regarding obtaining a legal proxy. If you do obtain a legal proxy and plan to attend the Annual Meeting, you will be required to present a valid form of identification.
Below is a map reflecting the location of CTS’ Annual Meeting.
CTS’ Articles of Incorporation provide that the number of directors will be between three and fifteen, as fixed from time‑to‑time by the Board. As part of the succession planning and search process, the Nominating and Governance Committee and the Board regularly assess the Board’s size. The Board has established the number of authorized directors at seven following the retirement ofseven. Mr. CianciaCatlow will retire immediately following the 20172018 Annual Meeting of Shareholders.Shareholders and has not been nominated for election in 2018. On April 2, 2018, the Board appointed Mr. Zulueta to serve as a director, temporarily increasing the number of directors to 8. There are seven director nominees for election.election and the number of authorized directors will remain at seven effective as of the Annual Meeting. Detailed information on each is provided below. All directors are elected annually and serve one‑year terms, or until their successors are elected and qualified.
Your Board recommends a vote FOR each of these director nominees.
PROPOSAL 2: APPROVAL, ON AN ADVISORY BASIS, OF THE COMPENSATION OF
CTS’ NAMED EXECUTIVE OFFICERS
As required under the Dodd‑Frank Wall Street Reform and Consumer Protection Act and Section 14A of the Securities Exchange Act of 1934 (“Exchange Act”), our Board of Directors is submitting a “Say‑on‑Pay” proposal for shareholder consideration. The Compensation Discussion and Analysis section of this proxy statement describes CTS’ executive compensation program and the compensation decisions made by the Compensation Committee and the Board in 20162017 with
respect to our named executive officers. CTS is asking shareholders to cast an advisory shareholder vote approving the compensation of CTS’ named executive officers (commonly referred to as a “say‑on‑pay” vote). Under current Board policy and as selected by the shareholders with 77.38% of the vote at the 2017 Annual Meeting, the shareholder vote for advisory approval of named executive officer compensation will occur annually. The next such vote will occur at our 20182019 Annual Meeting of Shareholders. Shareholders unlessapproved, on an advisory basis, the frequency is changed as2016 compensation of CTS’ named executive officers by a resultvote of 96.75% at the advisory vote on Proposal 3, or any other factors considered by the Board.2017 Annual Meeting.
As we describe in the Compensation Discussion and Analysis section of this proxy statement, CTS’ executive compensation program is designed to attract, retain, and motivate high‑quality executive talent, to provide executives with strong incentives to maximize CTS’ performance, and to align executives’ interests with those of shareholders. These goals are achieved through the application of a number of techniques, such as:
balancing fixed pay versus incentive‑based compensation appropriately;
selecting appropriate and broad‑based performance metrics;
establishing reasonable performance thresholds;
capping performance‑based compensation awards at certain maximum levels;
requiring multiple‑year performance periods for certain performance‑based awards; and
vesting a significant amount of equity compensation over multi‑year periods.
CTS remains committed to the use of broad‑based metrics such as earnings per share, strategic business unit operating earnings, sales growth and relative total shareholder return in measuring corporate performance.
For these reasons, the Board is asking shareholders to vote FOR the following resolution:
“RESOLVED, that the compensation of the named executive officers as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the compensation tables, and any related material disclosed in the CTS 20172018 proxy statement, is hereby approved.”
While the advisory vote we are asking you to cast is non‑binding, the Compensation Committee and the Board value the views of our shareholders and expect to take into account the outcome of the vote when considering future compensation decisions for our named executive officers.
Your Board recommends a vote FOR the advisory approval of CTS’ named
executive officer compensation.
PROPOSAL 3: ADVISORY VOTE ON THE FREQUENCY OF FUTURE ADVISORY
VOTES ON THE COMPENSATION OF CTS' NAMED EXECUTIVE OFFICERS
In Proposal 2 above, shareholders are being asked to cast a non-binding advisory vote with respect to the compensation of CTS' named executive officers. This advisory vote is commonly referred to as a "say-on-pay" vote. In this Proposal 3, the Board is also, pursuant to Section 14A of the Exchange Act, asking shareholders to cast a non-binding advisory vote on how frequently say-on-pay votes should be held in the future. Shareholders are entitled to cast their votes on whether we should hold say-on-pay votes every one, two, or three years. Alternatively, you may abstain from casting a vote.
This advisory vote is not binding on the Board. The Board believes at this time the existing annual say-on-pay voting frequency best serves the interests of shareholders. However, the Board acknowledges that there are a number of points of view regarding the relative benefits of annual and less frequent say-on-pay votes. Accordingly, the Board intends to hold say-on-pay votes in the future in accordance with the alternative that receives the most shareholder support.
Your Board recommends a vote FOR an advisory vote on the compensation of CTS' named
executives officers EVERY YEAR (1 YEAR).
PROPOSAL 4: RATIFICATION OF APPOINTMENT OF GRANT THORNTON LLP
AS INDEPENDENT AUDITOR FOR 20172018
Grant Thornton LLP has served as CTS’ independent auditor since June 2005 and has been appointed by the Audit Committee to continue as CTS’ independent auditor for 2017.2018. In the event that ratification of the appointment of Grant Thornton LLP as independent auditor for 20172018 is not approved by the shareholders at the Annual Meeting, the Board will review the Audit Committee’s future selection of independent auditors.
Representatives of Grant Thornton LLP will be present at the Annual Meeting. The representatives will be available to respond to appropriate questions. The representatives will also be afforded an opportunity to make such statements as they desire.
Your Board recommends a vote FOR ratification of the appointment of
Grant Thornton LLP as independent auditor for 2017.2018.
PROPOSAL 4: APPROVAL OF THE CTS CORPORATION
2018 EQUITY AND INCENTIVE COMPENSATION PLAN
General
We are asking shareholders to approve the CTS Corporation 2018 Equity and Incentive Compensation Plan (the “2018 Plan”). On February 8, 2018, upon the recommendation of the Compensation Committee, the Board unanimously approved and adopted, subject to shareholder approval, the 2018 Plan to replace our current equity plan, the CTS Corporation 2014 Performance and Incentive Compensation Plan (the “2014 Plan”). Our shareholders approved the 2014 Plan at CTS’ 2014 Annual Meeting of Shareholders. The Board is recommending that CTS’ shareholders vote in favor of the 2018 Plan, which will succeed in its entirety the 2014 Plan. The 2018 Plan will afford the Compensation Committee the ability to provide certain employees of CTS and its affiliates and CTS’ non-employee directors (“Participants”) with the opportunity to receive stock-based and other incentive grants in order to attract, motivate and help retain qualified individuals and to align their interests with the interests of CTS’ shareholders. You are being asked to approve the 2018 Plan.
If the 2018 Plan is approved by shareholders at the 2018 Annual Meeting, it will be effective as of the day of the 2018 Annual Meeting, and no further grants will be made on or after such date under the 2014 Plan. Outstanding awards under the 2014 Plan, however, will continue in effect in accordance with their terms. If the 2018 Plan is not approved by our shareholders, no awards will be made under the 2018 Plan and the 2014 Plan will remain in effect.
Our principal reason for adopting the 2018 Plan is to obtain shareholder approval of 2,500,000 shares of our common stock, without a par value (“Common Shares”), available for awards under the 2018 Plan as described below and in the 2018 Plan. The Board recommends that you vote to approve the 2018 Plan. The actual text of the 2018 Plan is attached to this proxy statement as Exhibit A. The following description of the 2018 Plan is only a summary of its principal terms and provisions and is qualified by reference to the actual text as set forth in Exhibit A. A new plan benefits table is not provided because no grants have been made under the 2018 Plan and all grants will be discretionary, as further described below.
Why CTS Believes You Should Vote for Proposal 4
The 2018 Plan authorizes the Compensation Committee to provide equity-based compensation in the form of stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), performance shares, performance units and other stock or stock-based awards to Participants. The 2018 Plan also authorizes the Compensation Committee to provide cash incentive awards to these same Participants. Some of the key features of the 2018 Plan that reflect CTS’ commitment to effective management of equity and incentive compensation are set forth below in this subsection.
CTS believes its future success continues to depend in part on its ability to attract, motivate and retain high quality employees and directors and that the ability to provide equity-based and/or incentive-based awards under the 2018 Plan is critical to achieving this success. CTS believes it would be at a severe competitive disadvantage if it could not use stock-based awards to recruit and compensate its non-employee directors and officers and other employees.
The use of Common Shares as part of CTS’ compensation program is also important to its continued success because equity-based awards are an essential component of our compensation program for certain employees, as they link compensation with long-term shareholder value creation and reward Participants based on CTS�� performance. As discussed in further detail in the “Compensation Discussion and Analysis”, equity compensation represents a significant portion of the compensation package for our Chief Executive Officer and other named executive officers. Because our equity awards generally vest over multiple years, the value ultimately realized from these awards depends on the long-term value of our Common Shares. Our
equity compensation program also helps us to attract and retain talent, targeting individuals who are motivated by pay-for-performance. Equity compensation also aligns the compensation interests of CTS’ directors with the investment interests of its shareholders and promotes a focus on long-term value creation because its equity compensation awards can be subject to vesting criteria.
As of March 19, 2018, 50,057 Common Shares remained available for awards under the 2014 Plan. If the 2018 Plan is not approved, CTS may be compelled to increase significantly the cash component of its non-employee director and employee compensation, which may not necessarily align director or employee compensation interests with the investment interests of its shareholders as well as the alignment provided by equity-based awards.
The following includes aggregated information regarding the overhang and dilution associated with our now-terminated CTS Corporation Amended and Restated 2009 Omnibus Equity and Performance Incentive Plan (the “A&R 2009 Plan”) and the 2014 Plan, and the potential shareholder dilution that would result if the proposed Common Share authorization under the 2018 Plan is approved. The following information is as of March 19, 2018. As of that date, there were approximately 33,017,770 of CTS’ Common Shares outstanding.
Total outstanding full-value awards (RSUs), assuming that the outstanding awards achieve maximum performance: 739,711 Common Shares (2.24 percent of outstanding Common Shares);
Outstanding stock options: 295,000 Common Shares (.89 percent of outstanding Common Shares) (outstanding stock options have a weighted average exercise price of $18.37 and an average remaining term of 2.2 years);
Total Common Shares subject to outstanding awards as described above (stock options and RSUs): 1,034,711 Common Shares (3.13 percent of outstanding Common Shares);
Total Common Shares currently available for future awards under the 2014 Plan: 50,057 Common Shares (.15 percent of outstanding Common Shares);
The total number of Common Shares subject to outstanding awards (1,034,711 Common Shares), plus the total number of Common Shares currently available for future awards under the 2014 Plan (50,057 Common Shares), represents a current overhang percentage of 3.29 percent (potential dilution represented by the 2014 Plan);
Proposed Common Shares available for awards under the 2018 Plan: Our new Common Share request is for 2,500,000 Common Shares. This would essentially encompass the 50,057 Common Shares currently remaining available for awards under the 2014 Plan and an additional 2,449,943 Common Shares. A request for 2,500,000 Common Shares represents about 7.6 percent of our outstanding Common Shares, this percentage reflects the dilution of our shareholders that could occur if the 2018 Plan is approved; and
The total Common Shares subject to outstanding awards as of March 19, 2018 (739,711 Common Shares), plus the proposed Common Shares available for awards under the 2018 Plan (2,500,000 Common Shares), represent a total overhang of 3,239,711 Common Shares (9.8 percent of outstanding Common Shares) under the 2018 Plan.
Based on the closing price on NYSE for CTS’ Common Shares on March 19, 2018 of $27.80 per Common Share, the aggregate market value as of March 19, 2018 of the 2,500,000 Common Shares requested for awards under the 2018 Plan was $69,500,000.
In 2015, 2016 and 2017, CTS granted awards under the 2014 Plan covering 585,725 Common Shares (including options), 258,564 Common Shares, and 181,659 Common Shares, respectively. Based on our basic weighted average of Common Shares outstanding for those three years of 32,548,477, 32,762,494, and 32,933,326 respectively, for the three-fiscal-year period 2015-2017, our average burn rate, not taking into account forfeitures, was 1% (our individual years’ burn rates were 1.8% for 2015, .8% for 2016, and .6% for 2017).
In determining the number of Common Shares to request for approval under the 2018 Plan, CTS’ management team worked with Compensation Strategies, Inc., the Compensation Committee’s independent compensation consultant, and the Compensation Committee to evaluate a number of factors including CTS’ recent Common Share usage and criteria expected to be utilized by institutional proxy advisory firms in evaluating this proposal for the 2018 Plan.
If the 2018 Plan is approved, CTS intends to utilize the Common Shares authorized under the 2018 Plan to continue its practice of incentivizing key individuals through equity grants. CTS currently anticipates that the Common Shares requested in connection with the approval of the 2018 Plan will last for about 8 years, based on its historic grant rates and the approximate
current Common Share price, but could last for a shorter period of time if actual practice does not match historic rates or CTS’ Common Share price changes materially. As noted elsewhere below, CTS’ Compensation Committee would retain full discretion under the 2018 Plan to determine the number and amount of awards to be granted under the 2018 Plan, subject to the terms of the 2018 Plan, and future benefits that may be received by Participants under the 2018 Plan are not determinable at this time.
CTS believes that it has demonstrated a commitment to sound equity compensation practices. CTS recognizes that equity compensation awards dilute shareholders’ equity, so it has carefully managed its equity incentive compensation. CTS’ equity compensation practices are intended to be competitive and consistent with market practices, and CTS believes its historical Common Share usage has been responsible and mindful of shareholder interests, as described above. In evaluating this proposal, shareholders should consider all of the information in this proposal.
2018 Plan Highlights
Administration. Generally, the 2018 Plan will be administered by the Compensation Committee. The Compensation Committee shall have authority to interpret the 2018 Plan and any award agreement under the 2018 Plan, prescribe rules and regulations, and make determinations necessary for the administration of the 2018 Plan. The determinations of the Compensation Committee shall be conclusive and binding. To the extent permitted by law, the Compensation Committee may delegate its authority to a subcommittee or, subject to certain conditions, to one or more officers of CTS to make awards to employees who are not directors, executive officers, or more than 10% shareholders. The Compensation Committee is authorized to take any action under the 2018 Plan it determines in its sole discretion to be appropriate subject only to the express limitations contained in the 2018 Plan, and no authorization in any 2018 Plan section or other provision of the 2018 Plan is intended or may be deemed to constitute a limitation on the authority of the Compensation Committee. CTS will not be required to issue fractional Common Shares under the 2018 Plan; the Compensation Committee may eliminate fractional Common Shares or settle such fractions in cash.
Reasonable 2018 Plan Limits. Subject to adjustment and the applicable Common Share counting provisions as described in the 2018 Plan, the maximum number of Common Shares available for awards under the 2018 Plan is 2,500,000 Common Shares. This Common Share pool will be reduced by one Common Share for every one Common Share subject to an award granted under the 2018 Plan, subject to the Common Share counting provisions of the 2018 Plan. The Common Shares available under the 2018 Plan will be authorized and unissued Common Shares, Common Shares purchased in the open market or otherwise, Common Shares in treasury, or any combination thereof. Unless otherwise determined by the Compensation Committee, awards that are designed to operate in tandem with other awards will not count against the maximum number of Common Shares available under the 2018 Plan in order to avoid double counting.
In addition, the 2018 Plan provides that, subject to adjustment as described in the 2018 Plan:
the maximum number of Common Shares that may be issued or transferred upon the exercise of Incentive Stock Options (as defined below) will not exceed the total Common Share pool for the 2018 Plan as described above; and
in no event will any non-employee director in any calendar year be granted compensation for such service having an aggregate maximum value (measured at the date of grant as applicable, and calculating the value of any equity awards based on the grant date fair value for financial reporting purposes) in excess of $500,000.
Allowances for Conversion Awards and Assumed Plans. Common Shares issued or transferred under awards granted under the 2018 Plan in substitution for or conversion of, or in connection with an assumption of, stock options, SARs, restricted stock, RSUs or other stock or stock-based awards held by awardees of an entity engaging in a corporate acquisition or merger transaction with CTS or any of its subsidiaries will not count against (or be added to) the aggregate Common Share limit or other 2018 Plan limits described above. Additionally, shares available under certain plans that CTS or its subsidiaries may assume in connection with corporate transactions from another entity may be available for certain awards under the 2018 Plan, under circumstances further described in the 2018 Plan, but will not count against (or be added to) the aggregate Common Share limit or other 2018 Plan limits described above.
Limited Share Recycling Provisions. Subject to certain exceptions described in the 2018 Plan, if any Common Shares subject to an award granted under the 2018 Plan are forfeited, or if any award granted under the 2018 Plan is cancelled or forfeited, expires or is settled for cash (in whole or in part), or is unearned (in whole or in part), the Common Shares subject to such award will, to the extent of such cancellation, forfeiture, expiration, cash settlement, or unearned amount, again be available for awards under the 2018 Plan. The following Common Shares will not be added (or added back, as applicable) to the aggregate
Common Share limit under the 2018 Plan: (1) Common Shares withheld by us, tendered or otherwise used in payment of the exercise price of a stock option or SAR granted under the 2018 Plan, (2) Common Shares withheld by us, tendered or otherwise used to satisfy tax withholding, and (3) Common Shares reacquired by the Company on the open market or otherwise using cash proceeds from the exercise of stock options granted under the 2018 Plan. Further, all Common Shares covered by SARs that are exercised and settled in Common Shares, whether or not all Common Shares covered by the SARs are actually issued to the Participant upon exercise, will be counted against the aggregate number of Common Shares available under the 2018 Plan. If a Participant elects to give up the right to receive compensation in exchange for Common Shares based on fair market value, such Common Shares will not count against the aggregate number of shares available under the 2018 Plan.
No Repricing Without Shareholder Approval. Except in connection with certain corporate transactions or events as described in the 2018 Plan, the repricing of options and SARs is prohibited without shareholder approval under the 2018 Plan.
Change in Control Definition. The 2018 Plan includes a definition of “Change in Control,” which definition is set forth below.
Other Feature. The 2018 Plan also provides that, except with respect to certain converted, assumed or substituted awards as described in the 2018 Plan, no stock options or SARs will be granted with an exercise price less than the fair market value of a Common Share on the date of grant.
Summary of Other Material Terms of the 2018 Plan
Eligibility. The Compensation Committee will designate those employees of CTS and its affiliates and the non-employee Board members who will participate in and receive awards under the 2018 Plan. The number of persons eligible to participate in the 2018 Plan is currently estimated to be approximately 100 such employees and 5 non-employee Board members.
Awards. The following types of awards may be granted under the 2018 Plan (which awards may be in lieu of other amounts owed to a Participant), subject to such terms as the Compensation Committee may prescribe in an award agreement consistent with the 2018 Plan:
Stock Options: Stock options represent rights to purchase Common Shares at a specified exercise price. The exercise price of stock options granted under the 2018 Plan may not be less than the fair market value of a common share on the date of grant, unless such grant is in substitution or assumption of another stock option in accordance with plan terms. Options may take the form of incentive stock options or nonqualified stock options, but incentive stock options may only be granted to employees under Section 3401(c) of the Internal Revenue Code of 1986, as amended (the “Code”). Options may not have a term of more than 10 years, and may not provide for any dividends or dividend equivalents.
SARs: SARs represent rights to receive the difference between the fair market value of a Common Share on the date of exercise and the exercise price, payable in cash or Common Shares. The exercise price of SARs granted under the 2018 plan may not be less than the fair market value of a common share on the date of grant, unless such grant is in substitution or assumption of another SAR in accordance with plan terms. SARs may not have a term of more than 10 years and may not provide for any dividends or dividend equivalents.
Restricted Stock: Restricted stock represents Common Shares subject to certain terms and restrictions and the risk of forfeiture. Any dividends or other distributions on Restricted Stock (but only to the extent such award itself provides for dividends or other distributions thereon) will be deferred until and paid contingent upon the earning or vesting of the underlying award.
Restricted Stock Units: RSUs represent the right to receive Common Shares or an amount equal to the fair market value of such Common Shares, payable in cash or Common Shares, subject to certain restrictions and/or the risk of forfeiture. Any dividends or other distributions on RSUs (but only to the extent such award itself provides for dividends or other distributions thereon) will be deferred until and paid contingent upon the earning or vesting of the underlying award.
Performance Shares: Performance shares represent an award, denominated in Common Shares, which is earned during a specified performance period subject to the attainment of one or more performance measures. Any dividends or other distributions on performance shares (but only to the extent such award itself provides for dividends or other distributions thereon) will be deferred until and paid contingent upon the earning or vesting of the underlying award.
Performance Units: Performance units represent an award, denominated in currency-valued units, which is earned during a specified performance period subject to the attainment of one or more performance measures. Any dividends or other distributions on performance units (but only to the extent such award itself provides for dividends or other distributions thereon) will be deferred until and paid contingent upon the earning or vesting of the underlying award.
Cash Incentive Awards: Cash incentive awards are cash awards that are earned during a specified performance period subject to the attainment of one or more performance criteria.
Other Stock Awards: Other stock awards are awards of Common Shares or other awards based in whole or in part on the value of a Common Share (such as dividend equivalents) or related to Common Shares, payable in Common Shares, cash, other securities, or other property. Any dividends or other distributions on other stock awards (but only to the extent such award itself provides for dividends or other distributions thereon) will be deferred until and paid contingent upon the earning or vesting of the underlying award.
Performance Measures. Under the 2018 Plan, the Compensation Committee may utilize performance objectives determined by the Compensation Committee for Participants who have received grants of performance shares, performance units or cash incentive awards or, when so determined by the Compensation Committee, stock options, SARs, restricted stock, RSUs or other stock awards.
Adjustments. In the event of any corporate transaction (as described in the 2018 Plan) or event having a similar effect, the Compensation Committee will make or provide for such adjustments in the number and kind of shares available for awards under the 2018 Plan and any 2018 Plan limits, the number and kind of shares covered by outstanding awards, the exercise price for outstanding awards, and other award terms, as the Compensation Committee, in its sole discretion, exercised in good faith, determines is equitably required to prevent dilution or enlargement of the rights of Participants or the benefits intended to be made available under the 2018 Plan. In the case of any stock split, including a stock split effected by means of a stock dividend, or of any other dividend paid in CTS Common Shares, the adjustments will be made automatically without the necessity of Compensation Committee action, on the customary arithmetical basis. Any fractional Common Share resulting from such an adjustment will be disregarded except as may be required for compliance with Section 409A of the Code. Also, in the event of any such transaction or event or in the event of a Change in Control, the Compensation Committee may provide in substitution for any or all outstanding awards under the 2018 Plan such alternative consideration (including cash) as it may determine to be equitable and may require the surrender of all or part of any award to be replaced in a manner that complies with Section 409A of the Code. In addition, for each stock option or SAR with an exercise price greater than the consideration offered in connection with any such transaction or event or Change in Control, the Compensation Committee may choose to cancel such award without any payment to the person holding such award.
Change in Control. Award agreements may provide for the treatment of awards upon certain corporate transactions or events, including a Change in Control. For purposes of the 2018 Plan, except as the Compensation Committee may otherwise provide for in an award agreement, a “Change in Control” will generally be deemed to have occurred upon the occurrence of any of the following events: (1) certain acquisitions of beneficial ownership of 25% or more of the combined voting power of CTS securities entitled to vote to elect CTS directors, subject to certain exceptions described in the 2018 Plan; (2) a turn-over of a majority of CTS’ incumbent Board serving on the effective date of the 2018 Plan, subject to certain exceptions described in the 2018 Plan; (3) the consummation of certain corporate transactions (such as a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of CTS), unless certain qualifying criteria are met, as described in the 2018 Plan; or (4) CTS’ shareholders approve a complete liquidation or dissolution of CTS, subject to certain exceptions described in the 2018 Plan.
Withholding. The Compensation Committee may make such provisions and take such steps as it may deem necessary and appropriate for the withholding of any taxes that CTS is required by law or regulation of any governmental authority, whether federal, state, local, domestic, foreign or other, to withhold in connection with the grant, exercise, payment, or removal of restrictions of an award (or other events regarding an award). In no event will the fair market value of Common Shares to be withheld to satisfy applicable withholding taxes in connection with a benefit exceed the minimum amount required to be withheld, unless (1) an additional amount can be withheld and not result in adverse accounting consequences, (2) such additional withholding amount is authorized by the Compensation Committee, and (3) the total amount withheld does not exceed the Participant’s estimated tax obligations attributable to the applicable transaction.
Other Provisions.
The 2018 Plan shall not be construed to give a Participant the right to continue as an employee or director of CTS and a Participant will not have any rights as a shareholder unless and until Common Shares are actually issued.
Any rights under the 2018 Plan are not assignable by a Participant except by will or by the applicable laws of descent and distribution, unless otherwise determined by the Compensation Committee. In no event will any award granted under the 2018 Plan be transferred for value.
Subject to the approval of the Board where required, the Compensation Committee may amend or terminate the 2018 Plan in whole or in part; provided that no amendment or termination may be made without shareholder approval that would materially increase the maximum number of Common Shares that may be issued under the 2018 Plan (except for adjustments permitted under the 2018 Plan), materially change the class of eligible Participants, permit the repricing of outstanding options or SARs (other than as provided for in the 2018 Plan) or otherwise require shareholder approval. Except for adjustments permitted under the 2018 Plan, no amendment of an award by the Compensation Committee (as permitted under the 2018 Plan) may materially impair any right of a Participant under an award without that Participant’s consent, except as necessary to comply with changes in law or accounting rules applicable to CTS.
The Compensation Committee may adopt, amend, or terminate arrangements to make tax or other benefits available to Participants subject to laws of a foreign jurisdiction or to conform with such laws.
The 2018 Plan shall be governed by the laws of the State of Indiana, without regard to its conflict of laws principles.
CTS reserves the right to make certain amendments to the 2018 Plan related to compliance with Section 409A of the Code.
The 2018 Plan provides that award agreements may contain an award “clawback” feature or reference a clawback policy or provisions.
Effective Date and Termination. The 2018 Plan is expected to become effective as of May 17, 2018, subject to shareholder approval. Unless earlier terminated, the 2018 Plan will expire on May 16, 2028.
New Plan Benefits
It is not possible to determine the specific amounts and types of awards that may be awarded in the future under the 2018 Plan because the grant and actual pay-out of awards under the 2018 Plan are subject to the discretion of the plan administrator.
Federal Income Tax Consequences
The following is a brief summary of certain of the federal income tax consequences of certain transactions under the 2018 Plan based on federal income tax laws in effect. This summary, which is presented for the information of shareholders considering how to vote on this proposal and not for 2018 Plan Participants, is not intended to be complete and does not describe federal taxes other than income taxes (such as Medicare and Social Security taxes), or state, local or foreign tax consequences.
Tax Consequences to Participants
Nonqualified Stock Options. In general: (1) no income will be recognized by an optionee at the time a non-qualified stock option is granted; (2) at the time of exercise of a non-qualified stock option, ordinary income will be recognized by the optionee in an amount equal to the difference between the exercise price paid for the Common Shares and the fair market value of the Common Shares, if unrestricted, on the date of exercise; and (3) at the time of sale of Common Shares acquired pursuant to the exercise of a non-qualified stock option, appreciation (or depreciation) in value of the Common Shares after the date of exercise will be treated as either short-term or long-term capital gain (or loss) depending on how long the Common Shares have been held.
Incentive Stock Options. No income generally will be recognized by an optionee upon the grant or exercise of an Incentive Stock Option. The exercise of an Incentive Stock Option, however, may result in alternative minimum tax liability. If Common Shares are issued to the optionee pursuant to the exercise of an Incentive Stock Option, and if no disqualifying disposition of such Common Shares is made by such optionee within two years after the date of grant or within one year after the transfer of such Common Shares to the optionee, then upon sale of such Common Shares, any amount realized in excess of
the exercise price will be taxed to the optionee as a long-term capital gain and any loss sustained will be a long-term capital loss.
If Common Shares acquired upon the exercise of an Incentive Stock Option are disposed of prior to the expiration of either holding period described above, the optionee generally will recognize ordinary income in the year of disposition in an amount equal to the excess (if any) of the fair market value of such Common Shares at the time of exercise (or, if less, the amount realized on the disposition of such Common Shares if a sale or exchange) over the exercise price paid for such Common Shares. Any further gain (or loss) realized by the Participant generally will be taxed as short-term or long-term capital gain (or loss) depending on the holding period.
SARs. No income will be recognized by a Participant in connection with the grant of a SAR. When the SAR is exercised, the Participant normally will be required to include as taxable ordinary income in the year of exercise an amount equal to the amount of cash received and the fair market value of any unrestricted Common Shares received on the exercise.
Restricted Stock. The recipient of restricted stock generally will be subject to tax at ordinary income rates on the fair market value of the restricted stock (reduced by any amount paid by the recipient for such restricted stock) at such time as the restricted stock is no longer subject to forfeiture or restrictions on transfer for purposes of Section 83 of the Code (“Restrictions”). However, a recipient who so elects under Section 83(b) of the Code within 30 days of the date of transfer of the Common Shares will have taxable ordinary income on the date of transfer of the Common Shares equal to the excess of the fair market value of such Common Shares (determined without regard to the Restrictions) over the purchase price, if any, of such restricted stock. If a Section 83(b) election has not been made, any dividends received with respect to restricted stock that are subject to the Restrictions generally will be treated as compensation that is taxable as ordinary income to the recipient.
Restricted Stock Units. No income generally will be recognized upon the award of RSUs. The recipient of an RSU award generally will be subject to tax at ordinary income rates on the fair market value of unrestricted Common Shares on the date that such Common Shares are transferred to the Participant under the award (reduced by any amount paid by the Participant for such RSUs), and the capital gains/loss holding period for such Common Shares will also commence on such date.
Performance Shares and Performance Units. No income generally will be recognized upon the grant of performance shares or performance units. Upon payment in respect of the earn-out of performance shares or performance units, the recipient generally will be required to include as taxable ordinary income in the year of receipt an amount equal to the amount of cash received and the fair market value of any unrestricted Common Shares received.
Other Stock Awards. No income generally will be recognized upon the grant of other stock awards. Upon payment of other awards, the recipient generally will be required to include as taxable ordinary income in the year of receipt an amount equal to the amount of cash received and the fair market value of any unrestricted Common Shares received.
Cash Incentive Awards. Upon payment in respect of the earning of cash incentive awards, the recipient generally will be required to include as taxable ordinary income in the year of receipt an amount equal to the amount of cash received.
The following table provides information about shares of CTS common stock that could be issued under all of CTS’ equity compensation plans as of December 31, 2017:
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Plan Category |
(a) Number of Securities to be issued Upon Exercise of Outstanding Options, Warrants and Rights(1) |
(b) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) |
Equity compensation plans approved by security holders | 970,114 | $18.37 | 303,020 |
Equity compensation plans not approved by security holders (2) | 9,620 | — | — |
Total | 979,734 | — | 303,020 |
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(1) | The first and total rows of this column include 661,032 restricted stock units representing service-based and performance-based awards assuming achievement at target, which are settled in CTS common stock. Achievement of the maximum performance-based awards would total 1,200,750 shares of CTS common stock as settlement. Restricted stock units have no bearing on the weighted-average exercise price in column (b). |
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(2) | In 1990, CTS adopted the Stock Retirement Plan for Non-Employee Directors. Prior to December 1, 2004, CTS annually credited an account for each non-employee director with 800 CTS common stock units. CTS also annually credited each deferred stock account with an additional number of CTS common stock units representing the amount of dividends which would have been paid on an equivalent number of shares of CTS common stock for each quarter during the preceding calendar year. As of December 1, 2004, this plan was amended to preclude crediting any additional CTS common stock units under the plan. Upon retirement, a participating non-employee director is entitled to receive one share of CTS common stock for each CTS common stock unit in his deferred stock account. |
Tax Consequences to CTS
To the extent that a Participant recognizes ordinary income in the circumstances described above, CTS or the subsidiary for which the Participant performs services will be entitled to a corresponding deduction provided that, among other things, the income meets the test of reasonableness, is an ordinary and necessary business expense, is not an “excess parachute payment” within the meaning of Section 280G of the Code and is not disallowed by the $1 million limitation on certain executive compensation under Section 162(m) of the Code.
Registration with the SEC
CTS intends to file a Registration Statement on Form S-8 relating to the Common Shares under the 2018 Plan with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, as soon as practicable after approval of the 2018 Plan by CTS’ shareholders.
Your Board recommends a vote FOR ratification of the 2018 Plan.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires CTS’ directors, executive officers, and certain persons who own more than 10% of the outstanding shares of CTS common stock to file with the Securities and Exchange Commission ("SEC") and the NYSE initial reports of ownership and reports of changes in ownership of CTS common stock. Executive officers, directors and holders of at least 10% of the outstanding shares of CTS securities are required to furnish CTS with copies of all Section 16(a) reports they file. Based solely on written representations from reporting persons and on our review of Section 16(a) reports provided by those individuals, CTS believes that all required Section 16(a) filings were completed in a timely manner, or subsequently amended, for the year ended December 31, 2016.2017.
COMMITTEES OF THE BOARD OF DIRECTORS
Directors are assigned to committees by the full Board each year following their election at the Annual Meeting.
Compensation Committee
The Compensation Committee is a standing committee of the Board. Directors Collawn, Catlow, Hunter and Murphy are the current members of the Compensation Committee. Ms. Collawn is the Chairman of the Compensation Committee. Mr. Catlow will retire immediately following the 2018 Annual Meeting. Each member of the Compensation Committee is an independent director as defined by the NYSE Corporate Governance Listing Standards and the CTS Corporation Corporate Governance Guidelines.
The Compensation Committee held three meetings in 2016.2017. A copy of the Compensation Committee Charter may be obtained free of charge from CTS’ website at http://www.ctscorp.com/wp-content/uploads/CC.pdf.
The Compensation Committee establishes executive compensation policies and reviews and approves senior executive compensation. The Chief Executive Officer recommends to the Compensation Committee the form and level of compensation for each named executive officer other than himself.himself to the Compensation Committee. The Compensation Committee reviews and approves corporate goals and objectives relevant to the named executive officer's, including the Chief Executive Officer’s, compensation, evaluates the Chief Executive Officer’s performance against those objectives, and makes recommendations to the Board regarding the Chief Executive Officer’s compensation. The Compensation Committee does not delegate authority to perform any of the foregoing functions with respect to the compensation of any named executive officer. The Compensation Committee also administers the CTS Corporation 2014 Performance and Incentive Compensation Plan, and the annual equity and non‑equity performance programs. In addition, the Compensation Committee reviews director compensation annually and makes recommendations regarding director compensation to the Board for approval. The Compensation Committee also conducts an annual evaluation of its own performance for the fiscal year.performance.
The Compensation Committee may, from time‑to‑time, direct senior functionaries of the Company’s human resources department to research specific issues and make recommendations to the Compensation Committee. In addition, for 2016,2017, the Compensation Committee engaged Compensation Strategies, Inc. as its compensation consultant. The Compensation Committee has assessed the independence of Compensation Strategies, as required under stock exchange listing requirements. The Compensation Committee has also considered and assessed all relevant factors, including those required by the SEC, that could give rise to a potential conflict of interest with respect to Compensation Strategies during 2016.2017. Based on this review, the Compensation Committee did not identify any conflict of interest raised by the work performed by Compensation Strategies.
Compensation Committee Interlocks and Insider Participation. Directors Collawn, Catlow, Hunter and Murphy were appointed to the Compensation Committee following their election to the Board at CTS’ 20162017 Annual Meeting of Shareholders. During 2016,2017, no executive officer of CTS served as a director of any other entity for which any CTS director was an executive officer.
Nominating and Governance Committee
The Nominating and Governance Committee is a standing committee of the Board. Directors Murphy, Ciancia, Collawn and Johnson are the current members of the Nominating and Governance Committee. Ms. Murphy is the Chairman of the Nominating and Governance Committee. Mr. Ciancia will retire immediately following the 2017 Annual Meeting. Each member of the Nominating and Governance Committee is an independent director as defined by the NYSE Corporate Governance Listing Standards and the CTS Corporation Corporate Governance Guidelines.
The Nominating and Governance Committee held two meetings in 2016.2017. A copy of the Nominating and Governance Committee Charter may be obtained free of charge from CTS’ website at http://www.ctscorp.com/wp-content/uploads/NGCC.pdf.
The Nominating and Governance Committee reviews and makes recommendations to the Board concerning committee assignments and director nominees for election at the Annual Meeting. The Nominating and Governance Committee reviews and makes recommendations to the full Board regarding CTS officers for election and succession, including succession planning for the Chief Executive Officer. The Nominating and Governance Committee also develops the CTS Corporation Corporate Governance Guidelines for the approval of the Board and makes recommendations on matters of corporate governance. The Nominating and Governance Committee considers potential director nominees identified by management and by non-management directors.directors and oversees director recruiting efforts. CTS’ Bylaws describe the process for nominating a candidate for election to the Board at the Annual Meeting. CTS does not have a formal policy concerning whether the Nominating and Governance Committee will consider director nominees submitted by shareholders. CTS did not receive any shareholder director nominees for election at the 20172018 Annual Meeting. At this time, the Board does not believe a formal policy regarding shareholder director nominees is necessary since CTS’ Bylaws provide a process for nomination of directors and no shareholder nominations for director have been received in past years.
The Nominating and Governance Committee reviews with the Board, on an annual basis, the requisite skills and director characteristics of any new members as well as the composition of the Board as a whole. This review includes an assessment of whether each non‑management director qualifies as independent and an assessment of the diversity, age, skills, and experience of the directors in the context of the needs of the Board. Although the Nominating and Governance Committee has not established any specific minimum criteria or qualifications that a candidate must possess, the Nominating and Governance Committee seeks a diverse selection of candidates who possess the experience necessary to make a valuable contribution to the Board. The Board construes the notion of diversity broadly, considering differences in viewpoint, professional experience, education, skills, and other individual qualities, in addition to race, gender, and national origin. The Board does not have a formal diversity policy, but considers diversity as one criteria evaluated as a part of the total package of attributes and qualifications a particular candidate possesses. The Board believes that its efforts to foster a diverse board have been effective; while all directors are skilled in business, a variety of points of view, educational backgrounds, and experiences are represented on the Board. The Nominating and Governance Committee may retain search firms for the purpose of identifying and evaluating director candidates.
Audit Committee
The Audit Committee is a standing committee of the Board. Directors Ciancia,Johnson, Catlow and JohnsonHunter are the current members of the Audit Committee. Mr. Johnson is the Chairman of the Audit Committee. As a result of Mr. Ciancia'sCatlow's retirement, the Nominating and Governance Committee has recommended, and the Board has nominated, Mr. HunterZulueta to serve on the Audit Committee following Mr. Ciancia'sCatlow's retirement and Mr. Hunter'sZulueta’s election at the 20172018 Annual Meeting. Each member of the Audit Committee is financially literate and meets the independence standards applicable to audit committee members under the NYSE Corporate Governance Listing Standards, as well as the CTS Corporation Corporate Governance Guidelines and the Audit Committee Charter. The Board has determined that Mr. Johnson and Mr. Hunter each qualifies as an audit committee financial expert under the criteria set forth in Item 407(d)(5)(ii) of Regulation S‑K.
The Audit Committee held eight meetings in 2016.2017. A copy of the Audit Committee Charter may be obtained free of charge from CTS’ website at http://www.ctscorp.com/wp-content/uploads/ACC.pdf.
The Audit Committee is responsible for appointing the independent auditor, approving engagement fees and non‑audit engagements, and reviewing the independence and quality of the independent auditor. The Audit Committee reviews audit plans, audit reports, and recommendations of the independent auditor and the internal audit department. The Audit Committee reviews systems of internal accounting controls and audit results. The Audit Committee also reviews and discusses with management CTS’ financial statements, earnings releases and earnings guidance. In addition, the Audit Committee reviews CTS’ compliance with public‑company regulatory requirements and with the CTS Code of Ethics.
Technology and Transactions Committee
The duties and responsibilities of the Technology and Transactions Committee are to:
reviewreviews and makes recommendations to management regarding CTS’ technology strategy, new product development program,programs, and performance in the context of targeted market segments and the Company’s strategic goals;
reviewgoals, as well as the Company’s organic development of technology and opportunities to acquire technology directly or through business acquisition or combination transactions;
review key technology initiatives, their expected benefitstransactions. The Technology and impact on the Company’s strategy and timelines for implementation;
review existing and future trends and threats in technology that may impact the Company’s strategy;
reviewTransactions Committee also reviews, on a preliminary basis, possible acquisitions, divestitures or other transactions identified by management for possible consideration
by the full board;board, assesses existing and
report future trends and threats in technology that may impact the Company’s strategy, and reports activities of the Committee to the full Board.
Directors Hunter, Catlow, O’Sullivan and Profusek are the current members of the Technology and Transactions Committee with Mr. Hunter as the Chairman. Mr. Catlow will retire immediately following the 2018 Annual Meeting.
The Technology and Transactions Committee held two meetings in 2016.2017. A copy of the Technology and Transactions Committee Charter may be obtained free of charge from CTS’ website at http://www.ctscorp.com/wp-content/uploads/TTC.pdf.
FURTHER INFORMATION CONCERNING THE BOARD OF DIRECTORS
Attendance
During 2016,2017, the Board held four meetings and took action by unanimous written consent one time.twice. In 2016,2017, all of the directors attended at least 75% of the regular meetings of the Board and the standing committees of which they were then members, either in person or by phone. It is the policy of the Board that each director endeavor to attend each Annual Meeting of Shareholders, unless exigent circumstances arise. Each director standing for re‑election at the 20162017 Annual Meeting of Shareholders attended that meeting.
Director Independence
The CTS Corporation Corporate Governance Guidelines provide that an independent director is one who:
Is not an employee of CTS and has not been an employee of CTS for at least five years;
Is not an affiliate of CTS other than in the capacity as a director, and has not been an affiliate of CTS for at least five years;
Is not an employee or affiliate of CTS’ present auditing firm or an auditing firm retained by CTS within the past five years and has not been an employee or affiliate of such a firm for at least five years;
Is not an employee of a company on whose board an executive of CTS presently serves as a director or has served as a director within the past five years and has not been an employee of such a company for at least five years;
Is not an employee of a company that accounts for at least 2% or $1 million, whichever is greater, of CTS’ consolidated gross revenues, and has not been an employee of such a company for at least five years;
Is not an employee of any company which made payments to or received payments from CTS which exceeded 2% or $1 million, whichever is greater, of that company’s consolidated gross revenues, and has not been an employee of such a company for at least five years;
Is not an employee or director of any company that makes direct material investments or trades in CTS stock or that regularly advises investors concerning CTS stock;
Does not presently receive any direct or material indirect compensation from CTS other than compensation attributable to the director’s service as a member of the Board and its committees;
Has not received more than $10,000 per year in direct compensation from CTS during the past five years, excluding compensation attributable to the director’s service as a member of the Board and its committees;
Does not have any other relationship with CTS or any other entity, including charitable and civic organizations that in the opinion of the Board could be considered to effect the director’s ability to exercise his independent judgment as a director; and
Is not an immediate family member of any individual who would fail to meet the criteria for independence set forth above.
For purposes of determining whether a director has a material relationship with CTS apart from his or her service as a director, the Board has determined that CTS’ purchase of regulated electric and gas service from a utility company does not constitute a material relationship.
Additionally, for purposes of determining whether a director has a material relationship with CTS apart from his or her service as a director, any transaction that is not required to be disclosed pursuant to Item 404(a) of Regulation S‑K shall be deemed categorically immaterial. A copy of the CTS Corporation Corporate Governance Guidelines may be obtained free of charge from CTS’ website at http://www.ctscorp.com/wp-content/uploads/CGG.pdf.
The Board has determined that each non‑management director is or was an independent director and has or had no material relationship with CTS, apart from his or her service as a director. The Board made this determination by reference to the definition of an independent director contained in the NYSE Corporate Governance Listing Standards and by reference to the standards set forth in the CTS Corporation Corporate Governance Guidelines, as described above. As a result, the Board concluded that Walter S. Catlow, Lawrence J. Ciancia, Patricia K. Collawn, Gordon Hunter, William S. Johnson, Diana M. Murphy, and Robert A. Profusek and Alfonso G. Zulueta are each independent directors.
CTS does not have a specific written policy regarding transactions with related persons. However, CTS does have written policies and procedures regarding conflicts of interest. The CTS Corporation Corporate Governance Guidelines provide that the Nominating and Governance Committee shall review any transaction that might be construed to disqualify a director as independent (including any transactions that are required to be reported under Item 404(a) of Regulation S-K) and, if appropriate, make a recommendation that the Board approve such transaction. The Board would then review and, if appropriate, approve such transaction. The Nominating and Governance Committee Charter further provides that the Nominating and Governance Committee shall review any potential director conflict of interest and recommend appropriate action to the Board.
Meetings of Non‑Management Directors
It is the policy of the Board to hold an independent session excluding management directors at each regular scheduled Board meeting. In 2016,2017, an independent session was held at each regular Board meeting. The Lead Independent Director of the Board presides over the independent sessions.
Board Leadership Structure
CTS does not have a policy as to whether the role of Chief Executive Officer and Chairman of the Board should be separate or combined, or whether the Chairman should be a management or non‑management director. In the recent past, the
Board has been structured with an independent or non‑management director as Chairman and alternatively structured with a combined Chairman/Chief Executive or Executive Chairman and Chief Executive Officer. Currently, Mr. O’Sullivan serves as Chairman of the Board, President and Chief Executive Officer and Mr. Profusek serves as Lead Director. Mr. O’Sullivan is the only CTS director who is not independent. He does not receive any additional compensation for his service on the Board.
The Lead Independent Director is the leader of the independent directors, and leads all sessions of independent directors, which normally occur at the end of each Board meeting. A full description of his duties is as follows:
Preside at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors;
Approve meeting agendas and schedules for the Board;
Review key strategic initiatives presented to the Board;
Serve as a liaison between the Chairman and the independent directors. To that end, ensure personal availability for consultation and communication with independent directors and with the Chief Executive Officer, as appropriate;
Call special meetings of the independent directors, as the Lead Independent Director may deem to be appropriate;
Be available, at the request of major shareholders, for consultation and direct communication. Respond directly to shareholder and other stakeholder questions and comments that are directed to the Lead Independent Director or to the independent directors as a group, consulting on such with the Chief Executive Officer or other directors as the Lead Independent Director may deem appropriate;
Act as a sounding board for the Chief Executive Officer and/or independent directors with respect to strategies, plans, organization, relationships, accountabilities, and other issues;
Between regularly scheduled Board meetings discuss with the Chief Executive Officer key corporate risks and current issues and plans for presentations on such to the full Board or its committees;
Lead the independent directors in appraising the Chief Executive Officer’s performance at least annually; and
Lead the directors in appraising the Board’s performance at least annually.
The General Counsel and Corporate Secretary’s Office provides support to the Lead Independent Director in fulfilling his role. The Lead Independent Director receives an annual retainer of $20,000, in addition to his ordinary director compensation, for the additional services the Lead Independent Director provides. The Board has established this leadership structure because the Board believes it is effective, efficient, appropriate to CTS’ size and complexity, and represents a cost‑effective allocation of responsibilities.
Contrasting with the cost and efficiency benefits is the desire to ensure that control over both management and corporate governance is not overly invested in one person. The Board is confident that, as currently constituted, it will provide ample counterbalance to a combined Chairman and Chief Executive Officer and that it continues to provide suitable independent oversight of management. The independent directors on the Board are all accomplished professionals possessing substantial business and business‑related experience. Additionally, most have served on the Board for a number of years. As discussed above, the independent directors meet in separate session excluding management at each regular meeting of the Board. Further, any director has the right to submit items to be heard at any Board meeting. Lastly, the independent directors outnumber the one non‑independent director, the combined Chairman and Chief Executive Officer, by a large supermajority.
Board of Directors’ Role in Risk Oversight
As a part of its oversight function, the Board monitors how management operates the Company. Risk is an important part of deliberations at the Board and committee levels throughout the year. Committees consider risks associated with their particular areas of responsibility. For example, the Audit Committee evaluates risk associated with accounting, financial reporting,
and legal compliance as it reviews those functions, and the Compensation Committee considers compensation‑related risks and risk mitigation when it sets compensation levels and structures compensation policies. In addition, as a whole the Board considers risks affecting the Company. To that end, the Board conducts periodic reviews of corporate risk management policies and procedures and annually reviews risk assessments prepared by management as a part of CTS’ enterprise risk management process. The enterprise risk management process evaluates CTS’ major risk exposures and the steps management has taken to monitor and mitigate these exposures. Therefore, the Board and its committees consider, among other items, the relevant risks to CTS when granting authority to management and approving business strategies. The Board has utilized this risk management structure for a number of years. Although the Board retains the right to make changes in risk oversight responsibilities from time‑to‑time, the Board anticipates that the risk management responsibilities will continue in a substantially similar manner as described above, whether or not the Board’s leadership structure changes.
Director Education
The CTS Corporation Corporate Governance Guidelines encourage all directors to participate in director continuing education programs. CTS reimburses directors for attendance at such programs. In addition, management monitors and reports to the directors regarding significant corporate governance initiatives. The directors also receive a presentation on new developments in corporate governance at least annually.
Stock Ownership Guidelines for Executives and Directors
The Board has adopted stock ownership guidelines that apply to non‑employee directors and executives in order to increase the alignment of their interests with those of shareholders and promote enduring shareholder value. Specifically, our
Chief Executive Officer is required to hold a number of share units equal to five times (5x) his base salary, our directors are required to hold a number of share units equal to five times (5x) their annual base cash retainer, and named executive officers (as that term is defined by the Securities and Exchange Commission) other than the Chief Executive Officer are required to hold a number of share units equal to three times (3x) their base salaries. Until such time as a named executive officer or Chief Executive Officer has attained the applicable share ownership guideline, he or she is expected to retain 100% of the share units awarded to him or her, net of amounts required to pay taxes and exercise prices. Thereafter, the named executive officer or Chief Executive Officer is expected to retain, for a period of at least two (2) years, at least 50% of the total share units with which he or she is credited as a result of equity awards made by CTS subsequent to the date on which the applicable share ownership guideline is attained, net of amounts required to pay taxes and exercise prices. Similar to the named executive officers and Chief Executive Officer, until such time as a director has attained the applicable share ownership guideline, he or she is expected to retain 100% of the share units awarded to him or her. Thereafter, he or she is expected to retain, for a period of at least two (2) years, at least 50% of the total share units with which he or she is credited as a result of equity awards made by CTS subsequent to the date on which the applicable share ownership guideline level is attained; provided, however, that this requirement will terminate upon retirement. The guidelines require that each director, Chief Executive Officer and named executive officer attain the applicable share unit ownership within six years of his or her initial election or appointment.
As part of CTS’ commitment to paying for performance and to ensuring that the interests of executives are aligned with those of shareholders, CTS also requires that vice presidents (other than named executive officers) reporting to the Chief Executive Officer hold share units with a value equal to one times (1.0x) annual base salary. This share ownership guideline level will be recalculated whenever the vice president receives an increase in base salary. Until such time as the vice president has attained this share ownership guideline, he or she is expected to retain 50% of the share units awarded to him or her, net of amounts required to pay taxes and exercise prices. Prior to any sale of shares, the vice president must consult with the Chief Executive Officer and General Counsel.
The guidelines are administered by the Compensation Committee. A copy of the guidelines may be obtained free of charge from CTS’ website at http://www.ctscorp.com/wp-content/uploads/SOG.pdf.
Director Resignation Policy
The Board of Directors has adopted a director resignation policy, which designates the circumstances under which a director must offer his or her resignation to the Board. Directors are expected to offer to resign from the Board when they change employment or when the major responsibilities they held when they joined the Board change. Such director may not necessarily leave the Board, but this policy provides an opportunity for the Board to review the appropriateness of his or her continued service.
Additionally, any nominee for director in an uncontested election as to whom a majority of the shares of the Company that are outstanding and entitled to vote in such election are designated to be “withheld” from or are voted “against” his or her election shall immediately tender his or her resignation, and the Board will decide, through a process managed by the Nominating and Governance Committee and excluding the nominee in question, whether to accept the resignation at its next regularly scheduled Board meeting. The Board will evaluate the best interests of CTS and its shareholders and may consider any factors it deems relevant in deciding whether to accept a director’s resignation.
Finally, the Guidelines require that a director tender his or her resignation effective as of the next occurring Annual Meeting of Shareholders after the date on which he or she reaches the age of 75. The Nominating and Governance Committee may recommend to the full Board that an exception be made to this policy. The Board will evaluate the best interests of CTS and its shareholders and may consider any factors it deems relevant in deciding whether to accept a director's resignation.
Code of Ethics
CTS has adopted a Code of Ethics that applies to all CTS employees, including the principal executive officer, the principal financial officer, the principal accounting officer and/or controller, and all other executive officers and non‑employee directors. The Code of Ethics includes ethical standards concerning conflicts of interest and potential conflicts of interest. With respect to executive officers and other employees, potential conflicts of interest must be reported to management. The Audit Committee is responsible for reviewing compliance with the Code of Ethics and reviews any potential conflict of interest involving an executive officer. A copy of the Code of Ethics may be obtained free of charge from the Corporate Secretary upon request or from CTS’ website at http://www.ctscorp.com/wp-content/uploads/CE.pdf.
Communications to Directors
Shareholders and other interested parties may address written communications to individual directors, including non‑management directors, or to the Board, as a whole, by writing to the Corporate Secretary at CTS’ executive offices located at 2375 Cabot Drive,4925 Indiana Avenue, Lisle, Illinois 60532. All communications from shareholders must include the name and address of the shareholder as it appears on the record books of CTS and the name and address of the beneficial owner, if any, on whose behalf the communication is submitted. The Corporate Secretary will compile such communications and forward them to the directors on a periodic basis. However, the Corporate Secretary has authority to disregard any communication that is primarily an advertisement or solicitation or is threatening, obscene, or similarly inappropriate in nature. Communications that have been disregarded for these reasons may be reviewed by any non‑management director upon request.
STOCK OWNERSHIP INFORMATION
Five Percent Owners of CTS Common Stock
The table below lists information about the persons known by CTS to beneficially own at least 5% of the outstanding shares of CTS common stock as of December 31, 2016,2017, unless a different date is indicated below. There were 32,762,49432,938,466 shares of CTS common stock issued and outstanding as of December 31, 2016.2017. Except as otherwise noted below, the information below is derived solely from the most recent Schedules 13F or 13G, and amendments thereto, filed with the Securities and Exchange Commission.
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| NAME AND ADDRESS | | NUMBER OF SHARES | | PERCENT OF CLASS | |
| | | | | | |
| BlackRock, Inc.(1) 55 East 52nd Street New York, New York 10022 | | 3,678,740 | | 11.2% | |
| | | | | | |
| GAMCO Investors, Inc.(2) One Corporate Center Rye, New York 10580 | | 3,242,044 | | 9.9% | |
| | | | | | |
| Dimensional Fund Advisors LP(3) Building One 6300 Bee Cave Road Austin, Texas 78746 | | 2,777,240 | | 8.5% | |
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| Wellington Management Group LLP(4) 280 Congress Street Boston, Massachusetts 02210 | | 2,363,773 | | 7.2% | |
| | | | | | |
| Janus Capital Management LLC(5) 151 Detroit Street Denver, Colorado 80206 | | 1,793,878 | | 5.5% | |
| | | | | | |
| The Vanguard Group(6) 100 Vanguard Blvd. Malvern, Pennsylvania 19355 | | 1,664,413 | | 5.1% | |
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| NAME AND ADDRESS | | NUMBER OF SHARES | | PERCENT OF CLASS | |
| | | | | | |
| BlackRock, Inc.(1) 55 East 52nd Street New York, New York 10022 |
| 4,175,414 |
| 12.7% | |
|
|
|
|
|
| |
| GAMCO Investors, Inc.(2) One Corporate Center Rye, New York 10580 |
| 3,080,355 |
| 9.4% | |
|
|
|
|
|
| |
| Dimensional Fund Advisors LP(3) Building One 6300 Bee Cave Road Austin, Texas 78746 |
| 2,723,993 |
| 8.3% | |
|
|
|
|
|
| |
| Wellington Management Group LLP(4) 280 Congress Street Boston, Massachusetts 02210 |
| 2,535,671 |
| 7.7% | |
|
|
|
|
|
| |
| The Vanguard Group(5) 100 Vanguard Blvd. Malvern, Pennsylvania 19355 |
| 1,848,998 |
| 5.6% | |
|
|
|
|
|
| |
| Janus Henderson Group plc(6) 201 Bishopsgate EC2M 3AE, London, United Kingdom |
| 1,755,175 |
| 5.3% | |
| |
(1) | As reported on Schedule 13G filed on January 9, 2017,19, 2018, BlackRock, Inc., a parent holding company, has sole voting power with respect to 3,611,6384,111,040 shares and sole dispositive power with respect to 3,678,7404,175,414 shares. |
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(2) | As reported on Schedule 13F filed on January 24, 2017,February 2, 2018, GAMCO Investors, Inc., Gabelli Funds, LLC and their affiliates have sole voting power with respect to 3,029,444 shares and sole dispositive power with respect to 3,242,0443,080,355 shares. The Reporting Persons beneficially own those shares as follows: GAMCO Investors, Inc. had sole voting power with respect to 2,235,444 shares and sole dispositive power with respect to 2,448,044;2,314,355; and Gabelli Funds LLC has sole voting and dispositive power with respect to 794,000766,000 shares. |
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(3) | As reported on Schedule 13G filed on February 9, 2017,2018, Dimensional Fund Advisors LP has sole voting power with respect to 2,756,3312,666,642 and sole dispositive power with respect to 2,777,2402,723,993 shares. Dimensional Fund Advisors LP disclaims beneficial ownership of these shares, which are owned by funds for which it acts as investment manager. |
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(4) | As reported on Schedule 13G filed on February 19, 2017,8, 2018, Wellington Management Group LLP, Wellington Group Holdings LLP, and Wellington Investment Advisors Holdings LLP, and Wellington Management Company LLP have shared voting power with respect to 1,842,5072,024,421 shares and shared dispositive and voting power with respect to 2,363,7732,535,671 shares. Wellington Management Company LLP has shared voting power with respect to 2,011,001 shares and shared dispositive power with respect to 2,522,251 shares. |
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(5) | As reported on Schedule 13G filed on February 13, 2017, Janus Capital Management LLC8, 2018, The Vanguard Group has sole voting power with respect to 36,674 shares; shared voting power with respect to 8,433 shares; sole dispositive power with respect to 1,807,358 shares; and shared dispositive power with respect to 41,640 shares. |
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(6) | As reported on Schedule 13G filed on February 13, 2018, Janus Henderson Group plc has shared voting and dispositive power with respect to 1,793,8781,755,175 shares. Janus Capital Management LLCHenderson Group plc also reported that it did not have the right to receive any dividends from, or the proceeds from the sale of, the shares and disclaims any ownership associated with such rights. |
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(6)
| As reported on Schedule 13G filed on February 9, 2017, The Vanguard Group has sole voting power with respect to 38,150 shares; shared voting power with respect to 8,433 shares; sole dispositive power with respect to 1,619,497 shares; and shared dispositive power with respect to 44,916 shares. |
Directors’ and Officers’ Stock Ownership
The following table shows the number of shares of CTS common stock each named executive officer and director, beneficially owned as of March 20, 2017,19, 2018, including shares of CTS common stock covered by stock options exercisable within 60 days of March 20, 2017.19, 2018. Please note that, as reported in this table, beneficial ownership includes those shares of CTS common stock a director or officer has the power to vote or transfer, as well as shares of CTS common stock owned by immediate family members that reside in the same household with the director or officer. The shares of CTS common stock shown as beneficially owned by all current directors and officers do not include 653,900 shares of CTS common stock held as of March 20, 2017, by the Northern Trust Company as Trustee of the CTS Corporation Master Retirement Trust. The CTS Corporation Benefit Plan Investment Committee has voting and investment authority over those shares of CTS common stock.
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| Name | | Beneficially Owned Shares(1) | | Options Exercisable within 60 days | | Shares Held in 401(k) | | Directors’ Deferred Common Stock Units(2) | | Total(3) | | % of Shares Outstanding | |
| Ashish Agrawal | | 27,071 |
| | — |
| | — |
| | 0 | | 27,071 | | * | |
| Walter S. Catlow | | 55,539 |
| | — |
| | — |
| | 4,098 | | 59,637 | | * | |
| Lawrence J. Ciancia | | 69,756 |
| | — |
| | — |
| | 16,365 | | 86,121 | | * | |
| Patricia K. Collawn | | 60,420 |
| | — |
| | — |
| | 800 | | 61,220 | | * | |
| Gordon Hunter | | 30,700 |
| | — |
| | — |
| | 0 | | 30,700 | | * | |
| William S. Johnson | | 8,500 |
| | — |
| | — |
| | 0 | | 8,500 | | * | |
| Luis F. Machado | | 4,691 |
| | — |
| | — |
| | 0 | | 4,691 | | * | |
| Diana Murphy | | 31,700 |
| | — |
| | — |
| | 0 | | 31,700 | | * | |
| Kieran O’Sullivan | | 204,355 |
| | — |
| | — |
| | 0 | | 204,355 | | * | |
| Robert A. Profusek(4) | | 63,542 |
| | — |
| | — |
| | 4,722 | | 68,264 | | * | |
| All Current Directors and Officers as a Group (10 total) | | 556,274 |
| | — |
| | — |
| | 25,985 | | 582,259 | | 1.77% | |
|
| | | | | | | | | | | | | | |
| | | | | | | | | | |
| Name | | Beneficially Owned Shares(1) | | Options Exercisable within 60 days | | Shares Held in 401(k) | | Directors’ Deferred Common Stock Units(2) | | Total(3) | | % of Shares Outstanding | |
| Ashish Agrawal |
| 38,394 |
| — |
| — |
| 0 |
| 38,394 |
| * | |
| Walter S. Catlow |
| 66,539 |
| — |
| — |
| 4,098 |
| 70,637 |
| * | |
| Patricia K. Collawn |
| 71,420 |
| — |
| — |
| 800 |
| 72,220 |
| * | |
| Gordon Hunter |
| 39,700 |
| — |
| — |
| 0 |
| 39,700 |
| * | |
| William S. Johnson |
| 19,500 |
| — |
| — |
| 0 |
| 19,500 |
| * | |
| Luis F. Machado |
| 8,839 |
| — |
| — |
| 0 |
| 8,839 |
| * | |
| Diana Murphy |
| 42,700 |
| — |
| — |
| 0 |
| 42,700 |
| * | |
| Kieran O’Sullivan |
| 242,128 |
| — |
| — |
| 0 |
| 242,128 |
| * | |
| Robert A. Profusek(4) |
| 74,542 |
| — |
| — |
| 4,722 |
| 79,264 |
| * | |
| All Current Directors and Officers as a Group(5) |
| 603,762 |
| — |
| — |
| 9,620 |
| 613,382 |
| 1.86% | |
| |
* | Represents less than 1% of the outstanding shares of CTS common stock |
| |
(1) | Includes shares of CTS common stock which will vest within 60 days of March 20, 2017.19, 2018. |
| |
(2) | Includes Restricted Stock Units that are distributable upon the director’s separation from service and convert on a one‑to‑one basis to shares of CTS common stock upon distribution. |
| |
(3) | No director or executive officer has pledged his or her shares of CTS common stock. |
| |
(4) | Excludes 1,800 shares held by Mr. Profusek’s spouse. Mr. Profusek disclaims any beneficial interest with respect to these shares. |
| |
(5) | Mr. Zulueta had not yet been appointed a director as of March 19, 2018. |
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis provides details about CTS’ compensation practices for its named executive officers. The information provided in this section should be read together with the tables and narratives that accompany the information presented.
The following executives are CTS’ named executive officers for 2016,2017, as that term is defined by the Securities and Exchange Commission:
Mr. Kieran O’Sullivan, Chairman, President and Chief Executive Officer;
Mr. Ashish Agrawal, Vice President and Chief Financial Officer; and
Mr. Luis F. Machado, Vice President, General Counsel and Secretary.
Executive Summary
CTS’ executive compensation program is designed to attract, retain, and motivate high‑quality executive talent, to provide executives with strong incentives to maximize CTS’ performance, and to align executives’ interests with those of our shareholders. Our executive compensation structure consists of base salary, annual cash incentives, performance‑based equity compensation, service‑based equity compensation, health and welfare benefits, limited perquisites, and retirement benefits. Our named executive officers are required to comply with various good governance policies, such as CTS’ stock ownership guidelines, insider trading restrictions, and an anti‑hedging/pledging policy. Additionally, various compensation elements contain “clawback” features, which permit CTS to recoup compensation paid for improperly earned incentives. CTS believes that our executive compensation program provides the best means of attracting, retaining, and motivating executives with the skills and experience necessary to achieve our business goals and maximize shareholder value. CTS has remained committed to its fundamental compensation structure and philosophy over a period of many years, including recent periods of economic volatility.
Recent Governance Activity. Our Board has adopted a policy, and our shareholders recommended by a vote of 77.38% in 2011,2017, that we hold “Say‑on‑Pay” votes every year. At our 20162017 annual meeting of shareholders, we received approximately 98.58%96.75% approval, based on the total votes cast, for our advisory “Say‑on‑Pay” proposal to approve the compensation of our named executive officers. The Compensation Committee believes the voting results demonstrate significant continuing support for our overall executive pay program. After reviewing the 20162017 Say‑on‑Pay vote results, the Committee decided to continue to apply the same general philosophy, compensation objectives and governing principles that it used in 20152016 regarding named executive officer compensation decisions and policies. The Committee remains dedicated to aligning executive pay with Company performance both in the existing executive pay programs and the governance environment surrounding the overall program.
CTS maintains robust corporate governance policies. The Committee continues to implement the executive pay and corporate governance practices described in this proxy statement, which align CTS’ executive compensation program with best practices in the competitive market.
20162017 Performance. We continuedare making progress on profitable growth around products that sense, connect, and move. Sales grew 6.6% to reposition our company during 2016$423 million in 2017. GAAP earnings per diluted share were $0.43 in 2017 compared to consolidate our operations in an effort to drive profitability. We have substantially completed the restructuring actions started in 2013 and 2014 and announced additional restructuring actions$1.03 in 2016. Full year 2016 reported2017 earnings included a $18.0 million one-time, non-cash charge related to the Tax Cuts and Jobs Act and a $13.4 million one-time, non-cash pension settlement charge. Adjusted earnings per share from continuing operations were $1.03, up from $0.78 in the prior year (adjusted earnings perdiluted share were $1.08 and $0.93 respectively, as set forth$1.23 in our Annual Report on Form 10K). Despite softness in sales, cash2017, up 14% from 2016. Cash flow from operations was $47$58.0 million in 2016,2017, up 22%23% from $39 million in 2015. In addition, we had $488 million in new business awards in 2016 compared to $560 million in 2015.2016.
Implications of 20162017 Results for Compensation. For the 20162017 Management Incentive Plan (or MIP), which is our annual performance‑based cash incentive plan, our named executive officers were each granted award opportunities weighted 60% on adjusted EPS performance goals, 30% on sales and 10% on controllable working capital as a percent of sales. CTS’ actual performance during 20162017 is calculated and paid in 20172018 and is included in 20162017 compensation.
The Compensation Committee also continued the 2014‑20162015‑2017 Performance Restricted Stock Unit Plan, which is a three‑year performance‑based equity award program operated under the CTS Corporation 2014 Performance and Incentive Compensation Plan. This program measures three‑year performance based on the following weighted criteria: 35% for achievement under a relative total shareholder return metric (or RTSR); 35% for achievement under a sales growth metric; and 30% for achievement under a free cash flow metric.metric (calculated as operating cash flow less capital expenditures). As a result of the Company’s three-year performance based on these metrics, Mr. O’Sullivan received 27,13338,950 and Mr. Agrawal received 11,20511,400 restricted stock units onin February 9, 2017.of 2018. Mr. Machado did not participate in the program. Awards under the 2014-20162015-2017 Performance Restricted Stock Unit Plan were made in 20172018 and were reported in the named executive officer’s compensation when granted in 2014.
2015.
In each of February 20152016 and 2016,2017, the Compensation Committee established a new three‑year performance‑based equity compensation program for the 2015‑20172016‑2018 and 2016-20182017-2019 periods respectively. Each program is essentially the same as the 2014‑20162015‑2017 program described above, with updated applicable performance metrics and the same relative weightings except that for the 2016-2018 period, the Committee elected to use Operating Cash Flow rather than Free Cash Flow as one of the metrics. Grants made to named executive officers under each of these programs are reported in compensation at fair value in the year the grant is made.
Mr. O’Sullivan joined CTS as CEO and President in January 2013. As part of Mr. O’Sullivan’s compensation, he was awarded participation in an exclusive CEO Performance Restricted Stock Unit Plan that involved a single RTSR metric. Under this plan, Mr. O’Sullivan had the opportunity to earn between 0 and 65,000 Restricted Stock Units based on performance under the previously stated RTSR metric for the three‑year performance period of January 2013 through December 2015. As a result of that program, Mr. O’Sullivan received 54,357 Restricted Stock Units on March 4, 2016, the fair value of which was reported in his compensation when granted in 2013.
Our 2015 performance was below target levels. As a result, our named executive officers realized lower compensation in 2015 because no bonus was paid under the Management Incentive Plan.
The Compensation Committee and the Board believe that the skill and abilities of our named executive officers are essential to CTS’ performance and creation of long‑term shareholder value. CTS believes that its policies and practices, as
presented by the Board’s compensation philosophy, enable CTS to attract, retain, and motivate high‑quality executive management and, where and when necessary, ensure smooth transitions during changes of leadership. We will continue to provide a compensation program that we believe is effective in attracting, retaining, and motivating high‑quality executives, serves shareholder interests, and is worthy of shareholder support.
Compensation Objectives
CTS designs its named executive officer compensation program to achieve three main objectives:
Offer Competitive Compensation. CTS seeks to provide a competitive level of compensation in order to attract, retain, and motivate highly qualified and talented executives;
Link Compensation to Performance. CTS seeks to optimize the performance of each executive by tying a substantial portion of compensation to achievement of financial and operational goals; and
Align Compensation with Shareholder Interests. CTS seeks to align the interests of its executives with shareholders by paying a significant portion of compensation in the form of equity that vests over time.
The various elements of total compensation further described below have been designed to address these three objectives. Additionally, the elements of total compensation are designed to reward the named executive officers for: (1) their core competencies, skills, experience and contributions to CTS (in the form of base salary, retirement benefits, health and welfare benefits and limited perquisites); (2) achievement of annual corporate financial goals (in the form of annual performance‑based cash incentives); and (3) achievement of long‑term financial objectives that are beneficial to CTS and its shareholders (in the form of performance‑based and service‑based equity awards). The first compensation element helps CTS offer competitive compensation, while the second and third compensation elements help CTS link compensation to performance and align compensation with shareholder interests. Decisions on specific elements of compensation do not generally affect the Committee’s decisions regarding the other elements of compensation except to the extent that these categories of compensation are structured to provide a substantial portion of total compensation that is based on performance and at‑risk each year.
Compensation Philosophy
CTS’ executive compensation philosophy is to initially target potential compensation for each named executive officer at approximately the fiftieth percentile of the compensation for similar positions at similarly situated companies based on market survey data provided by Compensation Strategies, the Compensation Committee’s independent compensation consultant (discussed in more detail below). This philosophy operates as only an initial, general guideline for CTS’ compensation decisions, however, rather than as a fixed rule or final determining factor. By initially targeting median compensation levels for its named executive officers, CTS believes it strikes the right balance between motivating named executive officers with market‑competitive factors and providing the compensation necessary to recruit and retain top executive talent.
|
| | | | | |
| Elements of Total Compensation | | Purpose | |
| ● Base Salary ● Retirement Benefits ● Health and Welfare Benefits ● Limited Perquisites | | ● | Fixed cash and other customary compensation to attract and retain high‑quality executive talent. | |
| ● Annual Performance‑Based Cash Incentives | | ● | At‑risk, variable incentive compensation to promote the achievement of specific financial and operational performance objectives; and | |
| | | ● | Attraction, retention, and motivation of high‑quality executive talent. | |
| ● Performance‑Based Equity Awards | | ● | At‑risk, variable incentive compensation to promote the achievement of specific sales goals; | |
| | | ● | Align executives’ interests with shareholder interests; and | |
| | | ● | Attraction, retention, and motivation of high‑quality executive talent. | |
| ● Service‑Based Equity Awards | | ● | Fixed equity awards for long‑term retention of executive talent; and | |
| | | ● | Align executives’ interests with shareholder interests. | |
CTS does not use a specific formula for allocating total compensation between current and long‑term compensation or between cash and non‑cash compensation. The amount allocated to each element of compensation generally reflects allocation percentages in Compensation Strategies’ market survey data for comparable positions, based on the analysis described below. Additionally, relevant factors such as an executive’s specific level of experience, responsibilities, demonstrated performance, length of service with the Company, achievement of individual and corporate goals, risk, and retention considerations also may affect compensation structure for a particular named executive officer.
CTS endeavors to ensure that a substantial portion of total compensation for its named executive officers is based on performance and is at‑risk each year. In this way, CTS’ executive compensation programs provide named executive officers with strong incentives to maximize CTS’ performance, which ultimately enhances shareholder value. As a named executive officer takes on more responsibility, the Compensation Committee generally increases the percentage of his or her total compensation that is at‑risk. As a result, our named executive officers have a substantial percentage of their total compensation opportunities based on at‑risk, variable elements of compensation. CTS believes that this practice is appropriate because CTS’ named executive officers have the greatest ability to drive performance and, therefore, should have the most to gain or lose in terms of compensation opportunities based on performance. In light of those facts, it is possible for CTS’ named executive officers to earn above‑market compensation in any year, but they may earn below‑market compensation as well, depending on individual and corporate performance for that year.
CTS believes that its compensation practices are prudent, and care is taken by the Compensation Committee to ensure that named executive officers are eligible to receive a reasonable amount of compensation in exchange for their services, so that they are properly incentivized to achieve CTS goals, and to ensure that compensation opportunities are structured to align named executive officers’ interests with those of our shareholders. These goals are achieved through application of a number of techniques, such as:
apportioning fixed pay versus incentive‑based compensation in an appropriate balance;
selecting appropriate and broad‑based performance metrics;
establishing reasonable performance thresholds;
capping performance‑based compensation awards at certain maximum levels;
requiring multiple‑year performance periods for certain performance‑based awards; and
vesting a significant portion of equity compensation over multiple‑year periods.
In this way, CTS believes that named executive officers will consider the impact of decisions in both the short‑term and long‑term and will exercise careful judgment, so that while attempting to enhance shareholder value they will not take actions that pose unnecessary risk to the overall long term well‑being of the Company. As a result, CTS has determined that, for the named executive officers and for all of its other employees, CTS’ compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on CTS.
The amount of total compensation realized or potentially realizable from prior compensation awards does not directly influence the level of compensation paid in the current year or future pay opportunities. Factors such as the tax and accounting treatment of different forms of compensation may influence the form and structure of executive compensation, but do not necessarily affect the total amount of compensation.
Role of Management in 20162017 Named Executive Officer Compensation Decisions
It is CTS’ practice to conduct a competitive market analysis on executive compensation at least on a biannual basis. In 20152016 (for the 20162017 calendar year), Compensation Strategies was engaged as an independent consultant to the Compensation Committee to conduct a competitive review of executive compensation levels. Mr. O’Sullivan relied on this information, together with his assessment of the named executive officers’ performance and such other factors as he deemed appropriate, to assess executive compensation pay and practices.
Mr. O’Sullivan recommended a total compensation package to the Compensation Committee for each named executive officer other than himself. The goal was to provide recommendations to the Compensation Committee that initially aligned each named executive officer’s total compensation opportunity at approximately the fiftieth percentile of similarly situated executives. The compensation data reviewed was the most significant factor considered by Mr. O’Sullivan with respect to his 20162017 compensation recommendations for the other named executive officers. This practice is consistent with CTS’ compensation philosophy: by using the median compensation as an initial guideline in setting total compensation, CTS should be able to attract, retain, and motivate highly qualified executives with the skills and experience necessary to lead the Company.
How Final 20162017 Named Executive Officer Compensation was Determined
At its February 20162017 meeting, the Compensation Committee also reviewed the data provided by Compensation Strategies and considered the recommendations of Mr. O’Sullivan, ultimately deciding on a total compensation package for each of the named executive officers. As a part of this meeting, the Compensation Committee set targets for compensation opportunities that may be able to qualify as performance‑based awards under Section 162(m) of the Internal Revenue Code. For all named executive officers other than Mr. O’Sullivan, total compensation packages for the year were finalized when approved by the Compensation Committee. The Compensation Committee also reviewed information provided by Compensation Strategies to assess and recommended a total compensation package for Mr. O’Sullivan to the Board, which was discussed by the Board in Independent Session at its February 20162017 meeting, and became final upon its ratification.
