SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant x
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¨ | 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 |
Costco Wholesale Corporation
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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¨ | Fee computed on table below per Exchange Act Rules 14a(6)(i)(4) and 0-11. |
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999 Lake Drive
Issaquah, Washington 98027
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO OUR SHAREHOLDERS:
The Annual Meeting of the Shareholders of Costco Wholesale Corporation (the “Company”) will be held at the Meydenbauer Center, Center Hall, 11100 N.E. 6th Street, Bellevue, Washington 98004, on Thursday, January 26, 2012,24, 2013, at 4:00 p.m., for the following purposes:
1. To elect the five Class III directors nominated by the Board of Directors to hold office until the 20152016 Annual Meeting of Shareholders and until their successors are elected and qualified;
2. To ratify the selection of KPMG LLP as the Company’s independent auditors for fiscal year 2012;2013;
3. To approve an amendment to the Company’s Fifth Restated 2002 Stock Incentive Plan to increase the number of shares available to be granted under the plan;
4. To approve, on a non-binding basis, the compensation of the Company’s named executive officers for fiscal year 20112012 as disclosed in these materials;
4. To consider a shareholder proposal as described in the accompanying Proxy Statement, if properly presented at the meeting;
5. To transact such other business as may properly come before the meeting or any adjournments thereof.
Only shareholders of record at the close of business on November 21, 2011,23, 2012, are entitled to notice of, and to vote at, the meeting. All shareholders are requested to be present in person or by proxy. Any shareholder who later finds that he or she can be present at the meeting, or for any reason desires to do so, may revoke the proxy at any time before it is voted.
Important Notice Regarding the Availability of Proxy Materials for the 20122013 Annual Meeting.We are mailing to many of our shareholders a notice of availability over the Internet of the proxy materials, rather than mailing a full paper set of the materials. The notice of availability contains instructions on how to access our proxy materials on the Internet, as well as instructions on obtaining a paper copy. All shareholders who do not receive such a notice of availability, including shareholders who have previously requested to receive a paper copy of the materials, will receive a full set of paper proxy materials by U.S. mail. This process will reduce our costs to print and distribute our proxy materials.
Voting by the Internet or telephone is fast and convenient, and your vote is immediately confirmed and tabulated. If you receive a paper copy of the proxy materials, you may also vote by completing, signing, dating and returning the accompanying proxy card in the enclosed return envelope furnished for that purpose. By using the Internet or telephone you help the Company reduce postage and proxy tabulation costs.
Please do not return the enclosed paper ballot if you are voting over the Internet or by telephone.
VOTE BY INTERNET | VOTE BY TELEPHONE | |
http://www.proxyvote.com 24 hours a day/7 days a week | (800) 690-6903 via touch tone phone toll-free 24 hours a day/7 days a week | |
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 p.m. Eastern Time on January | Use any touch-tone telephone to transmit your voting instructions up until 11:59 p.m. Eastern Time on January |
Your cooperation is appreciated, because a majority of the common stock must be represented, either in person or by proxy, to constitute a quorum for the conduct of business.
By order of the Board of Directors, |
Joel Benoliel |
Secretary |
December 13, 20112012
Important Notice Regarding the Availability of Proxy Materials for
the Meeting of Shareholders to be Held on January 26, 201224, 2013
The Proxy Statement and Annual Report to Shareholders are available at
http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-irhome
PARKING FACILITY AND DRIVING DIRECTIONS
MEYDENBAUER CENTER
11100 NE 6th Street
Bellevue, Washington
DRIVING DIRECTIONS | PARKING | |
• From Seattle via SR-520:
• Take SR-520 east to I-405 south. • Take Exit 13A west to NE 4th Street westbound. • Turn right onto 112th Ave NE. • Turn left onto NE 6th Street to Meydenbauer Center’s parking garage on the right. | Due to limited parking availability, we encourage you to explore Metro Transit’s commuter services. The Bellevue Transit Center is conveniently located less than a block from Meydenbauer Center.
Meydenbauer Center’s Parking Garage is located at 11100 NE 6th Street.It does not accommodate vehicles over 6’9” tall. | |
• From Seattle via I-90:
• Take I-90 east to I-405 north. • Take Exit 13A west to NE 4th Street westbound. • Turn right onto 112th Avenue NE. • Turn left onto NE 6th Street to Meydenbauer Center’s parking garage on right. | Bellevue Corporate Plaza Garage handles overflow parking for Meydenbauer Center. It is located at NE 6th Street on 110th Ave. NE. Proceed up the hill past Meydenbauer Center. Turn right at the light, and left into the parking structure.
Parking in these two facilities for this event will be paid by the Company. As you leave, tell the attendant you attended Costco’s Shareholders Meeting.
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PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
January 26, 201224, 2013
SOLICITATION AND REVOCATION OF PROXY
Proxies in the form furnished are solicited by the Board of Directors of the Company to be voted at the Annual Meeting of Shareholders to be held on January 26, 2012,24, 2013, or any adjournments (the “Annual Meeting”). The individuals named as proxies are Jeffrey H. Brotman and W. Craig Jelinek. A Notice of Internet Availability of Proxy Materials was first sent to shareholders and the accompanying notice of meeting, this Proxy Statement and the form of proxy are first being made available to shareholders on or about December 13, 2011.2012.
All shares represented by proxies received will be voted in accordance with instructions contained in the proxies. The Board of Directors unanimously recommends a vote:
1. | FOR the nominees for director listed in these materials and on the proxy; |
2. | FOR the ratification of the selection of the Company’s independent auditors; |
3. | FOR the |
4. | AGAINST the shareholder proposal. |
In the absence of voting instructions to the contrary, shares represented by validly executed proxies will be voted in accordance with the foregoing recommendations. A shareholder giving a proxy has the power to revoke it any time before it is voted by providing written notice to the Secretary of the Company, by delivering a later-dated proxy, or by voting in person at the Annual Meeting.
Only shareholders of record at the close of business on November 21, 201123, 2012 (the “Record Date”) will be entitled to vote at the Annual Meeting. At the close of business on the Record Date, there were 435,204,455434,824,153 shares of common stock outstanding, which represent all of the voting securities of the Company. Each share of common stock is entitled to one vote. Shareholders do not have cumulative voting rights in the election of directors.
A majority of the common stock entitled to vote at the Annual Meeting, present either in person or by proxy, will constitute a quorum. Shareholders who abstain from voting on any or all proposals will be included in the number of shareholders present at the meeting for purposes of determining the presence of a quorum. Abstentions and broker non-votes will not be included in the total of votes cast and will not affect the outcome of the vote.
With respect to proposal 1, the election of directors, the five directors receiving the highest number of votes will be elected. The Company’s bylaws provide that if in an uncontested election for directors a nominee receives a greater number of “withhold” votes than votes “for”
the nominee shall offer his or her resignation. A committee of independent directors whose election is not at issue will determine and publicly report the action to be taken with respect to the resignation offer.
With respect to proposalall other proposals (proposals 2 the ratification of the selection of the Company’s independent auditors,through 4), to approve the votes that shareholders cast “for” must exceed the votes that shareholders cast “against.”
With respect toeach proposal 3, the amendment of the Company’s 2002 Stock Incentive Plan, to approve the votes that shareholders cast “for” must exceed the votes that shareholders cast “against.”
With respect to proposal 4, the advisory vote on executive compensation, to approve the votes that shareholders cast “for” must exceed the votes that shareholders cast “against.”
If your shares are held by a broker or other financial institution on your behalf (that is, in “street name”), and you do not instruct the brokerthat firm as to how to vote these shares, on proposals 1, 3 or 4,Nasdaq rules allow the broker may not exercise discretionfirm to vote for or against those proposals. This would be a “broker non-vote” and theseyour shares will not be counted as having been votedonly on the proposal. With respect to proposalroutine matters. Proposal 2, the broker may exercise its discretionratification of the selection of the Company’s independent auditors for fiscal 2013, is the only matter for consideration at the meeting that Nasdaq rules deem to be routine. For all other proposals, you must submit voting instructions to the firm that holds your shares if you want your vote for or against that proposal into count. When a firm votes a client’s shares on some but not all of the absence of your instructionproposals, the missing votes are referred to as “broker non-votes.”. Please instruct your bankbroker or brokerother financial institution so your vote can be counted.
In addition to mailing the Notice of Internet Availability of Proxy Materials to shareholders, the Company has asked banks and brokers to forward copies of the Notice of Internet Availability of Proxy Materials, and upon request paper copies of the proxy materials, to persons for whom they hold stock of the Company and to request authority for execution of the proxies. The Company will reimburse the banks and brokers for their reasonable out-of-pocket expenses in doing so. Officers and employees of the Company may, without being additionally compensated, solicit proxies by mail, telephone, facsimile or personal contact. All proxy-soliciting expenses will be paid by the Company in connection with the solicitation of votes for the Annual Meeting.
PROPOSAL 1: ELECTION OF DIRECTORS
The Board of Directors is divided into three classes. Directors are elected by class, for three-year terms. Successors to the class of directors whose term expires at any annual meeting are elected for three-year terms. Each of W. Craig Jelinek, Benjamin S. Carson, Sr., M.D., William H. Gates, Hamilton E. James D. Sinegal, Jeffrey H. Brotman, Richard A. Galanti, Daniel J. Evans and JeffreyJill S. RaikesRuckelshaus is nominated as a member of Class I,II, to serve for a three-year term until the annual meeting of shareholders in 20152016 and until his or her successor is elected and qualified. All nominees are current directors.
Each nominee has indicated a willingness and ability to serve as a director. If any nominee becomes unable or unwilling to serve, the accompanying proxy may be voted for the election of such other person as will be designated by the Board of Directors. The proxies being solicited will be voted for no more than five nominees at the Annual Meeting. Each director will be elected by a plurality of the votes cast, in person or by proxy, at the Annual Meeting, assuming a quorum is present.
The following candidates for election have been nominated by the Board based on the recommendation of the Nominating and Governance Committee. In addition to the information presented below regarding each nominee’s specific experience, qualifications, attributes and skills that led the Board to conclude that he or she should serve as a director, the Board believes that each nominee has demonstrated: outstanding achievement in his or her professional career; relevant experience; personal and professional integrity; ability to make independent, analytical inquiries; experience with and understanding of the business environment; and willingness and ability to devote adequate time to Board duties. We also believe that our directors collectively have the skills and experience that make them well-suited to oversee the Company. They are established leaders in important areas of business, academia, government
service, and other public and non-profit service. In addition, members of our Board have had a great diversity of experiences and bring a wide variety of views that strengthen their ability to guide our Company.
The Board of Directors unanimously recommends that you vote FOR Proposal 1.
Directors
The following table sets forth information regarding each nominee for election as a director and each director whose term of office will continue after the Annual Meeting.
Name | Current Position With the Company | Age | Expiration of Term as Director | Current Position With the Company | Age | Expiration of Term as Director | ||||||||||||||
James D. Sinegal | Chief Executive Officer and Director | 75 | 2012 | |||||||||||||||||
Jeffrey H. Brotman | Chairman of the Board of Directors | 69 | 2012 | Chairman of the Board of Directors | 70 | 2015 | ||||||||||||||
Benjamin S. Carson, Sr., M.D. | Director | 60 | 2013 | Director | 61 | 2013 | ||||||||||||||
Susan L. Decker | Director | 49 | 2014 | Director | 50 | 2014 | ||||||||||||||
Daniel J. Evans | Director | 86 | 2012 | Director | 87 | 2015 | ||||||||||||||
Richard A. Galanti | Executive Vice President, Chief Financial Officer and Director | 55 | 2012 | Executive Vice President, Chief Financial Officer and Director | 56 | 2015 | ||||||||||||||
William H. Gates | Director | 86 | 2013 | Director | 87 | 2013 | ||||||||||||||
Hamilton E. James | Lead Independent Director | 60 | 2013 | Lead Independent Director | 61 | 2013 | ||||||||||||||
W. Craig Jelinek | President, Chief Operating Officer and Director | 59 | 2013 | President, Chief Executive Officer and Director | 60 | 2013 | ||||||||||||||
Richard M. Libenson | Director | 69 | 2014 | Director | 70 | 2014 | ||||||||||||||
John W. Meisenbach | Director | 75 | 2014 | Director | 76 | 2014 | ||||||||||||||
Charles T. Munger | Director | 87 | 2014 | Director | 88 | 2014 | ||||||||||||||
Jeffrey S. Raikes | Director | 53 | 2012 | Director | 54 | 2015 | ||||||||||||||
Jill S. Ruckelshaus | Director | 74 | 2013 | Director | 75 | 2013 | ||||||||||||||
James D. Sinegal | Director, and non-officer employee | 76 | 2015 |
Set forth below is information with respect to each director of the Company, which as used below means Costco Wholesale Corporation and includes its predecessor company, Costco Wholesale Corporation, as it existed prior to the 1993 merger with The Price Company.
James D. Sinegal is Chief Executive Officer of the Company; he was also President until February 2010. He will retire as Chief Executive Officer on January 1, 2012. Mr. Sinegal is a co-founder of the Company and has been a director since its inception. Mr. Sinegal’s qualifications to serve on the Board include his roles as a co-founder of the Company and Chief Executive Officer, his extensive career in the retail industry, and his extensive knowledge of our Company’s business developed over the course of his long career here.
Jeffrey H. Brotman is the Chairman of the Board of the Company. Mr. Brotman is a co-founder of the Company and has been Chairman of the Board since the Company’s
inception, except from October 1993 to December 1994, when he was Vice Chairman. Mr. Brotman’s qualifications to serve on the Board include his roles as a co-founder of the Company and Chairman of the Board, his extensive knowledge of our Company’s business developed over the course of his long career here, and his previous service on the boards of other public companies.
Benjamin S. Carson, Sr., M.D. has been a director of the Company since May 1999. Since 1984 he has been a Professor and Director of Pediatric Neurosurgery at Johns Hopkins Medicine. Dr. Carson has also served as a director of Kellogg Company since 1997. Dr. Carson has written extensively and is a frequent speaker on a variety of topics, including pediatric neurology, motivation and self-help for children, and community involvement. Dr. Carson’s qualifications to serve on the Board include the knowledge and experience he has gained, and contributions he has made, during his tenure as a director of our Company, his service on the board of another public company, and his important role in one of the nation’s leading institutions of higher learning.
Susan L. Decker has been a director of the Company since October 2004. She currently serves on various for-profit and non-profit boards of directors. Previously, she served as
Entrepreneur-in-Residence at Harvard Business School during the 2009-10 school year. Ms. Decker was President of Yahoo! Inc. from June 2007 to April 2009. Prior to becoming President, she served as the head of one of Yahoo!’s two major business units, the Advertiser and Publisher Group, and as Executive Vice President and Chief Financial Officer from June 2000 to June 2007. She is a director of Berkshire Hathaway Inc., Intel Corporation, and LegalZoom.com and was previously a director of Pixar. Ms. Decker’s qualifications to serve on the Board include the knowledge and experience she has gained, and contributions she has made, during her tenure as a director of our Company, her service on the boards of other public companies, and her broad-ranging experiences, including senior leadership positions, in the areas of finance, technology and marketing.
Daniel J. Evans has been a director of the Company since January 2003. He has been the chairman of Daniel J. Evans Associates, a consulting firm, since 1989. From 1983 through 1989, he served as a U.S. Senator for the State of Washington, and he was the President of The Evergreen State College from 1977 through 1983. From 1965 through 1977, he served as Governor of the State of Washington. Mr. Evans serves on the boards of NIC Inc. and Archimedes Technology Group. Mr. Evans’ qualifications to serve on the Board include the knowledge and experience he has gained, and contributions he has made, during his tenure as a director of our Company, his service on the boards of other public companies, and his broad-ranging experiences in government and public service.
Richard A. Galanti has been a director of the Company since January 1995, and Executive Vice President and Chief Financial Officer of the Company since October 1993. Mr. Galanti’s qualifications to serve on the Board include his extensive knowledge of the Company’s business developed over the course of his long career here, particularly in the areas of finance and financial reporting.
William H. Gates has been a director of the Company since January 2003. He has been the Co-Chair of the Bill & Melinda Gates Foundation since its inception. Mr. Gates serves on the Board of Regents of the University of Washington. He has served as trustee, officer and volunteer for more than two dozen Northwest organizations, including the Greater Seattle Chamber of Commerce and King County United Way. In 1995, he founded the Technology Alliance. From 1964 until 1994 Mr. Gates was a partner in the law firm of Preston, Gates & Ellis and predecessor firms. Mr. Gates’ qualifications to serve on the Board include the knowledge
and experience he has gained, and contributions he has made, during his tenure as a director of our Company and his broad-ranging experiences in the legal profession, one of the country’s largest foundations, and other public-service positions.
Hamilton E. James has been a director of the Company since August 1988 and the lead independent director since 2005. He is President and Chief Operating Officer of The Blackstone Group, a global alternative asset manager and provider of financial advisory services, and a member of the board of directors of its general partner, Blackstone Group Management L.L.C. He was previously a director of Credit Suisse First Boston USA, Inc. Mr. James’s qualifications to serve on the Board include the knowledge and experience he has gained, and contributions he has made, during his tenure as a director of our Company and his broad-ranging experiences in the financial services industry, including senior leadership positions.
W. Craig Jelinek has been a director and President and Chief Operating Officer of the Company since February 2010. He will become2010, and Chief Executive Officer onsince January 1, 2012. Mr. Jelinek previously was President and Chief Operating Officer from February 2010 until January 2012, and was Executive Vice President in charge of merchandising sincebeginning in 2004. He spent the previous twenty years in various management positions in warehouse operations. Mr. Jelinek’s qualifications to serve on the Board include his extensive knowledge of our Company’s business developed over the course of his long career here, particularly in the areas of operations and merchandising.
Richard M. Libenson has been a director of the Company since October 1993.1993 and has served as a consultant to the Company since that time. He was a founder and director of The Price Company from its formation in 1976 until Octoberit merged with the Company in 1993, and was an executive officer of The Price Company from 1976 until October 1989. Mr. Libenson’s qualifications to serve on the Board include his roles as a long-serving consultant to the Company and his extensive knowledge of our Company’s business developed over the course of his long career here and with The Price Company.
John W. Meisenbach has been a director of the Company since its inception. He is President of MCM, A Meisenbach Company, a financial services company, which he founded in 1962. He also currently serves as a director of Expeditors International and M Financial Holdings. Mr. Meisenbach is a trustee of the Elite Fund, an investment company registered under the Investment Company Act of 1940. Mr. Meisenbach’s qualifications to serve on the Board include the knowledge and experience he has gained, and contributions he has made, during his tenure as a director of our Company, his service on the boards of other public companies, and his broad-ranging experiences in the insurance industry.
Charles T. Munger has been a director of the Company since January 1997. He is Vice Chairman of the Board of Directors of Berkshire Hathaway Inc., and Chairman of the Board of Directors of Daily Journal Corporation. Mr. Munger’s qualifications to serve on the Board include the knowledge and experience he has gained, and contributions he has made, during his tenure as a director of our Company, his service on the boards of other public companies, and his broad-ranging experiences in the areas of investments, finance, and insurance.
Jeffrey S. Raikes has been a director of the Company since December 2008. He has been the Chief Executive Officer of the Bill & Melinda Gates Foundation since September 2008. Mr. Raikes held several positions with Microsoft Corporation from 1981 to 2008, including President of the Business Division from 2005 to 2008. Mr. Raikes qualifications to serve on the Board include broad-ranging experiences, including senior leadership positions, in the areas of technology and marketing and at one of the country’s largest foundations.
Jill S. Ruckelshaus has been a director of the Company since February 1996. Ms. Ruckelshaus serves on the boards of various non-profit organizations. Previously she was a
director of Lincoln National Corporation. Her qualifications to serve on the Board include the knowledge and experience she has gained, and contributions she has made, during her tenure as a director of our Company, her service on the boards of other public companies, and her broad-ranging experiences in government and other public service.
James D. Sinegal was Chief Executive Officer of the Company until his retirement on December 31, 2011. He was also President until February 2010. He has continued to serve as a non-officer employee since January 1, 2012. Mr. Sinegal is a co-founder of the Company and has been a director since its inception. Mr. Sinegal’s qualifications to serve on the Board include his roles as a co-founder of the Company and Chief Executive Officer, his extensive career in the retail industry, and his extensive knowledge of our Company’s business developed over the course of his long career here.
No family relationship exists among any of the directors or executive officers. No arrangement or understanding exists between any director or executive officer and any other person pursuant to which any director was selected as a director or executive officer of the Company.
The Board of Directors has determined that each member of the Audit, Compensation and Nominating and Governance committees meets the NASDAQ Global Select Market listing standards regarding “independence” and that each member is free of relationships that would interfere with the individual exercise of independent judgment. Each committee has a written charter, which may be viewed at our website at http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-irhome. Directors deemed independent are Mses. Decker and Ruckelshaus and Messrs. Carson, Evans, Gates, James, Munger and Raikes, who constitute a majority of the Board of Directors. The non-executive directors of the Company meet in executive session presided over by the Lead Independent Director at no less than two meetings of the Board of Directors each year.
Audit Committee. The functions of the Audit Committee include (among others):
providing direct communication between the Board of Directors and the Company’s internal and external auditors;
monitoring the design and maintenance of the Company’s system of internal accounting controls;
selecting, evaluating and, if necessary, replacing the external auditors;
reviewing the results of internal and external audits as to the reliability and integrity of financial and operating information and the systems established to monitor compliance with the Company’s policies, plans and procedures and with laws and regulations; and
reviewing the relationships between the Company and the external auditors to ascertain the independence of the external auditors.
The members of the committee are Messrs. Munger (chair), Evans and Ms. Decker. The Board of Directors has determined that Mr. Munger is an “audit committee financial expert” as defined by the rules of the Securities and Exchange Commission (“SEC”). The Audit Committee met eightseven times during fiscal 2011.2012. A report of the Audit Committee is set forth below.
Compensation Committee. The Compensation Committee’s function is to review the salaries, bonuses and stock-based compensation provided to executive officers of the Company and to oversee the overall administration of the Company’s compensation and stock-based compensation programs. Except with respect to setting the compensation of the chief executive officer, the committee may delegate its authority to a subcommittee of the committee (consisting either of a subset of members of the committee or any members of the Board who would be eligible to serve on the committee). In addition, to the extent permitted by applicable law, the committee may delegate to one or more executive officers of the Company the authority to grant stock options and other stock awards to employees who are not executive officers or members of the Board. The committee has delegated certain authority to the Chief
Executive Officer and Chairman of the Board with respect to such awards not involving executive officers. See Compensation Discussion and Analysis below for a further description of the role of the committee. The members of the committee are Messrs. Carson (chair), Munger and Ms. Ruckelshaus. The committee met oncethree times during fiscal 2011.2012. A report of the committee is set forth below.
Nominating and Governance Committee. The functions of the Nominating and Governance Committee are to identify and approve individuals qualified to serve as members of the Board of the Company, select director nominees for the annual meeting of shareholders, evaluate the Board’s performance, develop and recommend to the Board corporate governance
guidelines, and provide oversight with respect to corporate governance and ethical conduct. The members of the committee are Messrs. Evans and Gates (chair) and Ms. Ruckelshaus. The committee is authorized by its charter to engage its own advisors. The committee approved the nomination of the candidates reflected in Proposal 1. The committee met twofour times in fiscal 2011.2012. The Board is responsible for nominating members for election to the Board and for filling vacancies on the Board that may occur between annual meetings of shareholders. The committee is responsible for identifying, screening and recommending to the Board candidates for Board membership. When formulating its recommendations, the committee will also consider advice and recommendations from others as it deems appropriate.
The committee will consider shareholder recommendations for candidates to serve on the Board. In accordance with our Bylaws, the name of any recommended candidate, together with pertinent biographical information, a document indicating the candidate’s willingness to serve if elected, and evidence of the nominating shareholder’s ownership of Company stock should be sent to the Secretary of the Company. The Company may require additional information, as described in our Bylaws. Our Corporate Governance Guidelines provide that nominees for director will be selected on the basis of, among other things, knowledge, experience, skills, expertise, integrity, diversity, ability to make independent analytical inquiries, and understanding of the Company’s business environment, all in the context of an assessment of the perceived needs of the Board at the time. Nominees should also be willing to devote adequate time and effort to Board responsibilities. The Nominating and Governance Committee does not set specific, minimum qualifications that nominees must meet in order for the committee to recommend them to the Board, but rather believes that each nominee should be evaluated based on his or her individual merit, taking into account the needs of the Company and the composition of the Board.
We believe that the Company benefits from having directors with a diversity of viewpoints, backgrounds, and experiences. Currently, of the fourteen directors on the Board, two are women and one is African American. In addition, as discussed above, our directors bring a diversity of viewpoints and experiences as established leaders in important areas of business, academia, government service, and other public and non-profit service that we believe strengthens the Board’s ability to guide our Company. Pursuant to our Corporate Governance Guidelines, the Nominating and Governance Committee oversees a self-assessment of the Board’s performance every third year. The assessment seeks to identity specific areas, if any, in need of improvement or strengthening, including with respect to the diversity of our Board in terms of viewpoints, backgrounds and experiences.
Formal nomination of candidates by shareholders requires compliance with section 2.1 of the Bylaws. There is otherwise no formal process prescribed for identifying and evaluating nominees, except as described in the Corporate Governance Guidelines.
Corporate Governance Guidelines. The Board of Directors has adopted Corporate Governance Guidelines, which may be viewed at www.costco.com through the Investor Relations page.
Board Structure. The Corporate Governance Guidelines provide that the Board does not require the separation of the offices of the Chairman of the Board and the Chief Executive Officer and shall be free to choose its Chairman in any way that it deems best for the Company at any given point in time. Currently the positions of Chairman and Chief Executive Officer are filled separately. The Board believes that this structure is appropriate for the Company at this time. As a co-founder of the Company, Mr. Brotman has played a critical role in the growth of the Company, and his role as Chairman will be complemented by the role of Mr. Jelinek as
president and chief executive officer and a more active participant in day to day management of the Company. In addition, the Board believes that it obtains effective additional board leadership through the role of the Lead Independent Director, currently filled by Hamilton E. James. The Lead Independent Director presides over executive sessions of the Board and otherwise facilitates communication among senior management and the non-employee directors.
The Role of the Board in Risk Oversight. One of the Board’s functions is to oversee the ways in which management deals with risk. The Board seeks to ensure that management has in place processes for dealing appropriately with risk. It is the responsibility of the Company’s senior management to develop and implement the Company’s short- and long-term objectives and to identify, evaluate, manage and mitigate the risks inherent in seeking to achieve those objectives.
Management is responsible for identifying risk and risk controls related to significant business activities and Company objectives, and developing programs to determine the sufficiency of risk identification, the balance of potential risk to potential reward, the appropriate manner in which to control risk, and the support of the risk-controlling behavior and the risk to Company strategy. The Board implements its risk oversight responsibilities primarily through the Audit Committee, which receives management briefing on the potentially significant risks that the Company faces and how the Company is seeking to control risk where appropriate. The Audit Committee also oversees issues related to internal control over financial reporting. In more limited cases, such as with risks of significant new business concepts and substantial entry into new markets, risk oversight is addressed as part of the full Board’s engagement with the chief executive officer and management. Board members also often discuss risk as a part of their review of the ongoing business, financial, and other activities of the Company. The Board also has overall responsibility for executive-officer succession planning and reviews succession plans each year. The Nominating and Governance Committee also exercises oversight regarding risks associated with corporate governance matters and certain issues relating to the Company’s ethics and compliance programs.
The following table summarizes information regarding director compensation for the non-employee directors of the Company for fiscal 2011.2012.
Name | Fees Earned or Paid in Cash ($)(1) | Stock Awards ($)(2) | All Other Compensation ($)(3) | Total ($) | Fees Earned or Paid in Cash ($)1 | Stock Awards ($)2 | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||
Benjamin S. Carson, Sr., M.D. | 35,000 | 186,509 | 221,509 | 38,000 | 249,254 | 287,254 | ||||||||||||||||||||||||||
Susan L. Decker | 43,000 | 186,509 | 229,509 | 42,000 | 249,254 | 291,254 | ||||||||||||||||||||||||||
Daniel J. Evans | 44,000 | 186,509 | 286 | 230,795 | 46,000 | 249,254 | 295,254 | |||||||||||||||||||||||||
William H. Gates | 36,000 | 186,509 | 222,509 | 39,000 | 249,254 | 288,254 | ||||||||||||||||||||||||||
Hamilton E. James | 34,000 | 186,509 | 220,509 | 34,000 | 249,254 | 283,254 | ||||||||||||||||||||||||||
Richard M. Libenson | 34,000 | 186,509 | 324,850 | (4) | 545,359 | 35,000 | 249,254 | 4,673,611 | 3 | 4,957,865 | ||||||||||||||||||||||
John W. Meisenbach | 34,000 | 186,509 | 220,509 | 34,000 | 249,254 | 283,254 | ||||||||||||||||||||||||||
Charles T. Munger | 43,000 | 186,509 | 229,509 | 45,000 | 249,254 | 294,254 | ||||||||||||||||||||||||||
Jeffrey S. Raikes | 35,000 | 186,509 | 286 | 221,795 | 34,000 | 249,254 | 283,254 | |||||||||||||||||||||||||
Jill S. Ruckelshaus | 37,000 | 186,509 | 223,509 | 42,000 | 249,254 | 291,254 | ||||||||||||||||||||||||||
Richard D. DiCerchio | 7,500 | 16,351 | 39,007 | 62,858 |
(1) | Represents the amount of cash compensation received for fiscal |
(2) | In |
the RSUs granted to each non-employee director in |
(3) |
Richard M. Libenson has been engaged as a consultant to the Company. For such services, a corporation he owns was paid $300,000 during fiscal |
Each non-employee director earns $30,000 per year for serving on the Board and $1,000 for each Board and committee meeting attended. Directors are reimbursed for travel expenses incurred in connection with their duties.
Each non-employee director receives an annual grant of 3,000 restricted stock units (“RSUs”) near the beginning of the fiscal year. These RSUs vest one-third annually, beginning on the first anniversary of the date of grant. RSUs granted after September 29, 2006, are subject to accelerated vesting upon the director’s retirement: 50% after five years of service and 100% after ten years of service. In 2006 the equity portion of the director compensation program was revised to replace stock options with RSUs, consistent with the change made for employees. The compensation for non-executive directors was last adjusted in fiscal 2006 and was not reevaluated this fiscal year. In fiscal 2009, the Board adopted guidelines requiring non-executive directors to own and maintain at least 6,000 shares of Company stock by April 2014 or within five years of joining the Board.
As of the end of fiscal 2011,2012, non-employee directors held the following shares and outstanding equity awards:
Name | Stock Options | Restricted Stock Units | Shares Owned | Total | ||||||||||||
Benjamin S. Carson, Sr., M.D. | 24,000 | 6,000 | 10,500 | 40,500 | ||||||||||||
Susan L. Decker | 18,000 | 6,000 | 20,500 | 44,500 | ||||||||||||
Daniel J. Evans | 36,000 | 6,000 | 11,800 | 53,800 | ||||||||||||
William H. Gates | 16,500 | 6,000 | 22,840 | 45,340 | ||||||||||||
Hamilton E. James | 48,000 | 6,000 | 26,120 | 80,120 | ||||||||||||
Richard M. Libenson | — | 6,000 | 105,595 | 111,595 | ||||||||||||
John W. Meisenbach | — | 6,000 | 50,000 | 56,000 | ||||||||||||
Charles T. Munger | 24,000 | 6,000 | 133,949 | 163,949 | ||||||||||||
Jeffrey S. Raikes | — | 5,750 | 8,500 | 14,250 | ||||||||||||
Jill S. Ruckelshaus | 36,000 | 6,000 | 12,566 | 54,566 |
Pursuant to indemnification agreements previously approved by the Company’s shareholders, in connection with the derivative actions relating to stock options and with the approval of the Board, the Company in fiscal 2011 paid on behalf of non-executive directors and executive officers approximately $133,000 and $44,000 respectively, in attorneys’ fees and costs.
Name | Stock Options | Restricted Stock Units | Shares Owned | Total | ||||||||||||
Benjamin S. Carson, Sr., M.D. | 12,000 | 6,000 | 13,500 | 31,500 | ||||||||||||
Susan L. Decker | 18,000 | 6,000 | 23,500 | 47,500 | ||||||||||||
Daniel J. Evans | — | 6,000 | 14,800 | 20,800 | ||||||||||||
William H. Gates | 16,500 | 6,000 | 25,840 | 48,340 | ||||||||||||
Hamilton E. James | 36,000 | 6,000 | 29,120 | 71,120 | ||||||||||||
Richard M. Libenson | — | 56,000 | 108,595 | 164,595 | ||||||||||||
John W. Meisenbach | — | 6,000 | 53,000 | 59,000 | ||||||||||||
Charles T. Munger | 18,000 | 6,000 | 142,949 | 166,949 | ||||||||||||
Jeffrey S. Raikes | — | 6,000 | 11,250 | 17,250 | ||||||||||||
Jill S. Ruckelshaus | 24,000 | 6,000 | 15,566 | 45,566 |
Shareholder Communications to the Board
Shareholders may contact an individual director, the Board as a group, or a specified Board committee or group, including the non-employee directors as a group, at the following address: Corporate Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, WA 98027 Attn: Board of Directors. The Company will receive and process communications before forwarding them to the addressee. Directors generally will not be forwarded shareholder communications that are primarily commercial in nature, relate to improper or irrelevant topics, or request general information about the Company.
Meeting Attendance
During the Company’s last fiscal year, the Company’s Board of Directors met fourfive times. Each member of the Board attended 100% of the Board meetings and meetings of the committees on which he or she served, with the exception of Mr. Jelinek,Messrs. James, Raikes, and Meisenbach, who each missed one Board meeting. As set forth in our Corporate Governance Guidelines, directors are invited and encouraged to attend meetings of shareholders. NineAll directors except one attended the Annual Meeting of Shareholders in 2011.2012.
The following table sets forth information regarding ownership of the common stock by each person known to the Company to own more than 5% of the outstanding shares of the common stock on November 21, 2011.23, 2012.
Name and Address of Beneficial Owner | Shares | Percent1 | ||||||
Capital World Investors 333 South Hope Street, 55th Floor Los Angeles, California 90071 | ||||||||
| 2 | % |
(1) | Based on |
(2) | Information based on Form 13F-HR filed with the SEC by |
The following table sets forth the shares of the common stock owned by each director of the Company, each nominee for election as a director of the Company, the executive officers named in the Summary Compensation Table, and all directors and executive officers as a group on November 21, 2011.23, 2012.
Name of Beneficial Owner | Shares Beneficially Owned1 | Options2 | Total | Percent of Class3 | Shares Beneficially Owned1 | Options2 | Total | Percent of Class3 | ||||||||||||||||||||||||
James D. Sinegal | 2,055,599 | 4 | 300,000 | 2,355,599 | 4 | * | ||||||||||||||||||||||||||
Jeffrey H. Brotman | 721,718 | 5 | 450,000 | 1,171,718 | 5 | * | 743,834 | 4 | 150,000 | 893,834 | 4 | * | ||||||||||||||||||||
W. Craig Jelinek | 161,817 | 300,000 | 461,817 | * | 197,142 | 225,000 | 422,142 | * | ||||||||||||||||||||||||
Benjamin S. Carson, Sr., M.D. | 19,500 | 12,000 | 31,500 | * | 22,500 | 12,000 | 34,500 | * | ||||||||||||||||||||||||
Susan L. Decker | 29,500 | 6 | 18,000 | 47,500 | 6 | * | 41,500 | 5 | 9,000 | 50,500 | 5 | * | ||||||||||||||||||||
Daniel J. Evans | 28,421 | 7 | — | 28,421 | 7 | * | 23,800 | 6 | — | 23,800 | 6 | * | ||||||||||||||||||||
Richard A. Galanti | 50,740 | 130,000 | 180,740 | * | 63,773 | 110,000 | 173,773 | * | ||||||||||||||||||||||||
William H. Gates | 31,840 | 16,500 | 48,340 | * | 44,078 | — | 44,078 | * | ||||||||||||||||||||||||
Hamilton E. James | 35,120 | 48,000 | 83,120 | * | 38,120 | 36,000 | 74,120 | * | ||||||||||||||||||||||||
Richard M. Libenson | 114,595 | 8 | — | 114,595 | 8 | * | 147,928 | 7 | — | 147,928 | 7 | * | ||||||||||||||||||||
John W. Meisenbach | 59,000 | 9 | — | 59,000 | 9 | * | 62,000 | 8 | — | 62,000 | 8 | * | ||||||||||||||||||||
Charles T. Munger | 142,949 | 10 | 24,000 | 166,949 | 10 | * | 151,949 | 9 | 18,000 | 169,949 | 9 | * | ||||||||||||||||||||
Joseph P. Portera | 98,244 | — | 98,244 | * | 112,988 | — | 112,988 | * | ||||||||||||||||||||||||
Jeffrey S. Raikes | 17,250 | — | 17,250 | * | 20,250 | — | 20,250 | * | ||||||||||||||||||||||||
Jill S. Ruckelshaus | 21,566 | 36,000 | 57,566 | * | 24,566 | 24,000 | 48,566 | * | ||||||||||||||||||||||||
James D. Sinegal | 2,059,906 | 10 | — | 2,059,906 | 10 | * | ||||||||||||||||||||||||||
Dennis R. Zook | 39,083 | — | 39,083 | * | 32,976 | — | 32,976 | * | ||||||||||||||||||||||||
All directors and executive officers as a group (21 persons) | 4,126,709 | 1,334,500 | 5,461,209 | 1.21 | % | |||||||||||||||||||||||||||
All directors and executive officers as a group (22 persons) | 4,368,716 | 584,000 | 4,952,716 | 1.11 | % |
* | Less than 1%. |
(1) | Includes RSUs |
(2) | Includes options exercisable within 60 days of November |
(3) | Based on |
(4) | Includes |
Includes |
Includes |
Includes |
Includes 50,000 shares held by a trust of which Mr. Meisenbach is the principal beneficiary, of which he may be deemed to be beneficial owner. |
Includes 19,565 shares held by a charitable foundation funded and controlled by Mr. Munger. |
(10) | Includes 1,112,046 shares owned by a limited liability company of which Mr. Sinegal and his wife are co-managers. Also includes 404,708 pledged shares. |
Equity Compensation Plan Information
(at Fiscal Year-End)
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights(A) | Weighted-average exercise price of outstanding options, warrants and rights(B) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A))(C) | Number of securities to be issued upon exercise of outstanding options, warrants and rights(A) | Weighted-average exercise price of outstanding options, warrants and rights ($)(B) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A))(C) | ||||||||||||||||||
Equity compensation plans approved by security holders | 15,643,452 | 40.07 | 8,565,227 | 12,420,280 | 40.90 | 14,344,844 | ||||||||||||||||||
Equity compensation plans not approved by security holders | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | 15,643,452 | 40.07 | 8,565,227 | 12,420,280 | 40.90 | 14,344,844 |
(A) | Includes |
(B) | The weighted-average exercise price does not include the shares issuable upon vesting of RSUs, which have no exercise price. |
(C) | Available for issuance under the |
COMPENSATION DISCUSSION AND ANALYSIS
Following is a discussion and analysis of our compensation programs as they apply to our Chief Executive Officer, the Chairman of the Board of Directors, the Chief Financial Officer, and the three other most highly compensated individuals who were serving as executive officers at the end of fiscal 20112012 and our former Chief Executive Officer (the “Named Executive Officers”). Our Named Executive Officers for fiscal 20112012 were: W. Craig Jelinek, President and Chief Executive Officer;
James D. Sinegal, Former Chief Executive Officer; Jeffrey H. Brotman, Chairman of the Board; W. Craig Jelinek, President and Chief Operating Officer; Richard A. Galanti, Executive Vice President, Chief Financial Officer; Joseph P. Portera, Executive Vice President, COO-Eastern and Canadian Divisions; and Dennis R. Zook, Executive Vice President, COO-Southwest and Mexico Divisions.
Compensation Philosophy and Objectives
Our compensation programs are designed to motivate our executives and employees to continue to feel part of the Company and to participate in the growth of our business. Historically, the Company believes it has been very successful in attracting and retaining quality employees, achieving low turnover in our executive, staff and warehouse management ranks. In addition, in the judgment of the Compensation Committee (the “Committee”), the Company’s compensation programs have historically contributed to the financial and competitive success of the Company. Accordingly, the Committee believes that it has been desirable to continue compensation programs that have been persistent features at the Company for a number of years.
At the 2012 Annual Meeting, the advisory shareholder vote on executive compensation was 98% in favor. The Committee considered the results of the 2012 advisory shareholder vote and determined not to make any changes to our compensation programs in response to the vote. The compensation levels approved by the Committee for the Named Executive Officers for fiscal 20112012 are not materially changed from those approved for the prior year, except for the increase in RSUs granted to Mr. Jelinek in connectionchanges associated with his promotion tothe Chief OperatingExecutive Officer and the decrease in RSUs granted to Mr. Sinegal at his request. The Committee established the elements of executive compensation for fiscal 2011 in the fall of 2010, before the advisory shareholder vote on executive compensation in January 2011. The Committee gave final approval to the actual fiscal 2011 compensation levels in October 2011. At that time, the Committee noted the results of the advisory shareholder vote, with over 98% of votes cast in favor, and that vote has not caused the Committee to recommend any changes to our compensation policies.transition.
Role of the Compensation Committee
The Committee determines the amounts and elements of compensation for our Chief Executive Officer and Chairman. For other executive officers, it reviews the recommendations of the Chief Executive Officer, with which it generally agrees. The Committee’s function is more fully described above, under “Committees of the Board — Compensation Committee.”
During fiscal 2011,2012, the Committee consisted of Dr. Carson (chair), Mr. Munger and Ms. Ruckelshaus. The Committee has authority under its charter to engage compensation consultants but has not used consultants of any kind.any. The Committee’s primary activity occurs in the fall, following the close of the fiscal year, when the Committee: (i) approves grants of RSUs, including performance targets for RSUs granted to executive officers; (ii) determines whether performance targets have been satisfied for RSUs granted during the prior fiscal year; (iii) approves total compensation levels for executive officers for the fiscal year just concluded, including any salary increases and cash bonuses, and (iv) approves the executive officer cash bonus plan for the current fiscal year.
Elements of Compensation
The components of our executive compensation programs are equity compensation (since fiscal 2006 consisting solely of RSUs), base salary, a discretionary cash bonus program, and other benefits (primarily consisting of health plans, a 401(k) plan and a deferred compensation plan) and modest perquisites. The Committee believes that these components are appropriate and are consistent with the Company’s long-standing approach to executive compensation, which has made equity awards the dominant form of compensation.
The Committee did not extensively reevaluate this year whether there is an optimal mix of equity, salary, bonus and other compensation components for each executive officer. Rather, it relied upon the fact that the current structure has been utilized successfully in years past and gave
more particular attention to the incremental changes in the components of the mix and the value of the total compensation packages.
RSUs. RSU grants represent the largest component of compensation, based on their fair value at the time they are granted. The Committee believes that emphasizing this form of compensation above others helps to align the interests of employee-grantees with those of shareholders, both in the short term (with the performance conditions) and in the longer term (with time-vesting of up to five years, subject to earlier vesting for long service, as described below). To a lesser extent, the Committee also takes into account that longer-term vesting requirements can help promote executive retention.
Base salary. Base salary is the second largest compensation component. Payment of fixed cashThis compensation is consistent with the need for executive officers to have a predictable level
of cash compensation, which has been subject generally to modest annual adjustments (with the exception of Messrs. Sinegal andMr. Brotman, whose salaries havesalary has remained at the same level since 1999)1999, and Mr. Sinegal, whose salary remained the same from 1999 until he stepped down from the role of CEO in 2012, at which point his salary was reduced; in both cases they received slightly higher amounts in fiscal years with 53 weeks, including fiscal year 2012).
Cash bonus. Discretionary cash bonuses are and have been a relatively small component of compensation. They address short-term incentives and are linked to performance during the fiscal year. Historically, at least some portion of the cash bonuses has been paid each year. The Committee believes that maintaining cash bonuses as a modest element of compensation is consistent with preferring long-term equity incentives as being in the greater interest of the Company and its shareholders.
Executive base salaries and cash bonuses are, in the Committee’s view, low compared to the other companies in our peer group, described below under “Peer Companies.”
Other elements and perquisites. Consistent with its position as a low-overhead operator, the Company has traditionally sought to have modest perquisites and “other compensation.” A significant component of this compensation is related to helping executives fund their retirement needs (through the 401(k) plan and the deferred compensation plan), recognizing that the Company does not have a traditional retirement plan and that no executive has any agreement to receive severance compensation.
The foregoing components of compensation combine a mix of incentives that are intended to create rewards for shorter-term (twelve months) and longer-term performance (five years and beyond). Shorter-term incentives come primarily from the initial award of RSUs being subject to achievement of at least one one-year performance metric and, to a significantly lesser extent, discretionary cash bonuses that are subject to a mix of one-year performance metrics. Longer-term incentives come primarily from the vesting over five years of RSU awards, and, to a lesser extent, share ownership requirements for executive officers, and vesting elements in certain benefit plans (such as the deferred compensation plan and 401(k) retirement plan matches).
The Committee believes that the executive compensation programsthese elements do not promote unreasonableness in risk-taking behavior. The value of short-term incentives (including cash bonus awards with caps and performance conditions for awards of RSUs) is substantially exceeded by long-term incentives (including equity awards that vest over up to five years) and share ownership guidelines, which the Committee believes reward sustained performance that is aligned with shareholder interests.
Peer Companies
For fiscal 2011,2012, the Committee considered executive compensation data obtained from proxy statements for the following peer companies: Wal-Mart Stores, Inc., The Home Depot, Inc., Target Corporation, The Kroger Company, and Lowe’s Companies. This peer group is the same group as was used for fiscal 2011, except that The Kroger Company was added to replace BJ’s Wholesale Club, Inc., and Lowe’s Companies (BJ’s Wholesale Club was taken privatewhich ceased to be a publicly traded company in September 2011 so public data concerning it were more limited).2011. These companies were selected because they all are recognized as successful retailers and twoone of them representrepresents the two other major membership warehouse operators.operator. In utilizing the comparative data, the Committee took into account that one of the companies is substantially larger than the Company. The Committee doesdid not use the comparable company data to set mid-points or other specific quantitative comparisons of executive compensation — it has used them only for general reference.
Equity Compensation
If fully earned based upon the achievement of performance targets and when fully vested, equity compensation is the largest component of compensation for executive officers. During fiscalIn 2006, the Board of Directors determined to replace allthe stock option awardsaward program with awards of RSUs. Since fiscal 2009, RSU grants to all executive officers have been performance based,performance-based, with performance-vesting over a one-year period, time-vesting over five years, and vesting for long service contingent upon the executive’s maintaining employment status at the vest date. The Board and the Committee believe that the five-year vesting requirement helps to foster motivation on the part of employees to improve the operations of the Company over the longer term. Following satisfaction of performance targets, RSUs become time-vested RSUs that, in the absence of accelerated vesting for long service (described below) vest 20% upon the first anniversary of the grant date (following the determination by the Committee that the performance criteria have been satisfied) and 20% vest over each of the ensuing four years. (Vesting of RSUs awarded to non-executive officers and employees is not performance based.) To the extent time vestingtime-vesting requirements are met, RSUs are settled and paid in shares of common stock (net of shares withheld for tax purposes). Recipients are not entitled to vote or receive dividends on unvested and undelivered RSUs.
Beginning in fiscal 2009, all officers and employees who receive RSU grants are eligible forreceive accelerated vesting prior to termination if they have achieved long service with the Company (33% vesting credited on the first anniversary of the date of grant after 25 years of service, 66% vesting after 30 years of service, and 100% vesting after 35 years of service, with any remainder vesting ratably over the remaining vesting period). Interim vesting for long-servicelong service can occur in the case of certain terminations for RSU grants prior to 2009.
The Board adopted in July 2008 a fixed date of October 22 for RSU grants.The policy allows for exceptions as approved in advance by the Committee. For fiscal 2011, RSU grants were made on October 22, 2010, and the performance criteria for the performance-based grants were established in November 2010. The criteria were a 2%4% increase (versus fiscal 2010)2011) of total sales or pretax income (with both measures based on local currency). For Mr. Sinegal, the criteria were a 3% increase (versus fiscal 2010) in total sales or pretax income (with both measures based on local currency). After the end of fiscal 2011,2012, the Committee determined that both goals were achieved. Accordingly, the executive officers earned all of the RSUs granted, subject to time-based and long-service vesting. All executive officers received accelerated vesting for long service for a portion of these RSUs, with a further time-based vesting occurring on the first anniversary of the grant.
The Board adopted in July 2008 a fixed date of October 22 for RSU grants.The policy allows for exceptions as approved in advance by the Committee. For fiscal 2012, RSU grants were made on October 22, 2011 (with the exception of the grant to Mr. Liebenson in April 2012, see note 3 on page 9), and the performance criteria for the grants were established in November 2011.
All RSU awards in fiscal 20112012 were made under the Company’s Fifth Restated 2002 Stock Incentive Compensation Plan, approved by the Company’s shareholders and the only equity plan maintained by the Company.
Other Compensation
The Company provides the Named Executive Officers with the benefits offered to all other employees in most respects. The cost of these benefits constitutes a small percentage of each executive’s total compensation. Key benefits include paid vacation, premiums paid for long-term disability insurance, a matching contribution and a discretionary 401(k) plan contribution, and the payment of premiums for health insurance and basic life insurance. In addition, the Company has a nonqualified deferred-compensation plan for the benefit of certain highly compensated employees, including the Named Executive Officers. The plan provides that a certain percentage of an employee’s contributions may be matched by the Company, subject to certain limitations. This match will vest over a specified period of time. The Company does not maintain a pension plan or post-retirement medical plan for any Named Executive Officer. The Company also provides the Named Executive Officers with certain perquisites, including a car allowance. The Committee believes the benefits and perquisites are modest and consistent with its overall objective of attracting and retaining highly qualified executive officers.
Compensation of the Chief Executive Officer and the Chairman of the Board
In addition to considering the Company’s compensation policies generally, the Committee reviews executive compensation and concentrates on the compensation packages for the Chief Executive Officer and the Chairman, believing that these roles are particularly critical to the continued success of the Company. Near the beginning of fiscal 2011,2012, the Committee approved a written employment contractcontracts for Mr. Sinegal whichand Mr. Jelinek, related to their service during fiscal 2012 as Chief Executive Officer. The contract term for Mr. Sinegal was the same as his contract for the priorperiod of time from the beginning of the fiscal year through December 31, 2011. The contract term for Mr. Jelinek was for January 1, 2012 through the end of the fiscal year. The contract term was for the fiscal year, unless otherwise terminated earlier in accordance with its terms. Itagreements provided for Mr. Sinegal to get a pro rata portion of his annual base salary of $350,000. It$350,000, and Mr. Jelinek to receive a pro rata portion of his annual base salary of $650,000 based on their months of service as chief executive officer during fiscal 2012. The agreements further provided for both Mr. Sinegal and Mr. Jelinek to get a ratable share of a cash bonus of up to $200,000, determined by the Board or the Committee, and an RSU award determined by the Board or the Committee. The Company had the right to terminate Mr. Sinegal for cause, and he had the right to terminate the agreement on 60 days’ notice. Mr. Brotman, who is an executive chairman, does not have an employment agreement with the Company. Generally, the Committee has withtreated Mr. Brotman similarly to the agreement of Messrs. Brotman and Sinegal, treated them similarlyChief Executive Officer for compensation purposes, owing to the similarities in their historical and current contributions to the success of the Company, except that this year Mr. Sinegal, at his request, received a smaller RSU grant.purposes. Apart from the change-in-control provision in the Company’s equity plan applicable to all grantees (described below under “Potential Payments Upon Termination or Change-in-Control”), neither Mr. none of Messrs.��Brotman, nor Mr. Sinegal, or Jelinek has any severance or change-in-control arrangement with the Company (nor does any other employee).
For fiscal 2011,2012, the Committee granted 50,000 performance-based RSUs to Mr. Brotman, the same number granted for the prior fiscal year. Mr. Jelinek was granted 50,000 performance-based RSUs, consistent with the amount granted to Mr. Sinegal requested thatin his award be reducedrole as CEO, prior to fiscal 2011, when Mr. Sinegal, at his own request, received a smaller grant of 25,000 performance-based RSUs. For fiscal 2012, Mr. Sinegal was awarded 8,333 RSUs (one-third of his prior year grant of 25,000 shares, andin proportion to the committee acceded to that request.amount of time during fiscal 2012 which he served as CEO). The Committee determined after the end of the fiscal year that the performance criteria were met, and all of the RSUs were earned, subject to further time vestingtime-vesting and accelerated vestingaccelerated-vesting for long service.
The base salaries of Messrs.Mr. Brotman and Mr. Sinegal have been $350,000 since fiscal 1999. For fiscal 2012, Mr. Sinegal received a lower salary than in prior years as a result of stepping down as Chief Executive officer on December 31, 2011. Mr. Jelinek received a base salary of $650,000 for fiscal 2012. Cash bonuses have generally been capped at no more than $200,000 since fiscal 1997. Mr. Brotman was awarded a cash bonus of $198,820 in fiscal 2012, while Mr. Jelinek
received a cash bonus of $168,233, and Mr. Sinegal received $65,022, amounts that were determined in part according to their length of service in their respective roles during the year. The bonus amounts for Messrs. Brotman, Jelinek, and Sinegal each were awarded cash bonuses of $198,400 in fiscal 2011. There are no fixed criteria applieddetermined by the Committee as follows: (1) half of bonus eligibility was determined by whether the Company had achieved its pre-tax income goal, which was achieved in consideringfiscal 2012; (2) eligibility for the remaining half was determined by applying a percentage representing the amount of these bonuses. Generally, Mr. Sinegal recommends to the Committee the bonus he believes is appropriate. Historically, he has recommended modest amounts, seeking to link his bonus (as a percentage of that eligible amount stated in his employment contract) to bonuses earnedreceived by employees generally eligible for the bonuses. This year, the Company attained its internal net income goal and employees were eligible to receive the bonus award component associated with this goal (roughly 50% of the bonus potential). Mr. Sinegal recommended to the Committee bonus amounts for other
executive officers that were approximatelyin comparison to their bonus eligibility (approximately 99% of target amounts, inclusive of the net income goal; he requested a bonus for himself of approximately 99% of his eligible amount. Accordingly, Mr. Sinegal requested a bonus of $198,400 of the $200,000 eligible amount in his employment agreement.). The Committee approved this request and approved an equal award for Mr. Brotman.
The Committee observed that cashcriteria governing bonuses paid to chiefthese executive officers at some peer companies are substantially higher. The Committee, however, wishes to respect Mr. Sinegal’s desire to receive modest compensation, in part because it believes that higher amounts would not change Mr. Sinegal’s motivation and performance. The Committee has indicated in the past and continues to believe that Messrs. Brotman and Sinegal are underpaid. The Committee has also noted that Messrs. Brotman and Sinegal have for many years had direct and indirect economic interests in shareholdings of the Company, which further align their interests with the Company’s shareholders.described below.
Compensation of Other Named Executive Officers
As noted above, the most significant component of the compensation of the Named Executive Officersin fiscal 2012 is the award in fiscal 2011 of performance-based RSUs. RSU amounts awarded to Messrs. Galanti, Jelinek, Portera and Zook were 25,000 40,000, 25,000 and 25,000, respectively.each. The amounts awarded were based on the recommendations of Mr. Sinegal and were the same amounts as awarded in fiscal 2010, except for Mr. Jelinek. The award for Mr. Jelinek was increased as a result of his new role as Chief Operating Officer.2011. As noted above, the performance criteria were attained and the Named Executive Officers earned all of the RSUs granted, subject to further time vestingtime-vesting and accelerated vestingaccelerated-vesting for long service as described above.
Salaries for other Named Executive Officers were based upon the recommendation of Mr. Sinegal,Jelinek, who focused on the amount of increase deserved over the prior year’s salary level. SalaryBase salary levels increased up to 7.5%3.8% over fiscal 2010.2011 after adjusting for the length of the fiscal years (fiscal 2012 salaries actually increased up to 5.8% vs. fiscal 2011 as a result of the 53-week fiscal 2012 as compared to the normal 52-week fiscal year).
The Named Executive Officers (other than Messrs. Brotman, Sinegal and Sinegal)Jelinek) received discretionary cash bonuses ranging from approximately $79,000 to approximately $99,000, increased from$89,000, relatively flat as compared to the prior year. Bonus criteria were approved by the Committee in early fiscal 2011,2012, based upon the recommendation of Mr. Sinegal. After the close of the fiscal year, Mr. SinegalJelinek recommended bonus amounts to the Committee of approximately 99%95-110% of target amounts (which ranged from $80,000 to $100,000)the targeted amount ($80,000). The Committee maintains the discretion to vary from Mr. Sinegal’sthe Chief Executive Officer’s recommendation but historically has deferred to it, as it did this fiscal year. As with all other employees, roughly 50% of the bonus potential was achieved due to the Company’s attainment of its internal netpre-tax income target. For fiscal 2011,2012, eligibility for the bonus portion not associated with the Company’s netpre-tax income target was determined based on goals relevant to the executive officer’s area of responsibility: for those whose responsibilities are operational, the goals related to sales, controllable expenses, inventory shrinkage, and pretax profit in their areas of responsibility; for those whose responsibilities are primarily buying, the goals related to sales, gross margin, inventory shrinkage, and inventory turns in their areas of responsibility; for those whose responsibilities combine operational and buying functions, the goals related to a combination of those described above; and for those whose responsibilities are staff functions, the goals related to a combination of Company-wide operational and buying goals, in addition to qualitative factors relevant to their areas of responsibilities.responsibility. For each officer there is also a component not linked to any objective measure. Neither Mr. Sinegal nor Mr. Jelinek is not bound to recommend any specific bonus amount based on these factors; hethey can and doesdo consider what he believesthey believe to be the appropriate bonus in view of all the circumstances. To be eligible for the annual bonus, the individual must be employed by the Company and in the same or similar executive-level position at the time bonus checks are issued (historically in November).
Stock Ownership Guidelines
In fiscal 2009, the Company adopted stock ownership requirements for executive officers. By January 2010, all executive officers were required to own and maintain at least 12,000 shares of common stock. All executive officers are in compliance with this requirement.
Impact of Tax Considerations
The Committee examined the equity compensation in light of the impact of Section 162(m) of the Internal Revenue Code, which generally prohibits any publicly held corporation from taking a federal income tax deduction for compensation paid in excess of $1 million in any taxable year to the Named Executive Officers (other than the Chief Financial Officer), subject to certain exceptions for performance-based compensation (i.e., compensation paid only if an individual satisfies objective performance goals that the Committee has established in advance based on performance criteria approved by shareholders). RSUs granted to our Named Executive Officers are intended to satisfy the performance-based exception. In approving compensation types and levels, the Committee considers whether particular elements of that compensation will be deductible for federal income tax purposes. It retainsreserves the ability to approve what it believes to be appropriate compensation, even if the Company may not be able to deduct all of that compensation under federal tax laws.
Conclusion
The Committee believes that each element of compensation and the total compensation provided to each of the Named Executive Officers is reasonable and appropriate. The value of the compensation payable to the Named Executive Officers is significantly tied to the Company’s performance and the return to its shareholders. The Committee believes that its compensation programs will allow the Company to continue to attract and retain a top-performing management team.
Report of the Compensation Committee of the Board of Directors
The Compensation Committee of the Company’s Board of Directors has submitted the following report for inclusion in this Proxy Statement:
The Committee has reviewed and discussed with management the Compensation Discussion and Analysis contained in this Proxy Statement. Based on the review and discussions with management, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference in the Company’s Annual Report on Form 10-K for the fiscal year ended August 28, 2011,September 2, 2012, for filing with the SEC.
The foregoing report is provided by the following directors, who constituted the Committee during fiscal 2011.2012.
Benjamin S. Carson, Sr., M.D., Chair
Charles T. Munger
Jill S. Ruckelshaus
Summary of Compensation
The following table sets forth information regarding compensation for each of the Named Executive Officers for fiscal 2012, 2011, 2010, and 2009.2010.
Name and Principal Position | Year | Salary ($) | Bonus ($)(1) | Stock Awards ($)(2) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(3) | All Other Compensation ($)(4)(5) | Total ($) | Year | Salary ($) | Bonus ($)1 | Stock Awards ($)2 | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)3 | All Other Compensation ($)4,5 | Total ($) | ||||||||||||||||||||||||||||||||||||||||||
James D. Sinegal | 2011 | 350,000 | 198,400 | 1,560,015 | 1,538 | 81,206 | 2,191,159 | |||||||||||||||||||||||||||||||||||||||||||||||||
Chief Executive Officer | 2010 | 350,000 | 190,400 | 2,896,030 | — | 93,004 | 3,529,434 | |||||||||||||||||||||||||||||||||||||||||||||||||
2009 | 350,000 | 75,000 | 2,230,700 | 2,736 | 78,576 | 2,737,012 | ||||||||||||||||||||||||||||||||||||||||||||||||||
W. Craig Jelinek | 2012 | 662,500 | 168,233 | 3,870,300 | 21,226 | 88,514 | 4,810,773 | |||||||||||||||||||||||||||||||||||||||||||||||||
President and Chief Executive Officer | 2011 | 649,999 | 99,200 | 2,496,024 | 811 | 89,831 | 3,335,865 | |||||||||||||||||||||||||||||||||||||||||||||||||
2010 | 635,000 | 95,200 | 1,448,015 | — | 85,844 | 2,264,059 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Jeffrey H. Brotman | 2011 | 350,000 | 198,400 | 3,120,030 | 5,076 | 83,083 | 3,756,589 | 2012 | 356,731 | 198,820 | 3,870,300 | 30,483 | 82,637 | 4,538,971 | ||||||||||||||||||||||||||||||||||||||||||
Chairman of the Board | 2010 | 350,000 | 190,400 | 2,896,030 | — | 88,948 | 3,525,378 | 2011 | 350,000 | 198,400 | 3,120,030 | 5,076 | 83,083 | 3,756,589 | ||||||||||||||||||||||||||||||||||||||||||
2009 | 350,000 | 75,000 | 2,230,700 | 4,520 | 75,905 | 2,736,125 | 2010 | 350,000 | 190,400 | 2,896,030 | — | 88,948 | 3,525,378 | |||||||||||||||||||||||||||||||||||||||||||
W. Craig Jelinek | 2011 | 649,999 | 99,200 | 2,496,024 | 811 | 89,831 | 3,335,865 | |||||||||||||||||||||||||||||||||||||||||||||||||
President and Chief Operating Officer | 2010 | 635,000 | 95,200 | 1,448,015 | — | 85,844 | 2,264,059 | |||||||||||||||||||||||||||||||||||||||||||||||||
2009 | 603,849 | 32,353 | 1,115,350 | 1,360 | 82,544 | 1,835,456 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Richard A. Galanti | 2011 | 644,995 | 79,360 | 1,560,015 | 2,066 | 103,575 | 2,390,011 | 2012 | 664,922 | 79,222 | 1,935,150 | 49,801 | 96,605 | 2,825,700 | ||||||||||||||||||||||||||||||||||||||||||
Executive Vice President, Chief Financial Officer | 2010 | 600,000 | 76,160 | 1,448,015 | — | 108,327 | 2,232,502 | 2011 | 644,995 | 79,360 | 1,560,015 | 2,066 | 103,575 | 2,390,011 | ||||||||||||||||||||||||||||||||||||||||||
2009 | 600,000 | 32,353 | 1,115,350 | 4,146 | 80,435 | 1,832,284 | 2010 | 600,000 | 76,160 | 1,448,015 | — | 108,327 | 2,232,502 | |||||||||||||||||||||||||||||||||||||||||||
Joseph P. Portera | 2011 | 580,173 | 85,415 | 1,560,015 | 647 | 103,512 | 2,329,762 | 2012 | 593,616 | 86,193 | 1,935,150 | 13,595 | 109,505 | 2,738,059 | ||||||||||||||||||||||||||||||||||||||||||
Executive Vice President, COO- Eastern & Canadian Divisions | 2010 | 565,288 | 77,815 | 1,448,015 | — | 106,566 | 2,197,684 | 2011 | 580,173 | 85,415 | 1,560,015 | 647 | 103,512 | 2,329,762 | ||||||||||||||||||||||||||||||||||||||||||
2009 | 550,288 | 28,806 | 1,115,350 | 1,058 | 91,664 | 1,787,166 | 2010 | 565,288 | 77,815 | 1,448,015 | — | 106,566 | 2,197,684 | |||||||||||||||||||||||||||||||||||||||||||
Dennis R. Zook | 2011 | 574,884 | 88,870 | 1,560,015 | 277 | 90,118 | 2,314,164 | 2012 | 608,096 | 88,981 | 1,935,150 | 9,087 | 88,360 | 2,729,674 | ||||||||||||||||||||||||||||||||||||||||||
Executive Vice President, COO- Southwest & Mexico Divisions | 2010 | 560,289 | 85,399 | 1,448,015 | — | 91,066 | 2,184,769 | 2011 | 574,884 | 88,870 | 1,560,015 | 277 | 90,118 | 2,314,164 | ||||||||||||||||||||||||||||||||||||||||||
2009 | 545,288 | 24,000 | 1,115,350 | 578 | 79,440 | 1,764,656 | 2010 | 560,289 | 85,399 | 1,448,015 | — | 91,066 | 2,184,769 | |||||||||||||||||||||||||||||||||||||||||||
James D. Sinegal | 2012 | 182,557 | 65,022 | 680,327 | 36,569 | 81,231 | 1,045,706 | |||||||||||||||||||||||||||||||||||||||||||||||||
Former Chief Executive Officer | 2011 | 350,000 | 198,400 | 1,560,015 | 1,538 | 81,206 | 2,191,159 | |||||||||||||||||||||||||||||||||||||||||||||||||
2010 | 350,000 | 190,400 | 2,896,030 | — | 93,004 | 3,529,434 |
(1) |
(2) | Represents the grant-date fair value of performance-based RSUs granted to the Named Executive Officers during fiscal 2012, 2011 |
(3) | Each Named Executive Officer (among certain other employees) is eligible to participate in the Company’s nonqualified deferred-compensation plan, which allows the employee to defer up to 100% of salary and bonus and to receive a Company match of up to 50% of the deferred amount, up to a maximum match of $5,000. The minimum deferral period is five years, and the matching credit vests ratably over five years unless the participant has attained a sum of age and years of service totaling 65, in which case the Company match vests in one year. Interest accrues on deferred amounts at the Bank of America prime rate. For contributions made after January 1, 1997, an additional 1% interest is credited upon the participant’s attaining a sum of age and years of service totaling 65. The amounts reported in this column represent the interest on the officer’s balance to the extent that it is “above market” – greater than 120% of the applicable federal long-term rate. |
(4) | Detail is provided below in the Fiscal |
(5) | Executives, their families, and invited guests occasionally fly on the corporate aircraft as additional passengers on existing business flights. |
FISCAL 20112012 ALL OTHER COMPENSATION
Name | Deferred Compen- sation Match ($) | 401(k) Matching Contribution ($)(1) | 401(k) Discretionary Contribution ($)(1) | Health Care Insurance Premiums ($) | Vehicle Allowance ($) | Long- Term Disability Premiums ($) | Tax Gross-Up ($)(2) | Other ($) | All Other Compen- sation ($) | Deferred Compen- sation Match ($) | 401(k) Matching Contribution ($)1 | 401(k) Discretionary Contribution ($)1 | Executive Life Insurance ($) | Health Care Insurance Premiums ($) | Vehicle Allowance ($) | Long- Term Disability Premiums ($) | Tax Gross-Up ($)2 | Other ($) | All Other Compen- sation ($) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
James D. Sinegal | 5,000 | 500 | 22,050 | 32,131 | 13,879 | 4,883 | 2,763 | — | 81,206 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
W. Craig Jelinek | 5,000 | 500 | 22,050 | 6,079 | 29,892 | 14,553 | 6,529 | 3,911 | — | 88,514 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Jeffrey H. Brotman | 5,000 | 500 | 22,050 | 32,131 | 12,393 | 7,020 | 3,989 | — | 83,083 | 5,000 | 500 | 22,050 | — | 29,242 | 14,846 | 6,981 | 4,018 | — | 82,637 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
W. Craig Jelinek | 5,000 | 500 | 22,050 | 32,781 | 17,936 | 6,888 | 3,907 | 769 | 89,831 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Richard A. Galanti | 5,000 | 500 | 22,050 | 45,233 | 17,091 | 6,051 | 3,459 | 4,191 | 103,575 | 5,000 | 500 | 22,050 | — | 41,106 | 16,799 | 5,743 | 3,421 | 1,986 | 96,605 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Joseph P. Portera | 5,000 | 500 | 22,050 | 45,753 | 16,448 | 7,767 | 5,625 | 369 | 103,512 | 5,000 | 500 | 22,050 | 8,598 | 42,449 | 17,747 | 7,534 | 5,627 | — | 109,505 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dennis R. Zook | 5,000 | 500 | 22,050 | 32,131 | 15,776 | 7,841 | 6,820 | — | 90,118 | 5,000 | 500 | 22,050 | 3,209 | 29,242 | 14,751 | 6,802 | 6,806 | — | 88,360 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
James D. Sinegal | 5,000 | 500 | 22,050 | — | 29,242 | 17,297 | 4,349 | 2,793 | — | 81,231 |
(1) | The Company has a 401(k) Retirement Plan that is available to all U.S. employees who have completed 90 days of employment. For all U.S. employees, with the exception of California union employees, the plan allows pretax deferral, for which the Company matches 50% of the first $1,000 of employee contributions. In addition, the Company provides each eligible participant an annual discretionary contribution based on salary and years of service, which amount is set forth above. Vesting in the matching and discretionary contributions is based on years of service and is 100% vested after five years of service. |
(2) | Executives are compensated for additional tax costs associated with the Company’s payments on their behalf for long-term disability insurance. The insurance |
The following table provides information regarding grants of performance-based RSUs during fiscal 20112012 to each of the Named Executive Officers.
FISCAL 20112012 GRANTS OF PLAN-BASED AWARDS
Name | Grant Date | Estimated Future Payouts Under Equity Incentive Plan Awards (#)(1) | Grant-Date Fair Value of Stock and Option Awards ($)(2) | Grant Date | Estimated Future Payouts Under Equity Incentive Plan Awards (#)1 | Grant-Date Fair Value of Stock and Option Awards ($)2 | ||||||||||||||||||
James D. Sinegal | 10/22/10 | 25,000 | 1,560,015 | |||||||||||||||||||||
W. Craig Jelinek | 10/22/11 | 50,000 | 3,870,300 | |||||||||||||||||||||
Jeffrey H. Brotman | 10/22/10 | 50,000 | 3,120,030 | 10/22/11 | 50,000 | 3,870,300 | ||||||||||||||||||
W. Craig Jelinek | 10/22/10 | 40,000 | 2,496,024 | |||||||||||||||||||||
Richard A. Galanti | 10/22/10 | 25,000 | 1,560,015 | 10/22/11 | 25,000 | 1,935,150 | ||||||||||||||||||
Joseph P. Portera | 10/22/10 | 25,000 | 1,560,015 | 10/22/11 | 25,000 | 1,935,150 | ||||||||||||||||||
Dennis R. Zook | 10/22/10 | 25,000 | 1,560,015 | 10/22/11 | 25,000 | 1,935,150 | ||||||||||||||||||
James D. Sinegal | 10/22/11 | 8,333 | 680,327 |
(1) | Represents the number of performance-based RSUs granted to the Named Executive Officers during fiscal |
(2) | Represents the grant-date fair value of RSU awards granted, computed as described in footnote 2 to the Summary Compensation Table above. |
The following table sets forth information regarding outstanding stock options and unvested stock awards held by each of the Named Executive Officers as of August 28, 2011.September 2, 2012.
OUTSTANDING EQUITY AWARDS AT FISCAL 20112012 YEAR-END
Option Awards | Stock Awards | |||||||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date(1) | Number of Shares or Units of Stock Unvested at Fiscal Year- End (#)(2) | Stock Award Grant Date | Market Value of Shares or Units of Stock Unvested at Fiscal Year- End ($)(3) | |||||||||||||||||||||
James D. Sinegal | 150,000 | — | 37.35 | 04/01/14 | 10,000 | 10/19/06 | 772,100 | |||||||||||||||||||||
150,000 | — | 43.79 | 04/01/15 | 20,000 | 10/17/07 | 1,544,200 | ||||||||||||||||||||||
19,995 | 10/22/08 | 1,543,814 | ||||||||||||||||||||||||||
26,665 | 10/22/09 | 2,058,805 | ||||||||||||||||||||||||||
16,663 | 10/22/10 | 1,286,550 | ||||||||||||||||||||||||||
Jeffrey H. Brotman | 150,000 | — | 30.41 | 04/01/13 | 10,000 | 10/19/06 | 772,100 | |||||||||||||||||||||
150,000 | — | 37.35 | 04/01/14 | 20,000 | 10/17/07 | 1,544,200 | ||||||||||||||||||||||
150,000 | — | 43.79 | 04/01/15 | 19,995 | 10/22/08 | 1,543,814 | ||||||||||||||||||||||
26,665 | 10/22/09 | 2,058,805 | ||||||||||||||||||||||||||
33,330 | 10/22/10 | 2,573,409 | ||||||||||||||||||||||||||
W. Craig Jelinek | 30,000 | — | 38.79 | 04/02/12 | 5,000 | 10/19/06 | 386,050 | |||||||||||||||||||||
45,000 | — | 39.25 | 04/02/12 | 10,000 | 10/17/07 | 772,100 | ||||||||||||||||||||||
15,000 | — | 30.41 | 04/01/13 | 9,996 | 10/22/08 | 771,791 | ||||||||||||||||||||||
60,000 | — | 33.75 | 04/01/13 | 13,328 | 10/22/09 | 1,029,055 | ||||||||||||||||||||||
75,000 | — | 37.35 | 04/01/14 | 26,664 | 10/22/10 | 2,058,727 | ||||||||||||||||||||||
75,000 | — | 43.79 | 04/01/15 | |||||||||||||||||||||||||
Richard A. Galanti | 15,000 | — | 39.25 | 04/02/12 | 5,000 | 10/19/06 | 386,050 | |||||||||||||||||||||
30,000 | — | 33.75 | 04/01/13 | 10,000 | 10/17/07 | 772,100 | ||||||||||||||||||||||
25,000 | — | 37.35 | 04/01/14 | 9,996 | 10/22/08 | 771,791 | ||||||||||||||||||||||
75,000 | — | 43.79 | 04/01/15 | 13,328 | 10/22/09 | 1,029,055 | ||||||||||||||||||||||
16,663 | 10/22/10 | 1,286,550 | ||||||||||||||||||||||||||
Joseph P. Portera | — | — | — | — | 5,000 | 10/19/06 | 386,050 | |||||||||||||||||||||
10,000 | 10/17/07 | 772,100 | ||||||||||||||||||||||||||
9,996 | 10/22/08 | 771,791 | ||||||||||||||||||||||||||
13,328 | 10/22/09 | 1,029,055 | ||||||||||||||||||||||||||
16,663 | 10/22/10 | 1,286,550 | ||||||||||||||||||||||||||
Dennis R. Zook | — | — | — | — | 5,000 | 10/19/06 | 386,050 | |||||||||||||||||||||
10,000 | 10/17/07 | 772,100 | ||||||||||||||||||||||||||
9,999 | 10/22/08 | 772,023 | ||||||||||||||||||||||||||
13,332 | 10/22/09 | 1,029,364 | ||||||||||||||||||||||||||
16,664 | 10/22/10 | 1,286,627 |
Option Awards | Stock Awards | |||||||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date1 | Number of Shares or Units of Stock Unvested at Fiscal Year- End (#)2 | Stock Award Grant Date | Market Value of Shares or Units of Stock Unvested at Fiscal Year- End ($)3 | |||||||||||||||||||||
W. Craig Jelinek | 15,000 | — | 30.41 | 04/01/13 | 5,000 | 10/17/07 | 489,350 | |||||||||||||||||||||
60,000 | — | 33.75 | 04/01/13 | 6,664 | 10/22/08 | 652,206 | ||||||||||||||||||||||
75,000 | — | 37.35 | 04/01/14 | 9,996 | 10/22/09 | 978,308 | ||||||||||||||||||||||
75,000 | — | 43.79 | 04/01/15 | 21,332 | 10/22/10 | 2,087,763 | ||||||||||||||||||||||
33,330 | 10/22/11 | 3,262,007 | ||||||||||||||||||||||||||
Jeffrey H. Brotman | 150,000 | — | 37.35 | 04/01/14 | 10,000 | 10/17/07 | 978,700 | |||||||||||||||||||||
150,000 | — | 43.79 | 04/01/15 | 13,330 | 10/22/08 | 1,304,607 | ||||||||||||||||||||||
20,000 | 10/22/09 | 1,957,400 | ||||||||||||||||||||||||||
26,665 | 10/22/10 | 2,609,704 | ||||||||||||||||||||||||||
33,330 | 10/22/11 | 3,262,007 | ||||||||||||||||||||||||||
Richard A. Galanti | 10,000 | — | 33.75 | 04/01/13 | 5,000 | 10/17/07 | 489,350 | |||||||||||||||||||||
25,000 | — | 37.35 | 04/01/14 | 6,664 | 10/22/08 | 652,206 | ||||||||||||||||||||||
75,000 | — | 43.79 | 04/01/15 | 9,996 | 10/22/09 | 978,308 | ||||||||||||||||||||||
13,331 | 10/22/10 | 1,304,705 | ||||||||||||||||||||||||||
16,663 | 10/22/11 | 1,630,808 | ||||||||||||||||||||||||||
Joseph P. Portera | — | — | — | — | 5,000 | 10/17/07 | 489,350 | |||||||||||||||||||||
6,664 | 10/22/08 | 652,206 | ||||||||||||||||||||||||||
9,996 | 10/22/09 | 978,308 | ||||||||||||||||||||||||||
13,331 | 10/22/10 | 1,304,705 | ||||||||||||||||||||||||||
16,663 | 10/22/11 | 1,630,808 | ||||||||||||||||||||||||||
Dennis R. Zook | — | — | — | — | 5,000 | 10/17/07 | 489,350 | |||||||||||||||||||||
3,332 | 10/22/08 | 326,103 | ||||||||||||||||||||||||||
4,997 | 10/22/09 | 489,056 | ||||||||||||||||||||||||||
6,664 | 10/22/10 | 652,206 | ||||||||||||||||||||||||||
8,331 | 10/22/11 | 815,355 | ||||||||||||||||||||||||||
James D. Sinegal | — | — | — | — | 10,000 | 10/17/07 | 978,700 | |||||||||||||||||||||
13,330 | 10/22/08 | 1,304,607 | ||||||||||||||||||||||||||
20,000 | 10/22/09 | 1,957,400 | ||||||||||||||||||||||||||
13,331 | 10/22/10 | 1,304,705 | ||||||||||||||||||||||||||
4,166 | 10/22/11 | 407,726 |
(1) | Options vested 20% annually over five years from the grant |
(2) | RSUs are granted subject to (a) satisfaction of one-year performance conditions and (b) vesting over four years thereafter. Beginning with grants in fiscal 2009, RSUs are also subject prior to termination to accelerated vesting for long service. Specifically, RSUs with the following grant dates vest as follows, assuming satisfaction of the one-year performance conditions: |
Grant Date | Vesting | |
10/ | ||
| Vests 20% annually on each subsequent October 17 | |
10/22/2008, 10/22/2009, and 10/22/2010 | ||
10/22/ | ||
| Subsequent to the end of fiscal |
(3) | Based on the closing market price of |
FISCAL 20112012 OPTION EXERCISES AND STOCK VESTED
The following table provides information regarding stock options that were exercised and stock awards that vested during fiscal 20112012 for each of the Named Executive Officers.
Option Awards | Stock Awards | |||||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | ||||||||||||
James D. Sinegal | 450,000 | 12,533,520 | 55,000 | 3,585,354 | ||||||||||||
Jeffrey H. Brotman | 150,000 | 5,836,000 | 55,000 | 3,582,754 | ||||||||||||
W. Craig Jelinek | 75,000 | 3,121,902 | 27,508 | 1,793,191 | ||||||||||||
Richard A. Galanti | 70,000 | 2,539,346 | 27,508 | 1,793,191 | ||||||||||||
Joseph P. Portera | — | — | 27,508 | 1,793,191 | ||||||||||||
Dennis R. Zook | — | — | 27,500 | 1,791,378 |
Option Awards | Stock Awards | |||||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | ||||||||||||
W. Craig Jelinek | 75,000 | 3,787,853 | 35,332 | 2,974,382 | ||||||||||||
Jeffrey H. Brotman | 150,000 | 9,188,108 | 56,665 | 4,769,753 | ||||||||||||
Richard A. Galanti | 35,000 | 1,747,333 | 28,333 | 2,384,916 | ||||||||||||
Joseph P. Portera | — | — | 28,333 | 2,384,916 | ||||||||||||
Dennis R. Zook | — | — | 43,338 | 3,664,844 | ||||||||||||
James D. Sinegal | 300,000 | 16,477,010 | 44,999 | 3,787,226 |
FISCAL 20112012 NONQUALIFIED DEFERRED COMPENSATION
The following table provides information relating to the nonqualified deferred compensation plan for each of the Named Executive Officers. See Note 3 on page 19 to the Summary Compensation Table on page 18 for additional information about the nonqualified deferred compensation plan.
Name | Executive Contributions in Last Fiscal Year ($)(1) | Registrant Contributions in Last Fiscal Year ($)(2) | Aggregate Earnings in Last Fiscal Year ($)(3) | Aggregate Withdrawals/ Distributions ($) | Aggregate Balance at Last Fiscal Year-End ($)(4) | Executive Contributions in Last Fiscal Year ($)1 | Registrant Contributions in Last Fiscal Year ($)2 | Aggregate Earnings in Last Fiscal Year ($)3 | Aggregate Withdrawals/ Distributions ($) | Aggregate Balance at Last Fiscal Year-End ($)4 | ||||||||||||||||||||||||||||||
James D. Sinegal | 250,000 | 5,000 | 139,017 | — | 3,461,515 | |||||||||||||||||||||||||||||||||||
W. Craig Jelinek | 266,000 | 5,000 | 87,254 | — | 2,231,446 | |||||||||||||||||||||||||||||||||||
Jeffrey H. Brotman | 10,000 | 5,000 | 129,572 | 366,527 | 3,001,698 | 10,385 | 5,000 | 130,472 | — | 3,147,555 | ||||||||||||||||||||||||||||||
W. Craig Jelinek | 202,500 | 5,000 | 73,407 | — | 1,873,192 | |||||||||||||||||||||||||||||||||||
Richard A. Galanti | 359,500 | 5,000 | 185,727 | — | 4,637,038 | 337,000 | 5,000 | 209,020 | — | 5,188,058 | ||||||||||||||||||||||||||||||
Joseph P. Portera | 50,000 | 5,000 | 50,545 | — | 1,227,028 | 50,000 | 5,000 | 55,120 | — | 1,337,148 | ||||||||||||||||||||||||||||||
Dennis R. Zook | 134,231 | 5,000 | 29,979 | — | 805,800 | 76,154 | 5,000 | 37,835 | — | 924,789 | ||||||||||||||||||||||||||||||
James D. Sinegal | 159,122 | 5,000 | 154,690 | — | 3,780,327 |
��
(1) | These amounts were also included in “Salary” or “Bonus” in the Summary Compensation Table. |
(2) | These amounts were reported as “All Other Compensation” in the Summary Compensation Table. |
(3) | The amount representing interest on the Named Executive Officer’s balance that is “above market” (greater than 120% of the applicable federal |
(4) | Of the amounts in this column, the following amounts have also been reported in the Summary Compensation Table for fiscal 2012, 2011, |
Name | Reported for Fiscal 2011 ($) | Previously Reported for Fiscal 2010 ($) | Previously Reported for Fiscal 2009 ($) | Reported for Fiscal 2012 ($) | Previously Reported for Fiscal 2011 ($) | Previously Reported for Fiscal 2010 ($) | ||||||||||||||||||
James D. Sinegal | 256,538 | 177,115 | 110,621 | |||||||||||||||||||||
W. Craig Jelinek | 292,226 | 208,311 | 186,136 | |||||||||||||||||||||
Jeffrey H. Brotman | 20,076 | 15,000 | 154,735 | 45,868 | 20,076 | 15,000 | ||||||||||||||||||
W. Craig Jelinek | 208,311 | 186,136 | 215,755 | |||||||||||||||||||||
Richard A. Galanti | 366,566 | 354,500 | 332,146 | 391,801 | 366,566 | 354,500 | ||||||||||||||||||
Joseph P. Portera | 55,647 | 33,101 | 39,658 | 68,595 | 55,647 | 33,101 | ||||||||||||||||||
Dennis R. Zook | 139,508 | 15,000 | 15,578 | 90,241 | 139,508 | 15,000 | ||||||||||||||||||
James D. Sinegal | 200,691 | 256,538 | 177,115 |
Potential Payments Upon Termination or Change-in-Control
The Company does not have any change-in-control or severance agreements with any executive officer or director. Plans under which stock options and RSUs have been granted contain provisions concerningprovide for accelerated vesting upon a change in control. The amounts shown in the following table reflect the potential value to the Named Executive Officers, as of the end of fiscal 2011,2012, of full acceleration of all unvested RSUs upon a change in control of the Company and acceleration of unvested RSURSUs upon certain terminations of employment. (There were no unvested options held by the Named Executive Officers at the end of fiscal 2011.2012.) Under the Company’s FifthSixth Restated 2002 Stock Incentive Plan, in the event of a change in control, the Board (or other authorized plan administrator) may accelerate RSU vesting.
The amounts shown assume that a change in control was effective as of the last business day of fiscal 2011 (August 28, 2011)2012 (September 2, 2012) and that the price of Costco common stock on which the calculations were based was the closing price on August 26, 201131, 2012 ($77.21)97.87). The amounts below are estimates of the incremental amounts that would be received upon a change in control or termination of employment; the actual amount could be determined only at the time of any
actual change in control or termination of employment. For grants of RSUs for fiscal years
through 2008, in the event of a termination other than for cause: (a) proportional vesting (measured on a daily basis) occurs for the time period between the termination and the grant date or grant date anniversary; and (b) accelerated vesting for long service occurs for employees with age and years of service equaling or exceeding 65. For RSUs granted after fiscal 2008, in the event of a termination other than for cause: (a) proportional vesting (measured on a quarterly basis) occurs for the time period between termination and the grant date or grant date anniversary; and (b) accelerated vesting for long service occurs based on years of service. For purposes of the foregoing, the vesting formula for long service is 33% for 25 or more years of service; 66% for 30 or more years of service; and 100% for 35 or more years of service. RSUs granted after fiscal 2008 also provide for accelerated vesting for long service prior to termination. There is no accelerated vesting of RSUs in the event of a termination for cause.
ESTIMATED POTENTIAL INCREMENTAL PAYMENTS UPON TERMINATION OR
CHANGE IN CONTROL
Name | RSUs That May Vest Upon Change in Control(1)(4) | Total Value of RSUs That May Vest Upon Change in Control ($)(3) | RSUs Vested Upon Termination Without Cause(2)(4) | Total Value of RSUs Vested Upon Termination Without Cause ($)(3) | RSUs That May Vest Upon Change in Control1,4 | Total Value of RSUs That May Vest Upon Change in Control ($)3 | RSUs Vested Upon Termination Without Cause2,4 | Total Value of RSUs Vested Upon Termination Without Cause ($)3 | ||||||||||||||||||||||||
James D. Sinegal | 93,323 | 7,205,469 | 42,287 | 3,264,979 | ||||||||||||||||||||||||||||
W. Craig Jelinek | 76,322 | 7,469,634 | 35,254 | 3,450,309 | ||||||||||||||||||||||||||||
Jeffrey H. Brotman | 109,990 | 8,492,328 | 53,120 | 4,101,395 | 103,325 | 10,112,418 | 45,844 | 4,486,752 | ||||||||||||||||||||||||
W. Craig Jelinek | 64,988 | 5,017,723 | 33,053 | 2,552,022 | ||||||||||||||||||||||||||||
Richard A. Galanti | 54,987 | 4,245,546 | 26,553 | 2,050,157 | 51,654 | 5,055,377 | 22,920 | 2,243,180 | ||||||||||||||||||||||||
Joseph P. Portera | 54,987 | 4,245,546 | 26,553 | 2,050,157 | 51,654 | 5,055,377 | 22,920 | 2,243,180 | ||||||||||||||||||||||||
Dennis R. Zook | 54,995 | 4,246,164 | 26,562 | 2,050,852 | 28,324 | 2,772,070 | 26,460 | 2,589,640 | ||||||||||||||||||||||||
James D. Sinegal | 60,827 | 5,953,138 | 25,844 | 2,529,352 |
(1) | Column displays the maximum number of RSUs that, in the event of a change in control of the Company, the Board may chose to accelerate. |
(2) | RSUs are granted subject to (a) satisfaction of one-year performance conditions and (b) vesting over four years thereafter. |
(3) | Total value calculated assuming a termination or change-in-control date of |
(4) | Values assume satisfaction of the performance conditions for the October |
In the event that a Named Executive Officer’s employment with the Company is terminated, either voluntarily or involuntarily, the officer will receive the balance of the deferred compensation account no sooner than six months following termination of employment or death. The balances of each Named Executive Officer’s deferred compensation account as of the end of fiscal 20112012 are set forth in the table above titled “Fiscal 20112012 Nonqualified Deferred Compensation.” In addition, in the event of a threatened change in control of the Company, the Compensation Committee may take various actions to protect the deferred compensation benefit of the participants, including accelerating vesting or terminating the deferred compensation plan and paying benefits to the participants.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is an executive officer or former officer of the Company. In addition, no executive officer of the Company served on the board of directors of any entity whose executive officers included a director of the Company.
Certain Relationships and Transactions
John W. Meisenbach is a principal shareholder of MCM, A Meisenbach Company. MCM provided consulting and brokerage services in managing the Company’s employee benefit and member insurance programs. For these services, MCM received total compensation from third-party insurers and the Company of $2.77$2.75 million in fiscal 2011.2012.
Richard D. DiCerchio’s brother-in-law was employed by the Company during fiscal 2011 at an annual salary of $210,000, and received a bonus of $42,840 and an RSU grant of 2,700 shares. James D. Sinegal’s son was employed by the Company during fiscal year 2011until his resignation on February 1, 2012, at an annual salary of $268,500$273,500 and received a bonus of $50,000 and$50,000. Mr. Sinegal’s son also received an RSU grant of 12,500 shares. Cash bonuses were awarded under terms and conditions comparable to those applicable to other employees of the Company similarly situated. RSU grants are subject to terms and conditions affecting employees generally, including vesting over five years. Mr. Sinegal’s sonshares, which was forfeited in part upon his resignation. He also received reimbursements of the type received by other expatriate officers designed to offset higher costs associated with living and working abroad. The payments related to housing, education, travel, automobile, tax preparation and tax equalization, and were in the amount of approximately $412,000$438,000 associated with fiscal 2011.2012. Dennis R. Zook’s son was employed by the Company during fiscal year 2012 at an annual salary of $136,000 and received a bonus of $42,216, and an RSU grant of 2,000 shares. Thomas K. Walker’s son was employed by the Company during fiscal year 2012 at an annual salary of $128,600 and received a bonus of $40,000 and an RSU grant of 2,000 shares. These individuals also participate in benefit plans generally available to employees. Cash bonuses were awarded under terms and conditions comparable to those applicable to employees of the Company similarly situated. RSU grants are subject to terms and conditions affecting employees generally, including vesting over five years. No family members of executive officers or directors are executive officers of the Company.
These relationships and transactions were approved by the Audit Committee. The charter of the Audit Committee requires the Committee to review and approve all related-person transactions that are required to be disclosed under SEC Item 404(a) of Regulation S-K. There were no transactions required to be reported in this Proxy Statement since the beginning of fiscal 20112012 where this policy did not require review, approval or ratification or where this policy was not followed.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under SEC rules, the Company’s directors, executive officers and beneficial owners of more than 10% of the Company’s equity security are required to file periodic reports of their ownership, and changes in that ownership, with the SEC. Based solely on its review of copies of these reports and representations of such reporting persons, the Company believes that during fiscal 2011,2012, such SEC filing requirements were satisfied, except that one report concerning 25 shares was inadvertently filed late for each of Mr.Messrs. Murphy, Moulton, and Mr. Schutt related to an RSU grant.Schutt.
As of October 11, 20119, 2012
To the Board of Directors of Costco Wholesale Corporation:
We have reviewed and discussed with management the Company’s audited consolidated financial statements as of and for the fiscal year ended August 28, 2011.September 2, 2012.
We have discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T.
We have received the written disclosures and the letter from the independent auditors required by the Public Company Accounting Oversight Board regarding the independent auditors’ communications with this Committee concerning independence and have discussed with the independent auditors their independence.
Based on the reviews and discussions referred to above, we recommended to the Board of Directors that the audited consolidated financial statements referred to above be included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 28, 2011.September 2, 2012.
Charles T. Munger, Chair
Daniel J. Evans
Susan L. Decker
Code of Ethics for Senior Financial Officers
The Board of Directors has adopted a Code of Ethics for Senior Financial Officers. A copy of the Code of Ethics may be obtained at no charge by sending a written request to the Corporate Secretary, 999 Lake Drive, Issaquah, Washington 98027. If the Company makes any amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers, from this code to the chief executive officer, chief financial officer, or controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies.
INDEPENDENT PUBLIC ACCOUNTANTS
Information Regarding Our Independent Auditors
KPMG LLP has served as our independent auditors since May 13, 2002. Upon recommendation of the Audit Committee, our Board of Directors has appointed KPMG as our independent auditors for the fiscal year 2012.2013.
Services and Fees of KPMG
The following table presents fees for services rendered by KPMG for fiscal 20112012 and fiscal 2010:2011:
2011 | 2010 | 2012 | 2011 | |||||||||||||
Audit fees | $ | 4,878,000 | $ | 4,325,000 | $ | 4,751,000 | $ | 4,878,000 | ||||||||
Audit-related fees | 405,000 | 270,000 | 401,000 | 405,000 | ||||||||||||
Tax fees | 592,000 | 412,000 | 358,000 | 592,000 | ||||||||||||
All other fees | 7,000 | 17,000 | 75,000 | 7,000 | ||||||||||||
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|
|
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Total | $ | 5,882,000 | $ | 5,024,000 | $ | 5,585,000 | $ | 5,882,000 |
KPMG was paid fees for performing the following types of services during fiscal 2011:2012:
• | Audit Fees consist of fees paid for the audit of the Company’s annual consolidated financial statements included in the Annual Report on Form 10-K and review of interim condensed consolidated financial statements included in the quarterly reports on Form 10-Q and for the audit of the Company’s internal control over financial reporting. Audit fees also include fees for any services associated with statutory audits of subsidiaries and affiliates of the Company, and with registration statements, reports and documents filed with the SEC. |
• | Audit-Related Fees consist of fees for audits of financial statements of certain employee benefit plans, audits and attest services not required by statute or regulations and accounting consultations about the application of generally accepted accounting principles to proposed transactions. |
• | Tax Fees consist of fees for the review or preparation of international income, franchise, value-added tax or other tax returns, including consultations on such matters, |
assistance with studies supporting amounts presented in tax returns, and consultations on various tax compliance matters. |
• | Other Fees consist of fees for certain regulatory certifications, attestation reports at international locations, and executive education courses provided to Company employees. |
Audit Committee Preapproval Policy
All services to be performed for the Company by KPMG must be preapproved by the Audit Committee or a designated member of the Audit Committee, as provided in the committee’s written policies. All services provided by KPMG in fiscal 20112012 were pre-approved by the Audit Committee.
Annual Independence Determination
The Audit Committee has determined that the provision by KPMG of non-audit services to the Company in fiscal 20112012 is compatible with KPMG’s maintaining its independence.
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
Subject to ratification by the shareholders at the Annual Meeting, the Audit Committee and the Board of Directors have selected KPMG to audit the consolidated financial statements of the Company and its subsidiaries for the fiscal year ending September 2, 2012.1, 2013. KPMG has issued its reports, included in the Company’s Form 10-K, on the audited consolidated financial statements of the Company and internal control over financial reporting for the fiscal year ended August 28, 2011.September 2, 2012. KPMG has served the Company as independent auditors since May 13, 2002. Representatives of KPMG are expected to be present at the Annual Meeting, will have the opportunity to make a statement, if they desire to do so, and will be available to respond to appropriate questions.
Vote Required
The affirmative vote of a majority of the votes cast on this proposal will constitute ratification of the appointment of KPMG.
The Board of Directors unanimously recommends that you vote FOR Proposal 2.
APPROVAL OF AMENDMENTSADVISORY VOTE TO THE 2002 STOCK INCENTIVE PLAN
The Board has approved, subject to shareholder approval, an amendment to the Fifth Restated 2002 Stock Incentive Plan (the “2002 Plan”) to increase by 16 million the number of shares authorized for issuance. Under the terms of the 2002 Plan, each RSU issued counts as 1.75 shares toward the total share limits. The 2002 Plan as proposed to be amended is referred to as the “Sixth Restated 2002 Plan” and is attached as Appendix A to this Proxy Statement. The 2002 Plan was last amended following approval by the Company’s shareholders at the 2010 annual meeting. Through the first quarter of fiscal 2006, the Company granted only stock options under the 2002 Plan and predecessor plans, and since the fourth quarter of fiscal 2006, the Company has granted only RSUs under the 2002 Plan. Stock options and RSUs generally vest over five years and stock options have a ten-year term. The Company issues shares of common stock upon exercise of stock options and vesting of RSUs.
Approximately 7.5 million RSUs have been granted since January 28, 2010, when the shareholders authorized an additional 18 million option shares for the 2002 Plan. Currently, approximately 5.1 million shares remaining eligible for future RSU grants as of November 21, 2011. As of December 2, 2011, the fair market value of a share of Company common stock was $86.73, based on the closing price on the NASDAQ Global Select Market.
The following table summarizes RSU transactions during the first quarter of fiscal 2012:
Number of Units | Weighted- Average Grant Date Fair Value ($) | |||||||
Non-vested at August 28, 2011 | 9,726,753 | 57.56 | ||||||
Granted | 3,239,440 | 81.73 | ||||||
Vested | (3,723,163 | ) | 59.00 | |||||
Forfeited | (56,366 | ) | 67.21 | |||||
|
|
|
| |||||
Non-vested at November 21, 2011 | 9,186,664 | 65.45 |
As of November 21, 2011, approximately 5.3 million option shares were outstanding. For fiscal year 2011, the ratio of RSUs granted to basic shares outstanding was 0.8%.
The following description of the Sixth Restated 2002 Plan is a summary and is qualified in its entirety by reference to the complete text of the Fifth Restated 2002 Plan.
Summary Description of the Sixth Restated 2002 Plan. The Sixth Restated 2002 Plan is intended to strengthen the Company by allowing selected employees, directors and consultants to the Company to participate in the Company’s future growth and success by offering them an opportunity to acquire stock in the Company in order to retain, attract and motivate them. The Board has ultimate responsibility for administering the Sixth Restated 2002 Plan but may delegate this authority to a committee of the Board or an executive of the Company, subject to certain limitations. The Board has delegated responsibility to the Compensation Committee (the “Committee”) to administer the Sixth Restated 2002 Plan. The Committee has broad discretion to determine the amount and type of grants and their terms and conditions. The Committee has delegated certain authority to Messrs. Sinegal and Brotman with respect to awards not involving executive officers. Individual grants will generally be based on a person’s position and present and potential contributions to the Company.APPROVE NAMED EXECUTIVE OFFICER COMPENSATION
As of November 21, 2011, the Company had approximately 3,600 employees (including over 2,000 warehouse managers and assistant managers), ten non-employee directors and eight consultants who the Company estimates are eligible to participate in the Sixth Restated 2002 Plan. The Company has not specifically determined the nature and amount of any awards that will be granted in the future to any eligible individual or group of individuals, except that the maximum individual award that may be granted to an employee under the plan in any fiscal year of the Company is 500,000 shares annually. During fiscal 2011, 8.8% of the 3.9 million RSUs granted were to directors and executive officers.
Types of Awards. Under the Sixth Restated 2002 Plan, the Company may award (i) options, and (ii) stock awards, consisting of either stock bonus awards or stock units. These awards are described in more detail below. The Company stopped granting options in 2006. Options that have been issued have all been subject to vesting ratably over five years (other than options granted to non-employee directors). The Company’s present intention is that any options and stock awards granted under the Sixth Restated 2002 Plan would continue to be subject to this five-year vesting requirement, subject to accelerated vesting for long-term service.
Options. Options may be granted in the form of incentive stock options (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or nonstatutory stock options (“NSOs”). The Committee may condition the grant upon the attainment of specified performance goals or other criteria, which need not be the same for all participants. The Sixth Restated 2002 Plan will expire in December 2021, but options outstanding under the Sixth Restated 2002 Plan may extend beyond that date.
The exercise price of any option may not be less than the fair market value of the shares subject to the option on the date of grant (or 110% of the fair market value in the case of ISOs granted to employees who own more than 10% of the common stock). Options will become exercisable in accordance with the vesting schedule determinedrequired by the Committee or its delegates. The term of any option granted under the Sixth Restated 2002 Plan may not exceed ten years. In addition, ISOs are subject to certain other limitations in order to take advantage of the favorable U.S. tax treatment that may be available for ISOs.
Options generally may be exercised at any time within 120 days after termination of a participant’s employment by, or consulting relationship with, the Company, but only to the extent exercisable at the time of termination or, if such termination occurs after the first anniversary after the grant date, to the extent the option would have vested as of the time of termination if it vested in daily (rather than annual) increments. However, if termination is due to the participant’s death or disability, the option generally may be exercised within one year. In addition, upon a participant’s death, unvested options granted to that participant will become vested with respect to (i) all unvested shares if the participant is an officer of the Company or has been continuously employed by the Company for ten years at the date of death; and (ii) 50% of the unvested shares for all other participants who are employed by the Company at the date of death. Except as authorized by the Committee or its delegates, no option will be assignable or otherwise transferable by a participant, other than by will or by the laws of descent and distribution, to a grantor trust or partnership for estate planning purposes, or in connection with a qualified domestic relations order.
Stock Awards. Each stock bonus or stock unit award will contain provisions regarding (i) the number of shares subject to such stock award, (ii) the purchase price of the shares, if any, and the means of payment for the shares, (iii) the performance criteria, if any, that will determine the number of shares vested, (iv) such terms and conditions on the grant, issuance, vesting and forfeiture of the shares, as applicable, as may be determined from time to time by the Committee, (v) restrictions on the transferability of the stock award, and (vi) such further terms and conditions, in each case not inconsistent with the Sixth Restated 2002 Plan, as may be determined from time to time by the Committee. In the event that a participant’s relationship with the Company terminates, the Company may reacquire any or all of the shares of common stock held by the participant that have not vested or that are otherwise subject to forfeiture conditions. Stock unit awards may be awarded in consideration for past services. Rights under a stock unit award may not be transferred other than by will or by the laws of descent and distribution unless the stock unit right agreement specifically provides for transferability. Beginning in the fall of 2006, awards are subject to the accelerated vesting for long service as follows: where the years of service equal at least 25, one-third of the then-unvested RSUs will vest; at 30 years of service, two-thirds of the then-unvested RSUs will vest; and at 35 years of service, 100% of the then-unvested RSUs will vest. For awards granted in and after fiscal 2009, employees who attain the specified years of service receive shares under the accelerated vesting provisions on the vesting date rather than upon a qualified retirement.
If the Committee conditions the vesting of a stock bonus award on satisfaction of performance criteria, the Committee will use any one or more of the following performance
criteria, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit, affiliate or business segment, either individually, alternatively or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as specified by the Committee for the award: (i) cash flow; (ii) earnings (including gross margin, earnings before interest and taxes, earnings before taxes, and net earnings); (iii) earnings per share; (iv) growth in earnings or earnings per share; (v) stock price; (vi) return on equity or average shareholders’ equity; (vii) total shareholder return; (viii) return on capital; (ix) return on assets or net assets; (x) return on investment; (xi) revenue; (xii) income or net income; (xiii) operating income or net operating income; (xiv) operating profit or net operating profit; (xv) operating margin; (xvi) return on operating revenue; (xvii) market share; (xviii) sales or revenue growth; (xix) overhead or other expense reduction; (xx) growth in shareholder value relative to the moving average of the S&P 500 Index or a peer group index; (xxi) credit rating; (xxii) strategic plan development and implementation; (xxiii) improvement in workforce diversity, and (xxiv) any other similar criteria. The Committee may appropriately adjust any evaluation of performance under objectively determinable performance criteria to exclude any of the following events that occurs during a performance period: (a) asset write-downs; (b) litigation or claim judgments or settlements; (c) the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results; (d) accruals for reorganization and restructuring programs; and (e) any extraordinary non-recurring items as described in Accounting Standards Codification (ASC) 225-20 and/or in management’s discussion and analysis of financial condition and results of operations appearing in the Company’s annual report to shareholders for the applicable year.
General Provisions
The consideration payable upon the exercise of any option and any related taxes must generally be paid in cash or check. The Committee, in its sole discretion, may authorize payment by the tender of common stock already owned by the participant or other methods. The Company generally will not receive any consideration upon the grant of any options.
The Committee may waive in whole or in part any or all restrictions, conditions, vesting or forfeiture provisions with respect to any award (other than an award to an executive officer for which the Board retains authority) made under the Sixth Restated 2002 Plan. The Board may amend, alter or discontinue the Sixth Restated 2002 Plan or any award at any time, except that the consent of a participant is generally required if the participant’s rights under an outstanding award would be impaired. The Sixth Restated 2002 Plan requires shareholders to approve an amendment to the Plan to comply with applicable law, including applicable listing standards. Currently the rules of the Nasdaq Global Selected Market, on which the common stock is listed, require shareholder approval to, among other things, increase the total number of shares available for grant under the Second Restated 2002 Plan. The Board reserves the right in the future to authorize additional shares for issuance under the Sixth Restated 2002 Plan, subject to any applicable requirements concerning shareholder approval.
In the event of any stock split, reverse stock split, recapitalization, combination or reclassification of stock, stock dividend, spin-off, extraordinary cash dividend or similar change to the capital structure of the Company (not including a “fundamental transaction” or “change of control”), the Board will make appropriate and equitable adjustments to preserve the value of outstanding and future awards, including adjustments to: (i) the number and type of awards that may be granted under the plan; (ii) the number and type of awards that may be granted to any individual under the plan; (iii) the purchase price of any stock award; and (iv) the option price and number and class of securities issuable under each outstanding option. Subject to the foregoing requirement, the specific form of any such adjustments will be determined by the
Board. In the event of a “fundamental transaction” involving the Company, the Board may take one or more of the following actions: (a) arrange for the substitution of options; (b) accelerate the vesting and termination of outstanding options; or (c) cancel outstanding options in exchange for cash payments to participants. The Board is not required to adopt the same rules for each option or each participant. A “fundamental transaction” is a merger of the Company with another entity in a transaction in which the Company is not the surviving entity or a transaction or other event that results in other securities being substituted for common stock or common stock no longer being issuable. The Sixth Restated 2002 Plan specifies that a “change of control” will exist upon the occurrence of any of the following events: (i) at any time during any two consecutive year period, at least a majority of the Board shall cease to consist of “Continuing Directors” (meaning directors of the Company who were directors at the beginning of such two-year period, or who subsequently became directors and whose election, or nomination for election by the Company’s shareholders, was approved by a majority of the then Continuing Directors); or (ii) certain persons or groups acquire beneficial ownership of common stock having 30% or more of the voting power of all outstanding common stock, unless such acquisition is approved by a majority of the directors of the Company in office immediately preceding such acquisition; or (iii) a merger or consolidation occurs to which the Company is a party, in which outstanding shares of common stock are converted into shares of another company or other securities (of either the Company or another company) or cash or other property. The Sixth Restated 2002 Plan permits any of the above-described actions in connection with a change of control event. Further, the Board may take similar actions upon a divestiture of any of its affiliates.
The Sixth Restated 2002 Plan constitutes an unfunded plan for incentive and deferred compensation. The Company is not required to create trusts or arrangements to meet its obligations under the Sixth Restated 2002 Plan to deliver stock or make payments.
Plan Benefits
All awards to employees, officers, directors and consultants under the Sixth Restated 2002 Plan are made at the discretion of the Board and its delegates. Therefore, the benefits and amounts that will be received or allocated under the plan are not determinable at this time. However, please refer to the description of grants made to our named Executive Officers in the last fiscal year described in the “Fiscal 2011 Grants of Plan-Based Awards” table. Grants made to our non-employee directors in the last fiscal year are described in “Director Compensation.”
Federal Income Tax Consequences of Awards and Option Exercises Under the Sixth Restated 2002 Plan
The following is a general summary of the typical federal income tax consequences of the issuance and exercise of options under the Plan. It does not describe state or other tax consequences of the issuance and exercise of options.
Nonstatutory Stock Options. Generally, no federal income tax is payable by a participant upon the grant of an NSO and no deduction is taken by the Company. Under current tax laws, if a participant exercises an NSO, he or she will have taxable income equal to the difference between the market price of common stock on the exercise date and the stock option grant price. The Company will be entitled to a corresponding deduction on its income tax return.
Incentive Stock Options. The grant of an ISO has no federal income tax effect on the optionee. Upon exercise the optionee does not recognize income for “regular” tax purposes. However, the excess of the fair market value of the stock subject to an option over the exercise price of such option (the “option spread”) is includible in the optionee’s “Alternative Minimum
Taxable Income” for purposes of the Alternative Minimum Tax. If the optionee does not dispose of the stock acquired upon exercise of an ISO until more than two years after the option grant date and more than one year after exercise of the option, any gain upon sale of the shares will be a long-term capital gain. If shares are sold or otherwise disposed of before both of these periods have expired (a “disqualifying disposition”), the option spread at the time of exercise of the option (but not more than the amount of the gain on the sale or other disposition) is ordinary income in the year of such sale or other disposition. If the gain on a disqualifying disposition exceeds the amount treated as ordinary income, the excess is taxable as capital gain (which will be long-term capital gain if the shares have been held more than one year after the date of exercise of the option). The Company is not entitled to a federal income tax deduction in connection with ISOs, except to the extent that the optionee has taxable ordinary income on a disqualifying disposition.
Stock Awards. Stock Bonus awards will generally be taxed in the same manner as NSOs. However, shares issued pursuant to a stock award are subject to a “substantial risk of forfeiture” within the meaning of Section 83 of the Code to the extent the shares will be forfeited in the event that the employee ceases to provide services to the Company. As a result of this substantial risk of forfeiture, if applicable, the employee will not recognize ordinary income at the time the shares are issued. Instead, the employee will recognize ordinary income on the dates when the shares are no longer subject to a substantial risk of forfeiture, or when the shares become transferable, if earlier. The employee’s ordinary income is measured as the difference between the amount paid for the shares, if any, and the fair market value of the shares on the date the shares are no longer subject to forfeiture. The employee may accelerate his or her recognition of ordinary income, if any, and begin his or her capital gains holding period by timely filing (i.e., within thirty days of issuance of the shares) an election pursuant to Section 83(b) of the Code. In such event, the ordinary income recognized, if any, is measured as the difference between the amount paid for the shares, if any, and the fair market value of the shares on the date the shares are issued, and the capital gain holding period commences on such date. The ordinary income recognized by an employee will be subject to tax withholding by the Company. Unless limited by Section 162(m) of the Code, the Company is entitled to a deduction in the same amount as and at the time the employee recognizes ordinary income.
Stock unit awards represent a promise to deliver shares in the future based on the vesting schedule accompanying the award. At the time the shares are delivered, the employee will recognize ordinary income equal to the difference between the amount paid for the shares, if any, and the fair market value of the shares on the vesting date. The ordinary income recognized by an employee will be subject to tax withholding by the Company (generally in the form of shares). Unless limited by Section 162(m) of the Code, the Company is entitled to a deduction at the time and in the amount the employee recognizes ordinary income.
Section 162(m) Limitations. Section 162(m) of the Code limits to $1,000,000 per person the amount that the Company may deduct for compensation paid to any of its most highly compensated executive officers in any year after 1993. Under current regulations, compensation received through an award or the exercise of an option will not be subject to the $1,000,000 limit if the award and the plan meet certain requirements. One such requirement is that the plan must state the maximum number of shares with respect to which award may be made to any employee during a specified period. Accordingly, the Second Restated 2002 Plan provides that no employee may be granted awards to acquire more than 500,000 shares in any fiscal year of the Company. The Company believes that stock options granted under the Plan can qualify as performance-based compensation and so compensation amounts arising in connection with such awards may not be subject to the loss deduction rule of Section 162(m). Stock awards may also qualify as performance-based compensation so long as they are subject to performance
criteria that qualify under the applicable tax rules. If the stock awards so qualify, compensation amounts arising in connection with such awards may not be subject to this loss deduction rule. However, the Company may grant stock awards that are not subject to qualifying performance criteria and so it may not be able to deduct the full amount of compensation related to such stock awards to the extent the amount of compensation arising therefrom, together with other compensation paid to the affected executive officer, exceeds the Section 162(m) limit for the applicable year.
Vote Required
The affirmative vote of a majority of the votes cast on this proposal at the Annual Meeting is required to adopt the Sixth Restated 2002 Plan.
The Board of Directors unanimously recommends that you vote FOR Proposal 3.
ADVISORY VOTE ON EXECUTIVE COMPENSATION
Pursuant to Section 14A of the Securities Exchange Act of 1934, as amended, shareholderswe are entitled to anasking for your advisory (non-binding) vote on compensation programs for our Named Executive Officers (sometimes referred to as “say on pay”). The Board of Directors has determined that it will include say on pay votes in the Company’s proxy materials annually until the next required shareholder vote on the frequency of shareholder votes on the compensation of executives. Accordingly, you may vote on the following resolution at the 2011 annual meeting:(the “say on pay” resolution):
“Resolved, that the shareholders approve, on an advisory basis, the compensation of the Company’s Named Executive Officers as disclosed in the Compensation Discussion and
Analysis, the accompanying compensation tables, and the related narrative disclosure in this Proxy Statement.”
ThisThe Board of Directors will include say on pay votes in the Company’s proxy materials annually until the next required shareholder vote is nonbinding.on the frequency of such votes. The Board and the Compensation Committee, which is comprised of independent directors, expect to take into account the outcome of the vote when considering future executive compensation decisions to the extent they can determine the cause or causes of any significant negative voting results.
As described in detail under “Compensation Discussion and Analysis,” our compensation programs are designed to motivate our executives to create a successful company. If fully earned based on the achievement of performance targets, equity compensation in the form of restricted stock units that are subject to further time-based vesting is the largest component of executive compensation. We believe that our compensation program, with its balance of short-term incentives (including cash bonus awards and performance conditions for awards of restricted stock units) and long-term incentives (including equity awards that vest over up to five years) and share ownership guidelines reward sustained performance that is aligned with long-term shareholder interests. Shareholders are encouraged to read the Compensation Discussion and Analysis, the accompanying compensation tables, and the related narrative disclosure.
The Board of Directors unanimously recommends that you vote FOR the approval, on an advisory basis, of the compensation of our Named Executive Officers as disclosed in the Compensation Discussion and Analysis, the accompanying compensation tables, and the related narrative disclosure.
VOTE ON ANNUAL ELECTION OF BOARD OF DIRECTORS
In response to a shareholder proposal, the Company will hold a vote on a resolution urging the Board of Directors to take all necessary steps to eliminate the classification of the Board of Directors and to require that all directors be elected at each annual meeting, following the expiration of the terms in place following the 2013 Shareholder’s Meeting.
PROPOSAL TO REPEAL CLASSIFIED BOARD
RESOLVED, that shareholders of Costco Wholesale Corporation urge the Board of Directors to take all necessary steps (other than any steps that must be taken by shareholders) to eliminate the classification of the Board of Directors and to require that all directors elected at or after the annual meeting held in 2014 be elected on an annual basis. Implementation of this proposal should not prevent any director elected prior to the annual meeting held in 2014 from completing the term for which such director was elected.
SUPPORTING STATEMENT
This resolution was submitted on behalf of the Pension Reserves Investment Trust Fund by its trustee, the Pension Reserves Investment Management Board. The Shareholder Rights Project represented and advised the Pension Reserves Investment Management Board in connection with this resolution.
The resolution urges the board of directors to facilitate a declassification of the board. Such a change would enable shareholders to register their views on the performance of all directors at each annual meeting. Having directors stand for elections annually makes directors more accountable to shareholders, and could thereby contribute to improving performance and increasing firm value.
According to data from FactSet Research Systems, the number of S&P 500 companies with classified boards declined by more than 60% since 2000, and the average percentage of votes cast in favor of shareholder proposals to declassify the boards of S&P 500 companies during 2010 and 2011 exceeded 75%.
The significant shareholder support for declassification proposals is consistent with empirical studies reporting that:
Classified boards are associated with lower firm valuation (Bebchuk and Cohen, 2005; confirmed by Faleye (2007) and Frakes (2007));
Takeover targets with classified boards are associated with lower gains to shareholders (Bebchuk, Coates, and Subramanian, 2002);
Firms with classified boards are more likely to be associated with value-decreasing acquisition decisions (Masulis, Wang, and Xie, 2007); and
Classified boards are associated with lower sensitivity of compensation to performance and lower sensitivity of CEO turnover to firm performance (Faleye, 2007).
Although one study (Bates, Becher and Lemmon, 2008) reports that classified boards are associated with higher takeover premiums, this study also reports that classified boards are associated with a lower likelihood of an acquisition and that classified boards are associated with lower firm valuation.
Please vote for this proposal to make directors more accountable to shareholders.
BOARD OF DIRECTORS’ RESPONSE TO PROPOSAL 4
Your Board of Directors has given this proposal careful consideration and believes that it should not be implemented. The Board therefore unanimously recommends a vote AGAINST Proposal 4.
Under the classified board structure, board members are elected to three-year terms, such that generally every year only one-third of the directors are considered for election or re-election. The Company has had this structure continuously since it went public in 1985. Your Board of Directors believes that the classified board structure has served the Company and its shareholders well and continues to benefit shareholders.
The Board with its current governance structure has overseen a sustained period of strong performance.
The Company’s commitment to efficiency, the Board's concentrated efforts, and the constant focus on our mission and core values have produced strong financial performance over time. We believe that continuity in Board membership has assisted in consistent application of our goals of efficiency and quality. Comparable sales increases, measured for locations that have been open for one year or more (also known as “same store sales”) are a
key indicator of retailing success. The Company has had comparable warehouse sales growth figures of 7%, 10%, and 7% for fiscal years 2010, 2011 and 2012, respectively, as compared to an average of less than 1% annually over the same years for a group of competitor retailers.1 Net sales have grown at an annualized rate of 13.8% since Costco Wholesale was taken public in 1985. Net income has grown at an annualized rate of 13.5% over that same period. The Company's stock price has outperformed the market by returning greater than 65% (assuming the reinvestment of dividends) since the beginning of 2010, compared to a return of 20% for the S&P 500 Index, and 16.9% since December 1985 compared to a rate of 7.8% for the S&P 500 Index. The Company has also consistently returned increasing amounts of capital to shareholders, having raised its cash dividend from an annualized $0.40 in 2004 to $1.10 currently and having repurchased over $6.6 billion of the Company’s shares since June 2005.
Data cited by proponents concerning a group of other companies, many of which are poor role models and have inferior performance in comparison to the Company are, in the view of the Board, beside the point. They fail to demonstrate that the Company’s past or future performance has been or will be adversely affected by the frequency with which shareholders choose directors. The empirical data are, in any event, subject to conflicting interpretations.
A classified board promotes the stability and continuity important to long-term shareholder value.
Your Board believes that a classified structure provides valuable stability and continuity of leadership for the Company. With three-year terms, directors develop a deeper understanding of the Company’s business, competitive environment, and strategic goals. Experienced directors are better positioned to provide effective oversight and advice consistent with the long-term best interest of shareholders. Electing directors to three-year terms also enhances the independence of non-employee directors. The longer term reduces the influence of special interest groups who may have agendas contrary to the majority of shareholders and the Company’s own long-term goals.
The Board is accountable to the Company’s shareholders.
Our directors are committed to acting in the best interests of the Company and our shareholders. They are required by law to act in accordance with their fiduciary duties, regardless of the length of their terms. Furthering accountability to shareholders, in August 2010 the Board amended the Company’s bylaws to require that if in any uncontested election of directors a nominee receives a greater number of “withhold” votes than votes “for,” the nominee will offer his or her resignation to the Board. A committee of independent directors whose election is not at issue will determine and publicly report the action to be taken with respect to the resignation offer. This policy has enhanced the accountability of directors.
Shareholders have consistently supported the Board's actions.
Shareholders have repeatedly and consistently registered their approval of the Board's decision making. They have also registered their approval of the Board, by a margin of nearly 95% of the votes cast in the last three elections. Similarly, in 2011 and 2012 shareholders approved the Company's executive compensation by a vote of approximately 98% in both years.
1 | Target Corporation, Wal-Mart Stores, Inc., Best Buy Co., Inc., The Home Depot, Inc., Lowe's Companies, Inc., Office Depot, Inc., and PetSmart, Inc. |
The current board structure is designed to help shareholders receive enhanced value in a takeover.
Your Board intends that its classified structure be a safeguard against a purchaser gaining control of the Company without paying fair value. Because only one-third of the directors are elected at any annual meeting, a majority of the Board cannot be replaced at a single annual meeting. A classified board does not preclude a change in control of the Company. It does provide the board more time and flexibility to evaluate the adequacy and fairness of proposed offers, implement the optimum method of enhancing shareholder value, protect shareholders against abusive tactics during a takeover process, and negotiate the best terms for all shareholders, without the threat of imminent removal of a majority of board members. Elimination of the classified Board structure would reduce the Board’s power to deal with proposals it believes are unfair or inadequate.
Approval Process.
Shareholder approval of this proposal would not itself declassify the Board. To change the classified structure, the Board must authorize amendments to the Company’s governance documents. Shareholders would then have to approve each of those amendments with an affirmative vote of not less than two-thirds of the outstanding shares entitled to vote generally in the election of directors.
For the reasons set forth above, your Board of Directors unanimously believes that this proposal is not in the best interests of the Company and its shareholders and recommends that you vote AGAINST Proposal 4. Proxies solicited by the Board of Directors will be voted AGAINST this proposal unless a shareholder has indicated otherwise in voting the proxy.
The Company will provide the name and address of the proponent of the shareholder proposal and the number of shares the proponent holds upon oral or written request for such information. Requests may be sent to the Corporate Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027 or submitted by calling (425) 427-7766
Neither the Board of Directors nor management intends to bring before the meeting any business other than the matters referred to in the Notice of Meeting and this Proxy Statement. If any other business should properly come before the meeting, or any adjournment thereof, the persons named in the proxy will vote on such matters according to their best judgment.
SHAREHOLDER PROPOSALS FOR 2013THE 2014 ANNUAL MEETING
In order for a shareholder proposal to be included in the proxy statement for the 20132014 annual meeting of shareholders, it must comply with the SEC Rule 14a-8 and be received by the Company no later than August 15, 2012.2013. Proposals may be mailed to the Company, to the attention of the Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. A shareholder who intends to present a proposal at the Company’s annual meeting in 2013,2014, other than pursuant to Rule 14a-8, must comply with the requirements as set forth in our Bylaws, provide the Company notice of such intention by at least October 28, 2012,26, 2013, and such proposal must be a proper matter for shareholder action under Washington corporate law, or management of the Company will have discretionary voting authority at the 20132014 annual meeting with respect to any such proposal without discussion of the matter in the Company’s proxy statement.
ANNUAL REPORT TO SHAREHOLDERS AND FORM 10-K
The fiscal 20112012 Annual Report to Shareholders (which is not a part of our proxy soliciting materials), is being mailed with this Proxy Statement to those shareholders that received a copy of the proxy materials in the mail. For those shareholders that received the Notice of Internet Availability of Proxy Materials, this Proxy Statement and our fiscal 20112012 Annual Report to Shareholders are available at our website at http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-irhome. Additionally, and in accordance with SEC rules, you may access our Proxy Statement at www.proxyvote.com, a “cookie-free” website that does not identify visitors to the site.A copy of the Company’s Annual Report on Form 10-K filed with the SEC will be provided to shareholders without charge upon written request directed to Investor Relations. The Company makes available on or through our website free of charge our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after filing.
List of Shareholders of Record.Record. A list of shareholders of record entitled to vote at the Annual Meeting will be available at the Annual Meeting and will also be available for ten business days prior to the Annual Meeting between the hours of 9:00 a.m. and 4:00 p.m., Pacific time, at the office of the Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. A shareholder may examine the list for any legally valid purpose related to the Annual Meeting.
The Company is incorporated under Washington law, which specifically permits electronically transmitted proxies, provided that the transmission set forth or be submitted with information from which it can reasonably be determined that the transmission was authorized
by the shareholder. The electronic voting procedures provided for the Annual Meeting are designed to authenticate each shareholder by use of a control number to allow shareholders to vote their shares and to confirm that their instructions have been properly recorded.
As permitted by SEC rules, the Company will deliver only one Annual Report or Proxy Statement to multiple shareholders sharing the same address, unless the Company has received contrary instructions from one or more of the shareholders. The Company will, upon written or oral request, deliver a separate copy of the Annual Report or Proxy Statement to a shareholder at a shared address to which a single copy of the Annual Report or Proxy Statement was delivered and will include instructions as to how the shareholder can notify the Company that the shareholder wishes to receive a separate copy of the Annual Report or Proxy Statement in the future. Registered shareholders wishing to receive a separate Annual Report or Proxy Statement in the future or registered shareholders sharing an address wishing to receive a single copy of the Annual Report or Proxy Statement in the future may contact the Company’s Transfer Agent: BNY Mellon Shareowner Services, 480 Washington Blvd., Jersey City, NJ 07310; (800) 249-8982.
By order of the Board of Directors,
Joel Benoliel
Secretary
SIXTH RESTATED 2002 STOCK INCENTIVE PLAN
OF
COSTCO WHOLESALE CORPORATION
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