Board Committees
Our Board has three standing committees: the Audit Committee, the Compensation Committee, and the Nominating and Governance Committee. Our committees are composed entirely of independent directors as defined under the rules, regulations and listing qualifications of the NYSE. From time to time, our Board may also create additional committees for special purposes.
The table below provides membership information for each of the Board committees as of the date of this Proxy Statement:
|
|
|
|
|
Director
|
Audit Committee
|
Compensation Committee
|
Nominating and Governance Committee
|
Philip A. Falcone
|
|
|
|
Wayne Barr, Jr.*
|
ü
|
ü
|
ü
|
Warren H. Gfeller*
|
|
ü
|
ü
|
Lee S. Hillman*
|
ü
|
ü
|
ü
|
Robert V. Leffler, Jr.
|
ü
|
|
|
|
|
|
|
Number of Meetings Held During 2018
|
4
|
9
|
3
|
* Audit Committee financial expert
Chair of the Committee
Audit Committee and Audit Committee Financial Expert
The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). During the year ended
December 31, 2018
, the Audit Committee held four meetings. The Audit Committee currently consists of Warren H. Gfeller (Chairman), Wayne Barr, Jr., Lee S. Hillman and Robert V. Leffler, Jr., each of whom is an independent director. Our Board has determined that each of Messrs. Barr, Gfeller and Hillman qualify as an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC. The Board has considered the qualifications of the current members of the Audit Committee and has determined that they possess the skills necessary to review and analyze the Company’s financial statements and processes and to fulfill their other duties in accordance with the terms of the Audit Committee Charter.
The Audit Committee is responsible, among its other duties, for engaging, overseeing, evaluating and replacing the Company’s independent registered public accounting firm, pre-approving all audit and non-audit services by the independent registered public accounting firm, reviewing the scope of the audit plan and the results of each audit with management and the independent registered public accounting firm, reviewing the Company’s internal audit function, reviewing the adequacy of the Company’s system of internal accounting controls and disclosure controls and procedures, reviewing the financial statements and other financial information included in the Company’s annual and quarterly reports filed with the SEC, and exercising oversight with respect to the Company’s code of conduct (the “Code of Conduct”) and other policies and procedures regarding adherence with legal requirements. The Audit Committee’s duties are set forth in the Audit Committee Charter. A copy of the Audit Committee Charter is available under the “Investor Relations-Corporate Governance” section of our website at
www.hc2.com
.
Compensation Committee
During the year ended
December 31, 2018
, the Compensation Committee held nine meetings. The Compensation Committee currently consists of Robert V. Leffler, Jr. (Chairman), Wayne Barr, Jr., Warren H. Gfeller and Lee S. Hillman, each of whom is independent and a “non-employee director” as defined by Rule 16b-3 under the Exchange Act.
The Compensation Committee is primarily responsible for evaluating and establishing the compensation of our Chief Executive Officer (our “CEO”), our other executive officers and recommending for Board approval the compensation for our non-employee directors. The Compensation Committee is also responsible for administering our equity compensation plans, which includes the authority to decide compensation matters pertaining to the Second Amended and Restated 2014 Omnibus Equity Award Plan (the “Second Amended 2014 Plan”), including the approval of equity instruments under the Second Amended 2014 Plan as well as administering and approving the Company’s annual incentive plan, if any. The CEO recommends to the Compensation Committee the compensation for our executive officers other than the CEO. The Compensation Committee is responsible for
reviewing and assessing whether the Company’s compensation program encourages excessive risk and determines whether it is competitive in the marketplace. The Delaware General Corporation Law (the “DGCL”) generally permits the Compensation Committee to delegate its authority and responsibilities to subcommittees consisting of one or more members of such committee. A copy of the Compensation Committee Charter is available under the “Investor Relations-Corporate Governance” section of our website at
www.hc2.com
.
In addition, the Compensation Committee has the sole authority to hire, and to dismiss, a compensation consultant.
Nominating and Governance Committee
During the year ended
December 31, 2018
, the Nominating and Governance Committee held three meetings. The Nominating and Governance Committee currently consists of Robert V. Leffler, Jr. (Chairman), Wayne Barr, Jr., Warren H. Gfeller and Lee S. Hillman.
The Nominating and Governance Committee is responsible for (i) identifying, reviewing and evaluating candidates to serve as directors of the Company, (ii) serving as a focal point for communication between such candidates, non-committee directors and the Company’s senior management, (iii) recommending such candidates to the Board, and (iv) making such other recommendations to the Board regarding the governance affairs relating to the directors of the Company (excluding director compensation, which is the responsibility of the Compensation Committee) and advising the Board with respect to Board composition, procedures and committees. The Nominating and Governance Committee’s duties are set forth in the Nominating and Governance Committee Charter. A copy of the Nominating and Governance Committee Charter is available under the “Investor Relations-Corporate Governance” section of our website at
www.hc2.com.
Corporate Governance Guidelines
The Board has approved, following recommendation by the Nominating and Governance Committee, Corporate Governance Guidelines (the “Guidelines”), which address director qualifications and independence standards, responsibilities of the Board, access to management and independent advisors, certain Board compensation matters, procedures for review of related party transactions, Board orientation and continuing education, Board committees, succession planning, communications with stockholders and the media, and certain matters with respect to our Code of Conduct. A copy of the Guidelines is available under the “Investor Relations-Corporate Governance” section of our website at
www.hc2.com
.
Director Nomination Process
The Nominating and Governance Committee has the primary responsibility for identifying, evaluating, reviewing and recommending qualified candidates to serve on the Board. The Nominating and Governance Committee considers the following factors set forth in the Nominating and Governance Committee Charter in selecting candidates for Board service: experience, skills, expertise, diversity (“Diversity Considerations”), personal and professional integrity, character, business judgment, time availability in light of other commitments, dedication, conflicts of interest and other relevant factors deemed appropriate in the context of the needs of the Board. In evaluating Diversity Considerations, the Nominating and Governance Committee utilizes an expansive definition of diversity that includes differences of experience, education and talents, among other things. While the Nominating and Governance Committee does not have a formal diversity policy, it seeks to achieve a range of talents, skills and expertise on the Board and evaluates each nominee with regard to the extent to which he or she contributes to this overall mix.
The Nominating and Governance Committee may use multiple sources for identifying director candidates, including its own contacts and referrals from other directors and stockholders, members of management, the Company’s advisors, and executive search firms. The Nominating and Governance Committee will consider director candidates recommended by stockholders, in accordance with the procedures described below, and will evaluate such director candidates in the same manner that it evaluates candidates recommended by other sources. For those potential new director candidates who appear upon first consideration to meet the Board’s selection criteria, the Nominating and Governance Committee will conduct appropriate inquiries into their background and qualifications and, depending on the result of such inquiries, arrange for in-person meetings with the potential candidates. Directors are obligated to complete orientation training concerning the Company and to comply with limitations on outside activities that directors may engage in without Board approval.
Stockholders may submit written recommendations of director candidates by submitting such recommendation, including the candidate’s name and contact information and a statement of the candidate’s background and qualifications, to HC2 Holdings, Inc., 450 Park Avenue, 30th Floor, New York, NY 10022, Attention: Corporate Secretary.
