UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

(Amendment No.    )

Check the appropriate box:

SLEEP NUMBER CORPORATION 

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant) 

Payment of Filing Fee (Check the appropriate box):

Dear Shareholders,

Sleep Number’sAs a purpose driven company in the health and wellness space, we have improved more than 12 million lives to date. The dedication to our mission of improving lives by individualizing sleep experiences and our unparalleled innovation, supported by our long-term investments, is at the corepropelling superior, sustainable growth and profitability.

Track Record of our purpose-driven company. To date, we have improved the lives of more than eleven and a half million people. Performance

Our consumer innovation strategy translates directly to increased shareholder value. Overand multi-year focus on three performance drivers – growing consumer demand, increasing business leverage and deploying capital efficiently – has produced exceptional long-term results. For the past five years,four-year period ended December 28, 2019, Sleep Number has delivered compound annual growth rates of 9% in net sales, 9% in EBITDA and 29% in EPS. Our return on invested capital has grown 660 basis points. These results are reflected in our strategic consistency, profitable investments, and sleep innovations have generated85% five-year total shareholder return through December 28, 2019.

We delivered top-decile results in 2019, including an 11% increase in net sales to $1.7 billion, a 21% rise in net operating profit, 41% growth in earnings per diluted share to $2.70, 44% growth in operating cash flows to $189 million, and a 17.8% return on invested capital.

To achieve these exceptional results, we deliberately maintain a long-term perspective. What really matters is our:

We have accomplished this through the clarity of our differentiated strategy, investments that strengthen our competitive advantages, our inclusive culture and highly engaged team, guided by our company’s values of passion, integrity, innovation, courage and teamwork. Our management and Board’s dedication to our purpose, responsible corporate citizenship and long-term superior shareholder returns is unwavering.

Sustainable Competitive

This level of 144% through March 1resolve and resourcefulness, combined with life-changing proprietary innovations and an advantaged vertically integrated business model with digital at the core, is necessary to navigate complex and difficult challenges. These advantages are especially important when faced with unprecedented situations like the COVID-19 pandemic. We entered this period of disruption from a position of competitive and financial strength, with solid business fundamentals, exciting innovations and in the midst of our seventh consecutive quarter of double-digit demand growth. Yet, the environment has dramatically and rapidly changed and is redefining how we will all live and work in the future.

We intend to be part of the solution, as we deliver effortless, proven-quality sleep and relevant health and well-being insights. We’ve awakened society to the importance of sleep. The U.S. Centers for Disease Control and Prevention has declared sleep disorders a public health epidemic. One in three adults suffer from a lack of adequate sleep. As a company with purpose, we are taking on big challenges like sleep deprivation. Based on our proprietary research and analysis of more than 25 million sleep sessions, sleepers who routinely use their 360^st®, 2019. smart bed features, including SleepIQ^® technology, can improve quality sleep by over 15 minutes each night. This matters, because studies have shown that even 15 minutes more quality sleep per night can increase a body’s ability to prevent a cold, stave off weight gain, and enhance productivity. We are committed to making quality sleep the new badge of honor for society.

We have prioritized approximately $500 million in investments since 2012 to strengthen ourfive integrated competitive advantages ofthat drive consumer demand: proprietary sleep innovations, life-long customer relationships, longitudinal data, multi-channel brand communications and exclusive, distribution, and lifelong customer relationships. These strategic choices contributed to a 16% return on invested capital for 2018, compared to our high single-digit weighted average cost of capital.direct-to-consumer distribution.

Our revolutionaryEarlier this year at CES, the largest consumer innovation event in the world, we unveiled our next generation of 360 smart beds, which were honored with 12 awards including the Best of Innovation in the Smart Home category.We expect to begin introducing our new 360 smart bed portfolio this year with advanced SleepIQ capabilities that include monthly wellness reports, sleep circadian rhythm insights and heart rate variability measurement.

We will continue to evolve our Sleep Number 360^® smart beds have disruptedbed at a pace that keeps consumers highly engaged with our brand. Our customers’ daily engagement with our brand, via SleepIQ technology, reinforces their sleep quality with their SleepIQ^® score and other personalized insights. Our life-long relationship with customers is strengthened through our ability to link smart sleep to individualized health and wellness.

We recently entered into an extensive collaboration with the industry. WithMayo Clinic, the only bed that delivers proven qualitynation’s number one hospital, to advance sleep Sleep Number is atscience and cardiovascular medicine, demonstrating the intersectionvalue of our longitudinal data and the efficacy of our smart beds. By providing our unparalleled sleep knowledge and technology to world-class clinicians and researchers, we’re poised to make meaningful advancements to the science of sleep technology and health trends. Consumer enthusiasm for our smart bed drove double-digit sales growth since we completed the transition of our product line in the back half of 2018. Record full-year results included:

In 2019, we expect to generate earnings per diluted share of between $2.25 and $2.75, up 17% to 43% versus prior year.

Sleep Number 360 smart bed

Five years ago, we saw the potential of connected technology and incorporated biometric tracking into our Sleep Number^® beds with SleepIQ^® technology. Today, more than half of consumer households are interested in purchasing sleep tracking technology. Our 360^® smart beds detect movement, sleep disturbances, and biometric changes, and then use that information to automatically adjust the bed’s firmness for each individual sleeper.health.

We are communicating the vital role that this life-changing sleep plays in overall wellness throughalso realizing operational and financial benefits from our integrated marketing campaigns, storytelling,culture of innovation and social media.continuous improvement. We are amplifyingdriving business leverage through multi-year strategic investments in technology and automation that support our purpose-driven brand through groundbreaking partnerships with the NFL, the NFL Players Association,growth, evolution of our supply chain and the Professional Football Athletic Trainers Society. Now, over 1,800 NFL playerslogistics network, and total quality initiatives. In combination, these efforts are sleeping onimproving our 360 smart bedsquality, reliability and experiencing the powerful link between quality sleepefficiency, delivering margin expansion and their performance.an enhanced customer experience.

Purpose Driven, Performance Led

Lifelong customer relationships withBy prioritizing investments in our brand are another keynear- and long-term growth drivers, we will continue to demonstrate competitive advantage that drivesresilience as we pursue sustainable profitable growth. With digital at the core ofAdditionally, our smart beds, customers now interact withcompetitive advantages, vertically integrated business model – and most importantly, our brand daily. They can use their SleepIQ^® score to understand how qualitypurpose – will strengthen our leadership position in sleep impacts their day. This deep engagement leads to increased customer loyalty, which drives higher referrals and repeat sales.

Our integrated online and retail strategy highlights the science and value of our smart beds. Our exclusive distribution is also an important competitive advantage. With award-winning store design and interactive technology, our 580 Sleep Number^® storeshelp us deliver a unique sales experience across all 50 states.

The 360 smart bed is creating leverage across our business. With our full line of smart beds in place, we expect the absence of transition costs to benefit 2019. The simpler bed design and streamlined operational processes drive efficiencies in manufacturing, logistics, and supply chain. The multi-year network evolution is improving assembly flow, reliability, and scale.

Looking Ahead

In many ways, we are just getting started with our 360 smart beds, which have tremendous potential to add increasing value to consumers’ well-being. Today, our smart bed’s SleepIQ^®platform captures over 8.5 billion biometric data points every night and uses that data to deliver proven quality sleep. In the future, SleepIQ technology will likely enable customers to use their smart bed to better manage their health and wellness.

We are excited to be in a position of broader relevance in a changing consumer and competitive landscape. We expect our purpose-driven company, which is delivering life-changing sleep, to continue to generate top-tiersuperior shareholder returns over the long term.time.

Sleep well, dream big,

Shelly Ibach

Sleep Number^®Number® setting 40, average SleepIQ^®SleepIQ® score of 82

President and Chief Executive Officer

1001 Third Avenue South 

Minneapolis, Minnesota 55404

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS 

May 15, 201913, 2020

TO THE SHAREHOLDERS OF SLEEP NUMBER CORPORATION:

Sleep Number Corporation will hold its Annual Meeting of Shareholders at8:30 a.m. Central Time onWednesday, May 15, 201913, 2020. The meeting will be conducted completely as a virtual meeting via the Internet atwww.virtualshareholdermeeting.com/SNBR2019SNBR2020. The purposes of the meeting are to:

Shareholders of record at the close of business on March 20, 201918, 2020 will be entitled to vote at the meeting and any adjournments thereof. Your vote is important. Please be sure to vote your shares in favor of the Board of Directors’ recommendations in time for our May 15, 201913, 2020 meeting date. Your attention is directed to the Proxy Statement for a more complete statement of the matters to be considered at the meeting.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDERS’ MEETING TO BE HELD ON MAY 15, 2019:13, 2020: The Proxy Statement and Annual Report for the year ended December 29, 201828, 2019 and related materials are available atwww.sleepnumber.com/investor-relations. http://ir.sleepnumber.com.

These materials were first sent or made available to our shareholders on April 2, 2019.March 31, 2020.

	By Order of the Board of Directors,
	Samuel R. Hellfeld
	Senior Vice President,
	Chief Legal and Risk Officer and Secretary

April 2Minneapolis, Minnesota March 31,2019
Minneapolis, Minnesota2020

TABLE OF CONTENTS

As used in this Proxy Statement, the terms “we,” “us,” “our,” the “company” and “Sleep Number” mean Sleep Number Corporation and its subsidiaries and the term “common stock” means our common stock, par value $0.01 per share.

1001 Third Avenue South 

Minneapolis, Minnesota 55404

PROXY STATEMENT 

FOR 

ANNUAL MEETING OF SHAREHOLDERS

May 15, 201913, 2020

FREQUENTLY ASKED QUESTIONS ABOUT THE MEETING AND VOTING

This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Sleep Number Corporation for use at the 20192020 Annual Meeting of Shareholders.

When is the Annual Meeting and how can I attend?

The Annual Meeting will be held at 8:30 a.m. Central Time on May 15, 2019.13, 2020. The meeting will be conducted completely as a virtual meeting via the Internet. Shareholders may attend the meeting and submit questions electronically during the meeting via live webcast by visiting the virtual meeting platform atwww.virtualshareholdermeeting.com/SNBR2019.SNBR2020. Shareholders will need the 16-digit control number included in Notice of Internet Availability of Proxy Materials, on the proxy card, or in the instructions that accompanied the proxy materials to enter the Annual Meeting. Shareholders may log into the virtual meeting platform beginning at 8:15 a.m. Central Time on May 15, 2019.13, 2020. The meeting will begin promptly at 8:30 a.m. Central Time on May 15, 2019.13, 2020. We are monitoring developments regarding COVID-19 and preparing in the event any modifications to our Annual Meeting are necessary or appropriate. If we determine to make any change to the date, time or procedures of our Annual Meeting, we will announce such changes in advance on our websitehttp://ir.sleepnumber.com.

Why is this Annual Meeting virtual?

We are utilizing technology to provide expanded access and participation, improved communication, and cost savings to benefit our shareholders and the company. Shareholders will be able to listen, vote, and submit questions from any remote location through the Internet. The virtual format for the Annual Meeting is also environmentally friendly and sustainable over the long-term.

What if I have technical difficulties during the meeting or trouble accessing the virtual Annual Meeting?

We will have technicians ready to assist you with any technical difficulties you may have accessing the virtual meeting. If you encounter any difficulties accessing the virtual meeting during check-in or the meeting, please call the technical support number that will be posted on the virtual meeting platform log-in page.

Who is entitled to vote?

Shareholders of record at the close of business on March 20, 201918, 2020 (the “Record Date”) are entitled to vote at the meeting. As of the Record Date, there were 30,127,27327,361,658 shares of common stock outstanding. Each share is entitled to one vote on each matter to be voted on at the Annual Meeting. Shareholders aredo not entitled tohave cumulative voting rights.

What is the difference between “Shareholders of Record” and “Beneficial Owners”?

If your shares are registered in your name in the records maintained by our stock transfer agent, you are a “Shareholder of Record.” If you are a Shareholder of Record, notice of the meeting was sent directly to you.

If your shares are held in the name of your bank, broker, nominee or other holder of record, your shares are held in “street name” and you are considered the “Beneficial Owner.” Notice of the meeting has been forwarded to you by your bank, broker, nominee or other holder of record, who is considered, with respect to those shares, the Shareholder of Record. As the Beneficial Owner, you have the right to direct your bank, broker, nominee or other holder of record how to vote your shares by using the voting instructions you received.

If you are a Beneficial Owner and you do not give instructions to the organization holding your shares, then that organization cannot vote your shares and the shares held by that organization will not be considered as present and will not be entitled to vote on any matter to be considered at the Annual Meeting.

How can I receive proxy materials?

We are furnishing proxy materials to our shareholders primarily via the Internet. On or about April 2, 2019,March 31, 2020, we will begin mailing to certain of our shareholders a Notice of Internet Availability of Proxy Materials (the “Shareholder Notice”), which includes instructions on (i) how to access our Proxy Statement and Annual Report on the Internet, (ii) how to request that a printed copy of these proxy materials be forwarded to you, and (iii) how to vote your shares. If you receive the Shareholder Notice, you will not receive a printed copy of the proxy materials unless you request a printed copy by following the instructions in the Shareholder Notice. All other shareholders will be sent the proxy materials by mail beginning on or about April 2, 2019.March 31, 2020.

Requests for printed copies of the proxy materials can be made by Internet athttp://www.proxyvote.com, by telephone at 1-800-579-1639 or by email at sendmaterial@proxyvote.com by sending a blank email with your control number in the subject line.

What does it mean if I receive more than one proxy card or Shareholder Notice?

If you received more than one proxy card or Shareholder Notice, it generally means you hold shares registered in more than one account.accountand you should vote once for each proxy card or Shareholder Notice that you receive. If you received a paper copy of the Proxy Statement and you choose to vote by mail, sign and return each proxy card. If you choose to vote by Internet or telephone, vote once for each proxy card and/or Shareholder Notice you receive. If you have received more than one Shareholder Notice, vote once for each Shareholder Notice that you receive.

What are shareholders being asked to vote on?

There are three items to be voted on at the meeting:

What are my voting choices?

For proposal 1, the election of Directors, you may:

For each of proposal 2 (approval of the Sleep Number Corporation 2020 Equity Incentive Plan), proposal 3 (the advisory vote to approve executive compensation) and proposal 34 (the advisory vote to ratify the selection of independent auditors) you may:

How does the Board recommend that I vote?

Sleep Number’s Board unanimously recommends that you vote your shares:

How are votes counted?

If you are a Shareholder of Record and grant a proxy by telephone or Internet without voting instructions, or sign and submit your proxy card without voting instructions, your shares will be voted “For” each Director nominee and “For” each of the other proposals outlined above in accordance with the recommendations of the Board.

Proxies marked “Withhold” on proposal 1 (election of Directors), or “Abstain” on proposal 2 (approval of the Sleep Number Corporation 2020 Equity Incentive Plan), proposal 3 (the advisory vote to approve executive compensation) or proposal 34 (the advisory vote to ratify the selection of independent auditors), will be counted in determining the total number of shares entitled to vote on such proposals and will have the effect of a vote “Against” a Director or a proposal.

If you are a Beneficial Owner and hold your shares in “street name,” such as through a bank, broker or other nominee, you generally cannot vote your shares directly and must instead instruct the broker how to vote your shares using the voting instruction form provided by the broker.

What is a Broker Non-Vote?

If a Beneficial Owner does not provide timely instructions, the broker will not have the authority to vote on any non-routine proposals at the Annual Meeting, which includes proposals 1, 2 and 2.3. Brokers will have discretionary authority to vote on proposal 34 because the ratification of the appointment of independent auditors is considered a routine matter. If the broker votes on proposal 34 (the advisory vote to ratify the selection of independent auditors) but does not vote on another proposal because the broker does not have discretionary voting authority and has not received instructions from the Beneficial Owner, this results in a “broker non-vote” with respect to such other proposal(s).

Broker non-votes on a matter may be counted as present for purposes of establishing a quorum for the meeting but are not considered entitled to vote on that particular matter. Consequently, broker non-votes generally will have no effect on the outcome of the matter. However, if and to the extent that broker non-votes are required to establish the presence of a quorum at the Annual Meeting, then any broker non-votes will have the same effect as a vote “Withheld” or “Against” any matter that requires approval of a majority of the minimum number of shares required to constitute a quorum for the transaction of business at the Annual Meeting.

What is the vote required to approve each proposal?

Assuming that a quorum is present to vote on each of the proposals, proposals 1, 2, 3 and 34 will require the affirmative vote of holders of a majority of the shares represented and entitled to vote in person or by proxy on such action.

Please note that each of proposals 23 and 34 are “advisory” votes, meaning that the shareholder votes on these items are for purposes of enabling shareholders to express their point of view or preference on these proposals, but are not binding on the company or its Board of Directors and do not require the company or its Board of Directors to take any particular action in response to the shareholder vote. The Board intends to consider fully the votes of our shareholders in the context of any further action with respect to these proposals.

What constitutes a “quorum,” or how many shares are required to be present to conduct business at the Annual Meeting?

The presence, in person or by proxy, of the holders of a majority of the outstanding shares of common stock entitled to vote (i.e., at least 15,063,63713,680,830 shares) will constitute a quorum for the transaction of business at the Annual Meeting. In general, shares of common stock represented by a properly signed and returned proxy card or properly voted by telephone or via the Internet will be counted as shares represented and entitled to vote at the Annual Meeting for purposes of determining a quorum, without regard to whether the card reflects abstentions and withhold votes (or is left blank) or reflects a “broker non-vote” on a matter.

How do I vote my shares?

If you are aShareholder of Record as of the record date, you can vote your shares in any of the following ways:

The telephone and Internet voting procedures have been set up for your convenience. We encourage you to save corporate expense by submitting your vote by telephone or Internet. The procedures have been designed to authenticate your identity, to allow you to give voting instructions, and to confirm that those instructions have been recorded properly.

If you are aBeneficial Owner of shares held in “street name,” you must vote your shares in the manner prescribed by your bank, broker or other nominee. Your bank, broker or other nominee has provided notice by email or a printed voting instruction card for you to use in directing the bank, broker or nominee how to vote your shares. Telephone and Internet voting are also encouraged for Beneficial Owners who hold their shares in street name.

Beneficial Owners should be aware that brokers are not permitted to vote shares on non-routine matters, including the election of Directors or matters related to equity compensation plans or executive compensation, without instructions from the Beneficial Owner. As a result, brokers are not permitted to vote shares on proposal 1 (election of Directors), proposal 2 (approval of the Sleep Number Corporation 2020 Equity Incentive Plan) or proposal 23 (the advisory vote to approve executive compensation) without instructions from the Beneficial Owner. Therefore, Beneficial Owners are advised that if they do not timely provide instructions to their bank, broker or other holder of record with respect to proposals 1, 2 or 2,3, their shares will not be voted in connection with any such proposal for which they do not provide instructions. Proposal 34 (the advisory vote to ratify the selection of independent auditors) is considered a routine matter and, as such, brokers will still be able to vote shares held in brokerage accounts with respect to proposal 3,4, even if they do not receive instructions from the Beneficial Owner.

Your vote is important. Whether or not you plan to attend the meeting, we urge you to vote your shares in time for our May 15, 201913, 2020 meeting date.

May I revoke a proxy and change my vote?

Yes. Any shareholder giving a proxy may revoke it at any time prior to its use at the Annual Meeting by:

Can I receive future proxy materials electronically?

Yes. If you are a Shareholder of Record and you received a paper copy of the proxy materials, you may elect to receive future Proxy Statements and annual reports online as described in the next paragraph. If you elect this feature, you will receive an email message notifying you when the materials are available, along with a web address for viewing the materials. If you received this Proxy Statement electronically, you do not need to do anything to continue receiving proxy materials electronically in the future.

Whether you are a Shareholder of Record or a Beneficial Owner holding shares through a bank or broker, you can enroll for future electronic delivery of Proxy Statements and annual reportsAnnual Reports by following these steps:

You may view this year’s proxy materials atwww.proxyvote.com.Generally, banks and brokers offering this choice require that shareholders vote through the Internet in order to enroll. Beneficial Owners whose bank or broker is not included in this website are encouraged to contact their bank or broker and ask about the availability of electronic delivery. As is customary with Internet usage, the user must pay all access fees and telephone charges.fees.

What are the costs and benefits of electronic delivery of Annual Meeting materials?

There is no cost to you for electronic delivery of annual meeting materials. You may incur the usual expenses associated with Internet access as charged by your Internet service provider. Electronic delivery ensures quicker delivery, allows you to view or print the materials at your computer and makes it convenient to vote your shares online. Electronic delivery also conserves natural resources and saves the company printing, postage and processing costs.

Who bears the proxy solicitation costs?

The proxies being solicited hereby are being solicited by the Board of Directors of the company. The cost of preparing and mailing the notice of Annual Meeting, this Proxy Statement and the accompanying proxy and the cost of solicitation of proxies on behalf of the Board of Directors will be borne by the company. The company may solicit proxies by mail, Internet (including by email, Twitter, the use of our investor relations website and other online channels of communication), telephone, facsimile and other electronic channels of communication, town hall meetings, personal interviews, press releases, and press interviews. Our Directors, officers and regular team members may, without compensation other than their regular compensation and the reimbursement of expenses, solicit proxies by telephone or personal conversation. In addition, we may reimburse brokerage firms and others for their reasonable and documented expenses incurred in connection with forwarding proxy materials to the Beneficial Owners of our common stock.

STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

The following table shows the beneficial ownership of Sleep Number common stock as of February 23, 201922, 2020 (unless another date is indicated) by (a) each Director, each nominee for Director recommended by our Board and each executive officer named in the Summary Compensation Table on page 51 of this Proxy Statement, (b) all Directors and executive officers as a group and (c) each person known by us to be the Beneficial Owner of more than 5% of Sleep Number common stock.

* Less than 1% of the outstanding shares.

ELECTION OF DIRECTORS

(Proposal 1)

Nomination

Article XIV of our Third Restated Articles of Incorporation provides that the number of Directors must be at least one but not more than 12 and must be divided into three classes as nearly equal in number as possible. The exact number of Directors is determined from time-to-time by the Board of Directors. The term of each class is three years and the term of one class expires each year in rotation.