Overall Mix and Structure of 20162017 Named Executive Officer Compensation
For 2016,2017, the Compensation Committee considered the total compensation opportunities for each named executive officer and subjectively determined how total potential compensation should be allocated across the different elements of compensation. The Compensation Committee did not follow a definitive policy when determining the mix of and structure for total compensation. Instead, it broadly and subjectively considered factors consisting of each executive’s achievement of Company and individual goals, level of experience, responsibilities, demonstrated performance, length of service with the Company, risk, and retention considerations.
The Compensation Committee also considered market practices as reflected in the competitive review from Compensation Strategies to obtain a baseline of total potential compensation for each named executive officer. Using this as a starting point, the Compensation Committee engaged in discussions with the objective of ensuring that a substantial portion of each named executive officer’s total compensation was at‑risk and dependent on CTS’ financial performance. Care was taken to balance the incentives to drive performance in the short‑term versus the long‑term. In this way, CTS encouraged the named executive officers to vigorously pursue increased performance in 20162017 while also discouraging excessive risks that might be beneficial in the short‑term, but harmful long-term. CTS believes that this aligns the interests of the named executive officers with those of the shareholders year‑over‑year, as well as over the long‑term.
Cash incentives and equity compensation opportunities generally increase across the named executive officer positions consistent with increasing responsibility. This structure generally means that the most senior named executive officers will have a higher percentage of their total compensation at‑risk and variable than the less senior named executive officers. As a result, the most senior named executive officers who had the greatest ability to drive CTS’ 20162017 performance had the most to gain or lose based on corporate and individual performance in 2016.2017.
In addition to cash and equity components, CTS offered its named executive officers retirement benefits, health and welfare benefits, and limited perquisites in 2016.2017. The Company believes that offering named executive officers retirement benefits, health and welfare benefits, and a modest level of perquisites are standard practices in other companies, and that these compensation elements are expected components of overall compensation packages provided to CTS’ named executive officers.
Benchmarking for 20162017
In February 2014, the Compensation Committee engaged Compensation Strategies to conduct a full evaluation of CTS’ peer group and to make a recommendation on modifications to the existing peer group. In November of that year, Compensation Strategies recommended a peer group consisting of 2123 companies. These companies have comparable market capitalization and annual revenue and serve electronics‑related industries with an emphasis on those that supply the automotive industry. The Compensation Committee approved the new peer group for use in future compensation benchmarking activities as well as setting and measuring Company performance.
The peer group is comprised of the following 21 companies and remained in use for 20162017 compensation:
|
| | |
AVX Corporation | Haynes International, Inc. | Methode Electronics, Inc. |
Cabot Microelectronics Corporation | II-VI, Inc. | MTS Systems Corporation |
Dorman Products, Inc. | KEMET Corporation | Rogers Corporation |
Electro Scientific Industries, Inc. | Littelfuse, Inc. | Silicon Laboratories, Inc. |
Fabrinet | Materion Corporation | Stoneridge, Inc. |
Gentex Corporation | Maxwell Technologies, Inc. | Strattec Security Corporation |
Gentherm Inc. | Mercury Systems, Inc. | Vishay Precision Group, Inc. |
Elements of 20162017 Named Executive Officer Compensation
Base Salary. Base salary is included as an element of total compensation to ensure that each named executive officer received a suitable minimum returnbase level of cash compensation and is rewarded for his service to the Company. A sufficient base salary also helps to ensure that named executive officers do not become unduly focused on achievement of shorter‑term incentive awards that may be to the detriment of the overall long‑term health of CTS. For 2016,2017, the Compensation Committee initially determined reasonable base salaries for the named executive officers by aligning base compensation for each named executive officer at approximately the fiftieth percentile of peer executives. The Compensation Committee also considered each named executive officer’s responsibilities, past performance, and time with the Company in setting his final base salary for 2016.2017.
The base salaries for the named executive officers that were set in 20162017 were as follows: Mr. O’Sullivan, $707,600; Mr. Agrawal, $331,000;$340,900; and Mr. Machado, $284,000.$310,000. Messrs. O’Sullivan, Agrawal and Machado received a 3.0%0%, 5.1%3.0% and a 7.17%9.2% increase, respectively, to move their base salaries closer to the fiftieth percentile of the market. The 20162017 base salary levels described in this paragraph are not directly comparable to the amounts listed in the “Salary” column for 20162017 in the 20162017 Summary Compensation Table because they generally were implemented in April 2016.2017.
Annual Performance‑Based Cash Incentive Plan. CTS believes that it is important to motivate its named executive officers to achieve, and to reward them for achieving annual corporate financial goals. Therefore, CTS places a substantial part of each named executive officer’s total compensation at‑risk by tying it directly to corporate performance. CTS used the annual MIP to focus CTS’ named executive officers on the most critical of its shorter‑term financial metrics for 2016.2017. The MIP provides for annual cash payments to named executive officers based on CTS’ financial performance and achievement of individual goals. A named executive officer’s ultimate award is determined under a formula that provides for payment of zero to 200% of a target award based on CTS’ actual performance versus the established quantitative financial performance goals. In addition, the Compensation Committee reserves the right to adjust awards downward guided by the named executive officer’s actual performance versus individual goals. Awards under the MIP arehave been intended to potentially qualify as performance‑based
compensation under Section 162(m) of the Internal Revenue Code.
Under tax reform legislation, this qualified performance based exception to the Section 162(m) deductibility limit generally ceased to apply effective January 1, 2018, except that certain grandfathered arrangements in effect on November 2, 2017, may continue to qualify for the exception.
How MIP Target Award Opportunities and Performance Goals Were Set. In February 2016,2017, the Compensation Committee established a target award opportunity and quantitative financial performance goals for each named executive officer. Target award opportunities were set as a percentage of base salary. In setting target award opportunities, the Compensation Committee took into consideration the median percentile target awards in the Compensation Strategies report described above, as well as internal parity. CTS’ practice to structure its named executive officers’ annual MIP compensation at approximately the fiftieth percentile is based on a philosophy that by using a median award, CTS is able to balance motivating the named executive officer with what it perceives as market‑competitive factors in being able to attract, retain, and motivate top executive talent.
The quantitative financial performance goals were based on CTS’ established business plan for 2016.2017. Each year, the Board reviews a business plan prepared by members of management that includes projections for revenues, earnings, key balance sheet metrics, and cash flow for each business unit. The business plan considers prior year results, strategic initiatives, approved investment plans, projected market demands, competition, improvement initiatives, global trends impacting business generally, and other factors. The Compensation Committee generally may use any of the metrics set out in the business plan and authorized under the 2014 Performance and Incentive Compensation Plan, to establish quantitative financial performance goals for the annual MIP.
In 2016,2017, the Compensation Committee set quantitative financial performance goals for participants who are named executive officers using a two tiered approach with the initial target being an operating earnings threshold, followed by target for earnings per share adjusted EPSfor planned restructuring expenses as defined in the MIP, CTS’ annual sales, and controllable working capital as a percentage of sales.sales where working capital is comprised of inventory, accounts receivable and accounts payable. CTS chose adjusted EPSearnings per share as a metric because it is a direct measurement of overall corporate performance that takes into consideration market conditions and provides a quantitative measurement from which CTS is able to assess the performance of its named executive officers. CTS chose sales as a metric because it places an emphasis on CTS’ annual sales growth goals. Controllable working capital was chosen because it is an objective measure of the efficiency with which CTS manages its short‑term capital needs.
The Compensation Committee set the performance levels for these metrics and established a minimum performance level that had to be reached before MIP awards were paid. The MIP also includes a minimum threshold for EPS/Operating Earnings to achieve any award. Failure to reach the MIP’s threshold on this metric results in no payment for the entire award. In establishing minimum and maximum performance levels for particular financial performance goals, the Compensation Committee considered past and projected performance levels for both CTS and the named executive officers, external market conditions, presumptions for 2016,2017, and desired overall share performance targets for 2016.2017.
Determination of Actual Awards. Actual MIP award payments are based on a formula and can vary from zero to 200% of the target award opportunity based on achievement of the quantitative financial performance goals. If actual performance fails to meet the minimum or required threshold, the payout under the plan is zero. On the upside, payout increases linearly up to 200% as performance exceeds the threshold performance goals. One consequence of this cliff threshold and payout performance formula is that a named executive officer’s risk of receiving no award is greater than the named executive officer’s opportunity to obtain an award that is substantially above target. Another consequence is that payouts above target represent a fraction of the expected return to the Company from “better than plan” performance. Since payments are capped, a named executive officer cannot increase MIP awards beyond a fixed amount, counterbalancing the incentive to pursue outsized short‑term rewards at the expense of the long‑term health of the Company.
Likelihood of Executives Achieving MIP Goals. Management endeavored to establish a plan that demanded challenging, but achievable, results given expected business conditions. While actual awards will vary above and below target from year to year, CTS expects that over a period of several years, payouts under the MIP will average about 100% of target. Over the past five years, payouts under the MIP based on corporate metrics averaged 93%109.4% of target.
How 20162017 Awards Were Calculated. For CTS’ named executive officers, performance measurements were weighted 60% for the EPS objective, 30% on sales, and 10% on the controllable working capital as a percentage of sales objective. The target award for Mr. O’Sullivan was 95%100% of base salary. For Mr. Agrawal, the target award opportunity was 60%65% of base salary. For Mr. Machado, the target award opportunity was 55% of base salary. For this purpose, base salary is calculated as
actual salary received during the calendar year. These target award opportunities were derived in part from the data obtained from the Compensation Strategies report and in part by the Compensation Committee’s judgment on internal equity of the positions, their relative value to CTS, and the desire to maintain a consistent annual target award incentive for named executive officers of CTS and the business units.
The award opportunities available to each named executive officer ranged from no payment if the goals were met below the 50% performance level, to a 50% payout if threshold performance (50% level) was achieved, to a 100% payout if target performance (100% level) was achieved, to a 200% payout if the goals were met at or above the maximum (200%) performance level. For 2016,2017, the threshold for the adjusted EPS metric was $0.95$1.08 and the maximum was $1.08.$1.25. The threshold for the corporate controllable working capital metric was 12.7%12.3% with a maximum of 10.4%10.1%. The threshold for Company sales was $390$395 million with a maximum of $434.5$451 million.
| | | 2016 Management Incentive Plan Performance Goals at Target | | 2016 Management Incentive Plan Performance Results | 2017 Management Incentive Plan Performance Goals at Target | | 2017 Management Incentive Plan Performance Results |
Executive | 2016 Base Salary ($) (1) | 2016 Annual Target Award (%) | Adjusted EPS ($) | Controllable Working Capital as a Percentage of Annual Sales (%) | Sales/ Order Intake (000s) ($) | | Adjusted EPS ($) | Controllable Working Capital as a Percentage of Annual Sales (%) | Sales/ Order Intake (000s) ($) | 2016 Annual Incentive Earned (%) | 2016 Annual Incentive Earned ($) | 2017 Base Salary ($) (1) | 2017 Annual Target Award (%) | Adjusted EPS ($) | Controllable Working Capital as a Percentage of Annual Sales (%) | Sales/ Order Intake (000s) ($) | | Adjusted EPS ($) | Controllable Working Capital as a Percentage of Annual Sales (%) | Sales/ Order Intake (000s) ($) | 2017 Annual Incentive Earned (%) | 2017 Annual Incentive Earned ($) |
Kieran O’Sullivan | 702,849 | 95 | 0.98 | 11.5 | 395,000 | | 1.08 | 11.6 | 396,679 | 161% | 1,073,941 | 707,600 | 100 | 1.17 | 11.2 | 412,000 |
| 1.22 | 11.7 | 422,993 | 144% | 1,016,704 |
Ashish Agrawal | 327,308 | 60 | 0.98 | 11.5 | 395,000 | | 1.08 | 11.6 | 396,679 | 161% | 315,866 | 338,256 | 65 | 1.17 | 11.2 | 412,000 |
| 1.22 | 11.7 | 422,993 | 144% | 318,409 |
Luis Machado | 279,615 | 55 | 0.98 | 11.5 | 395,000 | | 1.08 | 11.6 | 396,679 | 161% | 247,354 | 303,000 | 55 | 1.17 | 11.2 | 412,000 |
| 1.22 | 11.7 | 422,993 | 144% | 244,980 |
| |
(1) | Amounts shown reflect regular base earnings for the calendar year 2016,2017, and will vary from the base salary referenced elsewhere in this report as result of effective date of increases. |
Performance‑Based Equity Compensation. Performance‑based equity grants encourage strong financial performance while aligning executive compensation with shareholder interests. Under the terms of the performance‑based plans, named executive officers may earn restricted stock unit (“RSU”) awards based upon, and thus are rewarded for, achievement of financial objectives that CTS believes are beneficial to the Company and its shareholders or based upon CTS’ overall performance relative to peers over a longer term. Strong financial performance is encouraged since increasing levels of performance will result in increasing award payouts to the named executive officers. Evaluating performance by comparison to peers helps to ensure a true measure of performance under current market conditions. Settling awards in equity helps to ensure alignment of executive compensation with shareholder interests.
2014‑20162015‑2017 Performance Restricted Stock Unit Plan. In February 2014,2015, the Compensation Committee established a three‑year performance‑based equity compensation program called the 2014‑20162015‑2017 Performance Restricted Stock Unit Plan. Depending upon CTS’ achievement of sales growth, free cash flow (comprised of operating cash flow less capital expenditures), and CTS’ RTSR compared to the peer group described below over a three‑year performance period (fiscal years 2014, 2015, 2016 and 2016)2017), a named executive officer is eligible to earn an RSU award of zero to 200% of a target award opportunity established for his position. Awards are weighted 35% for achievement of the RTSR metric, 35% for achievement of the sales growth metric and 30% for achievement of the free cash flow metric. Messrs. O’Sullivan and Agrawal are the only named executive officers who are participants in the 2014‑20162015‑2017 Performance Restricted Stock Unit Plan.
The awards arewere intended to potentially qualify as performance‑based compensation under Section 162(m) of the Internal Revenue Code. Performance will be measured after the end of the performance period, and awards for achievement of the performance goals will be granted in 20172018 in the form of RSUs vesting immediately, subject to certification of 20162017 fiscal year results by CTS’ independent auditors and will be included in 20172018 compensation. Awards will be settled on the basis of one share of CTS common stock for each RSU on the settlement date. The plan permits the Compensation Committee to adjust
awards, subject to the restrictions of Section 162(m) of the Internal Revenue Code, and contains recoupment features in the event of employee misconduct.
The Compensation Committee established a target award opportunity for each participating named executive officer in the form of a specific number of RSUs. The target RSU award opportunities for Messrs. O’Sullivan and Agrawal were 27,00041,000 and 11,15012,000 respectively.
The Compensation Committee selected RTSR, a comparison of the increase of CTS’ stock price against the stock price appreciation of the peer group described below (including aggregated dividends adjusted for stock splits over the period) as a performance goal because it is a meaningful measure of CTS’ overall relative performance in comparison to its peers. Three‑year sales growth was selected to reinforce senior management’s focus on increasing sales over the long‑term. Three‑year free cash flow was selected to focus management’s attention on operational efficiency. The Compensation Committee selected a three‑year performance measurement period to encourage sustained performance beneficial to shareholders over more than just an annual period.