The Nominating and Governance Committee is responsible for reviewing and making a recommendation to the Board regarding the continued service of the Company’s directors, (i) based upon service to the Company during a director’s term, attendance, participation, quality of performance and actual or potential conflicts of interest, and (ii) in the event an employee director’s employment with the Company is terminated for any reason or a non-employee director changes his/her primary job responsibility since the time such director was most recently elected to the Board. The Guidelines provide that members of the Company’s management serving on the Board who cease to serve as a member of the Company’s management shall offer his or her resignation from the Board effective on the last date of employment; while the Board need not accept such offer of resignation, in general a member of the Company’s management shall not continue to serve as a member of the Board following such cessation of employment. The Guidelines also provide that members of the Board will offer to resign from the Board upon the occurrence of certain specified sanctions, charges or admissions of fault or liability, subject to the Board’s refusal to accept such resignations in certain circumstances.
The Nominating and Governance Committee Charter and the Guidelines are intended to provide a flexible set of criteria for the effective functioning of the Company’s director nomination process. The Nominating and Governance Committee intends to review its Charter and the Guidelines at least annually
and anticipates that modifications may be necessary from time to time as the Company’s needs and circumstances evolve, and as applicable legal or listing standards change. The Nominating and Governance Committee may recommend to the Board for approval amendments to the Nominating and Governance Committee Charter and Guidelines at any time.
Stockholder and Other Interested Party Communications with the Board and/or Non-Employee Directors
The Board welcomes communications from the Company’s stockholders and other interested parties and has adopted a procedure for receiving and addressing those communications. Stockholders and other interested parties may send written communications to the Board or the non-employee directors by writing to the Board or the non-employee directors at the following applicable address: Board/Non-Employee Directors, HC2 Holdings, Inc., 450 Park Avenue, 30th Floor, New York, NY 10022, Attention: Corporate Secretary. Communications by e-mail should be addressed to
corpsec@hc2.com
and marked “Attention: Corporate Secretary” in the “Subject” field. The Corporate Secretary will review and forward all communications from stockholders or other interested parties to the intended recipient.
Meeting Attendance
During the year ended
December 31, 2018
, our Board held 11 meetings. During
2018
, each of our directors attended more than 75% of the aggregate number of meetings of our Board held during the period in which he was a director and the committees on which he served during the periods that he served. Directors are expected, absent schedule conflicts, to attend our Annual Meeting of Stockholders each year. All our then-serving directors and director nominees attended the
2018
Annual Meeting of Stockholders.
Code of Conduct
We have adopted a Code of Conduct applicable to all directors, officers and employees, including the CEO, senior financial officers and other persons performing similar functions. The Code of Conduct is a statement of business practices and principles of behavior that support our commitment to conducting business in accordance with the highest standards of business conduct and ethics. Our Code of Conduct covers, among other things, compliance resources, conflicts of interest, compliance with laws, rules and regulations, internal reporting of violations and accountability for adherence to the Code of Conduct. A copy of the Code of Conduct is available under the “Investor Relations-Corporate Governance” section of our website at
www.hc2.com
. Any amendment of the Code of Conduct or any waiver of its provisions for a director or executive officer must be approved by the Board or a duly authorized committee thereof. We intend to post on our website all disclosures that are required by law or the rules of the NYSE concerning any amendments to, or waivers from, any provision of the Code of Conduct.
Board Leadership Structure
The Company’s leadership structure consists of a combined Chairman of the Board and Chief Executive Officer and a Lead Independent Director. At this time, the Board believes that it is in the best interests of the Company to have Mr. Falcone serve as Chairman and Chief Executive Officer to implement the short- and long-term strategies of the Company, particularly in light of Mr. Falcone’s acquisition and investment experience. The Board believes that this joint position provides it with the ability to perform its oversight role over management with the benefit of a management perspective as to the Company’s business strategy and all other aspects of the business.
The Guidelines provide that the Chairman shall be elected annually by the Board and that in the event the Chairman is neither a non-executive nor an “independent” director, the Board shall select another director to serve as “Lead Independent Director” from among the members of the Board that are determined at that time by the Board to be “independent.” The Chairman may be removed as Chairman at any time by a majority of the members of the Board.
With the position of Lead Independent Director, our governance structure provides a form of leadership that allows the Board to function distinct from management, capable of objective judgment regarding management’s performance, and enables the Board to fulfill its duties effectively and efficiently. Mr. Leffler currently serves as the Company’s Lead Independent Director. The Board also believes that the strength of its independent directors, each of whom serves on the Board without any affiliation with management or any stockholder group, mitigates the risk of any potential conflicts that might result from combining the roles of Chief Executive Officer and Chairman.
The Chairman of the Board’s duties include:
|
|
•
|
presiding over all meetings and strategy sessions of the Board;
|
|
|
•
|
preparing the agenda for Board meetings with the Corporate Secretary and in consultation with the other members of the Board;
|
|
|
•
|
ensuring information flows openly between senior management and the Board; and
|
|
|
•
|
presiding over all meetings of stockholders.
|
The Lead Independent Director’s duties include:
|
|
•
|
convening and presiding over executive sessions of the independent directors;
|
|
|
•
|
setting the agenda of and leading meetings of the independent directors;
|
|
|
•
|
briefing the Chairman and Chief Executive Officer regarding issues arising during executive sessions, as necessary;
|
|
|
•
|
collaborating with the Chairman and Chief Executive Officer to determine the Board agenda and Board information;
|
|
|
•
|
consultations with the independent directors and the committee chairpersons; and
|
|
|
•
|
facilitating Board communication among the independent directors outside of Board meetings.
|
Board Role in Risk Oversight
The Board supervises and has control over the Company’s governance and compliance processes and procedures. As part of this role, the Board has overall responsibility for risk supervision, with a focus on material risks facing the Company. The Board primarily discharges its risk supervision responsibilities through its Audit Committee and Compensation Committee functions, each of which reports its activities to the Board. The risk supervision responsibilities of the Board’s committees include the following:
|
|
•
|
Audit Committee
. The Audit Committee is responsible for the supervision of risk policies and processes relating to the Company’s financial statements and financial reporting processes. This Committee reviews the Company’s risk management procedures and policies and discusses with management the Company’s material operating and financial risk exposures and the manner in which such exposures are managed. The Audit Committee also discusses these potential risks with the Company’s outside independent registered public accounting firm responsible for auditing the Company’s books, records and financial statements.
|
|
|
•
|
Compensation Committee
. The Compensation Committee is responsible for evaluating potential compensation-related risks and supervising management’s assessment of risks related to employee compensation policies and programs, as discussed further below under “Risk Considerations in Our Compensation Program.”
|
HC2’s CEO and other members of the Company’s senior management team primarily design, implement, execute and monitor HC2’s risk management policies and procedures. The Audit Committee meets with our senior management team periodically to review HC2’s risk management practices. The Board does not believe that its role in the oversight of our risks affects the Board’s leadership structure.
Risk Considerations in Our Compensation Program
Our Compensation Committee, on an ongoing basis, reviews, assesses and discusses with management (i) whether the compensation of the Company’s employees (including named executive officers) encourages employees to engage in excessive risk, (ii) the relationship between risk and management policies, practices and compensation, and (iii) compensation policies and practices that could mitigate any such risk. Our Compensation Committee has concluded that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company, particularly in light of the following factors:
|
|
•
|
Our use of a variety of elements in our compensation program, such as base salary, annual performance-based incentive compensation and equity awards, which provide a balance of long- and short-term incentives;
|
|
|
•
|
Our use of a variety of financial and strategic performance objectives within our compensation elements, which helps ensure that the Company’s overall business strategy is appropriately promoted; and
|
|
|
•
|
Our internal controls and procedures, which help us to monitor excessive or inappropriate risk taking.
|
Director Education
The Board believes that the stockholders of the Company are best served by a board of directors comprised of individuals who are well versed in modern principles of corporate governance and other subjects relevant to board service. All members of the Board are encouraged to attend any director education programs they deem appropriate to stay informed about developments in corporate governance and the industries in which the Company participates. The Company reimburses directors for the reasonable costs of attending director education programs.
Compensation of Directors
Annual Cash Compensation
. In 2018, the Company’s non-employee directors were paid the following cash fees on a quarterly basis in arrears: (i) $45,000 annual fee for each non-employee director; (ii) $15,000 annual fee for the Chair of the Audit Committee; (iii) $10,000 annual fee for the Chair of the Compensation Committee; (iv) $7,500 annual fee for the Chair of the Nominating and Governance Committee; (v) $10,000 annual fee for each member of the Audit Committee other than the Chair; (vi) $8,000 annual fee for each member of the Compensation Committee other than the Chair; and (vii) $6,000 annual fee for each member of the Nominating and Governance Committee other than the Chair.
In 2018, the Compensation Committee engaged McLagan Aon, a compensation data and consulting firm (“
McLagan
”), to assist the Committee in identifying a peer group and in conducting a review of the Company’s non-employee director and executive compensation programs. McLagan presented its findings to the Committee in a Director Compensation Detailed Analysis (the “
McLagan Director Report
”) and in an Executive Benchmarking Analysis (the “
McLagan Executive Report
”), each of which identified a comparator peer group that included 14 companies with a mix of multi-sector industrial conglomerates, diversified financial services and media firms, life sciences and pharmaceutical firms and asset managers (the “
Peer Group
”). The Peer Group consisted of the following companies:
|
|
|
|
Cannae Holdings, Inc.
|
Entravision Communications Corp
|
Prestige Brands Holdings, Inc.
|
Carlisle Companies, Inc.
|
Gannett Co., Inc.
|
Raven Industries Inc.
|
Compass Diversified Holdings
|
Legg Mason, Inc.
|
Spectrum Brands Holdings
|
CSW Industrials, Inc.
|
Meredith Corp
|
Steel Partners Holdings LP
|
E.W. Scripps Co.
|
Opko Health, Inc.
|
|
The McLagan Director Report indicated that the Company’s cash and equity retainers for non-management Board members were both currently below the 25th percentile of the Peer Group. Following extensive discussion and deliberations, and based on
the recommendations presented by McLagan, the Committee determined that it was in the best interests of the Company and its stockholders to increase the Board’s compensation to position it closer to the median compensation of its peers (the “
Director Compensation Increase
”) and approved an increase in the fees to be paid to the Company’s non-employee directors beginning on January 1, 2019.
As of January 1, 2019, the Company’s non-employee directors are paid the following cash fees on a quarterly basis in arrears: (i) $70,000 annual fee for each non-employee director; (ii) $31,500 annual fee for the Lead Independent Director; (iii) $25,000 annual fee for the Chair of the Audit Committee; (iv) $16,000 annual fee for the Chair of the Compensation Committee; (v) $12,000 annual fee for the Chair of the Nominating and Governance Committee; (vi) $12,500 annual fee for each member of the Audit Committee other than the Chair; (vii) $8,000 annual fee for each member of the Compensation Committee other than the Chair; and (viii) $6,000 annual fee for each member of the Nominating and Governance Committee other than the Chair. Each of these amounts will be prorated for non-employee directors who are elected or appointed during the year.
The Company also reimburses non-employee directors for their out-of-pocket expenses incurred in connection with their service on the Board. Employees of the Company, such as our named executive officers, who also serve as directors do not receive separate compensation for service on the Board. Because Mr. Falcone is a named executive officer, his compensation is reflected in the 2018 Summary Compensation Table in the “Compensation Tables” section, rather than in the Non-Employee Director Compensation Table below.
Annual Equity Compensation.
Unless otherwise provided by the Compensation Committee, following each annual meeting of stockholders during the term of the Second Amended 2014 Plan and for so long as equity is available to issue under such plan or a successor plan, each non-employee director is granted an award of restricted stock (“RSAs”). Prior to the Director Compensation Increase, the award of RSAs had a grant date fair market value of $60,000. In accordance with this policy, on
June 13, 2018
, the Compensation Committee awarded each of Messrs. Barr, Gfeller, Hillman and Leffler
9,584
shares of restricted stock, two-thirds of which will vest and become non-forfeitable on June 13, 2019 and one-third of which will vest and become non-forfeitable on June 13, 2020 (subject to continued service as a non-employee director through each applicable vesting date).
Following the Director Compensation Increase, as of January 1, 2019, and unless otherwise provided by the Compensation Committee, and for so long as equity is available to issue under the Second Amended 2014 Plan or a successor plan, each non-employee director will be granted RSAs with a grant date fair market value of $90,000, such grant to be made following each annual meeting of stockholders.
Indemnification Agreements with Directors and Executive Officers
The Company has entered into indemnification agreements with each of its directors and executive officers. These agreements require the Company to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with the Company.
Non-Employee Director Compensation Table
The following table provides compensation information for the year ended
December 31, 2018
for each non-employee director:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
Fees Earned or Paid in Cash ($)
|
|
Stock Awards ($)
(1)
|
|
All Other Compensation
($)
|
|
Total ($)
|
Wayne Barr, Jr.
(2)
|
|
$
|
45,000
|
|
|
$
|
59,996
|
|
|
$
|
25,000
|
|
(3)
|
$
|
129,996
|
|
Warren H. Gfeller
(4)
|
|
$
|
74,000
|
|
|
$
|
59,996
|
|
|
$
|
12,500
|
|
(5)
|
$
|
146,496
|
|
Lee S. Hillman
(6)
|
|
$
|
69,000
|
|
|
$
|
59,996
|
|
|
$
|
—
|
|
|
$
|
128,996
|
|
Robert V. Leffler, Jr.
(7)
|
|
$
|
72,500
|
|
|
$
|
59,996
|
|
|
$
|
—
|
|
|
$
|
132,496
|
|
|
|
(1)
|
These amounts represent the aggregate grant date fair value of RSAs granted in
2018
computed in accordance with FASB ASC Topic 718 (“ASC 718”). A discussion of the assumptions used in determining grant date fair value may be found in Note 18 to our Financial Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2018
. Each non-employee director received a grant of
9,584
RSAs on
June 13, 2018
. Each RSA grant had an aggregate grant date fair value of $
59,996
based on the closing price of HC2 common stock on
June 13, 2018
of $
6.26
.
|
|
|
(2)
|
As of
December 31, 2018
, Mr. Barr had (i) 13,094 RSAs outstanding, and (ii) 4,466 stock options outstanding.
|
|
|
(3)
|
This amount represents fees paid to Mr. Barr by Global Marine Holdings, LLC, a majority-owned subsidiary of the Company (“
GMH LLC
”), for his service on the GMH LLC Board of Directors in
2018
.
|
|
|
(4)
|
As of
December 31, 2018
, Mr. Gfeller had 13,094 RSAs outstanding.
|
|
|
(5)
|
This amount represents fees paid to Mr. Gfeller by GMH LLC for his service on the GMH LLC Board of Directors in
2018
.
|
|
|
(6)
|
As of
December 31, 2018
, Mr. Hillman had 13,094 RSAs outstanding.
|
|
|
(7)
|
As of
December 31, 2018
, Mr. Leffler had 13,094 RSAs outstanding.
|
EXECUTIVE OFFICERS
Executive officers are elected by and serve at the discretion of the Board. Set forth below is information regarding our executive officers as of
April 16, 2019
.
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Philip A. Falcone
|
|
56
|
|
Chairman, President and Chief Executive Officer
|
Michael J. Sena
|
|
46
|
|
Chief Financial Officer
|
Joseph A. Ferraro
|
|
41
|
|
Chief Legal Officer & Corporate Secretary
|
Suzi Raftery Herbst
|
|
43
|
|
Chief Administrative Officer
|
Philip A. Falcone.
Mr. Falcone’s biography can be found under “Board of Directors-Information Regarding Directors.”
Michael J. Sena
, has been HC2’s Chief Financial Officer since June 2015 and is a director and/or officer of several of HC2’s subsidiaries. Prior to joining the Company, Mr. Sena was the Senior Vice President and Chief Accounting Officer of HRG from October 2014 to June 2015, and had previously served as the Vice President and Chief Accounting Officer, from November 2012 to October 2014. Mr. Sena was also the Vice President and Chief Accounting Officer of Zap.Com, a subsidiary of HRG, from November 2012 to June 2015, and served as a director of Zap.Com from December 2014 until June 2015. From January 2009 until November 2012, Mr. Sena held various accounting and financial reporting positions with Reader’s Digest Association, Inc., last serving as Vice President and North American Controller. Before joining Reader’s Digest Association, Inc., Mr. Sena served as Director of Reporting and Business Processes for Barr Pharmaceuticals from July 2007 until January 2009. Prior to that, Mr. Sena held various positions with PricewaterhouseCoopers, LLP. Mr. Sena is a Certified Public Accountant and holds a B.S. in Accounting from Syracuse University.
Joseph A. Ferraro
, has been Chief Legal Officer and Corporate Secretary of HC2 since September 2017 and is an officer of several of HC2’s subsidiaries. Mr. Ferraro brings to HC2 over 16 years of extensive experience building and managing legal and compliance departments for permanent capital vehicles (including registered investment companies, such as business development companies (“BDCs”) and closed-end funds), registered investment advisers, private equity funds and other pooled investment vehicles. He is responsible for all legal matters at HC2, encompassing mergers and acquisitions, securities, commercial, employment, corporate governance, regulatory and other activities. Prior to joining HC2, for nearly nine years Mr. Ferraro was the General Counsel of Prospect Administration LLC, the administrator for Prospect Capital Corporation (NASDAQ: PSEC, together with its affiliates, “Prospect”), a BDC. Mr. Ferraro also served as Assistant Secretary of PSEC and Deputy Chief Compliance Officer of Prospect Capital Management, L.P., and advised multiple Prospect-affiliated registered investment companies, registered investment advisers and funds. At Prospect, Mr. Ferraro was responsible for legal matters across all Prospect entities and investment funds. Together with other industry general counsel, Mr. Ferraro also promoted, and provided Congressional testimony in support of, legislation to modernize the BDC provisions of the Investment Company Act of 1940, which became law in March 2018. Before joining Prospect, Mr. Ferraro was a corporate associate at the law firms of Boies, Schiller & Flexner LLP and Sullivan & Cromwell LLP. Mr. Ferraro graduated cum laude from Princeton University with an A.B. from The Woodrow Wilson School of Public and International Affairs, and graduated with honors from The Law School at The University of Chicago, where he served on the University of Chicago Law Review as a Staff Member and Managing Editor.
Suzi Raftery Herbst
, has been Chief Administrative Officer of HC2 since March 2015. Ms. Herbst has over 18 years of diverse human resources, recruiting, equity and foreign exchange sales experience. Prior to joining HC2, Ms. Herbst was the Senior Vice President and Director of Human Resources of Harbinger Capital and HRG from March 2010 through March 2015. Before joining Harbinger Capital and HRG, Ms. Herbst was the Head of Recruiting at Knight Capital Group. Prior to Knight, Ms. Herbst held various positions in the Human Resources and Foreign Exchange Sales departments at Cantor Fitzgerald. Ms. Herbst started her career in the Equity Sales department at Merrill Lynch. Ms. Herbst also served on the Board of Trustees of Cheshire Academy from September 2013 through September 2015. Ms. Herbst earned a Bachelor of Arts degree in Communications and Studio Art from Marist College.
COMPENSATION DISCUSSION AND ANALYSIS
The Compensation Discussion and Analysis that follows provides a description of our compensation program for our (i) Chairman, President and Chief Executive Officer, (ii) Chief Financial Officer, (iii) Chief Legal Officer and Corporate Secretary, (iv) Chief Administrative Officer and (v) former Senior Managing Director of Investments. We refer to these individuals throughout the Compensation Discussion and Analysis and the tables and narratives that follow as our “named executive officers.” For 2018, our named executive officers were as follows:
•
Philip A. Falcone, Chairman, President and Chief Executive Officer
•
Michael J. Sena, Chief Financial Officer
•
Joseph A. Ferraro, Chief Legal Officer and Corporate Secretary
•
Suzi Raftery Herbst, Chief Administrative Officer
•
Paul K. Voigt, Former Senior Managing Director, Investments
Compensation Program Overview, Philosophy and Objectives
The Compensation Committee’s Annual Compensation Decision-Making Process
Following the end of each fiscal year, the Compensation Committee reviews the Company’s performance and the performance of each named executive officer. Based on this review, the Compensation Committee discusses, assesses, and approves any potential base salary increases related to the current fiscal year, awards annual incentive bonuses with respect to the prior fiscal year, and authorizes equity award grants.
Typically, our CEO makes compensation recommendations to the Compensation Committee with respect to compensation of the named executive officers other than himself. With respect to our CEO, the Compensation Committee makes its decisions absent the input of the CEO.
The Compensation Committee believes that individualized consideration of the various compensation elements described below is necessary to provide the flexibility it needs to make appropriate compensation decisions without relying solely on the use of pre-established formulas or benchmarking. Consequently, the Compensation Committee believes it is in the best interest of the Company and our stockholders to conduct its own research regarding executive compensation, which includes a review of executive compensation programs of companies with whom we compete for executive and management-level talent.
In connection with its review process, the Compensation Committee reviews reports on executive compensation trends issued by respected publications, and compiles compensation information through Equilar, proxy statements, compensation-related public disclosures, industry trade journals and other sources. Recognizing that there is no one listed company that has a diverse group of businesses and geographic reach that would be comparable to the Company, the Compensation Committee conducts its compensation analysis by reviewing the compensation practices of companies with similar lines of operating business. The Compensation Committee also considers compensation practices at various investment banking institutions and private equity funds, as it believes the skill sets of its executives overlap with those required by those institutions. The Compensation Committee does not target any particular percentile or comparative level of compensation for executive officers.
For
2018
, the Compensation Committee determined that total compensation was at the appropriate level with respect to the executive positions analyzed. While the Compensation Committee took into account the results of compensation review and assessment in structuring our compensation program, other factors such as our general business and industry developments and individual performance influenced the Compensation Committee’s decision as to the appropriate compensation levels and structure for our named executive officers.
While the Compensation Committee did not benchmark compensation for our named executive officers at any specific level in 2018, they did review our compensation benchmark community to ensure peer company comparability based on our current business model, labor market, and financial structure and utilized the Peer Group and other information contained in the McLagan Executive Report to assess general trends in market executive compensation.
Philosophy and Objectives
Our compensation program for our named executive officers is designed to recognize the level of responsibility of each executive within the Company, taking into account the executive’s role and expected leadership within the Company, as well as to encourage decisions and actions that have a positive impact on our overall performance.
Our compensation philosophy is based upon the following objectives:
|
|
•
|
reinforce the achievement of key business strategies and objectives, through the grant of “at-risk” compensation earned based upon achievement of established performance targets;
|
|
|
•
|
reward our executives for outstanding performance and business results, based upon achievement of individual goals and objectives recommended to the Compensation Committee by the CEO with respect to his direct reports or, in the case of the CEO, agreed upon by the CEO and the Compensation Committee;
|
|
|
•
|
value each executive’s unique skills and competencies;
|
|
|
•
|
attract and retain qualified executives;
|
|
|
•
|
provide a competitive compensation structure; and
|
|
|
•
|
emphasize the enhancement of stockholder value and align our executives’ interests with those of our stockholders.
|
Elements of Compensation
For fiscal year
2018
, our executive compensation program for our named executive officers consisted of the following core elements: (i) an annual base salary and (ii) an annual bonus based on the achievement of Company performance measures and each executive’s individual contributions to such achievement, a portion of which is payable in cash and a portion of which is payable in equity awards with an additional time-based service requirement following the grant date. This total mix of payments has allowed us to provide compensation that directly addresses our compensation goals of talent retention, alignment of executive and stockholder interests and linking pay with performance. We also provide our named executive officers with additional benefits, including limited perquisites and participation in a 401(k) plan. The Compensation Committee also from time to time may grant special cash bonuses, sign-on bonuses, cash retention bonuses or incentive equity awards to named executive officers to recognize particularly strong achievement or for specific recruitment or retention purposes. Information on the total compensation of each named executive officer during fiscal year
December 31, 2018
is set forth under “
2018
Compensation Tables-Summary Compensation Table” below.
Annual Base Salary
The annual base salaries we provide to our named executive officers serve as compensation in recognition of each named executive officer’s ongoing contributions to the day-to-day performance of the operational areas for which he or she is responsible. The employment arrangements we maintain with our named executive officers provide for minimum annual base salaries, which may be increased or, in certain circumstances, decreased from time to time at the discretion of the Compensation Committee. Individual performance is reviewed on an annual basis during the Compensation Committee’s annual evaluation process, which is designed to ensure consistent global Company results, hold our named executive officers accountable for results (i.e., financial, leadership and individual goals) and set expectations for future results (i.e., actual results against budgeted goals). The goals and objectives considered during the annual evaluation process are prepared and reviewed on an annual basis.
The base salaries for our named executive officers (other than our CEO) also reflect input from our CEO regarding individual performance, Company strategy and retention factors.
Our named executive officers each are entitled to receive an annual base salary of $300,000 pursuant to their respective employment agreements, except that Mr. Falcone, upon the recommendations of McLagan (as discussed in the McLagan Executive Report) and the Compensation Committee, received a base salary of $600,000. No named executive officers other than Mr. Falcone received salary increases during fiscal year
2018
. For more detail for each named executive officer’s base salary please see “
2018
Compensation Tables-Summary Compensation Table” and “Employment Arrangements and Potential Payments Upon Termination or Change in Control.”
Annual Bonus Plan and Stock-Based Compensation
Stock-Based Compensation
On April 11, 2014, the Company’s Board of Directors adopted the HC2 Holdings, Inc. Omnibus Equity Award Plan (the “2014 Omnibus Plan”) and, subject to stockholder approval, subsequently adopted the Amended and Restated 2014 Omnibus Equity Award Plan (the “Amended 2014 Plan”) on April 21, 2017 and the Second Amended and Restated 2014 Omnibus Equity Award Plan (the “Second Amended 2014 Plan,” and together with the 2014 Omnibus Plan, the “Prior Plans”) on April 20, 2018. The Compensation Committee administers the 2014 Omnibus Plan, the Amended 2014 Plan and the Second Amended 2014 Plan and has broad authority to administer, construe and interpret the plans.
The Second Amended 2014 Plan provides for the grant of awards of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock awards, restricted stock units, other stock based awards, performance compensation awards (including cash bonus awards) or any combination of the foregoing.
Establishment of Bonus Pool
During fiscal year
2018
, all of the named executive officers participated in the 2014 HC2 Executive Bonus Plan (the “Bonus Plan”). Under the Bonus Plan, executive officers are eligible to earn annual compensation opportunities consisting of both cash and stock-based awards. By providing for a mix of both cash and equity, the Bonus Plan is designed to (i) offer variable compensation that provides competitive levels of total pay to executives if the Company achieves target-level performance results and (ii) reward and encourage long-term value creation by executives. Awards under the Bonus Plan are granted annually with a portion paid immediately in cash and a portion subject to be paid (or in the case of equity awards, vested) in future years so as to provide an additional retention feature.
Each named executive officer (other than Ms. Herbst) had two bonus components under the Bonus Plan with respect to 2018: (1) an individual bonus based on achievement of individual goals and objectives set by the Compensation Committee (and, other than for Mr. Falcone, based on the recommendations of the Company’s CEO) (the “Individual Bonus”), and (2) a corporate bonus based on the achievement of goals and objectives set by the Compensation Committee (and, other than for Mr. Falcone, based on the recommendations of the Company’s CEO) tied directly to the financial and strategic goals of the Company (the “Corporate Bonus”). Ms. Herbst was eligible to receive an Individual Bonus based on achievement of individual goals and objectives set by the Compensation Committee (based on the recommendation of the Company’s CEO), with a target bonus of $450,000 for fiscal year 2018. Mr. Voigt was eligible for both an Individual Bonus and a Corporate Bonus, but received neither because he resigned from employment with the Company during 2018.
For fiscal year
2018
, the named executive officers’ Corporate Bonus, if any, was based on the change in the Company’s “Net Asset Value” (as defined below) from the beginning of the Company’s
2018
fiscal year to the end of the Company’s
2018
fiscal year end (“NAV Return”), in excess of a threshold NAV Return level established by the Compensation Committee at the beginning of the
2018
performance year (the “Fiscal Year
2018
Threshold NAV Return”), as well as an assessment of how well the named executive officer was able to adapt to changes and obtain overall financial results in the Company’s businesses and industries and contribute to the NAV Return.
For fiscal year
2018
, NAV Return was based on the amount calculated as the product of (i) the percentage increase in the Net Asset Value per share of the Company from the beginning of fiscal year
2018
to the end of fiscal year
2018
multiplied by (ii) the Net Asset Value at the beginning of
2018
. The Bonus Plan provides that 12% of the excess, if any, of the NAV Return for fiscal year
2018
over fiscal year
2018
Threshold NAV Return is to be allocated to fund the bonus pool for Corporate Bonuses awarded to our named executive officers and other key employees. Pursuant to the Bonus Plan, this amount may be reduced by the Compensation Committee pursuant to its exercise of negative discretion.
For the purpose of the foregoing calculation, the Company’s “Net Asset Value” is generally calculated by (i) starting with the value of the Company’s “Net Asset Value,” as such term is defined in the certificates of designation governing our Preferred Stock (the “Preferred Stock Certificates”) (but without taking into account any discount with respect to appreciation on assets), (ii) then subtracting from such amount the Company’s deferred tax liabilities, (iii) then adding to such amount the Company’s capital contributions to fund start-up businesses, which is subject to a $10 million cap, (iv) then adding to such amount the Company’s deferred financing costs, (v) then adding to such amount the value of the Company’s assets that have not been appraised, which is subject to a $20 million cap, (vi) then adding to such amount expenses incurred in connection with completing any acquisitions by the Company within the past twelve months, and (vii) excluding any accretion on preferred stock (calculated in
the manner contained in the Preferred Stock Certificates). The Company then makes adjustments to eliminate the effects of any conversion of Preferred Stock into common stock and equity issuances during the period.
The Compensation Committee believes that NAV Return is a good proxy for value creation for the Company and its stockholders because it is designed to encourage, among other things, the generation of cash flow by the Company’s subsidiaries and transactions resulting in appreciation of the assets of the Company and its subsidiaries. Further, our Compensation Committee believes that paying a bonus consistently based on NAV Return that is partially subject to vesting over a number of years, encourages a long-term focus on value creation for the benefit of our stockholders.
The Company achieved a NAV Return of 21% during the fiscal year ended
December 31, 2018
. As a result, the named executive officers (other than Ms. Herbst) were eligible to receive a Corporate Bonus, the specific amounts of which are described in more detail below. Mr. Voigt did not receive a Corporate Bonus because he resigned from employment with the Company during 2018.
Corporate and Individual Performance Bonuses Awarded in Respect of
2018
Performance
The performance of certain of the named executive officers (other than that of our CEO) was subjectively evaluated by our CEO that were based on the achievement of goals and objectives set by the Company’s CEO tied directly to the financial and strategic goals of the Company, as well as an assessment of how well the named executive officer was able to adapt to changes and obtain overall financial results in the Company’s businesses and industries and contribute to the NAV Return. Based on such evaluation, our CEO recommended the amounts to the Compensation Committee (after taking into account the Individual Bonuses awarded) that should be awarded to each of our named executive officers (other than our CEO), which recommendations the Compensation Committee discussed and ultimately accepted. With respect to our CEO, the Compensation Committee determined the percentage of the overall bonus pool that should be allocated to our CEO without the CEO’s input.
The chart below shows the
2018
bonus amounts awarded to each named executive officer (other than Ms. Herbst) in respect of his Corporate Bonus for
2018
:
|
|
|
|
|
Named Executive Officer
|
2018 Corporate
Bonus Amount
|
Philip A. Falcone
|
$
|
6,115,329
|
|
Michael J. Sena
|
$
|
1,019,222
|
|
Joseph A. Ferraro
|
$
|
1,019,222
|
|
Paul K. Voigt
|
$
|
—
|
|
For the named executive officers who received a fiscal year
2018
Corporate Bonus, an amount up to two times their target Corporate Bonus, was awarded as follows:
|
|
(a)
|
40% of the Award will be paid in cash in 2018,
|
|
|
(b)
|
51% of the Award will be granted as restricted stock that vests if the executive remains employed through the first anniversary of the date of grant, and
|
|
|
(c)
|
9% of the Award will consist of a grant of stock options that vests and becomes exercisable if the executive remains employed through the first anniversary of date of grant.
|
Any Corporate Bonus paid in excess of two times the named executive officer’s target Corporate Bonus (“Excess Award Value”) was awarded as follows:
|
|
(a)
|
20% of the Excess Award will be paid in cash at the end of the first anniversary of the award date, and 20% of the Excess Award will be paid in cash at the end of the second anniversary of the award date (deferred cash),
|
|
|
(b)
|
51% of the Excess Award will be granted as restricted stock that vests in two substantially equal installments if the executive remains employed through each of the second and third anniversary of the date of grant, and
|
|
|
(c)
|
9% of the Excess Award will consist of a grant of stock options that vests and becomes exercisable in two substantially equal installments if the executive remains employed through each of the second and third anniversary of the date of grant.
|
Because Mr. Voigt’s employment terminated effective May 9, 2018, he was not eligible to receive any bonus payments.
Individual Performance-Based Awards
As stated above, for fiscal year
2018
, a portion of the annual bonus (namely, the Individual Bonus) was based on individual performance achievement against certain pre-established goals. For Messrs. Falcone, Sena, Ferraro and Voigt, their target Individual Bonus was set at $100,000. Ms. Herbst’s target Individual Bonus was set at $450,000. The performance goals for each named executive officer’s Individual Bonus were determined by our Compensation Committee on an individual basis. Participants were eligible to earn between 0% and 500% of their individual target bonus based on achievement of these individual performance goals. These Individual Bonuses could have been earned even if NAV Return during fiscal year
2018
did not exceed the Fiscal Year
2018
Threshold NAV Return. Individual Bonus awards with respect to 2018 were paid 75% in cash and 25% in RSAs. Mr. Voigt did not receive an Individual Bonus because he resigned from employment with the Company during 2018.
For fiscal year
2018
our Compensation Committee established both objective and subjective performance goals for Mr. Falcone’s Individual Bonus, which were to: (i) receive dividends from subsidiaries, (ii) broaden and strengthen the Company’s corporate platform through acquisitions and investments, (iii) improve the Company’s financial flexibility, (iv) remain in compliance with all existing or new debt covenants, and (v) work closely with subsidiaries to help in expansion of their platforms.
For fiscal year
2018
our Compensation Committee established both objective and subjective performance goals for Mr. Sena’s Individual Bonus, which were to: (i) improve accounting and financial procedures and internal control, (ii) receive dividends from subsidiaries, (iii) identify and manage accounting and financial priorities and business risks, and (iv) foster growth and teamwork of the finance department.
For fiscal year
2018
our Compensation Committee established both objective and subjective performance goals for Mr. Ferraro’s Individual Bonus, which were to: (i) establish policies and procedures for implementing the highest standards of regulatory legal compliance; (ii) provide high quality legal representation to HC2 with respect to deal-related matters, governance, shareholder agreements, annual meetings, proxy and relevant public filings, and debt/equity offering memorandums/shelf registrations (as directed by the CEO to raise capital); (iii) reduce spending on outside legal fees and filings; (iv) meet all priorities agreed to with the CEO; and (v) foster growth and teamwork of the legal department.
For fiscal year
2018
our Compensation Committee established both objective and subjective performance goals for Ms. Herbst’s Individual Bonus, which were to: (i) improve HR, IT and general services both at the parent and the subsidiary level; (ii) meet all priorities as agreed to with the CEO; (iii) foster growth and teamwork of the HR Department; and (iv) analyze and build out a shared services platform.
The table below shows the amounts awarded to each named executive officer under the Bonus Plan in respect of fiscal year
2018
performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officer
|
|
Individual Bonus
|
|
Corporate Bonus
|
|
Total
|
|
Cash
|
Equity
|
|
Cash
|
Equity
|
|
Philip A. Falcone
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
2,446,132
|
|
$
|
3,669,198
|
|
|
$
|
6,115,330
|
|
Michael J. Sena
|
|
—
|
|
—
|
|
|
407,689
|
|
611,533
|
|
|
1,019,222
|
|
Joseph A. Ferraro
|
|
—
|
|
—
|
|
|
407,689
|
|
611,533
|
|
|
1,019,222
|
|
Suzi Raftery Herbst
|
|
562,500
|
|
187,500
|
|
|
—
|
|
—
|
|
|
750,000
|
|
Paul K. Voigt
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Total NEO
|
|
$
|
562,500
|
|
$
|
187,500
|
|
|
$
|
3,261,510
|
|
$
|
4,892,264
|
|
|
$
|
8,903,774
|
|
Cash payments are made as follows, as long as the named executive officer is employed with the Company on the payment date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officer
|
2019
|
2020
|
2021
|
Total Cash
|
Philip A. Falcone
|
$
|
1,600,000
|
|
$
|
423,066
|
|
$
|
423,066
|
|
$
|
2,446,132
|
|
Michael J. Sena
|
400,000
|
|
3,844
|
|
3,845
|
|
407,689
|
|
Joseph A. Ferraro
|
400,000
|
|
3,844
|
|
3,845
|
|
407,689
|
|
Suzi Raftery Herbst
|
562,500
|
|
—
|
|
—
|
|
562,500
|
|
Paul K. Voigt
|
—
|
|
—
|
|
—
|
|
—
|
|
Total NEO
|
$
|
2,962,500
|
|
$
|
430,754
|
|
$
|
430,756
|
|
$
|
3,824,010
|
|
Cash amounts payable pursuant to the Bonus Plan are included in the column titled “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table for fiscal year
2018
(although no amounts are actually payable until after the end of fiscal year
2018
). However, in the case of equity awards, the SEC disclosure rules require that the Summary Compensation Table and the Grants of Plan-Based Awards table include for each fiscal year the aggregate fair value, as of the grant date, of equity awards granted only during the applicable fiscal year. The equity awards that were earned by our named executive officers pursuant to the Bonus Plan in respect of fiscal year
2018
performance were granted following the end of fiscal year
2018
. As these equity awards were made after the end of fiscal year
2018
, they are not included in the Summary Compensation Table and Grants of Plan-Based Awards Table in this Proxy Statement, but in accordance with SEC rules will be included in next year’s table for our named executive officers in fiscal year
2019
.
2019 HC2 Executive Bonus Plan
The Board adopted the 2019 HC2 Executive Bonus Plan (the “2019 Bonus Plan”) on April 25, 2019. The 2019 Bonus Plan will be effective for fiscal year 2019 and will remain in effect for each fiscal year thereafter until amended or terminated by the Compensation Committee. While the 2019 Bonus Plan generally has the same structure as the Bonus Plan for fiscal year 2018 (as described above), the 2019 Bonus Plan contains certain material differences, which are further described below.
Under the 2019 Bonus Plan, if the NAV Return is above the Threshold NAV Return, the Compensation Committee may still award a Corporate Bonus up to two times the participants’ target Corporate Bonus 40% in cash paid in 2020 and 9% as stock options that vest and become exercisable if the participant remains employed through the first anniversary of the date of grant. However, 51% of the Award will be granted as restricted stock units or restricted stock that vest if the participant remains employed through the first anniversary of the date of grant.
Any 2019 Corporate Bonus paid in excess of two times the participant’s target Corporate Bonus (“2019 Excess Award Value”) will still be awarded 51% as restricted stock that generally vests in two substantially equal installments if the executive remains employed through each of the second and third anniversary of the date of grant and 9% as stock options that generally vest and become exercisable in two substantially equal installments if the executive remains employed through each of the second and third anniversary of the date of grant. However, 40% of the 2019 Excess Award Value will be paid in cash in 2020, rather than as deferred cash paid on the first and second anniversaries of the date of grant.
The Bonus Plan contains certain individual limits on “performance-based compensation awards,” which were intended to meet a “performance-based compensation” exception to the limit imposed by Section 162(m) of the Internal Revenue Code of 1986, as amended (the “IRC”) on the Company’s ability to deduct certain executive compensation in excess of $1 million. As further discussed in the section entitled “Tax Considerations” below, the Tax Cuts and Jobs Act eliminated this performance-based exception. The individual limits on “performance-based compensation awards” contained in the Bonus Plan are therefore not included in the 2019 Bonus Plan.
Other Benefits
The named executive officers receive limited benefits that would be considered executive benefits. Most benefits are consistent with those offered generally to employees, which consist of life insurance, travel accident insurance, health insurance, dental insurance, vision insurance, short-term and long-term disability and opportunities to participate in the Company’s 401(k) plan. The Company matches 50% of the employee’s 401(k) plan contributions, up to the first 6% of such employee’s salary, with a maximum of $6,000 annually. In addition, separate and apart from his total compensation received from the Company, Mr.
Falcone received fees in the form of cash and equity from Inseego, of which the Company owned a minority interest, for his service on its Board of Directors in 2018. On August 4, 2018, Mr. Falcone informed Inseego’s Board of Directors (the “Inseego Board”) of his resignation from his position as a Director and Chairman of the Inseego Board effective upon consummation of a private placement at INSG. The Company sold its interest in Inseego effective December 4, 2018.
Advisory Vote on Executive Compensation (“Say on Pay Vote”)
Our Compensation Committee and our Board considered the results of our stockholder vote regarding the non-binding resolution on executive compensation presented at the
2018
Annual Meeting, where over 81% of votes cast approved the compensation program described in the Company’s proxy statement for the
2018
Annual Meeting. Any changes made to our executive compensation programs for fiscal year
2018
were tied to the Company’s
2018
initiatives and were not made in response to the Say on Pay Vote at the
2018
Annual Meeting. The Compensation Committee takes very seriously its role in the governance of the Company’s compensation programs and values input from the Company’s stockholders, and may consider the results of future Say on Pay Votes in connection with making its compensation-related decisions to the extent it deems it appropriate to do so.
Clawback/Forfeiture
Pursuant to the equity agreements under the equity incentive plans, incentive compensation for employees is subject to recoupment in the event that, for example, the Company restates its reported financial results, makes a mistake in calculations (to the extent that either such occurrence resulted in an excess award amount being paid) or to the extent required by applicable law (including, Section 302 of the Sarbanes Oxley Act and Section 954 of the Dodd Frank Act).
Potential Payments to Named Executive Officers Upon Termination or Change in Control
Our employment arrangements and severance guidelines (the “Severance Guidelines”) provide for certain payments to be made to our named executive officers in the event that their employment with the Company is terminated. Severance benefits are an important tool in attracting and retaining key employees and provide a degree of financial security to those employees.
Outstanding equity awards granted under the 2014 Omnibus Plan may be accelerated by the Board upon a Change in Control (as defined in the 2014 Omnibus Plan), such that award recipients have the ability to participate in the change in control with respect to common stock subject to such awards.
Outstanding equity awards granted under the Second Amended 2014 Plan and the Amended 2014 Plan, unless otherwise determined by the Compensation Committee on the date of grant or as set forth in the applicable award agreement, will not accelerate solely as a result of a Change in Control (as defined in the Second Amended 2014 Plan and the Amended 2014 Plan) if a “replacement award” (as defined in the Second Amended 2014 Plan and the Amended 2014 Plan) is promised to a participant in connection with the Change in Control. The vesting of a replacement award will only accelerate in connection with the Change in Control if the participant’s employment is involuntarily terminated by the Company (or a successor thereto) within two years following such Change in Control.
Pursuant to the terms of Mr. Falcone’s options (the “Falcone Options”), any unvested portions of the Falcone Options are accelerated upon the occurrence of a Fundamental Corporate Transaction (as defined in the Options award agreement). This provision, like all other provisions of the Falcone Options, was negotiated at the time of entry into Mr. Falcone’s employment agreement.
For further information regarding the potential severance and change in control benefits provided to our named executive officers pursuant to our employment and equity award arrangements with such named executive officers, as well as our Severance Guidelines, see “Employment Arrangements and Potential Payments Upon Termination or Change in Control.”
Tax Considerations
If a named executive officer is entitled to nonqualified deferred compensation benefits that are subject to Section 409A of the IRC, and such benefits do not comply with Section 409A, the executive would be subject to adverse tax treatment, including accelerated income recognition (in the first year that benefits are no longer subject to a substantial risk of forfeiture) and an additional income tax of 20% of the amount so recognized. The employment arrangements of our named executive officers described
herein, the Second Amended 2014 Plan and the Prior Plans, generally contain provisions intended to limit or eliminate adverse tax consequences through timing of payments.
Section 162(m) of the IRC generally places a limit of $1 million per year on the amount of compensation paid to certain of our executive officers that the Company may deduct from our federal income tax return for any single taxable year.
The Tax Cuts and Jobs Act, enacted on December 22, 2017, substantially modified Section 162(m) of the IRC and, among other things, eliminated the performance-based exception to the $1 million deduction limit effective as of January 1, 2018. As a result, beginning in 2018, compensation paid to certain executive officers in excess of $1 million will generally be nondeductible, whether or not it is performance-based. In addition, beginning in 2018, the executive officers subject to Section 162(m) of the IRC (the “Covered Employees”) will include any individual who served as the chief executive officer (“CEO”) or chief financial officer (“CFO”) at any time during the taxable year and the three other most highly compensated executive officers (other than the CEO and CFO) for the taxable year, and once an individual becomes a Covered Employee for any taxable year beginning after December 31, 2016, that individual will remain a Covered Employee for all future years, including following any termination of employment.
The Tax Cuts and Jobs Act includes a transition rule under which the changes to Section 162(m) of the IRC described above will not apply to compensation payable pursuant to a written binding contract that was in effect on November 2, 2017 and is not materially modified after that date. To the extent applicable to our existing contracts and awards, the Compensation Committee may avail itself of this transition rule. However, to maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals in the best interest of the Company, the Compensation Committee will not limit its actions with respect to executive compensation to preserve deductibility under Section 162(m) of the IRC if the Compensation Committee determines that doing so is in the best interests of the Company.
Compensation Committee Interlocks and Insider Participation
During
2018
and currently, the Compensation Committee consists of Robert V. Leffler, Jr. (Chairman), Warren H. Gfeller and Lee S. Hillman. None of the members of the Company’s Compensation Committee during
2018
: (i) served as an officer or employee of the Company during
2018
, (ii) was formerly an officer of the Company or (iii) has had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K.
During
2018
: (A) none of our executive officers served as a member of a compensation committee (or other body performing a similar role) of another entity, any of whose executive officers served on our Compensation Committee; (B) none of our executive officers served as a director of another entity, any of whose executive officers served on our Compensation Committee; and (C) none of our executive officers served as a member of the compensation committee (or other body performing a similar role) of another entity, any of whose executive officers served as one of our directors.
Anti-Pledging Policy
Our insider trading policy prohibits pledging, subject to certain exceptions as set forth therein. Under the policy, directors and employees of the Company or its subsidiaries and controlled affiliates and family members living in their households (“Covered Persons”) are not permitted to pledge securities of the Company (“Company Securities”) to secure loans, nor are they permitted to purchase securities of the Company on margin (other than in a cashless exercise of stock options). An exception to this prohibition may be granted by the Chief Legal Officer where a Covered Person wishes to pledge Company Securities as collateral to secure loans or purchase Company Securities on margin where, among other factors, the Covered Person clearly demonstrates the financial capacity and liquidity to repay the loan without resort to the pledged securities; provided that Covered Persons may only pledge Company Securities if (i) such securities represent less than 25% of the Company Securities held by such employee (excluding any unvested equity awards); (ii) such Company Securities represent less than 5% of the outstanding capital stock of the Company; and (iii) a request for approval of the Chief Legal Officer is submitted at least two weeks prior to execution (unless the Chief Legal Officer waives or shortens such notice requirement) and approval is granted. If an individual that was not previously a Covered Person (x) holds Company Securities in a margin account or is pledging Company Securities as a collateral of a loan and (y) becomes a Covered Person, such Covered Person shall promptly request approval from the Chief Legal Officer, and such approval shall be provided if such arrangement was already in place before the individual initially became a Covered Person and, as reasonably determined by the Chief Legal Officer, the aggregate amount of such Company Securities in the margin account and/or pledged is not material.
Anti-Hedging Policy
Pursuant to our insider trading policy, Covered Persons are not permitted to purchase financial instruments that are designed to hedge or offset any decrease in the market value of Covered Securities or otherwise engage in any other type of transaction involving Covered Securities that would have similar economic consequences.