Long-term equity-based incentives play a critical role in
2015. We do not maintain a formal policy regarding the board’s attendance at annual shareholder meetings; however, board members are expected to regularly attend all board meetings and meetings of the committees on which they serve and are encouragedour executive compensation program, motivating executives to make
every effortdecisions that focus on long-term shareholder value creation, aligning executives’ interests with the interests of shareholders, providing additional incentives, and serving to
attendattract and retain the
Annual Meetingbest available people for positions of
Shareholders. All sevenresponsibility with the Company. Our ability to continue to promote our long-term business success and provide competitive levels of
equity-based compensation is considered to be of utmost importance to our
directors at the time of the 2015 Annual Meeting of Shareholders attended the meeting.Committees of the Board
Ourbusiness. The board of directors has established an audit committee, a compensation committee and a nominating and governance committee. The charters of these committees are posted on our website at www.protolabs.com underbelieves that it is in the investor relations section.
The current composition and responsibilities of each committee, as well as the number of times it met during 2015, are described below.
Audit Committee
| | Compensation Committee
| | Nominating and
Governance Committee
|
Sven A. Wehrwein (chair)
| | Rainer Gawlick (chair)
| | John B. Goodman (chair)
|
John B. Goodman
| | Douglas W. Kohrs
| | Douglas W. Kohrs
|
Brian K. Smith
| | Brian K. Smith
| | Sven A. Wehrwein
|
| | Archie C. Black
| | |
Audit Committee
Among other matters, our audit committee:
oversees management’s processes for ensuring the quality and integritybest interests of our consolidated financial statements, our accountingshareholders to adopt a new equity compensation plan and financial reporting processes, and other financial information provided by us to any governmental body or to the public;
ensure sufficient shares for continued equity-based compensation.oversees our accounting and financial reporting processes;
evaluates the qualifications, independence and performanceAs of our independent auditor and internal audit function;
oversees the resolution of any disagreements between management and the auditors regarding financial reporting;
oversees our investment and cash management policies; and
supervises management’s processes for ensuring our compliance with legal, ethical and regulatory requirements as set forth in policies established by our board of directors.
Each of the members of our audit committee meets the requirements for independence and financial literacy under the applicable rules and regulations of the SEC and the NYSE. Our board of directors has determined that Sven A. Wehrwein is an audit committee financial expert, as defined under the applicable rules of the SEC. The audit committee met 10 times in 2015. Effective upon the election of directors at the 2016 Annual Meeting of Shareholders, our audit committee will consist of Sven A. Wehrwein, Rainer Gawlick and John B. Goodman.
Nominating and Governance Committee
Among other matters, our nominating and governance committee:
identifies qualified individuals to become board members, consistent with criteria approved by the board;
selects director nominees for the next Annual Meeting of Shareholders;
determines the composition of the board’s committees and evaluates and enhances the effectiveness of the board and individual directors and officers;
develops and implements the corporate governance guidelines for our company; and
ensures that succession planning takes place for critical senior management positions.
Each member of our nominating and governance committee satisfies the NYSE independence standards. The nominating and governance committee met four times in 2015. Effective upon the election of directors at the 2016 Annual Meeting of Shareholders, our nominating and governance committee will consist of John B. Goodman, Brian K. Smith and Sven A. Wehrwein.
Compensation Committee
Among other matters, our compensation committee:
reviews and approves compensation programs, awards and employment arrangements for executive officers;
administers compensation plans for employees;
reviews our programs and practices relating to leadership development and continuity; and
determines the compensation of non-employee directors.
In addition, the compensation committee has the authority to select, retain and compensate compensation consulting firms and other experts as it deems necessary to carry out its responsibilities.
Each member of our compensation committee satisfies current NYSE independence standards, is a “non-employee director” as that term is defined in Rule 16b-3 under the Securities Exchange Act of 1934, and is an “outside director” as that term is used in Section 162(m) of the Internal Revenue Code. The compensation committee met five times in 2015. Effective upon the election of directors at the 2016 Annual Meeting of Shareholders, our compensation committee will consist of Rainer Gawlick, Archie C. Black and Brian K. Smith.
Certain Relationships and Related Party Transactions
Since the beginning of 2015, we have engaged in the following transactions with certain of our executive officers, directors, holders of more than 5% of our voting securities and their affiliates and immediate family members:
Karbon Kinetics Limited
During the year ended DecemberMay 31, 2015, we made sales to our customer Karbon Kinetics Limited (“KKL”) on terms consistent with the terms we provide to our other customers. Mr. Lukis is a director, our former Chief Technology Officer and a 64% shareholder of KKL. Our revenues from sales to KKL did not exceed $120,000 during the year ended December 31, 2015.
Employment of Related Person
Brian Lukis, the son of Mr. Lukis, was employed by us as a Senior Software Developer until October 31, 2015. He was entitled to receive a base salary, incentive compensation and other employee benefits that are offered to similarly-situated employees of our company. Brian Lukis’ compensation during the year ended December 31, 2015 did not exceed $120,000.
Related Person Transaction Approval Policy
Our board of directors has adopted a written statement of policy regarding transactions with related persons, which we refer to as our related person policy. Subject to the exceptions described below, our related person policy requires our audit committee to review and approve any proposed related person transaction and all material facts with respect thereto. In reviewing a transaction, our audit committee will consider all relevant facts and circumstances, including (1) whether the terms are fair to us, (2) whether the transaction is material to us, (3) the role the related person played in arranging the transaction, (4) the structure of the transaction, (5) the interests of all related persons in the transaction, and (6) whether the transaction has the potential to influence the exercise of business judgment by the related person or others. Our audit committee will not approve or ratify a related person transaction unless it determines that, upon consideration of all relevant information, the transaction is beneficial to us and our shareholders and the terms of the transaction are fair to us. No related person transaction will be consummated without the approval or ratification of our audit committee. Under our related person policy, a related person includes any of our directors, director nominees, executive officers, any beneficial owner of more than 5%2022, there were 27,614,974 shares of our common stock issued and any immediate family member of any of the foregoing. Related party transactions exempt from our policy include payment of compensation by us to a related person for the related person’s service to us as an employee, director or executive officer, transactions available to all of our employees and shareholders on the same terms and transactions between us and the related person that, when aggregated with the amount of all other transactions between us and the related person or its affiliates, involve $120,000 or less in a year.
Compensation Committee Interlocks and Insider Participation
During 2015, Dr. Gawlick, Mr. Kohrs, and Mr. Smith served as the members of our compensation committee. Following his election to our board of directors on March 1, 2016, Mr. Black was added to our compensation committee. No current member of our compensation committee has ever been an officer or employee of our company or any of our subsidiaries and affiliates or has had any relationship with our company requiring disclosure in our proxy statement other than service as a director. None of our executive officers has served on the board of directors or on the compensation committee of any other entity, any officer of which served either on our board of directors or on our compensation committee.
Section 16(a) Beneficial Ownership Reporting Compliance
outstanding. The rules of the SEC require us to disclose the identity of directors, executive officers and beneficial owners of more than 10% of our common stock who did not file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934. Based solely on a review of copies of such reports and written representations from reporting persons, we believe that all directors and executive officers complied with all filing requirements applicable to them during fiscal 2015.
PROPOSAL 1
ELECTION OF DIRECTORS
General Information
Seven directors will be elected at the Annual Meeting. Upon the recommendation of the nominating and governance committee, the board of directors has nominated for election the seven persons named below. Each has consented to being named a nominee and will, if elected, serve until the next Annual Meeting of Shareholders or until a successor is duly elected. There are no family relationships between any director and any executive officer. Each nominee listed below is currently a director of Proto Labs, and, other than Mr. Black, each has been duly elected by the shareholders. Mr. Black was elected to the board of directors in March 2016. Douglas W. Kohrs, who currently serves as a director, has decided not to seek reelection at the Annual Meeting and will cease serving as a director upon conclusion of the Annual Meeting.
Nominees
The names of the nominees and other information are set forth below:
Lawrence J. Lukis – Age 67
Director since 2001
Chair since 2001
| Mr. Lukis founded our company in 1999 and has served as our Chairman since November 2001. Mr. Lukis also served as our Chief Technology Officer from November 2001 until July 2013. In 1985, Mr. Lukis co-founded LaserMaster Corp. (later ColorSpan), an innovator in laser printing products for desktop publishers and large format color inject printers, and served as a director and Chief Technology Officer from 1985 to 1997. ColorSpan was acquired by MacDermid Inc. in 2000 and was subsequently resold to Hewlett-Packard in 2007. Mr. Lukis currently serves on the board of directors of Karbon Kinetics Ltd., a manufacturer of electric bicycles.
|
| |
| Mr. Lukis’s institutional knowledge and his operational and technical experience allow him to provide guidance and leadership in his role as our Chairman. We believe his in-depth understanding of our company’s strategic plan, technology, global business, and history enable Mr. Lukis to serve as an effective Chairman of our board of directors.
|
| |
Victoria M. Holt – Age 58
Director since 2014
| Ms. Holt has served as our President and Chief Executive Officer since February 2014. Prior to joining us, Ms. Holt served as President and Chief Executive Officer of Spartech Corporation, a leading producer of plastic sheet, compounds and packaging products, from September 2010 until Spartech was purchased by PolyOne Corporation in March 2013. Prior to Spartech, Ms. Holt worked at PPG Industries, a leading coatings and specialty products company, serving as Senior Vice President, Glass and Fiber Glass, from May 2005 until September 2010. Ms. Holt also is a member of the board of directors of Waste Management, Inc., and she served as a director of Spartech while she was Chief Executive Officer.
|
| |
| Ms. Holt’s leadership, strategic planning, operational and international experience provide valuable insights to our board of directors. As Chief Executive Officer, she also is responsible for determining our strategy, articulating priorities and managing our continued growth.
|
| |
Archie C. Black – Age 54
Director since 2016
| Mr. Black has served as a director of our company since March 2016 and serves as a member of the compensation committee. Since 2001, Mr. Black has served as the President and Chief Executive Officer of SPS Commerce, Inc., a provider of cloud-based supply chain management solutions. Mr. Black also serves on the Board of Directors of SPS Commerce, Inc. Prior to joining SPS Commerce, Inc., Mr. Black was a Senior Vice President and Chief Financial Officer at Investment Advisors, Inc. Prior to his time at Investment Advisors, Inc., Mr. Black spent three years at Price Waterhouse.
|
| |
| Mr. Black is qualified to serve on our board because of his extensive management, financial, and operational experience at SPS Commerce, Inc., during which he led the transformation of a tech-driven startup company into a global business and developed a deep knowledge of the requirements involved with being a public company.
|
Rainer Gawlick – Age 48
Director since 2008
| Dr. Gawlick has served as a director of our company since September 2008 and serves as a member of the audit committee and as the chair of the compensation committee. Since July 2015, Dr. Gawlick has been President of Perfecto Mobile, Ltd., a leader in mobile testing. Prior to that he was with IntraLinks, Inc. where he is Executive Vice President of Global Sales. IntraLinks, Inc. is a computer software company providing virtual data rooms and other content management services. From August 2008 to April 2012, Dr. Gawlick served as Chief Marketing Officer of Sophos Ltd, a computer security company providing endpoint, network and data protection software. From April 2005 to August 2008, Dr. Gawlick served as Vice President of Worldwide Marketing and Strategy at SolidWorks Corp., a CAD software company. He also has held a variety of executive positions in other technology businesses and was a consultant with McKinsey & Company.
|
| |
| Dr. Gawlick has extensive sales, marketing and product-management experience in the technology industry. Dr. Gawlick offers expertise in building brand awareness, managing marketing on a global scale and developing growth strategies, which enables him to counsel our company on its global expansion.
|
| |
John B. Goodman – Age 56
Director since 2001
| Mr. Goodman has served as a director of our company since 2001 and serves as a member of the audit committee and as chair of the nominating and governance committee. Mr. Goodman currently serves on the board of advisors of TPG (The Plastics Group) and the board of directors of Inclined Biomedical Technologies, Inc. d/b/a Dribank Labs. From December 1982 to October 2010, Mr. Goodman held various positions at Entegris, Inc., a materials supplier, most recently as Senior Vice President and Chief Technology & Innovation Officer.
|
| |
| Mr. Goodman’s technical background and experiences in supply chain networks, logistics and financial planning and reviews enable Mr. Goodman to provide guidance and counsel on our strategic plan, research and development, supplier relationships and finance functions.
|
| |
Brian K. Smith – Age 56
Director since 2005
| Mr. Smith has served as a director of our company since June 2005 and serves as a member of the nominating and governance committee and the compensation committee. Since December 1998, Mr. Smith has been President, a director and an owner of Private Capital Management, Inc., a registered investment advisor. In his capacity as President of Private Capital Management, Inc., Mr. Smith has acted as a principal and director of approximately fifteen middle-market portfolio companies. From 1994 to 1998, Mr. Smith was the Managing Partner of Northland Business Capital, LLP, a private equity partnership, and Senior Vice President of The Northland Company, a financial services firm. Prior to 1994, Mr. Smith spent 15 years in the banking industry.
|
| |
| Mr. Smith has knowledge of financial matters, merger and acquisition activities and capital markets and experience in leadership positions with companies at a variety of stages. Mr. Smith’s experiences enable him to provide oversight concerning general business matters and risk management.
|
| |
Sven A. Wehrwein – Age 65
Director since 2011
| Mr. Wehrwein has served as a director of our company since June 2011 and serves as lead director, as chair of the audit committee, and as a member of the nominating and governance committee. Mr. Wehrwein has been an independent financial consultant to emerging companies since 1999. He has more than 35 years of experience as an investment banker, chief financial officer, and certified public accountant (inactive). He currently serves on the board of directors of SPS Commerce, Inc., a supply-chain management software company, and previously served on the board of directors of Cogentix Medical, Inc., a medical device company, and Image Sensing Systems, Inc. a vehicle-detection software company, all of which are publicly traded companies. Mr. Wehrwein also served on the board of directors of Compellent Technologies, Inc. from April 2007 until its acquisition by Dell Inc. in February 2011, on the board of directors of Synovis Life Technologies, Inc. from December 2004 until its acquisition by Baxter International, Inc. in February 2012, and on the board of directors of Vital Images, Inc. from May 1997 until its acquisition by Toshiba Medical Systems Corp. in June 2011.
|
| |
| Mr. Wehrwein’s qualifications to serve on our board of directors include, among other skills and qualifications, his capabilities in financial understanding, strategic planning and auditing expertise, given his experiences in investment banking and in financial leadership positions. As chairman of the audit committee, Mr. Wehrwein also keeps the board abreast of current audit issues and collaborates with our independent auditors and senior management team.
|
Voting Information and Board Voting Recommendation
As set forth in our Third Amended and Restated Articles of Incorporation, as amended, each director shall be elected by the vote of the majority of the votes cast with respect to the director, provided that directors shall be elected by a plurality of the votes present and entitled to vote on the election of directors at any such meeting for which the number of nominees (other than nominees withdrawn on or prior to the day preceding the date we first mail our notice for such meeting to the shareholders) exceeds the number of directors to be elected. A majority of the votes cast means that the votes cast “for” a director nominee must exceed the votes that are voted “against” that director.
THE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” EACH NOMINEE LISTED.
COMPENSATION DISCUSSION AND ANALYSIS
Named Executive Officers
The compensation provided to our named executive officers for 2015 is set forth in detail in the Summary Compensation Table and the other tables, accompanying footnotes and narrative that follow this section. This Compensation Discussion and Analysis explains our executive compensation philosophy, objectives and design, our compensation-setting process, our executive compensation program components and the decisions made in 2015 affecting the compensation of our named executive officers.
Throughout this section, we refer to the following individuals as our “named executive officers”:
| ●
| Victoria M. Holt, our President and Chief Executive Officer, or CEO;
|
| ●
| John A. Way, our Chief Financial Officer, or CFO;
|
| ●
| Donald G. Krantz, our Executive Vice President and Technology Officer;
|
| ●
| Jacqueline D. Schneider, our Vice President of Global Sales; and
|
| ●
| Robert Bodor, our Vice President/General Manager – Americas.
|
Summary of Proto Labs’ Performance and Organizational Changes
2015 Company Performance
2015 was an excellent year for Proto Labs across a number of financial measures. The company also executed on a number of key strategic initiatives including but not limited to our acquisition of Alphaform and further integration of Fineline, a 2014 acquisition.
Growth
| Profitability
| Cash Generation
| Strategic
|
+26%
Revenue increased to
$264.1 million in 2015
compared with $209.6
million in 2014.
| +12%
Net income for 2015
increased to $46.5
million, from $41.6
million in 2014.
| $58.6m
Cash generated from
operations during the
year totaled $58.6
million.
| Alphaform
Acquired during the
fourth quarter to
accelerate our launch
of 3D printing in
Europe.
|
Shareholder Value Creation
Proto Labs has delivered substantial total shareholder returns (TSR) since its IPO in February 2012, and in the last three years, delivering higher returns compared to companies in its compensation peer group, the S&P 500, and the Russell 2000 Index. In fiscal 2015, Proto Labs’ one-year TSR again outperformed its peers despite a challenging environment that affected returns for the industry. The chart below illustrates historic TSR performance.
|
The “Peer Group” reflected in the chart above represents the current compensation peer group developed by Pearl Meyer in late 2015 for 2016 compensation planning purposes. The group includes the following companies: 3D Systems Corporation, Cognex Corporation, FARO Technologies Inc., Gogo Inc., InvenSense Inc., Monotype Imaging Holdings, Inc., NN Inc., Power Integrations Inc., Shutterstock Inc., SPS Commerce Inc., Sun Hydraulics Corp., Tessera Technologies Inc., The Ultimate Software Group Inc., Ultratech Inc., and Universal Display Corp. The Peer Group reflected in the chart above is different from the peer group referenced below, which was developed by Pearl Meyer in late 2014 for 2015 compensation planning purposes. See the “Peer Group” section of this Compensation Discussion & Analysis for further details on the peer group developed by Pearl Meyer in late 2014 when establishing base salaries, annual equity awards and target annual incentive compensation for 2015.
