COMPENSATION DISCUSSION AND ANALYSIS (continued)
For the purposes of measuring relative performance, “return on capital” is defined as net income, adjusted for accounting changes andafter-tax interest expense, divided by the sum of total debt, stockholder’s equity, and anynon-controlling interest. EPS for this purpose is measured as net income, adjusted for accounting changes, if any, divided by fully diluted common shares outstanding. EPS during the performance cycle is compared to a baseline EPS to calculate the growth in diluted EPS during such cycle. There are currently three relevant cycles: 2015-2017 (basis is reported EPS for fiscal year ended 2014 of $2.45), 2016-2018 (basis is reported EPS for fiscal year ended 2015 of $2.75), and 2017-2019 (basis is reported EPS for fiscal year ended 2016 of $2.85).
For purposes of developing the performance metrics for determining the payout under the Cash LTI, the& Compensation Committee has approved a relative measuremeasurement methodology that compares our performance to the companies in the S&P Mid CapMidCap 400 Index, an external index.Index. We believe that, for the Cash LTI, the S&P Mid CapMidCap 400 Index relative measure methodology is an appropriate comparison of our performance against a larger and broader population of companies, which is representative of investment options available to the market.
Performance Period
The Human Capital & Compensation Committee generally established the Cash LTI award metrics for a three-year performance cycle prior to the beginning of the first fiscal year of the performance cycle.
Cash LTI Targets and Performance Levels
The Human Capital & Compensation Committee established target Cash LTI payouts for each NEO that are articulated as a percentage of the NEO’s base salary during the first year of the three-year performance cycle. These targets were set at levels that reflect the Human Capital & Compensation Committee’s desired to establish a meaningful incentive linked to the longer-term financial performance of the Company that fits within our overall compensation philosophy and strategy. Each NEO’s fiscal year 2021-2023 target Cash LTI payout is set forth below in “Fiscal 2021-2023 Cash LTI Payout for our NEOs”.
The Cash LTI performance metrics and corresponding payouts are based on our ranking within the S&P Mid CapMidCap 400 Index for all performance cycles that are currently outstanding, and are as follows:
| | |
PERFORMANCE |
| PAYOUT |
At 50th percentile |
| 50% of target |
At 60th percentile |
| 100% of target |
At 75th percentile |
| 200% of target |
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Compensation Discussion and Analysis
The above payout formula applies to each measureof the two performance measures, which are weighted equally.equally and measured independently from the other. If performance is below the 50th 50th percentile, no award will be earned or paid as it relates to that performance measure. Award amounts are interpolated for performance results between the above percentiles. Performance at the 60th60th percentile is necessary to earn a payout of 100% of target as it relates to that measure. We believe having a target payout at the 60th percentile sets a higher standard and is consistent with plan designs of other high performing companies in our peer group. The maximum award that can be earned for performance at or above the 75th 75th percentile is 200% of target as it relates to that measure.
The reward targets establishedOur Performance During the Fiscal 2021-2023 Cycle
Payouts for the fiscal year 2021-2023 cycle were based on the following performance levels:
| | | | | | | | |
METRIC | | WEIGHTING
(%) | | COMPANY
PERFORMANCE | | ACTUAL
PAYOUT AS A
% OF TARGET | |
Return on Capital | | 50 | | 49.8th Percentile | | | 0 | |
Growth in Earnings per Share | | 50 | | 33.3rd Percentile | | | 0 | |
Total | | | | | | | 0 | |
Fiscal 2021-2023 Cash LTI Payout for our NEOs
As reflected in the table above, the Company’s performance against each NEO are articulated as a percentageCash LTI performance metric for the fiscal year 2021-2023 cycle was below the threshold level of base salary. These targets reflectperformance, and no Cash LTI payouts were paid to any Cash LTI participant for such cycle. We believe this result demonstrates the Compensation Committee’s desire to establish a meaningful incentive linked to longer term financial performancerigor of our goal-setting and the strong pay-for-performance alignment of the Company that fits within our overall compensation philosophy and strategy.Cash LTI.
For the 2015-2017fiscal year 2021-2023 Cash LTI cycle, targets and actual payouts are detailed in the following table:table:
| | | | | | | | |
| NEO | | TARGET CASH LTI
AWARD AS % OF 2015
BASE SALARY | | ACTUAL AWARD AS %
OF 2015 BASE SALARY | | TARGET AMOUNT ($) | | ACTUAL AWARD ($) |
Thomas A. Gendron | | 50 | | 92.2 | | 395,505 | | 727,995 |
Robert F. Weber, Jr. | | 40 | | 73.7 | | 180,066 | | 331,860 |
A. Christopher Fawzy | | 25 | | 46.1 | | 86,827 | | 160,023 |
Martin V. Glass | | 35 | | 64.5 | | 140,049 | | 258,111 |
Sagar A. Patel | | 35 | | 64.5 | | 140,049 | | 258,111 |
| | | | | | | | |
NEO | | TARGET CASH
LTI AWARD AS
% OF 2021
BASE SALARY | | ACTUAL
AWARD
AS % OF 2021
BASE SALARY | | TARGET
AMOUNT
($) | | ACTUAL
AWARD
($) |
Charles P. Blankenship, Jr. | | 50 | | 0 | | 183,333 | | 0 |
William F. Lacey(1) | | — | | — | | — | | — |
Thomas G. Cromwell | | 40 | | 0 | | 236,800 | | 0 |
A. Christopher Fawzy | | 25 | | 0 | | 115,250 | | 0 |
Randall L. Hobbs(1) | | — | | — | | — | | — |
Mark D. Hartman(2) | | 20 | | 0 | | 98,222 | | 0 |
Sagar A. Patel(2) | | 31.67 | | 0 | | 105,490 | | 0 |
Roger A. Ross(3) | | 23.00 | | 0 | | 117,577 | | 0 |
(1)Messrs. Lacey and Hobbs did not participate in the 2021-2023 Cash LTI cycle, because their respective employment with the Company began after the first day of the last fiscal year of the performance period (participants must be employed on the first day of the fiscal year to be eligible).
(2)The target Cash LTI award as a % of 2021 base salary for Messrs. Hartman and Patel reflect a blended average, as they experienced changes to their respective target Cash LTI award percentages during the performance cycle.
(3)Mr. Ross did not participate in the first year of the 2021-2023 cycle because his employment with the Company began following the commencement of the performance cycle.
PayoutsChanges to Long-Term Incentive Compensation Program for Fiscal Year 2024
The Human Capital & Compensation Committee engaged in a comprehensive review of the Company’s LTI plan over the past year and determined to redesign the plan effective as of fiscal year 2024. The Human Capital & Compensation Committee specifically considered the following: the Company’s need to attract and retain talent; the alignment between the LTI plan and the Company’s long-term objectives; governance factors; alignment with stockholders; market data; and perspectives of key stakeholders. The fiscal year 2024 LTI plan design is intended to
50
Compensation Discussion and Analysis
enhance the plan’s pay-for-performance based structure. FW Cook provided significant input and guidance on the plan design.
With respect to the Company's NEOs, specific design elements effective for the 2015-2017 cycle werefiscal year 2024 LTI plan include:
•The 2024 LTI award is comprised of two equal parts:
o50% time-based equity that generally vests subject to continued service to the Company; and
o50% performance-based equity that vests based on the
following performance levels: | | | | |
METRIC | | COMPANY
PERFORMANCE
| | ACTUAL PAYOUT AS A
% OF TARGET
|
Return on Capital
| | 72.3rd Percentile | | 182.0 |
Growth in Earnings per Share
| | 73.7th Percentile | | 186.7 |
Total
| | | | 184.3 |
COMPENSATION DISCUSSION AND ANALYSIS (continued)
These performance levels resulted in awards that aggregateachievement of goals for total shareholder return (“TSR”) and generally vests subject to 184.3%continued service to the Company (see below for more detail)
•Time-based equity (applies to all employee participants)
oNEOs and all other employees who receive an annual equity award had the opportunity to elect on an annual basis whether their annual time-based equity grant will be comprised of target for each NEO for(i) 100% stock options, (ii) 100% RSUs, or (iii) 50% stock options and 50% RSUs
oStock options will vest over a period of four years from the 2015-2017 cycle. The amounts paid undergrant date at the rate of 25% per year, generally subject to continued service to the Company (no change from prior year)
oRSUs will now vest over a period of three years from the grant date at the rate of 33.33% per year, generally subject to continued service to the Company
•Performance-based equity, which will replace the Cash LTI endingprogram, will be awarded in the form of performance share units ("PSUs"), with performance measured over a three-year period based on the achievement of TSR relative to the companies in the S&P MidCap 400 Index
•In the event of a change in control, all equity award agreements now provide for accelerated vesting only upon a qualifying termination within a specified time period relative to the change in control (i.e., a "double trigger")
Mr. Blankenship's Compensation
On May 2, 2023, the Human Capital and Compensation Committee extended, for an additional 12-month period, the relocation benefits previously approved for Mr. Blankenship. Effective upon Mr. Blankenship’s appointment as CEO on May 9, 2022, and in order to accommodate a transition period for Mr. Blankenship and his family to relocate to the Fort Collins, Colorado area, the Human Capital and Compensation Committee previously authorized certain limited relocation benefits to Mr. Blankenship, which included the reimbursement of his commute between his current state of residence and Fort Collins, Colorado, as well as temporary housing, in each case for up to 12 months from his employment start date (the “Relocation Benefits”). To enable Mr. Blankenship to remain focused on his responsibilities to the Company, without increased distraction associated with a relocation process that has been delayed due to circumstances beyond Mr. Blankenship’s control, the Human Capital and Compensation Committee authorized an extension of the Relocation Benefits, which will now expire on May 9, 2024.
Mr. Lacey’s Compensation
Compensation Determination Process
In determining Mr. Lacey’s total target full fiscal year 2023 compensation (including all elements of his compensation and the sign-on incentives provided to him upon his hire), the Human Capital & Compensation Committee evaluated market data for peer company CFOs.
Long-Term Incentive Compensation
Pursuant to the terms of Mr. Lacey’s offer letter, his total annual target compensation under the LTI Plan for fiscal year 2024 is $1,200,000, granted in the same form and mix as other officers.
51
Compensation Discussion and Analysis
Mr. Lacey was not entitled to any amounts under the fiscal year 2021-2023 Cash LTI cycle because his employment with the Company began after the first day of the last fiscal year of the performance period (participants must be employed on the first day of the fiscal year to be eligible). Mr. Lacey will participate in the PSU Plan beginning in fiscal year 2017 can2024.
Sign-On Incentives
Mr. Lacey received, as sign-on incentives, a one-time $400,000 cash payment (which he would be found aboveobligated to reimburse if he voluntarily resigns from the Company within two years of his employment start date), as well as a one-time equity sign-on incentive. In determining the value and form of the sign-on incentive awards, the Human Capital & Compensation Committee considered factors including Mr. Lacey’s historical compensation arrangements, market practice, and retention objectives. The equity sign-on incentive award consisted of a one-time equity grant representing a grant date fair value of $1,200,000, comprised of $720,000 in RSUs and $480,000 of grant date fair value in stock options. Specifically, Mr. Lacey received on August 21, 2023 5,768 RSUs, all of which will cliff vest three years from the grant date, and 8,293 stock options with an exercise price equal to $124.82, the closing price of the Company’s stock as quoted on Nasdaq on such date. All the stock options will vest over four years at the rate of 25% per year.
Executive Development Program
Prior to joining the Company, Mr. Lacey had completed the first year of a two-year executive development program targeted at executive level persons of color to succeed in the SummaryC-Suite. Mr. Lacey’s previous employer funded the first year of the program. In July 2023, the Compensation Committee authorized the Company to contribute $75,000 to partially cover the fees for the second year of the program. Such amount was paid directly to the training organization.
Mr. Hobbs’ Compensation
Compensation Determination Process
In determining Mr. Hobbs’ total target full fiscal year 2023 compensation (including all elements of his compensation and the sign-on incentives provided to him upon his hire), the Human Capital & Compensation Committee evaluated information and input provided by Aon, Mr. Hobbs’ compensation arrangements at his previous employer, and market data for positions of similar responsibility at similarly sized manufacturing organizations.
Long-Term Incentive Compensation
Pursuant to the terms of Mr. Hobbs’ offer letter, his total annual target long-term incentive compensation for fiscal year 2023 was $710,000. This amount was delivered to Mr. Hobbs under the LTI Plan through an equity grant on his employment start date, with a grant date fair value of $710,000 (such grant, the “Hobbs FY23 Annual LTI Equivalent Award”). The Hobbs FY23 Annual LTI Equivalent Award was comprised of $276,080 in RSUs and $433,920 in stock options. Specifically, Mr. Hobbs received 10,181 stock options on December 5, 2022, with an exercise price equal to $96.30, the closing price of the Company’s stock as quoted on Nasdaq on such date, and 2,867 RSUs. All equity awards in the Hobbs FY23 Annual LTI Equivalent Award have a vesting schedule over four years at the rate of 25% per year.
Mr. Hobbs was not entitled to any amounts under the fiscal year 2021-2023 Cash LTI cycle because his employment with the Company began after the first day of the last fiscal year of the performance period (participants must be employed on the first day of the fiscal year to be eligible).
Sign-On Incentives
In determining the sign-on incentives for Mr. Hobbs, the Compensation Committee considered that Mr. Hobbs would forfeit significant compensation amounts upon a voluntary separation from his previous employer, including pension benefits and cash incentive benefits. As an inducement for Mr. Hobbs to accept the position, the Compensation Committee authorized certain compensation designed to replace the value that Mr. Hobbs would
52
Compensation Discussion and Analysis
(and subsequently did) forfeit by departing his previous employer (the “Hobbs Pension Replacement Compensation”). The Hobbs Pension Replacement Compensation was comprised of:
•a time-vested award of 36,345 RSUs on his employment start date, with a grant date fair value of $3,500,000 (the “Hobbs Pension Replacement RSU Award”), with the vesting of such RSUs to be at 50% at the end of three years and 50% at the end of four years;
•a cash contribution by the Company in the amount of $2,500,000 on behalf of Mr. Hobbs into the Executive Benefit Plan Compensation.on his employment start date (the “Hobbs Pension Replacement EBP Contribution”), with vesting to be 100% at the end of four years, and with Mr. Hobbs having full investment authority and related appreciation benefits or depreciation risk; and
•a cash award paid directly to Mr. Hobbs in the amount of $700,000, less applicable withholdings, upon his employment start date, which Mr. Hobbs would be required to repay if he voluntarily separates his employment with the Company within two years of hire.
Moreover, if Mr. Hobbs’ previous employer had terminated his employment (other than for cause), Mr. Hobbs would not have forfeited his pension benefits. To more effectively incentivize Mr. Hobbs to join the Company, the Hobbs Pension Replacement Compensation similarly provides that if the Company terminates Mr. Hobbs’ employment (other than for “Cause”, as such term is defined in Mr. Hobbs’ officer Severance and Change in Control Agreement) prior to the vesting of the Hobbs Pension Replacement RSU Award and the Hobbs Pension Replacement EBP Contribution, then such award and contribution would immediately vest upon such termination.
Mr. Hobbs also received a sign-on award of 5,192 RSUs on his employment start date, with a grant date fair value of $500,000 (the “Hobbs Sign-On RSU Award”), all of which will vest on the third anniversary of the grant date. The Compensation Committee determined that the Hobbs Sign-On RSU Award was customary in our industries for this type of hire and that it was consistent with Company’s recent sign-on equity grant practices for key senior leaders.
Other Compensation Programs
The NEOs are eligible to participate in the same health, welfare, and retirement benefits on the same basis as all of our U.S. employee membership. These benefits include a group health insurance program; life insurance, inclusive of employee life, additionalbuy-up employee life, optional spouse life, and optional child life; Accidental Death & Dismemberment insurance; Short-Term Disability; Long-Term Disability; Woodwarda 401(k) retirement savings plan (the “Woodward Retirement Savings Plan,Plan”), inclusive of employee contributions and Company contributions (100% match on the first 3% of employee contributions, 50% on the next 3% of employee contributions, maxing at 4.5%); Woodward Stock Plan (Company(annual Woodward contribution of 5% of baseeligible wages); and Retirement Income Plan (Company contribution of 1.5% of eligible wages, and 0.1% for each year of additional service). The Retirement Income Plan was closed to new participants as of September 30, 2003, with prior participants grandfathered.
All plans are subject to applicable limitations set by the Internal Revenue Service (“IRS”). Supplemental contributions to the Executive Benefit Plan (“EBP”) described below are made for the Retirement Savings Plan, the Woodward Stock Plan, and the grandfathered Retirement Income Plan and are solely to restore for IRS limitations.
Our NEOs are also eligible to participate in a non-qualified deferred compensation plan (the “Executive Benefit Plan” or the EBP. This plan“EBP”). The EBP is also available to other key members of management and to members of the Board. Employee participants are able to defer up to 50% of base salary, and up to 100% of any cash incentive (WVIP(EIP and/or Cash LTI) payments.
All of our tax-qualified plans are subject to applicable limitations set by the Internal Revenue Service (“IRS”). Supplemental contributions to the EBP (as more fully described below) are made for the Woodward Retirement Savings Plan, the Woodward Stock Plan, and the grandfathered Retirement Income Plan and are solely to restore for IRS limitations.
The benefits described in this section are paid to remain competitive in the marketplace. Amounts relating to certain of these benefits may be found in the “All Other Compensation” column of the Summary Compensation Table.
Post-Employment Compensation and Employment Contracts
The Company’s NEOs are not employed under general employment contracts and are employees at will.at-will.
53
Compensation Discussion and Analysis
We have entered into severance and change in control agreements with each of the NEOsNEOs. The agreements provide for severance benefits in orderthe event of a qualifying termination, whether within or outside a change in control period, although the benefits are different in each circumstance as more fully reflected below under the caption “Executive Compensation — Potential Payments Upon Termination or Change in Control”.
The severance benefits are intended to ensureease the consequences of a qualifying termination of employment. These benefits are also designed to prevent our senior executives from seeking employment with our competitors or elsewhere after a qualifying termination or from soliciting our employees or customers during a period after a qualifying termination.
The benefits applicable during a change in control period are designed to help align actions and behaviors that are aligned with, and in the best interests of, our stockholders in the event of a proposed or actual change ofin control transaction, to retain these executives through a change ofin control transaction and to enable them to remain focused on running the business to ensure a smooth transition. The change in control benefits are designed to preserve productivity, avoid disruption, and prevent attrition in the event we are involved in a change in control transaction.
SeveranceThe benefits are intended to ease the consequences of an unexpected termination of employment. These benefits are also designed to prevent our senior executives from seeking employment with our competitors after termination or soliciting our employees or customersapplicable during a period after termination of employment. The change in control severance programperiod also motivatesmotivate executives to pursue transactions that are in our stockholders’ best interests notwithstanding the potential negative impact of the transaction on their future employment. While cognizant of their terms, the Human Capital & Compensation Committee does not view the severance and change in control agreements as an element of current compensation, and such arrangements do not necessarily affect the Human Capital & Compensation Committee’s annual compensation decisions.
For a further description of the severance and change in control agreements, see the information under the caption “Executive Compensation — Potential Payments Upon Termination or Change in Control — Change in Control and Restrictive Covenant Agreements Post-Employment Provisions.”
