Executive Compensation

     71  
 
        

HUMAN RESOURCES AND COMPENSATION COMMITTEE REPORT

     74  
 
        

Compensation Tables

     75  
 
        

Summary Compensation Table

     75  
 
        

Grant of Plan Based Awards

     76  
 
        

Outstanding Equity Awards

     78  
 
        

Stock Vesting Table

     79  
 
        

Pension Benefits

     80  
 
        

Deferred Compensation

     81  
 
        

Potential Termination Payments

     82  
 
        

CEO Pay Ratio Disclosure

     86  
 
                

Stock Ownership Guidelines

     87  
 

5

  Other Items      OTHER MATTERS      88  
        

Stock Ownership

     88  
        

Ownership of Executive Officers & Directors

     89  
 
        

Transactions with Related Parties

     90  
 
        

Delinquent Section 16(a) Reports

     90  
 
        

Lumen Performance History

     91  
 
        

Frequently Asked Questions

     91  
 
         OTHER INFORMATION      98  
 
        

Proxy Materials

     98  
 
                

Annual Financial Report

     98  
 

Appendices

    

Appendix A - Non-GAAP Reconciliations

     A-1  
 
        

Appendix B - Annual Financial Report

     B-1  
 
        

Appendix C-1 - Amended and Restated Section 382 Rights Agreement

     C-1-1  
 
                

Appendix C-2 - First Amendment to the Amended and Restated Section 382 Rights Agreement

     C-2-1  

 

 

 

2021 Proxy Statement

 

   


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Forward-looking statements

Except for historical and factual information contained herein, matters set forth in our 2021 proxy materials identified by words such as “expects,” “believes,” “will” and similar expressions are forward-looking statements as defined by the federal securities laws and are subject to the “safe harbor” protection thereunder. These forward-looking statements are not guarantees of future results and are based on current expectations only and are subject to uncertainties. Actual events and results may differ materially from those anticipated by us in those statements due to several factors, including those disclosed in our other filings with the SEC. We may change our intentions or plans discussed in our forward-looking statements without notice at any time and for any reason.

Certain defined terms

All references in this proxy statement or related materials to “we,” “us,” “our,” the “Company” or “Lumen” refer to Lumen Technologies, Inc. In addition, each reference to (i) the “Board” refers to our Board of Directors, (ii) “Voting Shares” refers collectively to our shares of Common Stock (“Common Shares”) and shares of Series L Preferred Stock (“Preferred Shares”), (iii) “Meeting,” “the meeting” “annual shareholders meeting” or “annual meeting” refers to the 2021 annual meeting of our shareholders described further herein, (iv) “named executives,” “named officers,” “named executive officers” or “NEOs” refers to the five current officers listed in the Summary Compensation Table in this proxy statement, (v) “HRCC” refers to the Human Resources and Compensation Committee of our Board, (vi) “NCG Committee” refers to the Nominating and Corporate Governance Committee of our Board, (vii) “SLT”, “senior leadership team” or “senior officers” refers to our executive officers and a limited number of additional officers whose compensation is determined by the HRCC, (viii) “Qwest” refers to Qwest Communications International Inc., which we acquired on April 1, 2011, (ix) “Level 3” refers to Level 3 Parent, LLC and its predecessor, Level 3 Communications, Inc., (x) “Level 3 Combination” refers to our business combination with Level 3, which was consummated on November 1, 2017, (xi) “SEC” refers to the U.S. Securities and Exchange Commission, (xii) “ESG” refers to environmental, social and governance, (xiii) “GAAP” refers to U.S. generally accepted accounting principles, (xiv) “NYSE” refers to the New York Stock Exchange., (xv) “TSR” refers to total shareholder return; (xvi) “LTI” refers to long-term incentive compensation; (xvii) “STI” refers to short-term incentive compensation, (xviii) “CD&A” refers to the “Compensation, Discussion and Analysis” section of this proxy statement, (xix) “SOP” refers to Say on Pay, (xx) “NOL” refers to net operating losses and (xxi) “4IR” refers the 4th Industrial Revolution. Unless otherwise provided, all information is presented as of the date of this proxy statement.

 

 

 

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Lumen at a Glance

Key 2020 Financial Highlights

 

Lumen at a glance

Key 2020 financial highlights

During 2020, we delivered solid results, despite a global pandemic. Specifically, we:

 

 

Improved our total revenue trajectory by 150 basis points, comparing our 2020 year-over-year rate of change to the 2019 rate of change

 

Delivered solid profitability and strong cash flow:

 

  -  

Expanded our Adjusted EBITDA margin to 42.9%, compared to 42.3% for 2019

  -  

Adjusted EBITDA was $8.888 billion for 2020, compared to $9.070 billion for 2019

  -  

Reported Free Cash Flow of $3.131 billion for 2020, compared to $3.276 billion for 2019

  -  

Achieved approximately $830 million of annualized run rate Adjusted EBITDA cost transformation savings as of 4Q20, reaching our targeted savings range more than a year ahead of schedule

 

 

Reduced Net Debt by approximately $1.6 billion in 2020 and reduced leverage to 3.6x Net Debt to Adjusted EBITDA in 4Q20 from 3.7x in 4Q19

 

Refinanced approximately $13 billion in long-term debt (pro forma for first quarter 2021 activity), further reducing interest expense, extending maturities and strengthening our balance sheet

 

All of the above listed financial measures exclude integration and transformation costs and special items.

For information on how our non-GAAP metrics used above reconcile to GAAP measures, see Appendix A. For more complete information on Lumen and our recent performance, see the remainder of this proxy statement, including Appendix B.

 

 

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Who we are

We are an international facilities-based technology and communications company focused on providing our business and residential customers with a broad array of integrated services and solutions necessary to fully participate in our rapidly evolving digital world, which we believe is undergoing the 4th Industrial Revolution (4IR). We believe we are the world’s most interconnected network and our platform empowers our customers to rapidly adjust digital programs to meet immediate demands, create efficiencies, accelerate market access and reduce costs – enabling customers to rapidly evolve their information, communications and technology programs to address dynamic changes without distraction from their core competencies. By empowering our customers to rapidly acquire, analyze and act on data, we are furthering human progress through technology and enabling our customers to thrive.

 

 

 

 

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Lumen at a Glance

Who We Are:

 

In 2020, we launched the Lumen Platform and rebranded from CenturyLink to Lumen Technologies to better position us for the future. The Lumen brand speaks to the way that we interface differently with our customers with a focus on delivering digital experiences that are designed to drive their success as they navigate the 4IR.

As part of the Lumen launch, we refined our marketing approach to better align with our customer base. Lumen is the name of our Company and our flagship brand for serving the enterprise and wholesale markets. We also launched our Quantum Fiber brand and reconfirmed the importance of our expansive CenturyLink platform name. Quantum Fiber is our brand for providing fiber-based services to small business and residential customers. Our CenturyLink brand covers our mass market legacy copper-based services, managed for optimal cost and efficiency.

 

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With approximately 450,000 route miles of fiber optic cable globally, we are among the largest providers of communications services to domestic and global enterprise customers. Our terrestrial and subsea fiber optic long-haul network throughout North America, Europe, Latin America and Asia Pacific connects to the metropolitan fiber networks we operate. We provide services in over 60 countries, with most of our revenue being derived in the United States. We believe our secure global platform plays a central role in facilitating communications worldwide.

 

 

 

2021 Proxy Statement

 

 

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COVID-19 Response

 

COVID-19 response

As a technology and communications company, our COVID-19 response, transition and stakeholder support efforts affected not only our employees and our company but affected how our customers around the world were able to work, learn and live while learning to be “socially distant.” Below is a highlight of Lumen’s COVID-19 responses and considerations.

 

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Employee Welfare

 

 

Customer Connectivity

 

 

Engaged Leadership

 

 

Community Care

 

 By end of March 2020, 75% of our workforce was working from home, with 25% “work-from-work”

 

 Safety protocols developed to protect customers and technicians – minimum, if any, contact

 

 Regularly issued company-wide communications from internal team leaders, management and executives – sharing information about the Company’s COVID-19 efforts and vaccine availability information

 

 As part of the FCC’s Keep America Connected Pledge, we suspended data usage limits for consumer or small business customers and provided relief from late fees and disconnection for those experiencing COVID-19 hardships

 Strict social distancing practices and substantially restricted non-essential business travel

 

 Supported work from home transitions for customers across our businesses

 

 Business continuity planning (“BCP”) anticipated pandemic risk, enabled rapid response

 

 Actively engaged with state, local and national governments around the globe to ensure networking, connectivity and security capabilities needed to respond to the pandemic effectively

 Provided additional 80 hours PTO for COVID-19 issues – extending as needed

 

 Our redundant communications capabilities utilized diverse networks and routes to minimize service disruptions

 

 Evolved BCP program – ensuring our platform continues to provide secure, reliable communication

 

 Established a global COVID-19 Relief Campaign focused on supporting frontline healthcare workers and first responders, providing basic necessities to vulnerable populations and supporting small businesses

 US employee short-term disability program expanded; developed protections for non-US employees

 

 Automated notification supported rapid solutions for disruptive events

 

 Delivered key sales and customer support resources

 

 

 Board updated shareholders during spring and fall engagement

 

 Form 8-K and COVID-19 website to keep investors informed

 

 Donated high-speed connectivity to emergency field hospitals across the U.S.

 

 

 

 

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Item One – Election of Directors

 

Item One – Election of Directors

Lumen’s mission is to further human progress through the power of technology. We believe that strong corporate governance is key to achieving our mission.

We seek to strengthen our governance practices through the way we evaluate, select and refresh the members of our Board of Directors.

Following the NCG Committee’s recommendation, the Board of Directors has nominated the 11 nominees below for a one-year term expiring at our 2022 annual meeting of shareholders, or until his or her successor is duly elected and qualified. Other than Mr. Quincy L. Allen, all of the nominees were elected to the Board at the 2020 annual meeting.

To be elected, each of the 11 nominees must receive an affirmative vote of a majority of the votes cast in the director’s election. Any director failing to receive a majority of votes cast must promptly tender his or her resignation, which will be addressed by us in the manner described in our Bylaws.

Director Nominees:

Quincy L. Allen

Martha Helena Bejar

Peter C. Brown

Kevin P. Chilton

Steven T. “Terry” Clontz

T. Michael Glenn

W. Bruce Hanks

Hal Stanley Jones

Michael Roberts

Laurie Siegel

Jeffrey K. Storey

 

 

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2021 Proxy Statement

 

 

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Board of Directors and Governance

Board Composition – Qualifications, Skills and Diversity

 

Board of Directors and Governance

Board composition – qualifications, skills and diversity

Our Board collectively possesses a wide array of skills, experiences and perspectives that we believe strengthen its ability to fulfill its oversight roles in creating and maintaining long-term sustainable shareholder value.

Each year, the Board reviews the skills necessary to effectively discharge its oversight responsibilities on behalf of Lumen’s stakeholders. We strive to maintain a well-rounded and diverse Board. Below please find information about our nominees.

Skills

Lumen’s NCG Committee uses a skills matrix as part of the Board’s annual evaluation, succession planning and director nomination process. The goal is to ensure our director nominees collectively possess the relevant skills and backgrounds for effective governance and meaningful strategy oversight that enhances financial performance and builds stakeholder value. The skills listed in this matrix only indicate the most prominent skills that our Board relies upon. This matrix is not a comprehensive reflection of the wide variety of skills that our director nominees possess and routinely contribute to Lumen.

 

Skill

  Allen   Bejar   Brown   Chilton   Clontz   Glenn   Hanks   Jones   Roberts   Siegel   Storey

Customer Experience

                                 

Digital Transformation

                               

ESG

                                       

Finance

                             

Global Business Experience

                         

HR Leadership

                                     

Industry Experience

                                   

M&A Experience/ Legal

                             

Risk Management/ Cybersecurity

                                 

Strategy

                       

Technology & Innovation

                                 

 

 

 

 

 

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Board of Directors and Governance

Board Composition – Qualifications, Skills and Diversity

 

Board nominee composition

 

 

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Refreshment

Board and committee refreshment are regularly reviewed by our Nominating and Corporate Governance (NCG) Committee. Our Board periodically receives recommendations from the NCG Committee about possible changes designed to staff the Board and its committees with individuals who have the skills, experiences and perspectives necessary to make meaningful contributions to shaping and implementing Lumen’s business strategies.

In 2020 and for our 2021 slate of nominees, the NCG Committee and Board considered a wide range of factors in assessing the composition of the Board, including:

 

   

shareholder input on important elements of Board composition;

   

skill sets necessary to oversee the successful development and implementation of our business strategies, including our continued evolution to a digital technology company offering a simpler and improved customer experience;

   

balancing fresh, diverse perspectives with institutional and industry knowledge;

   

current and long-term needs of the Board; and

   

independence and potential conflicts.

Recent Board changes

In 2020, the NCG Committee retained an independent firm to help identify potential candidates with the skills, attributes and experience that matched the current needs of the Board. The search resulted in the appointment of Quincy L. Allen to the Board, effective February 25, 2021.

Earlier this year, one of our longest-tenured directors, Virginia Boulet, advised us that she would not stand for election at the 2021 annual meeting. Ms. Boulet was among our first female directors and for 26 years has stood at the vanguard of our efforts to build a more inclusive and dynamic organization well-equipped to compete for talent and customers.

Effective January 1, 2020, we added Hal Jones to the Board. Mr. Jones was among several director candidates recommended to the Board by Southeastern Asset Management, our fourth largest shareholder at the time of his appointment. In connection with adding Mr. Jones to the Board, we announced the retirement of several directors and various governance changes, which we discussed in our 2020 proxy statement and are summarized elsewhere herein.

 

 

 

2021 Proxy Statement

 

 

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Board of Directors and Governance

Our Director Nominees

 

Our director nominees

The first item for consideration at the meeting will be the election of the following 11 nominees:

Quincy L. Allen

 

 

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Director since 2021

 

Independent

 

61 years old

 

   Quincy L. Allen has over 35 years of leadership experience in the technology services industry. From 2015 to 2018, he served as IBM Corporation’s Go-To-Market Leader of Cognitive Process Services and Chief Marketing Officer for IBM Cloud. From 2012 to 2015, Mr. Allen served as Chief Marketing and Strategy Officer at Unisys Corporation, a global information technology company. From 2009 to 2010, he served as Chief Executive Officer for Vertis Communications, a direct marketing and advertising company. Vertis Communications filed for voluntary bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in November 2010 and emerged from bankruptcy in March 2012. In October 2012, Vertis Communications filed for bankruptcy protection again. Prior to joining Vertis, Mr. Allen held several leadership positions with Xerox Corporation, including President of the Global Services and Strategic Marketing Group and President of Production Systems Group. Mr. Allen currently also serves on the public company boards of Office Depot and ABM Industries, Inc. Mr. Allen is on the board of Launch NY, a not-for-profit supporting startup companies with access to seed capital and business mentoring. He previously served on the boards of NCR Corporation until 2012 and Gateway, Inc. until 2007.

Martha Helena Bejar

 

 

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Director since 2016

 

Independent

 

59 years old

 

Audit Committee

 

Nominating and Corporate Governance Committee (Chair)

   Martha Helena Bejar is a telecommunications expert with innovative experience as a co-founder of Red Bison Advisory Group, LLC, which provides business advisory services from 2014 to 2019. She served as Chief Executive Officer at Unium, Inc., a Wi-Fi technology provider, from 2016 to 2018; as Chief Executive Officer of Flow Mobile, Inc., a broadband wireless company, from 2012 to 2015; as Chief Executive Officer and Chairperson of Infocrossing, Inc. (a U.S.-based cloud services affiliate of Wipro Limited) from 2011 to 2012; as President of Worldwide Sales and Operations at Wipro’s Information Technology Services affiliate from 2009 to 2011; and as Corporate Vice President for the communications sector of Microsoft Corporation from 2007 to 2009. Prior to 2007, Ms. Bejar held diverse executive sales, operations, engineering and R&D positions at Nortel and Bellsouth/AT&T. Ms. Bejar currently serves on the public company boards of CommVault Systems; Sportsman’s Warehouse Holdings, Inc.; and Quadient SA (formerly Neopost). In the last five years she served on the public company boards of Mitel Networks Corporation and Polycom, Inc. and her other leadership experience includes serving as a trustee and board member of Rainer Scholars.

 

 

 

 

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Board of Directors and Governance

Our Director Nominees

 

Peter C. Brown

 

 

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Director since 2009

 

Independent

 

62 years old

 

Audit Committee

 

Nominating and Corporate Governance Committee

   Peter C. Brown is a business leader with significant, finance, strategy, corporate development, growth and management experience as Chairman and Chief Executive Officer of AMC Entertainment Inc. from 1999 to 2009 and its Chief Financial Officer from 1991 to 1999. Since retiring from AMC, Mr. Brown has served as Chairman of Grassmere Partners, LLC, a private investment firm. In 1997, he founded and was Chairman of the Board of EPR Properties, a NYSE-listed real estate investment trust. He currently serves as a member of EPR’s Audit Committee and Chairman of the Finance Committee. Mr. Brown also currently serves on the boards of NASDAQ traded Cinedigm Corporation where he is Chairman of the Nominating and Audit Committees and serves on the Compensation Committee. Past public and private company boards Mr. Brown has served on include CEC Entertainment, Inc.; National CineMedia, Inc.; Midway Games, Inc.; Lab One, Inc.; Protection One, Inc.; CORE Entertainment Holdings; Digital Cinema Implementation Partners and Movietickets.com. He has also served on many non-profit and civic boards.

Kevin P. Chilton

 

 

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Director since 2017

 

Independent

 

66 years old

 

Audit Committee

 

Risk and Security Committee (Chair)

   Kevin P. Chilton is retired from the U.S. Air Force as a four-star general and contributes considerable cybersecurity, risk management and scientific leadership experience to our Board. During his 34-year military career he also served as Commander, U.S. Strategic Command, from 2007 to 2011, overseeing the U.S. Department of Defense’s nuclear, space and cyberspace operations; as Commander, U.S. Air Force, Space Command from 2006 to 2007; as a NASA astronaut from 1987 to 1996, including three space shuttle flights; and as Deputy Program Manager of the International Space Station from 1996 to 1998. He currently serves as President of Chilton & Associates, LLC, a consulting company and on the public company board of AeroJet Rocketdyne. In the last five years he served on the public company boards of Anadarko Petroleum Corp., Level 3 Communications, Inc., Orbital Sciences Corporation and Orbital ATK, Inc. General Chilton serves in leadership roles for several organizations including: The United States Air Force Academy Falcon Foundation; Jewish Institute for the National Security of America; Cobham Advanced Electronic Solutions, Inc.; SEA Adventure Crusade, National Technology and Engineering Solutions of Sandia; and the Los Alamos & Lawrence Livermore National Lab.

 

 

 

2021 Proxy Statement

 

 

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Board of Directors and Governance

Our Director Nominees

 

Steven T. “Terry” Clontz

 

 

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Director since 2017

 

Independent

 

70 years old

 

Human Resources and Compensation Committee

 

Risk and Security Committee

   Steven T. “Terry” Clontz is an innovative technology leader with global telecommunications experience developed throughout his career in several executive roles in the telecommunications industry including: Chief Executive Officer of StarHub, Ltd., a Singaporean telecommunications company, from 1999 to 2010; Senior Executive Vice President (International) of Singapore Technologies Telemedia Pte. Ltd. from 2010 to 2017; Chief Executive Officer, President and a Director of IPC Information Systems from December 1995 to December 1998; and various senior executive positions, including President, Asia-Pacific, at BellSouth International, Inc. from 1987 to 1995. Mr. Clontz currently is a corporate advisor to ST Telemedia Pte. Ltd. since January 2018 and Temasek International Advisors Pte. Ltd. since January 2010. He serves on the public company board of StarHub Ltd. and, in the last five years, served on the public company boards of Level 3 Communications, Inc. (2012 to 2017) and InterDigital Wireless, Inc. (1998 to 2015). Mr. Clontz’s leadership experience includes various positions with other communications companies, including Cloud9 Technologies LLC; Virgin Mobile Latin America, Inc. and STT GDC Pte. Ltd.

T. Michael Glenn

 

 

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Director since 2017

 

Independent

 

65 years old

 

Chairman of the Board

 

Human Resources and Compensation Committee

   T. Michael Glenn brings significant market development, customer, communications, strategic development and operational experience to our Board having served in executive leadership roles including Executive Vice President of Market Development and Corporate Communications for FedEx Corp. from 1998 to December 2016. During which he also served as the President and Chief Executive Officer of FedEx Corporate Services and as a member of its five-person Executive Committee responsible for developing and implementing strategic business activities. Prior to 1998 he served as Senior Vice President, Worldwide Marketing, Consumer Service and Corporate Communications for FedEx Express. Mr. Glenn served as a senior advisor to Oak Hill Capital Partners, a private equity firm, from 2017 until 2020. He serves on the public company board of Pentair PLC and previously served on the public company board of Level 3 Communications, Inc. Mr. Glenn’s serves in leadership roles for several organizations including: Church Health and Madonna Learning Center.

 

 

 

 

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Our Director Nominees

 

W. Bruce Hanks

 

 

LOGO

 

Director since 1992

 

Independent

 

66 years old

 

Vice Chairman of the Board

 

Audit Committee (Chair)

   W. Bruce Hanks is a corporate development and planning, finance and public accounting leader with telecommunications expertise. He has held various senior level roles at Lumen from 1980 to 2001, including Chief Operating Officer, Senior Vice President—Corporate Development and Strategy, Chief Financial Officer, Chief Administrative Officer and President—Telecommunication Services. He also served as the Athletic Director of the University of Louisiana at Monroe from 2001 to 2004. He began his career as a Certified Public Accountant with Peat, Marwick & Mitchell. Mr. Hanks currently is a consultant for an investment management and financial planning company based in Monroe, Louisiana and serves in leadership roles for several organizations including board member of the American Football Coaches Foundation and the Edward Via College of Osteopathic Medicine and Advisory Board Member of First Horizon Corporation. Mr. Hanks previously served on the executive boards of several national telecommunications industry associations, private organizations, non-profits and other public companies. He currently serves as Vice Chairman and Audit Chair. He has served on audit, compensation, risk, finance and executive committees during his Board work. He is recognized as a Board Leadership Fellow by the National Association of Corporate Directors. He is a member of the Louisiana State Society of CPAs.

Hal Stanley Jones

 

 

LOGO

 

Director since 2020

 

Independent

 

68 years old

 

Risk and Security Committee

Audit Committee

   Hal Stanley Jones brings significant public accounting, financial and controls experience to our Board as the former Chief Financial Officer of Graham Holdings (formerly known as the Washington Post Company) from 2009 to 2013; as Chief Executive Officer and President of Kaplan Professional, a subsidiary of The Washington Post from 2008 to 2009; and through various senior level positions at The Washington Post Company, from 1989 to 2008. Mr. Jones began his career as a Certified Public Accountant at PricewaterhouseCoopers from 1977 to 1988. He currently serves on the public company board of Playa Hotels and Resorts, N.V. since 2013 when it became publicly traded. His other leadership experience includes working with Studio Theatre, a Washington, D.C.-based non-profit theater production company.

 

 

 

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Our Director Nominees

 

Michael Roberts

 

 

LOGO

 

Director since 2011

 

Independent

 

70 years old

 

Human Resources and Compensation Committee

 

Nominating and Corporate Governance Committee

   Michael Roberts has Fortune 500 global executive, marketing and customer service expertise. He has served as the President and Chief Operating Officer of McDonald’s Corporation from 2004 to 2006; as the Chief Executive Officer of McDonald’s USA during 2004; and, prior to those roles, held various senior level roles at McDonald’s USA from 2001 to 2004. Mr. Roberts currently serves as Founder and Chief Executive Officer of Westside Holdings LLC, a marketing and brand development company since 2006 and currently serves on the public company board of W. W. Grainger, Inc.

Laurie Siegel

 

 

LOGO

 

Director since 2009

 

Independent

 

65 years old

 

Human Resources and Compensation Committee (Chair)

 

Nominating and Corporate Governance Committee

   Laurie Siegel is a business advisor with expertise in human capital and executive compensation. She has served as Senior Vice President of Human Resources and Internal Communication of Tyco International from 2003 to 2012; held various senior level positions at Honeywell International, Inc. from 1994 to 2002; and in 2012 founded LAS Advisory Services, a business and human resources consultancy. She currently serves as a Senior Advisor to the G100 and as a Chairman of the G100 Talent Consortium. She also serves on the public company board of FactSet Research Systems, Inc. In the last five years she served on the public company boards of California Resources Corporation and Volt Information Sciences, Inc. Ms. Siegel’s other leadership experience includes board positions with various non-profit organizations, including Understood; Morristown Festival of Books; and public radio station KCLU.

 

 

 

 

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Our Director Nominees

 

Jeffrey K. Storey

 

 

LOGO

 

Director since 2018

 

60 years old

 

Risk and Security Committee

   Jeffrey K. Storey is an innovative, transformational telecommunications and cybersecurity leader serving as the President and Chief Executive Officer of Lumen since 2018. He served as the Chief Operating Officer of Lumen in 2017 and 2018 and as the President and Chief Executive Officer of Level 3 Communications, Inc. from 2013 to 2017. He also held the positions of President and Chief Operating Officer of Level 3 Communications, Inc. from 2008 to 2013, President of Leucadia Telecommunications Group (Leucadia National Corporation) from 2006 to 2008, Chief Executive Officer and President of WilTel Communications Group Inc. from 2002 to 2005 and in various other senior level positions with WilTel or its affiliates from 1999 to 2002. He held the title of Vice President of Commercial Services of Cox Communications from 1998 to 1999 and also served as a Vice President and General Manager of Cox Fibernet from 1994 to 1998. Mr. Storey began his career in telecommunications in 1983 with Southwestern Bell Telephone where he held various engineering and operations positions. In the last five years he served on the public company board of Level 3 Communications, Inc. He has been a member of the National Security Telecommunications Advisory Committee since 2016.

How our Board is evaluated and selected

Evaluations

A thoughtful performance evaluation process is an essential component of Board effectiveness. Our NCG Committee leads an annual evaluation of our Board, its members and committees and the Board determines if it has the skills, processes, structure and policies necessary to attain its goals and fulfill its responsibilities. While this formal evaluation is conducted on an annual basis, directors share their perspectives, feedback and suggestions periodically throughout the year. The NCG Committee uses this ongoing and annual feedback when considering Board composition, other governance enhancements and whether to nominate a director for re-election to the Board. The NCG Committee periodically engages nationally recognized firms to assist it with the design and implementation of its director evaluation processes.

Nomination

In considering director nominees, the NCG Committee reviews candidates suggested by Board and committee members, shareholders who comply with our Bylaws and senior management. From time to time, the NCG Committee may engage a third-party search firm to assist in identifying and evaluating qualified candidates.

The NCG Committee assesses each director candidate based on his or her skills, judgment, character, independence, diversity and experience in the context of the needs of the Board. Potential conflicts and over-boarding are also evaluated. When evaluating candidates for nomination as new directors, the NCG Committee considers (and asks any search firm that it engages to provide) a pool of candidates that includes women and individuals from diverse backgrounds, in accordance with the “Rooney Rule” the Board adopted in 2019. Our Corporate Governance Guidelines also establish a target average director tenure of no more than ten years, set a goal of all Board members (except our CEO) being independent and express the Board’s general sense that no director should be age 75 or older prior to the next annual shareholders meeting. The NCG Committee may, but has not formally chosen to, establish additional qualifications. The NCG Committee and the Board also evaluate on a periodic basis the effectiveness of its nominating processes and procedures.

 

 

 

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How Our Board is Evaluated and Selected

 

Between 2018 and 2020, we nominated Mr. Clontz to serve as a director in accordance with directives we received from affiliates of STT Crossing Ltd. (“STT”) pursuant to a Shareholders Rights Agreement that we entered into on October 31, 2016, with STT in connection with the Level 3 Combination. Although the nomination rights of STT and its affiliates under this agreement lapsed in May 2020, the Board has re-nominated Mr. Clontz to stand for election at the meeting.

Education and orientation

We encourage our directors to participate in continuing education programs focused on our business and industry, their committee roles and responsibilities and the legal and ethical responsibilities of directors. We reimburse our directors for the costs of these programs. We also provide continuing director education during Board and committee meetings and other Board discussions as part of the formal meetings. From time to time, these include presentations from third parties.

Additionally, we encourage our directors to participate in nationally recognized governance organizations, including the National Association of Corporate Directors (“NACD”) and G100.

New directors participate in an orientation program which familiarizes them with the Company’s business, operations, strategies and corporate governance practices and assists them in developing Company and industry knowledge to optimize their service on the Board. New directors also attend meetings with members of our management team to expedite their ability to effectively and fully discharge their responsibilities.

Independence

All directors other than our CEO are independent and the Board regularly meets in executive session with only the independent directors. Each year and prior to nominating a new director, the Board evaluates and affirmatively determines each director nominee’s independence using standards required by the SEC, NYSE and our Corporate Governance Guidelines. Annually, each director nominee completes a detailed questionnaire that solicits information about relationships that could have an impact on independence. Our management delivers reports on those relationships to the NCG and Audit Committees. Both the NCG and Audit Committees evaluate the reports from management and consider any other factors which could influence a nominee’s independence. During this review, the NCG and Audit Committees consider transactions and relationships between the Company, its subsidiaries or affiliates and any directors, executive officers, their immediate family members or an entity in which any of the foregoing have a significant interest. Both the NCG and Audit Committee chairs make reports on these independence evaluations to the Board. In early 2021, the Board reviewed all relationships between the Company and each director and affirmatively determined that all of our director nominees are independent other than Mr. Storey. Mr.  Storey is not independent because he is the Company’s President and CEO.

How our Board is organized

Board leadership structure

The NCG Committee periodically reviews the Board’s leadership structure and, when appropriate, recommends changes, taking into consideration the needs of the Board and the Company at the time. Since 2009, we have elected a non-executive chairman.

Effective May 20, 2020, Mr. Glenn became Lumen’s independent, non-executive Chairman, with Mr. Hanks continuing his role as Vice Chairman. As Chairman, Mr. Glenn presides over meetings of the Board, oversees the management, development and functioning of the Board and performs any additional duties the Board may identify. During the three years preceding his retirement on May 20, 2020, Harvey P. Perry served as our Chairman, and for the latter portion of this period, Mr. Hanks served as Lead Outside Director.

 

 

 

 

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How Our Board is Organized

 

We believe that separation of the Chairman and CEO positions has functioned effectively over the past several years. Separating these positions has allowed our CEO to have primary responsibility for the operational leadership and strategic direction of our business, while allowing our Chairman to lead the Board in its fundamental role of providing guidance to and separate oversight of, management.

As noted in our Corporate Governance Guidelines, the Board has decided that the Chairman of the Board and the chairs of our committees should rotate approximately every five years.

Board committees

Each of our four standing Board committees supports the full Board with various risk management, governance and strategic responsibilities. The table below indicates the Board’s standing committees and memberships as of the date of this proxy statement:

 

  Committee Assignments

Director

Audit 1 Human
Resources &
Compensation
Nominating &
Corporate
Governance
Risk &
Security

Quincy L. Allen 2

Martha H. Bejar

    Chair

Virginia Boulet 3

   

Peter C. Brown

   

Kevin P. Chilton

    Chair

Steven T. “Terry” Clontz

   

T. Michael Glenn

 

W. Bruce Hanks

  Chair

Hal Stanley Jones

   

Michael Roberts

   

Laurie Siegel

  Chair  

Jeffrey K. Storey 4

 

 

1.

Each member is an “audit committee financial expert.”

2.

Mr. Allen was appointed to the Board on February 25, 2021, and is expected to be named to committees in May 2021.

3.

As noted previously, Ms. Boulet has decided not to stand for re-election at the annual meeting.

4.

As President and CEO, Mr. Storey is our only non-independent director.

Audit – 10 meetings in 2020

Key responsibilities:

 

   

Oversees the Company’s system of financial reporting

   

Reviews and discusses our major financial risks, including matters potentially impacting financial reporting, with management, our internal auditors and our independent auditors

   

Assists the Board in fulfilling its oversight responsibilities relating to the adequacy and effectiveness of

 

  -  

our internal controls over financial reporting,

  -  

our internal controls regarding information technology security and

  -  

our disclosure controls and procedures

 

   

Monitors the qualifications, independence and performance of Lumen’s independent auditors

 

 

 

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See “Audit—Audit Committee Report” below for additional information.

Human Resources and Compensation – 4 meetings in 2020

Key responsibilities:

 

   

Establishes executive compensation

   

Oversees human capital resources strategy, including diversity and inclusion and talent recruiting, development and retention

   

Oversees, in consultation with management, our compliance with regulations governing executive and director compensation

   

Oversees labor relations

   

Monitors compensation risk

   

Oversees design and administration of equity incentive plans

See “CD&A” below for additional information.

Nominating and Corporate Governance – 5 meetings in 2020

Key responsibilities:

 

   

Recommends to the Board nominees to serve as directors and officers

   

Oversees CEO’s annual performance evaluation

   

Oversees the development and implementation of our ESG strategies

   

Oversees and recommends improvements to our governance principles, policies and practices

   

Assists the Board in fulfilling its oversight responsibilities with respect to the management of risks associated with the Company’s Board leadership structure and corporate governance matters

   

Annually leads Board and Committee evaluations

   

Evaluates Board composition, skills and director independence

   

Reviews political contributions reporting and budget

Risk and Security – 4 meetings in 2020

Key responsibilities:

 

   

Assists the Board in fulfilling its oversight responsibilities with respect to, among others:

 

  -  

risks posed by cyberattacks or other casualty events

  -  

risks related to network reliability, privacy and regulations

  -  

other key enterprise or operational risks as jointly determined by the Committee and management

  -  

insurance program reviews

 

   

Oversees our classified activities and facilities through a subcommittee

   

Oversees our corporate ethics and compliance and enterprise risk management programs and activities

   

Receives periodic reports on various risk exposures. These include quarterly reports on cybersecurity, which typically include reports on recent cyber intrusions, mitigation steps taken in response to those intrusions and ongoing cybersecurity initiatives and periodic reports from outside consultants regarding cyber security

   

Coordinates risk oversight functions of other Board committees

Additional information about the responsibilities of our committees is available in the committees’ respective charters, which can be obtained on our website: https://www.lumen.com/en-us/about/governance/board-committees.html.

 

 

 

 

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How Our Board is Organized

 

Director meeting attendance

Directors are expected to attend all Board meetings, meetings of committees on which they serve and the annual shareholders meeting. All then current directors attended our 2020 annual meeting. During 2020 there were four regular meetings of the Board, as well as 23 standing committee meetings. Each director attended more than 75% of the total number of the 2020 Board and the respective committee meetings on which he or she served. During 2020, our independent directors met in executive session on a quarterly basis, led either by our Chairman or then-Lead Outside Director.

Our Board’s responsibilities & engagement

Our Board and its committees collectively oversee management’s development and implementation of our business and strategy through regular meetings and communications with Lumen’s executive team. Our governance policies and practices provide a transparent framework for effective governance and compliance with SEC and NYSE requirements. The Board continually reviews our governance practices for alignment with best practices and stakeholder interests and acts to enhance our ability to oversee the execution of strategies that drive value for Lumen, our customers, employees and shareholders. Our Corporate Governance Guidelines, along with other governance documents, including our Code of Conduct, Bylaws and Board committee charters and other governance policies are available on our website: https://www.lumen.com/en-us/about/governance/documentation.html.

Shareholder engagement

The Board believes that input from shareholders is a critical component in our efforts to continually enhance our governance practices and earn our shareholders’ confidence toward improving long-term shareholder value. As illustrated below, members of management and the Board engage on a year-round basis with holders of our equity and debt securities, as well as proxy advisory firms and ESG rating firms, among others.

 

LOGO

 

  Regular outreach focused on shareholders’ corporate governance views, executive compensation and sustainability

  Share investor feedback with committee members

  

 

  Additional targeted outreach

  10-K filing

  Governance and compensation decisions taken

  Proxy drafting incorporating fall feedback on governance and compensation design

  

 

  Proxy filing

  ESG Report published

  Regular outreach to largest investors and proxy advisory firms to discuss important items to be considered at the annual meeting

  Hold annual meeting

  

 

  Additional targeted outreach

  Review and report results from our most recent annual meeting

  Provide proxy season trends to Board

  Discussion of our investor feedback among Board of Directors and its Committees

  Evaluate proxy season trends, corporate governance best practices, regulatory developments and our current practices

Board acts on stakeholder feedback received throughout the year

 

 

 

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Our Board’s Responsibilities & Engagement

 

In 2020, our compensation program received the support of 74% of the total votes cast at our annual meeting. These results were an improvement from the 2019 vote of 41%, but still not the support level we endeavor to achieve. In response to our 2020 vote, we increased our outreach efforts with shareholders throughout the fall, contacting shareholders representing 59% of our outstanding common stock and directly engaging with holders of 25% of our shares.

Our primary purpose for initiating these meetings was to obtain feedback from our shareholders on the changes to our 2020 compensation program design and metrics developed in response to 2019 shareholder engagement, but to also discuss other corporate governance topics important to shareholders including our response to the COVID-19 pandemic, board diversity, human capital management, employee diversity, inclusion and belonging and our ESG initiatives.

During the fall of 2020, each of the shareholder meetings was attended by our Chairman of the Board, our HRCC Chair and our NCG Committee Chair. The input we received was shared with the members of the Board who did not directly engage in our outreach process.

The chart below summarizes engagement topics discussed and governance actions taken over the past several engagement initiatives in response to specific shareholder feedback or voting guidelines published by our shareholders or proxy advisors.

 

 

Shareholder Engagement Topics – 2019 to 2021

 

 

Long-Term Incentive (LTI) Framework

 

  

 

Short-Term Incentive (STI) Framework

 

 

 

Pay for Performance Alignment

 

 

Board Diversity

 

  

 

Governance Practices

 

 

 

ESG

 

 

Human Capital Resources

 

  

 

Board Refreshment

 

 

 

COVID-19 Pandemic Response

 

 

 

Actions Taken in Response to Shareholder Input – 2020 to 2021

 

No Changes to 2020 compensation

program design – despite COVID-19

 

 

No one-time awards for 2020

Rotated NCG Committee Chair
at 2020 annual meeting

 

Reduced average Board tenure

 

Independent Chairman named at
2020 annual meeting

 

 

All non-CEO directors independent at
2020 annual meeting

Increased disclosure for:

 

 Board diversity

 Cyber security/ data privacy

 Human capital management

 ESG

 Incentive design rationale

 Rigorous goal setting process

 

 

 

 

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Actions Taken in Response to Shareholder Input – 2019 to 2020

“Rooney Rule” – adopted for director searches

 

 

Board Tenure - commitment to lower overall average years of service

 

NCG Committee Oversight – clarified political contributions and lobbying policies

 

 

Supplemental Proxy Filing – additional context and transparency of goal-rigor considerations

STI – added Revenue weighted at 15%

 

 

STI – added a discretionary 20% cap on Individual Performance Modifier for Named Executive Officers (NEOs)

 

Goal Rigor – supplemental disclosures to explain the compelling business rationale for our incentive compensation design

 

CEO Pay – increased for “realized” and “realizable” pay disclosure

 

LTI Performance Period – returned to 3 yr. cumulative

 

 

LTI – added Relative TSR modifier

 

No one-time awards for 2019

 

For more information on shareholder engagement impact on executive compensation design and metrics, see the CD&A section below.

Long-term strategic planning

To ensure that our business strategies create long-term, sustainable value for our shareholders, our Board regularly engages in active discussions with management to formulate and implement appropriate strategies for the Company and each of its business segments. The Board and management routinely discuss key initiatives, transformative technologies, innovation, culture and corporate governance opportunities focused on driving long-term value. During 2020, this collaboration resulted in the rebranding and repositioning of the business to align with our core mission of furthering human progress through technology. In addition to regular Board and committee meetings, which include presentations and discussions of strategic and tactical initiatives, the Board participates in an annual in-depth dedicated review of the Company’s overall strategy with our management team. The Board and our management team discuss the industry and competitive landscapes, short- and long-term plans, capital allocation strategies and other mission-critical topics.

CEO and executive succession planning

The Board and management recognize the importance of continuously developing our executive talent, identifying potential outside candidates and preparing for emergency situations. Our HRCC, along with management, conducts periodic talent reviews that include succession plans for our senior leadership positions, including 360° peer reviews. In 2018, the NCG Committee engaged a nationally recognized third-party consultant to develop a comprehensive executive management succession planning strategy and since then Lumen has retained the same consultant to continue to advise the Board and the company’s leadership with the following objectives:

 

   

View succession planning as an ongoing process, not an “event”

   

Develop a succession plan for different scenarios (emergency, accelerated and orderly)

   

Link succession planning to strategy by creating a CEO profile that focuses on what is most needed to lead Lumen in the future, not only today

   

Understand the external market of CEO-ready talent and update this understanding and benchmark data at regular future intervals

   

Assess the readiness of current key Lumen executives to assume the CEO position and Lumen’s executive development plans and timeframes for addressing any gaps in readiness

 

 

 

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Our Board’s Responsibilities & Engagement

 

   

Ensure that key Lumen executives have clear and actionable development plans, including detailed coaching for key executives and establish a regular and transparent process for leadership and the Board to track progress against development goals as needed

 

LOGO   

• Initiated our engagement with a third-party regarding succession planning efforts

• Developed CEO success profile

• Began assessment of key Lumen executives

 

 Approved an emergency succession plan and related communications plan

 Completed assessment of key Lumen executives

 Created development plans for key Lumen executives

 Identified and reviewed potential external CEO candidates

 

 Refreshed and reviewed potential external CEO candidates

 Implemented actionable development plans, including detailed coaching, for key Lumen executives

Risk oversight

The Board, along with its committees, reviews and oversees Lumen’s risk management processes in many ways, including receiving regular reports about our enterprise risk management (“ERM”) program, which is designed to comprehensively identify our most significant risks. Under the ERM program, management develops a response plan for prioritized risks, as well as monitoring and mitigation plans for other identified risk focus areas. Management provides regular reports on the risk portfolio and response efforts to the Risk and Security Committee. The Board also works with management to assess our key short-and long-term risks and mitigation efforts relating to, among other things, financial reporting, strategic plans, operations, capital budgets, human capital, corporate functions and business units. Among others, key areas of assessment include:

 

   

Cybersecurity Risks – As a technology and communications company that enables global transmission of large amounts of information over our networks, maintaining the security and integrity of information and systems under our control is a priority among our operational risk management efforts. We view cybersecurity risk as an enterprise-wide risk, subject to control and monitoring at various levels of management throughout the Company. The Risk and Security Committee and its Chair review Cybersecurity and Data Privacy quarterly and such topics of review include:

 

  -  

risk assessments from information security, privacy and internal audit management teams with respect to cybersecurity, including the adequacy and effectiveness of the Company’s internal controls regarding cybersecurity,

  -  

emerging cybersecurity developments and threats and

  -  

the Company’s strategy to mitigate cybersecurity risks, such as our contingency plans in the event of security breaches or other system disruptions and cyber insurance coverage.

To assess and mitigate cybersecurity risk, we have implemented a global information security management program that includes administrative, technical and physical safeguards and we periodically engage both internal and external auditors and consultants to assess and enhance our program, all of which is subject to oversight by and reporting to the Risk and Security Committee. We engage independent external auditors and consultants who are fully accredited under various information security standards, including those administered by the International Organization for Standardization and the PCI Security Council.

 

 

 

 

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Data Privacy Risks – In addition to securing our network, we also take steps to protect the content of information Lumen collects, stores, uses and shares. Employee and customer information is encrypted, consistent with industry standards or legal requirements, both at rest and in transmission. We have adopted a data minimization policy designed to comply with and detect breaches of applicable laws and ensure appropriate protections when sharing information with third parties, including vendors. We maintain other plans or programs to manage our data privacy risks, including a privacy policy and a cyber incident response plan. As part of the ERM process, the Risk and Security Committee receives reports on data privacy protection efforts and controls to meet and enhance legal and compliance requirements across the enterprise.

 

   

Human Capital Management Risks – The Board and management know our highly competitive business requires skilled and motivated employees and leaders with the necessary expertise to execute our innovation, efficiency and transformation strategies. Recognizing the crucial role employees play in our overall strategy, developing and retaining top talent is a priority. The Board regularly discusses with management Lumen’s continuous efforts to attract and retain the caliber of employee with the type of knowledge and skills necessary to realize our goals. Both our directors and management set a “tone at the top” through:

 

  -  

regularly meeting with our most senior human resources executive to discuss culture, talent strategy and leadership development and staying ahead of market trends by identifying early the skills needed for our future;

  -  

designing strategies to support diversity, inclusion and belonging programs; and

  -  

designing strategies to bridge any gaps in our succession plans by cultivating our in-house talent or engaging third parties.

 

   

Other Risks and Information – Our Board committees oversee certain other risks specified in the preceding section “ — Board Committees,” and our Board and committees further oversee the ESG program and other risks discussed under the heading “ESG Sustainability Leadership” below.

ESG sustainability leadership

Responsible corporate citizenship has long been a part of our governance and business strategy and continues to be a key priority for our Board and management team. The Board and the NCG Committee, in conjunction with designated management teams periodically evaluate our ESG program and seek to identify meaningful opportunities to strengthen our program. Some of our ESG highlights are described below.

Ethics and compliance – Our Code of Conduct sets forth the ethical expectations and standards of conduct required in all business dealings and interactions around the world and applies to all directors, officers and employees alike. Our Ethics and Compliance team is an independent function led by the Company’s Chief Ethics and Compliance Officer who maintains full and direct access and makes regular reports to the Risk and Security Committee of the Board of Directors. Specifically, Lumen’s program:

 

   

Conducts mandatory Code of Conduct training annually, the scope and content of which is fashioned through risk assessments and reinforced through localized, risk-based and targeted training and compliance strategies.

   

Offers employees several confidential avenues to report concerns and allegations of misconduct, including the Company’s Integrity Line, our global, multilingual, independent and continuously staffed compliance hotline.

   

Maintains a strong multidisciplinary compliance program supported by internal processes and resources, including compliance analysts, attorneys and an investigations team, all of whom are fully trained to evaluate and facilitate the review of allegations and concerns and periodic reporting to our management, our internal and external auditors and our directors, as appropriate.

   

Prohibits retaliation against any individual who raises a concern, makes a report, participates in an investigation, refuses to participate in suspected improper or wrongful activity, or exercises rights protected by law.

   

Protects human rights by incorporating our own principles and ethics in our business and supplier relationships, through contractual commitments and our Supplier Code of Conduct.

 

 

 

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ESG reporting – Since 2010, we have published an annual social responsibility, sustainability or ESG report highlighting our efforts to track our impact on the communities in which we live and operate. Although not part of this proxy statement, our most recent ESG report can be located in the “ESG” section of our website ir.lumen.com.

Environmental sustainability – We have maintained an environmental sustainability program for more than ten years and have been listed in the FTSE4Good index every year during that time. Among others, our recent environmental initiatives and achievements include:

 

   

In January of 2021, we sold our inaugural series of sustainability-linked notes in alignment with our established science-based targets and became the second domestic company to issue this type of instrument.

   

Reducing our absolute carbon emissions and carbon intensity by purchasing renewable energy and investing in facility efficiency improvements and new technologies in our data centers and network facilities around the world.

   

Maintaining or expanding the number of company locations with third-party certified Energy, Environmental and Safety Management Systems.

Customer experience – We strive to continually improve the experience we provide to our customers, including their interactions with our employees. We believe that an excellent experience not only leads to satisfied customers but also will improve our sales and revenue results, boost employee engagement and reduce costs. We have dedicated teams responsible for evaluating the best approach to the customer experience from our largest enterprise customers to our residential customers, coupled with frequent, transparent and informative communication processes.

An essential element of delivering on our commitment is listening to our customers by offering several channels for communication including voice, text, email, chat and social media, among others. In 2019 we launched Lumen’s inaugural customer experience (CX) event, during which we invited customers to our headquarters to collaborate directly with our management team.

While listening to customers is the best source of customer experience feedback, we believe overlaying it with employee feedback is the most effective way to continuously improve. Consequently, we regularly invite our front-line employees to provide feedback on opportunities to improve the experience and to make it easier to do their jobs.

Community impact – We support the passions and interests of our employees and empower them to be a positive influence in the world. This year we were proud to provide many opportunities to be good neighbors even through the challenges of COVID-19 by volunteering time, money and talent to support the causes that matter most to our employees. We seek to strengthen the communities in which we live and work through philanthropy, local community initiatives and global initiatives. Among our efforts are:

 

   

In support of STEM Education, Lumen partnered with organizations such as Pathways in Technology (P-TECH) to provide underserved youth with an innovative education opportunity with a direct pathway to college attainment and career readiness

   

As we adjusted to the changing needs for COVID-19, employees were provided opportunities to participate in over 30 virtual volunteering events

   

Employees were also encouraged to actively volunteer individually in their communities and were supported through our Dollars for Doers grants program

   

We offered employees the ability to participate in continual giving to causes that matter to them, while maximizing their contribution with our corporate match

   

Our employees are encouraged to volunteer and donate through our annual Campaign to Fight Hunger to support hunger relief efforts around the globe

 

 

 

 

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Board of Directors and Governance

Our Board’s Responsibilities & Engagement

 

Political and lobbying contributions oversight and disclosure – Our Board and NCG Committee engage in the oversight of our political initiatives and annually review Lumen’s political and lobbying activities and related budgets. We strive to advocate public policy solutions that best serve our stakeholders. Our semi-annual Political Contributions Reports provide transparency in this process, demonstrating ethical corporate governance and promoting confidence in the democratic process. Specifically, our Reports disclose our corporate political contributions and those of our political action committees in accordance with applicable federal and state campaign finance laws and contributions to trade associations and 501(c)(4) organizations. Although not part of this proxy statement, our most recent Political Contributions Reports can be located on our website at lumen.com.

Positive corporate culture – The Board and management believe that engaged and satisfied employees are essential to creating shareholder value. From the Board on down, we have carefully developed and deployed employee engagement plans to create a thriving culture throughout the organization focusing on our company’s overall purpose of furthering human progress through technology. When employees understand how their work fits in to the overall company strategy, it drives their engagement and ownership within each and every employee leading to stronger results. We measure employee engagement in how connected they feel to the culture through an engagement survey distributed approximately every four months. The survey is sent to all employees and has been a great success, receiving an approximate 85% participation rate.

Promoting diversity – We believe that understanding and respecting another’s perspective, experience, background and beliefs provides an opportunity to expand horizons, challenge complacency and foster empathy. For Lumen, diversity of perspective, experience, background and beliefs fuels our innovative, collaborative and engaged workplace. Realizing greater ethnic, racial and gender diversity across all levels of an organization is and will continue to be, an on-going journey.

Our Diversity & Inclusion Steering Committee, comprised of a cross-functional team of senior executives and led by our Chief Diversity & Inclusion Officer, regularly evaluates and seeks to refine our diversity, inclusion and belonging strategy. We aim for the highest standards of fairness and equal opportunity, in recruitment, hiring, promotions, job assignments and compensation. Efforts include (i) recruiting and outreach designed to attract diverse talent; (ii) management led listening circles; and (iii) employee resource groups – some active for more than 40 years – to support employee engagement, awareness, career development and training.

Recognition for our diversity and inclusion efforts include:

 

   

Human Rights Campaign – received in February 2021, for the third year in a row, the top score of 100% from Corporate Equality Index, a national report by the Human Rights Campaign on corporate policies and practices related to lesbian, gay, bisexual, transgender and queer workplace equality

   

Disability Equality Index – received a 100% score on Disability Equality Index as a “Best Place to Work” for people with disabilities

   

Forbes, January 2020 distinguished list of the top 500 employers in the area of Diversity

Commitment to pay equity – In 2020, we conducted a pay equity review of our U.S., non-union employees to determine whether employees of color who perform similar work at the same level are receiving “equal pay for equal work.” In 2019 we conducted a similar review for gender pay equity. In assessing pay equity, these reviews considered factors such as employees’ role, tenure, experience and performance. Following these reviews, we made pay adjustments where needed. As part of our commitment to fair and equitable compensation, we plan to continue regular gender and race/ethnicity pay equity studies of our U.S., non-represented employees and making pay adjustments where warranted. We also have implemented various processes to review compensation decisions, as they are made, for pay equity.

 

 

 

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Director Compensation

 

Director compensation

Overview

The Board believes that each of our non-employee directors (whom we also refer to as outside directors or non-management directors) should be compensated through a mix of cash and equity-based compensation. Our HRCC, consisting entirely of independent directors, has primary responsibility for periodically reviewing and considering any revisions to director compensation. In recent years, the HRCC has reviewed director compensation annually with assistance from its independent compensation consultant, including conducting annual benchmarking to help assess the appropriateness and competitiveness of our director compensation programs. The Board reviews the HRCC’s recommendations, discusses those recommendations with the compensation consultant and determines the amount of director compensation.

The table and the discussion below summarize how we compensated our outside directors in 2020. This table does not include compensation paid to our President and CEO, Jeff Storey, who does not receive any additional compensation for his service as a director. Please see the “Summary Compensation Table” below for details regarding all compensation paid to Mr. Storey during fiscal 2020.

2020 compensation of outside directors

 

Directors’ Compensation

 

Name

   Fees Earned or Paid
in Cash
     Stock Awards 1, 2      All Other
Compensation 3
     Total  

Continuing Directors 4

                                   

Martha H. Bejar

   $ 136,250      $ 162,746      $ 4,000      $ 302,996  

Peter C. Brown

     131,500        162,746        4,000        298,246  

Kevin P. Chilton

     135,500        162,746           298,246  

Steven T. Clontz

     103,000        162,746        4,000        269,746  

T. Michael Glenn

     253,000        162,746           415,746  

W. Bruce Hanks

     236,000        162,746        7,345        406,091  

Hal Stanley Jones

     86,250        162,746        4,000        252,996  

Michael Roberts

     103,000        162,746           265,746  

Laurie Siegel

     128,000        162,746        1,060        291,806  

Non-Returning Director 5

                                   

Virginia Boulet

   $ 108,750      $ 162,746               $ 271,496  

Departed Directors 6

                                   

Mary L. Landrieu

   $ 51,500            $ 51,500  

Glen Post III

     47,500              47,500  

Harvey Perry

     97,500           3,709        101,209  

 

1,

For fiscal 2020, the HRCC granted each outside director an award of restricted shares or restricted stock units valued at $165,000 based upon the volume-weighted average closing price of our Common Shares over a 15-day trading period ending prior to the May 20, 2020, grant date. However, as required by SEC rules, the dollar value reported in this column reflects the grant date fair value of that award based upon the closing stock price of our Common Shares on the grant date in accordance with FASB ASC Topic 718. These awards vest on May 20, 2021 (subject to accelerated vesting or forfeiture in certain limited circumstances). See “ — Cash and Stock Payments.”

 

2.

As of December 31, 2020, outside directors held the following unvested equity-based awards: Mses. Boulet and Siegel and Messrs. Brown, Clontz, Hanks, Jones and Roberts each held 16,439 shares of restricted stock, Messrs. Chilton and Glenn each held 16,439 RSUs and Ms. Bejar held 8,220 shares of restricted stock and 8,219 RSUs. In addition, Ms. Bejar and Messrs. Glenn and Roberts held 14,706 vested RSUs deferred under the Non-Employee Director Deferred Compensation Plan (the Deferred RSUs). For further information on our directors’ stock ownership, see “Other Matters—Ownership of Executive Officers & Directors,” and for information on certain deferred equity and cash fee arrangements, see “ — Non-Qualified Deferred Compensation.”

 

 

 

 

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3.

Includes (i) reimbursements for the cost of annual physical examinations and related travel of $3,345 for Mr. Hanks, $3,709 for Mr. Perry and $1,060 for Ms. Siegel, (ii) the payments related to the attendance of the KPMG Conference of $4,000 for Mr. Jones, and (iii) payments related to the attendance of the NACD Global Board Leaders’ Summit of $4,000 for each of Messrs. Hanks and Clontz and the payments related to the attendance of the G100 Conference of $4,000 for each of Ms. Bejar and Mr. Brown. Except as otherwise noted in the prior sentence, the table above does not reflect reimbursements for travel expenses).

 

4.

Excludes Quincy L. Allen, who was added to the Board in February 2021.

 

5.

Ms. Boulet’s term will end immediately following the 2021 annual shareholders’ meeting.

 

6.

The terms of each of these Directors ended immediately following the 2020 annual shareholders’ meeting.

Cash and stock payments

Cash fees – Each outside director is paid an annual fee of $75,000 plus $2,000 for attending each regular Board meeting, special Board meeting (including each day of the Board’s annual planning session), committee meeting and separate director education program.

Commencing with his appointment in May 2020, Mr. Glenn, in his capacity as the non-executive Chairman of the Board, received annual supplemental Board fees of $200,000 payable in cash (which were prorated for 2020). The Chairman’s duties are set forth principally in our Corporate Governance Guidelines. See “How Our Board is Organized—Board Leadership Structure.” Mr. Perry received the same supplemental fees at the same rate, prorated for his service as non-executive Chairman through May 2020.

During 2020, Mr. Hanks, in his capacity as non-executive Vice Chairman of the Board is entitled to receive annual supplemental Board fees of $100,000 payable in cash. Under our Bylaws, the Vice Chairman is charged with the responsibility of assisting the Chairman and performing such other duties as may be assigned to him by the Board or the Bylaws.

We also pay annual supplemental Board fees to the chairs of each of the following committees as follows: (i) the chair of the Audit Committee receives $25,000, (ii) the chair of the HRCC receives $25,000, (iii) the chair of the NCG Committee receives $15,000 and (iv) the chair of the Risk and Security Committee receives $12,500.

Equity grant – During 2020, the HRCC awarded an annual equity grant valued at $165,000 to each outside director, with the number of shares determined by dividing this target value by the volume-weighted average closing price of our Common Shares over a 15-day trading period ending prior to the grant date and rounding to the nearest whole share.

This grant was awarded to each director in the form of time-vested shares of restricted stock unless the director made an election to defer all or a portion of the award under our Non-Employee Directors Deferred Compensation Plan (discussed below). For those directors who elected to defer any portion of the grant, the portion deferred was issued to the director as time-vested restricted stock units. These awards are scheduled to vest on May 20, 2021 (one year after their grant), with vesting accelerated in certain circumstances as described in the award agreement.

Dividends (or, for restricted stock units, dividend equivalents) on these awards are not paid currently but rather accrue from the grant date through the date of vesting (for restricted stock) or the date of issuance of the underlying shares (for restricted stock units) and are subject to the same vesting terms as the related award. Dividends on shares of restricted stock are paid to the director upon vesting while dividend equivalents on restricted stock units are paid to the director at the same time as the underlying shares are issued to him or her.

Non-Qualified Deferred Compensation

Non-employee director deferred compensation plan – In March 2019, the Board adopted a deferred compensation plan for our non-employee directors. Under this plan, our non-employee directors may defer up

 

 

 

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Director Compensation

 

to 100% of their cash and equity compensation, effective for (1) equity compensation granted to non-employee directors for service after May 17, 2019 and (2) cash compensation earned by non-employee directors after December 31, 2019.

Participants in the Non-Employee Director Deferred Compensation Plan may elect to receive payment of their account balances in either two to five annual installments or a lump sum upon a fixed date, separation from service, or up to five years following separation from service, subject to any deferrals mandated by federal law.

All cash amounts deferred under this deferred compensation plan by non-employee directors are allocated among deemed investments that follow the performance of a broad array of funds and are reflected in the market value of each participant’s account. Distribution amounts will include investment returns (positive or negative).

If a non-employee director elects to defer all or a portion of the director’s annual equity award under this plan, as noted above, the portion of the award subject to the deferral election will be issued as restricted stock units instead of shares of restricted stock. Four of our current directors participate in this plan.

Legacy Qwest deferred compensation plan – closed to new participants and contributions – In connection with our 2011 merger with Qwest, we assumed the Qwest Deferred Compensation Plan for Non-Employee Directors. Under this plan, Qwest outside directors could elect to defer all or a portion of their cash directors’ fees, which were then converted to a number of “phantom units” based on the value of a share of Qwest stock, with credit for dividends paid to shareholders “reinvested” in additional phantom units. Plan balances attributable to amounts deferred on or after January 1, 2005, by Qwest directors who joined our Board following the merger were converted, based on the merger exchange ratio, to phantom units based on the value of one of our Common Shares. Other than the crediting and “reinvestment” of dividends for outstanding phantom units, the Company does not make any contributions to and no additional elective deferrals are permitted under this plan. Subject to the terms of the plan, each participant’s account will be distributed as a lump sum in cash as soon as practicable following the end of his or her service as a director. As of December 31, 2020, Michael Roberts was the only remaining participant in this plan, with a balance of 8,283 phantom units with an aggregate value of approximately $80,759 as of such date.

Other benefits

Each outside director is entitled to be reimbursed: (i) for expenses incurred in attending Board and committee meetings, (ii) for expenses incurred in attending director education programs and (iii) up to $5,000 per year for the cost of an annual physical examination, plus related travel expenses. We supply company-owned tablets to certain of our outside directors for use in reviewing materials posted to a dedicated portal that permits management to communicate with the Board.

Directors may use our aircraft in connection with company-related business. However, we generally do not permit either our directors or their family members to use our aircraft for personal trips (except when such use can be accommodated at no incremental cost to us or on terms generally available to all of our employees in connection with a medical emergency).

Our Bylaws require us to indemnify our directors and officers so that they will be free from undue concern about personal liability in connection with their service to the Company. We have signed agreements with each of those individuals contractually obligating us to provide these indemnification rights. We also provide our directors with customary directors and officers liability insurance.

 

 

 

 

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Audit

Audit Committee Report

 

Audit Committee Report

Our Audit Committee has oversight authority over Lumen’s financial reporting function, including our internal controls over financial reporting (“ICFR”) and our external independent audit process. In carrying out its oversight responsibilities, the Audit Committee:

 

   

monitors management’s responsibility for fairly presenting our financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) by maintaining accurate and reliable financial information through our ICFR processes;

   

appoints our independent auditor; and

   

regularly communicates with our independent auditor regarding the scope and status of its annual audit of our consolidated financial statements, including our ICFR.

As part of the Committee’s oversight of the Company’s financial statements, the Committee reviews and discusses with management, the Internal Audit team and the Company’s independent auditor, management’s key initiatives and programs aimed at maintaining and improving ICFR, the effectiveness of the Company’s internal and disclosure control structure and the scope and adequacy of the Company’s internal auditing program.

The Committee met 10 times in 2020 and included, whenever appropriate, executive sessions in which the Committee met separately with KPMG, our independent auditor, as well as representatives of our Internal Audit group and management. During 2020, the Committee discussed with KPMG: (i) those matters required to be discussed by the applicable requirements of the SEC and the Public Company Accounting Oversight Board (“PCAOB”), including the quality of the Company’s accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements; (ii) the written disclosures required by PCAOB regarding the independent auditor’s communications with audit committees concerning independence; (iii) KPMG’s independence and considered the effects that the provision of non-audit services may have on KPMG’s independence; and (iv) various other matters pertaining to the audit and other matters handled by KPMG.

Among other matters, over the course of the past year, the Committee also:

 

   

discussed the impact of COVID-19 on the Company’s financial statements as a whole, including short-term and long-term liquidity, credit losses, revenue, reserves, intangible assets and related ICFRs;

   

emphasized the continued importance of an environment supporting the integrity of the financial reporting process;

   

reviewed the scope of and overall plans for the annual audit and the internal audit program, including a review of critical accounting policies, critical accounting estimates and significant unusual transactions;

   

reviewed KPMG’s report describing its quality control procedures and its report included in the Company’s Annual Report on Form 10-K;

   

reviewed the performance of KPMG’s lead engagement partner;

   

reviewed and discussed each quarterly and annual financial statements and related earnings press releases before issuance, including reviewing the Company’s issuance of guidance and use of non-GAAP financial information, the adequacy of disclosures and management’s ICFR report and discussion and analysis;

   

received quarterly reports from the Director of Internal Audit, including the Company’s work regarding ICFR and met with other members of the Internal Audit staff;

   

received periodic reports pursuant to our policy for the submission of confidential communications from employees and others about accounting, internal controls and auditing matters and conducted certain follow-up inquiries as necessary;

   

reviewed and discussed the effectiveness of our disclosure controls and procedures;

   

discussed our 2020 Critical Accounting Matters with KPMG, including the work performed;

   

discussed SEC regulatory changes, including amendments to Regulation S-K and related disclosure enhancements;

 

 

 

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Audit Committee Report

 

   

discussed Company capital allocation, investment and tax planning strategies;

   

reviewed the Company’s debt compliance process, including primary debt covenants, debt agreement restrictions, maintenance covenant calculations and liquidity implications;

   

received reports on the Company’s goodwill impairment testing;

   

received and evaluated a report concerning the Company’s major financial risks along with the Company’s mitigating actions;

   

oversaw the implementation of new accounting standards, including “Credit Losses on Financial Instruments,” ASC 326 and appropriate related internal controls;

   

received detailed analyses on the Company’s accounting for income taxes;

   

received detailed analyses on the Company’s accounting for pension assets and liabilities;

   

received updates on and reviewed planning, for transition from LIBOR to new interest rate benchmarks;

   

received an annual report with regard to any hiring of former employees of KPMG;

   

met quarterly in separate executive sessions, including private sessions with the Company’s independent auditors, internal auditors and top executives; and

   

coordinated with other committees of the Board to oversee the Company’s risk management function, especially with respect to matters that could impact the Company’s financial results or financial position.

Taking all of these reviews and discussions into account and subject to the limitations on the role and responsibilities of the Committee referred to in its charter, the undersigned Committee members recommended that the Board include the Company’s audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020.

In addition to the Company’s corporate compliance program and integrity line, the Audit Committee has established procedures for the receipt and evaluation, on a confidential basis, of any complaints or concerns regarding our accounting, auditing, financial reporting or related matters. To report such matters, please send written correspondence to Audit Committee Chair, c/o Post Office Box 4364, Monroe, Louisiana 71211.

Submitted by the Audit Committee of the Board of Directors.

W. Bruce Hanks (Chair)

Martha Helena Bejar

Peter C. Brown

Kevin P. Chilton

Hal Stanley Jones

Item Two - Ratify KPMG as our 2021 Independent Auditor

The Audit Committee of the Board has appointed KPMG LLP as our independent auditor for the fiscal year ending December 31, 2021 and we are submitting that appointment to our shareholders for ratification on an advisory basis at the meeting. Although shareholder ratification of KPMG’s appointment is not legally required, we are submitting this matter to the shareholders, as in the past, as a matter of good corporate practice. In determining whether to reappoint KPMG as our independent auditor, the Audit Committee considered a number of factors, including, among others, the firm’s qualifications, industry expertise, prior performance, control procedures, proposed staffing and the reasonableness of its fees on an absolute basis and as compared with fees paid by comparable companies.

If the shareholders fail to vote on an advisory basis in favor of the appointment, the Audit Committee will reconsider whether to retain KPMG and may appoint that firm or another without re-submitting the matter to the shareholders. Even if the shareholders ratify the appointment, the Audit Committee may, in its discretion, select a different independent auditor at any time during the year if it determines that such a change would be in the Company’s best interests.

 

 

 

 

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Audit

Item Two- Ratify KPMG as Our 2021 Independent Auditor

 

In connection with the audit of the 2020 financial statements, we entered into an engagement letter with KPMG which sets forth the terms by which KPMG will provide audit services to us. Any future disputes between KPMG and us under that letter will be subject to certain specified alternative dispute resolution procedures, none of which are intended to restrict the remedies that our shareholders might independently pursue against KPMG.

The following table lists the aggregate fees and costs billed to us by KPMG and its affiliates for the 2019 and 2020 services identified below:

 

Fees

         

 

      2019    2020

Audit Fees 1

     $ 17,639,702      $ 14,750,818

Audit-Related Fees 2

       153,203        126,705

Tax Fees 3

       119,098        65,470

Other

             

Total Fees

     $ 17,912,003      $ 14,942,993

 

1.

Includes the cost of services rendered in connection with (i) auditing our annual consolidated financial statements, (ii) auditing our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, (iii) reviewing our quarterly financial statements, (iv) auditing the financial statements of several of our subsidiaries, (v) reviewing our registration statements and issuing related comfort letters, (vi) statutory audits for certain of our foreign subsidiaries and (vii) consultations regarding accounting standards.

 

2.

Includes the cost of preparing agreed upon procedures reports and providing general accounting consulting services.

 

3.

Includes costs associated with general tax planning, consultation and compliance (which were approximately $100,000 in 2019 and approximately $65,000 in 2020).

The Audit Committee maintains written procedures that require it to annually review and pre-approve the scope of all services to be performed by our independent auditor. This review includes an evaluation of whether the provision of non-audit services by our independent auditor is compatible with maintaining the auditor’s independence in providing audit and audit-related services. The Committee’s procedures prohibit the independent auditor from providing any non-audit services unless the service is permitted under applicable law and is pre-approved by the Audit Committee or its Chairman. The Chairman is authorized to pre-approve projects if the total anticipated cost of all projects pre-approved by him during any fiscal quarter does not exceed $250,000. The Audit Committee has pre-approved the Company’s independent auditor to provide up to $75,000 per quarter of miscellaneous permitted tax services that do not constitute discrete and separate projects. The Chairman and the Chief Financial Officer are required periodically to advise the full Committee of the scope and cost of services not pre-approved by the full Committee. Although applicable regulations permit us to waive these pre-approval requirements in certain limited circumstances, the Audit Committee did not use these waiver provisions in either 2019 or 2020.

KPMG has advised us that one or more of its partners will be present at the meeting. We understand that these representatives will be available to respond to appropriate questions and will have an opportunity to make a statement if they desire to do so.

Ratification of KPMG’s appointment as our independent auditor for 2021 will require the affirmative vote of a majority of the votes cast on the proposal at the meeting.

 

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NOL Rights Plan

Item Three – Ratify the Amendment to Our Amended & Restated NOL Rights Plan

 

Item Three – Ratify the Amendment to our Amended & Restated NOL Rights Plan

Our Board is inviting shareholders to vote to ratify that certain First Amendment effective as of December 1, 2020 (the “First Amendment”) to the Company’s Amended and Restated Section 382 Rights Agreement, dated as of May 9, 2019 (the “Restated Plan”), between the Company and Computershare Trust Company, N.A., as rights agent.

The Restated Plan was originally adopted to diminish the risk that the Company could experience an “ownership change” as defined under Section 382 of the Internal Revenue Code of 1986, which could substantially limit the Company’s ability to use its net operating loss carryovers (collectively, the “NOLs”) to reduce anticipated future tax liabilities. The Restated Plan was approved by our shareholders at the Company’s 2019 Annual Meeting of Shareholders by approximately 90% of the votes cast.

Description of the amendment

The First Amendment, which was unanimously approved by the Company’s Board of Directors, (1) extends the expiration date of the Restated Plan from December 1, 2020 to December 1, 2023, (2) provides for early termination of the Restated Plan if the Company fails to obtain shareholder approval of the First Amendment by December 1, 2021, (3) removes certain procedural requirements governing additional acquisitions of the Company’s common stock by STT Crossing Ltd. and its affiliates and (4) otherwise retains all other terms and provisions of the Restated Plan, as set forth below.

The First Amendment extended the Restated Plan’s expiration date through December 1, 2023 to protect the Company’s NOLs of approximately $5.1 billion as of December 31, 2020, which for U.S. federal income tax purposes can be used to offset future taxable income. Despite the extension of the expiration date, the Company cannot provide assurance as to whether, when or in what amounts it will be able to use its NOL carryforwards. The Restated Plan, as amended by the First Amendment, serves only as a deterrent through the threat of dilution, not a prohibition, to share accumulations that could result in the occurrence of an “ownership change” as defined under Section 382 of the Internal Revenue Code. Any such “ownership change” would substantially limit the Company’s ability to use its NOL carryforwards to reduce anticipated future tax payments.

If our shareholders do not ratify the First Amendment at the meeting (or a special meeting of shareholders held by December 1, 2021), by its terms the Restated Plan will expire on December 1, 2021.

Description of the restated plan

The Restated Plan is intended to act as a deterrent to any person or group seeking to acquire “beneficial ownership” of 4.9% or more of the Company’s outstanding shares of common stock, without the approval of the Board. The following description of the Restated Plan, as amended by the First Amendment, is qualified in its entirety by reference to the text of the Restated Plan and the First Amendment, which are attached to this proxy statement as Appendix C-1 and Appendix C-2, respectively. We urge you to read the Restated Plan and First Amendment carefully in their entirety as the discussion below is only a summary.

General. Under the Restated Plan, since February 25, 2019, each of our Common Shares has carried with it one preferred share purchase right (each, a “Right”), until the earlier of the Distribution Date (as defined below)

 

 

 

 

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Item Three – Ratify the Amendment to Our Amended & Restated NOL Rights Plan

 

or expiration of the Rights, as described below. In general, any person that, together with all Affiliates and Associates (each as defined in the Restated Plan), acquires 4.9% or more of our outstanding common stock after February 13, 2019, will be subject to significant potential dilution, at the discretion of the Independent Directors. In addition, the Restated Plan provides that shareholders that owned 5.0% of the Company’s common stock on February 13, 2019, will not trigger the Restated Plan as long as they do not (i) acquire additional shares of common stock representing one-half of one percent (0.5%) or more of the Common Shares outstanding at the time of such acquisition or (ii) fall under 4.9% ownership of the Common Shares but then re-acquire Common Shares that in the aggregate equal 4.9% or more of the Common Shares. To the Company’s knowledge, STT Crossing Ltd. was the only holder of 5.0% or more of the Company’s outstanding shares of common stock on February 13, 2019, for purposes of Section 382 of the Code. The Restated Plan permits STT Crossing Ltd. and its affiliates to acquire additional Common Shares subject to certain conditions and restrictions and to transfer such shares among themselves. By removing certain procedural requirements, the First Amendment affords greater flexibility to STT Crossing Ltd. and its affiliates to acquire additional Common Shares in accordance with rights we previously afforded to them under our 2016 shareholder agreement with STT Crossing Ltd.

The Board may, in its sole discretion prior to the Distribution Date, exempt any person or group for purposes of the Restated Plan if it determines the acquisition by such person or group will not jeopardize tax benefits or is otherwise in the Company’s best interests. Any person that acquires shares of common stock in violation of these limitations is known as an “Acquiring Person.” Notwithstanding the foregoing, a Person shall not be an “Acquiring Person” if the Independent Directors (as defined in the Restated Plan) determine at any time that a Person who would otherwise be an “Acquiring Person,” has become such without intending to become an “Acquiring Person,” and such Person divests as promptly as practicable (or within such period of time as the Independent Directors determine is reasonable) a sufficient number of shares of common stock of the Company so that such Person would no longer be an “Acquiring Person,” as defined pursuant to the Restated Plan. The Restated Plan is not expected to interfere with any merger or other business combination approved by our Board.

The rights. From the record date of February 25, 2019, until the Distribution Date or earlier expiration of the Rights, the Rights will trade with and will be inseparable from, the common stock. New Rights will also accompany any new shares of common stock that we issue after February 13, 2019, until the Distribution Date or earlier expiration of the Rights.

Exercise price. Each Right will allow its holder to purchase from our Company one ten-thousandth of a share of Series CC Junior Participating Preferred Stock (“NOL Preferred Share”) for $28, subject to adjustment (the “Exercise Price”), once the Rights become exercisable. This fraction of a NOL Preferred Share will give the shareholder approximately the same dividend, voting and liquidation rights as would one share of common stock. Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights.

We refer to the date when the Rights become exercisable as the “Distribution Date.” Until that date or earlier expiration of the Rights, the common stock certificates will also evidence the Rights and any transfer of shares of common stock will constitute a transfer of Rights. After that date, the Rights will separate from the common stock and be evidenced by book-entry credits or by Rights certificates that we will mail to all eligible holders of common stock. Any Rights held by an Acquiring Person, or any Affiliates or Associates of the Acquiring Person, are void and may not be exercised.

Consequences of a person or group becoming an acquiring person. If a person or group becomes an Acquiring Person, all holders of Rights except the Acquiring Person, or any Affiliates or Associates of the Acquiring Person, may, upon payment of the Exercise Price, purchase Common Shares with an aggregate market value of twice the Exercise Price, based on the “current per share market price” of the common stock (as defined in the Restated Plan) on the date of the acquisition that resulted in such person or group becoming an Acquiring Person.

 

 

 

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NOL Rights Plan

Item Three – Ratify the Amendment to Our Amended & Restated NOL Rights Plan

 

Exchange. After a person or group becomes an Acquiring Person, our Independent Directors in their sole discretion may extinguish the Rights by exchanging one share of common stock or an equivalent security for each Right, other than Rights held by the Acquiring Person or any Affiliates or Associates of the Acquiring Person.

Preferred share provisions. Each one ten-thousandth of a NOL Preferred Share, if issued:

 

   

will not be redeemable.

   

will entitle holders to dividends equal to the dividends, if any, paid on one share of common stock will entitle holders upon liquidation either to receive $1.00 per share or an amount equal to the payment made on one share of common stock, whichever is greater.

   

will vote together with the common stock as one class on all matters submitted to a vote of shareholders of the Company and will have the same voting power as one share of common stock, except as otherwise provided by law.

   

will entitle holders to a per share payment equal to the payment made on one share of common stock, if shares of our common stock are exchanged via merger, consolidation, or a similar transaction.

Exercisability. The Rights will not be exercisable until 10 business days (as may be extended in the discretion of the Independent Directors) after the public announcement that a person or group has become an Acquiring Person unless the Restated Plan is theretofore terminated or the Rights are theretofore redeemed (as described below).

Redemption. Our Board may redeem the Rights for $0.0001 per Right at any time before the Distribution Date. If our Board redeems any Rights, it must redeem all of the Rights. Once the Rights are redeemed, the only right of the holders of Rights will be to receive the redemption price of $0.0001 per Right. The redemption price will be adjusted if we have a stock split or stock dividends of our common stock.

Expiration. After giving effect to the First Amendment, the Rights will expire on the earliest of (i) December 1, 2023, (ii) the time at which the Rights are redeemed, (iii) the time at which the Rights are exchanged, (iv) the time at which the Board determines that the Company’s NOLs are utilized in all material respects or that an ownership change under Section 382 of the Code would not adversely impact in any material respect the time period in which the Company could use the NOLs, or materially impair the amount of the NOLs that could be used by the Company in any particular time period, for applicable tax purposes, (v) December 1, 2021 if approval of the First Amendment by the affirmative vote of a majority of the votes cast at a duly called meeting has not been obtained prior to such date, or (vi) a determination by the Board, prior to the Distribution Date, that the Restated Plan and the Rights are no longer in the best interests of the Company and its shareholders.

Anti-Dilution Provisions. Our Board may adjust the Exercise Price, the number of NOL Preferred Shares issuable and the number of outstanding Rights to prevent dilution that may occur from a stock dividend, a stock split, or a reclassification of the NOL Preferred Shares or common stock.

Amendments. The terms of the Restated Plan may be amended by our Board without the consent of the holders of the Rights, including to effect additional extensions of the expiration date of the Rights in the future. After any Distribution Date, our Board may not amend the agreement in a way that adversely affects holders of the Rights (other than an Acquiring Person, or an Affiliate or Associate of an Acquiring Person).

Certain Factors Shareholders Should Consider

Our Board believes that continuing to take measures to safeguard the Company’s NOLs through December 1, 2023, is in our shareholders’ best interests. However, you should consider the factors below when making your decision with respect to the ratification of the First Amendment.

 

 

 

 

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NOL Rights Plan

Item Three – Ratify the Amendment to Our Amended & Restated NOL Rights Plan

 

Continued Risk of Ownership Change. Although the Restated Plan is a deterrent measure intended to reduce the likelihood of an “ownership change,” we cannot assure you that it will be effective. The amount by which an ownership interest may change in the future could be affected by many factors, including purchases and sales of shares by shareholders holding 5% or more of our outstanding common stock notwithstanding the deterrent effects of the Restated Plan, decisions over which we have little or no effective control.

Anti-Takeover Effect. While the Restated Plan is not intended to prevent, or even discourage, a proposal to acquire the Company, it may have a potential anti-takeover effect because an Acquiring Person may have his ownership interest diluted upon the occurrence of a triggering event. Accordingly, the overall effects of the Restated Plan may be to render more difficult or discourage a merger, tender offer, or assumption of control by a substantial holder of our securities. However, as is the case with traditional shareholder rights plans, the Restated Plan should not interfere with any merger or other business combination approved by the Board.

Potential Impact on Value. The Restated Plan could have a negative impact on the trading price and intrinsic value of our common stock by deterring persons or groups of persons from acquiring our common stock, including in acquisitions for which some shareholders might receive a premium above market value.

Potential Effects on Liquidity. The Restated Plan is intended to deter persons or groups of persons from acquiring beneficial ownership of our common stock in excess of the specified limitations. A shareholder’s ability to dispose of our common stock may be limited if the Restated Plan reduces the number of persons willing to acquire our common stock or the amount they are willing to acquire. A shareholder may become an Acquiring Person upon actions taken by persons related to, or affiliated with, them. Shareholders are advised to carefully monitor their ownership of our common stock and consult their own legal advisors and/or us to determine whether their ownership of the shares approaches the proscribed level.

Vote required

Approval of this proposal will require the affirmative vote of the holders of a majority of the votes cast on the proposal at the meeting.

 

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Executive Compensation

Our Executive Officers

 

Our Executive Officers

We currently have five executive officers. Biographical information for each of them (other than Mr. Storey, who also serves as a director and whose biography may be found under “Board of Directors and Governance – Our Director Nominees”) is found below:

 

SHAUN ANDREWS

 

 

LOGO

  

 

 

Executive Vice President, Chief Marketing Officer

Since 2019

 

48 years old

 

 

 

Shaun Andrews is Lumen’s Executive Vice President, Chief Marketing Officer. With nearly 25 years of experience in technology, Mr. Andrews is responsible for Lumen’s product and solutions strategy and go-to-market approach. He also has oversight of global marketing, including the brand, global messaging and digital campaigns and marketing technology. Mr. Andrews previously served as Lumen’s Executive Vice President, Product Management. Prior to Lumen’s combination with Level 3 Communications, Inc. in 2017, Mr. Andrews held progressive leadership and strategy roles in Product Management as a Senior Vice President, starting with Level 3 in 2006. Mr. Andrews became Lumen’s Executive Vice President and Chief Marketing Officer in 2019.

 

INDRANEEL DEV

 

 

LOGO

  

 

 

Executive Vice President, Chief Financial Officer

Since 2018

 

49 years old

 

 

 

Indraneel Dev is the Executive Vice President, Chief Financial Officer for Lumen, with global responsibility for financial planning, accounting, tax, treasury, investor relations, procurement and supply chain management and the global real estate portfolio. Mr. Dev served as Level 3’s Group Vice President, Finance from 2004 to November 2017, when he joined Lumen as a result of the Level 3 business combination. He became Lumen’s CFO in September 2018.

 

STACEY W. GOFF

 

 

LOGO

  

 

 

Executive Vice President, General Counsel and Secretary

Since 2009

 

55 years old

 

 

 

Stacey W. Goff is Executive Vice President, General Counsel and Secretary for Lumen. Mr. Goff is responsible for Lumen’s legal function, as well as the communications, community relations and public policy functions. Mr. Goff joined Lumen in 1998 and has served as General Counsel since 2009.

 

SCOTT TREZISE

 

 

LOGO

  

 

 

Executive Vice President, Human Resources

Since 2013

 

52 years old

 

 

 

Scott Trezise is Lumen’s Executive Vice President, Human Resources. In this role, Mr. Trezise is responsible for the global employee experience, including talent acquisition, employee engagement, recognition, training and development, compensation and benefits, payroll, labor relations for represented employees and contingent labor. Mr. Trezise joined Lumen in 2013 in his current role.

 

 

 

 

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Executive Compensation

Item Four - Advisory Vote on Executive Compensation – “SAY-ON-PAY”

 

Item Four - Advisory Vote on Executive Compensation – “Say-on-Pay”

Each year, we provide our shareholders the opportunity to vote on a non-binding, advisory resolution to approve the compensation of our named executive officers (NEOs) as disclosed in our annual proxy statements in accordance with SEC rules.

Under our executive compensation programs, our NEOs are rewarded for achieving specific annual and long-term goals, as well as increased shareholder value. We believe this structure aligns executive pay with our financial performance and the creation of sustainable shareholder value. The Human Resources and Compensation Committee of our Board (HRCC) continually reviews our executive compensation programs to ensure they achieve the goals of aligning our compensation with both current market practices and your interests as shareholders.

As discussed in greater detail elsewhere in this proxy statement, the HRCC spends considerable time and effort to ensure that not only do we have the right leadership in place, but also that our executive compensation programs continue to appropriately incentivize and reward each key member of the team in a manner that aligns with shareholder interests. Over the last two years, this has included a significant emphasis on shareholder outreach and taking action in response to the input we received from shareholders, including making changes to our 2020 compensation programs. For additional information on our executive compensation programs generally and our recent compensation actions specifically, we urge you to read the “Compensation Discussion & Analysis” and “Compensation Tables” sections of this proxy statement.

At the meeting, we will ask you to vote, in an advisory manner, to approve the overall compensation of our NEOs, as described in this proxy statement, including the Compensation Discussion & Analysis, the Summary Compensation Table and the other related tables and disclosures. This proposal, commonly known as a “say-on-pay” proposal, gives you the opportunity to express your views. This advisory vote is not intended to address any specific element of compensation, but rather relates to the overall compensation of our named executive officers and our executive compensation policies and practices as described in this proxy statement. Accordingly, your vote will not directly affect or otherwise limit any existing compensation or award arrangement of any of our NEOs.

While this “say-on-pay” vote is advisory and will not be binding on our Company or the Board, it will provide valuable information for future use by our HRCC regarding shareholder sentiment about our executive compensation. We understand that executive compensation is an important matter for our shareholders. Accordingly, we invite shareholders who wish to communicate with our Board on executive compensation or any other matters to contact us as provided under “Board of Directors and Governance–Shareholder Engagement.”

Approval of this proposal will require the affirmative vote of the holders of a majority of the votes cast on the proposal at the meeting.

 

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Letter from our HRCC Chair

 

Letter from our HRCC Chair

Fellow shareholders,

At Lumen, we value the contributions of every employee. Never was this more important than in 2020; COVID-19 and social unrest presented unprecedented challenges to nearly every aspect of our business and impacted all of our employees. As Chair of the Human Resources and Compensation Committee (HRCC), our priority throughout has been the health and wellbeing of our employees and we are proud of how Lumen – and our employees – responded.

As detailed in our COVID-19 response highlights above, we were able to move 75% of our staff to remote work in March 2020, while providing strong health and safety protocols to safeguard our front-line, essential workers who have been dedicated to keeping our customers connected. While we have always emphasized that one of our strengths is the diversity of our people, recent events have brought to light the nature of social injustice within our society which has impacted our communities, our Company and individual employees. We remain committed to fostering a diverse and inclusive culture. In 2020 our Chief Diversity & Inclusion Officer and our executive Diversity & Inclusion Steering Committee worked closely with the HRCC to promote an inclusive culture and opportunities for all employees.

In response to the pandemic and societal shifts, management as a whole and individual leaders dramatically increased the cadence and scope of employee communication, including personal messages, regular enterprise-wide updates and Employee Resource Group participation.

In the midst of this rapidly-changing environment, we continued to pursue the strategic transformation for our business – including launching our new “Lumen” brand. As we continue to evolve from a telecommunications company into a technology company, our current revenue and margins are still declining from our legacy business. We are focusing on developing and offering products and services that are more sustainable technology solutions on our “Platform for Amazing Things” – the shift is deliberate but not immediate.

Our transformation has caused unique complications for executive compensation. Forecasting how the downward curve of traditional wireline business revenue and profit will intersect with the projected upward curve of technology solution revenue and profit is difficult to assess; we believe that the metrics and goals that we set in the 2020 executive compensation program are rigorous but reasonable and hold our management team accountable for managing our strategic transformation. We feel that the management team is on or ahead of pace for our long-term strategy since the Level 3 Combination in November 2017 – especially given the impacts of the pandemic on 2020 operations – for executing on this transition and their compensation payouts reflect this assessment.

While we were heartened that our say-on-pay vote support increased dramatically at our 2020 annual meeting, we continue to strive to build compensation programs and related disclosure that are more broadly supported. We remain keenly interested in the feedback of investors regarding our executive compensation program; we take that feedback into account when designing future compensation programs. In 2020, we contacted investors representing 59% of shares outstanding; and other directors participated in these engagements as appropriate.

 

 

 

 

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Letter from our HRCC Chair

 

With shareholder feedback in mind, we have made a series of changes to our compensation program over the last several years, including extending our performance period to three years in 2020 and adding a relative TSR modifier to our LTI plan.

Thank you for your investment in Lumen and we look forward to a brighter 2021.

Laurie Siegel

LOGO

Director and Chair, HRCC

 

 

 

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Compensation Discussion & Analysis

 

Compensation Discussion & Analysis

The CD&A is divided into five sections: (1) Executive Summary; (2) Compensation Philosophy and Oversight; (3) Pay and Performance Alignment; (4) Compensation Design, Awards and Payouts for 2020; and (5) HRCC Engagement and Compensation Governance. Please refer to the roadmap below in order to navigate this portion of the proxy.

 

  

 

ROADMAP

    
 

Section one – Executive Summary

     39    
 

Lumen Business Highlights

     39    
 

COVID-19 Pandemic Impact on Pay

     40    
 

Shareholder Engagement and 2020 Compensation Enhancements

     40    
 

Section two – Compensation Philosophy and Oversight

     42    
 

Role of Human Resources and Compensation Committee (HRCC)

     42    
 

Compensation Objectives and Design

     42    
 

Year-Round Shareholder Engagement Informs Compensation Design and Awards

     42    
 

Performance Objectives Align with Strategy

     43    
 

Rigorous Design and Target Setting Process

     43    
 

Our Pay Elements

     44    
 

Section three – Pay and Performance Alignment

     47    
 

Goal Setting

     47    
 

Incentive Program Guidelines

     47    
 

Pay Mix

     48    
 

Realized and Realizable Pay for Our CEO

     48    
 

Section four – Compensation Design, Awards and Payouts for 2020

     49    
 

Target Compensation

     49    
 

Salary

     50    
 

2020 Short-Term Incentive Program

     50    
 

2020 STI Performance Metrics

     51    
 

HRCC STI Award Oversight

     54    
 

2020 Long-Term Incentive Compensation

     56    
 

2020 Annual LTI Grants

     56    
 

2020 Annual LTI Performance Metrics

     57    
 

Share Dilution, Burn Rate and Stock-Based Compensation Expense

     59    

 

 

 

 

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Compensation Discussion & Analysis

 

 

Performance Periods Ending December 31, 2020

     59    
 

2019 Annual LTI Grant

     60    
 

2018 Promotion Grant for Mr. Storey

     61    
 

Other Benefits

     63    
 

Section five – HRCC Engagement and Compensation Governance

     66    
 

HRCC Human Capital Resources Priorities

     66    
 

HRCC Executive Compensation Review Process

     67    
 

Role of CEO and Management

     67    
 

Role of Compensation Consultants

     68    
 

Role of Peer Companies

     68    
 

Our Governance of Executive Compensation

     71    

 

 

 

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Table of Contents

Section one - Executive Summary

Lumen Business Highlights

 

Section one - Executive Summary

The HRCC oversees and provides direction to management on compensation programs for all employees with the goal of attracting and retaining the skilled talent needed for Lumen to reach its strategic objectives. The HRCC seeks to continuously improve our compensation program based on changing market conditions, an evolving business environment and deep engagement with shareholders. This CD&A reflects the HRCC’s overall philosophy on employee compensation with a focus on disclosing compensation for our five named executive officers (NEOs).

 

LOGO     LOGO     LOGO     LOGO     LOGO
Jeffrey K. Storey     Indraneel Dev     Stacey W. Goff     Shaun C. Andrews     Scott A. Trezise
President & Chief Executive Officer     Executive Vice President, Chief Financial Officer     Executive Vice President, General Counsel & Secretary     Executive Vice President, Chief Marketing Officer     Executive Vice President, Human Resources

When reviewing 2020 compensation, the HRCC considered several factors. A year ago, the Company was in the midst of responding to the COVID-19 pandemic that was just beginning to affect the nation and the world. In real time, we adjusted our operational priorities while continuing to focus on the long-term execution of our business. Our employees quickly pivoted to a new remote environment while empowering our customers to meet their own rapidly changing environments.

Lumen business highlights

Despite the pressure of these adjustments on our business, we delivered solid results during 2020 as we continued to advance our strategic initiatives, investing through the cycle, returning over $1 billion to shareholders and de-risking our balance sheet. Fiscal 2020 highlights include:

 

   

Made solid progress toward our revenue growth objectives

  -  

Improved our total revenue trajectory by 150 basis points, comparing our 2020 year-over-year rate of change to the 2019 rate of change

  -  

Grew Enterprise FY20 revenue (0.5% growth)

  -  

Grew Consumer Broadband revenue

   

Launched new products and brands, including the Lumen Platform, Lumen Edge Cloud, Security, Collaboration and Quantum Fiber

   

Achieved our objective for $800 million to $1 billion of transformation savings a year ahead of schedule

  -  

Increased Adjusted EBITDA margins by over 300 basis points since announcing our transformation savings target (44.5% in 4Q20 vs. 41.5% in 4Q18)

   

Delivered solid Adjusted EBITDA and Free Cash Flow results

  -  

Adjusted EBITDA: $8.9 billion

  -  

Free Cash Flow: $3.1 billion

   

Continued to improve the balance sheet

  -  

Reduced net debt by $1.6 billion

  -  

Refinanced and extended maturities for more than $13 billion (pro forma for the first quarter 2021 activity)

  -  

Lowered net cash interest by approximately $400 million

   

Improved Net Promoter Scores across strategic areas of the business

 

 

 

 

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Section one - Executive Summary

Lumen Business Highlights

 

   

Improved fourth quarter Adjusted EBITDA results, exceeded run rate target and offset revenue decline from 4Q18 to 4Q20

  -  

Adjusted EBITDA run rate: 1.4% from 4Q18 to 4Q20

  -  

Revenue: declined by 7.7% from 4Q18 to 4Q20

   

Achieved cumulative Adjusted EBITDA 1 results of $27.0 billion, exceeding target, for the three years ending December 31, 2020

   

For the three years ending December 31, 2020, Lumen’s TSR exceeded TSR Peer Group median, achieving 57th percentile

 

1.

Adjusted EBITDA as used in our LTI plan as further described within “-2019 Annual LTI Grant – Performance Results.”

COVID-19 pandemic impact on pay

In evaluating the effects of the COVID-19 pandemic on our 2020 results, the HRCC conducted a thoughtful review of its impact on our incentive plans. Management presented a detailed review of COVID-19 impacts on annual results. The COVID-19-related negative financial impacts include, but are not limited to, increased bad debt reserve, delay or cancellation of customer orders, cancelled sales for live events, delay in planned re-rates, delays in off-to-on net savings initiatives, increased call center costs related to work from home conditions of our employees, personal protection equipment for our front-line employees and offices and costs associated with enhanced paid-time off for our employees. These costs were partially offset by the positive financial impact related to emergency bandwidth upgrade services, increased usage of our services and tax credits. The aggregate impact to Adjusted EBITDA and Free Cash Flow, if excluded from our results as a special non-recurring item as permitted under our Guidelines on Administering Compensation (Guidelines), would have resulted in an upward adjustment of approximately 8% to our STI company performance funding of 91%.

For the approximately 26,000 employees who participate in our STI plan, excluding the senior officers as described below, it was decided to apply an upward discretion of 2% for a total payout of 93%. This was in recognition of the challenges and sacrifices that our employees experienced to ensure that business commitments were met, despite the considerable challenges involved in service delivery, disrupted supply chains and personal hardships associated with the pandemic. For more information on Lumen’s response to the COVID-19 pandemic, enhanced services provided to our customers and communities and support provided to our employees, see “COVID-19 Response.”

Given each member of our senior leadership team supported our response to COVID-19 in different ways, depending on their responsibilities and roles, the decision was made to not apply unilateral positive discretion to the financial metric results for the 2020 STI awards for the NEOs and broader senior leadership team. As described below, our 2020 STI plan has a mechanism for rewarding employees based on individual performance. For each senior leader, we captured these considerations in their respective individual performance modifier and tailored the magnitude of the adjustment as appropriate. Some senior leaders had a greater role in protecting our customers and employees and assuring business continuity as the COVID-19 pandemic evolved, while other senior leaders were focused on leading their teams toward strategic goals in a work-from-home environment. For more information regarding our 2020 STI plan payouts to our NEOs, including individual performance modifiers, see the section entitled “2020 Bonus Program” below.

Shareholder engagement and 2020 compensation enhancements

At our 2020 annual meeting, we received support from approximately 74% of shares voted on our say-on-pay proposal. Both before and following these results, we engaged with shareholders to solicit their views on a wide range of topics, including executive compensation.

 

 

 

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Section one - Executive Summary

Shareholder Engagement and 2020 Compensation Enhancements

 

Specifically, on the topic of executive compensation, before our annual meeting in spring 2020 we invited shareholders representing 52% of our outstanding shares to engage and discuss our compensation program changes. Following our 2020 annual meeting, we increased our outreach program, inviting shareholders representing 59% of our outstanding shares to engage, resulting in 14 meetings with holders representing 25% of our outstanding shares. Our Chairman of the Board (who is also a member of HRCC), HRCC Chair, NCG Committee Chair and, as appropriate, members of management, participated in these engagements.

During these conversations, we gained a better perspective of the factors that led to shareholders having reservations about our executive compensation program and, in turn, many of our shareholders have gained a better understanding of the challenges of recruiting, retaining and motivating top executive talent in a complex, rapidly changing industry that continues to face the challenges of declining, high-margin revenue related to legacy voice and copper-based wireline services. We have been encouraged by both the constructive feedback and support received during these shareholder engagements. In this year’s CD&A, we have focused our efforts to more effectively explain these challenges, their impact on our strategic priorities and how we design executive compensation to incentivize our long-term success.

In addition, with the feedback of our shareholders in mind, we implemented numerous changes to our 2020 incentive plans responsive to shareholder feedback, including:

 

 

Revised our STI plan metrics for 2020

   

Reduced the Adjusted EBITDA weighting from 65% to 50%

   

Added Revenue weighted at 15% as an additional measure of strategic progress

   

Maintained Free Cash Flow and Customer Experience components at same weight as 2019

 

 

Revised our LTI plan metrics and lengthened performance period for 2020 awards

   

Returned to 3-year cumulative period, reflecting strategic shift from integration to long-term vision

   

Maintained Adjusted EBITDA element

   

Added Relative TSR Modifier to reflect performance in light of industry trends and to further strengthen alignment with shareholders

We have benefited from these conversations and look forward to continuing to engage in productive dialogue with our stakeholders on all governance and stewardship matters, including compensation.

 

 

 

 

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Section two - Compensation Philosophy and Oversight

Role of Human Resources and Compensation Committee

 

Section two - Compensation Philosophy and Oversight

Compensation is important to Lumen’s overall business strategy for attracting, developing and retaining skilled and motivated executives and key employees who possess the right skill sets and leadership expertise to execute on our long-term vision. We design our compensation programs to reward executives and employees alike who are critical to our success.

Role of Human Resources and Compensation Committee

Lumen’s highly competitive business requires attracting, developing and retaining a motivated team inspired by leadership, engaged in meaningful work, motivated by growth opportunities and thriving in a culture that embraces diversity, inclusion and belonging. Understanding and anticipating the priorities of our current and future employees is important to realizing Lumen’s purpose to further human progress through technology. The HRCC supports the full Board with various aspects of human capital resources management, including employee and executive compensation. The HRCC is responsible for overseeing Lumen’s human resources strategies, prioritizing Lumen’s efforts to attract and retain employees and leaders with the skills and experience needed to achieve our strategic objectives in dynamic market conditions and creating an environment promoting equity and diversity. During 2020, the HRCC engaged with management on several issues impacting Lumen’s human capital strategy, including: effective employee engagement, diversity, inclusion and belonging, positive corporate culture, pay equity, executive and employee succession and recruiting and retention.

Compensation objectives and design

Our compensation programs are designed to be market competitive and fiscally responsible. We strive to pay competitive compensation to all employees, considering the job market in which they work and peer compensation within Lumen. Our programs are designed to reward those employees for their performance and contribution to our success. Although this CD&A provides insight into compensation awarded and paid to our NEOs, it is important to note that the incentive compensation framework and metrics apply to all Lumen employees participating in our incentive programs. For 2020, approximately 1,600 Lumen employees received equity incentives or LTI and approximately 26,000 participated in our STI program. As with our NEOs, each participant’s target compensation is determined based on the availability of talent, the criticality of skills, market compensation benchmarks and internal equity.

Year-round engagement informs compensation design and awards

The HRCC’s processes are both cyclical and ongoing.

 

   

At-least quarterly engagement with independent compensation consultant, discussing compensation trends, our performance against peers and market influences;

   

Spring and fall shareholder engagement discussing executive compensation (or more often if the opportunity arises);

   

Quarterly review of year-to-date results and projected performance for the various eligible outstanding incentive programs;

   

Quarterly review of anticipated individual eligible award values, including individual NEO tally sheets; and

   

In the fourth quarter, discussions about possible program design changes for the following fiscal year in light of compensation trends, performance against peers, market influences and shareholder feedback, independent compensation consultant observations and anticipated current year anticipated award values.

 

 

 

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Section two - Compensation Philosophy and Oversight

Compensation Objectives and Design

 

Performance objectives align with strategy

HRCC selects short-term and long-term plan performance objectives designed to drive execution of our overall business strategy. This process includes engagement with independent compensation consultant, discussing compensation trends, our performance against peers and market influences throughout the year as well as feedback from shareholder engagement regarding executive compensation and incentive design.

 

   

Incentive Compensation Design

  -  

Align performance objectives and metrics with company near and long-term strategy

  -  

Set ambitious short-and long-term targets at challenging but reasonably achievable levels that reflect priorities and drive progress toward our long-term vision

  -  

Prior year design, targets and performance

  -  

Performance-based compensation rewards performance over multiple time horizons and aligns with long-term shareholder value while discouraging excessive risk taking

  -  

Incorporate shareholder input - including SOP results

  -  

Allow for limited adjustments, positive or negative, as may be appropriate

  -  

Monitor share expense rate and dilution

   

Target Compensation

  -  

Balance between cash and equity incentive compensation

  -  

Align pay with market – target total compensation at the 50th percentile

  -  

Balance between individual contribution and company performance

  -  

Retain employees with essential expertise and skill

  -  

Offer comparable pay to employees who make similar contributions and have comparable skill sets and expertise - internal equity

Rigorous design and target setting process

Each year over the course of several meetings, the HRCC evaluates our incentive designs for the upcoming plan year and establishes rigorous threshold, target and maximum performance levels for the selected objectives that are rooted in our annual budget, public guidance and long-range strategic plan.

Our incentive design and targets are influenced by:

 

   

Board reviewed and approved annual and long-range financial plan, which are used to set our STI and LTI targets and inform our external outlook

  -  

Detailed financial and operational goals and timelines by our market segments and corporate support functions

  -  

Anticipated timing for execution of our strategic initiatives, new product launches and any acquisition or divestiture activity

  -  

Cash flow plan to execute on our capital allocation priorities, deleveraging plan, dividends to be returned to shareholders and maximizing our approximately $5.1 billion of NOLs, as of December 31, 2020

  -  

Prior year strategic goals and actual financial performance

  -  

Industry and competitive trends, such as: wireline industry trends, competitive landscape, product lifecycle

  -  

Other company-specific and external factors that influence our business

   

Declining high margin, residual voice and copper-based wireline revenue than the digital services in increasing customer demand

  -  

Legacy copper telecommunications services’ margin is greater than the technology and fiber broadband services margin – requiring us to simultaneously expand our customer base and services portfolio at a faster rate than the declining telecommunications services

  -  

Flat or negative revenue growth coupled with an improved revenue trajectory is a challenge as we continue our transformation into a technology company in light of decreasing demand for our legacy copper telecommunications services and the shift in our products and services mix to include more lower-margin items.

 

 

 

 

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Section two - Compensation Philosophy and Oversight

Compensation Objectives and Design

 

   

Adapting to the legacy copper telecommunications revenue declines requires us to adjust our cost structure annually

  -  

Using Adjusted EBITDA as a key financial metric in both our STI and LTI plans, with performance measured over different time horizons, incentivizes management to rapidly adjust our operations to achieve strategic priorities

   

In addition to the degree of difficulty and stretch discussed during Board review of our annual and long-range plan, the Chair of Audit (also Vice Chairman of the Board) works closely with our CEO and CFO to understand the detailed assumptions and participates in HRCC meetings when incentive targets are approved

   

The payout curves for each metric are reviewed and recalibrated as appropriate based on the degree of difficulty and stretch in our annual and long-range plans and historic payout levels compared to performance

   

Shareholder feedback and independent compensation consultant observations

Since NEO compensation includes a higher proportion of performance-based compensation (specifically LTI), it provides for greater alignment with shareholder interests.

Our pay elements

The three core elements of our executive compensation program are base salary, STI opportunity and LTI grants in the form of equity awards. Our LTI awards are structured as mix of performance-based restricted stock or RSUs (PBRS) and time-based restricted stock or RSU (TBRS), with heavier weighting on the PBRS portion for our senior leader team. Each element is described below and includes the performance metrics selected for our 2020 incentive programs that align with and help us realize, our multi-dimensional long-term business strategy.

 

 
Base Salary
As with most companies, base salary is annual fixed cash compensation that provides a competitive and stable component of income to our executives.

 

 
Short-Term Incentive Bonus
STI bonus is annual variable cash compensation based on the achievement of annual performance measures.

Alignment to Compensation Philosophy:

 

STI provides competitive short-term incentive opportunities for our executives to earn annual bonuses, typically paid in cash, based on performance objectives that, if attained, can reasonably be expected to (i) promote our business and strategic objectives and (ii) correspond to those paid to similarly situated and comparably-skilled executives at peer companies. The HRCC retains discretionary authority over determining any and all amounts to be paid under the STI plan.

 

 

 

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Section two - Compensation Philosophy and Oversight

Our Pay Elements

 

 
Performance Objectives Aligned with Strategy:

For 2020, the HRCC approved certain changes to our STI metrics, informed by discussions with our shareholders and the evolution of our business strategy after the Level 3 Combination to position our company to provide more technology driven products and services. Specifically, during 2018 and 2019, a critical post-combination integration period, our STI metrics were Adjusted EBITDA, Free Cash Flow and Customer Experience – reflecting management’s priority to rapidly assess and act on integration and transformation opportunities. For 2020, our focus shifted from strategy to implementation and the HRCC once again selected Adjusted EBITDA but reduced its weighting from 65% to 50% and added Revenue weighted at 15% to emphasize top line growth. Free Cash Flow and Customer Experience remain critical to our strategy and were retained as metrics in 2020 at similar weightings as 2019.

2020 Weighting    Metric
50%    Adjusted EBITDA measures the operational performance and profitability of our businesses and is commonly used by industry investors to evaluate our total enterprise value.
25%    Free Cash Flow is a comprehensive measure of the company’s overall financing position.
15%    Revenue generation is critical to our goal of increasing our strategic revenue growth in amounts sufficient to offset our continuing and systemic legacy revenue losses.
10%    Customer Experience is critical to maintain and grow our revenue base.
Individual Performance
Modifier
   A positive or negative adjustment for individual performance based on “line of sight” for their specific areas of responsibility and individual objectives. Since 2019, we have limited any positive adjustments for a NEO’s individual performance to 20% of the company performance funding under the plan.

 

 
Long-Term Incentive Compensation
Annual LTI is variable compensation awarded in equity that vests over three years from the date of grant, with at least 60% based on the achievement measured against pre-established performance measures and up to 40% based on three years of continued service.

Alignment to Compensation Philosophy:

 

LTI fosters a culture of ownership, aligns the long-term interests of our executives with our shareholders and helps to retain executives through stock price growth and the creation of long-term value. In addition, the number of shares vesting under our performance-based awards is dependent upon our performance measured against key business objectives over a multi-year period, further strengthening the alignment between executive pay, company performance and shareholder value creation. The amount of LTI compensation that is ultimately realized depends on how successfully we execute our strategic goals and our overall stock performance.

 

 

 

 

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Section two - Compensation Philosophy and Oversight

Our Pay Elements

 

 
Performance Objectives Aligned with Strategy:

Time-Vested LTI Awards (TBRS): Our grants of TBRS are intended to reinforce the link of interests between our executives and our shareholders by focusing on the long-term value of our common stock.

 

Performance-Based LTI Awards (PBRS): As with our 2020 STI program, the HRCC made certain changes to the performance metrics of our 2020 PBRS grants to reflect discussions with shareholders as well as the maturation of our company and business strategy including returning to a three-year performance cycle. For 2020, the HRCC changed to a Cumulative Adjusted EBITDA metric and, to further strengthen the alignment of executive and shareholder interests, added a relative TSR modifier.

2020 Weighting    Metric
100%    Adjusted EBITDA measures the operational performance and profitability of our businesses and is commonly used by industry investors to evaluate our total enterprise value. Cumulative Adjusted EBITDA measures sustained, cumulative EBITDA performance over a three-year period.
+/-20% Modifier    Relative TSR (3-year) rewards for achieving stock price growth relative to our TSR peer group over a three-year period.

For a discussion of how the HRCC allocates compensation between the three key components, see section below entitled “Pay and Performance Alignment.”

 

 

 

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Section three – Pay and Performance Alignment

Goal Setting

 

Section three – Pay and Performance Alignment

 

In allocating NEO target pay opportunities among the different compensation elements, the HRCC does not adhere to a prescribed formula but generally emphasizes performance-based and at-risk elements. The total target cash compensation opportunity (base salary plus target STI) represents less of our NEOs total target compensation than the total target LTI opportunity, in order to increase alignment with shareholders’ interests and motivate performance that creates sustainable long-term shareholder value.

Goal setting

As noted above, STI and LTI payouts are determined at the end of a performance period based on our achievement of pre-established goals. In order to ensure compensation elements are aligned with both company performance and the evolution of corporate strategy, incentive goals and targets are not automatically carried forward from one year to the next. Rather, the HRCC reevaluates performance goals in the first quarter each year, in order to establish goals that are:

 

   

challenging and sufficiently rigorous, based on the information available to us at the time,

   

appropriately tailored to our current business conditions as well as the prevailing business environment more broadly,

   

aligned with shareholder interests, and

   

designed to incentivize our executives to drive our key strategic objectives over the relevant performance period.

Incentive program guidelines

While our incentive goals, targets and payout criteria are designed to measure objective performance over a specified period of time, the HRCC does have the ability to make certain adjustments to our performance calculations. To provide structure and promote consistency in addressing such situations, the HRCC has adopted the Guidelines to aid its goal of reaching balanced STI and LTI payout decisions that align performance with our targets and corporate strategy. The Guidelines provide three types of potential adjustments that can affect the overall payout. The first two address adjustments made to the calculation of financial metrics and the third applies to an adjustment based on the terms of the STI plan.

For the first type, this occurs after completion of each performance period and in conjunction with our annual external reporting process when we review the financial information and assumptions in order to make certain mandatory adjustments to eliminate the effects of any unanticipated, material and non-recurring events. Generally, these adjustments have corresponded with the “Non-GAAP Integration, Transformation Costs and Special Items” supplemental schedule included in our earnings releases during the corresponding performance period.

The second type provides the HRCC with discretionary authority to adjust STI and LTI performance metrics based on any other “extraordinary, unusual, or non-recurring transactions or items.” In either case, the adjustments may be positive or negative but will only be made if the events were not known on the date the performance goals were established or were not reflected in the forward-looking financial information used to set such goals.

The third type, as discussed in greater detail below under “2020 STI Program” the HRCC has additional discretionary authority under the terms of the STI plan to adjust STI payouts. These discretionary adjustments may be included as a specific component of a given year’s STI plan design (for example, the 20% cap on upward adjustments for NEO individual performance included in our 2020 plan design) but under the terms of the STI plan, the HRCC retains overall authority over the STI plan and its payouts.

 

 

 

 

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Section three – Pay and Performance Alignment

Pay Mix

 

Pay mix

The following chart illustrates the approximate allocation of the total target compensation opportunity for our current CEO and named executive officers (shown as CEO and 2020 NEOs, respectively, below) between elements that are fixed and variable or performance-based pay that is “at risk.” As a result, the actual (or take home) pay that our CEO realizes in a given year may be more or less than his total target compensation for that year. This is shown as realized and realizable pay in the table below.

 

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A fixed annual salary (“base”) represents 10% of our CEO’s total target compensation and 18% of our other NEOs’ average target total compensation.

Variable pay, consisting of an STI bonus opportunity and LTI awards, represents 90% of our CEO’s total target compensation and 82% of our other current NEOs’ average target total compensation. This portion of pay is considered at-risk since the receipt or value of the award is subject to the attainment of certain performance goals, vesting requirements and overall stock performance.

Realized and realizable pay for our CEO

The chart below illustrates the realized and realizable pay for our CEO, 90% of which was at-risk variable compensation (STI, TBRS and PBRS) in each the last three years.

 

2018 1    2019 1    2020
STI – Payout 107.0%    STI – Payout 97.0%    STI – Payout 91.0%

TBRS – Realized 68.2%

PBRS – Realized 105.2%

• 2 Year Performance Period

• Adjusted EBITDA run rate – 157.1%

  

TBRS – Realizable 89.7%

PBRS – Realizable 133.6%

• 2 Year Performance Period

• Adjusted EBITDA run rate – 149.9%

  

TBRS – Realizable 89.1%

PBRS – Realizable 89.1%

• 3 Year Performance Period

• Cumulative Adjusted EBITDA – TBD

• Relative TSR – TBD

2018 Realized Pay 2 94.7%

   2019 Realizable Pay 3 110.6%    2020 Realizable Pay 3 90.5%

 

1.

For further information on our 2018 and 2019 STI performance and 2018 PBRS performance, please see our 2019 and 2020 proxy statements. For further discussion on our 2020 STI payout and 2019 PBRS payout, see “Performance Periods Ending December 31, 2020.” “TBD” means to be determined upon completion of the performance period.

 

2.

Realized Pay measures the actual pay realized by Mr. Storey, excluding one-time awards, by adding together (i) actual salary paid during the year, (ii) STI bonus that was ultimately paid for that year and (iii) the value of time- and performance-based LTI awards that vested.

 

3.

Realizable Pay measures the actual pay realizable for Mr. Storey, excluding one-time awards, for a given year by adding together the (i) realized pay, as describe in note (2) and (ii) the value of unvested time- and performance-based LTI, at “target” levels, based on stock price as of March 1, 2021.

 

 

 

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Section four – Compensation Design, Awards and Payouts for 2020

Target Compensation

 

Section four – Compensation Design, Awards and Payouts for 2020

As described in Sections two and three above, we believe that a forward-thinking, performance-based approach to executive pay is critical to ensure that Lumen has the right talent with the right skills to execute on our business strategy and deliver value to our shareholders.

As Lumen continues to evolve into a leading technology-focused company, our employee base and our compensation programs must also evolve. Although in years past we had considerable success in attracting and retaining talent with fiscally prudent market-based pay packages, we now compete with software and other technology-focused companies for a more limited pool of executive talent.

As a result, the individuals in that limited candidate pool, who have unique talents and expertise, are able to command much higher levels of compensation than what we have paid historically, making executive recruitment and retention more challenging. In making decisions regarding our 2020 executive pay programs, the HRCC engaged in extensive discussions with shareholders and, with the guidance of its compensation consultant, conducted a comprehensive review of peer practices. The HRCC’s deliberate approach to setting pay, as described under “Role of Peer Companies” is intended to ensure that our executive compensation program is appropriately calibrated to achieving the complementary goals of delivering value to shareholders and attracting, rewarding and retaining the talent necessary to lead us through the next phase of execution on our business strategy.

Target Compensation

As noted previously, the three key elements of our executive compensation program are base salary, STI bonus opportunity and LTI awards (at least 60% of which are PBRS). The HRCC has established target compensation levels for each of our senior officers on each of these three elements, reviewing the pay mix and pay levels at least annually. As of December 31, 2020, the total target compensation opportunities for our NEOs were as follows:

 

Total Target Compensation for Fiscal 2020 1

  NEO

   Salary    STI Target
Bonus %
 

 

STI Target
Bonus
Opportunity

   Total Target
Cash
   LTI Target 2    Total Target
Compensation 3

Mr. Storey

     $ 1,800,011        200 %     $ 3,600,022      $ 5,400,033      $ 12,600,000      $ 18,000,033

Mr. Dev

       750,000        125 %       937,500        1,687,500        4,000,000        5,687,500

Mr. Goff

       600,018        120 %       720,022        1,320,040        2,000,000        3,320,040

Mr. Andrews

       525,000        100 %       525,000        1,050,000        1,400,000        2,450,000

Mr. Trezise

       500,011        90 %       450,010        950,021        1,000,000        1,950,021

 

1.

For more complete information presented in accordance with the SEC’s rules, see the Summary Compensation Table below.

 

2.

The LTI target in this table represents the value of the target levels of equity awards to be granted as of December 31, 2020, which differ from amounts reported in the Summary Compensation Table, which are calculated in accordance with FASB ASC Topic 718.

 

3.

The Total Target Compensation for Messers Goff and Storey was at the 50th percentile of our compensation benchmarking data, between the 25th and 50th percentile for Messers Andrews and Dev, and below the 25th percentile for Mr. Trezise.

Each of these elements is discussed in greater detail below. For more information on how we determined specific pay levels in 2020, see further discussion under the heading “ — Compensation Benchmarking Peer Group.”

 

 

 

 

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Section four – Compensation Design, Awards and Payouts for 2020

Salary

 

Salary

Early each year, the HRCC takes a number of steps in connection with setting annual salaries, including the review of (i) compensation tally sheets and benchmarking data, (ii) each senior officer’s pay and performance relative to other senior officers, (iii) the scope and complexity of the role relative to benchmark data, (iv) the experience and proficiency in the role, (v) the criticality and skill set needed to execute the role and (vi) when the officer last received a pay increase.

Annual review process (February 2020). During its annual review of executive compensation in February 2020, the HRCC reviewed the compensation benchmarking data for each senior officer, comparing the officer’s pay to our peer group for the combined Company. Following this review and discussion, the HRCC increased Mr. Dev’s annual salary to $750,000 and left unchanged the salary for our other NEOs.

Recent actions (February 2021). In February 2021, the HRCC reviewed the compensation benchmarking data for all executive officers and increased the salary of Mr. Andrews to $550,000 and left unchanged the salary for our other NEOs.

2020 Short-term Incentive program

As described below, the 2020 STI design incorporates three components in determining the calculated STI bonus amount (payout) for our NEOs:

 

Target Bonus Opportunity

  X    Company Performance
Funding
  X    Individual Performance
Modifier
  =    Calculated STI
Bonus Amount

This chart below shows our overall level of achievement (company performance funding) on the financial and qualitative metrics in our 2020 STI plan (before the application of any individual performance modifiers as discussed below):

 

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Section four – Compensation Design, Awards and Payouts for 2020

2020 Short-term Incentive program

 

2020 STI performance metrics

In February 2020, the HRCC approved the 2020 STI plan metrics and set the “threshold,” “target” and “maximum” target goals for each. The 2020 metrics were similar to those used in 2019 although to better align the 2020 STI plan with our corporate strategy, the HRCC approved a reduction in the weighting for Adjusted EBITDA and the addition of Revenue, as discussed below.

 

 
Adjusted EBITDA 1 (weighted 50%)

 

Alignment to Strategy:

 

Adjusted EBITDA remains our largest financial performance objective (we reduced the weighting in our STI from 65% to 50% for 2020). We believe this metric is aligned with our shareholders’ best interests and our corporate strategy of profitable growth. As described elsewhere, in light of the revenue decline for our legacy services which are at higher margins, we need to adjust our cost structure every year - requiring a disciplined focus on Adjusted EBITDA and margins. The metric of Adjusted EBITDA is designed to incentivize and reward our senior officers to focus on the combination of cost savings and profitable revenue growth.

 

 

Rigor of Goal Setting:

 

As in prior years, the HRCC based its performance goals and targets on the Company’s Board-approved 2020 annual budget and long-range plan.

 

Specifically, our 2020 Adjusted EBITDA target of $9,100 million remains unchanged from our 2019 target and slightly above 2019 results of $9,070 million. The HRCC believes our performance targets are rigorous, even if they are the same as last year’s targets, after taking into consideration the various factors that influence our business, annual budget and long-range plan, including, but not limited to, the year-over-year wireline revenue declines as reported in our periodic reports with the SEC and the significant pressure it exerts on achieving the same or higher EBITDA year-over-year.

 

      Target    Payout as a % of Target Award  

Above Target

   ³ $9,600 million      200

Target

   $9,100 million      100

Threshold

   $8,800 million      50

Below Threshold

   < $8,800 million      0

 

Results:

 

The Adjusted EBITDA results of $8,953 million, below target of $9,100 million, achieved a payout of 84.8%.

 

 

 

Achieved Payout of 84.8% 2

 

 

 

  1.

As used in our 2020 STI plan, adjusted earnings before interest, taxes, depreciation, amortization and stock-based compensation expense and impairments (“Adjusted EBITDA”) excludes (i) integration and transformation costs and special items (see Appendix A for more information) and (ii) certain one time or non-recurring charges or credits.

 

  2.

The achieved payout percentage is calculated for each financial performance objective based on a corresponding payout scale approved by the HRCC. If the threshold performance level with respect to any particular financial performance objective under our STI program is not attained, the bonus payable to the participating officer with respect to that portion of his or her targeted bonus opportunity will be calculated as zero. If threshold performance is met on any particular metric, each participating officer will earn a reduced portion of his or her target bonus amount for that portion of the award. If the maximum performance level with respect to any particular metric is met or exceeded, each participating officer will earn a maximum of 200% of his or her target bonus amount. Measurement of the attainment of any particular metric is interpolated if actual performance is between (i) the “threshold” and the “target” performance levels or (ii) the “target” and the “maximum” performance levels.

 

 

 

 

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2020 Short-term Incentive Program

 

 

Free Cash Flow 3 (weighted 25%)

 

 

Alignment to Strategy:

 

Free Cash Flow is critical to supporting our key strategic initiatives and our commitment to supporting our dividend and investing in our growth segments.

 

 

Rigor of Goal Setting:

 

In February 2020, the HRCC set Free Cash Flow targets for our 2020 STI commensurate with our annual budget and our publicly disclosed guidance as established for the year.

 

Our 2020 Free Cash Flow target of $3,200 million is slightly below our 2019 target of $3,260 and results of $3,276 million.

 

      Target    Payout as a % of Target Award  
Above Target    ³ $3,840 million      200
Target    $3,200 million      100
Threshold    $2,560 million      50
Below Threshold    < $2,560 million      0

 

Results:

 

The Free Cash Flow results of $3,161 million, just below target of $3,200 million, achieved a payout of 97.7%.

 

 
 

 

Achieved Payout of 97.7%

 

 

  3.

As used in our 2020 STI plan, Free Cash Flow is a non-GAAP measure of net cash from operating activities less capital expenditures and before dividends. See Appendix A for more information.

 

 

 
Revenue (weighted 15%)
Alignment to Strategy:

The generation of revenue is critical to our goal of increasing our strategic revenue in amounts sufficient to offset our continuing and systemic legacy revenue losses. Thus, we added Revenue as a metric for 15% for our 2020 STI plan.

 

The HRCC believes our senior officers are appropriately incentivized to achieve our 2020 revenue targets with a balanced approach, since the majority of our 2020 STI is based on Adjusted EBITDA and Free Cash Flow, which rewards our senior officers for achieving profitable revenue growth.

 

 

Rigor of Goal Setting:

 

In February 2020, the HRCC set Revenue targets for our 2020 STI commensurate with our annual budget as established for the year.

 

      Target      Payout as a % of Target Award  
Above Target      ³ $22,779 million        200
Target          $21,903 million        100
Threshold          $21,027 million        50
Below Threshold      < $21,027 million        0

Results:

 

The Revenue results of $20,756 million achieved 98.8% of target of $21,903 million for a payout of 94.5%.

 

 

 

Achieved Payout of 94.5%

 

 

 

 

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Section four – Compensation Design, Awards and Payouts for 2020

2020 Short-term Incentive Program

 

 
Customer Experience 4 (weighted 10%)

Alignment to Strategy:

 

Meeting the needs of all our customers, improving customer satisfaction and service scores, reducing customer inconveniences and decreasing repair times are critical to supporting our goal of improving our revenue trajectories.

 

We believe the ease of doing business is a top driver of customer loyalty, which will be reflected in Net Promoter Score (“NPS”). Customer experience research suggests increased promotor scores will drive increase in customer spend within 24 months. As such, the primary measures for Customer Experience performance are NPS and Customer Ease Score (“CES”).

 

Rigor of Goal Setting:

 

Although there are quantitative metrics involved in Customer Experience, the overall metric is qualitative in nature. Each business unit is charged with improving relationships with our customers and is part of the annual planning process. Our customer experience goals and transformation programs are informed and prioritized using customer data trends and insights. Using regression analysis, we can model which programs drive the greatest improvements for the greatest number of customers. For goal setting, we consider historical Lumen performance trends and industry benchmarks to ensure that we are setting appropriate growth targets by segment.

 

Targets:

 

In February 2020, the HRCC approved the following goals and objectives for our 2020 STI plan:

 

 Execute companywide on transformative programs that truly improve the way we operate in order to improve NPS and CES for each of our business units

 Improve relationship Net Promoter Scores by four points and relationship Customer Ease Scores by 6% in all segments

 

Performance Results:

 

Our overall customer satisfaction performance for 2020 showed year over year improvement as follows:

 

Transformative Programs

 

 Integrate customer experience and employee experience in Lumen brand story

 Listen to understand and act, not just measure

 Mobilize “Customer First” culture

 Execute through “Journeys”

 Deliver “Digital Experiences”

 

Business Unit Results

 

Consumer Results

 

 Ranked #1 for Customer Service in Newsweek / Statista poll

 Overall relationship NPS slightly improved

 Relationship CES improved year over year

 Onboarding NPS declined, while relationship CES and transactional NPS improved year over year

 

Enterprise Results

 

 Enterprise relationship survey results

 Transactional NPS improved year over year

 

Network Operations Performance

 

 Exceeded target goals for both Enterprise and Consumer for transactional NPS and CES

 

Achieved Target Goals - 100% payout 5

 

 

 

 

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2020 Short-term Incentive Program

 

  4.

As used in our 2020 STI plan, customer experience is a qualitative objective is composed of performance year over year, quarter over quarter and against internal targets for net promoter scores (both relationship and transactional) as well as scores regarding customer’s ease of doing business with us for our Enterprise and Consumer business.

 

  5.

The achieved payout percentage is determined based on the HRCC’s qualitative review of certain criteria and performance metrics, as described under “Customer Experience - Performance Results” above.

HRCC STI award oversight

In February 2021, the HRCC reviewed audited results of the Company’s performance as compared to the financial and operational performance targets and respective weighting for the established metrics for our 2020 STI plan and determined that the Company Performance Funding was 91.0% (as confirmed by our Internal Auditors), based on the financial metrics detailed above, before considering each NEO’s individual performance modifier as discussed below.

The HRCC has adopted a cap of 20% to any upward adjustments to STI for individual performance and for 2020, no individual adjustment exceeded this percentage.

Bonus amounts

As contemplated by the STI plan and the Guidelines, the HRCC reserves the right to increase or decrease the STI bonus payout level based on their qualitative assessments for each senior officer’s performance against certain specific objectives and benchmarks, as well as overall company and individual performance during the year. For 2020, these adjustments are indicated in the “Individual Performance Modifier” heading in the table below. In certain circumstances, the HRCC may apply discretion to modify senior officer compensation, with any upward adjustments for NEOs capped at 20% (or 120% of company performance funding). The HRCC discussed each NEO’s 2020 performance and leadership accomplishments and approved the following adjustments to their Individual Performance Modifier, as quantified in the table below.

For Mr. Storey, the HRCC approved an individual performance modifier of 109.9%, keeping his overall STI bonus at target amount. This is higher than any previous performance modifier the HRCC has given to him but 2020 was an unusual year with enduring challenges. During a tumultuous year, Mr. Storey demonstrated exceptional leadership and remained focused on the wellbeing of our employees, keeping our customers connected, delivering financial results, and driving our ongoing business transformation.

Focusing on the health and safety of our employees, the company moved 75% of our global workforce to work from home, with agility and decisiveness in early March of 2020. Consistent with Lumen’s business continuity planning and after a year of operating with a predominantly distributed workforce, the Company continues to perform efficiently and effectively, delivering services that have been instrumental in our customers’ ability to maintain their businesses, work from home, and participate in remote learning. As our awareness around racial and social justice issues heightened, Mr. Storey focused Lumen’s opportunities for change by meeting with frontline employees, listening to their concerns and ideas and implementing a number of initiatives to ensure Lumen builds on our diversity, inclusion and belonging expectations.

Financially, the Company continued to turn our revenue trajectory from declining high-margin legacy revenue by evolving our services portfolio to both meet customer needs and attract new customers. Specifically, Lumen reduced the revenue rate of decline from 5% in 4Q18 to 3.5% in 4Q20 while delivering solid 2020 Adjusted EBITDA excluding integration, transformation costs and special items and Free Cash Flow excluding integration, transformation costs and special items, of $8.9 billion and $3.1 billion, respectively, in spite of the loss of approximately $750 million in high-margin revenue from declining legacy products. In addition, we increased Adjusted EBITDA excluding integration, transformation costs and special items margins to 44.5% in 4Q20 and improved our balance sheet throughout the year with our deleveraging plan, reducing net debt by $1.6 billion and refinancing $13 billion reducing cash interest expense and extending maturities.

 

 

 

 

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Section four – Compensation Design, Awards and Payouts for 2020

2020 Short-term Incentive Program

 

Mr. Storey continued to successfully lead the Company toward his long-term vision of digital transformation, but 2020 was a significant year toward our goals. Under Mr. Storey’s leadership in 2020, we:

 

   

repositioned the Company and expanded our market opportunities with new services such as the Lumen Platform and the Lumen Edge Cloud;

   

established “Lumen” as our flagship Enterprise brand;

   

clearly articulated value propositions by segment of the market, including launching our Quantum Fiber brand for our Mass Markets fiber-based services; and

   

reorganized our customer facing organizations into Enterprise Sales, Customer Success and Mass Markets to better align our sales and support teams to serve our customers within distinct market segments.

As a result of Mr. Storey’s performance in 2020, we are positioned to continue to create greater efficiencies and further improve our customer satisfaction scores.

Mr. Dev received an individual performance modifier of 105% based on his successful implementation of our deleveraging plan. In addition to reducing net debt by approximately $1.6 billion, we refinanced approximately $13 billion in debt. Our 2020 net cash interest is approximately $500 million lower than 2018. Mr. Dev also helped us deliver solid results on our other financial metrics as we achieved approximately $830 million of annualized run rate adjusted EBITDA transformation savings by the end of 2020, putting us in our targeted range a year earlier than planned.

Under Mr. Goff’s leadership and individual performance, the HRCC approved an individual performance modifier of 103% based on his achievements in leading regulatory, corporate compliance, litigation and corporate communication. Specific achievements included, CAF II extension, emergency 911 support, litigation and dispute resolution, shareholder outreach, simplification and automation of contracting processes, procurement of IP rights to Lumen name change, reduction of operating expense spend for his areas of responsibility and leading the company’s communication strategies including responses to COVID-19 pandemic and social unrest.

Mr. Andrews received an individual performance modifier of 103% based on a successful launch of the Lumen brand and quickly pivoting the organization to focus on ‘becoming Lumen’ through cultural, process and organizational changes. His team improved the customer experience as measured by both NPS and CES by focusing on the digital experience and releasing new customer focused capabilities such as: BMaaS on the edge, Zoom, VmWare, global SdWAN expansion, MS Teams, HyperWAN, DDOS Hyper and more. Through his partnership with our internal IT and transformation functions he advanced our effort to become an agile development model as shown by the high volume of quality launches throughout the year.

For Mr. Trezise, the HRCC approved an individual performance modifier of 105% based on his achievements in his efforts in leading the Human Resources function at Lumen. Mr. Trezise played a significant role in the Company’s proactive responses to both the COVID-19 pandemic and issues of social unrest. Mr. Trezise led numerous initiatives that enabled the organization to successfully and rapidly move 75% of employees to a remote working environment, while maintaining productivity levels consistent with pre-pandemic levels. As part of overall work in the area of engagement and culture building, Mr. Trezise continued to strengthen our programs to promote diversity, inclusion and belonging. Mr. Trezise has performed at the highest level in leading the organization in areas of compensation, training, benefits, talent acquisition, talent management, labor relations and overall HR functional excellence.

 

 

 

 

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Section four – Compensation Design, Awards and Payouts for 2020

2020 Short-term Incentive Program

 

The HRCC approved each NEO’s STI bonus as summarized in the table below.

 

2020 STI Bonus Amounts

NEO

   Target Bonus
Opportunity 1
        

 

Company
Performance
Funding 2

        Individual
Performance
Modifier 3
        Calculated STI Bonus
Amount

Mr. Storey

   $3,600,022    X    91%   X    109.9%   =    $3,600,022

Mr. Dev

   913,402    X    91%   X    105%   =    872,756

Mr. Goff

   720,021    X    91%   X    103%   =    674,876

Mr. Andrews

   525,000    X    91%   X    103%   =    492,083

Mr. Trezise

   450,010    X    91%   X    105%   =    429,985

 

1.

Determined based on earned salary and applicable STI target bonus percentage during 2020. The amount for Mr. Dev reflects a pro-rated amount based on an increase in both salary (from $650,000 to $750,000) and STI target bonus percentage (120% to 125%), each effective as of February 26, 2020.

 

2.

Calculated or determined as discussed above under “ — 2020 Performance Results.”

 

3.

The plan allows for positive or negative adjustment based on the individual’s overall performance and contributions. For NEOs, the HRCC has a policy in place to cap the adjustment to 120% (20% upward adjustment).

Recent STI Actions (February 2021). During its February 2021 meeting, the HRCC decided not to make any design changes to the STI plan. Consequently, the 2021 STI plan is substantially similar to the overall design of our 2020 STI plan. In connection with establishing financial targets for the 2021 STI program, consistent with our publicly disclosed guidance, the HRCC increased Mr. Trezise’s STI target to 100%. The target STI opportunity for each of our other NEOs remained unchanged.

2020 Long-term incentive compensation

For 2020, our annual LTI grants consist of a mix of time- and performance-based equity awards, as described below.

 

Form of LTI Award

   Mix      Vesting and Performance Period

Time-Based Restricted Stock or RSUs (TBRS)

     40%      One-third vesting each year over three-years; subject to continued service on vesting date.

Performance-Based Restricted Stock or RSUs (PBRS)

     60%      Three-year performance period with vesting on March 1, 2023, with payout ranging from 0% to 200% based on achievement as measured against performance metrics subject to continued service through vesting date.

2020 Annual LTI grants

Except for Messrs. Dev, Trezise and Andrews, the HRCC granted annual LTI awards to our named executives in February 2020 at amounts substantially similar to the awards granted to them in 2019. Mr. Andrews’ 2020 LTI target was increased to $1,400,000 in August 2019, following his promotion to Chief Marketing Officer and the HRCC’s review of compensation benchmarking data. In February 2020, the HRCC reviewed the compensation benchmarking data for all executive officers and increased Mr. Dev’s LTI target to $4,000,000 and Mr. Trezise’s LTI target to $1,000,000 and left unchanged the LTI target for our other NEOs. See further discussion under the heading “Role of Peer Companies” below.

 

 

 

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Section four – Compensation Design, Awards and Payouts for 2020

2020 Long-term Incentive Compensation

 

On February 26, 2020, the HRCC granted the LTI awards detailed below.

 

2020 Annual LTI Grants

 

Named Officer

   Time-Vested
Restricted Shares or RSUs
     Performance-Based
Restricted Shares or RSUs
        
   No. of
Shares 1,3
     Grant
Value 4
     No. of
Shares 2,3
     Grant
Value 4
     Total Grant
Value 4
 

Mr. Storey 5

     358,772      $ 5,040,000        538,159      $ 7,560,000      $ 12,600,000  

Mr. Dev

     113,896        1,600,000        170,844        2,400,000        4,000,000  

Mr. Goff

     56,948        800,000        85,422        1,200,000        2,000,000  

Mr. Andrews

     39,863        560,000        59,796        840,000        1,400,000  

Mr. Trezise

     28,474        400,000        42,711        600,000        1,000,000  

 

1.

Represents the number of restricted shares or RSUs granted in 2020.

2.

As discussed under “2020 Annual LTI Performance Metrics” below, the actual number of shares that vest in the future may be lower or higher, depending on the level of performance achieved.

3.

Dividends on the shares of restricted stock (or, with respect to RSUs, dividend equivalents) will not be paid on unvested awards but will accrue and be paid or be forfeited in tandem with the vesting of the related shares or RSUs.

4.

For purposes of these grants, we determined both the number of time-vested and performance-based restricted shares or RSUs by dividing the total grant value granted to the executive by the volume-weighted average closing price of a share of our common stock over the 15-trading-day period ending five trading days prior to the grant date (“VWAP”), rounding to the nearest whole share. However, as noted previously, for purposes of reporting these awards in the Summary Compensation Table, our shares of time-vested restricted stock or RSUs are valued based on the closing price of our common stock on the date of grant and our shares of performance-based restricted stock or RSUs are valued as of the grant date based on probable outcomes, as required by applicable accounting and SEC disclosure rules. See footnote 1 to the Summary Compensation Table for more information.

5.

Mr. Storey’s annual grant was in the form of RSUs.

2020 Annual LTI performance metrics

Following the end of the three-year performance period, the number of shares vesting under the PBRS will be calculated in two-steps: (i) determining achievement of the three-year Cumulative Adjusted EBITDA target and (ii) applying the Relative TSR modifier, with the ultimate payout ranging between 0%-200% of the number granted. Any shares earned under the PBRS will vest in full on March 1, 2023, subject to the holder’s continued employment through that date (except as otherwise provided in the applicable award agreement).

Step 1 – Cumulative Adjusted EBITDA:

 

 
Cumulative Adjusted EBITDA 1 (payout opportunity of 0%-200%)

Alignment to Strategy:

 

As described elsewhere, in light of the revenue decline for our high-margin, legacy voice and copper wireline services, we annually adjust our cost structure, requiring a disciplined focus on Adjusted EBITDA and margins. The metric of Adjusted EBITDA incentivizes our senior officers to focus on the combination of cost savings and profitable revenue growth.

 

While Adjusted EBITDA is a performance metric in both our STI and LTI plans, the performance targets are differentiated by the time horizon and underlying financial supporting targets. Adjusted EBITDA is weighted at 50% in our STI plan based on one-year targets generally based on internal budgets and aligned with external guidance. In our LTI plan, Adjusted EBITDA is weighted at 100% and based on a three-year cumulative target informed by our long-range plan.

 

 

 

 

 

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2020 Long-term Incentive Compensation

 

Rigor of Goal Setting:

 

The HRCC based the three-year Cumulative Adjusted EBITDA targets on our long-range plan, which includes significant stretch goals and alignment with market consensus.

 

The HRCC believes that these targets were set at levels that were both appropriate and sufficiently rigorous, particularly when viewed in light of: (i) the impact of the industry operating environment, (ii) wireline industry trends, (iii) competitive landscape, (iv) product lifecycles, (v) operational initiatives, (vi) capital allocation priorities and (vii) several other company-specific items that influence our business.

 

Performance Level Attainment

   Target    Payout as a % of Target Award 2  

Maximum

   ³ Maximum Amount      200

Target

   Target Amount 3      100

Threshold

   Threshold Amount      50

Below Threshold

   < Threshold      0

 

  1.

Cumulative Adjusted EBITDA is the sum of our Adjusted EBITDA excluding integration, transformation costs and special items (except with adjustments to reflect a 100% bonus accrual for each year) for 2020, 2021 and 2022. See Appendix A for more information.

 
  2.

Payouts interpolated between defined performance levels.

 
  3.

We do not feel it is appropriate to disclose our Cumulative Adjusted EBTIDA target as it would constitute forward-looking guidance. The Company employed a rigorous process to establish its annual budget and long-range plan. To further align this grant with our shareholders’ best interests, we also considered the consensus for the same three-year period when setting the threshold, target and maximum amounts which affirmed that our long-range plan, used to set targets, is rigorous.

 

Step 2 – Relative TSR Modifier:

 

 
Relative TSR Modifier (+/-20%)

 

Alignment to Strategy:

 

A relative metric is an important way to ensure that performance is measured appropriately relative to peers. Our Relative TSR Modifier is measured on our percentile rank versus the other 16 companies in our TSR peer group over three-years, which could result in a positive or negative adjustment (+/- 20%) to our 2020 annual PBRS grant for senior officers. As noted previously, there will be no positive adjustment if Lumen’s TSR is negative over the three-year period nor can total payout, regardless of TSR Modifier, exceed 200%.

 

For information regarding our TSR peer group, see further discussion under the heading “TSR Peer Group” below.

 

 

Rigor of Goal Setting:

 

The TSR peer group comprises telecommunications, cable and other communications companies that are generally comparable to us in terms of size, markets and operations. For information regarding our TSR peer group, see further discussion under the heading “TSR Peer Group” below.

 

The structure of our TSR modifier provides for a positive adjustment of 20% in the case of stretch performance whereby our TSR exceeds the 75th percentile performance for our TSR peer group for the three-year performance period. However, there will be no positive adjustment if Lumen’s TSR is negative over the three-year period, even if our TSR performance exceeds the 50th percentile for our TSR peer group. This ensures our executives are aligned with shareholders and not rewarded if our TSR is negative over the three-year performance period.

 

 

      Target    Payout as a % of Target Award  

Maximum

   ³ 75th Percentile      +20%  

Target

      50rd Percentile          0%  

Threshold

   £ 25th Percentile      -20%  

 

 

 

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Section four – Compensation Design, Awards and Payouts for 2020

2020 Long-term Incentive Compensation

 

Share dilution, burn rate and stock-based compensation expense

As part of their governance and oversight function, the HRCC approves the LTI grant values for our officers and, under delegated authority, approximately 1,600 eligible employees who participated in our 2020 annual LTI program. The HRCC also closely monitors our share usage, burn rate, dilution and overhang levels.

The annual LTI award value approved and granted by the HRCC, or under delegated authority, has declined by approximately $30 million from 2018 to 2020. As described elsewhere, our LTI awards have graded vesting and are expensed over a three-year period. The share-based compensation expense reported in our 10-K (see Appendix B) reflects expense for outstanding awards during that period, generally covering three different annual LTI awards and, to lesser degree, other awards for our LTI participants that were granted upon hire or promotion throughout the year.

On a quarterly basis, the HRCC reviews our share usage and burn rate projections. For the last three years, our burn rate, dilution and overhang levels have been within or below industry benchmark levels.

Recent LTI actions (February 2021)

In February 2021, the HRCC reviewed the compensation benchmarking data for all executive officers and increased the target LTI grant values for each of Messrs. Storey, Dev Andrews and Trezise to $14,000,000, $4,250,000, $1,600,000 and $1,200,000 respectively. The HRCC granted annual LTI awards to our NEOs in February 2021 at a similar mix to the awards granted to them in 2020, except for Mr. Storey. For Mr. Storey, the increase in his target LTI grant value was allocated entirely to the performance-based portion of his award, meaning that PBRS now composes 64% of his target LTI grant value with the remaining 36% delivered as TBRS.

Over the course of several meetings in February and March 2021, the HRCC reviewed the metrics and design for our 2021 annual LTI awards. HRCC maintained the three-year performance period and two performance metrics as our 2020 annual LTI awards, however the HRCC changed the weight of each as follows:

 

   

Cumulative Adjusted EBITDA – 50% weighting. Adjusted EBITDA measures the operational performance and profitability of our businesses as we continue to make progress on our telecommunications to technology transformation strategy.

   

Relative TSR – 50% weighting. Relative TSR was used as a modifier in our 2020 annual LTI awards, however for our 2021 awards we made it equally weighted with our Adjusted EBITDA metric – improving alignment with shareholder interests by rewarding for our stock performance relative to our peers, subject to a cap of 100% payout if Lumen’s TSR is negative, even if our performance exceeds the median of our TSR peer group.

Each metric provides an opportunity to earn a payout of 0-200%. We believe the 2021 LTI design continues to strike the right balance between performance incentives and long-term shareholder interests.

Performance periods ending December 31, 2020

While these award payouts relate to compensation decisions made in prior years, we did have two different awards of PBRS for which the performance period ended on December 31, 2020 – our 2019 annual LTI granted to participating employees, including our senior officers and a special grant made to Mr. Storey upon his promotion to CEO in 2018. For each type of award, we discuss below the: (i) alignment of the award to our strategy, (ii) rigor of goal setting and payout scale, (iii) performance results versus targets, (iv) earned payout level that represents the percentage of the target number of shares that ultimately vested (or will vest), with any unearned shares forfeited and (v) for our CEO, the ultimate realized, or estimated realizable, LTI value compared to original grant value.

 

 

 

 

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Section four – Compensation Design, Awards and Payouts for 2020

Performance Periods ending December 31, 2020

 

2019 Annual LTI grant

2019 was the last year that our LTI plan had a two-year performance period and was measured only on Adjusted EBITDA run rate. As part of the plan design, 50% of the PBRS vested on March 1, 2021, after the end of the performance period and the remaining 50% will vest on March 1, 2022, subject to the executive’s continued employment through the vesting date or as otherwise provided in the award agreement. For greater detail regarding the goal setting process and rationale for this plan, see our additional proxy soliciting materials filed with the SEC on May 4, 2020.

 

 
Adjusted EBITDA Run Rate

 

Alignment to Strategy:

 

To align this grant with our shareholders’ best interests and our long-term strategy of profitable growth, our annual LTI award in 2019 for our senior officers was based on Adjusted EBITDA run rate for the two-year performance period, which provided for the opportunity to earn 0% to 200% of the target number of PBRS.

 

As described elsewhere, in light of the revenue decline for our legacy services which are at higher margins, we need to adjust our cost structure every year – requiring a disciplined focus on Adjusted EBITDA and margins. The metric of Adjusted EBITDA is designed to incentivize and reward our senior officers to focus on the combination of cost savings and profitable revenue growth.

 

The HRCC determined that the framework to measure performance by Adjusted EBITDA run rate, rather than cumulative target and over a two-year, rather than three-year, performance period, was appropriate during the critical and complex integration period following the Level 3 Combination. During this portion of our long-term strategy, under our long-range plan we knew the Adjusted EBITDA performance level we wanted to attain at the end of the two-year performance period. By comparing fourth quarter Adjusted EBITDA performance at the beginning and end of the two-year performance period (run rate), we were able to provide the flexibility to integrate and transform two global companies while focusing on a single goal of fourth quarter Adjusted EBITDA performance at the end of the two-year performance period.

 

 

Rigor of Goal Setting:

 

Consistent with its historic practice, the HRCC set the performance goal and the specific threshold, target and maximum performance levels for this award based on the Company’s 2019 Board-approved annual budget and long-range plan.

 

At the time these awards were granted, the HRCC believed that the performance target levels were both appropriate and sufficiently rigorous, particularly when viewed in light of: (i) the impact of the industry operating environment, (ii) wireline industry trends, (iii) competitive landscape, (iv) product lifecycles, (v) operational initiatives, (vi) capital allocation priorities and (vii) several other company-specific items that influence our business.

 

Specifically, our long-range plan as of the first quarter 2019, the time these targets were set, reflected the overall wireline industry revenue pressure from legacy services and estimated decline in revenues of $220 million each year. The Company established strategic goals to offset the declining high margin legacy voice and copper-based revenue declines by continued cost savings from transformation initiatives that would hold Adjusted EBITDA unchanged or a 0% Adjusted EBITDA run rate for the two-year performance period from fourth quarter of 2018 to fourth quarter of 2020.

 

      Target 1    Payout as a % of Target Award 2  

Above Target

    ³ 2.8%      200

Target

      0.0%      100

Threshold

     (2.8%)        50

Below Threshold

   < (2.8%)          0

 

Performance Results:

 

The performance period ended on December 31, 2020. Our expectations on revenue decline were aligned with actual results, which reflect a decrease in total revenue from fourth quarter 2018 to fourth quarter 2020 of 7.7%. From 4Q18 to 4Q20, we improved fourth quarter Adjusted EBITDA results and achieved our run rate target of 1.4%, offsetting the revenue decline during the same time – which resulted in a payout of 149.9%. In essence, the improvement in Adjusted EBITDA surpassed our expectations for this period which drove the above-target payout.

 

 

 

 

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Section four – Compensation Design, Awards and Payouts for 2020

Performance Periods ending December 31, 2020

 

 
Earned Payout of 149.9% 3

CEO Realized Pay:

 

As of March 1, 2021, the projected realizable LTI value (for both TBRS and PBRS) was 116% of grant value, which reflects the impact of above target performance vesting of 149.9% for Adjusted EBITDA run rate and stock performance decline of 10.9% over the first two years of the three-year vesting period.

 

 Mr. Storey’s projected realizable LTI value of $14.6M (116%) compared to his grant value of $12.6M, based on a March 1, 2021 closing share price.

 

 

  1.

Determined by dividing (i) the Adjusted EBITDA actually attained for the fourth quarter of 2020 minus the Adjusted EBITDA actually attained for the fourth quarter of 2018 by (ii) the Adjusted EBITDA actually attained for the fourth quarter of 2018. See Appendix A for information on how Adjusted EBITDA is calculated.

  2.

Linear interpolation is used when our Adjusted EBITDA Run Rate performance is between the threshold, target and maximum amounts to determine the corresponding percentage of target award earned.

  3.

The earned shares vest in two equal installments on March 1 of each of 2021 and 2022, subject to continued employment through the applicable vesting date or as otherwise provided in the award agreement.

2018 Promotion grant for Mr. Storey

As an additional incentive for him to accept promotion to CEO in 2018, the HRCC awarded Mr. Storey a special LTI grant. Consistent with the structure of our annual LTI grants, this promotion grant consisted of 60% PBRS and 40% TBRS. The three-year performance period for this award ended on December 31, 2020, and the number of earned shares was determined on a two-step payout calculation based on Adjusted EBITDA and our relative TSR. As detailed below, the overall payout to Mr. Storey will be 128.6% of target. The earned shares will be issued to Mr. Storey on May 24, 2021, subject to his continued employment through such date or as otherwise provided in his award agreement.

 

Performance

Achievement Level

  

Step 1:

Cumulative
Adjusted
EBITDA
Performance 1

  

Step 2:

Relative TSR
Performance 2

   Payout as % of Target
Number of
Performance-Based
Restricted Shares3
 

Maximum

   N/A    75th Percentile      200

Stretch

   N/A    63rd Percentile      152

Slightly Above Target

   N/A    51st Percentile      104

Target

   ³$26.8 billion    N/A      100

Threshold

   $26.2 billion    N/A      50

Below Threshold

   <$26.2 billion    N/A      0

 

1.

See the discussion of the Step 1 calculation below, together with Appendix A.

2.

See the discussion of the Step 2 calculation below.

3.

Payouts interpolated between defined performance levels.

 

 

 

 

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Performance Periods ending December 31, 2020

 

Step 1: Cumulative Adjusted EBITDA Performance

 

 
Cumulative Adjusted EBITDA (payout opportunity of 0-100%)
Alignment to Strategy:

To align this grant with our shareholders’ best interests and our long-term strategy of profitable growth, the first part of Mr. Storey’s special promotion award was based on Cumulative Adjusted EBITDA for the three-year performance period, which provided the opportunity to earn 0% to 100% of the target number of PBRS.

 

The metric of Adjusted EBITDA is designed to incentivize and reward our senior officers to focus on the combination of cost savings and profitable revenue growth.

 

The use of a three-year cumulative framework in this special award to Mr. Storey was intended to complement the PBRS portion of our annual LTI plans for 2018 and 2019, which was also based on Adjusted EBITDA performance but measured as a two-year run rate, rather than a three-year cumulative, goal in our 2018 and 2019 LTI plans.

 

Rigor of Goal Setting:

 

To directly align this grant with our shareholders, Mr. Storey’s award was designed to track the same targets publicly disclosed to our shareholders. The three-year Cumulative Adjusted EBITDA target is the sum of annual Adjusted EBITDA targets, for 2018, 2019 and 2020, at 99% of the mid-point of our publicly disclosed guidance range as established in the first quarter for each year.

 

Consistent with prior practice and as discussed in greater detail above, the Company employed a rigorous process to establish its annual budget and long-range plan, which directly supported the Company’s long-term strategic objectives and was the basis for developing our publicly disclosed guidance ranges.

 

Performance Results:

 

The three-year performance period ended on December 31, 2020 and the Company achieved three-year Cumulative Adjusted EBITDA results of $27.0 billion which exceeded our Cumulative Adjusted EBITDA target of $26.8 billion; therefore achieving 100% for Step 1.

 

 
Step 1 – Attainment of 100%

Step 2: Relative TSR Performance

 

 
Relative TSR (payout opportunity 101-200%)

Alignment to Strategy:

 

To directly align this grant with our shareholders’ interests, the second part of Mr. Storey’s promotion grant was based on Lumen’s TSR performance relative to TSR peer group for the three-year performance period, directly aligning this part of the grant with our shareholders’ interests and value. This portion of the award, which represented the opportunity to earn between 101% and 200% of target, could only be earned if the performance target in Step 1 (Cumulative Adjusted EBITDA target) was met or exceeded and Lumen’s relative TSR performance for the three-year period exceeded the 50th percentile.

 

 

 

 

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Section four – Compensation Design, Awards and Payouts for 2020

Performance Periods ending December 31, 2020

 

Rigor of Goal Setting:

 

With the aid of its compensation consultant, the HRCC set a TSR peer group for Mr. Storey’s promotion grant focused principally on broader universe of companies we believe investors are considering when they decide whether to invest in us or our industry. The TSR peer group is comprised of telecommunications, cable and other communications companies that are generally comparable to us in terms of size, markets and operations. For information regarding our TSR peer group, see further discussion under the heading “ — TSR Peer Group” below and in our 2019 proxy “ — Performance Benchmarking Peer Group.”

 

Results:

 

The three-year TSR performance period ended on December 31, 2020, and the Company’s TSR was -16.13%, ranked number seven out of 15 peers, representing 57th percentile of our TSR peer group and yielding an additional earned payout of 28.6% above the 100% earned in Step 1.

 

 
Step 2 – Earned Payout of 128.6%

CEO Realized Pay:

 

As of March 1, 2021, the projected realizable LTI value was 74.1% of grant value, which reflects the combined earned payout of 128.6% and stock performance decline of 33.7% over 32 months out of the three-year vesting and performance period.

 

 Mr. Storey’s projected realizable LTI value of $5.5 million (74.1%) compared to his grant value of $7.4 million, based on a March 1, 2021 closing share price.

 

Other benefits

As a final component of executive compensation, we provide a broad array of benefits designed to be competitive, in the aggregate, with similar benefits provided by our peers. We summarize these additional benefits below.

Retirement plans

We maintain traditional broad-based qualified defined benefit and defined contribution retirement plans for our employees who meet certain eligibility requirements. With respect to these qualified plans, we maintain nonqualified plans that permit our officers to receive or defer supplemental amounts in excess of federally imposed caps that limit the amount of benefits highly compensated employees are entitled to receive under qualified plans. Additional information regarding our retirement plans is provided in the tables and accompanying discussion included below under the heading “Compensation Tables.”

Change of control arrangements

We have agreed to provide cash and other severance benefits to each of our executive officers who are terminated under certain specified circumstances following a change of control of Lumen. If triggered, benefits under these change of control agreements include payment of: (i) a lump sum cash severance payment equal to a multiple of the officer’s annual cash compensation, (ii) the officer’s annual bonus, based on actual performance and the portion of the year served, (iii) certain welfare benefits are continued for a limited period and (iv) the value or benefit of any long-term equity incentive compensation, if and to the extent that the exercisability, vesting or payment thereof is accelerated or otherwise enhanced upon a change of control pursuant to the terms of any applicable long-term equity incentive compensation plan or agreement.

Under these agreements, change of control benefits are payable to our executive officers if within a certain specified period following a change in control (referred to as the “protected period”), the officer is terminated

 

 

 

 

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Other Benefits

 

without cause or resigns with “good reason,” which is defined to include a diminution of responsibilities, an assignment of inappropriate duties and a transfer of the officer exceeding 50 miles.

The table below shows (i) the length of the “protected period” afforded to officers following a change of control and (ii) the multiple of salary and bonus payment and years of welfare benefits to which officers will be entitled if change of control benefits become payable under our agreements and related policies:

 

        Protected
Period
       Multiple of
Annual Cash
Compensation
       Years of
Welfare
Benefits
 

CEO

       2 years          3 times          3 years  

Other Executives

       1.5 years          2 times          2 years  

Other Officers

       1 year          1 time          1 year  

For more information on change of control arrangements applicable to our executives, including our rationale for providing these benefits, see “Compensation Tables – Potential Termination Payments – Payments Made Upon a Change of Control.” For information on change of control severance benefits payable to our junior officers and managers, see “ — Severance Benefits” in the next subsection below.

Severance benefits

Our executive severance plan provides cash severance payments equal to two years of total targeted cash compensation (defined as salary plus the targeted amount of annual incentive bonus) for our CEO or one year of total targeted cash compensation for any other senior officer in the event that the senior officer is involuntarily terminated by us without cause in the absence of a change of control.

The table below shows (i) the multiple of salary and bonus payment and (ii) years of welfare benefits to which officers will be entitled if a senior officer is involuntarily terminated by us without cause in the absence of a change of control:

 

        Multiple of Annual
Cash
Compensation
       Years of Welfare
Benefits
 

CEO

       2 times          2 years  

Other Executives and Senior Officers

       1 time          1 year  

Under our executive severance plan, subject to certain conditions and exclusions, more junior officers or managers receive certain specified cash payments and other benefits if they are either (i) involuntarily terminated without cause in the absence of a change of control or (ii) involuntarily terminated without cause or resign with good reason in connection with a change of control. Our full-time non-represented employees not covered by our executive severance plan may, subject to certain conditions, be entitled to certain specified cash severance payments in connection with certain qualifying terminations.

Under a policy that we adopted in 2012, we are required to seek shareholder approval of any future senior executive severance agreements providing for cash payments, perquisites and accelerated health or welfare benefits with a value greater than 2.99 times the sum of the executive’s base salary plus target bonus.

Life insurance benefits

We sponsor a long-standing supplemental life insurance premium reimbursement plan that has been closed to new participants for nearly a decade. Only one of our current senior officers (Mr. Goff) holds supplemental life insurance policies for which we are obligated to pay the premiums. For 2020, we reimbursed Mr. Goff a total of $10,957 for these premiums.

 

 

 

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Section four – Compensation Design, Awards and Payouts for 2020

Other Benefits

 

Perquisites

Officers are entitled to be reimbursed for the cost of an annual physical examination, plus related travel expenses.

Our aircraft usage policy permits the CEO to use our aircraft for personal travel up to $250,000 per year without reimbursing us and permits each other executive officer to use our aircraft for personal travel only if he or she pays for cost in advance of flight. In all such cases, personal travel is permitted only if aircraft is available and not needed for superseding business purposes. Periodically, the HRCC reviews the cost associated with the personal use of aircraft by senior management and determines whether or not to alter our aircraft usage policy. In connection with electing to retain this policy, the HRCC has determined that the policy: (i) provides valuable and cost-effective benefits to our executives that reside or frequently travel into our corporate headquarters that is located in a small city with limited commercial airline service, (ii) enables our executives to travel in a manner that we believe is more expeditious than commercial airline service and (iii) is being used responsibly by the executives.

For purposes of valuing and reporting the use of our aircraft, we determine the incremental cost of aircraft usage on an hourly basis, calculated in accordance with applicable guidelines of the SEC. The incremental cost of this usage, which may be substantially different than the cost as determined under alternative calculation methodologies, is reported in the Summary Compensation Table appearing below. For more information on the items under this heading, see the Summary Compensation Table appearing on page 75.

Other employee benefits

We maintain certain broad-based employee welfare benefit plans in which the executive officers are generally permitted to participate on terms that are either substantially similar to those provided to all other participants or which provide our executives with enhanced benefits upon their death or disability.

 

 

 

 

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Section five – HRCC Engagement and Compensation Governance

HRCC Human Capital Resources Priorities

 

Section five – HRCC engagement and compensation governance

HRCC human capital resources priorities

Although core to the HRCC agenda is compensation and specifically executive compensation, each of the functions described in its charter contribute to its ability to effectively oversee human capital resources. In light of that responsibility, in 2017 the HRCC changed its name from the “Compensation Committee” to the Human Resources and Compensation Committee.” HRCC human capital management priorities include:

Talent management and development

The HRCC is focused on growing and developing talent that is well positioned to meet the business’ strategic priorities. Specific activities that the HRCC oversees include ensuring that robust processes in the areas of goal setting, differentiated talent assessments, individual development planning and skill transformation programing are supported by a wide array of technical, sales, product and leadership training programs.

Culture shaping and engagement

The HRCC reviews management efforts and metrics to ensure that culture and engagement promote efficiency. At least twice a year, a detailed survey is completed to measure employee engagement and is reviewed with the HRCC. The latest results of the survey continued a three-year increasing trend of both overall engagement (77% positive) with the highest level of employee participation (87%).

Talent acquisition

In order to continually improve our overall talent base, the HRCC monitors and reviews our ability to recruit talent into the Company. Performance in this area has consistently been strong, and this year was positively recognized by Gartner Talent Index citing Lumen Technology Talent function as 35th among their top 200 organizations assessed.

Labor relations

With 23% of Lumen’s workforce unionized, it is important that proactive efforts are deployed to manage this strategic relationship. In 2020, Lumen was able to negotiate 12 expiring collective bargaining agreements and did not see any expansion of the union-represented workforce. Lumen constructively partners with union representatives where representation exists and aims to remain union-free where representation does not currently exist.

Diversity, inclusion and belonging

In 2020, Lumen was proud to receive positive recognition for our efforts in the area of diversity and inclusion by being included in Forbes Americas Best Employers for Diversity and for once again receiving a 100% perfect score on the prominent Human Rights Campaign Index, which evaluates the LGBTQ climate in an organization. The prominent social injustice activities of 2020 caused the HRCC to place even greater focus on ensuring that all management practices are positively impacting diversity, inclusion and belonging in the Lumen culture.

 

 

 

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Section five – HRCC Engagement and Compensation Governance

HRCC Executive Compensation Review Process

 

HRCC executive compensation review process

The HRCC’s annual process for compensation oversight, design and decisions includes:

 

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Performance objectives align with strategy – HRCC selects short-term and long-term plan performance objectives designed to drive execution of our overall business strategy. This includes engaging an independent compensation consultant, discussing compensation trends, our performance against peers and market influences throughout the year as well as feedback from shareholder engagement regarding executive compensation and incentive design.

 
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Rigorous design and target setting process – HRCC establishes rigorous threshold, target and maximum performance levels for the selected objectives that are rooted in our annual budget, public guidance and long-range strategic plan. The HRCC evaluates possible program design changes for the upcoming plan year in light of shareholder feedback, independent compensation consultant observations and anticipated award values in light of past design and objectives.

 
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Monitor interim performance – Throughout the performance period, HRCC monitors actual performance and real-time projected payouts of our selected metrics through quarterly updates.

 
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Application of Guidelines to administer incentive awards – After the end of the performance period, initial payout projections, as adjusted under the HRCC’s long-standing Guidelines, are compared against Company performance for the entirety of the performance period. The HRCC may make further adjustments for extraordinary events or, with respect to the STI program, any other discretionary adjustments it deems necessary and appropriate. The HRCC reviews award values in light of the Guidelines and determines if positive or negative adjustments are necessary to mitigate the impact of extraordinary events.

 
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Performance results and calculated payouts – Upon completion of each fiscal year, after our actual financial performance results are determined, including any adjustments or discretion applied under our Guidelines, the incentive payouts are calculated and reviewed by Internal Audit. Then, individual bonus and equity payouts are determined for our officers based on our LTI and STI programs and the related performance and relevant individual performance considerations.

Role of CEO and management

The HRCC regularly reviews the compensation programs for our senior leadership team including our NEOs and the broader participating employees of Lumen, to ensure they achieve our compensation objectives, including aligning executive compensation with our long-term strategy and shareholder interests. This includes using our incentive compensation awards to support our strategic and operating plans. The HRCC closely monitors the compensation programs and pay levels of executives from companies of similar size and complexity, to gauge our compensation programs against market practices and trends to support our efforts to retain and incentivize our executive talent.

 

 

 

 

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Section five – HRCC Engagement and Compensation Governance

Role of CEO and Management

 

Also, the HRCC discusses directly with our CEO in executive session, as appropriate, his performance reviews for our senior leadership team as well as his recommendations regarding their compensation (including adjustments to base salary, target annual cash incentives and equity incentive levels).

Role of compensation consultants

Since 2015 the HRCC engaged Meridian Compensation Partner, LLC (“Meridian”) as its independent compensation consultant to assist in the design and review of executive compensation programs, to determine whether the HRCC’s philosophy and practices are reasonable and compatible with prevailing practices and to provide guidance on specific compensation levels based on industry trends and practices.

For 2020, representatives of Meridian actively participated in the design and development of our executive compensation programs and attended all of the HRCC’s meetings. Meridian provides no other services to the Company and has no prior relationship with any of our NEOs. As required by SEC rules and NYSE listing standards, the HRCC has assessed the independence of Meridian and concluded that its work has not raised any conflicts of interest.

Role of peer companies

Each year, with assistance from its independent consultant, the HRCC reviews “peer groups” of other companies comparable to Lumen for purposes of assessing the compensation for our NEOs and other members of senior leadership team (Compensation Benchmarking Peer Group) and, as applicable, our total shareholder return performance (TSR Peer Group).

Compensation benchmarking peer group

Annually, with the assistance of its compensation consultant and management, the HRCC reviews and approves, the Compensation Benchmarking Peer Group – a list of peer companies comprised we use in the competitive market analyses of compensation for our NEOs and senior officers.

Our Compensation Benchmarking Peer Group should reflect Lumen’s industry, organizational complexity and market for executive talent. However, because we do not believe many companies compete directly with us and are also similarly sized, the list of direct peers is limited. To address the challenge, the HRCC reviews and approves the list of companies that compose our Compensation Benchmarking Peer Group during a two-step process for use in the competitive market analyses of compensation for our NEOs and senior officers.

In the first step, we identify public companies within our Global Industry Classification Standards (“GICS”) industry and sub-industry, diversified telecommunications services, cable and satellite and various high technology industries. The following attributes were reviewed and screened in order of importance:

 

   

Revenues (target between one-half and two times our revenue);

   

Reasonably sized enterprise value;

   

Reasonably sized assets;

   

Market capitalization (target between one-fourth and three and one-half times our market cap);

   

Disclosed peer of peers and reverse peers; and

   

Peer group disclosed by proxy advisors.

In order to satisfy the goal of a peer group between 15 and 20 companies, the HRCC believes the continued inclusion of Verizon Communications Inc. (“Verizon”) is appropriate as they continue to be aligned to many aspects of our business. Verizon is also included in the peer of peers and proxy advisor peer screens, which further supports their inclusion in our Compensation Benchmarking Peer Group. Additionally, the HRCC reviewed the results of market capitalization screening and concluded that eliminating companies that are significantly larger or smaller than us would leave us with an insufficient number of peers.

 

 

 

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Section five – HRCC Engagement and Compensation Governance

Role of Peer Companies

 

And last, the HRCC reviewed additional lists of companies that were identified as peer of peers, reverse peers or proxy advisor peers and for various reasons did not change the previous year’s peer group.

Compared to the 2020 Compensation Benchmarking Peer Group, Lumen is ranked at the 57th percentile of revenue, the 65th percentile of assets, the 48th percentile of enterprise value and below the 25th percentile of market capitalization, each as illustrated below.

 

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In the second step, the HRCC’s compensation consultant prepares competitive market analyses using compensation data publicly disclosed by the 2020 Compensation Benchmarking Peer Group and, for executive positions with no publicly disclosed compensation data, the HRCC reviews compensation survey data for companies in the telecommunications industry and general industry that are generally similar in size to Lumen. Based on the median, the HRCC compares our current NEO and SLT compensation to the Compensation Benchmarking Peer Group to determine the relative market value for each position.

The HRCC believes the use of the median and not the average, for competitive market data mitigates the inclusion of larger peer companies, such as Verizon and Comcast Corporation, with smaller peer companies, such as Frontier Communications Corporation and Motorola Solutions, Inc. Excluding the two largest and two smallest peer companies would result in a 15-member Compensation Benchmarking Peer Group whereas median compensation benchmarking data would be the same. Therefore, the HRCC deemed it was appropriate to continue and include all 19 peer companies.

 

 

 

 

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Section five – HRCC Engagement and Compensation Governance

Role of Peer Companies

 

As a result of the above-described screening process and based on input from Meridian, the HRCC reviewed the 19 companies making up the 2019 compensation benchmarking peer group and made no changes to the 2020 Compensation Benchmarking Peer Group. Once established, we believe that a well-selected peer group for compensation benchmarking should remain fairly stable for several years to help inform reliable and consistent market positioning, longer-term pay trends and market practices. Our Compensation Benchmarking Peer Group is summarized in the table following discussion of our TSR Peer Group below.

TSR Peer Group

As discussed above, our Compensation Benchmarking Peer Group is somewhat constrained by the number of companies based on revenue, enterprise value and market cap size. However, our TSR Peer Group is composed of a broader universe of companies we believe investors are considering when evaluating whether to invest in Lumen or our industry because risk profile is likely to be more important to an investor than company size.

Meridian led an evaluation process to identify and screen relevant public companies to determine our TSR Peer Group, with a goal range of 15 to 20 peer companies, as follows:

 

   

Start with a universe of potential similar industry peers with technology, telecommunications , cable and satellite services and various technology industries within our GICS industry and sub-industry

   

Conduct a historical stock price correlation between Lumen and a potential peer universe based on the industry sectors identified

   

Perform back-testing on historical stock performance (i.e., TSR and Beta and impacts of macroeconomic factors that would impact all companies similarly)

As discussed earlier in this CD&A, at its February 2020 meeting, the HRCC changed the metrics and performance period for our 2020 LTI plan, which included the addition of a Relative TSR Modifier over a three-year performance period. A primary consideration when selecting our TSR Peer Group for 2020 was the need to have peers with similar industry, business and risk profile as Lumen.

During the second half of 2019, in preparation for the 2020 annual LTI grant, the HRCC reviewed the TSR Peer Group described in our 2019 proxy statement for Mr. Storey’s one-time promotion grant that was awarded in 2018. Our 2020 TSR Peer Group includes 13 of the TSR peers used in Mr. Storey’s one-time promotion grant supplemented by three large, international integrated telecommunications companies based outside the U.S. (BT Group plc, Orange S.A. and Telefonica S.A.). The three non-U.S. companies were selected to maintain a robust sample of peers (of at least 15 to 20 peer companies) and because the companies are large, complex and provide services similar to ours. The 2020 TSR Peer Group is summarized in the table below.

 

Company

  

Our Compensation

Benchmarking Peer Group

   Our TSR Peer Group

BCE Inc.

  

    

Charter Communications

  

    

CISCO Systems Inc

  

  

Cognizant Technology Solutions Corp

  

    

Comcast Corporation

  

  

DISH Network Corp.

  

  

DXC Technology Corp

  

    

Frontier Communications Corporation

  

  

HP Inc

  

    

Liberty Global plc

  

  

Motorola Solutions, Inc.

  

  

 

 

 

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Role of Peer Companies

 

Company

  

Our Compensation

Benchmarking

Peer Group

     Our TSR Peer Group  

Oracle Corp

  

 

 

        

QUALCOMM Inc.

  

 

 

        

Seagate Technology plc

  

 

 

        

Sprint Corporation

  

 

 

        

Telus Corporation

  

 

 

  

 

 

T-Mobile

  

 

 

        

Verizon

  

 

 

  

 

 

Western Digital Corp

  

 

 

        

Unique TSR Peers

                 

AT&T, Inc.

           

 

 

BT Group, plc

           

 

 

Orange, S.A.

           

 

 

Telefonica S.A.

           

 

 

Telephone & Data Systems Inc.

           

 

 

United States Cellular Corporation

           

 

 

Viasat, Inc.

           

 

 

Zayo Group Holdings, Inc.

           

 

 

Totals

  

 

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Our governance of executive compensation 

The HRCC and management stay abreast of market trends and best practices through regular consultation with Meridian and by attending various training programs and forums. In addition to other practices described elsewhere in this proxy, below is a summary and brief descriptions of certain compensation policies and practices.

 

What We Do

   Focus on performance-based compensation weighted heavily towards long-term incentive awards

   Benchmark generally against 50th percentile peer compensation levels

   Maintain robust stock ownership guidelines applicable to our executive officers and outside directors

   Annually review our compensation programs to avoid encouraging excessive risk taking

   Conduct an annual succession planning process for our CEO

   Conduct an annual “say-on-pay” vote

   Discuss our executive compensation program during shareholder engagement

   Maintain a compensation “clawback” policy

   Impose compensation forfeiture covenants broader than those mandated by law

   Review the composition of our peer groups at least annually

 

 

 

 

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Section five – HRCC Engagement and Compensation Governance

Our Governance of Executive Compensation 

 

   Conduct independent and intensive performance reviews of our senior officers