Organizational Changes
In January 2015, we reorganized our leadership team to better align it with the needs of our business. As part of this reorganization, Dr. Krantz, who previously held the role of Chief Operating Officer, began serving as our Executive Vice President and Technology Officer; Dr. Bodor, who previously held the role of Chief Technology Officer, assumed the role of Vice President/General Manager – Americas; John Tumelty, who previously held the role of Managing Director of our European subsidiary, assumed the role of Vice President/General Manager and Managing Director – Europe and Ms. Schneider’s title changed from Vice President of Sales and Customer Service to Vice President of Global Sales.
On March 24, 2016, Dr. Krantz communicated his intent to retire in 2016 and will continue to serve in his current capacity while an orderly transition is accomplished. On April 5, 2016, Ms. Schneider announced her resignation from the Company to pursue other opportunities, effective May 13, 2016. Ms. Schneider intends to serve in her current capacity and assist with the transition through her resignation date.
Executive Compensation Philosophy and Objectives
We believe our success depends in large measure on our ability to attract, retain and motivate a talented senior management team to effectively lead our company in a dynamic and changing business environment, and that a competitive executive compensation program is essential to that effort. We believe that our executive compensation program should support our short- and long-term strategic and operational objectives, and reward corporate and individual performance that contributes to creating value for our shareholders.
Consistent with this philosophy, our executive compensation program incorporates the following key principles and objectives:
| ●
| Structure the compensation program so as to align the interests of our executive officers with those of our customers, employees, and shareholders generally;
|
| ●
| Provide a competitive total cash compensation opportunity that includes target incentive goals that are reasonably achievable yet represent appreciable and appropriate improvement over prior periods;
|
| ●
| Utilize equity-based awards in a manner designed to emphasize their long-term retentive function;
|
| ●
| Recognize and reward the achievement of company and business unit goals as well as individual performance;
|
| ●
| Provide compensation commensurate with the level of business performance achieved;
|
| ●
| Provide greater compensation opportunities for individuals who have the most significant responsibilities and therefore the greatest ability to influence our achievement of strategic and operational objectives;
|
| ●
| Structure the compensation program so that it is understandable and easily communicated to executives, shareholders and other constituencies;
|
| ●
| Place increasing emphasis on incentive/variable compensation for positions of increasing responsibility; and
|
| ●
| Make benefit programs available to executive officers consistent with those provided to salaried employees.
|
Compensation Decisions and Processes
The compensation committee of our board of directors, which consists solely of independent directors, generally has been responsible for overseeing our executive compensation program, including annually reviewing the ongoing compensation arrangements for each of our executive officers, including our CEO, and reporting those arrangements to our board.
Our compensation committee regularly receives and considers input from our CEO regarding the compensation and performance of the other executive officers, including recommendations as to compensation levels that the CEO believes are commensurate with an individual’s job performance, skills, experience, qualifications, criticality to our company and development/career opportunities, as well as with our compensation philosophy, external market data and considerations of internal equity. With the assistance of our CFO, our CEO also has provided recommendations to the compensation committee regarding the establishment of performance goals for the annual cash incentive plan based on the operating budget approved by our board of directors. Our CEO regularly attends meetings of our compensation committee, except where the CEO’s own compensation is being considered or times when the committee meets in executive session. Our CEO makes no recommendations to the compensation committee regarding her own compensation. The compensation committee communicates its views and decisions regarding compensation arrangements for our executive officers to our CEO, who generally has been responsible for implementing the arrangements.
In determining executive compensation, our compensation committee reviews and considers a number of factors, including individual and corporate performance, input from our CEO, compensation market data from third party compensation surveys, including Pearl Meyer (our compensation consultant), our compensation philosophy and key principles, the pay practicesclosing sale price of a set of comparable companies, feedback received from shareholders concerning say-on-pay, and the committee’s collective experience and knowledge. We have used market data primarily as a reference point to assess whether our compensation practices are reasonable, competitive and likely to achieve our objectives, and actually deliver compensation in amounts that are consistent with the compensation committee’s assessment of our company’s relative performance. As part of these assessments, we assumed that base salary and target total cash compensation levels were likely to be reasonable and competitive if together they approximated the market median we calculated from the surveys and other compensation data we utilized which for us generally meant a range between 80% and 125% of the market median. The utilization of a range is largely in recognition of the limitations of the survey data that include companies with limited degrees of comparability to our company and position titles that may encompass positions with responsibilities that differ to varying degrees from the responsibilities of a similarly titled position within our company. As a result, we did not establish specific compensation amounts or parameters for any executive officer position based on market data in 2015, recognizing that factors unique to each individual will ultimately determine that individual’s compensation, which may not necessarily be within the median range.
Our compensation committee also approves all awards to our executive officers under our 2012 Long-Term Incentive Plan (the “LTIP”), with awards then ratified by our board of directors. Our compensation committee has delegated authority to our CEO and the chair of the compensation committee under the LTIP to award stock options to employees (other than our executive officers) at their discretion, subject to individual and aggregate maximum amounts in each year. The CEO and the chair of the compensation committee typically exercise their discretion to grant these awards in connection with new hires and promotions and in recognition of extraordinary individual achievements. All awards granted pursuant to this delegated authority must have an exercise price at least equal to the closing priceshare of our common stock on the New York Stock Exchange on thethat date of grant, must have a vesting period of 20% of the shares subject to the option vesting annual over a five-year period and must be made in accordance with our equity grant timing policy described below in “Other Compensation and Equity-Related Policies—Equity Award Approval Policy.”
Peer Group
In late 2014, the compensation committee requested that its independent compensation consultant, Pearl Meyer, review our peer group used for executive compensation. Pearl Meyer used a multi-step process to construct a peer group that we believe fits our market position and profile. The compensation committee and our board of directors reviewed information relating to this peer group when establishing base salaries, annual equity awards and target annual incentive compensation for 2015.
When constructing the peer group, Pearl Meyer first identified U.S.-based, publicly-traded technology hardware and equipment, software and services, and capital goods companies. Second, it looked at companies with scope criteria approximately 1/3 to 3 times that of Proto Labs: annual revenues between $60 million and $550 million, and with market capitalizations between $660 million and $5.9 billion. Then, Pearl Meyer filtered for companies with high growth profiles, as indicated by a market capitalization-to-revenue ratio greater than three times, and positive EBITDA margins. Finally, Pearl Meyer gave preference to companies meeting these screens that (i) were in our existing peer group, (ii) represented manufacturing or rapid manufacturing organizations, and / or (iii) are believed to offer disruptive technologies.
Pearl Meyer’s review resulted in a peer group of the following 16 companies:
3D Systems Corporation
| Power Integrations, Inc.
| Tableau Software, Inc.
|
Cognex Corp.
| Raven Industries Inc.
| Tessera Technologies
|
FARO Technologies, Inc.
| Shutterstock, Inc.
| Ultratech, Inc.
|
GrubHub Inc.
| SolarWinds, Inc.*
| Ultimate Software Group, Inc.
|
InvenSense Inc.
| Sun Hydraulics Corporation
| Universal Display Corp.
|
Monotype Imaging Holdings, Inc.
| | |
* Note that in October 2015, SolarWinds announced it would be acquired by the private equity firms Silver Lake Partners and Thoma Bravo, LLC.
Below is selected information about the companies in the peer group that Pearl Meyer used when constructing the group:
| | Annual Revenue
| | Market Capitalization
|
25th percentile
| | $213 million
| | $1.3 billion
|
75th percentile
| | $383 million
| | $3.2 billion
|
The compensation committee uses data about executive compensation at peer group companies as a tool to assess the reasonableness of the total compensation paid to our executive officers. As discussed above, we do not establish a percentile which any part of our executive’s compensation or any executive’s overall compensation must meet or exceed.
Elements of Executive Compensation
Our executive compensation program historically has been comprised of three elements—base salary, annual cash incentive, and equity-based long-term incentives. The primary elements of our compensation program for 2015 were consistent with our 2014 compensation program. At our 2015 annual meeting, the say-on-pay proposal received the approval of more than 99% of the shares voted on the proposal. Our compensation committee considered this result to be an endorsement by our shareholders of our compensation program and maintained the fundamental features of our 2014 program for 2015. Our next say-on-pay proposal will be voted on at our 2017 Annual Meeting of Shareholders scheduled to be held in May 2017.
While all elements of our executive compensation program are intended to collectively achieve our overriding purpose of attracting, retaining and motivating talented executives, the table below identifies the form and additional specific purposes of each element.
Compensation
Component
| | Form of
Compensation
| | Purpose
|
Base Salary
| | Cash
| | •
| Compensate each named executive officer relative to individual responsibilities, experience and performance
|
| | | | | |
| | | | •
| Provide steady cash flow not contingent on short-term variations in company performance
|
| | | | | |
Annual Incentive
| | Cash
| | •
| Align compensation with our annual corporate financial performance
|
| | | | | |
| | | | •
| Reward achievement of short-term financial objectives
|
| | | | | |
| | | | •
| Provide participants with a meaningful total cash compensation opportunity (base salary plus annual incentive)
|
Long-Term Incentives
| | Stock Options and Restricted Stock Units
| | •
| Align compensation with our long-term returns to shareholders
|
| | | | •
| Encourage long-term retention
|
| | | | | |
| | | | •
| Create a long-term performance focus
|
| | | | | |
| | | | •
| Provide executive ownership opportunities
|
Our compensation committee has not adopted a formal or informal policy for allocating compensation among the various elements, or between cash and non-cash elements or between long- and short-term compensation. As noted earlier, however, we do place greater emphasis on incentive-based and variable forms of compensation for executives with more significant responsibilities, reflecting their greater capacity to affect our performance and results.
Base Salaries
At the time an executive officer is first hired, his or her base salary generally is established through individual negotiations between us and the executive officer, taking into account judgments as to the executive officer’s qualifications, experience, responsibilities, prior salary history, internal pay equity considerations and market factors.
The compensation committee annually reviews the base salaries of our executive officers near the end of each year and bases any adjustments for the following year on merit and market considerations. Merit-based adjustments primarily reflect a subjective assessment of an individual’s performance. Any market-based adjustments reflect an assessment of the competitive positioning of an individual’s salary with comparable positions in the market based on market data provided to the compensation committee by the compensation consultant and other market surveys the compensation committee might use.
Name | | 2015 Actual Salary Amount
($) | | 2015 Actual Incentive Amount
($) | | 2015 Total Cash Compensation Amount
($) | | Market 50th Percentile Total Cash Compensation
($)(1) | |
Victoria M. Holt | | 515,000 | | 500,903 | | 1,015,903 | | 802,000 | |
John A. Way | | 290,000 | | 211,736 | | 501,736 | | 467,000 | |
Donald G. Krantz | | 286,340 | | 208,877 | | 495,217 | | 482,000 | |
Jacqueline D. Schneider | | 268,000 | | 195,382 | | 463,382 | | 455,000 | |
Robert Bodor | | 250,000 | | 124,162 | | 374,162 | | 405,000 | |
| (1)
| Market compensation figures based on the peer group developed by Pearl Meter in late 2014 for 2015 compensation planning purposes.
|
Ms. Holt’s annual base salary for 2015 increased to $515,000 from $500,000 for 2014 as a result of a merit-based increase based on her contributions to our company and our company’s overall success in 2014 and expected success in 2015. Mr. Way’s annual base salary for 2015 remained at $290,000. Dr. Krantz’s annual base salary for 2015 increased to $286,340 from $278,000 for 2014 as a result of a merit-based increase and our company’s overall success in 2014 and expected success in 2015. Ms. Schneider’s annual base salary for 2015 increased to $268,000 from $255,000 for 2014 as a result of a merit-based increase attributable in part to her greater responsibilities in 2015 as well as a market-based increase intended to have her base salary approximate the median of our peer group. Dr. Bodor’s annual base salary for 2015 increased to $250,000 from $228,000 for 2014 as a result of a merit-based increase attributable in part to his greater responsibilities in 2015 as well as our company’s overall success in 2014 and expected success in 2015.
Annual Incentive Program
2015 Annual Incentive Program
All of our named executive officers participate in our annual incentive program. Our 2015 annual incentive program provided that payouts would be a function of two metrics:
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| Revenue growth, calculated without regard to foreign currency exchange rates or the results of operations of Alphaform, certain assets of which, including shares of select subsidiaries, we acquired from the Alphaform Group in October 2015. We refer to this aspect of the annual incentive program as the revenue factor.
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| Adjusted operating income margin, calculated without regard to foreign currency exchange rates or the results of operations of Alphaform. We refer to this aspect of the annual incentive program as the AOI threshold.
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For purposes of calculating annual incentives, AOI is defined as operating income before stock-based compensation expense as a percentage of revenue. Revenue growth and AOI were selected as the primary financial objectives that would determine the size of 2015 annual incentive payouts because our primary objective continues to be to grow our company.
For 2015, as in other previous years, we implemented a threshold level of AOI that, if met, would result in the eligibility for incentive payout being made to each executive as determined using the revenue factor. The threshold level of company-wide consolidated AOI for 2015 was 25.0%. For 2015, our company-wide AOI was 27.7%. As a result, our named executive officers compensated based on our consolidated results earned the incentive payments as calculated based on the revenue factor. Also, under the 2015 annual incentive program, the incentive compensation of the leaders of our Americas, European Union (“E.U.”) and Japanese units was based 65% on how the leader’s respective region performed and 35% on our global performance. Historically, the leaders of our major geographic business units received annual incentive compensation based solely on the performance of their respective unit. The change made for the 2015 program reflected the global nature of most of our support functions and resources and the need for our company to consider our global organization when making decisions with respect to each region to optimize the long-term success of our company.
In structuring the 2015 annual incentive program, the compensation committee approved 2015 revenue and AOI for our company as a whole and for each of our major geographic business units (the Americas, the E.U. and Japan). Including business unit performance objectives enables us to tailor annual incentive opportunities so as to reward each executive officer for the performance of those portion(s) of our company for which the officer had the most direct responsibility. All of our named executive officers other than Dr. Bodor had revenue goals based on our consolidated results. Dr. Bodor’s annual incentive compensation for 2015 was based 65% on our operating results in the Americas, the region for which he is primarily responsible, and 35% on consolidated results.
A target payout expressed as a percentage of annual base salary is established for each named executive officer annually. For 2015, their target payout percentages were as follows:
Name
| | Target Payout as %
of 2015 Salary
|
Victoria M. Holt
| | 100%
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John A. Way
| | 75%
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Donald G. Krantz
| | 75%
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Jacqueline D. Schneider
| | 75%
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Robert Bodor
| | 50%
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The target payout percentages for each named executive officer remained unchanged from the 2014 percentages in light of the compensation committee’s determination that the target percentages from 2014 remained competitive.
The payout is zero for 2015 revenue below specified threshold amounts for our company as a whole and each of its business units, is 30% at those threshold amounts, and increases (with no maximum) in amounts specified by the compensation committee to the degree revenue exceeds the respective threshold amounts. The revenue factor is 100% at targeted revenue growth on a consolidated basis or for each region, as applicable, for each individual.
For 2015, the compensation committee approved the following thresholds and targets for the revenue factor. Because we did not complete our acquisition of certain assets and shares of the Alphaform Group until October 2015, the actual performance and the threshold and target amounts reflected in the tables below exclude that acquisition for purposes of consistency.
Objective | | 2015 Threshold Growth | | 2015 Threshold Amount | | 2015 Target Growth | | 2015 Target Growth |
Consolidated Revenue Growth | | 10.0% | | $230.54M | | 26.1% | | $264.23M |
Americas Revenue Growth | | 10.0% | | $181.63M | | 25.8% | | $207.72M |
$48.19. The following table summarizes our actual performance during 2015information regarding awards outstanding and the related payout factors:
Objective
| | Actual
Performance(1)
| | | Final
Payout
Factor
| |
Consolidated Revenue(2)
| | | $262.95M
| | | | 97.35%(3)
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Americas Revenue(4)
| | | $208.02M
| | | | 100.81%
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| (1)
| Our actual performance is equal to our 2015 revenue without regard to foreign exchange rate fluctuation or the results of operations of Alphaform.
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| (2)
| For consolidated revenue performance between threshold and target, the payout factor would increase proportionately between 30% and 100%, or about 2.1 percentage points for each $1 million in additional consolidated revenue.
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| (3)
| The final payout factor represents the percentage of the target payout that would be made based on the actual company-wide revenue for 2015, without regard to foreign exchange rates or the results of operations of Alphaform. Each named executive officer other than Dr. Bodor received an incentive of approximately 8.2% more based on base salary than they would have received had exchange rate fluctuations been included in the revenue factor.
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| (4)
| For Americas revenue performance between threshold and target, the payout factor would increase proportionately between 30% and 100%, or about 2.7 percentage points for each $1 million in additional Americas revenue.
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Long-Term Equity-Based Compensation
Annual Equity Grants
The long-term incentive portion of our executive compensation program historically has taken the form of annual equity grants that have five-year annual ratable vesting periods. The five-year vesting period is longer than the vesting period used by most companies in our peer group. However, the Compensation Committee believes that a longer vesting period is more closely aligned with the creation of long-term shareholder value. Further, the committee understands that none of the companies in our peer group have the same business model or financial performance as our company.
We generally have not utilized a formulaic approach to determine the size of individual equity awards to our executives. Instead, our compensation committee generally has determined the size of individual grants using its collective business judgment and experience, taking into account factors such as the role and responsibility of the individual executive, the size and value of the unvested portion of existing equity awards and of existing holdingsshares of our common stock an evaluationremaining available for grant under the 2012 Plan(1) as of the expected and actual performanceMay 31, 2022:
