UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.  )

HEALTHCARE SERVICES GROUP, INC.

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

To the Shareholders of

HEALTHCARE SERVICES GROUP, INC.

NOTICE IS HEREBY GIVEN that the Annual Meeting (the “Annual Meeting”"Annual Meeting") of Shareholders of Healthcare Services Group, Inc. (the “Company""Company") will be held at the Courtyard Philadelphia Bensalem, 3280 Tillman Drive, Bensalem, Pennsylvania 19020, on May 26, 2015,31, 2016, at 10:00 A.M., for the following purposes:

Only shareholders of record at the close of business on April 2, 20151, 2016 will be entitled to notice of and to vote at the Annual Meeting.

 

HEALTHCARE SERVICES GROUP, INC.

This proxy statement contains information related to the annual meeting of shareholders (the “Annual Meeting”"Annual Meeting") of Healthcare Services Group, Inc. (the “Company,"Company," "we," "us" or "our"), to be held on Tuesday, May 26, 2015,31, 2016, beginning at 10:00 a.m. (EDT), to be held at the Courtyard Philadelphia Bensalem, 3280 Tillman Drive, Bensalem, Pennsylvania 19020, and at any postponements or adjournments thereof.

At the Company’s Annual Meeting, shareholders will hear an update on the Company’s operations, have a chance to meet some of itsour directors and executives and will act on the following matters:

Only holders of record of our common stockCommon Stock, $.01 par value (the "Common Stock") at the close of business on April 2, 20151, 2016 (the “Record Date”), are entitled to notice of and to vote at the Annual Meeting. On the Record Date, there were issued and outstanding approximately 71,470,00072,406,694 shares of our common stock.Common Stock. Each share of common stockCommon Stock entitles the holder thereof to one vote. This Proxy Statement is being mailed to shareholders on or about April 20, 2015.18, 2016.

In order to carry on the business of the Annual Meeting, we must have a quorum. The presence, in person or by proxy, of the holders of a majority of the outstanding shares of our common stockCommon Stock is required to constitute a quorum at the Annual Meeting.

The affirmative vote of a plurality of the shares of common stockCommon Stock entitled to vote and present in person or by proxy at the Annual Meeting and entitled to vote is required for the election to our Board of Directors of each of the nominees for director. Shareholders do not have the right to cumulate their votes in the election of directors.

The affirmative vote of the holders of a majority of the votes cast at the annual meetingAnnual Meeting in person or by proxy and entitled to vote is required for approval of Proposal No. 2 Proposal No. 3 and Proposal No. 4.3.

You may either vote ‘FOR’'FOR' or ‘WITHHOLD’'WITHHOLD' authority to vote for each nominee for election to the Board of Directors. You may vote ‘FOR,’ ‘AGAINST’'FOR,' 'AGAINST' or ‘ABSTAIN’'ABSTAIN' on Proposal No. 2 Proposal No. 3 and Proposal No. 4.3. Abstentions will be counted as present for purposes of determining the existence of a quorum, but will have no effect on the vote of the particular proposal. If you sign and submit a proxy card without voting instructions, your shares will be voted ‘FOR’'FOR' each director nominee ‘FOR’,'FOR' Proposal No. 2 and Proposal No. 3 AGAINST Proposal No. 4 and ‘FOR’'FOR' or ‘AGAINST’'AGAINST' any other proposal as recommended by the Board of Directors.

If shareholders do not give their brokers instructions as to how to vote shares held in street name, the brokers have discretionary authority to vote those shares on ‘routine’ matters, such as the ratification of independent registered public accounting firm, but not on ‘non-routine’'non-routine' proposals, such as the election of directors and the advisory vote regarding executive compensation and the shareholder proposal.compensation. As a result, if you hold your shares in street name and do not provide voting instructions to your broker, your shares will not be voted on any proposal on which your broker does not have discretionary authority to vote. Shares held by brokers who do not have discretionary authority to vote on a particular matter and who have not received voting instructions from their customers will be counted as present for the purpose of determining whether there is a quorum at the Annual Meeting, but will not be counted or deemed to be present in person or by proxy for the purpose of determining whether our shareholders have approved that matter.

You may vote in person at the Annual Meeting or by proxy. We recommend that you vote by proxy even if you plan to attend the Annual Meeting. You can always change your vote at the Annual Meeting.

Our Board of Directors is asking for your proxy. Giving us your proxy means you authorize us to vote your shares at the Annual Meeting in the manner you direct. You may vote for or against the proposals or abstain from voting.

Proxies submitted will be voted by the individuals named on the proxy card in the manner you indicate. If you give us your proxy but do not specify how you want your shares voted, they will be voted in accordance with the Board of Directors recommendations.

You may receive more than one proxy or voting card depending on how you hold your shares. If you hold shares through someone else, such as a stockbroker, you may get materials from them asking how you want to vote. The latest proxy card we receive from you will determine how we will vote your shares.

A proxy may be revoked by delivery of a written statement to the Secretary of the Company stating that the proxy is revoked, by a subsequent proxy executed by the person executing the prior proxy and presented to the Annual Meeting, or by voting in person at the Annual Meeting.

Only shareholders, their proxy holders, and our invited guests may attend the Annual Meeting. For security purposes, all persons attending the Annual Meeting must bring identification with photo. If you wish to attend the Annual Meeting in person but you hold your shares through someone else, such as a stockbroker, you must bring proof of your ownership to the Annual Meeting. For example, you could bring an account statement showing that you owned shares of the Company as of the Record Date as acceptable proof of ownership.

All expenses in connection with this solicitation will be borne by the Company. It is expected that solicitation will be made primarily by mail, but regular employees or representatives of the Company may also solicit proxies by telephone, facsimile, email or in person, without additional compensation, except for reimbursement of out-of-pocket expenses.

The Company operates within a comprehensive plan of corporate governance for the purpose of defining responsibilities, setting high standards of professional and personal conduct and assuring compliance with such responsibilities and standards. The Company regularly monitors developments in the area of corporate governance. These include corporate governance standards and disclosure requirements resulting from the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). In addition, the NASDAQ Stock Market, LLC ("NASDAQ") also has corporate governance and listing requirements. Our corporate governance policies are available on our website at http://investor.hcsgcorp.com/governance.cfm.

In accordance with the listing requirements of the NASDAQ, Stock Market, LLC, a majority of the current members of the Company's Board of Directors are independent: namely,independent, namely: John M. Briggs, Diane S. Casey, Robert L. Frome, John J. McFadden, Robert J. Moss, and Dino D. Ottaviano. In addition,Ottaviano and Jude Visconto, a new nominee for Director, is also independent under the NASDAQ Stock Market, LLC listing standards.Visconto. Accordingly, if Messrs. Briggs, Frome, McFadden, Moss, Ottaviano and OttavianoVisconto and Ms. Casey are re-elected as members of the Board of Directors and if Jude Visconto is elected as a member of the Board of Directors, a majority of the members of the Company's Board of Directors will continue to be independent.

Mr. Frome is a member of the law firm of Olshan Frome Wolosky, LLP, which law firm has been retained by the Company during the last fiscal year. Fees paid by the Company to such firm during the fiscal year ended December 31, 20142015 were less than $120,000. Additionally, the fees paid by the Company did not exceed 5% of such firm’s total revenues.

Accordingly, Mr. Frome is an independent director as such term is defined by NASDAQ Rule 5605(a)(2) of the NASDAQ Stock Market, LLC listing standards.

We have also adopted a Code of Ethics and Business Conduct for directors, officers and employees of the Company. It is intended to promote honest and ethical conduct, full and accurate reporting and compliance with laws as well as other matters. A copy of the Code of Ethics and Business Conduct is posted on our website at www.hcsg.com.

TheEffective May 26, 2015, the Board of Directors historically did not have a policy regarding ("the separation ofBoard") separated the rolespositions of Chairman of the Board and Chief Executive Officer by appointing Theodore Wahl as the Board believed it was in the best interests of the Company to make that determination based upon the position and direction of the Company and the membership of the Board. Accordingly, Daniel P. McCartney, the founder of the Company, has served as our Chairman of the Board of Directors and Chief Executive Officer since inception. The Board determined that, effective May 26, 2015, and in conjunction with the Annual Meeting, the Company will separate the roles of Chairman of the BoardPresident and Chief Executive Officer. The Board has appointed Daniel P. McCartney currentcontinued as Chairman of the Board and Chief Executive Officer, to serve as the Chairman, and current President and Chief Operating Officer, Theodore Wahl, to serve as the President & Chief Executive Officer of the Company. We believe that the Company will benefit from the intimate knowledge Messrs. McCartney and Wahl have of our operations and industry as well as Mr. McCartney's extensive experience serving as the ChairmanBoard.

The independent directors of the Board of a public company.

We believe that including a lead independent director in our current Board leadership structure, is optimal

Our Board conducts an annual evaluation in order to determine whether it and its committees are functioning effectively. As part of this annual self-evaluation, the Board evaluates whether the current leadership structure continues to be optimal for the Company and our shareholders.

Our Board is responsible for overseeing the Company’sCompany's risk management process. The Board focuses on the Company’sCompany's general risk management strategy, including the most significant risks facing the Company, and ensures that appropriate risk mitigation

strategies are implemented by management. The Board is also apprised of particular risk management matters in connection with its general oversight and approval of corporate matters.

The Board has delegated to the Audit Committee oversight of certain aspects of the Company’s risk management process. Among its duties, the Audit Committee oversees the Company’s compliance with legal and regulatory requirements and the Company’sCompany's system of disclosure controls and system of internal financial, accounting and legal compliance controls. The Board receives a quarterly update from the Audit Committee, which includes a review of items addressed during prior quarters. Our other Board committees also consider and address risk as they perform their respective committee responsibilities. All committees report to the full Board as appropriate, including when a matter rises to the level of a material risk.

The Company’s management is responsible for day-to-day risk management under the direction of John C. Shea,Jason J. Bundick, the Company's Chief Financial Officer.Compliance Officer, General Counsel and Secretary. Our internal audit department serves as the primary monitoring and testing function for Company-wide policies and procedures, and manages the day-to-day oversight of the risk management strategy for the ongoing business of the Company. This oversight includes identifying, evaluating, and addressing potential risks that may exist at the enterprise, strategic, financial, operational, and compliance and reporting levels. The Company conducts an annual review of the Company’sCompany's disclosure controls and procedures, code of ethics and billing and sales compliance. To the extent deemed necessary, the Company revises such procedures and policies.

We believe the division of risk management responsibilities described above is an effective approach for addressing the risks facing the Company and that our Board leadership structure supports this approach.

At the Annual Meeting, ten directors of the Company are to be elected, each to hold office for a term of one year. All nominees currently serve as Director. Unless authority is specifically withheld, management proxies will be voted FOR the election of the nominees named below to serve as directors until the next annual meeting of shareholders and until their successors have been chosen and qualify. Should any nominee not be a candidate at the time of the Annual Meeting (a situation which is not now anticipated), proxies will be voted in favor of the remaining nominees and may also be voted for substitute nominees. If a quorum is present, the candidate or candidates receiving the highest number of votes will be elected. Brokers that do not receive shareholder instructions are not entitled to vote for the election of directors because an uncontested election is considered a “non-routine” matter. Hence, shareholders who hold their shares through brokerage accounts and who would like to vote in favor of the director nominees will need to instruct their brokerage firm to vote for the Company’s nominees.

We believe that the collective skills, experiences and qualifications of our directors provides our Board with the expertise and experience necessary to advance the interests of our shareholders. While the Nominating, Compensation and Stock Option Committee of our Board has not established any specific, minimum qualifications that must be met by each of our directors, it uses a variety of criteria to evaluate the qualifications and skills necessary for each member of the Board. In addition to the individual attributes of each of our current directors described below, we believe that our directors should have the highest professional and personal ethics and values, consistent with our longstanding values and standards. They should have broad experience in the industry the Company serves at the policy-making level in business, exhibit commitment to enhancing shareholder value and have sufficient time to carry out their duties and to provide insight and practical wisdom based on their past experience.

Each of Messrs. McCartney, Wahl, and McBryan and Ms. Casey has extensive experience in the health care services industry. Each of the aforementioned persons’ operational experience, in addition to Mr. Wahl’s financial expertise, enables eachthem to provide guidance with respect to our operations. Also, we believe since Ms. Casey has not been an employee of the Company and has served her entire career as a direct patient care provider, she brings a patient care perspective to the Company. For instance, sheMs. Casey may become aware of new developments in the healthcare services industry before the Company’s management learns of such developments and their impact on patient-related issues.

Each of Messrs. Frome and Moss has extensive legal experience. In addition, Mr. Frome has also served as a member of the board of directors of other public companies and has extensive corporate finance, Securities and Exchange Commission (“SEC”) compliance and mergers and acquisitions experience, which experience aids his service to the Board. Both Mr. Frome and Mr. Moss also have extensive executive experience as they both have served as managing partners of their respective law firms.

Mr. Briggs’ years of experience as a certified public accountant provide him with extensive financial and accounting expertise obtained from over thirty years in public accounting. Mr. Briggs qualifies as an audit committee financial expert under SEC guidelines. Mr. Briggs also brings executive experience to the Board as he served as a partner at his accounting firm.

Mr. Ottaviano, through his experience as a top-level marketing and operations executive for many years for two different companies, one of which was a public company, has a comprehensive understanding of business operations, including business development, as well as the compliance obligations of public companies.

Mr. McFadden has sales and marketing experience both as a Principal of his consulting company and through his experience at The McGraw Hill Companies that provided him with an understanding of a large public company’s operations, as well as the compliance obligations of a public company.

Mr. Visconto has real estate experience as a Principal of American Property Holdings, with a specific focus on the acquisition, development and management of multi-family, senior housing and commercial assets. Mr. Visconto also has extensive experience with licensed operators, management companies and property owners, all of which align with our customer base.

If Messrs. Briggs, Moss and Ottaviano are re-elected as Directors of the Company it is anticipated that such individuals will comprise the Audit Committee following the Annual Meeting with Mr. Briggs serving as the chairman of such committee.

If Messrs. Ottaviano and McFadden and Ms. Casey are re-elected as Directors of the Company it is anticipated that such individuals will comprise the Nominating, Compensation and Stock Option Committee following the Annual Meeting with Mr. Ottaviano serving as the chairman of such committee.

 

The address of Blackrock, Inc. is 55 East 52nd Street, New York, NY 10022.10055.

The address of The Vanguard Group, Inc. is 100 Vanguard Blvd., Malvern, PA 19355.

We refer to our President and Chief Executive Officer, the Chief Financial Officer, our former Chief Executive Officer and each of our other three most highly compensated executive officers as our Named Executive Officers.Officers ("NEOs"). As more fully described below, (a) the base salary of Mr. Daniel McCartney was primarily based on a minimum base salary plus an additional amount based on the Company’s income from operations before income taxes and (b) in 2015, 2014 2013 and 2012,2013, the salaries and bonuses, where applicable, of Messrs. Wahl, Shea, Bryan McCartney, McBryan and McBryan,Bundick were based on their performance and level of responsibility. Our Nominating, Compensation and Stock Option Committee believes that the compensation paid to Mr. Daniel McCartney, is consistent with the principle that compensation plans of senior operational officers should be closely aligned with our performance on both a short-term and long-term basis to create value for shareholders, and that such compensation should assist us in attracting and retaining key executives critical to our long-term success.

In establishing compensation for executive officers, the following are the Company’sobjectives of the Company and the Nominating, Compensation and Stock Option Committee’s objectives:Committee:

To achieve these objectives, our overall compensation program aims to pay our Named Executive OfficersNEOs competitively, consistent with our success and their contribution to that success. To accomplish this we rely on programs that provide compensation in the form of both cash and equity. Although our Nominating, Compensation and Stock Option Committee has not adopted any formal guidelines for allocating total compensation between cash and equity, the Nominating, Compensation and Stock Option Committee considers the balance between providing short-term and long-term incentives which are designed to help align the interests of management with shareholders.

We have not retained a compensation consultant to review our policies and procedures with respect to executive compensation, although the Nominating, Compensation and Stock Option Committee may elect to retain such a consultant in the future if it determines that so doing would be helpful in developing, implementing or maintaining compensation plans.

The Nominating, Compensation and Stock Option Committee conducts an annual review of the aggregate level of our executive compensation, as well as the mix of elements used to compensate our executive officers. In addition, the Nominating, Compensation and Stock Option Committee has historically taken into account input from other independent members of our board of directorsBoard and, to the extent available, publicly available data relating to the compensation practices and policies of other companies within and outside our industry. As part of the review of the Company’s compensation, the compensation policies of the following companies have been examined: AMN Healthcare Services, Inc. (a healthcare staffing company), Crothall Services Group (a provider of hospital housekeeping, hospital facilities management, and hospital environmental services) and ARAMARK Corporation (a food, hospitality and facility service company). The Nominating, Compensation and Stock Option Committee believes that gathering information about the compensation practices of these companies is an important part of our compensation-related decision-making process. However, since none of these companies are specifically engaged in the Company’sCompany's business and the Company is unaware of any other public company which provides housekeeping and food services solely to the health care industry and primarily to the long term care segment of the industry, the Company believes that compensation comparisons with the aforementioned companies isare not apt. Accordingly, while the Nominating, Compensation and Stock Option Committee is aware of the compensation practices of the companies set forth above, the Nominating, Compensation and Stock Option Committee has not necessarily relied on comparisons with such entities for purposes of making compensation decisions for Company executive officers and the Company does not benchmark compensation against the compensation of such other companies.

The compensation of the President and Chief Executive Officer of the Company is determined by the Nominating, Compensation and Stock Option Committee. The compensation of the former Chief Executive Officer was also determined by the Nominating, Compensation and Stock Option Committee. Such determinations regarding compensation are based on a number of factors including, in order of importance:

Compensation for the Named Executive OfficersNEOs (referred to in the summary compensation table) other than the President and Chief Executive Officer and the former Chief Executive Officer, is determined by the President and Chief Executive Officer in consultation with the Nominating, Compensation and Stock Option Committee, taking into account the same factors considered in determining the President and Chief Executive Officer's compensation as described above. Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended (the "Code") limits deductibility of compensation in excess of $1 million paid to the Company's Named Executive OfficersNEOs unless this compensation qualifies as “performance-based.”"performance-based." Based on the applicable tax regulations, any taxable compensation derived from the exercise of stock options by senior executives under the Company's stock option plans should qualify as performance-based. The Company's 2012 Equity Incentive Plan (the “2012 Plan”"2012 Plan") contains limits as to how many stock options may be granted to a recipient in any calendar year and was approved by the Company's shareholders and therefore,shareholders. Therefore, compensation received as a result of stock options granted under the 2012 Plan qualify as “performance-based”"performance-based" for purposes of Section 162(m) of the Code. The Company's Named Executive Officers receive stock options and restricted stock. As described under “Executive Compensation - Grant"Grant of Plan-Based Awards”,Awards," stock options and restricted stock were granted in fiscal year 20142015 to certain Named Executive Officers.the NEOs.

The Company applies a consistent approach to compensation for all employees, including senior management. This approach is based on the belief that the achievements of the Company result from the coordinated efforts of all employees working toward common objectives.

In 2014, 2013 and 2012,2015, Mr. Daniel McCartney's minimum base salary was approximately $19,000, with the balance of his base salary derived from the Performance-Based Compensation criteria described in the paragraph below. The annual salary for Mr. John Shea increased from 2012 to 2014 due to the continuing increasedWahl was approximately $1,000,000 and was reflective of his responsibilities assumed by Mr. Shea resulting fromas President and Chief Operating Officer, as determined before his promotion from Viceto President of Finance and Chief Accounting Officer to Chief Financial Officer in 2012.Executive Officer. The annual salary for Mr. Theodore Wahl increased from 2012 to 2014 due to the continuing increasedJohn Shea was approximately $450,000 and was reflective of his responsibilities assumed by Mr. Wahl resulting from his promotion from Executive Vice President andas Chief Operating Officer to President and Chief Operating Officer in 2012.Financial Officer. The annual salaries of Mr. Michael McBryan and Mr. Bryan McCartney are approximately $102,000$106,000 with Performance-Based Compensation that is based on the criteria noted below and are reflective of their responsibilities as Executive Vice Presidents. The annual salary for Mr. Jason Bundick was approximately $311,000 with Performance-Based Compensation that is based on the criteria noted below and was reflective of his responsibilities as Chief Compliance Officer, General Counsel and Secretary.

from 1.85% to 1.70% in 2012 was appropriate. Moreover, the Nominating, Compensation and Stock Option Committee has historically established the rate to more align Daniel McCartney's compensation with the compensation of the Company's other managerial employees. The Nominating, Compensation and Stock Option Committee has historically tied the compensation of Mr. Daniel McCartney into the Company's financial performance because he has had responsibility for all key strategic and policy decisions impacting the Company. Mr. Bryan McCartney and Mr. McBryan are also subject to incentive compensation payments which are based on certain financial and non-financial performance measurements including facility growth, profitability, client retention and satisfaction. Their incentive compensation is reflective of their overall responsibility of the management of our operations and the delivery of the expected financial and non-financial performance associated with our services. Mr. Bundick is subject to incentive compensation payments which is based on certain financial and non-financial performance measurements including Company and personal performance.

We believe that risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on the Company. In addition, the Nominating, Compensation and Stock Option Committee believes that the mix and design of the elements of executive compensation do not encourage management to assume excessive risks. The Company has structured its compensation program so that certain employees are incentivized primarily on their ability to achieve revenue and profit objectives of the customer accounts under their supervision and generate new business. Additionally, incentive compensation is earned on the achievement of certain non-financial objectives such as recruiting and developing future management personnel, reviewing subordinate employees, maintaining good client relations and compliance with companyCompany operational reporting requirements. The Company believes that elements of this incentive policy may be subject to abuse. Specifically, the Company recognizes that incentivizing employees for new business generation could result in employees entering into agreements without conducting proper due diligence or an appropriate inquiryanalysis of the creditworthiness of the prospective client. Similarly, employees may be tempted to hire employees prior to their quarterly review in order to meet their recruitment goals. The Company recognizes that managers may be tempted to give better performance reviews of their subordinates in order to boost the appearance of their own performance. Also, the Company recognizes that in preparing budgets upon which an employee will be reviewed, an employee may seek to be too conservative in his or her estimates in order to more easily achieve performance targets. The Company has carefully designed its compensation policies and practices to diminish the potential abuses inherent in such programs to avoid unnecessary risks to the Company and its shareholders.

The following table sets forth certain information regarding compensation paid or accrued during the Company’s prior three fiscal years for the Company’s President and Chief Executive Officer, Chief Financial Officer, former Chief Executive Officer and the three highest paid executive officers serving at the end of 20142015 (the “Named Executive Officers”)NEOs).

The following table sets forth information concerning grants of plan-based awards made by us during the year ended December 31, 2014,2015, to each of the Named Executive Officers.

The Company has not entered into employment contracts with any of the Named Executive Officers.NEOs. No previously granted options or other equity-based awards were re-priced or otherwise materially modified during the fiscal year ended December 31, 2014.2015. As set forth above in the “Compensation"Compensation Discussion and Analysis,”" the Company believes that part of the compensation for the Named Executive OfficersNEOs should be in the form of long-term equity grants so as to align the interests of the Named Executive Officers with the Company's shareholders. In accordance with these objectives, Messrs. Wahl, Shea, Bryan McCartney, McBryan, Daniel McCartney, Shea, Wahl, McBryan and Bryan McCartneyBundick received stock options to purchase of 15,000, 6,250,1,650, 15,000, 15,000, 15,000 and 15,0005,000 shares, respectively, and restricted stock awards of 3,750,7,500, 1,650, 2,500, 2,500, 7,500 and 625 3,750, 1,875 and 1,875 shares, respectively. These stock options and restricted stock awards vest over five years, as an incentive to incentivize the Named Executive OfficersNEOs to increase the long-term value of the Company and thereby increase the value of its common stock.Common Stock.

The following table setstables set forth information concerning the outstanding equity awards of each of the Named Executive OfficersNEOs as of December 31, 2014: