UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
¨ | Preliminary Proxy Statement |
¨ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
x | Definitive Proxy Statement |
¨ | Definitive Additional Materials |
¨ | Soliciting Material Pursuant to §240.14a-11(c) or §240.14a-12 |
DISCOVER FINANCIAL SERVICES
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
x | No fee required. |
¨ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
(1) | Title of each class of securities to which transaction applies: |
(2) | Aggregate number of securities to which transaction applies: |
(3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
(4) | Proposed maximum aggregate value of transaction: |
(5) | Total fee paid: |
¨ | Fee paid previously with preliminary materials. |
¨ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
(1) | Amount Previously Paid: |
(2) | Form, Schedule or Registration Statement No.: |
(3) | Filing Party: |
(4) | Date Filed: |
2500 Lake Cook Road
Riverwoods, Illinois 60015
February 18, 201124, 2012
Dear Fellow Shareholder:
I cordially invite you to attend Discover Financial Services’ 20112012 Annual Meeting of Shareholders to be held at 9:00 a.m., local time, on April 7, 2011,18, 2012, at our corporate headquarters located at 2500 Lake Cook Road, Riverwoods, Illinois 60015.
All shareholders of record of our outstanding shares of Common Stock at the close of business on February 7, 201121, 2012 will be entitled to vote at the Annual Meeting.
Your vote is important! Whether or not you plan to attend the Annual Meeting,please read the enclosed proxy statement and vote as soon as possible via the Internet, by telephone or, if you receive a paper Proxy Card or voting instruction form in the mail, by mailing the completed Proxy Card or voting instruction form. Using the Internet or telephone voting systems or mailing your completed Proxy Card will not prevent you from voting in person at the meeting if you are a shareholder of record and wish to do so.
Important information about the matters to be acted upon at the meeting is included in the notice of meeting and proxy statement. Our 20102011 Annual Report contains information about our Company and its financial performance.
I am very much looking forward to our 20112012 Annual Meeting of Shareholders.
Very truly yours,
David W. Nelms
Chairman and Chief Executive Officer
NOTICE OF 20112012 ANNUAL MEETING OF SHAREHOLDERS
Time and Date | 9:00 a.m., | |
Place | Discover Financial Services 2500 Lake Cook Road Riverwoods, IL 60015 | |
Webcast | A live audio webcast of our Annual Meeting will be available on our website,www.discoverfinancial.com, starting at 9:00 a.m., | |
Items of Business | (1) To elect 11 members of the Board of Directors named in the Proxy Statement, each for a term of one year.
(2) To conduct an advisory (nonbinding) vote to approve named executive officer compensation.
(3) To
| |
Record Date | You are entitled to notice of and to vote at the meeting and at any adjournment or postponement of the meeting if you were a shareholder of record at the close of business on February | |
Materials to Review | This booklet contains our Notice of Annual Meeting and | |
Proxy Voting | It is important that your shares be represented and voted at the Annual Meeting. You can vote your shares by completing and returning your Proxy Card or by voting on the |
You are cordially invited to attend the Annual Meeting, but whether or not you expect to attend in person, you are urged to vote. Your prompt action will aid the Company in reducing the expense of proxy solicitation.
By Order of the Board of Directors,
Kathryn McNamara Corley
Executive Vice President, General Counsel and Secretary
February 18, 201124, 2012
Page | ||||
1 | ||||
6 | ||||
9 | ||||
9 | ||||
10 | ||||
11 | ||||
11 | ||||
12 | ||||
12 | ||||
13 | ||||
15 | ||||
16 | ||||
16 | ||||
18 | ||||
18 | ||||
18 | ||||
21 | ||||
Practices and Policies Supporting Strong Corporate Governance and Compensation Programs | 21 | |||
Review of Compensation Policies and Practices Related to Risk Management | ||||
Page | |||||||
30 | |||||||
31 | |||||||
31 | |||||||
32 | |||||||
Other Arrangements, Policies and Practices Related to Our Executive Compensation Program | |||||||
Executive | |||||||
35 | |||||||
36 | |||||||
37 | |||||||
| 38 | ||||||
| 39 | ||||||
39 | |||||||
40 | |||||||
2011Potential Payments Upon a Termination or Change in Control Table | 41 | ||||||
Share Ownership of Directors, Executive Officers and Principal Shareholders | 43 | ||||||
PROPOSAL 2 Advisory Vote to Approve Named Executive Officer Compensation | |||||||
| |||||||
| |||||||
|
DISCOVER FINANCIAL SERVICES
2500 Lake Cook Road
Riverwoods, Illinois 60015
(224) 405-0900
Proxy Statement
The Board of Directors of Discover Financial Services is soliciting your proxy to vote at the Annual Meeting of Shareholders to be held on April 7, 2011,18, 2012, at 9:00 a.m., local time, and any adjournment or postponement of that meeting (the “Annual Meeting”). The Annual Meeting will be held at our corporate headquarters located at 2500 Lake Cook Road, Riverwoods, Illinois 60015. This Proxy Statement and the accompanying Proxy Card, Notice of Meeting, and Annual Report to Shareholders were first sent or made available on or about February 25, 2011March 8, 2012 to shareholders of record as of February 7, 201121, 2012 (the “Record Date”). For those shareholders receiving a Notice of Internet Availability of Proxy Materials, the Notice of Internet Availability of Proxy Materials was first mailed on or about February 25, 2011March 8, 2012 to shareholders of record as of the Record Date. The only voting securities of the Company are shares of our Common Stock, $0.01 par value per share (the “Common Stock”), of which there were 545,246,937530,004,906 shares outstanding as of the Record Date (excluding treasury stock). We need a majority of the shares of Common Stock outstanding on the Record Date present, in person or by proxy, to hold the Annual Meeting.
In this Proxy Statement, we refer to Discover Financial Services as the “Company,” “Discover,” “we,” “our” or “us” and the Board of Directors as the “Board.” When we refer to our fiscal year, we mean the twelve-month period ending November 30 of the stated year (for example, fiscal 20102011 is December 1, 20092010 through November 30, 2010)2011). When we refer to the“Spin-off,” we mean the distribution of our Common Stock to shareholders of Morgan Stanley (“Morgan Stanley”), our former parent company, on June 30, 2007.
Our Annual Report to Shareholders, which contains our Annual Report on Form 10-K, including consolidated financial statements for fiscal 2010,2011, accompanies this Proxy Statement. Our Annual Report is not a part of our proxy solicitation materials. You also may obtain a copy of our Annual Report on Form 10-K for fiscal 20102011 that was filed with the Securities and Exchange Commission (“SEC”), without charge, by writing to or telephoning our Investor Relations department at the above address or telephone number. Our Annual Report on Form 10-K is also available in the “Investor Relations” section ofwww.discoverfinancial.com.
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING
Why Did I Receive These Materials?
Shareholders of the Company at the close of business on the Record Date are entitled to vote at the Annual Meeting. This Proxy Statement provides notice of the Annual Meeting, describes the fivethree proposals presented for shareholder action and includes information required to be disclosed to shareholders. The accompanying proxy card (the “Proxy Card”) provides shareholders with a simple way to vote on the described proposals without having to attend the Annual Meeting in person.
Can I Attend The Annual Meeting?
Yes. To gain admission to the Annual Meeting, you will need to show that you are a shareholder of the Company. All shareholders will be required to show valid, government-issued, picture identification or an employee badge issued by the Company. If your shares are registered in your name, your name will be compared
to the list of registered shareholders to verify your share ownership. If your shares are held in the name of your
broker or bank, you will need to bring evidence of your share ownership, such as your most recent brokerage account statement or a legal proxy from your broker. If you do not have valid picture identification and proof that you own Company shares, you will not be admitted to the Annual Meeting. In the interest of security, all packages and bags are subject to inspection. Please arrive before the start of the Annual Meeting to allow time for identity verification. You may also listen to a live audio webcast of the Annual Meeting atwww.discoverfinancial.com.
What Proposals Am I Being Asked To Vote On?
1. | The election of the Directors named in this Proxy Statement. (See Proposal 1 on page |
2. | An advisory (nonbinding) vote to approve named executive officer compensation. (See Proposal 2 on page |
3. |
The ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm. (See Proposal |
How Does The Board Of Directors Recommend That I Vote?
1. | For the election of the Directors named in this Proxy Statement. |
2. | For the approval, on an advisory basis, of named executive officer compensation. |
3. |
For the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm. |
What Does It Mean If I Receive More Than One Set Of Materials?
This means you hold shares of the Company in more than one way. For example, you may own some shares directly as a “registered holder” and other shares through a broker or you may own shares through more than one broker. In these situations you may receive multiple sets of proxy materials. In order to vote all of the shares you own, you must follow the voting procedures on each Notice of Internet Availability of Proxy Materials that you receive or sign and return all of the Proxy Cards that you receive. Each Proxy Card you receive comes with its own prepaid return envelope. If you vote by mail, make sure you return each Proxy Card in the return envelope which accompanied that Proxy Card.
Does My Vote Matter?
YES! We are required to obtain shareholder approval for the election of Directors and other important matters. Each share of Common Stock is entitled to one vote and every share voted has the same weight. In order for the Company to obtain the necessary shareholder approval of proposals, a “quorum” of shareholders (i.e., a majority of the issued and outstanding shares entitled to vote, excluding treasury stock) must be represented at the Annual Meeting in person or by proxy. If a quorum is not obtained, the Company must postpone the Annual Meeting and
solicit additional proxies; this is an expensive and time-consuming process that is not in the best interests of the Company or its shareholders. Since few shareholders can spend the time or money to attend shareholder meetings in person, voting by proxy is important to obtain a quorum and complete the shareholder vote.
How Do I Vote?
You may vote using any of the following methods:
By Internet or telephone. The Internet and telephone voting procedures we have established for shareholders of record are designed to authenticate your identity, allow you to give your voting instructions and
confirm that these instructions have been properly recorded. The availability of Internet and telephone voting for beneficial owners will depend on the voting processes of your broker, bank or nominee. Therefore, we recommend that you follow the voting instructions in the materials you receive.
Proxy card. Be sure to complete, sign and date the card and return it in the prepaid envelope. If you are a shareholder of record and you return your signed Proxy Card without indicating your voting preferences, the persons named in the Proxy Card will vote FOR the election of Directors, FOR the advisory vote to approve named executive officer compensation, FOR the approval, on an advisory basis, of a triennial advisory vote to approve named executive officer compensation, and FOR the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal 2010.2012.
By voting by Internet or telephone, or by returning your signed and dated Proxy Card in time to be received for the Annual Meeting, you authorize Kathryn McNamara Corley and Simon Halfin (the “Proxies”) to act as your proxies to vote your shares of Common Stock as specified.
In person at the Annual Meeting. All shareholders may vote in person at the Annual Meeting. If you are a beneficial owner of shares, you must obtain a legal proxy from your broker, bank or nominee and present it to the Company’s inspectors of elections (“Inspectors of Elections”) with your ballot when you vote at the meeting.
How Many Votes Are Required To Approve A Proposal?
Each Director will be elected by a majority of the votes cast with respect to such Director. A “majority of the votes cast” means that the number of votes cast “for” a given Director exceeds the number of votes cast “against” that Director. Under Delaware law, if thea Director is not elected at the Annual Meeting, the Director will continue to serve on the Board as a “holdover Director.director.” As required by the Company’s By-Laws, each Director has submitted an irrevocable letter of resignation as Director that becomes effective if he or she is not elected by shareholders and if the Board accepts the resignation. If a Director is not elected, the Nominating and Governance Committee will consider the Director’s resignation and recommend to the Board whether to accept or reject the resignation. The Board will decide whether to accept or reject the resignation and publicly disclose its decision and, if it rejects the resignation, the rationale behind the decision, within 90 days after the election results are certified.
The ratification ofadvisory (nonbinding) vote to approve named executive officer compensation and the vote to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm the advisory vote to approve named executive officer compensation and the vote to approve an amendment to the Directors’ Compensation Plan each requires the affirmative vote of a majority of the shares of Common Stock represented at the Annual Meeting and entitled to vote thereon. The advisory vote on the frequency of the shareholder advisory vote to approve named executive officer compensation will be determined by a plurality of the votes cast.
You may “abstain” from voting on any of the proposals in this proxy statement. Shares voting “abstain” on any nominee for Director will be excluded entirely from the vote and will have no effect on the election of Directors. Shares voting “abstain” on the advisory vote to approve named executive officer compensation on the
proposal to approve an amendment to the Directors’ Compensation Plan and on the proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm will be counted as present at the Annual Meeting for purposes of thateach such applicable proposal and your abstention will have the effect of a vote against the applicable vote or proposal. Shares voting “abstain” on the advisory vote on the frequency of the shareholder advisory vote to approve named executive compensation will be counted as present at the Annual Meeting for purposes of that proposal and your abstention will have no effect on this vote.
What Is The Effect Of Not Voting?
The effect of not voting depends on how ownership of your shares is registered and the proposal to be voted upon. If you own shares as a registered holder, rather than through a broker, your unvoted shares will not be represented at the Annual Meeting and will not count toward the quorum requirement. Except as described below, assuming a quorum is obtained, your unvoted shares will not affect whether a proposal is approved or rejected.
If you own shares through a broker and do not vote, your broker may represent your shares at the Annual Meeting for purposes of obtaining a quorum. As described in the answer to the following question, in the absence of your voting instruction, your broker may or may not vote your shares.
If I Don’t Vote, Will My Broker Vote For Me?
If you own your shares through a broker and you don’t vote, your broker may vote your shares at its discretion on certain “routine matters.” The Company believes that the ratification of the appointment of Deloitte and Touche LLP as our independent registered public accounting firm is a “routine matter” on which brokers will be permitted to vote any unvoted shares. With respect to other proposals, however, your broker may not be able to vote your shares for you and the aggregate number of unvoted shares is reported as the “broker non-vote.” “Broker non-vote” shares are counted toward the quorum requirement but they do not affect the determination of whether a matter is approved.
The Company believes that the election of Directors and the advisory vote on named executive officer compensation the advisory vote on the frequency of the advisory vote to approve named executive officer compensation and the approval of an amendment to the Directors’ Compensation Plan are not “routine matters” and brokers will not be permitted to vote any unvoted shares on those matters.
If I Own My Shares Through A Broker, How Is My Vote Recorded?
Brokers typically hold shares of Common Stock for many shareholders. In this situation the registered holder on the Company’s stock register is the broker or its nominee. This often is referred to as holding shares in “street name.” The “beneficial owners” do not appear in the Company’s shareholder register. Therefore, for shares held in street name, distributing the proxy materials and tabulating votes are both two-step processes. Brokers inform the Company how many of their clients are beneficial owners and the Company provides the broker with that number of proxy materials. Each broker then forwards the proxy materials to its clients who are beneficial owners to obtain their votes. When you receive proxy materials from your broker, your vote is sent to your broker. Shortly before the meeting, each broker totals the votes and submits a Proxy Card reflecting the aggregate votes of the beneficial owners for whom it holds shares.
If I Own My Shares In The Discover Financial Services 401(k) Plan, How Is My Vote Recorded?
The Bank of New York Mellon (“Mellon”), the trustee and custodian of the Discover 401(k) Plan, must receive your voting instructions for the Common Stock held on your behalf in this plan on or before April 4, 2011.15, 2012. If Mellon does not receive your voting instructions by that date, it will vote your shares, together with forfeited shares in the Discover 401(k) Plan, in the same proportion as the voting instructions that it receives from other Discover 401(k) Plan participants. On February 7, 2011,21, 2012, there were 3,358,5132,908,935 shares in the Discover 401(k) Plan.
Are My Votes Confidential?
Yes. The vote of any shareholder will not be revealed to anyone other than a non-employee tabulator of votes or an independent election inspector, except (i) as necessary to meet legal requirements or to assist in the pursuit or defense of legal action; (ii) if the Company concludes in good faith that a bona fide dispute exists as to the authenticity of one or more proxies, ballots or votes, or as to the accuracy of any tabulation of such proxies, ballots or votes; (iii) in the event of a proxy, consent or other solicitation in opposition to the voting recommendation of the Board of Directors; or (iv) if you request, or consent to disclosure of your vote or if you write comments on your Proxy Card or ballot.
Can I Revoke My Proxy And Change My Vote?
Yes. You have the right to revoke your proxy at any time prior to the time your shares are voted. If you are a registered holder, your proxy can be revoked in several ways: (i) by timely delivery of a written revocation to the
Corporate Secretary; (ii) by submitting another valid proxy bearing a later date (including by voting on the Internet or telephone or mailing a new Proxy Card); or (iii) by attending the meeting and giving notice to the Company’s inspectors of elections (the “Inspectors of Elections”) that you intend to vote your shares in person. If you are the beneficial owner of shares held by a broker, you must contact your broker in order to revoke your proxy.
Will Any Other Business Be Transacted At The Meeting? If So, How Will My Proxy Be Voted?
Management does not know of any business to be transacted at the Annual Meeting other than the matters described in this Proxy Statement. The period specified in the Company’s By-Laws for submitting additional proposals to be considered at the meeting has passed and there are no such proposals to be considered. However, should any other matters properly come before the Annual Meeting, or any adjournments and postponements thereof, shares to which voting authority has been granted to the Proxies will be voted by the Proxies in accordance with their judgment.
Who Counts The Votes?
Votes will be counted and certified by the Inspectors of Elections, who are employees of BNY Mellon Shareowner Services, the Company’s independent transfer agent and registrar.Services. If you are a registered holder, your executed Proxy Card is returned directly to BNY Mellon Shareowner Services for tabulation. As noted above, if you hold your shares through a broker, your broker returns one Proxy Card to BNY Mellon Shareowner Services on behalf of all its clients.
How Much Does The Proxy Solicitation Cost?
The largest expense in the proxy process is printing and mailing the proxy materials. We also reimburse brokers, fiduciaries and custodians for their costs in forwarding proxy materials to beneficial owners of our Common Stock. Proxies may be solicited on behalf of the Company by directors,Directors, officers or employees of the Company in person or by mail, telephone, over the Internet or facsimile transmission. No additional compensation will be paid to such directors,Directors, officers, or employees for soliciting proxies. The Company will bear the entire cost of solicitation of proxies, including the preparation, assembly, printing and mailing of this Proxy Statement and the accompanying Proxy Card, Notice of Annual Meeting and Annual Report to Shareholders. The Company has retained BNY Mellon Shareowner ServicesGeorgeson Inc. to assist with the solicitation of proxies from certain shareholders, for which services BNY Mellon Shareowner ServicesGeorgeson Inc. will receive a fee that is expected to be about $7,500 plus reimbursement for certain expenses.
Election of DirectorsELECTION OF DIRECTORS
Our Board currently has eleven directors.Directors. The entire Board stands for election at each annual meeting of shareholders. Each directorDirector holds office until his or her successor has been duly elected and qualified or the director’sDirector’s earlier resignation, death or removal. The nominees are all current directorsDirectors of Discover Financial Services, and each nominee has indicated that he or she will serve if elected. We do not anticipate that any nominee will be unable or unwilling to stand for election, but if that happens, your proxy will be voted for another person nominated by the Board. The Board may also choose to reduce the number of directorsDirectors to be elected, as permitted by our By-laws.By-Laws. Below are descriptions of the experience, qualifications, attributes and skills of each of the Company’s directorDirector nominees.
The Board believes that an effective board consists of a diverse group of individuals who bring a variety of complementary skills and experiences. The Nominating and Governance Committee and the Board consider the skills and experiences of the directorsDirectors in the broader context of the Board’s overall composition, with a view toward constituting a board that has the best skill set and experience to oversee the Company’s business. As
indicated below, our directorsDirectors have a combined wealth of leadership experience derived from extensive service guiding large, complex organizations as executive leaders or board members, and in government and academia. They have substantive knowledge and skills applicable to our business, including in the areas of regulation, public accounting and financial reporting, finance, risk management, business development, marketing, operations, strategic planning, management development and succession, compensation, corporate governance, public policy, international matters, banking, and financial services. The Nominating and Governance Committee regularly reviews the composition of the Board and its assessment of the Board’s performance in light of our evolving business requirements and its assessment of the Board’s performance to ensure that the Board has the appropriate mix of skills and experiences needed for the broad set of challenges that it confronts.
Information Concerning Nominees for Election as Directors
Jeffrey S. Aronin, 43.44. Director since 2007. Mr. Aronin is chairman and chief executive officer of Paragon Pharmaceuticals, a global development and biopharmaceutical investment firm. From 2000 to 2009, Mr. Aronin was president and chief executive officer of Ovation Pharmaceuticals Inc., a biopharmaceutical company he founded in 2000. In 2009, Ovation Pharmaceuticals was acquired by Lundbeck, Inc. Mr. Aronin served as president and chief executive officer of Lundbeck, Inc. in 2009 during its acquisition and integration of Ovation Pharmaceuticals. He is the former chairman and chief executive officer at MedCare Technologies Inc., a publicly held healthcare company.
Mr. Aronin has experience as a chief executive officer leading a global pharmaceutical company. His skills include knowledge of strategy and business development, finance, and marketing. He brings valuable leadership experience and knowledge in operations and the day-to-day management of a global corporation. Mr. Aronin also has experience in the structuring and execution of strategic corporate transactions, including mergers and acquisitions.
Mary K. Bush, 62.63.Director since 2007. Ms. Bush has served as the president of Bush International, a financial and business strategy advisory firm, since 1991 and as senior managing director of Brock Capital Group, LLC, an advisory and investment banking firm, since 2010. Ms. Bush is a member of the board of directors of ManTech International Corporation, Marriott International and The Pioneer Family of Mutual Funds. In the past five years, she has also served as a director of UAL Corporation, Brady Corporation, Briggs & Stratton, MGIC Investment Corporation and Mortgage Guaranty Investment Corporation.
Ms. Bush brings extensive financial market, banking, government and international experience to the Board. She is the founder and president of Bush International, which advises U.S. companies and foreign governments
on international financial markets, banking and economic matters. Prior to that, she served as managing director of the Federal Housing Finance Board, where she established financial policies and oversaw management and safety and soundness for the 12 Federal Home Loan Banks. She also has acted as vice president and head of International Finance of Fannie Mae and the U.S. Alternate Executive Director of the International Monetary Fund Board. In 2007, she served on the U.S. Department of the Treasury’s Advisory Commission on the Auditing Profession. Ms. Bush brings a broad understanding of the operations and business and economic challenges of public companies and the financial services industry.
Gregory C. Case, 48.49.Director since 2007. Mr. Case has been president and chief executive officer of Aon Corporation since 2005 and is a member of the company’sAon’s Board of Directors. Prior to joining Aon, Mr. Case was with McKinsey & Company, thean international management consulting firm, for 17 years, most recently serving as head of the Financial Services Practice. Prior to joining McKinsey, he worked for the investment banking firm of Piper, Jaffray and Hopwood and the Federal Reserve Bank in Kansas City.
Mr. Case has approximately 20 years experience in the insurance and financial services industries, including asin the chief executive officer of Aon, a global providerareas of risk management services, insurance and reinsurance brokerage, and through his management
consulting and banking experience. He brings valuable leadership experience and knowledge in business operations and the day-to-day management of a large global financial corporation. His skills include strategy and business development, risk management and people management.
Robert M. Devlin, 69.70.Director since 2007. Mr. Devlin is chairman of Curragh Capital Partners, a private equity and investment firm he founded in 2002. He is a principal owner and a director of Forethought Financial Group Inc., a life insurance and financial services company. He was chairman, president and chief executive officer of American General Corporation from 1996 to 2001. HeIn the past five years, he has also isserved as a director of Cooper Industries and LKQ Corporation.
Mr. Devlin has expertise in marketing and finance and knowledge of consumer markets based on his experience in diversified financial service organizations. He also has significant experience in mergers and acquisitions, corporate finance and cost reduction and containment as chairman of a private equity firm. He also brings valuable leadership experience and knowledge in operations and the day-to-day management of a global corporation. Finally, with his extensive career in management, he has experience in general management with regard to people, structure and systems.
Cynthia A. Glassman, Ph.D, 63.64.Director since 2009. Dr. Glassman was appointed by President Bush as Under Secretary for Economic Affairs at the U.S. Department of Commerce from 2006 to 2009 and as Commissioner of the U.S. Securities and Exchange Commission from 2002-2006. Dr. Glassman is a director of Navigant Consulting, Inc. She also is a Senior Research Scholar at the Institute for Corporate Responsibility at the George Washington University School of Business.
Dr. Glassman brings extensive regulatory, governance, risk management, financial services and banking experience to the Board. She holds a Ph.D. in economics and has spent over 35 years in the public and private sectors focusing on financial services regulatory and public policy issues, including 12 years at the Federal Reserve and 15 years in financial services consulting. Through her experience, she brings a thorough and insightful perspective to a wide range of banking, financial, risk management, regulatory, and corporate governance issues.
Richard H. Lenny, 59.60.Director since 2009. Mr. Lenny has been an operating partner with Friedman Fleischer & Lowe LLC, a private equity firm, since 2011. Mr. Lenny was chairman, president and chief executive officer of The Hershey Company, a manufacturer, distributor and marketer of chocolate and non-chocolate candy, snacks and candy-related grocery products, from March 2001 until his retirement in December 2007. From 1998 to 2001, Mr. Lenny was President of Nabisco Biscuit Company, which became a subsidiary of Kraft Foods, Inc. in 2000. Mr. Lenny is a director of McDonald’s Corporation and ConAgra Foods. In the last five years, he also served as a director of The Hershey Company and Sunoco Inc.
Mr. Lenny has experience as a chief executive officer for a global retail company that is a major consumer brand. Mr. Lenny’s skills include knowledge of strategy and business development, finance, marketing and consumer insights. He has extensive marketing experience with strong consumer brands that is of critical importance to Discover. He also brings valuable leadership experience and knowledge in operations and the day-to-day management of a large global corporation.
Thomas G. Maheras, 48.49.Director since 2008. Mr. Maheras has been the founding partner of Tegean Capital Management, LLC since 2008. Mr. Maheras was chairman and co-chief executive officer of Citigroup Inc.’s Markets and Banking in 2007. From 2004 to 2007, Mr. Maheras was chief executive officer of global capital markets at Citigroup. Mr. Maheras was formerly chairman of the U.S. Treasury Borrowing Advisory Committee and a director of the Securities Industry and Financial Markets Association.
Mr. Maheras has extensive risk management, banking and capital markets experience, including 23 years at Citi where his responsibilities included leading the global capital markets business. He also brings valuable
leadership experience and knowledge in operations and the day-to-day management of a global financial services organization. Mr. Maheras’ financial background and banking and financial services experience includes a knowledge of financial statements, corporate finance, accounting and capital markets.
Michael H. Moskow, 73.74.Director since 2007. Mr. Moskow retired as president and chief executive officer of the Federal Reserve Bank of Chicago in 2007, where he had served since 1994. Mr. Moskow serves on the board of directors of Northern Trust Mutual Funds, Taylor Capital Group Inc., and Commonwealth Edison Company, a subsidiary of Exelon Corporation. In the past five years, he has also served as a director of Diamond Management and Technology Consultants.
Mr. Moskow brings extensive regulatory, financial services and banking experience to the Board and has extensive knowledge of the economy and financial markets. He is currently vice chairman & senior fellow on the global economy at The Chicago Council on Global Affairs. From 1993 to 1994, he was a full-time faculty member at Northwestern University (Kellogg School of Management). Prior to teaching at Northwestern, Mr. Moskow was a Deputy U.S. Trade Representative, following his appointment by President Bush in 1991. From 1969 to 1977, he held a number of senior positions with the U.S. government, including undersecretary of labor at the U.S. Department of Labor, director of the Council on Wage and Price Stability and senior staff economist with the Council of Economic Advisers. Through his senior regulatory positions, particularly in the financial services arena, and service on the boards of other financial institutions, he brings a thorough and insightful perspective to a wide range of banking, financial, regulatory and risk management issues.
David W. Nelms, 50.51. Director since 1998 and Chairman since 2009. Mr. Nelms has served as our chief executive officer since 2004 and was president and chief operating officer from 1998 to 2004. Mr. Nelms was also our Chairman from 2004 until the Spin-Off.June 2007 spin-off from Morgan Stanley, our former parent company. Prior to joining Discover, Mr. Nelms worked at MBNA America Bank from 1991 to 1998, most recently as a vice chairman. From 1990 to 1991, Mr. Nelms was a senior product manager for Progressive Insurance. From 1986 to 1990, Mr. Nelms was a management consultant with Bain & Company.
Mr. Nelms’ deep understanding of the Company’s business and industry provides critical expertise to the Company and makes him well-qualified to serve as Chairman. Prior to his current position, Mr. Nelms served as president and chief operating officer of the Company. He also brings valuable leadership experience and knowledge in operations and the day-to-day management of a global financial corporation.
E. Follin Smith, 51.52.Director since 2007. Ms. Smith retired from Constellation Energy Group, Inc. in May 2007 where she was executive vice president, chief financial officer and chief administrative officer. Ms. Smith joined Constellation Energy Group as senior vice president, chief financial officer in June 2001 and was appointed chief administrative officer in December 2003. She serves on the board of directors of Ryder System, Inc.
Ms. Smith has experience as chief financial officer and chief administrative officer of public companies. She has extensive senior management experience, including through her service as senior vice president and chief financial officer of Armstrong Holdings, Inc. and senior financial positions with General Motors, including chief financial officer for the company’s Delphi Chassis System division. Ms. Smith’s strong risk management, financial and accounting background, gained through her experience as a chief financial officer, includes a thorough knowledge of financial statements, corporate finance, and accounting that is of significant value to the Company. Her skills also include oversight of human resources, risk management, legal and information technology functions.
Lawrence A. Weinbach, 71.72.Director since 2007 and Lead Director since 2009. Mr. Weinbach has been chairman of Great Western Products Holdings LLC, a manufacturer and master distributor of food and nonfood concession products, since January 2009 and has been a managing director of Yankee Hill Capital Management LLC, a private equity firm, since 2006. Prior to that, he was the executive chairman of Unisys Corporation, a
worldwide information services and technology company, from 2005 to 2006, and its chairman and chief executive officer from 1997 to 2004. Mr. Weinbach serves on the board of directors of Avon Products, Inc. In the last five years, he also served as a director of Quadra Realty Trust and UBS, AG.
Mr. Weinbach has experience in the financial and accounting industry and the information technology and financial services sectors. He began his career in 1961 at Arthur Andersen, ultimately serving as managing partner and chief executive of Andersen Worldwide, a global professional services organization, which included Arthur Andersen and the company now known as Accenture from 1989 to 1997. Mr. Weinbach’s strong financial background, gained through his private equity, accounting, investment banking and financial services experience, includes knowledge of risk management, governance, financial statements, corporate finance, accounting and capital markets. As a former chief executive officer, he also brings valuable leadership experience and knowledge in operations and the day-to-day management of a global corporation.
THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF ALL OF THE ELEVEN DIRECTOR NOMINEES: JEFFREY S. ARONIN, MARY K. BUSH, GREGORY C. CASE, ROBERT M. DEVLIN, CYNTHIA A. GLASSMAN, RICHARD H. LENNY, THOMAS G. MAHERAS, MICHAEL H. MOSKOW, DAVID W. NELMS, E. FOLLIN SMITH AND LAWRENCE A. WEINBACH. PROXIES SOLICITED BY OUR BOARD WILL BE VOTED “FOR” THESE NOMINEES UNLESS OTHERWISE INSTRUCTED.
The Board of Directors has adopted our Corporate Governance Policies, which contain the directorDirector independence guidelines. The Board uses these guidelines to assist it in determining whether or not directorsDirectors qualify as “independent” pursuant to the guidelines and the requirements set forth in the New York Stock Exchange’s Corporate Governance Rules (“(the “Rules”). In each case, the Board broadly considers all relevant facts and circumstances and applies the guidelines and the Rules in determining whether or not directorsDirectors qualify as “independent.” Our Corporate Governance Policies are available in the “Investor Relations” section ofwww.discoverfinancial.com and are available in print free of charge to any shareholder who requests a copy. Pursuant to our Corporate Governance Policies and the Rules, the Board reviewed the independence of all of our current directors.Directors.
During this review, the Board considered transactions and relationships between each Director or any member of his or her immediate family (or any entity of which a Director or an immediate family member is an executive officer, general partner or significant equity holder) and the Company and its subsidiaries and affiliates. The Board also considered whether there were any transactions or relationships between Directors or any member of their immediate family and members of the Company’s senior management. The purpose of this review was to determine whether any such relationships or transactions existed that were inconsistent with a determination that the Director is independent.
As a result of this review, the Board affirmatively determined that Jeffrey S. Aronin, Mary K. Bush, Gregory C. Case, Robert M. Devlin, Dr. Cynthia A. Glassman, Richard H. Lenny, Thomas G. Maheras, Michael H. Moskow, E. Follin Smith and Lawrence A. Weinbach are independent of the Company and its management under the standards set forth in the Corporate Governance Policies and the Rules. The Board determined that one of our Directors, David W. Nelms, is not independent. Mr. Nelms is considered an inside Directorindependent because of his employment as our Chief Executive Officer and, therefore, is not independent.Officer.
In determining that each of the Directors other than Mr. Nelms is independent, the Board considered, among other things, the following relationships, which it determined were immaterial to the Directors’ independence. The Board considered that the Company and its subsidiaries in the ordinary course of business have, during the
last three years, sold products and services to, and/or purchased products and services from, companies at which some of our Directors were officers during fiscal 2010.2011. In each case, the amount paid to or received from these companies in each of the last three years did not exceed the greater of $1,000,000 or 2% of that organization’s consolidated gross revenues, the threshold set forth in our Corporate Governance Policies and the Rules.
Our Board of Directors held eight10 meetings during fiscal 2010.2011. Each Director attended at least 75% or more of the total number of meetings of the Board and committees on which the Director served that were held while the Director was a member. Our Board of Directors has established the following committees: Audit and Risk, Compensation, and Nominating and Governance. The membership and function of each committee and the number of meetings held by each committee during fiscal 20102011 is described below.
Committee | Members | Primary Responsibilities | # of Meetings | |||||
Audit and Risk | Ms. Smith (Chair) Ms. Bush Dr. Glassman Mr. Maheras Mr. Moskow | • Oversee the integrity of our consolidated financial statements, our system of internal control over financial reporting, our risk management, and the qualifications and independence of our independent registered public accounting firm.
• Oversee the performance of our internal auditor and independent registered public accounting firm and our compliance with legal and regulatory requirements.
• Sole authority and responsibility to select, determine the compensation of, evaluate and, when appropriate, replace our independent registered public accounting firm. | 11 |
|
|
| |||||||||||
| Mr. Case (Chair) Mr. Aronin Mr. Devlin Mr. Lenny | • Annually review and approve the corporate goals and objectives relevant to the compensation of the Chief Executive Officer and evaluate his performance in light of these goals.
• Determine the compensation of our executive officers and other appropriate officers.
• Oversee risk management associated with our compensation practices.
• Administer our incentive and equity-based compensation plans.
• Oversee plans for management development and succession. |
Committee | Members | Primary Responsibilities | # of Meetings | |||||
Nominating and Governance | Mr. Weinbach (Chair) Ms. Bush Mr. Lenny | • Identify and recommend candidates for election to our Board and each Board committee.
• Establish procedures for oversight of the evaluation of our Board and management.
• Recommend Director compensation and benefits.
• Review annually our Corporate Governance Policies. | 4 |
Our Board has adopted a written charter for each of the Audit and Risk, Compensation and Nominating and Governance Committees setting forth the roles and responsibilities of each committee. The charters are available in the “Investor Relations” section ofwww.discoverfinancial.com.
All members of the Audit and Risk, Compensation and the Nominating and Governance Committees satisfy the standards of independence applicable to members of such committees. In addition, the Board has determined that Ms. Bush, Mr. Moskow and Ms. Smith are “audit committee financial experts” as such term is defined by the SEC rules.
Board Attendance at Annual Shareholder Meeting
The Company’s Corporate Governance Policies state that each Director will attend annual meetings of shareholders unless he or she is unable to attend a meeting due to extenuating circumstances. All Directors attended the 20102011 Annual Meeting of Shareholders.
The Nominating and Governance Committee is responsible for identifying, screening and recommending candidates to the Board. This Committee may consider Director candidates from a wide range of sources, including shareholders, officers and Directors. The Board is responsible for nominating Directors for election by the shareholders and filling any vacancies on the Board that may occur.
The Company’s Corporate Governance Policies describe our Director qualifications. The Board seeks members who combine a broad spectrum of experience and expertise with a reputation for integrity. Directors should have experience in positions with a high degree of responsibility and be leaders in the companies or institutions with which they are affiliated. Directors should be selected based upon their potential contributions to the Board and management and their ability to represent the interests of shareholders. Also, the Board will consider the diversity of a candidate’s perspectives, background and other demographics.
The Board currently combines the positions of CEO and Chairman, coupled with a lead independent director.Director (the “Lead Director”). The Board has designated Lawrence A. Weinbach, who is Chairman of the Nominating and Governance Committee, as the Lead Director. The Lead Director:
Presides at all meetings of the Board at which the Chairman is not present, and has the authority to call, and will lead, non-employee Director sessions and independent Director sessions;
Helps facilitate communication between the Chairman/CEOChairman and the independent directors;Directors;
Advises the Chairman of the Board’s informational needs;
Approves Board meeting agenda items and the schedule of Board meetings; and
May request inclusion of additional agenda items for Board meetings.
The Board believes that the combined position of CEO and Chairman enhances the effectiveness of the Board and, therefore, that the current Board leadership structure is optimal for the Company. Because of his position as CEO, Mr. Nelms is the directorDirector most familiar with Discover’s business and industry and best positioned to set and execute the Company’s strategic priorities. Mr. Nelms’ leadership, driven by his deep business and financial services expertise, enhances the Board’s ability to exercise its responsibilities. In addition, this model provides enhanced efficiency, effective decision-making and clear accountability. The lead independent directorLead Director further strengthens the Board’s independence and autonomous oversight of our business as well as Board communication and effectiveness. The Board evaluates this structure periodically, including the appointment of the lead independent director.Lead Director.
Non-employee Director Meetings
The non-employee directorsDirectors meet regularly in executive sessions without management present. The Company’s Corporate Governance Policies also require that if any non-employee Directors are not independent, then the independent directorsDirectors will meet in an independent directorDirector session at least once per year. Currently, all non-employee directorsDirectors are independent. The Lead Director, who is independent, presides over executive and independent directorDirector sessions.
The Board is responsible for approving the Company’s risk management framework, which includes the Company’s Enterprise Risk Management Policy and certain additional risk management policies. The Board receives reports of material exceptions to such policies. Additionally, the Board approves the risk appetite and limits, and capital targets and thresholds of the Company. It also appoints the Corporate Risk Officer, and other risk management function leaders, as appropriate.
The Board regularly devotes time during its meetings to review and discuss the most significant risks facing the Company, and management’s responses to those risks. During these discussions, the Chief Executive Officer, the General Counsel, the Chief Financial Officer and/or the Corporate Risk Officer present management’s
assessment of risks, a description of the most significant risks facing the Company and any mitigating factors and plans or practices in place to address and monitor those risks. The Board has also delegated certain of its risk oversight responsibilities to its Committees.
Consistent with the New York Stock Exchange listing standards, to which the Company is subject, the Board has delegated to the Audit and Risk Committee responsibility for oversight of the Company’s practices with respect to risk assessment and risk management, and for discussing with management the major risk exposures facing the Company and the steps the Company has taken to monitor and control such exposures. In this regard, the charter of the Audit and Risk Committee requires itthe Committee to review the Company’s framework for assessing and managing the risk exposures of the Company, including credit, market, liquidity and operational risks, and the steps management has taken to monitor and control such risk exposures. The Audit and Risk Committee also is required to review reports from management on the Company’s enterprise-wide risk management program, including the status of and changes to risk exposures, policies, procedures and practices, and the adequacy of risk parameters that have been established for each area of enterprise risk. The Audit and Risk Committee also is required to discuss with the risk management function whether it has the appropriate resources, independence and authority to fulfill its responsibilities.
The Audit and Risk Committee comprises solely independent directors.Directors. During the Audit and Risk Committee’s discussion of risk, the Company’s General Counsel, Chief Financial Officer, Corporate Risk Officer, Chief Compliance
Officer and Internal Auditor present information and participate in discussions with the Audit and Risk Committee regarding risk and risk management. ThisThe Committee also authorizes the Company’s Risk Committee, which comprises the members of the Company’s Executive Committee and the Corporate Risk Officer.Officer, who acts as the chair. Our Risk Committee is a management-level committee, chaired by our Corporate Risk Officer, that provides a forum for key members of our executive management team to review and discuss credit, market, liquidity, operational, legal and compliance and strategic risks across the Company and for each business unit. The Committee regularly reports to the Audit and Risk Committee on risks and risk management.
While the Board’s primary oversight of risk rests with the Audit and Risk Committee, theThe Compensation Committee directly oversees the risk management associated with the Company’s compensation practices, including an annual review of the Company’s risk assessment of its compensation policies and practices for its employees and the Company’s succession planning process.
As noted above, the Board believes that its leadership structure is appropriate for the Company. The Board believes that the combination of the combined Chief Executive Officer and Chairman, the Lead Director and the roles of the Board and its Committees provide the appropriate leadership to help ensure effective risk oversight.
Shareholders and other interested parties may contact any member of our Board by writing to: Discover Financial Services, 2500 Lake Cook Road, Riverwoods, Illinois 60015, Attention: Secretary and General Counsel. All communications should be accompanied by the following information: (i) if the person submitting the communication is a security holder, a statement of the type and amount of the securities of the Company that the person holds; (ii) if the person submitting the communication is not a security holder and is submitting the communication to the non-management directorsDirectors as an interested party, the nature of the person’s interest in the Company; (iii) any special interest, meaning an interest not in the capacity of a shareholder of the Company, of the person in the subject matter of the communication; and (iv) the address, telephone number and e-mail address, if any, of the person submitting the communication. The Board’s Policy Regarding Communications by Shareholders and Other Interested Parties with the Board of Directors is available in the “Investor Relations” section of our website,www.discoverfinancial.com. Shareholder and interested party communications received in this manner will be handled in accordance with procedures approved by our independent directors.Directors.
Shareholder Recommendations for Director Candidates
Our Nominating and Governance Committee is responsible for identifying individuals qualified to become Board members consistent with the Board qualification criteria described above and set forth in the Company’s Corporate Governance Policies which are available in the “Investor Relations” section ofwww.discoverfinancial.com. The Nominating and Governance Committee may consider directorDirector candidates recommended by shareholders. The procedures to submit recommendations are described in the Policy Regarding Director Candidates Recommended by Shareholders, available in the “Investor Relations” section ofwww.discoverfinancial.com.
Shareholders who wish to recommend a candidate for the Committee’s consideration must submit the recommendation in writing in accordance with the Board’s Policy Regarding Communications by Shareholders and Other Interested Parties with the Board of Directors discussed above. Shareholders may make recommendations at any time, but recommendations for consideration as nominees at the annual meeting of shareholders must be received not less than 120 days before the first anniversary of the date that the proxy statement was released to shareholders in connection with the previous year’s annual meeting. In fiscal 2010,2011, there were no directorDirector candidates submitted by shareholders. To submit a candidate for consideration for nomination at the 20122013 annual meeting of shareholders, shareholders must submit the recommendation, in writing, by October 28, 2011.November 8, 2012. The written notice must demonstrate that it is being submitted by a shareholder of record of the Company and include information about each proposed directorDirector candidate, including name, age, business address, principal occupation, principal qualifications and other relevant biographical information. In addition, the shareholder must confirm their candidates’the candidate’s consent to serve as a director.Director. Shareholders must send
recommendations to Discover Financial Services, 2500 Lake Cook Road, Riverwoods, Illinois 60015, Attention: Secretary and General Counsel and they will be forwarded to the Nominating and Governance Committee.
The Nominating and Governance Committee identifies, evaluates and recommends directorDirector candidates to the Board. The Committee accepts shareholder recommendations of directorDirector candidates and evaluates such candidates in the same manner as other candidates. The Committee determines the need for additional or replacement Board members, then identifies and evaluates the directorDirector candidate under the criteria described above based on the information the Committee receives with the recommendation or which it otherwise possesses, which may be supplemented by certain inquiries. If the Committee determines, in consultation with other directors,Directors, including the Chairman of the Board, that a more comprehensive evaluation is warranted, the Committee may then obtain additional information about the directorDirector candidate’s background and experience, including by means of interviews. The Committee will then evaluate the directorDirector candidate further, again using the qualification criteria described above. The Committee receives input on such directorDirector candidates from other directors,Directors, including the Chairman of the Board, and recommends directorDirector candidates to the full Board for nomination. The Committee may engage a third party to assist in identifying directorDirector candidates or to assist in gathering information regarding a directorDirector candidate’s background and experience. If the Committee engages a third party, the Committee approves the fee that the Company pays for these services.
Shareholders may nominate directorDirector candidates by complying with our By-Law provisions discussed at the end of the proxy statement under the heading “Shareholder Proposals for the 20122013 Annual Meeting.”
EXECUTIVE AND DIRECTOR COMPENSATION
The Compensation Committee is responsible for the review and approval of the Company’s executive compensation program. The Compensation Committee works with its independent consultant, Pearl Meyer & Partners, LLC (“Pearl Meyer”), to develop recommendations for the Compensation Committee. Members of the Company’s senior management and human resources department work with the Company’s compensation consultant, Meridian Compensation Partners, LLC (“Meridian”), a 2010 spin-off from Hewitt Associates (the Company’s former compensation consultant).
Role of the Compensation Committee
The Compensation Committee is responsible for the review and approval of all aspects of the Company’s executive compensation program and makes all decisions regarding the compensation of the Company’s executive officers named in the executive compensation tables below (“NEOs”). Specifically, the Compensation Committee has responsibility to, among other things:
review, approve and administer all compensation programs affecting NEOs and ensure such plans are aligned with the Company’s compensation structure policies;
annually review and approve:
¡ | performance criteria, goals and award vehicles used in our compensation plans, and |
¡ | performance of and compensation delivered to our Chief Executive Officer and other NEOs; |
conduct an annual review of the Company’s risk assessment of its compensation policies and practices;
oversee the Company’s management development and succession planning efforts; and
review and approve any contracts, policies, or programs related to compensation, contractual arrangements, or severance plans affecting NEOs.
As described below under “Compensation Discussion and Analysis—2010 Decision Making Process,”Role of Chief Executive Officer in Compensation Decisions,�� the Compensation Committee consults with the Chief Executive Officer with respect
to the compensation of the other NEOs. The Chief OperatingExecutive Officer and the Chief Financial Officer and consults with the Chief Operating Officer with respect to the executive officersthose NEOs who report directly to him.the Chief Operating Officer prior to presenting compensation recommendations with respect to those NEOs to the Committee.
The Compensation Committee’s charter is available in the “Investor Relations” section of the Company’s website atwww.discoverfinancial.com.
Role of the Compensation Consultants
The Compensation Committee regularly consults with its external independent compensation consultant in performing its duties. The Compensation Committee has broad authority to retain and dismiss compensation consultants, as well as to establish the scope of the consultant’s work. While the consultant reports to the Compensation Committee, the consultant also works with the Company’s human resources staffdepartment and executivesenior management as approved by the Compensation Committee Chair. The Compensation Committee previously retained Semler Brossy Consulting Group, LLC as its independent executive compensation consultant. In fiscal 2010, the Compensation Committee decided to select a new consultant. On April 8, 2010, following its review of consultant candidates, the members of the Compensation Committee unanimously decided to retain Pearl Meyer as the Committee’s new independent executive compensation consultant. Pearl Meyer provides experiential guidance to the Compensation Committee on what is considered fair and competitive practice in the industry, primarily with respect to the compensation of the Chief Executive Officer, but also for other senior Company officers. In 2011, Pearl Meyer also provided guidance to the Nominating and Governance Committee regarding Director Compensation. Pearl Meyer is independent of management and under the terms of its agreement with the Compensation Committee, Pearl Meyer will otherwise generally provide services only to the Compensation Committee. Other than executive and Director compensation consulting services noted above, Pearl Meyer performs no other services for the Company.
The Company has retained Meridian to advise our management on executive and Director compensation matters. Meridian provides competitive compensation program and policy data as well as information concerning industry practices.
We have adopted the Directors’ Compensation Plan to establish our directors’Directors’ annual compensation and to further advance the interest of the Company and its shareholders by encouraging increased share ownership by our non-employee directors,Directors in order to promote long-term shareholder value. Our directorsDirectors are required to retain a certain amount of stock as described in the section below “Share Ownership Guidelines.”
In fiscal 2011, Meridian conducted a review of director compensation to ensure that our Director compensation remains competitive relative to our peers. The study considered the director compensation at our peers and the increased demands, workload and responsibilities of our Directors as Directors of a financial services public company since 2007. Pearl Meyer reviewed Meridian’s study and concurred with its findings. Pearl Meyer presented the study to the Nominating and Governance Committee which in turn presented the findings to the Board. After considering the recommendation of the Nominating and Governance Committee, the Board approved the first increase in Director compensation since the Company became a public company in 2007. The increase became effective as of December 1, 2011. Accordingly, non-employee Directors who are members of a Board committee will receive an annual committee membership fee as detailed below. Committee chairs are not entitled to this new membership fee. The fees were structured so as to differentiate between the different workloads and responsibilities associated with membership on the different Board committees.
Directors who also are our employees do not receive any compensation under the Directors’ Compensation Plan. The compensation under the Directors’ Compensation Plan is described below.
Cash Compensation. Each non-employee directorDirector receives the following cash compensation under the Directors’ Compensation Plan for service on our Board and committees of our Board:
An annual retainer fee of $75,000;
An additional annualA Lead Director retainer fee for our Lead Director of $75,000;
An additional annualA committee chair retainer fee of $25,000 for the chairperson of each committee of our Board other than the Audit and Risk Committee; and
An additional annualA committee chair retainer fee of $50,000 for the chairperson of the Audit and Risk Committee; and
A non-chair committee membership fee of: (i) $15,000 for each member of the Audit and Risk Committee; (ii) $10,000 for each member of the Compensation Committee; and (iii) $5,000 for each member of the Nominating and Governance Committee.
Each non-employee directorDirector may elect to defer receipt of their cash compensation under the Directors’ Voluntary Nonqualified Deferred Compensation Plan until the directorDirector terminates all services for the Company. A bookkeeping account is maintained for each participant and interest is credited to the deferred amount based on 120% of the quarterly long-term applicable federal rate in effect.
Equity Compensation. Pursuant to the Directors’ Compensation Plan, we may issue awards of up to a total of 500,0001,000,000 shares of Common Stock to our non-employee directors.Directors. Each non-employee directorDirector receives an annual grant of $125,000 in restricted stock units (“RSUs”) for service on our Board and committees of our Board beginning with the first annual meeting at which the directorDirector is elected to our Board. For those directorsDirectors joining our Board on a date other than the date of an annual meeting, each directorDirector receives a grant of $125,000 in RSUs on the date on which the directorDirector becomes a member of our Board, adjusted by one-12th for each month before the next annual meeting of shareholders.
The number of RSUs granted is determined by dividing the dollar amount by our share closing price on the date of grant. Each grant made thereafter vests in its entirety on the first anniversary of its date of grant. Unless provided otherwise in the RSU agreement, RSUs granted to each non-employee directorDirector may become fully vested before the end of the regular restriction period if (i) such directorDirector is terminated due to disability or death or (ii) a change in control occurs. Upon vesting, the RSUs are converted into Common Stock. Each non-employee directorDirector may elect to defer the receipt of their equity compensation until the directorDirector terminates all services for the Company. Directors currently receive dividend payments on their RSUs. A bookkeeping account is maintained for each participant, which reflects the number of RSUs to which the participant is entitled under the terms of the Plan.
In order to continue to be able to provide equity compensation to our non-employee directors, we are seeking shareholder approval of an amendment to the Directors’ Compensation Plan to provide for an additional 500,000 shares of Common Stock to be issued under this plan. This proposal is discussed below under “Proposal 4—Approval of an Amendment to the Discover Financial Services Directors’ Compensation Plan.”
Reimbursements. Directors are reimbursed for reasonable expenses incurred in attending Board, of Directors, committee and shareholder meetings, including reasonable expenses for travel, meals and lodging.
Role of the Nominating and Governance Committee
The Nominating and Governance Committee is responsible for reviewing the effectiveness of the non-employee directorDirector compensation and benefits programs in supporting the Company’s ability to attract, retain and motivate qualified directors.Directors. If appropriate, the Nominating and Governance Committee will recommend changes to the Board regarding non-employee directorDirector compensation and benefits.
Non-employee Director Compensation Table. The table below sets forth cash and equity compensation (including deferred compensation) paid to our non-employee directorsDirectors with respect to their Board service in the fiscal year ended November 30, 2010.2011.
20102011 Director Compensation
Director | Fees Earned or Paid in Cash ($) | Stock Awards ($)(1) | All Other Compensation ($) | Total ($) | Fees Earned or Paid in Cash ($) | Stock Awards ($)(1) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||
Jeffrey S. Aronin(2) | 75,000 | 124,991 | 0 | 199,991 | 75,000 | 124,984 | 0 | 199,984 | ||||||||||||||||||||||||
Mary K. Bush | 75,000 | 124,991 | 0 | 199,991 | 75,000 | 124,984 | 0 | 199,984 | ||||||||||||||||||||||||
Gregory C. Case(2) | 100,000 | 124,991 | 0 | 224,991 | 100,000 | 124,984 | 0 | 224,984 | ||||||||||||||||||||||||
Robert M. Devlin | 75,000 | 124,991 | 0 | 199,991 | 75,000 | 124,984 | 0 | 199,984 | ||||||||||||||||||||||||
Cynthia A. Glassman | 75,000 | 124,991 | 0 | 199,991 | 75,000 | 124,984 | 0 | 199,984 | ||||||||||||||||||||||||
Richard H. Lenny | 75,000 | 124,991 | 0 | 199,991 | 75,000 | 124,984 | 0 | 199,984 | ||||||||||||||||||||||||
Thomas G. Maheras | 75,000 | 124,991 | 0 | 199,991 | 75,000 | 124,984 | 0 | 199,984 | ||||||||||||||||||||||||
Michael H. Moskow | 75,000 | 124,991 | 0 | 199,991 | 75,000 | 124,984 | 0 | 199,984 | ||||||||||||||||||||||||
E. Follin Smith | 125,000 | 124,991 | 0 | 249,991 | 125,000 | 124,984 | 0 | 249,984 | ||||||||||||||||||||||||
Lawrence A. Weinbach | 175,000 | 124,991 | 0 | 299,991 | 175,000 | 124,984 | 0 | 299,984 |
(1) | Reflects RSUs granted under the Directors’ Compensation Plan described above. Amounts reflect the grant date fair value of the fiscal |
(2) | The amounts listed in the “Fees Earned or Paid in Cash” column were deferred under the Directors’ Voluntary Nonqualified Deferred Compensation Plan. |
(3) | Includes $18,750 listed in the “Fees Earned or Paid in Cash” column that was deferred under the Directors’ Voluntary Nonqualified Deferred Compensation Plan. |
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis focuses on the Company’s Executive Officers who are named in the tables below and who are referred to as our “named executive officers” or “NEOs.” We summarize herein our executive compensation program and objectives and provide an overview of how and why the Compensation Committee of our Board of Directors (the “Committee”) made specific decisions involving our NEOs. We also refer you to our Annual Report on Form 10-K for the year ended November 30, 20102011 for additional information regarding the 20102011 financial results for our Company discussed below.
Executive SummaryOverview of Performance and Compensation
We delivered strongachieved record financial results in fiscal 2011 driven by strong performance across the Direct Banking and Payment Services segments, resulting in:
The highest net income in the Company’s 25-year history—$2,227 million exceeding 2011 Plan target of $981 million, 2010 exceeding our 2010 business plan (“2010 Plan”)net income of $765 million and outperforming mostthe previous highest net income of our competitors despite the challenging economic and regulatory environment. Our executive compensation decisions in 2010 were greatly influenced by the following important factors, each of which is discussed below in more detail:$1,276 million.
• |
|
Total assets growth of 13% year-over-year (“YOY”), driven by organic and acquired non-card assets (especially student loans) and a return to growth in credit card receivables.
Strong credit performance as the Company achieved the lowest delinquency rate for credit card loans over 30 days past due in its 25-year history (2.39%, down from 4.06% in 2010) and much lower charge-off rates than historical Company averages and results for most competitors.
Record Discover card sales volume, which exceeded $100 billion for the first time (as compared to $92.5 billion in 2010), due primarily to an increase in spending by both new and existing customers which was partially due to increased marketing.
Successful execution by management of The Student Loan Corporation acquisition and an additional purchase of student loan assets, furthering our strategy to diversify the balance sheet with the addition of over $5.5 billion of loans that were immediately accretive to earnings.
Payment Services segment transaction volume growth of 16% YOY and pretax income growth of 18%.
Continued commitment to drive value for our shareholders by increasing our dividend and implementing a share buyback program resulting in the repurchase of 18 million shares, or 3%, of our outstanding common stock in 2011.
In fiscal 2011, our NEOs made and effectively managed the execution of key business and strategic decisions that allowed achievement of the results noted above and made meaningful progress against our long-term strategy to diversify our balance sheet and deploy capital to drive strong returns to our shareholders. Furthermore, the Company’s earnings and related returns were among the strongest over our 25-year history even when adjusted for the decreases in loan loss reserves, which contributed to earnings, as the outlook for expected credit losses improved throughout the year. These accomplishments were significant given the slow recovery and the threat of continued volatility in the U.S. and global economy, including a sustained higher level of unemployment, weak consumer confidence, de-leveraging of personal balance sheets and the continued instability in the housing market. In addition, we delivered strong performance despite the continued unfavorable impact to our revenues from the provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”) provisions.
Financial Performance:
Other Performance Factors: Very strong performance against our performance priorities, exceeding or meeting most goals, including charge-offs and sales growth; strong performance against competitors in net charge-offs and receivable growth.
The compensation that our senior executives earned for 2011 reflected this strong Company |
Balanced Risk and Reward: We enhanced the link between our incentive compensation program and our risk management programs to ensure that our incentive compensation program appropriately balances risk and reward and does not encourage imprudent risk-taking.
Factors Affecting Compensation Decisions
While our Committee subjectively considers a number of factors when assessing performance for purposes of making compensation decisions, in 2010 the Committee primarily considered Company net income. We use net income because it is one of the key drivers of EPS and is a representative measure that is most directly tied to
the return to our common shareholders. Net income is also a balanced measure that focuses on overall performance to ensure that the executives are focused on the overall returns of the Company and not compensated to drive one measure over another. The Committee also considers other Company-wide financial metrics including ROE, credit performance, growth metrics, impact of legislative and regulatory changes on the business, performance versus competitors and other factors relevant to the year.
2010 compensation decisions were impacted by CPP restrictions. At the beginning of fiscal 2010, the Committee adjusted the mix between fixed and variable compensation and approved a base salary increase for our NEOs with the increase to be paid in the form of Company Common Stock (“Salary Stock”). In making this decision, the Committee considered CPP compensation restrictions, including limits on incentive compensation which meant that only one-third of our NEOs’ compensation could be paid in the form of incentive compensation. The Committee also considered the need to attract, motivate and retain a talented management team and to ensure that our compensation program remains competitive with other companies with which we compete for senior executive talent. Although not required under CPP restrictions, the Committee imposed a holding period requirement on shares of Salary Stock, in order to align executives’ long-term interests with those of shareholders.
For 2010, after consideration of all the aforementioned factors, the Committee made discretionary compensation decisions for each of the NEOs, which are detailed below under “Summary of Pay Decisions.”
During 2010, and following our repayment of the CPP investment, we conducted a comprehensive review of our executive compensation program and made several important changes for fiscal 2011 which further align with our pay-for-performance philosophy. The following table summarizes these key changes affecting our NEOs:
Compensation Program and Objectives
The Company’s 2010 executive compensation program and year-end compensation decisions were built on the following principles:
Pay for Performance—Pay reflects Company, business segment, and individual executive performance;
Competitive Market for Executive Talent—Our compensation is competitive relative to our peers in order to attract and retain a talented executive team; and
Balanced Compensation Structure—We maintain a mix of fixed and variable compensation, which is aligned with shareholder interests and the long-term interests of the Company and appropriately balances risk and reward.
Each of these principles is discussed below.
The Company believes in a pay-for-performance philosophy. The majority of compensation for our NEOs has historically been in the form of year-end bonus, a substantial portion of which is paid in deferred equity. In evaluating Company performance and when making NEO compensation decisions, the Committee considers financial performance as well as performance priorities, relative performance and individual executive performance.
Financial Performance—How well the Company performed compared to its 2010 Plan goals and performance during the previous year. For 2010, the Committee primarily used net income and a combination of the following performance metrics: return on equity, revenue, provision for loan losses and expenses, with primary focus on net income.
Other Performance Factors
In order to accomplish this, in December 2010, the Committee approved two separate LTI awards for all LTI eligible employees, solely applicable to this program transition year. |
The Committee also considersmarket survey data. We do not engage in strict benchmarking; rather, we use competitive market data as a reference point for elements of NEO compensation. For the proxy data, the peer group used in the analysis consists of 16 financial services companies of a similar business nature and revenue size to the Company, from which the Company might expect to draw executive talent. Given that the Company has few direct competitors of similar scope, size and business model, this peer group is somewhat varied in nature and represents: companies that are similar in business and focus primarily on credit card operations, regional financial institutions that have significant credit card and/or loan operations, and data/transaction processing companies. In 2011, the individual performance contributions of each executive, as described in more detail beginning on page 25.
Competitive Market for Executive Talent
The Committee reviewed the companies that met the foregoing criteria, and after evaluating these companies with its independent compensation consultant, approved the adjusted peer group set forth in the table below.
In 2011, the Committee removed three companies from the peer group—Marshall & Ilsley after it was acquired by BMO Financial Group and Total System Services and considered market data from a peer group when approving NEO compensation. We do not engage in strict benchmarking but rather use competitive data as a reference point for elements of NEO compensation. The peer group used in the analysis consists of 19 financial services companies of a similar business nature and revenue size to the Company, from which the Company might expect to draw executive talent. Given that the Company has few direct competitors of similar scope and size, the peer group is somewhat varied in nature and represents: companies that are similar in business and focus primarily on credit card operations, regional financial institutions that have significant credit card and/or loan operations, and data/transaction processing companies. In 2010, the Committee reviewed the companies that met the foregoing criteria, and after evaluating these companies with its independent compensation consultant, approved the adjusted peer group set forth in the table below.
The Committee uses the peer group below for comparisons of all components of the Company’s executive compensation and benefits package. The extraordinary economic environment during recent years caused such data to become less relevant and therefore the Committee reviewed but placed minimal weight on historic pay data from these peer companies. The Committee regularly reviews and adjusts the peer group, consistent with the criteria described above.
In 2010, the peer group consisted of the following companies:
Alliance Data Systems In 2011, the peer group consisted of the following companies:
|
Balanced Compensation Structure
The Committee determines compensation targets for the NEOs (aggregate of base salary, target STI and LTI opportunity) at year-end, based on the performance of the Company and the individual executive performance for the year, while considering compensation levels of other executives in similar roles. The Committee feels that a balance of these three components provides an ideal combination of risk and reward. There is no target bonus amount established for, or communicated to, the NEOs. For 2010, the variable year-end bonus amounts (cash and equity) paid to the NEOs are discretionary amounts determined by the Committee based on its evaluation of the above-referenced financial performance, other performance factors and the individual performance of each executive. The Committee considers peer group and market data in conjunction with the aforementioned factors before making compensation decisions and uses discretion to exercise its judgment instead of solely relying on a formulaic structure, balancing transparency and flexibility to pay appropriately for performance.
For 2010, the Committee, with input from its independent consultant, emphasized equity compensation for NEOs to align the long-term interests of our NEOs with our shareholders. The Committee believes that the use of RSUs that generally vest ratably over a four-year period focuses the executive on the Company’s long-term interests without leading to imprudent risk-taking. The Committee also continues to believe that time-vested RSUs represent an efficient method of delivering long-term equity compensation, generally using fewer shares than other types of equity vehicles while having a reasonably predictable expense impact.
Review of Compensation Policies and Practices Related to Risk Management
In fiscal 2010, the Committee undertook a risk review of the Company’s compensation practices in response to preliminary UST executive compensation regulations applicable to companies participating in the CPP (the “CPP Rules”). As required by these regulations, the Committee met with the Company’s senior risk officer to review employee compensation plans in which all employees (including the NEOs) participate, and to identify whether these arrangements had any features that might encourage unnecessary and excessive risk-taking that could threaten the value of the Company. The Committee considered a number of risk mitigation factors, including the balanced use of time-vesting RSUs and cash, emphasis on overall Company performance in compensation decisions, our robust risk governance and control structure and the Company’s share ownership guidelines, and concluded that these factors provided adequate safeguards that would either prevent or discourage excessive risk taking. A more detailed description of this risk review can be found below under “Compensation Committee Report.”
The Committee also continues to monitor a separate, on-going risk assessment by senior management of the Company’s broader employee compensation practices as part of the Federal Reserve’s regulatory initiative on incentive compensation paid by bank holding companies. Under this initiative, senior Company human resources, risk management, compliance, and legal personnel compiled and analyzed extensive information about the Company’s incentive plans, including plan documents, eligibility criteria, payout formulas and payment history, and held extensive interviews with business line managers to understand how evaluation of business risk affects incentive plan performance measures and compensation decisions.
Following these risk reviews, the Company and the Committee have not identified any risks arising from our compensation policies and practices for our named executives and our employees generally that are, either individually or in the aggregate, reasonably likely to have a material adverse effect on the Company.
Components of Total Compensation
The components of the Company’s executive compensation program are shown in the table below. Each of the components and how decisions were made for each NEO are more fully discussed in the sections following the table.
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| For 2011, the Committee, with input from its independent consultant, emphasized equity compensation for NEOs to align the long-term interests of our NEOs with our shareholders. The Committee believes that the use of RSUs that generally vest ratably over a four-year period, as well as at-risk PSUs tied to two-year Company performance with a one-year additional vesting period pending evaluation against the Company’s risk policy, focuses executives on the Company’s long-term interests without leading to imprudent risk-taking. In addition, the Committee believes that time-vested RSUs and performance-vested PSUs represent an efficient method of delivering long-term equity compensation, generally using fewer shares than other types of equity vehicles while having value that is ultimately tied to Company performance. Review of Compensation Policies and Practices Related to Risk Management In fiscal 2011, the Committee undertook a risk review of the Company’s compensation plans and practices. The Committee met with the Company’s CRO to review employee compensation plans in which all employees (including the NEOs) participate, and to identify whether these arrangements had any features that might encourage excessive risk-taking that could threaten the value of the Company. The Committee considered a number of risk mitigation factors, including the balanced use of time-vested RSUs, performance-vested PSUs and cash, emphasis on The Committee also continues to monitor a Following these risk reviews, the Company and the Committee have not identified any risks arising from our compensation policies and practices for our named executives and our employees generally that are, either individually or in Components of Total Compensation The components of the Company’s executive compensation program are shown in
| We continue to maintain our disciplined approach to benefits and perquisites. We do not provide any benefit plans to our NEOs that are not generally available to other employees, and generally provide only the following limited perquisites to our NEOs: access to the executive suite pantry and the executive gym. In 2011, Mr. Graf, our new CFO, received one-time relocation benefits in connection with his commencement of Role of Chief Executive Officer in | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mr. Nelms, as Chief Executive Officer, discussed each NEO’s overall contribution to Company performance and individual responsibility for business segment, function, and/or strategic goals, and then Mr. Nelms made a corresponding pay recommendation for each NEO. Mr. Nelms was assisted in this process by the Company’s Chief Human Resources Officer. For Messrs. Minetti and Talwar, Mr. Nelms discussed recommendations with Mr. Hochschild, the President and Chief Operating Officer of the Company, prior to presenting the recommendations to the Committee. No NEO, including Mr. Nelms, was involved in any capacity regarding his own pay decisions. The Committee requested input from the Company’s Chief Human Resources Officer, our Corporate Risk Officer and the Committee’s independent consultant regarding the compensation decisions for Mr. Nelms when it considered and approved the compensation of Mr. Nelms. Messrs. Graf, Minetti, Talwar and Guthrie did not have a role in these compensation decisions. Overall Company and Business Segment Performance For 2011, the Committee measured overall Company and business segment performance by focusing primarily on net income and also considering ROE, EPS, total revenue, total provision for loan loss and total operating expenses. Although no set weight is assigned to each of these performance metrics, we believe that net income is the best measure of overall Company performance and, accordingly, this metric had the greatest impact on the overall funding level of incentive compensation in 2011. The Committee also considered growth goals, relative performance measures, risk factors and individual performance. The Committee believes that the actions taken by the Company’s Chief Executive Officer and the other NEOs throughout 2011 contributed greatly to the Company’s results and positioned the Company to take advantage of challenging but improving economic conditions. Furthermore, throughout 2011, the Company continued to benefit from the strategic choices made by the Company’s senior management over the past few years. The following key strategic decisions, among other things, enabled the Company to remain profitable during 2011 and placed the Company in a strong position going forward: Continued conservative approach toward extending credit to new and existing customers, balancing growth with a customer’s ability to pay. Disciplined expense management focused on initiatives that drove asset and revenue growth. Executed growth strategy for private student loans, highlighted by the acquisition of The Student Loan Corporation. Streamlined operations footprint, reduced operating costs and continued to build upon Discover’s position as a service leader. Improved network acceptance, domestically and internationally, through increased merchant and acquirer relationships. Maintained strong capital position (best amongst card issuing competitor peer group) and enhanced governance and control environment focused on meeting regulatory guidance. As discussed above, the primary
The Committee also considered the Company’s progress on core strategic growth goals across the Company and within each segment in making overall, year-end compensation funding decisions. No set weight was assigned to any of these factors and no single growth goal was material to the Committee’s determination of individual compensation; rather the Committee reviewed and subjectively balanced these goals with other factors in the aggregate in determining individual compensation. These growth goals were based on our 2011 Plan, and were intended to be challenging but achievable. The Committee considered the Company’s overall strong performance against growth goals in 2011. The Committee noted an increase in total loans, due in large part to the acquisition of The Student Loan Corporation and the purchase of additional student loans from Citibank, N.A., which added an additional $5.5 billion of student loans to the Company’s loan portfolio. In addition, the Company had improved sales results over 2010 due primarily to an increase in spending by both new and existing customers, partially as a result of the successful implementation of relevant, targeted marketing campaigns. The Committee also noted an increase in transaction volume for the Payment Services segment and the Company’s strong year-over-year performance with respect to 30-day active outlets.
For additional context, the Committee reviews the Company’s relative performance against our largest direct business competitors in the U.S. market in both the Direct Banking and Payment Services segments. Highlights of the 2011 relative performance results considered by the Committee are described in the table below. The Committee reviewed competitor results for trailing four calendar quarters through completion of the third calendar quarter in 2011, since competitor information is only available through the third calendar quarter at the time of the Committee’s decision-making.
David W. Nelms. Mr. Nelms led the Company to significantly exceed goals for the year, including record profits and credit risk management results, despite the continued challenging economic and regulatory environment. Beyond current year results, he has further developed the long-term strategic plan, including measured portfolio expansion and diversification as demonstrated by the continuing and successful integration of The Student Loan Corporation, acquisition of student loan portfolios, and the pending closing of the Home Loan Center acquisition, a subsidiary of Tree.com, Inc. In addition, he continued to improve network acceptance, domestically and internationally, through increased merchant and acquirer relationships. Further, he has ensured that the Company has strong talent to realize its strategic plans, including hiring of both a new CFO and Chief Human Resources Officer to lead the financial and talent elements of the strategic plan. R. Mark Graf. Mr. Graf, who joined the Company in April 2011, quickly and effectively transitioned to his CFO role by successfully engaging with the Company’s management team, the Board, the investor community, and the finance function. He leveraged his background as a banker and his M&A experience to make early and material contributions to the Company’s M&A strategy and initiatives. He has been involved in developing the short and long-term financial and strategic plans with a keen focus on keeping revenue and expense growth aligned. He has developed strategies for effectively using the Company’s capital to maximize shareholder return while maintaining the Company’s strong capital position. Roger C. Hochschild.As President and Chief Operating Officer, Mr. Hochschild delivered record results through rigorous execution of plans and strategies. The Direct Banking business grew credit card loans and exceeded both the receivables and sales volume plans. In addition, the Direct Banking business performance improved with net charge off rate beating plan and lower than most competitors. The Payments business saw strong volume and profit growth. Both the Personal Loan and Student Loan product lines expanded significantly. The Student Loan Corporation was acquired and is being successfully integrated and the subsequent loan portfolio acquisitions added incremental growth to the portfolio. Mr. Hochschild continued to lead Company-wide expense reduction initiatives as well as Carlos Minetti.Mr. Minetti delivered both organic and acquisition growth across banking products, decreasing operating costs and building the Company’s position as a service leader. He grew direct-to-consumer deposits to become the Company’s largest funding source. He significantly expanded the Personal Loans portfolio with below target credit losses. He achieved target levels of Student Loan profitability and is in the process of successfully integrating The Student Loan Corporation and additional loan portfolio acquisitions to become a top 3 lender in the market. Mr. Minetti prepared the Company for expansion into the mortgage origination business with the pending acquisition of Home Loan Center, a subsidiary of Tree.com, Inc. In addition, he reduced operating costs by consolidating to a single processing center and continues to build Discover’s position as a service leader. Harit Talwar. Mr. Talwar led efforts as Discover card returned to growing loans ahead of all major bankcard competitors. He significantly increased the number and quality of new accounts booked, while reducing the average cost per account. He grew the customer base as well as increased wallet share of spend, receivables and overall sales. He strengthened rewards leadership with new on-line redemption programs as well as significantly increased enrollments in certain key programs. He strengthened online leadership by implementing a 3-year roadmap leveraging increased cardmember demand for online, mobile and social channels. He also achieved greater customer engagement in self-service, and our market share in on-line sales. Mr. Talwar continues to increase the Company’s brand prominence through advertising and sponsorships. Roy A. Guthrie. Mr. Guthrie successfully completed his tenure as CFO, transitioned to Mr. Graf, and continued to assist with critical Company initiatives following completion of his role as CFO in 2011. He was instrumental in long-term planning as well as financial execution and management to achieve our record 2011 results. In addition, he played a key role in due diligence regarding acquisition targets. Mr. Guthrie retired from the Company in early 2012. 2011 compensation decisions
The table above incorporates LTI awards in the fiscal year to | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
We continue to maintain our disciplined approach to benefits and perquisites. We do not provide any benefit plans to our NEOs which are not generally available to other employees, and generally provide only limited perquisites to our NEOs, including access to the executive pantry and the executive gym. We have also continued our practice of not entering into individual employment agreements with our NEOs.
Role of Chief Executive Officer in Compensation Decisions
Our Chief Executive Officer and Chief Human Resources Officer met with the Committee several times to discuss preliminary compensation decisions for the NEOs and senior officers. The Committee also met with its
independent compensation consultant to discuss compensation recommendations and decisions. This allowed for ample review and consideration of 2010 Company, business segment and individual performance and resulting 2010 compensation decisions. The role of the NEOs in compensation decisions is more fully discussed below and the role of the Committee and its consultant are discussed in “Executive and Director Compensation.” The decisions of the Committee for 2010 performance are reflected below in “Summary of Pay Decisions.”
Mr. Nelms, as Chief Executive Officer, discussed each executive’s overall contribution to Company performance and individual responsibility for business segment, function, and/or strategic goals, and then Mr. Nelms made a corresponding pay recommendation for each NEO. Mr. Nelms was assisted in this process by the Company’s Chief Human Resources Officer. For Messrs. Minetti and Talwar, Mr. Nelms discussed recommendations with Mr. Hochschild, the President and Chief Operating Officer of the Company, prior to presenting the recommendation to the Committee. Mr. Nelms was not involved in any capacity regarding his own pay decisions. The Committee requested input from the Company’s chief human resources officer and the Committee’s independent consultant regarding the compensation decisions for Mr. Nelms and met in an executive session, without any management present, when it considered and approved the compensation of Mr. Nelms. Messrs. Guthrie, Minetti and Talwar did not have a role in these compensation decisions.
Overall Company and Business Segment Performance
For 2010, the Committee measured overall Company and business segment performance by focusing primarily on net income and also considering return on equity, total revenue, total provision for loan loss, and total operating expenses. Although no set weight is assigned to each of these performance metrics, we believe that net income is the best measure of overall Company performance and, accordingly, this metric had the greatest impact on the overall funding level of incentive compensation in 2010. The Committee also considered performance priorities, relative performance measures and individual performance.
The Committee believes that the actions taken by the Company’s Chief Executive Officer and the other NEOs throughout 2010 contributed greatly to the Company’s results and positioned the Company well to take advantage of improving economic conditions. Furthermore, throughout 2010, the Company continued to benefit from the strategic choices made by the Company’s senior management over the past few years. In addition to the Company’s longstanding rigorous credit and balance sheet management practices, the following key strategic decisions, among other things, enabled the Company to remain profitable during 2010 and placed the Company in a strong position going forward:
Tightened new account acquisition criteria and reduced the marketing expenditures accordingly
Limited credit line increases and balance transfer offers to existing customer base
Significantly reduced exposure around contingent liability and implemented pro-active credit line decrease programs to the riskiest populations
Actively reduced overall cost structure to reflect an outlook that included low or no growth in our asset businesses
As discussed above, the primary factor which our Compensation Committee considered in making 2010 compensation decisions was the Company’s financial results which are summarized in the table below. The primary financial result considered for purposes of our 2010 compensation decisions was net income. In 2010 our net income was $765 million, exceeding both our 2009 net income of $130 million (excluding after-tax antitrust litigation settlement proceeds and certain related expenses) and our 2010 Plan target of $158 million. Also material to the Compensation Committee’s decision in 2010 was the Company’s return on equity of 12% in 2010, which
exceeded a return of 2% in 2009 (excluding after-tax antitrust litigation settlement proceeds and certain related expenses) and our 2010 Plan target of 3%. Additionally, the Compensation Committee considered the 2010 financial metrics set forth below. No set weight is assigned to any of these metrics and no single metric is material to the Compensation Committee’s determination of any individual’s compensation; rather the Compensation Committee reviews and subjectively balances these metrics in the aggregate in determining individual compensation.
Revenue of $6,658 million which was only 3% lower than 2009 revenue (excluding after-tax antitrust litigation settlement proceeds), despite a lower receivable base and the unfavorable impact of the CARD Act on revenue and fees.
Provision for loan loss of $3,207 million which benefited from improved credit performance and lower reserve requirements during 2010, and which was favorable to 2009 results by 26% and was better than expected when compared against our 2010 Plan.
Successful continued focus on controlling expenses, while investing in growth with total operating expense held essentially flat year-over-year at $2,206 million.
2009 | 2010 | Change | ||||||||||
Total Revenue(1)(2)(3) | $ | 6,839M | $ | 6,658M | (3 | %) | ||||||
Total Provision for Loan Loss(2) | $ | 4,358M | $ | 3,207M | (26 | %) | ||||||
Operating Expense(1)(4) | $ | 2,222M | $ | 2,206M | (1 | %) | ||||||
Net Income(1) | $ | 130M | $ | 765M | 487 | % | ||||||
ROE(1) | 2 | % | 12 | % | 1000 | bps |
The Committee also considered the Company’s progress on core strategic performance priorities across the Company and within each segment in making overall, year-end bonus funding decisions. No set weight is assigned to any of these factors and no single performance priority is material to the Compensation Committee’s determination of individual bonuses; rather the Committee reviews and subjectively balances these priorities in the aggregate in determining individual bonuses. These performance priorities are based on our 2010 Plan, and are intended to be challenging but achievable.
The Committee considered the Company’s overall strong performance against performance priorities in 2010. The Committee noted a reduction in total loans as a result of the CARD Act and the sale of federal student loans and improved sales results over 2009 due to improved consumer spending, higher gas prices and growth in active outlets. The Committee also noted an increase in transaction volume for the Payment Services segment which was higher than anticipated and the Company’s strong performance with respect to 30-day active outlets and direct-to-consumer deposits.
2009 | 2010 | Change | ||||||||||
Total Loans(1) | $ | 50.9B | $ | 48.8B | ($2.0B | ) | ||||||
Total Discover Card Sales | $ | 87.5B | $ | 92.5B | $ | 5.0B | ||||||
Transaction Volume in Payment Services | $ | 141.1B | $ | 152.1B | $ | 11.0B | ||||||
Domestic 30-Day Active Merchant Outlets | 2.5M | 2.6M | 0.1M | |||||||||
Direct to Consumer / Affinity Deposits | $ | 12.6B | $ | 20.6B | $ | 8.0B |
For additional context the Committee reviews the Company’s relative performance against our largest direct business competitors in the U.S. market in both the Direct Banking and Payment Services businesses. Highlights of the 2010 relative performance results considered by the Committee are described in the table below. The Committee reviews competitor results through completion of the third calendar quarter since competitor information was only available through the third calendar quarter at the time of the Committee’s decision-making.
|
|
|
|
The Committee considers individual performance in making final compensation decisions for each NEO, both as it relates to their specific objectives as well as their contributions to the success of the overall enterprise. The Committee believes this approach optimizes the benefit to shareholders versus an approach that focuses only on specific objectives in one area while not considering the best overall results to shareholders. Summaries of individual performance and contributions are described below.
David W. Nelms. Mr. Nelms led the Company to significantly exceed the goals of the 2010 Plan during a challenging economic and regulatory environment. He established a strong and positive relationship with regulators as a bank holding company and maintained open and productive dialogue on key issues. He established and communicated a new strategy (direct banking and payments) with a well grounded five-year strategic plan to grow the Company through organic and inorganic channels, as demonstrated through our acquisition of The Student Loan Corporation. Under Mr. Nelms’ leadership, the Company was able to repay its CPP obligations, while strengthening its balance sheet and capital and liquidity positions. He retained a key leadership team and produced business results while responding successfully to numerous challenges including the CPP, CARD Act, and the economy.
Roy A. Guthrie.Mr. Guthrie prudently and proactively managed the Company’s capital and liquidity and oversaw the reduction of risk and the Company’s balance sheet, which allowed the Company to repay its CPP obligation and still maintain a strong balance sheet and capital and liquidity positions. He also implemented an enhanced financial planning and analysis process and played a key leadership role supporting the Company’s M&A activities, including the acquisition of The Student Loan Corporation. In addition, he managed capital market volatility effectively while continuing to build out the Accounting and Treasury functions. Mr. Guthrie leveraged line of business planning and analysis groups to significantly enhance the strategic planning effort for the Company.
Roger C. Hochschild.Mr. Hochschild played a critical role in developing plans, targets, and strategies to surpass most 2010 Plan metrics despite a very challenging environment. The Payments Services segment surpassed profit goals and achieved key objectives for the Diners Club integration. He led the continued successful growth of deposit, personal and student loan products with the added achievement of the acquisition of The Student Loan Corporation. Mr. Hochschild continued to lead companywide expense reduction initiatives, more directly drove performance of his team and improved cross-functional goal alignment. He personally drove key strategies across a wide range of areas and was a key architect of the five-year strategic plan.
Carlos Minetti.Mr. Minetti had a very strong year including making significant progress across all banking product goals and being on track or ahead of 2010 Plan for both volumes and profitability (deposits, student loans, personal loans). He has built Discover into a “top 5” player in three direct banking products and played a leading role in The Student Loan Corporation acquisition. He played a key role in maintaining industry-leading loss rates through rigorous management and implementation of new strategies in collections and recovery. Mr. Minetti continues to be a key player in overall firm strategy with a particular focus on issues related to risk management and finance.
Harit Talwar. Mr. Talwar made strong progress across all card volume goals, ahead on sales, and has personally driven initiatives to exceed 2010 Plan on receivables growth. Yield and revenue margin have held up well, the result of significant efforts across 2009 and 2010 to prepare for the CARD Act impact. Mr. Talwar has also made significant progress on advertising and increasing the prominence of the Company’s brand. He has had a significant impact in his two years as President—U.S. Cards reflecting his central role in driving the growth and profitability of the Company’s core card business despite a shifting regulatory environment.
As noted in our 2009 proxy statement, we became a participant in the CPP in 2009. On April 21, 2010, we repaid the UST investment in our Company and ceased to be a participant in the CPP. During the portion of fiscal 2010 that we were a participant in the CPP, we adopted certain requirements for executive compensation and governance imposed on all CPP participants. The CPP Rules included, among other requirements, that:
We could not pay or accrue compensation for NEOs and the next twenty most highly compensation employees (other than under employment contracts in effect as of February 11, 2009) in the form of bonuses, retention awards, or incentive compensation, including stock options and equity awards, except that:
Due to |
In addition, as part of the restructuring, the Committee reduced the base salaries of the NEOs, and introduced PSUs with an enhanced clawback feature. These changes were made to further reinforce the Company’s objective of more closely aligning executive compensation with Company performance and increasing the accountability of our NEOs to shareholder interests while appropriately balancing risk and reward.
|
We could not provide any severance payment to anylong-term Company performance. The key features of our NEOs or any of the next five most highly compensated employees;
We could not deduct for tax purposes compensation paid to any NEO in excess of $500,000, regardless of whether it was performance-related or otherwise; and
We were required to adopt enhanced recoupment or “clawback” policies, requiring NEOs and other affected employees to forfeit compensation awarded based on materially inaccurate financial information or any other materially inaccurate performance-metric criteria.
Following our repayment of the CPP investment, we were generally no longer subject to the foregoing restrictions.
As discussed above, our 2010 compensation decisions were closely tied to our 2010 financial performance. Improvement in Company performance exceeded increases in compensation for the NEOs. The breakdown by component of NEO pay is summarized in the following table.
2010 | ||||||||||||||||||||||||||||
2008 Total | 2009 Total | Cash Salary | Stock Salary | Cash Bonus | Equity Bonus | Total | ||||||||||||||||||||||
David W. Nelms | $ | 5,750,000 | $ | 3,274,996 | $ | 1,000,000 | $ | 3,550,000 | $ | 1,700,000 | $ | 4,650,005 | $ | 10,900,005 | ||||||||||||||
Roy A. Guthrie | $ | 2,674,997 | $ | 1,574,986 | $ | 750,000 | $ | 1,150,000 | $ | 1,000,000 | $ | 1,200,001 | $ | 4,100,001 | ||||||||||||||
Roger C. Hochschild | $ | 4,599,996 | $ | 2,174,993 | $ | 800,000 | $ | 2,100,000 | $ | 1,290,000 | $ | 2,879,998 | $ | 7,069,998 | ||||||||||||||
Carlos Minetti | $ | 2,499,999 | $ | 1,500,000 | $ | 750,000 | $ | 1,000,000 | $ | 980,000 | $ | 1,070,005 | $ | 3,800,005 | ||||||||||||||
Harit Talwar | — | — | $ | 750,000 | $ | 1,000,000 | $ | 880,000 | $ | 1,070,005 | $ | 3,700,005 |
The table above incorporates the equity incentive compensation actually awarded each December for the recently completed fiscal years. These amounts vary from those shown in the 2010 Summary Compensation Table on page 37, as the amounts shown in the 2010 Summary Compensation Table include equity values based on award date. Specifically, because we grant equity incentive awards for a given fiscal year after completion of that fiscal year, the equity bonus for fiscal 2009 performance was granted immediately following the end of fiscal 2009 in fiscal 2010 and is thus reported in this year’s “2010 Grants of Plan-Based Awards Table” on page 38 of this proxy statement. Similarly, the equity bonus for 2010 performance (which is shown above) will be reported in the “2011 Grants of Plan-Based Awards” table in our proxy statement to be filed in 2012.
We provide our NEOs and other executives with a market competitive annual base salary to attract and retain an appropriate caliber of talent for the position. We generally review base salaries for the NEOs and other executives annually in November and December and determine whether to make increases or decreases based on changes in our competitive market (the peer group companies), individual performance, and experience in position.
In December 2009, the Committee approved an increase in the base salaries of our NEOs for fiscal 2010 with the increase to be paid in the form of Salary Stock. In making this decision, the Committee considered that, in order to attract, motivate and retain talented management with proven skills and experience, we must offer a compensation program that compares favorably with those offered by other large financial services and non-financial services companies with which we compete for a limited pool of highly qualified senior executive talent. The Committee, in consultation with its then independent compensation consultant, Semler Brossy, also considered competitive compensation data, historical total compensation levels and environmental factors, including the pay design of other CPP participants, to set base salaries. In light of these considerations, the Committee approved the use of Salary Stock to pay the base salary adjustment to align our NEOs’ interests with the long-term interests of shareholders and the Company. Subject to the NEO’s continued employment with the Company, the Salary Stock was paid to each NEO in installments, net of applicable tax withholdings and deductions, on each of the Company’s regular pay dates (“Pay Date”) beginning with the pay period ending on January 10, 2010, and continuing consistent with the Company’s established payroll schedules up to and including the pay period ending on November 28, 2010.
Although the CPP Rules do not impose any holding period or transfer restrictions on Salary Stock received, the Committee imposed transfer restrictions on the Salary Stock in order to further align the interests of executives with the longer term interests of shareholders and the Company. Salary Stock is subject to restrictions
on transfer that lapse upon the dates set forth in the following schedule: (i) June 30, 2011 with respect to Salary Stock awarded on Pay Dates from January 15, 2010 to April 9, 2010; (ii) June 30, 2012, with respect to Salary Stock awarded on Pay Dates from April 23, 2010 to August 13, 2010; and (iii) June 30, 2013, with respect to Salary Stock awarded on Pay Dates from August 27, 2010 to December 3, 2010. Salary Stock included a right to receive dividend payments and, as required by the CPP Rules, was fully vested on the applicable Pay Date. Payment of Salary Stock has been discontinued for fiscal 2011 and base salaries for 2011 were reduced as discussed below in “2011 Executive Compensation Program Changes and Outlook.”
Cash:As one portion of our variable year-end bonus, we have historically provided the opportunity for our NEOs and other executives to earn a market competitive annual cash bonus award based on financial performance, other performance factors and individual performance as discussed above in “2010 Decision Making Process.” This opportunity is provided to motivate executives to achieve our annual business goals, to attract and retain an appropriate caliber of talent for the position, and to recognize that similar annual cash awards are almost universally provided at other companies with which we compete for talent. Annual cash bonus awards for NEOs were suspended, during our participation in the CPP, as required by the CPP Rules.
Equity: Our NEOs and other executives were eligible to earn a long-term equity incentive award subject to the limitations imposed by the CPP Rules. We provide this opportunity to motivate executives to make decisions that focus on the long-term, sustainable growth of our Company and thus increase shareholder value, to attract and retain an appropriate caliber of talent for the position, and to recognize that similar long-term equity incentives are almost universally provided at other companies with which we compete for talent. The equity bonus for 2010 was awarded in the form of RSUs that are subject to a four-year time-based vesting requirement.
When making year-end bonus decisions for 2010, the Committee primarily considered Company financial performance and also considered business segment performance, Company performance metrics relative to its peers, competitive market data and individual performance. After a thoughtful review of this information and after consideration of CPP Rules, the Committee made a discretionary judgment on appropriate 2010 compensation for each of the NEOs. See “2010 Decision Making Process” above for more details on the factors considered by the Committee in reaching its conclusions. In compliance with the CPP Rules, the NEOs did not receive a cash bonus award for the period during which we participated in the CPP. See “2010 Decision Making Process—CPP Compensation Restrictions” above for more detail on the CPP compensation restrictions.
2011 Executive Compensation Program Changes and Outlook
On December 10, 2010, the Committee restructured the compensation program for the NEOs by reducing base salaries, and introducing performance stock units with a clawback feature. These changes were made to further reinforce the Company’s objective of more closely aligning executive compensation with Company performance, while appropriately balancing risk and reward.
As a result of these structural changes, after the above discussed grant of incentive equity and cash compensation for 2010 performance, NEO compensation for 2011 will consist of four key components—base salary, short-term incentive cash, and a long-term incentive program consisting of PSUs and RSUs—with a significant portion of total compensation (PSUs and RSUs) tied to long-term Company performance. Under the restructured compensation program, incentive equity compensation will be granted on a prospective basis at the beginning of the performance period (as opposed to being awarded following the completion of a performance period) as a way of motivating desired executive behaviors and aligning compensation with the long-term
interests of shareholders. The Company also introduced an enhanced clawback for PSUs to further align the accountability of our NEOs to shareholder interests. The key changes to our compensation program are summarized below.
Highlights
Reduction in Base Salaries.For 2011, the Company has reduced the base salary (including the elimination of Salary Stock) of our NEOs. The following table shows the base salaries which are expected to be paid to our NEOs in fiscal 2011 compared to 2010 base salaries (cash and stock):
2010 Base Salary | 2011 Base Salary | |||||||||||||||
Name | Cash | Stock | Total | Cash Only | ||||||||||||
David W. Nelms | $ | 1,000,000 | $ | 3,550,000 | $ | 4,550,000 | $ | 1,000,000 | ||||||||
Roy A. Guthrie | $ | 750,000 | $ | 1,150,000 | $ | 1,900,000 | $ | 650,000 | ||||||||
Roger C. Hochschild | $ | 800,000 | $ | 2,100,000 | $ | 2,900,000 | $ | 750,000 | ||||||||
Carlos Minetti | $ | 750,000 | $ | 1,000,000 | $ | 1,750,000 | $ | 650,000 | ||||||||
Harit Talwar | $ | 750,000 | $ | 1,000,000 | $ | 1,750,000 | $ | 650,000 |
We provide our NEOs and other executives with a market competitive annual base salary to attract and retain an appropriate caliber of For 2011, the Company reduced the base salaries of our NEOs, including the elimination of base salary paid in the form of Common Stock (“Salary Stock”). Salary Stock was provided to NEOs in 2010 after the Committee’s consideration of compensation restrictions connected with the Company’s participation in the U.S. Treasury’s Capital Purchase Program (“CPP”) and the need to attract, motivate and retain a talented management team, ensuring that our compensation program remained competitive with other companies with which we competed for senior executive talent. The following table shows the base salary rates for our NEOs in fiscal 2011 compared to 2010:
In 2011, we continued to offer our NEOs the opportunity to earn a market competitive annual cash award based on financial performance, other performance and risk factors and individual performance. Starting in 2011, we established target STI opportunities for the When making year-end STI decisions for 2011, the Committee primarily considered Company financial performance, business segment performance, other performance and risk factors, competitive market data and individual performance. After a thoughtful review of this information, the Committee made a discretionary judgment on appropriate 2011 STI compensation for each of the NEOs. See “2011 Decision Making Process” above for more details on the factors considered by the Committee in reaching its conclusions. Starting in 2011, the Company awarded PSUs in addition to RSUs as part of its LTI program. This shift was made to better align NEO interests with the long-term interests of the Company and of its shareholders. We established a target LTI value for the NEOs, represented as a percentage of their base salaries. In addition, we established a target PSU and RSU mix as a percentage of the total target LTI of each NEO. The PSU and RSU grants were made at the beginning of the 2011 fiscal year in December 2010. The majority of the NEOs 2011 LTI award consisted of PSUs which were granted under the Company’s Amended and Restated 2007 Omnibus Incentive Compensation Plan (the “Omnibus Incentive Plan”) and replaced a portion of the awards that were historically granted in the form of time-vested RSUs. Under this program, PSUs will generally vest and |
Enhanced Clawback: The Company instituted a clawback that will allow us to reclaim PSU compensation for up to three years if the Company restates its financial statement due to material noncompliance with financial reporting requirements.
Short-Term Incentive
In 2011, we will continue to offer our NEOs the opportunity to earn a market competitive annual cash award based on financial performance, other performance factors and individual performance. Starting in 2011, we have established a target short-term incentive for the NEOs, represented as a percentage of their base salaries. These targets were communicated to the NEOs at the beginning of the 2011 fiscal year. The Committee believes establishing targets is more representative of prevalent market practice and will provide the NEOs greater clarity and motivation to achieve business goals. Net income will be the primary factor that funds the incentive pool, within a framework pre-established by the Committee. The Committee will then make a discretionary adjustment to funding after evaluation of other performance factors such as charge-offs and relative risk performance. If net income results are above or below the set framework, the Committee will maintain discretion to determine the appropriate funding level. The Committee believes this provides the right balance between transparency and flexibility to adjust for extraordinary circumstances that positively or negatively affect net income, and will ensure that pay is commensurate with performance. The short-term incentive opportunity is provided to motivate executives to achieve our annual business goals, to attract and retain an appropriate caliber of talent for the position, and to recognize that similar annual cash incentive awards are almost universally provided at other companies with which we compete for talent.
Long-Term Incentive
Starting in 2011, the Company is awarding PSUs and RSUs as part of its long-term incentive program. This shift was made to better align NEO interests with the long-term interests of the Company and of its shareholders. We have established a target long-term incentive for the NEOs, represented as a percentage of their base salaries. In addition, we have established a target PSU and RSU mix as a percent of the total long-term incentive target of each NEO. The PSU and RSU grants were made at the beginning of the 2011 fiscal year. Please see below for further details on the PSUs and the RSUs.
Performance Stock Unit Program
The PSUs were granted under the Company’s Amended and Restated 2007 Omnibus Incentive Compensation Plan and will replace a portion of the awards that were historically granted in the form of time-vested RSUs. Under this program, PSUs will generally vest and convert to shares of Company Common Stock if and to the extent the Company performs against a predetermined Company performance goal over a two year period, the executive remains employed by the Company for three years from the beginning of the performance period (with exceptions for certain termination events)(with exceptions for certain termination events as detailed below), and are subject to an evaluation of compliance with the Company’s risk policy at the end of the third year. The performance period begins on December 1, 2010 and ends on November 30, 2012 (the “Performance Period”“). The EPS performance target is established during the annual Plan process and incorporates a degree of stretch that is intended to push the Company and the NEOs to achieve higher performance within the Company’s risk framework. In this way, target PSU payout will be achieved if the Company meets its Plan goals. Maximum and threshold performance are each expected to be infrequent in occurrence. Participants will receive no portion of the award if the minimum performance threshold is not met. If the Company exceeds the target performance hurdles, the NEO can potentially earn an award in excess of the target, number, up to a maximum of two times the target award. Any shares received upon conversion of these PSUs will be subject to the share ownership guidelines for senior executives. In addition, the Company instituted a clawback that will allow the Company to reclaim PSU compensation for up to three years if the Company restates its financial statement due to material noncompliance with financial reporting requirements. The awards will receive dividend equivalents in cash which will accumulate and pay out, if at all, if and when the underlying shares are paid to the NEOs.
The purpose of this grant is to further reinforce the NEO’s accountability for the Company’s future financial and strategic goals by tying a greater portion of compensation directly to the Company’s earnings per shareEPS and ultimately the Company’s stock price. The following PSUs were awarded to the NEOs:
| ||||
| ||||
| ||||
| ||||
| ||||
|
To the extent the NEO voluntarily terminates from the Company or is terminated for cause prior to the scheduled vesting date, other than as described below, none of the PSUs will vest and the entire award will be forfeited. In certain instances of a termination of the NEO’s employment prior to the scheduled vesting date, including due to: (i) involuntary termination such as a reduction in force or elimination of the executive’s position, provided that a customary release agreement is executed or (ii) a retirement, death or disability, a pro-rata portion of the PSUs will vest and convert to shares following the conclusion of the vesting period. In the event of a change in control of the Company during the first year of the Performance Period,performance period, the award will be converted to cash at target performance and paid out according to the vesting schedule or sooner in the event of a qualified termination following the change in control event. In the event of a change in control of the Company during the second year of the Performance Period,performance period, performance will be measured through the last day of the Company’s quarter preceding the change in control and the award will then be converted to cash and paid out according to the vesting schedule or sooner in the event of a qualified termination following the change in control event. TheIn addition, PSUs are subject to certain restrictive covenants. The awards will receive dividend equivalents in cash which will accumulatecovenants including non-competition, non-solicitation and pay out, if at all, when the underlying shares are paid to the NEOs and to the extent the shares are paid.confidentiality restrictions.
A portion of the equityLTI grant for 2011 consistsconsisted of RSUs. These RSUs generally vest and convert ratably over a four-year period and are subject to market risk tied to the Company stock price. The RSUs are now granted at the beginning of each year, but otherwise contain terms and conditions which are substantially similar to awards the Company previously granted at the end of the year for prior year performance. The Committee feels that RSUs ensure that the interests of senior executives are directly aligned with the long-term interests of the Company and its shareholders. The senior executive
Vesting of RSUs will forfeitbe accelerated in the award if heevent of termination of the executive’s employment (i) in connection with a change in control, (ii) in the event of the executive’s death or she is terminateddisability, (iii) in the event of the executive’s eligible retirement, or otherwise leaves(iv) involuntary termination such as a reduction in force or elimination of the Company prior to the award vesting (with exceptions for certain termination events).
executive’s position, provided that a customary release agreement is executed. Unvested RSUs will be cancelled in the event of a termination of employment for any other reason. RSUs include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Company common stockholders. Awards are subject to certain restrictive covenants including non-competition, non-solicitation and confidentiality restrictions.
The Committee feels that emphasis on long-term equity compensation should be commensurate with level in the organization, so as to appropriately motivate the individuals with the most impact on driving the success of the organization and creating shareholder value. Therefore, for 2011, the Committee determined that 67% of the CEO’s target compensation and, on average, 58%57% of the other NEOs’ target compensation, willshould be in the form of long-term equity compensation.compensation, a majority of which is paid in PSUs.
2012 Executive Compensation Program Outlook
The Committee and the Company anticipate that the financial services industry will continue to face significant challengescontinued volatility in 2011.the U.S. and global economies in 2012 and will also be subject to uncertainty from potential impacts of ongoing regulatory reform. Recognizing these factors, the Company has maintained very strong capital levels and high levels of liquidity, in addition to a rigorous approach to risk management and expense control. The Committee will continue to focus on the achievement of key financial and strategic business goals and monitor the compensation program to ensure it aligns the interests of our NEOs with those of our shareholders and our long-term goals while avoiding unreasonable risk. In light of the continued alignment of our compensation program with the Company’s strategic goals, we have maintained the changes implemented in 2011, as detailed above, for 2012.
Other Arrangements, Policies and Practices Related to Our Executive Compensation Program
The Committee maintains share ownership guidelines for NEOs and other executives, and the Nominating and Governance Committee maintains guidelines for Directors. The guidelines recommend that the following multiples of annual cash base salary or, in the case of our Directors, annual retainer, be held at the close of each fiscal year:
Participants | Recommended Share Ownership (as Multiple of Cash Base Salary or Annual Retainer) | |||
Director | 5X | |||
CEO/President | 5X | |||
Executive Committee (including all other NEOs) | 3X |
Stock to be counted toward ownership targets includes actual Common Stock including stock owned in “street” accounts, unvested restricted stock units, and Common Stock held in the Company’s 401(k) plan. The guidelines provide that recommended ownership must be attained within five years of hireappointment (or plan inception, if later). To monitor progress toward meeting the guidelines, the Compensation Committee reviews current executive ownership levels at each November meeting, ahead of year-end executive compensation decisions. The Nominating and Governance Committee reviews Director ownership levels. Holdings will beare calculated using the average stock price for the ten trading days prior to the November meeting. If a NEO or other executive is not on schedule to meet guidelines, the Committee may grant a larger portion of the NEO’s
year-end award in equity. Share ownership levels are calculated and communicated annually to the Compensation Committee, including all stock holdings of Directors and executive officers. Under Company policy, executives are also prohibited from engaging in selling short or trading in derivatives with Company securities. These policies and guidelines tie a significant portion of our executive officers’ compensation directly to the Company’s stock price.
As of the close of the fiscal 2010,2011, using the ten-day average stock price prior to November 30, 2010,2011, the following multiples of cash base salary areis held by each of our NEOs:
Executive Officer | Required Multiple | Actual Multiple at Fiscal | ||||||
David W. Nelms | 5X | |||||||
R. Mark Graf(1) | 3X | 2X | ||||||
Roger C. Hochschild | 5X | 39X | ||||||
Carlos Minetti | 3X | 17X | ||||||
Harit Talwar | 3X | 12X | ||||||
Roy A. Guthrie | 3X | |||||||
| ||||||||
| ||||||||
|
(1) | Mr. Graf became subject to the guidelines on his effective date of appointment of April 11, 2011 and has until April 11, 2016 to attain the required multiple. |
The Company offers twotax-qualified retirement programs to all employees, including NEOs, that are intended to provide post-retirement benefits. The programsNEOs are the active Discover 401(k) Plan and the frozen Discover Pension Plan, which was frozen effective December 31, 2008.not eligible for any supplemental retirement benefits.
The Discover 401(k) Plan is structured with the intention of qualifyingand Discover Pension Plan are both designed to qualify under Section 401(a) of the Internal Revenue Code (“IRC”). UnderAdditional information regarding the Company contributions to the Discover 401(k) Plan is provided in the footnotes to the 2011 Summary Compensation Table. Additional information regarding the Company contributions to the Discover Pension Plan is provided after the 2011 Pension Benefits Table.
Executive Change in Control Severance Policy and Severance Pay Plan
The Company provides severance protection to our NEOs and other executives under a Change in Control Severance Policy. This policy contains a double trigger, meaning that the NEO will only receive benefits in the event of an involuntary termination (without just cause or voluntary resignation for good reason or death or disability) within two years following or six months prior to a change in control. We provide this protection to optimally align the interests of shareholders and executives, and to attract and retain an appropriate caliber of talent for the position. Further, similar change in control severance protections are commonly provided at other companies with which we compete for talent. Our Change in Control Severance Policy for executives, including our NEOs, was approved by the Compensation Committee on September 21, 2007 and amended on June 23, 2008 to comply with new tax laws. In 2011, management conducted a review of market competitive practices with the Committee resulting in two amendments. On March 1, 2011, the Change in Control Severance Policy was amended to eliminate tax gross-ups for new employees; on August 1, 2011, it was amended to eliminate eligibility below a certain employee level.
The Company sponsors a broad-based Severance Pay Plan to provide severance benefits to eligible employees, including NEOs who are involuntarily terminated (without cause in connection with a workforce reduction, closure or other similar event). We provide this benefit to offer employees security in the event of an unanticipated job loss.
The Change in Control Severance Policy and the Severance Pay Plan and the estimated payments for each of our NEOs under both are detailed in the “2011 Potential Payments Upon a Termination or Change in Control Table” below.
Accounting and Tax Information
Section 162(m) of the IRC generally disallows a tax deduction to public companies for compensation in excess of $1 million per year paid to the CEO or other employee who is a NEO for the tax year by reason of being among the three highest compensated officers for the tax year (other than the CEO or the CFO). Certain compensation, including “performance-based compensation,” may qualify for an exemption from the deduction limit if it satisfies various technical requirements under Section 162(m). With respect to our annual incentive awards, in January 2011, the Compensation Committee approved an incentive pool for our executives that is designed to qualify compensation awarded thereunder as “performance-based.” The 2011 incentive pool was 8% of our after-tax net income from continuing operations, with our NEOs allocated no more than a specified percentage of the pool, as follows: Mr. Nelms—29%; Mr. Hochschild—20%; CFO as of 2011 fiscal year end (Mr. Graf)—15%; Mr. Minetti—12%; and Mr. Talwar—12%. Actual amounts of the incentive awards were approved within these limits based on the factors described above.
As a result of our participation in the CPP, compensation in excess of $500,000 earned by any “senior executive officer” while the U.S. Department of the Treasury held an equity or debt interest in the Company will never be deductible, including “performance-based” compensation.
The Compensation Committee views the tax deductibility of executive compensation as one factor to be considered in the context of its overall compensation philosophy. The Committee reviews each material element of compensation on a continuing basis and takes steps to assure deductibility if that can be accomplished without sacrificing flexibility and other important elements of the overall executive compensation program.
The Compensation Committee establishes the compensation program for the CEO and for the other NEOs. The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis of the Company with management and, based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Proxy Statement, its Annual Report on Form 10-K and such other filings with the Securities and Exchange Commission as may be appropriate.
Submitted by the Compensation Committee of the Board of Directors:
Gregory C. Case (Chair)
Jeffrey S. Aronin
Robert M. Devlin
Richard H. Lenny
The narrative, tables and footnotes below describe the total compensation paid for fiscal 2011 to the Chief Executive Officer, Chief Financial Officers and the next three most highly compensated individuals (collectively, theNEOs) who were serving as executive officers of the Company on November 30, 2011, the last day of the fiscal year.
2011 SUMMARY COMPENSATION TABLE
The following table contains information regarding the components of total compensation of the NEOs are permitted to make pre-tax deferrals, limited to 30% of eligible earnings, including base, salary, bonusfor the Company’s fiscal years ended November 30, 2009, November 30, 2010 and commissions, upNovember 30, 2011. The information included in this table reflects compensation earned by the NEOs for services rendered to the IRC Section 401(a)(17) compensation limit ($245,000 in 2010 and 2011)Company during the respective periods.
Executive | Year | Salary (1) | Bonus (2) | 2010 RSUs (A) | 2011 RSUs (B) | 2011 PSUs (C) | Stock Awards (A + B + C) (3) | Non-Equity Incentive Plan Compensation (2) | Change in Pension Value and NQDC Earnings (4) | All Other Compensation (5) | Total | |||||||||||||||||||||||||||||||||
David W. Nelms | 2011 | 1,000,000 | 0 | 4,650,005 | 1,499,996 | 3,478,195 | 9,628,196 | 3,225,000 | 19,950 | 17,150 | 13,890,296 | |||||||||||||||||||||||||||||||||
Chairman & Chief | 2010 | 4,550,000 | 1,700,000 | 2,274,996 | 0 | 10,775 | 17,150 | 8,552,921 | ||||||||||||||||||||||||||||||||||||
Executive Officer | 2009 | 1,000,000 | 0 | 3,325,000 | 0 | 39,750 | 17,150 | 4,381,900 | ||||||||||||||||||||||||||||||||||||
R. Mark Graf(6) | 2011 | 384,658 | 50,000 | (6) | 0 | 999,991 | 0 | 999,991 | 770,000 | 0 | 271,424 | (6) | 2,476,073 | |||||||||||||||||||||||||||||||
EVP, Chief Financial | ||||||||||||||||||||||||||||||||||||||||||||
Officer and Chief Accounting Officer | ||||||||||||||||||||||||||||||||||||||||||||
Roger C. Hochschild | 2011 | 750,000 | 0 | 2,879,998 | 1,012,504 | 2,347,790 | 6,240,292 | 2,000,000 | 20,113 | 17,150 | 9,027,555 | |||||||||||||||||||||||||||||||||
President & Chief | 2010 | 2,900,000 | 1,290,000 | 1,449,993 | 0 | 10,840 | 17,150 | 5,667,983 | ||||||||||||||||||||||||||||||||||||
Operating Officer | 2009 | 725,000 | 0 | 2,799,996 | 0 | 38,585 | 17,150 | 3,580,731 | ||||||||||||||||||||||||||||||||||||
Carlos Minetti | 2011 | 650,000 | 0 | 1,070,005 | 649,996 | 968,933 | 2,688,934 | 1,600,000 | 14,685 | 17,150 | 4,970,769 | |||||||||||||||||||||||||||||||||
EVP, President— | 2010 | 1,750,000 | 980,000 | 875,000 | 0 | 8,132 | 17,150 | 3,630,282 | ||||||||||||||||||||||||||||||||||||
Cnsmr Banking & | 2009 | 625,000 | 0 | 1,474,999 | 0 | 28,839 | 17,150 | 2,145,988 | ||||||||||||||||||||||||||||||||||||
Operations | ||||||||||||||||||||||||||||||||||||||||||||
Harit Talwar | 2011 | 650,000 | 0 | 1,070,005 | 649,996 | 968,933 | 2,688,934 | 1,350,000 | 16,397 | 17,150 | 4,722,481 | |||||||||||||||||||||||||||||||||
EVP, President US | 2010 | 1,750,000 | 880,000 | 875,000 | 0 | 9,292 | 17,150 | 3,531,442 | ||||||||||||||||||||||||||||||||||||
Cards | ||||||||||||||||||||||||||||||||||||||||||||
Roy A. Guthrie(7) | 2011 | 384,212 | 0 | 1,200,001 | 681,195 | 1,015,429 | 2,896,625 | 875,000 | 7,255 | 17,150 | 4,180,242 | |||||||||||||||||||||||||||||||||
Former Chief | 2010 | 1,900,000 | 1,000,000 | 949,986 | 0 | 4,691 | 17,150 | 3,871,827 | ||||||||||||||||||||||||||||||||||||
Financial Officer | 2009 | 625,000 | 0 | 1,649,997 | 0 | 15,431 | 17,150 | 2,307,578 |
(1) | Represents the base salary earned during the fiscal year. |
(2) | Starting in 2011, we restructured our incentive compensation program, including by establishing target STI opportunities for the NEOs. Accordingly, STI amounts moved from the Bonus column to the Non-Equity Incentive Plan Compensation column pursuant to applicable SEC disclosure rules. The values represented are paid in January of the next fiscal year but earned by the NEOs in the year indicated, except as otherwise noted. |
(3) | For fiscal 2011 amounts shown in the Stock Awards column include three different awards (2010 RSUs, 2011 RSUs and 2011 PSUs), presented separately in columns (A), (B) and (C) to enhance understanding. For fiscal 2011 represents the aggregate grant date fair value of RSU and PSU awards made to the NEOs pursuant to FASB ASC Topic 718, which includes the RSU grant made for the 2010 fiscal year (the 2010 RSUs) in addition to the RSU and PSU grants made for the 2011 fiscal year (the 2011 RSUs and 2011 PSUs). The value of PSUs included in the table is based on the probable outcome of the performance conditions on the grant date. The value of the PSUs at the grant date assuming the highest level of performance conditions are met is $6,956,390 for Mr. Nelms, $4,695,580 for Mr. Hochschild, $1,937,866 for Messrs. Minetti and Talwar and $2,030,858 for Mr. Guthrie. Mr. Graf was not awarded any PSUs for fiscal 2011. Please see “Summary of Pay Decisions” for further details. Additional details on accounting for stock-based compensation can be found in Note 3 “Summary of Significant Accounting Policies-Stock-based Compensation” and Note 12 “Stock-Based Compensation Plans” of our Consolidated Financial Statements contained in our Annual Report on Form 10-K. |
(4) | Represents the actuarial increase during the fiscal year in the pension value. For details on the valuation method and assumptions used in calculating the present value of accumulated benefit, please see Note 13 “Employee Benefit Plans” of the Consolidated Financial Statements in our Annual Report on Form 10-K. There were no above market nonqualified deferred compensation earnings for the plans in which each NEO participated. A description of the Company’s pension benefits is provided following the 2011 Pension Benefits Table on page 39. |
(5) | Represents the Company’s contributions to the 401(k) plan for each NEO during each calendar year, and for Mr. Graf in 2011, also represents the cost to the Company of providing relocation benefits in connection with his hire (as detailed below in footnote 6). The Discover 401(k) Planallows for pre-tax deferrals up to 30% of eligible earnings, including base, salary, bonus and commissions, up to the IRC Section 401(a)(17) compensation limit ($245,000 in 2011 and $250,000 in 2012) (“Eligible Earnings IRC. The Discover 401(k) Plan is a safe harbor plan and
|
(6) | Mr. Graf joined the Company as CFO in April of 2011. The Bonus column for Mr. Graf includes a |
(7) | Mr. Guthrie stepped down as CFO of the Company upon Mr. Graf’s appointment and transitioned to part-time status during 2011. |
2011 GRANTS OF PLAN-BASED AWARDS TABLE
The following table includes the 2011 target STI opportunities, and the RSU and PSU awards made to the NEOs in December of 2010. The RSU and PSU awards were made for fiscal 2010 and fiscal 2011 performance, but each of these awards was granted in fiscal 2011. No options were awarded to the NEOs in fiscal 2011. For more information regarding these grants, see the discussion on pages 18-34.
Name David W. Nelms R. Mark Graf Roger C. Hochschild Carlos Minetti Harit Talwar Roy A. Guthrie
|