The Board of Directors seeks to ensure that the Board of Directors is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow the Board of Directors to satisfy its oversight responsibilities effectively. As discussed below under “Corporate Governance and Nominating Committee” beginning on page 7,8, a slate of Directors to be nominated for election at the annual shareholders’ meeting each year is approved by the Board of Directors after recommendation by the Corporate Governance and Nominating Committee. In the case of a vacancy on the Board of Directors (other than one resulting from removal by shareholders), the Corporate Governance and Nominating Committee will identify individuals believed to be qualified candidates to serve on the Board of Directors approvesand will recommend any director nominees to the full Board of Directors for election. The Board of Directors will then approve a Directordirector nominee to fill the vacancy followingon the recommendationBoard of a candidate by the Chairman of the Board.Directors. In identifying candidates for Director, the Corporate Governance and Nominating Committee and the Board of Directors take into account (1) the comments and recommendations of board members regarding the qualifications and effectiveness of the existing Board orof Directors or additional qualifications that may be required when selecting new board members that may be made in connection with the self-examinations described below under “Corporate Governance and Nominating Committee” beginning on page 7,8, (2) the requisite expertise and sufficiently diverse backgrounds of the Board of Directors’ overall membership composition, (3) the independence of outside Directors and other possible conflicts of interest of existing and potential members of the Board of Directors and (4) all other factors it considerssuch bodies consider appropriate. Although the Company has no formal policy regarding diversity, the charter of the Corporate Governance and Nominating Committee includes a statement that it and the Board of Directors believe that diversity is an important component of a board of directors, including such factors as background, skills, experience, expertise, gender, race and culture. As mentioned above, the Corporate Governance and Nominating Committee and the Board of Directors include diversity as one of several criteria that they consider in connection with selecting candidates for the Board.Board of Directors. The Board of Directors seeks to ensure that the Boardit is composed of members whose particular background, expertise, qualifications, attributes and skills, when taken together, allow the Board of Directors to satisfy its oversight responsibilities effectively.
![](https://capedge.com/proxy/DEF 14A/0001437749-11-000534/p1.jpg) ![](https://capedge.com/proxy/PRE 14A/0001437749-13-000211/arapic.jpg) | Mr. Hovnanian has been Chief Executive Officer since July 1997 after being appointed President in 1988 and Executive Vice President in 1983. Mr. Hovnanian joined the Company in 1979 and has been a Director of the Company since 1981 and was Vice Chairman from 1998 through November 2009. In November 2009, he was elected Chairman of the Board following the death of Kevork S. Hovnanian, the chairman and founder of the Company and the father of Mr. Hovnanian. |
| |
![](https://capedge.com/proxy/DEF 14A/0001437749-11-000534/p2.jpg) ![](https://capedge.com/proxy/PRE 14A/0001437749-13-000211/coutts.jpg) | Mr. Coutts retired from the position of Executive Vice President of Lockheed Martin Corporation (NYSE), which he held from 2000 to 2008. Mr. Coutts was President and COO of the former Electronics Sector of Lockheed Martin. He was elected an officer by the Board of Directors of Lockheed Martin in December 1996. Mr. Coutts held management positions with General Electric Corporation (NYSE) from 1972-1993,1972 to 1993, and was with GE Aerospace when it became part of Lockheed Martin in 1993. Mr. Coutts is the retired Chairman of Sandia Corporation, a subsidiary of Lockheed Martin Corp., and is on the Board of Directors of Stanley Black and Decker (NYSE) and is the Chairman of the Governance and Nominating Committee,, as well as the Pall Corporation (PLL)(NYSE), and is also a member of the Board of Overseers, College of Engineering, Tufts University. He is a Member of the Chapter of the National Cathedral. He was elected as a Director of Hovnanian Enterprises, Inc. in March 2006 and is a member of the Company’s Compensation Committee. |
![](https://capedge.com/proxy/DEF 14A/0001437749-11-000534/p3.jpg) ![](https://capedge.com/proxy/PRE 14A/0001437749-13-000211/kangas.jpg) | Mr. Kangas was the Global Chairman and Chief Executive Officer of Deloitte Touche Tohmatsu from December 1989 to May 2000, when he retired. He also serves on the Boards of Directors of United Technologies Corp. (NYSE), AllScripts, Inc. (NASDAQ), Tenet Healthcare Corporation, Inc. (NYSE), and Intuit, Inc. (NASDAQ). He was on the Board of Directors of Electronic Data Systems, Inc. (NYSE) from 2004 to 2008.2008 and AllScripts, Inc. (NASDAQ) (and, prior to its merger with AllScripts, Inc., Eclipsys Corporation (NASDAQ)) from 2004 to 2012. Mr. Kangas is the past Chairman of the Board of the National Multiple Sclerosis Society. Mr. Kangas was elected as a Director of Hovnanian Enterprises, Inc. in September 2002, is Chairman of the Company’s Audit Committee and a member of the Company’s Compensation Committee and Corporate Governance and Nominating Committee. |
| |
![](https://capedge.com/proxy/DEF 14A/0001437749-11-000534/p4.jpg) ![](https://capedge.com/proxy/PRE 14A/0001437749-13-000211/marengi.jpg) | Mr. Marengi, sincefrom July 2007 servesto March 2012, served as a Venture Partner for Austin Ventures. Prior to that date, Mr. Marengi served as senior vice president for Dell Inc.’s (NASDAQ)the Commercial Business Group.Group of Dell Inc. (NASDAQ). In this role, Mr. Marengi was responsible for the Dell units serving medium business, large corporate, government, education and healthcare customers in the United States. Mr. Marengi joined Dell in July 1997 from Novell Inc. (NASDAQ), where he was president and chief operating officer. He joined Novell in 1989 and moved through successive promotions to become executive vice president of worldwide sales and field operations. He is also an outside Director for Quantum Corporation (NYSE) and is a member of the Compensation Committee and se rves as Chairman ofsits on the Board forof Entorian Technologies, Inc. (NASDAQ)(formerly, the OTC Markets). Mr. Marengi was elected Directorto the Board of Directors of Hovnanian Enterprises, Inc. in March 2006 and is member of the Company’s Corporate Governance and Nominating Committee. |
| |
![](https://capedge.com/proxy/DEF 14A/0001437749-11-000534/p5.jpg) ![](https://capedge.com/proxy/PRE 14A/0001437749-13-000211/pagano.jpg) | Mr. RobbinsPagano was a managingpartner at Simpson Thacher & Bartlett LLP until his retirement at the end of 2012. He was the head of the firm’s capital markets practice from 1999 to 2012, and, before that, administrative partner of the New York office of Kenneth Leventhal & Company and executive committee partner, retiring from the firm in 1992. He was made a partner of Kenneth Leventhal & Company in 1973. Mr. Robbins was a Trustee of Keene Creditors Trust from 1996 until July 2009.to 1999. He was Director and the Chairman of the Audit Committee of Raytech Corporation from May 2003 until March 2007, and was a Director and Chairman of the Audit Committee of Texas Petrochemicals Inc. from May 2006 until December 2009. Mr. Robbins was elected as a Director of Hovnanian Enterprises, Inc. in January 2001, and is a member of the Company’s Audit Committee.firm’s executive committee during nearly all of that period. He also serves on the Board of Directors of Cheniere Energy Partners GP, LLC, the general partner of Cheniere Energy Partners (NYSE MKT). Mr. Pagano serves on the Engineering Advisory Council of Lehigh University. |
| |
![](https://capedge.com/proxy/DEF 14A/0001437749-11-000534/p6.jpg) ![](https://capedge.com/proxy/PRE 14A/0001437749-13-000211/sorsby.jpg) | Mr. Sorsby has been Chief Financial Officer of Hovnanian Enterprises, Inc. since 1996, and Executive Vice President since November 2000. Mr. Sorsby was also Senior Vice President from March 1991 to November 2000 and was elected as a Director of the Company in 1997. He is Chairman of the Board of Visitors for Urology at The Children’s Hospital of Philadelphia (“CHOP”) and also serves on the Institutional Advancement Committee at CHOP. |
| |
![](https://capedge.com/proxy/DEF 14A/0001437749-11-000534/p7.jpg) ![](https://capedge.com/proxy/PRE 14A/0001437749-13-000211/weinroth.jpg) | Mr. Weinroth is a partner in Coral Reef Capital Partners, a private equity fund and was from 2003 untilto mid-2008 a Managing Member of Hudson Capital Advisors, LLC and since then he has been an advisor to Coral Reef Capital Partners, a private equity and merchant banking firm. From 1989successor firm to 2003, he served as co-Chairman and headsome of the Investment Committee at First Britannia Mezzanine N.V., a European private investment firm. Hudson Capital employees. He is Chairman of the Board Emeritus(Emeritus) of Core Laboratories, N.V. (NYSE), a global oil field service company where he had previously been Chairman from 1994 through 2001. From l989 to 2003, he served as Co-Chairman and head of the Board from 1994 to 2001.Investment Committee of First Britannia Mezzanine, N.V., a European private investment firm. He was Vice Chairis presently Chairman of the Central Asian AmericanAsia Education Foundation, a successor to the Central Asian-American Enterprise Fund, to which he was appointed by the President of the United States, and is Chairman of its successor, the US Central Asia Education Foundation. HeStates. Mr. Weinroth has been Chairman of four NYSE listedNYSE-listed companies and chief executiveChief Executive of three of them. He is also a Trustee and the immediate past Chairman of The Joyce Theatre Foundation, Inc., and a Trustee of the Paul Taylor Dance Foundation as well as a recently retired TrusteeBoard member of the Horace Mann School.Flea Theater. Mr. Weinroth has been a Director of Hovnanian Enterprises, Inc. since 1982, is a member of the Company’s Audit Committee, and Chairman of the Company’sCompany's Compensation Committee and Corporate Governance and Nominating Committee, and is a member of its Audit Committee. |
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the year ended October 31, 2010,2012, the Board of Directors held four regularly scheduled meetings and fourone telephonic meetings.meeting. In addition, Directors considered Company matters and had communications with the Chairman of the Board of Directors and others outside of formal meetings. During the fiscal year ended October 31, 2010,2012, each Director attended 100% of the meetings of the Board of Directors and at least 75%95% of the meetings of its Committees on which such Director served. Directors are expected to attend the Annual Meeting of Shareholders, but the Company does not have a formal policy with respect to attendance. All of the members of the Board of Directors attended the Annual Meeting of Shareholders held on March 16, 2010.27, 2012.
Audit Committee
TheFor fiscal 2012, the members of the Audit Committee of the Board of Directors arewere Messrs. Kangas, Robbins and Weinroth. Weinroth. The Board of Directors has determined that all of the members of the Audit Committee meet the standards for independence in our Certificate of Incorporation, which is available on our website at www.khov.com under “SEC Filings/Quarterly Filings/09-08-08 Filing Date,” and the independence requirements mandated by the NYSE listing standards.
The Audit Committee is currently chaired by Mr. Kangas and is responsible for reviewing and approving the scope of the annual audit undertaken by the Company’s independent registered public accounting firm and meeting with them to review the results of their work as well as their recommendations. The Audit Committee selects the Company’s independent registered public accounting firm and also approves and reviews their fees. The duties and responsibilities of the Audit Committee are set forth in its charter, which may be found at www.khov.com under “Investor Relations/Corporate Governance.” During the fiscal year ended October 31, 2010,2012, the Audit Committee met on fourthree occasions and held eight telephonic meetings. The Audit Committee also authorizes staffing and compensation of the Internal Audit Department. The Vice President of Internal Audit for the Company reports directly to the Audit Committee on, among other things, the Company’s compliance w ithwith certain Company procedures which are designed to enhance management’s understanding of operating issues and the results of the Audit Department’s annual audits of the various aspects of the Company’s business. In fiscal 2010,2012, the Audit Department issued 13eight traditional audit reports and performed 2316 reviews pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. For additional information related to the Audit Committee, see “The Audit Committee” below.
Compensation Committee
The members of the Compensation Committee of the Board of Directors areduring fiscal 2012 were Messrs. Weinroth, Kangas and Coutts. The Board of Directors has determined that all of the members of the Compensation Committee meet the standards for independence in our Certificate of Incorporation and the independence requirements mandated by the NYSE listing standards. The duties and responsibilities of the Compensation Committee are set forth in its charter, which may be found on our website at www.khov.com under “Investor Relations/Corporate Governance.”
The Compensation Committee is currently chaired by Mr. Weinroth and is responsible for reviewing salaries, bonuses and other forms of executive compensation for the Company’s senior executives, key management employees and non-employee Directors, and is active in other compensation and personnel areas as the Board of Directors from time to time may request. In addition, all members of the Compensation Committee qualify as “non-employee directors” for purposes of Rule 16b-3 of the Exchange Act, and as “outside directors” for purposes of Section 162(m) (“Section 162(m)”) of the Internal Revenue Code of 1986, as amended. For a discussion of the criteria used and factors considered by the Compensation Committee in reviewing and determining executive compensation, see “The Compensation Committee” and “Compensation Discussion and Analysis” below. During the fiscal year ended October 31, 2010,2012, the Compensation Committee met on fivefour occasions and held no telephonic meetings.
Corporate Governance and Nominating Committee
The Company has established a Corporate Governance and Nominating Committee, although the Company is not required to have such committee because it is a controlled company under the rules of the NYSE. The members of the Corporate Governance and Nominating Committee of the Board of Directors areduring fiscal 2012 were Messrs. Weinroth, Kangas and Marengi. The Board of Directors has determined that all of the members of the Corporate Governance and Nominating Committee meet the standards for independence in our Certificate of Incorporation and the independence requirements mandated by the NYSE listing standards.
The Corporate Governance and Nominating Committee is currently chaired by Mr. Weinroth. The Corporate Governance and Nominating Committee is responsible for corporate governance matters, and reviewing and recommending nominees for the Board of Directors, succession planning and other Board-related policies. The Corporate Governance and Nominating Committee also oversees the annual performance evaluation of the Board of Directors and its Committees, the Board’s periodic review of the Company’s Corporate Governance Guidelines (“Guidelines”) and compliance with the Company’s Related Person Transaction Policy. During the fiscal year ended October 31, 2010,2012, the Corporate Governance and Nominating Committee met on twothree occasions and held twono telephonic meetings.
The Guidelines require that annually each Director prepares annually an assessment of each Board committee on which hesuch Director serves as well as of the full Board of Directors as to the effectiveness of each committee and the full Board of Directors and any recommendations for improvement.
The duties and responsibilities of the Corporate Governance and Nominating Committee are set forth in its charter, which may be found at www.khov.com under “Investor Relations/Corporate Governance,” and the Guidelines may be found at the same website address under “Investor Relations/Corporate Governance.”
In conducting its nomination function, among other factors, the Board of DirectorsCorporate Governance and Nominating Committee generally considers the size of the Board of Directors best suited to fulfill its responsibilities, the Board of Directors’ overall membership composition to ensure the Board of Directors has the requisite expertise and consists of persons with sufficiently diverse backgrounds, the independence of outside directors and other possible conflicts of interest of existing and potential members of the Board of Directors.Directors as more fully described under “Election of Directors – Board of Directors – Composition” above.
The Company does not have a specific policy regarding shareholder nominations of potential directors to the Board of Directors, other than through the process described under “Shareholder Proposals for the 20122014 Annual Meeting” below. The Corporate Governance and Nominating Committee will consider director candidates recommended by shareholders. Possible nominees to the Board of Directors may be suggested by any Director and given to the Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee may seek potential nominees and engage search consultants to assist it in identifying potential nominees. The Corporate Governance and Nominating Committee adopted an amendment to its charter in November 2009 affirming its belief that d iversitydiversity is an important factor to consider in evaluating potential nominees. The Corporate Governance and Nominating Committee recommends to the Board of Directors a slate of nominees for the Board of Directors for inclusion in the matters to be voted upon at the Annual Meeting. The Company’s Restated By-laws provide that Directors need not be shareholders. Vacancies on the Board of Directors, other than those resulting from removal by shareholders, may be filled by action of the Board of Directors.
As of the 120th calendar day prior to February 1, 2011,March 27, 2013, the Board of Directors had not received any recommendation for the nomination of a candidate to the Board of Directors by any shareholder or group of shareholders that at such time held more than 5% of the Company’s voting stock for at least one year.
VOTE REQUIRED
The election of the nominees to the Company’s Board of Directors for the ensuing year, to serve until the next Annual Meeting of Shareholders of the Company, and until their respective successors may be elected and qualified, requires that each director be elected by a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, represented in person or by proxy at the 20112013 Annual Meeting. In determining whether each director has received the requisite number of affirmative votes, abstentions and broker non-votes will have no impact on such matter because such shares are not votes cast.
Mr. Hovnanian and others with voting power over the shares held by the Estate of Kevork S. Hovnanian, the Limited Partnership and certain family trusts have informed the Company that they intend to vote in favor of the nominees named in this proposal. Because of their collective voting power, this proposal is assured passage.
Our Board of Directors recommends that shareholders vote FOR the election of the nominees named in this proposal to the Company’s Board of Directors.
(2) RATIFICATION OF THE SELECTION OF AN INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
On January 5, 2009, the Audit Committee of the Board of Directors of the Company terminated its relationship with Ernst & Young LLP as the independent registered public accounting firm for the Company. Ernst & Young LLP’s reports on the financial statements of the Company for the fiscal years ended October 31, 2007 and 2008 did not contain any adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principle. During the fiscal years ended October 31, 2007 and 2008, and through January 5, 2009, (1) there were no disagreements with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the sati sfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference thereto in its reports on the financial statements of the Company for such years, and (2) there have been no “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-K.
Also on January 5, 2009, the Audit Committee of the Company’s Board of Directors appointed Deloitte & Touche LLP as the independent registered public accounting firm for the Company as of and for the fiscal year ending October 31, 2009. This appointment followed a solicitation and review process conducted by the Company’s Audit Committee.
During the fiscal years ended October 31, 2007 and 2008, and through January 4, 2009, (1) Deloitte & Touche LLP had not been engaged as the principal accountant of the Company to audit its financial statements or as an independent accountant to audit a significant subsidiary of the Company, and (2) the Company had not consulted with Deloitte & Touche LLP regarding (a) the application of accounting principles to any completed or proposed transaction, (b) the type of audit opinion that might be rendered on the Company’s financial statements for such periods, or (c) any other accounting, auditing or financial reporting matter described in Items 304(a)(2)(i) and (ii) of Regulation S-K.
The selection of an independent registered public accounting firm to examine financial statements of the Company to be made available or transmitted to shareholders and to be filed with the SEC for the fiscal year ending October 31, 20112013 is submitted to this Annual Meeting of Shareholders for ratification. Deloitte & Touche LLP has been selected by the Audit Committee of the Company to examine such financial statements. In the event that the shareholders fail to ratify the appointment, the Audit Committee will consider the view of the shareholders in determining its selection of the Company’s independent registered public accounting firm for the subsequent fiscal year. Even if the selection is ratified, the Audit Committee may, in its discretion, direct the appointment of a new independ entindependent registered public accounting firm at any time during the fiscal year if the Audit Committee determines that such a change would be in the best interests of the Company and our stockholders.its shareholders.
The Company has been advised that representatives of Deloitte & Touche LLP will attend the Annual Meeting of Shareholders to respond to appropriate questions and will be afforded the opportunity to make a statement if the representativerepresentatives so desires.desire.
VOTE REQUIRED
Ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm to examine financial statements of the Company for the year ending October 31, 2011,2013 requires the majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, present in person or by proxy at the 20112013 Annual Meeting. In determining whether the proposal has received the requisite number of affirmative votes, abstentions will have no impact on such matter because such shares are not considered votes cast.
Mr. Hovnanian and others with voting power over the shares held by the Estate of Kevork S. Hovnanian, the Limited Partnership and certain family trusts have informed the Company that they intend to vote in favor of this proposal. Because of their collective voting power, this proposal is assured passage.
Our Board of Directors recommends that shareholders vote FOR ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm.
(3) APPROVAL OF AN AMENDMENT TO THE COMPANY’S CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF CLASS A COMMON STOCK
On December 14, 2012, subject to shareholder approval, the Board authorized an amendment to our Certificate of Incorporation to increase the number of authorized shares of Class A Common Stock (the “Class A Common Stock”) from 200,000,000 shares to 400,000,000 shares (the “Class A Amendment”). Pursuant to Proposal 4, we are separately proposing an increase to our authorized Class B Common Stock, but we are not proposing an increase to the number of authorized shares of Preferred Stock.
If approved by shareholders, the Class A Amendment would be reflected in an Amended and Restated Certificate of Incorporation of Hovnanian Enterprises, Inc., and the first paragraph of paragraph Fourth of our Certificate of Incorporation would be amended to provide as follows:
“FOURTH: The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 430,100,0001 shares, of which 400,000,000 shares shall be Class A Common Stock having a par value of one cent ($0.01) per share, 30,000,0002 shares shall be Class B Common Stock having a par value of one cent ($0.01) per share and 100,000 shares shall be Preferred Stock having a par value of one cent ($0.01) per share.” If the shareholders approve the proposed amendment, it will become effective upon filing of an Amended and Restated Certificate of Incorporation with the Delaware Secretary of State, which the Company anticipates doing as soon as practicable following shareholder approval.
The newly authorized shares of Class A Common Stock will have all the rights and privileges of the shares of Class A Common Stock presently authorized. Therefore, approval of this proposal and any subsequent issuance of additional shares of Class A Common Stock would not affect your current rights as a shareholder, except for any dilutive effects of a potential increase in the number of outstanding shares of Class A Common Stock to, among other things, earnings per share, book value per share and the voting power of current holders of our Class A Common Stock.
Reasons for the Proposal
Our Board believes that the number of shares of Class A Common Stock that is available for issuance is not sufficient. We are currently authorized to issue 200,000,000 shares of Class A Common Stock. As of November 1, 2012, 118,362,931 shares of Class A Common Stock were issued and outstanding and 73,181,095 shares of Class A Common Stock were reserved (1) for conversions of our Class B Common Stock into shares of Class A Common Stock, (2) for the issuance upon exercise of outstanding stock options and stock awards, (3) for stock options and stock awards that may be granted in the future under our stock option or other incentive programs and (4) for stock that may be issued upon settlement or exchange of our outstanding equity-linked securities. As a result, there are currently only 8,455,974 shares of Class A Common Stock available, including shares held in Treasury, for other purposes.
The Board believes that it is advisable and in the Company’s and its shareholders’ best interests to have a greater number of authorized shares of Class A Common Stock in order to maintain the Company’s flexibility to use its capital stock for business and financing purposes in the future. The additional shares will be available for issuance from time to time at the discretion of the Board, normally without further shareholder action (except as may be required for a particular transaction by applicable law, requirements of regulatory agencies or by NYSE rules), for any proper corporate purpose including, among other things, capital-raising and deleveraging transactions, investment opportunities, to issue under stock option or other incentive programs, to attract and retain talented personnel and for other value-creating opportunities and strategic transactions. The Board believes that the proposed increase in the Company’s authorized Class A Common Stock will provide a sufficient number of shares available to maintain the flexibility necessary to pursue the foregoing and other opportunities in the foreseeable future.
The Board believes that prudent corporate governance includes the Company having a sufficient number of authorized but unissued shares of Class A Common Stock available for various purposes, and the Board regularly evaluates the Company’s needs and opportunities to utilize shares of the Company’s Class A Common Stock. In recent years, the Company has been focused on evaluating its debt profile, capital structure and various financing and refinancing alternatives and has successfully completed several deleveraging transactions, including with issuances of Class A Common Stock and securities which may be settled or exchanged for Class A Common Stock. These issuances represent the primary use of the Class A Common Stock over the past few years.
The Company has no current plans, and there are currently no agreements or arrangements to issue any of the additional shares of Class A Common Stock that would be authorized by the proposed Class A Amendment. However, if shareholders approve the proposed Class A Amendment, the additional authorized shares would give the Board more flexibility in responding to a variety of corporate opportunities, including those discussed above, which, if they become available, are likely to require prompt action on our part. The Board believes that the increase in the authorized number of shares of Class A Common Stock will enable the Company to take timely advantage of market conditions and the availability of favorable opportunities without the delay and expense associated with convening a special meeting to obtain shareholder approval at that time (unless otherwise required by regulatory agencies or by NYSE rules).
1 The Company will have the authority to issue a total of 460,100,000 shares of all classes of stock if Proposal 4 is also approved.
2 The Company will have the authority to issue a total of 60,000,000 shares of Class B Common Stock if Proposal 4 is approved.
Possible Effects of the Increase in Class A Common Stock
The Company has not proposed the increase in the number of authorized shares of Class A Common Stock with the intent of using the additional shares to prevent or discourage any actual or threatened takeover of the Company. The Company currently has in effect a shareholder approved rights plan that is not designed to protect shareholders against the possibility of a hostile takeover. Instead, it is meant to preserve shareholder value and the value of certain tax assets primarily associated with net loss carryforwards and built-in losses under Section 382 of the Internal Revenue Code of 1986, as amended. The proposed Class A Amendment does not change any of the existing terms of the rights plan.
The increase in the authorized number of shares of Class A Common Stock and the subsequent issuance of such shares could, however, have the effect of delaying or preventing a change of control of the Company without further action by shareholders. Shares of authorized and unissued Class A Common Stock could (within the limits imposed by applicable law) be issued in one or more transactions that could make a change of control of the Company less likely. The additional authorized shares could be used to discourage persons from attempting to gain control of the Company by diluting the voting power of shares then outstanding or by increasing the voting power of persons who would support the Board in a potential takeover scenario. However, this proposal is not made in response to any effort of which we are aware to accumulate our stock or to obtain control of us, nor do we have a present intent to use the additional shares of authorized Class A Common Stock to oppose a hostile takeover attempt or to delay or prevent changes in control of management. In addition, members of the Hovnanian family, including Ara Hovnanian, the Chairman of our Board, President and Chief Executive Officer, have the power to cast a majority of the votes that can be cast by the holders of all our currently outstanding common stock, voting together, through personal holdings, the Limited Partnership, family trusts and shares held by the Estate of Kevork S. Hovnanian.
You will not realize any dilution in your percentage ownership or your voting rights as a result of increasing our authorized Class A Common Stock. In the absence of future issuances of our Class A Common Stock to you, issuances of additional shares of our Class A Common Stock in the future would dilute your percentage ownership and the voting power of the outstanding shares of our Class A Common Stock. In addition, the issuance of additional shares of our Class A Common Stock (or even the potential issuance) may have a depressive effect on the market price of our Class A Common Stock. Shareholders do not have preemptive rights, which means that they do not have the right to purchase shares in any future issuance of Class A Common Stock in order to maintain their proportionate equity interests in the Company.
VOTE REQUIRED
Approval of the proposed amendment to the Certificate of Incorporation to increase the number of authorized shares of Class A Common Stock requires the affirmative vote of the holders, represented in person or by proxy at the 2013 Annual Meeting, of (1) a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, and (2) a majority of the votes cast by the shareholders of Class A Common Stock. In determining whether this proposal has received the requisite number of affirmative votes, abstentions will have no effect on the outcome because they are not considered votes cast. Approval of the Class A Amendment is not conditioned on the approval of the Class B Amendment described in Proposal 4.
If our shareholders approve the proposed Class A Amendment, it will become effective upon filing of an Amended and Restated Certificate of Incorporation with the Delaware Secretary of State, which we anticipate doing as soon as practicable following shareholder approval. However, if our shareholders approve the proposed Class A Amendment, our Board retains discretion under Delaware law not to implement the proposed amendment. If our Board were to exercise such discretion, the number of authorized shares of Class A Common Stock would remain at current levels.
Mr. Hovnanian and others with voting power over the shares held by the Estate of Kevork S. Hovnanian, the Limited Partnership and certain family trusts have informed the Company that they intend to vote in favor of this proposal.
Our Board of Directors recommends that shareholders vote FOR the approval of the proposed amendment to our Certificate of Incorporation to increase the number of authorized shares of Class A Common Stock.
(4) APPROVAL OF AN AMENDMENT TO THE COMPANY’S CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF CLASS B COMMON STOCK
On December 14, 2012, subject to shareholder approval, the Board authorized an amendment to our Certificate of Incorporation to increase the number of authorized shares of Class B Common Stock (the “Class B Common Stock”) from 30,000,000 shares to 60,000,000 shares (the “Class B Amendment”). Pursuant to Proposal 3, we are separately proposing an increase to our authorized Class A Common Stock, but we are not proposing an increase to the number of authorized shares of Preferred Stock.
If approved by shareholders, the Class B Amendment would be reflected in an Amended and Restated Certificate of Incorporation of Hovnanian Enterprises, Inc., and the first paragraph of paragraph Fourth of our Certificate of Incorporation would be amended to provide as follows:
“FOURTH: The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 260,100,0003 shares, of which 200,000,0004 shares shall be Class A Common Stock having a par value of one cent ($0.01) per share, 60,000,000 shares shall be Class B Common Stock having a par value of one cent ($0.01) per share and 100,000 shares shall be Preferred Stock having a par value of one cent ($0.01) per share.” If the shareholders approve the proposed amendment, it will become effective upon filing of an Amended and Restated Certificate of Incorporation with the Delaware Secretary of State, which the Company anticipates doing as soon as practicable following shareholder approval.
The newly authorized shares of Class B Common Stock will have all the rights and privileges of the shares of Class B Common Stock presently authorized. Therefore, approval of this proposal and any subsequent issuance of additional Class B Common Stock would not affect your current rights as a shareholder, except for any dilutive effects of a potential increase in the number of outstanding shares of Class B Common Stock to, among other things, earnings per share, book value per share and the voting power of holders of our Class B Common Stock.
Reasons for the Proposal
The Company is a family enterprise that has been in operation since 1959, and the Company has maintained a shareholder approved dual-class capital structure since 1992. The Board established this structure as part of its philosophy to foster continuity and stability in the Company’s operations.
The Board continues to believe that it important to the Company’s continued and future development to provide for continuity of direction and management and to maintain stability in the Company’s relationships with its lenders, suppliers, contractors and others who are important to the conduct of the Company’s business. The Board also believes that the Hovnanian family’s direction and management of the Company and the stability in the Company’s relationships with others fostered by their control have been crucial to the growth and success of the Company over its history and will continue to be so in the future.
In light of the benefits to the Company of the continuity of share ownership and control of the Hovnanian family, the Board believes that it is advisable and in the best interests of the Company and its shareholders to maintain the relative proportion of the Class B Common Stock to the Class A Common Stock. If Proposal 3 is approved, we would be authorized to issue 400,000,000 shares of Class A Common Stock. Therefore, approval of the Class B Amendment would maintain the proportion of authorized Class A Common Stock and Class B Common Stock as it currently stands and enable the Company to pursue the initiatives described in Proposal 3.
3 The Company will have the authority to issue a total of 460,100,000 shares of all classes of stock if Proposal 3 is also approved.
4 The Company will have the authority to issue a total of 400,000,000 shares of Class A Common Stock if Proposal 3 is approved.
The Company has historically issued Class B Common Stock to the Hovnanian family in connection with equity awards and with the anticipation that the Class B Common Stock would be held for investment. Under the terms of the Company’s Certificate of Incorporation, transfers of Class B Common Stock are restricted to certain permitted transferees (otherwise each share of Class B Common Stock would be converted into Class A Common Stock on a share-for-share basis) and, if the Class B Common Stock is held in nominee name, the beneficial owner of the Class B Common Stock is required to make representations that such holder has held continuously since the date of issuance in order to receive the benefit of the Class B Common Stock voting. Absent such representations, each share of Class B Common Stock would carry the same number of votes as a share of Class A Common Stock.
Possible Effects of the Increase in Class B Common Stock
The Company has not proposed the increase in the number of authorized shares of Class B Common Stock with the intent of using the additional shares to prevent or discourage any actual or threatened takeover of the Company. The Company currently has in effect a shareholder approved rights plan that is not designed to protect shareholders against the possibility of a hostile takeover. Instead, it is meant to preserve shareholder value and the value of certain tax assets primarily associated with net loss carryforwards and built-in losses under Section 382 of the Internal Revenue Code of 1986, as amended. The proposed Class B Amendment does not change any of the existing terms of the rights plan.
The increase in the authorized number of shares of Class B Common Stock and the subsequent issuance of such shares could, however, have the effect of delaying or preventing a change of control of the Company without further action by shareholders. Shares of authorized and unissued Class B Common Stock could (within the limits imposed by applicable law) be issued in one or more transactions that could make a change of control of the Company less likely. The additional authorized shares could be used to discourage persons from attempting to gain control of the Company by diluting the voting power of shares then outstanding or by increasing the voting power of persons who would support the Board in a potential takeover scenario. However, this proposal is not made in response to any effort of which we are aware to accumulate our stock or to obtain control of us, nor do we have a present intent to use the additional shares of authorized Class B Common Stock to oppose a hostile takeover attempt or to delay or prevent changes in control of management. In addition, members of the Hovnanian family, including Ara Hovnanian, the Chairman of our Board, President and Chief Executive Officer, have the power to cast a majority of the votes that can be cast by the holders of all our currently outstanding common stock, voting together, through personal holdings, the Limited Partnership, family trusts and shares held by the Estate of Kevork S. Hovnanian.
You will not realize any dilution in your percentage ownership or your voting rights as a result of increasing our authorized Class B Common Stock. Issuances of additional shares of our Class B Common Stock in the future would dilute your percentage ownership and the voting power of the outstanding shares of our Class A Common Stock. In addition shareholders do not have preemptive rights.
VOTE REQUIRED
Approval of the proposed amendment to the Certificate of Incorporation to increase the number of authorized shares of Class B Common Stock requires the affirmative vote of the holders, represented in person or by proxy at the 2013 Annual Meeting, of (1) a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, and (2) a majority of the votes cast by the shareholders of Class B Common Stock. In determining whether this proposal has received the requisite number of affirmative votes, abstentions will have no effect on the outcome because they are not considered votes cast. Approval of the Class B Amendment is not conditioned on the approval of the Class A Amendment described in Proposal 3.
If our shareholders approve the proposed Class B Amendment, it will become effective upon filing of an Amended and Restated Certificate of Incorporation with the Delaware Secretary of State, which we anticipate doing as soon as practicable following shareholder approval. However, if our shareholders approve the proposed Class B Amendment, our Board retains discretion under Delaware law not to implement the proposed amendment. If our Board were to exercise such discretion, the number of authorized shares of Class B Common Stock would remain at current levels.
Mr. Hovnanian and others with voting power over the shares held by the Estate of Kevork S. Hovnanian, the Limited Partnership and certain family trusts have informed the Company that they intend to vote in favor of this proposal. Because of their collective voting power, this proposal is assured passage.
Our Board of Directors recommends that shareholders vote FOR the approval of the proposed amendment to our Certificate of Incorporation to increase the number of authorized shares of Class B Common Stock.
(5) ADVISORY VOTE ON EXECUTIVE COMPENSATION
In accordance with the requirements of Section 14A of the Exchange Act (which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)) and the related rules of the SEC, we are including in these proxy materials a separate resolution subject to shareholder vote to approve, in a non-binding vote, the compensation of our named executive officers as disclosed on pages 1318 to 38.50.
In light of the voting results with respect to the frequency of shareholder votes on executive compensation at the 2011 Annual Meeting of Shareholders in which a substantial majority of our shareholders (96.3% of the votes cast by shareholders of Class A Common Stock and Class B Common Stock, voting together) voted for “say-on-pay” proposals to occur every three years, the Board of Directors initially decided that the Company would hold, in accordance with the vote of an overwhelming majority, a triennial advisory vote on the compensation of named executive officers, which vote would next take place at the Company’s 2014 Annual Meeting of Shareholders. However, we have voluntarily elected to hold our next “say-on-pay” vote at this 2013 Annual Meeting of Shareholders.
In considering their vote, shareholders may wish to review with care the information on the Company’s compensation policies and decisions regarding the named executive officers presented in Compensation Discussion and Analysis on pages 1318 to 27,36, as well as the discussion regarding the Compensation Committee on pages 1116 and 12.17.
TheAs we discuss in the Compensation Discussion and Analysis begins at page 13. As we discuss in Compensation Discussion and Analysis,section, the Board of Directors believes that the Company’s long-term success depends in large measure on the talents of the Company’s employees. The Company’s compensation system plays a significant role in the Company’s ability to attract, retain and motivate the highest quality associates in a difficult market. The principal underpinnings of the Company’s compensation system are an acute focus on performance, shareholder alignment, sensitivity to the relevant market place, and a long-term orientation.
The Compensation Committee ties increases or decreases in overall compensation with the overall financial performance of the Company. During fiscal years when the Company’s profitability has been higher, total compensation has been higher. During more recent years when the Company’s performance has been lower due in part to the economic downturn and recession particularly in the housing industry, the Compensation Committee’s policies and actions have significantly lowered overall compensation in recent years relative to profitable periods.compensation. These policies and actions include:
| · | Significant reductions in annual bonus opportunity, where, on average, the maximum award for all named executive officers is approximately 92% lower than the maximum award during the last ten years and approximately 45%39% lower than the maximum award during the last threefour years; |
| · | Focus on lowering net debt levelsimproving EBITDA through a bonus component for our Chairman of the Board, President and Chief Executive Officer, and our Executive Vice President and Chief Financial Officer and our Chief Operating Officer that is only earned if net debtEBITDA improvement performance goals are met; |
| · | Focus on a return to profitability and lowering net debt over a three-year performance period through a long-term incentive award for all named executive officers in fiscal 2010; |
| · | Continued policyPolicy of generally targeting a fixed guideline number of stock options rather than a specific option value as part of the annual compensation program (since the guideline number of stock options generally was not increased as stock prices in the homebuilding industry declined, the value of stock option grants to our named executive officers has declined significantly); and |
| · | Reduction in shareholder dilution through the Compensation Committee actions to cancel stock optionsCommittee’s active management of both equity award levels and not return the cancelled shares to the poolnumber of shares available for new awards under the Amended and Restated 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan.equity awards. |
The text of the resolution in respect of this proposal is as follows:
“Resolved, that the compensation paid to the Company’s named executive officers as disclosed pursuant to Item 402 of Regulation S-K in the Proxy Statement relating to the Company’s Annual Meeting of Shareholders to be held on March 15, 2011,12, 2013, including the Compensation Discussion and Analysis, compensation tables, and narrative discussion, is hereby approved.”
The Board recommends that shareholders vote FOR approval of this resolution.
(4) ADVISORY VOTE ON THE FREQUENCY OF
SHAREHOLDER VOTE ON EXECUTIVE COMPENSATION
In accordance with the requirements of Section 14A of the Exchange Act (which was added by the Dodd-Frank Act) and the related rules of the SEC, we are including in these proxy materials a separate resolution subject to shareholder vote to recommend, in a non-binding vote, whether a non-binding shareholder vote to approve the compensation of our named executive officers (that is, votes similar to the advisory vote in the preceding proposal on pages 9 and 10) should occur every one, two or three years.
In considering their vote, shareholders may wish to review with care the information presented in connection with the preceding proposal, the information on the Company’s compensation policies and decisions regarding the named executive officers presented in Compensation Discussion and Analysis on pages 13 to 27, as well as the discussion regarding the Compensation Committee on pages 11 and 12.
We believe a three-year frequency is most consistent with our approach to executive compensation. Our reasons include:
| · | The homebuilding industry is cyclical in nature and, accordingly, the best way for shareholders to evaluate how executive compensation relates to our performance is over a multi-year time frame; |
| · | The Committee has focused executives on long-term results through regular awards of stock options, which generally vest over a multi-year period up to five years and expire only after ten years; |
| · | Our recently adopted Long Term Incentive Program is specifically designed to incentivize performance, and to position the Company for future growth, over a three-year performance period; and |
| · | We do not make significant changes to the structure of our compensation programs frequently, although we tailor the performance objectives for each executive officer each year to focus on the areas deemed critical to the Company’s current and future success and long-term shareholder value. |
The text of the resolution in respect of this proposal is as follows:
“Resolved, that the shareholders recommend, in a non-binding vote, whether a non-binding shareholder vote to approve the compensation of the Company’s named executive officers should occur every one, two or three years.”
The Board recommends that shareholders vote for THREE YEARS with respect to how frequently an advisory shareholder vote to approve the compensation of our named executive officers should occur.
THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the “Committee”) is the principal overseer of the Company’s various policies and procedures related to executive compensation. The Committee meets at least threefour times a year to discuss industry trends with regard to overall compensation issues and consults with outside compensation consultants as needed. The Committee is governed by its Charter which is available on the Company’s public website (www.khov.com)(www.khov.com).
Areas of Responsibility
The Committee, in conjunction with the Board of Directors and with management’s input, shapes the Company’s executive compensation philosophy and objectives. In particular, the Committee is charged with:
| · | Reviewing, at least annually, the salaries, bonuses and other forms of compensation, including stock option grants, for the Company’s senior executives (which include the Chairman of the Board, President and Chief Executive Officer (the "CEO"“CEO”), the Executive Vice President and Chief Financial Officer (the “CFO”), the Chief Operating Officer (the “COO”) and the other named executive officers (“NEOs”) for whom compensation is reported in the tables below); |
| · | Reviewing, at least annually, compensation paid to the Company’s non-employee Directors; |
| · | Participating in the review of compensation of other designated key employees of the Company as may be directed by the Board of Directors or by management;Company; |
| · | Periodically reviewing the Company’s policies and procedures pertaining to the Company’s equity award plans and forms of equity grants to all employees and non-employee Directors, employee benefit plans (for example, the 401(k) plan and deferred compensation plans), the Chief Executive Officer’s severance agreement,agreements, executive perquisites, and forms of equity grants to all employees and non-employee directors; |
| · | Fostering good corporate governance practices as they relate to executive compensation; and |
| · | Reviewing, at least annually, as part of the Board'sBoard of Directors’ oversight responsibilities, the Company's compensation program to assessand reports from the Company’s CFO regarding his assessment of whether there are any compensation risks that are reasonably likely to result in a material adverse effect on the Company (see "Oversight of Risk Management") below). In addition, the Committee regularly considers business and compensation risks as part of its process for establishing performance goals and determining incentive awards for each of the NEOs. |
These areas of responsibilities are discussed in more detail below under “Compensation Discussion and Analysis.” During the fiscal year ended October 31, 2010,2012, the members of the Committee were all independent, non-employee Directors.“non-employee directors” for purposes of Rule 16b-3 of the Exchange Act, and “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended.
Compensation Review Process for the Named Executive Officers
The Committee, in conjunction with the Board of Directors and with management’s input, is responsible for making decisions related to the overall compensation of the NEOs.
At least annually, the Committee establishes objective financial measures for determining bonus awards to the NEOs. The Committee also considers salary, employee benefits and discretionary bonus awards, if any, for the NEOs.
In determining overall compensation for the NEOs, the Committee may consult with other members of the Board of Directors, including the CEO and the CFO. TheseEach of these individuals often provideprovides the Committee with insight on the individual and overall performance of executives (other than with respect to himself), including the achievement of personal objectives, if any, rather than relying solely on the Company’s financial performance measures in determining their compensation. The CEO and CFO are not present for the Committee’s evaluation of their individual performance. The Committee also engages an outside compensation specialist related to various compensation issues.
Outside Compensation Consultant
Since October 2003, the Committee has engaged Pearl Meyer & Partners (“PM&P”) as the Committee’s independent outside compensation consultant to provide services related to executivereviews and non-employee Director compensation. PM&P does not provide any other services to the Company unless approved by the Committee and no such services were provided in fiscal 2010. In fiscal 2010, PM&P assisted the Committee with its review and design of the Company’s annual bonus and long-term incentive plans for the NEOs in order to reflect modifications and realignment of priorities in the Company’s objectives due to declining market conditions in the homebuilding industry. The analysis also included a review ofanalyzes the compensation of chiefthe named executive officers and chief financial officers amongof the Company’s peer group of 11 publicly-traded homebuilding companies (the “Peer Group”). See “Peer Group Considerations”, discussed further below. The Committee may engage outside compensation consultants in the Compensation Discussion and Analysis below for a list of the companies in the Company’s Peer Group.
The Committee’s primary objective in engaging PM&P isrelation to obtain advice and feedback related to maintaining programs that providevarious compensation opportunities for executives within the median range of the competitive homebuilder Peer Group for comparable financial performance.issues. The Committee may also instruct PM&Pa compensation consultant to provide assistance in fostering an overall compensation program that aligns with its compensation philosophy to guide, motivate, retain and reward its executives for the achievement of the Company’s financial performance, strategic initiatives and individual goals, including increased long-term shareholder value in the context of a challenging business environment. The Company also periodically participates in a homebuilding industry groupNotwithstanding any input from compensation consultants, the Committee has the sole discretion to make all final decisions related to NEO compensation.
Outside Compensation Consultant and No Conflicts of Interest
For fiscal 2012, the Committee engaged Pearl Meyer & Partners (“PM&P”) as the Committee’s outside compensation consultant to provide certain services related to executive compensation s urvey that is conducted byand non-employee Director compensation. PM&P does not provide any other services to the Company unless approved by the Committee, and which provides valuable informationno such services were provided in fiscal 2012. After considering the relevant factors, the Company has determined that no conflicts of interest have been raised in connection with the services PM&P performed for the Company in fiscal 2012. In fiscal 2012, PM&P assisted the Committee with its review of the Company’s annual bonus and long-term incentive plans for the NEOs as well as its review of the compensation program for the non-employee directors.
The Committee’s primary objective in engaging PM&P has been to obtain advice and feedback related to maintaining programs that provide compensation opportunities for executives within the median range of the competitive homebuilder Peer Group for comparable financial performance and PM&P also provided assistance to the Committee in assessing its competitive pay levels. An abbreviated edition of the homebuilding industry survey was conducted by PM&P during fiscal 2010 at no charge to any participants, including the Company.fostering an overall compensation program as discussed above.
The Committee weighs the information gatheredadvice and feedback from PM&Pits compensation consultant and the members of the Board of Directors, as well as the views of and information gathered by the members of management it has consulted in conjunction with its review of other information itthe Committee considers relevant when making decisions or making recommendations to the full Board of Directors regarding executive compensation.
Board Communication
The Company’s Board of Directors is updated at least quarterly of any compensation decisions or recommendations made by the Committee and the Committee requests feedback from the Board of Directors regarding specific compensation issues as it deems necessary.
Compensation Committee Report
The Committee has reviewed and discussed the Compensation Discussion and Analysis provided below with the Company’s management. Based on itsthis review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.statement and in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2012.
COMPENSATION COMMITTEE
Stephen D. Weinroth, Chair
Robert B. Coutts
Edward A. Kangas
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended October 31, 2010,2012, the members of the Compensation Committee were Messrs. Weinroth, Kangas, and Coutts. Each of Messrs. Weinroth, Kangas, and Coutts are non-employee Directors, and were never officers or employees of the Company or any of its subsidiaries.subsidiaries and did not have any relationships requiring disclosure under Item 404 of Regulation S-K during fiscal 2012. None of our executive officers served on the board of directors or compensation committee of any other entity that has or had one or more executive officers who served on our Board of Directors or our Compensation Committee during fiscal 2012.
COMPENSATION DISCUSSION AND ANALYSIS
1. EXECUTIVE SUMMARY
Company Performance in Fiscal 2012
Beginning in the second quarter of fiscal 2012, the Company began to see positive operating trends, which continued into the third and fourth quarters of fiscal 2012. Below are some highlights for fiscal 2012:
| · | Total revenues for fiscal 2012 were $1.5 billion, up 30.9% from $1.1 billion during all of fiscal 2011; |
| · | During fiscal 2012, the dollar value of net contracts, including unconsolidated joint ventures, increased 43.9% to $1.9 billion compared with $1.3 billion for fiscal 2011, and the number of net contracts increased 30.1% to 5,838 homes compared with 4,488 homes in the previous year; |
| · | During fiscal 2012, deliveries, including those in our unconsolidated joint ventures, were 5,356 homes compared with 4,216 homes during fiscal 2011, representing an increase of 27.0%; |
| · | Contract backlog as of October 31, 2012, including that in our unconsolidated joint ventures, was $742.2 million for 2,145 homes, which was an increase of 34.4% and 29.0%, respectively, compared to October 31, 2011; |
| · | During all of fiscal 2012, homebuilding gross margin percentage, before interest expense included in cost of sales, was 17.8% compared with 15.6% in 2011; |
| · | During all of fiscal 2012, total selling, general and administrative expenses were $190.3 million, or 12.8% of total revenues, compared with $211.4 million, or 18.6% of total revenues, for fiscal 2011; |
| · | The Company refinanced $797 million of secured senior notes during the fourth quarter of fiscal 2012, which reduces annual cash interest payments by approximately $17 million and extends the maturity of the refinanced debt from 2016 until 2020; and |
| · | The fiscal year-end closing price of a share of Class A Common Stock increased 199% compared to 2011. |
Best Practices
| · | ·Pay-for-Performance:
| Pay-for-Performance: The Compensation Committee (“Committee”) ties increases or decreases in overall compensation with the overall financial performance of the Company. During fiscal years when the Company’s profitability has been higher, total compensation has been higher. During more recent years when the Company’s performance has been lower due in part to the economic downturn and recession, which is particularly significant in the housing industry, the overall compensation has been lower than during profitable periods.lower. The Committee seeks to motivate management to achieve enhancedimproved financial performance of the Company through bonus plans that reward higher performance with increased bonus opportunities. In its selection of metrics to measure bonus achievement, the Committee has selected metrics to correspond to the financial needs of the Company during the relevant period. During periods of profitability, the bonus metrics were focused on profitability and return on shareholder’sshareholders’ equity measures. During recent periods when there was little or no likelihood of profits, bonus metrics were focused on opportunities that would reduce the Company’s debt obligations that wouldand improve cash flow and liquidity to enable the Company to weather the difficult economic conditions and return to profitability. |
| | The following graph demonstrates the link between the CEO’s annual realized pay and the Company’s Total Shareholder Return (“TSR”). Annual realized pay includes salary, annual bonus, perquisites and other compensation plus the realized value of options exercised and shares vesting during the fiscal year. |
| (1) | The TSR Index measures the change in the Company's stock price relative to fiscal 2006. The index for each fiscal year is determined by comparing the fiscal year-ending stock price to the ending stock price in fiscal 2006 which is set at 100. |
| · | ·
| Emphasis on Long-Term Value Creation and Retention: The Committee attemptsseeks to align the interests of management with the long-term interests of the shareholders through theby granting of a significant portion of the total compensation in the form of stock options that increase in value as the Company’s financial performance improves. The Committee also seeks to retain management through the utilization of compensation methods that require executives to be employed through various vesting periods in order to receive the full financial benefits of stock option grants that vest over multiple years, deferred shares as part of an annual bonus, and the recently adopted Long TermLong-Term Incentive Plan.Program implemented in fiscal 2010. |
| · | ·
| Reduction in Dilution: In recent years, the Committee also focused on reducing the dilution of shareholder value by not returning 2,528,251 cancelled stock options to the pool of shares available for stock options in the Amended and Restated 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan (the "Stock Incentive Plan"). |
| | Maintaining Appropriate Peer Group: In constructing the Peer Group, the Committee selected those companies that compete directly with the Company in the homebuilding industry, are of comparable size and complexity in operations to the Company and are generally in the markets where we compete.in which the Company competes. The Committee reviews the composition of the Peer Group on an annual basis and makes adjustments, if needed. For example, in fiscal 2010, the Committee determined that Meritage Homes Corporation should be added to the Peer Group. The Committee reviews the executive compensation of the Peer Group companies and seeks to award total compensation opportunity for our NEOs near the median of the Peer Group.Group, with variation in actual compensation earned both above and below the median, depending on performance. |
| · | ·
| No Employment Agreements, Excise Tax Gross-Ups, SERPs or Defined Benefit Plans: The Company does not maintain employment or other agreements that provide contractual rights to employees upon termination of employment (other than upon death or disability), except for the change in control severance agreements the Company entered into with Messrs. O’Connor and itValiaveedan in January 2012 discussed below and in footnote (5) to the “Potential Payments Upon Termination Or Change-In-Control Table,” and the Company does not provide excise tax gross-ups, supplemental executive retirement plans or defined benefit pension plans for any NEOs. |
| · | ·
| Maintenance and Enforcement of Stock Ownership Guidelines: The Board of Directors has established stock ownership guideline’s requiringguidelines pursuant to which the CEO, CFO and CFOCOO are requested to achieve and maintain recommended minimum levels of stock ownership as set forth on pages 26 and 27.below under “Stock Ownership Guidelines.” |
| · | ·Perquisites:
| Perquisites: The Compensation Committee has provided NEOs only a few perquisites in addition to typical medical, dental and life insurance benefits. The Company limits the personal use of Company automobiles and its fractional aircraft share, reimbursement for country club dues and personal income tax preparation and accounting services to the CEO. In addition,Our perquisites aredo not grossed up for personal income taxes.include any tax gross-ups. |
Overall Compensation Decisions for Fiscal 2012
The Committee’s compensation decisions for fiscal 2012 reflected a conservative approach to fixed pay elements (base salary), the achievement of pre-established goals (annual bonuses) and long-term equity awards well below median of the Peer Group in view of the challenging business environment and the Company’s stock performance in such environment.
| · | ·
| Base Salaries: Three of the four NEOs who were also NEOs for fiscal 2009 The CEO and CFO received no base salary increase infor fiscal 2010. Our newly appointed COO, upon his promotion at the end of the first quarter of fiscal 2010,2012. The remaining three NEOs received a base salary increaseincrease. In December 2011, the Committee approved fiscal 2012 increases for Messrs. Pellerito, Valiaveedan and O’Connor. The increases for Messrs. Pellerito and Valiaveedan were approved in order to compensate him for his elevated set of responsibilities. In addition, based on a review of externalmove them closer to the Peer Group data, our CFO received a base salary increasemedian and, in fiscal 2010, which was intendedthe case of Mr. Valiaveedan, to bringfurther align him towith the median level for the broad-based compensation survey data (as described further under “Compensation Philosophy and Objectives – Peer Group Considerations”). Mr. O’Connor received an increase as a result of the Peer Group.his promotion to Vice President — Chief Accounting Officer and Corporate Controller. See “Details of Compensation Elements – Base Salaries” below for additional information on base salaries. |
| · | ·
| Annual Bonuses: Consistent with the achievement of specified financial andor personal objectives, fiscal 20102012 bonuses were paid out to all NEOs. Bonuses for the CEO, CFO and COO were the same as for fiscal 2011. Bonuses for the other NEOs increased in proportion to the amount of their annual salary increases, as their bonus calculations are a percentage of base salary. Additional details are described below under “Details of Compensation Elements – Annual Bonuses – Regular Bonuses.” |
| · | ·
| Discretionary Bonuses: None Discretionary bonuses were madeawarded to Mr. O’Connor and Mr. Valiaveedan in fiscal 2010 to any NEO while he was an executive officer.2013 in respect of their performance in fiscal 2012, as described further under “Details of Compensation Elements – Annual Bonuses – Discretionary Bonuses.” |
| · | ·
| Long TermLong-Term Awards, including stock options and participation in the 2011-2013 LTIP:Long-Term Incentive Program (described below): Grants of equity awards made to NEOs forin fiscal 20102012 and the annualized target value of the Company’s Long-Term Incentive Program fell considerably below median Peer Group long-term incentive compensation levels, includinglevels. The Long-Term Incentive Program was implemented in fiscal 2010 as a multi-year award with a three-year performance period (fiscal 2011-2013), with additional vesting conditions in fiscal 2014 and 2015. In fiscal 2012, the targetCommittee determined that stock options granted in June 2012 to the CEO, CFO and COO would have an exercise price 33 1/3% above the closing stock price on the grant date. In determining to grant options with an exercise price at this premium level, the Committee sought to provide a stronger link with increased shareholder value, as these executives have more significant responsibility for the Company’s long-term strategy as compared to the other NEOs. The Committee also determined to increase the number of options awarded in recognition of the premium pricing and its determination that the CEO, CFO and COO’s long-term incentive values on the grant date (including recent annual option grants and the annualized fiscal 2010 value of the Long-Term Incentive Program annualizedLTIP at target, discussed below) were considerably below the median value of long-term incentive awards granted to the endPeer Group chief executive officers, chief financial officers and chief operating officers. Additional details are described below under “Details of its three-year performance period.Compensation Elements – Stock Grants.” |
| · | Change in Control and Severance Agreements: In January 2012, the Company entered into change in control severance protection agreements with Messrs. O’Connor and Valiaveedan. The Committee considers the continued services of these key executives whose skills are not specifically tied to the homebuilding industry to be in the best interests of the Company and its shareholders. The agreements are designed to reinforce and encourage their continued attention and dedication to their duties of employment without personal distraction or conflict of interest in circumstances which could arise from the occurrence of a change in control of the Company. These agreements provide benefits following a change in control only if the executive is terminated involuntarily or terminates with Good Reason. Neither of these agreements provide for excise tax gross-ups. The provisions of such agreements are described below under “Potential Payments Upon Termination Or Change-In-Control Table.” |
| · | Impact on CEO Total Direct Compensation: The following graphs compare fiscal 2012 CEO total direct compensation (the sum of base salary, annual bonus/incentive and long-term incentive awards, excluding all other compensation elements) to the most recently published Peer Group median data available to the Committee when finalizing fiscal 2012 CEO compensation. |
![](https://capedge.com/proxy/PRE 14A/0001437749-13-000211/graph1.jpg)
| (1) | Reflects the most recently published Peer Group Median data available to the Committee when finalizing fiscal 2012 CEO compensation. Note that the annual incentive and long-term incentive compensation levels for two of the eleven peer group CEOs reflected in the Peer Group Median were substantially lower than their prior year levels because these CEOs were no longer serving in such positions during or just after the end of the year for which the data was gathered. Had these two CEOs been excluded from the Peer Group CEO Median, the Peer Group CEO Median would have been higher and, consequently, the CEO’s Total Direct Compensation would have been further below the Peer Group CEO Median Total Direct Compensation. |
![](https://capedge.com/proxy/PRE 14A/0001437749-13-000211/graph2.jpg)
| (1) | Reflects the most recently published Peer Group Median data available to the Committee when finalizing fiscal 2012 CEO compensation. Note that the annual incentive and long-term incentive compensation levels for two of the eleven peer group CEOs reflected in the Peer Group Median were substantially lower than their prior year levels because these CEOs were no longer serving in such positions during or just after the end of the year for which the data was gathered. Had these two CEOs been excluded from the Peer Group CEO Median, the Peer Group CEO Median would have been higher and, consequently, the CEO’s Total Direct Compensation would have been further below the Peer Group CEO Median Total Direct Compensation. |
2. COMPENSATION PHILOSOPHY AND OBJECTIVES
The Compensation Committee, in conjunction with the Board of Directors and with senior management, has been instrumental in shaping the Company’s compensation philosophy and objectives because of its responsibilities and oversight of the Company’s various policies and procedures concerning executive compensation.
The six primary objectives that the Committee consideredconsiders in making compensation decisions are discussed below.below, as are our other philosophies and mechanisms for determining compensation. In making compensation-related decisions, the Committee also considered its role in promoting good corporate governance practices.
Primary Objectives for the Compensation Program
The Company’s primary objectives for compensating its executives are as follows:
| 1. | To fairly compensate its executives in a manner that is appropriate with respect to their performance, level of responsibilities, abilities and skills; |
| 2. | To offer compensation that guides, motivates, retains and rewards its executives for the achievement of the Company’s financial performance, strategic initiatives and individual goals; |
| 3. | To align the executive’s interests with the interests of the shareholders; |
| 4. | To maintain competitive pay opportunities for its executives so that it retains its talent pool and, at the same time, has the ability to attract new and highly-qualified individuals to join the organization as it grows or in the event of succession or replacement of an executive; |
| 5. | To safeguard that the reward system is appropriately designed in the context of a challenging business environment; and |
| 6. | To ensure that compensation plans do not incentivize a level of risk that is reasonably likely to have a material adverse effect on the Company. |
Tailored Compensation
Consistent with these objectives, the Company’s compensation philosophy also takes into consideration the very unique roles played by each of the named executive officersNEOs for whom compensation is reported in the tables below, (“NEOs”), and the Committee seeks to individually tailor their compensation packages to align their pay mix and pay levels with their contributions to, and positions within, the Company. For example:
| · | CEO,: CFO and COO: The compensation package of the CEO,, Mr. Ara K. Hovnanian, differsthe CFO, Mr. J. Larry Sorsby, and the COO, Mr. Thomas J. Pellerito, differ from that of the other NEOs due to histheir unique roleroles and elevated set of responsibilities. Because the CEO, makesCFO and COO make executive decisions that influence the direction, stability and profitability of the Company, histheir overall compensation is intended to strongly align with objective financial measures of the Company. |
| | |
| · | CFO: The Committee recognizes that the role of the CFO, Mr. J. Larry Sorsby, similar to the CEO, is important in influencing the direction, stability and profitability of the Company. Therefore, a significant portion of the CFO’s overall compensation is also aligned with objective financial measures of the Company. Since fiscal 2008, Mr. Sorsby’s role and contributions as CFO have intensified significantly as a result of the downturn in the homebuilding industry and the Company’s focus on debt reduction and other actions taken to proactively access the capital markets and restructure the balance sheet for future profitability, and his compensation, like that of the CEO, is intended to align with debt reduction and ensuring adequate liquidity. |
| · | COO: The compensation package of the COO, Mr. Thomas J. Pellerito, differs from that of the CEO and CFO to reflect the impact and influence he has on the operational results of the Company’s homebuilding business. His overall compensation is focused on standardizing best practices among the Company’s operational units to improve its products and services, gain efficiencies, reduce costs and improve profitability. |
| · | Other NEOs: The Company’s Senior Vice President –— Chief Accounting Officer and Corporate Controller, Mr. Paul W. Buchanan, Brad G. O’Connor, andSenior Vice President – General Counsel,— Finance and Treasurer, Mr. Peter S. Reinhart,David G. Valiaveedan, have, as result of their respective positions, less direct influence on the Company’s strategic and operational decisions. Therefore, overall compensation levels for these NEOs reflectsreflect both objective financial measures of the Company and the attainment of personal objectives (as determined by the Committee, which may consult with the CFO, and the CEO who may consult withand other members of senior management). The Committee periodically reviews the compensation for these two executives relative to the Peer Group and broad-based compensation survey data, with consideration of internal pay relationships in years when market benchmarking is not conducted. The Committee does n ot consider the specific participants in the broad-based compensation survey data to be a material factor in its review. The Committee believes that a review of market data periodically (but not necessarily every year) is sufficient for these positions based on their roles and historical compensation levels. In fiscal 2010, internal pay relationships and the Committee’s evaluation of each individual’s performance contributions served as the primary considerations for these two executives because the Committee maintained the base salary, annual bonus opportunity and stock option grants for these individuals at levels similar to or less than the past two years. |
Variable Incentive Compensation and Discretionary Awards
The Company’s compensation philosophy emphasizes variable incentive compensation elements (bonus and long-term incentives) that reflect, the value of which reflects the Company’s financial and stock performance. For executives who report to the CEO or CFO, including Messrs. O’Connor and Valiaveedan, the variable compensation elements also include personal performance objectives. For all executive officers, the Committee retains the flexibility to adjust incentive awards downward or to consider discretionary bonus awards. Discretionary awards may be appropriate, for example, to reward progress toward strategic objectives or to reflect strong leadership while addressing industry-wide market conditions or to servein “special circumstances” as a retention bonus for valued executives.described on page 31 under “Discretionary Bonuses.”
Peer Group Considerations
As context for setting the compensation levels for the CEO, CFO and COO in fiscal 2010,2012, the Committee considered the compensation levels and practices of its Peer Group companies. The Company’s Peer Group includes the following 11 publicly-traded homebuilding companies: (1) Beazer Homes USA, Inc.; (2) D.R. Horton, Inc.; (3) KB Home; (4) Lennar Corporation; (5) M.D.C. Holdings, Inc.; (6) Meritage Homes Corporation; (7) NVR, Inc.; (8) Pulte Homes, Inc.; (9) Ryland Group, Inc.; (10) The Standard Pacific Corp.; and (11) Toll Brothers, Inc. The companies in the Peer Group are the same as those used in fiscal 2011 and were selected by the Committee, in consultation with PM&P and management, because of their comparable business profile. In particular, the Company’s revenue size relative to the companies in the Peer Group and the presence of the Peer Group comp aniescompanies in the Company’s markets were considered the most relevant measurefactors for selection of peer companies within the homebuilding industry. In January 2010, Centex Corporation was removed from the Peer Group due to its merger with Pulte Homes, Inc. and Meritage Homes Corporation was added to the Peer Group as the next closest comparator company. The Committee and PM&P will continue to review the appropriateness of the Peer Group composition. For the other NEOs, the Committee places equal or greater weight on its consideration of internal pay equity, an evaluation of individual performance contributions and other factors described in detail below.
The Committee relies heavily on Peer Group comparisons for the CEO, CFO and COO. Because only four of the 11 Peer Group companies report data for a chief operating officer position, the Committee may also review broad-based compensation survey data for the COO. The Committee periodically reviews the compensation for the other NEOs relative to the Peer Group and broad-based compensation survey data, with consideration of internal pay relationships in years when market benchmarking is not conducted. The Committee does not consider the specific participants in the broad-based compensation survey data to be a material factor in its review. The Committee believes that a review of market survey data periodically (but not necessarily every year) is sufficient for these positions based on their roles and historical compensation levels. The Committee considered broad-based market survey data in connection with its fiscal 2012 compensation determinations.
Consideration of Market Conditions Considerations
In determining overall compensation for all the NEOs, the Committee also takes into account leadership abilities and risk management contributions, which are especially critical during difficult market conditions. In addition, in establishing compensation levels, the Committee takes into consideration competitive market pressures, both within and outside of the homebuilding industry.
During fiscal 2010,Since late 2006, the homebuilding industry continued to behas been impacted by a lack of consumer confidence, increasing home foreclosure rates, large supplies of resale and new home inventories, and more restrictive lending standards for homebuyers. The result has been continuedhomebuyers, resulting in weak demand for new homes, slower sales, higher than normal cancellation rates, and increased price discounts and other sales incentives to attract homebuyers. Beginning in the second quarter of fiscal 2012, the Company began to see positive operating trends, which continued into the third and fourth quarters of fiscal 2012. See “Executive Summary” for highlights of the Company’s performance in fiscal 2012.
The heightened importance of cash flow and liquidity, as well as the Company’s budget cuts and downsizing, were considered byDuring fiscal 2012, the Committee sought to emphasize improving EBITDA without limiting management’s ability to strategically deploy cash, such as for repurchasing debt and making land purchases, in making executive compensation decisions for fiscal 2010.anticipation of the initial stages of recovery in the homebuilding industry. As a result, the Committee approved the same bonus metrics for fiscal 2010 annual bonus formulas of2012 as in fiscal 2011, except that the cash balances component was removed. For fiscal 2012, the CEO and CFO continued to place a heavier focus on cash flow and liquidity. While the salary of the CEOsalaries remained the same as in fiscal 2009, the CFO’s salary was increased to align with the Peer Group, as discussed in more detail below. At the end of the first quarter of fiscal 2010, the Company appointed Mr. Pellerito as COO and increased his salary consistent with his increased responsibilities.2011. The salaries of the COO, Mr. Thomas Pellerito, Vice President — Chief Accounting Officer and General Counsel did notCorporate Controller, Mr. Brad G. O’Connor, and Vice President — Finance and Treasurer, Mr. David G. Valiaveedan, were increased by 10%, 8.5% and 5.3%, respectively, over fiscal 2011. The salary increases for Messrs. O’Connor and Valiaveedan resulted in a corresponding increase fromin the priordollar amount of their bonus opportunity for fiscal year2012. The adjustments for Messrs. Pellerito and their fiscal 2010 bonus formulas remainedValiaveedan were made to provide better alignment with the samecompensation of comparable positions in the Peer Group and, for Mr. Valiaveedan, to further align him with the median level in the broad-based compensation survey data. Mr. O’Connor’s base salary was increased as fiscal 2009, including payouts made entirely in cash for all NEOs.
The Committee established these compensation levels taking into consideration competitive market pressures, both withina result of his promotion to Vice President — Chief Accounting Officer and outside of the homebuilding industry, and the strength of leadership required in this challenging business environment.Corporate Controller.
In setting fiscal 2012 compensation, the Committee determined that stock options granted in June 2012 to the CEO, CFO and COO would have an exercise price 33 1/3% above the closing stock price on the grant date in connection with an increase in the number of options awarded for the reasons discussed above under “Executive Summary – Compensation Decisions for Fiscal 2012.”
Say-on-Pay and Say-on-Frequency Votes
In light of the voting results with respect to the frequency of shareholder votes on executive compensation at the 2011 Annual Meeting of Shareholders at which a substantial majority of our shareholders (96.3% of the votes cast by shareholders of Class A Common Stock and Class B Common Stock, voting together) voted for “say-on-pay” proposals to occur every three years, the Board of Directors initially decided that the Company would hold, in accordance with the vote of an overwhelming majority, a triennial advisory vote on the compensation of named executive officers, which would next take place at the Company’s 2014 Annual Meeting of Shareholders. However, we have voluntarily elected to hold our next “say-on-pay” vote at this 2013 Annual Meeting of Shareholders. We currently expect the next advisory vote on the frequency of shareholder votes on executive officer compensation to occur at the Company’s 2017 Annual Meeting of Shareholders.
The Board of Directors thoughtfully considers the opinions expressed by shareholders through their votes, periodic meetings and other communications, and believes that shareholder engagement leads to enhanced governance practices. During fiscal 2012, the Company conducted proactive investor outreach programs, including attending 10 investor conferences and meeting one-on-one with more than 250 investors. Additionally, the Company periodically engages investors to discuss specific matters of importance to shareholders. For example, in March 2012, the CFO contacted several major institutional shareholders to obtain feedback regarding the Company’s compensation philosophy and pay levels for which he received positive feedback.
3. FISCAL YEAR 20102012 COMPENSATION ELEMENTS AND COMPENSATION MIX
Compensation Elements at a Glance
There are five main compensation elements that support the Company’s compensation objectives, each of which is discussed in detail below.
1. Base salaries;
2. Annual bonuses;
3. Stock grants (for example, stock options and restricted stock unit awards);
4. Long-Term Incentive Plan (definedProgram (“LTIP”) (described below) (payable in both cash and stock); and
5. VariousOther employee benefits, including limited perquisites.
Compensation Mix
Fixed vs. Variable Compensation. A significant portion of executives’ “Total Direct Compensation” (which includes base salary, annual bonuses, stock grants and stock grants)LTIP awards) opportunity is attributed toconsists of variable compensation – that is, the ultimately realized compensation on an annualized basis is dependent on either individualCompany or Companyindividual performance. Of the elements of Total Direct Compensation, base salary is fixed compensation, while annual bonuses, and stock grants, and LTIP awards are variable compensation. Bonuses for the CEO and the CFO were based upon objective formulas tied to financial performance goals that include the Company’s (a) ROACE (as defined below) and (b) net debt reduction. For the COO, the bonus reflects h is responsibilities both before and after his promotion and includes the achievement of tailored personal objectives that relate to this transition period. For the other NEOs, bonuses were determined based on both the Company’s ROACE and the achievement of tailored personal objectives. An important part of each NEO’s compensation package also consists of stock options, the ultimate value of which is tied to the Company’s stock performance. These variable elements are intended to align the executives’ performance and interests with Company performance and long-term shareholder value.
The intent of the Committee for fiscal 2012 was to maintain variable compensation opportunity as a significant percentage of Total Direct Compensation opportunity for all NEOs for fiscal 2010 and to maintain its approximate level from year to year. In addition, the Committee intends for Total Direct Compensation and the level of variable compensation realized to align with the median level of the Peer Group in years when the Company performs at median levels compared to the Peer Group. InFrom fiscal 2007 2008, 2009 and 2010,through fiscal 2012, the percentage of variable compensation received by the Company’s NEOs had declined from historical levels because total bonus amounts ultimately received by NEOs were zero for the CEO for fiscal 2007 and significantly lower than historical amounts for all NEOs forfrom fiscal 2007 2008, 2009 and 2010, withthrough fiscal 20102012. Fiscal 2012 bonus amounts, o non average, were approximately 92% lower than the maximumhighest award for these NEOs during the last ten years. In fiscal 2010,2012, the Committee also awarded stock grants to each of the NEOs, as discussed below, at continuedvalues that were lower amountsthan historical levels even when considering the greater number of options awarded to the CEO, CFO and COO with an exercise price 33 1/3% above the closing stock price on the grant date. The value of the fiscal 2012 stock grants were also well below the Peer Group median long-term incentive values for the CEO, CFO and CFO. COO and well below the Peer Group and broad-based compensation survey median for the other NEOs.
Long-Term vs. Short-Term Compensation. An important portion of each NEO’s Total Direct Compensation is long-term compensation, which normally includes stock option and/or restricted stock unit awards and deferred share awards granted in lieu of cash for a portion of total bonus amounts. In fiscal 2010, there were no awards of restricted stock units or deferred shares to NEOs. In fiscal 2009 and 2010, due to the reduced amount of the bonuses, deferred share awards were not granted and the total bonus amounts were paid 100% in cash. Short-term compen sationcompensation consists of base salary and the cash portion of annual bonus amounts. Long-term compensation consists of stock option awards and, in prior years, restricted stock unit awards which areis intended to foster long-term commitment by the executive, employee-shareholder alignment and improved long-term shareholder value. From fiscal 2009 through fiscal 2012 there were no deferred shares awarded to NEOs due to the reduced amount of the overall bonuses for each NEO as compared to more profitable years, and the bonus amounts were paid 100% in cash. In fiscal 2010, the Committee also adopted a special Long-Term Incentive Plan ("LTIP")LTIP for the named executive officers and other key senior executives of the Company, as discussed below. The Committee does not currently anticipate considering a similar LTIP program until after the expiration of the three-year LTIP performance period.
The average long-term compensation amounts (including stock and option grants at their grant date fair value and the LTIP award annualized at target) as a percent of Total Direct Compensation for fiscal years 20062008 through 20102012 for the CEO and CFO were 54%48% and 42%34%, respectively. The average long-term compensation amoun tamount (including stock and option grants at their grant date fair value and the LTIP award annualized at target) as a percent of Total Direct Compensation for fiscal years 2010 through 2012 for the COO (who was 41%promoted to his current position in fiscal 2010) was 36%. The average long-term compensation percentages (including stock and option grants at their grant date fair value and the LTIP award annualized at target)amounts as a percent of Total Direct Compensation for Messrs. BuchananO’Connor and Reinhart forValiaveedan are lower than the same five-year period were 21% each, reflectingCEO, CFO and COO because, while the Committee’s belief that whileCommittee believes it is important for these executives to be compensated in part based on the long-term performance of the Company, they have less direct influence on the long-term financial success of the Company as compared to the CEO, CFO and COO.
4. DETAILS OF COMPENSATION ELEMENTS
Base Salaries
Base salaries are intended to reward executives for their day-to-day contributions to the Company. The Committee believes that base salaries within the competitive median range are necessary to retain the Company’s executive talent pool, and it determined that the fiscal 20102012 base salaries of the Company’s executive officers were necessary to retain their services.
Base salaries of all the NEOs are reviewed annually by the Committee and are subject to adjustment based on factors that may include individual performance, change in responsibilities, average salary increases or decreases in the industry, compensation for similar positions involving the Company’s Peer Group or other comparable companiesbroad-based compensation survey data if comparable data waswere unavailable from the Peer Group companies, as well as other factors such as cost of living and internal pay relationships with other executives. The Committee also consults with PM&P in determining the need for salary adjustments.
| · | CEO: For fiscal 2007 2008, 2009 and 2010,through 2012, the CEO did not receive any adjustments in his existing annual base salary. Furthermore, the Committee did not increase the CEO’s base salary for fiscal 2011. This is reflective ofreflects the Company’s budget cuts and downsizing due to industry conditions. In addition, basedBased on discussions with PM&P and peer group market data gathered by management, the Committee has determined that the CEO’s fiscal 20102012 base salary iswas near the median base salary level of other chief executive officers at Peer Group companies. |
| · | CFO: For fiscal 2010,2011 and 2012, the CFO received a 20% increasedid not receive any adjustments in his annual base salary. The Committee determined that the CFO’s fiscal 2012 base salary to align his base salary closer towas near the median base salary level of other chief financial officers at Peer Group companies. The Committee desires to position base salary for the CFO near the Peer Group median and salaries for Peer Group CFOs had increased considerably more rapidly than at the Company. Based on year-end discussions with PM&P, the Committee had determined that the CFO’s fiscal 2010 base salary fell at the median. The Committee did not increase the CFO’s base salary for fiscal 2011. |
| · | COO: In view of Mr. Pellerito’s new responsibilities asFor fiscal 2012, the COO the Committee increasedreceived a 10% increase in his annual base salary to $500,000, which ismove him closer to the Peer Group median. Notwithstanding that increase, the Committee determined that Mr. Pellerito’s base salary remains below the median base salary level of other chief operating officers at Peer Group companies. The Committee determined that Mr. Pellerito’s base salary should fall below the Peer Group median given that he is new to the role. The Committee did not increase the COO’s base salary for fiscal 2011. |
| · | Other NEOs: For fiscal 2010, Messrs. Buchanan2012, Mr. O’Connor received an 8.5% salary increase as a result of his promotion to Vice President – Chief Accounting Officer and Reinhart did not receive any increase in their respective base salaries. However, for fiscal 2011, Messrs. BuchananCorporate Controller and Reinhart eachMr. Valiaveedan received a 2%5.3% salary increase. In making these determinations,increase to move him closer to the Committee consideredPeer Group median and to further align him with the individual performance of each executive,median level in the merit budget for employees of the Company generally, and the cost of living.broad-based compensation survey data. |
Annual Bonuses
Regular Bonuses
The Company provides each of the NEOs with an opportunity to earn annual bonuses, which are intended to reward executives for the attainment of short-term financial objectives and, in the case of certainsome NEOs, individual performance objectives. Fiscal 20102012 bonus awards were made pursuant to the Company’s amended and restated Hovnanian Enterprises, Inc. Senior Executive Short-Term Incentive Plan (the “Short-Term Incentive Plan”) and the 2012 Hovnanian Enterprises, Inc. Stock Incentive Plan (“2012 Plan”), each of which is a shareholder approved plan, although no stockstock-based awards were paid as part of the fiscal 20102012 bonus awards under either plan.
Bonus opportunities are intended to be competitive with industry-wide practices in order to retain and attract executive talent. For fiscal 2010, similar to2012, as in fiscal years 2009 through 2011, the earned bonuses for the NEOs were paid 100% in cash.
The regular annual bonus opportunities in fiscal 20102012 for each of the NEOs are shown in the following table. The performance goals for each NEO are discussed below.
| | CEO | | CFO | | COO (1) | | Vice President — Chief Accounting Officer and Corporate Controller | | General CounselVice President — Finance and Treasurer |
Return on Avg.Average Common Equity ("ROACE") (2)(1) | | % of Pre-tax Income based on ROACE | | $ Bonus based on ROACE | | N/A | | $ Bonus based on ROACE | | $ Bonus based on ROACE |
Net DebtEBITDA Improvement | | $ Bonus based on Net DebtEBITDA Improvement | | $ Bonus based on Net DebtEBITDA Improvement | | $ Bonus based on EBITDA Improvement | | N/A | | N/A |
Positive Pre-tax Profit in Both the Third and Fourth Fiscal Quarters (1) | | N/A | | N/A | | $ Bonus based on achievement of Positive Pre-tax Profit in Both the Third and Fourth Fiscal Quarters | | N/A | | N/A |
Tailored Personal Objectives | | N/A | | N/A | | $ Bonus based on achievement of specific goalsN/A | | $ Bonus based on achievement of specific goals | | $ Bonus based on achievement of specific goals |
Formula | | Total award is greater of ROACE or Net Debt awards,EBITDA improvement factors, with maximum of $949,500 | | Total award is greater of ROACE or Net Debt awards,EBITDA improvement factors, with maximum of $350,000 | | Total award is based on goal achievement,sum of EBITDA improvement and Positive Pre-tax Profit factors, with a maximum of $187,500$350,000 | | Total award is sum of ROACE and personal objectives awards,factors, with maximum of 30% of base salary | | Total award is sum of ROACE and personal objectives awards,factors, with maximum of 20%25% of base salary |
(1) Discusses only the bonus formula after promotion to an executive officer position.
(2) Based on fiscal 20102012 results, payments under the ROACE and Positive Pre-tax Profit in Both the Third and Fourth Fiscal Quarters award component wascomponents were zero.
Historically, annual bonuses for the CEO and the CFO werehave been linked solely to a measure of the Company’s return on average equity (ROACE, as the current example), a common industry practice. For fiscal 2008,2011, for the CEO and CFO, the bonus formulas for these NEOs were reoriented by including aformula component related to net debt reduction component. For fiscal 2009 and 2010, the net debt reduction component was changed to a net debt amount component. In light of prevailing market conditions,calculation based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) improvement and cash balances. During fiscal 2012, the Committee sought to emphasize improving EBITDA without limiting management’s ability to strategically deploy cash, such as for repurchasing debt and making land purchases, in consultation with PM&P, determinedanticipation of the initial stages of recovery in the homebuilding industry. As a result, the Committee approved the same bonus metrics for fiscal 2012 as in fiscal 2011, except that continuing this additionalthe cash balances component was removed. The COO’s fiscal 2012 bonus measureopportunity was based in part on the same EBTIDA improvement goals and was also based on specified targets for the reductionCompany achieving positive pre-tax profit in both the third and fourth quarters of the Company’s net debt amount provided clarity and was well-aligned with the Company’s focus on cash flow and liquidity.fiscal 2012 in order to provide an additional incentive to achieve pre-tax profitability given his oversight of homebuilding operations. The Committee considered reduction in costs as a component of the bonus, but determinedbelieves that the focus on debt reduction and return on equity were more appropriate ingoals established for fiscal 2012, which are described below, supported the current economic climate forfinancial objectives of the Company and cost savings would be reflected inwere set at levels that were challenging, but attainable. Furthermore, the ROACE component. maximum bonus levels for the CEO and CFO were capped at no more than the actual 2011 bonus amounts earned. The COO’s maximum bonus level was capped at $350,000, which included an additional $100,000 bonus opportunity compared to fiscal 2011 related to the pre-tax profit component of his bonus formula.
Specifically, the bonus formulas for the CEO and the CFO for fiscal 20102012 provided that bonuses would be equal to the greater of (a) the executive’s bonus formula based on the Company’s ROACE and (b) the new bonus formula based solely on the Company’s net debt amount.EBITDA improvement. “ROACE” is defined as “net income” (as described below) divided by “average common equity” (stockholder’s(stockholders’ equity less preferred stock at the beginning of the fiscal year and at the end of each fiscal quarter during the year divided by five). “Net debt”“EBITDA improvement” is defined as the “total debt” (balancesdifference between the EBITDA reflected in the Company’s fiscal 2012 financial statements, excluding gains or losses on extinguishment of bank debt, senior secured notes, senior notes,inventory impairment losses and senior subordinated notes) netland option write-offs, and the Company’s EBITDA reflected in its fiscal 2011 financial statements. The Committee used this EBITDA improvement measure because it believed it was appropriate to exclude from the bonus formula items outside management’s control (e.g., impairments driven by a declining market) and it did not want to discourage management from making capital structure improvements (e.g., debt extinguishments, which could result in gains or losses on the extinguishment of any cash (including restricted cash)debt). However, if fiscal 2012 EBITDA had not been adjusted, the bonuses earned by the CEO, CFO and cash equivalents asCOO under the EBITDA improvement component of the last dayannual bonus would still have been the same. While the EBITDA component of fiscal 2010. Net debt assumes “debt extinguishment accounting” and adds back to cash any investments in new joint ventures, newly identified properties above and beyond the fiscal 2010 original budget, deposits, land purchases, land development costs and work-in-progress home construction costs. For fiscal 2010, the Committee approved a $250,000 increase in the maximum bonus amountformula for the CEO, CFO and COO in recognition of his increased responsibilitiesprior years compared adjusted EBITDA to EBITDA in assuming the position of Chairmanpreceding year, for fiscal 2013, the EBITDA component of the Board. The Committee also approved a $95,200 increasebonus formulas for these NEOs is structured so that it will require improvement in the maximum bonus amountadjusted EBITDA in fiscal 2013 over fiscal 2012 adjusted EBITDA in order for the CEO, CFO and COO to be eligible for the same or increased bonus levels under this component of the fiscal 2013 bonus formula compared to their earned fiscal 2012 bonuses. Specifically, the Committee determined that the fiscal 2013 EBITDA component of the bonus formulas for the CEO, CFO and COO will be based on achieving targeted levels of the Company’s adjusted EBITDA for fiscal 2013, which levels have been set in orderreference to align his compensation opportunityfiscal 2012 adjusted EBITDA. The fiscal 2013 bonus formulas for the NEOs are described in more closely with the Peer Group median level.detail below under “Actions for Fiscal 2013.”
For fiscal 2010,2012, the COO’s bonus formula for the COO was based in part on EBITDA improvement. Mr. Pellerito also had the opportunity to earn an additional $100,000 if the Company achieved positive Pre-tax Profit in both the third and fourth quarters of fiscal 2012. For this purpose, “Pre-tax Profit” is defined as earnings (loss) before income taxes as reflected on the achievementCompany’s consolidated financial statements, excluding gains or losses on extinguishment of tailored personal objectives since he was promoted to his current position during the fiscal year.debt, inventory impairment losses and land option write-offs.
For fiscal 2010,2012, the bonus formulas for Messrs. BuchananO’Connor and ReinhartValiaveedan remained the same as their fiscal 20092011 formulas. Messrs. BuchananO’Connor and ReinhartValiaveedan have, as result of their respective positions, less direct influence on the Company’s strategic and operational decisions compared to the CEO, CFO and the CFOCOO, and, therefore, their bonus formulas weredo not revised to include a net debt amountan EBITDA improvement component. Specifically, these NEOs’ fiscal 20102012 bonus formulas provide,provided, as in fiscal 2009,2011, that bonuses would be based on both (a) a formula based on the Company’s ROACE and (b) the attainment of tailored personal objectives.
Fiscal 20102012 bonus formulas for each of the NEOs are further tailored as set forth below and are assessed annually. For all of the ROACE bonus formulas discussed below for each of the NEOs, net income“net income” used in calculating ROACE is after taxes and preferred dividends and, at the Committee’s discretion, excludes land charges.
| · | CEO: The CEO’s bonus formula for fiscal 2010 provided for a bonus award equal to the greater of (a) a fixed percentage of pre-tax income based on the Company’s ROACE and (b) a fixed dollar amount based on the Company’s net debt amount, with his final bonus from both formulas not to exceed $949,500. The methodology underlying the ROACE portion of the formula was historically designed to yield an annual bonus that would result in Total Direct Compensation opportunity that falls within the median range of the Peer Group for comparable financial performance. |
FOR THE CEO, THE BONUS FORMULA IS THE GREATER OF:
(a) ROACE Calculation Method*
ROACE percentage | % Pre-tax Income |
0.0% | 0.00% |
5.0% | 1.00% |
10.0% | 1.25% |
15.0% | 1.50% |
20.0% | 2.00% |
| * The bonus is interpolated between the points shown in the table, and may be extrapolated beyond the maximum ROACE percentage shown at a rate of 0.10% of pre-tax income per percentage point increase in ROACE, which is the rate applied between the last two tiers of the above chart, but is subject to a maximum bonus of $949,500, which is subject to the maximum bonus payable under the Short-Term Incentive Plan. |
AND
(b) Net Debt Amount Calculation Method*
| | Net Debt (millions) |
| | Greater than $1,150 | | | | $1,150 | | | | $1,105 |
Bonus (thousands) | | | $0 | | | | $500.0 | | | | $949.5 |
* The bonus is interpolated between the points shown in the table and capped at $949,500. Prior to fiscal 2009, there was no imposed cap on the CEO’s bonus. Had there been no cap in fiscal 2010, the bonus could have been as high as $2,000,000. The Committee intends to consider removing or increasing the cap when the Company returns to profitability.
Based on the bonus formula above, Mr. Hovnanian earned a cash bonus of $949,500 which was entirely attributed to the net debt amount calculation method of his bonus formula. For the reason discussed above, this bonus was paid 100% in cash.
| CFO: The CFO’s bonus formula provided for a bonus amount equal to the greater of (a) a fixed dollar amount based on the Company’s ROACE and (b) a fixed dollar amount based on the Company’s net debt amount, with his final bonus not to exceed $350,000. The ROACE portion of the formula was historically designed to yield an annual bonus that would result in Total Direct Compensation opportunity that falls within the median range of the Peer Group for comparable financial performance.
|
FOR THE CFO, THE BONUS FORMULA IS THE GREATER OF:
(a) ROACE Calculation Method* |
ROACE percentage | | Bonus (thousands) |
0.0% | | | $0 |
4.7% 5.0% 10.0% 15.0% 20.0% 25.0% | | | $350.0 |
| * The bonus is interpolated between the points shown in the table and capped at $350,000. The bonus is subject to the maximum payment under the Short-Term Incentive Plan. |
AND
(b) Net Debt Amount Calculation Method*
| | Net Debt (millions) |
| | Greater than | | | | | | | | |
| | | $1,150 | | | | $1,150 | | | | $1,107 |
Bonus (thousands) | | | $0 | | | | $187.5 | | | | $350.0 |
| * The bonus is interpolated between the points shown in the table and capped at $350,000. Prior to fiscal 2009, there was no imposed cap on the CFO’s bonus. Had there been no cap in fiscal 2010, the bonus could have been as high as $750,000. The Committee intends to consider removing or increasing the cap when the Company returns to profitability. |
Based on the bonus formula above, Mr. Sorsby earned a cash bonus of $350,000 which was entirely attributed to the net debt amount calculation method of his bonus formula. For the reason discussed above, this bonus was paid 100% in cash.
For fiscal 2011, for the CEO and CFO, the bonus formula component related to net debt (as described above) will shift to a calculation based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) improvement and cash balances. The Committee believes that the goals established for fiscal 2011 support the financial objectives of the Company and have been set at levels that are challenging, but attainable. Furthermore, the maximum bonus levels are capped at no more than the actual 2010 bonus amount.
| · | COO: The COO’s bonus for the first quarter of fiscal 2010 was related to his former position as Group President while his bonus for the remaining three quarters of fiscal 2010 was based on tailored personal objectives related to his new role. Mr. Pellerito’s Group President bonus formula was based on profitability, return on inventory, customer satisfaction and mortgage capture for the Group he managed. There was also a portion that was payable at the CEO’s discretion. Mr. Pellerito’s Group President bonus formula was designed to challenge him to achieve increasingly better business results. For example, Mr. Pellerito achieved a bonus based on profitability and return on inventory only two times during the five-year period from fiscal 2006 through fiscal 2010. In addition, the performance levels required for customer satisfaction goals during that same five-year period were increased four times, reflecting the Company’s commitment to its customers. For fiscal 2010, no profitability or return on inventory bonus was paid under the Group President bonus formula to Mr. Pellerito. Mr. Pellerito did receive a payment for the customer satisfaction, mortgage capture and discretionary components of his Group President bonus formula, though the customer satisfaction and mortgage capture payments were reduced by 50% since the Group for which he was responsible was not profitable. The cash bonus paid to Mr. Pellerito under the Group President bonus formula in fiscal 2010 was $44,798. Mr. Pellerito’s personal objectives related to his role as COO were focused on improving the operational results of the Company’s homebuilding business by standardizing best practices among the Company’s operational units to improve its products and services, gain efficien cies, reduce costs and improve profitability. The Committee determined that Mr. Pellerito fully met his fiscal 2010 personal objectives (the “outstanding” category below) and approved a cash bonus of $187,500 which was his maximum for the portion of time he was COO. In total, for fiscal 2010, Mr. Pellerito received a cash bonus of $232,298 under both his Group President and COO bonus formulas. |
COO Calculation Method – for Meeting Personal Objectives Measure*
Goals | Bonus |
Threshold | $62,500 |
Target | $125,000 |
Outstanding | $187,500 |
| * “Threshold,” “target,” and “outstanding” levels are determined by the CEO, who may consult with other members of senior management, and are used for internal evaluation purposes only. The amounts represented in the table above are prorated based on the portion of fiscal 2010 during which Mr. Pellerito served as COO and are subject to the maximum bonus payable under the Short-Term Incentive Plan and Stock Incentive Plan, as applicable. |
For fiscal 2011, the COO’s bonus formula will be based on EBITDA improvement and cash balances. The Committee believes that the goals established for fiscal 2011 are challenging, but attainable. Furthermore, the COO’s maximum bonus level is capped at $250,000.
| · | Other NEOs: Fiscal 2010 incentive opportunities for Messrs. Buchanan and Reinhart were based on a combination of Company performance and individual performance factors that were within each of these executives’ control and that would have a positive impact on the Company. Therefore, the bonus program for these NEOs targets the achievement of both (a) ROACE financial performance objectives for the Company and (b) personal objectives, and, for fiscal 2010, was capped at 50% of the maximum percentages of base salary they could otherwise achieve under the personal objectives portion of their respective bonus formulas. |
FOR OTHER NEOs, THE BONUS FORMULA IS BOTH:
(a) Calculation Method – for Achievement of Financial Performance Measure*
ROACE Percentage | Paul Buchanan | Peter Reinhart |
0.0% | $0 | $0 |
5.0% | 10% of base salary | 10% of base salary |
10.0% | 20% of base salary | 20% of base salary |
15.0% | 40% of base salary | 30% of base salary |
20.0% | 60% of base salary | 40% of base salary |
25.0% | 90% of base salary | 80% of base salary |
| * The bonuses are interpolated between the points shown in the table. The total bonuses payable under both components are capped at 50% of the maximum percentages of base salary these NEOs could otherwise achieve under the personal objectives portion of their respective bonus formulas and are subject to the maximum bonus payable under the Short-Term Incentive Plan and Stock Incentive Plan, as applicable. |
AND
(b) Calculation Method – for Meeting Personal Objectives Measure*
Goals | Paul Buchanan | Peter Reinhart |
Threshold | Up to 20% of base salary | Up to 20% of base salary |
Target | Up to 40% of base salary | Up to 30% of base salary |
Outstanding | Up to 60% of base salary | Up to 40% of base salary |
| * “Threshold,” “target,” and “outstanding” levels are determined by the CFO and the CEO, who may consult with other members of senior management, and are used for internal evaluation purposes only. As stated above, the total bonuses payable under both components are capped at 50% of the maximum percentages of base salary these NEOs could otherwise achieve under the personal objectives portion of their respective bonus formulas and are subject to the maximum bonus payable under the Short-Term Incentive Plan and Stock Incentive Plan, as applicable. |
Mr. Buchanan’s fiscal 2010 personal objectives included supervising the preparation of the proxy financial schedules, supporting the implementation of the Company’s enterprise management software platform and enhancements to the Company’s financial management system, and the management of special projects assigned by the CEO and CFO. Mr. Reinhart’s fiscal 2010 personal objectives included negotiating the resolution of storm water issues and management and resolution of significant litigation.
Based on the bonus formulas above and the Committee’s determinations regarding each executive’s personal objectives, none of these NEOs earned bonuses related to the ROACE calculation method for fiscal year 2010, but each did earn a cash bonus for meeting his fiscal 2010 personal objectives in full (the “outstanding” category); however, since the outstanding payouts for meeting personal objectives would exceed the cap described above, the bonuses were reduced by 50% to comply with the cap, resulting in payments of $86,100 and $61,500 for Mr. Buchanan and Mr. Reinhart, respectively.
For fiscal 2011, there was no change to the bonus formulas for these NEOs.
Since fiscal 2007, the NEOs have also been offered the opportunity to earn a one-time retention bonus equal to 3% of such NEO’s fiscal year end 2007 base salary if the NEO remains employed with the Company through the end of the first fiscal year in which the Company’s ROACE returns to 20%. At the end of fiscal 2010,2012, the Company’s ROACE did not meet this threshold, so there were no resulting retention bonuses paid out inearned for this year.
The following description provides detail as to the determination of each NEO’s annual bonus. Due to the reduced amount of the bonuses as compared to more profitable years, all bonuses were paid in 100% in cash. In addition, for fiscal 2012, each NEO’s bonus was subject to a cap, which the Committee has increased for fiscal 2013 bonuses and intends to consider removing or further increasing in future fiscal years as the Company’s financial results improve as they did in fiscal 2012. See “Actions for Fiscal 2013.”
| · | CEO: The CEO’s bonus formula for fiscal 2012 provided for a bonus award equal to the greater of (a) a fixed percentage of pre-tax income based on the Company’s ROACE and (b) a fixed dollar amount based on the Company’s EBITDA improvement, with his final bonus not to exceed $949,500, the amount of his annual bonus for fiscal 2011. The methodology underlying the ROACE portion of the formula was historically designed to yield an annual bonus that would result in a Total Direct Compensation opportunity that falls within the median range of the Peer Group for comparable financial performance as well as supporting the financial objectives of the Company. Prior to fiscal 2009, there was no imposed cap on the CEO’s bonus. The Committee intends to consider removing or increasing the cap as the Company’s financial results improve. |
FOR THE CEO, THE BONUS FORMULA WAS THE GREATER OF:
(a) ROACE Calculation Method*
ROACE percentage | % Pre-tax Income |
0.0% | 0.00% |
5.0% | 1.00% |
10.0% | 1.25% |
15.0% | 1.50% |
20.0% | 2.00% |
* | The bonus is interpolated on a linear basis between the points shown in the table, and may be extrapolated beyond the maximum ROACE percentage shown at a rate of 0.10% of pre-tax income per percentage point increase in ROACE, which is the rate applied between the last two tiers of the above chart, but was capped at $949,500 and was also subject to the maximum bonus payable under the Short-Term Incentive Plan. |
AND
(b) EBITDA Improvement Calculation Method*
EBITDA Improvement (millions) | | $ | 0.0 | | | $ | 37.5 | | | $ | 75.0 | |
Bonus (thousands) | | $ | 0.0 | | | $ | 474.8 | | | $ | 949.5 | |
* | The bonus is interpolated on a linear basis between the points shown in the table. The bonus was capped at $949,500, and was also subject to the maximum payout under the Short-Term Incentive Plan. |
Based on the bonus formula above, because there was no payment under the ROACE component and EBITDA Improvement was $213.8 million, which significantly exceeded the maximum performance level, Mr. Hovnanian earned a cash bonus equal to the cap of $949,500, which was entirely attributed to the EBITDA Improvement Calculation Method of his bonus formula.
| · | CFO: The CFO’s bonus formula for fiscal 2012 provided for a bonus amount equal to the greater of (a) a fixed dollar amount based on the Company’s ROACE and (b) a fixed dollar amount based on the Company’s EBITDA improvement, with his final bonus not to exceed $350,000, the amount of the annual bonus for fiscal 2011. The ROACE portion of the formula was historically designed to yield an annual bonus that would result in a Total Direct Compensation opportunity that falls within the median range of the Peer Group for comparable financial performance. Prior to fiscal 2009, there was no imposed cap on the CFO’s bonus. The Committee intends to consider removing or increasing the cap as the Company’s financial results improve. |
FOR THE CFO, THE BONUS FORMULA WAS THE GREATER OF:
(a) ROACE Calculation Method*
ROACE percentage | | | Bonus (thousands) |
0.0% | | | | $ | 0.0 |
4.7% 5.0% 10.0% 15.0% 20.0% 25.0% | | ![](https://capedge.com/proxy/PRE 14A/0001437749-13-000211/symbol.jpg) | | $ | 350.0 |
* | The bonus is interpolated on a linear basis between the first two percentage points shown in the table, but was capped at $350,000 and was also subject to the maximum payment under the Short-Term Incentive Plan. |
AND
(b) EBITDA Improvement Calculation Method*
EBITDA Improvement (millions) | | $ | 0.0 | | | $ | 37.5 | | | $ | 75.0 | |
Bonus (thousands) | | $ | 0.0 | | | $ | 175.0 | | | $ | 350.0 | |
* | The bonus is interpolated on a linear basis between the points shown in the table. The bonus was capped at $350,000, and was also subject to the maximum payout under the Short-Term Incentive Plan. |
Based on the bonus formula and the ROACE and EBITDA Improvement results described above, Mr. Sorsby earned a cash bonus equal to the cap of $350,000, which was entirely attributed to the EBITDA Improvement Calculation Method of his bonus formula.
| · | COO: The COO’s bonus formula for fiscal 2012 provided for a bonus amount equal to a fixed dollar amount based on the Company’s EBITDA improvement, with his EBITDA improvement bonus not to exceed $250,000, the amount of the annual bonus for fiscal 2011. Mr. Pellerito also had the opportunity to earn an additional $100,000 bonus if the Company achieved positive Pre-tax Profit (as defined above) in both the third and fourth quarters of fiscal 2012. The Committee intends to consider removing or increasing the COO’s total bonus cap of $350,000 as the Company’s financial results improve. |
FOR THE COO, THE BONUS FORMULA WAS BOTH:
(a) EBITDA Improvement Calculation Method*
EBITDA Improvement (millions) | | $ | 0.0 | | | $ | 37.5 | | | $ | 75.0 | |
Bonus (thousands) | | $ | 0.0 | | | $ | 125.0 | | | $ | 250.0 | |
* | The bonus is interpolated on a linear basis between the points shown in the table. The EBITDA improvement bonus was capped at $250,000 and was also subject to the maximum payout under the Short-Term Incentive Plan. |
AND
(b) Pre-tax Profit in Third and Fourth Fiscal Quarters*
Pre-tax Profit | | Greater than zero in both third and fourth quarters | |
Bonus (thousands) | | $ | 100.0 | |
* | The Pre-tax Profit bonus was capped at $100,000 and was also subject to the maximum payout under the Short-Term Incentive Plan. |
Based on the bonus formula and the EBITDA Improvement results described above and the fact that the Company did not achieve positive Pre-tax Profit (as defined above) in both the third and fourth quarters of fiscal 2012, Mr. Pellerito earned a cash bonus equal solely to the EBITDA improvement bonus cap of $250,000.
| · | Other NEOs: Fiscal 2012 incentive opportunities for Messrs. O’Connor and Valiaveedan were based on a combination of Company performance and individual performance factors that were within each of these executives’ control and that would have a positive impact on the Company. Therefore, the bonus program for these NEOs targeted the achievement of both (a) ROACE financial performance objectives for the Company and (b) personal objectives, and, for fiscal 2012, the total bonuses payable under both components were capped at 50% of the maximum percentages of base salary they could otherwise achieve under the personal objectives portion of their respective bonus formulas (the caps were 30% and 25% of base salary, respectively). The Committee intends to consider removing or increasing the caps as the Company’s financial results improve. |
FOR OTHER NEOs, THE BONUS FORMULA WAS BOTH:
(a) Calculation Method – for Achievement of Financial Performance Measure*
ROACE Percentage | | Brad O’Connor | | | David Valiaveedan | |
0.0% | | | $0 | | | | $0 | |
5.0% | | 10% of base salary | | | 15% of base salary | |
10.0% | | 20% of base salary | | | 30% of base salary | |
15.0% | | 40% of base salary | | | 40% of base salary | |
20.0% | | 60% of base salary | | | 50% of base salary | |
* | The bonuses are interpolated on a linear basis between the points shown in the table. The total bonuses payable under both components were capped at 50% of the maximum percentages of base salary these NEOs could otherwise achieve under the personal objectives portion of their respective bonus formulas (the caps were 30% and 25% of base salary, respectively) and were subject to the maximum bonus payable under the Short-Term Incentive Plan. |
AND
(b) Calculation Method – for Meeting Personal Objectives Measure*
Goals | Brad O’Connor | David Valiaveedan |
Threshold | Up to 20% of base salary | Up to 30% of base salary |
Target | Up to 40% of base salary | Up to 40% of base salary |
Outstanding | Up to 60% of base salary | Up to 50% of base salary |
* | “Threshold,” “target,” and “outstanding” levels are determined by the CFO and the CEO, who may consult with other members of senior management, and are used for internal evaluation purposes only. As stated above, the total bonuses payable under both components were capped at 50% of the maximum percentages of base salary these NEOs could otherwise achieve under the personal objectives portion of their respective bonus formulas (the caps were 30% and 25% of base salary, respectively) and were subject to the maximum bonus payable under the Short-Term Incentive Plan. |
Mr. O’Connor’s fiscal 2012 personal objectives included implementing controls, either systemic or manual, for the segregation of assets among the groups of entities securing the Company’s secured bonds; providing support to operating group management related to centralizing accounting functions at the operating group level and exploring the centralization of functions at headquarters (e.g., vendor maintenance); ensuring the timely filing of all SEC-required documents; and overseeing the adoption of the more extensive second year SEC-mandated requirements for XBRL filings. Mr. O'Connor successfully completed these objectives by ensuring timely compliance with SEC requirements for XBRL filings, as well as the efficiency and accuracy of new internal reporting tools. He also led the team of Senior Accounting and Finance Managers to identify and implement accounting process centralization at the operating group and headquarters levels and led a project team that implemented system improvements relating to the segregation of assets for the Company’s secured bonds.
Mr. Valiaveedan’s fiscal 2012 personal objectives included developing and executing the Company’s capital structure strategy, negotiating joint venture and land banking agreements, preparing Company projections and managing existing joint ventures. During fiscal 2012, Mr. Valiaveedan successfully negotiated and closed a land banking arrangement with GSO Capital Partners, LP and the buyout of a joint venture partner. In addition, he played an instrumental role in the development and execution of the Company’s capital markets strategy, including several debt refinancing transactions and equity and equity-linked transactions. These significant transactions raised capital, extended debt maturities and reduced the Company’s interest expense.
Based on the bonus formulas above and the Committee’s determinations regarding each executive’s personal objectives, neither of these NEOs earned bonuses related to the ROACE Calculation Method for fiscal 2012, but each earned a cash bonus for meeting his respective fiscal 2012 personal objectives in full (the “outstanding” category). Since, however, the outstanding payouts for meeting personal objectives would exceed the cap described above, the bonuses were reduced by 50% to comply with the cap, resulting in payments of $93,000 and $72,500 for Mr. O’Connor and Mr. Valiaveedan, respectively.
Discretionary Bonuses
The Committee has the authority to make discretionary bonus awards, which it considers under special circumstances, including exceptional contributions not reflected in the regular bonus measures, new hire sign-on bonuses and retention rewards. No discretionary bonus awardsDiscretionary bonuses of $50,000 were granted to each of Messrs. O’Connor and Valiaveedan for their performance during fiscal 2012. These awards recognized their significant contributions involving capital raising/restructuring activities as well as their leadership and assistance in generating positive operating trends in the NEOs inlatter half of fiscal 2010 for periods in which they were executive officers.2012.
Stock Grants
The Committee may make grants of stock options, stock appreciation rights, restricted stock and restricted stock units (“RSUs”), unrestricted shares of stock, or stock-based awards settled in cash pursuant to the Stock Incentive2012 Plan. In fiscal 2010,2012, the Committee awarded stock options to each of the NEOs, subjectNEOs. Messrs. O’Connor and Valiaveedan were eligible to an electionelect to receive restrictedRSUs in lieu of stock units (“RSUs”) instead for some of the NEOs.options, but neither made such an election. No other stock-based awards were made to NEOs in fiscal 2010, aside from the LTIP grant discussed below.2012.
Stock options are intended to establish a strong commitment to maintain employment with the Company and focus on creating long-term shareholder value. In addition, stock options are selected over other types of stock-based awards because their design inherently rewards executives only if the stock price increases, which provides a balance with cash incentives and the more retention-oriented restricted stockRSU grants.
Because the ultimate value received by stock option and RSU holders is directly tied to increases in the Company’s stock price, stock options and RSUs also serve to link the interests of management and shareholders and to motivate executive officers to make decisions that will increase the long-term total return to shareholders. Additionally, grants under the Stock Incentive2012 Plan include vesting and termination provisions that the Committee believes will encourage stock option and RSU holders to remain long-term employees of the Company.
The Committee ultimately approves the size of the grants taking into account the recommendations by the CEO (other than for his own grant) and other criteria as determined by the Committee. The Committee generally targets a specific number of options rather than a specific option value. This philosophy directly aligns option grant values with shareholder value since option values are generally higher when the stock price is increasing and lower when the stock price is decreasing. Consequently, in spite ofdespite the fact that the stock price has remained significantly lower than historical levels, the number of each NEO’s option grants havehas generally remained relatively consistent, with the exception of the special performance grantoption grants for the CEO, CFO and CFOCOO in 2009 and a promotion-based increase forfiscal 2012 which had an exercise price 33 1/3% above the COO.closing stock price on the grant date. The Committee’s determination and rationale for the fiscal 20102012 grants is described below.
The Committee will continue to determine the appropriate mix of options and other award types based on the objectives of the compensation program, the Company’s business needs, the potential dilution impact and the pool of shares remaining available for grant under the Company’s shareholder-approved incentive plans.
Stock options and RSUs generally vest in four equal annual installments, commencing on the second anniversary date of the grant, providing a five-year period before becoming fully vested.
During the first quarter of fiscal 2012, the Committee conducted its annual review of the Company’s and NEO’s performance during fiscal 2011. The Committee also periodically considers emerging trends in incentive plan design and “best practices” for aligning executive pay and performance. Following its review, the Committee requested, and the CEO and CFO agreed, to apply specific performance conditions to the stock option and RSU awards previously granted during fiscal 2011 (when the full year performance results were not yet known). The performance conditions require that, as a condition of vesting, the Company’s Adjusted EBITDA must exceed “fiscal 2011 actual EBITDA” for two consecutive fiscal years, in the case of options, during the option term and, in the case of RSUs, prior to the tenth anniversary of the grant date. Regardless of when the performance criteria are met, vesting will not occur sooner than 25% per year beginning on the second anniversary of the grant date. For this purpose, “fiscal 2011 actual EBITDA” is the amount from our consolidated financial statements for the year ended October 31, 2011. Adjusted EBITDA will be based on EBITDA from the consolidated financial statements for the applicable fiscal year-end, excluding inventory impairment losses and land option write-offs and gains or losses on extinguishment of debt. These conditions reflect the Company’s heightened focus on cash flow and liquidity. At the end of fiscal 2012, the Committee determined that the Company’s Adjusted EBITDA exceeded fiscal 2011 actual EBITDA and that the performance criteria of “two consecutive fiscal years” had not yet been met.
Fiscal 20102012 Stock Option Awards
In determining the fiscal 20102012 equity awards for the NEOs, the Committee considered, without giving specific weight to any one factor, then availablethen-available information on Peer Group equity awards for the NEOs, PM&P guidance regarding the anticipated range of declinechanges in equity award values across industries, the Company’s available share pool and the potential impact on shareholder dilution, the Company’s stock performance, the historical equity awards provided to each NEO, the desire to retain the employment of each NEO, and the desire to continue to link a portion of each NEO’s compensation with future Company performance. AllExcept for the CEO, all stock option awards in fiscal 20102012 were made in the form of options to purchase shares of Class A Common Stock, except for the CEO whose award was made in the form of options to purchase shares of Class B Common Stock becauseStock. Because the Committee took into consideration the potential benefits to the Company previously expressed by the Board of Directors of the continuity of share ownership and control of the Hovnanian family.family, the CEO’s stock option award was made in the form of options to purchase shares of Class B Common Stock.
| | CEO, CFO and CFO.COO. The CEO, wasCFO and COO were granted 375,000600,000, 120,000 and 80,000 stock options, whichrespectively. These grants represented a higher award level than fiscal 2011, in recognition that these options have a premium exercise price 33 1/3% above the sameclosing stock price on the grant date. In contrast, the 2011 option grants for these NEOs had an exercise price set at the fair market value as of the grant date. In determining to grant options with an exercise price at this premium level, the Committee sought to provide a stronger link with increased shareholder value, as fiscal 2008 and a decrease of 375,000 stock options from fiscal 2009. The CFO received a total of 75,000 stock options, which representedthese executives have more significant responsibility for the same levelCompany’s long-term strategy as fiscal 2008 and a decrease of 75,000 stock options from fiscal 2009. As compared to the other NEOs. The Committee also determined to increase the number of options awarded based on its determination that the CEO, CFO and COO’s long-term incentive values granted to Peer Group chi ef executive officers and chief financial officers,on the long-term values granted to the CEO and CFOgrant date (including therecent annual option grants and the annualized fiscal 2010 value of the LTIP at target, discussed below), were considerably below thosethe median value of long-term incentive awards granted to the Peer Group chief executive officerofficers, chief financial officers and chief financial officer medians.operating officers. Additional details are described above under “– Stock Grants.” |
| · | COO.Other NEOs. In recognition of his increased responsibilities, the COOfiscal 2012, Mr. O’Connor was granted 50,00020,000 stock options which represented a 43% increase fromand Mr. Valiaveedan was granted 15,000 stock options, both with exercise prices set at the fair market value on the date of grant. The number of options granted to him inMr. O’Connor was higher than fiscal 2009. As compared2011 due to long-term incentive valueshis promotion, and the number of options granted to Peer Group chief operating officers,Mr. Valiaveedan was the long-term value granted tosame as fiscal 2011. These awards for fiscal 2012 were considerably below the COO (including the option grant and annualized value of the LTIP at target, discussed below), was below that ofmedian levels for the Peer Group chief operating officer medians as he is new to the position. Note that only six of the eleven Peer Group companies report the chief operating officer position in their proxies.and broad-based compensation surveys. |
| · | Other NEOs. Messrs. Buchanan and Reinhart were each granted 15,000 stock options in fiscal 2010, which represented a decrease of 10,000 stock options each from fiscal 2009 and which were considerably below the Peer Group Median. |
Long TermLong-Term Incentive PlanProgram
In fiscal 2010, the Company adopted a Long TermLong-Term Incentive Program (“LTIP”) under its stockholder-approved Amended and Restated 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan (“2008 Plan”) to aid the Company in retaining key employees and to motivate them to exert their best efforts to promptly return the Company to profitability and lower debt levels by providing rewards at the end of a multi-year period. The LTIP is intended to incentivize achievement of specified pre-tax profit goals and specified improvements in the Company’s capital structure through reductions in homebuilding debt.
Each of the NEOs is a participant in the LTIP and their awards, if any, will be determined based on actual performance for the full 36-month performance period, subject to the vesting requirements over an additional 24-month period, as described below. This performance period commenced on November 1, 2010 (the beginning of fiscal 2011) and will end on October 31, 2013 (that is, the performance period covers fiscal 2011, 2012 and 2013). After the performance period, the awards, to the extent earned, remain subject to vesting conditions forduring fiscal 2014 and 2015. The executive will not receive the full award unless the companyCompany achieves the pre-tax profit and homebuilding debt performance goals and the executive remains employed for the entire five-year period. The Committee does not curren tly anticipate considering a similar LTIP program until after the expiration of the three-year LTIP performance period.
Pre-tax profit and homebuilding debt were chosen as the performance metrics for the LTIP because they are critical during this challenging economic cycle. The Committee determined that other goals, such as revenue growth and cost reductions, would be reflected in pre-tax profit calculations, but in a balanced way with an emphasis on achieving profitability. The Committee believed that a focus on revenue growth alone would not adequately emphasize profitability and that a focus on cost-cutting alone could emphasize short-term achievements that may sacrifice future profitability. The Committee also determined that if the current difficult economic conditions continue during all or most of the LTIP’s performance period and achievement of pre-tax profit is n otnot attainable, then realization of reduced homebuilding debt would put the Company in a better financial position to weather such an extended downturn and return to profitability when the economic conditions ultimately improve.
Awards, if any, will be based on a specific target multiple of each participant’s base salary in effect on the date the participant is granted the award (the “Grant Date,” or June 11, 2010 for all NEOs) and, if. If shares of stock are elected as a form of payout, the target number of shares is set based on the closing price of the Class A Common Stock on the Grant Date, regardless of whether the share price increases or decreases by the time the Awardaward is determined or distributed. TheIn order to manage the potential dilution impact of the LTIP, the Committee required that at least 20% of the payout be in the form of cash. All stock awards under the LTIP were made in the form of rights to receive shares of Class A Common Stock, except for the CEO whose award was made in the form of rights to receive shares of Class B Common Stock because the Committee took into consideration the potential benefits to the Company previously expressed by the Board of Directors of the continuity of share ownership and control of the Hovnanian family. The following describes for each NEO histhe target multiple of base salary and form of his irrevocable payout election:election for each NEO:
| | Target Multiple | |
| of Base Salary | Payout Method |
| | of 2010 Base Salary | | Payout Method |
CEO | | | 3.00 | | 20% cash / 80% shares |
CFO | | | 2.00 | | 20% cash / 80% shares |
COO | | | 2.00 | | 20% cash / 80% shares |
Other NEOs | | | 1.00 | 50% | 20% cash / 50%80% shares |
InAlthough the Grants of Plan-Based Awards in Fiscal 2010 table,Committee views both the stock and cash payout portions of the LTIP grantsas multi-year incentive plan awards, they are reported as “Non-Equity Incentive Plan Awards” and the share payout portions are reported as “Equity Incentive Plan Awards.” Fordifferently for purposes of the Summary Compensation Table, theTable. The share payout portions are reflected as “Stock Awards” in fiscal 2010 at their grant date fair value under Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 718, Compensation – Stock Compensation ("ASC Topic 718"), which was based on the probable outcome as of the Grant Date. Conversely, the actual amounts earned on the cash payout portions, if any, will be reflected in the Summary Compensation Table as “Non-Equity Incentive Plan Compensation” in fiscal 2013 (which coincides wi thwith the end of the performance period) or, if participants achieve a minimum performance payment during an earlier fiscal year, even though such payment remains subject to subsequent vesting restrictions, then such minimum payment would be reflected in that earlier fiscal year. At the end of fiscal 2012, the Company did not reach breakeven or positive Pre-tax Profit (as defined below), so no minimum payment was achieved for this year.
For purposes of the LTIP, “Pre-tax Profit” is defined as earnings (loss) before income tax payments as reflected on our audited financial statements, excluding the impact of any items deemed to be extraordinary items for financial reporting purposes. “Homebuilding Debt” is defined as total (recourse) notes payable excluding accrued interest, as reflected on our consolidated audited balance sheet, less any debt issued after January 2010 that has an equity component such as debt convertible into equity.shares of stock.
The following table illustrates the percent of the target award that can be achieved at each performance level. Awards will be interpolated on a linear basis between performance levels but will not be extrapolated above the maximum performance levels listed below.
| | | | Homebuilding Debt as of 10/31/2013 (in billions) |
| | | | Greater than $1.70 | | $1.65 | | $1.60 | | $1.55 | | $1.50 | | $1.40 or less |
FY 2013 Pre-tax Profit (in millions) | | $100 or more | | 100% of target award | | 125% of target award | | 150% of target award | | 175% of target award | | 200% of target award | | 250% of target award |
| $75 | | 75% of target award | | 100% of target award | | 125% of target award | | 150% of target award | | 175% of target award | | 225% of target award |
| $50 | | 50% of target award | | 75% of target award | | 100% of target award | | 125% of target award | | 150% of target award | | 200% of target award |
| $25 | | 25% of target award | | 50% of target award | | 75% of target award | | 100% of target award | | 125% of target award | | 175% of target award |
| Less than $0 | | 0% of target award | | 25% of target award | | 50% of target award | | 75% of target award | | 100% of target award | | 150% of target award |
| | Homebuilding Debt as of 10/31/2013 (in billions) |
| | Greater than $1.70 | $1.65 | $1.60 | $1.55 | $1.50 | $1.40 or less |
| $100 or more | 100% of target award | 125% of target award | 150% of target award | 175% of target award | 200% of target award | 250% of target award |
| $75 | 75% of target award | 100% of target award | 125% of target award | 150% of target award | 175% of target award | 225% of target award |
FY 2013 Pre-tax Profit (in millions) | $50 | 50% of target award | 75% of target award | 100% of target award | 125% of target award | 150% of target award | 200% of target award |
| $25 | 25% of target award | 50% of target award | 75% of target award | 100% of target award | 125% of target award | 175% of target award |
| Less than $0 | 0% of target award | 25% of target award | 50% of target award | 75% of target award | 100% of target award | 150% of target award |
If the Company reachesreached breakeven or positive Pre-tax Profit for either of fiscal 2011 or 2012, a participant will bewas eligible for a minimum payment equal to 50% of the target award, provided that he meetsmet the vesting requirements described below. This minimum payment iswould have been inclusive of and not incremental to any other award granted to the participant under the LTIP and willwould not exceedhave exceeded 50% of target award if the Company achievesachieved breakeven or positive Pre-tax Profit in both fiscal 2011 and 2012. No minimum payout was achieved in either fiscal 2011 or fiscal 2012.
As a condition of earning each portion of the award, and as a retention inducement, otherfollowing the performance period, a participant must also be employed through the vesting dates outlined below (other than in cases of death, disability or qualified retirement, or in the case of Messrs. O’Connor and Valiaveedan, specified termination following a change in control of the performance period, a participant must be employed through the vesting dates outlined below.Company). The vesting percentages relate to the earned award value as of October 31, 2013.
| 1. | 50% of the award will become vested on October 31, 2013 and payable in January 2014; |
| 2. | 30% of the award will become vested on October 31, 2014 and payable in January 2015; and |
| 3. | 20% of the award will become vested on October 31, 2015 and payable in January 2016. |
Other Employee Benefits
The Company maintains additional employee benefits that the Committee believes enhance executive safety, efficiency and time that the executive is able to devote to Company affairs.
In addition to benefits generally provided to employees of the Company, certainWe do not believe that special perquisites should play a major role in our executive compensation program. However, some NEOs are also eligible to participate inprovided one or more of the following programs:items:
| · | Auto allowance, including car maintenance and fuel expense; |
| · | Personal use of the Company’s automobiles (including driver’s compensation) and a fractional share in an aircraft; |
| · | Executive term life insurance; |
| · | Annual Executive Physical Exam Program; |
| · | Golf membership or country club fee reimbursement; and |
| · | Personal income tax preparation.preparation services; and |
| · | Personal accounting services. |
The Committee annually reviews the elements and level of executive perquisites for the NEOs. In particular, in evaluating the appropriateness of these benefits for the CEO, the Committee took into consideration the degree to which the CEO is required to travel to various Company locations and business functions on a daily basis. Based on its review, the Committee requested that the CEO use Company-provided transportation to enhance the efficient use of his time and due to safety concerns.time.
The Company’s contributions to the NEOs’ 401(k) plan and executive deferred compensation plan (“EDCP”) accounts were suspended on February 20, 2009 and continued to be suspended throughout fiscal 2010.2012. However, in fiscal 2010,2012, a one-time Employer Non-Elective Contributionemployer non-elective contribution funded by the use of the forfeitures account was made to all employees’eligible participants’ 401(k) plan accounts from 2009for the 2011 calendar year, in accordance with terms of the 401(k) plan. Beginning with the January 11, 2013 pay period, the Company will reinstate its 401(k) match at 50% of the level it matched prior to its suspension in February 2009. This will apply to all participants in the 401(k) plan, unapplied forfeitures.including the NEOs.
Specific benefits and the incremental costs of such benefits are described in detail in the footnotes to the Summary Compensation Table. The Company does not offer any defined benefit pension plans to its employees.
5. ACTIONS FOR FISCAL 2013
The Committee approved a base salary increase to $600,000 for Mr. Pellerito, effective in December 2012, to move him closer to the Peer Group median. Messrs. O’Connor and Valiaveedan each received a 3% base salary increase, also effective in December 2012, in consideration of their individual performance and in line with the Company’s ordinary course merit-based salary and cost of living increase practices. The Committee maintained the base salaries of the CEO and CFO at their fiscal 2012 amounts, which amounts have not changed since December 2005 for the CEO and January 2010 for the CFO.
In prior fiscal years, the EBITDA component of the bonus formula for the CEO, CFO and COO compared adjusted EBITDA to EBITDA in the preceding year. For fiscal 2013, the EBITDA component of the bonus formulas for these NEOs is structured so that it will require improvement in adjusted EBITDA in fiscal 2013 over fiscal 2012 adjusted EBITDA in order for the CEO, CFO and COO to be eligible for the same or increased bonus levels under this component of the fiscal 2013 bonus formula compared to their earned fiscal 2012 bonuses. Specifically, the Committee determined that the fiscal 2013 EBITDA component of the bonus formulas for the CEO, CFO and COO will be based on achieving targeted levels of the Company’s adjusted EBITDA for fiscal 2013, which levels have been set in reference to fiscal 2012 adjusted EBITDA. The Committee also determined that the fiscal 2013 bonus formulas for the CEO, CFO and COO will include a liquidity component in addition to the EBITDA component. In recognition of the Company’s improvements in operating trends beginning in the second quarter of fiscal 2012 and to further incent future improvements, the Committee increased the overall maximum bonus opportunity for the CEO, CFO and COO to $1,500,000, $575,000 and $575,000, respectively. The fiscal 2013 bonus formulas for such NEOs will otherwise remain the same except that the COO’s bonus formula will not include the Pre-tax Profit in Third and Fourth Fiscal Quarters component of his fiscal 2012 bonus formula.
The Committee determined that the fiscal 2013 bonus formulas for Messrs. O’Connor and Valiaveedan will remain the same as in fiscal 2012 except that, for the reasons discussed above with respect to the CEO, CFO and COO, if the Company’s fiscal 2013 Pre-tax Profit is greater than zero, the maximum amounts these NEOs could receive under the personal objectives component of their respective bonus formulas will no longer be reduced by 50%. In addition, the personal objectives for Messrs. O’Connor and Valiaveedan were updated to reflect key goals for fiscal 2013.
6. TAX DEDUCTIBILITY AND ACCOUNTING IMPLICATIONS
As a general matter, the Committee always takes into account the various tax and accounting implications of compensation. When determining amounts of equity grants to executives and employees, the Committee also examines the accounting cost associated with the grants.
The Company’s annual bonus and stock option programs are intended to allow the Company to make awards to executive officers that are deductible under Section 162(m) of the Internal Revenue Code, which provision otherwise sets limits on the tax deductibility of compensation paid to a company’s most highly compensated executive officers (with the exception of the Company’s CFO). The Committee will continue to seek ways to limit the impact of Section 162(m) of the Internal Revenue Code. However, the Committee believes that the tax deduction limitation should not compromise the Company’s ability to establish and implement incentive programs that support the compensation objectives discussed above. Accordingly, achieving these objectives and maintaining required flexibility in this re gardregard may result in compensation that is not deductible for federal income tax purposes. The bonus and LTIP formulas approved by the Committee for fiscal 20102012 were, however, intended to be established in accordance with the requirements for deductibility as performance-based compensation under Section 162(m) of the Internal Revenue Code.
6.7. TIMING AND PRICING OF STOCK OPTIONS
For fiscal 2010,2012, stock options were granted on the second Friday in June for all eligible employees, consistent with our practice of granting equity awards annually on the second Friday in June. The Company’s practice of setting “fixed” equity award grant dates is designed to avoid the possibility that the Company could grant stock awards prior to the release of material, non-public information whichthat is likely to result in an increase in its stock price, or delay the grant of stock awards until after the release of material, non-public information that is likely to result in a decrease in the Company’s stock price. ExerciseOther than with respect to the CEO’s, CFO’s, and COO’s stock option grants in fiscal 2012, exercise prices of stock options were set at the closing price per share of the Company’s Class A Common Stock on the NYSE on the date the options wer ewere granted. The options granted to the CEO, CFO and COO in fiscal 2012 were granted with an exercise price 33 1/3% above the closing stock price on the grant date. See “Stock Grants – Fiscal 2012 Stock Option Awards” above.
7.8. STOCK OWNERSHIP GUIDELINES
The Board of Directors of the Companyhas adopted stock ownership guidelines, recommended by the Committee, which set forth recommended minimum amounts of stock ownership, directly or beneficially, for certain senior executive officers. On an annual basis, the CEO, CFO, COO and non-employee Directors because they have the most long-term strategic impact for shareholders. The Committee reviews adherence to the Company’s stock ownership guidelines on an annual basis, which guidelines are incorporated into the Company’s Corporate Governance Guidelines. The Company believes these guidelines further enhance the Company’s commitment to aligning the interests of executiveour non-employee Directors and senior management with those of its stockholders.shareholders.
In its annual review in 2008, the Compensation Committee determined that, once the stock ownership guidelines were met, they would be deemed satisfied for subsequent annual review periods, regardless of decreases in the Company’s stock price on the New York Stock Exchange, so long as the executive or non-employee Director does not sell any portion of the share amounts which were originally included in determining that the recommended thresholds were met. The Compensation Committee reviewed this determination in fiscal 20102012 and maintained this policy.
As of January 18, 2011 (the record date for the Annual Meeting), all senior executive officers had met the Company’s stock ownership guidelines.
Senior Executive Officers
All senior executive officers meet the Company’s stock ownership guidelines. The guidelines provide that the following senior executive officers of the Company are encouragedrequested to achieve and maintain minimum stock ownership amounts as follows:
Chairman, President and CEO – 5x6x current base salary
CFO – 2x current base salary
COO – 2x current base salary
See “Non-Employee Director Compensation” for information on the stock ownership guidelines for non-employee Directors.
EXECUTIVE COMPENSATION
(1) SUMMARY COMPENSATION TABLE
The following table summarizes the compensation for the fiscal years ended October 31, 2010,2012, October 31, 20092011, and October 31, 20082010 of the chief executive officer, the chief financial officer, and the next three most highly compensated executive officers serving as executive officers as of October 31, 2010.2012. These five individuals compose our named executive officers or “NEOs.”
Summary Compensation Table
Name and Principal Position | | Year | | Salary (1) | | | Bonus (2) | | | Stock Awards (3) | | | Option Awards (4) | | | Non-Equity Incentive Plan Compensation (5) | | | Change in Pension Value and Nonqualified Deferred Compensation Earnings | | | All Other Compen-sation (6) | | | Total (7) |
Ara K. Hovnanian, (8) | | 2010 | | $ | 1,092,606 | | | | — | | | $ | 2,622,255 | | | $ | 1,413,750 | | | $ | 949,500 | | | | — | | | $ | 188,189 | | | $ | 6,266,300 |
President, Chief Executive Officer and | | 2009 | | $ | 1,092,606 | | | | — | | | | — | | | $ | 1,380,000 | | | $ | 699,500 | | | | — | | | $ | 267,015 | | | $ | 3,439,121 |
Chairman of the Board | | 2008 | | $ | 1,092,606 | | | | — | | | $ | 503,641 | | | $ | 1,256,250 | | | $ | 979,302 | | | | — | | | $ | 336,344 | | | $ | 4,168,143 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
J. Larry Sorsby, | | 2010 | | $ | 572,308 | | | | — | | | $ | 960,001 | | | $ | 282,750 | | | $ | 350,000 | | | | — | | | $ | 52,229 | | | $ | 2,217,288 |
Executive Vice President and Chief | | 2009 | | $ | 500,000 | | | $ | 75,000 | | | | — | | | $ | 276,000 | | | $ | 254,800 | | | | — | | | $ | 58,822 | | | $ | 1,164,622 |
Financial Officer | | 2008 | | $ | 499,023 | | | $ | 75,000 | | | $ | 183,456 | | | $ | 251,250 | | | $ | 356,721 | | | | — | | | $ | 182,059 | | | $ | 1,547,509 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Thomas J. Pellerito, | | 2010 | | $ | 468,870 | | | $ | 28,750 | | | $ | 799,999 | | | $ | 188,500 | | | $ | 203,548 | | | | — | | | $ | 38,276 | | | $ | 1,727,943 |
Chief Operating Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Paul W. Buchanan, | | 2010 | | $ | 287,000 | | | | — | | | $ | 143,499 | | | $ | 56,550 | | | $ | 86,100 | | | | — | | | $ | 18,506 | | | $ | 591,655 |
Senior Vice President — Chief Accounting | | 2009 | | $ | 286,192 | | | $ | 50,000 | | | | — | | | $ | 46,000 | | | $ | 86,100 | | | | — | | | $ | 34,331 | | | $ | 502,623 |
Officer | | 2008 | | $ | 280,000 | | | $ | 50,000 | | | $ | 60,480 | | | $ | 50,250 | | | $ | 117,600 | | | | — | | | $ | 46,880 | | | $ | 605,210 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Peter S. Reinhart, | | 2010 | | $ | 307,500 | | | | — | | | $ | 153,749 | | | $ | 56,550 | | | $ | 61,500 | | | | — | | | $ | 29,724 | | | $ | 609,023 |
Senior Vice President — General Counsel | | 2009 | | $ | 306,635 | | | $ | 50,000 | | | | — | | | $ | 46,000 | | | $ | 61,500 | | | | — | | | $ | 69,461 | | | $ | 533,596 |
| | 2008 | | $ | 300,000 | | | $ | 50,000 | | | | 43,200 | | | $ | 50,250 | | | $ | 84,000 | | | | — | | | $ | 48,646 | | | $ | 576,096 |
Name and Principal Position | Year | | Salary (1) | | | Bonus (2) | | | Stock Awards (3) | | | Option Awards (4) | | | Non-Equity Incentive Plan Compensa-tion (5) | | | Change in Pension Value and Nonqualified Deferred Compensation Earnings | | | All Other Compensa-tion (6) | | | Total (7) | |
Ara K. Hovnanian, (8) | 2012 | | $ | 1,092,606 | | | | — | | | $ | — | | | $ | 1,032,000 | | | $ | 949,500 | | | | — | | | $ | 181,582 | | | $ | 3,255,688 | |
President, Chief | 2011 | | $ | 1,092,606 | | | | — | | | $ | 24,125 | | | $ | 529,875 | | | $ | 949,500 | | | | — | | | $ | 170,049 | | | $ | 2,766,155 | |
Executive Officer and Chairman of the Board | 2010 | | $ | 1,092,606 | | | | — | | | $ | 2,622,255 | | | $ | 1,413,750 | | | $ | 949,500 | | | | — | | | $ | 188,189 | | | $ | 6,266,300 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
J. Larry Sorsby, | 2012 | | $ | 600,000 | | | | — | | | $ | — | | | $ | 206,400 | | | $ | 350,000 | | | | — | | | $ | 50,433 | | | $ | 1,206,833 | |
Executive | 2011 | | $ | 600,000 | | | | — | | | $ | 4,825 | | | $ | 105,975 | | | $ | 350,000 | | | | — | | | $ | 48,259 | | | $ | 1,109,059 | |
Vice President and Chief Financial Officer | 2010 | | $ | 572,308 | | | | — | | | $ | 960,001 | | | $ | 282,750 | | | $ | 350,000 | | | | — | | | $ | 52,229 | | | $ | 2,217,288 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Thomas J. Pellerito, | 2012 | | $ | 538,462 | | | | — | | | $ | — | | | $ | 137,600 | | | $ | 250,000 | | | | — | | | $ | 46,406 | | | $ | 972,468 | |
Chief Operating | 2011 | | $ | 500,000 | | | | — | | | $ | 3,217 | | | $ | 70,650 | | | $ | 250,000 | | | | — | | | $ | 42,913 | | | $ | 866,780 | |
Officer | 2010 | | $ | 468,870 | | | $ | 28,750 | | | $ | 799,999 | | | $ | 188,500 | | | $ | 203,548 | | | | — | | | $ | 38,276 | | | $ | 1,727,943 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Brad G. O’Connor, | 2012 | | $ | 308,029 | | | $ | 50,000 | | | $ | — | | | $ | 35,600 | | | $ | 93,000 | | | | — | | | $ | 28,303 | | | $ | 514,932 | |
Vice President — Chief Accounting Officer and Corporate Controller | 2011 | | $ | 284,523 | | | | — | | | $ | 965 | | | $ | 21,195 | | | $ | 85,680 | | | | — | | | $ | 27,401 | | | $ | 419,764 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
David G. Valiaveedan, | 2012 | | $ | 288,821 | | | $ | 50,000 | | | $ | — | | | $ | 26,700 | | | $ | 72,500 | | | | — | | | $ | 28,269 | | | $ | 466,290 | |
Vice President — | 2011 | | $ | 274,361 | | | $ | — | | | $ | 2,413 | | | $ | 17,663 | | | $ | 68,850 | | | | — | | | $ | 27,357 | | | $ | 390,644 | |
Finance and Treasurer | 2010 | | $ | 270,000 | | | $ | — | | | $ | 221,913 | | | $ | 42,413 | | | $ | 67,500 | | | | — | | | $ | 24,696 | | | $ | 626,522 | |
| (1) | The “Salary” Column.Column. The effective date of the last base salary increase for both Messrs. Buchanan and ReinhartMr. Pellerito was December 1, 2008 which wasJanuary 19, 2012. This increase occurred after the beginning of fiscal 20092012 resulting in a prorated base salary for fiscal 2009.2012. Messrs. O’Connor’s and Valiaveedan’s salary increases were effective as of the beginning of fiscal 2012, however, amounts reflected in the Summary Compensation Table reflect payment of two weeks’ salary at the fiscal 2011 rate, which was paid in fiscal 2012. |
| (2) | The “Bonus” Column. In accordance with SEC rules, the “Bonus” column discloses discretionary cash bonus awards. Discretionary cash retention awards were awarded in December 2007 for the CFO in the amount of $150,000 and for the Chief Accounting Officer and the General Counsel in the amount of $100,000 each, that vested and became payable 50% in July 2008 and 50% in January 2009. Mr. Pellerito was awarded a discretionary cash bonus of $28,750 for fiscal 2010 for service performed prior to his becoming an executive officer.Discretionary bonuses of $50,000 were granted to each of Messrs. O’Connor and Valiaveedan, for their performance during fiscal 2012. These awards recognized their significant contributions involving capital raising/restructuring activities as well as their leadership and assistance in generating positive operating trends in the latter half of fiscal 2012. The cash portion of bonuses earned based on the NEOs meeting either financial performance-based measures or personal objectives portions of their regular bonus programs are reflected in the Summary Compensation Tabl eTable as “Non-Equity Incentive Plan Compensation” and described under footnote (5) below. |
| (3) | The “Stock Awards” Column. This column reflects the aggregate grant date fair value of LTIP awards, deferred share awards and restricted stock unitsRSUs granted in fiscal 2011 (and, for Mr. Valiaveedan, in fiscal 2010 and 2011) and the portion of the LTIP awarded in fiscal year indicated,2010 that may be paid out in shares, which were, in each case, computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are set forth in Footnotes 3 and 15 to the Company’s audited financial statements for the fiscal year indicated in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2010.2012. The grant date fair value of the share portion of the LTIP awards in fiscal 2010 (which for Mr. Valiaveedan equaled $216,000 of the total value reflected for that year) is based upon the probable outcome of the performance conditions.conditions as of the grant date. The maximum value of thethose LTIP shares at grant date fair value is:was: $6,555,638, $2,400,002, $2,000,000 $358,747 and $384,3 74$540,000 for Messrs. Hovnanian, Sorsby, Pellerito Buchanan and Reinhart,Valiaveedan, respectively. The LTIP award levels above are subject to future performance over a three-year period (fiscal 2011-2013) and, if earned, awards are subject to vesting restrictions that extend until Octoberthrough the end of fiscal 2015, or a total of five years from grant. There is no assurance that the LTIP awards will be earned at the levels shown above and actual awards could be zero if the performance goals are not achieved. |
| (4) | The “Option Awards” Column. Similar to the “Stock Awards” column, this column reflects the aggregate grant date fair valuevalues of stock options awarded in the fiscal year indicated, which were computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are set forth in Footnotes 3 and 15 to the Company’s audited financial statements for the fiscal year indicated in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2010. Fifty percent2012. All of the 2009 stock2012 option awards for Messrs. Hovnanian, Sorsby and SorsbyPellerito were granted inpremium-priced options with exercise prices set 33 1/3% above the formCompany’s closing stock price on the date of performance-based options. See the footnotes to the Outstanding Equity Awards at Fiscal 2010 Year-End table for a discussion of the perform ance criteria.grant. |
| (5) | “Non-Equity Incentive Plan Compensation” Column. This column represents the cash portion of the performance-based bonus awards earned by the NEOs in the fiscal year indicated. |
| (6) | “All Other Compensation” Column. This column discloses all other compensation for the fiscal year indicated, including reportable perquisites and other personal benefits. |
For fiscal 2010,2012, total perquisites and other personal benefits, and those that exceeded the greater of $25,000 or 10% of total perquisites and other personal benefits for each NEO, were as follows:
Fiscal 2010 Perquisites (Supplemental Table) | |
Fiscal 2012 Perquisites (Supplemental Table) | | Fiscal 2012 Perquisites (Supplemental Table) |
| | Total Perquisites and Description | | | Fiscal 2010 Perquisites that Exceeded the Greater of $25,000 or 10% of Total Perquisites | | Total Perquisites and Description | | Fiscal 2012 Perquisites that Exceeded the Greater of $25,000 or 10% of Total Perquisites |
Name | | Total Fiscal 2010 Perquisites | | | | | | Personal Use of Company’s Fractional Aircraft Share (b) | | | Personal Use of Company’s Automobiles (c) | Total Fiscal 2012 Perquisites | Types of Perquisites (a) | Personal Use of Company’s Fractional Aircraft Share | | Personal Use of Company’s Automobiles (c) | | Personal Income Tax Preparation (d) |
Ara K. Hovnanian | | $ | 185,865 | | | | (1) (2) (4) (5) (6) (7) | | | $ | 60,746 | | | $ | 80,411 | | $ | 180,230 | | (1) (2) (4) (5) (6) (7) (8) | | (b) | | | $ | 86,658 | | | $ | 30,843 | |
J. Larry Sorsby | | $ | 49,904 | | | | (3) (4) (5) | | | | N/A | | | | N/A | | $ | 49,081 | | (3) (4) (5) | | N/A | | | | N/A | | | | N/A | |
Thomas J. Pellerito | | $ | 35,952 | | | | (3) (4) (5) | | | | N/A | | | | N/A | | $ | 45,054 | | (3) (4) (5) | | N/A | | | | N/A | | | | N/A | |
Paul W. Buchanan | | $ | 16,202 | | | | (2) (4) (5) | | | | N/A | | | | N/A | |
Peter S. Reinhart | | $ | 27,400 | | | | (3) (4) (5) | | | | N/A | | | | N/A | |
Brad G. O’Connor | | | $ | 26,954 | | (3) (4) (5) | | N/A | | | | N/A | | | | N/A | |
David G. Valiaveedan | | | $ | 26,934 | | (3) (4) (5) | | N/A | | | | N/A | | | | N/A | |
In addition to the perquisites and other personal benefits listed above, the NEOs received the following other compensation in fiscal 2010:2012:
The table below is intended to provide additional, supplemental compensation disclosure and not as a replacement for the Summary Compensation Table.