Karl J. Warnke
You are cordially invited to attend the Annual Meeting of Shareholders to be held at the Company’sCompany's corporate headquarters in the Davey Institute building, 1500 North Mantua Street, Kent, Ohio, at 5:00 p.m. EST on Tuesday, May 19, 2015.16, 2017. We hope you will be able to attend.
We will report on our operations at the Annual Meeting of Shareholders, entertain any discussion, vote on the matters identified in this Proxy Statement, and consider other business matters properly brought before the meeting.
The Notice of Annual Meeting of Shareholders and the Proxy Statement describe the matters to be acted upon at the meeting. Regardless of the number of shares you own, your vote on these matters is important. Whether or not you plan to attend the meeting, we urge you to vote, sign and return your proxy card. If you later decide to vote in person at the meeting, you will have an opportunity to revoke your proxy and vote by ballot.
We look forward to seeing you at the meeting.
"Preliminary Copy, Subject to Completion"
PRELIMINARY COPY, DATED MARCH 6, 2017 - SUBJECT TO COMPLETION
THE DAVEY TREE EXPERT COMPANY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of The Davey Tree Expert Company will be held at The Davey Tree Expert Company, Davey Institute building, 1500 North Mantua Street, Kent, Ohio, at 5:00 p.m. on Tuesday, May 19, 2015.16, 2017. The purpose of the meeting is:
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1. | To elect as directordirectors the nomineenominees named in this Proxy Statement and recommended by the Board of Directors to the class whose term expiresterms expire in 2018.2020. |
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2. | To amend the 2003 Amended Articles of Incorporation (the "Articles") with respect to increase the authorized numberCompany's right of Common Shares from 24 million to 48 million.first refusal. |
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3. | To amend the Articles with respect to the Company's exercise of its right of first refusal upon the death of a shareholder. |
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4. | To amend the Articles to grant the Company a right to repurchase common shares. |
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5. | To amend the 1987 Amended and Restated Regulations (the "Regulations") with respect to the time of annual and special meetings of shareholders. |
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6. | To amend the Regulations with respect to the notice of special meetings of the Board of Directors. |
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7. | To amend the Regulations to clarify and separate the roles of certain officers of the Company. |
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8. | To amend the Regulations with respect to the record date of annual meetings of shareholders. |
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9. | To amend the Regulations to permit the issuance of uncertificated shares. |
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10. | To amend the Regulations to allow the Board of Directors to amend the Regulations to the extent permitted by Ohio law. |
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11. | To approve, on an advisory, nonbinding basis, the compensation of the Named executive officers, as described in this Proxy Statement. |
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12. | To approve, on an advisory, nonbinding basis, the frequency of the shareholder vote to approve the compensation of the Named executive officers. |
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13. | To hear reports and to transact any other business that may properly come before the meeting. |
Shareholders of record at the close of business on March 14, 2015,17, 2017 are entitled to notice of and to vote at the meeting and any postponement or adjournment thereof.
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| | For the Board of Directors, | |
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| | /s/Joseph R. Paul | |
| | JOSEPH R. PAUL | |
| | Secretary | |
April 6, 20152017
Important Notice Regarding the Availability of Proxy Materials
for the Annual Meeting of Shareholders to be held on May 19, 201516, 2017
The Proxy Statement, proxy cards, Notice letter, 20142016 Annual Report and
Annual Report on Form 10-K for the fiscal year ended December 31, 20142016
are available at our Internet website at http://www.davey.com.
THE DAVEY DIFFERENCE
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VISION | | MISSION |
Provide solutions that promote balance among people, progress and the environment. | | Deliver environmental excellence in client experience, employee strength, safety and financial sustainability as we advance the green industry. |
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| | VALUES | | |
| Integrity | Improvement | Safety | |
| Leadership | Expertise | Resolve | |
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STRATEGIES | | PRIORITIES |
Smart Growth | | Maintain Focus |
Excellent Service Experience | | Mission Progress |
Differentiate Davey | | Align and Adjust |
Employee Strength | | Diversity |
Financial Sustainability | | | |
PRELIMINARY COPY, DATED MARCH 6, 2017 - SUBJECT TO COMPLETION
PROXYSTATEMENTSUMMARY
This summary highlights information contained in this Proxy Statement. This summary does not contain all of the information that you should consider, and we encourage you to read the Proxy Statement and our Annual Report on the Form 10-K before voting. In this Proxy Statement, the terms "Davey," "Company," "we," and "our" refer to The Davey Tree Expert Company and its consolidated subsidiaries. The charts below is based on the Davey's fiscal year ended December 31, 2016, as well as information for the same periods in 2015 and 2014.
2016 FINANCIAL HIGHLIGHTS
EXECUTIVE COMPENSATION ELEMENTS
For a detailed discussion on our executive compensation program, please see the "Compensation Discussion and Analysis" beginning on page 26 of this Proxy Statement.
ELEMENTS OF 2016 NAMED EXECUTIVE OFFICER ("NEO") COMPENSATON
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Realized Pay - Amounts actually paid to or on behalf of NEOs |
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Title | Description |
Base Salary | NEO base salaries |
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Annual Incentive Compensation Plan | Calculated on 2016 results and paid in 2017 |
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Supplemental Bonus Plan | Value added bonus plan paid in 2016 |
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Perquisites | Paid in 2016 on behalf of the NEOs |
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Realizable Pay - Amount that reflect the value of benefits that may be payable over specific periods of time in the future, as calculated pursuant to the SEC's rules |
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Title | Description |
Stock Options and Stock Appreciation Rights | Awarded in 2016 and exercisable over time in future years |
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Long-Term Incentives | Awarded in 2016 and payable after retirement |
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Retirement Plans | Allocated in 2016 and payable after retirement |
OTHER KEY FEATURES OF NEO COMPENSATION
No individual severance / employment agreements
No tax related gross-ups
Stock redemption time limits / insider trading policy
2016 NAMED EXECUTIVE OFFICER TARGET PAY MIX
The chart below shows composite percentage values for each element of our NEOs 2016 compensation. For more information, please see the Summary Compensation Table on page 38 of this Proxy Statement.
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Realized Compensation | | Realizable (Contingent) Compensation |
Salary | Bonuses / Incentives | Perquisites | | Stock Awards | Option Awards | Retirement Plans |
42.8% | 35.7% | 3.6% | | 6.4% | 11.2% | 0.3% |
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THE DAVEY TREE EXPERT COMPANY TABLE OF CONTENTS |
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Proxy Statement | 1 |
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Questions and Answers Concerning this Proxy Statement and Proxy Cards | 2 |
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Proposal One - Election of DirectorDirectors | 24 |
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Corporate Governance | 8 |
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2016 Director Compensation | 12 |
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Ownership of Common Shares | 14 |
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Proposals to Amend the Company's Articles of Incorporation | 15 |
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Proposal Two - Approval to Amend the Articles with Respect to the Company's Right of Incorporation to Increase the Authorized Number of Common SharesFirst Refusal | 515 |
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Corporate GovernanceProposal Three - Approval to Amend the Articles with Respect to the Company's Exercise of its Right of First Refusal Upon the Death of a Shareholder | 616 |
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Ownership ofProposal Four - Approval to Amend the Articles to Grant the Company a Right to Repurchase Common Shares | 1017 |
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Proposals to Amend the Company's Code of Regulations | 18 |
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Proposal Five - Approval to Amend the Regulations with Respect to the Time of Annual and Special Meetings of Shareholders | 18 |
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Proposal Six - Approval to Amend the Regulations with Respect to the Notice of Special Meetings of the Board of Directors | 19 |
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Proposal Seven - Approval to Amend the Regulations to Clarify and Separate the Roles of Certain Officers | 20 |
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Proposal Eight - Approval to Amend the Regulations with Respect to the Record Date | 21 |
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Proposal Nine - Approval to Amend the Regulations to Permit the Issuance of Uncertificated Shares | 22 |
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Proposal Ten - Approval to Amend the Regulations to Allow the Board of Directors to Amend the Regulations to the Extent Permitted by Ohio Law | 23 |
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Proposal Eleven - Advisory Approval of Our Named Executive Officer Compensation | 24 |
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Proposal Twelve - Advisory Approval of the Frequency of the Vote to Approve the Compensation of Our Named Executive Officers | 25 |
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Compensation Discussion and Analysis | 1126 |
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Report of Thethe Compensation Committee | 1837 |
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Compensation Risk Analysis | 1837 |
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Compensation of Executive Officers | 18 |
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2014 Director Compensation | 27 |
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Company Performance | 2837 |
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Independent Auditors | 3047 |
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Report of the Audit Committee | 3148 |
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General | 3248 |
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Appendix A - Proposal Amendment to Articles of Incorporation | 33A-1 |
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Appendix B | B-1 |
PRELIMINARY COPY, DATED MARCH 6, 2017 - SUBJECT TO COMPLETION
THE DAVEY TREE EXPERT COMPANY
PROXY STATEMENT
The Board of Directors of The Davey Tree Expert Company requests your proxy for use at the Annual Meeting of Shareholders and at any postponements or adjournments of that meeting. The Annual Meeting of Shareholders of The Davey Tree Expertthe Company will be held at the Company’sCompany's corporate headquarters in the Davey Institute building, 1500 North Mantua Street, Kent, Ohio, at 5:00 p.m. on Tuesday, May 19, 2015.16, 2017. This proxy statement is to inform you about the matters to be acted upon at the meeting.
There are twelve items to be voted upon by our shareholders at the annual meeting. If you attend the meeting, you can vote your shares in person or by ballot. If you do not attend the meeting, your shares canwill still be voted at the meeting if you sign and return theyour proxy card. Shares represented by a properly signed proxy card will be voted in accordance with the choices marked on the card. If no choices are marked,you return a properly signed proxy card, but do not indicate how to vote your shares, the sharesproxy committee identified on your proxy card will be votedvote in accordance with the Board of Directors' recommendations, as indicatedset forth below:
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Proposal | | Vote to be Castcast | See page number below for a detailed explanation of the proposal |
Proposal 1 – - Election of nomineenominees for director | | FOR THE NOMINEENOMINEES | 4 |
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Proposal 2 – To amend - Amend the 2003 Amended Articles of Incorporation (the "Articles") with respect to increase the authorized numberCompany's right of Common Shares from 24 million to 48 million | first refusal | FOR THE AMENDMENT | 15 |
Proposal 3 - Amend the Articles with respect to the Company's exercise of its right of first refusal upon the death of a shareholder | FOR THE AMENDMENT | 16 |
Proposal 4 - Amend the Articles to grant the Company a right to repurchase common shares | FOR THE AMENDMENT | 17 |
Proposal 5 - Amend the 1987 Amended and Restated Regulations (the "Regulations") with respect to the time of annual and special meetings of shareholders | FOR THE AMENDMENT | 18 |
Proposal 6 - Amend the Regulations with respect to the notice of special meetings of the Board of Directors | FOR THE AMENDMENT | 19 |
Proposal 7 - Amend the Regulations to clarify and separate the roles of certain officers of the Company | FOR THE AMENDMENT | 20 |
Proposal 8 - Amend the Regulations with respect to the record date of annual meetings of shareholders | FOR THE AMENDMENT | 21 |
Proposal 9 - Amend the Regulations to permit the issuance of uncertificated shares | FOR THE AMENDMENT | 22 |
Proposal 10 - Amend the Regulations to allow the Board of Directors to amend the Regulations to the extent permitted by Ohio law | FOR THE AMENDMENT | 23 |
Proposal 11 - Approve, on an advisory, nonbinding basis, the compensation of the Named executive officers, as described in this Proxy Statement | FOR THE COMPENSATION | 24 |
Proposal 12 - Approve, on an advisory, nonbinding basis, the frequency of the shareholder vote to approve the compensation of the Named executive officers | FOR AN ADVISORY VOTE EVERY THREE YEARS | 25 |
You may revoke your previously submitted proxy before it is voted by submitting another properly signed proxy card with a later date or by giving notice to us in writing or orally at the annual meeting. Attending the annual meeting will not by itself revoke your proxy.
For 2015,2017, we will use the "notice and access" option for the delivery of proxy materials. The Notice of Internet Availability of Proxy Materials will be mailed to our shareholders on or about April 6, 2015.2017. Our Proxy Statement, proxy cards, 20142016 Annual Report and Annual Report on Form 10-K for the fiscal year ended December 31, 20142016 will be made available to our shareholders on the same date as the Notice is mailed and may be accessed on our Internet website at www.davey.com under the tab "Corporate Information" at the bottom of the page and then under "SEC Filings." On or about that date, we will begin mailing paper copies of our proxy materials to shareholders who request them. The information on our Internet website is not incorporated by reference into, and is not a part of, this Proxy Statement, and our Internet address is included in this Proxy Statement as an inactive textual reference only.
Our 20142016 Annual Report, a copy of the Notice letter, and individual proxy cards will be mailed to our shareholders on or about April 16, 2015.17, 2017. Our corporate offices are located at 1500 North Mantua Street, Kent, Ohio 44240. Our telephone number is 330.673.9511.
Questions and Answers Concerning this Proxy Statement and Proxy Cards
It is your legal designation of another person to vote your shares of stock in accordance with the choices marked on your proxy card. That other person is called a proxy. We have designated the persons identified on your proxy card as proxies for the 20152017 Annual Meeting of Shareholders.
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2. | What is a proxy statement? |
It is a document that the Securities and Exchange Commission ("SEC") regulations require us to make available to you when we ask you to sign a proxy card. The proxy statement contains information about the matters to be voted upon at the Annual Meeting, information about our directors and executive officers and other important information, including how to change your vote after you vote your shares.
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3. | What is the difference between holding shares as a shareholder of record and as a beneficial owner? |
If your shares are registered in your name, i.e., you have stock certificates with your name on them, you are a shareholder of record. If your shares are held in the 401KSOP and ESOP Plan in your name, you are a beneficial owner.
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4. | What shares are included on the proxy card? |
The shares registered in your name as of the record date are included on the white proxy card. The shares held beneficially in your name in the 401KSOP and ESOP Plan as of the record date are included on the green proxy card.
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5. | What constitutes a quorum for the Annual Meeting? |
A majority of the voting power of The Davey Tree Expertthe Company present in person or by proxy constitutes a quorum for the Annual Meeting.
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6. | Who can vote at the annual meeting? |
Each share of Davey's common stock, whether held as a shareholder of record or as a beneficial owner, has one vote on each matter.
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7. | What is the vote required for each proposal? |
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Proposal to Elect Directors |
Proposal | | Vote Required |
Proposal 1 – - Election of nomineenominees for director | | Plurality vote: the nomineenominees receiving the greatest number of "for" votes cast at the Annual Meeting by proxy or by ballot will be elected. A properly executed proxy card marked "withhold" with respect to the election of theany nominee will not be voted.voted with respect to that nominee. |
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Proposals to Amend the Articles |
Proposal | Vote Required |
Proposal 2 – To amend - Amend the Articles with respect to the Company's right of Incorporation to increase the authorized number of Common Shares from 24 million to 48 millionfirst refusal | | AffirmativeThe affirmative vote of the holders of a majoritytwo-thirds of the common shares outstanding and entitled to vote at the Annual Meeting.Meeting is required to approve each of Proposals 2, 3 and 4. |
Proposal 3 - Amend the Articles with respect to the Company's exercise of its right of first refusal upon the death of a shareholder |
Proposal 4 - Amend the Articles to grant the Company a right to repurchase common shares |
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Proposals to Amend the Regulations |
Proposal | Vote Required |
Proposal 5 - Amend the Regulations with respect to the time of annual and special meetings of shareholders | The affirmative vote of the holders of common shares entitled to exercise a majority of the voting power of the Company is required to approve each of Proposals 5, 6, 7, 8, 9 and 10. |
Proposal 6 - Amend the Regulations with respect to the notice of special meetings of the Board of Directors |
Proposal 7 - Amend the Regulations to clarify and separate the roles of certain officers of the Company |
Proposal 8 - Amend the Regulations with respect to the record date of annual meetings of shareholders |
Proposal 9 - Amend the Regulations to permit the issuance of uncertificated shares |
Proposal 10 - Amend the Regulations to allow the Board of Directors to amend the Regulations to the extent permitted by Ohio law |
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Say-on-Pay and Say-When-on-Pay Proposals |
Proposal | Vote Required |
Proposal 11 - Approve, on an advisory, nonbinding basis, the compensation of the Named executive officers, as described in this Proxy Statement | The number of votes cast "for" advisory approval of the compensation of the Named executive officers at the Annual Meeting by proxy or by ballot must exceed the number of votes cast "against" advisory approval. |
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Proposal 12 - Approve, on an advisory, nonbinding basis, the frequency of the shareholder vote to approve the compensation of the Named executive officers | The option of every year, every two years or every three years that receives the highest number of votes cast at the Annual Meeting by proxy or by ballot will be considered the shareholders' recommendation of the frequency for the advisory vote on the compensation of our Named executive officers. |
PROPOSAL ONE
ELECTION OF DIRECTORDIRECTORS
Our Code of Regulations provides for the annual election by the shareholders of those directors in the class whose terms in office expire at the Annual Meeting. Our Code of Regulations also provides that the Board of Directors will be divided into three classes consisting of not less than three directors (including vacancies) each whose terms in office will expire in consecutive years. Further, the number of directors may be fixed or changed by the shareholders at any meeting of shareholders called to elect directors at which a quorum is present.
Our Board of Directors is now composed of seveneight directors and two vacancies,one vacancy, with one director and two vacancies in the class whose term expires in 2015, three directors in the class whose terms expire in 20162017, two directors and one vacancy in the class whose terms expire in 2018 and three directors in the class whose terms expire in 2017.2019. Each of our directors serves for a term of three years and until a successor is elected. If the shareholders vote to elect the nomineenominees listed, two vacanciesone vacancy will exist after the Annual Meeting. The Company believes the current directors and the director nomineenominees represent a diverse group of leaders in their respective field that have the skills and dedication necessary to guide the Company's overall strategic objectives and policies andpolicies. Although we will not recommend a candidate simply because a vacancy exists. That being said,exists, the Corporate Governance Committee continues to search for a qualified candidatescandidate to fill the existing vacancies,vacancy, but has not identified nomineesa nominee at this time.
The nomineenominees for election as directordirectors for the term expiring in 2018,2020, as well as present directors whose terms will continue after the meeting, appear below.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE NOMINEENOMINEES LISTED.
Present DirectorDirectors Whose Term ExpiresTerms Expire in 20152017
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| Patrick M. Covey, age 53, has been a director of the Company since 2014 and with the Company since 1991. He has been Chief Operating Officer since February 2012 and was elected President in March 2016. Mr. Covey was previously appointed to Executive Vice President, Operations in 2007. Prior to that, Mr. Covey served as Vice President and General Manager of the Davey Resource Group and as Vice President, Southern Operations, Utility Services. Mr. Covey has also held various managerial positions with the Company including Manager of Systems and Process Management and Administrative Manager, Utility Services. Mr. Covey holds a bachelor of business administration degree in accounting and finance from the University of Wisconsin - Madison and is a certified public accountant. He is a board member of Environmental Design, Inc., a tree and landscape company headquartered in Texas and is a member of the Board of Trustees for the Arbor Day Foundation. |
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| J. Dawson Cunningham, age 70, has been a director of the Company since 2005. He was Executive Vice President and Chief Financial Officer of Roadway Corporation ("Roadway"), an over-the-road truck transport operation, from 1998 until his retirement in 2003. Prior to that, he held various positions as an officer of Roadway beginning in 1986. Mr. Cunningham previously served as Co-Chairman of the Board of Trustees, New York State Teamsters Council Health and Hospital Fund and Conference Pension and Retirement Fund, having served as a trustee since 1992, and was a trustee of the New England Teamster and Trucking Industry Pension Fund from 1996 until January 2007. He served as a member of the Board of Trustees of Akron General Health System, serving as Chairman from 1998 to 2003. He is also a past member of the board of directors of the American Red Cross and Junior Achievement. |
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| Sandra W. Harbrecht, age 67, has been a director of the Company since 2008. She has been President and Chief Executive Officer of Paul Werth Associates, a public relations firm, since 2008 and was President since 1985. Prior to that, she was a Credit Analyst for Bank One, Columbus NA and also an educator for ten years in the Worthington City School system. She is past Chair of the Board of Trustees for Kent State University and serves on the Dean's Advisory Councils for the Fisher College of Business and the College of Engineering at The Ohio State University. She is also the past Chair of Experience Columbus and a former board member of the Columbus Chamber of Commerce, an accredited member of the Public Relations Society of America, a past chair of the Society's Counselors Academy and a founding member of the Council of Public Relations Firms. Ms. Harbrecht also serves as a director on the board of the Motorists Mutual Insurance Company, a regional insurance firm.
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Present Directors Whose Terms Expire in 2018
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| Donald C. Brown, age 61, became a director of the Company in March 2016. He was been Executive Vice President, Finance and Administration, and CFO of FedEx Freight, a North American freight shipping company, since 2008 and until November 2016 when he became Executive Vice President, Administration. Before joining FedEx Freight as Senior Vice President and CFO in 2001, he held financial management positions at FedEx Corporation, FedEx Corporate Services and FedEx Logistics. His prior affiliations include Caliber System, Inc., Roadway Services, Inc. and Ernst & Young. He is a member of the Board of Advisors for Miller Transfer & Rigging, and is a past member of the Board of Directors of the Memphis Development Foundation. Mr. Brown is a graduate of Kent State University where he serves on the College of Business Administration National Advisory Board and National Athletic Development Council, and was recognized in 2014 as a Distinguished Athletic Alumnus.
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| Karl J. Warnke, age 63,65, has been an officer of the Company since 1988 and a director of the Company since 2000. He became Chairman of the Board on May 20, 2009. He was President and Chief Operating Officer from 1999 through December 31, 2006, and has been President and Chief Executive Officer since January 1, 2007.2007, and continues to serve as Chairman and Chief Executive Officer since March 2016. Prior to that, Mr. Warnke was Vice President and General Manager of Utility Services from 1988 and was named Executive Vice President of the Company from 1993 to 1999. Mr. Warnke is a member of the Conference Board’sBoard's Executive Council for Mid-Cap Companies, and is a member of the executive committee of the Greater Akron Chamber Board of Directors, and a vice chair of the Board of Trustees for the Ohio Chapter of The Nature Conservancy. He is a director and audit committee member of the Wikoff Color Corporation, which provides specialty inks throughout the U.S. and select foreign countries. |
Present Directors Whose Terms Expire in 20162019
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| William J. Ginn, age 62,64, has been a director of the Company since 2007. He was named Executive Vice President of The Nature Conservancy, an international nonprofit conservation organization, in 2014, and prior to that was the Chief Conservation Officer. He has also served that organization as its Director of the Global Forest Partnership, Manager of Division Conservation Programs-NEC, and as Senior Advisor to the Asia Pacific Region. Before joining The Nature Conservancy, Mr. Ginn developed one of the first major U.S. companies in the organic recycling area, which was later sold to a Fortune 500 solid-waste management company. He has also taught courses in economics and environment as a visiting faculty member at the College of the Atlantic. |
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| Douglas K. Hall, age 63,65, has been a director of the Company since 1998. He retired in February 2008 after serving since 1999 as President and Chief Executive Officer of MDA Federal, Inc. ("MDA Federal") (formerly Earth Satellite Corporation), a subsidiary of MDA Corporation, a provider of remote sensing systems and data utilizing geographic information systems ("GIS"). Prior to joining MDA Federal, he was Vice President and Chief Operations Officer of The Nature Conservancy, an international nonprofit conservation organization, from 1996 to 1999. From 1993 to 1996, he served as Assistant Secretary for Oceans and Atmosphere and Deputy Administrator of the National Oceanic and Atmospheric Administration ("NOAA") in the U.S. Department of Commerce. He currently servesformerly served as a senior fellow for the World Wildlife Fund in Washington, D.C. |
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| John E. Warfel, age 66,69, has been a director of the Company since 2008. Mr. Warfel is owner of Warfel Group, Inc., dba Action Coach, a business coaching firm helping business owners with their strategies and results, and is also currently President of Warfel Enterprises, LLC, a consulting company. He had been President of Westfield Financial Corporation, a diverse group of financial services and related companies operating in the United States and Canada and a member of Westfield Group, from 2002 until his retirement in 2008. Prior to joining Westfield Financial Corporation, he was Vice Chairman and President of Oswald Companies, a large regional insurance firm, from 1975 to 2002. He is past President of the Insurance Board of Greater Cleveland, a member of national and local chapters of Property and Casualty Underwriters, past Vice President of the Ohio ESOP Association, past member of the Board of Trustees of Assurex Global, past Chairman of Employees Resource Council, and past board member and Secretary/Treasurer of the National American Heart Association. |
Present Directors Whose Terms Expire in 2017
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| Patrick M. Covey, age 51, has been with the Company since 1991. He has been Chief Operating Officer since February 2012. Mr. Covey was previously appointed to Executive Vice President, Operations in 2007. Prior to that, Mr. Covey served as Vice President and General Manager of the Davey Resource Group and as Vice President, Southern Operations, Utility Services. Mr. Covey has also held various managerial positions with the Company including Manager of Systems and Process Management and Administrative Manager, Utility Services. Mr. Covey holds a bachelor of business administration degree in accounting and finance from the University of Wisconsin - Madison and is a certified public accountant. He is a board member of Environmental Design, Inc., a tree and landscape company headquartered in Texas. He also serves on the Portage County Development Board, is a member of the International Society of Arboriculture ("ISA"), Tree Care Industry Association ("TCIA"), and is a member of the American Institute of Certified Public Accountants ("AICPA").
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| J. Dawson Cunningham, age 68, has been a director of the Company since 2005. He was Executive Vice President and Chief Financial Officer of Roadway Corporation ("Roadway"), an over-the-road truck transport operation, from 1998 until his retirement in 2003. Prior to that, he held various positions as an officer of Roadway beginning in 1986. Mr. Cunningham previously served as Co-Chairman of the Board of Trustees, New York State Teamsters Council Health and Hospital Fund and Conference Pension and Retirement Fund, having served as a trustee since 1992, and was a trustee of the New England Teamster and Trucking Industry Pension Fund from 1996 until January 2007. He served as a member of the Board of Trustees of Akron General Health System, serving as Chairman from 1998 to 2003. He is also a past member of the board of directors of the American Red Cross and Junior Achievement.
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| Sandra W. Harbrecht, age 65, has been a director of the Company since 2008. She has been President and Chief Executive Officer of Paul Werth Associates, a public relations firm, since 2008 and was President since 1985. Prior to that, she was a Credit Analyst for Bank One, Columbus NA and also an educator for ten years in the Worthington City School system. She is past Chair of the Board of Trustees for Kent State University and serves on the Dean’s Advisory Councils for the Fisher College of Business and the College of Engineering at The Ohio State University. She is also the past Chair of Experience Columbus and a former board member of the Columbus Chamber of Commerce, an accredited member of the Public Relations Society of America, a past chair of the Society’s Counselors Academy and a founding member of the Council of Public Relations Firms. Ms. Harbrecht also serves as a director on the board of the Motorists Mutual Insurance Company, a regional insurance firm.
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Experience, Qualifications and Skills of the Members and Nominees of the Board of Directors
Directors are responsible for overseeing our business strategy and objectives consistentlyconsistent with their fiduciary duties to shareholders. The Board believes that each director and nominee for director has unique and valuable individual skills and experience that, when taken as a whole, promote the overall management of the Company for the benefit of our shareholders. Moreover, the individual qualifications, accomplishments and characteristics of each of our directors and nomineenominees for directordirectors provide us with the variety and depth of knowledge, diversity, judgment and vision necessary to provide effective oversight in guiding our affairs and direction.
We believe that each director and nominee for director has qualifiedthe requisite experience in a variety of fields including services delivery, industry, transportation, governmental, regulatory, nonprofit, education, and environmental protection, each of which we believe provides a diverse range of perspectives, and valuable knowledge and insight concerning various elements of our business.
All directors play an active role in overseeing our business, both at the Board and Committee level. The directors and nomineenominees for directordirectors have demonstrated leadership skills in managing business risk and in various aspects of business, government, education and philanthropy, which contributes significantly to fulfilling their responsibility to us and to our shareholders.
In addition to the biographical information presented above for each director, the following outlines additional skills, attributes, experience and qualifications of our directors that we believe makes each person uniquely qualified to serve on our Board of Directors at this time.Directors.
Individual Qualifications
Mr. Warnke
Forty-one year career in the horticulture, arboriculture, landscape and environmental science industry
Board member for multiple nonprofit and professional organizations for over twenty years
Extensive experience in business management, strategic plan development, sales, production, and management of multiple services and subsidiary companies in the United States and Canada
Twenty-six years of executive-level leadership, including as a director for a privately-held employee-owned ink manufacturing company
Mr. Ginn
Extensive experience in environmental conservation, most notably in sustainability, recycling and forest conservation
Undergraduate and graduate work in human ecology and landscape architecture
Well-versed in the various aspects of starting, managing, and selling a successful recycling business
Executive-level management experience
Mr. Hall
Extensive experience in business leadership, financial management and financial audit
Well-versed and experienced in environmental policy
Significant involvement in human resource and corporate management
Experienced in mergers and acquisitions and strategic planning
Mr. Warfel
Over forty-years executive experience in sales, marketing, acquisitions, integrations, and growing companies
Extensive and significant experience in property and casualty insurance, as well as risk management
Business owner, including current ownership of consulting entities, with expertise in succession planning and leadership transitions
Financial acumen and experienced with Employee Stock Ownership Plans ("ESOP")
Mr. Covey
Twenty-threeTwenty-five years of experience in the Company with involvement in all U.S. operations and various administrative groups
Board member experience with nonprofit and professional organizations
Financial auditing experience with a large national accounting firm and the Company
Extensive involvement in all aspects of mergers, acquisitions and strategic partnerships
Mr. Cunningham
Executive-level experience with a service-based over-the-road transportation public company
Chief financial officer with responsibility for internal and external financial reporting, including filings with the SEC
Executive-level responsibility for corporate-wide human resources, including compensation, benefits, and policy
Fifteen years of experience as a CPA with a large international accounting firm and experienced in mergers and acquisitions
Ms. Harbrecht
Extensive experience in business marketing, advertising, promotion, public relations and communications
Experienced as an educator guiding and facilitating student learning
Significant involvement in college advisory boards and councils
Over twenty-five years of executive-level experience
PROPOSAL TWOMr. Brown
APPROVAL TO AMEND ARTICLES OF INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF COMMON SHARES FROM 24 MILLION TO 48 MILLIONOver twenty-five years of executive experience with transportation companies involved in freight and parcel delivery services
The Board of Directors has approved a proposal to amend the Company's 2003 Amended Articles of Incorporation ("Articles") to increase the authorized number of the Company's Common Shares from 24 million to 48 million. The proposal does not affect the number of Preferred Shares, which remains at 4,000,000. Subject to shareholder approval, the proposed amendment, which is included as Appendix A to this Proxy Statement, would replace the first paragraph of Article Fourth of the 2003 Amended Articles of IncorporationExtensive experience with internal and external financial reporting, including filings with the following language:SEC and interactions with audit committees
The authorized numberThirteen years of shares of the Company is 52,000,000, consisting of 4,000,000 Preferred Shares, without par value (the "Preferred Shares"),experience as a CPA with a large international accounting firm concentrating on financial audit services and 48,000,000 Common Shares with par value of $1 each (the "Common Shares").acquisitions
The Articles currently authorize the issuance of up to 24 million Common Shares. As of the fiscalExecutive level responsibility for risk management and human resources
Mr. Warnke
Forty-three year ended December 31, 2014 there were 21,456,880 shares issued of which 13,164,933 shares were outstanding, and the remaining shares were treasury shares. Treasury shares are not anticipated to be included in any stock split. Currently, as reflectedcareer in the Equity Compensation Plan Information table on page 28, 3,746,211 shares were reservedhorticulture, arboriculture, landscape and environmental science industry
Board member for issuance under equity compensation plans.nonprofit, for profit and professional organizations for over twenty years
The BoardExtensive experience in business management, strategic plan development, sales, production, and management of Directors believes it ismultiple services and subsidiary companies in the best interestUnited States and Canada
Twenty-eight years as corporate officer with executive-level leadership in the Davey Company and subsidiaries. Also serves as a director for a multinational employee-owned ink manufacturing company
Mr. Ginn
Extensive experience in environmental conservation, most notably in sustainability, recycling and forest conservation
Undergraduate and graduate work in human ecology and landscape architecture
Well-versed in the various aspects of the Company to increase the authorized number of common sharesstarting, managing, and selling a successful recycling business
Executive-level management experience
Mr. Hall
Extensive experience in order to give the Company greater flexibilitybusiness leadership, financial management and financial audit
Well-versed and experienced in consideringenvironmental policy
Significant involvement in human resource and planning for future corporate needs,management
Experienced in mergers and acquisitions and strategic planning
Mr. Warfel
Over forty-years executive experience in sales, marketing, and growing companies, including but not limited to, stock dividends, grants under equity compensation plans, stock splits, financings, potential strategic transactions,significant experience with acquisitions and their "integration"
Extensive and significant experience in property and casualty insurance, as well as other general corporate transactions. In particular, the Board would like to have a sufficient numberrisk management
Business owner, including current ownership of common shares available to effect a two-for-one stock splitconsulting entities, with expertise in the form of a stock dividend of one common share for each common share outstanding on the record date for such stock split, which has not yet been determined. The Board believes that a stock split would benefit the Companysuccession planning and its shareholders because it would be expected to place the price of the Company's common shares at a point that is more attractive to employee investors, which may resultleadership transitions in improved liquiditysmall and enhanced trading volume for our common shares. However, the Board has not made a final determinationlarge companies
Financial acumen and experienced with respect to a stock split nor has it set a definite record date for such a split. Without approval by the shareholders of the Company to increase the authorized number of the Company's common shares, the Board would be unable to authorize a two-for-
one stock split and have a sufficient reserve of common shares remaining to consider and plan for future potential business needs. In addition, the Board of Directors believes that additional authorized common shares will enable the Company to take timely advantage of market conditions and favorable financing and other opportunities that become available to the Company without the delay and expense associated with convening a special meeting of the Company's shareholders.Employee Stock Ownership Plans ("ESOP")
Other than as described above, the Company has no current plan, commitment, arrangement, understanding or agreement regarding the issuance of the additional shares of common shares that will result from the Company's adoption of the proposed amendment. Except as otherwise required by law or by regulation the newly authorized shares of common shares will be available for issuance at the discretion of the Board of Directors without further action by the shareholders for various future corporate needs, including those outlined above. The adoption of the proposed amendment would not have any immediate dilutive effect on the proportionate voting power or other rights of the Company's existing shareholders; however, any future issuance of additional authorized shares of the Company's common shares may, among other things, dilute the earnings per share of the common shares and the equity and voting rights of those holding common shares at the time the additional shares are issued.
In addition to the corporate purposes mentioned above, an increase in the authorized number of the Company's common shares may make it more difficult to, or discourage an attempt to, obtain control of the Company by means of a takeover bid that the Board of Directors determines is not in the best interest of the Company and its shareholders. However, the Board of Directors does not intend or view the proposed increase in the authorized number of the Company's common shares as an antitakeover measure and is not aware of any attempt or plan to obtain control of the Company.
The additional shares of authorized common stock will have the same rights, privileges and restrictions as the shares of Common Stock currently authorized and outstanding. The proposed amendment will not affect the rights of current holders of the Company's Common Stock, none of whom have preemptive or similar rights to acquire the newly authorized shares.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE AMENDMENT TO THE ARTICLES OF INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF THE COMPANY'S COMMON SHARES FROM 24 MILLION TO 48 MILLION.
CORPORATE GOVERNANCE
Director Selection Process
We believe the Board should represent a broad and diversifieddiverse spectrum of experienced and qualified individuals who are able to contribute value to our success.business. The Corporate Governance Committee is responsible for the review of and recommendation to the Board of Directors nominees for election as directors. The Committee works with the full Board to develop criteria for open Board positions, taking into account the factors that it deems appropriate. These factors may include identifying a nominee whose array and diversity of talents, experiences, qualifications, personal attributes, and skills would complement those already represented on the Board; the level of independence from us; our current needs, business priorities, objectives and goals; and the need for a certain specialized expertise. In applying these criteria, the Committee considers a candidate’scandidate's general understanding of elements relevant to the success of a service company in the current business environment, the understanding of our business and our risk factors, senior operating experience with a service company, public company, or other organizations, a broad understanding of and direct experience in corporate business and service delivery, as well as the candidate’scandidate's educational and professional background. The Board believes that diversity of professional experience, professional training and personal accomplishments are important factors in determining the composition of the Board. The Committee considers candidates suggested by other Board members, management and shareholders. The Committee may also retain a qualified independent third-party search firm to identify and review candidates.
The minimum qualifications a director nominee should possess include depth of knowledge in the nominee's field, diversity of experience and background, demonstrated judgment and vision to oversee and guide our business.
Once a prospective nominee has been identified, the Committee will make an initial determination as to whether to continue with a full review and evaluation. In making this determination, the Committee will take into account all information provided to the Committee, as well as the Committee’sCommittee's own expertise and experience. The Committee will then consider the potential candidate to ensure he or she has exhibited the criteria that the Committee has established for the position.position, as well as the time and desire to effectively carry out their duties and responsibilities.
If the prospective nominee passes the preliminary review, members of the Committee, as well as other Board members as deemed appropriate, will interview the nominee. Upon completion of this process, the Committee will confer and make a recommendation to the Board. The Board, after reviewing the Committee’sCommittee's report, will make the final determination whether to nominate the candidate. Selection for persons identified to be appointed to a Board position will be conducted in the manner described above. Any shareholder who desires to recommend a prospective nominee for the Board should notify our Corporate Secretary in the manner described below in "Shareholder Nominations for Director."
Shareholder Nominations for Director
Shareholders may nominate candidates for election as directors if they followby following the procedures and complycomplying with the deadlines specified in our Code of Regulations,Regulations. Under those procedures, any shareholder who proposes to nominate one or more candidates for election as maydirector must, not less than 30 days prior to the meeting at which the directors are elected, notify the Corporate Secretary of his intention to make the nomination and provide the Company with all of the information about each of the candidates as would be amended from time-to-time.required under the rules of the SEC to be included in a proxy statement soliciting proxies for the election of the candidate, including (i) name, age, and business and residence address, (ii) principal occupations or employment during the last five years, (iii) the number of shares of the company beneficially owned by the candidate, (iv) transactions between the candidate and the Company and (v) all other information required under the rules of the SEC. A copy of ourthe Code of Regulations is available to any shareholder who makes a written request to the Corporate Secretary, and shareholders may submit nominations in writing by sending the submission to the Corporate Secretary, at The Davey Tree Expert Company, 1500 North Mantua Street, Kent, Ohio 44240.
A shareholder may nominate one or more candidates for election as director by, not less than 30 days prior to the meeting at which the directors are to be elected, notifying our Corporate Secretary of his or her intention to make the nomination. The shareholder must provide us with all of the information about each of the candidates so nominated as would be required under the rules of the SEC to be included in a proxy statement.
Any submission should include details regarding the qualifications of the recommended candidate and other pertinent information. Director nominees should have high professional and personal ethics and values, requisite experience and background, and must be able to represent the interests of the shareholders, as well as meet the criteria set by the Corporate Governance Committee. Further, a nominee must have the time and desire to meet their duties and responsibilities effectively and have the potential to contribute to the effectiveness of the Board of Directors.
Shareholders may submit nominations in writing by sending such submission to Corporate Secretary, The Davey Tree Expert Company, 1500 North Mantua Street, Kent, Ohio 44240.
Independence
The Board reviews, at least annually, director independence. As part of that review, the Board considers transactions and relationships between each director and any member of his or her family and the Company and its subsidiaries and affiliates. AllAny such relationships are reported under the heading "Transactions with Related-Persons, Promoters and Certain Control Persons" in this Proxy Statement. The purpose of this review is to determine whether any relationships or transactions existed or exist that could be considered inconsistent with a determination that the director is independent. Although our common shares are not listed on the New York Stock Exchange ("NYSE") or on any other exchange, with respect to determining if a director or a director nominee is independent, we useutilize the same definition of independenceSEC approved standards as useddeveloped by the NYSE, a national securities exchange.NYSE.
As a result of their most recent review, the Board determined that the following Directors have been identified as being independent: Mr. Brown, Mr. Cunningham, Mr. Ginn, Mr. Hall, Ms. Harbrecht, and Mr. Warfel. No director has been identified as a lead independent director. Mr. Warnke, our Chairman President and Chief Executive Officer, and Mr. Covey, our President and Chief Operating Officer, are both employees of the Company and therefore, are not deemed to beconsidered independent directors.
The Company also determined by due inquiry that no director has a relationship with our principal independent auditor, Ernst & Young LLP that could be considered inconsistent with a determination that the director is independent.LLP.
Committees of the Board of Directors; Attendance
The Members of each Board of Directors Committee are listed in the following table:
|
| | | |
Director | Compensation Committee | Audit Committee | Corporate Governance Committee |
Donald C. Brown | | X | X |
Patrick M. Covey | | | X |
J. Dawson Cunningham | (Chair) | X | |
William J. Ginn | X | X | |
Douglas K. Hall | X | (Chair) | |
Sandra W. Harbrecht | | X | X |
John E. Warfel | X | | (Chair) |
Karl J. Warnke | | | X |
Compensation Committee
The present members of the Compensation Committee are Messrs. Cunningham (Chair), Ginn, Hall, and Warfel. The Compensation Committee, which is composed entirely of independent directors as that term is defined bywho meet the NYSE,NYSE's independence standards, which we follow. The Compensation Committee recommends to the Board of Directors the salaries and other compensation of our executive officers and supervises the administration of our benefit programs. As more fully set out in the "Compensation Discussion and Analysis" in this Proxy Statement, the Compensation Committee does not delegate its authority to set compensation; however, the Board does review recommendations from our Chief Executive Officer regarding the compensation of other officers. Furthermore, the Committee periodically retains outside consultants to review and discuss compensation and benefit plans. The Compensation Committee met two times in 2014.2016.
When utilized, the outside consultants are provided with specific instructions relating to the research to be performed. Once engaged to conduct a salary and bonus-level review, the consultants are directed to compare our plans with those of companies of similar size and in similar industries. Similarly, the consultants are directed to compare and contrast benefit plans that are applicable to private and public companies of similar size and with similar governance structures. Findings by the consultants are reviewed by the Committee and with the full Board, which then makes the final decisions regarding compensation. The committeeCommittee directed the executive officers to engage Pay Governance LLC ("Pay Governance") in 2014 to review the material features of our compensation structure. The Compensation Committee considered the results of Pay Governance's review as outlined in the "Compensation Discussion and Analysis," beginning on page 11, and made no material changes to the compensation structure in 2014.2013 and to update the study in 2015. The next compensation structure review is scheduled to occur in 2017.
Pay Governance has not provided other professional services to date, including advice related to our insurance and employee benefit programs. In 2014, we paid Pay Governance $21,770 for compensation analysis and review services. In order to perform the services
that are required of them, Pay Governance does have access to certain confidential information about us; however, they do not participate in the final strategic decision-making process. Further, Pay Governance is compensated on a fee-based structure and no portion of any payment made to them is dependent upon achieving a certain result or is otherwise commission-based.
No director has been identified as having a relationship that requires disclosure as a compensation committee interlock.
Audit Committee
The present members of the Audit Committee are Messrs. Cunningham, Ginn, Hall (Chair),is composed entirely of independent directors who meet the independence requirements under the NYSE's listing standards and Ms. Harbrecht.SEC rules. The Board has determined that Mr. DawsonMessrs. Brown and Cunningham qualifiesqualify as an audit committee financial expertexperts pursuant to the SEC's rules. The Audit Committee met two times in 2014.2016. In addition, the Chair and members met with management and the independent auditors by teleconference four times in 2014.2016.
The Audit Committee assists the Company's Board of Directors in fulfilling its oversight responsibilities relating to: the integrity of the Company's financial statements and financial reporting process; the Company's systems of internal accounting and financial controls; the performance of the Company's internal and independent auditors; the independent auditors' qualifications and independence; and the Company's compliance with ethics policies and legal and regulatory requirements. Specifically, the Audit Committee oversees the appointment, engagement, compensation, termination and oversight of the Company's independent auditors, including conducting a review of their independence, reviewing and approving the planned scope of the Company's annual audit, overseeing the independent auditors' audit work, reviewing and preapproving any audit and nonaudit services that may be performed by the Company's independent auditors, reviewing with management and the Company's independent auditors the adequacy of the Company's internal control over financial reporting and disclosure controls, and reviewing the Company's critical accounting policies and the application of accounting principles.
In addition, the Audit Committee establishes procedures, as required under applicable law, for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting control over financial reporting or auditing matters and the confidential anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Audit Committee's role also includes meeting to review the Company's annual audited financial statements and quarterly financial statements with management and the Company's independent auditors. The Audit Committee annually reviews the independence and performance of the independent auditor in connection with any determination of whether to retain the independent auditauditor or engage another firm as our independent auditor. In the course of these reviews, the Committee considers, among other things, the historical and recent performance, and an analysis of known legal risks and significant proceedings.
Corporate Governance Committee
The present members of the Corporate Governance Committee are Messrs. Covey, Warfel (Chair), WarnkeBrown and Ms. Harbrecht. Mr. Warfel and Ms. Harbrecht are independent directors who meet the NYSENYSE's independence standards. The Corporate Governance Committee screens and recommends candidates for election as directors and recommends committee members and committee chairpersons for appointment by the Board of Directors. The Committee will consider nominees for the Board of Directors recommended by our shareholders. The Committee also conducts annual performance evaluations of the committees of the Board. The Corporate Governance Committee met two times in 2014.2016.
General
Nonindependent directors may not serve on the Compensation or Audit Committee. Independent directors generally serve on at least two committees.
The Board met five times in 2014.2016. All incumbent directors attended at least 75% of the meetings of the Board of Directors and of the committees on which they served.served during the period that they served except Mr. Brown, who was unable to attend one audit committee meeting. We encourage our directors to attend the Annual Meeting of Shareholders. In 2014,2016, all directors attended the Annual Meeting of Shareholders.
The charters of the Compensation, Audit and Corporate Governance committees, as well as the Corporate Governance Guidelines, are available on the Company’sCompany's website at www.davey.com under the tab "Corporate Information," at the bottom of the page then under "Board Committee Charters," or by contacting the Corporate Secretary at The Davey Tree Expert Company, 1500 North Mantua Street, Kent, Ohio 44240.
Role of the Board in Risk Oversight
The Board recognizes that it is neither possible nor prudentreasonable to eliminate all risk, and that in order to remain competitive, certain risk-taking is an essential element of every business decision and part of our business strategy. However, the Board also understands that within any business framework, steps must be taken to properly safeguard the assets of the Company, implement and maintain appropriate
financial and other controls, and ensure that business is conducted sensiblyprudently and in compliance with applicable laws and regulations and proper governance.
Assessing and managing risk is the responsibility of our management. It is the responsibility of the Board of Directors to oversee risk management. As part of this responsibility, the Board oversees and reviews certain aspects of our risk management efforts. For example, the Board requires that an annual overall assessment of risk be performed and has delegated this oversight of the process to the Audit Committee. This enterprise-wide risk management assessment is designed to review and identify potential events that may affect us, including cyber securitycybersecurity risks, manage risks within our risk profile and provide reasonable assurance regarding the achievement of our objectives. The Audit Committee reviews and discusses with management our major financial risk exposures and the steps management has taken to monitor and control such exposures, including our financial risk assessment and risk management policies.
We are aware that cyber securitycybersecurity is an integral part of our risk analysis and discussions with management.discussions. While all entities are at some risk of a cyber securitycybersecurity attack, the Company has taken steps deemed appropriate by the Company to detect and limit the severity of a cybercybersecurity attack. These measures include, among other things, robust password requirements, firewalls, and limiting access to sensitive information. To date, the Company is not aware of any successful system-wide cybercybersecurity attack. The Company maintains employee and customer information and has developed contingency plans, but has not developed a system-wide cybercybersecurity attack cost matrix.
Company representatives meet annually in executive session with the Audit Committee. The General Auditor and the Chief Financial Officer review with the Audit Committee each year’syear's annual internal audit plan, which focuses on significant areas of financial, operating, and compliance risk. The Audit Committee also receives regular reports from management on the results of internal audits.
In addition, each year our management team conducts an assessment of potential risks facing us and reports their findings to the Audit Committee. Risks are rated as to severity and the likelihood of threat, and management outlines the mitigation efforts associated with each risk. To the extent management identifies mitigation efforts that were not in place, management identifies the initiative to address the particular situation. The Audit Committee then reports these findings to the full Board to assist in its oversight of risk. Moreover, in 2014, our management team completed a risk assessment consistent with the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsorship Organizations of the Treadway Commission ("COSO 2013").
As further described under "Compensation Risk Analysis," the Compensation Committee is responsible for the oversight of risks relating to employment policies and our compensation and benefits arrangements. To assist in satisfying these oversight responsibilities, the Committee may retain a compensation consultant and meets regularly with management to understand the financial, human resource and shareholder implications of compensation decisions that are made by the Board. The philosophy, process and rationale the Compensation Committee utilized as part of its responsibilities is discussed in detail in the "Compensation Discussion and Analysis" included in this Proxy Statement beginning on page 11.26.
Board Leadership
Mr. Warnke is the Chairman of our Board of Directors and Chief Executive Officer and President.Officer. Our Board has the authority to choose its chairman in any way it deems best for us at any given point in time. Historically, we have combined the positions of chief executive officer and chairman. We believe this is appropriate because we are an Employee Stock Ownership Plan ("ESOP") company, and combining the chairman and chief executive officer positions gives our employee-owners a clear leader and improves efficiencies in the decision-making process. We believeFurther, we have greatly benefited from having a single person setting our tone and direction, and having primary responsibility for managing our operations. This structure has also allowed the Board to carry out its oversight responsibilities with the full involvement of our independent directors. To date, the Board’sBoard's role in the oversight of risk assessment has not caused it to identify any changes to the current leadership structure. However, our Board believes that there is no single leadership structure that would be most effective in all circumstances and, therefore, retains the authority to modify our leadership structure to best address our circumstances as and when appropriate.
Corporate Responsibility
We understand our corporate responsibility is to maintain shareholder value through continued economic sustainability. In fulfilling this responsibility to our shareholders, substantially all of whom are current or past employees or immediate family members or trusts of current or former employees, we are cognizant that economic sustainability is multifaceted. We understand that one facet relates to our environmental stewardship. As outlined in our 2013 Corporate Responsibility Report, which was published in 2014, we respect the connection between our services and our impacts on employees, clients, the natural environment and communities. We also have an Environmental Policy which is available on our website at www.davey.com under the tab "Corporate Information" at the bottom of the page then under "Corporate Policies." We will continue to monitor our activities as a responsible corporate citizen and will continue to review our business practices in light of our corporate responsibility.
Communicating Concerns to Directors
We have established procedures to permit communications with the Board of Directors regarding the Company. Interested parties may communicate with the Board of Directors by contacting the Chairman, the chairs of the Audit, Compensation and Corporate Governance Committees of the Board, or with any independent Director by sending a letter to the following address: The Davey Tree Expert Company, Corporate Secretary, 1500 North Mantua Street, Kent, Ohio 44240.
An interested party may also communicate concerns through other mediums as set forth in our Whistleblower Conduct Reporting Policy. A copy of our Whistleblower Conduct Reporting Policy is available on our Company’sCompany's website at www.davey.com under "Corporate Policies," or by contacting the Corporate Secretary at The Davey Tree Expert Company, 1500 North Mantua Street, Kent, Ohio 44240.
All communications directed to our Board of Directors or Board Committees are reviewed and communicated with the appropriate Board member or members.
Compensation of Directors
The current compensation structure for nonemployee directors is designed to fairly pay directors for work required based on our size, scope and industry. The primary goal of the directors is to enhance the long-term interests of our shareholders by establishing company-wide general goals and objectives and identifying executive officers capable of carrying out those goals and objectives. In order to align director compensation with these objectives, the Compensation Committee reviews director compensation and recommends changes to the Board. To assist with this review, the Board periodically directs the Company to
engage Pay Governance, an independent compensation consulting firm, to review and evaluate director compensation. Pay Governance assists us in fostering a framework for director compensation based on market conditions, our compensation philosophy, and comparisons to companies of similar size and complexity. A review by Pay Governance was completed in 2014 and updated in 2015. Another review is scheduled to occur in 2017.
We pay nonemployee directors a fee of $40,000 per year, plus $1,000 for the first and $500 for each additional board or committee meeting attended on the same day, plus reasonably incurred travel and lodging expenses. Committee Chairs receive an additional retainer as follows: Audit Committee Chair - $8,000/year; Compensation Committee Chair - $6,000/year; and Governance Committee Chair - $5,000/year. The Chairman of the Board, if not an active employee of the Company, would receive an additional retainer of $7,500/year. Directors receive a fee of $500 for each teleconference meeting or written consent related to considering the authorization or taking of an action without a meeting, except for the Audit Committee members who receive a fee of $1,000 per teleconference meeting. Directors may defer all or part of their fees in cash or stock equivalent units until their retirement as directors.
Each nonemployee Director receives an annual stock award grant of Director Restricted Stock Units ("DRSU") equal to a fixed amount of $36,000. In 2016, the annual grant, at the then-fair value price of $32.70, equaled 1,100 units awarded to each Director. The number of DRSUs associated with the award will fluctuate based on the fair value price of the Company's common shares; however, the value of $36,000 will remain constant. The award will vest over three years and vesting will accelerate upon retirement. Beginning with the 2017 award, an award may be paid in one-to-five-year installments, but must be paid in full by age 75.
2016 DIRECTOR COMPENSATION(1)
|
| | | | | | | | | |
Director | Fees Earned or Paid in Cash(2) | Stock Awards | Total |
Brown, Donald C. | $ | 40,875 |
| $ | 35,970 |
| $ | 76,845 |
|
Cunningham, J. Dawson | 57,250 |
| 35,970 |
| 93,220 |
|
Ginn, William J. | 51,250 |
| 35,970 |
| 87,220 |
|
Hall, Douglas K. | 59,750 |
| 35,970 |
| 95,720 |
|
Harbrecht, Sandra W. | 50,250 |
| 35,970 |
| 86,220 |
|
Warfel, John E. | 51,750 |
| 35,970 |
| 87,720 |
|
|
| |
(1) | Mr. Warnke and Mr. Covey are employees and they do not receive any compensation as directors. |
(2) | Directors may elect to defer all or part of their director fees in stock equivalent units (SEUs). Ms. Harbrecht and Messrs. Brown and Ginn have made such an election. SEUs are calculated by dividing the fee earned by the then current market price. SEUs will subsequently be valued for payment purposes at the market price in effect on the date of payment. |
The aggregate number of all vested and unvested (exercisable and unexercisable) SARs awards and unvested DRSU awards for each director, outstanding as of December 31, 2016, is set forth in the following table.
|
| | | | |
Director | SARs (Exercisable and Unexercisable) | DRSU |
Brown, Donald C. | — |
| 1,100 |
|
Cunningham, J. Dawson | 6,666 |
| 1,100 |
|
Ginn, William J. | 9,333 |
| 5,210 |
|
Hall, Douglas K. | 9,333 |
| 5,210 |
|
Harbrecht, Sandra W. | 7,110 |
| 5,210 |
|
Warfel, John E. | 9,333 |
| 5,210 |
|
Environmental Stewardship
We understand our corporate responsibility is to maintain shareholder value through continued economic sustainability. In fulfilling this responsibility to our shareholders, most of whom are current or past employees or immediate family members or trusts of current or former employees, we are cognizant that economic sustainability is multifaceted. We understand that one facet relates to our environmental stewardship. As outlined in our 2015 Corporate Responsibility Report, which was published in 2016, we respect the connection between our services and our impacts on employees, clients, the natural environment and communities. We also have an Environmental Policy, which is available on our website at www.davey.com under the tab "Corporate Information" at the bottom of the page, then under "Corporate Policies." We will continue to monitor our activities as a responsible corporate citizen and will continue to review our business practices in light of our corporate responsibility.
Employee Ownership
In 1979, the Company was sold to its employees by the family and descendants of the Company's founder. At that time, in addition to the employees purchasing common shares of the Company, the Company formed an Employee Stock Ownership Trust ("ESOP"), which was later converted to the 401KSOP and ESOP Plan. The Company has remained largely employee-owned since the sale in 1979, and employee ownership remains a hallmark of the Company. Currently, the Company is one of the largest and oldest ESOP service firms in the United States.
In addition to offering employees a means to earn a paycheck and obtain employee benefits, employees have the opportunity to become shareholders of the Company. This has allowed the Company to grow and become a stable yet progressive institution. Our decisions regarding our business, our growth, and our compensation plans are directly influenced by our employee-ownership nature.
Shareholder Proposals
The Company provides its shareholders with a process to submit shareholder proposals for consideration at the annual shareholder's meeting. Any shareholder who wishes to submit a proposal to be considered for a vote must follow the requirements set out in SEC Rule 14a-8, which include a shareholder owning at least $2,000 or 1% of Company common stock for at least one year by the date the proposal is submitted. Further, the proposal must be limited to 500 words.
Any shareholder who wishes to submit a proposal to be considered for inclusion in next year's Proxy Statement should send the proposal to us on or before December 7, 2017. Additionally, a shareholder may submit a proposal for consideration at next year's Annual Meeting of Shareholders, but not for inclusion in next year's Proxy Statement, if that proposal is submitted on or before February 20, 2018.
Business Conduct Policies
We have a Code of Ethics that applies to all of our employees and directors and we have a Code of Ethics for Financial Matters that applies to all employees and directors, but particularly those who oversee the preparation of our financial statements. TheWe also have a Harassment Policy, an Equal Employment Opportunity Policy, an Environmental Policy and a Privacy Policy. These policies are available at our website, www.davey.com under the tab "Corporate Information" at the bottom of the page then under "Corporate Policies," or by contacting the Corporate Secretary at The Davey Tree Expert Company, 1500 North Mantua Street, Kent, Ohio 44240.
Transactions with Related-Persons, Promoters and Certain Control Persons
Our Board of Directors has adopted a written policy regarding related-party transactions. Under that policy, all transactions with or involving a related-person must be disclosed to and approved in advance by the Corporate Governance Committee. Further, each officer and director is requested, on an annual basis, to confirm the existence of any related-person transaction. Even if disclosed, each such transaction must have a legitimate business purpose and be on terms no less favorable than that which could be obtained from unrelated third parties. Related-party transactions are considered when determining if a director is deemed to be an independent director.
In 2014,2016, no executive officer, director or director nominee was indebted to us or was a party to any transaction in which any related-person will have a direct or indirect material interest. Further, no related-person has proposed such a transaction. For purposes of this discussion, a related-person is a director, a nominee for director, an executive officer, an immediate family member (including nonrelated-persons sharing the same household) of any of these persons, or any entity controlled by any of these persons.
OWNERSHIP OF COMMON SHARES
The following table shows, as of March 14, 2015,17, 2017, the number and percent of our common shares beneficially owned by each nominee, director, and officer listed in the "2014"2016 Summary Compensation Table," and all directors and officers as a group.
| | Name | Number of Shares (1)(2)(3)(4) | Percent (2) (5) | Number of Shares (1)(2)(3)(4)(5) | Percent(2)(6) |
Karl J. Warnke | 516,286 |
| 3.89 | % | 589,519 |
| 4.73 | % |
Donald C. Brown | | — |
| — | % |
J. Dawson Cunningham | 20,985 |
| .16 | % | 24,924 |
| .20 | % |
William J. Ginn | 11,393 |
| .09 | % | 13,719 |
| .11 | % |
Douglas K. Hall | 49,086 |
| .37 | % | 53,018 |
| .43 | % |
Sandra W. Harbrecht | 25,434 |
| .19 | % | 30,281 |
| .25 | % |
John E. Warfel | 13,618 |
| .10 | % | 15,950 |
| .13 | % |
Patrick M. Covey | 48,158 |
| .36 | % | 97,170 |
| .78 | % |
Joseph R. Paul | 31,270 |
| .24 | % | 62,012 |
| .51 | % |
Steven A. Marshall | 133,291 |
| 1.00 | % | 153,350 |
| 1.23 | % |
James F. Stief | 176,625 |
| 1.33 | % | 204,904 |
| 1.63 | % |
19 directors and officers as a group, including those listed above | 1,507,627 |
| 11.37 | % | |
20 directors and officers as a group, including those listed above (6) | | 1,677,535 |
| 13.86 | % |
|
| |
(1) | Other than as described below, beneficial ownership of the common shares listed in the table is comprised of sole voting and investment power, orpower. |
(2) | The following persons share voting and investment power shared with a spouse. |
| spouse with respect to the following number of shares: Mr. Warnke, 394,738; Mr. Marshall, 33,610; Mr. Stief, 57,649; and Mr. Hall, 40,387. Mr. Warfel shares voting and investment power with his spouse and daughter with respect to the following number of shares 5,519. |
(2)(3) | Includes shares allocated to individual accounts under our 401KSOP and ESOP Plan for which the following executive officers have sole voting power as follows: Mr. Warnke, 47,90648,373 shares; Mr. Covey, 5,1415,372 shares; Mr. Paul, 2,5802,931 shares; Mr. Marshall, 62,41162,957 shares; Mr. Stief, 24,88825,367 shares; and 267,733 shares274,811shares by all officers as a group. |
| |
(3)(4) | These numbers include the right to purchase common shares on or before May 13, 201516, 2017 upon the exercise of outstanding stock options: Mr Warnke, 1,2006,400 shares; Mr. Covey, 12,20016,000 shares; Mr. Paul, 9,5009,600 shares; Mr. Marshall, 25,4009,400 shares; Mr. Stief, 7,4009.800 shares; and 118,900109,295 common shares by all directors and officers as a group. These numbers also include the right to purchase common shares on or before May 13, 201516, 2017 upon the exercise of outstanding stock appreciation rights: Mr. Warnke, 20,9046,400 shares; Mr. Covey, 8,96816,000 shares; Mr. Paul, 2,8439,600 shares; Mr. Marshall, 7,8029,400 shares; Mr. Stief, 4,8699,800 shares; and 72,211109,295 common shares by all directors and officers as a group, and the right to purchase common shares on or before May 16, 2017 upon the exercise of Stock Rights under the Stock Subscription program: Mr. Warnke, 1,390 shares; Mr. Covey, 416 shares; Mr. Paul, 1,045 shares; Mr. Marshall, 1,040 shares; Mr. Stief, 313 shares and 14,238 common shares by all directors and officers as a group. |
| |
(4)(5) | Of the shares listed, the following number of shares were pledged as security: 22,788 shares by all directorsMr. Stief, 15,581 shares; and officers as a group. |
| Mr. Repenning, 4,826 shares. |
(5)(6) | Percentage calculation based on total shares outstanding plus the options and rights exercisable by the respective individual on or before May 13, 2015,16, 2017, in accordance with Rule 13d-3(d) of the Securities Exchange Act of 1934, as amended. |
To our knowledge, as of March 14, 2015,17, 2017, no person or entity was an owner, beneficial or otherwise, of more than five percent of our outstanding common shares. Argent Trust Company, trustee of the 401KSOP and ESOP Plan, 1100 Abernathy Road, 500 Northpark, Suite 550, Atlanta, GA 30328, had, as of March 14, 2015,17, 2017, certain trustee-imposed rights and duties with respect to common shares held by it. The number of common shares held in the 401KSOP and ESOP Plan as of March 14, 2015,17, 2017, was 4,136,376,3,785,447, or 31.19%28.48% of our outstanding common shares.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers and persons who own more than ten percent of our common shares to file reports of ownership and changes in ownership of our common shares held by them with the SEC. Currently, we file these reports on behalf of our directors and executive officers. Based on our review of these reports, we believe that during the year ended December 31, 2014, except as follows,2016, all reports were timely filed.
PROPOSALS TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION
Employee ownership has been one of the Company’s core values since 1979. As part of our original plan to transfer control of the Company to our employees, we initially sold common shares to our Employee Stock Ownership Trust ("ESOT"), which is the trust for our Employee Stock Ownership Plan ("ESOP"). The following Form 4's inadvertently were filed late: director restrictedESOP, in conjunction with the ESOT, provided for the grant to certain employees of certain ownership rights in, but not possession of, the common shares held by the trustee of the ESOT. Effective January 1997, we commenced operation of the Davey 401KSOP and ESOP, which retained the existing ESOP participant accounts and incorporated a deferred savings plan feature. The Davey 401KSOP and ESOP provides eligible employees with the option to invest retirement funds in shares of our common stock.
Our common shares are not publicly traded. Instead, our employees have the ability to purchase our common shares through a variety of means, including through the Davey 401KSOP and ESOP, through our Employee Stock Purchase Plan, which gives employees the ability to purchase common shares through payroll deductions, and through stock units for Messrs. Ginn, Hall, Warfel, Cunningham, Cowan (who served as a director until the 2014 Annual Meeting of Shareholders),subscription offerings we may conduct from time to time. Our employees and Ms. Harbrecht; andnon-employee directors may also receive shares upon the exercise of stock options or other equity awards granted under our 2014 Omnibus Plan.
To protect our level of employee ownership, we have long imposed transfer restrictions on our common shares. These restrictions are set forth in our Amended Articles of Incorporation (the "Articles") and stock subscriptionin other plans and agreements pursuant to which our employees and non-employee directors have received shares, including our 2014 Omnibus Plan. By virtue of these restrictions, our common shares are predominantly held by former and current Davey employees, held in the Davey 401KSOP and ESOP, and by certain transferees or beneficiaries of our former and current shareholders.
In just the last three years, the percentage of our outstanding common shares held by active Company employees has decreased from approximately 58% to approximately 50%. After considering this decrease and the current composition of our shareholder base, our Board of Directors, in consultation with management, determined it to be in the best interests of the Company and our shareholders to amend our Articles to impose additional transfer restrictions and grant the Company additional rights to repurchase common shares held by Ms. Conner.certain shareholders. The foregoing reports were filed on April 10, 2014. Also, amended Form 3's for Messrs. Doyle, RepenningBoard of Directors believes these additional restrictions and Vaughn were filed late on July 11, 2014rights are necessary in order to report stock subscription rightsfully support and promote the Company’s policy favoring employee ownership. To that were inadvertently omitted fromend, our Board of Directors has approved, and is asking our shareholders to approve, the three separate proposals to amend our Articles described below.
The full text of the Articles reflecting each of the proposed amendments is attached to this Proxy Statement as Appendix A. Text that is underlined represents the new text proposed to be added to the Articles and text that is struck through represents the text proposed to be deleted. The following description of each proposed amendment to the Articles is qualified in its entirety by reference to Appendix A.
Separate Proposals
Proposals 2, 3 and 4 each relate to the amendment of Article SIXTH in the Articles, but Proposal 2 concerns an amendment to the Company’s right of first refusal, Proposal 3 concerns an amendment to the mechanics of how the Company exercises its right of first refusal in certain instances and Proposal 4 concerns an amendment to grant the Company the right to repurchase shares held by certain shareholders. Therefore, we are setting out each separate matter intended to be acted upon, so that shareholders are able to express their respective Form 3's.views on each amendment separately. The approval of any proposal is not conditioned on the approval of any other proposal. The Company will only amend the Articles to implement a proposal if that particular proposal receives the requisite vote for approval. Those amendments that are not approved by shareholders will not be reflected in the Articles.
COMPENSATION DISCUSSION AND ANALYSISPROPOSAL TWO
APPROVAL TO AMEND THE ARTICLES WITH RESPECT
TO THE COMPANY'S RIGHT OF FIRST REFUSAL
We are seeking shareholder approval to amend the Company’s right of first refusal in Article SIXTH of the Articles.
Background of the Proposal
Article SIXTH of the Articles currently provides that, upon the proposed sale, gift or transfer of common shares by a shareholder or the shareholder’s estate, other than (i) transfers to a current employee of the Company, (ii) transfers by a current or former employee of the Company to members of his or her immediate family, and (iii) transfers by a deceased current or former employee to members of his or her immediate family, the Company and the ESOT shall have the right, at their option, to repurchase all
(but not less than all) common shares held by the shareholder or the shareholder’s estate, as the case may be. For purposes of Article SIXTH, "immediate family member" includes the employee’s spouse, children (including any adopted children and step children), and any trust established for the benefit of one or more of them.
We are proposing to amend the right of first refusal in Article SIXTH to provide that when a shareholder, or, following the death of a shareholder, the shareholder’s estate or personal representative, proposes to sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise (each, a "transfer"), other than transfers to a current employee of the Company, then the Company and the ESOT will have the right, at their option, to purchase all (but not less than all) of the common shares proposed to be transferred. The right of the Company and the ESOT to purchase the common shares may be exercised at any time within 30 days after the certificate or certificates representing the common shares have been surrendered to the Company or its transfer agent for transfer (or if later, within 30 days following the end of the Company’s blackout period if the transfer is proposed during the Company’s blackout period).
The Board of Directors believes it is necessary to expand the Company’s current right of first refusal to encompass all proposed transfers to third parties, except for transfers to current employees of the Company, in order to fully support the Company’s policy of remaining an employee-owned Company. The broader transfer restrictions are intended to enhance employee ownership and reduce the incidence of our common shares being transferred to third parties with little or no connection or affiliation to the Company.
Effects of the Amendment
The proposed amendment will become effective upon the filing and acceptance of the Amended Articles with the Ohio Secretary of State. Upon the effectiveness of the Amended Articles, any transfers of our common shares proposed to be made upon or following discussion relatesthe effectiveness of the Amended Articles will be subject to the amended right of first refusal. Transfers of our common shares made prior to the effectiveness of the Amended Articles will not be impacted by, or become retroactively subject to, the amended right of first refusal.
Shareholders should be aware that, regardless of whether the proposed amendment is approved, all common shares issued pursuant to our equity plans remain subject to any additional repurchase rights or restrictions on transfer imposed on such shares, including those set forth under our 2014 Omnibus Plan. If approved, certain common shares may also become subject to the repurchase right proposed to be added to the Articles in Proposal 4.
Vote Required to Approve the Amendment
The affirmative vote of the holders of two-thirds of the common shares outstanding and entitled to vote at the Annual Meeting is required to approve Proposal 2.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE APPROVAL OF THE PROPOSAL TO AMEND THE ARTICLES WITH RESPECT TO THE COMPANY’S RIGHT OF FIRST REFUSAL.
PROPOSAL THREE
APPROVAL TO AMEND THE ARTICLES WITH RESPECT TO THE COMPANY'S EXERCISE OF
ITS RIGHT OF FIRST REFUSAL UPON THE DEATH OF A SHAREHOLDER
We are seeking shareholder approval to amend Article SIXTH of the Articles to extend the time period within which the Company may exercise its right of first refusal to purchase common shares proposed to be transferred by a deceased shareholder’s estate or personal representative.
Background of the Proposal
Article SIXTH of the Articles currently provides that in the event of the death of a shareholder and the proposed transfer of the deceased shareholder’s common shares to anyone other than certain individuals specified in the Articles, the Company and the ESOT have the right, at their option, to purchase the deceased shareholder’s common shares by delivering written notice to the representatives of the shareholder’s estate. The Company must deliver the notice of exercise at any time on or before the 30th day after the Company receives written notice of (i) the shareholder’s death and (ii) the identity and address of the representatives of the shareholder’s estate.
We are proposing to amend Article SIXTH to instead provide that the Company and the ESOT may exercise the right of first refusal described above by delivering written notice at any time on or before the 60th day after the Company receives written notice of (i) the intent to transfer the deceased shareholder’s common shares and (ii) the identity and address of the shareholder’s estate or personal representative. The remaining provisions of Article SIXTH will also be amended to reflect the change from a 30-day exercise period to a 60-day exercise period following the notice of intent to transfer the deceased shareholder’s common shares.
The Board of Directors believes these changes are appropriate in order to give the Company additional time to gather the necessary information it may need to make a decision as to whether to exercise its right to purchase the common shares.
Effects of the Amendment
The proposed amendment will become effective upon the filing and acceptance of the Amended Articles with the Ohio Secretary of State. Upon the effectiveness of the Amended Articles, any transfers of our common shares by a deceased shareholder’s estate or personal representative proposed to be made upon or following the effectiveness of the Amended Articles will be subject to the amended provisions. Any transfers made prior to the effectiveness of the Amended Articles will not be impacted by, or become retroactively subject to, the amended provisions.
Vote Required to Approve the Amendment
The affirmative vote of the holders of two-thirds of the common shares outstanding and entitled to vote at the Annual Meeting is required to approve Proposal 3.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE APPROVAL OF THE PROPOSAL WITH RESPECT TO THE COMPANY’S EXERCISE OF ITS RIGHT OF FIRST REFUSAL UPON THE DEATH OF A SHAREHOLDER.
PROPOSAL FOUR
APPROVAL TO AMEND THE ARTICLES TO GRANT THE COMPANY A RIGHT TO
REPURCHASE COMMON SHARES
We are seeking shareholder approval to amend Article SIXTH of the Articles to grant the Company a right to repurchase common shares held by certain shareholders.
Background of the Proposal
Our Articles currently permit the Company and the ESOT to repurchase common shares only upon certain transfers, described in the background of Proposal 2. The proposed amendments would enable the Company and the ESOT, at any time or times, and from time to time, at their option, to purchase any or all common shares held by any shareholder, other than (i) the ESOT, (ii) a former employee who has retired from the Company or (iii) a current employee or director of the Company. The shares could be repurchased without any proposed transfer of such shares.
The Board of Directors expects that this amendment, if adopted, would provide the Company with the flexibility to increase its rate of share repurchases in the future. The Company, at this time, does not have any specific repurchase targets, and the timing and amount of actual repurchases will be determined by a number of factors, including, but not limited to, the Company’s cash and debt position, future liquidity needs and legal requirements.
Effects of the Amendment
The proposed amendment, if approved, would become effective upon the filing and acceptance of the Amended Articles with the Ohio Secretary of State. Upon the effectiveness of the Amended Articles, the Company and the ESOT would have the right to purchase any or all common shares held by a shareholder, other than (i) the ESOT, (ii) a former employee who has retired from the Company or (iii) a current employee or director of the Company, regardless of when or how the common shares were acquired.
Shareholders should be aware that, regardless of whether the proposed amendment is approved, all common shares remain subject to any additional repurchase rights or restrictions on transfer imposed on such shares, including those set forth under our 2014 Omnibus Plan and in Article SIXTH of our Articles.
Vote Required
The affirmative vote of the holders of two-thirds of the common shares outstanding and entitled to vote at the Annual Meeting is required to approve Proposal 4.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE APPROVAL OF THE PROPOSAL TO AMEND THE ARTICLES TO GRANT THE COMPANY A RIGHT TO REPURCHASE COMMON SHARES.
PROPOSALS TO AMEND THE COMPANY’S CODE OF REGULATIONS
We are seeking shareholder approval to amend certain provisions of our Code of Regulations (the "Regulations"). Our Board of Directors believes these amendments would make the Regulations more consistent and in line with the current Ohio General Corporation Law ("OGCL") and corporate practice, better reflect our practices and provide more accommodations to our shareholders with respect to certain matters, such as shareholder meetings.
The full text of the Regulations reflecting each of the proposed amendments is attached to this Proxy Statement as Appendix B. Text that is underlined represents the new text proposed to be added to the Regulations and text that is struck through represents the text proposed to be deleted. The following description of each proposed amendment to the Regulations is qualified in its entirety by reference to Appendix B.
The amendment proposed in each Proposal will become effective immediately upon shareholder approval.
Separate Proposals
Proposals 5 through 10 all relate to the amendment of the Regulations, but each Proposal concerns the amendment of distinct provisions of the Regulations. Therefore, we are setting out each separate matter intended to be acted upon, so that shareholders are able to express their views on each amendment separately. The approval of a proposal is not conditioned on the approval of any other proposal. The Company will only amend the Regulations to implement a proposal if that particular proposal receives the requisite vote for approval. Those proposals that are not approved by shareholders will not be reflected in the Regulations.
Minor Changes to the Regulations
In the event any of Proposals 5 through 10 is passed, the Company will also make the following two minor changes to the Regulations:
In Article IV, Section 2, change the word "pension" to "retirement" in discussing benefits that may be provided, and
In Article VIII, remove the requirement for the Company’s corporate seal to be "circular in form."
PROPOSAL FIVE
APPROVAL TO AMEND THE REGULATIONS WITH RESPECT TO THE TIME
OF ANNUAL AND SPECIAL MEETINGS OF SHAREHOLDERS
We are seeking shareholder approval to amend the Regulations with respect to the time we hold our annual meeting of shareholders and the time when we may convene a special meeting of shareholders.
Background of the Proposal
Our Regulations currently provide that the annual meeting of shareholders will be held at 2:00 p.m., on the third Tuesday of May in each year, unless the Board of Directors specifically designates a different date or time, and that any special meeting of shareholders would be convened between 9:00 a.m. and 4:00 p.m. The Board of Directors proposes to change the stated time of the annual meeting to 5:00 p.m., on the third Tuesday of May in each year, and the time period within which we may convene a special meeting to between 6:00 a.m. and 9:00 p.m., or at such other time as designated in the notice of the special meeting. We have traditionally held the annual meeting of shareholders at 5:00 p.m. on the third Tuesday of May over many years to allow more shareholders to attend the meeting, considering that most of the Company’s shareholders are employees of the Company whose work duties may interfere with the currently stated 2:00 p.m. meeting time, and this amendment is being
proposed to reflect our current practice. The change to the special meeting time will also provide more flexibility when scheduling a special meeting in order to better accommodate shareholders.
Effect of the Proposed Amendment
If shareholders approve this proposal, Article I, Section 1 of the Regulations will be revised to provide for the annual meeting of shareholders to be held at 5:00 p.m., on the third Tuesday of May in each year, unless the Board of Directors designates a different date or time, and Article I, Section 2 of the Regulations will be revised to provide for a special meeting of shareholders to be convened between 6:00 a.m. and 9:00 p.m., or at such other time as designated in the notice of the special meeting.
Vote Required
The affirmative vote of the holders of our common shares entitled to exercise a majority of the voting power of the Company is required to approve Proposal 5.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE PROPOSAL TO AMEND THE REGULATIONS WITH RESPECT TO THE TIME OF ANNUAL AND SPECIAL MEETINGS OF SHAREHOLDERS.
PROPOSAL SIX
APPROVAL TO AMEND THE REGULATIONS WITH RESPECT TO THE NOTICE
OF SPECIAL MEETINGS OF THE BOARD OF DIRECTORS
We are seeking shareholder approval to amend our Regulations with respect to when and how we provide notice of special meetings of the Board of Directors to our directors.
Background of the Proposal
Our Regulations currently require us to provide written notice of the time and place of each special meeting of the Board of Directors to each director either by personal delivery or by mail, telegram or cablegram at least two business days before the meeting. The Board of Directors is proposing to change these requirements to instead require written notice to be given at least five business days before the meeting by personal delivery, e-mail, certified mail or recognized delivery service. In addition to modernizing the Regulations, these changes are intended to bring the notice requirements more in line with the Company’s current practice. Further, these changes will ensure that each director has sufficient time to fully consider the matters to be presented at the special meeting prior to voting and to make arrangements in order to attend and participate in the special meeting.
Effect of the Proposed Amendment
If shareholders approve this proposal, Article II, Section 6 of the Regulations will be revised to provide that written notice of the time and place of special meetings of the Board of Directors will be given to each director either by personal delivery, e-mail, certified mail or recognized delivery service at least five business days before the meeting.
Vote Required
The affirmative vote of the holders of our common shares entitled to exercise a majority of the voting power of the Company is required to approve Proposal 6.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE PROPOSAL TO AMEND THE REGULATIONS WITH RESPECT TO THE NOTICE OF SPECIAL MEETINGS OF THE BOARD OF DIRECTORS.
PROPOSAL SEVEN
APPOVAL TO AMEND THE REGULATIONS TO
CLARIFY AND SEPARATE THE ROLES OF CERTAIN OFFICERS
We are seeking shareholder approval to amend our Regulations to clarify and separate the roles of certain officers in order to bring our Regulations more in line with the Company’s organizational structure and practice.
Background of the Proposal
In accordance with the OGCL, our Regulations currently require the Board of Directors to elect a President, Secretary and Treasurer and grant the Board of Directors the discretionary authority to elect certain other officers, including a Chairman of the Board. The general duties and authorities prescribed to each of these officers are set forth in the Regulations.
In light of the Company’s current organizational structure and practice, the Board of Directors proposes to amend the Regulations to better clarify and separate the roles of certain officers. The amendments are also intended to give the Board of Directors more flexibility to assign separate titles to senior management of the Company, if the Company’s needs would be best served by members of management having separate areas of responsibility.
Several of the proposed changes would clarify the duties and authorities of the Chief Executive Officer of the Company, which are not currently addressed in the Regulations. These changes would also reflect the Company’s current practice of appointing a separate Chief Executive Officer and a President while preserving the flexibility of the Board of Directors to appoint one individual to serve as both the President and Chief Executive Officer.
Effect of the Proposed Amendment
If shareholders approve this proposal, the following changes will be made to the Regulations:
|
| | |
Section | | Proposed Change |
Article 1, Section 1, Annual Meeting | l | The Chief Executive Officer, in lieu of the President, will have authority to designate the time and place of the Company's annual meeting of shareholders. |
| | |
Article 1, Section 2, Special Meeting | l | The Chief Executive Officer will have the authority to call a special meeting of the shareholders, and the President, Executive Vice Presidents, Senior Vice Presidents and Vice Presidents will no longer have such authority. |
| | |
Article II, Section 6, Special Meetings | l | The Chief Executive Officer will have the authority to call a special meeting of the Board of Directors, and Executive Vice Presidents, Senior Vice Presidents and Vice Presidents will no longer have such authority. |
| | |
Article III, Section 1, Election and Designation of Officers | l | "Chief Executive Officer" will be listed as an officer title the Board of Directors has the discretionary authority to elect. |
| l | The President will no longer be required to be a director of the Company. |
| | |
Article III, Section 4, Duties at Meetings | l | Section 4 will be titled "Duties at Meetings" and will provide that either the Chairman of the Board, the Vice Chairman of the Board, the Chief Executive Officer or the President shall preside at all meetings of the shareholders, and that either the Chairman of the Board, the Vice Chairman of the Board, the Chief Executive Officer or, if a director, the President, shall preside at all meetings of the Board of Directors, except for meetings at which the Chairman of the Board, if any, presides. |
| l | The duties of the President will be addressed in Section 6 of Article III. |
|
| | |
Section | | Proposed Change |
Article III, Section 5, Duties of Chief Executive Officer | l | Section 5 will be titled "Duties of Chief Executive Officer" and will address the duties of the Chief Executive Officer. Section 5 will also provide that the President (if different) will exercise the authority and perform the duties of the Chief Executive Officer in the event the Chief Executive Officer is unable to do so. |
| | |
Article III, Section 6, Duties of the President | l | Section 6 will be titled "Duties of the President" and will address the duties of the President. Section 6 will also provide that if the President is not the Chief Executive Officer, then the President will act under the control of the Chief Executive Officer. |
| | |
Article III, Section 7, Duties of the Chairman of the Board | l | Section 7 will be titled "Duties of the Chairman of the Board" and will address the duties of the Chairman of the Board. Section 7 will provide that the Vice Chairman of the Board, the Chief Executive Officer or, if a director, the President, will exercise all the authority of, and perform all of the duties of, the Chairman of the Board in the event the Chairman of the Board is unable to do so. |
| | |
Article III, Section 10, Other Officers | l | The positions of Executive Vice President, Senior Vice President and Vice President will be added to Section 10, which discusses the authority and duties of other officers elected by the Board of Directors. |
| | |
Article VII, Section 1, Form of Certificates and Signatures | l | The President, Executive Vice Presidents, Senior Vice Presidents, Assistant Secretaries and Assistant Treasurers will no longer have the authority to sign physical stock certificates representing shares of the Company. |
| | |
Other Minor Changes | l | Section numbers and references will be updated throughout the Regulations to reflect the changes discussed above. |
Vote Required
The affirmative vote of the holders of our common shares entitled to exercise a majority of the voting power of the Company is required to approve Proposal 7.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE PROPOSAL TO AMEND THE REGULATIONS TO CLARIFY AND SEPARATE THE ROLES OF CERTAIN OFFICERS.
PROPOSAL EIGHT
APPROVAL TO AMEND THE REGULATIONS
WITH RESPECT TO THE RECORD DATE
We are seeking shareholder approval to amend our Regulations to increase the maximum time within which the Board of Directors may fix the record date to no more than 75 days prior to the annual shareholders meeting.
Background of the Proposal
Article VI of our Regulations currently provides that the Board of Directors may fix a record date for any lawful purpose, including, without limitation, for the determination of the shareholders who are entitled to receive notice of or to vote at any meeting of shareholders, in accordance with the provisions of the OGCL. The OGCL provides that any record date set for the determination of the shareholders who are entitled to receive notice of or to vote at a meeting of shareholders shall not be more than 60 days preceding the date of the meeting, unless the articles or regulations specify a shorter or a longer period for that purpose. The Board of Directors, pursuant to the authority granted in the OGCL, is proposing to amend the Regulations to
provide that the Company may set a record date no later than 75 days prior to the date of the annual meeting. This change is proposed to allow more time for the Company to prepare and distribute proxy materials.
Effect of the Proposed Amendment
If shareholders approve this proposal, Article VI of our Regulations will be revised to provide that the Board of Directors may fix a record date for the annual shareholders meeting to no more than 75 days prior to the date of the meeting for any lawful purpose, including the determination of the shareholders entitled to receive notice of or vote at the meeting.
Vote Required
The affirmative vote of the holders of our common shares entitled to exercise a majority of the voting power of the Company is required to approve Proposal 8.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE PROPOSAL TO AMEND THE REGULATIONS TO FIX THE RECORD DATE.
PROPOSAL NINE
APPROVAL TO AMEND THE REGULATIONS TO
PERMIT THE ISSUANCE OF UNCERTIFICATED SHARES
We are seeking shareholder approval to amend our Regulations to allow the Board of Directors to authorize the Company to issue shares without issuing physical (paper) certificates to evidence those shares ("uncertificated shares").
Background of the Proposal
Article VII of our Regulations currently requires the Company to issue physical certificates to each shareholder of record evidencing the shares owned by such shareholder. The current version of Article VII was consistent with the requirements of the OGCL when drafted. However, in view of changes in the OGCL and developments in technology and recordkeeping processes, the Board of Directors believes that the current requirements of the Regulations are unduly restrictive, and that the Company should have the flexibility to issue uncertificated shares to the extent permitted by the OGCL.
Effect of the Proposed Amendment
If shareholders approve this proposal, Article VII of our Regulations will be revised to allow the Board of Directors to authorize the Company to issue uncertificated shares and will also authorize the Board of Directors to make all rules and regulations as it deems expedient to concerning the issue, transfer and registration of certificated and uncertificated shares.
While the proposed amendment will permit the Company to continue to issue physical stock certificates, such as upon the specific request of a shareholder, the Company may begin utilizing the authority to issue its shares in uncertificated shares by recording shares issued by the Company or transferred into the name of a new or existing registered owner in electronic form with no physical stock certificate being issued.
Even if shareholders approve this proposal, shareholders will still have the ability to request physical certificates from the Company, if desired, and will still have their shares registered on the books of the Company, meaning that they will receive annual and other reports, dividends, proxy statements and other communications of the Company, exactly the same as if they held stock certificates directly. In addition, shareholders owning their shares in electronic form will not have to worry about safekeeping or losing certificates, or having them stolen.
Vote Required
The affirmative vote of the holders of our common shares entitled to exercise a majority of the voting power of the Company is required to approve Proposal 9.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE PROPOSAL TO AMEND THE REGULATIONS TO PERMIT THE ISSUANCE OF UNCERTIFICATED SHARES.
PROPOSAL TEN
APPROVAL TO AMEND THE REGULATIONS TO ALLOW THE BOARD OF DIRECTORS
TO AMEND THE REGULATIONS TO THE EXTENT PERMITTED BY OHIO LAW
We are seeking shareholder approval to amend our Regulations to allow our Board of Directors to adopt amendments to the Regulations to the extent permitted by the OGCL. Our Regulations currently require our shareholders to adopt all amendments, regardless of how minor.
Background of the Proposal
Many jurisdictions, such as Delaware, have historically allowed the directors of a corporation to amend that corporation’s bylaws (the equivalent of Ohio’s code of regulations) without shareholder approval. In 2006, the OGCL was amended to allow directors of an Ohio corporation to make certain amendments to its code of regulations without shareholder approval, if the authority to do so is provided in the corporation’s articles of incorporation or code of regulations, and so long as the shareholders also retain the power to adopt, amend, or repeal the corporation’s code of regulations.
After the 2006 amendment, the OGCL provides Ohio corporations, such as the Company, with flexibility similar to Delaware corporations, except that the law reserves to shareholders the right to approve amendments affecting certain fundamental matters, including the following:
changing the percentage of common shares needed to call a special shareholders’ meeting;
changing the length of the time period required for notice of shareholders’ meetings;
changing the requirement for a quorum at shareholders’ meetings;
prohibiting shareholder or director actions from being authorized or taken by written consent without a meeting;
changing the length of the terms of office for our directors or providing for classification of directors;
requiring greater than a majority vote of shareholders to remove directors without cause;
changing the requirements for a quorum at directors’ meetings or the required vote for an action of the directors; or
including a requirement that a "control share acquisition" of the corporation be approved by the corporation’s shareholders.
Effect of the Proposed Amendment
If shareholders approve this proposal, Article IX of our Regulations will be revised to allow the Board of Directors to amend our Regulations in the future to the extent permitted by the OGCL. Although we cannot predict in advance how the Board of Directors will exercise this power, if approved by shareholders, the Board of Directors anticipates that it may be used from time to time to modernize our Regulations, to reflect changes to conform with applicable laws, and to make ministerial and other changes as the Board of Directors deems appropriate. We will be required to promptly notify our shareholders of any amendments that the Board of Directors makes to our Regulations by filing a report with the SEC or by sending a notice to shareholders of record as of the date of the adoption of the amendment.
Even if shareholders approve this proposal, shareholders will retain the power to adopt, amend, and repeal the Regulations without action by the Board of Directors. As a result, shareholders will have the ability to change, modify, or repeal any amendments made by the Board of Directors should they determine that course to be appropriate. Under no circumstances will the Board of Directors be permitted to delegate its authority to adopt, amend, or repeal our Regulations to a committee of the Board of Directors.
Vote Required
The affirmative vote of the holders of our common shares entitled to exercise a majority of the voting power of the Company is required to approve Proposal 10.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE PROPOSAL TO AMEND THE REGULATIONS TO PERMIT THE BOARD OF DIRECTORS TO AMEND THE REGULATIONS TO THE EXTENT PERMITTED BY OHIO LAW.
PROPOSAL ELEVEN
ADVISORY APPROVAL OF OUR NAMED EXECUTIVE OFFICER COMPENSATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, and Section 14A of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), enable our shareholders to vote to approve, on an advisory, nonbinding basis, the compensation of our Named Executive Officers as disclosed in this Proxy Statement, often referred to as the "say-on-pay" proposal. In 2011, our shareholders voted to hold this "say-on-pay" vote every three years and the Board of Directors voted to approve this option. Shareholders also have the opportunity to vote on the frequency of future votes on named executive officer compensation at this annual meeting, as described below under "Proposal Twelve - Advisory Approval of the Frequency of the Vote to Approve the Compensation of Our Named Executive Officers."
As described in detail under the heading "Compensation Discussion and Analysis," our executive compensation program is designed to attract, motivate, and retain our executive officers, who are critical to our success. Under this program our executive officers are rewarded for the achievement of specified short-term, long-term and strategic goals, and increased shareholder value. Please read the "Compensation Discussion and Analysis" and review other information provided in this Proxy Statement for additional details about our executive compensation program, including information about the Fiscal Year 2016 compensation of our named executive officers.
We believe our compensation program strikes the appropriate balance between utilizing responsible, measured pay practices and effectively incentivizing our executives to dedicate themselves fully to create value for our shareholders.
In support of this belief and reflective of the Compensation Committee’s oversight of the executive compensation program, the Compensation Committee has adopted the following practices:
Performance goals that require the management team to maintain and improve profitability in all economic environments to receive target compensation;
A principal part of executive compensation consists of performance-based incentives, including performance shares;
Establish total direct compensation such that, when our fundamental financial performance is at target levels, total compensation (base salary, short-term cash incentives, and long-term incentives) for each executive officer is competitive with the total compensation for executives in comparable positions at companies in our market; and
Incentive plan payouts based on pre-established and measurable metrics with payouts that cannot exceed maximum values.
The Compensation Committee continually reviews the compensation programs for our Named Executive Officers to ensure they achieve the desired goals of aligning our executive compensation structure with our shareholders’ interests and current market practices.
We are asking our shareholders to indicate their support for our Named Executive Officer compensation program as described in this Proxy Statement. Accordingly, we ask our shareholders to vote on the following resolution at the Annual Meeting:
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"RESOLVED, that the Company’s shareholders approve, on an advisory, nonbinding basis, the compensation of the Company’s named executive officers, as disclosed in the Company’s Proxy Statement for the 2017 Annual Meeting of Shareholders, pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the Summary Compensation Table and the other related tables and narrative disclosures." |
This proposal gives our shareholders the opportunity to express their views on the compensation of our named executive officers. For 2014,This vote is not intended to address any specific item of compensation or any single compensation philosophy, policy or practice, but rather the overall compensation of our named executive officers include Karl J. Warnke, Principal Executive Officer ("PEO"as described in this proxy statement.
While the Board of Directors values the opinions of our shareholders, the say-on-pay vote is advisory and is not binding on the Company, the Board of Directors or the Compensation Committee. However, we did consider the results of the advisory vote last taken in 2014 and, due to the strong support demonstrated by our shareholders, determined that no immediate changes to the compensation plan for our named executive officers were necessary. We will consider the results of the vote when evaluating the perception of our plans by the shareholders and will continue, as has been our ongoing practices, to evaluate whether any future actions will be advisable to address those concerns.
Vote Required
The number of votes cast by shareholders, either in person or by proxy, at the annual meeting "for" advisory approval of the compensation of our named executive officers pursuant to the above resolution must exceed the number of votes cast "against" advisory approval. Abstentions and non-votes will have no effect on the vote. Shares represented by executed proxies on proxy cards will be voted, if specific instructions are not otherwise given, for the advisory approval of the compensation of our named executive officers.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.
PROPOSAL TWELVE
ADVISORY APPROVAL OF THE FREQUENCY OF THE VOTE TO APPROVE THE
COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS
The Dodd-Frank Act enables our shareholders to indicate how frequently we should seek an advisory vote on the compensation of our named executive officers (also known as "say-when-on-pay"), Joseph R. Paul, Principal Financial Officer ("PFO"). This advisory vote, which is also required by Section 14A of the Exchange Act, must be solicited from our shareholders at least once every six years. At the last vote held at the 2011 annual meeting of shareholders, shareholders voted for the advisory vote on named executive officer compensation to be held once every three years, and our Board of Directors approved this choice.
Our Board of Directors believes that a frequency of every three years for the advisory vote on executive compensation is the optimal interval for the Company for conducting and responding to a vote on executive compensation. Our Board of Directors and the otherCompensation Committee also believe that holding a vote on executive compensation every three years provides the Board of Directors and the Compensation Committee with the opportunity to thoroughly consider the results of the advisory vote, respond to the vote results and effectively implement any appropriate changes to our executive compensation policies and procedures. Shareholders who have concerns about executive compensation during the interval between votes on executive compensation may bring their specific concerns to the attention of our Board of Directors.
We understand that our shareholders may have different views as to the frequency of "say-on-pay" votes, and we look forward to hearing from our shareholders on this Proposal. We are asking our shareholders to indicate whether they would prefer that we conduct future advisory votes on the compensation of our named executive officers annually, every two years or every three years by voting on the following resolution at the annual meeting:
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"RESOLVED, that the option of every year, every two years or every three years that receives the highest number of votes cast for this resolution will be considered the shareholders’ recommendation of the frequency with which The Davey Tree Expert Company is to hold a shareholder advisory vote on the compensation of its named executive officers." |
Although this advisory vote on the frequency of the advisory vote on our named executive officer compensation is non-binding, the Board of Directors and the Compensation Committee will take into account the outcome of the vote when considering the frequency of future advisory votes on the compensation of our named executive officers. The Board of Directors and the Compensation Committee may decide that it is in the "2014 Summary Compensation Table" (collectivelybest interests of our shareholders and the “Named Executive Officers”Company to hold an advisory vote on the compensation of our named executive officers more or "NEOs").less frequently than the option approved by our shareholders. The next shareholder vote on the frequency of future votes on the compensation of our named executive officers will occur at our 2023 annual meeting of shareholders.
RoleVote Required
The option of every year, every two years or every three years that receives the highest number of votes cast by shareholders, either in person or by proxy, at the annual meeting will be considered the shareholders’ recommendation of the frequency for the advisory vote on the compensation of our named executive officers. Abstentions and non-votes will have no effect on the vote. Shares represented by executed proxies on proxy cards will be voted, if specific instructions are not otherwise given, for a three year frequency.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE OPTION OF ONCE EVERY THREE YEARS AS THE FREQUENCY WITH WHICH SHAREHOLDERS ARE PROVIDED AN ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.
COMPENSATION DISCUSSION AND ANALYSIS
The Compensation CommitteeDiscussion and Analysis section of the Proxy Statement discusses the compensation of the NEOs and includes an overview of 2016's business environment and company performance, as well as a description of the major elements of the Company's executive officer compensation plans and programs, and the factors that are considered in making compensation decisions.
We, theThe members of the Compensation Committee of the Board of Directors, which is composed entirely of independent, nonemployee directors, assist the Board of Directors ("Board" or "Board of Directors") in carrying out its responsibilities for management succession matters, for developing, approving and administering the Company’sCompany's executive officer incentive and benefits programs, for establishing the base salary for the Chief Executive Officer, and for recommending director compensation, and for establishing the salaries for the CEO and the President.compensation. In this role, we are carefulour objective is to align NEOexecutive officer compensation with the interests of the Company’s shareholders, review all proposed compensation programs and program changes, and discuss our recommendations with the full Board of Directors for final approval.Company's shareholders.
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II. | Financial Performance Overview and Company Performance |
Financial Performance Overview
An improvingIn 2016 the U.S. economy exhibited signs of improvement; however, certain sectors were affected by continued economic pressures. Much like the overall economy, the Company's divisions experienced varied results. In spite of these pressures, the Company maintained its growth strategy and achieved record-setting revenues and operating profit in many parts of the country, as well as continued sales growth in most of the Company’sCompany's divisions and subsidiaries contributed to outcomes that exceeded plan and prior year results. Except for cash flow generated from operations, all financial results are based on the audited financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Specifically, in 2014continued its organic and acquisition growth strategy. In 2016, the Company:
Generated cash flow from operating activities of $49,279,000$56,860,000 (as set forth on page F-7 in the Company's Form 10-K for the fiscal year ended December 31, 2014)2016);
Achieved operating profit, as definednet income of $22,284, or 2.6% of revenues, compared to $21,790, or 2.7%, of revenues in our descriptionthe prior year;
Generated income from operations of operating profit on page 14, of $52,818,000 or 6.7%;$45,371,000, which was 2.9% higher than in 2015;
Realized returnReturn on average invested capital of 20.51%17.04%;
Increased revenues by $76,063,000 over 2013 revenues,$23,774,000, or a 10.7% increase; and2.9% increase over 2015 revenues;
Completed multiple business acquisitions in differentstrategic geographic regions and markets; and
Continued to implement the Company's Vision 2020 growth and value strategy.
The Company's income from operations was only 2.9% higher than in 2015 mostly due to economic pressures in the electric utility market, which was offset by improving economics in the residential and commercial market sectors. All financial results noted above are based on the Company's audited financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") except for return on average invested capital ("ROAIC"). ROAIC is defined and discussed under the Long-Term Incentive Compensation caption in Section V of this Compensation Discussion and Analysis.
Company Performance
The following Performance Graphs compares cumulative total shareholder returns for our common shares during the last ten and five years to the Standard & Poor's 500 Stock Index (the "S&P 500") and to an index of selected peer group companies. The peer group, which is the same group used by our independent stock valuation firm, consists of: ABM Industries Incorporated; Comfort Systems USA, Inc.; Dycom Industries, Inc.; MYR Group, Inc.; Quanta Services, Inc.; Rollins, Inc.; and Scotts Miracle-Gro Company. Each of the U.S.three measures of cumulative total return assumes reinvestment of dividends.
The five-year cumulative total return graph on page 28 indicates that the Company's return line is [l] to the S&P 500 and Canada.our peer group. The change in the Company's performance on the five-year and ten-year graphs compared to historical performance against our peer group was driven in part by an upward trend of improved financial performance by our peer group, as well as investor confidence in the years following the last recession. Unlike our peer group, the Company did not experience the dramatic downturn during the 2008 recession, which, in turn, resulted in a continual and persistent increase in returns over both the five and ten year periods.
In 2016 the Company's results remained on an upward trajectory, but were not as dramatic as our peer group primarily because the two companies that account for the greatest weighted return percentage in our peer group, Quanta Services, Inc., and Scotts Miracle-Gro Company, experienced significant increases in profit percentages when compared to their prior year results.
In order to show a more complete and balanced comparison, we have included the ten-year cumulative total return graph below. As detailed on the ten-year graph, our returns have been consistently higher when compared to both the S&P 500 and the Peer Group. Over this ten-year period, our indexed returns have grown to [l] points over the base year, while our Peer Group, the closest to our return, has grown to [l] points over that same time period. We consider the ten-year cumulative total return graph to present a more accurate comparison of our results and the results of our comparators.
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| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 |
Davey | 100 | 123 | 129 | 132 | 148 | 160 | 190 | 218 | 251 | 274 | [ l ] |
S&P 500 Index | 100 | 105 | 66 | 84 | 97 | 99 | 115 | 152 | 172 | 175 | 196 |
Peer Group | 100 | 109 | 85 | 97 | 118 | 121 | 132 | 174 | 177 | 186 | 266 |
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| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 |
Davey | 100 | 119 | 136 | 156 | 171 | [ l ] |
S&P 500 Index | 100 | 116 | 154 | 175 | 177 | 198 |
Peer Group | 100 | 109 | 144 | 146 | 154 | 219 |
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III. | Changes in Executive Compensation |
In 2016 we made changes to the Supplemental Executive Retirement Plan ("SERP"). As detailed in this discussion, the SERP was amended to set monthly payments at retirement for the three remaining active participants. Although we will continue to adjust the SERP accrual to account for changes in actuarial values, no additional benefits will be granted to the three remaining participants.
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IV. | Philosophy and Elements of Executive Compensation Structure and Components |
Aligning Compensation to Company Performance and Shareholder Value
Our compensation philosophy is to drive and support the Company's business goals by recognizing the attainment of measurable performance and the achievement of approved goals and objectives. In addition, we regularly assess whether the Company's compensation structure establishes appropriate incentives for management and employees, and validate that awards are made with due consideration of balancing risks and rewards.
To drive this philosophy, a significant part of the compensation for senior executives is tied to Company performance or achievement of certain goals and, therefore, is not guaranteed. If the Company or an executive fails to perform within established parameters for a given fiscal year, incentive compensation may be changed, reduced or eliminated.
We believe our executive officer compensation programs are closely aligned with the interests of the Company's shareholders. Among other things, as discussed more fully in the Annual Incentive Compensation Plan caption of this Section, a significant portion of the NEOs' annual pay is comprised of the management incentive compensation plan payment. The weighting toward management incentive compensation plan payments is designed to link a substantial percentage of the NEOs' pay to goal achievements and Company performance of the Company. In order to also focus management's attention on the future growth and development of the long-term performance of the Company, incentives reflect competitive market levels and practices, and focus on longer-term financial performance, sustainability, and strategic development of the Company.
For 2016, executive management objectives included revenue, operating profit, growth, acquisitions and management succession goals. With regard to these objectives, in 2016 the Company's revenues were a record high and increased 2.9% over the prior year. Operating profit (a non-GAAP measure as defined in this Proxy Statement) was $51,580,000 in 2016 and the Company achieved an operating profit percentage of 6.1%. Moreover, the Company completed multiple acquisitions and each NEO was engaged in the management succession planning both with the assistance of the Board of Directors and with other officers and managers of the Company.
Objectives of Compensation Structure and Components
The main objectives of the compensation programs are to:
attract and retain qualified personnel;
reward personnel for achieving recognized goals and objectives;
generate a fair return to shareholders on their investment;
utilize the compensation structure to align with the Company's culture, business objectives and employee ownership structure.
In order to meet these objectives, we design the Company's compensation programs such that shareholders' interests are advanced before we approve any incentive payments to the executive officers. To the extent that the efforts of the executive officers result in higher earnings and enhanced shareholder value, we believe the officers should be rewarded. As a result, we intend for the compensation programs to create a significant incentive to properly manage the Company, which in turn will create long-term benefits for shareholders without encouraging the taking of excessive risks that could be detrimental to the growth of the Company or the interests of its shareholders.
Our executive compensation program provides a balanced mix of salary, incentive bonuses and equity awards. By creating a compensation program that includes both long- and short-term goals and targets, we believe that each element of the overall program, comprised of base salary, annual cash incentive plan awards, and longer-term stock options, stock appreciation rights, and performance-based restricted stock unit grants, complements and rewards annual performance as well as ensures long-term viability, growth and shareholder value. Conversely, in order to reduce the risk of focusing on too narrow a result, currently no portion of an award under the compensation programs is based solely on an increase in the Company's stock price. Further, no award is grossed-up or otherwise adjusted to account for its tax consequences and the calculation of awards under the programs is established based on U.S. GAAP financial measures consistent with our audited financial statements. Additionally, to retain and attract qualified executive and management talent, the Board has approved several retirement benefit plans.
We understand that compensation programs should be designed to reduce the opportunity for participants to take unnecessary risks to the detriment of the shareholders or the Company's future viability in order to achieve identified performance targets. We have designed the executive compensation programs to address these risks and minimize the opportunity for any individual to manipulate or undermine the programs. We have accomplished this by tailoring the programs to incorporate measurable objectives. These objectives include plan and targeted objectives including revenues, operating and pre-tax profit, organic and acquisition growth, cash flow, and return on invested capital. The objectives also include certain non-financial measures such as management succession, including identifying and cultivating future managers and executives that are set in advance and reviewed periodically by the Board. Annual bonus-based calculations, and goals and responsibilities set jointly by us with input from the CEO, are approved by the Board. Further, the Board reviews and approves all executive bonus payments. We implemented these programs in part to reduce the opportunity for manipulation during economic downtimes or financial turmoil. Thus, the Board determined, except as indicated in this discussion, no significant material changes were necessary to preserve the integrity of the programs.
Role of Independent Compensation Consultants
To ensure that our compensation programs continue to meet our philosophy and are responsive to economic changes, we periodically retain outside consultants to assess the adequacy and fairness of the Company's compensation programs andprograms. We also meet frequently with the PEOCEO to obtain management’smanagement's recommendations on compensation issues. However,issues; however, Company management personnel
are not involved in approving executive compensation programs. Although we consider the executives integral to the Company’s success, no executive officer has an employment agreement with the Company. In 2011, weWe instructed the Company to retain Pay Governance, an independent consulting firm, to provide a comprehensive review and guidance of the officer compensation structure, in 2013, which was updated and reviewed again in 2014 instructed2015. The next review and analysis is scheduled to occur in 2017.
Pay Governance did not provide any consulting services to the Company or to engageus in 2016. Further, Pay Governance does not provide other services to the Company, is not dependent on the Company as a material source of revenue, has no personal or business relationships with any member of the Compensation Committee or executive officers of the Company, and does not own any Company stock. Thus, we have concluded that no conflict of interest exists with respect to the services provided by Pay Governance.
Based on our experience, and upon the information provided by Pay Governance, we determined that, except for the change in the SERP program, no significant changes were necessary to the Company's overall compensation structure. We will continue to review all aspects of the compensation taking into account our commitment to align executive compensation to augment shareholder value and positive financial results; and will make changes as necessary to reflect pertinent market, economic and competitive conditions.
Results of 2014 and 2011 Shareholder Votes on Executive Compensation
In 2014, the Company's shareholders approved, on an advisory, nonbinding basis, the compensation of the NEOs by an overwhelming majority (the so called "say-on-pay" vote). Specifically, as a percentage, 96.4% of the shares voted were to approve the compensation. Given the strong level of shareholder support, the Board of Directors determined that no material changes to the Company's compensation plans were necessary as a result of the 2014 say-on-pay vote. The Board of Directors and the Compensation Committee value the opinions of the Company's shareholders and will continue to evaluate any concerns raised by the shareholders regarding executive compensation, including the results of the 2017 say-on-pay vote.
At the 2011 annual meeting, the Company's shareholders cast an advisory vote to review executive compensation every three years. Our shareholders are being asked at the Annual Meeting to vote to approve, on an advisory, non-binding basis, the compensation of our NEOs and the frequency of holding future votes on NEO compensation.
Although both of these shareholder votes are on an advisory, nonbinding basis, we consider the results to be a strong affirmation of the actions taken by the Board of Directors in establishing the compensation plans for the NEOs and will continue to monitor the shareholders' opinions regarding executive compensation.
Elements of Executive Compensation
The Compensation of the NEOs outlined in the Proxy Statement is a combination of realized and realizable pay. We define realized pay as compensation that is actually awarded to an NEO, or paid on that NEO's behalf, as a result of the performance or achievement of certain goals and objectives for a given year. We define realizable pay as the potential value of future payments that may be awarded over specific periods of time in the future. The Company is required to value realizable pay, even though it is not yet available to the NEO, at a specific point in time, either at the time of the potential award or as of the end of the fiscal year. Depending on a number of factors, including the long-term increase in shareholder value, these contingent future payments may be more or less than the value assigned to these awards in this Proxy Statement.
As one of the oldest ESOP service companies in the United States, our compensation plans are developed in part with the objective of retaining and fostering employee ownership. Thus, many aspects of our compensation plans, including the annual incentive compensation plan, as well as the granting of stock options and stock appreciation rights, were developed to promote employee ownership through company performance and enhanced shareholder value.
The compensation plans discussed in the Proxy Statement, as well as their category, are as follows:
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REALIZED PAY | | REALIZABLE PAY |
(payment and compensation) | | (potential payments and opportunities) |
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Base Salary | | Stock Options |
Annual Incentive Compensation Plan | | Stock Appreciation Rights |
Supplemental Bonus Plan | | Performance-Based Restricted Stock Units |
Perquisites | | Qualified Retirement Plan |
| | Nonqualified Retirement Plans |
Each element of the NEOs' compensation, including additional information regarding the alignment of pay and performance for each program, is discussed in more detail below.
Base Salaries
Although not tied to a specific benchmark or pre-determined formula, we pay executive officers a base salary that generally is near 90% of the market "midpoint" for similar positions at companies that are approximately the same size and complexity. Similarly, we have not established a unique peer group for compensation competitiveness studies. However, we periodically retain Pay Governance, to determine the adequacy of base salaries, as well as all other compensation of the Company's executive officers. This review includes examining market data as part of its evaluation process. We engaged Pay Governance to review compensation in 2013, and update that study.again in 2015. The next review is scheduled to occur in 2017.
In addition, we evaluate the eventCEO based on the Company's annual performance, as well as other performance objectives as established by us, including demonstrated capabilities, scope of responsibility, experience, expertise, achievement of results, and development of management employees. These other objectives can and do change annually and may incorporate such things as management succession activities, board governance issues and other objective and individual measures of significance to us. For 2016 these measures included meeting a specified operating profit target, achieving sales growth consistent with the Vision 2020 development plan, and obtaining a specified average invested capital. Other considerations included targeted acquisitions in selected markets and ongoing management succession planning. Annually, the salaries of other executive officers are reviewed by us with the CEO to determine merit and performance increases based on the CEO's evaluation, as well as our evaluation. We also have the opportunity to interact with senior executives at various times during the year, which aids in our assessment of each individual's performance.
The base salary disclosed in the "2016 Summary Compensation Table" on page 38 for each NEO in 2016 and prior years reflects the philosophy outlined above as it relates to executive compensation. The increase in their 2016 over 2015 base salary reflects the NEOs' achievement of the specific objectives noted above, as well as adjustments based on the results of the 2013 and 2015 Pay Governance studies to continue to align executive compensation with similar industry objectives.
Annual Incentive Compensation Plan
To align executive officer compensation with the interests of the Company's shareholders, we have established a policy whereby a significant portion of the NEOs' compensation is contingent on the Company's profitability. Under the Management Incentive Compensation Plan ("MICP"), the executive officers and other key personnel have an opportunity to earn an incentive bonus award based primarily on annual operating profit achieved; an assessment considered to be a significant measure of financial success for the Company and the shareholders. Consistent with the Board's objective of linking performance to compensation, for the NEOs, these incentive awards at the "target" level, approximate 70% to 85% of a changeparticipant's total annual base salary. In addition, there are approximately 50 other employees eligible for an incentive award of between approximately 25% and 50% of total annual base salary. In addition to the mathematical calculation under the plan formula, we have the option to consider other relevant factors, as determined by the Board, in setting the NEOs' final incentive awards. Such factors might include segment performance or achievement of individual financial or nonfinancial goals. We also may consider extraordinary or nonrecurring events affecting the annual results, as well as the achievement of nonfinancial goals such as management succession or customer benchmarks in evaluating the achievement of performance targets. The amount of the bonus award will increase the closer the actual results are to the target.
The MICP was designed with Pay Governance's assistance to be competitive at or above market median levels and the MICP percent of total annual salary range for each NEO is based on that NEO's duties and responsibilities for certain
segments and operations of the business. The Board establishes, as a percentage of revenue, a target operating profit percentage each year, calculated as described below. To the extent that the target operating profit percentage is overachieved, the NEOs' incentive award will increase. At 120% of the annual target, the formula is increased such that 150% of the normal target percentage of base salary is granted. At or above 121% of the annual target, an amount equal to 25% of the excess operating profit over 120% of our annual target is added to the annual incentive pool. However, in no event will the annual incentive payments for all participants be greater than 15% of the actual operating profit for that year. If the Company's actual operating profit percentage is below 80% of the annual target as set by the Board, generally no incentive bonus awards are paid.
These factors are reviewed by us and the failure to achieve certain goals can negatively impact incentive awards. To provide motivation for the NEOs to look beyond the current year results, continue to maintain sustainable results, and to continue to emphasize the importance of employee ownership, the NEOs receive shares of stock for 10% of the amount of an incentive award above $25,000. These factors are reviewed by us and the failure to achieve certain goals can negatively impact incentive awards.
For a given year, each NEO will have a target bonus percentage set between 70% and 85%. For 2016, NEO target bonus percentages were the same as set by us in 2014 and 2015 pursuant to the 2013 Pay Governance studies and were as follows: Mr. Warnke -- 85%, Mr. Covey -- 75%, and Messrs. Paul, Marshall and Stief -- 70%. Each NEO is then evaluated for achievement of the goals and objectives described above and a NEO's failure to achieve these goals and objectives may impact the NEO's incentive award.
For 2016 and 2015, we set the target operating profit percentage at 6.2%. The operating profit percentage actually achieved for fiscal years 2016 and 2015 was 6.1% and 6.6%, respectively. We set the target operating profit percentage based on a number of factors, including competitive, economic and environmental factors. While this percentage is deemed to be aggressive, we continue to believe that even with the current economic and regulatory pressures, and considering unforeseen developments, it is achievable. Incentive awards are calculated after year-end financial results are reviewed, and no award is paid until the annual financial statements are certified by the Company's independent auditors and approved by us and the Board.
The operating profit percentage is calculated by dividing operating profit by revenues. Operating profit, a non-GAAP financial measure, is defined as income from operations as presented in the Company's financial statements prepared under U.S. GAAP adjusted to exclude: administrative incentive compensation expense; pension expense; stock-based compensation expense; excess declining-balance depreciation method expense over straight-line method depreciation expense; and gains and losses on the sale of assets. The number is further adjusted to include state and local income taxes and to remove the effect of any item deemed an extraordinary or nonrecurring event. Although we have not developed a pre-determined list of such events, it could potentially include a phenomenal weather event, terrorist attack, or restructuring of an operating unit. We also consider as the achievement of non-financial goals or objectives such as successful management succession.We use the non-GAAP measurement of operating profit because we believe these measurements reflect those items that are directly within the executive's control and responsibilities. As reflected in the "2016 Summary Compensation Table" on page 38, due to the actual operating profit percentage being lower than in 2015, the payments to all NEOs' were lower than in the prior year.
Management Supplemental Bonus Plan
Because of a high level of performance expected from the NEOs, we implemented the Management Supplemental Bonus Plan ("MSBP"). We determined that this plan was an important part of recognizing those, who by virtue of their level of responsibility and proven results, bring added value to the organization and achieve results despite continued regulatory, contractual, and economic pressures. More specifically, the NEOs have direct responsibility to implement the Company's Vision 2020, a plan to drive shareholder value by increasing revenues and enhancing operating margins through a focus on client loyalty and employee engagement. Bonuses under the MSBP are not subject to a predetermined set of metrics or benchmarks but the MSBP is approved annually by the Board and is generally paid in January of each year. The 2016 bonus was calculated after the Vision 2020 goals, as definedwell as the NEOs' commitment to drive revenue enhancement. Vision 2020 continues to be implemented by the NEOs', as well as other management personnel, through a series of initiates to implement strategies related to smart employee growth, client service, brand awareness and financial sustainability. Payments to the NEO's under the MSBP are reflected in ourthe "2016 Summary Compensation Table" on page 38.
Other Bonus Plans
We also paid discretionary bonuses to many office personnel and paid bonuses under various retention, production and sales programs to eligible field employees.
Long-Term Incentive Compensation
The principal objective of the long-term incentive program is to reward employees for achieving positive long-term results that increase the value of the Company's stock, as well as to dissuade management from concentrating solely on annual results. By awarding certain employees nonqualified stock options ("NQSOs") and providing opportunities for employees to acquire stock through other stock programs, including the Employee Stock Purchase Program and the Stock Appreciation Rights program described below, we are aligning the long-term value of the stock price with potential financial gains for employees and executives. Under the 2014 Omnibus Stock Plan, which was approved by the shareholders in 2014, the tax and accounting treatment of an award is accounted for as disclosedrequired by law and U.S. GAAP. To date, the tax and accounting treatment of an award has not dictated what awards are made or how an award is fashioned.
Stock options generally vest in equal installments over five years, beginning on the first anniversary of the grant date. These options provide NEOs and other leading managers with the opportunity to acquire common stock over time at a price that is fixed, based on the stock valuation price as of the date of grant.
If the stock value increases after the grant of options, the option becomes more valuable. This accomplishes two objectives. First, except as described below, the employee must remain employed over the vesting period. Second, it ties a significant component of the employee's compensation to the interests of all shareholders by focusing executive officers on longer-term results.
Each option has a limited term, generally expiring no later than ten years from the date of grant. At the end of the option term, the right to purchase any unexercised options expires. Except as described below, option holders generally forfeit any unvested or unexercised options if their employment with the Company terminates.
In the case of a retirement by an option holder, the retiree may exercise vested stock options within three months after the date of retirement. If an option holder dies or is permanently disabled while employed by the Company, or within three months following the date of the option holder's retirement, the option holder, or option holder's representative, has the right to exercise any vested stock options within one year after such event. Also, we may accelerate unvested options to become immediately exercisable, in-full or in-part, upon death, permanent disability or retirement, provided the option holder has completed at least one year of continuous service. If the option holder's termination is due to any reason other than those listed above, the option holder may exercise any vested stock options within the three-month period after the date of termination, but only with our consent or that of the Board or the CEO. The right to exercise a stock option in these limited circumstances would not result in an extension of that stock option's initial expiration date.
We have periodically granted options, taking into account the amount of options currently outstanding, the period of time between grants and changes within management positions, as well as overall performance of the Company and the performance of individual grantees. Option grants take into account the achievement of certain goals and objectives, including rewarding management employees for their efforts to maintain or replace contracts, identify new business opportunities, developing a labor and talent pool, and sustaining existing business; as well as the ability to address ever-expanding regulatory burdens and requirements from local, state and the federal governments. Moreover, although we make the final decision, we may solicit input from our senior executives regarding the performance of other officers and employees.
After considering alternatives to the practice of periodically granting options, and after concluding that granting options is consistent with the goals and objectives of the Company's compensation plans, we granted stock options in each of the last four years. The 2016 option grants to Messrs. Covey, Paul and Stief were made after reviewing the NEOs' overall performance within that NEOs' area of responsibility. Messrs. Warnke and Marshall did not receive 2016 option grants primarily because their mix of long-and-short term compensation components are adequate for their respective positions and responsibilities; and we concluded it was appropriate to allocate the available stock options to other Company personnel. Outstanding options granted to NEOs', including the NQSO granted in 2016, are reflected in the "Plan Benefits--December 31, 2014 ‘as-if’ Triggering Event Occurred""Outstanding Equity Awards at Fiscal Year-End" beginning on page 41.
In general, stock option grants to nonexecutive employees occur in the same way as grants to executive officers. Consistent with this practice, stock options grants were made to other officers and management employees in 2016.
Stock option grants are not specifically timed to enhance overall executive compensation, and we do not time grants to make up for any shortfalls in annual incentive or other benefit payments. Tax and accounting treatment of any stock option grant is accounted for as required by law and U.S. GAAP.
We have not intentionally timed the grant of stock options to coincide with the release of material nonpublic information, and any policy adopted by us will address the prohibition of timing option grants in relation to the release or existence of material nonpublic information. We will continue to review the appropriateness of granting options, as well as considering other methods to reward managers for the achievement of goals consistent with the Company's growth and shareholder value.
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B. | Stock Appreciation Rights |
Under the Stock Appreciation Rights ("SARs") program, eligible employees receive annual grants of stock-settled stock appreciation rights. The award level for each participant in the plan is based on that participant's scope of responsibilities and the ability to achieve success given these responsibilities. As a participant in the SARs program is provided with the opportunity to undertake more responsibility for the success of the Company, that participant may be granted a greater number of rights or units; however, the overall performance of the Company will continue to determine the number and value of the rights or units granted to all participants. We, with input from the CEO, establish the targets based on the participant's responsibility and position. Since this program will reward sustained stock value improvement over time, similar to the stock option program we anticipate that this program will further our objective to align the long-term value of the Company's stock price with financial incentives for the NEOs, officers and managers. Under the plan, SARs are used to acquire common shares based on the appreciation in the stock price times the number of SARs awarded. The appreciation is calculated by subtracting the stock price at the date of grant from the stock price at the date of redemption. The SARs vest at the rate of 20% per year and are automatically deemed exercised on the tenth anniversary of the effective date of the grant. As with options, SARs were awarded in 2016 based on our review and analysis of Company and NEO performance, including sales growth, successful acquisition integration, cash flow and return on invested capital. Grants to the NEOs in 2016 are detailed in the "2016 Grants of Plan-Based Awards" table on page 26, 40.
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C. | Restricted Stock Units and Performance-Based Restricted Stock Units |
In 2013, we froze the time-based and performance-based restricted stock awards and replaced them with the Performance-Based Restricted Stock Unit Plan ("PRSUs").
PRSUs are granted to NEOs pursuant to the long-term performance plan available to officers and selected managers. This is consistent with the market practices utilized by other companies similar in size and in accordance with an updated approach to long-term incentives. Further, we believe that return on invested capital inherent in the PRSU awards is an appropriate measure of corporate performance because achievement of these targets would increase shareholder return and provide expansion opportunities for the Company.
The level of an award of PRSUs under the long-term performance plan is made each fiscal year based on the return on average invested capital ("ROAIC"), the levels of which were set based on an analysis of industry benchmarks. The ROAIC is calculated as "EBIT" divided by Average IC where:
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EBIT = | Net income + taxes + interest - cost of any pension settlement |
IC = | Net worth (total assets less total liabilities) + funded debt (defined as long-term debt, current debt and current/long term capital leases) |
Average IC = | Beginning IC at January 1, 2016 + Ending IC at December 31, 2016 divided by two |
The ROAIC for receiving the maximum award is currently set at 24%, the same as it was when first established by the Board in 2004. Further, if the ROAIC is 8% or less, there will be no PRSU awards. Achieving a ROAIC of more than 8% but less than 24% will result in a participant receiving a portion, but less than the full value, of the available PRSU grant. The actual ROAIC achieved in 2015 was 17.31% which resulted in 58.2% of potentially available PRSUs being awarded in 2016.
PRSUs vest five years from the date of grant but will not generally be paid until retirement or qualified termination. We designed the PRSU awards to retain executive talent by enhancing long-term retirement benefits and established the award levels based on job responsibilities and performance. Except as it relates to the calculation, PRSU awards are not based upon or in any way contingent upon the participant's compensation package. Each NEO received the PRSU award as set forth in the column labeled "All Other Stock Awards" in the "2016 Grants of Plan - Based Awards" table on page 40.
Qualified Retirement Plan
The Company's executive officers, as well as other eligible employees, are entitled to participate in the qualified retirement plan. The plan, the 401KSOP and ESOP Plan ("401K"), was set up pursuant to ERISA regulations and seeks to provide every employee with the opportunity to accumulate funds for retirement.
Under the 401K, an employee who is a noncollective bargaining employee, who is at least 21 years old, and has completed one year of continuous service, is automatically enrolled in the 401K. The employee may then elect to opt out of the 401K, and participants can suspend contributions at any time. Participant contributions are on a before-tax basis and the Company makes an annual contribution in Company stock equal to 100% of the first 1% percent and 50% of the next 3% percent of the participant's W-2 wages, subject to the Internal Revenue Service ("IRS") limit of $270,000 in 2017 and $265,000 in 2016, which is the government-imposed annual compensation limit required for qualified retirement plans. This represents a potential maximum contribution of 2.5%. Participant contributions are always 100% vested, and Company contributions become 100% vested after three years of continuous service, or upon death, permanent disability or retirement of a participant. The 401K offers a variety of investment options with varying levels of risks and returns for the participant's contributions; however, the participant's investment in Company stock is limited to 25% of the participant's annual contributions. The value of the account eligible for distribution is the vested investment value at the time of distribution, and there is no guarantee of any rate of return or investment value.
As described in previous filings, The Davey Tree Expert Company Employee Retirement Plan ("ERP") was frozen effective December 31, 2008. Under the frozen ERP, benefits currently being paid to retirees will continue and benefits accrued through December 31, 2008 for employees covered by the ERP will not be affected. However, no further benefits will be accrued under the ERP. Thus, eligible participants who retire will still choose the same payment options and forms of retirement, beginning as early as age 55. The value of each of the NEOs ERP benefit is included in the "2016 Pension Benefits" table on page 44.
Non-Qualified Retirement Plans
The non-qualified retirement plan is The Davey Tree Expert Company 401KSOP Match Restoration Plan ("Match Plan").
Pursuant to the Match Plan, an employee who has elected to contribute the maximum amount to the 401K, but who is precluded by Internal Revenue Code ("IRC") restrictions from receiving the full matching contribution paid by the Company, is eligible to participate in the Match Plan. The Match Plan allows the employee to accumulate an amount that could have been matched if the IRC restrictions had not been in effect. Each participant has two potential match criteria. If the participant is unable to contribute the full matching percentage permitted, the Company will increase the participant's Company match such that it, when added to the match under the 401K, will equal 50% of the permitted percentage. Further, the Company will contribute an amount equal to 50% of 3% for any amount above the maximum compensation level, which is set at $265,000 and $270,000 for 2016 and 2017, respectively. The Company maintains an account record for each employee who meets this criteria to reflect that employee's interest in the Match Plan. Interest on each account record, currently set at 7%, is accrued annually on December 31.
The Davey Tree Expert Company Retirement Benefit Restoration Plan ("Restoration Plan") was frozen effective December 31, 2008. After being frozen, no benefits were added to the plan; however, the benefit accruals for the participants in place prior to the plan being frozen continue to be actuarially determined on an annual basis.
In 2013, the Board of Directors elected to close the Supplemental Executive Retirement Plan ("SERP") to future participants. When the SERP was closed, the decision was made to allow current participants to continue to earn limited benefits because, at the time, these participants had relied on the provisions of this plan in making retirement planning and timing decisions. In keeping with our decisions related to the ERP and Restoration Plan, no further accruals under the SERP were made to any NEO after 2015. Further, in December of 2016, we set the annual SERP retirement benefit for the three remaining active participants. This allowed us to set the Company's future liability for retirement payments to these participants at a fixed amount per year.
Payments made under these plans will be made from the Company's general assets.
The present value of the NEOs nonqualified retirement plans is presented in the "2016 Pension Benefits" table on page 44.
Perquisites
NEOs qualify for certain perquisites as described in footnote 7 to the "2016 Summary Compensation Table" on page 38. Many of these perquisites, including the health plan, long-term disability plan, personal tax preparation fees, and the management car plan, are made available to other officers and management employees of the Company. We believe these perquisites are appropriate to attract and retain qualified personnel and to provide additional incentives to enhance management's performance and commitment.
Other Benefit Plans
Other benefit plans that are available to all eligible employees, including NEOs, consist of, among others, the Employee Stock Purchase Plan, the payroll savings plan, the group health insurance plan, the disability plan, the life insurance plan, the dental and vision insurance plans, and the vacation and paid-time-off plans.
With regard to the purchase and sale of stock, other than as described above or in plan documents, executive officers may generally purchase stock on the same basis as any other employee, either through the Employee Stock Purchase Plan or through direct purchase.
Board of Directors Authority
The Board retains the authority to determine eligibility and participation by employees in the plans. Further, except as described above, even though it has no current plan to do so, the Board may amend the plans, and change the costs and the allocation of benefits between persons and groups.
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VI. | Employment, Termination and Change in Control |
Employment
Although we consider the NEOs integral to the Company's success, no NEO or other executive officer has an employment or severance agreement with the Company.
Insider Trading Policy / Pledging / Claw Back / Stock Redemption Policy
For many years we have had an Insider Trading and Public Disclosure Policy in place that prevents NEOs, other officers and management personnel from conducting Company stock transactions based on insider information of any kind. Under this policy, certain persons cannot engage in stock transactions using material nonpublic information that could either positively or adversely affect the value of the Company's stock either through direct transactions with the Company or through the 401K. Because of the unique nature of the restriction on ownership and sale of stock, as well as the fact that the Company's stock is not publicly traded, we have not identified a need to implement a clawback policy or a prohibition on pledging Company securities. In addition, because of these unique features, it is not feasible to hedge Company stock. However, we will continue to monitor our policies and review the effects of implementing such policies.
We also maintain a Stock Redemption Policy. Under this policy, executive officers, as well as other officers and executive managers, may only redeem stock during a 60-day period which begins when the year-end stock valuation is released or when the Company's audited annual financial statements are released, whichever is later, or after the release of the midyear stock price.
Change In Control
Under our 2014 Omnibus Plan, a “change of control” will be deemed to occur if (i) any person, either alone or together with a group, acquires beneficial ownership of 20% or more of our outstanding common shares or commences a tender or exchange offer for 20% or more of our outstanding common shares that is declared by the Compensation Committee to constitute a “change in control,” (ii) we establish a record date for shareholders to vote upon a merger transaction that will result in our shareholders holding less than 80% of the outstanding shares of the surviving or resulting entity in the merger, the disposition of all or substantially all of our assets, or the dissolution of the Company, or (iii) at any time during a consecutive 24-month period, “continuing directors” represent less than a majority of the members of our Board of
Directors (“continuing directors” meaning individuals who were directors at the beginning of the 24-month period or whose appointment or nomination for election as directors was approved by a majority of the continuing directors then in office). Upon the occurrence of a “change of control” event as described above, unless the Board of Directors determines otherwise: all outstanding stock appreciation rights, stock options and stock purchase rights become fully exercisable; all restrictions on restricted stock and other awards are deemed satisfied; and all cash awards become fully earned. Any such determination by the Board of Directors that is made after the occurrence of the change in control will not be effective unless a majority of the "continuing directors" then in office are "continuing directors" and the determination is approved by a majority of the "continuing directors." For this purpose, "continuing directors" are directors who were in office at the time of the change in control or who were recommended or elected to succeed "continuing directors" by a majority of the "continuing directors" then in office. Other than as outlined above, we havethe Company has no so-called "golden parachute" severance packages with any NEO.
Results of 2014 Shareholder Vote on Executive Compensation
In 2014, our shareholders approved, on an advisory, nonbinding basis, the compensation of our Named Executive Officers by an overwhelming majority. Specifically, as a percentage, 96.4% of the shares voted were to approve the compensation. Given the strong level of shareholder support, our Board of Directors determined that no material changes to the Company's compensation plans were necessary. Nonetheless, as has been our practice, we regularly evaluate these plans and recommend changes, as we deem appropriate. Our Board of Directors and the Compensation Committee value the opinions of our shareholders and will continue to evaluate any concerns raised by our shareholders regarding executive compensation.
The next advisory vote on the Named Executive Officer compensation (so called "say-on-pay") and the next advisory vote on the frequency of the advisory votes on the Named Executive Officer compensation will occur at the 2017 Annual Meeting of Shareholders.
Although both of these shareholder votes are on an advisory, nonbinding basis, we consider the results to be a strong affirmation of the actions taken by the Board of Directors in establishing the compensation plans for the NEOs and will continue to monitor our shareholders’ opinions regarding executive compensation.
Compensation Philosophy and Objectives
Our compensation philosophy is to drive and support the Company’s business goals by compensating for measurable performance and achievement of approved goals, regularly assessing whether the Company’s compensation structure establishes appropriate incentives for management and employees, and validating that awards are made with due consideration of balancing risks and rewards.
The Company’s compensation programs are designed to reward employees for producing sustainable growth for our shareholders and to attract and retain qualified and experienced talent. A significant part of the compensation for senior executives is tied to Company performance or achievement of certain goals and, therefore, is not guaranteed. If the Company or an executive fails to perform within established parameters for a given fiscal year, incentive compensation may be reduced or eliminated.
The main objectives of the compensation programs are to: attract and retain qualified personnel; reward personnel for achieving recognized goals and objectives; generate a fair return to shareholders on their investment; and do so in a way consistent with the Company’s culture, business objectives and employee ownership structure. In order to meet these objectives, we design the Company's compensation programs such that the Company shareholders’ interests are advanced before we approve any incentive payments to the executive officers. To the extent that the efforts of the executive officers result in higher earnings and enhanced shareholder value, we believe the officers should be rewarded. As a result, we intend for the compensation programs to create a significant incentive to properly manage the Company, which in turn will create long-term benefits for the shareholders without encouraging the taking of excessive risks that could be detrimental to the interests of the shareholders.
The comprehensive compensation program provides a balanced mix of salary, incentive bonus and equity awards. By creating a program that includes both long- and short-term goals and targets, we believe that each element of the overall program, comprised of base salary, annual cash incentive plan awards, and longer-term stock options, stock appreciation rights, and performance-based restricted stock unit grants, complements and rewards annual performance as well as ensures long-term viability, growth and shareholder value. Additionally, to retain and attract qualified executive and management talent, the Board has approved several retirement benefit plans. Conversely, in order to reduce the risk of focusing on too narrow a result, currently no portion of an award under the compensation programs is based solely on an increase in the Company’s stock price. Further, no award is grossed-up or otherwise adjusted to account for its tax consequences and the calculation of awards under the programs is established based on U.S. GAAP financial measures consistent with our audited financial statements.
We understand that compensation programs should be designed to reduce the opportunity for participants to take unnecessary risks to the detriment of the Company’s shareholders and future viability in order to achieve their performance targets. We have designed the programs to address these risks and minimize the opportunity for any individual to manipulate or undermine the programs. We have accomplished this by tailoring the programs to incorporate objective features. These features include plan and targeted objectives that are set in advance and reviewed periodically by the Board, annual bonus-based calculations, and goals and responsibilities set jointly by us and the PEO and approved by the Board. The objectives include operating profit, return on invested capital, management succession planning, and profitable sales growth. Further, the Board reviews and approves all executive bonus payments. We designed and implemented these programs before the recent economic turbulence in part to prevent the complications ultimately experienced by others; therefore, after the initial economic downturn, the Board did not determine that any material changes were necessary to preserve the long-term integrity of the programs.
In 2011 and again in 2014, we authorized the executive officers to engage Pay Governance, an independent executive compensation advisory firm, to evaluate the current executive officer compensation structure. Pay Governance does not provide other services to the Company, is not dependent on the Company as a material source of revenue, has no personal or business relationships with any member of the Compensation Committee or executive officers of the Company, and does not own any Company stock. Thus, as outlined in Item 407(e)(3) of Regulation S-K, we have concluded that no conflict of interest exists with respect to the services provided by Pay Governance.
Based on our experience, and the information provided by Pay Governance, we determined that no material changes were necessary to the Company's overall compensation structure. We will continue to review all aspects of compensation taking into account our commitment to align executive compensation to augment shareholder value and positive financial results; and will make changes as necessary to reflect pertinent market, economic and competitive conditions.
Base Salaries
We pay executive officers a base salary that generally is near 90% of the market “midpoint” for similar positions at companies that are approximately the same size and complexity. Although we have not established a unique peer group for compensation competitiveness studies, we periodically retain an independent compensation consulting firm to determine the adequacy of base salaries, as well as all other compensation of the Company’s executive officers we last engaged Pay Governance to review compensation in 2014. Other than as described above, annual base salary increases are not directly tied to a predetermined formula.
We evaluate the Company’s PEO based on the Company’s annual performance, as well as other performance objectives as established by us, including demonstrated capabilities, achievement of results, and development of management employees. These other objectives can and do change annually and may incorporate such things as management succession activities, board governance issues and other objective and individual measures of significance to us. For 2014, these measures included targeted acquisitions in selected markets and continued management succession planning. Similarly, the other NEOs are evaluated not only on performance related to achieving certain financial objectives, but on other defined objectives, and on their scope of responsibility, experience and expertise. Annually, the salaries of other executive officers are reviewed by us with the PEO to determine merit and performance increases based on the PEO’s evaluation, as well as our evaluation. We periodically review the NEOs’ performance and have the opportunity to interact with senior executives at various times during the year, which aids in our assessment of each individual’s performance.
The base salary disclosed in the "2014 Summary Compensation Table" on page 19 for each NEO in 2014 and prior years reflects the philosophy outlined above as it relates to executive compensation. The increase in their 2014 over 2013 base salary reflects the NEOs achievement of specific objectives, as well as adjustments based on the results of the 2012 and 2014 Pay Governance studies to continue to align executive compensation with industry benchmarks. For 2014, the specific objectives included goals related to revenues, operating profit, acquisitions, and management succession. With regard to these objectives, in 2014 the NEOs met or exceeded these targets. The Company's sales were a record high and increased 10.7% over the prior year, while operating profit in 2014 was 110% of the targeted operating profit percentage. Moreover, the Company completed multiple acquisitions and each NEO was engaged in the management succession planning both with the assistance of the Board of Directors and with other officers and managers of the Company.
Annual Incentive Compensation Plan
To align executive officer compensation with the interests of the Company’s shareholders, we have established a policy whereby a measurable portion of the compensation of the NEOs compensation is contingent on the Company’s profitability. Under the Management Incentive Compensation Plan ("MICP"), the executive officers and other key personnel have an opportunity to earn an incentive bonus award based primarily on the annual operating profit achieved; an assessment considered to be a significant measure of financial success for the Company and the shareholders. The focus of this element of the overall compensation program is to reward achievement of annual goals set by us. Consistent with the results of the 2012 Pay Governance study and as approved by the Board of Directors, we updated the MICP to more appropriately align NEO compensation with competitive norms. These incentive awards now approximate 25% to 85% of a participant’s total annual base salary. Currently, there are approximately 45 employees eligible for an incentive award under this Plan. The Board of Directors establishes, as a percentage of sales, a target operating profit percentage each year, calculated as described
below. The degree to which the target percentage is underachieved or overachieved affects the total pool available for bonus awards. In addition to the mathematical calculation under the plan formula, we have the option to consider other relevant factors, as determined by the Board of Directors, in setting NEO final incentive awards. Such factors might include segment performance or achievement of individual goals. However, if the Company’s actual operating profit percentage is below 80% of the annual target as set by the Board, generally no incentive bonus awards are paid. The amount of the bonus award will increase the closer the actual results are to the target.
Consistent with the Board’s objective of linking performance to compensation, the NEOs have an individual target percentage that ranges from 70% to 85% of base salary. The range for each NEO is based on that NEO’s duties and responsibilities for certain segments and operations of the business. Earning this target incentive is dependent on the Company achieving the overall target operating profit percentage. To the extent that the target operating profit percentage is overachieved, the NEO’s incentive award will increase. At 120% of the annual target, the formula is increased such that 150% of the normal target percentage of base salary is granted. At or above 121% of the annual target, an amount equal to 25% of the excess operating profit over 120% of our annual target is added to the annual incentive pool. However, in no event will the annual incentive payments for all participants be greater than 15% of the actual operating profit for that year. We may consider extraordinary or nonrecurring events affecting the annual results in evaluating the achievement of performance targets. To provide motivation for the NEOs to look beyond the current year results, continue to maintain sustainable results, and to continue to emphasize the importance of employee ownership, the NEOs receive shares of stock for 10% of the amount of an incentive award above $25,000. For example, if a NEO has earned an incentive award of $50,000, then $47,500 would be paid in cash and $2,500 would be paid in stock at the most recent valuation, usually our year-end valuation: [e.g., ($50,000 - $25,000) = $25,000 x 10% = $2,500]. We also paid discretionary bonuses to many office personnel and paid bonuses under several safety, retention, production and sales programs to eligible field employees.
For 2014, we set the target operating profit percentage at 6.1%, and the operating profit percentage actually achieved for fiscal year 2014 was 6.7%. We set the target operating profit percentage based on a number of factors, including competitive, economic and environmental factors. While this percentage is deemed to be aggressive, we continue to believe that even with the current economic and regulatory pressures, and including consideration of unforeseen developments, it is achievable. Incentive awards are calculated after year-end financial results are reviewed, and no award is paid until the annual financial statements are certified by the Company’s independent auditors and approved by us and the Board of Directors. Although no NEO’s annual incentive award is based solely on achieving the target operating profit percentage, that factor is an important measure of performance for the Company. As discussed above, other factors such as cash flow, debt levels and management succession planning contribute to the determination of each individual’s annual incentive award. These factors are reviewed by us and failure to achieve certain goals can negatively impact incentive awards.
The actual operating profit percentage is calculated by dividing actual operating profit by net revenues. Operating profit is defined as income from operations as presented in the Company’s financial statements prepared under U.S. GAAP adjusted to exclude: administrative incentive compensation expense; pension expense; stock-based compensation expense; excess declining balance depreciation method expense over straight-line method depreciation expense; and gains and losses on the sale of assets. The number is further adjusted to include state and local income taxes and to remove the effect of any item deemed an extraordinary or nonrecurring event by us. For a given year, each NEO will have a target bonus percent set between 70% and 85%. For 2014, NEO target bonus percentages were the same as set by us in 2012 pursuant to the Pay Governance study and were as follows: Mr. Warnke -- 85%, Mr. Covey -- 75%, and Messrs. Paul, Marshall and Stief -- 70%. Each NEO is then evaluated for achievement of the goals and objectives described above and a NEO's failure to achieve these goals and objectives may impact the NEO's incentive award. The Company’s earnings were higher in 2014 when compared to 2013. In 2014 the targeted operating profit percentage was 6.1% and the actual performance was 6.7%, or 110% of target; whereas, in 2013 operating profit was 6.6%. As reflected in the "2014 Summary Compensation Table" on page 19, due to achieving 110% of target operating profit percentage and/or achieving above-target segment results, the payments were higher in 2014 than in 2013.
Long-Term Incentive Compensation: Stock Options
In 2014, by an overwhelming majority of 99.1% of the shares outstanding, the shareholders approved the 2014 Omnibus Stock Plan ("Plan"), which replaced the 2004 Omnibus Stock Plan. The 2014 Plan contains many of the same provisions as the 2004 Omnibus Stock Plan, including consolidating into a single plan provision the grant of stock options, other stock-based incentives, and the employee stock purchase program. These provisions of the Plan gives us broad discretion to fashion the terms of awards in order to provide employees with longer-term stock-based incentives that are appropriate under the circumstances. The principal objective of the long-term incentive program is to reward employees for achieving positive long-standing results that increase the value of the Company’s stock and to dissuade management from concentrating solely on annual results. By awarding certain employees incentive stock options ("ISOs") or nonqualified stock options ("NQSOs") and providing opportunities for employees to acquire stock through other stock programs, including the Stock Appreciation Rights program described below, we are aligning the long-term value of the stock price with potential financial gains for employees and executives. Under the Plan, the tax and accounting treatment of an award is accounted for as required by law and U.S. GAAP. To date, the tax and accounting treatment of an award has not dictated what awards are made or how an award is fashioned.
Stock options, whether they are ISOs or NQSOs, generally vest in equal installments over five years, beginning on the first anniversary of the grant date. These options provide senior executives with the opportunity to acquire common stock over time at a price that is fixed,
based on the most recent stock valuation price as of the date of grant. Swaps involving stock options granted pursuant to nonqualified plans are not eligible for tax deferred treatment.
There is a limited term in which an option grantee can exercise stock options, known as the "option term." The option term is generally ten years from the date of grant. At the end of the option term, the right to purchase any unexercised options expires. Except as described below, option holders generally forfeit any unvested options if their employment with the Company terminates.
In the case of a retirement by an option holder, the retiree may exercise any vested stock options within three months after the date of retirement. Upon the death or permanent and total disability of an option holder while employed by the Company or within three months after the date of termination, the option holder or option holder’s representative has the right to exercise any vested stock options within one year after the date of the option holder’s termination or death. Also, we may accelerate unvested options outstanding at or granted after September 13, 2007, to become immediately exercisable, in-full or in-part, upon death, permanent disability or upon retirement at age 62 or older, provided the option holder has completed at least one year of continuous service. If the option holder’s termination is due to any reason other than those listed above, the option holder may exercise any vested stock options within the three-month period after the date of termination, but only with our consent or that of the Board of Directors or the PEO. The right to exercise a stock option in these limited circumstances would not result in an extension of that stock option’s initial expiration date.
If the stock value increases after the grant of options, the option becomes more valuable. This accomplishes two objectives. First, the employee must remain employed over the vesting period, providing an incentive for the option holder to remain employed by the Company; second, it ties a significant component of the employee’s compensation to the interests of all shareholders by focusing executive officers on longer-term results. In general, option grants to nonexecutive employees occur in the same way as grants to executive officers. Option grants are not specifically timed to enhance overall executive compensation, and we do not time option grants to make up for any shortfalls in annual incentive or other benefit payments. Nonqualified stock options were granted to the NEOs, officers and other management employees in 2014.
We have periodically granted options, taking into account the amount of options currently outstanding, the period of time between grants and changes within management positions, as well as overall performance of the Company and the performance of individual grantees. Although we make the final decision, we may solicit input from our senior executives regarding the performance of other officers and employees. Tax and accounting treatment of any stock option grant is accounted for as required by law and U.S. GAAP. Although historically we have not granted stock options on an annual basis, after considering alternatives to the practice of periodically granting stock options, and after concluding that granting these options is consistent with the goals and objectives of the Company's compensation plans to grant options to management on a periodic basis we last granted stock options in 2013 and 2014. These goals and objectives include rewarding management employees for their efforts to maintain or replace contracts, identify new business opportunities, develop a labor and talent pool, and sustain existing business relationships in the face of a continued somewhat turbulent economy; as well as the ability to address ever-expanding regulatory burdens and requirements from local, state and the federal government. Options granted to NEOs are reflected in the "Outstanding Equity Awards at Fiscal Year-End" on page 22 and reflect our assessment of each NEO's performance of the criteria set out above. We have not intentionally timed the grant of stock options to coincide with the release of material nonpublic information, and any policy adopted by us will address the prohibition of timing of option grants in relation to the release or existence of material nonpublic information. We will continue to review the appropriateness of granting options, as well as considering other methods to reward managers for the achievement of goals consistent with the Company’s growth and shareholder value.
Stock Appreciation Rights
Under the Stock Appreciation Rights ("SARs") program, eligible employees may receive annual grants of stock-settled stock appreciation rights. The award level for each participant in the plan is based on that participant’s scope of responsibilities and the ability to achieve success given these responsibilities. As a participant in the SARs program is provided with the opportunity to undertake more responsibility for the success of the Company, that participant may be granted a greater number of rights or units; however, the overall performance of the Company will continue to determine the number and value of the rights or units granted to all participants. We, with input from the PEO, establish the targets based on the participant’s responsibility and position. Since this program will reward sustained stock value improvement over time, similar to the stock option program we anticipate that this program will further our objective to align the long-term value of the Company’s stock price with financial incentives for the NEOs, officers and managers. Under the plan, the SARs are used to acquire common shares based on the appreciation in the stock price times the number of SARs awarded. The appreciation is calculated by subtracting the stock price at the date of grant from the stock price at the date of redemption. The SARs vest at the rate of 20% per year and are automatically deemed exercised on the tenth anniversary of the effective date of the grant. As with options, SARs were awarded based on our review and analysis of Company and NEO performance including sales growth, successful acquisition integration, cash flow and return on invested capital. Grants to the NEOs in 2014 are detailed in the "2014 Grants of Plan-Based Awards" table on page 21.
Qualified Retirement Plans
The Company’s executive officers, as well as every other eligible employee, are entitled to participate in the qualified retirement plan. The plan, the 401KSOP and ESOP Plan ("401K"), was set up pursuant to ERISA regulations and seeks to provide every employee with the opportunity to accumulate funds for retirement. As described in previous filings, The Davey Tree Expert Company Employee Retirement Plan ("ERP") was frozen effective December 31, 2008.
Under the frozen ERP, benefits currently being paid to retirees will continue and benefits accrued through December 31, 2008 for employees covered by the ERP will not be affected. However, no further benefits will be accrued under the ERP. Thus, eligible participants who retire will still choose the same payment options and forms of retirement, beginning as early as age 55, as before. The benefit formula will remain .30% of covered compensation for each full or partial year of benefit service, plus .30% of compensation in excess of covered compensation for each full or partial year of benefit service. The minimum guaranteed benefit remains $80 per month. Covered compensation refers to the average of the participant’s social security taxable wage bases for their years of service, to a maximum of 35 years, ending with the calendar year in which the participant reaches social security retirement age. If a participant is vested and terminates before he or she is eligible for retirement and the value of the benefit is less than $5,000, the participant is eligible to receive a one-time lump sum payment. The value of the NEOs ERP benefit is included in the "2014 Pension Benefits" table on page 24.
Under the 401K plan, an employee who is a noncollective bargaining employee, who is at least 21 years old, and has completed one year of continuous service, is automatically enrolled in the 401K. The employee may then elect to opt out of the 401K, and participants can suspend contributions at any time. Participant contributions are on a before-tax basis and the Company makes an annual contribution in Company stock equal to 100% of the first 1% percent and 50% of the next 3% percent of the participant’s W-2 wages, subject to the Internal Revenue Service ("IRS") limit and not to exceed $260,000 in 2014 or $265,000 in 2015, which is the government-imposed annual compensation limit required for qualified retirement plans. This represents a potential maximum contribution of 2.5%. Participant contributions are always 100% vested, and Company contributions become 100% vested after three years of continuous service, or upon death, permanent disability or retirement of a participant. The 401K offers a variety of investment options with varying levels of risks and returns for the participant’s contributions; however, the investment in Company stock is restricted to no more than 25% of the employee’s annual contributions. The value of the account eligible for distribution is the vested investment value at the time of distribution, and there is no guarantee of any rate of return or investment value.
Non-Qualified Retirement Plans
Our nonqualified retirement plan is The Davey Tree Expert Company 401KSOP Match Restoration Plan ("Match Plan"). The Davey Tree Expert Company Supplemental Executive Retirement Plan ("SERP") was closed effective 2013 and the Davey Tree Expert Company Retirement Benefit Restoration Plan ("Restoration Plan") was frozen effective December 31, 2008. Payments made under these plans will be made from the Company’s general assets.
Pursuant to the Match Plan, an employee who has elected to contribute the maximum amount under the qualified 401K plan, but who is precluded by Internal Revenue Code ("IRC") restrictions from receiving the full matching contribution paid by the Company, is eligible to participate in the Match Plan. The Match Plan allows the employee to accumulate an amount that could have been matched if the IRC restrictions had not been in effect. Each participant has two potential match criteria. If the participant is unable to contribute the full matching percentage permitted, we will increase the participant’s Company match such that it, when added to the match under the 401K, will equal 50% of the permitted percentage. Further, the Company will contribute an amount equal to 50% of 3% for any amount above the maximum compensation level, which is set at $260,000 for 2014 and $265,000 for 2015. The Company maintains an account record for each employee who meets this criteria to reflect that employee’s interest in the Match Plan. Interest on each account record, currently set at 7%, is accrued annually on December 31.
In 2013, the Board of Directors elected to close the SERP to future participants. As described in the 2013 Proxy Statement, prior to the closure the SERP provided a retirement benefit of an amount equal to 30% multiplied by a participant’s Final Average Compensation ("FAC") calculation, which was then reduced by the sum of the participant’s Restoration Plan benefit, qualified ERP benefit, 401K benefit, Match Plan benefit and one-half of the employee’s Social Security benefit. This amount was further reduced if a participant had less than 20 years of service at age 65. FAC was based on the average of the highest three annual earnings out of the last five years prior to retirement. If at actual retirement the calculation set out above for a participant, excluding the 30% SERP component, was greater than or equal to 30% of FAC, no benefit was payable under the SERP. Although the SERP is closed, current participants will continue to earn limited benefits. The decision to allow current participants to continue to earn limited benefits was made because these participants have relied on the provisions of this plan in making retirement planning and timing decisions. The NEOs listed in this Proxy Statement, except for Mr. Paul, will continue to earn limited benefits. The present value of the NEO's executive retirement plans benefits is presented in the "2014 Pension Benefits" table on page 24.
Long-Term Incentive Compensation: Restricted Stock Units and Performance-Based Restricted Stock Units
As described in last year's Proxy Statement, in 2013 we froze the time-based and performance-based restricted stock awards available for certain executive officers, including the PEO. Prior to freezing this plan, we granted restricted stock awards ("RSU") primarily to provide retention incentives through additional retirement benefits. The performance-based restricted stock awards ("PRSU") was another, but more stringent, method to supplement retirement benefits. In general, prior to 2007, awards vested on the earlier of the fifth anniversary of the date of grant or the participant’s termination of employment with us. Each RSU and PRSU was eligible to be paid as soon as practical after it vested, or a participant could elect to defer receipt of a payment to a later date. In 2006, we amended the Plan so that no RSU or PRSU granted after 2006 was paid until the participant retired. In 2009, we amended the Plan such that each RSU or PRSU award vested as outlined above or as determined by us as set forth in the notice of the award. As with the stock options, tax and accounting treatment of an award was accounted for as required by law and U.S. GAAP. Further, the tax or accounting treatment of an award did not dictate what awards were made or how an award was fashioned.
Before we froze the plan in 2013, the RSU awards provided a participant with the opportunity to achieve a total retirement benefit that would equal 40% of the participant’s projected final average annual compensation at retirement. When we selected a participant to receive this award, we determined the RSU award for that participant based upon a calculation that starts with a computation of the participant’s estimated retirement benefits payable from Company-sponsored plans, along with 50% of the participant’s estimated social security benefit. Next, this value was compared to an estimate equal to 40% of the participant’s final average annual compensation, and the difference was deemed the "Benefit Shortfall." Then, a target value of Company stock was calculated using certain assumptions, including a current compound annual growth rate of 10% (the "Target Share Value"). The Benefit Shortfall was divided by the Target Share Value. This quotient was then divided by the number of years to reach normal retirement, and the resulting number was the initial RSU award. In succeeding years, the named participant received an annual grant of RSUs equal to the initial grant, unless we decided to increase or decrease the award or drop the participant from the plan. Except as it related to the calculation, the RSU award was not based upon or in any way contingent upon the other elements of a participant’s compensation package. Consistent with the decision to freeze these grants in 2013, no RSU awards under this executive retirement program have been made since 2012.
Beginning in 2013, performance based restricted stock units ("PRSUs") are granted to NEOs pursuant to the long-term performance plan available to officers, selected managers and NEOs will receive awards established on equivalent calculations. This is consistent with the market practices utilized by other companies similar in size and consistent with an updated approach to long-term incentives. Further, we believe that return on invested capital inherent in the PRSU awards is an appropriate measure of corporate performance because achievement of these targets would increase shareholder return and provide expansion opportunities for the Company.
The level of an award of PRSUs under the long-term performance plan is made each fiscal year based on the return on average invested capital ("ROAIC"), which was set based on an analysis of industry benchmarks. The ROAIC for receiving the maximum award is currently set at 24%, the same as it was when first established by the Board of Directors in 2004. Further, if the ROAIC is 8% or less, there will be no PRSU awards. Achieving a ROAIC of more than 8% but less than 24% will result in a participant receiving a portion, but less than the full value, of the available PRSU grant. The actual ROAIC achieved in 2013 was 20.55%, which resulted in 78.4% of potentially available PRSUs being awarded in 2014. PRSUs vest five years from the date of grant but may not generally be exercised until retirement or qualified termination. We designed the PRSU awards to retain executive talent by enhancing long-term retirement benefits and establish the award levels based on job responsibilities and performance. Except as it relates to the calculation, PRSU awards are not based upon or in any way contingent upon the participant’s compensation package. Each NEO received the PRSU award as set forth in the column labeled "All Other Stock Awards" in the "2014 Grants of Plan - Based Awards" table on page 21.
Perquisites
NEOs qualify for certain perquisites as described in footnote 6 to the "2014 Summary Compensation Table" on page 19. Many of these perquisites, including the health plan, long-term disability plan, personal tax preparation fees, and the management car plan, are made available to other officers and management employees of the Company. We believe these perquisites are appropriate to attract and retain qualified personnel and to provide additional incentives to enhance management’s performance and commitment.
Insider Trading Policy/Stock Redemption Policy
For many years we have had an Insider Trading and Public Disclosure Policy in place that prevents NEOs, other officers and management personnel from conducting Company stock transactions based on insider information of any kind. Under this policy, certain persons cannot engage in stock transactions using material nonpublic information that could either positively or adversely affect the value of our stock either through direct transactions with us or through our 401K. Because of the unique nature of the restriction on ownership and sale of stock, as well as the fact that our stock is not publicly traded, we have not identified a need to implement a clawback policy or a prohibition on pledging Company securities. In addition, because of these unique features, it is not feasible to hedge our stock. However, we will continue to monitor our policies and review the effects of implementing such policies.
We also maintain a Stock Redemption Policy. Under this policy, executive officers, as well as other officers and executive managers, may only redeem stock during a 60-day period which begins when the year-end stock valuation is released or when the Company’s audited annual financial statements are released, whichever is later, or after the release of the mid-year stock price.
Other Benefit Plans
Other benefit plans that are available to all eligible employees, including executive officers, consist of, among others, the employee stock purchase plan, the payroll savings plan, the group health insurance plan, the disability plan, the life insurance plan, the dental and vision insurance plans, and the vacation and paid-time-off plans.
With regard to the purchase and sale of stock, other than as described above or in plan documents, executive officers may generally purchase stock on the same basis as any other employee, either through the stock purchase plan or through direct purchase.
The Board retains the authority to determine eligibility and participation by employees in the plans. Further, except as described above, even though it has no current plan to do so, the Board may amend the plans, and change the costs and the allocation of benefits between persons and groups.
REPORT OF THE COMPENSATION COMMITTEE
The Committee reviewed and discussed the foregoing "CompensationCompensation Discussion and Analysis"Analysis with management and, based thereon, recommended to the Board of Directors that it be included in the 20152017 Proxy Statement and incorporated by reference in the Company’sCompany's Annual Report on Form 10-K for the fiscal year ended December 31, 2014.2016.
By the Compensation Committee of the Board of Directors: J. Dawson Cunningham (Chair), William J. Ginn, Douglas K. Hall, and John E. Warfel.
COMPENSATION RISK ANALYSIS
As outlined under the "Compensation Philosophy and Objectives"Structure" section of the "Compensation Discussion and Analysis," the Compensation Committee addresses compensation risk analysis as an integral part of its ongoing analysis of compensation programs. As part of the compensation structure review, Pay Governance was engaged in 20112013 and 20142015 to review compensation plans. The Board is not presently aware of any information that would lead it to believe that risks arising from the Company’sCompany's employee compensation policies and practices are reasonably likely to have a material adverse effect on the Company. The Committee will continue to regularly consider risk factors associated with any business entity, including the individual components of the compensation plans, as well as the manipulation of sales, expenses or electronic data; and the Committee believes the Company has sufficient controls in place to prevent such occurrence.
COMPENSATION OF EXECUTIVE OFFICERS
As described in the "Compensation Discussion and Analysis," a NEO’sNEO's compensation is based on a number of factors, as determined by the Board of Directors. In setting compensation, the Board utilizes a number of quantitative and qualitative performance-related factors. Although we have not established a specific peer group, the Pay Governance studies completed in 20122014 and 2014updated in 2015 reviewed competitive norms and market medians. In general, base salary is generally set near 90% of the market midpoint for similar positions at companies of approximately the same size and complexity. Incentive plan compensation is based primarily upon achieving an annual predetermined target operating profit percentage. PRSU, SARs, ISO and NQSO awards are granted pursuant to authority under the 2004 or 2014 Omnibus Stock Plan and are based on achieving predetermined performance targets, as well as achieving goals and objectives set by the Board. No NEO has an employment agreement or arrangement with the Company and each NEO is considered an employee-at-will.
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This voting instruction card, when properly executed and timely received, will be voted in the manner directed herein. If the Trustee does not receive this card by May 18, 2015,16, 2017, your shares will be voted, as provided in the Plan, proportionately in accordance with directions received from other participants in the Plan. If you wish to vote the “nondirected”"nondirected" shares differently from the shares allocated to your account, you may do so by requesting a separate voting instruction card from the Trustee at Argent Trust Company, Attn: Susan M. Longmire, 1100 Abernathy Road, 500 Northpark, Suite 550, Atlanta, GA 3032830328.