Immediately prior to the 20192020 Annual Meeting, our Board will consist of 1110 members, fourtwo of which will be up for election at the 20192020 Annual Meeting. The Board has nominatedMichael J. Harrison, Shelly R. Ibach, DeborahJulie M. Howard, Kathleen L. Kilpatrick, Ph.D.,Nedorostek and Barbara R. MatasJean-Michel Valettefor election to the Board, each for a term of three years expiring at the 20222023 Annual Meeting, or until their successors are elected and qualified. Ms. Howard, Ms. Nedorostek and Mr. Harrison, Ms. Ibach, Ms. Kilpatrick and Ms. MatasValette have each consented to being named as a nominee in this Proxy Statement and to serve as a Director if elected. Mr. HarrisonMs. Nedorostek has served on our Board since 2011; Ms. Ibach2011, and Mr. Valette has served on our Board since 2012;1994. If elected, Ms. Kilpatrick has servedHoward will be a new independent Director on our Board since 2018; andBoard. Ms. Matas has served on our Board since 2016. As previously announced, in light of her increasing professional commitments, Vicki O’Meara will be retiring from the Board following the Annual Meeting. The Company thanks Ms. O’Meara for her service and dedication during her tenureHoward was identified as a member ofpotential Board candidate by a third-party search firm in response to specifications set by the Board.Corporate Governance and Nominating Committee.

Vote Required

The election of each nominee for Director requires the affirmative vote of a majority of the shares represented and entitled to vote on the election of Directors at the Annual Meeting. Any broker non-votes on the election of each nominee for Director will be treated as shares not entitled to vote on that matter, and thus will not be counted in determining whether the Director has been elected.

Board Recommendation

The Board recommends a vote “For” the election of each of Ms. Howard, Ms. Nedorostek and Mr. Harrison, Ms. Ibach, Ms. Kilpatrick and Ms. Matas.Valette. In the absence of other instructions, properly signed and delivered proxies will be voted “For” the election of each of these nominees.

If prior to the Annual Meeting the Board should learn that any nominee will be unable to serve for any reason, the proxies that otherwise would have been voted for such nominee will be voted for such substitute nominee as selected by the Board. Alternatively, the proxies, at the Board’s discretion, may be voted for such fewer number of nominees as results from the inability of any such nominee to serve. The Board has no reason to believe that any of the nominees will be unable to serve.

Information about the Board’s Nominees and Other Directors

The following table provides information as of the date of this Proxy Statement about each individual serving as a Director of our company and each individual nominated by the Board to serve as a Director. Each Director or Nominee has furnished the information included below that relates to his or her respective age, principal occupation and business experience, as well as the names of other boards on which he or she currently serves as a Director or has served in the past. In addition, the table below highlights the relevant experience, qualifications, attributes and skills that led our Board to conclude that each Director or nominee is qualified to serve as a Director of our company.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS YOU VOTE “FOR” THE ELECTION OF EACH OF THE NOMINEES LISTED ABOVE

Corporate GovernanceAfter serving 17 years as a Sleep Number Director, Michael A. Peel will retire from the Board when his current term expires at the 2020 Annual Meeting of Shareholders.  The company sincerely thanks Mr. Peel for his service, dedication and leadership during his tenure as a member of the Board. 

Corporate Governance

Information about the Board of Directors and its Committees

The Board of Directors has determined that each of the following Directors who served as a member of our Board during any part of fiscal 20182019 is an “independent Director” as defined by applicable rules of the Nasdaq Stock Market and the rules and regulations of the Securities and Exchange Commission (“SEC”):

The Board maintains three standing committees, including an Audit Committee, a Management Development and Compensation Committee and a Corporate Governance and Nominating Committee.  Each of the committees of the Board has a charter and each of these charters is included in the investor relations section of the company’s website at http://www.sleepnumber.com/sn/en/investor-relations.ir.sleepnumber.com.  The information contained in or connected to our website is not incorporated by reference into or considered a part of this Proxy Statement.

The current members of each of the Board committees are identified in the table below.

*In his capacity as non-executive Chairman of the Board, Mr. Valette generally attends all committee meetings.

The Board has determined that each Director serving on a committee meets the independence and other requirements applicable to such committee prescribed by applicable rules and regulations of the Nasdaq Stock Market, the SEC and the Internal Revenue Service.

The Board of Directors has further determined that two current members of the Audit Committee, Stephen L. Gulis, Jr. and Barbara R. Matas, meet the definition of “audit committee financial expert” under rules and regulations of the SEC and meet the qualifications of “financial sophistication” under the Marketplace Rules of the Nasdaq Stock Market.  These designations related to our Audit Committee members’ experience and understanding with respect to certain accounting and auditing matters are disclosure requirements of the SEC and the Nasdaq Stock Market and do not impose upon any of them any duties, obligations or liabilities that are greater than those generally imposed on a member of our Audit Committee or of our Board of Directors.

The Board of Directors met in person or by telephone conference fivefour (4) times during 2018.2019.  The Audit Committee met in person or by telephone conference eight (8) times during 2018.2019.  The Management Development and Compensation Committee met in person or by telephone conference fivesix (6) times during 2018.2019.  The Corporate Governance and Nominating Committee met in person or by telephone conference seveneleven (11) times during 2018.2019.  Each of the members of our Board of Directors serving in 20182019 attended 75% or more of all meetings of the Board and committees on which they served during fiscal 2018.2019.

Audit Committee.  The Audit Committee is comprised entirely of independent Directors, currently including Barbara R. Matas (Chair), Stephen L. Gulis, Jr., and Deborah L. Kilpatrick, Ph.D. and Vicki A. O’Meara. The Audit Committee provides assistance to the Board in satisfying its fiduciary responsibilities relating to accounting, auditing, operating and reporting practices of our company.  The Audit Committee is responsible for providing independent, objective oversight with respect to our company’s accounting and financial reporting functions, internal and external audit functions, systems of internal controls regarding financial matters, cybersecurity, and legal, ethical and regulatory compliance.  The responsibilities and functions of the Audit Committee are further described in the Audit Committee Report beginning on page 6584 of this Proxy Statement.

Management Development and Compensation Committee.  The Management Development and Compensation Committee is comprised entirely of independent Directors, currently including Brenda J. Lauderback (Chair), Daniel I. Alegre, Michael J. Harrison and Kathleen L. Nedorostek.  The principal function of the Committee is to discharge the responsibilities of the Board relating to executive compensation and development of current and future leadership resources.

The responsibilities and functions of the Management Development and Compensation Committee, as well as its processes and procedures for consideration and determination of executive and Director compensation, are further described in the Compensation Discussion and Analysis beginning on page 30 of this Proxy Statement.

Corporate Governance and Nominating Committee.  The Corporate Governance and Nominating Committee is comprised entirely of independent Directors, currently including Michael A. PeelJ. Harrison (Chair), Stephen L. Gulis, Jr., Michael J. Harrison and Kathleen L. Nedorostek.Nedorostek and Michael A. Peel.  The primary functions of the Corporate Governance and Nominating Committee are to develop and recommend to the Board corporate governance principles to govern the Board, its committees, and our executive officers and team members in the conduct of the business and affairs of our company; to identify and recommend to the Board individuals qualified to become members of the Board and its committees; and to develop and oversee the annual Board and Board committee evaluation process.

Board Leadership Structure

Our Board is currently comprised of 10nine (9) independent Directors and one (1) executive Director, Shelly R. Ibach, who has served as our President and Chief Executive Officer since June 2012.  Since February 2008, the Board has determined to separate the positions of Chairman of the Board and Chief Executive Officer. BasedOfficer based on its ongoing review of best practices in corporate governance, and to enable the President and Chief Executive Officer to focus all of her time and energy inappropriate leadership of the day-to-day operations of the company and its growth and profitability initiatives, the Board continues to believe it is best for the company to separate these positions.structure at this time.  Jean-Michel Valette, an independent Director, has served as Chairman of the Board since May 2010.

Consistent with the company’s Corporate Governance Principles, the Board retains the right to review this determination and to either continue to maintain these positions as separated positions or to combine the positions, as the Board determines to be in the best interests of the company at the time.  Under the company’s Corporate Governance Principles, duringDuring any period in which the positions of Chairman of the Board and Chief Executive Officer are combined, the Board would appoint a Lead Director from among the independent members of the Board, who would have certain Board leadership responsibilities specified in our Corporate Governance Principles.

Board Role in Risk Oversight

Our Board is responsible for overseeing the company’s policies and practices with respect to risk assessment and risk management and has delegated to the Audit Committee the responsibility of assisting the Board in fulfilling this role.  Among its duties and processes, the Audit Committee (a) reviews and discusses with management the company’s policies and practices with respect to risk assessment and risk management;management, including with respect to financial risk exposures, internal controls over financial reporting, and cybersecurity; (b) oversees the company’s internal audit function and processes; (c) establishes and oversees procedures for receiving and addressing complaints regarding accounting, internal controls or auditing matters; (d) reviews legal compliance and other legal matters with the company’s legal counsel; and (e) reports to the full Board with respect to matters within its area of responsibility.

The Audit Committee oversees the company’s internal audit function, which is responsible for undertaking an annual enterprise risk assessment process and reporting to the Audit Committee with respect to this assessment and related risk management and mitigation strategies.  The Audit Committee reviews and approves, at least annually, the company’s internal audit plan and receives quarterly reports with respect to the results of internal audits.  The leader of the company’s internal audit function reports directly to the Audit Committee with respect to internal audit matters, and the Audit Committee has authority to review and approve the appointment, replacement or dismissal of the leader of this function.  The leader of the internal audit function meets regularly in executive session with the Audit Committee without any other members of the company’s management team present.

In addition to the Audit Committee’s role, each of the other committees considers risks within its respective areas of responsibility.  We believe our current Board leadership structure helps ensure proper risk oversight, based on the allocation of duties among committees and the role of our independent Directors in risk oversight.

Director Nominations Process

The Corporate Governance and Nominating Committee (the “CGNC”) administers the process for nominating candidates to serve on our Board of Directors.  The CGNC recommends candidates for consideration by the Board as a whole, which is responsible for appointing candidates to fill any vacancy that may be created between meetings of the shareholders and for nominating candidates to be considered for election by shareholders at our Annual Meeting.

Consistent with the company’s Corporate Governance Principles, the CGNC periodically reviews with the Board the appropriate skills and characteristics required of Board members in the context of the current membership of the Board and the strategic direction of the company.

The Board has established selection criteria to be applied by the CGNC and by the full Board in evaluating candidates for election to the Board.  These criteria, which are set forth in our Corporate Governance Principles, include general characteristics, areas of specific expertise and experience, and considerations of diversity.  The general characteristics include:

The specific areas of expertise and experience sought by the CGNC and the Board from time to time will vary depending on the composition of the Board and the strategic direction of the company, but will generally include CEO experience, executive level experience with analogous businesses and industries, financial and accounting expertise, and functional expertise relevant to the strategic direction of the company or the needs of the committees of the Board.

TheOur Director selection and nomination process specifically includes consideration of diversity, such as diversity of age, gender, race and national origin, educational and professional experience and differences in viewpoints.  The company does not have a formal policy with respect to diversity. However, the CGNC considers Director candidates in the context of the Board’s overall composition, including whether the Board has an appropriate combination of professional experience, skills, knowledge and variety of viewpoints and backgrounds in light of the company’s current and expected future needs.  In addition, the CGNC also believes that it is desirable for newWe are committed to seeking Director candidates to contribute towho reflect diverse perspectives, including a variety of viewpoints on the Board, which may be enhanced by acomplementary mix of different professional and personal backgrounds and experiences.experiences, which we believe is critical to the success of the company and its ability to create long-term value for our shareholders.   Currently, five of our ten Directors are women, two of our Directors are ethnically diverse, and two of our three standing committees are chaired by women.  If the Board’s new Director nominee is elected at the Annual Meeting of Shareholders, six of our 11ten Directors arewill be women.

The CGNC reviews these selection criteria and the overall Director nomination process at least annually in connection with the nomination of Directors for election at the company’s annual meeting for consistency with best practices in corporate governance and effectiveness in meeting the needs of the Board from time-to-time.

The CGNC may use a variety of methods for identifying potential nominees for election to the Board, including consideration of candidates recommended by Directors, officers or shareholders of the company.  The CGNC also has the authority under its charter to engage professional search firms or other advisors to assist the CGNC in identifying candidates for election to the Board, or to otherwise assist the CGNC in fulfilling its responsibilities.

Shareholder nominations of candidates for membership on the Board submitted in accordance with the terms of our Bylaws will be reviewed and evaluated by the CGNC in the same manner as for any other nominations.  Any shareholder who wishes the CGNC to consider a candidate should submit a written request and related information to our Corporatecorporate Secretary.  Under our Bylaws, if a shareholder intends to nominate a person for election to the Board of Directors at a shareholder meeting, the shareholder is required to give written notice of the proposed nomination to the Corporatecorporate Secretary at least 120 days prior to the first anniversary of the date that the company first released or mailed its proxy materials to shareholders in connection with the preceding year’s regular or annual meeting.  The shareholder’s notice must include, for each nominee whom the shareholder proposes to nominate for election as a Director: (i) the name, age, business address and residence address of the nominee, (ii) the principal occupation or employment of the nominee, (iii) the class and number of shares of capital stock of the company that are beneficially owned by the nominee, and (iv) any other information concerning the nominee that would be required under the rules of the Securities and Exchange Commission in a proxy statement soliciting proxies for the election of such nominee.  The shareholder’s notice must also include: (i) the name and address of the nominating shareholder, as they appear on the company’s books, and (ii) the class and number of shares of the company that are owned beneficially and of record by the shareholder.  The shareholder’s notice must also be accompanied by the proposed nominee’s signed consent to serve as a Director of the company.

Shareholder Engagement

Our Board of Directors and management team maintain a deep commitment to strong corporate governance.  Engagement with, and accountability to, our shareholders are cornerstones of this commitment.  Accordingly, we maintain an active shareholder engagement program that facilitates channels of communication and aims to foster relationships with our shareholders to drive sustainable, long-term growth and shareholder value.  As part of our engagement program, members of our management team and the Chairmanone or more members of theour Board of Directors regularly meet with shareholders, in-person or by phone, to discuss strategy, governance, pay for performance orientation, and other matters of shareholder interest.  Our ongoing shareholder engagement and commitment to long-term value creation will continue to inform the Board of Director’s deliberations in 20192020 and beyond.

Shareholders may communicate with the Board of Directors, its Committeescommittees or any individual member of the Board of Directors by sending a written communication to our Corporatecorporate Secretary at 1001 Third Avenue South, Minneapolis, MN 55404.  The Corporatecorporate Secretary will promptly forward any communication so received to the Board, any Committeecommittee of the Board or any individual Board member specifically addressed in the communication.  In addition, if any shareholder or other person has a concern regarding any accounting, internal control or auditing matter, the matter may be brought to the attention of the Audit Committee, confidentially and anonymously, by calling 1-800-835-5870, inserting the I.D. Code of AUDIT (28348) and following the prompts from the recorded message.  The company reserves the right to revise or make exceptions to this policy in the event that the process is abused, becomes unworkable or otherwise does not efficiently serve the purposes of the policy.

Policy Regarding Director Attendance at Annual Meeting

Our policy is to require attendance by all of our Directors at our Annual Meeting of Shareholders, except for absences due to causes beyond the reasonable control of the Director.  All of the Directors then serving on our Board were in attendance at our 20182019 Annual Meeting of Shareholders.

Corporate Governance Principles

Our Board of Directors has adopted Corporate Governance Principles that were originally developed and recommended by the CGNC.  These Corporate Governance Principles are available in the investor relations section of the company’s website athttp://www.sleepnumber.com/sn/en/investor-relationsir.sleepnumber.com.  The information contained in or connected to our website is not incorporated by reference into or considered a part of this Proxy Statement.  Among these Corporate Governance Principles are the following:

Independence.  A substantial majority of the members of the Board should be independent, non-employee Directors.  It is the responsibility of the Board to establish the standards for independence, and the Board has followed the independence standards for companies listed on The Nasdaq Stock Market.  All of our Directors are independent except our Chief Executive Officer, Shelly R. Ibach.  All Committeescommittees of the Board are composed entirely of independent Directors.

Chairman and Chief Executive Officer Positions.  At the present time, the Board believes that it is in the best interests of the company and its shareholders for the positions of Chairman of the Board and Chief Executive Officer to beare separated and for the position of Chairman of the Board to beis held by a non-executive, independent member of the Board.  The Board retains the right to review this determination and to either continue to maintain these positions as separated positions or to combine the positions, as the Board determines to be in the best interests of the company at the time.  During any period in which the positions of Chairman of the Board and Chief Executive Officer are combined, the Board will appoint a Lead Director from among the independent members of the Board.

Classified Board Structure.  Our Third Restated Articles of Incorporation provide for a classified Board serving staggered terms of three years each.  The Board will periodically review its classified Board structure in the context of other provisions and measures applicable to unsolicited takeover proposals with the objective of positioning the Board and the company to maximize the long-term value of our company for all shareholders.

Majority Voting Standard with Resignation Policy for Board Elections.  Our Third Restated Articles of Incorporation provide for a majority voting standard in the case of uncontested elections of Directors and a plurality voting standard in the case of contested elections of Directors in order to reduce the risk of a “failed election” in a contested Director election. If a nominee for Director who is an incumbent Director is not elected at a meeting of shareholders and no successor to the incumbent Director is elected at the meeting of shareholders, the incumbent Director shall promptly offer to tender his or her resignation to the Board.  The CGNC shall make a recommendation to the Board on whether to accept or reject the offer, or whether other action should be taken.  The Board shall act on whether to accept the Director’s offer, taking into account the CGNC’s recommendation, and publicly disclose (by press release, a filing with the SEC or other broadly disseminated means of communication) its decision and the supporting rationale within 90 days after the date of the certification of the election results.  The CGNC, in making its recommendation, and the Board, in making its decision, may each consider any factors or other recommendations that it considers relevant and appropriate.  The incumbent Director who offers to tender his or her resignation shall not participate in the Board’s decision.  If such incumbent Director’s offer to tender his or her resignation is not accepted by the Board, such Director shall continue to serve until his or her successor is duly elected, or his or her earlier death, resignation, retirement, disqualification or removal.

Board Diversity.  The company does not have a formal policy with respect to diversity. However, the CGNC considers Director candidates in the context of the Board’s overall composition, including whether the Board has an appropriate combination of professional experience, skills, knowledge and variety of viewpoints and backgrounds in light of the company’s current and expected future needs. In addition, the CGNC believes that it is desirable for newWe are committed to seeking Director candidates to contribute towho reflect diverse perspectives, including a variety of viewpoints on the Board, which may be enhanced by acomplimentary mix of different professional and personal backgrounds and experiences.experiences, which we believe is critical to the success of the company and its ability to create long-term value for our shareholders.

Approach to Term and Age Limits.  We believe that specific or fixed term or age limits could cause the company to arbitrarily lose important contributors to the Board.  It is the sense of the Board, however, that a Director who reaches the age of 72 should promptly tender his or her resignation to the Chair of the CGNC, and the Board should have an opportunity to review the qualifications of the Director for continued Board membership.  The CGNC will review the qualifications of the Director for continued Board membership annually and make a recommendation to the Board each year, which will make a final determination with respect to the tendered resignation.

Change in Responsibilities.  Directors who retire or who have a change in their principal employment or affiliation after joining the Board should not necessarily leave the Board.  There should, however, be an opportunity for the Board to review the qualifications of the Director for continued Board membership.  Any Director who undergoes a material change in principal employment or affiliation will promptly tender his or her resignation to the Chair of the CGNC.  The CGNC will review the qualifications of the Director for continued Board membership and make a recommendation to the Board, which will make a final determination with respect to the tendered resignation.

Other Board or Audit Committee Service.  The Board recognizes that service on other boards can in some circumstances limit the time that Directors may have to devote to fulfilling their responsibilities to the company.  It is the Board’s guideline that no Director shall serve on more than a total of sixfour (4) public company boards (including the Sleep Number Board), no Director who is a named executive officer (of another company) serve on more than a total of two (2) public company boards (including the Sleep Number Board),  and that no member of the company’s Audit Committee shall serve on more than a total of three (3) public company audit committees (including the Sleep Number Audit Committee).  If any Director exceeds or proposes to exceed these guidelines, the Director is required to promptly notify the Chair of the CGNC and the committee will review the facts and circumstances and determine whether such service would interfere with the Director’s ability to devote sufficient time to fulfilling the Director’s responsibilities to the company.  Currently, none of the Directors serve on more than three public company boards, including the Sleep Number Board.

Chief Executive Officer Service on Other Boards.  The Chief Executive Officer may not serve on more than twoone (1) public company boardsboard other than the Sleep Number Board of Directors.

Board and Committee Evaluations.  The Board believes that the company’s governance and the Board’s effectiveness can be continually improved through evaluation of both the Board as a whole and its committees.  The CGNC is responsible for annually evaluatingoverseeing the annual evaluation of the Board’s effectiveness in these areas and reviewing the results and recommendations for improvement with the full Board.  The evaluation process includes an annual self-evaluation of the Board and its committees, as well as periodic individual director evaluations.  The CGNC retains an independent third party to manage the evaluation process to ensure that it remains as thorough and transparent as possible.

Board Executive Sessions.  Executive sessions or meetings of independent Directors without management present will be held at least twice each year.  At least one session will be to review the performance criteria applicable to the Chief Executive Officer and other executive officers, the performance of the Chief Executive Officer against such criteria, and the compensation of the Chief Executive Officer and other executive officers.  Additional executive sessions or meetings of independent Directors may be held from time-to-time as required.  The Board’s practice has been to meet in executive session for a portion of each regularly scheduled meeting of the Board.  Any member of the Board may request at any time an executive session without the presence of management.  Executive sessions or meetings with the CEOChief Executive Officer shall be held from time-to-time for a general discussion of relevant topics.

Paid Consulting Arrangements.  The Board believes that the company should not enter into paid consulting arrangements with independent Directors.

Board Compensation.  Board compensation should encourage alignment with shareholders’ interests and should be at a level equitable to comparable companies.  The Management Development and Compensation Committee is responsible for periodic assessments to assure these standards are being met.

Share Ownership Guidelines for Executive Officers and Directors.  The Board has established the stock ownership guidelines for executive officers and Directors as further described in the Compensation Discussion and Analysis beginning on page 30 of this Proxy Statement and as summarized below.

Prohibition of Hedging or Pledging of Shares.  Under our policy with respect to trading in the company’s securities, Directors, officers, director-level and above team members and other team members whose duties regularly bring them into contact with confidential or proprietary information (“insiders”)designated by Sleep Number from time to time as “insiders” are prohibited from engaging in any form of hedging or monetization transactions involving the company’s securities.securities, including, but not limited to, the use of financial instruments such as prepaid variable forwards, equity swaps, collars and exchange funds.  In addition, insiders are prohibited from engaging in short sales of the company’s securities and from trading in any form of publicly traded options, puts, calls or other derivatives of the company’s securities.  Insiders are also prohibited from engaging in any form of pledging of the company’s securities, including (i) purchasing company securities on margin; (ii) holding company securities in any account which has a margin debt balance; (iii) borrowing against any account in which company securities are held; or (iv) pledging company securities as collateral for a loan.

Conflicts of Interest.  Directors are expected to avoid any action, position or interest which conflicts with an interest of the company, or that gives the appearance of a conflict.  If any member of the Board becomes aware of any such conflicting or potentially conflicting interest involving any member of the Board, the Director should immediately bring such information to the attention of the Chairman of the Board, the Chief Executive Officer and the General CounselChief Legal and Risk Officer of the company.

Performance Goals and Evaluation.  The Management Development and Compensation Committee is responsible for establishing the procedures for setting annual and long-term performance goals for the Chief Executive Officer and for the evaluation by the full Board of his or her performance against such goals.  The Committeecommittee meets at least annually with the Chief Executive Officer to receive his or her recommendations concerning such goals.  Both the annual goals and the annual performance evaluation of the Chief Executive Officer are reviewed and discussed by the independent Directors at a meeting or executive session of that group.  The Committeecommittee is also responsible for setting annual and long-term performance goals and compensation for the other executive officers whom report directly to the Chief Executive Officer.

Compensation Philosophy.  The Board supports and, through the Management Development and Compensation Committee, oversees team member compensation programs that are closely linked to business performance and emphasize equity ownership.

Senior Management Depth and Development.  The Chief Executive Officer reports to the Board, at least annually, on senior management depth and development, including a discussion of assessments, leadership development plans and other relevant factors.

Provisions Applicable to Unsolicited Takeover Attempts or Proposals.  The Board will periodically review (not less often than every three years) the company’s Third Restated Articles of Incorporation and Bylaws and various provisions that are designed to maximize shareholder value in the event of an unsolicited takeover attempt or proposal.  Such review includes consideration of matters such as the company’s state of incorporation, whether the company should opt in or out of applicable control share acquisition or business combination statutes, and provisions such as the company’s classified Board structure.  The objective of this review is to maintain a proper balance of provisions that will not deter bona fide proposals from coming before the Board, and that will position the Board and the company to maximize the long-term value of our company for all shareholders.

Shareholder Approval of Equity-Based Compensation Plans.  Shareholder approval will be sought for all equity-based compensation plans.

Social ImpactCorporate Responsibility and Sustainability

OurAt Sleep Number, our mission is to improve lives by individualizing sleep experiences.  This mission – and our values of passion, integrity, innovation, courage and teamwork – are central to our company culture, business strategy and community engagement. As a purpose driven company and leader in sleep innovation, we are committed to making a positive impact on customers, communities, team members, shareholders and the world we all share.  Better quality sleep has the power to transform lives by improving individuals’ health and wellness.  That is why we are dedicated to our mission and creating a world that’s healthier, kinder, more compassionate, and more connected.  Our innovations and investments have improved more than 12 million lives while delivering superior value creation for our shareholders.

Team: As a company with purpose, we have created a unique culture of talented and highly engaged team members dedicated to improving lives and having a meaningful impact on society.  We value individuality and embrace each other’s unique talents, perspectives and experiences. We strive to help every team member realize their potential.  Our more than 4,400 team members are building fulfilling careers and making the world a better place through proven quality sleep.  To contribute to their well-being, it is our policy to maintain a safe and healthy work environment and treat all team members fairly and with respect.

Communities: Every day, we educate consumers on the importance of sleep and its vital connection to their overall wellness.  We inspirehealth and wellness, inspiring them to make itsleep a priority in their lives.  In 2018,Because quality sleep is essential to a healthier and happier society, we announcedare committed to helping future generations benefit from better sleep. We are making good progress toward our commitment to help overgoal of improving the well-being of more than one million young people achieve life-changingyouth through quality sleep by 2025. In 2019, through our products and sleep expertise.  We are partneringpartnerships with leading national organizations focused on youth health and wellness initiatives, to achieve their commitment, including GENYOUth, Alliance for a Healthier Generationwe improved the lives of more than 350,000 youth through advocacy, education and Good360.  We believe excellent sleep is essential to a healthierproduct donations.

Suppliers and happier society, strengthening our connections with one another, and expanding the frontier of what’s possible.Business Partners: We strive to conductalign with suppliers and business partners who share our business in an ethicalvalues and socially responsible manner. In addition tomission. We communicate our Code of Business of Conduct detailed below, we maintain a Code of Conduct for Business Partners that addressesto all active suppliers and require them to acknowledge their commitment to it.  This Code of Conduct for Business Partners articulates our expectations related to labor and human rights, health and safety, environmental issues, ethics, and compliance with related laws, rules and regulations.regulations, and describes our rights to monitor and enforce supplier compliance. Sleep Number provides team members and management who have direct responsibility for supply chain management with training on matters within the scope of the Code and monitors suppliers’ compliance with our standards and the Code through both formal audits and informal visits.

Environment: We are committed to understanding and reducing the environmental impact of our end-to-end operations, including headquarters, stores, designs, manufacturing and supply chain and waste emissions.  At our more than 600 stores, plants and corporate offices, we have successful programs to reduce and divert landfill waste.  We also maintain Equal Employment Opportunityoffer mattress recycling options to our customers in select cities and work with trusted partners to give old mattresses new life as carpet padding.  We continue to pursue sustainable practices and standards to foster areduce our energy consumption.  As part of our supply chain evolution, we are reducing transportation time and the environmental impact of our logistics by, among other actions, working with and choosing suppliers with supply points proximate to Sleep Number operations or taking actions to improve the proximity.

Corporate Responsibility and Sustainability Report: We recently published our first comprehensive Corporate Responsibility and Sustainability Report, which provides information about our social, environmental and governance practices and priorities. The report underscores our strong commitment to well-being and our culture of diversity, inclusion and respect.respect; our long-standing enterprise position on human rights; our disciplined focus on product quality; and our high expectations for integrity and sound judgment from our team, suppliers, and business partners. A copy of the Corporate Responsibility and Sustainability Report is included in our Investor Relations section of our website at http://ir.sleepnumber.com. The information contained in or connected to our website is not incorporated by reference into or considered a part of this Proxy Statement.

Code of Business Conduct

We have developedare committed to the highest standards of ethical business practices throughout our company. Our company values, team member training, company policies and circulated to all ofculture underscore our team membersexpectations for integrity and provide clear guidelines for business decisions and behavior.

We have a Code of Business Conduct, addressingprovided to all team members, which addresses legal and ethical issues that may be encountered by our team members in the conductduring their normal course of our business.  Among other things, theThe Code of Business Conduct is reviewed annually with the Audit Committee and instructs and requires that our team members comply with applicable laws, engage in ethical and safe conduct in our work environment, avoid conflicts of interests, conduct our business with integrity and high ethical standards, and safeguard our company’s assets. A copy of the Code of Business Conduct is included in the investor relations section of our website athttp://www.sleepnumber.com/sn/en/investor-relations. We intend to disclose any amendments to and any waivers from a provision of our Code of Business Conduct on our website. The information contained in or connected to our website is not incorporated by reference into or considered a part of this Proxy Statement.

Team members are required to report any conduct that they believe in good faith violates our Code of Business Conduct.  The Code of Business Conduct also sets forth procedures under which team members or others may report through our management team and, ultimately, directly to our Audit Committee (confidentially and anonymously, if so desired) any questions or concerns regarding accounting, internal accounting controls or auditing matters.

All of our team members are required to periodically certify their commitment to abide by our Code of Business Conduct.  We regularly monitor compliance with the Code of Business Conduct and report findings to our Audit Committee with respect to our findings.Committee.  We also provide training in key areas covered by the Code of Business Conduct to help our team members to comply with their obligations.

A copy of the Code of Business Conduct is included in our Investor Relations section of our website at http://ir.sleepnumber.com.  We intend to disclose any amendments to and any waivers from a provision of our Code of Business Conduct on our website.  The information contained in or connected to our website is not incorporated by reference into or considered a part of this Proxy Statement.

Related Party Transactions Policy

The Board of Directors has adopted a written policy intended to ensure the proper approval and reporting of transactions between the company and any of its Directors, nominees for Director, executive officers or significant shareholders or entities or persons related to them that would be required to be disclosed by the company pursuant to Item 404 or Regulation S-K of the Federal securities laws.  Under this policy, any proposed or existing related party transaction is subject to the approval or ratification of the Corporate Governance and Nominating Committee.  A copy of the Related Party Transactions Policy can be accessed through our Investor Relations website athttp://www.sleepnumber.com/sn/en/investor-relationsir.sleepnumber.com.  The information contained in or connected to our website is not incorporated by reference into or considered a part of this Proxy Statement.  There were no related party transactions during the year ended December 29, 201828, 2019 and there are none currently contemplated.

CCOMPENSATIONOMPENSATION COMMITTEE REPORT

The Management Development and Compensation Committee of the Board of Directors (the “Committee”), consisting entirely of independent Directors, has reviewed and discussed the following Compensation Discussion and Analysis with management, and based on this review and discussion, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

The Management Development and Compensation Committee

Brenda J. Lauderback, Chair

Daniel I. Alegre

Michael J. Harrison

Kathleen L. Nedorostek

COMPENSATION DISCUSSION AND ANALYSIS

Table of Contents:

Introduction

The Compensation Discussion and Analysis (CD&A) describes our executive compensation program, including the objectives and elements of compensation as well as determinations made by the Committee regarding our named executive officers (NEOs).

For 2018,2019, the following five current executive officers were determined to be NEOs as a result of their position during the year as chief executive officer (CEO), or chief financial officer (CFO), or their total compensation making them among the three other highest paid executives for the fiscal year.

PCompensation Philosophy and Approachurpose Driven Company

The executive compensation programAs a purpose driven company in health and wellness, our mission is designed to support our long-term strategic orientation. Itimprove lives by individualizing sleep experiences. Our vision is competitive, heavily weighted toward performance-based incentive programs, and encourages appropriate risk taking and investing in the business as we execute our consumer innovation strategy. Our incentive programs reward our executive officers for superior performance and strengthening competitive advantages to deliver sustainable, long-term profitable growth. The incentive opportunities are tied to multiple financial metrics that support our business strategy and are aligned with shareholder interests.

Our executive compensation program is designed to:

Shareholders have expressed their support of our executive compensation program and its alignment with company performance. Over the last six years (2013-2018), an average of 96% of votes cast by shareholders were in support of our annual proposal to approve, on an advisory basis, the compensationbecome one of the company’s NEOs including 93% of votes cast at our 2018 Annual Meeting. We have maintained this strong support from our shareholders over time. We have regular outreach discussions with shareholders to benefit from their interests. We regularly review and update our executive compensation program to ensure alignment with our objectives. We also adhere to many governance best practices and policies.

Progress as a Company

The U.S. retail bedding market is approximately $16 billion, fragmented, and competitive. Sleep Number is breaking through the commodity-driven “sea of sameness”world’s most beloved brands by delivering an unparalleled sleep experience. By executing our consumer innovation strategy, we have become the leader in sleep innovation with five significant competitive advantages: proprietary sleep innovations, longitudinal data, lifelong customer relationships, brand communications and exclusive direct-to-consumer distribution. We are committed to delivering highly differentiated innovations. Consumerssuperior shareholder value by: (1) increasing consumer demand; (2) leveraging our business model; and (3) deploying capital efficiently.

Sleep disorders have been declared a public health epidemic by the U.S. Centers for Disease Control. One in three adults suffers from a lack of adequate sleep. We are engagedtaking on big challenges, like sleep deprivation, with our purpose-driven brandrevolutionary Sleep Number 360^® smart beds that deliver proven quality sleep. Based on analysis of over 25 million sleep sessions, our research shows that sleepers who routinely use their 360^® smart bed features and are responding stronglySleepIQ^® technology can improve quality sleep by over 15 minutes each night, nearly 100 hours each year. Third-party studies have shown that even 15 minutes more quality sleep per night increases a body’s ability to stave off weight gain or a cold and can increase productivity. With the significant opportunity to improve peoples’ lives through higher quality sleep, in 2020 we entered into an extensive collaboration with world-renowned Mayo Clinic to advance sleep science and cardiovascular medicine. By uniting our new revolutionaryunparalleled sleep knowledge and technology with world-class clinicians and researchers, we’re poised to make meaningful advancements to the science of sleep, with goals to materially foster better sleep – and health – for society.

The 360 smart beds. The executionbed effortlessly adjusts throughout the night. SleepIQ technology – the operating system of our strategy has broadened our relevance, as individuals increasingly understand the importancebed – uses artificial intelligence and machine learning to automatically adjust the comfort and support for each individual. It then provides a SleepIQ^® score, a nightly measure of quality sleep against an individual’s personal best and delivers personalized insights to their overall well-being. Asimprove quality sleep via the SleepIQ^® mobile application. Sleep Number leverages the sleep innovation leader, we are taking market share and realizingbiometric data collected during sleep sessions – expected to exceed one billion by the benefitsend of our advantaged products and integrated marketing and retail initiatives.2020 – to continuously improve all 360 smart beds with ongoing over-the-air updates.

In 2012,Our inclusionary culture results in a high level of engagement and propensity to perform. We embrace individuality and inspire people to be their best, as we embarked on a transformational, consumer innovation strategy as the pathwork together to improve lives and deliver sustainable, profitable long-term growth. Executing this strategy has required significant capital investments, substantial buildout of vital performance capabilities, and time to execute these plans. Since 2012, we have taken numerous transformative actions including:lives.

In summary, we operate with a compensation program designed to reward achievement of superior results and creation of long-term shareholder value.

22018019 Performance and Accomplishments

We delivered superior performance in 20182019 with net salesgrowth in both our top line and earnings per share (EPS) exceedingbottom line results near the high end of our internal expectations.  This performance exceeded street consensus and the midpoint of our external guidance.  With additional transition costs and investments, we fell short of our aggressive internal business plan on adjusted EBITDA and net operating profit (NOP) for the year. Consumers have responded stronglyConsumers’ response to our innovations,revolutionary 360 smart beds has been exceptional, driving double-digit demand for six consecutive quarters including accelerated sales growth in the back-halffourth quarter of the year.2019.  Highlights of our full year financial results include:

For additional information on our non-GAAP financial measures, such as adjusted EBTIDAEBITDA and ROIC, and their reconciliation to operating income and net income, as applicable, see “Non-GAAP Data Reconciliations” inon pages 23 and 24 of our Annual Report on Form 10-K filed on February 26, 2019.25, 2020.

We delivered a total shareholder return (TSR) for one, three and five years that was in the top quartile of our peer companies (as described on page 49) when measured through the end of our fiscal year 2018. Our one, three, and five-year TSR are in the top quartile when the measurement period ends on March 1, 2019 to include the market reaction to our fourth quarter earnings release issued on February 13, 2019.

TSR results when the measurement period ends on March 1, 2019:Building lifelong relationships with our customers, while investing to ensure broad consumer relevance, has resulted in sustainable, profitable growth, including a 5-year EPS CAGR of 17%, and 5-year Total Shareholder Return of 85%. We remain committed to investing in initiatives that deliver meaningful value for our team, customers and communities. We expect our advantaged and efficient business model, combined with near- and long-term investments, will continue to deliver superior returns for our shareholders. 

Awrds

Notes: TSR refersIn addition to these financial results, Sleep Number was the percent changerecipient of multiple awards recognizing excellence in product innovation and design, manufacturing quality and safety, and the valueachievements of a shareholder’s investment in the company over the measurement period as determined by change in share price plus the value of any dividends paid. Peer companies are described on page 49.its senior leadership and President & CEO.

We are delivering life- changing value to our customers, resultingThe Climate360 smart bed received the prestigious CES 2020 “Best of Innovation” award and was selected as CES Innovation Honorees across Health & Wellness and Tech for a Better World categories. It received eight additional “best of” awards from tech and consumer media during CES. The 360 smart beds were selected as CES 2020 Innovation Honorees in superior shareholder value creation.three categories: Smart Home, Health & Wellness and Tech for a Better World.

PCompensation Program Overview

Our pay for performance compensation program has three main components that make up the total direct compensation opportunity for our executive officers, as summarized in the table below. With the effectiveness of the program, there were no changes to the design of these elements of our compensation program for 2018.

By design, our executive compensation mix is heavily weighted toward performance-based incentive programs that only have value if company performance meets or exceeds pre-determined financial goals, or if shareholder value increases. As highlighted in the charts below, over 80% of our CEO’s target total direct compensation opportunity is performance-based and fully at-risk; for our other NEOs, this percentage is over 60%.

Payay and Performance Alignment

The letter to shareholders from our CEO in this Proxy Statement and the section “2018“2019 Performance and Accomplishments” provide a full descriptionprovides highlights of our performance for the year.  The following is a summary of our company performance that determined the actual payouts earned

for our 20182019 AIP and 20162017 Performance RSUs.  The performance and payouts for these incentive programs are described in more detail later in this CD&A.

Pay earned for 20182019 demonstrates that when the company falls short ofexceeds its internal goals, payouts are reduced belowabove target.  The following chart illustrates the alignment between our incentive payouts and shareholder outcomes for the three-year period from 20162017 to 2018.2019.

CCompensation Framework andompensation Actions

Each March, the Committee considers both shareholder feedback and market data provided by its independent consultant when setting the base pay and target incentive opportunities for our executive officers. The Committee generally seeks to align the target direct compensation opportunity with the median of the market(our approach to benchmarking is described in more detail on page 49).

Given the significant weight the executive compensation program places on at-risk and performance-based incentive opportunities,the compensation realized by our executive officers will vary significantly depending on company performance against pre-determined goals and changes in shareholder value—, an important design objective of our executive compensation program.

BBasease Salary

We set base salaries for our executive officers to be competitive and to allow us to attract and retain top executive talent.  Base salaries are the smallest component of our target 2018 pay mix, comprising 19%represent 16% of the CEO’s target total direct compensation and 37%38% on average for our other NEOs.

Our Committee reviews base salaries annually, considering market data and both individual and company performance when making base pay decisions.  At its meeting on March 8, 2018,2019, the Committee approved the base salary adjustments for 2018effective March 24, 2019 shown in the following table.  Ms. IbachBarra and Mr. CallenKrishna each received a combination of a merit increase based on performance and a marketspecial adjustment sincein recognition of their respective salaries were both at least 10% belowadditional responsibilities and expanded leadership roles within the market median based on benchmarking data provided by the Committee’s independent compensation consultant.Company.  Other NEOs each received merit increases that considered market position and their performance.

Note:  The base salary adjustments approved by the Committee in March 20182019 were effective with the pay period beginning March 25, 2018.24, 2019.  

AAnnualnnual Incentive Plan (AIP)

Performance Metric.  Our AIP provides our executive officers with an annual incentive opportunity contingent upon our adjusted EBITDA performance.  Adjusted EBITDA is a useful indicator of our annual financial performance and our ability to generate cash flow from operating activities, which we believe to be an important source of our shareholder value creation.  We define adjusted EBITDA as net income plus:  income tax expense, interest expense, depreciation and amortization, stock-based compensation expense and asset impairments (as detailed in our quarterly and annual financial filings).  For additional information on adjusted EBTIDA,EBITDA, including a reconciliation to net income see “Non-GAAP Data Reconciliations” inon page 23 of our Annual Report on Form 10-K filed on February 26, 2019.25, 2020. 

Design Overview.  The design of our AIP has two main components that determine the amount of the payout earned by our NEOs for company performance.  First is the executive officer’s target incentive opportunity, which is set each year by the Committee considering market data and their position within the company.  The other component is the leverage curve withCompany performance measured against goals for adjusted EBITDA that determine the percent of the target payout earned for the year.  It is the combination of these two components that results in the final AIP payout for our NEOs.

Our AIP includes an opportunity to receive a progress payment if a first half performance goal for adjusted EBITDA is achieved or exceeded.  The progress payment is equal to half of the AIP target incentive for the first half of the year.  If the progress payment is earned and paid out in July of the fiscal year, it is subtracted from the annual payout earned and paid out following the end of the fiscal year in February.  By having this opportunity for a progress payment in our AIP, it reinforces the importance of starting out the year with strong first half performance.

Individual Target Incentive.  Each executive officer has a target incentive that is expressed as a percent of the actual salary they receive for the fiscal year.  The Committee reviews these targets annually to ensure that they are aligned with the median target incentives and total cash opportunities of our peers and the market (our peer group and approach to benchmarking is described on page 49).  The Committee approved the following target annual incentives for the named executive officers for 2019, which were unchanged from 2018. The Committee increased the target incentive for Ms. Ibach from 115% to 120% of salary effective March 25, 2018 to more closely align with the market median based on benchmarking data provided by the Committee’s independent compensation consultant.

20182019 Performance Goals.  At its meeting on January 18, 2018,February 12, 2019, the Committee approved the following performance goals and range of payout opportunity for the 20182019 AIP.  These goals and payout opportunities were set to provide a strong motivation for achievement of stretch performance objectives and a reasonable sharing rate of incremental adjusted EBITDA.  The 2018 goal for target payout was set at adjusted EBITDAfollowing is an overview of $183.4 million, an 8% increase over 2017 actual of $169.1 million. When this goal was set, it represented top quartile performance compared to the three-year historical growth rate in EBITDA of our peer companies. Thegoals and payout levels and performance goalsthat were approved for threshold and maximum were set for 2018 consistent with the AIP methodology for 2017. This approach ensures that there is an appropriate sharing rate for how the AIP payout cost changes with incremental adjusted EBITDA.2019 AIP:

For the progress payment opportunity, the Committee approved a first half goal for 20182019 of $81.8$75.5 million in adjusted EBITDA.  The first half goal for 20182019 represented our first half operating plan aligned with the annual AIP goal for target payout of $183.4$178.8 million.

20182019 Performance.  Although 2018 net sales were up 6% and we achieved our fifth straight year of positive comp sales, we fell short of our internalOur adjusted EBITDA goal for 2018. Adjusted EBITDA2019 was $165.6$190.4 million, forup 15% over 2018 which was 90%and 106% of the AIP goal for target payout. This represented a 2.1% decline over the prior year driven in part by approximately $16 million of profit impacts to complete the replacement of our mattress and adjustable base product lines with the 360 smart bed in 2018. For this level of 20182019 adjusted EBITDA (between target and maximum), we earned an AIP payout of 53.5%128.3% of target. The Committee approved this payout, as it was determined based on the approved structure for the 2019 AIP and is reflective of our pay for performance alignment, while acknowledging the significant business improvements accomplished to drive accelerated sales and profit growth in the back half of 2018.alignment.

Our first half adjusted EBITDA was $66.8$78.9 million, belowwhich was above our goal of $81.8$75.5 million in order to earn a progress payment for the 20182019 AIP.  As a result, nothere was a progress payment was made to NEOs and participants in the AIP in July 2018.2019.  

20182019 Payout.  The following table shows the actual AIP total payout earned for 20182019 based on the base salary received during 2019, the target incentive opportunity for each NEO and the approved payout of 53.5%128.3% of target.   There was noa progress payment made for the first half of 2018,2019, so a portion of the full AIP total payout amounts shown below werewas paid out in July 2019, with the balance paid out in February 2019.2020. 

Long-Term Incentive Plan (LTI)

Design Overview.  LTI is the largest component of the total direct compensation opportunity for our executive officers and one of the most critical.officers.  It provides a reward opportunity that is directly aligned with the long-term interest of our shareholders.  As an incentive, there is only payout value if we achieve certain long-term company performance goals or, for stock options, positive stock price appreciation.  The grants have multi-year vesting requirements which also assist in the retention of our executive team; considered especially important to executing a long-term oriented innovation strategy.

The design of our LTI includes two types of annual equity grants:  Performance RSUs and Stock Options.  For 2018,2019, our executive officers received an annual total LTI grant value that was split 75% in Performance RSUs and 25% in Stock Options (same mix as the 20172018 LTI grants).   This combination appropriately rewards our executive officers for achieving long-term profitable growth and the creation of shareholder value.

As a condition of accepting any LTI grant, our executive officers agree to reasonable restrictions on their activities during and for a reasonable period of time after their respective termination of employment, including, but not limited to, the assignment of inventions, non-competition, non-solicitation, confidentiality, and an agreement to arbitrate disputes.

20182019 Stock Option Grants.  Stock options vest in three equal annual installments on each of the anniversaries following the grant date.  Their term expires 10 years after the grant date, provided they have not been exercised or cancelled earlier due to certain events, and their exercise price is equal to the closing trading price of the company’s common stock on the grant date.

The number of stock options granted in 20182019 was determined by dividing the target option grant value (25% of the executive officer’s total LTI grant value) by the calculated grant date fair value per stock option.  In this calculation of the grant date option value, we derive a Black-Scholes value under generally accepted accounting principles, using a 20-day average stock price leading up to grant date in order to mitigate short-term stock price volatility. See the footnotes to the “Summary Compensation Table” and “Grants of Plan-Based Awards” for a description of how grant date fair value is determined for purposes of the disclosure in these tables.

The grant date forFor stock options granted in 2018 wasto our NEOs as part of our annual LTI award process on March 21, 2018,29, 2019, the 20-day average share price was $35.80,$46.78, estimated Black-Scholes value per option was 41% of share price,$19.18, and the option exercise price was $34.35.$47.00.  For stock options also granted to Ms. Ibach on September 18, 2019, the 20-day average share price was $42.49, estimated Black-Scholes value per option was $17.42, and the option exercise price was $43.91. 

20182019 Performance RSU Grants.Performance RSUs become vested on the third anniversary of the grant date, and a percent of target is earned and paid out based on company performance against annual growth goals over a three-year performance period.  The payout under the Performance RSUs may be reduced based on an ROIC modifier.modifier (the modifier can only reduce a payout, not increase it).  The performance metrics for 20182019 Performance RSUs are annual growth in net sales and NOP over fiscal years 2018, 2019, 2020 and 2020.2021.  Prior to the grant date, the Committee established annual growth goals for each of the three years, based on top-quartileconsidering the Company’s long-range strategic plan and historical performance of our peer performance whichgroup.  Performance against these annual growth goals will determine the percent of target payout earned for net sales and NOP for the entire performance period.  The annual measurement for either metric can range from 50% to 200% of target, with the threshold payout being 50% of target if the threshold performance goal is achieved.

At the end of the three-year performance period, the payout for Performance RSUs is determined based on the average of the payouts earned for each of the three years in the performance period, with net sales and NOP equally weighted each year.  By assessing growth achieved each year relative to long-term growth goals, our executive officers are able to make the appropriate investments in the business during ever-changing market and competitive environments while prioritizing long-term sustainable profitable and sustainable growth.

The final payout of Performance RSUs is subject to a ROIC modifier that can reduce the payout by up to 20%.  The reduction occurs if the three-year average basis points difference between ROIC and weighted average cost of capital (WACC) for the 2018-20202019-2021 period is below a certain threshold established by the Committee prior to the grant date.  The ROIC modifier was added to the design of the Performance RSUs in 2015 to reduce the payout if capital investments in the business do not generate returns that are sufficiently above the WACC.

The following chart illustrates how the overall payout for 20182019 Performance RSUs, covering the 2018-20202019-2021 period, will be determined.determined, which is the same design as the 2018 Performance RSUs.

The target number of Performance RSUs for the 20182019 award was determined by dividing the grant value (equal to 75% of the executive officer’s total LTI grant value) by the estimated grant date fair value per share, which is calculated using 20-day average stock price leading up to grant date in order to mitigate short-term stock price volatility.  See the footnotes to the “Summary Compensation Table” and “Grants of Plan-Based Awards” for a description of how grant date fair value is determined for purposes of the disclosure in these tables.

The grant date forFor Performance RSUs granted in 2018 wasto our NEOs as part of our annual LTI award process on March 21, 2018 and29, 2019, the 20-day average share price was $35.80.$46.78.  For Performance RSUs also granted to Ms. Ibach on September 18, 2019, the 20-day average price was $42.49.

20182019 LTI Grant Values.  The Committee approves a total LTI grant value for each executive officer, considering the executive officer’s performance and level of responsibility, as well as the competitive position of the officer’s targeted total direct compensation.  The Committee seeks to make LTI grants to provide a total direct compensation opportunity that is near the market median.

The following table summarizes the LTI grants made to our NEOs in 2018,2019, and the split in grant value between Performance RSUs (75%) and Stock Options (25%).  The LTI grant valuesvalue for Ms. Ibach is the total value of Performance RSU and Messrs. CallenStock Option awards made during 2019, which occurred on March 29, 2019 as part of our annual LTI award process and Brown were increasedon September 18, 2019 as part of our regular mid-year review of executive officer compensation.  Ms. Ibach is the only NEO who received an additional LTI award on September 18, 2019.  See “Grants of Plan-Based Awards” for 2018 to have their target total direct compensation opportunity be more aligned with the market median basedinformation on benchmarking data provided by the Committee’s independent compensation consultant.these awards.    

*The actual grant date fair value for these LTI grants as disclosed in the Summary Compensation Table will vary slightly from the amounts shown above due to valuation assumptions as described in the footnotes to the “Grants of Plan-Based Awards” table on page 53.

20162017 Performance RSU Payout.  The 20162017 Performance RSUs covering the 2016-20182017-2019 period, which are similar in design as the 20182019 Performance RSUs, were granted on March 22, 201621, 2017 and vested and paid out on March 22, 201921, 2020 in the form of shares of common stock, less tax withholding settled in shares of common stock.  Based on net sales and NOP annual growth over the three fiscal years (2016, 2017,(2017, 2018, and 2018)2019), the overall payout earned for this grant was 89.3%128.5% of target.  As described below, this was an average of the percent of target payout earned for growth in net sales and NOP in each of the three years covered by the award.  The ROIC modifier, which could have reduced this payout, was surpassed and did not apply.

The following is a summary of how the 89.3%128.5% of target payout was determined for the 20162017 Performance RSUs.

The following are the annual growth goals that were established for thisthe 2017 Performance RSU grant.

The following charts show the actual performance achieved for the performance period and how the total payout of 89.3%128.5% of target was determined.

2017 Special Performance RSU Grant.  In 2017, a special award of Performance RSUs was made to executive officers including the NEOs.  The award was tied to achieving an EPS goal of $2.75 for fiscal year 2019.  This goal was 250% of the $1.10 in EPS reported for 2016.  Given the uncertainty of corporate tax rates at the time of the award in 2017, it was stipulated in the award agreement that the 2019 goal would be adjusted to the 2016 effective corporate tax rate for Sleep Number of 32.3%.  With this adjustment, the goal for 2019 EPS became the equivalent of $3.27, up from the original goal of $2.75.

Our Company achieved reported EPS for 2019 of $2.70, which was a compound annual growth rate of nearly 35% from 2016 to 2019, and within 2% of the original goal of $2.75.  This was below the adjusted goal of $3.27.  As a result, the Special Performance RSU award was not earned and will be forfeited.  Note that based on SEC rules, the grant date fair value for this award is still included in the Stock Awards column of the Summary Compensation Table for 2017 and considered part of the total compensation of our NEOs for that year even though the award was ultimately not earned.  Additional information on this award can be found in the Compensation Discussion and Analysis of the Company’s 2018 Proxy Statement. 

Compensation Philosophy and Approach

The executive compensation program is designed to support our long-term strategic orientation.  It is competitive, heavily weighted toward performance-based incentive programs, and allows for appropriate risk taking and investments in the business as we execute our consumer innovation strategy.  Our incentive programs reward our executive officers for superior performance to deliver sustainable, profitable growth.  The incentive opportunities are tied to multiple financial metrics that support our business strategy and are aligned with shareholder interests.

Our executive compensation program is designed to:

Shareholders have expressed their support of our executive compensation program and its alignment with company performance.  Over the last five years (2015-2019), an average of 96% of votes cast by shareholders were in support of our annual proposal to approve, on an advisory basis, the compensation of the company’s NEOs including 97% of votes cast at our 2019 Annual Meeting.  We have maintained this strong support from our shareholders over time.  We have regular outreach discussions with shareholders to learn more about their perspectives. We regularly review and update our executive compensation program to ensure alignment with our objectives.  We also adhere to many governance best practices and policies.

Compensation Program Overview

Our pay for performance compensation program has three main components that make up the total direct compensation opportunity for our executive officers, as summarized in the table below.  With the effectiveness of the program, there were no changes to the design of these elements of our compensation program for 2019. 

By design, our executive compensation mix is heavily weighted toward performance-based incentive programs that only have value if company performance meets or exceeds pre-determined financial goals, or if shareholder value increases.  As highlighted in the charts below, over 80% of our CEO’s target total direct compensation opportunity is performance-based and fully at-risk; for our other NEOs, this percentage is over 60%. 

Other Elements of Compensation

Benefits.  Our executive officers participate in the benefit programs provided to our benefit eligible team members.  This includes company provided medical, dental, basic life, short-term disability, long-term disability, and a matched 401(k) savings plans.plan.  Our NEOs participate in the 401(k) plan on the same basis as all other team members.  There is no supplemental matching program, excess plan, or other retirement program.  The value of the 401(k) matching contribution made by the company for our NEOs is included in “All Other Compensation” as disclosed in the “Summary Compensation Table” on page 51.

Non-Qualified Deferred Compensation Plan.  As described in more detail on page 57, our executive officers along with other leaders may elect to defer a portion of their salary, AIP payout, and Performance RSU payout under this non-qualified deferred compensation plan.  The company does not make any contributions to this plan on behalf of participants.  The plan offers a range of investment options for the tracking of an investment return on the deferrals, and participants can elect how their deferrals will be distributed in the future.

Executive Benefits and Perquisites.  Consistent with our commitment to emphasize pay for performance in our mix of total compensation, our executive officers receive very few executive benefits and perquisites.  The company has paid for a supplemental long-term disability that provided a benefit of 60% of pay in excess of the limits under the group plan.  The Committee has approved the elimination of this executive benefit at the end of 2019.  The company provides only two perquisites to our executive officers:  financial counseling and an annual executive physical exam.  The annual limit for financial counseling is $15,000 for our CEO and $8,000 for our other NEOs.  The company pays for the cost after insurance coverage of an annual executive physical exam.  Amounts reimbursed for financial counseling or the executive physical exam are fully taxable to the executive and there is no “gross up” by the company to cover these taxes for the executive.

Employment Agreements.We do not have employment agreements with any of our executive officers that provide for continued employment for any period of time.

Severance Plan.  Our executive officers and other key leaders of the company participate in the Sleep Number Executive Severance Pay Plan.  This plan provides for severance pay, prorated AIP incentive, and other benefits such as outplacement and limited COBRA reimbursement in the event of involuntary termination of employment not for cause or termination for good reason, including for events following a change-in-control, as those terms are defined in the plan.  This plan is described in more detail in the section labeled “Potential Payments to Named Executive Officers”Upon Termination or Change in Control” found on page 58.

Compensation Governance, Practices, and Policies

In order to meet the key objectives of our executive compensation program, the Company has adopted a strong corporate governance framework with the following practices and policies that ensure alignment with shareholder interests.  There have been no changes to these policies or practices since the last disclosure in the 2019 Proxy Statement.

Stock Ownership.  Encouraging stock ownership among our executive officers is critical in aligning their interests with those of our shareholders.  The company has in place stock ownership guidelines in place for executive officers as well as for members of the Board of Directors.  The following is the value of share ownership that is expected at various levels under these guidelines:guidelines:

According to the guidelines, the stock ownership value includes:  shares owned outright, shares held in the Profit Sharing and 401(k) Plan or Deferred Compensationthe Executive Deferral Plan, after tax intrinsic value of vested and outstanding stock options, after tax value of outstanding Performance RSUs (prorated to the extent that any year of the performance period has been completed and the payout for that year is known).  Until the guideline is met, executives are required to hold 50% of the net shares from the vesting or payout of any LTI grant or from the exercise of stock options.  Directors are expected to achieve the guideline level of ownership within five years of their appointment to the Board.

Committee and Governance.   The Committee is comprised entirely of independent, non-employee Directors.  The key responsibilities of the Committee as outlined in its charter include:

The Committee usually meets fourfive to six times per year, in person or by conference call.  OurThe Chairman of the Board, our CEO, other members of our management team, and the Committee’s independent compensation consultant may be invited to attend all or a portion of a Committee meeting, depending on the nature of the agenda.  TheAlso, the Committee also typicallyconsistently meets in executive session without any members of management present.

Neither our CEO nor any other member of our management team votes on any matters before the Committee.  The Committee, however, solicits the views of our CEO on compensation matters, generally, other than her own, and particularly with respect to the compensation of members of the senior management team reporting to the CEO.  The Committee also solicits the views of other members of senior management and the company’s Human Resources department on topics related to key compensation elements and broad-based team member benefit plans.

Role of Independent Compensation Consultant.  Under its charter, the Committee has the authority to retain and consult with independent advisors to assist in fulfilling their responsibilities and duties.  To maintain the independence of these advisors, use by the company of any of these advisors for work other than that expressly commissioned by the Committee must be approved in advance by the Committee.

Since fiscal 2013, the Committee has retained Frederic W. Cook & Co., Inc. (FW Cook) as its independent compensation consultant.  At the Committee’s request each year, FW Cook certifies that it continues to be an independent advisor and discloses information in a letter to the Committee that demonstrates this independence.  The Committee assessed this certification and disclosure information and concluded that no conflict of interest or independence concerns exist in the engagement of FW Cook as the Committee’s independent compensation consultant.  In the course of its engagement, the independent compensation consultant:

CEO Assessment Process.The Committee evaluates Ms. Ibach'sIbach’s performance by soliciting input from all members of the Board.  The Board also assesses Ms. Ibach'sIbach’s performance against objectives incorporating key operationalstrategic and strategicoperational factors, including growth, profitability, product innovation, advancement of strategic initiatives, organizational development and investor relations.  The CEO performance feedback from all independent Board members is consolidated into a detailed performance reviewreport which is the basis of a full Board discussion in Executive Session led by the Chair of the Committee.  The Board'sBoard’s assessment of Ms. Ibach'sIbach’s performance is a major consideration in determining any compensation adjustments for the coming year.

Compensation Risk Assessment.Based on an annual risk assessment, the company has determined that none of its compensation policies, practices or programs is reasonably likely to have a material adverse effect on the company.  The results of this risk assessment were shared with the Committee.

Peer Group.  The Committee, in consultation with FW Cook, annually reviews the composition of the industry peer group to ensure that the included companies are appropriate in terms of size and business focus.  The selected peer group consists of publicly traded industry competitors, as well ascompanies that are within a representative grouprange of similarly sized companiessize compared to Sleep Number and involved in household/home furnishing, appliances, retail, or technology industries with a focus on products delivered direct to consumers.  The selection criteria also consider other factors such as whether the company demonstrates high growth particularly through product development manufacturing and/or retailing of home furnishings and other consumer durablemarket expansion or whether the company has products with which we compete for talent and for shareholder investments.or service driven through technology or innovation.   To ensure that our peer group includes companies of appropriate size and scope, we generally aim to select peerscompanies whose net sales EBITDA and market capitalization are within a range of one-halfone-third to twothree times our own comparable metrics.

In September 2018, the Committee approved the addition of two new companies to the peer group on the recommendation of FW Cook. The two companies added were Conn’s, Inc. and iRobot Corporation, which increased the size of the peer group to 17 companies in total. Conn’s operates in a business similar to our peers and considers our company as one its peers. iRobot is aligned with our business model and focus on technology innovation for products in the home. No companies were removed from the peer group. The following is the updated listing of our peer group as of September 2018:2018 that was then utilized in the benchmarking reviewed by the Committee for compensation actions approved in March 2019 and described in this 2020 Proxy Statement:

TheIn September 2019, the Committee approved changes to the peer group prior to adding these two companies was usedfor purposes of benchmarking that will be reviewed for compensation actions in March 2020 (disclosed in the competitive analysis considered for2021 Proxy Statement).  They approved the removal of Columbia Sportswear, which is a controlled company that made it difficult to make valid pay decisions madecomparisons.  They also approved the removal of Express, Pier 1, and Vitamin Shoppe, which are not currently aligned with Sleep Number’s growth strategy.  In their place, the Committee approved the addition of three companies given their growth characteristics, consumer innovation, use of technology, and comparability in March 2018.size:  Herman Miller, Inc.; Steelcase Inc.; and Plantronics, Inc.   

Benchmarking.  With the assistance of FW Cook, the Committee considers market data on base salary, target total cash compensation, and target total direct compensation when establishing compensation levels for executive officers.  The sources for this market comparison are from peer group pay data (most recent disclosures) and certain retail, technology or general industry surveys from third parties.  For each executive, we attempt to match as closely as possible our position to what is most comparable in our peers or the surveys.  This competitive analysis is just one factor considered when making pay decisions on base salary or incentive opportunities.

The Committee generally seeks to align target total direct compensation opportunities with the median of the market, while providing opportunity for top quartile compensation for performance above goal and below median compensation for performance below goal. Additionally, performance goals are set with consideration for historical peer group growth levels, with the goal of ensuring that above target payouts require performance above the median of the peer group.performance.

Tax Considerations.  We have historically considered the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code in our design and operation of various incentive programs including AIP and LTI.  The Tax Cut and Jobs Act, signed into law on December 22, 2017 (the “Tax Act”), among other things, repealed the exemption from the $1 million compensation deduction limit under Section 162(m) for “performance-based” compensation effective for the company’s taxable years beginning after December 31, 2017, subject to transition relief for binding contracts entered into prior to November 2, 2017.  Our AIP and LTI programs are designed to permit the grant and payment of equity or cash incentive awards that qualify as “performance-based” compensation, which, to the extent applicable, would be exempt from the Section 162(m) deduction limitation.  The Committee intends to administer the existing AIP and LTI programs, to the extent covered under the transition rule, with a view towards preserving their ability to qualify as exempt “performance-based” compensation for purposes of Section 162(m).  However, the Committee does not require all compensation programs, including AIP and LTI, to be fully deductible under Section 162(m) as the Committee believes it is important to preserve flexibility in maintaining compensation programs that are aligned with our compensation philosophy. Given the Tax Act repeal of the performance-based pay exception, the Committee may design future programs and administer the existing programs in a manner that does not satisfy the requirements for an exemption from the Section 162(m) deduction limit.

We currently expect that we will continue to structure our executive compensation program consistent with our pay for performance philosophy so that a significant portion of total executive compensation is linked to the performance of our company.

Summary Compensation Table

The following table contains compensation information for the last three fiscal years relating to the named executive officers. Note that the AIP awards earned for each fiscal year are reported under the heading “Non-Equity Incentive Plan Compensation.” The values shown under the headings “Stock Awards” and “Option Awards” are the grant date fair values of the awards received in each fiscal year. This does not represent what was earned or paid out for these awards due to performance. The details of our named executive officers’ compensation are discussed in the Compensation Discussion and Analysis beginning on page 30.