The Compensation Committee also determined the various performance levels that had to be achieved in order to earn an RSU award. When measuring performance against peers, the RSU award drops to zero if performance falls below a threshold level of RTSR performance achievement. The award payout for exceptional RTSR performance is capped at 200% of target. After the minimum award threshold is achieved, awards are interpolated between award levels. The criteria to achieve various RSU award levels under the plan are shown in the table below.
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| Three‑Year Sales Growth (Weight 35%) | | Award Level | |
| Three‑Year Sales Growth less than 7.5%6.0% | | 0% (No Award) | |
| Three‑Year Sales Growth greater than or equal to 7.5%6.0%, but less than 15%12% | | 50%‑99% of Target Award | |
| Three‑Year Sales Growth greater than or equal to 15%12%, but less than 22.5%18% | | 100%‑149% of Target Award | |
| Three‑Year Sales Growth greater than or equal to 22.5%18%, but less than 37.5%24% | | 150%‑199% of Target Award | |
| Three‑Year Sales Growth greater than or equal to 37.5%24% | | 200% of Target Award | |
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| Three‑Year Free Cash Flow (Weight 30%) | | Award Level | |
| Three‑Year Free Cash Flow less than $30,000,000$60,000,000 | | 0% (No Award) | |
| Three‑Year Free Cash Flow ≥ $45,000,000, but less than $60,000,000
| | 50%‑99% of Target Award | |
| Three‑Year Free Cash Flow ≥ $60,000,000, but less than $75,000,000 | | 100%50%‑149%99% of Target Award | |
| Three‑Year Free Cash Flow ≥ $75,000,000, but less than $90,000,000 | | 100%‑149% of Target Award | |
| Three‑Year Free Cash Flow ≥ $90,000,000, but less than $105,000,000 | | 150%‑199% of Target Award | |
| Three‑Year Free Cash Flow ≥ $90,000,000$105,000,000 | | 200% of Target Award | |
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| | | | |
| Relative Total Stockholder Return (Weight 35%) | | Award Level | |
| RTSR < 30% of Peer Group | | 0% (No Award) | |
| RTSR ≥ 30% of Peer Group but less than 50% of Peer Group | | 50%‑99% of Target Award | |
| RTSR ≥ 50% of Peer Group but less than 70% of Peer Group | | 100%‑149% of Target Award | |
| RTSR ≥ 70% of Peer Group but less than 90% of Peer Group | | 150%‑199% of Target Award | |
| RTSR ≥ 90% of Peer Group | | 200% of Target Award | |
The Compensation Committee selected a peer group consisting of 2023 companies whose performance will be compared to CTS’ performance over the three‑year performance period for RTSR measurement. A peer company may be removed from the list if delisted from its exchange for certain reasons not involving poor performance, including a merger. Of the 2023 peer companies selected, the following 1421 remain on the list:
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AVX Corporation | Haynes International, Inc. | Methode Electronics, Inc. |
Cabot Microelectronics Corporation | II-VI, Inc. | MTS Systems Corporation |
Dorman Products, Inc. | KEMET Corporation | Rogers Corporation |
Dorman Products,Electro Scientific Industries, Inc. | Littlefuse,Littelfuse, Inc. | Silicon Laboratories, Inc. |
Fabrinet | Materion Corporation | Stoneridge, Inc. |
Gentherm, Inc.Gentex Corporation | Methode Electronics,Maxwell Technologies, Inc. | Strattec Security Corporation |
GenTex CorporationGentherm Inc. | MTSMercury Systems, CorporationInc. | Vishay Intertechnology,Precision Group, Inc. |
Harman International Industries, Inc. | Pulse Electronics | |
Participants must remain continuously employed by CTS through the end of the three‑year performance period to be eligible to earn an award, subject to limited exceptions. Since CTS’ named executive officers are generally expected to retain their stock awards, named executive officers are incentivized to consider the long‑term implications of actions taken in pursuit
of performance‑based equity awards. Similar to the MIP discussed above, the Compensation Committee can, in its discretion, adjust a participant’s payout of an award downward after consideration of other business factors, including overall CTS performance and the individual participant’s contribution to CTS performance. The Compensation Committee can also adjust a payout of an award in its discretion to prevent the enlargement or dilution of the award because of extraordinary events or circumstances as determined by the Compensation Committee. However, adjustments cannot be made with respect to the award of a covered employee if doing so would cause the related compensation to fail to qualify as “qualified performance‑based compensation” within the meaning of Section 162(m) of the Internal Revenue Code. Recent tax reform legislation may affect the applicability of the performance based exception under Section 162(m) - see “Annual Performance-Based Cash Incentive Plan” above.
The 2014‑20162015‑2017 Performance Restricted Stock Unit Plan contains a recoupment feature. Specifically, if CTS learns of any intentional misconduct by a plan participant that directly contributes to CTS having to restate all or a portion of its financial statements, the Board may, in its sole discretion, require the participant to reimburse CTS for the difference between any awards paid to the participant based on achievement of financial results that were subsequently the subject of a restatement and the amount the plan participant would have earned as awards under the plan based on the financial results as restated.
Three-year Performance Restricted Stock Unit Plans. In each of February 20152016 and February 2016,2017, the Compensation Committee established a new three‑year performance‑based equity compensation program called the 2015‑20172016‑2018 Performance Restricted Stock Unit Plan and the 2016-20182017-2019 Performance Restricted Stock Unit Plan respectively, in which named executive officers participate. The plans are essentially the same as the 2014‑20162015‑2017 plan described above.above except that three year operating cash flow has replaced the free cash flow metric.
As in the prior years’ performance plan, each performance target of the three-year performance plans has a minimum threshold which must be achieved before any award is available. After the minimum award threshold is achieved, award levels will be interpolated between established measurement levels. Depending upon achievement of performance goals set by the Compensation Committee, a named executive officer could earn an RSU award of zero to 200% of a target award established for his position. CTS believes that the applicable threshold goals have been established at levels that should be appropriately difficult to attain, and that the applicable target goals will require considerable and increasing collective effort on the part of our employees, including our named executive officers, to achieve. Achievement of the applicable maximum goals is considered to require a “stretch” given current market conditions. The Compensation Committee again established a specific number of RSUs for each named executive officer as a target award, selected a three‑year performance period, selected various performance levels for achievement of awards, established a minimum threshold beneath which no award would be paid, and selected a peer group of companies as discussed earlier in this proxy statement.
The three-year performance plans contain a peer group adjustment protocol, require participants to remain continuously employed during the entire three‑year performance period (with limited exceptions in the event of death, disability, change of ownership, unforeseeable emergency, termination without cause, and qualified retirement), and will settle earned RSU awards, if any, in shares of CTS common stock on a one‑to‑one basis by March 15th of the year following the performance period. The three-year performance plans permit the Compensation Committee to adjust awards, subject to the restrictions of Section 162(m) of the Internal Revenue Code, and contain recoupment features in the event of employee misconduct. Recent tax reform legislation may affect the applicability of the performance based exception under Section 162(m) - see “Annual Performance-Based Cash Incentive Plan” above.
The Compensation Committee established a target award opportunity for each participating named executive officer in the form of a specific number of RSUs for each three-year performance plan. The target RSU award opportunities under the 2015-2017 Performance Restricted Stock Unit Plan are: Mr. O’Sullivan, 41,000; and Mr. Agrawal, 12,000. The target RSU award opportunities under the 2016-2018 Performance Restricted Stock Unit Plan are: Mr. O'Sullivan 50,200; Mr. Agrawal 15,960; and Mr. Machado 14,000.14,000; and under the 2017-2019 Performance Restricted Stock Unit Plan are: Mr. O’Sullivan, 36,420; Mr. Agrawal, 11,993 and Mr. Machado, 9,205.
Performance Vesting Stock Option Plan.In May 2015, the Compensation Committee established a special five‑year performance‑based equity compensation program called the Performance Vesting Stock Option Plan in which all of the named executive officers participate. The plan employs a single business‑critical metricachievement of $600 Million in revenue in any trailing four quarters within the five-year window as a performance vesting trigger. CTS believes that the applicable target goal will require considerable and increasing collective effort on the part of our named executive officers to achieve given current market conditions. Options are very commonly used in such situations because they provide the greatest “leverage” to executives for any resulting increases in stock price. The use of options is also consistent with the peer group’s practices; options are used to incent performance by almost 60% of the peer companies.
The Compensation Committee established a target award opportunity for Mr. O’Sullivan of 100,000 options; Mr. Agrawal, of 35,000 options; and Mr. Machado, of 30,000 options, each with a strike price of $18.37, in the form of performance stock options. Mr. Machado received a grant of 10,000 options effective upon his hire date in August of 2015 and another 20,000 options effective June 15, 2016. If the performance metric is not met within the 5 year performance period, the Options will not vest and be forfeited.
Chief Executive Officer Performance Share Agreement. In addition to his participation in the performance‑based equity incentive plans described above, Mr. O’Sullivan was granted participation in a CEO Performance Plan called the 2013‑2015 CEO Performance Restricted Stock Unit Plan. Under this plan, performance was measured against one metric, RTSR, over a three‑year performance period (2013‑2015). The maximum award under the plan was 65,000 Restricted Stock Units, as follows:
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| | | | |
| RTSR for the Performance Period | | Shares Earned for the Performance Period(1)
| |
| Less than 30% | | 0 shares | |
| Greater than 30% and less than 50% | | 16,250 shares | |
| Greater than 50% and less than 70% | | 32,500 shares | |
| Greater than 70% and less than 90% | | 48,750 shares | |
| Greater than 90% | | 65,000 shares | |
| |
(1)
| Award levels for RTSR will be interpolated between established measurement levels. |
Mr. O’Sullivan received 54,357 Restricted Stock Units under the 2013-2015 CEO Performance Restricted Stock Unit Plan on March 4, 2016, which was reported in Mr. O’Sullivan’s compensation at fair value when granted in 2013.
Service‑Based Equity Compensation. CTS believes that stock ownership and equity‑based compensation are valuable tools for motivating employees to improve, and rewarding them for improvements in, CTS’ long‑term performance. CTS also believes that equity grants are an effective way to align named executive officer and shareholder interests because a significant amount of a named executive officer’s potential income is directly tied to enhancing shareholder value. Service‑based equity grants also play a critical role in retaining and motivating executive talent by encouraging named executive officers to remain employees throughout the service period so that they will receive equity awards. The retention of qualified named executive officers over the longer term assists CTS in retaining valuable institutional knowledge. Further, service‑based equity compensation also helps to assure that named executive officers are able to meet their obligations under CTS’ stock ownership guidelines. The Compensation Committee considered service‑based equity grants as part of its review of annual executive compensation in February 2016.2017. For new hires or to recognize significant individual contributions, the Compensation Committee may grant individual RSU awards at different times during the year and may use alternative vesting schedules or distribution options.
20162017 Grants. For 20162017 service‑based equity compensation grants, CTS issued RSUs. In February 2016,2017, the Compensation Committee awarded RSUs vesting over a three‑year period to Messrs. Agrawal (10,750)(8,884) and Machado (8,960)(6,705) based on the recommendation of Mr. O’Sullivan. In making his recommendation, Mr. O’Sullivan analyzed the third party market information provided by Compensation Strategies and subjectively considered retention and performance factors. Mr. O’Sullivan’s 20162017 RSU award was recommended by the Compensation Committee and approved by the entire Board (other than Mr. O’Sullivan, who abstained in discussions and votes related to his own awards). Mr. O’Sullivan’s 20162017 grant was for 34,60025,080 RSUs based on benchmarking, retention and performance factors.
In February of 2016, upon recommendation of its compensation consultant based on benchmarking, the Committee made a one-time award of RSU's to Messrs. O'Sullivan, Agrawal and Machado of 32,482 RSU's, 10,225 RSU's and 2,645 RSU's respectively. This award vested in its entirety on the first anniversary of the grant date.
Each service‑based RSU award is settled on a one‑for‑one basis in shares of CTS common stock upon vesting. Grants of equity made in 20162017 are reported in the “2016“2017 Grants of Plan‑Based Awards” table on page 29.table. CTS believes that the general practice of deferred vesting of equity awards over several years further helps to align the interests of our named executive officers and shareholders. Since a substantial portion of each named executive officer’s compensation is paid out in the form of service‑based equity grants, and since the value of equity will vary over time, depending mostly upon the overall performance and strength of CTS, actions taken in one year may substantially affect a named executive officer’s compensation over the course of many subsequent years. Therefore, named executive officers are encouraged to consider the longer‑term health of CTS in addition to shorter‑term considerations. CTS also believes that deferred vesting helps in the retention of named executive officers, as unvested portions of grants are ordinarily forfeited in the event of termination.
Defined Contribution Plan. Substantially all U.S.‑based CTS employees are eligible to participate in the CTS Corporation Retirement Savings Plan, referred to as the CTS 401(k) Plan. CTS matches an employee’s contributions dollar for
dollar up to the first 3% of eligible pay, and thereafter at $0.50 for every dollar up to the next 2% of eligible pay, for a maximum matching contribution of 4%, subject to limitations under the Internal Revenue Code. All of the named executive officers participate in the 401(k) Plan.
Other Compensation. CTS provides a limited set of perquisites and other compensation in order to attract, retain, and motivate the named executive officers. For 2016,2017, compensation for named executive officers included reimbursements for tax preparation services, financial planning services, and an annual executive physical. Other compensation includes imputed income on life insurance benefits. The costs of tax preparation services is capped at $2,500 for the named executive officers. The cost of financial planning services is capped at $5,000 for each named executive officer. The cost of executive physicals is capped at $2,000 for each of the named executive officers and their respective spouses. The notes to the 20162017 Summary Compensation Table delineate the various perquisites named executive officers received for 2016.2017.
Health and Welfare Benefits. Named executive officers are also eligible to participate in a standard set of health and welfare benefits, including medical insurance, dental insurance, vision insurance, life insurance, accidental death and dismemberment insurance, disability insurance, dependent life insurance, an employee assistance plan, and health care and dependent care reimbursement accounts. The same terms of participation that apply to salaried employees generally govern the participation of named executive officers in these benefits.
Agreements with Named Executive Officers
Executive Severance Policy. Effective September 10, 2009, CTS enacted an Executive Severance Policy. This policy formalized and standardized CTS’ severance practices for certain officers and key employees. For a complete understanding of the executive severance policy, please see the section of this proxy statement titled “Potential Payments Upon Termination or Change‑in‑Control” below.
Change‑In‑Control Severance Agreements. CTS entered into change‑in‑control severance agreements with the named executive officers, the purpose of which is to help CTS retain named executive officers and encourage them to focus on corporate interests during times of change and uncertainty. As discussed in the “Potential Payments Upon Termination or Change‑in‑Control” section, these agreements reduced or eliminated certain payments, including an excise tax gross‑up, and placed a cap on the total severance benefit. For a complete understanding of the severance agreements, please see the section of this proxy statement titled “Potential Payments Upon Termination or Change‑in‑Control” below.
Stock Ownership Guidelines
See Page 12the section titled "Stock Ownership Guidelines for Executives and Directors" of this Proxy for a discussion of CTS’ Stock Ownership Guidelines.
CTS Securities Hedging/Pledging Policy
CTS has adopted a policy prohibiting officers and directors who receive CTS securities from engaging in any transaction in which they may profit from short‑term speculative swings in the value of those securities or from pledging CTS’ securities in lending transactions. These individuals may not engage in the purchase or sale of put and call options, short sales, and other hedging transactions designed to minimize the risk in owning CTS securities. These individuals may not pledge CTS’ securities as collateral for a loan, including, without limitation, in a margin account. The prohibitions described above do not apply to the exercise of stock options granted as a part of a CTS incentive plan.
