Exhibit 10.18
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TETRA TECH, INC.
EXECUTIVE COMPENSATION POLICY |
Approved as amended: | November 14, 2013 |
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Document Owner: | Board of Directors |
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TABLE OF CONTENTS
Section |
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1.0 |
| PURPOSE |
2.0 |
| PHILOSOPHY |
3.0 |
| SCOPE |
4.0 |
| ROLES AND RESPONSIBILITIES |
5.0 |
| EXECUTIVE COMPENSATION COMPONENTS AND PLAN |
6.0 |
| PROCESS FLOW/SCHEDULE |
7.0 |
| APPENDIX I – EXAMPLES OF ANNUAL INCENTIVE BONUS |
8.0 |
| APPENDIX II – RESTRICTED STOCK PLAN SUMMARY AND EXAMPLES |
9.0 |
| APPENDIX III – TIMING OF EXECUTIVE EQUITY AWARDS |
10.0 |
| APPENDIX IV – DETERMINATION OF NET INCOME |
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1.0 PURPOSE
The purpose of this document is to define the executive compensation policy for Tetra Tech, Inc. “Tetra Tech” or the “Company”.
2.0 PHILOSOPHY
Tetra Tech’s executive compensation program is designed to
Align the interests of executive officers with those of the stockholders;
Attract, motivate, reward and retain top level executives upon whom, in large part, the success of the Company depends;
Be competitive with compensation programs for companies of similar size and complexity with whom the Company competes for executive talent, including direct competitors;
Provide compensation based upon the short-term and long-term performance of both the individual executive and the Company; and
Strengthen the relationship between pay and performance by emphasizing variable, at-risk compensation that is dependent upon the successful achievement of specified corporate and individual goals.
We believe a significant portion of executive officer pay should be at risk, and based upon performance. Therefore, base salaries are targeted for approximately the median of the peer group. Compensation at risk, specifically bonuses and equity grants, are targeted to provide compensation that is above the median of our peers when above average business results are attained.
3.0 SCOPE
This policy applies to all executive officers of Tetra Tech.
4.0 ROLES AND RESPONSIBILITIES
Board of Directors
Approves this Executive Compensation Policy;
Delegates authority as specified in this policy to the Compensation Committee; and
Approves positions to be covered by this policy as recommended by the Chairman/CEO.
Compensation Committee
Under delegated authority from the Board of Directors, develops, administers and monitors executive compensation in the long-term interests of the Company and its stockholders;
Evaluates the performance and establishes the compensation of the Chairman/CEO;
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Establishes the compensation of all other executive officers of the Company based, in part, on the Chairman/CEO’s recommendations;
Determines that performance goals have been attained before payment; and
Reserves the right to approve exceptions to this policy as recommended by the Chairman/CEO (subject to the terms of the Executive Compensation Plan described in Section 5.2).
Audit Committee
Jointly with the Compensation Committee determines the individual performance factor for the CFO.
Chairman/CEO
Reviews the performance of all other officers of the Company and makes specific recommendations to the Compensation Committee in regard to their compensation; and
Develops performance targets for all other executive officers and recommends those targets to the Compensation Committee.
Human Resources
Acquires information regarding peer group and other competitor pay practices and, with the Compensation Committee’s independent compensation consultant, provides analysis of this information to the Chairman/CEO and the Compensation Committee; and
With the Compensation Committee’s independent compensation consultant, provides compensation practice trend data to the Chairman/CEO, and the Compensation Committee.
Finance and Accounting
Provides Corporate performance data for use in determining the degree to which certain performance objectives have been met; and
Assures payments have been properly accrued and reported.
5.0 EXECUTIVE COMPENSATION COMPONENTS AND PLAN
The primary components of compensation for executive officers are base salary, annual performance bonuses and long-term incentive compensation.
5.1 Base Salary
Base salaries for executive officers are reviewed on an annual basis to ensure internal equity and external competitiveness. Salaries are reviewed to determine whether the base compensation is within a reasonable range of executive pay levels at other companies that potentially compete with the Company for business and executive talent. Total compensation is considered during this analysis. Consideration is given to individual performance, experience and time in the
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position, initiative, contribution to overall corporate performance, and salaries paid to other executives in the Company. The review and determination occur as shown in Section 6.0.
5.2 Annual Performance Bonuses
Executive officer bonuses shall be subject to the terms of the Company’s Executive Compensation Plan as adopted by the Board on November 14, 2013 (the “Plan”). Specifically, no bonus may exceed the applicable percentage of the Company’s Net Income as defined in Section 5(d) of the Plan and set forth in Appendix IV of this Policy. Notwithstanding any term or provision set forth in this Policy, in the event of any inconsistency between this Policy and the Plan, or the exercise of any discretion on the part of the Compensation Committee pursuant to this Policy, the terms of the Plan shall control and supersede the inconsistent term or provision of this Policy or the exercise of discretion hereunder.
This component is intended to promote the interests of the Company by providing both an incentive and a financial reward for key employees who contribute most to the operating results and growth of the Company. Each year the Company identifies a target amount of incentive compensation for each executive officer. This target is expressed as a percentage of base salary.
Bonuses are paid based upon meeting pre-determined performance criteria. These criteria fall into two categories: (1) overall corporate performance, designated the Corporate Performance Factor (CPF), based on an assessment of how the Company did on an overall basis in achieving its key objectives and (2) individual contribution, designated the Individual Factor (IF), based on individual performance. The CPF, determined by the Compensation Committee, will have a range of 0 to 1.4 with a target of 1.0 based on the achievement of key objectives. The CPF for group presidents will be determined by the Chairman/CEO based on the contribution of the specific group to the Company. The IF will have a range of 0 to 1.2 with a target of 1.0 for expected contribution level for each covered position. The IF will be recommended by the Chairman/CEO and approved by the Compensation Committee, with the exception of the Chairman/CEO and CFO positions. The IF for the Chairman/CEO will be determined by the Compensation Committee. The IF for the CFO will be recommended by the Chairman/CEO and determined jointly by the Audit Committee and Compensation Committee, giving strong consideration to the Audit Committee’s assessment of the strength of the Company’s internal financial controls and the accuracy and appropriateness of its financial reporting.
Target bonus amounts as a percentage of base salary are as follows:
TARGET BONUS AMOUNTS | ||
POSITION |
| PERCENTAGE (%) |
Chairman/CEO/President |
| 120 |
Chief Financial Officer |
| 75 |
Group Presidents |
| 75 |
Other Executive Officers |
| 50 |
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Each Officer is eligible to receive an annual bonus in the range of 0% to 168% of target, i.e., CPF (1.4) x IF (1.2) = 1.68 (168%) x target.
MINIMUM/MAXIMUM OF BASE | |||
POSITION | TARGET PERCENTAGE | MINIMUM (%) | MAXIMUM (%) |
Chairman/CEO/President | 120 | 0 | 202 |
Chief Financial Officer | 75 | 0 | 126 |
Group Presidents | 75 | 0 | 126 |
Other Executive Officers | 50 | 0 | 84 |
The Compensation Committee reserves the right to “zero” the CPF if results are significantly below expected targets or a manageable event negatively and severely impacts stockholder value. The minimum performance threshold is .6; achievement of less than 60% in either the CPF or IF will result in the elimination of the bonus paid. Notwithstanding the above, the Compensation Committee, in consultation with the Chairman/CEO, reserves the discretion to adjust specific performance bonus amounts when deemed to be in the interests of the stockholders. Bonus payments are made by December 15 of each year, based upon performance in the recently concluded fiscal year.
5.3 Long-Term Incentive Compensation
Long-term incentive awards are designed to:
Reward financial performance and encourage recipients to achieve long term sustained growth of stockholder value. The long-term incentive compensation program encourages executives to maintain a long-term financial perspective by linking a substantial portion of their compensation to stockholder returns and the Company’s long-term financial success;
Aid in the retention of key executives;
Balance the effect of market dynamics on equity compensation;
Take into consideration the effect of equity award expense on Company performance; and
Foster executive officer stock ownership.
Long-term incentives are generally provided in the form of equity compensation, such as stock options, restricted stock, and/or other equity related awards. However, the Compensation Committee reserves the right to utilize deferred cash incentives if beneficial to the interests of the Company and its stockholders. Long-term incentive awards may have certain restrictions, such as mandatory vesting periods, which encourage participating executives to continue in the Company’s employ and thereby act as a retention incentive.
The value of the long-term incentive to be awarded will be based upon a percentage of the Officer’s salary to be determined annually by the Compensation Committee.
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All grants of equity compensation shall be in accordance with the provisions and limitations of the equity incentive plan periodically adopted by the Board of Directors and approved by the stockholders. The schedule for distribution of long term-incentives is shown in Section 6.
In addition to the above, the following guidelines will apply to the long-term incentive plan:
A maximum of 2% of outstanding shares of stock and/or options will be distributed in any one year period. The Compensation Committee retains the discretion to increase this amount due to special circumstances, such as an acquisition;
A reserve of at least 10% of the shares available for distribution each year will be held outside the normal distribution for special needs (i.e., hiring, retention) that occur during the year; and
All equity awards shall be approved by the Compensation Committee. The mix of awards to executive officers will generally be approximately 40% stock options vesting over four years, 40% performance-based restricted stock (performance shares) vesting over three years, and 20% time-vested restricted stock units (RSUs) vesting over four years.
No more than 0.9% of the outstanding shares of stock and/or options can be distributed to executive officers in one year;
The plan shall target 2-5% of the non-officer population for inclusion in the long-term incentive program; and
Executive officers will be eligible to receive performance share awards during the first restricted stock approval cycle following their date of hire, or date of appointment as an executive officer.
5.4 Other Section 16B Officer Provisions
Certain additional consideration will be provided to Section 16B officers as approved by the Compensation Committee. These provisions recognize and reward the officers for the additional responsibilities, liabilities and contributions that accompany officer status. Specifically, the Chairman/CEO is provided with a country club membership that is made available primarily for use in entertaining clients and other business associates. Section 16B officers receive a $900 per month automobile allowance, as well as limited reimbursement for club memberships, estate/financial planning and annual physical examinations. Also, Section 16B officers are eligible to defer compensation via participation in the Deferred Compensation Plan.
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7.0 APPENDIX I – EXAMPLES OF ANNUAL INCENTIVE BONUSES
Subject to the limitations of the Executive Compensation Plan:
Example 1
Narrative: The Company significantly exceeds each of its keys objectives and the CEO significantly exceeds all individual contribution expectations, maximizing the bonus payment.
Position: | CEO | Base Salary: $100,000 | CPF: 1.4 | IF: 1.2 |
Bonus to be paid: $100,000 X 1.20 X 1.4 X 1.2 = $201,600
Example 2
Narrative: The Company achieves all and exceeds some of its key objectives, and the CFO meets all individual contribution expectations.
Position: | CFO | Base Salary: $100,000 | CPF: 1.2 | IF: 1.0 |
Bonus to be paid: $100,000 X 0.75 X 1.2 X 1.0 = $90,000
Example 3
Narrative: The Company meets its key objectives, and the General Counsel meets individual contribution expectations.
Position: | General Counsel | Base Salary: $100,000 | CPF: 1.0 | IF: 1.0 |
Bonus to be paid: $100,000 X 0.50 X 1.0 X 1.0 = $50,000
Example 4
Narrative: The Company meets most of its key objectives, and the Corporate Controller significantly exceeds individual contribution expectations.
Position: | Corporate Controller | Base Salary: $100,000 | CPF: 0.8 | IF: 1.2 |
Bonus to be paid: $100,000 X 0.50 X 0.8 X 1.2 = $48,000
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8.0 APPENDIX II – RESTRICTED STOCK PLAN SUMMARY AND EXAMPLES
Overview
Tetra Tech’s baseline equity compensation plan provides for a mix of stock options, performance shares and time-vested RSUs to be awarded to Section 16B officers.
Performance share awards will be eligible for vesting in equal installments annually over a three-year period. Vesting will be based on GAAP EPS growth, as follows:
Annual Award Vesting % | EPS Growth |
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0% | EPS < 5% year-over-year growth |
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60% | EPS 5-9% year-over-year growth |
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100% | EPS 10-14% year-over-year growth |
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120% | EPS 15-20% year-over-year growth |
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140% | EPS > 20% year-over-year growth |
Evaluation of performance for vesting purposes and the award of performance shares will occur annually as part of the normal compensation cycle as shown in Section 6.0.
For the purpose of this Plan, “GAAP EPS” is the fully diluted earnings per share from continuing operations, as defined by Statement of Financial Accounting Standards (SFAS) 128, and related interpretations.
A goal for evaluating the measurement of the GAAP EPS from continuing operations is to ensure that the performance share awards represent the financial results within the executive management’s control. Also, any “one-time” accounting adjustments are to be eliminated from the calculated results in order to ensure consistency among the fiscal years. In order to account for the above, the GAAP EPS will be adjusted for the following:
The impact of goodwill impairment will be excluded;
The impact of accounting changes requiring current and prior period adjustments due to materiality under relevant SEC Staff Accounting Bulletins and related accounting pronouncements will be excluded;
The impact of any changes in newly issued or existing accounting principles and related interpretations for the vesting years 1 to 3 will be excluded;
The financial statement impact from the settlement of tax audits more or less than amounts previously recorded will be excluded;
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Gains and losses from the sales of subsidiaries and significant lines of business will be excluded;
The impact of shares issued and costs incurred in connection with acquisitions, mergers or debt restructurings will be excluded; and
The discretion of the Board of Directors shall be allowed for instances of one-time events and management adjustments.
For each fiscal year, the Company’s CFO shall certify the amount of “GAAP EPS”, adjusted as set forth above.
Executive officer restricted stock and RSU awards shall be subject to the terms of the Company’s 2005 Equity Incentive Plan, as amended through November 14, 2013 (the “2005 Plan”). Notwithstanding any term or provision set forth in this Policy, in the event of any inconsistency between this Policy and the 2005 Plan, or the exercise of any discretion on the part of the Compensation Committee pursuant to this Policy, the terms of the 2005 Plan shall control and supersede the inconsistent term or provision of this Policy or the exercise of discretion hereunder.
Plan Summary
In the November/December Compensation Committee meeting the Committee will authorize a specific number of performance shares to be used for the three-year Restricted Stock (RS) Plan that starts in the current fiscal year. For example, in December, 2006 the “2007, 2008 and 2009 Restricted Stock Plan” was authorized and funded. The Compensation Committee will also approve the number of shares to be allocated to 16B officers.
As stated, the performance shares will vest in 1/3 increments over three years based on GAAP EPS achieved during the Performance Period. For a specific three year RS plan, the prior year GAAP EPS is the measurement control point (see examples). Once established for a three year RS Plan, the EPS control point cannot be modified.
At the end of each fiscal year, EPS will be determined and compared to EPS for the immediately preceding fiscal year so that the year-over-year growth rate may be calculated. For each Section 16B officer, the EPS growth rate will be used to determine the vesting percentage of each installment. Each installment of stock eligible for vesting in a given year will be scored based upon the average annual EPS growth since the year in which that installment was granted.
In the event the duties of a restricted stock holder are reduced, such shares may continue to vest at the discretion of the Compensation Committee.
Assuming a new RS Plan is authorized each year, by the third year, three individual plans, each with its own period and control point will be running concurrently (see below).
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DATE | PLAN AUTHORIZED | CONTROL POINT | PLAN PERIOD | ||
12/06 | 2007 RS Plan | FY 06 GAAP EPS | ‘07,08,09 | ||
12/07 | 2008 RS Plan | FY 07 GAAP EPS | 08,09,10 | ||
12/08 | 2009 RS Plan | FY 08 GAAP EPS | 09,10,11 | ||
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Example 1
A Section 16B officer is allocated 3,000 performance shares at the end of fiscal year 2006 to vest in equal amounts at the end of fiscal years 2007, 2008 and 2009, designated the “07 RS Plan.” For fiscal year 2007, the EPS growth rate is determined to be an 8% improvement over fiscal year 2006. Accordingly, 600 of the 1,000 (i.e., .6 x 1,000) eligible shares will vest in 2007.
Example 2
This example provides vesting results under a series of scenarios involving vesting award amounts and hypothetical EPS growth.
Date | Performance | Earnings Per | Average |
| Vesting Schedule | Vesting Schedule Effective | ||
12/06 | 1200 | .65 | 0% |
| Year-over-Year | % | Year-over-Year | % |
12/07 | 1500 | .79 | 21.5% |
| EPS< 5% | 0% | EPS < 5% | 0% |
12/08 | 1800 | 1.02 | 29.1% |
| EPS 5% - 9% | 60% | EPS 5% - 9% | 60% |
12/09 | 2100 | 1.21 | 18.6% |
| EPS 10% - 14% | 100% | EPS 10% - 14% | 100% |
12/10 | 2400 | .85 | <29.8%> |
| EPS > 14% | 120% | EPS 15% - 20% | 120% |
12/11 | 2700 | 1.45 | 71.0% |
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| EPS > 20% | 140% |
Sample Vesting
Eligible for Vesting (1/3 of Annual RS Award) |
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12/07
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400 Shares (from ‘06 award) | 900 Shares (400 of ‘06 award, 500 of ‘07 award) | 1,500 Shares (400 from ‘06 award, 500 from ‘07 award, 600 from ‘08 award) | 1,800 Shares (500 from ‘07 award, 600 from ‘08 award, 700 from ‘09 award) | 2,100 Shares (600 from ‘08 award, 700 from ‘09 award, 800 from ‘10 award) | ||
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Actual Vesting |
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400 x 1.2 = 480 | 400 x 1.2 = 480 | 400 x 1.2 = 480 |
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500 x 1.2 = 600 |
500 x 1.2 = 600 |
500 x 0 = 0 |
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600 x 1.2 = 720 |
600 x 0 = 0 |
600 x .1.0 = 600 | ||
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700 x 0 = 0 |
700 x .6 = 420 | ||
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800 x 1.4 = 1120
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480 Shares
| 1,080 Shares
| 1,800 Shares
| 0 Shares
| 2,140 Shares
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9.0 APPENDIX III – TIMING OF EXECUTIVE EQUITY AWARDS
The effective date of the grant for all stock option, performance share and RSU awards is the date of approval by the Compensation Committee.
Equity compensation recommendations for executive officers in accordance with this policy, including stock options, performance shares and RSUs, will be presented to the Compensation Committee at the November/December meeting. The Compensation Committee will also consider salary increase and annual performance bonus recommendations at the November/December meeting.
Actual approval of stock option, performance share and RSU awards to executive officers will be made by the Compensation Committee at its November/December meeting, consistent with the annual equity awards to all equity recipients.
The Compensation Committee approves awards for new hires as recommended by the Chairman/CEO. The effective date of the award is the date of approval by the Compensation Committee.
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10.0 APPENDIX IV – DETERMINATION OF NET INCOME
For the purpose of this Policy, “net income” is defined in the Company’s Executive Compensation Plan, as follows:
The Company’s net income as set forth in its audited financial statements excluding (i) the dilutive effects of acquisitions or joint ventures; (ii) restructuring and/or other nonrecurring charges, including but not limited to goodwill impairments and earn-out adjustments; (iii) the effects of changes to generally accepted accounting standards required by the Financial Accounting Standards Board; (iv) the impact of any “extraordinary items” as determined under generally accepted accounting principles; and (v) exchange rate effects, as applicable, for any non-US dollar denominated sales and earnings.
For each fiscal year, the Company’s CFO shall certify the amount of “net income”, as defined above.
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