UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. _____)
Filed by the Registrant S
Filed by a Party other than the Registrant ¨
Check the appropriate box:
☐ | Preliminary Proxy Statement. | |
☐ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)). | |
☒ | Definitive Proxy Statement. | |
☐ | Definitive Additional Materials. | |
☐ | Soliciting Material Pursuant to §240.14a-12. |
Hovnanian Enterprises, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
☒ | No fee required. | ||
☐ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. | ||
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(2) | Aggregate number of securities to which transaction applies: | ||
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☐ | Fee paid previously with preliminary materials. | ||
☐ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. | ||
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HOVNANIAN ENTERPRISES, INC. | |
110 West Front Street, P.O. Box 500, Red Bank, N.J. 07701 (732) 747-7800 | |
January 28, 2013
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders, which will be held on Tuesday, March 12, 2013,11, 2014, at the offices of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, New York 10017. The meeting will start promptly at 10:30 a.m., Eastern Time.
In accordance with the Securities and Exchange CommissionCommission’s rule allowing companies to furnish proxy materials to their shareholders over the Internet, the Company is primarily furnishing proxy materials to our shareholders of Class A Common Stock and registered shareholders of Class B Common Stock on the Internet, rather than mailing paper copies of the materials (including our Annual Report to Shareholders for fiscal 2012)2013) to each of those shareholders. We believe that this e-proxy process will expedite our shareholders’ receipt of proxy materials, lower costs, and reduce the environmental impact of our Annual Meeting. If you received only a Notice Regarding the Availability of Proxy Materials (the “Notice”) by mail or electronic mail, you will not receive a paper copy of the proxy materials unless you request one. Instead, the Notice will instruct you as to how you may access and review the proxy materials on the Internet. The Notice will also instruct you as to how you may access your proxy card to vote over the Internet, by telephone or by mail. If you received a Notice by mail or electronic mail and would like to receive a paper copy of our proxy materials, free of charge, please follow the instructions included in the Notice.
We anticipate that the Notice will first be mailed to our shareholders on or about January 28, 2013,27, 2014, and will be sent by electronic mail to our shareholders who have opted for such means of delivery on or about January 28, 2013.
All shareholders of record of Class B Common Stock who hold in nominee name have been sent a full set of paper proxy materials, including a proxy card. As in the past, shareholders of record of Class B Common Stock held in nominee name will only be able to vote by returning the enclosed proxy card in the envelope provided for this purpose or by voting in person at the Company’s 20132014 Annual Meeting.
Attached to this letter is a Notice of Annual Meeting of Shareholders and Proxy Statement, which describesdescribe the business to be conducted at the meeting. We will also report on matters of current interest to our shareholders.
It is important that your shares be represented and voted at the meeting. Therefore, we urge you to complete, sign, date and return the enclosed proxy card or, if applicable, register your vote via the Internet or by telephone according to the instructions on the proxy card. If you attend the meeting, you may still choose to vote your shares personally even though you have previously designated a proxy.
We sincerely hope you will be able to attend and participate in the Company’s 20132014 Annual Meeting. We welcome the opportunity to meet with many of you and give you a firsthand report on the progress of your Company.
Sincerely yours, | |
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Ara K. Hovnanian Chairman of the Board |
PROXY VOTING METHODS
If at the close of business on January 14, 2013,2014, you were a shareholder of record or held shares through a broker or bank, you may vote your shares as described below or you may vote in person at the Annual Meeting. To reduce our administrative and postage costs, we would appreciate if shareholders of Class A Common Stock and registered shareholders of Class B Common Stock would please vote through the Internet or by telephone, both of which are available 24 hours a day. You may revoke your proxies at the times and in the manners described on page 1 of the Proxy Statement. If you are a shareholder of record or hold shares through a broker or bank and are voting by proxy, your vote must be received by 11:59 p.m. (Eastern Time) on March 11, 201310, 2014 to be counted unless otherwise noted below.
To vote by proxy:
Shareholders of Class A Common Stock and Registered Shareholders of Class B Common Stock:
BY INTERNET
● | Go to the website atwww.proxyvote.com and follow the instructions, 24 hours a day, seven days a week. |
● | You will need the 12-digit Control Number included on your Notice Regarding the Availability of Proxy Materials to obtain your records and to create an electronic voting instruction form. |
BY TELEPHONE
● | From a touch-tone telephone, dial (800) 690-6903 and follow the recorded instructions, 24 hours a day, seven days a week. |
● | You will need the 12-digit Control Number included on your Notice Regarding the Availability of Proxy Materials in order to vote by telephone. |
BY MAIL
● | Request a proxy card from us by following the instructions on your Notice Regarding the Availability of Proxy Materials. |
● | When you receive the proxy card, mark your selections on the proxy card. |
● | Date and sign your name exactly as it appears on your proxy card. |
● | Mail the proxy card in the postage-paid envelope that will be provided to you. |
● | Mailed proxy cards must be received no later than March |
Shareholders of Record of Class B Common Stock held in Nominee Name:
● | Nominees of shareholders of Class B Common Stock may only appoint proxies by signing, dating and returning the enclosed proxy card in the envelope provided. |
● | Shares of Class B Common Stock held in nominee name will be entitled to ten votes per share only if the beneficial owner voting instruction card and the nominee proxy card relating to such shares is properly completed, mailed and received not less than 3 nor more than 20 business days prior to March |
YOUR VOTE IS IMPORTANT—THANK YOU FOR VOTING
HOVNANIAN ENTERPRISES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Hovnanian Enterprises, Inc. will be held on Tuesday, March 12, 2013,11, 2014, at the offices of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, New York 10017 at 10:30 a.m. for the following matters:
1. | The election of directors of the Company for the ensuing year, to serve until the next Annual Meeting of Shareholders of the Company, and until their respective successors may be elected and qualified; |
2. | The ratification of the selection of Deloitte & Touche LLP, an independent registered public accounting firm, to examine the financial statements of the Company for the year ending October 31, |
3. | The approval of the |
4. | The approval of the |
5. | To approve, in a non-binding advisory vote, the compensation of the Company’s named executive officers; and |
6. | The transaction of such other business as may properly come before the meeting and any adjournment thereof. |
The Board of Directors recommends that you vote FOR each of the nominees listed in proposal 1, FOR proposal 2, FOR proposal 3, FOR proposal 4 and FOR proposal 5.
Only shareholders of record at the close of business on January14, 20132014 are entitled to notice of, and to vote at, the Annual Meeting. Accompanying this Notice of Annual Meeting of Shareholders is a proxy statement, proxy card(s) and the Company’s Annual Report for the fiscal year ended October 31, 2012.2013.
To ensure your shares are voted, if you are a shareholder of Class A Common Stock or a registered shareholder of Class B Common Stock, you may vote your shares over the Internet, by telephone, or by requesting a paper proxy card to complete, sign and return by mail. These voting procedures are described on the preceding page and on the proxy card.
If you are a shareholder of record of Class B Common Stock held in nominee name, you may only appoint proxies to vote your shares by signing, dating and returning the enclosed proxy card in the envelope provided.
All shareholders are urged to attend the meeting in person or by proxy. Shareholders who do not expect to attend the meeting are requested to complete, sign and date the enclosed proxy card and return it promptly, or, if applicable, to register their vote via the Internet or by telephone according to the instructions on the preceding page and the proxy card.
By order of the Board of Directors, | |
![]() | |
MICHAEL DISCAFANI Secretary |
January 28, 2013
If you are a shareholder of record and you plan to attend the Annual Meeting, please mark the appropriate box on your proxy card or, if applicable, so indicate when designating a proxy via the Internet or by telephone. If your shares are held by a bank, broker or other intermediary and you plan to attend, please send written notice to Hovnanian Enterprises, Inc., 110 West Front Street, P.O. Box 500, Red Bank, New Jersey 07701, Attention: Michael Discafani, Secretary, and enclose evidence of your ownership (such as a letter from the bank, broker or other intermediary confirming your ownership or a bank or brokerage firm account statement). The names of all those planning to attend will be placed on an admission list held at the registration desk at the entrance to the meeting. In order to be admitted to the Annual Meeting, you will need a form of personal identification (such as a driver’s license) along with either your Notice, proxy card or proof of Common Stock ownership. If your shares are held beneficially in the name of a bank, broker or other holder of record and you wish to be admitted to the Annual Meeting of Shareholders, you must present proof of your ownership of our Common Stock, such as a bank or brokerage account statement. If you do not plan to attend the Annual Meeting, please designate a proxy by mail or, if applicable, via the Internet or by telephone. If you choose to vote by mail, please complete, sign and date the enclosed proxy card and return it promptly so that your shares will be voted. If you have received a hard copy of the proxy materials, the enclosed envelope requires no postage if mailed in the United States. |
TABLE OF CONTENTS
1 | |
VOTING RIGHTS AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 2 |
4 | |
5 | |
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS | 8 |
(2) RATIFICATION OF THE SELECTION OF AN INDEPENDENT REGISTERED PUBIC ACCOUNTING FIRM | 10 |
APPROVAL OF INCENTIVE PLAN | 11 |
(4) APPROVAL OF | 19 |
23 | |
25 | |
27 | |
27 | |
31 | |
34 | |
35 | |
47 | |
48 | |
48 | |
49 | |
50 | |
50 | |
54 | |
58 | |
61 | |
62 | |
Potential Payments Upon Termination or Change-in-Control Table | 64 |
66 | |
71 | |
72 | |
72 | |
73 | |
73 | |
74 | |
75 | |
75 | |
11, 2014 | 78 |
78 | |
79 |
HOVNANIAN ENTERPRISES, INC.
110 WEST FRONT STREET
P.O. BOX 500
RED BANK, NEW JERSEY 07701
PROXY STATEMENT
The accompanying proxy is solicited on behalf of the Board of Directors of Hovnanian Enterprises, Inc. (the “Company”, “we”, “us”, or “our”) for use at the Annual Meeting of Shareholders referred to in the foregoing noticeNotice and at any adjournment thereof.
Shares represented by properly executed proxies that are received or executed in time and not revoked will be voted in accordance with the specifications thereon. If no specifications are made in an executed proxy, the persons named in the accompanying proxy card(s) will vote the shares represented by such proxies for the Board of Directors’ slate of directors, for the ratification of the selection of Deloitte & Touche LLP, an independent registered public accounting firm, to examine the financial statements of the Company for the fiscal year ending October 31, 2013,2014, for approval of the amendment to2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan, for approval of the Certificate of Incorporation to increase the number of authorized shares of Class A Common Stock, for the amendment to the Certificate of Incorporation to increase the number of authorized shares of Class B Common Stock,Amended and Restated Hovnanian Enterprises, Inc. Senior Executive Short-Term Incentive Plan and for the approval, in a non-binding advisory vote, of the compensation of the Company's named executive officers and on any other matters as recommended by the Board of Directors, unless contrary instructions are given.
Any person may revoke a previously designated proxy before it is exercised. If you voted by Internet, telephone or mail and are a shareholder of record, you may change your vote and revoke your proxy by (i) delivering written notice of revocation to Michael Discafani, Secretary, provided such statement is received no later than March 11, 2013,10, 2014, (ii) voting again by Internet or telephone at a later time before the closing of voting facilities at 11:59 p.m. (Eastern Time) on March 11, 2013,10, 2014, (iii) submitting a properly signed proxy card with a later date that is received no later than March 11, 201310, 2014 or (iv) revoking your proxy and voting in person at the 20132014 Annual Meeting. If you hold your shares in street name, you may submit new voting instructions by contacting your bank, broker or other nominee. You may also change your vote or revoke your proxy in person at the 20132014 Annual Meeting if you obtain a signed proxy from the record holder (broker or other nominee) giving you the right to vote the shares. Please note that attendance at the 20132014 Annual Meeting will not by itself revoke a proxy.
We will bear the costs of soliciting proxies from the holders of our Class A Common Stock and Class B Common Stock (collectively, “Common Stock”). We are initially soliciting these proxies by mail and e-mail, but solicitation may be made by our directors, officers and selected other employees telephonically, electronically or by other means of communication. Directors, officers and employees who help us in the solicitation will not be specially compensated for those services, but they may be reimbursed for their out-of-pocket expenses incurred in connection with the solicitation. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward soliciting materials to beneficial owners and will be reimbursed for their reasonable out-of-pocket expenses incurred in sending proxy materials to beneficial owners.
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Board of Directors has set January 14, 20132014 as the record date for the 20132014 Annual Meeting of Shareholders. As of the close of business on the record date, there were shares of Class A Common Stock outstanding and shares of Class B Common Stock outstanding.
The following table sets forth as of November 1, 2012,January 14, 2014, (1) the Class A Common Stock and Class B Common Stock of the Company beneficially owned by holders of more than 5% of either the Class A Common Stock or the Class B Common Stock of the Company and (2) the Class A Common Stock, Class B Common Stock and Depositary Shares of the Company beneficially owned by each Director, each nominee for Director, each executive officer named in the tables set forth under “Executive Compensation” below and all Directors and executive officers as a group. The table does not include ownership with respect to our 7.25% Tangible Equity Units because none of the individuals or groups listed below has any beneficial ownership of such securities.
Class A Common Stock (1) | Class B Common Stock (1) | Depositary Shares(1) (3) | ||||||||||||||||||||||
Amount and Nature of Beneficial Ownership | Percent of Class (2) | Amount and Nature of Beneficial Ownership | Percent of Class (2) | Amount and Nature of Beneficial Ownership | Percent of Class (2) | |||||||||||||||||||
Directors, Nominees for Director, Named Executive Officers and Directors and Executive Officers as a Group | ||||||||||||||||||||||||
Ara K. Hovnanian (4) | 3,786,237 | 3.03 | % | 2,466,227 | 15.40 | % | — | — | ||||||||||||||||
Robert B. Coutts | 142,199 | 0.11 | % | — | — | — | — | |||||||||||||||||
Edward A. Kangas | 239,217 | 0.19 | % | — | — | — | — | |||||||||||||||||
Joseph A. Marengi | 131,112 | 0.10 | % | — | — | — | — | |||||||||||||||||
Brad G. O’Connor | 73,908 | 0.06 | % | — | — | — | — | |||||||||||||||||
Vincent Pagano Jr. | 9,170 | 0.01 | % | — | — | — | — | |||||||||||||||||
Thomas J. Pellerito | 1,262,914 | 1.01 | % | — | — | — | — | |||||||||||||||||
J. Larry Sorsby | 747,114 | 0.60 | % | — | — | — | — | |||||||||||||||||
David G. Valiaveedan | 52,219 | 0.04 | % | — | — | 2,000 | 0.04 | % | ||||||||||||||||
Stephen D. Weinroth | 282,509 | 0.23 | % | 4,500 | 0.03 | % | — | — | ||||||||||||||||
All Directors and executive officers as a group (10 persons) | 13,853,991 | 10.98 | % | 9,609,373 | 60.00 | % | 2,000 | 0.04 | % | |||||||||||||||
Holders of More Than 5% | ||||||||||||||||||||||||
Estate of Kevork S. Hovnanian (5) | 6,596,543 | 5.28 | % | 3,255,251 | 21.99 | % | — | — | ||||||||||||||||
Peter S. Reinhart as Trustee of the Sirwart Hovnanian 1994 Marital Trust (6) | — | — | 5,210,091 | 35.19 | % | — | — | |||||||||||||||||
Hovnanian Family 2012L.L.C. (7) | 970,849 | 0.78 | % | 3,883,395 | 26.23 | % | — | — |
Class A Common Stock (1) | Class B Common Stock (1) | Depositary Shares (1) (3) | ||||||||||||||||||||||
Directors, Nominees for Director, Certain Executive Officers, Directors and Executive Officers as a Group and Holders of More Than 5% | Amount and Nature of Beneficial Ownership | Percent of Class (2) | Amount and Nature of Beneficial Ownership | Percent of Class (2) | Amount and Nature of Beneficial Ownership | Percent of Class (2) | ||||||||||||||||||
Estate of Kevork S. Hovnanian (4) | 7,567,392 | 6.40 | % | 7,138,646 | 48.70 | % | — | — | ||||||||||||||||
Ara K. Hovnanian (5) | 4,137,001 | 3.50 | % | 1,856,314 | 12.05 | % | — | — | ||||||||||||||||
Robert B. Coutts | 131,112 | 0.11 | % | — | — | — | — | |||||||||||||||||
Edward A. Kangas | 231,217 | 0.20 | % | — | — | — | — | |||||||||||||||||
Joseph A. Marengi | 121,512 | 0.10 | % | — | — | — | — | |||||||||||||||||
Brad G. O’Connor | 38,895 | 0.03 | % | — | — | — | — | |||||||||||||||||
Vincent Pagano Jr. | — | — | — | — | — | — | ||||||||||||||||||
Thomas J. Pellerito | 1,243,668 | 1.05 | % | — | — | — | — | |||||||||||||||||
Peter S. Reinhart as Trustee of the Sirwart Hovnanian 1994 Marital Trust (6) | — | — | 5,210,091 | 35.54 | % | — | — | |||||||||||||||||
John J. Robbins | 160,705 | 0.14 | % | — | — | — | — | |||||||||||||||||
J. Larry Sorsby | 274,302 | 0.23 | % | — | — | — | — | |||||||||||||||||
David G. Valiaveedan | 26,105 | 0.02 | % | — | — | 2,000 | 0.04 | % | ||||||||||||||||
Stephen D. Weinroth | 279,309 | 0.24 | % | 4,500 | 0.03 | % | — | — | ||||||||||||||||
All Directors and executive officers as a group (10 persons) | 13,771,218 | 11.55 | % | 8,999,460 | 58.41 | % | 2,000 | 0.04 | % |
(1) | The figures in the table with respect to Class A Common Stock do not include the shares of Class B Common Stock beneficially owned by the specified persons. Shares of Class B Common Stock are convertible at any time on a |
On July 29, 2008, the Company’s Board of Directors declared a dividend of one Preferred Stock Purchase Right for each outstanding share of Class A Common Stock and Class B Common Stock. The dividend was paid to stockholders of record on August 15, 2008. Subject to the terms, provisions and conditions of the Rights Plan, if the Preferred Stock Purchase Rights become exercisable, each Preferred Stock Purchase Right would initially represent the right to purchase from the Company one ten-thousandth of a share of Series B Junior Preferred Stock for a purchase price of $35.00 per share. However, prior to exercise, a Preferred Stock Purchase Right does not give its holder any rights as a stockholder, including without limitation, any dividend, voting or liquidation rights. |
(2) | Based upon the number of shares outstanding plus options currently exercisable or exercisable within 60 days of |
(3) | Each Depositary Share represents 1/1,000th of a share of 7.625% Series A Preferred Stock. |
(4) | Includes |
(5) | Includes 6,156,543 shares of Class A Common Stock and 3,255,251 shares of Class B Common Stock held by the Executors of the Estate of Kevork S. Hovnanian, deceased (the “Estate of Kevork S. Hovnanian”). Ara K. Hovnanian is special purpose Executor with respect to investments in the Companyand, accordingly, the shares held by the Estate of Kevork S. Hovnanian are included in “All Directors and executive officers as a group,” but such shares are not also included in |
(6) |
Includes 4,833,826 shares of Class B Common Stock held by the Kevork S. Hovnanian Family Limited Partnership, a Connecticut limited partnership (the “Limited Partnership”). Peter S. Reinhart, as trustee of the Sirwart Hovnanian 1994 Marital Trust (the “Marital Trust”), is the managing general partner of the Limited Partnership and, as such, has the sole power to vote and dispose of the shares of Class B Common Stock held by the Limited Partnership, as well as of the 376,265 shares of Class B Common Stock held directly by the Marital Trust. Mr. Reinhart disclaims beneficial ownership of the shares held by the Limited Partnership and the Marital Trust. |
(7) | Represents 970,849 shares of Class A Common Stock and 3,883,395 shares of Class B Common Stock held by the Hovnanian Family 2012 L.L.C. (the “2012 LLC”). Ara K. Hovnanian is the special purpose manager with respect to investments in the Companyand, accordingly, the shares held by the 2012 LLC are included in “All Directors and executive officers as a group,” but such shares are not also included in Mr. Hovnanian’s separate figure of beneficial ownership. The business address of the 2012 LLC is 110 West Front Street, P.O. Box 500, Red Bank, New Jersey 07701. |
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company’s executive officers, directors, persons who beneficially own more than 10% of a registered class of the Company’s equity securities and certain entities associated with the foregoing (“Reporting Persons”) to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission (the “SEC”). These Reporting Persons are required by SEC rules to furnish the Company with copies of all Forms 3, 4 and 5, and amendments thereto, that they file with the SEC.
Based solely on the Company’s review of copies of the forms and amendments of forms it has received and written representations from the Company’s officers and directors, the Company believes that, with respect to the fiscal year ended October 31, 2012,2013, all the Reporting Persons complied with all applicable filing requirements.
The Company’s Restated By-laws provide that the Board of Directors shall consist of up to eleven Directors who shall be elected annually by the shareholders. The Company’s Restated Certificate of Incorporation (“Certificate of Incorporation”) requires that, at any time when any shares of Class B Common Stock are outstanding, one-third of the Directors shall be independent, as defined therein.
Under the rules of the New York Stock Exchange (the “NYSE”“NYSE”), listed companies of which more than 50% of the voting power for the election of directors is held by an individual, group or other entity are not required to have a majority of independent directors, as defined by NYSE rules, or to comply with certain other requirements. Because Mr. A. Hovnanian, the Estate of Kevork S. Hovnanian, the Limited Partnership and the 2012 LLC established for members of his family and family trusts hold more than 50% of the voting power of the Company, the Company is a controlled company within the meaning of the rules of the NYSE. However, the Company does not avail itself of any of the exemptions afforded to controlled companies under the NYSE rules. This may change in the future at the Company’s discretion.
The Board of Directors has determined that a Board of Directors consisting of the seven nominees listed below is the best composition in order to satisfy both the independence requirements of the Company’s Certificate of Incorporation as well as the rules of the NYSE. The Board of Directors has also determined that Messrs. Coutts, Kangas, Marengi, Pagano, and Weinroth are independent as defined under the Company’s Certificate of Incorporation and the NYSE rules. In reaching its determination that Mr. Pagano is independentThe Company’s Certificate of Incorporation may be found on the Company’s website at www.khov.com under applicable standards, the Corporate Governance and Nominating Committee and the Board of Directors considered that he was a partner with Simpson Thacher & Bartlett LLP until his retirement on December 31, 2012. Simpson Thacher & Bartlett LLP has provided, and continues to provide, legal services to the Company.
The following individuals have been recommended to the Board of Directors by the Corporate Governance and Nominating Committee and approved by the Board of Directors to serve as Directors of the Company to hold office until the next Annual Meeting of Shareholders and until their respective successors have been duly elected and qualified. Mr. Robbins, a current director, is not standing for re-election at the 2013 Annual Meeting of Shareholders. Mr. Robbins will serve through the remainder of his term, which will end at the Company’s 2013 Annual Meeting of Shareholders. The Board of Directors thanks Mr. Robbins for his many years of service to the Company. Mr. Pagano has been nominated as Mr. Robbins’ successor to the Board of Directors.
In the event that any of the nominees for Director should become unavailable to serve as a Director, it is intended that the shares represented by proxies will be voted for such substitute nominees as may be nominated by the Board of Directors, unless the number of Directors constituting a full Board of Directors is reduced. The Company has no reason to believe, however, that any of the nominees is, or will be, unavailable to serve as a Director. Proxies cannot be voted for a greater number of persons than the number of nominees shown below.
Board of Directors
Name | Age | Company Affiliation |
| Year First Became a Director |
| |
Ara K. Hovnanian | 56 | President, Chief Executive Officer, Chairman of the Board & Director |
|
| 1981 |
|
Robert B. Coutts | 63 | Director |
|
| 2006 |
|
Edward A. Kangas | 69 | Director |
|
| 2002 |
|
Joseph A. Marengi | 60 | Director |
|
| 2006 |
|
Vincent Pagano Jr. | 63 | Director |
|
| 2013 |
|
J. Larry Sorsby | 58 | Executive Vice President, Chief Financial Officer & Director |
|
| 1997 |
|
Stephen D. Weinroth | 75 | Director |
|
| 1982 |
|
Name | Age | Company Affiliation | Year First Became a Director | |||
Ara K. Hovnanian | 55 | President, Chief Executive Officer, Chairman of the Board & Director | 1981 | |||
Robert B. Coutts | 62 | Director | 2006 | |||
Edward A. Kangas | 68 | Director | 2002 | |||
Joseph A. Marengi | 59 | Director | 2006 | |||
Vincent Pagano Jr. | 62 | Director Nominee | — | |||
J. Larry Sorsby | 57 | Executive Vice President, Chief Financial Officer & Director | 1997 | |||
Stephen D. Weinroth | 74 | Director | 1982 |
Board of Directors — Composition
The Board of Directors seeks to ensure that the Board of Directors is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow the Board of Directors to satisfy its oversight responsibilities effectively. As discussed below under “Corporate Governance and Nominating Committee” beginning on page 8,9, a slate of Directors to be nominated for election at the annual shareholders’ meeting each year is approved by the Board of Directors after recommendation by the Corporate Governance and Nominating Committee. In the case of a vacancy on the Board of Directors (other than one resulting from removal by shareholders), the Corporate Governance and Nominating Committee will identify individuals believed to be qualified candidates to serve on the Board of Directors and shall review the candidates who have met those qualifications with the Company’s Chairman who will recommend any director nomineesdetermine if the candidate is eligible for recommendation by the Corporate Governance and Nominating Committee to the full Board of Directors for election.Directors. The Board of Directors will then approve a director nominee to fill the vacancy on the Board of Directors. In identifying candidates for Director, the Corporate Governance and Nominating Committee, the Chairman and the Board of Directors take into account (1) the comments and recommendations of board members regarding the qualifications and effectiveness of the existing Board of Directors or additional qualifications that may be required when selecting new board members that may be made in connection with the self-examinations described below under “Corporate Governance and Nominating Committee” beginning on page 8,9, (2) the requisite expertise and sufficiently diverse backgrounds of the Board of Directors’ overall membership composition, (3) the independence of outside Directors and other possible conflicts of interest of existing and potential members of the Board of Directors and (4) all other factors such bodies and persons consider appropriate. Although the Company has no formal policy regarding diversity, the charter of the Corporate Governance and Nominating Committee includes a statement that it and the Board of Directors believe that diversity is an important component of a board of directors, including such factors as background, skills, experience, expertise, gender, race and culture. As mentioned above, the Corporate Governance and Nominating Committee and the Board of Directors include diversity as one of several criteria that they consider in connection with selecting candidates for the Board of Directors. The Board of Directors seeks to ensure that it is composed of members whose particular background, expertise, qualifications, attributes and skills, when taken together, allow the Board of Directors to satisfy its oversight responsibilities effectively.
When considering whether directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Corporate Governance and Nominating Committee and the Board of Directors focused primarily on the information discussed in each of the Directors’ individual biographies set forth below on pages 57 and 6.8. In particular, with regard to Mr. Coutts, the Corporate Governance and Nominating Committee and the Board of Directors considered his strong background in the manufacturing sector, believing that his experience with a large multinational corporation engaged in the manufacture of complicated products is invaluable in evaluating the multiple integrated processes in the homebuilding business and also valuable in performance management and other aspects of the Company. With regard to Mr. Kangas, the Corporate Governance and Nominating Committee and the Board of Directors considered his significant experience, expertise and background with regard to accounting matters, including the broad perspective brought by his experience in consulting to clients in many diverse industries. With regard to Mr. Marengi, the Corporate Governance and Nominating Committee and the Board of Directors considered his strong background in the technology sector, because new technologies and their cost and benefit analyses are important factors in the success of the Company. With regard to Mr. Pagano, the Corporate Governance and Nominating Committee and the Board of Directors considered his significant experience, expertise and background with regard to legal and capital markets matters, including the broad perspective brought by his experience in advising clients in the homebuilding industry and many other diverse industries. With regard to Mr. Weinroth, the Corporate Governance and Nominating Committee and the Board of Directors considered his many years of experience in the investment banking field, which are very valuable to the Company as it continues to evaluate its debt profile and capital structure and various financing and refinancing alternatives. With regard to Mr. Hovnanian, our Chief Executive Officer and Chairman of the Board, the Corporate Governance and Nominating Committee and the Board of Directors considered his more than thirty years of experience with the Company. With regard to Mr. Sorsby, our Chief Financial Officer, the Corporate Governance and Nominating Committee and the Board of Directors considered his more than twenty years of experience with the Company.
Board of Directors — Nominees’ Biographies
![]() ![]() | Mr. Hovnanian has been Chief Executive Officer since July 1997 after being appointed President in 1988 and Executive Vice President in 1983. Mr. Hovnanian joined the Company in 1979 and has been a Director of the Company since 1981 and was Vice Chairman from 1998 through November 2009. In November 2009, he was elected Chairman of the Board following the death of Kevork S. Hovnanian, the chairman and founder of the Company and the father of Mr. Hovnanian. |
![]() ![]() | Mr. Coutts retired from the position of Executive Vice President of Lockheed Martin Corporation (NYSE), which he held from 2000 to 2008. Mr. Coutts was President and |
![]() ![]() | Mr. Kangas was the Global Chairman and Chief Executive Officer of Deloitte |
![]() ![]() | Mr. Marengi, from July 2007 to March 2012, served as a Venture Partner for Austin Ventures. Prior to that date, Mr. Marengi served as senior vice president for the Commercial Business Group of Dell Inc. (NASDAQ). In this role, Mr. Marengi was responsible for the Dell units serving medium business, large corporate, government, education and healthcare customers in the United States. Mr. Marengi joined Dell in July 1997 from Novell Inc. (NASDAQ), where he was president and chief operating officer. He joined Novell in 1989 and moved through successive promotions to become executive vice president of worldwide sales and field operations. |
![]() ![]() | Mr. Pagano was a partner at Simpson Thacher & Bartlett LLP until his retirement at the end of 2012. He was the head of the firm’s capital markets practice from 1999 to 2012, and, before that, administrative partner of the firm from 1996 to 1999. He was a member of the firm’s executive committee during nearly all of |
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![]() | Mr. Sorsby has been Chief Financial Officer of Hovnanian Enterprises, Inc. since 1996, and Executive Vice President since November 2000. Mr. Sorsby was also Senior Vice President from March 1991 to November 2000 and was elected as a Director of the Company in 1997. He is Chairman of the Board of Visitors for Urology at The Children’s Hospital of Philadelphia (“CHOP”) and also serves on the Institutional Advancement Committee at CHOP. |
![]() ![]() | Mr. Weinroth was from 2003 to mid-2008 a Managing Member of Hudson Capital Advisors, LLC and since then he has been an advisor to Coral Reef Capital Partners, a successor firm to some of the Hudson Capital employees. He is Chairman of the Board (Emeritus) of Core Laboratories, N.V. (NYSE), a global oil field service company where he had previously been Chairman from 1994 through 2001. From l989 to 2003, he served as Co-Chairman and head of the Investment Committee of First Britannia Mezzanine, N.V., a European private investment firm. He is presently Chairman of the Central Asia Education Foundation, a successor to the Central Asian-American Enterprise Fund, to which he was appointed by the President of the United States. Mr. Weinroth has been Chairman of four NYSE-listed companies and Chief Executive of three of them. He is also a Trustee and the immediate past Chairman of The Joyce Theatre Foundation, Inc., and Vice Chairman and a Trustee of the Paul Taylor Dance Foundation as well as a Board member of the Flea Theater. Mr. Weinroth has been a Director of Hovnanian Enterprises, Inc. since 1982, is Chairman of the Company's Compensation Committee and |
During the year ended October 31, 2012,2013, the Board of Directors held four regularly scheduled meetings and one telephonic meeting. In addition, Directors considered Company matters and had communications with the Chairman of the Board of Directors and others outside of formal meetings. During the fiscal year ended October 31, 2012,2013, each Director attended 100% of the meetings of the Board of Directors and at least 95%93% of the meetings of its Committees on which such Director served. Directors are expected to attend the Annual Meeting of Shareholders, but the Company does not have a formal policy with respect to attendance. All of the members of the Board of Directors attended the Annual Meeting of Shareholders held on March 27, 2012.
Audit Committee
The members of the Audit Committee of the Board of Directors wereare Messrs. Kangas, RobbinsCoutts and Weinroth. The Board of Directors has determined that all of the members of the Audit Committee meet the standards for independence in our Certificate of Incorporation, which is available on our website at www.khov.com under the Investor Relations tab, “SEC Filings/Quarterly Filings/09-08-08 Filing Date,Current Reports/03-15-13,” and the independence requirements mandated by the NYSE listing standards.
The Audit Committee is currently chaired by Mr. Kangas and is responsible for reviewing and approving the scope of the annual audit undertaken by the Company’s independent registered public accounting firm and meeting with them to review the results of their work as well as their recommendations. The Audit Committee selects the Company’s independent registered public accounting firm and also approves and reviews their fees. The duties and responsibilities of the Audit Committee are set forth in its charter, which may be found at www.khov.com under “Investor Relations/Corporate Governance.” During the fiscal year ended October 31, 2012,2013, the Audit Committee met on threefive occasions and held eight telephonic meetings. The Audit Committee also authorizes staffing and compensation of the Internal Audit Department. The Vice President of Internal Audit for the Company reports directly to the Audit Committee on, among other things, the Company’s compliance with certain Company procedures which are designed to enhance management’s understanding of operating issues and the results of the Audit Department’s annual audits of the various aspects of the Company’s business. In fiscal 2012,2013, the Audit Department issued eightten traditional audit reports and performed 16 reviews pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. For additional information related to the Audit Committee, see “The Audit Committee” below.
Compensation Committee The Company has a Compensation Committee, although it is not required to have such a committee because it is a controlled company under the rules of the NYSE. The members of the Compensation Committee of the Board of Directors The Compensation Committee is currently chaired by Mr. Weinroth and is responsible for reviewing salaries, bonuses and other forms of executive compensation for the Company’s senior executives, key management employees and non-employee Directors, and is active in other compensation and personnel areas as the Board of Directors from time to time may request. In addition, all members of the Compensation Committee qualify as Corporate Governance and Nominating Committee The Company has The Corporate Governance and Nominating Committee is currently chaired by Mr. The Guidelines require that each Director prepares annually an assessment of each Board committee on which such Director serves as well as of the full Board of Directors as to the effectiveness of each committee and the full Board of Directors and any recommendations for improvement. The duties and responsibilities of the Corporate Governance and Nominating Committee are set forth in its charter, which may be found at www.khov.com under “Investor Relations/Corporate Governance,” and the Guidelines may be found at the same website address under “Investor Relations/Corporate Governance.” In conducting its nomination function, among other factors, the Corporate Governance and Nominating Committee generally considers the size of the Board of Directors best suited to fulfill its responsibilities, the Board of Directors’ overall membership composition to ensure the Board of Directors has the requisite expertise and consists of persons with sufficiently diverse backgrounds, the independence of outside directors and other possible conflicts of interest of existing and potential members of the Board of Directors as more fully described under “Election of Directors – Board of Directors – Composition” above. The Company does not have a specific policy regarding shareholder nominations of potential directors to the Board of Directors, other than through the process described under “Shareholder Proposals for the during fiscal 2012 wereare Messrs. Weinroth, Coutts, Kangas and Coutts.Marengi. The Board of Directors has determined that all of the members of the Compensation Committee meet the standards for independence in our Certificate of Incorporation and the independence requirements mandated by the NYSE listing standards. The duties and responsibilities of the Compensation Committee are set forth in its charter, which may be found on our website at www.khov.com under “Investor Relations/Corporate Governance.”“non-employee directors”“Non-Employee Directors” for purposes of Rule 16b-3 ofunder the Exchange Act, and as “outside directors” for purposes of Section 162(m) (“Section 162(m)”) of the Internal Revenue Code of 1986, as amended.amended (the “Code”). For a discussion of the criteria used and factors considered by the Compensation Committee in reviewing and determining executive compensation, see “The Compensation Committee” and “Compensation Discussion and Analysis” below. During the fiscal year ended October 31, 2012,2013, the Compensation Committee met on four occasions and held noone telephonic meetings.7 established a Corporate Governance and Nominating Committee, although the Company is not required to have such committee because it is a controlled company under the rules of the NYSE. The members of the Corporate Governance and Nominating Committee of the Board of Directors during fiscal 2012 wereare Messrs. Weinroth,Pagano, Kangas and Marengi. The Board of Directors has determined that all of the members of the Corporate Governance and Nominating Committee meet the standards for independence in our Certificate of Incorporation and the independence requirements mandated by the NYSE listing standards.Weinroth.Pagano. The Corporate Governance and Nominating Committee is responsible for corporate governance matters, and reviewing and recommending nominees for the Board of Directors, succession planning and other Board-related policies. The Corporate Governance and Nominating Committeealso overseesthe annual performance evaluation of the Board of Directors and its Committees, the Board’sBoard of Directors’ periodic review of the Company’s Corporate Governance Guidelines (“Guidelines”) and compliance with the Company’s Related Person Transaction Policy. During the fiscal year ended October 31, 2012,2013, the Corporate Governance and Nominating Committee met on three occasions and held no telephonic meetings.20142015 Annual Meeting” below. The Corporate Governance and Nominating Committee will consider director candidates recommended by shareholders.shareholders in the same manner as it considers candidates recommended by others. Possible nominees to the Board of Directors may be suggested by any Director and given to the Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee may seek potential nominees and engage search consultants to assist it in identifying potential nominees. The Corporate Governance and Nominating Committee adopted an amendment to itsCommittee’s charter in November 2009 contains a provisionaffirming its belief that diversity is an important factor to consider in evaluating potential nominees. The Corporate Governance and Nominating Committee recommends to the Board of Directors a slate of nominees for the Board of Directors for inclusion in the matters to be voted upon at the Annual Meeting. The Company’s Restated By-laws provide that Directors need not be shareholders. Vacancies on the Board of Directors, other than those resulting from removal by shareholders, may be filled by action of the Board of Directors.
As of the 120th calendar day prior to March 27, 2013,January 28, 2014, the Board of Directors had not received any recommendation for the nomination of a candidate to the Board of Directors by any shareholder or group of shareholders that at such time held more than 5% of the Company’s voting stock for at least one year.
VOTE REQUIRED
The election of the nominees to the Company’s Board of Directors for the ensuing year, to serve until the next Annual Meeting of Shareholders of the Company, and until their respective successors may be elected and qualified, requires that each director be elected by the affirmative vote by a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, represented in person or by proxy at the 20132014 Annual Meeting. In determining whether each director has received the requisite number of affirmative votes, abstentions and broker non-votes will have no impact on such matter because such shares are not considered votes cast.
Mr. Hovnanian and others with voting power over the shares held by the Estate of Kevork S. Hovnanian, the Limited Partnership, the 2012 LLC and certain family trusts have informed the Company that they intend to vote in favor of the nominees named in this proposal. Because of their collective voting power, this proposal is assured passage.
Our Board of Directors recommends that shareholders vote FOR the election of the nominees named in this proposal to the Company’s Board of Directors.
REGISTERED PUBLIC ACCOUNTING FIRM
The selection of an independent registered public accounting firm to examine financial statements of the Company to be made available or transmitted to shareholders and to be filed with the SEC for the fiscal year ending October 31, 20132014 is submitted to this Annual Meeting of Shareholders for ratification. Deloitte & Touche LLP has been selected by the Audit Committee of the Company to examine such financial statements. In the event that the shareholders fail to ratify the appointment, the Audit Committee will consider the view of the shareholders in determining its selection of the Company’s independent registered public accounting firm for the subsequent fiscal year. Even if the selection is ratified, the Audit Committee may, in its discretion, direct the appointment of a new independent registered public accounting firm at any time if the Audit Committee determines that such a change would be in the best interests of the Company and its shareholders.
The Company has been advised that representatives of Deloitte & Touche LLP will attend the Annual Meeting of Shareholders to respond to appropriate questions and will be afforded the opportunity to make a statement if the representatives so desire.
VOTE REQUIRED
Ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm to examine financial statements of the Company for the year ending October 31, 20132014 requires the affirmative vote by a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, presentrepresented in person or by proxy at the 20132014 Annual Meeting. In determining whether the proposal has received the requisite number of affirmative votes, abstentions will have no impact on such matter because such shares are not considered votes cast.
Mr. Hovnanian and others with voting power over the shares held by the Estate of Kevork S. Hovnanian, the Limited Partnership, the 2012 LLC and certain family trusts have informed the Company that they intend to vote in favor of this proposal. Because of their collective voting power, this proposal is assured passage.
Our Board of Directors recommends that shareholders vote FOR ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm.
(3) APPROVAL OF THE 2012 subjectHOVNANIAN ENTERPRISES, INC.
AMENDED AND RESTATED STOCK INCENTIVE PLAN
Shareholders are being asked to shareholder approval,consider and approve a proposal to amend and restate the Board authorized an amendment to our Certificate of Incorporation to increase the number of authorized shares of Class A Common Stock (the “Class A Common Stock”) from 200,000,000 shares to 400,000,000 shares (the “Class A Amendment”). Pursuant to Proposal 4, we are separately proposing an increase to our authorized Class B Common Stock, but we are not proposing an increase to the number of authorized shares of Preferred Stock.
The principal purpose of the proposed Class A Amendment. However, ifAmended Plan is to facilitate the ability to grant contemplated long-term performance awards to key employees, directors and consultants of the Company. As described below under “Compensation Discussion and Analysis,” equity-based awards have historically formed a significant portion of our total compensation in order to align key employees’ and directors’ interests with that of our shareholders. Our ability to make equity-based awards helps us attract, retain and motivate key employees and directors as well as foster long-term value-creation. These efforts have been particularly critical during a difficult homebuilding market.
Assuming Proposal 4 to amend and restate the Company’s Senior Executive Short-Term Incentive Plan is approved by shareholders, approve the proposed Class A Amendment,increased share reserve under the additional authorized shares would giveAmended Plan will also facilitate the Board more flexibility in responding to a variety of corporate opportunities, including those discussed above, which, if they become available, are likely to require prompt action on our part. The Board believes that the increase in the authorized number of shares of Class A Common Stock will enable the Company to take timely advantage of market conditions and the availability of favorable opportunities without the delay and expense associated with convening a special meeting to obtain shareholder approval at that time (unless otherwise required by regulatory agencies or by NYSE rules).
Approval by shareholders of the Amended Plan will also approved.
We are not seeking to make any other changes to the terms of the plan document other than certain technical changes.
The Company’s Board of Directors has approved the adoption of the Amended Plan and, if the Amended Plan is approved by shareholders at the 2014 Annual Meeting, it will become immediately effective as of the date of the 2014 Annual Meeting. If shareholders do not approve the Amended Plan, the Existing Plan will continue to remain in effect according to its terms, and we may continue to make awards (subject to the authorized limit of 5,000,000 shares) under the Existing Plan.
In reaching our conclusion as to the appropriateness of the additional share proposal, we reviewed key metrics that are typically used to evaluate such proposals. One such metric many investors use is a calculation that quantifies how quickly a company uses its shareholder capital. The increasetotal number of shares issuable under awards we have granted under the Existing Plan, the 2008 Stock Incentive Plan and theSenior Executive Short-Term Incentive Plan, as a percentage of our annual weighted average common stock outstanding (commonly referred to as the “burn rate”) has been on average 1.06% over the last three completed fiscal years, which is below the ISS unadjusted industry median of 1.37%. As applicable for the award, this calculation is based on the amount of shares issuable at the target level of performance under awards as of the dates they were granted. In addition to burn rate, many investors look at the economic effect of dilution. Assuming all 6,450,000 shares of common stock of the Company being requested to be added to the share reserve pursuant to this proposal were fully dilutive as of January 14, 2014, the dilutive effect on all outstanding shares would be approximately 4.5%.
For a discussion of the Amended Plan, see “Material Features of the Amended Plan” below. The Amended Plan is set forth in Appendix A hereto.
The Company’s Board of Directors recommends that shareholders vote for the approval of the Amended Plan.
Material Features of the Amended Plan
The following is a brief summary of the material features of the Amended Plan. Because this is only a summary, it does not contain all the information about the Amended Plan that may be important to you and is qualified in its entirety by the full text of the Amended Plan as set forth in Appendix A hereto.
Purpose
The purpose of the Amended Plan is to aid the Company and its affiliates in recruiting and retaining key employees, directors and consultants of outstanding ability and to motivate those employees, directors and consultants to exert their best efforts on behalf of the Company and its affiliates by providing incentives through the granting of “Awards”, which consist of options, stock appreciation rights or other stock-based Awards (including performance-based Awards) granted pursuant to the Amended Plan. All employees, directors and consultants of the Company and its affiliates are eligible to participate in the authorizedAmended Plan if they are selected by the Compensation Committee of the Board of Directors (the “Committee”) to participate in the Amended Plan (any such individual, a “Participant”). For the fiscal year ended October 31, 2013, approximately 12 employees, 5 directors (includes non-employee directors only), and no consultants were selected by the Committee to participate in the Existing Plan. The Company anticipates that future participation by employees and directors under the Amended Plan will be at levels similar to their past participation under the Existing Plan.
Administration
The Amended Plan is generally administered by the Committee, which may delegate its duties and powers in whole or in part to any subcommittee thereof consisting solely of at least two individuals who are each intended to be “Non-Employee Directors” within the meaning of Rule 16b-3 under the Exchange Act, “outside directors” within the meaning of Section 162(m), and “independent directors” within the meaning of the applicable rules, if any, of any national securities exchange on which shares of common stock of the Company are listed or admitted to trading; provided, however, that any action permitted to be taken by the Committee may be taken by the Board of Directors in its discretion. Additionally, if the Company’s Chief Executive Officer is serving as a member of the Board of Directors, the Board of Directors may by specific resolution constitute the Chief Executive Officer as a “committee of one” with the authority to grant Awards covering up to 1,000,000 shares per fiscal year to certain non-executive officer Participants.
Awards
Awards are determined (“granted”) by the Committee and are subject to the terms and conditions stated in the Amended Plan and to such other terms and conditions, not inconsistent therewith as the Committee shall determine. Any stock options or stock appreciation rights granted must have a per share exercise price that is not less than 100% of the fair market value of the Company’s common stock underlying such awards on the date an award is granted (other than in the case of awards granted in substitution of previously granted awards). The maximum term for stock options and stock appreciation rights granted under the Amended Plan is ten years from the initial date of grant.
In the event a performance-based Award is granted under the Amended Plan, it may be granted in a manner that is intended to cause the Award to be deductible by the Company under Section 162(m), however, there can be no guarantee that a performance-based Award will be treated as “performance-based compensation” under Section 162(m). To that end, performance-based Awards intended to be deductible under Section 162(m) must be based on the attainment of written performance goals approved by the Committee. Within 90 days after the start of a designated performance period (or, if less, the number of days which is equal to 25% of such performance period), the Committee will establish the objective performance goals for each Participant. The performance goals will be based on one or more of the following criteria: (1) earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (2) net income; (3) operating income; (4) earnings per share of common stock of the Company; (5) book value per share; (6) return on shareholders’ equity; (7) total shareholder return; (8) expense management; (9) return on investment before or after the cost of capital; (10) improvements in capital structure; (11) profitability of an identifiable business unit or product; (12) maintenance or improvements of profit margins; (13) stock price; (14) market share; (15) revenues or sales; (16) costs; (17) cash flow; (18) working capital; (19) changes in net assets (whether or not multiplied by a constant percentage intended to represent the cost of capital); and (20) return on assets. The Committee may also approve grants of Awards or other compensation that do not qualify for a deduction under Section 162(m) if it determines that it is appropriate to do so in light of other competing interests and goals, such as the attraction and retention of key executives.
Prior to the payment of any Award that is intended to qualify as performance-based compensation for purposes of Section 162(m), the Committee will certify that the applicable performance goals have been met. In connection with such certification, the Committee may decide to pay amounts, which are less than the Award otherwise payable for achievement of the applicable performance goals at the sole discretion of the Committee. Payment of such an Award to a Participant will occur only after such certification and will be made as determined by the Committee in its sole discretion after the end of such performance period.
Effect of Certain Events on Amended Plan and Awards
In the event of any change in the outstanding shares of common stock by reason of any stock dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other corporate exchange or change in capital structure, any distribution to shareholders of common stock other than regular cash dividends or any similar event, the Committee in its sole discretion and without liability to any person shall make such substitution or adjustment, if any, as it deems to be equitable, as to (1) the number or kind of common stock or other securities that may be issued as set forth in the Amended Plan or pursuant to outstanding Awards, (2) the exercise price relating to outstanding options or stock appreciation rights, (3) the maximum number or amount of Awards that may be granted to a Participant during a fiscal year and/or (4) any other affected terms of such Awards. Except as otherwise provided in an Award agreement, in the event of a Change in Control (as defined in the Amended Plan), the Committee in its sole discretion and without liability to any person may take such actions, if any, as it deems necessary or desirable with respect to any Award (including, without limitation, (1) the acceleration of an Award, (2) the payment of a cash amount in exchange for the cancellation of an Award which, in the case of options and stock appreciation rights, may equal the excess, if any, of value of the consideration to be paid in the Change in Control transaction to holders of the same number of shares of common stock of the Company subject to such options or stock appreciation rights (or, if no consideration is paid in any such transaction, the fair market value of the shares of common stock of the Company subject to such options or stock appreciation rights) over the aggregate exercise price of such options or stock appreciation rights and/or (3) the requiring of the issuance of substitute Awards that will substantially preserve the value, rights and benefits of any affected Awards previously granted under the Amended Plan) as of the date of the consummation of the Change in Control.
Limitations
The Amended Plan provides that the total number of shares of common stock of the Company that may be issued under the Amended Plan (inclusive of the 5,000,000 shares initially reserved under the Existing Plan and the additional 6,450,000 shares which are being requested under this proposal) is 11,450,000. The maximum amount that may be paid with respect to performance-based Awards (other than Awards denominated in shares) during a fiscal year to any Participant shall be equal to the greater of (x) $15 million and (y) 2.5% of the Company’s income before income taxes as reported in the Company’s audited consolidated financial statements prepared for the year in respect of which the performance-based Award is to be paid or distributed, as applicable. The number of shares covered by Awards granted under the Amended Plan that terminate or lapse without the payment of consideration will be available for future grants under the Amended Plan. Additionally, the maximum number of shares of common stock of the Company for which options or stock appreciation rights may be granted during a fiscal year to any Participant is 2,000,000, and the maximum number of shares that may be subject to other share-denominated performance Awards granted during a fiscal year to any Participant is also 2,000,000. The Amended Plan also provides that the maximum number of shares subject to Awards granted during a calendar year to any non-employee director serving on the Board, taken together with any cash fees paid to such non-employee director during such calendar year, shall not exceed $600,000 in total value (calculating the value of any such Awards based on the grant date fair value of such Awards for financial reporting purposes).
No Award may be granted under the Amended Plan after the tenth anniversary of January 10, 2012 (i.e., the date when the Board of Directors adopted the Existing Plan), but Awards theretofore granted may be extended beyond that date.
The Amended Plan generally prohibits the Company from taking actions that would constitute a “repricing” of stock options or stock appreciation rights (for example, lowering exercise prices for outstanding Awards). Additionally, the Amended Plan precludes the payment of dividends or dividend equivalent rights on performance-based Awards unless and until the corresponding performance-based Award has been earned in accordance with its terms.
Amendment and Termination
The Committee may amend, alter or discontinue the Amended Plan, but no amendment, alteration or discontinuation shall be made which, (a) without the approval of the shareholders of the Company, would (except as provided in the Amended Plan in connection with adjustments in certain corporate events), increase the total number of shares of common stock of the Company reserved for the purposes of the Amended Plan or change the maximum number of shares of common stock of the Company for which Awards may be granted to any Participant or amend the prohibitions on repricing set forth above or (b) without the consent of a Participant, would materially impair any of the rights or obligations under any Award theretofore granted to such Participant under the Amended Plan; provided, however, that the Committee may amend the Amended Plan in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Code or other applicable laws. The Committee may not amend, alter or discontinue the provisions relating to a Change in Control (as defined in the Amended Plan) after the occurrence of a Change in Control.
Clawback/Forfeiture
Any Awards granted under the Amended Plan may be subject to reduction, cancellation, forfeiture or recoupment to the extent required by applicable law or listed company rules, to the extent otherwise provided in an Award agreement at the time of grant or as determined pursuant to the Company’s recoupment policy.
Nontransferability of Awards
Unless otherwise determined by the Committee, an Award shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and distribution. Notwithstanding the foregoing, and subject to the conditions stated in the Amended Plan, a Participant may transfer an option (other than an option that is also an incentive stock option granted pursuant to the Amended Plan) or stock appreciation right in whole or in part by gift or domestic relations order to a family member of the Participant. Under no circumstances will the Committee permit the transfer of an Award for value.
Certain United States Federal Income Tax Consequences
Stock Options
An employee to whom an incentive stock option (“ISO”) that qualifies under Section 422 of the Code is granted will not recognize income at the time of grant or exercise of such option. No federal income tax deduction will be allowable to the Company upon the grant or exercise of such ISO. However, upon the exercise of an ISO, special alternative minimum tax rules apply for the employee.
When the employee sells shares acquired through the exercise of an ISO more than one year after the date of transfer of such shares and more than two years after the date of grant of such ISO, the employee will normally recognize a long-term capital gain or loss equal to the difference, if any, between the sale prices of such shares and the option price. If the employee does not hold such shares for this period, when the employee sells such shares, the employee will recognize ordinary compensation income and possibly capital gain or loss in such amounts as are prescribed by the Code and regulations thereunder, and the Company will generally be entitled to a federal income tax deduction in the amount of such ordinary compensation income.
An employee to whom an option that is not an ISO (a “non-qualified option”) is granted will not recognize income at the time of grant of such option. When such employee exercises a non-qualified option, the employee will recognize ordinary compensation income equal to the excess, if any, of the fair market value as of the date of a non-qualified option exercise of the shares the employee receives, over the option exercise price. The tax basis of such shares will be equal to the exercise price paid plus the amount includable in the employee’s gross income, and the employee’s holding period for such shares will commence on the day after which the employee recognized taxable income in respect of such shares. Any subsequent sale of the shares by the employee will result in long- or short-term capital gain or loss, depending on the applicable holding period. Subject to applicable provisions of the Code and regulations thereunder, the Company will generally be entitled to a federal income tax deduction in respect of the exercise of non-qualified options in an amount equal to the ordinary compensation income recognized by the employee. Any such compensation includable in the gross income of an employee in respect of a non-qualified option will be subject to appropriate federal, state, local and foreign income and employment taxes.
Restricted Stock
Unless an election is made by the Participant under Section 83(b) of the Code, the grant of an Award of restricted stock will have no immediate tax consequences to the Participant. Generally, upon the lapse of restrictions (as determined by the applicable restricted stock agreement between the Participant and the Company), a Participant will recognize ordinary income in an amount equal to the product of (x) the fair market value of a share of common stock of the Company on the date on which the restrictions lapse, less any amount paid with respect to the Award of restricted stock, multiplied by (y) the number of shares of restricted stock with respect to which restrictions lapse on such date. The Participant’s tax basis will be equal to the sum of the amount of ordinary income recognized upon the lapse of restrictions and any amount paid for such restricted stock. The Participant’s holding period will commence on the date on which the restrictions lapse.
A Participant may make an election under Section 83(b) of the Code within 30 days after the date of transfer of an Award of restricted stock to recognize ordinary income on the date of award based on the fair market value of common stock of the Company on such date. An employee making such an election will have a tax basis in the shares of restricted stock equal to the sum of the amount the employee recognizes as ordinary income and any amount paid for such restricted stock, and the employee’s holding period for such restricted stock for tax purposes will commence on the date after such date.
With respect to shares of restricted stock upon which restrictions have lapsed, when the employee sells such shares, the employee will recognize capital gain or loss consistent with the treatment of the sale of shares received upon the exercise of non-qualified options, as described above.
Stock Units
A Participant to whom a restricted stock unit (“RSU”) is granted generally will not recognize income at the time of grant (although the Participant may become subject to employment taxes when the right to receive shares becomes “vested” due to retirement eligibility or otherwise). Upon delivery of shares of common stock of the Company in respect of an RSU, a Participant will recognize ordinary income in an amount equal to the product of (x) the fair market value of a share of common stock of the Company on the date on which the common stock of the Company is delivered, multiplied by (y) the number of shares of common stock of the Company delivered.
Other Stock-based Awards
With respect to other stock-based Awards paid in cash or common stock, Participants will generally recognize income equal to the fair market value of the Award on the date on which the Award is delivered to the recipient.
Code Section 409A
Section 409A (“Section 409A”) of the Code generally sets forth rules that must be followed with respect to covered deferred compensation arrangements in order to avoid the imposition of an additional 20% tax (plus interest) upon the service provider who is entitled to receive the deferred compensation. Certain Awards that may be granted under the Amended Plan may constitute “deferred compensation” within the meaning of and subject to Section 409A. While the Committee intends to administer and operate the Amended Plan and establish terms (or make required amendments) with respect to Awards subject to Section 409A in a manner that will avoid the imposition of additional taxation under Section 409A upon a Participant, there can be no assurance that additional taxation under Section 409A will be avoided in all cases. In the event the Company is required to delay delivery of shares or any other payment under an Award in order to avoid the imposition of an additional tax under Section 409A, the Company will deliver such shares (or make such payment) on the first day that would not result in the Participant incurring any tax liability under Section 409A. The Committee may amend the Amended Plan and outstanding Awards to preserve the intended benefits of Awards granted under the Amended Plan and to avoid the imposition of an additional tax under Section 409A of the Code.
General
Ordinary income recognized by virtue of the exercise of non-qualified options, the lapse of restrictions on restricted stock or RSUs or payments made in cash or shares of common stock of the Company is subject to applicable tax withholding as required by law.
The Company generally will be entitled to a federal tax deduction to the extent permitted by the Code at the time and in the amount that ordinary income is recognized by Participants.
The discussion set forth above does not purport to be a complete analysis of all potential tax consequences relevant to recipients of options or other Awards or to their employers or to describe tax consequences based on particular circumstances. It is based on federal income tax law and interpretational authorities as of the date of this proxy statement, which are subject to change at any time.
Stock Awards Previously Granted Under the Existing Plan
The following table sets forth information on awards granted under the Existing Plan since its adoption and after giving effect to shares forfeited and reincluded in the Existing Plan pool. The closing price of the Class A Common Stock on the NYSE on January 14, 2014 (the record date for the 2014 Annual Meeting) was $6.17 per share (shares of Class B Common Stock convert on a one-for-one basis to shares of Class A Common Stock).
Name & Position | Stock Option Grants # of Shares Covered | Restricted Stock Unit Grants # of Shares Covered (1) | Total of All Columns in Table # of Shares Covered | ||||||||||
Ara K. Hovnanian, President, Chief Executive Officer and Chairman of the Board | 1,200,000 | 827,733 | 2,027,733 | ||||||||||
J. Larry Sorsby, Executive Vice President, Chief Financial Officer and Director | 240,000 | 303,030 | 543,030 | ||||||||||
Thomas J. Pellerito, Chief Operating Officer | 160,000 | 303,030 | 463,030 | ||||||||||
Brad G. O’Connor, Vice President, Chief Accounting Officer and Corporate Controller | 40,000 | 80,633 | 120,633 | ||||||||||
David G. Valiaveedan, Vice President — Finance and Treasurer | 30,000 | 75,430 | 105,430 | ||||||||||
Current Executive Officers as a Group | 1,670,000 | 1,589,856 | 3,259,856 | ||||||||||
Robert B. Coutts, Director | 0 | 53,919 | 53,919 | ||||||||||
Edward A. Kangas, Director | 0 | 67,108 | 67,108 | ||||||||||
Joseph A. Marengi, Director | 0 | 42,832 | 42,832 | ||||||||||
Vincent Pagano Jr., Director | 0 | 19,520 | 19,520 | ||||||||||
Stephen D. Weinroth, Director | 61,573 | 15,939 | 77,512 | ||||||||||
Current Non-Executive Directors as a Group (2) | 61,573 | 199,318 | 260,891 | ||||||||||
All Employees, including All Current Officers who are not Executive Officers, as a Group | 386,125 | 709,257 | 1,095,382 |
(1) | Includes all full value shares granted under the Existing Plan, which consist of restricted stock units (RSUs), shares issued to non-employee Directors as part of their annual equity award and the maximum number of shares that are potentially issuable under the share portion of awards granted under the 2013 Long-Term Incentive Program under the Existing Plan. |
(2) | The Stock Option Grants column does not include 42,130 stock options granted to Mr. Robbins, a former director. Mr. Robbins was not granted any RSUs. |
Equity Compensation Plan Information
The following table provides information as of October 31, 2013, with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.
Number of Class A Common Stocksecurities to beissued uponexercise ofoutstandingoptions,warrants andrights(2)(5) | Number of ClassB Common Stocksecurities to beissued uponexercise ofoutstandingoptions,warrants andrights(2)(5) | Weightedaverageexerciseprice ofoutstandingClass ACommon Stockoptions,warrants andrights(3) | Weightedaverageexerciseprice ofoutstandingClass BCommon Stockoptions,warrants andrights(4) | Number ofsecuritiesremainingavailable forfuture issuanceunder equitycompensationplans(excludingsecuritiesreflected incolumns (a))(1)(6) | |||||||||||
Plan Category | (a) | (a) | (b) | (b) | (c) | ||||||||||
Equity compensation plans approved by security holders: | 6,660,018 | 5,094,021 | $7.20 | $4.03 | 339,141 | ||||||||||
Equity compensation plans not approved by security holders: | — | — | — | — | — | ||||||||||
Total | 6,660,018 | 5,094,021 | $7.20 | $4.03 | 339,141 |
(1) | Under the Company’s equity compensation plans, securities may be issued in either Class A Common Stock or Class B Common Stock. |
(2) | Includes the maximum number of shares that are potentially issuable under the share portion of the 2013 Long-Term Incentive Program under the Existing Plan and the actual number of shares for which performance has been met that are issuable under the 2010 Long-Term Incentive Program under the 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan, subject to vesting. |
(3) | Does not take into account 2,914,062 shares that may be issued upon the vesting of restricted stock and performance-based awards discussed in (2) above, or 192,402 shares of restricted stock vested and deferred at the associates' election, because they have no exercise price. |
(4) | Does not take into account 1,714,780 shares that may be issued upon the vesting of the performance-based awards discussed in (2) above, or 341,741 shares of restricted stock vested and deferred at the associates’ election, because they have no exercise price. |
(5) | These shares include 2,233,175 shares that would be issued in full only if the maximum level of performance for performance-based awards is achieved for the 2013 Long-Term Incentive Program under the Existing Plan, which is not currently expected. These shares also include 483,875 shares that may be issued upon exercise of outstanding options with exercise prices greater than $20.00 per share. |
(6) | The number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in columns (a)) as of the January 14, 2014 record date was 341,741. The increase is primarily due to forfeitures for terminated employees subsequent to October 31, 2013, partially offset by shares issued to the non-employee Directors on January 10, 2014 as part of their annual retainer. |
Additional Equity Compensation Plan Information
The following is the Company’s overhang information, which measures the number of shares subject to equity-based awards outstanding but unexercised or unvested, as of October 31, 2013 regarding all of its existing equity compensation plans, as well as certain other information relating to outstanding awards under the plans:
● | Stock options outstanding: 6,591,054 | |
● | Weighted average exercise price of outstanding stock options: $5.74 | |
● | Weighted average remaining contractual term of outstanding stock options: 6.8 years | |
● | Nonvested RSUs (including RSU awards for performance-based long-term incentive plans based on achieving the actual outcome, where known, or the target outcome, where the performance period has not ended): 2,463,647 | |
● | Vested but not yet issued RSUs: 1,359,445 | |
● | Total shares of Common Stock outstanding as of October 31, 2013 were 139,201,327 and as of the January 14, 2014 record date were 139,704,865 |
The following table sets forth the number of time-based stock options and the subsequent issuance of such shares could, however, have the effect of delaying or preventing a change of control oftime-based RSU awards granted by the Company without further action by shareholders. Shares of authorized and unissued Class A Common Stock could (within the limits imposed by applicable law) be issued in one or more transactions that could make a change of control of the Company less likely. The additional authorized shares could be used to discourage persons from attempting to gain control of the Company by diluting the voting power of shares then outstanding or by increasing the voting power of persons who would support the Board in a potential takeover scenario. However, this proposal is not made in response to any effort of which we are aware to accumulate our stock or to obtain control of us, nor do we have a present intent to use the additional shares of authorized Class A Common Stock to oppose a hostile takeover attempt or to delay or prevent changes in control of management. In addition, members of the Hovnanian family, including Ara Hovnanian, the Chairman of our Board, President and Chief Executive Officer, have the power to cast a majority of the votes that can be cast by the holders of all our currently outstanding common stock, voting together, through personal holdings, the Limited Partnership, family trusts and shares held by the Estate of Kevork S. Hovnanian.
Fiscal Year | Number of Time-Based Stock Options Granted | Number of Time-Based RSUs Granted | Number of Shares of Common Stock Granted Related to Performance-Based Awards (1) | Weighted Average Number of Shares of Common Stock Outstanding (2) | ||||||||||||
2013 | 487,500 | 104,944 | 1,293,269 | 145,087,291 | ||||||||||||
2012 | 1,334,828 | 133,855 | — | 126,350,000 | ||||||||||||
2011 | 269,100 | 29,468 | 420,000 | 100,444,000 |
(1) | Includes RSU and stock option awards granted under the 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan (as amended and restated) and the Existing Plan (including the 2013 Long-Term Incentive Program), based on achieving the target outcome for the performance criteria under the performance-based awards. | |
(2) | Weighted average number of shares of common stock outstanding is the amount used for calculating our basic earnings per share as presented in our audited consolidated financial statements. |
VOTE REQUIRED
Adoption of the holders, represented in person orAmended Plan requires approval by proxy at the 2013 Annual Meeting, of (1) a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, and (2) a majority ofrepresented in person or by proxy at the votes cast by the shareholders of Class A Common Stock.2014 Annual Meeting. In determining whether thisthe proposal has received the requisite number of affirmative votes, abstentions are considered “votes cast” under NYSE rules and thus will have the same effect as a vote “against” the proposal. Broker non-votes will not count as votes cast “for” or “against” the proposal to adopt the Amended Plan and will have no effect on the outcome because they are not considered votes cast. Approval of the Class A Amendment is not conditioned on the approval of the Class B Amendment described in Proposal 4.
Mr. Hovnanian and others with voting power over the shares held by the Estate of Kevork S. Hovnanian, the Limited Partnership, the 2012 LLC and certain family trusts have informed the Company that they intend to vote in favor of the Amended Plan. Because of their collective voting power, this proposal.
Our Board of Directors recommends that shareholders vote FOR approval of the Amended Plan.
(4) APPROVAL OF THE AMENDED AND RESTATED
HOVNANIAN ENTERPRISES, INC. SENIOR EXECUTIVE SHORT-TERM INCENTIVE PLAN
Shareholders are being asked to consider and approve the amended and restated Hovnanian Enterprises, Inc. Senior Executive Short-Term Incentive Plan (as amended and restated, the “Short-Term Incentive Plan”) which:
(1) | extends the period of time for which Bonus Awards (as defined below) may be made under the Short-Term Incentive Plan to the date of the Company’s first shareholders’ meeting that occurs during 2019, such that no new Bonus Awards may be granted after such expiration date (Bonus Awards granted prior to the first shareholders’ meeting in 2019 will remain in effect and be subject to the terms of the Short-Term Incentive Plan); |
(2) | provides that any share issuances made with respect to future Bonus Awards would be granted under the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan (as amended from time to time, the “Stock Plan”), provided that shares or share-based awards may be awarded under the Stock Plan only if Proposal (3), “Approval of the 2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan” is approved by shareholders; and |
(3) | makes certain changes, clarifications and language improvements (including the addition of total shareholder return as a permissible performance goal under the Short-Term Incentive Plan in order to conform the performance metrics under the Short-Term Incentive Plan to those under the Stock Plan). |
The principal purpose of the proposed Short-Term Incentive Plan is to facilitate the ability to grant performance-based awards to key employees of the Company. As described below under “Compensation Discussion and Analysis,” the Committee seeks to motivate management to achieve improved financial performance of the Company through bonus plans that reward higher performance with increased bonus opportunities. The Short-Term Incentive Plan contains performance metrics aimed to correspond to the financial needs of the Company during the relevant period, thereby incentivizing the participants to achieve financial results that benefit the Company and, ultimately, its shareholders.
The Short-Term Incentive Plan provides for annual bonus awards calculated using a pre-established formula, which is based on the Company’s performance. The Company has proposed to limit the term of the Short-Term Incentive Plan to a period ending upon the Company’s first shareholders’ meeting that occurs during 2019, with the expectation that any extension of the term of the Short-Term Incentive Plan will be approved by shareholders in a manner intended to permit Bonus Awards (defined below) to continue to be granted under the Short-Term Incentive Plan and meet certain requirements of Section 162(m), which section governs the tax deductibility of performance-based compensation. Under Section 162(m), the Company may not deduct certain compensation over $1,000,000 in any year to the Chief Executive Officer or any of the three other most highly compensated executive officers of the Company, other than the Chief Financial Officer, unless, among other things, this compensation qualifies as “performance-based compensation” under Section 162(m), and the material terms of the plan for such compensation are approved by shareholders. For purposes of Section 162(m), the material terms include (1) the employees eligible to receive compensation, (2) a description of the business criteria on which the performance goals are based, and (3) the maximum amount of compensation that can be paid to an employee during a specified period. Each of these aspects is discussed below.
The Company’s Board of Directors has approved the adoption of the Short-Term Incentive Plan and, if the Short-Term Incentive Plan is approved by shareholders at the 2014 Annual Meeting, it will become immediately effective as of the date of the 2014 Annual Meeting. If shareholders do not approve the Short-Term Incentive Plan, Bonus Awards with respect to the 2014 fiscal year that have been contingently granted under the Short-Term Incentive Plan will be canceled.
For a discussion of the Short-Term Incentive Plan, see “Material Features of the Short-Term Incentive Plan” below. The Short-Term Incentive Plan is set forth in Appendix B hereto.
The Company’s Board of Directors recommends that shareholders vote for the approval of the proposed amendmentShort-Term Incentive Plan.
Material Features of the Short-Term Incentive Plan
The following is a brief summary of the material features of the Short-Term Incentive Plan. Because this is only a summary, it does not contain all the information about the Short-Term Incentive Plan that may be important to our Certificate of Incorporation to increase the number of authorized shares of Class A Common Stock.
Purpose
The Company is a family enterprise that has been in operation since 1959, and the Company has maintained a shareholder approved dual-class capital structure since 1992. The Board established this structure as part of its philosophy to foster continuity and stability in the Company’s operations.
Administration
The Short-Term Incentive Plan is administered by a committee of two or more individuals who are each “Non-Employee Directors” within the meaning of Rule 16b-3 under the Exchange Act, or any successor thereto, “outside directors” as defined under Section 162(m) and “independent directors” within the meaning of the Increaseapplicable rules, if any, of any national securities exchange on which shares of common stock of the Company are listed or admitted to trading, unless otherwise determined by the Company’s Board of Directors to act as such a committee (the “Committee”). The Compensation Committee may select senior executives of the Company and its affiliates who are “covered employees”, as defined in Class B Common Stock
Bonus Awards
Bonus Awards granted under the Short-Term Incentive Plan may be granted in a manner that is intended to cause the Bonus Award to be deductible by the Company under Section 162(m), however, there can be no guarantee that a Bonus Award will be treated as “performance-based compensation” under Section 162(m). A Participant’s Bonus Award shall be determined based on the achievement of written performance goals approved by the Committee. Within 90 days after the start of a designated performance period (or, if less, the number of authorizeddays which is equal to 25% of such performance period), the Committee will establish the objective performance goals for each Participant. The performance goals will be based on one or more of the following criteria: (1) earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (2) net income; (3) operating income; (4) earnings per share of common stock of the Company; (5) book value per share; (6) return on stockholders’ equity; (7) expense management; (8) return on investment before or after the cost of capital; (9) improvements in capital structure; (10) profitability of an identifiable business unit or product; (11) maintenance or improvements of profit margins; (12) stock price; (13) market share; (14) revenues or sales; (15) costs; (16) cash flow; (17) working capital; (18) changes in net assets (whether or not multiplied by a constant percentage intended to represent the cost of capital); (19) return on assets and (20) total shareholder return.
Prior to the payment of any Bonus Award, the Committee, will certify that the applicable performance goals have been met. In connection with such certification, the Committee may decide to pay amounts which are less than the Bonus Award otherwise payable for achievement of the applicable performance goals. The Committee may base the decision to reduce the Bonus Award on any criteria it deems relevant. Payment of a Bonus Award to a Participant will occur only after such certification and will be made as determined by the Committee in its sole discretion after the end of such performance period. The Short-Term Incentive Plan provides that the Committee shall determine, in its discretion, whether a Bonus Award shall be payable in cash, common stock of the Company, share-based awards, or a combination thereof, which may include, without limitation, permitting a Participant to elect to defer receipt of all or any portion of such Bonus Award (in a manner consistent with Section 162(m) and Section 409A of the Code) into a right to receive deferred cash or shares of Class B Common Stock with the intent of using the additional shares to prevent or discourage any actual or threatened takeovercommon stock of the Company. The Company currently hasat a future date (such right, a “Deferred Share Unit”). Any such shares or share-based awards issued in effect a shareholder approved rights plan that is not designed to protect shareholders against the possibilitysettlement of a hostile takeover. Instead, it is meantBonus Award shall be granted pursuant to preserve shareholder value and the value of certain tax assets primarily associated with net loss carryforwards and built-in lossesStock Plan, provided that shares or share-based awards may be awarded under Section 382the Stock Plan only if Proposal (3), “Approval of the Internal Revenue Code2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan” is approved by shareholders.
Effect of 1986,Certain Events on Short-Term Incentive Plan and Bonus Awards
In the event of a Change in Control (as defined in the Stock Plan described under Proposal (3) and attached as amended. Appendix A), the Committee in its sole discretion and without liability to any person may take such actions, if any, as it deems necessary or desirable with respect to any Bonus Award.
Limitations
The proposed Class B Short-Term Incentive Plan provides that the maximum Bonus Award to any Participant with respect to any fiscal year shall be the greater of (x) $15 million and (y) 2.5% of the Company’s income before income taxes, as reported in the Company’s audited consolidated financial statements for the year in respect of which the Bonus Award is to be payable or distributed, as applicable.
No new Bonus Awards may be granted under the Short-Term Incentive Plan after the date of the Company’s first shareholders’ meeting that occurs during 2019, but previously granted Bonus Awards may extend beyond that date.
Amendment does not changeand Termination
The Committee may at any time amend, suspend or terminate the Short-Term Incentive Plan in whole or in part. Notwithstanding the foregoing, no amendment, suspension or termination of the Short-Term Incentive Plan shall be made which (1) without the Participant’s consent, materially impairs any of the existing termsrights or obligations under any Bonus Award theretofore granted to a Participant under the Short-Term Incentive Plan, or (2) without the approval of the rights plan.
Nontransferability of Bonus Awards
A Participant’s rights and interest under the Short-Term Incentive Plan generally may not be used to discourage persons from attempting to gain controlassigned, transferred, hypothecated or encumbered, except in the event of a Participant’s death.
Participants of the Short-Term Incentive Plan
For the fiscal year ending October 31, 2014, five Participants were selected by the Committee to participate in the Short-Term Incentive Plan (five Participants in the Executive Officers Group, no Participants in the Non-Executive Director Group, and no Participants in the Non-Executive Officer Employee Group). Bonus Awards with respect to such 2014 fiscal year have been contingently granted under the Short-Term Incentive Plan by the Company, by diluting the voting power of shares then outstanding or by increasing the voting power of persons who would support the Board in a potential takeover scenario. However, this proposal is not made in responsesubject to any effort of which we are aware to accumulate our stock or to obtain control of us, nor do we have a present intent to use the additional shares of authorized Class B Common Stock to oppose a hostile takeover attempt or to delay or prevent changes in control of management. In addition, membersachievement of the Hovnanian family, including Ara Hovnanian,relevant performance goals and the Chairman of our Board, President and Chief Executive Officer, have the power to cast a majorityapproval of the votes that can be castShort-Term Incentive Plan by the holders of all our currently outstanding common stock, voting together, through personal holdings,Company’s shareholders at the Limited Partnership, family trusts2014 Annual Meeting.
New Plan Benefits
The following table sets forth information on the maximum bonus for fiscal 2014 which may be earned under the Short-Term Incentive Plan if the Short-Term Incentive Plan is approved by shareholders and shares held by the Estate of Kevork S. Hovnanian.
Short-Term Incentive Plan
Maximum Fiscal 2014 Bonus Award Potential
Name And Position | Bonus Awards Dollar Value (1) | ||
Ara K. Hovnanian, President, Chief Executive Officer and Chairman of the Board | $2,500,000 | ||
J. Larry Sorsby, Executive Vice President, Chief Financial Officer and Director | $950,000 | ||
Thomas J. Pellerito, Chief Operating Officer | $950,000 | ||
Brad G. O’Connor, Vice President, Chief Accounting Officer and Corporate Controller | $197,327 | ||
David G. Valiaveedan, Vice President — Finance and Treasurer | $153,831 | ||
Executive Officer Group | $4,751,158 | ||
Non-Executive Director Group | N/A | ||
Non-Executive Officer Employee Group | N/A |
(1) | Represents the maximum bonus which may be earned in fiscal 2014 under the Short-Term Incentive Plan. Bonus Awards may be paid in cash or in shares of Common Stock of the Company. A portion of earned bonuses may, at the Committee’s discretion, also be paid in the form of deferred shares that vest in four equal annual installments beginning on the second November 1st following the fiscal year during which the service giving rise to the deferred share award was performed, subject to rounding and continued employment with the Company. Deferred share award recipients who have reached age 58 or who have completed at least 20 years of service for the Company, however, will be fully vested in all shares relating to a deferred share award on the later of (1) the January 15th following the fiscal year during which the service giving rise to the deferred share is performed or (2) the date on which age 58 is reached or 20 years of service is completed. |
Equity Compensation Plan Information
Information as a result of increasingOctober 31, 2013 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized Class B Common Stock. Issuances of additional shares of our Class B Common Stock in the future would dilute your percentage ownership and the voting powerfor issuance is set forth under Proposal (3) “Approval of the outstanding shares of our Class A Common Stock. In addition shareholders do not have preemptive rights.
VOTE REQUIRED
Adoption of the proposed amendment to the Certificate of Incorporation to increase the number of authorized shares of Class B Common StockShort-Term Incentive Plan requires the affirmative vote of the holders, represented in person orapproval by proxy at the 2013 Annual Meeting, of (1) a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, and (2) a majority ofrepresented in person or by proxy at the votes cast by the shareholders of Class B Common Stock.2014 Annual Meeting. In determining whether thisthe proposal has received the requisite number of affirmative votes, abstentions are considered “votes cast” under NYSE rules and thus will have the same effect as a vote “against” the proposal. Broker non-votes will not count as votes cast “for” or “against” the proposal to adopt the Short-Term Incentive Plan and will have no effect on the outcome because they are not considered votes cast. Approval of the Class B Amendment is not conditioned on the approval of the Class A Amendment described in Proposal 3.
Mr. Hovnanian and others with voting power over the shares held by the Estate of Kevork S. Hovnanian, the Limited Partnership, the 2012 LLC and certain family trusts have informed the Company that they intend to vote in favor of this proposal.the Short-Term Incentive Plan. Because of their collective voting power, this proposal is assured passage.
Our Board of Directors recommends that shareholders vote FOR the approval of the proposed amendment to our Certificate of Incorporation to increase the number of authorized shares of Class B Common Stock.
In accordance with the requirements of Section 14A of the Exchange Act (which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)) and the related rules of the SEC, we are including in these proxy materials a separate resolution subject to shareholder vote to approve, in a non-binding vote, the compensation of our named executive officers, including the compensation tables and any related narrative discussion, as disclosed on pages 1827 to 50.
In considering their vote, shareholders may wish to review with care the information on the Company’s compensation policies and decisions regarding the named executive officers presented in Compensation Discussion and Analysis on pages 1827 to 36,49, as well as the discussion regarding the Compensation Committee on pages 1625 and 17.
As we discuss in the Compensation Discussion and Analysis section, the Board of Directors believes that the Company’s long-term success depends in large measure on the talents of the Company’s employees. The Company’s compensation system plays a significant role in the Company’s ability to attract, retain and motivate the highest quality associates in a difficult market. The principal underpinnings of the Company’s compensation system are an acute focus on performance, shareholder alignment, sensitivity to the relevant market place and a long-term orientation.
The Compensation Committee ties increases or decreases in overall compensation with the overall financial performance of the Company. During fiscal years when the Company’s profitability has been higher, total compensation has been higher. During more recent years when the Company’s performance has been lower due in part to the economic downturn and recession, particularly in the housing industry, the Compensation Committee’s policies and actions have significantly lowered overall compensation. These policies and actions include:
● | Significant reductions in annual bonus |
● | Selection of bonus metrics to correspond to the |
● |
Focus on a return to profitability and lowering net debt or refinancing debt over |
● | Policy of generally targeting a fixed number of stock options rather than a specific option value as part of annual compensation. Despite the |
● | Active management of both equity award levels and the number of shares available for new |
The text of the resolution in respect of this proposal is as follows:
“Resolved, that the compensation paid to the Company’s named executive officers as disclosed pursuant to Item 402 of Regulation S-K in the Proxy Statement relating to the Company’s Annual Meeting of Shareholders to be held on March 12, 2013,11, 2014, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby approved.”
The Board recommends that shareholders vote FOR approval of this resolution.
The Compensation Committee of the Board of Directors (the “Committee”) is the principal overseer of the Company’s various policies and procedures related to executive compensation. The Committee meets at least four times a year to discuss industry trends with regard to overall compensation issues and consults with outside compensation consultants as needed. The Committee is governed by its Charter which is available on the Company’s public website (www.khov.com) under “Investor Relations/Corporate Governance”.
Areas of Responsibility
The Committee, in conjunction with the Board of Directors and with management’s input, shapes the Company’s executive compensation philosophy and objectives. In particular, the Committee is charged with:
● | Reviewing, at least annually, the salaries, bonuses and other forms of compensation, including stock option grants, for the Company’s senior executives (which include the |
● | Reviewing, at least annually, compensation paid to the Company’s non-employee Directors; |
● | Participating in the review of compensation of other designated key employees of the Company; |
● | Periodically reviewing the Company’s policies and procedures pertaining to the Company’s equity award plans and forms of equity grants to all employees and non-employee Directors, employee benefit plans (for example, the 401(k) plan and deferred compensation plans), severance agreements and executive |
● | Fostering good corporate governance practices as they relate to executive compensation; and |
● | Reviewing, at least annually, as part of the Board of Directors’ oversight responsibilities, the Company's compensation program and reports from the |
These areas of responsibilities are discussed in more detail below under “Compensation Discussion and Analysis.” During the fiscal year ended October 31, 2012,2013, the members of the Committee were all “non-employee directors”“Non-Employee Directors” for purposes of Rule 16b-3 ofunder the Exchange Act, and “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended.
Compensation Review Process for the Named Executive Officers
The Committee, in conjunction with the Board of Directors and with management’s input, is responsible for making decisions related to the overall compensation of the NEOs.
At least annually, the Committee establishes objective financial measures for determining bonus awards to the NEOs. The Committee also considers salary, employee benefits and discretionary bonus awards, if any, for the NEOs.
In determining overall compensation for the NEOs, the Committee may consult with other members of the Board of Directors, including the CEO and the CFO.CFO rather than relying solely on the Company’s financial performance measures in determining their compensation. Each of these individuals often provides the Committee with insight on the individual and overall performance of executives (other than with respect to himself), including the achievement of personal objectives, if any, rather than relying solely on the Company’s financial performance measures in determining their compensation.any. The CEO and CFO are not present for the Committee’s evaluation of their individual performance. The Committee also reviews and analyzes the compensation of the named executive officers of the Company’s peer group of 11 publicly-traded homebuilding companies (the “Peer Group”), discussed further below. The Committee may engage outside compensation consultants in relation to various compensation issues. The Committee may also instruct a compensation consultant to provide assistance in fostering an overall compensation program that aligns with its compensation philosophy to guide, motivate, retain and reward its executives for the achievement of the Company’s financial performance, strategic initiatives and individual goals, including increased long-term shareholder value in the context of a challenging business environment. Notwithstanding any input from compensation consultants, the Committee has the sole discretion to make all final decisions related to NEO compensation.
Outside Compensation Consultant and No Conflicts of Interest
For fiscal 2012,2013, the Committee engaged Pearl MeyerFrederic W. Cook & PartnersCo., Inc. (“PM&P”F.W. Cook”) as the Committee’s outside compensation consultant to provide certain services related to executive and non-employee Director compensation. PM&P does not provide any other services to the Company unless approved by the Committee, and no such services were provided in fiscal 2012. After considering the relevant factors, the Company has determined that no conflicts of interest have been raised in connection with the services PM&P performed for the Company in fiscal 2012. In fiscal 2012, PM&P2013, F.W. Cook assisted the Committee with its review of the Company’s annual bonus and long-term incentive plans for the NEOs as well as its review of the compensation program for the non-employee directors.
The Committee’s primary objective in engaging PM&PF.W. Cook has been to obtain advice and feedback related to maintaining programs that provide compensation opportunities for executives within the median range of the competitive homebuilderPeer Group forcomparable financial performance and PM&Pperformance. F.W. Cook also provided assistance to the Committee in fostering an overall compensation program as discussed above.
The Committee weighs the advice and feedback from its compensation consultant and the members of the Board of Directors, as well as the views of, and information gathered by, the members of management it has consulted in conjunction with its review of other information the Committee considers relevant when making decisions or making recommendations to the full Board of Directors regarding executive compensation.
Board Communication
The Company’s Board of Directors is updated at least quarterly of any compensation decisions or recommendations made by the Committee, and the Committee requests feedback from the Board of Directors regarding specific compensation issues as it deems necessary.
Compensation Committee Report
The Committee has reviewed and discussed the Compensation Discussion and Analysis provided below with the Company’s management. Based on this review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statementProxy Statement and in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2012.
COMPENSATION COMMITTEE
Stephen D. Weinroth, Chair
Robert B. Coutts
Edward A. Kangas
Joseph A. Marengi
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended October 31, 2012,2013, the members of the Compensation Committee were Messrs. Weinroth, Coutts, Kangas and Coutts.Marengi. Each of Messrs. Weinroth, Coutts, Kangas and Coutts areMarengi is a non-employee Directors, wereDirector, was never officersan officer or employeesemployee of the Company or any of its subsidiaries and did not have any relationships requiring disclosure under Item 404404(a) of Regulation S-K during fiscal 2012.in this Proxy Statement. None of our executive officers served on the board of directors or compensation committee of any other entity that has or had one or more executive officers who served on our Board of Directors or our Compensation Committee during fiscal 2012.
Company Performance in Fiscal 2012
Beginning in the second quarter of fiscal 2012, the Company began to see positive operating trends, which continued into the third and fourth quarters of fiscal 2012.2013. Below are some highlights forof the Company’s performance during fiscal 2012:
● | Total revenues for fiscal |
● | During fiscal |
● | During fiscal |
● | Contract backlog as of October 31, |
● | During |
● | During |
● | During fiscal 2013, the Company |
● | After an increase of 199% from fiscal 2011 to fiscal 2012, |
Best Practices
● | Pay-for-Performance: The |
The following graph demonstrates the link between the CEO’s annual realized pay and the Company’s Total Shareholder Return (“TSR”). Annual realized pay includes: (1) base salary, annual bonus, perquisites and other compensation (“Annual Compensation”) plus (2) long-term cash awards and stock awards vesting during the fiscal year and the realized value of options exercised (“Realized Value of Long-Term Compensation”).
Hovnanian CEO Pay Alignment with TSR Performance ($ `000)
(1) | Represents the value of the vested portion of the 2010 Long-Term Incentive Program award for performance during fiscal 2011, 2012 and 2013 and the value of the vested portion of the June 10, 2011 restricted stock unit award (the only restricted stock unit award vesting in these years) for performance during fiscal 2012 and 2013. The CEO did not exercise any stock options during the fiscal 2011-2013 periods. | |
(2) | The TSR Index measures the change in the Company's stock price relative to fiscal |
● | Emphasis on Long-Term Value Creation and Retention: The Committee seeks to align the interests of management with the long-term interests of the Company’s shareholders by granting a significant portion of |
● | Maintaining an Appropriate Peer Group: In constructing the Peer Group described below, the Committee selected those companies that compete directly with the Company in the homebuilding industry, are of comparable size and complexity in operations to the Company and are generally in the markets in which the Company competes. The Committee reviews the composition of the Peer Group on an annual basis and makes adjustments, if needed. The Committee reviews the executive compensation of the Peer Group companies and seeks to award a total compensation opportunity for our NEOs near the median of the Peer Group, with variation in actual compensation earned both above and below the median, depending on performance. |
● | CEO Total Direct Compensation vs. Peer Group: The following graphs compare the CEO’s total direct compensation (the sum of base salary, annual bonus/incentive and long-term incentive awards (including the annualized value of long-term incentive program awards at the target outcome for the performance criteria), but excluding all other compensation elements) to the Peer Group chief executive officer median data for fiscal 2010 through 2012. No comparison is shown for fiscal 2013 because complete Peer Group chief executive officer median data was not available at the time of filing this Proxy Statement. For fiscal 2013, our CEO’s base salary was $1.1 million, his bonus was $1.5 million and his long-term incentive awards (including the annualized value of long-term incentive program awards at the target outcome for the performance criteria) were $5.3 million. We expect fiscal 2013 Peer Group chief executive officer total direct compensation to increase from prior levels based on improvement trends across the homebuilding industry during fiscal 2013. |
Hovnanian CEO Total Direct Compensation vs. Peer Group CEO Median Total Direct Compensation (1)(3)
(1) | Reflects the sum of base salary, annual bonus/incentive and long-term incentive awards (including the annualized value of long-term incentive program awards at the target outcome for the performance criteria) and excludes all other compensation elements. | |
(2) | Long-term incentives include the annualized value of long-term incentive program awards at the target outcome for the performance criteria. | ||
(3) | Data shown is based on each Peer Group company’s respective fiscal year which varies among Peer Group companies and, consequently, may be different than the Company’s fiscal year. |
Hovnanian CEO Total Direct Compensation vs.
Peer Group CEO Median Total Direct Compensation (1)(2)
(1) | Reflects the sum of base salary, annual bonus/incentive and long-term incentive awards (including the annualized value of long-term incentive program awards at the target outcome for performance criteria) but excludes all other compensation elements. | |
(2) | Data shown is based on each Peer Group company’s respective fiscal year which varies among Peer Group companies and, consequently, may be different than the Company’s fiscal year. |
● | No Excise Tax Gross-Ups |
● | Maintenance and Enforcement of Stock Ownership Guidelines: The Board of Directors has established stock ownership guidelines pursuant to which the CEO, CFO and COO are requested to achieve and maintain recommended minimum levels of stock ownership as set forth below under “Stock Ownership Guidelines.” |
● | Perquisites: The Committee has provided NEOs only a few perquisites in addition to typical medical, dental and life insurance benefits. The Company limits the personal use of Company automobiles and its fractional aircraft share, reimbursement for country club dues and personal income tax preparation and accounting services to the CEO. Our perquisites do not include any tax gross-ups. |
● | Clawback Policy: Under Section 304 of the Sarbanes-Oxley Act of 2002, if we are required to restate our financial results due to material noncompliance with any financial reporting requirements as a result of misconduct, the CEO and CFO could be required to reimburse us for any bonus or other incentive-based or equity-based compensation received during the 12 months following the first public issuance of the non-complying document, and any profits realized from the sale of our securities during those 12 months. In addition to this requirement, it is the Company’s policy that, if we are required to restate our financial results due to material noncompliance by the Company with any financial reporting requirement under the securities laws as a result (directly or indirectly) of an executive officer’s misconduct, the Board will require, at its discretion and approval, the reimbursement and/or cancellation of any incentive-based compensation (including stock options awarded as compensation) in excess of the amount that would have been awarded based on the restated financial results. This policy applies to incentive-based compensation awarded to the executive officer during the three-year period preceding the date on which the Company is required to prepare an accounting restatement based on erroneous data. Additional information about the clawback policy is described under “Actions for Fiscal 2014.” |
Compensation Decisions for Fiscal The Committee’s compensation decisions for fiscal ● Base Salaries: The CEO and CFO received no base salary increase for fiscal ● Annual Bonuses: Consistent with the achievement of specified financial or personal objectives, fiscal ● Discretionary Bonuses: ● Long-Term Awards, including stock options and participation in the Long-Term Incentive Program The Committee, in conjunction with the Board of Directors and with senior management, has been instrumental in shaping the Company’s compensation philosophy and objectives because of its responsibilities and oversight of the Company’s various policies and procedures concerning executive compensation. The six primary objectives that the Committee considers in making compensation decisions are discussed below, as are our other philosophies and mechanisms for determining compensation. In making compensation-related decisions, the Committee also considered its role in promoting good corporate governance practices. Primary Objectives for the Compensation Program The Company’s primary objectives for compensating its executives are as follows: 1. To fairly compensate its executives in a manner that is appropriate with respect to their performance, level of responsibilities, abilities and skills; 2. To offer compensation that guides, motivates, retains and rewards its executives for the achievement of the Company’s financial performance, strategic initiatives and individual goals; 3. To align the executive’s interests with the interests of 4. To maintain competitive pay opportunities for its executives so that it retains its talent pool and, at the same time, has the ability to attract new and highly-qualified individuals to join the organization as it grows or in the event of succession or replacement of an executive; 5. To safeguard that the reward system is appropriately designed in the context of a challenging business environment; and 6. To ensure that compensation plans do not incentivize a level of risk that is reasonably likely to have a material adverse effect on the Company. Tailored Compensation Consistent with these objectives, the Company’s compensation philosophy also takes into consideration the ● CEO, CFO and COO: The compensation package of the CEO, Mr. Ara K. Hovnanian, the CFO, Mr. J. Larry Sorsby, and the COO, Mr. Thomas J. Pellerito, differ from that of the other NEOs due to their unique roles and elevated set of responsibilities. Because the CEO, CFO and COO make executive decisions that influence the direction, stability and profitability of the Company, their overall compensation is intended to strongly align with objective financial measures of the Company. ● Other NEOs: The Company’s Vice President — Chief Accounting Officer and Corporate Controller, Mr. Brad G. O’Connor, and Vice President — Finance and Treasurer, Mr. David G. Valiaveedan, have, as result of their respective positions, less direct influence on the Company’s strategic and operational decisions. Therefore, overall compensation levels for these NEOs reflect both objective financial measures of the Company and the attainment of personal objectives (as determined by the Committee, which may consult with the CFO, the CEO and other members of senior management). Variable Incentive Compensation The Company’s compensation philosophy emphasizes variable incentive compensation elements (bonus and long-term incentives), the value of which reflects the Company’s financial and stock performance. For executives who report to the CFO, including Messrs. O’Connor and Valiaveedan, the variable compensation elements also include personal performance objectives. For all executive officers, the Committee retains the flexibility to adjust incentive awards downward or to consider discretionary bonus awards in “special circumstances” as described on page Peer Group Considerations As context for setting the compensation levels for the CEO, CFO and COO in fiscal The Committee relies heavily on Peer Group comparisons for the CEO, CFO and COO. Because only four of the 11 Peer Group companies report data for a chief operating officer position, the Committee may also review broad-based compensation survey data for the COO. The Committee periodically reviews the compensation for the other NEOs relative to the Peer Group and broad-based compensation survey data, with consideration of internal pay relationships in years when market benchmarking is not conducted. The Committee does not consider the specific participants in Consideration of Market Conditions In determining overall compensation for all the NEOs, the Committee also takes into account leadership abilities and risk management contributions, which are especially critical during difficult market conditions. In addition, in establishing compensation levels, the Committee takes into consideration competitive market pressures, both within and outside of the homebuilding industry. Since late 2006 through the beginning of 2012, the homebuilding industry As an example of the Committee’s consideration of market conditions, during fiscal As another example of the consideration of market conditions, the Committee determined that 50% of the stock options granted in June Say-on-Pay and Say-on-Frequency Votes In light of the voting results with respect to the frequency of shareholder votes on executive compensation at the 2011 Annual Meeting of Shareholders at which a substantial majority of our shareholders (96.3% of the votes cast by shareholders of Class A Common Stock and Class B Common Stock, voting together) voted for “say-on-pay” proposals to occur every three years, the Board of Directors initially decided that the Company would hold, in accordance with the vote of an overwhelming majority, The Board of Directors thoughtfully considers the opinions expressed by shareholders through their votes, periodic meetings and other communications, and believes that shareholder engagement leads to enhanced governance practices. During fiscal In addition, the Committee considered the result of the 2013 advisory, non-binding “say-on-pay” proposal in We currently expect the next advisory vote on the frequency of shareholder votes on executive officer compensation to occur at the Company’s 3. Compensation Elements at a Glance There are five main compensation elements that support the Company’s compensation objectives, each of which is discussed in detail below. 1. Base salaries; 2. Annual bonuses; 3. Stock grants (for example, stock options and restricted stock unit (“RSU”) awards); 4. Long-Term Incentive Programs (“LTIPs”) (described below) (payable in both cash and stock); and 5. Other employee benefits, including limited perquisites. Compensation Mix Fixed vs. Variable Compensation. A significant portion of executives’ “Total Direct Compensation” (which includes base salary, annual bonuses, stock grants and LTIP awards) opportunity consists of variable compensation – that is, the ultimately realized compensation on an annualized basis is dependent on either Company or individual performance. Of the elements of Total Direct Compensation, base salary is fixed compensation, while annual bonuses, stock grants and LTIP awards are variable compensation. An important part of each NEO’s compensation package consists of stock options, the ultimate value of which is tied to the Company’s stock performance. These variable elements are intended to align the executives’ performance and interests with Company performance and long-term shareholder value. The intent of the Committee for fiscal Long-Term vs. Short-Term Compensation. An important portion of each NEO’s Total Direct Compensation is long-term compensation, which normally includes stock option and/or The average long-term compensation amounts (including stock and option grants at their grant date fair value and the LTIP Base Salaries Base salaries are intended to reward executives for their day-to-day contributions to the Company. The Committee believes that base salaries within the competitive median range are necessary to retain the Company’s executive talent pool, and it determined that the fiscal Base salaries of all the NEOs are reviewed annually by the Committee and are subject to adjustment based on factors that may include individual performance, change in responsibilities, average salary increases or decreases in the industry, compensation for similar positions ● CEO: For fiscal 2007 through ● CFO: For fiscal 2011 ● COO: For fiscal ● Other NEOs: For fiscal Annual Bonuses Regular Bonuses The Company provides each of the NEOs with an opportunity to earn annual bonuses, which are intended to reward executives for the attainment of short-term financial objectives and, in the case of some NEOs, individual performance objectives. Fiscal The Committee has discretion under the Short-Term Incentive Plan to reduce or eliminate the amount of any bonus amounts payable to any participant based on performance or any other factors the 201220122013 reflected a conservative approach to fixed pay elements (base salary), the achievement of pre-established goals (annual bonuses) and long-term equity awards well below median of the Peer Group in view of the challenging business environment and the Company’s stock performance in such environment.·2012.2013. The remaining three NEOs each received a salary increase. In December 2011, theThe Committee approved fiscala base salary increase from $550,000 to $600,000 for Mr. Pellerito, which became effective in December 2012, increases for Messrs. Pellerito, Valiaveedan and O’Connor. The increases for Messrs. Pellerito and Valiaveedan were approved in order to move themposition his salary closer to the Peer Group chief operating officer median and, in the case of Mr. Valiaveedan, to further align him with the median level for the broad-based compensation survey data (as described further under “Compensation Philosophy and Objectives – Peer Group Considerations”). Mr.Messrs. O’Connor and Valiaveedan each received ana 3% base salary increase, as a resultwhich also became effective in December 2012, in consideration of his promotion to Vice President — Chief Accounting Officertheir individual performance and Corporate Controller.in line with the Company’s ordinary course merit-based and cost of living salary increase practices. See “Details of Compensation Elements – Base Salaries” below for additional information on base salaries.·20122013 annual bonuses were paid to all NEOs. Bonuses for the CEO, CFONEOs were higher than in fiscal 2012 given the Company’s significant improvements in Adjusted EBITDA (as defined below) and COO were the same as for fiscal 2011. Bonuses for the other NEOs increased in proportionreturn to the amount of their annual salary increases, as their bonus calculations are a percentage of base salary.profitability. Additional details are described below under “Details of Compensation Elements – Annual Bonuses – Regular Bonuses.”· Discretionary The Committee did not award discretionary bonuses were awarded to Mr. O’Connor and Mr. Valiaveedan inany NEO for fiscal 2013 in respect of their performance in fiscal 2012, as described further under “Details of Compensation Elements – Annual Bonuses – Discretionary Bonuses.”2013.·(described below): Grantsdescribed below: For fiscal 2013, the Committee granted the same number of equity awards madestock options to the NEOs as in fiscal 2012 and the annualized target value2012. The Committee also determined that 50% of the Company’s Long-Term Incentive Program fell considerably below median Peer Group long-term incentive compensation levels. The Long-Term Incentive Program was implemented in fiscal 2010 as a multi-year award with a three-year performance period (fiscal 2011-2013), with additional vesting conditions in fiscal 2014 and 2015. In fiscal 2012, the Committee determined that stock options granted in June 20122013 to the CEO, CFO and COO would have an exercise price 33 1/3% above the closing stock pricebe subject to performance conditions. These performance-based options vest in four equal annual installments, commencing on the grant date. In determining to grant options with an exercise price at this premium level, the Committee sought to provide a stronger link with increased shareholder value, as these executives have more significant responsibility for the Company’s long-term strategy as compared to the other NEOs. The Committee also determined to increase the number of options awarded in recognitionsecond anniversary date of the premium pricing and its determinationgrant, except that the CEO, CFO and COO’s long-term incentive values on the grant date (including recent annual option grants and the annualized fiscal 2010 valueno portion of the LTIP at target, discussed below) were considerably belowaward will vest unless the median value of long-term incentive awards granted to the Peer Group chief executive officers, chief financial officers and chief operating officers. Additional details arespecific performance conditions described below under “Details of Compensation Elements – Stock Grants.”·Change in Control and Severance Agreements: In January 2012, the Company entered into change in control severance protection agreements with Messrs. O’Connor and Valiaveedan.Grants” are met. The Committee considers the continued services of these key executives whose skills are not specifically tied to the homebuilding industry to be in the best interests of the Company and its shareholders. The agreements are designed to reinforce and encourage their continued attention and dedication to their duties of employment without personal distraction or conflict of interest in circumstances which could arise from the occurrence of a change in control of the Company. These agreements provide benefits following a change in control only if the executive is terminated involuntarily or terminates with Good Reason. Neither of these agreements provide for excise tax gross-ups. The provisions of such agreements are2013 LTIP, described below under “Potential Payments Upon Termination Or Change-In-Control Table.“Details of Compensation Elements,”20·Impact on CEO Total Direct Compensation: The following graphs compare was implemented in fiscal 2012 CEO total direct compensation (the sum of base salary, annual bonus/incentive2013 as a multi-year award with a 31-month performance period and long-term incentive awards, excluding all other compensation elements) to the most recently published Peer Group median data available to the Committee when finalizing fiscal 2012 CEO compensation.(1)Reflects the most recently published Peer Group Median data available to the Committee when finalizing fiscal 2012 CEO compensation. Note that the annual incentive and long-term incentive compensation levelsadditional vesting conditions for two offiscal years beyond the eleven peer group CEOs reflected in the Peer Group Median were substantially lower than their prior year levels because these CEOs were no longer serving in such positions during or just after the end of the year for which the data was gathered. Had these two CEOs been excluded from the Peer Group CEO Median, the Peer Group CEO Median would have been higher and, consequently, the CEO’s Total Direct Compensation would have been further below the Peer Group CEO Median Total Direct Compensation.performance period.(1)Reflects the most recently published Peer Group Median data available to the Committee when finalizing fiscal 2012 CEO compensation. Note that the annual incentive and long-term incentive compensation levels for two of the eleven peer group CEOs reflected in the Peer Group Median were substantially lower than their prior year levels because these CEOs were no longer serving in such positions during or just after the end of the year for which the data was gathered. Had these two CEOs been excluded from the Peer Group CEO Median, the Peer Group CEO Median would have been higher and, consequently, the CEO’s Total Direct Compensation would have been further below the Peer Group CEO Median Total Direct Compensation.21theour shareholders; very unique roles played by each of the NEOs for whom compensation is reported in the tables below, and the Committee seeks to individually tailor their compensation packages to align their pay mix and pay levels with their contributions to, and positions within, the Company. For example:··22 and Discretionary Awards3141 under “Discretionary Bonuses.” 2012,2013, the Committee considered the compensation levels and practices of its Peer Group companies. The Company’s Peer Group includes the following 11 publicly-traded homebuilding companies: (1) Beazer Homes USA, Inc.; (2) D.R. Horton, Inc.; (3) KB Home; (4) Lennar Corporation; (5) M.D.C. Holdings, Inc.; (6) Meritage Homes Corporation; (7) NVR, Inc.; (8) Pulte Homes,Group, Inc.; (9) Ryland Group, Inc.; (10) The Standard Pacific Corp.; and (11) Toll Brothers, Inc. The companies in the Peer Group are the same as those used in fiscal 20112012 and were selected by the Committee, in consultation with PM&Pthe Committee’s former compensation consultant, Pearl Meyer, and management, because of their comparable business profile. In particular, the Company’s revenue size relative to the companies in the Peer Group and the presence of the Peer Group companies in the Company’s markets were considered the most relevant factors for selection of peer companies within the homebuilding industry. The Committee will continue to review the appropriateness of the Peer Group composition. For the other NEOs, the Committee places equal or greater weight on its consideration of internal pay equity, an evaluation of individual performance contributions and other factors described in detail below.the broad-based compensation survey data to be a material factor in its review.reviews. The Committee believes that a review of market survey data periodically (but not necessarily every year) is sufficient for these positions based on their roles and historical compensation levels. The Committee considereddid not review broad-based market survey data in connection with itssetting fiscal 20122013 compensation determinations.hashad been impacted by a lack of consumer confidence, increasing home foreclosure rates, large supplies of resale and new home inventories, and more restrictive lending standards for homebuyers, resulting in weak demand for new homes, slower sales, higher than normal cancellation rates, and increased price discounts and other sales incentives to attract homebuyers. BeginningAlthough new home demand remains at historically low levels, during fiscal 2013, the overall homebuilding market continued the improvement that started in the second quarter of fiscal 2012,2012. As a result, the Company began to see positive operating trends, which continued intoexperienced higher revenues and gross margins, increased contracts and deliveries and pre-tax profitability for the third and fourth quarters of fiscal 2012.year for the first time since fiscal 2006. See “Executive Summary” for highlights of the Company’s performance in fiscal 2012.During2013.2012,2013, the Committee sought to emphasize improvingcash flow and liquidity and, as a result, during fiscal 2013, the bonus formula for the CEO, CFO and COO also included a cash balances component. In addition, the EBITDA without limiting management’s ability to strategically deploy cash, such as for repurchasing debt and making land purchases, in anticipationcomponent of the initial stages of recovery in the homebuilding industry. As a result, the Committee approved the same bonus metricsformulas for fiscal 2012 as in fiscal 2011, except that the cash balances component was removed. For fiscal 2012, the CEO and CFO salaries remainedwas structured so that it would require improvement in Adjusted EBITDA in fiscal 2013 compared to fiscal 2012 Adjusted EBITDA in order for these NEOs to be eligible for the same as in fiscal 2011. The salariesor increased bonus levels under this component of the COO, Mr. Thomas Pellerito, Vice President — Chief Accounting Officer and Corporate Controller, Mr. Brad G. O’Connor, and Vice President — Finance and Treasurer, Mr. David G. Valiaveedan, were increased by 10%, 8.5% and 5.3%, respectively, over fiscal 2011. The salary increases for Messrs. O’Connor and Valiaveedan resulted in a corresponding increase in the dollar amount of2013 bonus formula compared to their bonus opportunity for fiscal 2012. The adjustments for Messrs. Pellerito and Valiaveedan were made to provide better alignment with the compensation of comparable positions in the Peer Group and, for Mr. Valiaveedan, to further align him with the median level in the broad-based compensation survey data. Mr. O’Connor’s base salary was increased as a result of his promotion to Vice President — Chief Accounting Officer and Corporate Controller.23In settingearned fiscal 2012 compensation,bonuses.20122013 to the CEO, CFO and COO would have an exercise price 33 1/3% above the closing stock pricebe subject to performance conditions. These performance-based options vest in four equal annual installments, commencing on the second anniversary date of the grant, dateprovided that no portion of the award will vest unless the Committee determines that the Company achieved $100 million in connection with an increasePre-tax Profit (as defined below) in the numberat least one of options awarded for the reasonsfiscal 2014, fiscal 2015 or fiscal 2016 as discussed above under “Executive Summary – Compensation Decisions for Fiscal 2012.”a triennialan advisory vote on the compensation of named executive officers which would next take placeevery three years. However, the Company voluntarily elected to hold a “say-on-pay” vote at its 2013 Annual Meeting of Shareholders in addition to the Company’sscheduled “say-on-pay” vote at this 2014 Annual Meeting of Shareholders. However, we have voluntarily elected to hold our next “say-on-pay” vote at this 2013 Annual Meeting of Shareholders. We currently expect theThe Company’s next advisory vote on the frequencycompensation of shareholder votes onits named executive officer compensationofficers is required to occurbe held at the Company’s 2017 Annual Meeting of Shareholders.2012,2013, the Company conducted proactive investor outreach programs, including attending 10nine investor conferences as well as other meetings with the investment community and meeting one-on-one or in small groups with more than 250200 investors. Additionally, the Company periodically engages investors to discuss specific matters of importance to shareholders. For example,Marchconnection with the discharge of its responsibilities. A substantial majority of our shareholders (98.5% of the votes cast by shareholders of Class A Common Stock and Class B Common Stock, voting together) approved the compensation of our named executive officers for fiscal 2012 described in our proxy statement for the CFO contacted several major institutional shareholders2013 Annual Meeting of Shareholders. As this level of support was extremely high, the Committee decided that the say-on-pay vote result did not necessitate substantive changes to obtain feedback regardingour compensation programs.compensation philosophy and pay levels for which he received positive feedback.FISCAL 2012FISCAL 2013 COMPENSATION ELEMENTS AND COMPENSATION MIX1. Base salaries;2. Annual bonuses;3. Stock grants (for example, stock options and restricted stock unit awards);4. Long-Term Incentive Program (“LTIP”) (described below) (payable in both cash and stock); and5. Other employee benefits, including limited perquisites.20122013 was to maintain variable compensation opportunity as a significant percentage of Total Direct Compensation opportunity for all NEOs and to maintain its approximate level from year to year. In addition, the Committee intends for Total Direct Compensation and the level of variable compensation realized to align with the median level of the Peer Group in years when the Company performs at median levels compared to the Peer Group. From fiscal 2007 through fiscal 2012,2013, the percentage of variable compensation received by the Company’s NEOs had declined from historical levels because total bonus amounts ultimately received by our NEOs were zero for the CEO for fiscal 2007 and significantly lower than historical amounts for all NEOs from fiscal 2007 through fiscal 2012.2013. Fiscal 20122013 bonus amounts, on average, were approximately 92%87% lower than the highest award for these NEOs during the last ten years. In fiscal 2012,2013, the Committee also awarded the same number of stock grantsoptions to each of the NEOs as in fiscal 2012, as discussed below, at values that were lower than historical levels even when consideringwith 50% of the greater number of options awarded to the CEO, CFO and COO with an exercise price 33 1/3% above the closing stock price on the grant date. The value of the fiscal 2012 stock grants were also well below the Peer Group median long-term incentive values for the CEO, CFO and COO and well below the Peer Group and broad-based compensation survey median for the other NEOs.24restricted stock unitRSU awards and deferred share awards granted in lieu of cash for a portion of total bonus amounts. Short-term compensation consists of base salary and the cash portion of annual bonus amounts. Long-term compensation is intended to foster long-term commitment by the executive, employee-shareholder alignment and improved long-term shareholder value. From fiscal 2009 through fiscal 20122013 there were no deferred shares awarded to NEOs due to the reduced amount of the overall bonuses for each NEO as compared to more profitable years, and the annual bonus amounts were paid 100% in cash. In fiscal 2010 and 2013, the Committee also adopted a special LTIPLTIPs for the named executive officersNEOs and other key senior executives of the Company, as discussed below. No RSUs were granted to any NEOs in fiscal 2013.awardawards annualized at target) as a percent of Total Direct Compensation for fiscal years 20082009 through 20122013 for the CEO and CFO were 48%55% and 34%41%, respectively. The average long-term compensation amount (including stock and option grants at their grant date fair value and the LTIP awardawards annualized at target) as a percent of Total Direct Compensation for fiscal years 2010 through 20122013 for the COO (who was promoted to his current position in fiscal 2010) was 36%42%. The average long-term compensation amounts (including stock and option grants at their grant date fair value and the LTIP awards annualized at target) as a percent of Total Direct Compensation for Messrs. O’Connor and Valiaveedan are lower than that of the CEO, CFO and COO because, while the Committee believes it is important for these executives to be compensated in part based on the long-term performance of the Company, they have less direct influence on the long-term financial success of the Company as compared to the CEO, CFO and COO.20122013 base salaries of the Company’s executive officers were necessary to retain their services.involvingin the Company’s Peer Group or broad-based compensation survey data if comparable data were unavailable from the Peer Group companies, as well as other factors such as cost of living increases and internal pay relationships with other executives.·2012,2013, the CEO did not receive any adjustments in his existing annual base salary. This reflects the Company’s budget cuts and downsizing due to industry conditions. Based on discussions with PM&PF.W. Cook and peer groupPeer Group market data gathered by management, the Committee determined that the CEO’s fiscal 20122013 base salary was near the median base salary level of other chief executive officers at Peer Group companies.·and 2012,through 2013, the CFO did not receive any adjustments in his annual base salary. The Committee determined that the CFO’s fiscal 20122013 base salary was near the median base salary level of other chief financial officers at Peer Group companies.·2012,2013, the COO received a 10% increase in his annual base salary increase from $550,000 to move him$600,000 to position his salary closer to the Peer Group chief operating officer median. Notwithstanding that increase, the Committee determined that Mr. Pellerito’s base salary remains below the median base salary level of other chief operating officers at Peer Group companies. ·2012,2013, Mr. O’Connor received an 8.5% salary increase as a result of his promotion to Vice President – Chief Accounting Officer and Corporate Controller and Mr. Valiaveedan each received a 5.3%3% salary increase to move him closer to the Peer Group medianin consideration of their individual performance and to further align himin line with the median level in the broad-based compensation survey data.Company’s ordinary course merit-based and cost of living salary increase practices. 2520122013 annual bonus awards were made pursuant to the Company’s amended and restated Hovnanian Enterprises, Inc. Senior Executive Short-Term Incentive Plan (the “Short-Term Incentive Plan”) and the 2012 Hovnanian Enterprises, Inc. Stock Incentive Plan (“2012 Plan”), each of which is a shareholder approved plan, although no stock-based awards were paid as partplan.fiscal 2012 bonus awards under either plan.
Bonus opportunities are intended to be competitive with industry-wide practices in order to retain and attract executive talent. For fiscal 2012,2013, as in fiscal years 2009 through 2011,2012, the earned bonuses for the NEOs were paid 100% in cash.
The regular annual bonus opportunities in fiscal 20122013 for each of the NEOs are shown in the following table. The performance goals for each NEOMessrs. O’Connor and Valiaveedan are discussed below.
CEO | CFO | COO | Vice President — Chief Accounting Officer and Corporate Controller | Vice President — Finance and Treasurer | ||||||
Return on Average Common Equity ("ROACE") (1) | % of Pre-tax | $ Bonus based on ROACE | N/A | $ Bonus based on ROACE | $ Bonus based on ROACE | |||||
Adjusted EBITDA and Cash Balances | $ Bonus based on Adjusted EBITDA | $ Bonus based on Adjusted EBITDA | $ Bonus based on Adjusted EBITDA | N/A | N/A | |||||
Tailored Personal Objectives | N/A | N/A | N/A | $ Bonus based on achievement of specific goals | $ Bonus based on achievement of specific goals | |||||
Formula | Total award is greater of (a) ROACE or (b) sum of Adjusted EBITDA | Total award is greater of (a) ROACE or (b) sum of Adjusted EBITDA | Total award is | Total award is sum of ROACE and personal objectives factors, with maximum amount of | Total award is sum of ROACE and personal objectives factors, with maximum amount of | |||||
(1) | Based on fiscal 2013 results, payments under the ROACE award component were zero. |
Historically, annual bonuses for the CEO and the CFO have been linked to a measure of the Company’s return on average equity (ROACE, as the current example), a common industry practice. For fiscal 2011,2012, the bonus formula for the CEO, CFO and CFO, the bonus formulaCOO included a component related to net debt was changed to a calculation based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) improvement. The fiscal 2013 bonus formulas for these NEOs continued to focus on EBITDA improvement and cash balances. During fiscal 2012,but, because the Committee sought in 2013 to emphasize improving EBITDA without limiting management’s ability to strategically deploy cash suchflow and maintain adequate liquidity, a separate cash balances measure was also included, as for repurchasing debt and making land purchases, in anticipationdescribed further below. In recognition of the initial stages of recoveryCompany’s improvements in operating trends beginning in the homebuilding industry. As a result, the Committee approved the same bonus metrics for fiscal 2012 as in fiscal 2011, except that the cash balances component was removed. The COO’s fiscal 2012 bonus opportunity was based in part on the same EBTIDA improvement goals and was also based on the Company achieving positive pre-tax profit in both the third and fourth quarterssecond quarter of fiscal 2012 in orderand to provide an additional incentive to achieve pre-tax profitability given his oversight of homebuilding operations. Thefurther incentivize future improvements, the Committee believes thatincreased the goals established foroverall fiscal 2012, which are described below, supported the financial objectives of the Company and were set at levels that were challenging, but attainable. Furthermore, the2013 maximum bonus levelsopportunity for the CEO, CFO and CFO were capped at no more than the actual 2011 bonus amounts earned. The COO’s maximum bonus level was capped atCOO to $1,500,000, $575,000 and $575,000, respectively, from $949,500, $350,000 which included an additional $100,000 bonus opportunity compared toand $350,000, respectively, in fiscal 2011 related to the pre-tax profit component of his bonus formula.
Specifically, the bonus formulas for the CEO and the CFO for fiscal 20122013 provided that annual bonuses would be equal to the greater of (a) the executive’s bonus formula based on the Company’s ROACE andor (b) the bonus formula based on the Company’s Adjusted EBITDA plus fiscal quarter ending Cash balances. The COO’s bonus formula for fiscal 2013 was based solely on the sum of the Company’s Adjusted EBITDA improvement.plus fiscal quarter ending Cash balances factors. “ROACE” is defined as “net income” (as described below) divided by “average common equity” (stockholders’ equity less preferred stock at the beginning of the fiscal year and at the end of each fiscal quarter during the year divided by five). “EBITDA improvement”For all of the ROACE bonus formulas discussed below for the NEOs, “net income” used in calculating ROACE is after taxes and preferred dividends (as reflected on the Company’s financial statements) and excludes land charges. “Pre-tax Profit” is defined as earnings (losses) before income tax expense as reflected on the difference betweenCompany’s audited financial statements, excluding the impact of any items deemed by the Committee to be extraordinary items (for example, losses from land impairments and losses from debt repurchases/debt retirement such as call premiums, above par purchase prices and related issuance costs or gains from debt repurchases). “Adjusted EBITDA” is defined as EBITDA reflected in the Company’s fiscal 20122013 financial statements, excluding gains or losses on extinguishment of debt, inventory impairment losses and land option write-offs,write-offs. “Cash” is defined as homebuilding cash and the Company’s EBITDA reflected in its fiscal 2011 financial statements.cash equivalents plus restricted cash that collateralizes letters of credit. The Committee used this Adjusted EBITDA improvement measure because it believed it was appropriate to exclude from the bonus formula items outside management’s control (e.g.,(for example, impairments driven by a declining market) and it did not want to discourage management from making capital structure improvements (e.g.,(for example, debt extinguishments, which could result in gains or losses on the extinguishment of debt). However, ifSpecifically, the Committee determined that the fiscal 2012 EBITDA had not been adjusted, the bonuses earned by the CEO, CFO and COO under the EBITDA improvement component of the annual bonus would still have been the same. While the2013 EBITDA component of the bonus formulaformulas for the CEO, CFO and COO would be based on achieving targeted levels of the Company’s Adjusted EBITDA for fiscal 2013 (as shown below), which levels were set in prior years compared adjusted EBITDAreference to EBITDA in the preceding year, forfiscal 2012 Adjusted EBITDA. For fiscal 2013, the EBITDA component of the bonus formulas for these NEOs isthe CEO and CFO was structured so that it willwould require improvement in adjustedAdjusted EBITDA in fiscal 2013 over fiscal 2012 adjustedAdjusted EBITDA in order for the CEO, CFO and COOthese NEOs to be eligible for the same or increased bonus levels under this component of the fiscal 2013 bonus formula compared to their earned fiscal 2012 bonuses. Specifically, the Committee determined that the fiscal 2013 EBITDAThe Cash balances component of the bonus formulas for the CEO, CFO and COO will be based on achieving targeted levels of the Company’s adjusted EBITDA for fiscal 2013, which levels have been set in reference to fiscal 2012 adjusted EBITDA. The fiscal 2013 bonus formulas for the NEOs are described in more detail below under “Actions for Fiscal 2013.”
For fiscal 2012,2013, the bonus formulas for Messrs. O’Connor and Valiaveedan remained the same as their fiscal 2011 formulas.2012 formulas, except that, in recognition of the Company’s improvements in operating trends beginning in the second quarter of fiscal 2012 and to further incentivize future improvements, if the Company achieved positive Pre-tax Profit (as defined above) in fiscal 2013, the maximum amounts these NEOs could receive under the personal objectives component of their respective bonus formulas (60% and 50% of base salary, respectively) would no longer be reduced by 50%. Messrs. O’Connor and Valiaveedan have, as result of their respective positions, less direct influence on the Company’s strategic and operational decisions compared to the CEO, CFO and COO, and, therefore, their bonus formulas do not include an Adjusted EBITDA improvementplus fiscal quarter ended Cash balances component. Specifically, these NEOs’ fiscal 20122013 bonus formulas provided, as in fiscal 2011,2012, that bonuses would be based on both (a) a formula based on the Company’s ROACE and (b) the attainment of tailored personal objectives.
Since fiscal 2007, the NEOs have also been offered the opportunity to earn a one-time retention bonus equal to 3% of such NEO’s fiscal year end 2007 base salary if the NEO remains employed with the Company through the end of the first fiscal year in which the Company’s ROACE returns to 20%. At the end of fiscal 2012,2013, the Company’s ROACE did not meet this threshold, so there were no resulting retention bonuses earned for this year.
Fiscal 2013 bonus formulas for each of the NEOs are further tailored as set forth below and are assessed annually. The following description provides detail as to the determination of each NEO’s fiscal 2013 annual bonus. Due to the reduced amount of the bonuses as compared to more profitable years, all bonuses for fiscal 2013 were paid in 100% in cash. In addition, for fiscal 2012,2013, each NEO’s bonus was subject to a cap, which the Committee has increased for fiscal 2013 bonuses and intends to consider removing or further increasing in future fiscal years as the Company’s financial results improve as they did in fiscal 2012.2013. See “Actions for Fiscal 2013.2014.”
● | CEO: The CEO’s bonus formula for fiscal |
FOR THE CEO, THE BONUS FORMULA WAS THE GREATER OF:
(a) ROACE Calculation Method*
ROACE percentage | % Pre-tax Income |
0.0% | 0.00% |
5.0% | 1.00% |
10.0% | 1.25% |
15.0% | 1.50% |
20.0% | 2.00% |
ROACE percentage | % Pre-tax Profit |
0.0% | 0.00% |
5.0% | 1.00% |
10.0% | 1.25% |
15.0% | 1.50% |
20.0% | 2.00% |
* | The bonus is interpolated on a linear basis between the points shown in the table, and may be extrapolated beyond the maximum ROACE percentage shown at a rate of 0.10% of |
OR
(b) Adjusted EBITDA Improvementand Cash Balances Calculation Method*
EBITDA Improvement (millions) | $ | 0.0 | $ | 37.5 | $ | 75.0 | ||||||
Bonus (thousands) | $ | 0.0 | $ | 474.8 | $ | 949.5 |
Adjusted EBITDA (millions) | Bonus (thousands) |
$0.0 | $0.0 |
$96.7 | $675.0 |
$107.4 | $750.0 |
$118.2 | $850.0 |
$123.5 | $1,000.0 |
$128.9 or greater | $1,150.0 |
PLUS
Number of Fiscal 2013 Quarter-Ends | Bonus (thousands) |
Less than 2 | $0.0 |
2 | $150.0 |
3 | $250.0 |
4 | $350.0 |
* | The Adjusted EBITDA bonus is interpolated on a linear basis between the points shown in the table. The total bonus was capped at |
Based on the bonus formula above, because there was no payment under the ROACE component, the CEO’s 2013 cash bonus was entirely attributed to the Adjusted EBITDA and Cash Balances Calculation Method of his bonus formula. Fiscal 2013 Adjusted EBITDA Improvement was $213.8$179.6 million, which significantly exceeded the maximum performance level, and the Cash balances at the end of all four fiscal 2013 quarters were above $170 million. As a result, Mr. Hovnanian earned a cash bonus equal to the cap of $949,500, which was entirely attributed to the EBITDA Improvement Calculation Method of his bonus formula.
● | CFO: The CFO’s bonus formula for fiscal |
FOR THE CFO, THE BONUS FORMULA WAS THE GREATER OF:
(a)ROACE Calculation Method*
ROACE percentage | Bonus (thousands) | ||||
0.0% | $ | 0.0 | |||
4.7% 5.0% 10.0% 15.0% 20.0% 25.0% | ![]() | $ | 350.0 |
ROACE percentage | Bonus (thousands) | |||
0.0% | $ 0.0 | |||
5.0% | $ 375.0 | |||
7.67% | $ 575.0 | |||
10.0% | $ 575.0 | |||
15.0% | $ 575.0 | Capped | ||
20.0% | $ 575.0 | |||
25.0% | $ 575.0 |
* | The bonus is interpolated on a linear basis between the first |
OR
(b) Adjusted EBITDA and Cash Balances Calculation Method*
Adjusted EBITDA (millions) | Bonus (thousands) |
$0.0 | $0.0 |
$96.7 | $250.0 |
$107.4 | $280.0 |
$118.2 | $315.0 |
$123.5 | $370.0 |
$128.9 or greater | $425.0 |
PLUS
Number of Fiscal 2013 Quarter-Ends | Bonus (thousands) |
Less than 2 | $0.0 |
2 | $75.0 |
3 | $100.0 |
4 | $150.0 |
* | The Adjusted EBITDA bonus is interpolated on a linear basis between the points shown in the table. The total bonus was capped at $575,000, and was also subject to the maximum payout under the Short-Term Incentive Plan. |
Based on the bonus formula and the ROACE and Adjusted EBITDA and Cash balances results described above, Mr. Sorsby earned a cash bonus equal to the cap of $575,000, which was entirely attributed to the Adjusted EBITDA and Cash Balances Calculation Method of his bonus formula.
● | COO: The COO’s bonus formula for fiscal 2013 provided for a bonus amount equal to a fixed dollar amount based on the Company’s Adjusted EBITDA plus a fixed dollar amount based on the Company’s quarterly Cash balances, with his total bonus not to exceed $575,000. The Committee intends to consider removing or increasing the cap as the Company’s financial results improve. |
FOR THE COO, the Adjusted EBITDA Improvementand Cash Balances Calculation Method*
EBITDA Improvement (millions) | $ | 0.0 | $ | 37.5 | $ | 75.0 | ||||||
Bonus (thousands) | $ | 0.0 | $ | 175.0 | $ | 350.0 |
Adjusted EBITDA (millions) | Bonus (thousands) |
$0.0 | $0.0 |
$96.7 | $250.0 |
$107.4 | $280.0 |
$118.2 | $315.0 |
$123.5 | $370.0 |
$128.9 or greater | $425.0 |
PLUS
Number of Fiscal 2013 Quarter-Ends | Bonus (thousands) |
Less than 2 | $0.0 |
2 | $75.0 |
3 | $100.0 |
4 | $150.0 |
* | The Adjusted EBITDA bonus is interpolated on a linear basis between the points shown in the table. The bonus was capped at |
Based on the bonus formula and the ROACEAdjusted EBITDA and EBITDA ImprovementCash balances results described above, Mr. SorsbyPellerito earned a cash bonus equal to the cap of $350,000, which was entirely attributed to the EBITDA Improvement Calculation Method of his bonus formula.
● |
EBITDA Improvement (millions) | $ | 0.0 | $ | 37.5 | $ | 75.0 | ||||||
Bonus (thousands) | $ | 0.0 | $ | 125.0 | $ | 250.0 |
Other NEOs: Fiscal |
FOR OTHER NEOs, THE BONUS FORMULA WAS BOTH:
(a) Calculation Method – for Achievement of Financial Performance Measure*
ROACE Percentage | Brad O’Connor | David Valiaveedan |
0.0% | $0 | $0 |
5.0% | 10% of base salary | 15% of base salary |
10.0% | 20% of base salary | 30% of base salary |
15.0% | 40% of base salary | 40% of base salary |
20.0% | 60% of base salary | 50% of base salary |
* | The bonuses are interpolated on a linear basis between the points shown in the table. The total bonuses payable under both components were subject to the maximum bonus payable under the Short-Term Incentive Plan and were capped at |
Goals | Brad O’Connor | David Valiaveedan |
Threshold | Up to 20% of base salary | Up to 30% of base salary |
Target | Up to 40% of base salary | Up to 40% of base salary |
Outstanding | Up to 60% of base salary | Up to 50% of base salary |
* |
|
Mr. O’Connor’s fiscal 20122013 personal objectives included implementing controls, either systemic or manual, for the segregation of assets among the groups of entities securingleading the Company’s secured bonds; providing supportaccounting department in determining best practices to operating group management related to centralizingimplement standardized accounting functions atprocesses and controls across the operating group level and exploring the centralization of functions at headquarters (e.g., vendor maintenance); ensuring the timely filing of all SEC-required documents; and overseeing the adoptionorganization now that a majority of the more extensive second year SEC-mandated requirementsCompany’s operations use the same enterprise-wide information system; creating reporting tools for XBRL filings.financial planning, projecting cash flows and reviewing actual results using the applications and data available from the new enterprise-wide system; and ensuring federal and state deferred tax assets are used effectively and in accordance with federal and state tax laws. Mr. O'Connor successfully completed these objectives by ensuring timely compliance with SEC requirements for XBRL filings, as well asleading a team of the efficiencyCompany’s accounting and accuracy offinance associates in defining and implementing standardized accounting processes and controls across the organization and continually developing new internaland enhanced reporting tools. He alsotools considering the data available from the new enterprise-wide system. In addition, Mr. O’Connor led the tax team of Senior Accountingin their analysis and Finance Managers to identifypreparation for fully and implement accounting process centralization atproperly utilizing the operating groupfederal and headquarters levels and led a project team that implemented system improvements relating to the segregation ofstate deferred tax assets for the Company’s secured bonds.
Mr. Valiaveedan’s fiscal 20122013 personal objectives included developing and executing the Company’s capital structure strategy, including obtaining non-recourse bank financing, negotiating joint venture and land banking agreements, preparing Company projections and managing existing joint ventures. During fiscal 2012,2013, Mr. Valiaveedan successfully negotiated and closed a land banking arrangement with GSO Capital Partners, LP and the buyout of a joint venture partner. In addition, he played an instrumentalintegral role in the development and execution of the Company’s capital markets strategy, including several debt refinancing transactionsstrategy. Most significantly, he led the origination and equity and equity-linked transactions. These significant transactions raised capital, extended debt maturities and reducedexecution of the Company’s interest expense.
Based on the bonus formulas above and the Committee’s determinations regarding each executive’s personal objectives, neither of these NEOs earned bonuses related to the ROACE Calculation Method for fiscal 2012,2013, but each earned a cash bonus for meeting his respective fiscal 20122013 personal objectives in full (the “outstanding” category). Since, however,Because the outstanding payouts for meeting personal objectives would exceedCompany achieved positive Pre-tax Profit in 2013, the cap described above the bonuses werewas not reduced, by 50% to comply with the cap, resulting in payments of $93,000$191,580 and $72,500$149,350 for Mr. O’Connor and Mr. Valiaveedan, respectively.
Discretionary Bonuses
The Committee has the authority to make discretionary bonus awards, which it considers under special circumstances, including exceptional contributions not reflected in the regular bonus measures, new hire sign-on bonuses and retention rewards. Discretionary bonuses of $50,000No discretionary bonus awards were granted to each of Messrs. O’Connor and Valiaveedan for their performance duringthe NEOs in fiscal 2012. These awards recognized their significant contributions involving capital raising/restructuring activities as well as their leadership and assistance in generating positive operating trends in the latter half of fiscal 2012.
Stock Grants
The Committee may make grants of stock options, stock appreciation rights, restricted stock and restricted stock units (“RSUs”),RSUs, unrestricted shares of stock or stock-based awards settled in cash pursuantunder the shareholder-approved 2012 Hovnanian Enterprises, Inc. Stock Incentive Plan (as amended or amended and restated from time to the 2012 Plan.time). In fiscal 2012,2013, the Committee awarded stock options to each of the NEOs. Messrs. O’Connor and Valiaveedan were eligible to elect to receive RSUs in lieu of stock options, but neither made such an election. No other stock-based awards were made to NEOs in fiscal 2012.
Stock options are intended to establish a strong commitment to maintain employment with the Company and focus on creating long-term shareholder value. In addition, stock options are selected over other types of stock-based awards because their design inherently rewards executives only if the stock price increases, which provides a balance with cash incentives and the more retention-oriented RSU grants. Because the ultimate value received by stock option and RSU holders is directly tied to increases in the Company’s stock price, stock options and RSUs also serve to link the interests of management and shareholders and to motivate executive officers to make decisions that will increase the long-term total return to shareholders. Additionally, grants under the 2012Stock Plan include vesting and termination provisions that the Committee believes will encourage stock option and RSU holders to remain long-term employees of the Company.
The Committee ultimately approves the size of the grants taking into account the recommendations by the CEO (other than for his own grant) and other criteria as determined by the Committee. The Committee generally targets a specific number of options rather than a specific option value. This philosophy directly aligns option grant values with shareholder value since option values are generally higher when the stock price is increasing and lower when the stock price is decreasing. Consequently, despite the fact that the stock price has remained significantly lower than historical levels, the number of each NEO’s option grants has generally remained relatively consistent, with the exception of the option grants for the CEO, CFO and COO in fiscal 2012 whichand 2013. The number of fiscal 2012 options granted to the CEO, CFO and COO was greater than fiscal 2011; however, the fiscal 2012 option grants had an exercise price 33 1/3% above the closing stock price on the grant date. The number of option grants for fiscal 2013 was the same as fiscal 2012 for all NEOs with the exercise price set at the closing stock price on the grant date. Fifty percent of the fiscal 2013 option grants for the CEO, CFO and COO are subject to specific performance conditions. The Committee’s determination and rationale for the fiscal 20122013 grants is described below. The Committee will continue to determine the appropriate mix of options and other award types based on the objectives of the compensation program, the Company’s business needs, the potential dilution impact and the pool of shares remaining available for grant under the Company’s shareholder-approved incentive plans.
Stock options and RSUs generally vest (assuming, in the case of the performance-based awards that the conditions have been met), in four equal annual installments, commencing on the second anniversary date of the grant date, providing a five-year period before becoming fully vested.
Fiscal 20122013 Stock Option Awards
In determining the fiscal 20122013 equity awards for the NEOs, the Committee considered, without giving specific weight to any one factor, then-available information on Peer Group equity awards for the NEOs, the anticipated changes in equity award values across industries, the Company’s available share pool and the potential impact on shareholder dilution, the Company’s stock performance, the historical equity awards provided to each NEO, the desire to retain the employment of each NEO and the desire to continue to link a portion of each NEO’s compensation with future Company performance. Except for the CEO, all stock option awards in fiscal 20122013 were made in the form of options to purchase shares of Class A Common Stock. Because the Committee took into consideration the potential benefits to the Company previously expressed by the Board of Directors of the continuity of share ownership and control of the Hovnanian family, the CEO’s stock option award was made in the form of options to purchase shares of Class B Common Stock.
● | CEO, CFO and COO. |
● | Other NEOs. In fiscal |
In fiscal 2012, the NEOs’ long-term incentive values on the grant date (including the 2012 option grants and the annualized value of the 2010 LTIP at target, discussed below) were considerably below the median value of long-term incentive awards granted for comparable positions in the Peer Group. Due to the timing of our fiscal year-end, no comparison could be made for fiscal 2013 because complete Peer Group median data was not available at the time of filing this Proxy Statement. The Committee expects 2013 Peer Group compensation levels will increase from prior levels based on improvement trends across the homebuilding industry during fiscal 2013.
2010 Long-Term Incentive Program
In fiscal 2010, the Company adopted a Long-Term Incentive Program (the “2010 LTIP”) under its previous stockholder-approved Amended and Restated 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan (“2008 Plan”) to aid the Company in retaining key employees and to motivate them to exert their best efforts to promptly return the Company to profitability and lower debt levels by providing rewards at the end of a multi-year period. The 2010 LTIP iswas intended to incentivize achievement of specified pre-tax profit goals and specified improvements in the Company’s capital structure through reductions in homebuilding debt.
Each of the NEOs is a participant in the 2010 LTIP and their awards,award payouts, if any, will beare determined based on actual performance for the full 36-month performance period, subject to the vesting requirements over an additional 24-month period, as described below. This performance period commenced on November 1, 2010 (the beginning of fiscal 2011) and will endended on October 31, 2013 (that is, the performance period covers fiscal 2011, 2012 and 2013). After the performance period, the awards, to the extent earned, remain subject to vesting conditions during fiscal 2014 and 2015. The executive will not receive the full award unless the Company achieves the pre-tax profit and homebuilding debt performance goals and the executive remains employed for the entire five-year period.
Pre-tax profit and homebuilding debt were chosen as the performance metrics for the 2010 LTIP because they arewere determined to be critical during thisthe challenging economic cycle. The Committee determineddecided that other goals, such as revenue growth and cost reductions, would be reflected in pre-tax profit calculations, but in a balanced way with an emphasis on achieving profitability. The Committee believed that a focus on revenue growth alone would not adequately emphasize profitability and that a focus on cost-cutting alone could emphasize short-term achievements that may sacrifice future profitability. The Committee also determined that if the currentthen difficult economic conditions continuecontinued during all or most of the 2010 LTIP’s performance period and achievement of pre-tax profit iswas not attainable, then realization of reduced homebuilding debt would put the Company in a better financial position to weather such an extended downturn and return to profitability when the economic conditions ultimately improve.
Award payouts, if any, willwould be based on a specific target multiple of each participant’s base salary in effect on the date the participant iswas granted the award (the “Grant Date,“grant date,” or June 11, 2010, for all NEOs). If the participant selected shares of stock are elected as a form of payout, the target number of shares iswas set based on the closing price of the Class A Common Stock on the Grant Date,grant date, regardless of whether the share price increasesincreased or decreasesdecreased by the time the award is determined or distributed. In order to manage the potential dilution impact of the 2010 LTIP, the Committee required that at least 20% of the payout be in the form of cash. All stock awards under the 2010 LTIP were made in the form of rights to receive shares of Class A Common Stock, except for the CEO whose award was made in the form of rights to receive shares of Class B Common Stock because the Committee took into consideration the potential benefits to the Company previously expressed by the Board of Directors of the continuity of share ownership and control of the Hovnanian family. The following describes the target multiple of base salary and form of irrevocable payout election for each NEO:
Target Multiple | ||||||||||
of 2010 Base Salary | Payout Method | |||||||||
CEO | 3.00 | 20% cash / 80% shares | ||||||||
CFO | 2.00 | 20% cash / 80% shares | ||||||||
COO | 2.00 | 20% cash / 80% shares | ||||||||
Other NEOs | 1.00 | 20% cash / 80% shares |
Although the Committee views both the stock and cash portions of the 2010 LTIP as multi-year incentive plan awards, they are reported differently for purposes of the Summary Compensation Table.Table under “Executive Compensation” below. The share payout portions arewere reflected as “Stock Awards” in fiscal 2010 at their grant date fair value under Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 718, Compensation – Stock Compensation ("ASC Topic 718"), which was based on the probable outcome as of the Grant Date.grant date. Conversely, the actual amounts earned on the cash payout portions, if any, will beare reflected in the Summary Compensation Table as “Non-Equity Incentive Plan Compensation” infor fiscal 2013 (which coincides with the end of the performance period) or, if participants achievehad achieved a minimum performance payment during an earlier fiscal year, even though such payment remains subject to subsequent vesting restrictions, then such minimum payment would behave been reflected in that earlier fiscal year. At the end of fiscal 2012, the Company did not reach breakeven or positive Pre-tax Profit (as defined below), so no minimum payment was achieved for this year.
For purposes of the 2010 LTIP, “Pre-tax Profit”“pre-tax profit” is defined as earnings (loss) before income tax paymentsexpense as reflected on our audited financial statements, excluding the impact of any items deemed to be extraordinary items for financial reporting purposes. “Homebuilding Debt”debt” is defined as total (recourse) notes payable excluding accrued interest, as reflected on our consolidated audited balance sheet, less any debt issued after January 2010 that has an equity component such as debt convertible into shares of stock.
The following table illustrates the percent of the target award that can becould have been achieved at each performance level. Awards will bewere interpolated on a linear basis between performance levels but willwere not be extrapolated above the maximum performance levels listed below.
Homebuilding Debt as of 10/31/2013 (in billions) | |||||||
Greater than $1.70 | $1.65 | $1.60 | $1.55 | $1.50 | $1.40 or less | ||
$100 or more | 100% of target award | 125% of target award | 150% of target award | 175% of target award | 200% of target award | 250% of target award | |
$75 | 75% of target award | 100% of target award | 125% of target award | 150% of target award | 175% of target award | 225% of target award | |
FY 2013 Pre-tax Profit (in millions) | $50 | 50% of target award | 75% of target award | 100% of target award | 125% of target award | 150% of target award | 200% of target award |
$25 | 25% of target award | 50% of target award | 75% of target award | 100% of target award | 125% of target award | 175% of target award | |
Less than $0 | 0% of target award | 25% of target award | 50% of target award | 75% of target award | 100% of target award | 150% of target award |
|
| Homebuilding Debt as of 10/31/2013 (in billions)
| |||||
|
| Greater than $1.70 | $1.65 | $1.60 | $1.55 | $1.50 | $1.40 or less |
| $100 or more | 100% of target award | 125% of target award | 150% of target award | 175% of target award | 200% of target award | 250% of target award |
| $75 | 75% of target award | 100% of target award | 125% of target award | 150% of target award | 175% of target award | 225% of target award |
FY 2013 Pre-tax Profit (in millions) | $50 | 50% of target award | 75% of target award | 100% of target award | 125% of target award | 150% of target award | 200% of target award |
| $25 | 25% of target award | 50% of target award | 75% of target award | 100% of target award | 125% of target award | 175% of target award |
| Less than $0 | 0% of target award | 25% of target award | 50% of target award | 75% of target award | 100% of target award | 150% of target award |
If the Company reached breakeven or positive Pre-tax Profitpre-tax profit for either of fiscal 2011 or 2012, a participant waswould have been eligible for a minimum payment equal to 50% of the target award, provided that he met the vesting requirements described below. This minimum payment would have been inclusive of and not incremental to any other award granted to the participant under the 2010 LTIP and would not have exceeded 50% of target award if the Company achieved breakeven or positive Pre-tax Profitpre-tax profit in both fiscal 2011 and 2012. No minimum payout was achieved in either fiscal 2011 or fiscal 2012.
As a condition of earning each portion of the award, and as a retention inducement, following the performance period, a participant must also be employed through the vesting dates outlined below (other than in cases of death, disability or qualified retirement, or in the case of Messrs. O’Connor and Valiaveedan, specified termination following a change in control of the Company). The vesting percentages relate to the earned award value as of October 31, 2013.
1. | 50% of the award |
2. | 30% of the award will become vested on October 31, 2014 and is payable in January 2015; and |
3. | 20% of the award will become vested on October 31, 2015 and is payable in January |
with the cash portion of the earned award value becoming vested and payable before any share portion of the earned award value becomes vested and payable.
2013 Long-Term Incentive Program
In fiscal 2013, the Company adopted a Long-Term Incentive Program (the “2013 LTIP”) under its stockholder-approved Stock Plan to further aid the Company in retaining key employees and to motivate them to exert their best efforts to achieve greater levels of profitability and to extend the maturity and/or reduce the amount of existing homebuilding debt by providing rewards at the end of a multi-year period. The 2013 LTIP is intended to incentivize achievement of specified pre-tax profit goals and specified improvements in the Company’s capital structure through refinancings of, or reductions in, homebuilding debt.
Each of the NEOs is a participant in the 2013 LTIP and their award payouts, if any, will be determined based on actual performance for the full 31-month performance period, subject to vesting requirements over an additional 24-month period, as described below. This performance period commenced on March 11, 2013 and will end on October 31, 2015 (that is, the performance period covers a portion of fiscal 2013 and all of fiscal years 2014 and 2015). After the performance period, the awards, to the extent earned, remain subject to vesting conditions during fiscal 2016 and 2017. The executive will not receive the full award unless the Company achieves the pre-tax profit and refinancings and/or reductions in existing homebuilding debt performance goals and the executive remains employed for the entire 55-month period.
Pre-tax profit and refinancings and/or reductions in existing homebuilding debt were chosen as the performance metrics for the 2013 LTIP to focus management on improving the operating performance of the Company while ensuring an adequate capital structure for growth.
Award payouts, if any, will be based on a specific target multiple of each participant’s base salary in effect on the date the participant was granted the award (the “grant date,” or March 11, 2013, for all NEOs). The target number of shares was set based on the closing price of the Class A Common Stock on the grant date, regardless of whether the share price increases or decreases by the time the award is determined or distributed. In order to manage the potential dilution impact of the 2013 LTIP, the Committee required that 40% of the payout be in the form of cash. All stock awards under the 2013 LTIP were made in the form of rights to receive shares of Class A Common Stock, except for the CEO whose award was made in the form of rights to receive shares of Class B Common Stock because the Committee took into consideration the potential benefits to the Company previously expressed by the Board of Directors of the continuity of share ownership and control of the Hovnanian family. The following describes the target multiple of base salary and form of payout for each NEO:
Target Multiple | |||||
of 2013 Base Salary | Payout Method | ||||
CEO | 3.00 | 40% cash / 60% shares | |||
CFO | 2.00 | 40% cash / 60% shares | |||
COO | 2.00 | 40% cash / 60% shares | |||
Other NEOs | 1.00 | 40% cash / 60% shares |
Although the Committee views both the stock and cash portions of the 2013 LTIP as multi-year incentive plan awards, they are reported differently for purposes of the Summary Compensation Table under “Executive Compensation” below. The share payout portions are reflected as “Stock Awards” in fiscal 2013 at their grant date fair value under FASB ASC Topic 718, which was based on the probable outcome as of the grant date. Conversely, the actual amounts earned on the cash payout portions, if any, will be reflected in the Summary Compensation Table as “Non-Equity Incentive Plan Compensation” in fiscal 2015 (which coincides with the end of the performance period) even though such payment remains subject to subsequent vesting restrictions.
For purposes of the 2013 LTIP, “pre-tax profit” is defined as earnings (loss) before income tax expense as reflected on our audited financial statements, excluding the impact of any items deemed to be extraordinary items for financial reporting purposes and excluding losses from land impairments and losses from debt repurchases/debt retirement such as call premiums, above par purchase prices and related issuance costs. “Existing Homebuilding Debt” is defined as total (recourse) notes payable excluding accrued interest, as reflected on our consolidated audited balance sheet as of January 31, 2013 (the most current balance sheet at the time the 2013 LTIP was adopted), less any debt that has an equity component such as debt convertible into equity, tangible equity units and/or exchangeable notes. To qualify under the 2013 LTIP as a refinancing of “Existing Homebuilding Debt,” any such refinanced Existing Homebuilding Debt must have a minimum maturity date of five years from the date of the refinancing or be refinanced with a revolving line of credit.
The following table illustrates the percent of the target award that can be achieved at each performance level. Awards will be interpolated on a linear basis between performance levels but will not be extrapolated above the maximum performance levels listed below.
Refinancings of Existing Homebuilding Debt Between 3/11/2013 and 10/31/2015 and/or Reductions of Existing Homebuilding Debt Between 11/01/2013 and 10/31/2015 (in millions)
| |||||||
$125 or less | $165 | $205 | $245 | $285 | $325 or more | ||
$200 or more | 100% | 125% | 150% | 175% | 200% | 250% | |
FY 2015 Pre-tax | $150 | 75% | 100% | 125% | 150% | 175% | 225% |
Profit | $100 | 50% | 75% | 100% | 125% | 150% | 200% |
$50 or less | 0% | 15% | 30% | 45% | 60% | 90% | |
As a condition of earning each portion of the award, and as a retention inducement, following the performance period, a participant must also be employed through the vesting dates outlined below (other than in cases of death, disability or qualified retirement, or in the case of Messrs. O’Connor and Valiaveedan, specified termination following a change in control of the Company). The vesting percentages relate to the earned award value as of October 31, 2015.
1. | 20% of the award will become vested on October 31, 2015 and is payable in January 2016; |
2. | 30% of the award will become vested on October 31, 2016 and is payable in January 2017; and |
3. | 50% of the award will become vested on October 31, 2017 and is payable in January 2018; |
with the cash portion of the earned award value becoming vested and payable before any share portion of the earned award value becomes vested and payable.
Other Employee Benefits The Company maintains additional employee benefits that the Committee believes enhance executive safety, efficiency and time that the executive is able to devote to Company affairs. We do not believe that special perquisites or other personal benefits should play a major role in our executive compensation program. However, some NEOs are provided one or more of the following items: ● Auto allowance, including car maintenance and fuel expense; ● Personal use of the Company’s automobiles (including driver’s compensation) and a fractional share in an aircraft; ● Executive term life insurance; ● Annual Executive Physical Exam Program; ● Golf membership or country club fee reimbursement; ● Personal income tax preparation services; and ● Personal accounting services. The Committee annually reviews the elements and level of executive perquisites for the NEOs. In particular, in evaluating the appropriateness of these benefits for the CEO, the Committee The Company’s contributions to the NEOs’ 401(k) plan and executive deferred compensation plan (“EDCP”) accounts were suspended on February 20, Specific benefits and the incremental costs of such benefits are described in detail in the footnotes to the Summary Compensation Table. The Company does not offer any defined benefit pension plans to its employees. The Committee approved The Committee ·······34tooktakes into consideration the degree to which the CEO is required to travel to various Company locations and business functions on a daily basis. Based on its review, the Committee has requested that the CEO use Company-provided transportation to enhance the efficient use of his time.2009 and continued to be suspended throughout fiscal 2012. However, in2009. In fiscal 2012, a one-time employer non-elective contribution funded by the use of the amount of forfeitures account was made to all eligible participants’ 401(k) plan accounts for the 2011 calendar year, in accordance with the terms of the 401(k) plan. Beginning with the January 11, 2013 pay period, however, the Company will reinstatereinstated its 401(k) match, but at 50% of the level it matched prior to its suspension in February 2009. This will applyThe reinstated match was up to 3% of employee contributions based on tenure. The reinstatement applied to all participants in the 401(k) plan, including the NEOs. a base salary increase to $600,000 for Mr. Pellerito, effective in December 2012, to move him closer to the Peer Group median. Messrs. O’Connor and Valiaveedan each received a 3% base salary increase, also effective in December 2012,21, 2013, for each of Messrs. Sorsby, Pellerito, O’Connor and Valiaveedan, in consideration of their individual performance and in line with the Company’s ordinary course merit-based salary and cost of living increase practices. For the eighth year in a row, the Committee did not increase the CEO’s base salary.maintaineddetermined that, for fiscal 2014, the base salaries of the CEO and CFO at their fiscal 2012 amounts, which amounts have not changed since December 2005 for the CEO and January 2010 for the CFO.In prior fiscal years, theAdjusted EBITDA component of the bonus formula for the CEO, CFO and COO compared adjusted EBITDACOO’s bonus formulas would change to EBITDAa Pre-tax Profit (defined in the preceding year. Forsame manner as the fiscal 2013 the EBITDAbonus formulas) component. The Pre-tax Profit component of the bonus formulas for these NEOs is structured so that it will require a 20% improvement in adjusted EBITDAPre-tax Profit in fiscal 20132014 over fiscal 2012 adjusted EBITDA2013 in order for the CEO, CFO and COO to be eligible for the same or increased bonus levelsamount under this component of their fiscal 2014 bonus formula as they earned under their fiscal 2013 Adjusted EBITDA bonus component. In addition, the Cash (defined in the same manner as the fiscal 2013 bonus formula compared to their earned fiscal 2012 bonuses. Specifically, the Committee determined that the fiscal 2013 EBITDAformulas) balances component of thethese NEOs’ bonus formulas forwas modified to also take into account the CEO, CFO and COO will be based on achieving targeted levels ofavailable borrowing capacity under the Company’s adjusted EBITDA for fiscal 2013, which levels have been set in reference to fiscal 2012 adjusted EBITDA. The Committee also determined that the fiscal 2013 bonus formulas for the CEO, CFO and COO will includerevolving credit facility (that is, a liquidity component in addition to the EBITDA component.balances measure). In recognition of the Company’s continued improvements in operating trends beginning in the second quarter of fiscal 2012 and to further incentincentivize future improvements, the Committee increased the overall maximum bonus opportunity for the CEO, CFO and COO to $1,500,000, $575,000$2,500,000, $950,000 and $575,000,$950,000, respectively. The fiscal 20132014 bonus formulas for such NEOs will otherwise remain the same except that the COO’sas their bonus formula will not include the Pre-tax Profit in Third and Fourth Fiscal Quarters component of hisformulas for fiscal 2012 bonus formula.20132014 bonus formulas and caps for Messrs. O’Connor and Valiaveedan will remain the same as those in fiscal 2012 except that, for the reasons discussed above with respect to the CEO, CFO and COO, if the Company’s fiscal 2013 Pre-tax Profit is greater than zero, the maximum amounts these NEOs could receive under the personal objectives component of their respective bonus formulas will no longer be reduced by 50%.2013. In addition, the personal objectives for Messrs. O’Connor and Valiaveedan were updated to reflect key goals for fiscal 2013.
Beginning with the January 10, 2014 pay period, the Company reinstated its 401(k) match at 100% of the level it matched prior to its suspension in February 2009 (see “Details of Compensation Elements – Other Employee Benefits” above). The reinstated match is up to 6% of employee contributions based on tenure. This applied to all participants in the 401(k) plan, including the NEOs. Consistent with the full reinstatement of the 401(k) match in January 2014, the Committee approved the full reinstatement of the EDCP contribution for the NEOs and certain other executives of the Company to provide up to 6% of earnings above the annual 401(k) limit for calendar 2014 based on tenure. Calendar year contributions will be credited in the subsequent fiscal year and reflected in the proxy statement for that year.
In January 2014, we adopted a recoupment, or “clawback” policy, that applies to our executive officers, including our named executive officers. Under the policy, the Board will require, at its discretion and approval, reimbursement and/or cancellation of incentive-based compensation (including stock options awarded as compensation) awarded to an executive officer where the Board has determined that (a) the Company is required to prepare an accounting restatement due to the material noncompliance by the Company with any financial reporting requirement under the securities laws, (b) the misconduct of the executive contributed, either directly or indirectly, to the noncompliance that resulted in the obligation to restate the Company’s financial statements and (c) a lower award and/or payout thereof would have been made to the executive based upon the restated financial results, and, under the policy, the Board may recover from the executive any excess of the amount that would have been awarded based on the restated financial results. The policy applies to incentive-based compensation awarded to an executive officer during the three-year period preceding the date on which the Company is required to prepare an accounting restatement based on erroneous data.
As a general matter, the Committee always takes into account the various tax and accounting implications of compensation. When determining amounts of equity grants to executives and employees, the Committee also examines the accounting cost associated with the grants.
The Company’s annual bonus and stock option programs are intended to allow the Company to make awards to executive officers that are deductible under Section 162(m) of the Internal Revenue Code,, which provision otherwise sets limits on the tax deductibility of compensation paid to a company’s most highly compensated executive officers (with the exception of the Company’s CFO). The Committee will continue to seek ways to limit the impact of Section 162(m) of the Internal Revenue Code.. However, the Committee believes that the tax deduction limitation should not compromise the Company’s ability to establish and implement incentive programs that support the compensation objectives discussed above. Accordingly, achieving these objectives and maintaining required flexibility in this regard may result in compensation that is not deductible for federal income tax purposes. The bonus formulas approved by the Committee for fiscal 20122013 were, however, intended to be established in accordance with the requirements for deductibility as performance-based compensation under Section 162(m) of the Internal Revenue Code.
For fiscal 2012,2013, stock options were granted on the second Friday in June for all eligible employees, consistent with our practice of granting equity awards annually on the second Friday in June. The Company’s practice of setting “fixed” equity award grant dates is designed to avoid the possibility that the Company could grant stock awards prior to the release of material, non-public information that is likely to result in an increase in its stock price, or delay the grant of stock awardsuntil after the release of material, non-public information that is likely to result in a decrease in the Company’s stock price. Other than with respect to the CEO’s, CFO’s, and COO’s stock option grants in fiscal 2012, exerciseExercise prices of stock options were set at the closing price per share of the Company’s Class A Common Stock on the NYSE on the date the options were granted. The options granted to the CEO, CFO and COO in fiscal 2012 were granted with an exercise price 33 1/3% above the closing stock price on the grant date. See “Stock Grants – Fiscal 2012 Stock Option Awards” above.
The Board of Directors has adopted stock ownership guidelines, recommended by the Committee, which set forth recommended minimum amounts of stock ownership, directly or beneficially, for the CEO, CFO, COO and non-employee Directors because they have the most long-term strategic impact for shareholders.Directors. The Corporate Governance and Nominating Committee reviews adherence to the Company’s stock ownership guidelines on an annual basis, which guidelines are incorporated into the Company’s Corporate Governance Guidelines. The Company believes these guidelines further enhance the Company’s commitment to aligning the interests of our non-employee Directors and senior management with those of itsour shareholders.
Under the Committee determined that,terms of the ownership guidelines, once the stock ownership guidelines wereare met, they would beare deemed satisfied for subsequent annual review periods, regardless of decreases in the Company’s stock price on the New York Stock Exchange, so long as the executive or non-employee Director does not sell any portion of the share amounts which were originally included in determining that the recommended thresholds were met. The Committee reviewed this determination in fiscal 2012 and maintained this policy.
Senior Executive Officers
The guidelines provide that the following senior executive officers of the Company are requested to achieve and maintain minimum stock ownership amounts as follows:
Chairman, President and CEO – 6x6 times current base salary
CFO – 2x3 times current base salary
COO – 2x3 times current base salary
The CEO, CFO and COO currently meet their respective stock ownership guidelines.
See “Non-Employee Director Compensation” for information on the stock ownership guidelines for non-employee Directors.
The following table summarizes the compensation for the fiscal years ended October 31, 2012,2013, October 31, 2011,2012, and October 31, 20102011 of the chief executive officer, the chief financial officer, and the next three most highly compensated executive officerspersons serving as executive officers as of October 31, 2012.2013. These five individuals compose our named executive officers or “NEOs.”
Summary Compensation Table
Name and Principal Position | Year | Salary (1) | Bonus (2) | Stock Awards (3) | Option Awards (4) | Non-Equity Incentive Plan Compensa-tion (5) | Change in Pension Value and Nonqualified Deferred Compensation Earnings | All Other Compensa-tion (6) | Total (7) | ||||||||||||||||||||||||
Ara K. Hovnanian, (8) | 2012 | $ | 1,092,606 | — | $ | — | $ | 1,032,000 | $ | 949,500 | — | $ | 181,582 | $ | 3,255,688 | ||||||||||||||||||
President, Chief | 2011 | $ | 1,092,606 | — | $ | 24,125 | $ | 529,875 | $ | 949,500 | — | $ | 170,049 | $ | 2,766,155 | ||||||||||||||||||
Executive Officer and Chairman of the Board | 2010 | $ | 1,092,606 | — | $ | 2,622,255 | $ | 1,413,750 | $ | 949,500 | — | $ | 188,189 | $ | 6,266,300 | ||||||||||||||||||
J. Larry Sorsby, | 2012 | $ | 600,000 | — | $ | — | $ | 206,400 | $ | 350,000 | — | $ | 50,433 | $ | 1,206,833 | ||||||||||||||||||
Executive | 2011 | $ | 600,000 | — | $ | 4,825 | $ | 105,975 | $ | 350,000 | — | $ | 48,259 | $ | 1,109,059 | ||||||||||||||||||
Vice President and Chief Financial Officer | 2010 | $ | 572,308 | — | $ | 960,001 | $ | 282,750 | $ | 350,000 | — | $ | 52,229 | $ | 2,217,288 | ||||||||||||||||||
Thomas J. Pellerito, | 2012 | $ | 538,462 | — | $ | — | $ | 137,600 | $ | 250,000 | — | $ | 46,406 | $ | 972,468 | ||||||||||||||||||
Chief Operating | 2011 | $ | 500,000 | — | $ | 3,217 | $ | 70,650 | $ | 250,000 | — | $ | 42,913 | $ | 866,780 | ||||||||||||||||||
Officer | 2010 | $ | 468,870 | $ | 28,750 | $ | 799,999 | $ | 188,500 | $ | 203,548 | — | $ | 38,276 | $ | 1,727,943 | |||||||||||||||||
Brad G. O’Connor, | 2012 | $ | 308,029 | $ | 50,000 | $ | — | $ | 35,600 | $ | 93,000 | — | $ | 28,303 | $ | 514,932 | |||||||||||||||||
Vice President — Chief Accounting Officer and Corporate Controller | 2011 | $ | 284,523 | — | $ | 965 | $ | 21,195 | $ | 85,680 | — | $ | 27,401 | $ | 419,764 | ||||||||||||||||||
David G. Valiaveedan, | 2012 | $ | 288,821 | $ | 50,000 | $ | — | $ | 26,700 | $ | 72,500 | — | $ | 28,269 | $ | 466,290 | |||||||||||||||||
Vice President — | 2011 | $ | 274,361 | $ | — | $ | 2,413 | $ | 17,663 | $ | 68,850 | — | $ | 27,357 | $ | 390,644 | |||||||||||||||||
Finance and Treasurer | 2010 | $ | 270,000 | $ | — | $ | 221,913 | $ | 42,413 | $ | 67,500 | — | $ | 24,696 | $ | 626,522 |
Name and Principal Position | Year | Salary (1) | Bonus(2) | Stock Awards (3) | Option Awards (4) | Non-Equity Incentive Plan Compensation (5) | Change in Pension Value and Nonqualified Deferred Compensation Earnings | All Other Compen- sation (6) | Total (7) | ||||||||||||||||
Ara K. Hovnanian, | 2013 | $1,092,606 | — | $1,966,692 | $3,084,000 | $2,534,152 | — | $185,619 | $8,863,069 | ||||||||||||||||
President, Chief | 2012 | $1,092,606 | — | — | $1,032,000 | $949,500 | — | $181,582 | $3,255,688 | ||||||||||||||||
Executive Officer | 2011 | $1,092,606 | — | $24,125 | $529,875 | $949,500 | — | $170,049 | $2,766,155 | ||||||||||||||||
and Chairman of the Board | |||||||||||||||||||||||||
J. Larry Sorsby, | 2013 | $600,000 | — | $719,999 | $616,800 | $953,600 | — | $49,897 | $2,940,296 | ||||||||||||||||
Executive | 2012 | $600,000 | — | — | $206,400 | $350,000 | — | $50,433 | $1,206,833 | ||||||||||||||||
Vice President and | 2011 | $600,000 | — | $4,825 | $105,975 | $350,000 | — | $48,259 | $1,109,059 | ||||||||||||||||
Chief Financial Officer | |||||||||||||||||||||||||
Thomas J. Pellerito, | 2013 | $590,385 | — | $719,999 | $411,200 | $890,500 | — | $41,823 | $2,653,907 | ||||||||||||||||
Chief Operating | 2012 | $538,462 | — | — | $137,600 | $250,000 | — | $46,406 | $972,468 | ||||||||||||||||
Officer | 2011 | $500,000 | — | $3,217 | $70,650 | $250,000 | — | $42,913 | $866,780 | ||||||||||||||||
Brad G. O’Connor, | 2013 | $317,512 | — | $191,583 | $102,800 | $279,920 | — | $16,626 | $908,441 | ||||||||||||||||
Vice President — | 2012 | $308,029 | $50,000 | — | $35,600 | $93,000 | — | $28,303 | $514,932 | ||||||||||||||||
Chief Accounting | 2011 | $284,523 | — | $965 | $21,195 | $85,680 | — | $27,401 | $419,764 | ||||||||||||||||
Officer and Corporate | |||||||||||||||||||||||||
Controller | |||||||||||||||||||||||||
David G. Valiaveedan, | 2013 | $297,027 | — | $179,222 | $77,100 | $234,535 | — | $16,622 | $804,506 | ||||||||||||||||
Vice President — | 2012 | $288,821 | $50,000 | — | $26,700 | $72,500 | — | $28,269 | $466,290 | ||||||||||||||||
Finance and Treasurer | 2011 | $274,361 | — | $2,413 | $17,663 | $68,850 | — | $27,357 | $390,644 |
(1) | The “Salary” Column. The effective date of the last base salary |
(2) | The “Bonus” Column. In accordance with SEC rules, the “Bonus” column discloses discretionary cash bonus awards. |
(3) | The “Stock Awards” Column. This column reflects the aggregate grant date fair value of RSUs granted in fiscal 2011 |
(4) | The “Option Awards” Column. Similar to the “Stock Awards” column, this column reflects the aggregate grant date fair values of stock options awarded in the fiscal year indicated |
(5) | “Non-Equity Incentive Plan Compensation” Column. This column represents the cash portion of the performance-based annual bonus awards earned by the NEOs in the fiscal year |
(6) | “All Other Compensation” Column. This column discloses all other compensation for the fiscal year indicated, including reportable perquisites and other personal benefits. |
For fiscal Total Perquisites and Description Fiscal 2013 Perquisites that Exceeded the Greater of $25,000 or 10% of Total Perquisites Name Total Fiscal 2013 Perquisites Types of Perquisites(a) Personal Use of Company’s Automobiles (b) Personal Income Tax Preparation (c) Ara K. Hovnanian (1) (2) (4) (5) (6) (7) (8) J. Larry Sorsby (3) (4) (5) N/A N/A Thomas J. Pellerito (3) (4) (5) N/A N/A Brad G. O’Connor (3) (4) (5) N/A N/A David G. Valiaveedan (3) (4) (5) N/A N/A (a) (1) Personal use of the Company’s fractional aircraft share; (2) Personal use of the Company’s automobiles; (3) Perquisites related to executives’ use of their own vehicles; (4) (b) The incremental costs of personal use of the Company’s automobiles are calculated as the allocable share of all costs of the automobiles for the fiscal year (including depreciation and, for the CEO, the Company's driver's salary and benefits) based upon the percentage of total miles driven during the fiscal year represented by personal trips. (c) Reflects the Company’s reimbursement of actual tax preparation expenses incurred by Mr. Hovnanian. In addition to the perquisites and other personal benefits listed above, the NEOs received the following other compensation in fiscal Fiscal Name Term Life Insurance Premiums Company Contributions to the Executive’s Retirement Plan (401(k)) (a) Company Contributions to the Executive Deferred Compensation Plan (EDCP) Ara K. Hovnanian J. Larry Sorsby Thomas J. Pellerito Brad G. O’Connor David G. Valiaveedan (a) Beginning with the (7) “Total” Compensation Column.This column reflects the sum of all the columns (the Salary, Bonus, Stock Awards, Option Awards, Non-Equity Incentive Plan Compensation, Change in Pension Value and Nonqualified Deferred Compensation Earnings, and All Other Compensation columns) of the Summary Compensation Table. Fiscal The table below is intended to provide additional, supplemental compensation disclosure and not as a replacement for the Summary Compensation Table. Fiscal Name Fiscal 2013 Salary Fiscal 2013 Cash Bonus Fiscal 2013 Stock Vested (excluding LTIP) (a) Intrinsic Value of Options Granted in Fiscal 2013 (b) 2010 LTIP Cash Realized (c) 2010 LTIP Stock Realized (d) Change in Pension Value and Nonqualified Deferred Compensation Earnings Fiscal 2013 All Other Compen-sation Total of All Columns of Supplemental Table Ara K. Hovnanian J. Larry Sorsby Thomas J. Pellerito Brad G. O’Connor David G. Valiaveedan (a) "Fiscal 2013 Stock (b) The “Intrinsic (c) Reflects the cash portion of the 2010 LTIP awards that were realized in fiscal (d) Reflects the stock portion of the 2010 LTIP awards that were realized in fiscal 2013 on the basis of performance through October 31, 2013 at the stock price on that date. The shares relating to the The following table summarizes both: (1) The potential equity and non-equity incentive plan awards that could have been or could be earned by each of the NEOs at the defined levels of “Threshold,” “Target” and “Maximum” based on the performance-based awards granted to the NEOs in fiscal (2) All other plan-based awards, such as stock options and RSUs, granted in fiscal Each of the following columns is described in the footnotes below the table. Grants of Plan-Based Awards in Fiscal Grant Estimated Possible Payouts Under Non-Equity Incentive Plan Awards Estimated Future Payouts Under Equity Incentive Plan Awards (#) All Other Stock Awards: Number of Shares of Stock or Units All Other Option Awards: Number of Securities Underlying Options (#) Exercise or Base Price of Option Awards ($/Sh) Grant Date Fair Value of Stock and Option Awards Name Date Threshold Target Maximum Threshold Target Maximum (#) Ara K. (1) N/A N/A N/A N/A Hovnanian 3/11/2013 (2) 3/11/2013 (3) 6/14/2013 (4) J. Larry (1) N/A N/A N/A N/A Sorsby 3/11/2013 (2) 3/11/2013 (3) 6/14/2013 (4) Thomas J. (1) N/A N/A N/A N/A Pellerito 3/11/2013 (2) 3/11/2013 (3) 6/14/2013 (4) Brad G. (1) N/A N/A N/A N/A O’Connor 3/11/2013 3/11/2013 (3) 6/14/2013 (4) David G. (1) N/A N/A N/A N/A Valiaveedan 3/11/2013 (2) 3/11/2013 (3) 6/14/2013 (4) (1) Regular Bonuses for CEO and CFO. As stated above under “Regular Bonuses” in the Compensation Discussion and Analysis, the fiscal 2012,2013, total perquisites and other personal benefits, and those that exceeded the greater of $25,000 or 10% of total perquisites and other personal benefits for each NEO, were as follows:Fiscal 2012 Perquisites (Supplemental Table) Total Perquisites and Description Name Types of Perquisites (a) Ara K. Hovnanian $ 180,230 (1) (2) (4) (5) (6) (7) (8) (b) $ 86,658 $ 30,843 J. Larry Sorsby $ 49,081 (3) (4) (5) N/A N/A N/A Thomas J. Pellerito $ 45,054 (3) (4) (5) N/A N/A N/A Brad G. O’Connor $ 26,954 (3) (4) (5) N/A N/A N/A David G. Valiaveedan $ 26,934 (3) (4) (5) N/A N/A N/A $176,216 $104,527 $28,430 $40,494 $32,604 �� $10,140 $10,140 SubsidizedCompany-subsidized medical premiums;premiums under grandfathered service provision and long-term disability premium; (5) Use of the Company’s Annual Executive Physical Exam Program; (6) Golf/country club membership fees; (7) Personal income tax preparation; and (8) Personal accounting services.The incremental costs of Mr. Hovnanian’s personal use of the Company’s fractional aircraft share were less than the greater of $25,000 or 10% of total perquisites.(c)(d)382012:20122013 All Other Compensation Other Than Perquisites (Supplemental Table)Name Term Life Insurance Premiums Company Contributions to the Executive’s Retirement Plan Company Contributions to the Executive Deferred Compensation Plan (“EDCP”) Ara K. Hovnanian $427 $925 — J. Larry Sorsby $427 $925 — Thomas J. Pellerito $427 $925 — Brad G. O’Connor $423 $925 — David G. Valiaveedan $410 $925 — $1,753 $7,650 — $1,753 $7,650 — $1,569 $7,650 — $ 748 $5,738 — $ 893 $5,589 — This column represents a one-time Employer Non-Elective Contribution, funded byuseJanuary 11, 2013 pay period, the Company reinstated its 401(k) match at up to 3% of the forfeitures account, which was madeemployee’s contribution, based on tenure. This applied to all eligible participants’participants in the 401(k) plan, accounts forincluding the 2011 calendar year, in accordance with terms of the 401(k) plan.NEOs.20122013 Total Compensation (Supplemental Table). The Fiscal 20122013 Total Compensation (Supplemental Table) below includes the same amounts as the “Salary,” “Bonus,” “Non-Equity Incentive Plan Compensation,” “Change in Pension Value and Nonqualified Deferred Compensation Earnings,” and “All Other Compensation” columns of the Summary Compensation Table for fiscal 2012,2013, but values stock awards and option awards for the fiscal year differently, as explained in footnotes (a), (b) and (b)(d) below.20122013 Total Compensation (Supplemental Table)Name Ara K. Hovnanian $ 1,092,606 $ 949,500 — — — $ 181,582 $ 2,223,688 J. Larry Sorsby $ 600,000 $ 350,000 — — — $ 50,433 $ 1,000,433 Thomas J. Pellerito $ 538,462 $ 250,000 $ 1,851 — — $ 46,406 $ 836,719 Brad G. O’Connor $ 308,029 $ 143,000 $ 5,083 — — $ 28,303 $ 484,415 David G. Valiaveedan $ 288,821 $ 122,500 $ 5,180 — — $ 28,269 $ 444,770 $1,092,606 $1,500,000 $15,813 — $1,034,152 $1,695,530 — $185,619 $5,523,720 $600,000 $575,000 $3,163 — $378,600 $620,730 — $49,897 $2,227,390 $590,385 $575,000 $7,608 — $315,500 $517,274 — $41,823 $2,047,590 $317,512 $191,580 $12,541 — $88,340 $144,837 — $16,626 $771,436 $297,027 $149,350 $15,421 — $85,185 $139,666 — $16,622 $703,271 Awards" in thisVested (excluding LTIP)" column, for Mr. Pellerito, representMessrs. Hovnanian and Sorsby, represents the portion of the RSU awardawards granted to himthem on June 13, 2008, which10, 2011 that vested and was issued in fiscal 20122013, at the stock price on the date of issue.vesting. For Mr. Pellerito, the amount represents the portion of the RSU awards granted to him on June 13, 2008 and June 10, 2011 that vested in fiscal 2013, at the stock price on the date of vesting. For Mr. O’Connor, the amount represents the portion of the RSU award granted to him on May 19, 2006June 10, 2011 and the deferred shares awardsaward granted for service performed in fiscal years 2007 andyear 2008 whichthat vested and were issued in fiscal 20122013, at the stock price on the date of issue.vesting. For Mr. Valiaveedan, the amount represents the portion of RSU awards granted to him on June 13, 2008, June 12, 2009, and June 11, 2010 and June 10, 2011 and the deferred shares awardsaward granted for service performed in fiscal years 2007 andyear 2008, whichthat vested and were issued in fiscal 20122013 at the stock price on the date of issue.vesting.(b)Expense Value of Outstanding Options Granted in Fiscal 2012”2013” column is based on the intrinsic expense value or degree to which the stock option was “in-the-money” of stock option awardsfor options granted in fiscal 2012 at2013 as of the grant date, instead of the grant date fair values of option awards granted in fiscal 2012,2013, as discussed under footnote (4) above. The2012 option grants for Messrs. Hovnanian, Sorsby2013 on the basis of performance through October 31, 2013 and Pellerito were premium-priced optionspaid in January 2014. This amount is included in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table along with an exercise price 33 1/3% above the closingcash portion of the performance-based annual bonus awards earned by the NEOs in fiscal 2013.grant datestock portion of the 2010 LTIP awards began to be distributed in January 2014, and were therefore underwater onare subject to additional vesting terms as described in the grant date.“Compensation Discussion and Analysis” section above.
53(8)Beginning in fiscal 2010, the Committee approved a $250,000 increase in the maximum annual bonus amount for the CEO, reported under “Non-Equity Incentive Plan Compensation,” in recognition of his increased responsibilities in assuming the position of Chairman of the Board.2012;2013; and2012.2012 Grant All Other Stock Awards: Number of Shares of Stock or Units All Other Option Awards: Number of Securities Underlying Options (#) Exercise or Base Price of Option Awards ($/Sh) Grant Date Fair Value of Stock and Option Awards Name Date Threshold Target Maximum Threshold Target Maximum (#) (4) (5) (6) Ara K. (1) $0 — $949,500 N/A N/A N/A N/A Hovnanian 02/10/2012 (2) 0 337,500 337,500 $1.93 $0 06/08/2012 (3) 600,000 $2.88 $1,032,000 J. Larry (1) $0 $350,000 $350,000 N/A N/A N/A N/A Sorsby 02/10/2012 (2) 0 67,500 67,500 $1.93 $0 06/08/2012 (3) 120,000 $2.88 $206,400 Thomas J. (1) $0 $225,000 $350,000 N/A N/A N/A N/A Pellerito 06/08/2012 (3) 80,000 $2.88 $137,600 Brad G. (1) $62,000 $93,000 $93,000 N/A N/A N/A N/A O’Connor 06/08/2012 (3) 20,000 $2.16 $35,600 David G. (1) $72,500 $72,500 $72,500 N/A N/A N/A N/A Valiaveedan 06/08/2012 (3) 15,000 $2.16 $26,700 (5) (6) (7) $0 $— $1,500,000 0 331,093 827,733 $1,966,692 $0 $1,311,127 $3,277,818 0 300,000 300,000 300,000 $6.28 $3,084,000 $0 $575,000 $575,000 0 121,212 303,030 $719,999 $0 $480,000 $1,200,000 0 60,000 60,000 60,000 $6.28 $616,800 $0 $415,000 $575,000 0 121,212 303,030 $719,999 $0 $480,000 $1,200,000 0 40,000 40,000 40,000 $6.28 $411,200 $63,860 $191,580 $191,580 (2) 0 32,253 80,633 $191,583 $0 $127,720 $319,300 20,000 $6.28 $102,800 $74,675 $149,350 $149,350 0 30,172 75,430 $179,222 $0 $119,480 $298,700 15,000 $6.28 $77,100 20122013 bonus formulas for Messrs. Hovnanian and Sorsby were based on the greater of (a) the ROACE calculation method or (b) the sum of the Adjusted EBITDA and the EBITDA ImprovementCash Balances calculation method, providedexcept that their finaltotal bonuses could not exceed $949,500$1,500,000 and $350,000,$575,000, respectively. These NEOs would not earn any bonus under the ROACE calculation method if the ROACE percentage (as defined above under “Regular Bonuses” in the Compensation Discussion and Analysis) was zero or lower (as was the case in fiscal 2012)2013) and would not earn any bonus under the Adjusted EBITDA Improvement calculation method if the Adjusted EBITDA improvement calculation (as discussed above under “Regular Bonuses” in the Compensation Discussion and Analysis) was $0 or lower. Because bonus amounts above those levels, however, would be interpolated, $0 has been disclosed at the “threshold” level for purposes of the above table for these NEOs.For purposes of the above table presentation, bonuses earned at the “target” levels for the CEO and the CFO would be equal to the greater of (a) the ROACE calculation method assuming a “target” percentage of 15% in accordance with the respective bonus formula tables and (b) the amount that could be earned under the EBITDA Improvement calculation at the “target” level or the “mid-point” range of the respective bonus formula tables as described above under “Regular Bonuses” in the Compensation Discussion and Analysis, provided that their final bonuses could not exceed $949,500 and $350,000 for the CEO and CFO, respectively. Based on the greater of both components of their respective “target” levels of the bonus formulas, the ROACE portion of the bonus formulas would be greater than the EBITDA Improvement portion for Mr. Sorsby. As a result, the total cash bonus payable to Mr. Sorsby at this level would be capped at $350,000. Mr. Hovnanian’s ROACE calculation method would provide for a payment of 1.5% of pre-tax income and, because pre-tax income was not determinable at the time the fiscal 2012 bonus formula was established, no target amount is reflected for Mr. Hovnanian in the above table.