Policy on Recovery of Awards
The CTS Corporation 2014 Performance and Incentive Compensation Plan, under which various performance‑based and service‑based equity grants are made, includes a provision to address recoupment of incentive awards in the event of financial restatements. The recoupment provisions provide that if the Board learns of any intentional misconduct by a plan participant that contributes to CTS having to restate its financial statements, the Board may require that individual to reimburse CTS for the difference between any award he or she received and the amount of the award he or she would have received based on the financial results as restated. The 2014 Performance and Incentive Compensation Plan provides for recoupment provisions to be added to individual award agreements. In addition, the Compensation Committee Charter provides that the Committee may adopt a claw-back policy as may be required or advisable under any law or regulation. The Compensation Committee reviews its Charter and policies at least annually to ensure appropriate recoupment of compensation is available to the Company.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management and approved its inclusion in this proxy statement. Based on this review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in CTS’ Annual Report on Form 10‑K for the year ended December 31, 2016.2017.
CTS Corporation 20162017 Compensation Committee
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Patricia K. Collawn, Chairman | Walter S. Catlow |
Diana M. Murphy | Gordon Hunter |
EXECUTIVE COMPENSATION
20162017 Summary Compensation Table
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| Name and Principal Position | Year | Salary(1) ($) | Bonus ($) | Stock Awards (2) ($) | Option Awards ($) | Non- Equity Incentive Plan Compensation (3) ($) | Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) | All Other Compensation (4) ($) | Total ($) |
| Kieran M. O'Sullivan | 2016 | 702,849 | - | 1,595,887 | - | $1,073,941 | - | 22,460 | 3,395,137 |
| President and | 2015 | 708,046 | - | 1,197,052 | 541,000 | $0 | - | 16,600 | 2,462,698 |
| Chief Executive Officer | 2014 | 657,039 | - | 969,233 | - | $581,632 | - | 13,381 | 2,221,285 |
| | | | | | | | | | |
| Ashish Agrawal | 2016 | 327,308 | - | 502,510 | - | $315,866 | - | 4,164 | 1,149,848 |
| Vice President and | 2015 | 318,567 | - | 350,522 | 189,350 | $0 | - | 128,463 | 986,902 |
| Chief Financial Officer | 2014 | 281,029 | - | 397,227 | | $130,935 | - | 4,640 | 813,831 |
| | | | | | | | | | |
| Luis F. Machado | 2016 | 279,615 | - | 346,903 | 80,600 | $247,354 | - | 13,209 | 967,681 |
| Vice President and | 2015 | 96,827 | | 145,440 | 54,100 | $0 | - | 165,253 | 461,620 |
| General Counsel & Secretary | | | | | | | | | |
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Name and Principal Position | Year | Salary(1) ($) | Bonus ($) | Stock Awards (2) ($) | Option Awards ($) | Non- Equity Incentive Plan Compensation (3) ($) | Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) | All Other Compensation (4) ($) | Total ($) |
Kieran M. O'Sullivan | 2017 | 707,600 | - | 1,462,301 | - | 1,016,704 | - | 31,911 | 3,218,516 |
President and | 2016 | 702,849 | - | 1,595,887 | - | 1,073,941 | - | 22,460 | 3,395,137 |
Chief Executive Officer | 2015 | 708,046 | - | 1,197,052 | 541,000 | - | - | 16,600 | 2,462,698 |
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Ashish Agrawal | 2017 | 338,256 | - | 495,914 | - | 318,409 | - | 14,536 | 1,167,115 |
Vice President and | 2016 | 327,308 | - | 502,510 | - | 315,866 | - | 4,164 | 1,149,848 |
Chief Financial Officer | 2015 | 318,567 | - | 350,522 | 189,350 | - | - | 128,463 | 986,902 |
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Luis F. Machado | 2017 | 303,000 | - | 378,013 | - | 244,980 | - | 16,934 | 942,927 |
Vice President and | 2016 | 279,615 | - | 346,903 | 80,600 | 247,354 | - | 13,209 | 967,681 |
General Counsel & Secretary | 2015 | 96,827 | - | 145,440 | 54,100 | - | - | 165,253 | 461,620 |
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(1) | Numbers shown reflect regular base earnings for theeach calendar year 2016 which varies from the base salary referenced elsewhere in this report. |
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(2) | The amounts reported in the “Stock Awards” column for 2016 represent the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 of stock awards granted during the year. Amounts reflected consist of service‑based and performance‑based awards. For the performance‑based awards reported in this column for 2016,2017, such amounts are based on the probable outcome of the relevant performance conditions as of the grant date and therefore are at target. Assuming that the highest level of performance is achieved for these awards, the grant date fair value of these awards would be: Mr. O’Sullivan, $1,337,629;$1,770,923; Mr. Agrawal, $425,270;$583,163; Mr. Machado, $373,044.$447,595. |
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(3) | Amounts for 2016 represent payments earned under the MIP in respect of that year's performance and paid in the subsequent year. |
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(4) | Amounts in this column for 20162017 reflect values for financial planning, tax preparation services and a CTS match under the following perquisites and personal benefits and other amounts:401(k) Plan. |
For Mr. O’Sullivan, executive physical, financial planning, tax preparation services and a CTS match under the 401(k) Plan.
For Mr. Agrawal, tax preparation services and a CTS match under the 401(k) Plan.
For Mr. Machado, financial planning, tax preparation services and a CTS match under the 401(k) Plan.
20162017 Grants of Plan‑Based Awards
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| | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price Of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($) |
Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) |
Kieran M. O'Sullivan | | | | | | | | | | | |
2016 Management Incentive Plan(1) | | 333,853 | 667,706 | 1,335,412 | | | | | | | |
2016-2018 Performance Restricted Stock Unit Plan(2) | 2/7/2016 | | | | 25,100 | 50,200 | 100,400 | | | | 668,815 |
2014 Performance and Incentive Compensation Plan | 2/7/2016 | | | | | | | 67,082 | | | 927,073 |
Performance Vesting Stock Option Plan(3) | | | | | | | | | 0 | | 0 |
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Ashish Agrawal | | | | | | | | | | | |
2016 Management Incentive Plan(1) | | 98,193 | 196,385 | 392,770 | | | | | | | |
2016-2018 Performance Restricted Stock Unit Plan(2) | 2/7/2016 | | | | 7,980 | 15,960 | 31,920 | | | | 212,635 |
2014 Performance and Incentive Compensation Plan | 2/7/2016 | | | | | | | 20,975 | | | 289,875 |
Performance Vesting Stock Option Plan(3) | | | | | | | | | 0 | | 0 |
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Luis F. Machado | | | | | | | | | | | |
2016 Management Incentive Plan(1) | | 76,895 | 153,789 | 307,578 | | | | | | | |
2016-2018 Performance Restricted Stock Unit Plan(2) | | | | | 7,000 | 14,000 | 28,000 | | | | 186,522 |
2014 Performance and Incentive Compensation Plan | 02/17/2016 | | | | | | | 11,605 | | | 160,381 |
Performance Vesting Stock Option Plan(3) | 6/15/2016 | | | | | | | | 20,000 | | 80,600 |
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| | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price Of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($) |
Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) |
Kieran M. O'Sullivan |
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2017 Management Incentive Plan(1) |
| 353,800 | 707,600 | 1,415,200 |
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2017-2019 Performance Restricted Stock Unit Plan(2) | 2/9/2017 |
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| 18,210 | 36,420 | 72,840 |
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| 885,461 |
2014 Performance and Incentive Compensation Plan | 2/9/2017 |
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| 25,080 |
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| 576,840 |
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Ashish Agrawal |
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2017 Management Incentive Plan(1)
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| 109,933 | 219,866 | 439,732 |
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2017-2019 Performance Restricted Stock Unit Plan(2) | 2/9/2017 |
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| 5,997 | 11,993 | 23,986 |
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| 291,582 |
2014 Performance and Incentive Compensation Plan | 2/9/2017 |
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| 8,884 |
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| 204,332 |
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Luis F. Machado |
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2017 Management Incentive Plan(1) |
| 83,325 | 166,650 | 333,300 |
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2017-2019 Performance Restricted Stock Unit Plan(2) | 2/9/2017 |
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| 4,603 | 9,205 | 18,410 |
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| 223,798 |
2014 Performance and Incentive Compensation Plan | 2/9/2017 |
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| 6,705 |
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| 154,215 |
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(1) | The 20162017 Management Incentive Plan is governed by the 2014 Performance and Incentive Compensation Plan. |
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(2) | In February of 2016,2017, the Compensation Committee established terms applicable to performance‑based equity compensation awards for fiscal years 2016‑20182017‑2019 under the CTS Corporation 2014 Performance and Incentive Compensation Plan. The awards are intended to qualify as performance‑based compensation under Section 162(m) of the Internal Revenue Code. Restricted stock units for achievement of the performance goals will be issued in 20182020 following certification of 20172019 fiscal year results by CTS’ independent auditors. |
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(3)
| In May of 2015, the Compensation Committee established terms applicable to the Performance Vesting Stock Option Plan for fiscal years 2015‑2020 under the CTS Corporation 2014 Performance and Incentive Compensation Plan. These Performance Options will vest only upon achievement of a critical CTS performance metric within the five year performance period. If the performance metric is not met within the five year performance period, the Options will not vest and be forfeited. |
Compensation Arrangements. CTS did not have employment agreements with any named executive officers for 2016.2017. In an effort to formalize and standardize CTS’ severance practices for other officers and key employees, CTS enacted an Executive Severance Policy in 2009, and CTS maintains change‑in‑control severance agreements with the named executive officers. For a complete understanding of the executive change‑in‑control severance agreements and the Executive Severance Policy, please see the section of this proxy statement titled “Potential Payments upon Termination or Change‑ in‑Control” below.
Annual base salary for each named executive officer, other than Mr. O’Sullivan, is determined by the Compensation Committee. Mr. O’Sullivan’s annual base salary was determined by the Board based on recommendations by the Compensation Committee. Mr. O’Sullivan did not receive any compensation for his service as a director.
Outstanding Equity Awards at 20162017 Fiscal Year‑End
| | | Option Awards | | Stock Awards | Option Awards | | Stock Awards |
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Name | Number of Securities Underlying Unexercised Options Exercisable (#) | | Number of Securities Underlying Unexercised Options Unexercisable (#)(1) | | Option Exercise Price ($) | | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested (#) | | Market Value of Shares or Units of Stock That Have Not Vested ($) | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(2) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | Number of Securities Underlying Unexercised Options Exercisable (#) | | Number of Securities Underlying Unexercised Options Unexercisable (#)(1) | | Option Exercise Price ($) | | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested (#) | | Market Value of Shares or Units of Stock That Have Not Vested ($) | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(2) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
Kieran M. O’Sullivan | — | | 100,000 | | 18.37 | | 5/26/2020 | | 91,281(3) | | 2,044,694 | | 118,200 | | 2,647,680 | — |
| 100,000 |
| 18.37 |
| 5/26/2020 |
| 57,246 (3) |
| 1,474,085 |
| 127,620 |
| 3,286,215 |
Ashish Agrawal | — | | 35,000 | | 18.37 | | 5/26/2020 | | 28,732(4) | | 643,597 | | 39,110 | | 876,064 | — |
| 35,000 |
| 18.37 |
| 5/26/2020 |
| 18,717 (4) |
| 481,963 |
| 39,953 |
| 1,028,790 |
Luis F. Machado | — | | 30,000 | | 18.37 | | 5/26/2020 | | 16,938(5) | | 379,411 | | 14,000 | | 313,600 | — |
| 30,000 |
| 18.37 |
| 5/26/2020 |
| 15,344 (5) |
| 395,108 |
| 23,205 |
| 597,529 |
An eligible named executive officer is entitled to severance compensation if, within three years after a change‑in‑control, the named executive officer terminates his or her employment for good reason or his or her employment is terminated by CTS or its successor for any reason other than cause, disability, or death. Good reason is defined generally as: (1) the failure to maintain the named executive officer in his or her office or position or an equivalent or better office or position; (2) a significant adverse change in the nature of the named executive officer’s duties; (3) a reduction in the named executive officer’s base or incentive pay or an adverse change in any employee benefits; (4) the named executive officer’s good faith determination that, as a result of a change in circumstances following the change‑in‑control, he or she is unable to carry out or has suffered a substantial reduction in the duties he or she had prior to the change‑in‑control; (5) a successor entity’s failure to assume all obligations of CTS under the severance agreement; (6) CTS or its successor moves the named executive officer’s principal work location by more than 35 miles or requires him or her to travel at least 20% more; (7) CTS or its successor commits any material breach of the severance agreement; or (8) CTS’ common stock ceases to be publicly traded or listed on the New York Stock Exchange. Cause is defined generally as a separation from service resulting from the executive: (a) being convicted of a crime involving fraud, embezzlement or theft in connection with work duties or responsibilities; (b) intentionally and wrongfully damaging CTS property; (c) intentionally and wrongfully disclosing CTS’ confidential information; or (d) intentionally and wrongfully competing with CTS without CTS’ consent, subject to certain exceptions.
If the change‑in‑control severance agreement is triggered, the severance compensation to which the named executive officer is entitled includes: (1) a lump sum payment equal to two times the sum of the greater of the executive’s base salary at the time of the change‑in‑control or his average base salary over the three years prior to termination, plus the greater of his average incentive pay over the three years prior to the change‑in‑control and his target incentive pay for the year in which the change‑in‑control occurred; (2) continued availability of medical and dental benefits for 24 months following termination at the executive’s expense, with CTS reimbursing the executive for the portion of the premium in excess of the employee share for such coverage, provided that the obligation to provide these benefits will be reduced to the extent medical and dental benefits are provided by another employer; (3) reimbursement of up to $30,000 for outplacement services; and (4) only in the case of Mr. O’Sullivan, in consideration of the non‑compete provision contained in his severance agreement, a lump sum payment equal to one times the sum of the greater of his base salary at the time of the change‑in‑control or his average base salary over the three years prior to termination plus the greater of his average incentive pay over the three years prior to the change‑in‑control and his target incentive pay for the year in which the change‑in‑control occurred.
In addition, if any payments made to the named executive officer would be subject to excise tax under the “golden parachute” rules of Sections 280G and 4999 of the Internal Revenue Code, those payments will be reduced so that no portion will exceed the “excess parachute payment” threshold that would trigger the excise tax.
The payment scheme is designed to comply with Section 409A of the Code; lump sum payments of severance compensation are generally to be made as soon as practicable but not more than ninety days after the named executive officer separates from service, provided however, that if the named executive officer is a “Specified Employee” within the meaning of Section 409A of the Code, then the payment shall be made on the earlier of the first day of the seventh month following the date of the named executive officer’s separation from service or the named executive officer’s death. Payment of severance compensation under the change‑in‑control severance agreement will be reduced to the extent of any corresponding payments under any other agreement.
To the extent that a named executive officer receives severance benefits under the change-in-control severance agreement, the named executive officer may not, for a period of one year following his termination date, participate in the management of any business which engages in substantial and direct competition with CTS or its successor. In addition, for a period of four years after separation from service, the named executive officer may not solicit any corporate employee to leave employment with CTS or any of its subsidiaries, may not hire or engage any person who was employed with CTS or any of its subsidiaries and may not assist any organization with whom the named executive officer is associated in taking such actions. The named executive officer is generally entitled to be reimbursed by CTS for legal fees incurred to enforce his rights under the severance agreement.
Assuming that a change‑in‑control event occurred and (unless otherwise indicated) that the named executive officer was terminated without cause on December 31, 2016,2017, the estimated severance compensation provided to each named executive officer is as follows: