Mr. Hart has been our President and Chief Executive Officer and a member of our board for almost fifteen years and his leadership and strategic guidance over these years have been critical to our success. Mr. Hart also brings the knowledge of the operations of our companyCompany to the board, which provides invaluable insight to the board as it reviews the company’sCompany’s strategic and financial plans.
Mr. Weil has served on the boards of directors for a variety of companies in fields such as insurance, financial services, shipping, ship building, mining, and manufacturing, where he gained invaluable experience, among others, in the areas of risk assessment and risk oversight. Because of his wide-ranging experience on various boards and as president of an investment company, we believe that Mr. Weil’s knowledge in the areas of officer compensation, risk assessment and oversight, corporate governance, finance, investment, and board development makes him a valuable resource as our independent Chairman, our Chairman of our Compensation Committee and a member of our Governance and Nominating Committee.Directors Whose Terms Continue Through 2012
S. Walter FoulkrodRobert G. Deuster haswas elected to the board on February 28, 2011. Previously, Mr. Deuster served as Chairman and Chief Executive Officer of Newport Corporation, a memberpublic company that is a global supplier of our boardlaser, optical and motion control products, from May 1996 until his retirement in October of directors since 1996.2007. Mr. Foulkrod hasDeuster also served on the Audit Committee sinceas President of Newport from May 1996 until July 2004, and in June 1997 and on the Governance and Nominating Committee since 2008. Mr. Foulkrod is an attorney and a memberbecame Chairman of the Dauphin County Bar AssociationBoard. From 1985 to 1996, Mr. Deuster served in various senior management positions at Applied Power, Inc. (now Actuant Corporation, a public company), a global manufacturer of electrical and hydraulic products, serving as Senior Vice President of the Pennsylvania Bar Association. From 2000 to 2006, he was a member of Foulkrod Ellis Professional Corporation, Attorneys at Law and prior to that, was the sole owner of S. Walter Foulkrod, III & Associates, Attorneys at Law,Distributed Products Group from 1994 to 2000. From 19841996, President of the Barry Controls Division from 1989 to 1994, Mr. Foulkrod served as president and chairman of Foulkrod, Reynolds & Havas, P.C. From 1973 to 1976, Mr. Foulkrod worked for Reliance Insurance Company, an insurance company, first as General ManagerPresident of the Corporate Law DepartmentAPITECH Division from 1986 to 1989 and Assistant General Counsel, and later as Associate General Counsel and Assistant Corporate Secretary. In carrying out his responsibilities at Reliance Insurance Company, Mr. Foulkrod became intimately familiar of statutory and financial statements.
Throughout his legal career, Mr. Foulkrod participated in hundreds of cases which required expertise in understanding the interrelationships between the balance sheet, the income statement, and the statement of cash flows. Mr. Foulkrod has been involved in identifying, assessing and managing risk exposure at public companies during the last three decades of his legal practice. Mr. Foulkrod has received a certificate of director training from the John E. Anderson Graduate School of Management of the University of California, Los Angeles, Director Training and Certification program as well as a certificate of director education from the National Association of Corporate Directors, an association that he has been a member of since 2000. We believe that the wide range of experience in financial, regulatory, and legal matters that Mr. Foulkrod possesses significantly expands the diverse perspectives of the board of directors and provides keen insight into risk assessment and oversight of our company.
Julie H. Sullivan has served on our board of directors since 2009. Dr. Sullivan has been the Executive Vice President and Provost and Interim Vice President of FinanceSales and AdministrationMarketing of the University of San Diego since 2009. As such, she is the Chief Academic OfficerEnerpac Division from 1985 to 1986. From 1975 to 1985, he held engineering and Chief Budget Officer of the university, and in this role she is responsible for university-wide budget and planning as well as investment and debt management. Dr. Sullivan has also served as the Vice President and Provost from 2005 to 2009 where she was the Chief Academic Officer and Chief Budget Officer of the university. In 2009, Dr. Sullivan served as Interim Vice President of Finance and Administrationmarketing management positions at the University of San Diego where she was the Chief Finance Officer, a position that involved overseeing accounting, financial and regulatory reporting, human resources, facilities, and sustainability for the university. Previously, Dr. Sullivan was a Full Professor of the University of California, San Diego, Rady School of Management and the Graduate School of International Relations and Pacific Studies from 2003 to 2005.
Since 2005, Dr. Sullivan has servedGeneral Electric Company’s Medical Systems Division. Mr. Deuster currently serves on the board of directors of Applied Micro Circuits Corporation, an electronics company, where she also currently serves as chair of the audit committee as a certified financial expert and is a member of the governance and nominating committee. Dr. Sullivan has been an Advisory Director of Schenectady International,Symmetry Medical Inc., a public company that provides medical devices and solutions to the global chemical company where she isorthopedic market. He also a member of the audit, compensation, and pension committees since 2001. From 2007 to 2008, Dr. Sullivan also servedserves as a director for United PanAm Financial Corporation,NEXX Systems, a specialty financeprivately held semiconductor capital equipment company, engagedand Ondax, Inc., a private optical components company. Mr. Deuster received a B.S. in non-prime automobile finance, where she chaired the audit committee as a certified financial expert. In addition, Dr. Sullivan currently serves and has served on the boards of directors of not for profit entities. Dr. SullivanElectrical Engineering from Marquette University in 1973. Mr. Deuster is a member of the National Association of Corporate Directors, the Corporate Directors Forum, the American Institute of Certified Public Accountants, and the American Accounting Association.Directors.
Dr. Sullivan has a Ph.D. in businessWe believe that Mr. Deuster’s extensive technology industry experience and accounting and a masters of arts in accounting and taxation. Dr. Sullivan is also a certified public accountant (non-practicing). Based on Dr. Sullivan’s extensive experience on the boards of diverse entitiesdirectors of various public and her academic research, we believe that she is on the cutting edge of financial issues and corporate governance matters and providesprivate companies makes him an invaluable perspective tomember of our board of directors. This experience provides him keen insight of both the management and operations of a business and the governance and oversight matters facing companies.
Richard D. Ruppert, MD has served as a member of our board of directors since 1996. Dr. Ruppert is a physician and has served as a director of our subsidiary, Physicians Insurance Company of Ohio, since 1998. Since 2002, Dr. Ruppert has servedcurrently serves as a trustee of the Ohio Historical Society and previously served as its president from 2006 to 2008. Also, Dr. Ruppert has served as a trustee of the Fort Meigs Historical Society since 2002 and has served on the board since 2009. Dr. Ruppert has served as an Emeritus President and an Emeritus Professor of Internal Medicine at Medical College of Ohio since 2003.Ohio. Dr. Ruppert was President of the American Society of Internal Medicine from 1992 to 1993 and President of the Medical College of Ohio from 1977 to 1993. He served as Vice Chancellor of the Ohio Board of Regents from 1970 to 1976. Dr. Ruppert was namedelected a Master Fellow of the American College of Physicians in 2008 and received the Jefferson Award from Toledo, Ohio in 2009. Dr. Ruppert is a member of the National Association of Corporate Directors.
As President of the Medical College of Ohio, Dr. Ruppert was directly responsible for the finances of the school and its two hundred$200 million dollar budget. He also supervised all reviews and audits of the school’s financial records. Dr. Ruppert’s experience in managing the finances of the Medical College of Ohio and in positions of leadership with businesses, community organizations, and not for profit entities provides invaluable experience and knowledge to our board of directors. In addition, his almost fifteen years of service on our board of directors provides stability and insight that are critical to the working success of our board and make him an important contributor to our Audit Committee and Compensation Committee.
Julie H. Sullivan, Ph.D. has served as a member of our board of directors since 2009. Dr. Sullivan is Executive Vice President and Provost of the University of San Diego. Previously, Dr. Sullivan was a Full Professor of the University of California, San Diego, Rady School of Management and the Graduate School of International Relations and Pacific Studies. Dr. Sullivan currently serves on the board of directors of Applied Micro Circuits Corporation, an electronics company. Dr. Sullivan is also an Advisory Director of Schenectady International, Inc., a global chemical company. Dr. Sullivan is a member of the National Association of Corporate Directors.
Dr. Sullivan has a Ph.D. in business and accounting and a masters of arts in accounting and taxation. Dr. Sullivan is also a certified public accountant (non-practicing). Based on Dr. Sullivan’s extensive experience on the boards of diverse entities and her academic research, we believe that she is extremely knowledgeable and a renowned expert with regard to financial issues and corporate governance matters and provides an invaluable perspective to our board of directors.
Directors Whose Terms Continue Through 2013
Carlos C. Campbell has served as a member of our board of directors since 1998. Since June 1985, Mr. Campbell has been President of C.C. Campbell & Co., a strategic advisory company. Mr. Campbell has served as a director and as a member of the audit committee of Resource America, Inc. since 1990. In addition, Mr. Campbell was a director of HyperFeed Technologies, Inc., formerly an 80% owned subsidiary that dissolved in 2009 after bankruptcy proceedings. Mr. Campbell has also served as a director of eight other public corporations.
Mr. Campbell has completed over two dozen seminars on director training. He has a Certificate of Director Education from the National Association of Corporate Directors and is a graduate of the Director's Institute, University of California Los Angeles, where he was designated a Corporate Director. He has completed seminars in corporate governance, auditing and compensation at the Harvard Business School. Mr. Campbell is a member of the National Association of Corporate Directors. Mr. Campbell has participated in numerous professional forums with the NACD on governance, compensation and mergers &acquisitions. Mr. Campbell served as the Assistant Secretary of Commerce for Economic Development, U.S. Department of Commerce (1981-1984) where is was the final authority for an annual program budget of $300 million and a loan portfolio in excess on $1 billion. We believe that Mr. Campbell’s extensive directorship training, strategic advisory and government experience, two areas of expertise that are important to certain of our operating segments, enriches the makeup of the board of directors and provide keen insight into or businesses. Mr. Campbell has a B.S.in Construction Management from Michigan State University, a Certificate in Engineering Science from the U.S. Naval Post Graduate School, and a Master of City & Regional Planning from the School of Engineering & Architecture, Catholic University of America.
Kristina M. Leslie has served on our board of directors since 2009 and as our Non-Executive Vice Chair and lead independent director since August 2010. Ms. Leslie is the former Chief Financial Officer of DreamWorks Animation SKG, Inc. where she served in that capacity from 2004 through 2007. Prior to becoming Chief Financial Officer, Ms. Leslie oversaw the corporate finance and strategic planning functions at DreamWorks, LLC since 1996. Currently, Ms. Leslie serves on the Board of Directors of Orbitz Worldwide, Inc. where she is a member of the Audit and Compensation Committees as well as the Board of Directors of Methodist Hospital of Southern California where she is Treasurer and Chair of the Finance, Audit and Compliance Committee. Ms. Leslie is also a Trustee and Vice Chair of the Board at Flintridge Preparatory School. Ms. Leslie is a member of the National Association of Corporate Directors.
Ms. Leslie has a masters of business administration with a concentration in finance. Ms. Leslie has substantial management experience from her years of service at DreamWorks LLC and later as CFO of DreamWorks Animation SKG, a publicly-held company, which gives her keen insight on matters relating to strategic planning, financial reporting, financial management, corporate governance, risk oversight, and management succession. Her years of service as a director on public and not-for-profit companies also gives her substantial experience on governance and risk oversight matters.
Kenneth J. Slepicka has served as a member of our board of directors since 2005. Mr. Slepicka is currently the Chairman, Chief Executive Officer and acting Chief Financial Officer of Synthonics Inc., an early stage biotechnology company, and has served in such capacity since 2005. In addition, Mr. Slepicka served as President and Treasurer of SBC Warburg Futures Inc. from 1994 to 1998 and as Executive Director of Fixed Income Trading for O’Connor & Associates from 1985 to 1994. He has also held risk advisor and portfolio manager positions in the financial services industry. Mr. Slepicka has served as a member of the FIA Steering Committee and the Federal Reserve FCM Working Group and as a Governor of the Board of Trade Clearing Corporation. In addition, Mr. Slepicka currently serves and has served on the boards of directors of several not-for-profit entities. He is also a former member of the Chicago Board of Trade, Chicago Mercantile Exchange, Chicago Board of Options Exchange, and Pacific Options Exchange. Mr. Slepicka was also a director of HyperFeed Technologies, Inc., formerly an 80% owned subsidiary that dissolved in 2009 following bankruptcy proceedings. Mr. Slepicka has a masters of business administration. Mr. Slepicka has also received a Master Director Certification from the National Association of Corporate Directors. Mr. Slepicka is a member of the National Association of Corporate Directors and has earned certificates of director education in 2007, 2008, and 2009 from this organization.
We believe that Mr. Slepicka’s training and broad finance and management experience combine to make him an invaluable asset to our board of directors relating to financial and risk oversight and other matters. His experience in the financial services industry also provides needed insight for a company like us that has significant assets and investments under management. We also believe Mr. Slepicka’s management experience as well as experience with the financial services industry makes him a valuable Chairman of our Audit Committee and member of our Compensation Committee.
The threetwo nominees for election as directors receiving the highest number of votes will be elected.
OUR BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE ELECTION OF EACH OF THE NOMINEES TO THE BOARD OF DIRECTORS.
ADVISORY (NON-BINDING) VOTE
ON EXECUTIVE COMPENSATION (SAY-ON-PAY)
The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, requires that our stockholders have the opportunity to cast an advisory (non-binding) vote on executive compensation, commonly referred to as a “Say-on-Pay” vote, commencing with our 2011 annual meeting, as well as an advisory vote with respect to whether future Say-on-Pay votes will be held every one, two or three years, which is the subject of Proposal No. 3 in this proxy statement.
The advisory vote on executive compensation is a non-binding vote on the compensation of our “named executive officers,” as identified in the Compensation Discussion and Analysis, or CD&A section, the tabular disclosure regarding such compensation, and the accompanying narrative disclosure, set forth in this proxy statement. Please read the CD&A section of this proxy statement for a detailed discussion about our executive compensation programs, including information about the fiscal 2010 compensation of our named executive officers.
The advisory vote on executive compensation is not a vote on our general compensation policies, the compensation of our board of directors, or our compensation policies and practices as they relate to risk management. The Dodd-Frank Act requires that we hold the advisory vote on executive compensation at least once every three years.
Our compensation philosophy centers around the principle of aligning pay and performance. The primary objectives of our compensation program are to pay for performance, recruit, retain and motivate the highest quality executive officers who are critical to our success, align the interests of our named executive officers and other employees with those of our shareholders and promote excellent corporate governance. The CD&A section of this proxy statement provides a more detailed discussion of our executive compensation program and compensation philosophy.
We have many compensation practices that ensure consistent leadership, decision-making and actions, without taking unnecessary risks. The practices are discussed in detail in the CD&A and include:
● | We adhere to the highest ethical standards in our corporate governance practice, such as our long-standing insider trading policy. |
● | We do not provide tax reimbursements or gross-ups in connection with any of the components of our executive compensation. |
● | All of our employees are employed on an at-will basis, other than our CEO who is the only employee with an employment agreement. |
● | We do not provide our named executive officers with any perquisites or other benefits that are not available to all employees. |
● | Our overall compensation programs include a mix of different components for the short-term (base salary) and the long-term (bonuses based on growth in book value per share and stock-based awards). |
The vote solicited by this Proposal No. 2 is advisory, and therefore is not binding on the Company, our board of directors or our Compensation Committee, nor will its outcome require the Company, our board of directors or our Compensation Committee to take any action. Moreover, the outcome of the vote will not be construed as overruling any decision by the company or our board of directors.
Furthermore, because this non-binding, advisory resolution primarily relates to the compensation of our named executive officers that has already been paid or contractually committed, there is generally no opportunity for us to revisit these decisions. However, our board of directors, including our Compensation Committee, values the opinions of our shareholders and, to the extent there is any significant vote against our named executive officers’ compensation as disclosed in this proxy statement, we will consider our shareholders’ concerns and evaluate what actions, if any, may be appropriate to address those concerns.
Shareholders will be asked at the Annual Meeting to approve the following resolution pursuant to this Proposal No. 2:
RESOLVED, that the shareholders of PICO Holdings, Inc. approve, on an advisory basis, the compensation of the Company’s named executive officers, disclosed pursuant to Item 402 of Regulation S-K in the Company’s definitive proxy statement for the 2011 Annual Meeting of Stockholders.
The Board unanimously recommends a vote “FOR” approval of the foregoing resolution.
Unless otherwise instructed, it is the intention of the persons named in the accompanying proxy card to vote shares represented by properly executed proxy cards for the approval of the foregoing resolution.
ADVISORY (NON-BINDING) VOTE ON THE FREQUENCY OF
AN ADVISORY VOTE ON EXECUTIVE COMPENSATION
In connection with Proposal 2 above seeking advisory approval of our executive compensation program, the Dodd-Frank Act also requires that we include in this proxy statement a separate advisory (non-binding) vote to advise on whether the vote on executive compensation should occur every one, two or three years. You have the option to vote for any one of the three options, or to abstain on the matter. For the reasons described below, our board of directors unanimously recommends that our stockholders select a frequency of every three years, or a “triennial vote.” We are required to solicit shareholder approval on the frequency of future executive compensation proposals at least once every six years, although we may seek shareholder input more frequently.
Our board of directors believes that our current executive compensation program directly links executive compensation to our financial performance and aligns the interests of our executive officers with those of our shareholders. Our board of directors also believes that, of the three choices, submitting an advisory (non-binding) executive compensation resolution to shareholders every three years is the most appropriate choice.
Our executive compensation program does not typically change significantly from year to year and is designed to motivate, monitor, and when appropriate, reward performance over a multi-year period. A vote held every three years would be more consistent with, and provide better input on, our long-term compensation, which constitutes a significant portion of the compensation of our named executive officers. Our board of directors believes that shareholder feedback every three years will be more meaningful as it will provide shareholders with a sufficient period of time to evaluate the overall compensation paid to our named executive officers, the components of that compensation and the effectiveness of that compensation. The amount of compensation and mix of components of such compensation in any one year may differ from year to year, and the three year period will provide shareholders with a more complete view of the amount and mix of that compensation. A triennial executive compensation vote will also provide shareholders with the benefit of assessing over a period of years whether the components of the compensation paid to our named executive officers have achieved positive results for the Company. A three-year vote cycle also gives our board of directors and Compensation Committee sufficient time to thoughtfully consider the results of the advisory vote, to engage with shareholders to understand and respond to the vote results and effectively implement any appropriate changes to our executive compensation policies and practices. Finally, many large shareholders rely on proxy advisory firms for vote recommendations. We believe that a triennial vote on executive compensation, rather than an annual or biennial vote, will help proxy advisory firms provide more detailed and thorough analyses and recommendations. Less frequent Say-on-Pay votes will improve the ability of institutional shareholders to exercise their voting rights in a more deliberate, thoughtful and informed way that is in the best interests of shareholders.
Our shareholders also have the opportunity to provide additional feedback on important matters involving executive compensation even in the years when Say-on-Pay votes do not occur. For example, the rules of NASDAQ require that we seek shareholder approval for new employee equity compensation plans and material revisions thereto. Further, as discussed under the section “Process for Shareholders to Communicate with Board of Directors” of this proxy statement, we provide shareholders with an opportunity to communicate directly with our board of directors, including on issues of executive compensation.
We have in the past been, and will in the future continue to be, proactively engaged with our shareholders on a number of topics and in a number of forums. Thus, we view the advisory vote on executive compensation as an additional, but not exclusive, opportunity for our shareholders to communicate with us regarding their views on the Company’s executive compensation program. In addition, because our executive compensation program has typically not changed materially from year to year and is designed to operate over the long-term and to enhance long-term performance, we are concerned that an annual advisory vote on executive compensation could lead to a short-term perspective inappropriately bearing on our executive compensation programs. Finally, although we believe that holding an advisory vote on executive compensation every three years will reflect the right balance of considerations in the normal course, we will periodically reassess that view and can provide for an advisory vote on executive compensation on a more frequent basis if changes in our executive compensation program or other circumstances suggest that a more frequent vote would be appropriate.
We understand that our shareholders may have different views as to what is the best approach for the Company, and we look forward to hearing from our shareholders on this proposal. Our board of directors will continue to engage with shareholders on executive compensation between shareholder votes. You may cast your vote on your preferred voting frequency by choosing the option of three years, two years, one year, or abstain from voting when you vote in response to the resolution set forth below.
“RESOLVED, that the shareholders of PICO Holdings, Inc. determine, on an advisory basis, that the frequency with which the shareholders of the Company shall have an advisory vote on executive compensation, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, is:
Choice 1—every year; |
Choice 2—every two years; |
Choice 3—every three years; or |
Choice 4—abstain from voting. |
This vote may not be construed (1) as overruling a decision by the Company or our board of directors or (2) to create or imply any change or addition to the fiduciary duties of the Company or our board of directors.
The Board unanimously recommends that you vote “For” the option of once every three years as the frequency with which shareholders are provided an advisory vote on executive compensation, as disclosed pursuant to Item 402 of Regulation S-K in the Company’s definitive proxy statement.
RATIFICATION OF
DELOITTE & TOUCHE LLP AS THE COMPANY’S INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee has appointed Deloitte & Touche LLP as our independent registered public accounting firm to audit our financial statements for the year ending December 31, 2010.2011.
Although ratification by shareholders is not required by law, the board of directors has determined that it is desirable to request approval of this appointment by the shareholders. If the shareholders do not ratify the appointment, the Audit Committee will reconsider whether or not to retain Deloitte & Touche LLP and may decide to retain them notwithstanding the vote. Even if the appointment is ratified, the Audit Committee in its discretion may change the appointment at any time during the year if it determines that such a change would be in the best interests of our companyCompany and our shareholders. In addition, if Deloitte & Touche LLP should decline to act or otherwise become incapable of acting, or if the engagement should be discontinued, the Audit Committee will appoint a substitute independent public registered public accounting firm. A representative of Deloitte & Touche LLP will be present at the Annual Meeting, will be given the opportunity to make a statement if he or she so desires and will be available to respond to appropriate questions.
The following table sets forth the aggregate fees billed by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates for the fiscal years ended December 31, 20092010 and December 31, 2008:2009:
| | | | | | | | |
| | | | | | | |
Audit Fees | | $ | 970,000 | | | $ | 998,875 | | $855,000 | $970,000 |
Tax Fees | | | 550,053 | | | | 868,950 | | 288,038 | 550,053 |
Audit-Related Fees | | | 122,000 | | | | 27,675 | | 45,000 | 122,000 |
All Other Fees | | | -0- | | | | -0- | | |
Total | | $ | 1,642,053 | | | $ | 1,895,500 | | $1,188,038 | $1,642,053 |
The Audit Committee has determined that the provision of non-audit services listed above is compatible with the independence of Deloitte & Touche LLP.
Consistent with SEC policies regarding independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has recommended, and the board of directors has approved, pre-approval guidelines for all audit and non-audit services to be provided by the independent registered public accounting firm. These pre-approval guidelines are:
(1) | At the earliest possible date, management shall inform the Audit Committee of each audit or non-audit service which management desires our independent registered public accounting firm to perform; |
(2) | Management shall promptly provide to the Audit Committee detailed information about the particular services to be provided by our independent registered public accounting firm; |
(3) | The supporting documentation provided to the Audit Committee by management shall be sufficiently detailed so that the Audit Committee knows precisely what services it is being asked to pre-approve; and |
(4) | The Audit Committee has delegated pre-approval authority to the Chairman of the Audit Committee. All such pre-approvals shall be presented to the full Audit Committee at the Audit Committee’s next scheduled meeting. |
Ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm requires the affirmative vote of a majority of all the votes cast on the matter at the Annual Meeting.
OUR BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2010.2011.
The board of directors has determined that Carlos C. Campbell, S. Walter Foulkrod, III, Esq.,Robert G. Deuster, Kristina M. Leslie, Richard D. Ruppert, MD, Kenneth J. Slepicka,and Julie H. Sullivan, Ph.D., and John D. Weil are “independent directors” as defined by listing standards for the Nasdaq Global Market. The independent directors have regularly scheduled executive session meetings at which only the independent directors are present. ExecutiveIn 2010, executive sessions arewere led by ourMr. Weil as Chairman Mr. Weil.and independent director until he retired from the Board in August 2010, at which time Ms. Leslie fulfilled this duty as the lead independent director. An executive session is held in conjunction with each regularly scheduled quarterly board meeting and other sessions may be called by the Chairman in his own discretion or at the request of the board of directors.
The Corporate Governance and Nominating Committee has been responsible for reviewing and making recommendations to the board of directors regarding the board’s leadership structure, including whether the board of directors should have an independent Chairman.structure. Prior to February 2008, the Chairman has generally been one of our officers. The role of the Chairman is to manage the affairs of the board of directors, including ensuring that the board is organized properly, functions effectively and meets its obligations and responsibilities. The Chairman also develops and approves agendas and presides at all meetings of the board of directors and the shareholders. From November 1996 until May 2007, the position was held by Mr. Langley, one of our executive officers at the time. After Mr. Langley informed the board of directors of his decision to voluntarily retire, the Corporate Governance and Nominating Committee and the board of directors considered whether the Chairman should be an independent director. In the course of their evaluation, this Committee and the board of directors considered factors that included:
· | the challenges and opportunities of our company,Company, including the need for clear accountability; |
· | the policies and practices in place to provide effective and independent oversight of management; |
· | applicable regulatory requirements; and |
· | corporate governance trends and practices of other large public corporations. |
After considering these and other factors, in February 2008, the Corporate Governance and Nominating Committee recommended, and the board of directors approved, the election of an independent chairman. As a result, Mr. Weil, who served as Lead Director from May 2007 until such time, was elected Chairman. Mr. Weil served as Chairman until he retired from the Board in August 2010, at which point the board appointed Mr. Langley as Non-Executive Chairman and Ms. Leslie as Non-Executive Vice Chair.
Our board of directors believes that the current board leadership structure is best for our companyCompany and our shareholders at this time because it:
· | Increases visibilitySeparates the offices of Chair and Chief Executive Officer. As opposed to shareholders. Prior to February 2008, the board of directors had bothhaving a Chairman andwho is also the Chief Executive Officer, a Lead Director. Innon-executive Chairman enhances the presenceboard’s ability to provide oversight of an officer chairman, the visibility of the Lead Directormanagement.
|
· | Provides for Succession Planning. We have appointed Kristina M. Leslie as a non-executive Vice Chair in order to the shareholders as an independent representative of their interest, was reduced because the officer chairman presided at the Annual Meetings of Shareholders. Accordingly, the Chairmanaddress our need for succession planning. Additionally, Ms. Leslie is a more visible and prominent role. To further promote our company’s corporate governance policies, the board of directors believed that the Chairman title should be given to an independent director and nother serving in a prominent role as the Vice Chair increases her visibility to management.our shareholders. |
· | Requires substantial time. The Chairman role has evolved to include significant duties and responsibilities, such as more interaction with executive management on strategic opportunities, capital formation, and other important matters, which may be difficult to reconcile with the full-time demands of managing the day-to-day affairs of the company.Company. |
· | Enhances the independent oversight of management and reduces any conflicts of interest. Because the board of directors serves to oversee and monitor the actions of management, the board believes that the leader of the boardits leaders should be in a position to be critical of such actions. |
11
Our board of directors as a group is responsible for all risk oversight of our Company and, as such, has full access to management so that it can maintain open and continuous communication that ensures that the risks associated with the various aspects of our Company are appropriately identified and addressed. In addition, each of our committees oversees a portion of the Company’s risk framework and controls. Our Compensation Committee reviews the risks associated with compensation incentives. Our Audit Committee oversees the risks associated with (a) our financial statements, financial and liquidity risk exposures, including any material and pending legal proceedings, significant transactions, and investment guidelines and performance, (b) fraud, (c) security of and risks related to information technology systems and procedures, and (d) related party transactions and actual and potential conflicts of interests. Our Corporate Governance and Nominating Committee oversees the policies and procedures related to director and management succession and transition. In carrying out each of their responsibilities in overseeing the Company’s policies with respect to risk, the committees discuss the issues with internal personnel and third parties that they deem appropriate. After such review and discussions, the committees evaluate and report to the full board of directors each of their respective findings and recommendations. The board of directors is ultimately responsible for the adoption of any such recommendations.
The Company's leadership structure compliments our board of directors’ risk oversight function. The separation of the offices of the Chief Executive Officer and the Chairman promotes effective consideration of matters presenting significant risks by management and directors. Our board of directors’ role of risk oversight has not specifically affected its leadership structure. Our board of directors regularly reviews its leadership structure and evaluates whether it is functioning effectively.
The board of directors has an Audit Committee, a Compensation Committee, and a Corporate Governance and Nominating Committee. Our Audit and Compensation Committees are composed solely of independent directors. Our Corporate Governance and Nominating Committee is not composed entirely of independent directors. As a result, any nominations for our board of directors must be approved by a majority of our independent directors. The committees operate pursuant to written charters, which are available on our website under “Corporate Governance” at http://investors.picoholdings.com.investors.picoholdings.com. The following table sets forth the three standing committees of the board, the current members of each committee during the last fiscal year and the number of meetings held by each committee.committee in 2010.
Audit Committee. The Audit Committee consists of Messrs. Slepicka (Chairman)Ms. Leslie (Chair), Mr. Campbell, and Foulkrod and Dr. Ruppert, Dr. Sullivan, and Mr. Deuster, none of whom has been or is an officer or employee of our company.Company. Each member of the Audit Committee, in the judgment of the board of directors, is independent as that term is defined in the listing standards for the Nasdaq Global Market. In 2009,2010, this committee met fivesix times. The functions of the Audit Committee include: (a) meeting with the independent registered public accounting firm to review their reports on their audits of our financial statements, their comments on our internal control over financial reporting and the action taken by management with regard to such comments; (b) reviewing and approving all related persons transactions; (c) reviewing auditor independence; and (d) issuing an Audit Committee report to the shareholders; (d)and (e) the appointment of our independent registered public accounting firm and pre-approving all auditing and non-auditing services to be performed by such firm. The Audit Committee has the authority, in its discretion, to order interim and unscheduled audits to investigate any matter brought to its attention and to perform such other duties as may be assigned to it from time to time by the board of directors. In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed with management the audited consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2010, its accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements.
Compensation Committee. The Compensation Committee consists of Messrs. WeilMr. Campbell (Chairman), CampbellMs. Leslie, Dr. Ruppert and Slepicka and Dr. Ruppert.Mr. Deuster. None of its members is or has been an officer or employee of our company,Company, and theour board of directors has determined that each member of the Compensation Committee is independent as that term is defined in the listing standards for the Nasdaq Global Market. The Compensation Committee met one timethree times in 2009.2010. The functions of the Compensation Committee include: (a) evaluating the performance of, and set compensation for, our Chief Executive Officer and other senior management; (b) reviewing and approving the overall executive compensation program for our officersexecutives and the officersexecutives of our subsidiaries; (c) considering and reviewing compensation levels for services as a member of theour board of directors and its committees; (d) making recommendations to theour board of directors with respect to new cash-based incentive compensation plans and equity-based compensation plans; and (e) administering and granting awards under the PICO Holdings, Inc. 2005 Long-Term Incentive Plan. The Compensation Committee’s goals are to attract and retain qualified directors and key executives critical to our long-term success, to reward executives for our long-term success and the enhancement of shareholder value, and to integrate executive compensation with both annual and long-term financial results. Additional information on the Compensation Committee’s processes and procedures for consideration of executive compensation are addressed in the Compensation Discussion and Analysis below.
Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee met two times in 2009.2010. Its members consist of Messrs. Langley (Chairman)Dr. Sullivan (Chair), Campbell, Foulkrod, and Weil. Messrs. Campbell, Foulkrod and WeilSlepicka. Dr. Sullivan and Mr. Campbell are not and have not been an officer or employee of our company.Company. In the judgment of the board of directors, Messrs.Dr. Sullivan and Mr. Campbell Foulkrod and Weil are independent as that term is defined in the listing standards for the Nasdaq Global Market. Mr. Langley served as an officer of the company until he resigned effective December 31, 2007. The functions of the Corporate Governance and Nominating Committee include: (a) identifying, reviewing, evaluating and selecting candidates to be nominated for election to the board of directors; (b) identifying and recommending members of the board of directors to committees; (c) overseeing and implementing the system of the corporate governance of the company;Company; and (d) overseeing the plans and process to monitor, control and minimize our risks and exposures.
Oversight of risk. Our board of directors as a group is generally responsible for all risk oversight of our company and, as such, has full access to management so that it can maintain open and continuous communication that ensures that the risks associated with the various aspects of our company are appropriately identified and addressed. In addition, each of our committees oversees a portion of the company’s risk framework and controls. Our Compensation Committee reviews the risks associated with compensation incentives. Our Audit Committee oversees the risks associated with (a) our financial statements, financial and liquidity risk exposures, including any material and pending legal proceedings, significant transactions, and investment guidelines and performance, (b) fraud, (c) security of and risks related to information technology systems and procedures, and (d) related party transactions and actual and potential conflicts of interests. Our Corporate Governance and Nominating Committee oversees the policies and procedures related to director and management succession and transition. In carrying out each of their responsibilities in overseeing the company’s policies with respect to risk, the committees discuss the issues with internal personnel and third parties that they deem appropriate. After such review and discussions, the committees evaluate and report to the full board of directors each of their respective findings and recommendations. The board of directors is ultimately responsible for the adoption of any such recommendations.
Director nominees. The Corporate Governance and Nominating Committee works with the board of directors to determine the appropriate characteristics, skills, and experience for the board as a whole and its individual members. In evaluating the suitability of individual board members, the Governance and Nominating Committee and the board take into account many factors, including:
· | leadership skills; |
· | business experience; |
· | academic credentials; |
· | inter-personal skills; |
· | the ability to understand our business; |
· | the understanding of the responsibilities of being a director of a publicly held company; |
· | corporate experience; |
· | prior experience on other boards of directors; and |
· | the potential for contributing to our success. |
Although we do not currently have a policy with regard to the consideration of diversity in identifying candidates for election to the board, the Corporate Governance and Nominating Committee recognizes the benefits associated with a diverse board, and takes diversity considerations into account when identifying candidates. The Corporate Governance and Nominating Committee utilizes a broad conception of diversity, including diversity of professional experience, employment history, prior experience on other boards of directors, and more familiar diversity concepts such as race, gender and national origin. These factors, and others considered useful by the Corporate Governance and Nominating Committee, will be reviewed in the context of an assessment of the perceived needs of the board at a particular point in time. After assessing the perceived needs of the board, the Corporate Governance and Nominating Committee identifies specific individuals as a potential source of director candidates with relevant experience. The priorities and emphasis of the Corporate Governance and Nominating Committee and of the board may change from time to time to take into account changes in business and other trends and the portfolio of skills and experience of current and prospective board members. The Corporate Governance and Nominating Committee establishes procedures for the nomination process and recommends candidates for election to the board. Consideration of new board nominee candidates involves a series of internal discussions, review of information concerning candidates, and interviews with selected candidates. Board members or employees typically suggest candidates for nomination to the board. In 2009,2010, we did not employ a search firm or pay fees to other third parties in connection with seeking or evaluating board nominee candidates.
The Corporate Governance and Nominating Committee will consider nominees recommended by shareholders; however, such recommendations must be submitted in writing to our Corporate Secretary along with the candidate’s resume and any other relevant information. See “Shareholder Nomination of Directors” below. Because our Governance and Nominating Committee is not composed entirely of independent directors, any nominations for our board of directors must be approved by a majority of our independent directors.
Pursuant to Section 407 of the Sarbanes-Oxley Act of 2002, the board of directors has determined that Kristina M. Leslie, Richard D. Ruppert, M.D. and Kenneth J. SlepickaJulie H. Sullivan, Ph.D, are “independent” and are each qualified as an audit committee financial expert as defined in Regulation S-K, Item 407 of the United States Securities Exchange Act of 1934, as amended, or Exchange Act.
In 2009,2010, there were sixfive meetings of the board of directors. All of the directors attended 75% or more of the aggregate of their respective board and committee meetings.
It is the policy of the board that each director, in the absence of extenuating circumstances, should attend our Annual Meeting in person. All of our directors, except Dr. Sullivan attended our 20092010 Annual Meeting.
Any shareholder of the companyCompany may nominate one or more persons for election as a director at an Annual Meeting of Shareholders if the shareholder complies with the notice, information and consent provisions contained in our bylaws. We have an advance notice bylaw provision. In order for the director nomination to be timely for the 20112012 Annual Meeting, a shareholder’s notice to our secretary must be delivered to our principal executive offices not less than 90 days nor more than 120 days before the anniversary of the date of the 20102011 Annual Meeting. As a result, any notice for a director nomination given by a shareholder pursuant to the provisions of our bylaws (other than notice pursuant to SEC Rule 14a-8) must be received no earlier than January 14, 201113, 2012 and no later than the close of business on February 13, 2011.12, 2012.
If the date of our 20112012 Annual Meeting is a date that is not within 30 days before or 60 days after May 14, 2011,13, 2012, the anniversary date of our 20102011 Annual Meeting, notice by the shareholder of a proposal must be received no earlier than the close of business on the 120th day before the Annual Meeting and not later than the close of business of (i) the 90th day prior to such Annual Meeting or (ii) the 10th day following the day on which public announcement of the date of such Annual Meeting is first made by us.
Shareholder nominations must include the information regarding each nominee required by our bylaws. A copy of our bylaws is posted on our website under “Corporate Governance” at http://investors.picoholdings.com. Nominations not made according to these procedures will be disregarded. The Corporate Governance and Nominating Committee will consider candidates recommended by shareholders, when submitted in writing along with the candidate’s resume and any other relevant information. All candidates (whether identified internally or by a qualified shareholder) who, after evaluation, are then recommended by the Governance and Nominating Committee and approved by the board, will be included in our recommended slate of director nominees in our proxy statement. A copy of the Corporate Governance and Nominating Committee’s Charter is posted on our website under “Corporate Governance” at http://investors.picoholdings.com.investors.picoholdings.com.
For information about shareholder proposals (other than nominations of directors), please see “Shareholder Proposals to be Presented at Next Annual Meeting” on page 4238 of this proxy statement.
The Compensation Committee determines our compensation objectives, philosophy and forms of compensation and benefits for our executive officers. This Compensation Discussion and Analysis discusses and analyzes our executive compensation program and information shown in the executive compensation tables for our fiscal year 20092010 that follow.
Our executive compensation programs areprogram is designed to supportretain our business goalsexecutive officers and, promote economically sustainable growth.when warranted, reward them for achieving superior growth in book value per share with moderate risk. This section of the proxy statementCompensation Discussion and Analysis discusses the principles underlying our compensation policies and the practices and decisions of the Compensation Committee with respect to our named executive officers. For the year ended December 31, 2009,2010, our named executive officers were our were:
· | John R. Hart | President and Chief Executive Officer, John R. Hart, our Executive Vice President and Chief Financial Officer (our “CEO”) |
· | Maxim C.W. Webb | Executive Vice President and Chief Financial Officer |
· | John T. Perri | Vice President and Chief Accounting Officer |
· | James F. Mosier | General Counsel and Secretary |
· | W. Raymond Webb | Vice President of Investments |
Executive Summary
In this Executive Summary, we highlight (1) our compensation philosophy, (2) the key practices in our executive compensation program as they relate to corporate governance, risk mitigation and best practices, and (3) the relationship between executive compensation, including incentive compensation of our CEO and our three other most highly compensated executive officers: Richard H. Sharpe, Damian C. Georgino, and W. Raymond Webb.
2009 — The Year In Review
The global financial and economic crises continued to create a very challenging economic environment for us in 2009. These crises and the related steep decline in investor and business confidence have continued to negatively affect our business results. As described in more detail below, the Compensation Committee, with assistance from its independent compensation consultant, conducted an evaluation of each named executive officer’s compensation at the beginning of 2009. The Compensation Committee determined that the total compensation opportunities of our named executive officers, other thanand our Chief Executive Officer were below our targeted levels, and that it was in the company’s best interests to provide additional incentive compensation and other amounts to these executive officersfinancial performance for retention purposes. The Compensation Committee also determined that it was in the company’s best interests for retention purposes to enter into employment agreements with each of Messrs. Sharpe, M. Webb and Georgino in order to formalize our compensation arrangements with each of them. Based on its evaluation, the Compensation Committee did not make any significant changes to our Chief Executive Officer’s compensation, as it determined that his total compensation opportunities were in line with our targeted levels.fiscal 2010.
Our Executive Compensation Philosophy and Programs
Our executive compensation philosophy centers on the principle of aligning pay and performance. We focus on developing an overall executive compensation package that helps to recruit, retain and motivate qualified executives upon whom we rely for our current and future success.
We have designeda simple compensation philosophy, which is to hire good people and pay them fairly. We define “good people” as individuals who are smart, experienced, hardworking, and honest. Recognizing how disruptive and costly it is to replace good people and how difficult it is to find them, we want our compensation programskey executive officers, if they perform, to achievebe compensated at a level that exceeds what they could earn at any other similar company. Given our historical performance and the following primary objectives:relatively small number of people who are responsible for these results, we see little reason to change our approach. In the case of our CEO, we recognize that he was instrumental in restructuring the Company and developing and implementing our business model. Following this business model has resulted in outstanding historical performance. Over the past 10 years, shareholders’ equity has grown by over 180% and our stock price has risen by over 150%. This compares to 14.7% growth in the Standard & Poor’s 500 over the same period. Our CEO has been with the Company for over 15 years and our other named executives have all been with the Company for over 12 years.
· | pay for performance; |
· | recruit, retain and motivate the highest quality executive officers who are critical to our success; |
· | align the interests of our named executive officers and other employees with those of our shareholders; and |
· | promote excellent corporate governance. |
Our small management team provides for more efficient decision making and greater accountability. It also allows us to pay those individuals more because our total compensation across the Company is less than our peers. Incentive compensation is a key component of our executive compensation program, which allows our executive officers to earn above-average compensation if they achieve superior growth in book value per share. We tie these awards to a benchmark of the five-year average of the Standard & Poor’s 500 index in order to emphasize long-term performance. We do not have a short-term focus on earnings. Although incentive compensation may be awarded in a particular year, this compensation is a result of years of efforts that are recognized when there is a monetization event. This more closely aligns the compensation of our executive officers with our corporate objectives and risk tolerance. We made no incentive compensation awards in 2010.
Our executive compensation program is subject to a thorough process that includes Compensation Committee review and approval of program design and practices; the advice of a third-party compensation consultant engaged by the Compensation Committee; and long-standing, consistently applied practices with respect to incentive compensation.
Company’s Performance in 2010.
We measure our success by the long-term growth in our book value per share with moderate risk. In 2010, our book value per share decreased by 3% from 2009, primarily because, due to a continuation of modest economic activity in our markets, we had few asset monetizations and therefore had no significant realized gains in the year.
Additionally, we use changes in our stock price as a metric for measuring our long-term performance. Our CEO and other named executive officers have been awarded stock based compensation in the form of Stock Appreciation Rights and Restricted Stock Units, or RSUs. Their compensation is, therefore, closely aligned to the long-term growth in our stock price. In 2010, our stock price reached a high of $39.47 per share during the second fiscal quarter and a low of $27.39 per share during the third fiscal quarter. In 2009, our stock price reached a high of $35.34 and a low of $19.75.
Executive Compensation Actions 2010.
In summary, we took the following actions regarding executive compensation in 2010:
· | As a result of changes in personnel and the growth and complexity of the company we increased the base salary for our Chief Financial Officer and Chief Accounting Officer; |
· | As a result of the Company’s performance in 2010 and the decline in book value per share, none of our executive officers earned an annual incentive award; and |
· | As a result of our retention objectives and recognition of our CEO’s critical value to the Company, our CEO was granted an RSU award covering 400,000 shares of our common stock, while our Chief Financial Officer and Chief Accounting Officer were granted RSU awards covering 40,000 and 14,000 shares of our common stock, respectively. These RSU awards do not vest until October 2014. |
Base Salary Increases
Mr. M. Webb assumed additional responsibilities, resulting in a decision by the Compensation Committee to increase his annual base salary from $358,290 to $500,000 in 2010. Further, we revised the employment terms for Mr. Webb to eliminate certain post-termination severance payments, as well as any associated tax gross-ups. Additionally, Mr. Perri also assumed greater responsibilities in 2010, resulting in a decision by the Compensation Committee to promote him to Chief Accounting Officer and to increase his annual base salary from $197,224 to $275,000.
Equity Awards
Historically, the Company has not made annual stock-based awards. This results in the appearance, as of the date of grant, that the equity incentive compensation of our executive officers is greater than that of our peers. Our equity awards are intended to be multi-year awards, however, our executive officers cannot realize the value of these awards until after four years. Thus, when viewed on a multi-year basis, the equity incentive compensation of our executive officers is consistent with the practices of our peers. We believe that this approach more closely aligns the interests of our executive officers with the interests of our shareholders, is consistent with achieving superior long-term growth in book value per share and provides attractive incentive to remain employed by the Company.
Our Executive Compensation Components
The following table lists the principal components of our executive compensation program and the primary purpose of each.
| | |
Base salary | Provide base compensation that is competitive for each role. Reviewed on an annual basis. | Cash |
Annual incentive awards and bonuses | Annual incentive for superior performance and to drive company and individual performance; attractretain executive talent and retain executives through potential wealth accumulation.officers. | Cash |
Long-term incentives | Long-term incentiveincentives are awarded from time to drive companytime at the discretion of the Compensation Committee for superior performance and individual performance andto align the interests of our named executive officers and other employees with those of our shareholders; retain and motivate named executive officers through long-term vesting and potential wealth accumulation.vesting. | EquityRestricted Stock Units |
Retirement benefits | RecruitRetain and retainrecruit our named executive officers. | 401(k) plan |
Deferred Compensation Opportunity | RecruitRetain and retainrecruit our named executive officers by offering them an opportunity to defer income tax on amounts deferred. | Non-qualified deferred compensation plan |
Insurance and other benefits | Provide for the safety and wellness of our named executive officers. | Various |
Termination and severance benefits | RecruitRetain and retainrecruit our named executive officers. | Various, including cash and accelerated vesting of long-term incentives |
Although we believe each of these seven compensation elements helps us to achieve one or more of our compensation objectives, we believe the combination of total cash compensation opportunities (base salary and annual incentive awards), long-term incentives and termination benefits are the most critical elements for purposes of achieving our compensation objectives.
Our Business and How it Relates to Our Executive Compensation Philosophy
As described under “Item 1. Business” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009,2010, we are a diversified holding company. To maximize long-term shareholder value, our strategic mission is to manage operations to achieve a superior return on net assets by:
· | Building and operating businesses with unique assets that we believe have the potential to create significant value; and |
· | Acquiring businesses that we identify as undervalued and where our management participation in operations can aid in the recognition of the businesses’ fair value as well as create additional value. |
This business strategy requires a management team with demonstrated expertise in asset and business acquisitions, investments of all types of securities (public and private), and financial management and business operations of acquired entities in local as well as international markets. This team must review, operate and manage a broad and diversified range of businesses, investments, assets, and operations that currently include water resources and storage, real estate, and insurance, but may include related or unrelated businesses in the future. In addition, this team must assist in setting strategic direction for each business and the company as a whole. This team is also responsible for seeking out and investigating new investment and acquisition opportunities as well as coordinating and maintaining good investor relations.
In connection with its evaluationGiven our historical performance, the relatively small number of the named executive officers’ compensation during 2009, the Compensation Committee engaged the Consulting Division of Silverton Bank (formerly known as The Bankers Bank) as its independent consultant to assist it in updating the company’s peer companies. As in prior years, peer group companies were selected from industry categories that were comparable toofficers responsible for pursuing our businesses, operations and strategies, with a particular emphasis on companies (i) where management teams must have asset acquisition, investment, operational, and financial management skills similar to those required to implement our strategy, and (ii) in the industries in which we have made acquisitions and conduct operations.
Our peer group for 2009 included the following companies, many of which were also included in our peer group for previous years:
|
| | |
Affiliated Managers Group, Inc. | BCG Partners, Inc. | Capital Trust, Inc. |
Calamos Asset Management, Inc. | Duff & Phelps Corporation | Hercules Technology Growth Capital, Inc. |
Cohen & Steers, Inc. | FBR Capital Markets Corp. | Kohlberg Capital Corporation |
Eaton Vance Group | GFI Group Inc. | MCG Capital Corporation |
Federated Investors, Inc. | Investment Technology Group | Northstar Realty Finance Corp. |
GAMCO Investors, Inc. | KBW, Inc. | Redwood Trust, Inc. |
Pzena Investment Management, Inc. | Knight Capital Group, Inc. | |
U.S. Global Investors, Inc. | LaBranche & Co Inc. | |
Waddell & Reed Financial, Inc. | Oppenheimer Holdings, Inc. | |
Westwood Holdings Group, Inc. | Piper Jaffray Companies | |
| Stifel Financial Corp. | |
This peer group includes a broad spectrum of finance, insurance, and real estate organizations (SIC codes 6100 – 6700), but excludes depository and non-depository institutions, insurance brokers and agents, and trusts. While many additional companies could have been included in the industry categories noted above, we were significantly differentiated from many individual companies in these categories. For instance, in order to develop competitive market compensation data on similarly sized organizations in comparable industry categories, our peer group generally includes only companies that are similar in size to us, measured by total shareholders’ equity, total assets or market capitalization. As a result, while we believe we are most similar, in terms of business strategy and the skill set required of management, to larger publicly held companies such as Berkshire-Hathaway, Inc. and Leucadia National Corp., such companies were excluded because their relative size makes any comparison necessarily inappropriate. In addition, many other peer entities whose size and operations are similar to ours were excluded because they are privately held enterprises that do not make their compensation information publicly available.
The Compensation Committee determined that total compensation for our named executive officers should be targeted at the top 25th percentile of our peers. As we’ve noted, we are a diversified holding company whose businesses, operations, and strategy require a management team with demonstrated expertise in asset and business acquisitions, investments of all types of securities (public and private), and financial management, and business operations of acquired entities in local as well as international markets. Given the expertise we believerequire our management team mustto possess in order to successfully pursue our business strategy, we believe it is necessary to target total compensation for our named executive officers at the top 25th percentile of our peer group. We believe thisa level of target compensationthat allows us to recruit, retain, and motivaterecruit, high quality executives, which is one of the primary objectives of our executive compensation programs. However, the Compensation Committee has the ability to, and does, exercise discretion to use a different targeted total compensation level if it determines a different targeted compensation level to be appropriate and in the best interests of the company.program.
The Role of the Compensation Committee in Determining Executive Compensation
Our Compensation Committee is a standing committee. The Compensation Committee is composed of independent, outside directors“outside directors” within the meaning of Section 162(m) of the United States Internal Revenue Code and independent, non-employee directors“non-employee directors” within the meaning of Exchange Act Rule 16b-3, of the Exchange Act, who also meet the independence requirements of the Nasdaq Global Market. John D. WeilCarlos C. Campbell is Chairman of our Compensation Committee. The other Compensation Committee members are Carlos C. Campbell,Kristina M. Leslie, Richard D. Ruppert, MD,M.D. and Kenneth J. Slepicka.Robert G. Deuster.
The Compensation Committee is responsible for assuring that all of our executive compensation decisions are developed, implemented and administered in a way that supports our fundamental philosophy that a significant portion of executive compensation is linked to our performance. To this end, the committeeCompensation Committee oversees and administers all of our executive compensation plans and policies, administers the PICO Holdings, Inc. 2005 Long-Term Incentive Plan (including reviewing and approving grants of awards under the 2005 Long-Term Incentive Plan), and annually reviews and approves the individual elements of the named executive officers’ total compensation package.
The Compensation Committee reviews and, if appropriate, updates its charter on an annual basis to ensure that it reflects its goals and objectives. In 2010, in order to enhance our corporate governance and oversight of the compensation process, the Compensation Committee revised its charter to include the following sentence: “All decisions by the Compensation Committee which affect employment agreements, salaries, incentive awards/bonuses, or any awards granted under the Company’s 2005 Long Term Incentive Plan, shall only be effective when memorialized in a written resolution or consent and signed by all members of the Compensation Committee.” A copy of the Compensation Committee’s Charter is posted on our website under “Corporate Governance” at http://investors.picoholdings.com.
Pursuant to its charter,Assessment of 2010 Compensation
In early 2010, the Compensation Committee is authorized to engage a compensation consultant to assist it in the evaluation of the compensation of the company’s elected officers, including the named executive officers. The Compensation Committee engaged the Consulting Services Division of Silverton BankMatthews, Young in connection with its review of the compensation arrangements of our named executive officers in effect for 2009. Our independent consultant compiled2010. In addition, Matthews, Young assisted us in evaluating whether our compensation policies and practices for all employees create risks that are reasonably likely to have a surveymaterial adverse effect on the Company. As a result of changes in personnel and responsibilities, in the latter half of 2010, the Compensation Committee reviewed and reassessed the compensation packages offered to our named executive officers. As part of that was intendedprocess, the Compensation Committee engaged Compensia, Inc., a national compensation consulting firm, to comparereview our 2008 pay levels forcompensation structure. Compensia completed their report in late 2010.
Though each of our named executive officers withis directly responsible for the pay levels in place at our peer group companies, and to analyze our equity based compensation practices for alleffective management of a discrete aspect of our operations and administration, the named executive officers. Theofficers are jointly responsible for the execution of our plans and strategies. Accordingly, the Compensation Committee requested that the consultantCompensia provide a variety of comparative metrics by which the committee would assess compensation:the compensation of our named executive officers:
(1) | a comparison of the average salaries, average cash compensation, and average equity awards of our named executive officers as a group over the last four years against the executive officers of our peer group companies whose scope of accountability and position in the executive management hierarchy are similar to ours as a group; |
(2) | a comparison of the average salaries, average cash compensation, and average equity awards of our named executive officers, excluding our Chief Executive Officer,CEO, as a group over the last four years against the executive officers of our peer group, companies, excluding their chief executive officers and next most highly compensated named executive officers, whose scope of accountability and position in the executive management hierarchy are similar to ours as a group; |
(3) | a comparison of the individual base salary, other cash compensation and equity awards of our Chief Executive OfficerCEO against the chief executive officers of our peer group companies;group; and |
(4) | a comparison of the individual base salary, other cash compensation and equity awards of each of Messrs. Sharpe, M. Webb, Georgino,R. Webb, Perri and R. WebbMosier against the average compensation of the named executive officers of our peer group, companies, in each case, excluding the compensation of their chief executive officer and next most highly compensated executive officer. |
Late in 2009, the Committee’s lead independent consultant joined Matthews, Young - Management Consulting, which is a division of Matthews, Young & Associates, Inc., as Director of Executive Compensation Consulting Services. The Compensation Committee engaged Matthews, Young in connection with its review of the compensation arrangements of our named executive officers in effect for 2010. Matthews, Young was not engaged to provide any advice or recommendations with respect to the named executive officers’ compensation arrangements in effect for 2009, but will assist the Compensation Committee in comparing our 2009 pay levels for our named executive officers with the pay levels in place at our peer group companies during 2009. In addition, Matthews, Young assisted us in evaluating whether our compensation policies and practices for all employees create risks that are reasonably likely to have a material adverse effect on the company.
Neither the Compensation Committee nor the company engaged Silverton Bank or Matthews, Young to provide any additional non-executive compensation consulting services to the company during 2009.
In addition to engaging an independenta compensation consultant, the Compensation Committee often seeks input from our management. For example, some of our named executive officers and other executive officers have from time to time assisted the Compensation Committee in gathering compensation data. Our human resources department also gathers and reviews major compensation studies and salary surveys and monitors the consumer price index. Based on the human resources department’s summary of these studies, surveys and reports, the Chief Operating Officermanagement will recommend a cost of livingpayroll adjustment for the upcoming year to the Compensation Committee. The cost of living adjustment is the same for all of our directors, officers and employees. In accordance with NASDAQ rules, however, (i) our named executive officers did not vote on executive compensation matters, and (ii) none of our named executive officers was present when his own compensation was being discussed or approved.
General Determination of 2009 Compensation
The following is the Company’s peer group. As in prior years, the peer group companies were selected from industry categories that were comparable to our businesses, operations and strategies, with a particular emphasis on companies (i) where management teams must have asset acquisition, investment, operational and financial management skills similar to those required to implement our business strategy and (ii) in the industries in which we have made acquisitions and conduct operations.
During its reviewOur peer group for 2010 consisted of the compensation arrangements of our named executive officers in 2009, the Compensation Committee determined that it was in the company’s best interests for retention purposes to enter into employment agreements with each of Messrs. Sharpe, M. Webb and Georgino. Prior to 2009, the company’s general policy was not to offer employment agreements to any named executive officer other than our Chief Executive Officer, Mr. Hart, who was at the time determined to be uniquely critical to our success. The company entered into these employment agreements because it believed it was important for retention purposes to formalize the compensation and severance arrangements for these named executive officers, which had previously been determined in a largely discretionary manner.following companies:
2010 Peer Group Companies |
American Capital Ltd | Harris & Harris Group, Inc. | MCG Capital Corporation |
Ampal-American Israel Corporation | Hercules Technology Growth Capital Inc. | Redwood Trust, Inc. |
Capital Southwest Corporation | Internet Capital Group, Inc. | Safegaurd Scientifics, Inc. |
Capital Trust, Inc. | Kohlberg Capital Corporation | |
The employment agreements entitled Messrs. Sharpe, M. Webbpeer group includes holding and Georginofinance companies that have principal businesses similar to receive 80,000 restricted stock units underours. In order to develop competitive market compensation data on similarly-sized organizations in comparable industry categories, our 2005 Long-Term Incentive Plan. At the same time, Mr. R. Webb was also granted 30,000 restricted stock units. Thepeer group generally includes only companies that are similar in size to us, measured by total shareholders’ equity, total assets or market capitalization.
General Determination of 2010 Compensation Committee determined to grant this amount of equity awards to these named executive officers because it determined that the overall 2008 compensation of these named executive officers was below market and our targeted levels. The Compensation Committee also wanted to increase the equity holdings of these named executive officers and further align their interests with those of our shareholders, which was why the primary increase in the total 2009 compensation amounts for these executives was in the form of additional equity awards. Our Chief Executive Officer, Mr. Hart, did not receive any restricted stock unit awards during 2009 because we determined that his overall 2008 and 2009 compensation was generally consistent with our targeted levels.
Elements of Executive Officer Compensation
1. Annual Cash Compensation
Annual cash compensation comprises two parts: (1) base salary and (2) annual incentive awards and discretionary bonus opportunities.awards.
Base Salary
We believe base salaries are important because they provide a specified minimum level of cash compensation to our named executive officers for their services. We seek to provide base compensation that is competitive for the duties and responsibilities of our named executive officers. During 2009, noneAt the beginning of our named executive officers received a merit-based increase in his base salary. The Compensation Committee’s 2009 executive compensation review found that the aggregate base salaries for Messrs. Sharpe, M. Webb, Georgino and R. Webb ranked in the bottom 50th percentile among the aggregate base salaries for other similarly positioned executive officers at our peer group companies. Each2010, each named executive officer’s base salary was increased by approximately 4%. Thereafter, the base salaries of two of the named executive officers were further adjusted in 2010 as a costresult of living adjustmentchanges in their roles and responsibilities.
As a result of approximately 5.5%. This cost of living adjustment waschanges in personnel and growth in both the same for allsize and complexity of our directors,Company, which resulted in Mr. M. Webb assuming additional responsibilities, we increased his annual base salary from $358,290 to $500,000. Further, we revised his employment terms to eliminate post-termination severance and the associated tax gross-up which could have been due upon the payment of any post-termination severance. As a result of changes in personnel and growth in both the size and complexity of our Company, which resulted in Mr. Perri assuming greater responsibility, he was promoted to Chief Accounting Officer and his base salary was increased from $197, 224 to $275,000. As a result of the changes to base salaries of Mr. M. Webb and Mr. Perri, the Compensation Committee’s 2010 executive compensation review found that, as compared with the aggregate base salary of other similarly positioned executive officers in our peer group, the base salaries of Messrs. Hart and employees.Webb exceeded the 75th percentile and the base salary of Mr. Perri approximates the market median.
See “—Summary Compensation Table” below for the base salaries paid to our named executive officers during 2009.2010.
Annual Incentive Awards and Discretionary Bonus Opportunities
We provide annual incentive awards that are based on the company’sCompany’s long-term performance, to motivate our named executive officers to increase our book value per share. Theserather than short-term focus on earnings. Accordingly, these awards motivate our executivesexecutive officers and align their interests with those of our shareholders by increasing the executives’their annual compensation as our book value per share increases. We believe increasesif superior growth in book value per share increases shareholder value by increasing the trading value of our stock. In determining the incentive award mechanism, the Compensation Committee decided to use our book value per share as a measure for growth because such measure is not as sensitive to short-term market fluctuations and external events beyond our control that may affect the price of our common stock. Ouroccurs. We tie these annual incentive awards if any, are paidto a benchmark of the five-year average of the Standard & Poor’s 500 index in cash, less applicable tax withholdings.order to emphasize long-term performance. Although an incentive award may be earned in a particular year, the award is a result of years of effort that is recognized when there is a monetization event. We believe that this approach more closely aligns our executive officers’ pay with our corporate objectives and risk tolerance.
Mr. Hart’sOur CEO’s employment agreement provides for incentive compensation when our growth in book value per share exceeds a pre-determined threshold.threshold level. Each year’s threshold level is equal to 80% of the S&PStandard & Poor’s 500’s annualized total return for the previous five calendar years, but not less than zero.years. If our growth in book value per share in a fiscal year exceeds the threshold amount, Mr. Hartlevel, our CEO is entitled to receive 7.5% of the increase in book value per share over such threshold multiplied by the number of shares of our common stock outstanding at the beginning of the fiscal year. The employment agreements for each of
In addition, our practice is to provide Messrs. Sharpe, M. Webb, Perri and Georgino provide that each executive’sR. Webb with an annual incentive compensation amount isaward equal to his base salary multiplied by the ratio of the annual incentive compensation payments (including any discretionary payments) paid to Mr. Hartour CEO to Mr. Hart’sour CEO’s base salary. For example, if Mr. Hart’sour CEO’s total incentive compensation payments equal 50% of his base salary, each of these executives willnamed executive officers is eligible to receive an incentive compensation paymentaward equal to 50% of his base salary. As a result, the incentive compensation opportunity for each of these executivesthree named executive officers is indirectly based on the same growth in book value per share metric that is applicable to Mr. Hart.our CEO.
Unlike the other named executive officers, Mr.For 2010, book value per share decreased by 3%. As a result, neither our CEO nor any of Messrs. M. Webb, Perri or R. Webb’s annual incentive awards are discretionary. In prior years, if Mr. HartWebb received an annual incentive compensation award under his employment agreement, he generally recommended that all named executive officers be paid an incentive award that was consistent with Mr. Hart’s incentive payment. As a result, in practice, Mr. R. Webb’s incentive payment follows the same formula as Messrs. Sharpe, M. Webb and Georgino.for 2010.
For our 2009 incentive compensation calculation, we determined that the threshold percentage (that is, 80% of the S&P’s annualized total return for the five previous calendar years, including 2009) was 0.34%. Based on our performance during 2009, our increase in book value per share was 1.24%, which exceeded the threshold percentage determined for 2009. As a result, Mr. Hart received a total incentive compensation payment equal to $508,690, equaling approximately 27% of his base salary for 2009. In accordance with their employment agreements, Messrs. Sharpe, M. Webb and Georgino, each received an incentive payout in the amount of approximately 27% of their respective base salaries. Mr. R. Webb also received a discretionary incentive payout in the amount of approximately 27% of his base salary for 2009.
Each of these executives is also eligible to receive additional annual incentive awards or annual bonus awards in the discretion of the Compensation Committee. However, the Compensation Committee determined not to award any additional discretionary incentive awards or bonuses to the named executive officers during 2009.
See “—Summary Compensation Table” below for the incentive compensation payments to our named executive officers for 2009.
2. Long-Term Incentives
Our policy isHistorically, the Company has not made annual awards of long-term incentives. Consequently, when we do make such awards, this may result in the appearance that we have granted equity incentive compensation at levels in excess of the named executive officers’companies in our peer group. When we do make long-term incentives shouldincentive awards, they are intended to be directly linked tomulti-year awards. Historically, on a multi-year basis, the value provided to our shareholders. Therefore, 100% of the named executive officers’ long-term incentives are currently awarded in the form of equity instruments reflecting, or valued by reference to,incentive compensation of our common stock. Our long-term incentive plan has been designed to align executive compensationofficers is consistent with the long-term interestspractices of our shareholders and to retain our named executive officers through potential wealth accumulation. peer group.
Under the 2005 Long-Term Incentive Plan, which was approved by our shareholders on December 8, 2005, the Compensation Committee may award to participants various forms of equity-based incentives, including stock appreciation rights, or SARS, stock options, restricted stock, restricted stock units, or RSUs, performance awards, deferred compensation awards and other stock-based awards.
Prior to 2009, the equity award grantsincentive compensation awarded to our named executive officers under the 2005 Long-Term Incentive Plan had been made solely in the form of stock-settled stock appreciation rights. Stock-settled stock appreciation rights have been our preferred equity award because named executive officers will only realize value in these awards if our shareholders realize value on their shares followingSARs. During 2010, the grant date. In this way, the value realized by the named executive officers will be commensurate with the value realized by shareholders from appreciation in our stock price.
While we continue to believe stock-settled stock appreciation rights are an effective equity award tool that helps us achieve many of our executive compensation objectives, we decidedCompensation Committee determined to grant equity awardsincentive compensation in the form of restricted stock units during 2009. All ofRSU awards for the named executive officers except our Chief Executive Officer were awarded restricted stock units during 2009. We opted to grant restricted stock units in favor of stock-settled stock appreciation rights for several reasons. We believe that (i) “full value” awards such as restricted stock units are less complex than stock-settled stock appreciation rights and easier for recipients to understand the incentive compensation opportunity, (ii) full value restricted stock unit awards are less dilutive than stock-settled stock appreciation rights because we can provide the same aggregate grant date award value while using fewer shares, (iii) full value restricted stock unit awards continue to have retentive value and help to align the interests of our executives with those of our shareholders even in periods of minimal stock price appreciation or stock price decline, (iv) full value restricted stock unit awards are less likely to encourage short-term risk-taking at the expense of long-term results and (v) granting a combination of stock-settled stock appreciation rights and full value awards such as restricted stock units is currently the prevalent practice among our peer group companies based on information provided by Silverton Bank. In addition, in informal feedback we have received from certain shareholders, these shareholders have expressed a desire for us to award restricted stock units or other full value equity awards so that our named executive officers have their personal wealth affected by the value of our common stock even in periods of minimal stock price appreciation or stock price decline when their stock-settled stock appreciation rights are not “in the money.”following reasons:
· | full value RSU awards are less dilutive than stock-settled SAR because we can provide the same aggregate grant date award value while using fewer shares; |
· | full value RSU awards continue to have retentive value and help to align the interests of our executive officers with those of our shareholders even in periods of minimal stock price appreciation or stock price decline; |
· | full value RSU awards are less likely to encourage short-term risk-taking at the expense of long-term results; and |
· | granting a combination of stock-settled SARs and full value awards such as RSUs is currently the prevalent practice among our peer group companies. |
Unlike many of our peer group companies and other public companies, historically
During 2010, we have not granted equitythe following RSU awards to our named executive officers on an annual basis. For example, priorofficers:
Name | 2010 RSU Grant |
John R. Hart | 400,000 |
Maxim C. W. Webb | 40,000 |
John T. Perri | 14,000 |
The Compensation Committee decided to grant our CEO a significant equity award in 2010 in recognition of his critical value to the 2009 grants of restricted stock units, none of our named executive officerscompany. In particular, the Compensation Committee noted that he had received equity awards since 2007 (and our Chief Executive Officer has not previously received any equity awards since 2007). Recent changes2007. To achieve its retention objectives and to provide further incentive for him, the Compensation Committee determined, after reviewing the equity practices of the peer group and the equity holdings of the chief executive officers at the companies in the peer group, to grant our CEO an RSU award covering 400,000 shares of our common stock with a grant date fair value of $12,276,000.
In making this award, the Compensation Committee took into consideration that as a multi-year award, our CEO cannot realize any value from the award until the completion of its four-year vesting schedule. Consequently, he will have to remain with the Company for the full four-year period to obtain any benefit from the award. The Compensation Committee also noted that, under the SEC’s executive compensation disclosure rules, now require usthe Company is required to report the total value restricted stock unit and stock-settled stock appreciation right awardsof the entire RSU award in our Summary Compensation Table usingin the grant date fair valueyear of these awards, rather than using the amount recognizedgrant. However, for financial statement reporting purposes, we will record compensation expense ratably for the award over its four-year vesting schedule.
In addition, in recognition of the changes in personnel and the increased size and complexity of the Company and in line with our goal of retaining our key executives, in 2010, the Compensation Committee awarded 40,000 RSUs to valueMr. M. Webb and 14,000 RSUs to Mr. Perri. In making these awards. For companies like usawards, the Compensation Committee took into consideration that, have not granted equity awards to our named executive officers on an annual basis, this change will cause significant year-to-year fluctuations in equity compensation amounts (and as a result, total compensation amounts) reportedmulti-year award, they cannot realize any value from their awards until the completion of the RSUs’ four-year vesting schedule. Consequently, they will both have to remain with the Company for our named executive officers. We will now be requiredthe full four-year period to report much higher equity compensation amounts in years such as 2007 and 2009 when we grant equity awards, while we will no longer be required to reportobtain any equity compensation amounts in years like 2008 when we did not grant any equitybenefit from their awards. Readers should be aware of this change in the disclosure rules, and particularly its potential to cause significant year-to-year fluctuations in the compensation amounts reported by companies like us that have not historically granted equity awards on an annual basis.
See “—Summary Compensation Table” below for the aggregate grant date fair value of the restricted stock unitsRSU awards granted to Messrs. Sharpe, M. Webb, Georgino, and R. Webbour named executive officers during 2009.2010.
3. Retirement and Deferred Compensation Plans
We maintain the PICO Holdings, Inc. 401(k) Employees Retirement Plan and Trust to provide a tax-deferred means to save for retirement. The named executive officers have the opportunity to participate in this Section 401(k) plan on the same basis as all of our other employees.
We also maintain a nonqualified deferred compensation plan, which allows our executivesexecutive officers to elect to defer compensation they earn and receive the tax benefits associated with delaying the income tax on the compensation deferred. We do not make any matching or other contributions to the nonqualified deferred compensation plan. The amounts deferred under the plan are credited with interest, earnings, appreciation, losses and depreciation based on the performance of notional investment fundsequities, bonds or benchmarkscash selected by the participants, and are held in a grantor trust, the assets of which are subject to the claims of our creditors. We provide the non-qualified deferred compensation plan to be competitive with other employers because we believe most of our peer group companies provide these types of plans.
See “—Nonqualified Deferred Compensation” below for a description of our nonqualified deferred compensation plan and the amounts deferred by our named executive officers thereunder.
4. Insurance and Other Benefits
We generally provide insurance and other benefits to provide for the safety and wellness of our employees. These benefits include health insurance, life insurance, dental insurance, vision insurance, and disability insurance, which are available to all employees, including our named executive officers, on a nondiscriminatory basis. We also provide paid parking for employees in our La Jolla, California office. We provide these benefits to be competitive with other employers, because we believe most of our peer group companies provide these types of benefits.
5. Termination and Change in Control
We provide certain termination of employment and change in control payments and benefits to our named executive officers. We provide these payments and benefits to help recruitretain and retainrecruit our named executive officers, which is one of the primary objectives of our executive compensation program.
Termination Benefits
Mr. Hart. Mr. Hart is entitledPursuant to termination benefits pursuant tothe operation of the terms of his employment agreement, which was entered into on May 7, 2007 and amended effective January 1, 2009 solely to comply with the requirements of Section 409A of the Internal Revenue Code (no benefits were increased pursuant to the amendment). Under Mr. Hart’s employment agreement, if Mr. Hart is terminated by the company for any reason other than cause, including death or disability, after January 1, 2009, but prior toat December 31, 2012, he2010, our CEO was not eligible to receive any severance payments or benefits as a result of a termination of employment. This result is under review and the Company may decide to revise our CEO’s severance arrangements in the future. Our CEO (or his beneficiary, as appropriate) will be paid a lump sum equalis also eligible to $3,686,400 minus the amount of base salary paid to Mr. Hart after January 1, 2009 to the date of termination. The lump sum amount of $3,686,400 was equal to three times Mr. Hart’s base salary as of the beginning of his May 7, 2007 employment agreement, and was determined based on our negotiations with Mr. Hart in connection with Mr. Hart’s assumption of additional responsibilities upon the retirement of our former Chairman, Mr. Langley. We continue to believe Mr. Hart’s termination benefits are reasonable, particularly because as a result of the offset for the amount of base salary paid after January 1, 2009, Mr. Hart’s severance amount pursuant to this provision at the end of 2009 would have been less than one times his current base salary (and will continue to decrease in future years). Mr. Hart (or his beneficiary, as appropriate) will also receive the pro rata portion of any annual incentive award with respect to the year in which his employment is terminated. Additionally, the RSU awards that the Company granted to our CEO will fully vest upon his termination of employment without cause, excluding death or disability, and on a change in control transaction.
In addition, pursuantMr. M. Webb. On December 31, 2010, the Company and Mr. M. Webb entered into an agreement to modify the terms of his employment. Pursuant to this agreement, Mr. Webb agreed to terminate his prior employment agreement dated March 3, 2009 and continue on an “at will” basis without a contractual right to severance payments or benefits other than in accordance with our current benefit plans available to employees of the Company generally. Mr. Webb voluntarily agreed to surrender his contractual severance payments and benefits as part of the Company’s overall review of executive compensation in 2010. Severance payments and benefits under our current benefit plans generally include two weeks of base salary for each full year of employment with us if Mr. Hart terminates hiswe terminate a participant’s employment for any reason even if he voluntarily terminatesother than cause. Additionally, the RSU awards that the Company granted to Mr. Webb will fully vest upon his employment, prior to December 31, 2010, we will be required to pay an additional lump sum payment to him. This lump sum amount would have been $200,000 had he terminated employment during the calendar year 2009 and decreases to $100,000 for a termination of employment during 2010. This paymentwithout cause, excluding death or disability, and corresponding reductions of $100,000 per year are based on the Compensation Committee’s determination that the formula for cash-settled stock appreciation rights under our prior long-term incentive plan (the 2003 Long-Term Incentive Plan) improperly reduced the cash bonus when the book value per share increased.a change in control transaction.
Messrs. Sharpe, M.Perri, R. Webb and GeorginoMosier.. As described above, the Compensation Committee determined it was in the company’s best interests for retention purposes to enter into employment agreements with each None of Messrs. Sharpe, M.Perri, R. Webb and Georgino during 2009. Each executive’s employment agreement provides for severance benefits in connection with certain terminations of the executive’s employment with us. Severance benefits payable for a termination by the company without cause or by the executive for good reasonMosier are generally equal to one times the executive’s base salary and average annual bonus, if any, and also include full vesting for any outstanding and unvested equity awards and continued health benefits for 18 months. If the executive’s termination without cause or for good reason is in connection with a change of control, or if the executive’s employment terminates as a result of the executive’s death or disability, the severance benefits will be increased and will be based on a “2x” multiple (e.g., two times the executive’s base salary and average bonus, if any, and continued health benefits for 24 months). These severance benefits are in addition to any severance benefits payable under our generally applicable severance benefit plan. In addition, if any benefit the executive becomes entitled to receive in connection with a change of control is subject to an excise tax applicable to “excess parachute payments” under Section 280G of the Internal Revenue Code and the aggregate excise tax is more than a de minimis amount, the executive will receive a tax gross-up payment to cover such excise taxes. We determined that it was appropriate to provide these severance benefits in order to retain these executives, which was one of our primary executive compensation objectives during 2009. We were also advised by our independent compensation consultant, Silverton Bank, that the severance provisions in the new employment agreements were consistent with employment contracts in place at our peer group companies, and therefore Silverton Bank recommended that the new employment agreements include change in control provisions.
Mr. R. Webb. Mr. R. Webb is not a party to an employment agreement with us and is thereforethey are only entitled to severance payments and benefits under our generally applicable severance benefit plan. BenefitsAs described above, payments and benefits under this plan generally include two weeks of base salary for each full year of employment with us if we terminate a participant’s employment for any reason other than cause. Additionally, the RSU awards that the Company granted to Messrs. Perri and R. Webb will fully vest upon their termination of employment without cause, excluding death or disability, and on a change in control transaction.
Equity Acceleration Upon a Change in Control
Our 2005 Long-Term Incentive Plan was approved by our shareholders on December 8, 2005, and it has not been materially amended since this date. UnderAll stock-settled SAR granted and outstanding under our 2005 Long-Term Incentive Plan the default rule is that all outstanding options and stock-settled stock appreciation rights will vest immediately and becomeare fully exercisable upon a change in control. Further, thevested at this time. The vesting conditions, restriction periods or performance goals applicable to any outstanding shares subject to a restricted stock unit award, restricted stockan RSU award or other award under our 2005 Long-Term Incentive Plan will be accelerated and/or waived.waived upon a change in control of the Company or termination of employment without cause. We provided for this single trigger“single trigger” accelerated vesting arrangement under our 2005 Long-Term Incentive Plan in order that participants might appropriately share in the value they created for our shareholders to the full extent of our prior equity award grants.awards. While a change in control transaction may accelerate the creation of value for shareholders, it may also eliminate any potential for the executivesexecutive officers to realize additional value with respect to their equity awards over the intended vesting period. We also believe this acceleration feature remains consistent withLikewise, a termination of employment for other than cause would eliminate the practices of our peer group.executive officer’s ability to realize the additional value they created in the Company.
See “—Potential Payments upon Termination or Change in Control” for a more detailed description of our termination and change in control benefits for the named executive officers.
Risk Considerations
Recent changes to the SEC’s disclosure rules require us to analyze our compensation policies and practices for our named executive officers as well as those policies and practices in effect for our business segments and all employees, and to provide additional disclosure if the risks arising from these compensation policies and practices are reasonably likely to have a material adverse effect on the company. We engaged Matthews, Young to assist the company and the board of directors in reviewing our compensation policies and practices to determine whether they encourage unnecessary or excessive risk-taking. Together, we reviewed each plan’s purpose, participation level, assignment of plan administration authority, performance measurement, and incentive award potential. We also jointly reviewed the competiveness and mix of compensation elements comprising our total executive compensation package. Matthews, Young prepared a written report, which it reviewed with senior management, including the company’s senior risk officer, who were able to provide valuable insight into our risk profile. In addition, Matthews, Young reviewed its findings directly with the Compensation Committee.
As a result of our review, we find the following with respect to our risk profile:
· | Incentive plans are well designed, effectively administered, focused on relevant performance measures; |
· | Our plans are reasonable with respect to potential compensation levels; |
· | Our overall mix of compensation elements is appropriately balanced and achieves a balance of focus on operating versus strategic results; |
· | Base salaries for executive officers are sufficiently competitive to eliminate the need for executives to take unnecessary risk in order to earn large incentives necessary to provide adequate cash compensation; and |
· | Equity-based compensation levels are competitive and sufficient to provide a balanced focus between short- and long-term priorities and results and does not encourage the taking of short-term risks at the expense of long-term results. |
We have concluded that our compensation policies, plans, and practices do not encourage unnecessary or unreasonable risk-taking and do not encourage executives or employees to take risks that are reasonably likely to have a material adverse effect on the Company.
Aligning Shareholder and Executive Interests
We employ a multi-faceted compensation strategy to encourage and reward executives for focusing their efforts on achieving a superior return on net assets over the long term. Our annual cash incentive plan rewards management for growing book value per share greater than a competitive threshold growth rate compared to the five-year total shareholder return of S&P 500 companies. We also employ equity-based compensation plans to more specifically align our executive management’s compensationterm with shareholders.
Prior to 2009, the only equity based incentives granted to executive management were stock appreciation rights (settled in stock). In 2009, we changed the form of our equity grants for executives from stock appreciation rights to restricted stock units. Both types of equity-based incentives are sensitive to the movement in the price of our stock. In order for stock appreciation rights to have compensation value for our executives, our executives must exercise the rights when our stock price is above the exercise price on the date of grant, while the compensation value of restricted stock units increases and decreases with the movement of our stock price regardless of the price of our stock on the date of grant. Generally, the number of restricted stock units granted to our executives will be significantly less that the number of stock appreciation rights as we manage the effective use of shares available in our plan reserve and align total executive compensation with shareholder interests.
moderate risk. In 2010, the Compensation Committee engaged itsCompensia as an independent compensation advisor to assist in reviewing prevailing market practices for incentive cash compensation, stock ownership and retention guidelines and use of equity as long term incentives. The Compensation Committee discussed the effectiveness of stock ownership and stock retention guidelines as a means of complimentingcomplementing our current compensation strategy for aligning shareholder and executive interests. During 2010, the Committee will continue this assessment of effective stock ownership and retention guidelines for executive officers and outside directors.
Tax Deductibility of Executive Compensation
Under Section 162(m) of the Internal Revenue Code, annual compensation in excess of $1,000,000$1 million to each of a company’s Chief Executive Officer and fourthree other most highly compensated executive officers (not including the Chief Financial Officer) is not deductible as compensation expense for United States federal income tax purposes unless it satisfies the performance-based compensation“performance-based compensation” exception of Section 162(m). Stock-settled stock appreciation rights have historically been the preferred type of award under the 2005 Long-Term Incentive Plan in part because they should qualify as performance-based compensation. However, inIn structuring the base salaries and annual- and long-term incentive awards for our named executive officers, the companyCompany determined that shareholder interests would best be served by not restricting the company’sCompany’s discretion and flexibility by trying to qualify the named executive officers’ compensationthese components as “performance-based.” Therefore, the amount of base salary, annual incentive awards, and discretionary bonuses and restricted stock unitRSU awards in excess of $1,000,000$1 million to any one of our named executive officers subject to the Section 162(m) limitations will not qualify for a corporate tax deduction for the amount over $1,000,000.in excess of $1 million.
The following report of the Compensation Committee shall not be deemed to be “soliciting material” or to otherwise be considered “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that we specifically incorporate it by reference into such filing.
The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on that review and discussion, the committeeCompensation Committee has recommended to the board of directors, and the board has approved, that the foregoing Compensation Discussion and Analysis be included in the company’sCompany’s annual report on Form 10-K for the fiscal year ended December 31, 20092010 and our 20102011 proxy statement on Schedule 14A.
| Compensation Committee: |
| John D. Weil, Chairman
Carlos C. Campbell, Chairman Kristina M. Leslie Richard D. Ruppert, M.D. Kenneth J. SlepickaRobert G. Deuster
|
The SEC’s disclosure rules require us to analyze our compensation policies and practices for our named executive officers as well as those policies and practices in effect for our business segments and all employees, and to provide specific disclosure if the risks arising from these compensation policies and practices are reasonably likely to have a material adverse effect on the company. We engaged Matthews, Young to assist the company and the board of directors in reviewing our compensation policies and practices to determine whether they encourage unnecessary or excessive risk-taking. Together, we reviewed each element of our compensation program, the purpose of each compensation plan, participation level, assignment of plan administration authority, performance measurement, and incentive award potential. We also jointly reviewed the competiveness and mix of compensation elements comprising our total executive compensation package. Matthews, Young prepared a written report and presented this report to senior management who were able to provide valuable insight into our risk profile. In addition, Matthews, Young reviewed its findings directly with the Compensation Committee.
As a result of our review, we find the following with respect to our risk profile:
● | Our focus is on long-term growth with minimal leverage and this philosophy is conducive to minimizing compensation related risks; |
● | Incentive plans are well designed, effectively administered, focused on relevant performance measures; |
● | Our plans are reasonable with respect to potential compensation levels; |
● | The elements of our compensation plan are appropriately weighted in our overall mix that achieves a balance of focus between operating results and strategic results; |
● | Base salaries for executive officers are sufficiently competitive to eliminate the need for them to take unnecessary risk in order to earn large incentives necessary to provide adequate cash compensation; and |
● | Equity-based compensation levels are competitive and sufficient to provide a balanced focus between short- and long-term priorities and results and does not encourage the taking of short-term risks at the expense of long-term results. |
We have concluded that our compensation policies, plans, and practices do not encourage unnecessary or unreasonable risk-taking and do not encourage executives or employees to take risks that are reasonably likely to have a material adverse effect on the company
The following table presents information concerning the compensation of the named executive officers for services during 2010, 2009 2008 and 2007. Recent changes to the2008. The SEC’s current executive compensation disclosure rules now require us to value stock awards and option awards reported in the following table using the grant date fair value of the awards, rather than using the amount recognized for financial statement reporting purposes to value these awards. Because of these changes torules differ from the original disclosure rules, the amounts reported below for stock option awards in 2008 and 2007 differ from the amounts previously reported in our Summary Compensation Table for 2008, and, 2007, respectively, and, as a result, each named executive officer’s total compensation amounts for 2008 and 2007 are also different than the amounts previously reported.
Name and Principal Position | | | | | | | | | | | | | Non-Equity Incentive Plan Compensation ($)(2) | | | All Other Compensation ($)(3) | | | | | | | | | | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($)(3) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
John R. Hart | 2009 | | $ | 1,888,703 | | $ | 508,690 | | | $ | -0- | | $ | -0- | | | $ | -0- | | | $ | 32,250 | | | $ | 2,429,643 | | 2010 | 1,964.251 | | 12,276,000 | | | 38,150 | 14,278,401 |
President & Chief Executive | 2008 | | | 1,790,239 | | | -0- | | | | -0- | | | -0- | | | | -0- | | | | 30,500 | | | | 1,820,739 | | 2009 | 1,888,703 | 508,691(2) | | | 32,250 | 2,429,644 |
Officer | 2007 | | | 1,228,800 | | | 1,500,000 | (4) | | | -0- | | | 7,489,575 | | | | -0- | | | | 29,500 | | | | 10,247,875 | | 2008 | 1,790,239 | | | | 30,500 | 1,820,739 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Richard H. Sharpe | 2009 | | | 362,323 | | $ | 97,586 | | | | 1,580,000 | | | -0- | | | | -0- | | | | 32,250 | | | | 2,072,159 | | |
Executive Vice President & Chief | 2008 | | | 343,434 | | | -0- | | | | -0- | | | -0- | | | | -0- | | | | 30,500 | | | | 373,934 | | |
Operating Officer | 2007 | | | 327,080 | | | -0- | | | | -0- | | | -0- | | | | -0- | | | | 29,500 | | | | 356,580 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Maxim C. W. Webb | 2009 | | | 344,510 | | $ | 92,788 | | | | 1,580,000 | | | -0- | | | | -0- | | | | 32,250 | | | | 2,049,548 | | 2010 | 405,626 | | 1,227,600 | | | 38,150 | 1,671,376 |
Executive Vice President, Chief | 2008 | | | 326,550 | | | -0- | | | | -0- | | | -0- | | | | -0- | | | | 30,500 | | | | 357,050 | | 2009 | 344,510 | 92,788(2) | 1,580,000 | | | 32,250 | 2,049,548 |
Financial Officer & Treasurer | 2007 | | | 268,250 | | | -0- | | | | -0- | | | 308,961 | | | | -0- | | | | 29,500 | | | | 606,711 | | 2008 | 326,550 | | | | 30,500 | 357,050 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Damian Georgino | 2009 | | | 329,002 | | $ | 88,611 | | | | 1,580,000 | | | -0- | | | | -0- | | | | 32,250 | | | | 2,029,863 | | |
Executive Vice President - Corporate Development & | 2008 | | | 311,850 | | | -0- | | | | -0- | | | -0- | | | | -0- | | | | 309,149 | | | | 620,999 | | |
Chief Legal Officer(5) | 2007 | | | 96,905 | | | -0- | | | | -0- | | | 3,273,887 | | | | -0- | | | | -0- | | | | 3,370,792 | | |
John T. Perri (5) | | 2010 | 223,149 | | 429,660 | | | 33,542 | 686,351 |
Vice President and | | | | | | |
Chief Accounting Officer | | | | | | |
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W. Raymond Webb | 2009 | | | 232,628 | | $ | 62,654 | (6) | | | 592,500 | | | -0- | | | | -0- | | | | 30,384 | | | | 918,166 | | 2010 | 241,932 | | | | 34,053 | 275,985 |
Vice President, Investments | 2008 | | | 220,500 | | | -0- | | | | -0- | | | -0- | | | | -0- | | | | 29,240 | | | | 249,740 | | 2009 | 232,628 | 62,654(4) | 592,500 | | | 30,384 | 918,166 |
| 2007 | | | 210,000 | | | -0- | | | | -0- | | | 357,346 | | | | -0- | | | | 27,533 | | | | 594,879 | | 2008 | 220,500 | | | | 29,240 | 249,740 |
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James F. Mosier (5) | | 2010 | 120,692 | 6,035 | | | 42,415 | 169,142 |
General Counsel and Secretary | | | | | | |
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