EXCERPTS FROM SAFETY-KLEEN'S ANNUAL MEETING PROXY STATEMENT EXHIBIT 1
DIRECTORS' COMMITTEES, MEETINGS AND COMPENSATION
Board Compensation
Directors who are employees of the Company receive no additional
compensation for their services as directors. In 1996, directors who were not
employees received $12,000, plus $2,000 for each Board or committee meeting
attended and were reimbursed for travel and other expenses related to attendance
at Board and committee meetings. In February 1988, a nonqualified stock option
plan for outside directors (the "Directors' Plan") was adopted by the Board and
approved by the shareholders at the 1988 annual meeting. The Directors' Plan
allows eligible directors of the Company to purchase up to an aggregate of
300,000 shares of Common Stock at a price equal to the fair market value of the
Common Stock on the date such options are granted. Only directors who are not
employees of the Company are eligible to participate in the Director's Plan.
Pursuant to the Directors' Plan, an option to purchase 15,000 shares of the
Company's Common Stock (i) was granted to each director serving on the Board on
the date the Directors' Plan was adopted and (ii) is granted to each new outside
director at the time such director is named or appointed to the Board. The
Director's Plan also provides for the automatic grant of a second option to
purchase 15,000 shares to each outside director on the fifth anniversary of the
initial grant of options to such director, but only if such director is still
serving on the Board at that time. Options are exercisable 25 percent annually,
on a cumulative basis, starting one year from date of grant and expire ten years
from date of grant.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table specifies the components of the compensation packages
of the Chief Executive Officer of the Company and the four other most highly
compensated executive officers of the Company (the "named executive officers")
for the last three fiscal years.
Long Term
Comp.
-----------
Awards
Annual -----------
Compensation Securities
------------- Underlying All Other
Bonus Option/SARS Compensation
Name and Principal Position Year Salary (1)(2) (#)(2) (3)
- --------------------------- ---- ------ ------ ----------- ------------
John G. Johnson, Jr.......... 1996 417,901 272,010 65,000 3,750
President and CEO 1995 391,661 119,170 50,000 2,625
1994 310,384 119,600 47,750 2,250
Donald W. Brinckman(4)....... 1996 417,062 183,968 37,750 3,750
Chairman 1995 404,615 84,840 30,000 2,625
1994 440,000 138,000 64,600 2,250
Joseph Chalhoub.............. 1996 220,221 141,976 28,650 3,750
Senior Vice President 1995 205,855 86,514 22,450 2,859
1994 183,594 66,420 28,600 4,510
David A. Dattilo............. 1996 191,470 137,502 25,800 3,750
Senior Vice President 1995 185,444 78,815 21,000 2,265
1994 178,500 68,850 29,550 2,250
F. Henry Habicht III......... 1996 190,916 128,019 25,050 3,750
Senior Vice President 1995 182,738 78,815 20,900 2,266
1994 162,765 66,900 24,350 1,145
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(1) The amounts shown in the bonus column represent payments under the
Company's Management Incentive Plan described under the caption
"Compensation Committee Report."
(2) Bonuses are paid and stock options are granted in February of each year
based on performance during the prior year. Accordingly, bonus payments and
option grants are reported in this table for the year to which they relate,
instead of the year in which they were paid or granted.
(3) 1996 amounts reported represent Company contributions to the Savings and
Investment Plan, a defined contribution plan.
(4) Mr. Brinckman retired as an executive officer effective March 17, 1997. He
will continue to serve as Chairman of the Board.
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Option/SAR Grants In Last Fiscal Year
The following table provides information related to option/SARs granted to
the named executive officers during fiscal 1996.
Individual Grants
--------------------------------------------------------
Potential Realizable Value
Number of At Assumed Annual Rates
Securities % of Total of Stock Price
Underlying Options/SARS Exercise Appreciation for
Options/SARS Granted to or Base Option Term
Granted Employees Price Expiration ----------------------------
Name (#)(1) In Fiscal Year ($/SH) Date 5$($)(2) 10%($)(2)
- ---- ------------ -------------- -------- ---------- ------------ --------------
John G. Johnson, Jr. 50,000 5.82% $15.125 2/2/06 $ 475,598 $ 1,205,265
Donald W. Brinckman 30,000 3.49% 15.125 2/2/06 285,359 723,159
Joseph Chalhoub 22,450 2.61% 15.125 2/2/06 213,543 541,164
David A. Dattilo 21,000 2.44 15.125 2/2/06 199,751 506,211
F. Henry Habicht II 20,900 2.43% 15.125 2/2/06 198,800 503,801
Shareholders/(3)/ N/A N/A N/A N/A 554,046,703 1,404,063,125
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(1) All options are nonqualified, expire 10 years from date of grant, were
issued at fair market value on the date of grant and vest at the rate of
25% per year beginning one year from grant date. Options granted to
executive officers have a tandem limited stock appreciation right (LSAR)
which entitles the officer to elect to receive a "Change of Control Value"
(as described in the 1993 Stock Option Plan) of the option in cash in the
event a change of control occurs. Does not include options granted in
February of 1997 relating to fiscal 1996 and reported in the Summary
Compensation Table as compensation earned in 1996. See Note 2 to Summary
Compensation Table.
(2) The potential realizable value portion of the foregoing table illustrates
the gain that might be realized upon the exercise of the options
immediately prior to the expiration of their term, assuming the specified
compounded rates of appreciation of the Company's Common Stock over the
term of the option. Actual gains, if any, on the stock option exercises are
dependent on the future performance of the Common Stock, overall market
conditions, as well as the option holders' continued employment through the
vesting period. The amounts reflected in this table may not necessarily be
achieved.
(3) With respect to shareholders, the potential realizable value illustrates
the gain that might be realized on the 58,246,939 shares of Common Stock
issued and outstanding as of year end, assuming the specified compounded
rates of appreciation of the Company's Common Stock over the term of the
options. The value is calculated based on the Exercise or Base Price of the
option grant on February 2, 1996 of $15.125 per share.
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Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-end Option/Sar
Values
The following table provides information related to options exercised by
the named executive officers during fiscal year 1996 and the number and value of
options held at fiscal year end.
Number of Unexercised Value of Unexercised
Shares Options Held at In-The-Money Options At
Acquired Fiscal Year End(#)(1) Fiscal Year End ($)(1)(2)
on Value -------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
John G. Johnson, Jr... 0 $0 47,474 104,126 $36,322 $105,513
Donald W. Brinckman... 0 0 390,141 109,601 67,218 95,974
Joseph Chalhoub....... 0 0 57,087 54,063 22,390 52,289
David A. Dattilo...... 0 0 70,214 53,401 22,479 50,382
F. Henry Habicht II... 0 0 25,749 49,251 19,650 47,523
__________________
(1) Does not include options granted in February of 1997 relating to fiscal
1996 and reported in the Summary Compensation Table as compensation earned
in 1996. See Note 2 to Summary Compensation Table.
(2) Represents the difference between the per share exercise price and the
closing price of the Common Stock on December 27, 1996 ($16.625).
Pension Plan
The following table reflects annual pension benefits commencing at age 65
based upon assumed final pay amounts and years of credited service:
Estimated Annual Pension Based Upon
Indicated Years Of Credited Service For The
Pension Plan And The Excess Benefit Plan
Assumed
Average
Annual 10 15 20 25 30 35 40
Final Pay Years Years Years Years Years Years Years
- --------- ------- ------- ------- ------- ------- ------- -------
$250,000 41,186 61,778 82,371 102,964 123,557 123,767 123,977
300,000 49,521 74,281 99,041 123,802 148,562 148,772 148,982
350,000 57,856 86,783 115,711 144,639 173,567 173,777 173,987
400,000 66,191 99,286 132,381 165,477 198,572 198,782 198,992
450,000 74,526 111,788 149,051 186,314 223,577 223,787 223,997
500,000 82,861 124,291 165,721 207,152 248,582 248,792 249,002
550,000 91,196 136,793 182,391 227,989 273,587 273,797 274,007
600,000 99,531 149,296 199,061 248,827 298,592 298,802 299,012
650,000 107,866 161,798 215,731 269,664 323,597 323,807 324,017
700,000 116,201 174,301 232,401 290,502 348,602 348,812 349,022
750,000 124,536 186,803 249,071 311,339 373,607 373,817 374,027
800,000 132,871 199,306 265,741 332,177 398,612 398,822 399,032
850,000 141,206 211,808 282,411 353,014 423,617 423,827 424,037
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The Safety-Kleen Pension Plan for Salaried Employees (the "Pension Plan")
provides retirement benefits for life for salaried employees, including
executive officers, of the Company and its participating subsidiaries. Pensions
are based on final pay, which is defined as the average annual earnings
(including commissions and incentive compensation) for the five consecutive
years which yield the highest average. For the named executive officers, covered
compensation is substantially the same as the sum of the Salary and Bonus
columns for 1996 on the Summary Compensation Table. The pensions are payable
monthly commencing the first calendar month after retirement. Various provisions
under the Internal Revenue Code of 1986, as amended (the "Code") limit the
accrued benefit payable under the Pension Plan, currently to $120,000, and limit
the amount of annual compensation that may be taken into account in determining
pension benefits, currently to $150,000.
Under the Safety-Kleen Corp. Excess Benefit Plan (the "Excess Benefit
Plan"), executive officers are generally entitled to the difference between the
benefits actually paid to them under the Pension Plan and the benefits which
they would have received under the Pension Plan were it not for certain
restrictions imposed under the Code, discussed above. The Excess Benefit Plan
also provides that the executive officers' benefits are calculated on the
highest five of their last ten years' compensation and that any executive
officer who has attained both the age of 60 years and 30 years of service will
receive an unreduced pension benefit.
The amounts shown above are computed on straight-life annuity amounts and
are not subject to deduction for Social Security Benefits or other offset
amounts. The amounts are assumed payable under the Pension Plan option providing
lifetime benefits for the employee only, and would be reduced if the retiree
elected a surviving spouse's pension. Messrs. Johnson, Brinckman, Chalhoub,
Dattilo and Habicht had 4 years, 37 years, 19 years, 29 years and 4 years,
respectively, of credited service under the Pension Plan as of December 31,
1996. Mr. Chalhoub's benefits paid under the Pension Plan will be offset by
benefits payable under a defined contribution plan administered by Safety-Kleen
Canada, Inc. which he participated in for the first 17 years of his employment.
Employment Contracts And Severance Arrangements
The Company has agreed to provide executive life insurance to 37 of its
officers and key managers (including the named executive officers) whereby the
Company and executive contribute to a life insurance policy owned by the
executive; no such contributions were made during 1996.
The Company has entered into agreements with twenty of its officers and
other vice presidents, including the named executive officers, providing for the
payment of certain severance benefits in the event the officer or vice president
is terminated within three years after a change in control of the Company (which
is generally defined as the purchase by any person or group of persons of more
than 20% of the issued and outstanding Common Stock, a change in the majority of
the members of the Board over a 24-month period, or certain corporate
reorganizations) for reasons other than a voluntary termination or discharge for
cause (as both terms are defined in such contracts). Benefits under these
contracts include the payment of a lump sum severance benefit equal to three
times the executive's annual salary at the time of termination (or if greater,
at the time of the change in control), plus three times the greater of (i) the
bonus he received for the previous year or (ii) the maximum bonus to which he
could be entitled for the year in which the termination occurs.
Each of the severance agreements provides for a reduction of payments due
under such agreement, to the extent that such payments, together with all other
amounts payable to the executive other than payments attributable to options
granted him under the Company's stock option plans, constitute "excess parachute
payments" under federal tax law. The contract also provides that the Company
will reimburse the executive for any additional income taxes (including excise
taxes) he incurs as a result of payments upon termination
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(including payments attributable to options) being treated as excess parachute
payments under federal income tax law.
Compensation Committee Report On Executive Compensation
Pursuant to the rules regarding disclosures of Company policies concerning
executive compensation, this report is submitted by Messrs. Farmer, Gwillim, and
Jannotta in their capacity as the Board's Compensation Committee and addresses
the Company's compensation policies for 1996 as they affected Mr. Johnson, the
Chief Executive Officer ("CEO"), and the Company's other executive officers,
including the named executive officers.
Overview Of Executive Compensation Policy. The Company's compensation
philosophy is incentive oriented, particularly for executive officers. The key
elements of the Company's executive compensation program consist of salary,
annual bonus, and stock options. The annual bonus portion of the officers'
compensation is incentive based and is directly linked to corporate performance
and returns to shareholders. Accordingly, the Company has developed an overall
compensation strategy and specific compensation plans that tie a significant
portion of executive compensation to the Company's success in meeting specified
performance goals and to appreciation in the Company's stock price. The overall
objectives of this strategy are to motivate the CEO and the executive officers
to achieve the goals inherent in the Company's business strategy, to link
executive and shareholder interests through equity-based plans, and finally, to
provide a compensation package that recognizes individual contributions, as well
as overall business results.
In determining compensation, the Compensation Committee compares the
executive officers' compensation to the compensation paid to persons in
comparable positions at comparable companies. While the elements of compensation
described below are considered separately, the Compensation Committee takes into
account the full compensation package provided by the Company to the individual,
including pension benefits, supplemental retirement benefits, severance plans,
insurance, and other benefits. The comparable companies used for this comparison
are not the same companies that comprise the peer group index in the Stock
Performance Graph on page 15, because the Compensation Committee believes that
the Company's competitors for executive talent are not generally the companies
included in that index. For these purposes, comparable companies are
approximately 67 companies, surveyed by an outside consulting firm, whose sales,
assets, shareholders' equity, net income, return on equity, and total number of
employees are similar to those of the Company (the "Primary Survey Group"). For
purposes of evaluating compensation of the CEO and the other named executive
officers, the Compensation Committee also reviews data on a special survey group
(the "Special Survey Group"). The Special Survey Group reports the compensation
paid to the named executives holding comparable positions at publicly traded
industrial companies with sales between $800 million and $1.2 billion and with
earnings between $50 million and $80 million. For 1996, the Special Survey Group
consisted of 26 companies.
In addition, the Compensation Committee receives the recommendations of the
CEO for the compensation to be paid the executive officers, other than the CEO
and the Chairman of the Board. This process is designed to ensure consistency
throughout the executive compensation program.
Section 162(m) of the Internal Revenue Code precludes publicly-held
companies from taking income tax deductions for compensation paid to its CEO or
any of its four other most highly paid executive officers to the extent any such
individual's taxable compensation for the year exceeds $1 million. However,
compensation that qualifies as "performance-based" under Section 162(m) is not
subject to the $1 million deduction limit. To qualify as "performance-based,"
compensation payments must, among other things, be
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based on objective performance criteria established under a plan, the material
terms of which have been approved by shareholders.
The Compensation Committee intends to design the Company's compensation
programs to generally conform with Section 162(m) so that in the event total
compensation paid to any executive officer exceeds $1 million in any one year,
compensation payments in excess of $1 million should qualify as "performance-
based," and the Company will preserve its tax deduction with respect to those
payments. Pursuant to this policy, an amendment to the Company's 1993 Stock
Option Plan and the material terms of the Company's Management Incentive Plan
are being presented for shareholder approval so that amounts realized by
participants under such plans will qualify as "performance-based" under Section
162(m).
Salaries. Salaries for executive officers are determined by (i)
subjectively evaluating the responsibilities of the position held and the
experience and performance of the individual and (ii) comparing base salaries
for comparable positions at comparable companies. Salaries paid to the named
executive officers, including Mr. Johnson, in 1996 were below the fiftieth
percentile of the amount paid for comparable positions among the Special Survey
Group .
Annual Bonus. The Company's executive officers are eligible for an annual
cash bonus under the Company's Management Incentive Plan (the "Incentive Plan").
The purpose of the Incentive Plan is to supplement through an incentive bonus
the pay for executive officers (and other key management personnel) so that
overall total cash compensation (salary and bonus) is externally competitive and
properly rewards Incentive Plan participants for their efforts in achieving
certain specified performance goals. For 1996, if the Company had met these
performance goals, total cash compensation (salary and bonus) would have been
below the seventy-fifth percentile of the amount paid for comparable positions
among the Primary Survey Group.
The Incentive Plan operates as follows. In 1996, the Board of Directors
reviewed the profit plan (the "Profit Plan") for the year and created an
incentive fund, consisting of both a formula and personal performance fund,
based on earnings results relative to the Profit Plan. In order to qualify for
the minimum percentage of earnings allocable to the formula portion of the
incentive fund, Safety-Kleen had to attain consolidated net earnings equal to
80% of Profit Plan consolidated net earnings. In order to qualify for the
maximum percentage of earnings allocable to the formula portion of the incentive
fund, Safety-Kleen had to attain consolidated net earnings equal to at least
120% of Profit Plan consolidated net earnings. At the minimum consolidated net
earnings level, a formula incentive fund consisting of 1% of consolidated pretax
earnings would have been created. This factor rose on a graduated basis to a
maximum of 5.0% of consolidated pretax earnings at the maximum level. Each
participant was allocated a percentage of the bonus pool based on the
participant's responsibilities at the Company. At the beginning of 1996, the
Compensation Committee reviewed the CEO's recommendations for participants in
the Incentive Plan and determined the list of plan participants and the
percentage share of the formula pool for each participant. For 1996, there were
116 participants in the Incentive Plan
In addition to a share of the formula pool, Incentive Plan participants
were also eligible for personal performance bonuses payable in the discretion of
the Compensation Committee in an amount not to exceed 50% of his or her share of
the formula pool. Thus, the aggregate maximum annual bonus payments were 7.5% of
pre-tax earnings. After the Company received its audited year-end financial
statements and the size of the formula bonus pool was determined, the
Compensation Committee reviewed the CEO's recommendations for each participant's
discretionary award based on the participant's individual contributions to the
Company and determined the participants' discretionary shares. The Incentive
Plan also provided for the Board of Directors to make a determination,
notwithstanding the other plan provisions, regarding the amount of the bonus
pool and the awards to be paid to individual participants. This provision
permitted the
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Board of Directors to make whatever changes it deemed necessary to preserve the
purposes and objectives of the Incentive Plan.
For 1996, a formula pool of 3.3% of pre-tax earnings was allocated to
participants. Discretionary bonuses increased the size of the total pool
allocated to participants to 4.1% of pre-tax earnings. For 1996, Mr. Johnson
received 5.45% of the formula bonus pool under the Incentive Plan and a
discretionary bonus equal to 40% of his formula bonus.
For 1997, the Board of Directors approved a new Management Incentive Plan.
A bonus pool will be created in a manner similar to 1996. However, annual bonus
payments to participants for 1997 will be determined based on incremental
improvements in Economic Value Added(R) ("EVA(R)"). EVA measures a firm's true
economic profit after subtracting the cost of all capital employed by the firm.
EVA was selected to determine bonus payments to participants under the Company's
incentive plan because the Company believes improvements in EVA are closely
correlated to improvements in shareholders' total return.
Stock Options. Stock option grants under the 1993 Stock Option Plan are
designed to align the long-term interests of the Company's executives and its
shareholders and assist in the retention of executives. Stock options are
granted with an exercise price equal to the market price on the date of grant.
The Company's practice is to award options at the beginning of each year and
vest such options at the rate of 25% per year beginning at the one-year
anniversary of the grant. This approach is designed to create shareholder value
over the long-term because the full benefit of the options cannot be realized
unless stock price appreciation occurs over a number of years.
In February 1996, the Compensation Committee recommended and the Board of
Directors granted nonqualified stock options under the 1993 Stock Option Plan to
all executive officers, as well as certain other employees. The grants made to
each executive officer, including the CEO, were based on each executive's level
in the Company and immediate prior year's total cash compensation. The number of
options granted to each executive officer was determined by (i) multiplying the
executive's total cash compensation by a specified percentage (which ranged from
150% to 80%) depending upon the executive officer's level of responsibility
within the Company and (ii) dividing the product obtained in (i) by the
Company's average stock price for the prior year. Applying a 150% multiplier for
Mr. Johnson, he was granted 50,000 options. This formula approach, which is
indirectly based on competitive compensation data, provides for awards based on
current duties and responsibilities, as well as present and potential
contributions to the success of the Company.
Russell A. Gwillim, Chairman
Richard T. Farmer
Edgar D. Jannotta
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1987, the Company purchased its oil processing business from enterprises
controlled by Joseph Chalhoub. Mr. Chalhoub is now a Senior Vice President of
the Company and supervises, among other things, the Company's oil reprocessing
business. Mr. Chalhoub holds a 31% interest in Booth Oil Company, Inc.
("Booth"). Booth was the operator of an oil reprocessing facility in Buffalo,
New York which is owned by the Company (the "Facility"). Booth operated the
Facility until June of 1996, when the Company assumed responsibility for
operations. The Company paid Booth approximately $1.5 million for processing
services at the Facility during 1996. The Company believes that the prices it
paid for processing and
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management services at the Facility were competitive with the prices it would
have been required to pay at other third party facilities.
During 1996, the Company paid approximately $150,000 to Williams & Vanino,
Inc., for environmental management consulting services. Marcia E. Williams, a
director of the Company, is President of Williams & Vanino. In addition, Marcia
Williams' husband is a partner with the law firm of Latham & Watkins. Safety-
Kleen utilized Latham & Watkins for legal services in 1996.
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