The Restated Audit Committee Charter, among other things, requires the Audit Committee to pre-approve all audit and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent auditor. The Audit Committee has adopted a pre-approval policy in order to ensure that the performance of audit and non-audit services by the independent auditor does not impair the auditor’sauditor's independence. The policy provides for the general pre-approval of specific types of services, gives guidance to management as to the specific type of services that are eligible for pre-approval and provides cost limits for each such service on an annual basis. The policy requires specific pre-approval of all other permitted services. Requests or applications to provide services that require separate approval by the Audit Committee are submitted by the Company’sCompany's chief financial officer to the Audit Committee and must include a statement as to whether, in the chief financial officer’sofficer's view, the request or application is consistent with the SEC’sSEC's rules on auditor independence. The Audit Committee may delegate pre-approval authority to one or more of its members who shall report any pre-approval decisions to the Audit Committee at its next scheduled meeting.
Approval of this proposal requires the affirmative vote of a majority of the shares present in person or by proxy and entitled to vote on the matter.
The Board of Directors maintains an Audit Committee comprised of three independent directors. The Board of Directors and the Audit Committee believe that the Audit Committee’s current member composition satisfies the rules of Thethe SEC and NASDAQ Stock Market LLC that govern audit committee composition, including the requirement that audit committee members meet the heightened independence requirements as contemplated by the applicable rules of Thethe NASDAQ Stock Market LLC.Global Select Market. The Audit Committee operates under a written charter, which was adopted by the Board of Directors (as amended to date, the “Restated Audit Committee Charter”). A copy of the Restated Audit Committee Charter may be viewed on the Investor Relations section of our website at www.luminexcorp.com.
Pursuant to the Restated Audit Committee Charter, the Audit Committee oversees the financial reporting process on behalf of the entire Board of Directors. The Audit Committee is responsible for the appointment, compensation and oversight of the work of Luminex’s independent registered public accountants. Management has the primary responsibility for the financial statements and the reporting process including the systems of internal controls. Our independent registered public accountants are responsible for performing an independent audit of Luminex’s financial statements in accordance with standards established by the Public Company Accounting Oversight Board, expressing an opinion on the conformity of our audited financial statements to generally accepted accounting principles and auditing the effectiveness of Luminex’s internal control over financial reporting and issuing a report thereon. In fulfilling its oversight responsibilities, the Audit Committee reviews and discusses with management and the independent registered public accountants the audited and interim financial statements included in our reports filed with the SEC in advance of the filings of such reports.
The Audit Committee discussed with the independent registered public accountants the overall scope and plans for their audit. The Audit Committee met with the independent registered public accountants, with and without management present, to discuss the results of their examination, their evaluation of Luminex’s internal controls requirements under Section 404 of the Sarbanes-Oxley Act of 2002, and the overall quality of Luminex’s financial reporting.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors (and the Board of Directors approved) that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2011,2014, as filed with the SEC.
Kevin M. McNamara (Chairman)
Robert J. Cresci
Thomas W. Erickson
(3) | Target grant date value.. Scale based |
(5) | Increased to $355,888 on actual performance against metrics is 0% to 275%.October 1, 2014 for expanded responsibilities. |
Consistent with our objectives and philosophies and the evolving nature of the Company, our compensation programs for our named executive officers for fiscal 2014 included the following key features described below and reflected in the chart above:
Base Salaries. Salary adjustments for our named executive officers, excluding the current and former CEOs, reflect total merit-based adjustments of approximately 2.5% to 3.5%. The larger increases were awarded for additional responsibilities, market equity and individual performance. Mr. Bradley received an additional 6.1% increase in salary in October 2014 for expanded responsibilities. Our former CEO’s base salary was unchanged across 2012, 2013 and 2014.
Annual Performance-Based Cash Awards. We provide our named executive officers a market competitive performance-based annual incentive opportunity based upon the achievement of specific Company, business unit and personal objectives. See “2014 Executive Compensation Reviews - Performance Based Cash Awards” herein. Consistent with our philosophy of linking annual incentive payouts with Company and differentiated project and department performance achievements, annual bonuses earned and paid for 2014 ranged from approximately 99% to 116% of the 2014 target for the named executive officers (other than our current and former CEOs), reflecting the partial achievement (and overachievement for the Company’s operating income metric) of the Company’s financial targets and measured performance outcomes (by position) for the year. Our former CEO’s annual bonus for 2014 was prorated to reflect his retirement in October and paid out at approximately 90% of his 2014 earned base salary. We do not have any multi-year bonus programs for named executive officers or guaranteed bonus payments.
Long-Term Stock Based Incentive Compensation. After significant analysis and discussion, the Committee determined for 2014 to grant long-term equity incentive opportunities solely in restricted shares, as opposed to the historical utilization of grant date fair value split between restricted shares and options. The Committee based its determination on, among other things:
(4) | Total reflects cash payments in Canadian dollars but |
(i) | Reducing the dilutive effect of shares used and the number of shares actually withdrawn from the Equity Plan share pool; |
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(ii) | Delivering executive equity awards in US dollars.amounts that are consistent with intended long term incentive targeted amounts, awarded in 2014 based on individual performance by each executive; and |
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(iii) | Promoting retention of key executives by granting restricted shares with longer vesting periods than historically utilized with options. |
The grant date fair market value of equity awards granted to the named executive officers (inclusive of the CEO) was increased in 2014 to be more in line with equity grants of our peer group and to return our long-term equity grant values to a more normalized level (as 2013 grant values were reflective of unique expense reduction initiatives and efforts to limit dilution). The 2014 equity award value increases were also based upon (a) long-term retention purposes, (b) merit increases with respect to certain employees’ increased responsibilities and performance and (c) with respect to the former CEO and current CFO, the discontinuation of the long-term incentive plan (“LTIP”) program for 2014 (discussed further below).
To align with competitive market practices of our peer companies and with the recommendation of Aon Hewitt, the Committee decided to adjust the historically utilized restricted share vesting term from five years to four equal annual increments for the 2014 grants. Each of the officers, excluding the CEO, was granted aggregate equity awards with grant date fair market values between $300,000 and $500,000. The then CEO’s equity award grant date fair market value was $1,740,000.
Long-Term Performance Incentive Plan. After significant analysis and discussion, the Committee determined to discontinue the LTIP program for 2014. The Committee based its determination upon, among other things: (i) the considerable and unrecoverable expense associated with the LTIP's market-based goals in the event of achievement at a level less than initially projected; and (ii) the immediate and significant withdrawal of shares from the Equity Plan's share pool on the grant date assuming maximum performance, which were not returned to the share pool in the event of less than maximum performance until the applicable determination date.
Executive Benefits. We do not maintain “top hat” or supplemental executive retirement plans, or offer our named executive officers material “executive” perquisites, except for annual executive physicals, or excessive change in control arrangements.
New CEO. Mr. Shamir, the new CEO, joined the Company on October 14, 2014 at an annualized base salary of $600,000, approximately 86% of the former CEO’s base salary at the time of his retirement. Mr. Shamir was granted a bonus of $150,000 for his service in 2014, as determined at the discretion of the Compensation Committee in February 2015 for his immediate assessment and engagement of his leadership team and significant contributions to the Company. Mr. Shamir received initial “on-boarding” equity awards as set forth above (option award for 250,000 shares and a restricted stock award for 100,000 shares) in conjunction with his joining the Company.
Pay for Performance Alignment. We strive to achieve a mix of compensation that reflects our desire to focus executives on long-term performance and value creation while rewarding and encouraging achievement of short-term business objectives and performance which also benefits our stockholders. This is noted by a significant portion of our current and former CEOs’ and other named executive officers’ total target compensation for 2014 being performance-based or “at-risk”. The Company’s belief in performance-contingent compensation is clearly reflected in: (i) the volatility of payouts under the annual performance-based cash awards and the prior LTIP awards; and (ii) the Committee’s determination to grant our named executive officers equity award values (as well as base salary adjustments) based in part on prior year performance.
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Annual Performance-Based Cash Awards: |
| Year | | Target % of Salary | | Maximum % of Salary | | Realized % of Salary |
CEO: | 2012 | | 100% | | 165% | | 68% |
| 2013 | | 100% | | 175% | | 47% |
| 2014 | | 100% | | 175% | | 90% |
| | | | | | | |
Other Named Executive Officers: | 2012 | | 50% | | 75% | | 35-40% |
| 2013 | | 50% | | 75% | | 23-25% |
| 2014 | | 50% | | 75% | | 41-58% |
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LTIP (1): |
| Year | | Targeted Shares | | Earned Shares | | Earned as a % of Target |
CEO: | 2010 | | 48,338 | | 18,835 | | 39% |
| 2011 | | 43,383 | | 0 | | 0% |
| 2012 | | 35,794 | | 0 | | 0% |
CFO: | 2010 | | 18,126 | | 7,063 | | 39% |
| 2011 | | 16,268 | | 0 | | 0% |
| 2012 | | 8,948 | | 0 | | 0% |
(1) No subsequent years have completed their respective performance period. The average of the five completed periods for the CEO is 58% of target and the average of the four completed periods, as participated in by the CFO, is 44% of target.
Overall, the Committee believes the Company’s compensation for its current and former CEOs and other executives reflects the balance of (a) necessary base salaries to attract and retain executives; (b) multi-faceted, variable one to four year components of compensation awards; and (c) relevant performance-based opportunities of cash and equity awards that seek to reflect growth and achievement of the Company.
Summary of Key Governance Practices
The Company strives to maintain good governance standards in our compensation practices. They include:
Independence of Committee Members. All Committee members are independent pursuant to the NASDAQ Global Select Market, SEC, and Section 162(m) “independence” definitions.
Independence of executive compensation consultant. The executive compensation advisor to the Committee met the SEC’s requirements for independence. Aon Hewitt provides minimal compensation-related services to management and had no prior relationship with our CEO or other named executive officers (as described on page 42 below).
Ongoing succession planning. The Committee, in conjunction with the full Board, engages in in-depth discussions regarding succession planning and talent development of our executives.
No Excise Tax Gross-Ups. We have no tax gross-up provisions in any of our employment agreements or incentive plans.
No Option Repricing. Our Equity Plan does not permit repricing of stock options or canceling underwater stock options in exchange for cash or another award without the consent of our stockholders.
Double trigger change in control protection in CEO employment agreement. The current CEO’s employment agreement requires the termination of his employment by the Company in addition to a change in control of the Company before change in control payments are triggered.
Clawback Policy. We have a “clawback” policy as described on page 41 below.
No significant perquisites offered. Our executives receive limited perquisite benefits. The only perquisite generally offered to our named executive officers is an annual physical.
No Supplemental Executive Retirement Programs (SERPs) offered. We do not offer SERPs to our current executives.
Anti-Hedging/Anti-Pledging. We have an anti-hedging policy and an anti-pledging policy as described on page 42 below.
Stock Ownership Guidelines. Directors and officers have robust stock ownership guidelines. Each director and officer who has not achieved the targeted ownership levels is expected to retain certain shares of common stock acquired upon exercise of stock options or from restricted share grants pursuant to the Company’s equity plans as described on page 41 below.
Overview of Compensation Process.
The Committee is primarily responsible for establishing the compensation programs for the CEO and all other executive officers. In addition, the Committee reviews and makes recommendations to the full boardBoard regarding non-employee director compensation. The Committee also administers the Company’s Amended and Restated 2006 Equity Incentive Plan (the “Equity Plan”) under which equity-based and other incentive awards may be made to employees, directors and consultants.
During 2014, the Committee held nine meetings.
The Committee reviews executive compensation and the Company’s compensation policies and costs in an attempt to ensure that our compensation programs are consistent with our compensation philosophy and promote the objectives of our organization and stockholder interests. The Committee also periodically reviews “tally” sheets quantifying the aggregate compensation, current or contingent, of our executives, together with additional compensation analyses prepared by management and the Committee’s compensation consultants. These materials assist the Committee in confirming that executives are compensated, as a whole, in a manner consistent with the design and objectives of our compensation programs. The Committee also utilizes this information to understand internal pay equity and external market positioning among the Company’s executives. Finally, the Committee considers total stock utilization, equity expense and equity run rate in its annual decision making. The consideration of this information, however, is only one of numerous factors considered by the Committee consistent with our flexible compensation philosophy described below.
The Committee seeks the advice and analyses of compensation consultants as and when it deems appropriate. The Committee engaged AON/Aon Hewitt as its compensation consultant for 2011.2014. The Committee annually examines the appropriateness of our “peer group” and collects peer group net total compensation data, based to the extent possible upon positions of comparable scope and complexity, in order to assess our executive compensation in relation to our general compensation benchmarks. In 2011, AON/2014, Aon Hewitt independently preparedreviewed peer compensation studies to assist the Committee in this analysis, which focused on the core direct elements of our executive compensation program. AON/Aon Hewitt also assisted the Committee in the design of our executive equity grant programs as well as the LTIP.
consideration of any other long-term incentive plans. Finally, given the CEO’s insight into internal pay equity issues as well as executive performance versus expectations, skill sets, potential and past and projected responsibilities, the views and recommendations of the CEO are solicited by the Committee with respect to executive compensation. The CEO’s recommendations are given significant weight. The Committee also solicits the views of other boardBoard members with particular insight into relevant matters, who may, upon request, attend Committee meetings in an observer capacity. The Committee makes all final decisions regarding executive compensation. The CEO is excused from meetings prior to the Committee’s approval of his compensation and discussion of his performance in relation to his compensation decisions. The Committee does not delegate the authority to make equity or other compensatory awards to our executive officers.
Compensation Philosophy.
Our compensation programs and objectives are designed around five core philosophies:
1. Each element of compensation should support our compensation objectives and should, when viewed collectively, work together to appropriately support all of these objectives. The Committee believes that each element of our compensation program should be designed to simultaneously fulfill one or more of our “compensation objectives” described above, and that each element should work together as a whole to appropriately support all of these objectives.
2. Our compensation programs should create a management culture that is performance-driven and has a vested interest in increasing stockholder value and the successful execution of our corporate goals and strategies. Accordingly, our philosophy emphasizes performance-based incentives for our executive officers, in part by having a substantial portion of each officer’s cash compensation contingent upon the successful financial, operating and strategic performance of the Company, as well as upon successful execution of an executive’s individualunique project and department goals or directives. Equity incentives that vest over several years and/or upon the achievement of performance targets also play a prominent role in our program.
3. Our compensation decisions should support the Company’s anticipated growth and executive development. Our compensation policies must primarily be designed to attract and retain the required talent to support our anticipated growth and increasing operational complexity. Simultaneously, our policies should foster and reward the growth and development, in terms of competency, responsibilities and leadership, of our executive team.
4. Our compensation programs and policies should consider external perceptions and “good governance” and should not provide incentives for excessive risk taking for short-term gains. The Committee believes that it is important to undertake a specific review of our compensation programs and policies each year to be sure that they follow “good governance practices” in the Committee’s view and that they do not incentivize excessive or inappropriate risk taking in the Committee’s view.
5. Our compensation decisions should be flexible to reflect the unique attributes of the Company and the contributions of each executive. The Committee’s compensation philosophy for an executive officer allows for flexibility in assessing an overall analysis of the executive’s performance for the prior year, projected role and responsibilities, required impact on execution of Company strategy and directional changes, external pay practices and competitive market conditions, total cash compensation and relative equity positioning internally, recommendations from our CEO and compensation consultants it may engage, and other factors the Committee deems appropriate. Our philosophy also considers an officer’s prior experience and professional status, employee retention, vulnerability to recruitment by other companies and the difficulty and costs associated with replacing executive talent. The weighting of these and other relevant factors is determined on a case by case basis for each executive in the context of the relevant facts and circumstances.
5. Our compensation programs and policies should consider external perceptions and “good governance” and should not provide incentives for excessive risk taking for short-term gains. The Committee believes that it is important to undertake a specific review of our compensation programs and policies each year to be sure that they follow “good governance practices” in the Committee’s view and that they do not incentivize excessive or inappropriate risk taking in the Committee’s view. The Committee has received an annual independent opinion on this from its compensation consultant and this has been affirmed in 2014.
Program Design.Design
What are the primary compensation elementselements?? The Committee has designed our executives’ compensation packages around three primary elements:
base salary;
annual variable performance awards payable in cash; and · | annual variable performance awards payable in cash; and |
long-term stock-based incentive awards, including annual time-vesting equity awards.· | long-term stock-based incentive awards, including, in addition to annual time-vesting equity awards, restricted shares that are subject to both performance- and time-based vesting and RSUs under our LTIP for our most senior executive officers. |
How do we use “benchmarks“benchmarks”??” While we do not support rigid adherence to compensatory formulas, there are general pay positioning policies, or benchmarks, we refer to which have been derived, in part, based on the market-based information determined from our peer group data and recommendations from AON/Aon Hewitt. Our benchmark for base salary is to be generally competitive with market pay levels, usually defined as between the 25th percentile and the median (50th(50th percentile) of our peer group.group, depending on experience and other factors relevant to the specific position. The Committee’s desire is to provide total short-term cash opportunities near the peer group median (50th(50th percentile) for meeting targeted annual goals, but allow for upside fornear the 75th percentile upon meeting or exceeding performance goals approved by the Committee. The Committee also targets total potential compensation opportunities (including equity awards) with ana potential “upside” that generally falls between the 50th and the 75th percentile percentiles of our peer group, (and approximating the 75th percentile for LTIP participants), provided the Company and the executive deliver superior performance.
We chose the base salary benchmark primarily to target a market competitive range of base salarysalaries as the norm. Our benchmarks for short-term cash bonus and total compensation opportunities reflect our desire that “target” performance results in median market competitive incentives similar to our base salary objective, but, consistent with our goal of driving the achievement of business and financial objectives that help create stockholder value and share price appreciation, rewards above-average performance with above-average cash and total compensation. These benchmarks also reflect that we compete with larger companies for executive talent that may offer base and total target compensation opportunities above the market median.
To help assess how our executives are compensated in relation to our benchmarks, the Committee collects compensation data from a peer group. However, these survey results will beare used by the Committee solely as a baseline reference, in part, due to the fact that the survey data does not provide full insight as to actual performance, responsibilities, tenure, prior experience and other relevant information needed to accurately assess position comparability and the competitiveness of our compensation packages. Accordingly, certain executives may be compensated below or above the Committee’s benchmarks based on various factors consistent with our flexible compensation philosophy. Our process and rationale for determining our peer group for 20112014 are described below under “Executive“2014 Executive Compensation for 2011.Review.”
Do we have a target compensation “mix“mix?”?” We have also derived, with the assistance of AON/Aon Hewitt, general guidelines with respect to compensation allocation or “mix.” We generally believe at least 60%that more than 40% of an executive’s total compensation opportunity, typically increasing with level of responsibility, should be performance and equity based, with the equity component approximating at least 50-60%50% to 70% of target total compensation opportunities at the CEO level, (split between time-based equity grants, performance-based equity grants and LTIP grants), and ranging generally from approximately 40%30% to 60%50% for the other named executive officers. We believe our strong emphasis on equity promotes retention and appropriately focuses our executives on long-term performance, share ownership and value creation. The Company believes in the use of various forms of equity to support and drive performance and retention, including the appropriate use of both restricted shares and stock options at different points in time as determined by the Committee in its discretion (see page 34 and 43 below). Additionally, we generally believe 15%20% to 20%30% of an executive’s total compensation opportunities should be allocated to short-term performance bonus opportunities. This reflects our desire to reward and encourage the achievement of short-term business objectives and performance which should also benefit our stockholders. However, as with our use of benchmarks (and for similar reasons), our targeted compensation “mix” thresholds are only intended to be reference points.
How does our compensation design support our compensation objectives and philosophies?
philosophies?
Base Salary.Salary. The primary goal for base salary is to be market competitive and to compensate an executive’s short-term contributions, as well as to provide current financial stability. The initial base compensation for our executive officers has been established by the terms of employment agreements between the Company and the executives negotiated at the time of hire.hire based on market data. The Committee’s goal when annually reviewing salaries is, assuming continued performance, to initially target base salaries at or near our benchmarks and then adjust based on other relevant considerations, including the recommendation of our CEO, performance, increase in responsibilities, internal pay equity and the impact of base salary on short-term performance bonus opportunities.
Short-Term Performance Incentive Opportunity.Opportunity. The Committee believes that a significant portion of an executive’s total cash compensation should be linked to Company operating performance and individual contributionsR&D, project, departmental and leadership goals which contribute to our strategic and growth objectives. Accordingly, our cash-based incentive opportunities will generally be targeted as a percentage of base salary earned during the year and achievement will be based on specific company-wide financial goals and individual accountabilityR&D, project, departmental and leadership performance goals. Though our overall benchmark is market median, the minimum target incentive opportunities are generally as set forth in the executive’s employment agreement. In recent years, including 2011,2014, 50% of the target bonus has been tied to Company-wide specific financial performance metrics (with an opportunity to over achieve), 40% tied to business unit, R&D or specific key objectives relating to the executiveexecutive’s organizational responsibilities and their areaareas of expertise and 10% to personal leadership and contribution objectives.objectives established by the CEO. While certain individualR&D or project goals can be measured objectively, others, such as leadership, and teamwork,may involve qualitative, subjective assessment that will ultimately be left to the Committee, based primarily on recommendations of our CEO. Additionally, where an executive’s primary responsibility may be in a particular business unit or function (for example, marketing, R&D, or a particular segment), the performance goals may be more heavily weighted towards specific financial or other critical business outcomes and achievements in that unit or function. In the case of strategic and other tangible non-financial goals, such as product milestones or FDA clearances for new products, we attempt to target individualdevelop project goals with respect to which the executive can directly or indirectly influence the successful execution. By example, project objectives for various executives include: (i) completion of product development milestones, (ii) completion of new product market analysis, (iii) finalize negotiation and execution of strategic agreements, (iv) execution of strategically imperative organizational structure modifications, and (v) analysis and execution of effective tax optimization strategies.
Accordingly, our annual incentive programs are designed to focus our executives on organizational priorities and performance, including accomplishing organizational strategies and financial goals. The potential payouts under the incentive plans are currently based on a sliding scale designed to relate the annual incentive payout to a range. For superior performance, there is a maximum range of payout, with a reduced payout for below “target” performance and no payout forif financial performance is below a minimum threshold level. Accordingly, significant underachievement is not rewarded in the design of our plan, which promotes our goal of executive accountability with respect to their role in the collective success of our organization. In addition, for clarity, there are no multiyear bonus programs for named executive officers and no guaranteed bonus payments.
The performance goals are determined near the beginning of each fiscal year. Our CEO typically recommends performance goals to the Committee, which are then reviewed and approved or modified in the Committee’s sole discretion. Pursuant to our incentive plans, these goals may be adjusted during the year for litigation or claim judgments or settlements and certain other extraordinary non-recurring items (such as a material acquisition) or changes in the business or priorities. With a target award of 50% of earned base salary for 2014, bonuses earned and paid were approximately 50% to 58% of base salary for the named executive officers (other than our CEO). With a target award of 100% of base salary earned in 2014, Mr. Balthrop received a bonus earned and paid of approximately 90% of base salary (which was prorated for his shortened term of service). Mr. Shamir was not eligible for a performance incentive award, but was granted a prorated discretionary bonus of $150,000 at the time annual bonuses were reviewed and determined for all other executive officers for his immediate assessment and engagement of the leadership team and significant contributions to the Company as determined by the Committee.
Long-Term Stock-Based Incentive Compensation. We believe that stock-based compensation helps to create a culture that encourages our executives to think and act as stockholders. We believe long-term equity incentives also hold executives accountable for decisions that may have a long-term impact and thus focus executives on the implications of their decisions over an extended time frame. At the same time, these awards allow our executives to share in the Company’s long-term success when their efforts were a substantial factor in that value creation. Finally, we believe equity incentives are necessary to be competitive in our recruitment and retention efforts.
Time-based Equity Awards. The Committee utilizes equity to seek to attract and retain the best talent while aligning the executives with the interest of our stockholders. In conjunction with the 20112014 equity awards as in 2010, the Committee determined the desired value to be delivered to an executive pursuant to the time-based equity component of his or her total compensation opportunity, and allocated 70% of that value solely to restricted shares, as opposed to the historical utilization of grant date fair value split between restricted shares and 30% to stock options. With one exception,The Committee based its determination on, among other things: (i) reducing the valuedilutive effect of time-basedshares used and the number of shares actually withdrawn from the Equity Plan share pool; (ii) delivering executive equity grants was reducedawards in amounts that are consistent with intended long-term incentive targeted amounts, awarded in 2014 based on individual performance by approximately 50% over the value granted in 2010 or that would otherwise have been recommended in 2011. This significant reduction was parteach executive; and (iii) promoting retention of key executives by granting restricted shares with longer vesting periods than historically utilized with options. Each of the Company’s focused effort to reduce generalofficers, excluding the CEO, was granted aggregate equity awards with grant date fair market values between $300,000 and administrative expenses in 2011. It was not anticipated that such$500,000. The CEO’s equity award reductions would be repeated in subsequent years but rathergrant date fair market value was intended to focus management on a significant Company objective in 2011.$1,740,000.
We believe our predominant use of restricted shares for our 2014 awards, in addition to limiting dilution servesand the burn rate of shares available for issuance under our Equity Plan, served our compensation objectives of key executive retention, given the four year vesting period, and alignmentaligns executive interests with our stockholders given the five year vesting.stockholders. Additionally, providing a substantial portion of the equity award as “full value” restricted shares will addadds to the perceivedrealized value, as a whole, of the annual time-based equity award, given that the volatility of our stock and our stage of development can create uncertainty of value with respect to stock options. We believe a significant long-term stake in our equity will also help reduce excessive or inappropriate risk-taking principally motivated by short-term share price appreciation. AtThe Committee anticipates continued use of various forms of equity from time to time in its discretion to appropriately motivate and align the same time, having 30%executives with the interests of the annual time-based equity award in the form of options makes a material portion of the value of each annual award linked solely to long-term share price appreciation to help ensure our executives are appropriately motivatedCompany and focused on delivering long-term stockholder value. The use of stock options also contributes to the competitiveness of our compensation packages and promotes entrepreneurial decision making. The Committee believes its policy to utilize a “portfolio approach,” or a combination of restricted shares and options, provides it the flexibility to set what it believes to be optimal combinations of retention- and performance-focused equity incentives based on, among other factors, the dilutive effect of our equity program, the Company’s stage of development and size and the competitive practices of our peers.
stockholders.
The Committee makes annual equity awards based on a target dollar amount. While this results in an uncertain share usage, it results in a predictable expense for the Company and allows the Committee to tailor the value of the awards more precisely to reflect its business direction, compensation philosophies, objectives and design. The Committee determines the target dollar amount for stock-based awards to the executive officers on a discretionary basis and takes into account, among other factors, the recommendations of the CEO and any compensation consultants the Committee may engage, together with our compensation benchmarks, prior equity grants and current equity holdings, and seniority and internal pay equity considerations. As stated above, the 2011 time-based equity awards were significantly reduced as part of an overall focus on general and administrative expense reduction. The Committee did not intend to continue to reduce the time-based awards beyond the 2011 grants. Furthermore, the award for Mr. Bradley was increased in 2011 in support of his excellent performance, the Committee’s desire to address certain internal pay equity considerations and his not participating in the 2011 performance-based restricted share awards addressed below.
The actual number of restricted shares granted is generally determined by dividing the dollar amount allocated to the restricted share componentaward by the fair market value of the shares on the date of grant. For 2011, theThe Committee didhas not applyapplied a discount to the value of these shares to reflect the forfeiture restrictions associated with service-based vesting. The number of shares subject to options granted is generally determined by dividing the dollar amount allocated to the option component by the value of an option share with reference to the fair market value of the shares on the date of grant calculated pursuant to a modified Black-Scholes model specific to the Company. For 2011, this calculation resulted in an option share value of approximately 54% of the fair market value of our common stock on the grant date.
The restricted shares currently are generally subject to time vesting over fivefour years in equal annual increments on the anniversary date of such grants, while 2011 stock option grants vest over three years in equal annual increments and have a total life of up to ten years provided continued employment.grants. We believe that time-based equity awards appropriately align the interests of our executives with those of our stockholders. Time-based vesting of restrictedRestricted shares are utilized for retention and stock options provide economic benefit only to the extent the employee maintains a long-term business relationship with and commitment to the Company. Additionally, stock price appreciation is required in order to realize value from stock options, and is required to create significant additional value with respect to restricted shares. For 2011, however, for the reasons described below under “ – Executive Compensation for 2011,” we granted performance-based annual restricted share awards for our named executive officers.
Long-Term Incentive Plan. The primary goals ofAfter significant analysis and discussion, the design ofCommittee determined to discontinue the LTIP are to offer an additional long-term performance driven incentive to certain of our most senior executives, as well as serving as a retention vehicleprogram for these key officers.2014. The LTIP award, taken together with all compensation opportunities, is intended to offer participating executives total compensation opportunities at or exceedingCommittee based its determination upon, among other things: (i) the 75th percentile of our peer group as a reward for maximum performance under the LTIP (which performance would reflect, in our view, exceptional performanceconsiderable and value creation). For 2011, as with 2010, the participants in the LTIP were Mr. Balthrop and Mr. Currie. Each year the Committee,unrecoverable expense associated with the input of the CEO, addresses the scope of participation in the LTIP.
Awards under the LTIP are granted by the Committee in the form of Restricted Stock Units (“RSUs”) and are treated as “performance awards” under the Equity Plan. Grants of RSUs under the LTIP shall initially be unvested and represent the maximum amount of shares that participants may receive under the LTIP, assuming achievement of the maximum level of performanceLTIP's market-based goals established for the grant. The vesting and value of the LTIP awards are dependent on continued service, but also on company performance over a three-year period measured by, for 2011, (i) appreciation in our share price and (ii) operating profit per share. The Committee believes that by making an LTIP grant every year, with vesting tied to financial and share price performance over a three-year period and continued service over a five-year period (as a result of 50% of the value of the award earned vesting at the end of the three-year performance period and the remaining 50% vesting on the two-year anniversary of the initial vesting date), our participating executives are given a powerful incentive to focus on long-term, sustained improvement in Company performance and stockholder value.
Each year, the Committee determines the levels of performance that will represent target, threshold and maximum performance levels for each goal. The metrics for determining performance against operating profit goals follow generally accepted accounting principles; however, the Committee may consider certain items or events as extraordinary when determining the Company’s performance against profit goals (and share price goals) and make what it deems to be appropriate adjustments, in each case subject to certain limitations.
The specific design of the 2011 LTIP is more fully described on pages 33 and 34 below. Additionally, in the event that any settlement of RSUs causesachievement at a level less than initially projected; and (ii) the aggregate payments or benefitsimmediate and significant withdrawal of shares from the Equity Plan's share pool on the grant date assuming maximum performance, which were not returned to be made or afforded to an LTIP participant under the RSU agreement, together with any other payments or benefits received or to be received by such participant, in connection with a change in control to exceed 110% of the maximum amount permitted under the Code to be received without incurring an excise tax, then we shall pay to such participant an additional amount, in cash, necessary to reimburse such participant on an after-tax basis for any excise tax payable by such participant, as further describedshare pool in the formevent of RSU agreement previously filed withless than maximum performance until the SEC. The Company is not party to any other 280G “gross-up” arrangements with its named executive officers, but believed it was appropriate in the case of the LTIP to ensure the award maintained its full motivational value by preserving to the maximum extent deemed reasonable the intended value of the award to each participant, resulting in the “modified” gross-up structure described above and recommended by AON/Hewitt.applicable determination date.
The performance periods for two LTIP grants have now matured. For 2008, as for 2009, the Company did not achieve the trading price per share metric and did achieve between target and maximum as to the adjusted operating cash flow goal. The Committee continues to evaluate the LTIP and its performance metrics and pays particular attention to the realized equity awards in comparison to the potential maximum award which is the dollar value set forth each year in the Summary Compensation Table. The following reflects realized share awards relative to the minimum, target and maximum under the LTIP for the award periods now complete (2008 and 2009). The Committee believes it is important for investors to appreciate and understand the difference between realized awards and potential awards under the LTIP. The goal is to provide meaningful rewards for truly superior performance. As a result, the program does not necessarily anticipate the target or maximum metrics to be achieved; however, if they are, it should reflect significant alignment between stockholder and participant interests. See results to date below.
Participant | Grant Year | Share Minimum (1) | Share Target | Share Maximum | Actual Shares Issued (2) | Issued as a Percentage of Maximum |
Balthrop | 2008 | 11,188 | 37,296 | 102,564 | 42,059 | 41.0% |
Balthrop | 2009 | 15,316 | 51,052 | 140,396 | 70,198 | 50.0% |
Currie | 2009 | 5,743 | 19,144 | 52,648 | 26,324 | 50.0% |
________________
(1) | If no metric achieved upon completion of the three year period then zero shares would be awarded. The share number reflected is the minimum award if one of the two minimum threshold metrics is met. |
(2) | Subject to one half released to participant upon certification and one half on the December 31 two years following completion of the performance period. |
Accelerated Vesting upon Change in Control. Our employment agreements with our named executive officers and other Vice Presidents provide for acceleration of vesting, or lapse of restrictions, of equity awards in connection with a change in control. We believe this is appropriate in order to avoid being at a competitive disadvantage in our recruiting and retention efforts, as employees often consider equity upside opportunities in a change in control transaction a critical element of compensation. Additionally, accelerated vesting provisions provide security that equity-related consideration will be earned in the event the Company is sold or the subject of a “hostile” takeover. The absence of such an agreement could impact an employee’s willingness to work through a merger transaction which could be beneficial to our stockholders. The outstanding restricted shares and stock options of our named executive officers also vest in full upon their death or disability. We have been advised by AON/Aon Hewitt that this is not an uncommona common practice among our peer group.
With respect to the 2013 LTIP awards which remain outstanding for Mr. Currie, if a change in control occurs prior to the end of the performance period (December 31, 2015), the Committee shallwill determine the vested units by (i) applying the performance criteria set forth in the LTIP using the effective date of the change in control as the end of the performance period, and by appropriately and proportionately adjusting the performance criteria for such shortened performance period, and (ii) multiplying the number of units so determined by .3333 if the change in control occurs in the first year of the performance period, .6667 if the change in control occurs in the second year of the performance period, and 1 if the change in control occurs in the third year of the performance period. Additionally, upon a change in control, the restricted period for any units awarded following the end of the applicable performance periods shallwill automatically terminate.
Timing of Equity Grants. Except with respect to new hires or promotions, we generally determine annual executive equity compensation awards each year in the first quarter and no earlier than the meeting in which we approve the prior year’s annual performance bonuses. This allows us to assess the prior year’s total compensation and performance when considering current year grants. It is the Company’s current policy that annual grants to existing employees (excluding LTIP grants) shallgrants historically) will be effective on the tenth trading day following the filing of the Company’s Annual Report on Form 10-K. In the event of a “new hire,” “promotional” or other ad hoc equity award, that equity award shallwill not be approved except at a meeting of the Committee and it shallwill be effective on the first trading day of the month that immediately follows the month in which the start date, promotion or other event triggering an ad hoc award occurs. The per share exercise price of an option award shallwill be based on the closing price of the Company’s common stock on the NASDAQ Global Select Market on the applicable effective date as specified above. This policy applies to awards to all eligible employees, not just our executive officers. The Committee may make an exception to the general policies above when it determines an exception is in the best interest of the Company based on the recommendation of our CEO.
20112014 Executive Compensation Review.
Our “named executive officers” for 20112014 consisted of: Nachum “Homi” Shamir, our new President and Chief Executive Officer, effective as of October 14, 2014; Patrick J. Balthrop, President and Chief Executive Officer;Officer through October 14, 2014; Harriss T. Currie, Chief Financial Officer, Senior Vice President, Finance and Treasurer; Jeremy Bridge-Cook, Senior Vice President, Assay Group; Michael F. Pintek,Research and Development; Russell Bradley, Senior Vice President, Operations;Corporate Development, Chief Marketing and Russell Bradley,Sales Officer; and David S. Reiter, Senior Vice President, Business DevelopmentGeneral Counsel and Strategic Planning.
Corporate Secretary.
For 2011, AON/2014, Aon Hewitt preparedreviewed for the Committee a peer group compensation survey of peer companies selected, with the concurrence of the Committee, from within the relevant biotechnology and medical technology industries (including research, medical device and diagnostic) and a group of larger companies targeted by the Committee and our former CEO that were believed to be relevant peers. The Company peerspeer companies were selected primarily based on product competitiveness and market capitalizationfocus but with consideration of net income and/or revenue (generally within a range of approximately one half to four times the Company’s market capitalization and/or revenue), as well as similar organizational and operational complexity and stage of development where practicable. The 2011Two companies from the 2013 peer group waswere not included in the same2014 peer group: Lexicon Pharmaceuticals, Inc., and Nanosphere, Inc., which were removed as the 2010 peer group, except that Inverness Medical Innovations, Inc. renamed itself Alere Inc. after Inverness acquired Alere.they were no longer considered to be appropriate peers based on our current and future product offerings. We believe the size of the peer group, 17 entities, is appropriate in light of the diverse nature of our industries and industry and sector volatility as a result of mergers and acquisitions. The following are the companies included in the peer group analysis:
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| | |
Affymetrix, Inc. | Exelexis, Inc. | Gen-Probe Incorporated | | Myriad Genetics, Inc.Nektar Therapeutics |
Alere Inc. | | Hologic, Inc. | | Nanosphere, Inc.PAREXEL International Corporation |
Array BioPharma Inc. Cepheid
| | Idenix Pharmaceuticals, Inc. Illumina, Inc.
| | Nektar Therapeutics
PAREXEL International Corporation QIAGEN N.V. |
Cepheid | Illumina, Inc. | Quidel Corporation |
Charles River Laboratories International Inc. Enzo Biochem, Inc.
| | Kendle International Inc.
Lexicon Pharmaceuticals, Inc.
| | QIAGEN N.V.
Quidel Corporation
|
Exelexis, Inc | | Meridian Bioscience, Inc. | | Regeneron Pharmaceuticals,Surmodics, Inc. |
Enzo Biochem, Inc. | Myriad Genetics, Inc. | | | | SurModics, Inc. |
The analysisWe reviewed the most recent publicly available proxy statement data of the peer companies. A proprietary AON/Aon Hewitt executive compensation database along with the Radford Life Science Survey was also utilized to “validate”validate and supplement peer group data, though significantly more weight was given to the peer group compensation survey. Specific executive position matches within the peer group were based, to the extent practicable, on the degree of compatibility of the position’s roles and responsibilities. The survey results were presented on a comparative basis to our then current compensation, on both an actual basis from proxy statement data from the peer companies (i.e., actual “tabular” medians and percentiles) and based on a regression analysis (i.e., using Luminex’s average 20102013 market capitalization to reflect company size) that attempted to normalize the results by adjusting for significant differences in the size of our peers and/or the scope of the position comparables.
comparable positions.
The Committee considered the information from AON/Aon Hewitt’s peer group compensation survey, together with tally sheets and summary compensation tables prepared by management. The Committee assessed this information relative to the policies and objectives described above and the recommendations of our former CEO and made the following determinations regarding 20112014 named executive officer compensation, as further detailed under the “Summary Compensation Table” below.
Base Salary. The results of the market analysis performedreviewed by AON/Aon Hewitt revealed that base salaries of our named executive officers were generally within or below our benchmark range for our peer group. It was determined that oursuch executives’ base salaries should be modestly increased to reflect adjustments for merit. Salary adjustments for our named executive officers, excluding the former CEO, reflect total merit-based adjustments, atin consideration of applicable market data of our peer group, of approximately 1%2.5% to 2.5%3.5%. The former CEO recommended these modest increases based generally on performance assessments for 2010.and expanded responsibilities. Our former CEO’s base salary was the same in 2014 as in 2013 and 2012. The annual base salaries established for our named executive officers for 20112014 were as follows: Mr. Balthrop – $514,948;- $700,000; Mr. Currie – $325,227;- $373,100; Dr. Bridge-Cook – $351,882 (Cdn.- $382,635 (CAD) ($329,035 (USD)); Mr. Bradley – $284,439;- $335,478; and Mr. Pintek – $326,104.Reiter - $334,468. Mr. Bradley’s salary was increased to $355,888 on October 1, 2014 for expanded responsibilities following the departure of another senior vice president. Mr. Balthrop’s successor, Mr. Shamir, received an annualized salary of $600,000, effective October 14, 2014.
Performance-based Cash Awards. The Committee determined it was reasonable and consistent with our compensation philosophies to maintain the target performance bonus opportunities (expressed as a percentage of base salary earned in the priorapplicable calendar year) the same for 2011.2014 consistent with 2013. Accordingly, the bonus programs were substantially the same in 2011,2014, as compared with 2010,2013, for our named executive officers (including for our former CEO), subject to modifications to applicable performance objectives and corresponding weighting under our cash-based bonus plans to reflect updates to responsibilities and our business plan and strategic and other initiatives for 2011.2014. The increased base salaries, however, provide an opportunity for officers to modestly increase such component of compensation if performance metrics were attained or exceeded. Accordingly as in 2010, target bonus amounts, expressed as a percentage of base salary earned in 2011,2014 (as in 2013), were 50% for each named executive officer, except for our former CEO whose target bonus percentage wasremained at 100% of base salary earned in 2011,2014, consistent with 20102013 and as required by his employment agreement. The Company’s named executive officers would not be eligible for any bonus regardless of the independent achievement of established financial, operating and individual performance metrics, if the Company’s total consolidated revenue failed to exceed a threshold approved by the Committee, which was determined by the Committee to be $202,582,000 for 2014.
2011
2014 Performance-based Cash Awards for Named Executive Officers Other than the CEO
The Committee approved 20112014 performance award opportunities based upon achievement of Company performance objectives (“Company Financial Objectives”), which were subsequently adjusted (upwards) by the Committee to account for the Company’s acquisition of EraGen Biosciences, Inc., as well as personalspecific R&D, project or departmental business objectives (“IndividualProject Objectives”). and leadership goals. For named executive officers (other than the CEO), the total target awards under the performance-based cash bonus plan were weighted 50% for the achievement of Company Financial Objectives and 50% for the achievement of Individual Objectives.Project Objectives and leadership goals. The weighting of specific components of the Individual Objectives varied for each executive taking into account, among other factors, responsibilities, seniority and other strategic initiatives in which an executive may be involved. The Company Financial Objectives were subject to an over/underachievement scale with possible payouts of 0% to 200% of the potential bonus for Company Objectives based on financial results in relation to the applicable performance targets, with minimum payouts starting at 50% payout of the target value for each goal for minimum threshold performance. IndividualThe weighting of specific components of the Project Objectives and leadership goals varied for each executive taking into account, among other factors, responsibilities, seniority, leadership development and other strategic initiatives in which an executive may be involved. Project Objectives and leadership goals for these executive officers were not subject to an overachievement scale. Accordingly, total annual cash performance awards could range from 0% to a maximum of 150% of the target bonus (which was 50% of the named executive officer’s earned base salary).
The Company Financial Objectives and weight afforded to each goal in 20112014 were as set forth in the table below:
| | | | |
Goal | | Percentage Weight* | |
A. Achieve Total Consolidated Revenue of $178.2 million ($184.3 million actual)
| | | 15 | |
B. Achieve High Margin Item Revenue of $122.3 million ($127.5 million actual)
| | | 20 | |
C. Achieve Adjusted Consolidated Operating Profit of $10.3 million ($23.8 million actual)
| | | 15 | |
| | | |
Total | | | 50 | |
* Expressed as a percentage of total target bonus amount.
| |
|
| | | | | | | | | | |
Financial Goal | | Minimum | | Target | | Maximum | | Percentage Achievement | | Percentage Weight* |
Consolidated Revenue | | $225 million | | $234.7 million | | $240 million | | 60% | | 10 |
High Margin Revenue | | $178 million | | $181.8 million | | $187 million | | 0% | | 10 |
Operating Profit | | $21.2 million | | $28 million | | $32 million | | 200% | | 30 |
Total | | | | | | | | | | 50 |
As a result, the Company Financial Objectives achieved a net result equal to 66/50, or 132% of target for the Company Financial Objectives.
The IndividualProject Objectives varied by executive (and according to areas of responsibility) and were based on specified management initiatives and projects for 20112014 (including business and product development milestones, partnership and strategic goals and leadership objectives)goals), with each objective given a specified weight (out of the total target award opportunity), typically 40% (ofof the total bonus opportunity) for projects and 10% foropportunity. Ten percent (10%) of the total bonus opportunity was based on leadership and team contributions.contributions as determined by the CEO. The projectProject Objectives and leadership goals were graded 100% for on time completion, 75% for completed late, 50% for partially complete and 0% for failure to produce even partial completion, in each case in the subjective judgment of the Committee based, in part, upon the recommendation of the CEO. The maximum number of points a named executive officer was eligible to receive for completion of his IndividualProject Objectives and leadership goals was 50.
By example, Project Objectives for various executives included: (i) completion of product development milestones, (ii) completion of new product market analysis, (iii) finalize negotiation and execution of strategic agreements, (iv) execution of strategically imperative organizational structure modifications, and (v) analysis and execution of effective tax optimization strategies.
At a Committee meeting in February 2012,2015, our CEO reviewed in detail both the Company’s financial and operating performance relative to the Company Financial Objectives for 2011,2014, as well as the performance of the individual named executive officers relative to the applicable Individual Objectives.Project Objectives and leadership goals. Achievement of actual, individual performancePerformance Objectives and leadership goals under the bonus plan for named executive officers was determined and certified by management to be as follows:
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Name | | CompanyProject Objectives | | Individual Objectives | | Total | and leadership goals |
Harriss T. Currie | | 100/47/50 | | 46.96/50 | | 146.96/100 | |
Jeremy Bridge-Cook | | 100/33.25/50 | | 45/50 | | 145/100 | |
Russell Bradley | | 100/46/50 |
David Reiter | | 49.25/49.6/50 | | 149.25/100 | |
Michael F. Pintek | | 100/50 | | 48.5/50 | | 148.5/100 | |
Based on theseGiven the overachievement of Company Financial Objectives at 132% of target (or 66/50) and the results above for Project Objectives and consistent with the terms of the bonus plan,leadership goals, the Committee approved a 20112014 cash bonus amountamounts for each named executive officer (other than our former CEO, who is discussed below), ranging from approximately 72.5%50% to 74.6%58% of their base salary actually paid in 2011, which is above our2014 (or 99% to 116% of the target of 50%bonus established for these officers, reflecting superior performance in 2011.2014).
2011
2014 Performance-based Cash Award for CEO
For 2011,2014, the CEO incentive plan was based upon achievement of certain financial, project and R&D targets. The targetthe Company performance goals were the sameFinancial Objectives (same as the corresponding objectives for our other named executive officers.officers) and specific project, R&D and business targets. Mr. Balthrop’s total award opportunity under the incentive plan ranged from zero to a maximum of 175% of his target bonus amount. The target bonus established by the Committee was 100% of Mr. Balthrop’s base salary as described above. The project objectives were based on specified management initiatives as recommended by Mr. Balthrop and approved by the Committee with input from our Executive Committee, with each objective given a specific weight. The total target awards under the CEO incentive plan were weighted 50% for the achievement of the Company performance goalsFinancial Objectives and 50% for the achievement of Mr. Balthrop’s project, R&D and business objectives.
Mr. Balthrop’s 20112014 incentive plan included an over/underachievement feature with possible payouts between 0% and 150%200% with respect to Company financial objectivesFinancial Objectives based on financial results between specified threshold minimum and maximum performance levels of the applicable performance targets, calculated on a linear basis. The project goals that are not financial were graded 100% forbased on time completion, 75% for completed late, 50% for partially completed and 0% for failure to produce partial completion,actual results achieved or if specific milestones were achieved timely, with potential overachievement payouts for certain of these objectives. For 2011, Mr. Balthrop’s total award opportunity under the CEO incentive plan ranged from zero to a maximumproject objectives and determined achievements were as follows:
Instrument Placements and Related Revenue: 10% Target
ARIES milestones: 20% Target
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▪ | Development milestones 15% - 0% achieved |
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▪ | CE mark 5% - 0% achieved |
NxTag milestones: 5% Target
MolecularDx Assay Revenue Plan of 150%$89.5 million: 15% Target
| |
▪ | Achieved $86.4 million or 14.48% |
Total Results: 24.22% of his target bonus amount. 50%
The target bonus established by the Committee was 100% ofreviewed Mr. Balthrop’s base salary as described above.
At the Committee meeting approving incentive payouts for 2011 for our other executive officers, the Committee also reviewed our CEO’s performance generally and relative to histhe plan for 2011. After consideration2014. Mr. Balthrop’s Company Financial Objectives, as set forth above, were achieved at a percentage weight of this without66/50 or 132% of target. The specific project, R&D and business goals achieved a result of 24.22/50. This resulted in an overall achievement of 90.22% of target. Prorating his annual base salary for the CEO present,10.5 months of service and applying the Committee’s overall view of the CEO’s performance and contributions in 2011, the Committee determined to awardpercentage achievement, Mr. Balthrop 139.5%received a bonus of his target bonus for 2011. The following table breaks down Mr. Balthrop’s incentive plan goals per goal, which were over achieved on the Company performance objectives (100 points out of a targeted 50 points), and partially achieved on the project goals (39.5 points out of a targeted 50 points).$499,969.
Goal | | Achievement/ Target | |
Achieve Total Consolidated Revenue of $178.2 million ($184.3 million actual)*
| | | 30/15 | |
Achieve High Margin Item Revenue of $122.3 million ($127.5 million actual)*
| | | 40/20 | |
Achieve Adjusted Consolidated Operating Profit of $10.3 million ($23.8 million actual)*
| | | 30/15 | |
Individual Objectives, including expense reduction, product placements and project milestones** | | | 39.5/50 | |
Total | | | 139.5/100 | |
| | | |
* | Subject to overachievement. If actual results exceed the maximum performance level then the bonus earned is 150% of the targeted amount and calculated on a linear basis between target and maximum. |
** | Committee had discretion to award up to 150% of target for certain objectives. |
Long-Term Stock-Based Incentive Compensation. The market peer group data providedreviewed by AON/Aon Hewitt generally indicated that our CEO and CFO were historically deemed to be compensated above the market median in terms of long-termlong term compensation (based on grant date fair market value assuming target performance under the LTIP) at above the 50th percentile of the peer group. Yet, as a resultnoted above, the actual LTIP payouts for historic periods averaged 58% and 44% of their “target” LTIP grants. However, in 2011, due to the temporary reduction in the time-based equity awards, the total long-term incentive target awards made in 2011 were below our target for these two officers; that is, generally at or above the 75th percentile for superior performance.CEO and CFO, respectively. Our other named executive officers have been historically at or below the market median values for long-term/equity compensation and were again at or below median in 2011. The 2011 decisions were below our generally targeted2014. In 2014, the Company increased the grant date fair market value level forof equity awards forgranted to our named executive officers to be more in line with equity grants of our peer companies and to return our long-term equity grant values to a more normalized level (as 2013 grant values were reflective of unique expense reduction initiatives and efforts to limit dilution). The 2014 equity award value increases were also based on various factors but centrally becauseupon (a) long-term retention purposes, (b) merit increases with respect to certain employees’ increased responsibilities and performance and (c) with respect to the former CEO and current CFO, the discontinuation of the Company’s effort to reduce general and administrative expensesLTIP program in 2011. In particular, the CEO’s recommendations were the most significant factor and were based on his assessment of performance, internal pay positioning, market competitiveness based on our compensation survey and general and administrative expense reduction efforts. The Committee also considered the desire for an appropriately significant long-term incentive aligned with our stockholders’ interests, consistent with our performance-based compensation philosophy.
As more fully described below, the target amount for total equity compensation for our executives was allocated across (1) time-vested and (2) performance-vested awards for 2011, with our CEO and CFO having an additional equity grant under our LTIP.
2014.
Time-based Equity Awards. Awards. Based upon the considerations described above, for 20112014 the Committee determined to make time-based equity grants, split 70/30 between RSAs (or RSUs) and options,awards solely in time based restricted shares in the following dollar amounts: Mr. Balthrop —- $1,740,000; Mr. Currie - $500,000; Dr. Bridge-Cook - $400,000; Mr. Currie — $175,000; Mr. Bridge-Cook — $175,000; Mr. Bradley —- $400,000; and Mr. Pintek — $175,000. With the exception of Mr. Bradley, theReiter - $300,000. The grant date fair market value of time-based equity grantsawards granted to our named executive officers was reduced by 50% overincreased in 2014 for the value grantedreasons set forth above. To align with competitive market practices of our peer companies and with the recommendation of Aon Hewitt, the Committee decided to adjust the historically utilized restricted share vesting term from five years to four equal annual increments for 2014 grants.
Pursuant to his employment agreement, our current CEO was awarded in 2010 or that would otherwise have been recommendedconnection with his initial employment in 2011. In lightOctober 2014, (i) an option to purchase two hundred and fifty thousand (250,000) shares of his prior year performance in 2010the Company’s common stock and internal pay equity considerations, Mr. Bradley’s time-based equity awards increased by 60% over 2010. The time-based(ii) one hundred thousand (100,000) shares of the Company’s restricted shares granted in 2011 are generallycommon stock, each under and subject to time vestingthe terms of the Equity Plan. The option and shares of restricted common stock granted to our current CEO are subject to the applicable equity award agreements which provide that each vest over five years, and the options over threefour years in equal annual increments onand that the anniversary dateoptions will be for a term of such grants. See above under “Program Design—Long-Term Stock-Based Incentive Compensation.”
Performance-based Restricted Share Awards. Except with respect to Mr. Balthrop’s initial hire grants and in connection with the LTIP commencing in 2008 for certain key executives, we have not prior to 2011 utilized performance based vesting restrictions with respect to equity awards. However, based upon the recommendation of AON/Hewitt and our CEO, given the reduction in time-based equity grants in 2011 (in comparison to prior years) to assist in our efforts to reduce general and administrative expenses and recognizing our need to offer competitive equity compensation opportunities, the Committee granted our named executive officers a one-year performance-based restricted share grant in 2011.
We believe these performance grants are consistent with our goal to align the interests of our executives with stockholders, given the clear pay for performance linkage and increase of executive focus on metrics critical to long-term and sustained increase in stockholder value.seven years. The dollar value of these one-year performance-based restricted share grants was generally determined by reference to the value associated with the first year of vestingexercise price of the portion of the time-based equity awards that was reduced and would otherwise have beenoptions granted in 2011, recognizing that these grants would vest based on a one-year performance period. Accordingly,to our current CEO was granted shares with an initial value of $80,000, and our other named executive officers were granted shares with an initial value of $35,000 (excluding Mr. Bradley given his larger time-based award), of these performance-based restricted shares. The actual number of performance-based restricted shares granted is generally determined by dividing the dollar amount allocated to the restricted share component by the fair$21.10 (the closing market value of the sharesprice on the date of grant. the grant).
The Committee did not apply a discountunvested shares associated with Mr. Balthrop's and Mr. Reiter's departures will be returned to the value of these shares to reflect the forfeiture restrictions associated with performance-based vesting.
Performance-based restrictedEquity Plan share awards are treated as “performance awards” under the Equity Plan. Grants of performance-based restricted share awards are initially unvested and represent the amount of shares that participants may receive pursuant to the applicable award agreement, assuming achievement of the performance goal establishedpool for the grant. The performance-based restricted shares granted in 2011 were dependent on continued employment, and were generally subject to vesting based on a total consolidated operating profit target consistent with the maximum performance level for this metric approved in our executive cash bonus plan for 2011, based on a one-year performance period. The Committee determined that total consolidated operating profit was an appropriate performance metric since operating profit is an important measure of the true value of our business: our ability to generate profit indicates the health of our business and allows our company to return value to stockholders. The metrics for determining performance against operating profit goals follow generally accepted accounting principles; however, the Committee was permitted to consider certain items or events as extraordinary when determining the Company’s performance against profit goals and make what it deems to be appropriate adjustments, in each case subject to certain limitations. For 2011, the total consolidated operating profit target for the performance-based restricted share awards was determined by the Committee to be $20,300,000. At a Committee meeting in February 2012, our CEO reviewed in detail the Company’s financial and operating performance relative to the Company’s operating profit for 2011, and the Committee certified that the target was achieved with respect to the 2011 performance-based restricted share awards, as actual operating profit of $23,843,000 was achieved, exceeding the target by 17%. Upon the Committee’s certification that the operating profit target was achieved, the 2011 performance-based restricted shares became vested in full and are no longer subject to restrictions. See above under “Program Design—Long-Term Stock-Based Incentive Compensation.”
future issuance.
Long TermLong-Term Incentive Plan (LTIP). TheAfter significant analysis and discussion, the Committee determined to include Messrs. Balthrop and Currie indiscontinue the LTIP program for 2011 (which plan is designed2014. The Committee based its determination upon, among other things: (i) the considerable and unrecoverable expense associated with a similar structure as in 2010). Mr. Currie’s target grant value was $300,000 and Mr. Balthrop’s target grant value was $800,000 (which were the same levels as in 2010). For Mr. Balthrop and Mr. Currie, the Committee determined it was appropriate to have increased levels of equity and total compensation opportunities through participationLTIP's market-based goals in the LTIP. As indicated above,event of achievement at a primary goal of implementinglevel less than initially projected; and (ii) the LTIP program was to provide a significantly performance-based incentive structure that allows the participating executive an opportunity for total compensation at or exceeding the 75th percentile as a reward for exceptional long-term performanceimmediate and value creation, as well as the Committee’s view as to the participants’ performance and anticipated future contributions, and for its potential retention value.
For 2011, each LTIP participant was assigned a target award amount expressed in dollars (the “Target Amount”). The potential payout amounts are based on “Threshold,” “Target” and “Maximum” levels of payout based on the aggregate weighted achievement of the corresponding performance targets for the LTIP participants and were as follows:
| | | | | | | | | | | | | | | | |
| | Target Dollar | | | | | | | | | | |
Participant | | Amount | | | Threshold | | | Target | | | Maximum | |
Patrick J. Balthrop | | $ | 800,000 | | | | 60 | % | | | 100 | % | | | 275 | % |
| | | | | | (26,030 shares | ) | | (48,383 shares | ) | | (119,305 shares | ) |
| | | | | | | | | | | | | | | | |
Harriss T. Currie | | $ | 300,000 | | | | 60 | % | | | 100 | % | | | 275 | % |
| | | | | | (9,761 shares | ) | | (16,268 shares | ) | | (44,739 shares | ) |
| | | | | | | | | | | | | | | | |
The potential payout amounts are expressed above both as a percentage of the applicable Target Amount and the numbersignificant withdrawal of shares eligible to be vested (determined by dividingfrom the specified amount of the Threshold, Target or Maximum Amount by the closing price of the Company’s common stock as reported by The NASDAQ Global Select MarketEquity Plan's share pool on the grant date), in each case atdate assuming maximum performance, which were not returned to the applicable weighted aggregate performance level. Payouts between Threshold and Maximum for Participants shall be calculated by the Committee in its sole discretion using straight-line interpolation.
Accordingly, for 2011, Mr. Balthrop was granted an unvested RSU award under the LTIP for 119,305 shares of our common stock, and Mr. Currie was granted an unvested RSU award under the LTIP for 44,739 shares of our common stock. Partial or complete vesting of the RSUs for Mr. Balthrop and Mr. Currie shall be dependent upon their continued employment and the achievement of the specific performance goals described below, extending from the date of grant through December 31, 2013. The Committee, in its sole discretion, shall determine whether and to what extent performance goals have been achieved under outstanding awards on or before March 15, 2014 (the “Determination Date”). In the event that Mr. Balthrop or Mr. Currie achieves less than the maximum level of the performance goals, the total number of shares represented by his RSU shall be reduced to reflect where actual interpolated performance lies in the range of performance goals and weighted aggregate corresponding payout opportunities established for the grant, including up to 48,383 and 16,268 shares for Mr. Balthrop and Mr. Currie, respectively, if “Target” performance is achieved, 26,030 and 9,761 shares, respectively,share pool in the event that minimum threshold goals are achieved, and zero shares inof less than maximum performance until the event that minimum threshold goals are not achieved. Calculation of shares between “Threshold” and “Target” (60% to 100%) and from “Target” to “Maximum” performance (100% to 275%) shall each be determined based on straight-line interpolation within the respective ranges. Vesting of the RSU (after giving effect to the adjustment above) shall occur as follows: 50% on the Determination Date and 50% on December 31, 2015. The Committee reserves the right to make certain adjustments to awards under the LTIP from time to time, in its sole discretion, to accommodate for certain unusual or nonrecurring events, or to avoid unwarranted penalties or windfalls for participants.
Performance goals under the grants are based on the following components, with the following weights given to each: 50% on the trading price of our common stock at the end of the performance period (the “Trading Price Goal”) and 50% on our operating profit per diluted share at the end of the performance period (the “Operating Profit Goal”), each as described more fully below and in the LTIP. In 2011, the Operating Profit Goal replaced an operating cash flow performance goal utilized in prior years, because it was viewed as being more inclusive and representative of total Company financial performance and its external expectations.
Partial or complete achievement of the Trading Price Goal is dependent upon the average closing price of our common stock for the twenty consecutive trading days ending December 31, 2013, inclusive, subject to certain adjustments as described in the LTIP. Each of Mr. Balthrop and Mr. Currie were assigned a range of trading price targets as follows: a minimum threshold of $28.50 per share, a target of $32.38 per share, and a maximum goal of $51.42 per share.
Partial or complete achievement of the Operating Profit Goal is dependent upon the aggregate “total income from operations” per diluted share (as defined in the LTIP) for the year ended December 31, 2013 (“OP/S”), as further described in the LTIP. “Operating Profit” means the income from operations as reflected on the Company’s Consolidated Statement of Operations for the year ended December 31, 2013 included in its Annual Report on Form 10-K for the period ended December 31, 2013, as further described in the LTIP. Each of Mr. Balthrop and Mr. Currie was assigned a range of OP/S targets as follows: a minimum threshold of $0.73 per share, a target of $0.81 per share, and a maximum goal of $1.19 per share.
These goals should not be viewed as predictions or estimates of future performance, and the actual achievement of these targets are subject to numerous known and unknown risks and uncertainties including, without limitation, those described under “forward looking statements,” “risk factors” or similar headings in our quarterly and annual reports filed with the SEC.
When considering the design of the LTIP for 2011 grants, the Committee determined that share price appreciation and operating profit per share were the most appropriate performance metrics for the following reasons:
• | Share price appreciation is likely the most readily quantifiable metric to confirm an increase in total value and investment return from a stockholder perspective over the performance period; and |
• | Operating profit per share measures the true value of our business. Our ability to generate profit indicates the health of our business and should allow our Company to create value to stockholders. |
The foregoing summary of the 2011 LTIP is qualified in its entirety by reference to the complete texts of the 2011 LTIP and form of RSU award agreement previously filed by the Company with the SEC.
applicable determination date.
At a Committee meeting in February 2012,2015, the Committee reviewed the Company’s financial and operating performance relative to the performance goals for the 20092012 LTIP with respect to Mr. Balthrop and Mr. Currie (the only participantsremaining participant in the 2009 LTIP)2012 LTIP due to Mr. Balthrop’s retirement). The performance goals under the grant to Mr. Balthrop and Mr. Currie for the 20092012 LTIP were based 50% on the trading price of our common stock at the end of the performance period (the “2009“2012 Trading Price Goal”) and 50% on our operating cash flows per diluted sharetotal income from operations at the end of the performance period (the “2009 Operating Cash Flow“2012 Total Income from Operations Goal”). Partial or complete achievement of the 2012 Trading Price Goal was dependent upon the average closing price of our common stock for the twenty consecutive trading days ending December 31, 2011,2014, inclusive, subject to certain adjustments as described in the 20092012 LTIP. Partial or complete achievement of the Operating Cash Flow2012 Total Income from Operations Goal was dependent upon the average quarterly “total operating cash flows” per diluted shareincome from operations” (as defined in the 20092012 LTIP) for the four quartersyear ended December 31, 2011 (“Average CFPS”),2014, as further described in the 20092012 LTIP. AchievementThe final determination and certification of actual performance relative to the 2012 LTIP goals under the 2009 LTIP was determined and certifiedmade by management and the Committee to be as follows:
2009 LTIP Goal | | Threshold | | | Target | | | Maximum | | | Actual | |
2009 Trading Price Goal | | $ | 32.38 | | | $ | 36.79 | | | $ | 58.42 | | | $ | 20.85 | |
2009 Operating Cash Flow Goal | | $ | 0.134 | | | $ | 0.152 | | | $ | 0.241 | | | $ | 0.270 | |
Accordingly, in February 2012, 70,198 of the 2009 LTIP RSUs granted2015 resulted in no shares earned due to Mr. Balthrop (50% of the maximum grant) and 26,324 of the 2009 LTIP RSUs grantedfailure to Mr. Currie (50% of the maximum grant) remained eligible based on the satisfaction of the aforementionedachieve threshold performance goals, one-half of which vested and settled on February 8, 2012 and the remaining eligible RSUs will vest on December 31, 2013, provided that Mr. Balthrop and Mr. Currie, respectively, remain employed by the Company. Vested RSUs granted under the 2009 LTIP are paid out in shares of Luminex common stock.levels.
Additional Disclosures
Additional Disclosures.
20112014 “Say-on-Pay” Advisory Vote.Vote. The Company provided stockholders a “say on pay” advisory vote on its executive compensation in 2011, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.2014. At our 20112014 Annual Meeting of Stockholders, stockholders expressed substantial support for the compensation of our named executive officers, with approximately 98.5%81% of the votes cast for approval of the “say on pay” advisory vote on executive compensation. The Committee evaluated the results of the 20112014 advisory vote and considered many other factors in evaluating the Company’s executive compensation programs as discussed in this Compensation Discussion and Analysis. While each of theseall factors bore on the Committee’s decisions regarding our named executive officers’ compensation, in light of the substantial support expressed by our stockholders for our compensation program, the Committee did not make any changes to our executive compensation program and policies as a direct result of the 20112014 “say on pay” advisory vote.
Change in Control; Termination Benefits.Benefits. We believe that reasonable and appropriate severance and change in control benefits are necessary in order to be competitive in our executive recruiting and retention efforts. We also believe that a change in control arrangement will provide an executive security that will likely reduce the reluctance of an executive to pursue a change in control transaction that could be in the best interests of our stockholders. Finally, while we have not conducted a study to confirm this, we believe formalized severance and change in control arrangements are common benefits offered by employers competing for similar executive talent. While the Committee will receive this information as part of its review of annual tallies of total executive compensation (including contingent compensation), we do not typically consider the value of potential severance and change in control payments when assessing annual compensation as these payouts are contingent and have a primary purpose unrelated to ordinary compensation matters and objectives. The Committee generally assesses these potential payouts only in view of their reasonableness during negotiations with a new hire, and periodically in light of competitive market conditions or in respect of internal equity considerations as described below.
Therefore, upon their joining the Company, we entered into employment agreements with our named executive officers. These agreements generally provide for severance payments (including premiums for certain continuing health, retirement and insurance benefits) where the executive is terminated without “cause” (including the Company’s failure to renew the employment agreement) or as a result of incapacity or death, or if the executive resigns for “good reason.” Although the definitions may vary slightly across these agreements, “good reason” generally means certain demotions in responsibilities or title, decreases in compensation, the Company’s continued material breach of the employment agreement and/or relocation requirements, while “cause” typically means a material fraud by the executive upon the Company or the executive’s continued material breach of the employment agreement (or, for Mr. Balthrop,with respect to the CEO, failure to perform the duties outlined in his employment agreement, conduct likely to cause injury to the Company, conviction of a felony or a criminal act involving moral turpitude, violation of a Company policy or a breach of his employment agreement).
Severance generally consists of an amount equal to the executive’s base salary at the highest rate in effect for the six month period prior to termination (or, for Mr. Balthropthe CEO the amount of base salary that would have been paid over the remainder of the then-current term if greater and for Dr. Bridge-Cook 1.5x his base salary) and the prior year’s bonus amount, and, except with respect to Mr. Shamir, less any payment or payments received during the 12 month period from the time of termination under any long-term disability plan if the executive was terminated by reason of incapacity. In addition, health or other employee benefits (other than bonus and incentive compensation benefits) for the executive (and the executive’s family) generally continue for a period of twelve12 months following an executive’s termination to the extent permitted by the applicable plans and law. In addition, to the extent permitted by applicable law, Mr. Shamir is entitled to a lump sum amount equal to (a) the Company’s annual cost for Mr. Shamir’s disability and life insurance in effect on the date of termination as well as (b) the prior year 401(k) plan contributions paid for the benefit of the CEO. If the termination occurs other than for cause or voluntary termination, Mr. BalthropShamir is entitled to additional severance in an amount equal to the pro ratedprorated portion of the current-year bonus to the extent the performance measures are achieved.
TheExcept for the lump sum amount described above for Mr. Shamir, the severance payments are paid in semi-monthly installments for a period of twelve12 months following the date of termination. IfIn the executiveevent that an executive’s employment is terminated without cause,(by the severance payments are generally made upfront at the time of termination (orCompany, with respect to Mr. Shamir) within six months asof the occurrence of a change in control of the Company, in lieu of the severance compensation described below)above, Luminex must pay the executive’s prior year’s bonus amount and base salary at the highest rate in aeffect during the six months immediately prior to the change in control through the date of termination, in lump payment in ordersum within three business days of termination. The executive would also be entitled to make a clean separation from, and avoid continued entanglement with,an amount equal to the employee.prorated portion of the current-year bonus to the extent the performance measures are achieved. Additionally, certain of the employment agreements, including Mr. Balthrop’s prior to his retirement, and Mr. Shamir’s, provide that in the event the payment of any severance amounts payable pursuant to the employment agreements within six months of the date of the applicable executive’s termination of employment would cause such executive to incur any additional tax under Section 409A of the Code, then payment of such amounts shallwill be delayed until the date that is six months following such executive’s termination date.
In addition, as described above, upon a change ofin control, all unvested options or other restricted shares will immediately become vested and uponexercisable, as applicable, pursuant to these agreements and the terms of the applicable equity awards. Upon a termination without cause or as a result of death or disability, all unvested restricted shares and options held by the executive will immediately become vested and exercisable, as applicable, pursuant to these agreements.
agreements and the terms of the applicable equity awards. Each named executive officer has agreed to limitations on his ability to disclose confidential information relating to us and acknowledges that all discoveries, inventions and other work product relating to his employment belong to us. Also, during the one year period (two year period for Mr. Shamir) following an executive’s termination of employment, each executive has agreed not to compete, directly or indirectly, with the core business of the Company. Furthermore, during the applicable non-compete period, each executive has agreed not to solicit our employees or consultants.
The foregoing summaries are qualified in their entiretiesentirety by reference to the complete texts of the employment agreements, as amended, and previously filed by the Company with the SEC.
Historically, while each employment agreement has been the result of an arms-length negotiation, we have tried to utilize a similar form of agreement where possible (apart from minimum salary and cash bonus targets). Accordingly, Messrs. Currie, Bridge-Cook, Bradley and PintekReiter have a similar form. Mr. Balthrop’sShamir’s agreement varies to some extent from the forms above and again reflects an arms-length negotiation following a lengthythe CEO search, and we believe the terms are appropriate in light of Mr. Balthrop’sShamir’s background, skill set, the difficulty in replacing Mr. Balthrop and the competitive nature of histhe recruitment process.
Consulting Agreements. The Company and Mr. Balthrop entered into a six-month consulting agreement dated October 14, 2014. Mr. Balthrop agreed to advise Mr. Shamir and the Board on strategic matters and other transitional and consulting services as requested and authorized by Mr. Shamir from time to time. As compensation, Mr. Balthrop is paid a monthly rate of $58,333 through April 14, 2015. Mr. Balthrop’s consulting agreement provides that if the Company terminates such consulting agreement without “cause,” the Company must pay Mr. Balthrop his monthly rate through the end of the consulting term. Mr. Balthrop’s consulting agreement contains certain non-competition, non-solicitation and confidentiality provisions.
In December 2014, Mr. Reiter announced his intention to resign from his position as Senior Vice President, General Counsel and Corporate Secretary on or about April 1, 2015 to rejoin his independent legal practice. Mr. Reiter resigned these positions upon the hiring of Richard Rew as Senior Vice President, General Counsel and Corporate Secretary effective March 16, 2015 and is serving as Senior Attorney until April 1, 2015. The Company and Mr. Reiter entered into a consulting agreement pursuant to which Mr. Reiter will advise the CEO and the General Counsel on legal matters and other transitional and consulting services to be reasonably requested and authorized by the CEO or General Counsel from time to time. The term of Mr. Reiter’s consulting agreement is through the end of 2015. As compensation, the consulting agreement entitles Mr. Reiter to be paid a monthly rate of $12,388 and receive reimbursement for three months of COBRA benefits. Mr. Reiter, among other obligations, agreed to provide up to 20 hours of consulting services weekly. In addition, Mr. Reiter’s consulting agreement contains certain non-competition, non-solicitation and confidentiality provisions.
The foregoing summaries are qualified in their entirety by reference to the complete texts of the consulting agreements previously filed by the Company with the SEC.
Clawback Policy.Policy. The Company can recover incentive compensation pursuant to our executive incentive bonus plan, perform once-basedperformance-based equity awards and LTIP that was based on (i) achievement of financial results that were subsequently the subject of a restatement, other than as a result of changes to accounting rules and regulations, or (ii) financial information or performance metrics subsequently found to be materially inaccurate, in each case regardless of individual fault. The recovery policy applies to any incentive compensation earned or paid (or performance-based equity awards or LTIP RSUs vested) to an employee at a time when he or she is an employee after the effective date of the policy. Subsequent changes in status, including retirement or termination of employment, do not affect the Company’s rights to recover compensation (or performance-based equity awards or vested LTIP RSUs) under the policy. The Committee may also provide for incremental additional payments to (or vesting of LTIP RSUs of) then-current executives in the event any restatement or error indicates that such executives should have received higher bonus payouts or LTIP RSU vesting in the effected periods. This policy is administered by the Committee in the exercise of its discretion and business judgment based on the relevant facts and circumstances.
Retirement Plans.Plans. We match contributions by our named executive officers to our 401(k) plan at the same percentage provided to the other employees at the Company, up to the maximum amount permitted under the Code.
Perquisites and Other Benefits.Benefits. The Company does not generally provide perquisites that are not, in the Committee’s view, integrally and directly related to the named executive officers’ duties. The only perquisite generally offered to our named executive officers is an annual physical. While we have no formal relocation policy for new hires, we will on occasion (including for Mr. Shamir) agree to reimbursement of certain relocation, temporary housing and related costs as part of a negotiation for an executive based on the particular facts and circumstances of the negotiation. Senior management also participates in our other broad-based benefit programs available to our salaried employees including health, dental and life insurance programs. The Company generally does not provide tax “gross-up” perquisites to its named executive officers, except to LTIP participants in relation to a change-in-control as described on pages 35 and 36 above. Except as otherwise discussed herein, other welfare and employee-benefit programs are generally the same for all eligible Company employees, including our executive officers, with some variation as required by law with respect to our international employees. While the Committee believes the existing benefits to be reasonable, the Committee intends to periodically reassess our perquisite and benefits programs to help ensure that these programs are appropriately competitive with market medians and effective as a recruiting and retention tool.
Stock Ownership/Retention Guidelines. The boardBoard expects each executive officer and non-employee director to demonstrate a long-term commitment to the Company and to the Company’s stockholders by acquiring and holding a meaningful investment in the Company’s common stock. We believe requiring directors and executive officers to hold a significant long-term stake in our equity accomplishes the following principle goals: (i) further aligning long-term economic interests of our executives and our stockholders by encouraging our management to think and act like long-term investors; and (ii) helping to reduce excessive or inappropriate risk-taking motivated principally by short-term share price appreciation. Therefore, the boardBoard has established specific ownership and retention guidelines for the Company’s executive officers and non-employee directors, summarized below.
Over time each executive officer and non-employee director is expected to build his or her ownership of the Company’s common stock. The targeted ownership levels are expected to be achieved over five years from the time each such person was named an executive officer or a non-employee director, as applicable, and maintained thereafter. The targeted ownership levels are as follows: CEO: five (5)six (6) times annual salary; executive officers: two and one half (21/2)(2.5) times annual salary; non-employee directors: three (3)five (5) times the annual cash retainer.retainer, exclusive of meeting, chairperson and committee fees.
Each executive officer and non-employee director who hasdoes not yet achievedhold the targeted ownership levels is expected to retain certain shares of common stock acquired upon exercise of stock options or from restricted share grants pursuant to the Company’s equity plans as follows: (1) a minimum of one-half75% of the net number of shares acquired (net of exercise price and tax withholdings) upon stock option exercises; and (2) in the case of restricted shares, after each vesting date of the award, at least one half75% of the net vested shares.shares (net of tax withholdings). The boardBoard of directorsDirectors is authorized to make temporary exemptionsexceptions to the foregoing ownership guidelines in its discretion where compliance would impose a severe economic hardship or otherwise prevent the executive officer or non-employee director from complying with a court order. Our namedAll non-employee directors have ownership in excess of the applicable guideline and each of the other executive officers arehas ownership that meets or exceeds the applicable guideline or is abiding by the necessary hold requirements to build the requisite ownership.
Anti-Hedging and Anti-Pledging Policy. We have adopted an anti-hedging policy that prohibits our directors and officers from engaging in complianceany hedging transaction that reduces or limits such director’s or officer’s economic risk with these guidelines (subjectrespect to permitted transitional periodsthe director’s or officer’s holdings, ownership or interest in the Company’s securities. We have also adopted an anti-pledging policy that prohibits our directors and officers from pledging the Company’s common stock as collateral for Mr. Pintek who was hiredmargin or other loans without the prior approval of the Company’s Board of Directors, except for (i) pledges of the Company’s common stock that were outstanding prior to March 6, 2013 and (ii) pledges of less than five years ago and Dr. Bridge-Cook), and our CEO has substantially exceeded his guidelines.15% (in the aggregate) of a director’s or officer’s shares of Company common stock by directors or officers who, excluding the number of shares pledged, otherwise meet or exceed the Company’s stock ownership guidelines applicable to them.
Accounting and Tax Matters.Matters. In part because of our lack of supplemental or “top hat” retirement or deferred compensation plans typical of larger companies, we do not presently consider tax or accounting consequences to be a material factor in the design of our executive compensation packages, except as to the applicability of Section 162(m) of the Code and to the extent of the Code Section 280 “gross-up” protection described on page 29 above with respect to LTIP participants.Code. None of the compensation paid to our named executive officers for 20112014 exceeded the $1 million limit per officer for qualifying executive compensation for deductibility under Section 162(m) of the Code. Code. Our Equity Plan is structured so that any compensation deemed paid to an officer when he or she exercises an outstanding option or SAR under the Equity Plan with an exercise price equal to the fair market value of the optionunderlying shares on the grant date will qualify asconstitute qualified performance-based compensation which will not be subject to the $1 million limitation. Restricted share grants, for which the vesting restrictions are solely time-based, maydo not qualify asconstitute qualified performance-based compensation and could be subject to the $1 million limitation. As previously reported, in connection with the Company hiring Mr. Balthrop as the Company’s chief executive officer and president in May 2004, Mr. Balthrop was granted a non-qualified stock option to purchase 500,000 shares of the Company’s common stock (the “Balthrop Option”). The Balthrop Option (see “Narrative to Summary Compensation Table” below) was not issued pursuant to a stockholder approved plan and ifthe portion that was exercised prior to 2014, while Mr. Balthrop iswas a covered employee, willdid not qualify asconstitute qualified performance-based compensation and willwas therefore be subject to the $1 million limitation. We have also attempted to structure the LTIP and our cash performance bonus program for 20122015 to qualify for deductibility under Section 162(m) of the Code for future years, primarily in light of the current and projected compensation expense for our current CEO and our growth expectations. It is important to note, however, that the Company is carrying forward significant net operating losses based on historical operations in a net loss position. Although it will consider the tax implications of its compensation decisions, the Committee believes its primary focus should be to attract, retain, and motivate executives and to align the executives’ interests with those of the Company’s stakeholders.stockholders. Accordingly, because the amount and mix of individual compensation areis based on competitive considerations as well as Company and individual performance, executive officer compensation that is not performance-based may exceed $1 million in a given year.
Additional Compensation Consultant Disclosures.Disclosures. As described above, the Committee has engaged AON/Aon Hewitt as its compensation consultant. During 2011,2014, the Company (on behalf of the Committee) paid AON/Aon Hewitt approximately $32,400 $66,300in consulting fees directly related to services performed for the Committee. During the same period, the Company engaged and paid AON/Aon Hewitt approximately $1,900$660 for a variety of human resources and employee benefitsother consulting services unrelated to executive compensation. While the Committee discussed and did not object to the other services provided by AON/Aon Hewitt, the Committee did not recommend or formally approve these services as they were approved by management in the normal course of business and unrelated to AON/Aon Hewitt’s assignments for the Committee and the scope of the Committee’s responsibilities. However, AON/Aon Hewitt is engaged by and reports directly to the Committee for matters of executive compensation. Based on the foregoing and, in part, on policies and procedures implemented by AON/Aon Hewitt to ensure the objectivity of AON/Aon Hewitt’s individual executive compensation consultant to the Committee, the Committee believes that the consulting advice it receives from AON/Aon Hewitt is objective and not influenced by AON/Aon Hewitt’s other nominal relationships with the Company. The Committee intends to periodically review this dual utilization to ensure AON/Aon Hewitt’s objectivity is not impaired in the Committee’s view and to consider if more formal pre-approval policies are warranted for management directed services.
2012
2015 Executive Compensation Preview and Summary.
Summary. The following is a brief summary of the actions taken by the Committee during the first quarter of 20122015 with respect to executive officer compensation matters for 2012.2015. The Committee has again engaged AON/Aon Hewitt to serve as the Committee’s compensation consultant for 2012. AON/2015. Aon Hewitt, among other matters, was asked to update its detailed peer group compensation analysesprovide updated equity trend data and suchother market industry information was reviewed andto be utilized as the Committee evaluated its decisions for 20122015 compensation matters. Overall, we believe that our compensation programs are competitive from a market standpoint and consistent with our compensation policies and objectives. The Committee strongly believes that securing the continuing services of Pat Balthrop, our CEO of eight years, is important to the execution of our strategic plan and long term success for our Company. Highlighted below are some of the key actions and decisions with respect to our executive compensation programs for fiscal 2012,2015, as approved by the Committee:
No increases to base salaries for the named executive officers.
· | Executive base salaries for the executive officers, excluding the CEO, were raised 2.5% to 7.6%, based upon merit, external and internal equity adjustments. The CEO’s base salary was increased from $515,000 to $700,000 based upon review of relevant benchmarking date within the peer group, his long-term superior performance for the Company, increased complexity and scope of the business, and his importance to management and the board of directors as the strategic leader and builder of the executive team. |
Performance-based cash compensation opportunities remain constant as a percentage of base salaries for the respective executive officers. The Company financial performance measures have been consolidated to a matrix based upon a relative mix of revenue and operating profit. With respect to the individual project, R&D and departmental performance objectives for executives, the new CEO has focused the executive officers on a more limited number of critical performance and leadership measures for 2015.
· | Performance based cash compensation opportunities remained consistent as a percentage of base salaries for the respective officers and continued to focus on substantially similar performance metrics. The increased based salaries, however, provide an opportunity for officers to modestly increase such component of compensation if performance metrics are attained or exceeded. |
The Committee made a significant change in the long-term equity incentive program. The Committee, with the support of the new CEO, has determined that the use of options for the purchase of common stock for the executive officers in lieu of restricted share awards is in the best interest of the Company and the alignment with the stockholders at this time. The primary purpose for the change is to align incentives to promote stockholder value through the growth of our stock price. New awards for 2015 provide for four year vesting with no vesting until the end of year two and 25% vesting in each of years three and four. The extension of the timeline before any vesting occurs reduces the short-term nature of the award, promotes a long-term commitment and focuses efforts to enhance value. The Committee believes this use of equity balances appropriately with competitive base salaries and annual performance based cash bonus opportunities, created for inducing employee focus on annual financial metrics, and departmental and R&D focused project goals. Each of the executive officers, excluding the CEO, was granted equity awards with grant date fair market values between $300,000 and $500,000 (or options for the purchase of 44,702 to 74,504 shares). The CEO’s equity award grant date fair value was $1,677,750, in the form of an option for the purchase of 250,000 shares.
· | Long-term equity incentive opportunities returned to the Company’s traditional approach of annual time-based equity awards based upon an allocated value before restricted shares (65% of the value) and options (35% of the value). This is an adjustment from a 70/30 split previously utilized in time based equity awards in recent years. The vesting of the restricted shares is in five equal increments and the options vest over three equal annual installments. Each of the officers, excluding the CEO, was granted aggregate equity awards equal to $350,000, with an exception for Mr. Bradley at $375,000. The CEO’s equity award was increased to $1,200,000. |
· | The Committee again agreed to include the CEO and CFO in the LTIP program for 2012, which plan is designed with a similar structure as 2011 (but substituting operating profit in the aggregate for the calendar year 2014 in lieu of operating profit per share for the cash flow metric) in order to incentivize long-term performance. Mr. Balthrop’s and Mr. Currie’s target awards were $800,000 and $200,000 respectively. This reflects a $100,000 reduction in Mr. Currie’s target award, based upon a review of the totality of compensation components and potential maximums pursuant to the various elements. |
Compensation Committee Report
The Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed it with management and, based on such review and discussion, recommended to the boardBoard of directorsDirectors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into the Company’s Annual Report on Form 10-K.
Submitted by the Compensation Committee of the boardBoard of directors,Directors,
Jay B. Johnston (Chairman)
| | |
| | Jay B. Johnston (Chairman) |
| | Fred C. Goad, Jr. |
| | Jim D. Kever |
| | Gerard Vaillant |
Jim D. Kever
38