DEF 14A 1 d495361ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.   )

Filed by the Registrant  x                            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))

 

x Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material Pursuant to §240.14a-12

AOL 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):

 

x No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1) Title of each class of securities to which transaction applies:

 

      

 

  (2) Aggregate number of securities to which transaction applies:

 

      

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

      

 

  (4) Proposed maximum aggregate value of transaction:

 

      

 

  (5) Total fee paid:

 

      

 

 

¨ 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.

 

  (1) Amount Previously Paid:

 

      

 

  (2) Form, Schedule or Registration Statement No.:

 

      

 

  (3) Filing Party:

 

      

 

  (4) Date Filed:

 

      

 


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LOGO

March 20, 2013

Dear Fellow Stockholders:

Please join us for AOL Inc.’s Annual Meeting of Stockholders on May 3, 2013, at 9:00 a.m. (Eastern Time) at the Sheraton Inner Harbor, 300 South Charles Street, Baltimore, Maryland 21201. We are pleased to be utilizing the Securities and Exchange Commission rule allowing companies to furnish proxy materials to their stockholders over the internet. We believe that the e-proxy process will expedite our stockholders’ receipt of proxy materials, lower the costs of distribution and reduce the environmental impact of our Annual Meeting.

In accordance with this rule, we are sending stockholders of record at the close of business on March 7, 2013 a Notice of Internet Availability of Proxy Materials. The Notice contains instructions on how to access our Proxy Statement and Annual Report and vote online. If you would like to receive a printed copy of our proxy materials instead of downloading a printable version from the internet, please follow the instructions for requesting such materials included in the Notice as well as in the attached Proxy Statement.

Attached to this letter are a Notice of Annual Meeting of Stockholders and Proxy Statement, which describe the business to be conducted at the Annual Meeting. We also will report on matters of current interest to our stockholders.

Your vote is important. Whether you own a few shares or many, and whether or not you plan to attend the Annual Meeting in person, it is important that your shares be represented and voted at the Annual Meeting.

Thank you for your continued support of AOL Inc.

Sincerely,

 

LOGO

Tim Armstrong

Chairman and Chief Executive Officer


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PROXY VOTING METHODS

If at the close of business on March 7, 2013 you were a stockholder of record, you may vote your shares by proxy through the internet, by telephone or by mail, or you may vote in person at our Annual Meeting of Stockholders to be held on May 3, 2013 (the “Annual Meeting”). If at the close of business on March 7, 2013 you held shares through a bank, broker or other nominee, you may vote by submitting voting instructions to your bank, broker or nominee. In these cases, you may vote directly over the internet or by telephone or mail by submitting a voting instruction form. We encourage you to vote through the internet or by telephone, both of which you may do 24 hours a day, 7 days a week. In addition, if at the close of business on March 7, 2013 you were a stockholder of record or held shares through a bank, broker or other nominee, you may vote in person at the Annual Meeting. You may revoke your proxy at the time and in the manner described on page 3 of the Proxy Statement.

If you hold your shares directly in your name in our stock records maintained by our transfer agent, Computershare Trust Company N.A., proxies submitted via the internet or by telephone must be received by 11:59 p.m., Eastern Time, on Thursday, May 2, 2013.

If you hold shares through a bank, broker or other nominee, voting instructions submitted over the internet or by telephone as described above must be received by 11:59 p.m., Eastern Time, on Thursday, May 2, 2013.

Proxies or voting instructions submitted by mail should be returned in the envelope provided to you with your paper proxy card or voting instruction form, and received not later than 9:00 a.m. Eastern Time, on Friday, May 3, 2013.

To vote by proxy:

BY INTERNET

 

   

If you have internet access, by submitting the proxy by following the instructions included in the Notice of Internet Availability of Proxy Materials or your proxy card.

BY TELEPHONE

 

   

By submitting the proxy by following the telephone voting instructions included in the proxy card or on the internet voting website specified on the proxy card.

BY MAIL

 

   

If you have not already received a printed copy of the proxy materials by mail, request a proxy card from us by following the instructions on your Notice of Internet 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.

YOUR VOTE IS IMPORTANT. THANK YOU FOR VOTING.


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AOL INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

TIME

   9:00 a.m. (Eastern Time) on Friday, May 3, 2013

PLACE

   Sheraton Inner Harbor, 300 South Charles Street, Baltimore, Maryland 21201

ITEMS OF BUSINESS

  

1.      To elect the 8 director nominees listed in the Proxy Statement.

  

2.      To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2013.

  

3.      To hold an advisory vote to approve executive compensation.

  

4.      To approve the Company’s Tax Asset Protection Plan.

  

5.      To consider such other business as may properly come before the Annual Meeting and any adjournments or postponements thereof.

RECORD DATE

   You may vote at the Annual Meeting or any adjournment or postponement of the Annual Meeting if you were a stockholder of record at the close of business on March 7, 2013.

VOTING BY PROXY

   To ensure your shares are voted, you may vote your shares via the internet, by telephone or, if you have received a printed copy of the proxy materials from us by mail, by completing, signing, dating and promptly returning the enclosed proxy card by mail. Internet and telephone voting procedures are described on the preceding page, in the General Information section beginning on page 1 of the Proxy Statement and on the proxy card. For shares held through a bank, broker or other nominee, you may vote by submitting voting instructions to your bank, broker or nominee.

By Order of the Board of Directors,

 

LOGO

Julie Jacobs

Executive Vice President, Corporate Development, General Counsel and Corporate Secretary

This Notice of Annual Meeting and Proxy Statement

are being distributed to stockholders beginning on or about March 20, 2013.


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TABLE OF CONTENTS

 

General Information

     1   

Notice of Internet Availability of Proxy Materials

     5   

Item 1—Election of Directors

     6   

Nominees for Election as Directors

     6   

Board of Directors Information

     11   

Committees of the Board and Meetings

     11   

Audit and Finance Committee

     11   

Compensation and Leadership Committee

     12   

Nominating and Governance Committee

     14   

Executive Committee

     15   

Transactions Committee

     15   

Governance of Your Company

     15   

Standards of Business Conduct

     15   

Code of Ethics for Our Senior Executive and Senior Financial Officers

     16   

Whistleblower Procedures

     16   

Corporate Governance Policy

     16   

Significant Governance Practices

     17   

Board Composition and Director Nomination Process

     17   

Annual Meeting of Stockholders

     18   

Director Independence and Independence Determinations

     18   

Board Leadership Structure

     18   

Executive Sessions

     20   

Board and Committee Evaluations

     20   

Communications with the Board of Directors

     20   

Oversight of Risk Management

     20   

Executive Officers

     21   

Item 2—Ratification of Independent Registered Public Accounting Firm

     23   

Audit-Related Matters

     23   

Report of the Audit and Finance Committee

     23   

Policy Regarding Pre-Approval of Services Provided by the Independent Auditors

     24   

Audit and Non-Audit Fees

     25   

Item 3—Advisory Vote to Approve Executive Compensation

     26   

Key Financial and Operational Highlights

     26   

Key Compensation Practices Highlights

     27   

Item 4—Approval of the Company’s Tax Asset Protection Plan

     28   

Background and Reasons for the Proposal

     28   

Summary of Terms of the Plan

     29   

Certain Considerations Relating to the Plan

     30   

 

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Equity Compensation Plan Information

     32   

Executive Compensation

     33   

Compensation Discussion and Analysis

     33   

Executive Summary

     33   

2012 Financial and Operational Highlights

     33   

New Executive Employment Agreements Introduced Performance-Based Equity and Standard Terms

     34   

Compensation Philosophy and Process

     39   

Our Compensation Goals and Principles

     39   

Other Executive Compensation Practices

     52   

Compensation Committee Report

     54   

Compensation Committee Interlocks and Insider Participation

     54   

Tabular Executive Compensation Disclosure

     55   

2012 Summary Compensation Table

     55   

Grants of Plan-Based Awards in 2012

     57   

Narrative to the 2012 Summary Compensation Table and the Grants of Plan-Based Awards in 2012 Table

     58   

Outstanding Equity Awards at 2012 Fiscal Year-End

     65   

Option Exercises and Stock Vested During 2012

     68   

Non-Qualified Deferred Compensation for Fiscal 2012

     69   

Potential Payments Upon Termination of Employment or Change in Control for 2012

     70   

Termination Without Cause/For Good Reason or Change in Control and Termination Without Cause/For Good Reason

     71   

Termination of Employment Due to Disability or Death

     73   

Non-Employee Director Compensation

     83   

Summary Compensation Information

     83   

Director Compensation in 2012

     85   

Share Ownership Information

     87   

Certain Relationships and Related Party Transactions

     89   

Policy and Procedures Governing Related Person Transactions

     89   

Related Person Transactions

     89   

Section 16(a) Beneficial Ownership Reporting Compliance

     90   

Stockholder Proposals for 2014 Annual Meeting

     90   

Householding of Proxy Materials

     90   

Other Business

     91   

Annex A—Tax Asset Protection Plan

     A-1   

Annex B—Reconciliation of Non-GAAP Financial Measures

     B-1   

 

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AOL INC.

770 Broadway

New York, New York 10003

Telephone: (212) 652-6400

PROXY STATEMENT

Annual Meeting of Stockholders

May 3, 2013

9:00 a.m. (Eastern Time)

GENERAL INFORMATION

Why am I being provided with these materials?

We have made these proxy materials available to you via the internet or, upon your request, have delivered printed versions of these materials to you by mail in connection with the solicitation by the Board of Directors (the “Board”) of AOL Inc. (the “Company” or “AOL”) of proxies to be voted at our Annual Meeting of Stockholders to be held on May 3, 2013 (the “Annual Meeting”), and at any postponements or adjournments of the Annual Meeting. If at the close of business on March 7, 2013 you were a stockholder of record or held shares through a bank, broker or other nominee, you are invited to vote your shares and attend the meeting.

There are four proposals scheduled to be voted on at the Annual Meeting:

 

   

Election of eight director nominees.

 

   

Ratification of the appointment of Ernst & Young LLP (“Ernst & Young”) as our independent registered public accounting firm for 2013.

 

   

Approval, on an advisory basis, of the Company’s executive compensation.

 

   

Approval of the Company’s Tax Asset Protection Plan.

Why did I receive a one-page notice in the mail regarding the internet availability of proxy materials instead of a full set of proxy materials?

Pursuant to the rules adopted by the United States Securities and Exchange Commission (the “SEC”), we have elected to provide stockholders access to our proxy materials via the internet. We believe that the e-proxy process will expedite our stockholders’ receipt of proxy materials, lower the costs of distribution and reduce the environmental impact of our Annual Meeting. Accordingly, we are sending a Notice of Internet Availability of Proxy Materials (the “Notice”) on or about March 20, 2013 to stockholders of record entitled to vote at the Annual Meeting. All stockholders will have the ability to access the proxy materials on the website referred to in the Notice or your proxy card and to download printable versions of the proxy materials or to request and receive a printed set of the proxy materials from us. Instructions on how to access the proxy materials over the internet or to request a printed copy from us may be found in the Notice.

Who is entitled to vote?

Stockholders as of the close of business on March 7, 2013 (the “Record Date”) may vote at the Annual Meeting. As of that date, there were 77,211,619 shares of our common stock outstanding and entitled to vote. You have one vote for each director nominee and for each other proposal to be voted on at the Annual Meeting with respect to each share of common stock held by you as of the Record Date, including shares:

 

   

Held directly in your name as “stockholder of record” (also referred to as “registered stockholder”); and

 

   

Held for you in an account with a broker, bank or other nominee (shares held in “street name”)—street name holders generally cannot vote their shares directly and instead must instruct the broker, bank or nominee how to vote their shares.

 

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What constitutes a quorum?

A majority of the voting power of the outstanding shares of common stock entitled to vote generally on the business properly brought before the Annual Meeting must be represented in person or by proxy to constitute a quorum for the Annual Meeting. Abstentions are counted as present and entitled to vote for purposes of determining a quorum. If you hold your shares in street name and do not provide voting instructions to your broker, New York Stock Exchange (“NYSE”) rules grant your broker discretionary authority to vote your shares on “routine matters” at the Annual Meeting, including the ratification of the independent auditors in Proposal 2. However, the proposals regarding the election of directors, the advisory vote to approve executive compensation and the approval of the Company’s Tax Asset Protection Plan are not considered “routine matters.” As a result, if you do not provide instructions your shares will not be voted on Proposals 1, 3 and 4 (resulting in a “broker non-vote”). Although “broker non-votes” will be counted as present and entitled to vote for purposes of determining a quorum, we urge you to promptly provide voting instructions to your broker so that your shares are voted on all proposals.

How many votes are required to approve each proposal?

Each director nominee shall be elected at the Annual Meeting by the vote of a majority of the votes cast with respect to the nominee. A majority of the votes cast with respect to election of a director nominee means that the number of votes cast “FOR” a nominee must exceed the votes cast “AGAINST” that nominee (with “abstentions” and “broker non-votes” not counted as votes cast with respect to that nominee).

Any other proposal requires the affirmative vote of a majority of the voting power of the shares of common stock of the Company present in person or represented by proxy at the Annual Meeting and voting thereon.

How are votes counted?

You may vote “FOR” or “AGAINST” each of the director nominees, or you may “ABSTAIN” from voting for one or more nominees. You may vote “FOR” or “AGAINST” or you may “ABSTAIN” from voting on each of the other proposals.

With respect to the election of directors, neither an abstention nor a broker non-vote will count as a vote cast “for” or “against” a director nominee. Therefore, abstentions and broker non-votes will have no direct effect on the outcome of the election of directors.

With respect to each of the other proposals to be voted on at the Annual Meeting, neither an abstention nor a broker non-vote will count as voting with respect to the proposal. Therefore, abstentions and broker non-votes will have no direct effect on the outcome of the proposal.

If you sign and submit your proxy card without specifying how you would like your shares voted, your shares will be voted in accordance with the Board’s recommendations specified below under “How does the Board recommend that I vote?” and in accordance with the discretion of the persons named on the proxy card (the “proxyholders”) with respect to any other matters that may be voted upon at the Annual Meeting.

Who will count the vote?

Representatives of Computershare Trust Company N.A., our transfer agent, will tabulate the votes and act as inspectors of election.

How does the Board recommend that I vote?

Our Board recommends that you vote your shares:

 

   

“FOR” the election of each of the director nominees set forth in this Proxy Statement.

 

   

“FOR” the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2013.

 

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“FOR” the approval, on an advisory basis, of the Company’s executive compensation.

 

   

“FOR” the approval of the Company’s Tax Asset Protection Plan.

How do I vote my shares without attending the Annual Meeting?

If you are a registered stockholder you may vote by granting a proxy using any of the following methods:

 

   

By Internet—If you have internet access, by submitting your proxy by following the instructions included in the Notice or your proxy card.

 

   

By Telephone—By submitting your proxy by following the telephone voting instructions included in the proxy card or on the internet voting website specified on the proxy card.

 

   

By Mail—If you have received or requested a printed copy of the proxy materials from us by mail, you may vote by mail by completing, signing and dating the enclosed proxy card where indicated and by mailing or otherwise returning the proxy card in the envelope provided to you. You should sign your name exactly as it appears on the proxy card. If you are signing in a representative capacity (for example, as guardian, executor, trustee, custodian, attorney or officer of a corporation), indicate your name and title or capacity.

If your shares are held in street name, your bank, broker or other nominee should give you instructions for voting your shares. In these cases, you may vote via the internet, by telephone or by mail by submitting a voting instruction form.

Internet and telephone voting facilities will close at 11:59 p.m. (Eastern Time) on May 2, 2013 for the voting of shares held by stockholders of record and for the voting of shares held in street name.

Mailed proxy cards or voting instruction forms should be returned in the envelope provided to you with your proxy card or voting instruction form, and received by 9:00 a.m. (Eastern Time) on May 3, 2013.

How do I vote my shares in person at the Annual Meeting?

First, you must satisfy the requirements for admission to the Annual Meeting as detailed below. Then, if you are a stockholder of record and prefer to vote your shares at the Annual Meeting, you must bring either your Notice or proof of stock ownership. You may vote shares held in street name at the Annual Meeting only if you obtain a signed proxy from the record holder (bank, broker or other nominee) giving you the right to vote the shares. You may obtain directions to the Annual Meeting by contacting our Corporate Secretary via email at corporatesecretary@teamaol.com, via phone at (212) 652-6450, via fax at (703) 466-9813 or via mail to AOL Inc., 770 Broadway, New York, New York 10003.

Even if you plan to attend the Annual Meeting, we encourage you to vote in advance via internet, telephone or mail so that your vote will be counted even if you later decide not to attend the Annual Meeting.

What does it mean if I receive more than one Notice or proxy card on or about the same time?

It generally means you hold shares registered in more than one account. To ensure that all your shares are voted, please sign and return each proxy card or, if you vote via internet or telephone, vote once for each Notice you receive. For more information, see “Householding of Proxy Materials” on page 90 of this Proxy Statement.

May I change my vote or revoke my proxy?

Yes. Whether you have voted via internet, telephone or mail, if you are a stockholder of record, you may change your vote and revoke your proxy by:

 

   

Sending a written statement to that effect to our Corporate Secretary, provided such statement is received at or prior to the Annual Meeting;

 

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Submitting a vote at a later time via internet or telephone before the closing of those voting facilities at 11:59 p.m. (Eastern Time) on May 2, 2013;

 

   

Submitting a properly signed proxy card with a later date that is received at or prior to the Annual Meeting; or

 

   

Attending the Annual Meeting and voting in person.

If you hold 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 voting instructions in person at the Annual Meeting if you obtain a signed proxy from the record holder (bank, broker or other nominee) giving you the right to vote the shares. Only the latest validly executed proxy that you submit will be counted.

Do I need a ticket to be admitted to the Annual Meeting?

No, although only stockholders and one guest, and other individuals invited by the Company are entitled to attend the Annual Meeting. To obtain admission to the Annual Meeting, you must register in advance by emailing corporatesecretary@teamaol.com, by calling (212) 652-6450 or by faxing (703) 466-9813. You may bring one immediate family member as a guest. Please register by April 30, 2013. Please include the following information in your email, voicemail or fax:

 

   

your name and mailing address;

 

   

whether you need special assistance at the Annual Meeting;

 

   

the name of your immediate family member guest, if one will accompany you; and

 

   

if your shares are held for you in the name of your bank, broker or other nominee, evidence of your stock ownership (such as a letter from your bank or broker or a photocopy of a current brokerage or other account statement) as of March 7, 2013.

In addition, we may establish additional or different rules and regulations for admission into and the conduct of the Annual Meeting.

Do I also need to present identification to be admitted to the Annual Meeting?

Yes, all stockholders and guests must present a government-issued form of identification in order to be admitted to the Annual Meeting.

Could other matters be decided at the Annual Meeting?

We are currently unaware of any matters to be raised at the Annual Meeting other than those referred to in this Proxy Statement. If other matters are properly presented at the Annual Meeting for consideration, the proxyholders will have the discretion to vote on those matters for you.

Who will pay for the cost of this proxy solicitation?

We will pay for the cost of soliciting proxies. Proxies may be solicited on our behalf by directors, officers or employees (for no additional compensation) in person or by telephone, electronic transmission and facsimile transmission. We have hired Georgeson Inc. to solicit proxies. We will pay Georgeson Inc. a fee of $9,000, plus reasonable expenses, for these services. Brokers and other nominees will be requested to solicit proxies or authorizations from beneficial owners and will be reimbursed for their reasonable and documented expenses.

 

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WHAT THE COMPANY HAS DONE SINCE THE 2012 ANNUAL MEETING

Since the 2012 Annual Meeting, at which each of the Company’s directors standing for election were reelected, we have followed through on the commitments we made to stockholders. Specifically, we have achieved the following:

 

   

Grew fourth quarter Revenue and full year Adjusted OIBDA in 2012. In 2012 we returned to revenue growth in the fourth quarter and Adjusted OIBDA growth for the full year, and we believe we are well positioned to continue our growth path in 2013.

 

   

Aggressively managed expenses, while investing for the future. In 2012, we reduced expenses while investing in the future growth of the Company. We intend to reduce costs further and leverage our infrastructure going forward.

 

   

Unlocked $1.056 billion of value through the patent transaction with Microsoft and committed to returning all proceeds to stockholders. In 2012, we sold over 800 of our patents and related patent applications to Microsoft Corporation and granted Microsoft a non-exclusive license to our retained patent portfolio (the “patent transaction”). We committed to completing the return of $1.056 billion in proceeds from the 2012 patent transaction through the payment of a special cash dividend of $5.15 per share of common stock to the Company’s stockholders on December 14, 2012 and a $600 million accelerated stock repurchase program.

 

   

Added two new independent directors to the Board. The Board appointed Hugh F. Johnston, Executive Vice President and Chief Financial Officer of PepsiCo, Inc., and Dawn G. Lepore, Chief Executive Officer of Prosper Marketplace, Inc., as new independent directors in September and October 2012 respectively.

 

   

Moved to segment reporting. In the fourth quarter of 2012, we changed the way in which we evaluate our business for the purpose of allocating resources and assessing performance. As a result, we have changed our reporting of business results from a single reportable segment to three reportable segments, which are determined based on how the business is evaluated by our chief operating decision maker function. Our reportable segments are The Brand Group, The Membership Group, and AOL Networks. In addition to the above reportable segments, we have a corporate and other category that includes activities that are not directly attributable or allocable to a specific segment. 

NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to be held on May 3, 2013.

The Proxy Statement and Annual Report are available at http://corp.aol.com/proxymaterials.

 

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ITEM 1—ELECTION OF DIRECTORS

The Board, upon recommendation of the Nominating and Governance Committee of the Board (the “Nominating and Governance Committee”), unanimously nominated the 8 director nominees listed below for election to the Board at the Annual Meeting. Each of the 8 nominees currently serves as a member of the Board and was last elected by the stockholders at the 2012 Annual Meeting of Stockholders, with the exception of Mr. Johnston and Ms. Lepore who were appointed to the Board in September and October 2012, respectively, each after being recommended to the Nominating and Governance Committee by a third party search firm.

Directors elected at the Annual Meeting will be elected to hold office until the 2014 Annual Meeting of Stockholders and until their successors are duly elected and qualified. Unless otherwise instructed, the proxyholders intend to vote the proxies held by them for the election of the 8 nominees named below. The proxies cannot be voted for more than 8 candidates for director. If any of the 8 nominees is unable or unwilling to be a candidate for election by the time of the Annual Meeting (a contingency which the Board does not expect to occur), the proxyholders may vote for a substitute nominee chosen by the present Board to fill the vacancy. In the alternative, the proxyholders may vote just for the remaining nominees, leaving a vacancy that may be filled at a later date by the Board. Alternatively, the Board may reduce the size of the Board. Set forth below are the principal occupation, business experience, qualifications, directorships and certain other information for each of the 8 nominees.

Nominees for Election as Directors

 

Name, Title, Age and Tenure as a Director

  

Principal Occupation, Business Experience, Qualifications and Directorships

LOGO

TIM ARMSTRONG

Chairman and Chief Executive Officer

AOL Inc.

Director Since 2009

Age 42

  

Mr. Tim Armstrong has served as Chairman and Chief Executive Officer of AOL Inc. since April 2009. Prior to that, Mr. Armstrong served as President, Americas Operations of Google Inc., a global technology company. Mr. Armstrong joined Google Inc. in 2000 as Vice President, Advertising Sales, and in 2004 was promoted to Vice President, Advertising and Commerce and then in 2007 was named President, Americas Operations and Senior Vice President. As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, Mr. Armstrong also was a co-founder and initial investor in Patch Media Corporation, a news, information and community platform business acquired by AOL in 2009. Before joining Google Inc., Mr. Armstrong served as Vice President of Sales and Strategic Partnerships for Snowball.com Inc. from 1998 to 2000. Prior to that, he served as Director of Integrated Sales and Marketing at Starwave’s and Disney’s ABC/ESPN Internet Ventures. Mr. Armstrong started his career by co-founding and running a newspaper based in Boston, Massachusetts. Mr. Armstrong serves on the board of directors of priceline.com Incorporated, and is a trustee of Lawrence Academy and of The Paley Center for Media, and a Chairman Emeritus of the Ad Council, a non-profit organization.

 

Mr. Armstrong brings to the Board extensive experience, expertise and background in internet marketing, sales and the interactive media industry gained from his former positions at Google Inc. He also possesses corporate leadership experience and extensive knowledge of our business gained from his position as Chief Executive Officer with responsibility for the day-to-day oversight of the Company’s business operations.

 

 

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Name, Title, Age and Tenure as a Director

  

Principal Occupation, Business Experience, Qualifications and Directorships

LOGO

RICHARD DALZELL

Former Senior Vice President and

Chief Information Officer

Amazon.com, Inc.

Director since 2009

Age 55

  

Mr. Richard Dalzell was Senior Vice President and Chief Information Officer of Amazon.com, Inc., an online retailer, until his retirement in 2007. Previously, Mr. Dalzell served in numerous other positions at Amazon.com, Inc., including Senior Vice President of Worldwide Architecture and Platform Software and Chief Information Officer from 2001 to 2007, Senior Vice President and Chief Information Officer from 2000 to 2001 and Vice President and Chief Information Officer from 1997 to 2000. Prior to his employment with Amazon.com, Inc., Mr. Dalzell was Vice President of the Information Systems Division at Wal-Mart Stores, Inc. from 1994 to 1997.

 

Mr. Dalzell brings to the Board extensive experience, expertise and background in internet information technology gained from his service as the Chief Information Officer of Amazon.com, Inc. He also brings corporate leadership experience gained from his service in various senior executive roles at Amazon.com, Inc.

 

 

  

 

LOGO

HUGH F. JOHNSTON

Executive Vice President and
Chief Financial Officer

PepsiCo

Director since 2012

Age 51

  

Mr. Hugh Johnston has served since 2010 as Executive Vice President and Chief Financial Officer of PepsiCo, Inc., a global food and beverage company. Mr. Johnston joined PepsiCo in 1987 and has held a number of increasing leadership roles, including Executive Vice President, Global Operations and President, Pepsi-Cola North America Beverages during the period 2007 to 2009. Mr. Johnston left PepsiCo from August 1999 through March 2002 to pursue a general management role as VP, Retail, at Merck Medco, leading the company’s retail pharmacy card business.

 

Mr. Johnston brings to the Board extensive experience, expertise and background in accounting, financial, strategy and general management matters gained from his current position as Executive Vice President and Chief Financial Officer of PepsiCo, Inc. and various senior executive roles at PepsiCo and Merck Medco.

 

 

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Name, Title, Age and Tenure as a Director

  

Principal Occupation, Business Experience, Qualifications and Directorships

LOGO

DAWN G. LEPORE

Chief Executive Officer

Prosper Marketplace, Inc.

Director since 2012

Age 58

  

Ms. Dawn Lepore is Chairman and Chief Executive Officer at Prosper Marketplace, Inc., a peer-to-peer lending marketplace. Formerly, she was CEO and Chairman of the Board of drugstore.com, inc., a leading online retailer of health, beauty, and wellness products, which she led from 2004 until its sale to Walgreens in 2011. Prior to joining drugstore.com, Ms. Lepore held leadership positions at The Charles Schwab Company, an investment services firm that provides brokerage, banking and investment-related services to consumers and businesses. In her 21 years with Schwab, she held a variety of roles. She served as Vice Chairman of technology, operations, administration, strategy and active trader, was Chief Information Officer, a member of Schwab’s executive committee and a trustee of SchwabFunds. Ms. Lepore previously served on the board of directors of eBay Inc. from 1999 to January 2013, The New York Times Company from 2008 to 2011 and drugstore.com, inc. from 2004 to 2011.

 

Ms. Lepore brings to the Board extensive experience, expertise and background in internet commerce and information technology gained from her roles at Schwab and background in building and operating online businesses gained from her service as Chief Executive Officer and Chairman of the Board of drugstore.com, inc. She also brings public company board experience gained from her service as a board member of eBay Inc., The New York Times Company and drugstore.com, inc.

 

 

  

 

LOGO

ALBERTO IBARGÜEN

President and Chief Executive Officer

John S. and James L. Knight Foundation

Director since 2011

Age 69

  

Mr. Alberto Ibargüen is the President and Chief Executive Officer of the John S. and James L. Knight Foundation, a private, independent foundation dedicated to the promotion of quality journalism, advancing media innovation and the arts. Before joining the Foundation in 2005, Mr. Ibargüen served in various positions at Knight-Ridder, Inc. from 1995 to 2005, as Chairman & Publisher of The Miami Herald (1998) and as Vice President of International Operations, The Miami Herald and Publisher of El Nuevo Herald. Mr. Ibargüen serves on the boards of directors of AMR Corporation and PepsiCo, Inc.

 

Mr. Ibargüen brings to the Board extensive experience, expertise and background with regard to media, journalism, and financial matters gained from his current position as the President and Chief Executive Officer of the John S. and James L. Knight Foundation and from his service in various positions at Knight-Ridder, Inc., in addition to his service on the Audit Committees of PepsiCo, Inc. and AMR Corporation. He also brings public company board experience gained from his service on the boards of directors of AMR Corporation and PepsiCo, Inc.

 

 

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Name, Title, Age and Tenure as a Director

  

Principal Occupation, Business Experience, Qualifications and Directorships

LOGO

PATRICIA MITCHELL

President and Chief Executive Officer

The Paley Center for Media

Director since 2009

Age 70

  

Ms. Patricia Mitchell has served as President and Chief Executive Officer of The Paley Center for Media, a global non-profit cultural institution, since 2006. Before that, Ms. Mitchell was President and Chief Executive Officer of the Public Broadcasting Service, a non-profit public broadcasting television service, from 2000 to 2006. For more than two decades, Ms. Mitchell was a journalist and producer, serving as reporter, anchor, talk show host, producer and executive for three broadcast networks and several cable channels. Ms. Mitchell previously served on the board of directors of Sun Microsystems, Inc. from 2005 to 2010 and of Bank of America Corporation from 2001 to 2009.

 

Ms. Mitchell brings to the Board extensive experience, expertise and background in media, telecommunications and broadcasting gained from her current service as the President and Chief Executive Officer of The Paley Center for Media, as well as her former role as President and Chief Executive Officer of the Public Broadcasting Service. In addition, she brings public company board experience gained from her service on the boards of Sun Microsystems, Inc. and Bank of America Corporation.

 

  

 

LOGO

FREDRIC REYNOLDS

Retired Executive Vice President and

Chief Financial Officer

CBS Corporation

Director since 2009

Age 62

  

Mr. Fredric Reynolds was with CBS Corporation, a media company, and its predecessor companies from 1994 until he retired in August 2009. Mr. Reynolds was Executive Vice President and Chief Financial Officer of CBS Corporation from 2005 to 2009. He also served as President and Chief Executive Officer of the Viacom Television Stations Group of Viacom Inc., and President of the CBS Television Stations Division of CBS, Inc. Before that, he served as Executive Vice President and Chief Financial Officer of Viacom Inc. and its predecessor CBS Corporation, which was formerly Westinghouse Electric Corporation. Mr. Reynolds joined Westinghouse from PepsiCo, Inc. Mr. Reynolds serves on the boards of directors of Mondelez International, Inc. (formerly Kraft Foods Inc.) and Metro-Goldwyn-Mayer Studios Inc. Mr. Reynolds previously served on the board of directors of The Readers Digest Association, Inc. from 2010 to 2011.

 

Mr. Reynolds brings to the Board extensive experience, expertise and background in media, telecommunications, accounting and financial matters gained from his service as the Chief Financial Officer of CBS Corporation, as well as his service on the Audit Committees of Mondelez International, Inc. (formerly Kraft Foods Inc.) and The Readers Digest Association, Inc. and the board of Metro-Goldwyn-Mayer Studios Inc. He also brings corporate leadership experience gained from his service in various senior executive positions at CBS Corporation and Viacom Inc.

 

 

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Name, Title, Age and Tenure as a Director

  

Principal Occupation, Business Experience, Qualifications and Directorships

LOGO

JAMES STENGEL

President and Chief Executive Officer

The Jim Stengel Company, LLC

Director since 2009

Age 57

  

Mr. James Stengel has been President and Chief Executive Officer of The Jim Stengel Company, LLC, a marketing think tank and consulting firm, since 2008. Mr. Stengel is also currently an adjunct marketing professor at UCLA’s Anderson School of Management. Mr. Stengel worked at The Procter & Gamble Company, a global consumer products company, from 1983 to 2008, holding a variety of positions including Global Marketing Officer from 2001 to 2008. Mr. Stengel served on the board of directors of Motorola, Inc. prior to the spin-off of Motorola Mobility, Inc. in January 2011 and Motorola Mobility Inc. prior to its sale to Google in 2012.

 

Mr. Stengel brings to the Board extensive experience, expertise and background in branding and marketing, having served as the Global Marketing Officer of Procter & Gamble Company. He also brings public company board experience and leadership development experience gained from his service as a board member and as the Chairman of the Compensation and Leadership Committee of Motorola Mobility, Inc. prior to its sale to Google in 2012, and of Motorola, Inc. prior to the spin-off of Motorola Mobility, Inc. in January 2011.

THE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE ELECTION OF EACH OF THE EIGHT DIRECTOR NOMINEES NAMED ABOVE.

 

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BOARD OF DIRECTORS INFORMATION

Committees of the Board and Meetings

There are currently five standing committees of the Board: the Audit and Finance Committee, the Compensation and Leadership Committee, the Nominating and Governance Committee, the Executive Committee and the Transactions Committee (each, a “Committee”). Currently, as discussed in more detail below, each Committee is comprised entirely of independent directors, consistent with the definition of “independent” under the NYSE listing standards applicable to boards of directors generally and board committees in particular. Each Committee is authorized to retain its own outside counsel and other advisors as it deems necessary or advisable.

The Board has adopted written charters for each of its standing Committees, copies of which are posted on our website at www.corp.aol.com/corpgov. A stockholder also may request a copy of these materials in print, without charge, by contacting our Corporate Secretary at AOL Inc., 770 Broadway, New York, New York 10003. Each of the Audit and Finance Committee, the Compensation and Leadership Committee, the Nominating and Governance Committee and the Transactions Committee reviews its charter on an annual basis. Each Committee makes recommendations, as appropriate, to management or the full Board as a result of its charter review.

The following table summarizes the current membership of the Board and of each of its standing Committees, as well as the number of times the Board and each Committee met during 2012.

 

     Board    Audit
and
Finance
   Compensation    Nominating
and
Governance
   Executive    Transactions

Tim Armstrong

   Chair               

Richard Dalzell*

   X       X         

Alberto Ibargüen*

   X    X       X      

Hugh Johnston*

   X    X            

Dawn Lepore*

   X                X

Patricia Mitchell*

   X          Chair    X   

Fredric Reynolds*

   X    Chair       X    Chair    Chair

James Stengel*

   X       Chair       X   

Number of 2012 meetings

   16    11    9    5    0    5

 

* Independent director

Each current director attended 75% or more of the total number of meetings of the Board and of the Committees on which each such director served during 2012. In addition to the five standing Committees, the Board may approve, and has from time to time approved, the creation of special committees to act on behalf of the Board.

Audit and Finance Committee

The Audit and Finance Committee of the Board (the “Audit and Finance Committee”), among other things:

 

   

assists in the Board’s oversight of the quality and integrity of our financial statements and accounting practices;

 

   

selects an independent registered public accounting firm, taking into account the vote on ratification by stockholders at our annual meeting;

 

   

pre-approves all services to be provided to us by our independent registered public accounting firm;

 

   

confers with our independent auditors on the matters required to be discussed under Auditing Standard No. 16 as well as such other matters relating to the annual financial audit as appropriate.

 

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reviews the qualifications, independence and performance of our independent registered public accounting firm;

 

   

oversees our internal audit function;

 

   

meets with our independent auditor, our financial personnel and internal financial controllers regarding our internal controls and other matters; and

 

   

assists in overseeing our compliance, internal controls and risk management policies.

All members of the Audit and Finance Committee are “independent,” consistent with the NYSE listing standards applicable to boards of directors in general and audit committees in particular and SEC rules regarding audit committees. In addition, the Board has determined that each of the members of the Audit and Finance Committee is financially literate and that each of Mr. Reynolds and Mr. Johnston has sufficient accounting and related financial management expertise to satisfy the criteria to be an “audit committee financial expert” under the rules and regulations of the SEC.

In accordance with the Audit and Finance Committee charter, no Audit and Finance Committee member may simultaneously serve on more than two other public company audit committees unless the Board specifically determines that it would not impair the ability of an existing or prospective member to serve effectively on the Audit and Finance Committee. None of the current members currently serves on more than two other public company audit committees.

Compensation and Leadership Committee

The Compensation and Leadership Committee of the Board (the “Compensation Committee”), among other things:

 

   

sets our general policy regarding executive compensation and reviews, no less than annually, the compensation provided to our Chief Executive Officer (“CEO”) and such other senior executives of the Company as the Compensation Committee may, from time to time, determine should be subject to the Compensation Committee’s direct purview, currently including (i) the Company’s employees with the title of Executive Vice President or higher, (ii) any other Section 16 officer and (iii) each of the Company’s other employees, if any, whose annual total target compensation has a value of $3 million or greater;

 

   

reviews and approves the compensation (including salary, bonus, equity, equity-based incentives and any other incentive compensation and other benefits, direct and indirect) of our CEO and other senior executives as are subject to the Compensation Committee’s direct purview;

 

   

reviews and approves corporate goals and objectives relevant to the CEO’s and other senior executives’ compensation, including annual performance objectives;

 

   

oversees our disclosure regarding executive compensation, including the Compensation Committee report on executive officer compensation as required by the SEC to be included in our annual proxy statement on Schedule 14A and included or incorporated by reference in our annual report on Form 10-K;

 

   

approves any employment agreements for our CEO and other senior executives;

 

   

oversees the Company’s overall compensation structure, practices, benefit plans and human development policies, including, as appropriate, reviewing and recommending compensation and benefit plans for Board approval;

 

   

annually considers whether there are any risks arising from the Company’s compensation policies and overall actual compensation practices for employees, including non-executive officers, that are reasonably likely to have a material adverse effect on the Company;

 

   

administers the Company’s executive bonus and equity-based incentive plans;

 

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considers and recommends to the Board the frequency of the Company’s advisory vote to approve executive compensation;

 

   

oversees the Company’s response to any regulatory developments affecting compensation;

 

   

reviews and oversees executive leadership and organizational development and practices;

 

   

annually reviews compliance by senior executives with the Company’s equity ownership guidelines;

 

   

annually considers an assessment of any potential conflicts of interest raised by the work of compensation consultants advising the Board or any of its Committees, who are involved in determining or recommending executive or director compensation; and

 

   

reviews and makes recommendations to the Board (together with the Nominating and Governance Committee) regarding the Company’s response to stockholder proposals related to compensation matters for inclusion in our annual proxy statement.

All members of the Compensation Committee are “independent” as defined by the NYSE listing standards. In addition, all members of the Compensation Committee qualify as “non-employee directors” (within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and as “outside directors” (within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”)).

Delegation of Authority with Respect to Equity Grants

Pursuant to its charter, unless otherwise prohibited by law, our certificate of incorporation or our by-laws, the Compensation Committee may delegate its responsibilities to subcommittees or individuals. The Compensation Committee has delegated limited authority to individuals serving as our chief executive officer, chief financial officer, chief legal officer and chief human resources officer to make certain equity grants outside of the annual equity grant process to newly hired employees or those employees who are otherwise selected to receive a grant other than employees with the title of Executive Vice President or higher, any other Section 16 officer or any employee whose annual total target compensation has a value of $3 million or greater.

Compensation Consultant

The Compensation Committee has the authority under its charter to retain outside consultants or advisors, as it deems necessary or advisable. In accordance with this authority, the Compensation Committee has engaged Compensation Advisory Partners LLC (“CAP”) as its independent compensation consultant to provide it with objective and expert analyses, advice and information with respect to executive compensation. All executive compensation services provided by CAP were conducted under the direction or authority of the Compensation Committee. After considering the following six factors with respect to CAP: (i) the provision of other services to us by CAP; (ii) the amount of fees received from us by CAP, as a percentage of the total revenue of CAP; (iii) the policies and procedures of CAP that are designed to prevent conflicts of interest; (iv) any business or personal relationship of the CAP consultant with a member of the Compensation Committee; (v) any of our stock owned by the CAP consultants; and (vi) any business or personal relationship of the CAP consultant or CAP with any of our executive officers, our Compensation Committee has concluded that no conflict of interest exists with CAP.

In addition to CAP, members of our Human Resources, Legal and Finance Departments support the Compensation Committee in its work.

For additional information on the Compensation Committee’s activities, its use of outside advisors and its consideration and determination of executive compensation, see “Executive Compensation—Compensation Discussion and Analysis” beginning on page 33 of this Proxy Statement.

 

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Compensation Programs and Risk Management

Management engaged the executive compensation firm Exequity LLP to assist us in conducting a detailed review and analysis of risk associated with the employee compensation plans administered by the Company in 2012, including (i) base pay, (ii) cash-based incentive plans, (iii) sales incentive plans and (iv) equity plans.

Key characteristics of our compensation plans and programs, such as the structure of annual and long-term incentives, the combination and number of metrics used in such programs, the positions eligible to participate, the use and availability of discretion (including the ability of program administrators to limit award payouts), individual target and maximum awards and the timing of payouts were analyzed based on the level of risk associated with the plans and programs.

The assessment also identified and evaluated characteristics of the plans and programs that mitigate risk associated with compensation, including the processes for calculating payouts under incentive compensation programs (such as third-party verification or determination of performance achieved), approval processes (including the ability of program administrators to limit award payouts), maximum payouts, use of a combination of long-term and short-term incentive programs with different time horizons for measuring performance, share ownership and equity retention policies for senior executives, the mix of cash bonuses and long-term equity incentive compensation, the existence of claw-back and anti-pledging policies, and multi-year vesting schedules for equity awards.

Based on this detailed review and analysis, management and the Compensation Committee determined that there are no risks arising from the Company’s compensation plans and programs that are reasonably likely to have a material adverse effect on the Company.

Nominating and Governance Committee

The Nominating and Governance Committee of the Board (the “Nominating and Governance Committee”), among other things:

 

   

develops and recommends to the Board our corporate governance principles and otherwise takes a leadership role in corporate governance matters;

 

   

reviews, evaluates the adequacy of, and recommends to the Board amendments to, our by-laws, certificate of incorporation and other governance policies;

 

   

reviews and makes recommendations to the Board regarding the purpose, structure, composition and operations of our various Committees;

 

   

identifies, reviews and recommends directors for election to the Board and establishes procedures for stockholders to recommend director candidates for the Nominating and Governance Committee to consider;

 

   

oversees the CEO succession planning process, including an emergency succession plan;

 

   

reviews the compensation for non-employee directors and makes recommendations to the Board;

 

   

reviews the leadership structure of the Board and recommends changes to the Board as appropriate and makes a recommendation to the independent directors regarding the appointment of the Lead Independent Director;

 

   

annually evaluates the performance of the Chairman of the Board and the Lead Independent Director;

 

   

oversees the Board’s annual self-evaluation process;

 

   

reviews and approves related person transactions;

 

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reviews and makes recommendations to the Board regarding our response to stockholder proposals for inclusion in our annual proxy statement; and

 

   

oversees and monitors general governance matters including communications with stockholders, regulatory developments relating to corporate governance and our corporate social responsibility activities.

All of the members of the Nominating and Governance Committee are “independent” as defined by the NYSE listing standards.

Executive Committee

The Executive Committee of the Board (the “Executive Committee”), consisting of the Lead Independent Director (as described below) and the Chairs of the Audit and Finance Committee, the Nominating and Governance Committee and the Compensation Committee, provides flexibility to act promptly between regularly scheduled meetings of the Board. During these intervals, the Board has granted to the Executive Committee all the powers of the Board in the management of the business and affairs of the Company, except (i) as limited by the Company’s certificate of incorporation or by-laws, the rules of the NYSE or applicable law or regulation and (ii) with respect to matters that are specifically reserved for another committee of the Board.

Transactions Committee

The Board has granted to the Transactions Committee of the Board (the “Transactions Committee”) authority to review, authorize and approve the terms of acquisitions, divestitures, investments, joint ventures and strategic transactions (collectively, “Transactions”) of the Company with a value less than or equal to $100 million in cash or stock or other consideration or any combination thereof that are required to be approved by the Board. The Transactions Committee has also been granted the authority to review and make recommendations to the Board for or against Transactions with a value greater than $100 million and to review, authorize and approve the terms of any significant employee retention or compensation arrangements in connection with Transactions as well as other duties granted to it from time to time.

GOVERNANCE OF YOUR COMPANY

Our Standards of Business Conduct, our Code of Ethics for Our Senior Executive and Senior Financial Officers, our Corporate Governance Policy, our Committee charters and other corporate governance information are available on our website at www.corp.aol.com/corpgov. Any stockholder also may request them in print, without charge, by contacting our Corporate Secretary at AOL Inc., 770 Broadway, New York, New York 10003.

Standards of Business Conduct

Our Standards of Business Conduct apply to our employees and members of the Board. The Standards of Business Conduct establish policies pertaining to, among other things, employee conduct in the workplace, electronic communications and information security, accuracy of books, records and financial statements, securities trading, confidentiality, conflicts of interest, fairness in business practices, the Foreign Corrupt Practices Act, the UK Bribery Act, antitrust laws and political activities and solicitations.

Our Chief Ethics and Compliance Officer oversees adherence to the Standards of Business Conduct in addition to overseeing our compliance function throughout our business. Our Chief Ethics and Compliance Officer also assists in the communication of the Standards of Business Conduct and oversees employee education regarding its requirements, including online compliance training. All employees worldwide participate in annual business conduct training.

 

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We maintain an employee help line, called the SBC Help Line. The SBC Help Line and the Whistleblower Procedures discussed below are the Company’s primary mechanisms for receiving and acting on business conduct and ethical complaints. Through the SBC Help Line, employees can report integrity concerns or seek guidance on business conduct matters. In some countries, local and regional differences in culture and law limit the scope and types of reports we may accept through our Help Line. We provide alternative reporting direction for employees in these countries. The SBC Help Line has a toll-free number for U.S.-based employees, and provides toll-free international numbers for employees based in some countries outside the United States. Employees may also report integrity concerns via mail, fax or email. If an employee alleges a complaint, our Chief Ethics and Compliance Officer receives the report and then coordinates with internal and outside resources, as appropriate, to investigate reported concerns. The Chief Ethics and Compliance Officer regularly reports to the Audit and Finance Committee inquiries and complaints we receive through the SBC Help Line and any resulting investigations and corrective actions.

Code of Ethics for Our Senior Executive and Senior Financial Officers

Our Code of Ethics for Our Senior Executive and Senior Financial Officers (the “Code of Ethics”) applies to certain senior management of the Company, including individuals in the role of CEO, Chief Operating Officer (“COO”), as applicable, Chief Financial Officer (“CFO”), Controller and the senior-most tax executive (and others performing similar senior executive functions at the Company from time to time in the future). Among other things, the Code of Ethics mandates that the designated officers engage in and promote honest and ethical conduct, avoid conflicts of interest and disclose any material transaction or relationship that reasonably could be expected to give rise to a conflict, protect the confidentiality of non-public information about the Company, take all reasonable measures to achieve responsible use of the Company’s assets and resources, comply with all applicable governmental rules and regulations and promptly report any possible violation of the Code of Ethics. Additionally, the Code of Ethics requires that these individuals promote full, fair, accurate, timely and understandable disclosure in the Company’s publicly filed reports and other public communications and sets forth standards for accounting practices and records. We hold individuals to whom the Code of Ethics applies accountable for adherence to the Code of Ethics. Our Chief Ethics and Compliance Officer oversees and assists in the communication of the Code of Ethics.

Whistleblower Procedures

With respect to complaints and concerns regarding accounting, internal accounting controls and auditing, and in response to Section 301 of the Sarbanes-Oxley Act of 2002, the Audit and Finance Committee has established additional procedures, referred to as Whistleblower Procedures. Under these procedures, as under our standard SBC Help Line procedures, persons, including employees of the Company, may submit, without fear of retaliation, and, where the law permits, anonymously, an allegation of questionable accounting, internal accounting controls or auditing matters to the Company through the SBC Help Line options described above. Employees may also report these types of complaints and concerns to the Company’s Controller. The Chief Ethics and Compliance Officer’s regular reports to the Audit and Finance Committee include these complaints and concerns, and if the Chief Ethics and Compliance Officer and/or Company management determine that an allegation is both credible and material to the Company’s financial reporting, financial condition or internal controls, they will inform the Audit and Finance Committee promptly.

Corporate Governance Policy

Our commitment to good corporate governance is reflected in our Corporate Governance Policy, which describes the Board’s views on a wide range of governance topics. The Corporate Governance Policy is reviewed no less than annually by the Nominating and Governance Committee and, to the extent deemed appropriate in light of emerging practices, revised accordingly, upon recommendation to and approval by the Board.

 

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Significant Governance Practices

Board Composition and Director Nomination Process

Our director recruitment process involves, among other steps: developing criteria for selecting members of the Board; identifying potential candidates; reviewing the potential candidates against the relevant criteria; interviewing the potential candidates; and exchanging relevant information between us and the potential candidates. We have retained an outside executive search firm to assist in the process of identifying and recruiting individuals to serve on our Board.

The Nominating and Governance Committee evaluates director candidates in accordance with the director membership criteria described in our Corporate Governance Policy. The Nominating and Governance Committee evaluates a candidate’s qualifications to serve as a member of our Board based on the skills and characteristics of individual directors as well as the composition of our Board as a whole. With regard to the criteria for our Board members, we believe that each director should possess integrity, judgment, acumen, familiarity with our business, independence of thought and the ability to work collegially, as well as the time and ability to make a constructive contribution to the Board. In addition, we endeavor to provide that the Board has the appropriate overall mix of professional skills and background, industry experience, financial expertise (including expertise that would qualify a director as a “financial expert” as that term is defined under the rules and regulations of the SEC), age, diversity and geographic background to fulfill the roles of the Board and its committees. In particular, we seek skilled persons in the areas of finance, accounting, technology, marketing and general executive management, as well as those who are experienced in the areas of advertising, media and government. Finally, we seek to have a substantial majority of the Board members who are independent under the NYSE listing standards, and have a majority of the Board members possess prior experience working closely with, or serving on, the board of a public company.

At least annually, in connection with the director nomination process, the Board evaluates its composition to assess the skills and experience that are currently represented on the Board, as well as those that the Board will find valuable in the future, given the Company’s current position and strategic plans. This evaluation enables the Board to update the Board membership criteria as the Company’s needs evolve over time and to assess the effectiveness of efforts at pursuing diversity. In connection with the nominations of each of the current Board members for election as directors at the Annual Meeting, the Board considered the biographical information and director qualifications set forth with respect to each Board member under “Item 1—Election of Directors—Nominees for Election as Directors.”

The Nominating and Governance Committee considers and reviews all candidates in the same manner regardless of the source of the recommendation. The Nominating and Governance Committee has established procedures for stockholders of the Company to recommend director candidates. Stockholders who wish to recommend director candidates for the Nominating and Governance Committee’s consideration should send their recommendation to our Corporate Secretary at AOL Inc., 770 Broadway, New York, New York 10003 and should include:

 

   

the full name, address and telephone number of the stockholder making the recommendation and of the candidate being recommended;

 

   

the number of shares of the Company’s stock that are beneficially owned by the stockholder making the recommendation and the amount of time such shares have been held;

 

   

a description of all arrangements or understandings between the stockholder and the candidate;

 

   

a brief explanation of the value or benefit that the stockholder making the recommendation believes that the candidate would provide to the Company as a director along with a copy of the candidate’s résumé, references and an executed written consent of the candidate to be interviewed by the Nominating and Governance Committee, if the Nominating and Governance Committee chooses to do so in its discretion, and to serve as a director of the Company if elected; and

 

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an analysis of the candidate’s qualifications to serve on the Board and on each of the Board’s committees in light of the criteria set forth in the Company’s by-laws and Corporate Governance Policy (including all regulatory requirements incorporated by reference therein).

Our amended and restated by-laws provide that any stockholder of record entitled to vote for the election of directors at the applicable meeting of stockholders may nominate persons for election to our Board, if such stockholder complies with the applicable advance notice procedures in the Company’s by-laws, which are discussed on page 90 of this Proxy Statement.

Annual Meeting of Stockholders

We encourage all of our directors to attend each annual meeting of stockholders. All of the directors who were members of our Board at the time of our 2012 Annual Meeting of Stockholders attended that meeting.

Director Independence and Independence Determinations

Under NYSE rules, a director is not independent unless the Board makes an affirmative determination to such effect. In order to determine that a director is independent, the Board must affirmatively determine that the director has no material relationship with the Company, and the director must satisfy the standards and objective tests set forth under NYSE rules.

In making this determination, the Board considers all relevant facts and circumstances, including commercial, charitable and familial relationships that exist between the director and the Company, or between entities with which the director is affiliated and the Company. In the event a director has a relationship with the Company that is relevant to his or her independence, the Board determines in its judgment whether such relationship is material. During its independence review, the Board considered that Mr. Armstrong, our Chairman and CEO, serves on the Board of Trustees of The Paley Center for Media, a non-profit institution, where Ms. Mitchell serves as President and CEO. The Board determined that this relationship does not impair Ms. Mitchell’s independence because Mr. Armstrong does not serve on the Executive Compensation Committee of The Paley Center for Media’s Board of Trustees or otherwise determine or influence Ms. Mitchell’s compensation.

Our Corporate Governance Policy requires that a substantial majority of the members of the Board and that all the members of the Audit and Finance Committee, the Compensation Committee and the Nominating and Governance Committee be independent under the NYSE regulations. The Board has determined that each of the following director nominees is independent: Ms. Lepore, Ms. Mitchell and Messrs. Dalzell, Ibargüen, Johnston, Reynolds and Stengel. Mr. Armstrong, our CEO, is not independent. In addition, the Board previously determined that Ms. Dykstra (who resigned from the Board in September 2012) and Ms. Susan Lyne (who resigned from the Board on March 1, 2013) were independent prior to their resignations.

Board Leadership Structure

The Board believes that no single leadership structure will always be the most effective for creating long-term stockholder value. The Board believes that an effective leadership structure can be achieved by either combining or separating the CEO and Chairman positions, if the structure encourages the free and open dialogue of differing opinions and provides for strong checks and balances. Specifically, an effective governance structure must balance the powers of the CEO and the independent directors and provide that the independent directors are fully informed, able to discuss and debate the issues that they deem important and able to provide effective oversight of management.

 

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The Board has determined that combining the CEO and Chairman positions is currently the appropriate leadership structure for the Company. The Board believes that combining the CEO and Chairman roles fosters clear accountability, effective decision-making and alignment on corporate strategy between the Board and the senior management of the Company. Nevertheless, the Board believes that “one-size” does not fit all, and that the decision of whether to combine or separate the positions of CEO and Chairman depends upon each company’s particular circumstances at a given point in time. Accordingly, the Board intends to carefully consider from time to time, including during its annual self-evaluation, whether the CEO and Chairman positions should be combined or separated based on what the Board believes is best for the Company and its stockholders at that time.

The Board has a Lead Independent Director who is elected by the independent members of the Board. Currently, the Lead Independent Director is Mr. Reynolds. As set forth in the Company’s Corporate Governance Policy, the responsibilities of the Lead Independent Director include:

 

   

presiding at executive sessions of the non-employee and independent directors and at meetings of the Board at which the Chairperson is not present;

 

   

serving as the liaison between the Chairperson of the Board and the independent directors;

 

   

approving the schedule, agenda and information for Board meetings (including having the ability to include specific items on those agendas);

 

   

providing leadership and serving as temporary Chairperson of the Board and CEO in the event of the inability of the Chairperson or CEO to fulfill his role due to crisis or any other event or circumstance;

 

   

advising the Chairperson of the Board with respect to consultants and legal and financial advisors who may report directly to the Board;

 

   

convening executive sessions of the non-employee and independent directors when necessary and appropriate; and

 

   

being available, as appropriate, for communication with the Company’s stockholders.

As part of its evaluation of the Board’s leadership structure, the Board considered the fact that it has appointed a Lead Independent Director with responsibilities that are substantially similar to many of the functions typically fulfilled by a board chairman, including presiding at executive sessions of independent directors and convening such sessions when necessary and appropriate, serving as the liaison between the CEO and the independent directors, approving the agenda for Board meetings and being available for communication with the Company’s stockholders. The Board believes that the Lead Independent Director position balances the need for effective and independent oversight of management with the significant benefits of strong, unified leadership. In addition, the Board has noted that all of the members of the Board other than Mr. Armstrong are independent, and all of the members of each of the committees of the Board are independent, within the meaning of “independent” under NYSE listing standards.

The Board has also considered that the combined role of CEO and Chairman promotes unified leadership and direction for the Company as it continues to execute its strategy to improve the Company’s growth trajectory and create meaningful stockholder value. Additionally, the Board believes that the current structure promotes effective decision-making by seeing that the Board’s agenda responds to the Company’s strategic opportunities and challenges and that the Board receives the information it needs to fulfill its responsibilities. The Board also considered that the combined role of CEO and Chairman allows one person to speak on behalf of the Company to its customers, employees and stockholders, and minimizes inefficiencies that might arise under a different structure as the Board and management respond to developments affecting the Company.

The Board believes that its existing structure is in the best interest of the Company and our stockholders, as it allows for a balance of authority between the CEO and Chairman and the independent directors and provides an environment in which the independent directors, under the leadership of the Lead Independent Director, are

 

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fully informed, have significant input into the content of Board meeting agendas and are able to provide objective and thoughtful oversight of management.

Executive Sessions

In 2012, the independent directors on the Board met in executive sessions, without any employee directors or management present. Executive sessions of the non-employee directors and independent directors are led by the Lead Independent Director and facilitate candid discussion of the independent directors’ viewpoints regarding the performance of management and the strategic direction of the Company.

Board and Committee Evaluations

Annually the Board and each of the Audit and Finance, Compensation and Nominating and Governance Committees evaluate and discuss their respective performances and effectiveness, as required by our Corporate Governance Policy and their respective charters. These evaluations cover a wide range of topics, including, but not limited to, the fulfillment of the Board and Committee responsibilities identified in the Corporate Governance Policy and Committee charters, which are posted on our website at www.corp.aol.com/corpgov.

Communications with the Board of Directors

Stockholders and other interested parties who wish to communicate with our Board or a particular member of our Board (including the Lead Independent Director) or with the non-management or independent directors as a group, may do so by addressing such communications to our Corporate Secretary, AOL Inc., 770 Broadway, New York, New York 10003, who will forward such communications to the appropriate party. Such communications may be made confidentially or anonymously. All communications that relate to matters that are within the scope of the responsibilities of the Board and its Committees will be forwarded to the Chairman (or Lead Independent Director, as the case may be). Communications that relate to matters that are within the responsibility of one of the Committees will also be forwarded to the Chair of the appropriate Committee. Communications that relate to ordinary business matters that are not within the scope of the Board’s responsibilities, such as customer complaints, will be sent to the appropriate contact person within the Company. Solicitations, junk mail and obviously frivolous or inappropriate communications will not be forwarded, but will be made available to any director who wishes to review them.

Oversight of Risk Management

The Board has overall responsibility for risk oversight with a focus on the most significant risks facing the Company. The Board carries out its risk oversight responsibilities primarily through the Audit and Finance Committee, which is responsible for oversight of the Company’s risk management policies and procedures. The Company is exposed to a number of risks including financial risks, strategic and operational risks and risks relating to regulatory and legal compliance. The Audit and Finance Committee discusses with management the Company’s major risk exposures and the steps management has taken to monitor and control such exposures, including the guidelines and policies to govern the process by which risk assessment and risk management are undertaken. The CFO is responsible for the Company’s risk management function and works closely with the Company’s senior management to identify risks material to the Company. The CFO reports regularly to the CEO and the Audit and Finance Committee regarding the Company’s risk management policies and procedures. In that regard, the CFO meets with the Audit and Finance Committee regularly to discuss the risks facing the Company, highlighting any new risks that may have arisen since they last met. The Audit and Finance Committee also reports to the Board on a regular basis to apprise Board members of its discussions with the CFO regarding the Company’s risk management efforts. The CFO reports directly to the Board at least annually to apprise it directly of the Company’s risk management efforts. Additionally, the Transactions Committee has responsibility for reviewing and recommending acquisition strategies and targets to the Board and management, as appropriate, and as part of its review considers and weighs risks associated with such transactions.

 

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Executive Officers

The following sets forth certain information as of March 6, 2013 concerning our executive officers.

Mr. Tim Armstrong

Mr. Armstrong, age 42, has served as Chairman and Chief Executive Officer of AOL since April 2009. Prior to that, Mr. Armstrong was President, Americas Operations of Google Inc.¸ a global technology company. Mr. Armstrong joined Google in 2000 as Vice President, Advertising Sales, and in 2004 was promoted to Vice President, Advertising and Commerce and then in 2007 was named President, Americas Operations and Senior Vice President. Before joining Google, Mr. Armstrong served as Vice President of Sales and Strategic Partnerships for Snowball.com from 1998 to 2000. Prior to that, he served as Director of Integrated Sales and Marketing at Starwave’s and Disney’s ABC/ESPN Internet Ventures. Mr. Armstrong started his career by co-founding and running a newspaper based in Boston, Massachusetts. Mr. Armstrong is a current Board member of priceline.com Incorporated, a trustee of Lawrence Academy and The Paley Center for Media and a Chairman Emeritus of the Ad Council, a non-profit organization.

Mr. Edward Brody

Mr. Brody, age 49, has served as Executive Vice President and CEO of AOL Networks (formerly known as Advertising.com Group) since June 2012. Prior to that Mr. Brody served in various roles with AOL, including AOL’s Chief Revenue Officer from July 2011 to May 2012, President of AOL’s Advertising.com Group from February 2011 to July 2011, President of AOL’s Paid Services and COO of AOL’s Advertising, Media and Commerce from October 2010 to February 2011, and President of AOL Paid Services from November 2009 to October 2010. Prior to joining AOL, Mr. Brody founded and served as CEO of eCommerce company ARPU, Inc. (now SnappCloud, Inc.) from February 2005 to November 2009. Prior to founding ARPU, Mr. Brody served as AOL’s SVP, Premium Services from April 2003 to February 2005 and served in various roles, including CFO, with early search company LookSmart, Ltd. from September 1998 to March 2001. Prior to joining LookSmart, Mr. Brody was a partner, founder of the Internet practice, and head of the San Francisco office of Mercer Management Consulting (now Oliver Wyman) from August 1986 to September 1998.

Mr. Curtis Brown

Mr. Brown, age 49, has served as Executive Vice President and Chief Technology Officer of AOL since May 2012. Prior to that, Mr. Brown served as Senior Vice President of Engineering and Chief Technology Officer of AOL’s global advertising business, Advertising.com from November 2010 to May 2012. Prior to joining AOL in 2010, Mr. Brown served from June 2008 to November 2010 as Senior Vice President and Chief Technology Officer of Kaplan Test Prep, a multi-national educational services provider and as an independent technical consultant from January 2008 to June 2008, with clients that included the Metropolitan Museum of Art and digital brand agency, Katzenbach Partners. He has also previously held the title of Chief Technology Officer with Skymall, Oxygen Media, The Princeton Review and CTB/McGraw-Hill. Mr. Brown has served as a member of the IT Technology Advisory Board at the New School and the CTO Advisory Council for InfoWorld magazine and is a founding member of the New York City CTO Club.

Ms. Karen Dykstra

Ms. Dykstra, age 54, has served as Chief Financial Officer of AOL since September 2012. Prior to that, Ms. Dykstra was a partner at Plainfield Asset Management LLC and held leadership positions with Plainfield from 2006 to 2010, including Chief Operating Officer and Chief Financial Officer of Plainfield Direct Inc. Plainfield Asset Management LLC manages investment capital for institutions and high net worth individuals in the United States and abroad. Plainfield Direct Inc., a direct lending and investment business of Plainfield Asset Management, is now known as Plainfield Direct LLC. Prior to joining Plainfield, she was the Chief Financial

 

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Officer of Automatic Data Processing, Inc. from 2003 to 2006 and acted as the Principal Financial Officer from 2001 to 2003. Her career spanned 25 years with Automatic Data Processing. Ms. Dykstra currently serves on the board of directors of Gartner Inc. She previously served on the AOL Board of Directors from 2009 until September 2012 and on the board of directors of Crane Co. from 2004 until 2012.

Ms. Julie Jacobs

Ms. Jacobs, age 46, has served as Executive Vice President, Corporate Development, General Counsel and Corporate Secretary of AOL since December 2011. Prior to that, Ms. Jacobs served as Executive Vice President, General Counsel and Corporate Secretary, a role she held from May 2010 to December 2011. Prior to that, Ms. Jacobs served as Senior Vice President, Deputy General Counsel and Assistant Corporate Secretary, a role she held from March 2006 until May 2010. Ms. Jacobs joined AOL in 2000 as Assistant General Counsel. Prior to joining AOL, Ms. Jacobs was an attorney at Milbank Tweed Hadley & McCloy LLP, where her practice focused on a wide variety of international development and telecommunications projects.

Ms. Susan Lyne

Ms. Lyne, age 62, has served as Executive Vice President and Chief Executive Officer of AOL’s Brand Group since February 2013. Prior to that, Ms. Lyne served as the Chair of Gilt Groupe, Inc., an online fashion and luxury brand retailer, since September 2010. Previously, she was Gilt Groupe’s Chief Executive Officer from September 2008 to September 2010. From 2004 to 2008, Ms. Lyne served as President, Chief Executive Officer and director of Martha Stewart Living Omnimedia, Inc., an integrated media and merchandising company. From 1996 to 2004, Ms. Lyne held various positions at the Walt Disney Company, including Executive Vice President Acquisition, Development and New Business, Walt Disney Motion Picture Group from 1996 to 1998, Executive Vice President, Movies and Miniseries, ABC Entertainment from 1998 to 2002 and President, ABC Entertainment from 2002 to 2004. Prior to joining Walt Disney, she worked for News Corporation Ltd. and K-111 Communications. Ms. Lyne currently serves on the board of directors of Starz, LLC and as Vice Chairman on the board of directors of Gilt Groupe, Inc. Ms. Lyne previously served on the AOL Board of Directors from 2009 until March 1, 2013 and on the board of directors of CIT Group Inc from 2006 until 2009.

Mr. John Reid-Dodick

Mr. Reid-Dodick, age 51, has served as Executive Vice President and Chief People Officer of AOL since December 2011. Prior to that, Mr. Reid-Dodick served as Global Head of Human Resources of Thomson Reuters Markets, a division of Thomson Reuters, serving the financial services and media markets, from 2008 to 2011 and Global Head of Human Resources, Reuters Business Divisions and Americas Human Resources from 2005 to 2008. Mr. Reid-Dodick was the Global Head of Organizational Development and Learning at Reuters Group PLC from 2003 to 2005, and before that was Reuters interim Group Human Resources Director from 2002 to 2003 and Director of Human Resources from 2001 to 2002. Mr. Reid-Dodick joined Reuters America in 1995 as Corporate Counsel, and served as Reuters America’s General Counsel from 1997 to 2000 and Executive Vice President for Corporate Affairs from 2000 to 2001. Before joining Reuters America, Mr. Reid-Dodick was an attorney at Sullivan & Cromwell LLP, where his practice focused on securities, antitrust and contract litigation.

 

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ITEM 2—RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Audit-Related Matters

Report of the Audit and Finance Committee

In accordance with its charter, the Audit and Finance Committee assists the Board in fulfilling responsibilities in a number of areas. These responsibilities include, among others: (i) overseeing the quality and integrity of our financial statements and accounting practices; (ii) selecting an independent registered public accounting firm (taking into account the vote on ratification by the stockholders); (iii) pre-approving all services to be provided to us by our independent registered public accounting firm; (iv) reviewing and discussing matters required to be discussed under Auditing Standard No. 16, as adopted by the Public Company Accounting Oversight Board (the “PCAOB”) and amended from time to time, and such other matters pertaining to the annual financial audit as the Committee may deem appropriate; (v) reviewing the independence of our independent registered public accounting firm; (vi) overseeing our internal audit function; (vii) meeting with our independent registered public accounting firm and appropriate financial and accounting personnel regarding our internal controls and other matters; and (viii) overseeing all of our compliance, internal controls and risk management policies. To assist it in fulfilling its oversight and other duties, the Audit and Finance Committee regularly meets separately with the internal auditor, the independent registered public accounting firm and management.

Independent Registered Public Accounting Firm and Internal Audit Matters

The Audit and Finance Committee discussed with the Company’s independent registered public accounting firm its plan for the audit of the Company’s annual consolidated financial statements as of and for the year ended December 31, 2012 (the “2012 Financial Statements”), as well as reviews of the Company’s quarterly financial statements. The Audit and Finance Committee met with the independent registered public accounting firm, with and without management present, to discuss the results of its audits and quarterly reviews of the 2012 Financial Statements, as well as its evaluations of the Company’s internal control over financial reporting and the overall quality of the Company’s accounting principles. The Audit and Finance Committee has also appointed Ernst & Young as the Company’s independent registered public accounting firm for 2013.

The Audit and Finance Committee has reviewed and approved the annual internal audit plan for 2013 and has met with the head of the internal audit group, with and without management present, to review and discuss internal audit matters.

Financial Statements as of and for the year ended December 31, 2012

Management has the primary responsibility for the Company’s financial statements and the reporting process, including its systems of internal and disclosure controls (including internal control over financial reporting). The independent registered public accounting firm is responsible for performing an independent audit of the Company’s consolidated financial statements and expressing an opinion on the conformity of the consolidated financial statements with U.S. generally accepted accounting principles (“GAAP”).

In this context, the Audit and Finance Committee has met and held discussions with management and the independent registered public accounting firm with respect to the 2012 Financial Statements. Management represented to the Audit and Finance Committee that the Company’s consolidated financial statements were prepared in accordance with U.S. GAAP.

In connection with its review of the Company’s year-end financial statements, the Audit and Finance Committee has reviewed and discussed with management and the independent registered public accounting firm the consolidated financial statements, management’s assessment of the effectiveness of the Company’s internal control over financial reporting and the independent registered public accounting firm’s evaluation of the effectiveness of the Company’s internal control over financial reporting. The Audit and Finance Committee also discussed with the independent registered public accounting firm the matters required to be discussed by applicable PCAOB rules, including the quality and acceptability of the Company’s accounting policies, financial

 

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reporting processes and controls. The Audit and Finance Committee also received the written disclosures and the letter from the independent registered public accounting firm required by the PCAOB regarding the independent registered public accounting firm’s communications with the Audit and Finance Committee concerning independence, and the Audit and Finance Committee discussed with Ernst & Young its independence from the Company and its management. The Audit and Finance Committee further considered whether the provision by the independent registered public accounting firm of any non-audit services described elsewhere in this Proxy Statement is compatible with maintaining auditor independence and determined that the provision of those services does not impair the independent registered public accounting firm’s independence.

In performing its functions, the Audit and Finance Committee acts only in an oversight capacity and necessarily relies on the work and assurances of the Company’s management, internal audit group and independent registered public accounting firm, which, in their reports, express opinions on the conformity of the Company’s annual financial statements with U.S. GAAP and the effectiveness of the Company’s internal control over financial reporting.

In reliance on the reviews and discussions referred to in this Report and in light of its role and responsibilities, the Audit and Finance Committee recommended to the Board, and the Board approved, that the audited financial statements of the Company be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “2012 Form 10-K”) filed with the SEC.

Submitted by the Audit and Finance Committee of the Company’s Board of Directors:

Fredric Reynolds (Chair)

Alberto Ibargüen

Hugh Johnston

Policy Regarding Pre-Approval of Services Provided by the Independent Auditors

The Audit and Finance Committee has established a policy (the “Pre-Approval Policy”) requiring its pre-approval of all audit services and permissible non-audit services provided by the independent registered public accounting firm, along with the associated fees for those services. The Pre-Approval Policy provides for the annual pre-approval of specific types of services pursuant to policies and procedures adopted by the Audit and Finance Committee and gives detailed guidance to management as to the specific services that are eligible for such annual pre-approval.

The Pre-Approval Policy requires the specific pre-approval of all other permitted services. In evaluating any pre-approval, the Audit and Finance Committee considers whether the provision of a non-audit service is consistent with the SEC’s rules on registered public accounting firm independence, including whether provision of the service: (i) would create a mutual or conflicting interest between the independent registered public accounting firm and the Company; (ii) would place the independent registered public accounting firm in the position of auditing its own work; (iii) would result in the independent registered public accounting firm acting in the role of management or as an employee of the Company; or (iv) would place the independent registered public accounting firm in a position of being an advocate for the Company. Additionally, the Audit and Finance Committee considers whether the independent registered public accounting firm is best positioned and qualified to provide the most effective and efficient service, based on factors such as the independent registered public accounting firm’s familiarity with the Company’s business, personnel, culture, accounting systems or risk profile and whether provision of the service by the independent registered public accounting firm would enhance the Company’s ability to manage or control risk or improve audit quality or would otherwise be beneficial to the Company. The Audit and Finance Committee also considers the relative level of fees for audit and non-audit services in deciding whether to pre-approve such services. The Audit and Finance Committee has delegated to its Chair the authority to address certain requests for pre-approval of services between meetings of the Audit and Finance Committee, and the Chair must report any pre-approval decisions to the Audit and Finance Committee at its next regular meeting. The Pre-Approval Policy is designed to help ensure that there is no delegation by the Audit and Finance Committee of authority or responsibility for pre-approval decisions to management of the

 

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Company. The Audit and Finance Committee monitors compliance by management with the Pre-Approval Policy by requiring the CFO, pursuant to the Pre-Approval Policy, to report to the Audit and Finance Committee on a regular basis regarding the pre-approved services rendered by the independent registered public accounting firm. Management has also implemented internal procedures to promote compliance with the Pre-Approval Policy.

Audit and Non-Audit Fees

In connection with the audit of the 2012 Financial Statements, the Company entered into an agreement with Ernst & Young that sets forth the terms under which Ernst & Young performed audit services for the Company.

The following table presents the aggregate fees billed for professional services rendered by Ernst & Young for the audit of our financial statements for 2012 and 2011 and the aggregate fees for other services rendered by Ernst & Young billed in those periods (in thousands):

 

     2012      2011  

Audit fees(1)

   $ 5,016       $ 3,791   

Audit-related fees(2)

   $ 20       $ 24   

Tax fees(3)

   $ 1048       $ 593   

All other fees

   $ 9       $ —    
  

 

 

    

 

 

 

Total

   $ 6,093       $ 4,408   
  

 

 

    

 

 

 

 

(1) Audit fees related to audits of financial statements, reviews of quarterly financial statements and related reports and reviews of registration statements and certain periodic reports filed with the SEC.
(2) Audit-related fees related primarily to investment activities and other audit services.
(3) Tax fees related to domestic and international tax return preparations, refund claims and tax payment planning were $535 thousand and $524 thousand in 2012 and 2011, respectively. Other tax service fees, which include domestic and international tax advisory services relating to routine tax advice and issues (including earnings and profit analysis and return of proceeds from the patent transaction), were $513 thousand and $69 thousand in 2012 and 2011, respectively.

The Audit and Finance Committee considered whether providing the non-audit services shown in this table was compatible with maintaining Ernst & Young’s independence and concluded that it was compatible.

The Audit and Finance Committee has selected Ernst & Young to serve as our independent registered public accounting firm for 2013. In this Item 2, we are asking stockholders to ratify the selection of Ernst & Young to serve as our independent registered public accounting firm for 2013. Although ratification is not required by our by-laws or otherwise, the Board is submitting the selection of Ernst & Young to our stockholders for ratification as a matter of good corporate governance. If the selection is not ratified, the Audit and Finance Committee will consider whether it is appropriate to select another independent registered public accounting firm. Even if the selection is ratified, the Audit and Finance Committee in its discretion may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and our stockholders.

Representatives of Ernst & Young are expected to be present at the Annual Meeting and to answer appropriate questions. They also will have the opportunity to make a statement if they desire to do so.

The shares represented by your proxy will be voted for the ratification of the selection of Ernst & Young unless you specify otherwise. Ernst & Young has served as the independent registered public accounting firm of the Company since the complete legal and structural separation of the Company from Time Warner Inc. (“Time Warner”) in December 2009, following which we became an independent, publicly-traded company (the “Spin-off”).

THE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE RATIFICATION OF ERNST & YOUNG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2013.

 

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ITEM 3—ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION

Section 14A of the Exchange Act, which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, requires that, not less frequently than once every three years, we provide stockholders with an advisory vote to approve the Company’s executive compensation as disclosed herein. Accordingly, in this Item 3, stockholders are being asked to approve the following advisory resolution:

RESOLVED, that the stockholders of the Company approve, on an advisory basis, the compensation of the Company’s Named Executive Officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis and the related compensation tables and narrative discussion in the Proxy Statement for the Annual Meeting.

The Company believes that it is appropriate to seek the views of stockholders on the design and effectiveness of the Company’s executive compensation program. The Company’s goal for its executive compensation program is to attract, motivate and retain a talented, entrepreneurial and creative team of executives who will provide leadership for the Company’s success in dynamic and competitive markets. The Company seeks to accomplish this goal in a way that rewards performance and is aligned with its stockholders’ long-term interests. The Company believes that its executive compensation program, which emphasizes long-term equity awards, satisfies this goal and is strongly aligned with the long-term interests of its stockholders.

Stockholders are encouraged to read the Compensation Discussion and Analysis, compensation tables and narrative discussion in this Proxy Statement beginning on page 33 of this Proxy Statement, which discuss in detail how our compensation policies and procedures implement our compensation philosophy and how our 2012 performance relates to our 2012 compensation decisions.

Key Financial and Operational Highlights

In 2012, as a result of the leadership of our executives and their execution of the Company’s key strategies, we had a strong financial year. Our achievements included:

 

   

achieving total shareholder return of 130%, which surpassed the Morgan Stanley High Technology Index return of 16%, the S&P 500 return of 13% and the S&P 400 return of 16%;

 

   

returning to revenue growth in the fourth quarter for the first time in 8 years;

 

   

returning to full year Adjusted OIBDA growth;

 

   

growing operating income in the fourth quarter 24% year-over-year;

 

   

growing global advertising revenue in the fourth quarter 13% year-over-year;

 

   

growing our unique visitors in the fourth quarter 6% year-over-year;

 

   

growing our search revenue in the fourth quarter 17% year-over-year;

 

   

reducing shares outstanding by approximately 19% year-over-year as of December 31, 2012, including through a $600 million accelerated stock repurchase program;

 

   

unlocking $1.056 billion of value through the patent transaction;

 

   

completing a special cash dividend payment that completed the return of $1.056 billion to stockholders; and

 

   

over-performing against the Company financial targets in the 2012 Annual Bonus Plan.

 

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Key Compensation Practices Highlights in 2012

Recent executive compensation program highlights include the following:

 

   

We revised the Industry Peer Group (as discussed in more detail below) to better reflect both: (a) the nature of our business and (b) the scope of our operations, as measured by revenue.

 

   

We modified executive equity grant practices by introducing equity grants tied to the achievement of specific performance criteria for our CEO and executive team members to emphasize our pay-for-performance philosophy.

 

   

71% of the equity granted to our CEO in connection with his new employment agreement is performance contingent and tied to either revenue goals, relative total shareholder return (“Total Shareholder Return”) and/or stock price targets; 29% is made up of time-based stock options.

 

   

Other executive team members received one-third of equity granted in connection with new employment contracts in the form of performance share units contingent on relative Total Shareholder Return.

 

   

We entered into new employment agreements with key executives that substantially conform to the guidelines established by the Company for executive officers. As a result, the new employment agreements, in certain cases, reduce the benefits to executives compared to their prior employment agreements with the Company.

 

   

We provide limited perquisites to our executives, we maintain equity ownership guidelines for our executives and we maintain strict clawback and anti-hedging requirements for our executives.

As an advisory vote, this proposal is not binding upon the Board or the Company. Whether a majority of the votes cast by our stockholders are cast in favor of or against the advisory resolution, our Board and its Compensation Committee will not be required to change our compensation programs as a result. However, the Board and the Compensation Committee, which is responsible for designing and administering the Company’s executive compensation program, value the opinions expressed by stockholders in their vote on this proposal and will review and consider the outcome of the vote when making future decisions on executive compensation.

Taking into account the advisory vote of stockholders regarding the frequency of advisory votes to approve executive compensation at our 2011 Annual Meeting, the Board’s current policy is to include a resolution regarding approval of the Company’s executive compensation annually until the next advisory vote on frequency occurs. Accordingly, unless the Board modifies its policy on the frequency of future votes, the next advisory vote to approve our executive compensation will occur at the 2014 Annual Meeting.

THE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE APPROVAL, ON AN ADVISORY BASIS, OF THE FOREGOING RESOLUTION APPROVING THE COMPANY’S EXECUTIVE COMPENSATION AS DISCLOSED IN THE COMPENSATION DISCUSSION AND ANALYSIS AND THE RELATED COMPENSATION TABLES AND NARRATIVE DISCUSSION CONTAINED IN THIS PROXY STATEMENT.

 

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ITEM 4—APPROVAL OF THE COMPANY’S TAX ASSET PROTECTION PLAN

Our Board is asking stockholders to approve the Tax Asset Protection Plan, dated August 27, 2012 (the “Plan”). If our stockholders do not approve the Plan by or on August 27, 2013, the Plan will automatically expire on that date.

Background and Reasons for the Proposal

We believe that we have valuable tax attributes which are significant assets of the Company. As of December 31, 2012, we had several domestic tax attributes, including federal net operating losses of approximately $284 million pre-tax, which expire over a period ranging from five to twenty years, and capital loss carry-forwards of approximately $1,255 million pre-tax, which expire over a period ranging from three to five years (the “Tax Assets”). Unless otherwise restricted, we can utilize the Tax Assets in certain circumstances to offset future U.S. taxable income, including in connection with capital gains that may be generated from a potential asset sale.

Our ability to use the Tax Assets could be limited and the timing of the usage of the Tax Assets could be substantially delayed, however, if we experience an “ownership change,” as defined in Section 382 of the Internal Revenue Code. A company generally experiences an “ownership change” for tax purposes if the percentage of stock owned by its 5% stockholders (as defined for tax purposes) increases by more than 50 percentage points over a rolling three-year period.

We adopted the Plan, after consultation with our legal, tax and investment banking advisors, including a review of the ownership of our common stock, to help protect stockholder value and preserve our ability to use the Tax Assets. Calculating whether an “ownership change” has occurred is subject to uncertainty. This uncertainty arises from the complexity and ambiguity inherent in Section 382 of the Internal Revenue Code, as well as limitations on the knowledge that any publicly traded company can have about the ownership of and transactions in its securities. We have analyzed the information available, along with various scenarios of possible future changes in ownership. In light of this analysis, our current stock price and daily trading volume, we believe that, if no action is taken, it is possible that we could undergo a subsequent “ownership change” under Section 382 of the Internal Revenue Code, which would substantially reduce our ability to utilize the Tax Assets. We believe the implementation of the Plan will serve the interests of all stockholders given the size of the Tax Assets and the potential loss of value should changes in our stock ownership occur that are sufficient to cause a 50 percentage point or greater “ownership change.”

The Plan is intended to act as a deterrent to any person acquiring beneficial ownership of 4.9% or more of our outstanding common stock without the approval of the Board. Stockholders who beneficially owned 4.9% or more of our outstanding common stock as of the execution of the Plan did not trigger the Plan so long as they do not acquire beneficial ownership of additional shares of common stock. Similarly, the exercise of any options, warrants, rights or similar interests (including restricted stock) granted by the Company to its directors, officers and employees, any unilateral grant of any security by the Company and any transaction exempted by the Board, will not trigger the Plan. In addition, changes in beneficial ownership solely as a result of a reduction in the number of shares of common stock outstanding will not trigger the Plan. The Board will consider written requests to exempt certain stockholders or proposed acquisitions of our common stock from the ownership trigger. Such exemptions may be granted by the Board in its sole discretion.

If stockholders do not approve the Plan, the Plan will expire on August 27, 2013. Otherwise, the Plan will expire as of the earliest of the following events:

 

   

August 27, 2015;

 

   

the time at which the Rights (as defined below) are redeemed pursuant to the Plan;

 

   

the time at which the Rights are exchanged in full pursuant to the Plan;

 

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the effective date of the repeal of both Section 382 and Section 383 of the Internal Revenue Code, or any successor provisions or replacement provisions, if the Board determines that the Plan is no longer necessary for the preservation of Tax Assets; or

 

   

the beginning of a taxable year of the Company for which the Board determines that the Company has or will have no Tax Assets.

Summary of Terms of the Plan

The following description of the terms of the Plan does not purport to be complete and is qualified in its entirety by reference to the Plan, which is attached hereto as Annex A and is incorporated herein by reference. We urge you to read carefully the Plan in its entirety, as the discussion below is only a summary.

The Rights. In connection with the adoption of the Plan, on August 26, 2012, we declared a dividend of one preferred stock purchase right (individually, a “Right” and collectively, the “Rights”) for each share of our common stock outstanding at the close of business on September 7, 2012. One Right will also be issued together with each share of common stock issued after September 7, 2012, but before the Distribution Date (as defined below) and, in certain circumstances, after the Distribution Date. Subject to the terms, provisions and conditions of the Plan, if the Rights become exercisable, each Right would initially represent the right to purchase from the Company one ten-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”) for a purchase price of $100 (the “Purchase Price”). If issued, each fractional share of Series A Preferred Stock would give the stockholder approximately the same dividend, voting and liquidation rights as does one share of common stock. However, prior to exercise, a Right does not give its holder any rights as a stockholder of the Company, including, without limitation, any dividend, voting or liquidation rights.

Initial Exercisability. The Rights will not be exercisable until the earlier of (i) ten business days after a public announcement that a person has become an “Acquiring Person” by acquiring beneficial ownership of 4.9% or more of the Company’s outstanding common stock (or, in the case of a person that had beneficial ownership of 4.9% or more of the Company’s outstanding common stock upon execution of the Plan, by obtaining beneficial ownership of additional shares of common stock) and (ii) ten business days (or such later date as may be specified by the Board prior to such time as any person becomes an Acquiring Person) after the commencement of a tender or exchange offer by or on behalf of a person that, if completed, would result in such person becoming an Acquiring Person.

The Company refers to the date that the Rights become exercisable as the “Distribution Date.” Until the Distribution Date, common stock certificates or the ownership statements issued with respect to uncertificated shares of common stock will evidence the Rights. Any transfer of shares of common stock prior to the Distribution Date will also constitute a transfer of the associated Rights. After the Distribution Date, separate rights certificates will be issued and the Rights may be transferred other than in connection with the transfer of the underlying shares of common stock unless and until the Board has determined to effect an exchange pursuant to the Plan (as described below).

Flip-In Event. In the event that a person becomes an Acquiring Person, each holder of a Right, other than Rights that are or, under certain circumstances, were beneficially owned by the Acquiring Person (which will thereupon become null and void), will thereafter have the right to receive upon exercise of a Right and payment of the Purchase Price, a number of shares of common stock having a market value of two times the Purchase Price.

Redemption. At any time until a person becomes an “Acquiring Person”, the Board may redeem the Rights in whole, but not in part, at a price of $0.00001 per Right (the “Redemption Price”). The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.

 

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Exchange. At any time after a person becomes an Acquiring Person, the Board may exchange the Rights (other than Rights that have become null and void), in whole or in part, at an exchange ratio of one share of common stock, or a fractional share of Series A Preferred Stock (or of a share of a similar class or series of the Company’s preferred stock having similar rights, preferences and privileges) of equivalent value, per Right (subject to adjustment). Immediately upon an exchange of any Rights, the right to exercise such Rights will terminate and the only right of the holders of Rights will be to receive the number of shares of common stock (or fractional share of Series A Preferred Stock or of a share of a similar class or series of the Company’s preferred stock having similar rights, preferences and privileges) equal to the number of such Rights held by such holder multiplied by the exchange ratio. The Board shall not be empowered to effect such exchange at any time after an Acquiring Person becomes the beneficial owner of 50% or more of the Company’s outstanding common stock.

Expiration. The Rights and the Plan will expire on the earlier of (i) the Close of Business on the earlier of (a) August 27, 2015 or (b) August 27, 2013 if stockholder approval of the Plan has not been received by or on such date, (ii) the time at which the Rights are redeemed pursuant to the Plan, (iii) the time at which the Rights are exchanged in full pursuant to the Plan, (iv) the effective date of the repeal of both Section 382 and Section 383 of the Internal Revenue Code, or any successor provisions or replacement provisions, if the Board determines that the Plan is no longer necessary for the preservation of Tax Assets or (v) the beginning of a taxable year of the Company for which the Board determines that the Company has or will have no Tax Assets.

Anti-Dilution Provisions. The Board may adjust the Purchase Price, the number of shares of Series A Preferred Stock or other securities or assets issuable and the number of outstanding Rights to prevent dilution that may occur as a result of certain events, including among others, a stock dividend, a stock split or a reclassification of the Series A Preferred Stock or common stock. With certain exceptions, no adjustments to the Purchase Price will be required until cumulative adjustments amount to at least 1% of the Purchase Price.

Amendments. For so long as the Rights are redeemable, the Board may supplement or amend any provision of the Plan in any respect without the approval of the holders of the Rights. From and after the time the Rights are no longer redeemable, the Board may supplement or amend the Plan only to cure an ambiguity, to alter time period provisions, to correct inconsistent provisions, or to make any additional changes to the Plan which the Company may deem necessary or desirable, but only to the extent that those changes do not impair or adversely affect any Rights holder (other than an Acquiring Person or any Affiliate or Associate of an Acquiring Person or certain of their transferees) and do not result in the Rights again becoming redeemable or the Plan again becoming amendable other than in accordance with this sentence.

Certain Considerations Relating to the Plan

Our Board believes that protecting the Tax Assets is in the Company’s and our stockholders’ best interests. Nonetheless, we cannot eliminate the possibility that changes in our stock ownership will occur sufficient to cause a 50 percentage point “ownership change” even if the Plan is approved. You should consider the factors below when making your decision.

Future Use and Amount of the Tax Assets is Uncertain. Our use of the Tax Assets depends on our ability to generate taxable income in the future. We cannot assure you whether we will have taxable income in any applicable period or, if we do, whether such income will exceed any potential Section 382 limitation and therefore we cannot assure you that we will realize the full value of the tax assets.

Potential Challenge to the Tax Assets. The amount of the Tax Assets has not been audited or otherwise validated by the Internal Revenue Service (the “IRS”). The IRS could challenge the amount of the Tax Assets, which could result in an increase in our liability for income taxes. In addition, determining whether an “ownership change” has occurred is subject to uncertainty, both because of the complexity and ambiguity of the Section 382 provisions and because of limitations on the knowledge that any publicly traded company can have about the ownership of, and transactions in, its securities on a timely basis. Therefore, we cannot assure you that

 

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the IRS or other taxing authority will not claim that we experienced an “ownership change” and attempt to reduce the benefit of the Tax Assets even if the Plan is in place.

Continued Risk of Ownership Change. Although the Plan is intended to diminish the likelihood of an “ownership change,” we cannot assure you that it will be effective. The amount by which our ownership may change in the future could, for example, be affected by purchases and sales of stock by stockholders and new issuances or repurchases of stock by us, should we choose to do so.

Potential Effects on Liquidity. The Plan is intended to deter persons or groups of persons from acquiring beneficial ownership of shares of our common stock in excess of the specified limitation. A stockholder’s ability to dispose of our common stock may be limited if the Plan reduces the number of persons willing to acquire our common stock or the amount they are willing to acquire.

Potential Impact on Value. The Plan could negatively impact the value of our common stock by deterring persons or groups of persons from acquiring shares of our common stock, including in acquisitions for which some stockholders might receive a premium above market value.

Anti-Takeover Effect. Our Board adopted the Plan to diminish the risk that our ability to use the Tax Assets to reduce potential federal income tax obligations becomes limited. Nonetheless, the Plan may have an “anti-takeover effect” because it will deter a person or group of persons from acquiring beneficial ownership of 4.9% or more of our common stock or, in the case of persons or persons that already own 4.9% or more of our common stock, from acquiring any additional shares of our common stock. The Plan could discourage a merger, tender offer or accumulations of substantial blocks of shares.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE COMPANY’S TAX ASSET PROTECTION PLAN.

 

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EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes information as of December 31, 2012, about the Company’s outstanding equity compensation awards and shares of common stock reserved for future issuance under the Company’s equity compensation plans.

 

Plan Category

   Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights(2)(3)
(a)
     Weighted-average
exercise price of
outstanding
options, warrants
and rights(4)
(b)
     Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))(5)
(c)
 

Equity compensation plans approved by security holders(1)

     11,255,752       $ 18.59         9,760,840   

Equity compensation plans not approved by security holders

     0         —          0   

Total

     11,255,752       $ 18.59         9,760,840   

 

(1) Consists of shares that may be issued under the Amended and Restated AOL Inc. 2010 Stock Incentive Plan in the form of stock options, stock appreciation rights, restricted stock, RSUs, PSUs or other stock-based awards.
(2) Consists of 8,052,873 shares of our common stock issuable upon the exercise of outstanding options, 2,373,098 shares of our common stock issuable upon the vesting of RSUs and a maximum of 321,890 shares of our common stock issuable upon the vesting of PSUs awarded under the Amended and Restated AOL Inc. 2010 Stock Incentive Plan, and 382,375 shares of our common stock issuable upon the exercise of outstanding options and 125,516 shares of our common stock issuable upon the vesting of RSUs outstanding under the HP Plan. See footnote 3 below for further details about the HP Plan.
(3) In connection with our acquisition of TheHuffingtonPost.com, Inc. (“Huffington Post”) in March 2011, we assumed the HuffingtonPost.com, Inc. Long-Term Incentive Plan (as amended and restated, the “HP Plan”) and, generally, converted into Company shares all Huffington Post shares either subject to outstanding options or still available for issuance under the HP Plan. Specifically, as of closing: (1) we converted 706,881 outstanding shares that were subject to Huffington Post stock options into 664,075 Company stock options; (2) the remainder of the shares subject to outstanding Huffington Post stock options were cashed out pursuant to the merger agreement (all of the cashed-out shares were canceled and will not be returned to the share pool as Company shares under the HP Plan); and (3) a small number of shares subject to Huffington Post stock options held by previously terminated employees had been either exercised or forfeited (the forfeited shares were returned to the share pool, and converted into Company shares under the HP Plan). The number in this column includes 507,891 shares of Company common stock issuable upon the exercise of outstanding options and RSUs under the HP Plan.
(4) The weighted-average exercise price pertains only to the 8,435,248 outstanding options and not to the outstanding RSUs and PSUs, which by their nature have no exercise price.
(5) Consists of 9,695,351 shares of Company common stock available for future issuance under the Amended and Restated AOL Inc. 2010 Stock Incentive Plan and 65,489 shares of Company common stock available for future issuance under the HP Plan.

 

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This Compensation Discussion and Analysis discusses (i) the elements of our compensation programs applicable to the Named Executive Officers (each an “NEO”) for 2012, (ii) the actions taken in 2012 with respect to compensation for the NEOs and (iii) the compensation of our NEOs during 2012.

We refer to the following individuals as NEOs for 2012:

 

Name

 

Title

Tim Armstrong

  Chairman and Chief Executive Officer

Arthur Minson*

  Former Executive Vice President and Chief Operating Officer

Karen Dykstra**

  Executive Vice President and Chief Financial Officer

Curtis Brown***

  Executive Vice President and Chief Technology Officer

Julie Jacobs

  Executive Vice President, Corporate Development, General Counsel and Corporate Secretary

John Reid-Dodick

  Executive Vice President and Chief People Officer

 

* Mr. Minson was promoted to the role of Executive Vice President and Chief Operating Officer on June 29, 2012. He had been serving as Executive Vice President and Chief Financial Officer prior to the promotion. Mr. Minson continued in the role of CFO until he was replaced by Ms. Dykstra effective September 19, 2012. Mr. Minson stepped down from his position as EVP and COO effective February 26, 2013. He is remaining with the Company for a transition period ending no later than December 31, 2013.
** Ms. Dykstra served as a director of the Company until September 19, 2012. She joined the Company as Executive Vice President and Chief Financial Officer effective as of September 19, 2012 and resigned as a director of the Company immediately thereafter.
*** Mr. Brown was promoted to Executive Vice President and Chief Technology Officer, effective as of May 9, 2012. Prior to that he served as interim Chief Technology Officer of the Company. Prior to the interim Chief Technology Officer role, he held the position of Senior Vice President of Network, Publisher and Data Technologies of the Company.

In June 2012, our stockholders voted, on an advisory basis, on a resolution regarding the Company’s executive compensation (the “say on pay proposal”). The proposal was approved by more than 80% of the votes cast demonstrating stockholder support for our overall executive compensation program. The Compensation Committee considered this result along with input from its compensation consultant on best practices when designing the compensation program for our NEOs in 2012, and made certain changes to the program as a result of the advisory vote including strengthening the link between our NEOs’ compensation and performance by issuing Performance Share Units (“PSUs”) to NEOs who received equity awards following the advisory vote. Our current policy is to include a resolution regarding approval of the Company’s executive compensation annually and such a proposal is submitted to our stockholders during the Annual Meeting as described Item 3 of this Proxy Statement. The Compensation Committee considered and will continue to consider the outcome of these advisory votes when evaluating future executive compensation arrangements. We expect to hold the next vote on the frequency of advisory votes to approve executive compensation at our 2017 annual meeting.

EXECUTIVE SUMMARY

2012 Financial and Operational Highlights

As described in more detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our most recent Annual Report on Form 10-K, fiscal year 2012 was a strong year. We aggressively executed our business strategy in 2012 by doing the following:

 

   

achieving Total Shareholder Return of 130%, which surpassed the Morgan Stanley High Technology Index return of 16%, the S&P 500 return of 13% and the S&P 400 return of 16%;

 

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returning to revenue growth in the fourth quarter for the first time in 8 years;

 

   

returning to full year Adjusted OIBDA growth;

 

   

growing operating income in the fourth quarter 24% year-over-year;

 

   

growing global advertising revenue in the fourth quarter 13% year-over-year;

 

   

growing our unique visitors in the fourth quarter 6% year-over-year;

 

   

growing our search revenue in the fourth quarter 17% year-over-year;

 

   

reducing shares outstanding by approximately 19% year-over-year as of December 31, 2012, including through a $600 million accelerated stock repurchase program;

 

   

unlocking $1.056 billion of value through the patent transaction;

 

   

completing a special cash dividend payment that completed the return of $1.056 billion to stockholders; and

 

   

over-performing against the Company financial targets in the 2012 Annual Bonus Plan.

See our 2012 Annual Report on Form 10-K for further details on these developments.

Additionally, our NEOs’ 2012 compensation reflected strong Company performance as follows:

CEO Compensation: Mr. Armstrong earned an above target annual bonus of $2,750,000, as a result of strong Company performance against Adjusted OIBDA and Free Cash Flow targets under the 2012 Annual Bonus Plan (as further discussed below) and strong individual performance. Mr. Armstrong also received a special cash performance award of $500,000 to recognize him for the role he played in the Company’s return to growth, the completion of the $1.056 billion patent transaction and the special cash dividend paid to stockholders of the Company on December 14, 2012. Mr. Armstrong’s salary did not increase in 2012. In connection with entering into his new employment agreement upon expiry of his prior agreement, Mr. Armstrong received long term equity awards, which included equity awards tied to specific performance criteria for the first time. The performance-based equity represented 71% of the total value of his 2012 equity awards on their grant date and may be earned based upon achievement of revenue goals, relative Total Shareholder Return and/or stock price targets. The remaining 29% of the grant date value of his 2012 equity awards were made up of time-based stock options.

Other NEO Compensation: Each of the other NEOs earned above target annual bonuses as a result of strong Company performance against financial targets in the 2012 Annual Bonus Plan and strong individual performances. Mr. Minson and Ms. Jacobs also received special cash performance awards to recognize them for their individual roles in the completion of the $1.056 billion patent transaction and the payment of a special cash dividend to stockholders. Mr. Minson entered into a new employment agreement in 2012 upon expiry of his prior agreement and in connection with his promotion, and received a salary increase and equity awards, including equity awards tied to relative Total Shareholder Return performance for the first time. Mr. Brown entered into a new employment agreement in 2012 in connection with his promotion and also received a salary increase and equity awards, including equity awards tied to relative Total Shareholder Return performance for the first time. See “Narrative to the 2012 Summary Compensation Table and the Grants of Plan-Based Awards in 2012 Table” beginning on page 58 of this Proxy Statement for further discussion of NEO employment arrangements.

New Executive Employment Agreements Introduced Performance-Based Equity and Standard Terms

In 2012 the Compensation Committee reviewed the overall compensation philosophy for our executives, including how long term incentives are linked to Company performance. As a result the following occurred:

 

   

We introduced three new types of performance-based long term incentive awards as part of executive compensation including performance-based stock options and two types of performance-based stock units (described in more detail below).

 

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Three of the NEOs, including our CEO, our former COO and our CPO, entered into new employment agreements that reduced certain contractual benefits compared to prior agreements.

CEO

Our CEO’s prior employment agreement had been negotiated and approved by Time Warner Inc. prior to the Spin-off and included several terms more favorable for the CEO than the Company’s current form of executive agreement. Upon review, the Committee concluded that the current form of employment agreement is more appropriate for the CEO of a stand-alone company. Mr. Armstrong’s prior agreement expired and was replaced with a new agreement that reduced his contractual benefits compared to his prior agreement. In connection with the new employment agreement, Mr. Armstrong received an equity award which included our new performance-based equity awards linking compensation more directly with the Company’s long term stock price performance. These awards included performance-based stock options that may vest over a two year performance period tied to the price of our stock, performance-based stock units with vesting based on achievement of revenue targets over a three year performance period (referred to as “Rev PSUs” in this proxy statement) and performance-based stock units with vesting based on relative Total Shareholder Return over a three year performance period (referred to as “TSR PSUs” in this proxy statement). The material terms of these new performance-based equity awards are described further in the table below.

Other NEOs

Over the course of 2012, Mr. Minson, (whose prior agreement was the Time Warner Inc. form of agreement similar to Mr. Armstrong’s prior agreement), Mr. Brown, and Ms. Dykstra entered into new employment agreements that substantially conformed to standard terms applicable to other senior executives in the Company. In the case of Mr. Minson, like with Mr. Armstrong, the new agreement reduced his contractual benefits compared to his prior agreement.

Additionally, in July 2012 we amended Mr. Reid-Dodick’s employment agreement to conform the terms of certain equity incentive awards granted when he was hired to the standard Company executive employment agreement. As a result, the amendment reduces certain favorable terms applicable to Mr. Reid-Dodick’s prior equity awards compared to Mr. Reid-Dodick’s original employment agreement.

The new agreements entered into with Messrs. Minson and Brown and Ms. Dykstra also provided for awards of newly created TSR PSUs. The Company intends that the value of annual equity awards granted to our NEOs and other senior executives in the near future shall be delivered in equal thirds based on the Black-Scholes value of time-based stock options, and the face value of RSUs and PSUs (assuming target level performance) on the date of grant.

 

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The following table describes the Company’s compensation policies and practices that help to advance the Compensation Committee’s compensation philosophy and that are designed to discourage excessive risk taking.

 

Executive Compensation Practices  

Executive Compensation Practices

Not Engaged in by the Company

   

•    Compensation is tied to performance against clearly articulated Company financial goals and individual performance goals

 

•    The Company does not have guaranteed annual bonuses.

   

•    The Compensation Committee exerts its discretion to reduce bonus plan funding when it believes financial targets have not been fully met.

   
   

•    The Company mitigates compensation-related risks by utilizing multi-year vesting, performance-based equity and multiple performance targets across different types of equity awards.

 

•    We do not over-emphasize short or long term compensation to the detriment of the other

   

•    The RSU and stock option award agreements for the NEOs provide for accelerated vesting in full after a change in control only if the NEO is also terminated without cause, resigns for good reason or remains employed through the one year anniversary of the change in control.

 

•    The PSU award agreements for the NEOs provide for accelerated vesting based on actual performance level achieved if, within 12 months following a change in control, the NEO is terminated without cause, resigns for good reason, or terminates due to death or disability.

 

•    Mr. Armstrong’s performance-based stock option agreement provides for full vesting to the extent performance goals are achieved at or prior to the change in control, if Mr. Armstrong is terminated without cause, resigns for good reason, or terminates due to death or disability within one year after the change in control.

 

•    The equity award agreements do not provide for automatic “single trigger” vesting acceleration upon a change in control.

   

•    Employment agreements for NEOs have been conformed over time such that terms are substantially the same as terms offered other senior executives in the Company. As a result, with respect to our CEO and former COO, the new agreements reduced certain contractual benefits compared to their prior agreements.

 

•    Employment agreements for NEOs do not provide for any “tax gross-up” payments to them as a result of a change in control of the Company

   

•    The Company provides limited perquisites and personal benefits.

 

•    The Company does not provide a defined benefit pension plan or supplemental executive retirement plan (SERP) for its executives.

 

•    The Company does not maintain a non-qualified deferred compensation plan for its employees.(1)

 

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•    The Company has stock ownership guidelines with which all NEOs are required to comply.

 

•    The Company has a clawback policy.

 

•    The Company’s current equity plan prohibits stock options repricing.

 

•    The Company does not permit its NEOs to engage in hedging transactions.

 

•    The Company does not permit its NEOs to pledge Company stock without prior authorization of the General Counsel.

   

•    The Compensation Committee has engaged an independent compensation consulting firm (CAP) to advise it. The Committee annually reviews the relationship and has determined that the consulting firm does not have any conflicts of interest with the Company.

 

•    The Compensation Committee does not allow its independent compensation consulting firm to provide any other services to the Company

(1) Ms. Dykstra was permitted to defer the cash and RSU compensation she received as a director prior to becoming an NEO according to the terms of the AOL Inc. 2011 Directors’ Deferred Compensation Plan. As an employee of the Company, she continues to participate in the AOL Inc. 2011 Directors’ Deferred Compensation Plan, but may not defer any compensation earned as an employee.

 

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The following table describes the types of equity incentives awarded to NEOs during 2012 and reflects the Compensation Committee’s focus on further tying equity awards to specific performance criteria. With respect to the types of awards granted to the CEO, the Compensation Committee determined that the design of such equity awards appropriately aligned the potential reward with stockholder interests.

 

     New 2012 Long Term Incentive (“LTI”) Design
     CEO 2012 Equity Awards
     New Performance – Based LTI Awards   Time-Based LTI
Awards
     Performance-Based Options   TSR PSUs   Rev PSUs   Time-Based Options
Percent of total grant   43%   14%   14%   29%
Vesting period   Vesting over 2 years   3 year performance
period –
January 1, 2012 – December 31, 2014
  3 year performance
period –
January 1, 2012 – December 31, 2014
  Vesting over 4 years
Vesting criteria  

Subject to the executive’s continued employment with the Company, fifty percent of the award will vest following the first anniversary of the grant date if our stock price exceeds a certain threshold, generally representing a 20% increase in the per share price of our common stock as of the date of grant.

 

Subject to the executive’s continued employment with the Company, fifty percent of the award will vest following the second anniversary of the grant date if our stock price exceeds a certain threshold, generally representing a 30% increase in the per share price of our common stock as of the date of grant.

  Subject to the executive’s continued employment with the Company, the number of PSUs earned following the end of the three year performance period is determined by AOL’s relative Total Shareholder Return compared to the Morgan Stanley High-Technology Index.   Subject to the executive’s continued employment with AOL, the number of PSUs earned following the end of the three year performance period is determined based on the achievement of revenue goals. Minimum revenue goals must be met at end of performance period in order for any awards to be earned.   25% of the award vests after one year; monthly vesting thereafter for 36 months.
     Other NEOs Receiving Equity Awards in 2012 in Connection with New Employment Agreements
     New Performance-Based LTI Awards   Time-Based LTI Awards
    

TSR PSUs

  Time-Based Options   Restricted Stock
Units
Percentage of total grant   33 1/3%   33 1/3%   33 1/3%
Vesting period  

3 year performance period –

January 1, 2012 – December 31, 2014

  Vesting over 4 years   Vesting over 4 years
Vesting criteria   Subject to the executive’s continued employment with the Company, the number of PSUs earned following the end of the three year performance period is determined by AOL’s relative Total Shareholder Return compared to the Morgan Stanley High-Technology Index.   25% vests after one year; monthly vesting thereafter for 36 months.   50% vests after 2 years; 25% vests on third anniversary; 25% vests on fourth anniversary.

 

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COMPENSATION PHILOSOPHY AND PROCESS

Our Compensation Goals and Principles

The goal of our executive compensation program is to attract and retain talented executives and to reward executives in a manner that aligns compensation with short-term and long-term goals of the Company and creating stockholder value. In 2012 we were guided by the following principles in determining the compensation of our NEOs:

 

   

Accountability for Business Performance. Compensation should be significantly tied to our financial and operating performance so that executives are held accountable through their compensation for the performance of the business operations for which they are responsible and for sustainable long-term stockholder value.

 

   

Accountability for Individual Performance. Compensation should be tied, in part, to the executive’s individual performance to encourage and reflect individual contributions to our performance.

 

   

Independence. Compensation should be consistent with high standards of corporate governance which shall include having an independent Compensation Committee of the Board review and set executive compensation using its own independent advisors that are hired and funded by the Compensation Committee to assist with carrying out its responsibilities.

 

   

Retain and Attract Talent. Compensation should reflect the competitive marketplace to enable us to attract, retain and motivate talented executives over the long term as required to achieve the Company’s objectives.

This section discusses the Company’s compensation policies and practices that help to advance the Compensation Committee’s compensation philosophy and that are designed to discourage excessive risk taking.

Performance Review Process

We determine regular base salary merit increases, annual bonuses and equity grants, if any, through an annual review of all employees, including the NEOs, to measure individual performance over the course of the performance year against pre-set financial, operational and individual goals. The process assists in confirming that each NEO’s compensation is tied to our overall financial and operating performance, individual achievement and execution of our strategic initiatives and demonstration of our values. The annual performance review process is generally conducted in the fourth quarter of the relevant year and continues into the first quarter of the following year. As part of the annual performance review process, Mr. Armstrong conducts a performance assessment of the other NEOs and makes recommendations concerning base salary merit increases, equity awards and annual bonuses, if any. For 2012, Mr. Armstrong, in consultation with our Human Resources Department, conducted the performance assessment of each other NEO, and shared the relevant compensation recommendations with the Compensation Committee. Additionally for 2012, the Compensation Committee conducted an independent performance assessment of Mr. Armstrong and reviewed this assessment with the Board. In connection with promotions and new employment agreements that occur during the year, salary levels are reviewed by the Compensation Committee and may be increased to recognize outstanding performance and to align compensation with comparative peer levels. During 2012, Mr. Minson received a 13% salary increase as of September 7, 2012 in connection with his promotion to COO. Mr. Brown received a 3% salary increase as of May 9, 2012 in connection with his promotion to Chief Technology Officer (“CTO”).

Use of Compensation Surveys and Other Comparative Data

In connection with our compensation planning process, both management and the Compensation Committee review peer group compensation information to benchmark executives’ pay design and levels. The external compensation data sources referenced by management and the Compensation Committee as they deliberate appropriate levels and mixes of compensation include both private compensation surveys (“survey data”) and

 

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public SEC filings (e.g., proxy statements and other compensation-related filings) for companies specifically selected as peers for the purposes of pay benchmarking (“proxy data”), as described in greater detail below.

Annually we participate in and receive competitive pay data analysis based on numerous compensation surveys of public and private technology companies and other multinational companies prepared by a variety of different compensation firms, including Radford Consulting and The Croner Company. In applying proxy data, we use an “Industry Peer Group” that includes companies with which we compete for talent, business or investment capital.

In 2012, we revised the Industry Peer Group such that it better reflects:

 

   

companies with which we compete for talent because attracting and retaining employees that possess a depth of expertise in highly sought after specialty areas, including engineering, mobile and editorial, is critical to achieving the Company’s long-term objectives; and

 

   

companies with which we compete based on the scope of our operations, as measured by revenue.

Based on these considerations, we added to the Industry Peer Group: Akamai Technologies Inc., Autodesk, Inc. and LinkedIn Corp. We removed News Corporation from the Industry Peer Group. Following these changes, the list of companies included in the revised Industry Peer Group are as set forth below.

 

Adobe Systems Incorporated

Akamai Technologies Inc.

Autodesk, Inc.

CA, Inc.

Discovery Communications, Inc.

Electronic Arts Inc.

Gannett Co.

  

Google Inc.

IAC/InterActiveCorp

Interpublic Group of Companies, Inc.

Intuit Inc.

LinkedIn

Microsoft Corporation

Netflix Inc.

  

The New York Times Company

priceline.com Inc.

Salesforce.com, Inc.

Symantec Corporation

Time Warner Cable Inc.

Yahoo! Inc.

Revenues in 2011 for the revised 2012 Industry Peer Group ranged from $0.5 billion to $72.1 billion, with median 2011 revenues of approximately $4.2 billion, as compared to AOL’s 2011 revenues of approximately $2.2 billion.

AOL management and the Compensation Committee will continue to review the composition of the Industry Peer Group and make such modifications as are warranted in connection with our continually evolving business.

Considerations in Determining Compensation

Our compensation philosophy is reflected in the elements of our executive compensation program, which are listed in the table below. In general, we believe that the elements of compensation reflect a focus on performance-driven compensation, a balance between short-term and long-term compensation and a combination of cash and equity-based compensation. The elements of executive compensation are reviewed by the Compensation Committee, our CEO and our Chief People Officer (“CPO”) to maintain the amount and type of compensation within appropriate competitive parameters as well as to promote long-term performance.

 

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Each element of our compensation program applicable to NEOs and the rationale for providing each such element are described below.

 

     Compensation
Program
 

Brief

Description

  NEOs Eligible
to Participate
 

Goal

Alignment

         
Annual Cash Compensation   Base salary   Annual cash compensation based on individual performance and competitive market data   All NEOs   Compensate competitively in market and motivate executives
  Annual Bonus Plan  

Annual incentive award based on the achievement of Company financial

objectives and individual performance goals

  All NEOs  

Compensate competitively in market and motivate executives

 

Reward performance

 

Promote alignment of reward with stockholders’ interests

         
Long Term Incentive Compensation   Stock Options   Time–based vesting options – vesting is generally over a four-year period. Awards vary based on performance, competitive market position and position within the organization   All NEOs  

Compensate competitively in market

 

Reward performance

 

Retention

    Performance–based vesting options – options may vest over a two-year period based on the Company’s stock price appreciation   CEO  

Compensate competitively in market

 

Reward performance

 

Promote alignment of reward with stockholders interests

 

Retention

  Restricted Stock Units  

Vesting is generally over a four-year period.

 

Awards vary based on performance, competitive market position and position within the organization

  All NEOs  

Compensate competitively in market

 

Reward performance

 

Promote alignment of reward with stockholders interests

 

Retention

  Performance Stock Units   TSR PSUs: Vesting based on relative Total Shareholder Return of Company as compared to the Total Shareholder Return of companies in the Morgan Stanley High-Technology Index during a three-year period.   All NEOs  

Compensate competitively in market

 

Reward performance

 

Align reward with stockholders interests

 

Retention

    Rev PSUs: Vesting based on revenue goals that align with Company’s strategic plan during a three-year period   CEO  

Compensate competitively in market

 

Reward performance

 

Promote alignment of reward with stockholders interests

 

Retention

 

Focus executive on creating long-term stockholder value

 

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     Compensation
Program
 

Brief

Description

  NEOs Eligible
to Participate
 

Goal

Alignment

         

Benefits/

Perquisites

 

Health & Welfare

Benefits, Retirement

  Medical, dental, vision and other welfare benefits, 401(k) Savings Plan (these benefits are available to all employees)   All NEOs  

Compensate competitively in market

 

Retention

  Employee Stock Purchase Plan   Company stock purchasable at discount (these benefits are available to all employees)   All NEOs owning less than 5% of Company stock (as a result our CEO is not eligible)  

Compensate competitively in market

 

Retention

  Executive Benefits
  Death, disability and life insurance   For portions of 2012, select executive officers received these benefits based on terms of prior negotiated agreements with Time Warner. NEOs no longer receive these benefits   Retention
  Limited Perquisites   Minimal perquisites generally; Commuting and transportation package for CTO   CTO received as a negotiated term in his employment agreement   Compensate competitively in market

Employment Agreements entered into in 2012

During 2012 we entered into new employment agreements with each of Messrs. Armstrong, Minson, and Brown and Ms. Dykstra and we amended Mr. Reid-Dodick’s and Ms. Jacobs’ employment agreements. The new employment agreement for Mr. Armstrong was entered into in conjunction with the expiry of his prior agreement in 2012. The new employment agreement for Mr. Minson was entered into in conjunction with the expiry of his prior agreement in 2012 and his promotion to a new role. The new employment agreement with Mr. Brown was entered into in connection with his promotion to a new role. The new employment agreement for Ms. Dykstra was entered into in connection with her new role as Executive Vice President and Chief Financial Officer of the Company. The amendment to Mr. Reid-Dodick’s employment agreement was entered into in order to conform certain terms of his agreement with those of other senior executives in the Company. In the case of our CEO, former COO and CPO, the terms of the new agreements resulted in less favorable terms than their prior agreement. The amendment to Ms. Jacobs’ employment agreement provided for a minor modification intended to ensure documentary compliance under section 409A of the Internal Revenue Code.

Elements of Compensation for 2012

Base Salary

We believe that including a competitive base salary in each NEO’s compensation package is appropriate in order to attract, retain and motivate executives capable of leading our business in the complex and competitive environment in which we operate. In setting and reviewing base salaries, we consider the nature and scope of each executive’s responsibilities, the executive’s prior compensation and performance in his or her job, the pay levels of our similarly situated executives and published market data (including both the Radford Global Technology Survey and the data for our Industry Peer Group).

Performance–Based Compensation

2012 Annual Cash Bonus

Executive AIP

Messrs. Armstrong and Reid-Dodick and Ms. Jacobs participated in the AOL Inc. Annual Incentive Plan for Executive Officers (the “Executive AIP”), which provides certain of our executive officers selected by the

 

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Compensation Committee with the opportunity to receive performance-based annual bonuses that are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code (“Code Section 162(m)”). Annual incentive awards under the Executive AIP are funded upon achievement of a single performance measure under the Executive AIP—positive “Adjusted Net Income”—which is generally defined as income from continuing operations as defined under U.S. GAAP, excluding special items and transactions not indicative of our core operating performance.

For participants in the Executive AIP, the ABP (described in more detail below) is a sub-plan of the Executive AIP. As such, once the funding threshold for the Executive AIP is certified as having been met, the actual incentive awards are determined using the guidelines and the performance criterion under the ABP, including both financial and individual components, as described below. We had Adjusted Net Income of approximately $431 million in 2012, which satisfied the performance requirement of the Executive AIP.

Mr. Armstrong’s employment agreement provides a target bonus opportunity of 200% of base salary. In March 2012, the Compensation Committee approved a 2012 target bonus of $2,000,000 and a maximum bonus opportunity of $4,000,000 for Mr. Armstrong, consistent with the limitations contained in the Executive AIP.

The 2012 bonus target for each of Mr. Reid-Dodick and Ms. Jacobs was 100% of base salary as set forth in their respective employment agreements and the maximum bonus opportunity was 200% of bonus target as set forth in the ABP.

Annual Bonus Plan (ABP)

In 2012, Messrs. Minson and Brown and Ms. Dykstra did not participate in the Executive AIP but participated in the ABP. Mr. Minson’s 2012 target bonus was 200% of base salary (as set forth in his employment agreement) and his maximum bonus opportunity was 200% of his target bonus as set forth in the ABP. The 2012 bonus target for Ms. Dykstra was 100% of base salary (as set forth in her employment agreement) and the maximum bonus opportunity was 200% of her target bonus as set forth in the ABP. However, Ms. Dykstra’s employment agreement provides that her actual bonus for 2012 shall be prorated on a daily basis beginning on the starting date of her employment term. As modified by the new employment agreement we entered into with Mr. Brown in May 2012, the 2012 bonus target for Mr. Brown was 100% of base salary, prorated to reflect the mid-year change in his base salary and bonus target level in connection with his promotion to CTO; Mr. Brown’s maximum bonus opportunity was 200% of his target bonus as set forth in the ABP.

The ABP is critical for rewarding outstanding Company performance, individual performance and behaviors that contribute to the achievement of corporate objectives. The performance criteria for each of the NEOs under the ABP guidelines include both financial and individual components. Specifically, our NEOs’ performance criteria are based 75% on overall Company financial metrics—Adjusted OIBDA and Free Cash Flow (each as defined below)—and 25% on individual performance. Of the overall Company financial metrics component, 70% is based on Adjusted OIBDA and the remaining 30% is based on Free Cash Flow. The Compensation Committee chose this weighting because it emphasizes the importance of the Company’s financial performance and reinforces individual accountability for the achievement of an executive’s goals for the year. The Compensation Committee selected Adjusted OIBDA and Free Cash Flow because they are important measures of the Company’s financial performance and are substantially consistent with the measures on which the Company historically has focused its quarterly and annual earnings results.

At the beginning of the 2012 plan year, Mr. Armstrong and Mr. Minson proposed the annual goals to the Compensation Committee—both Company financial metrics and, with respect to executive officers (and other senior management), individual performance metrics—which were then reviewed by the Compensation Committee. During March 2012, upon the recommendation of management, the Compensation Committee approved increased target levels for the financial metrics. The individual performance metrics are based on the NEO’s individual performance rating in his or her annual review.

 

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Below are the individual achievements the Compensation Committee considered for each NEO for 2012 in evaluating individual performance for purposes of the ABP. As a result of these performance achievements, each of the NEOs received over 100% of their annual target bonus for the portion tied to individual performance.

Tim Armstrong

 

   

Formulated and executed a strategy that led the Company to revenue growth.

 

   

Led the Company in improving advertising revenue growth while continuing tight cost controls.

 

   

Led the Company in completing the successful $1.056 billion patent transaction.

 

   

Oversaw return of proceeds to stockholders through a modified Dutch auction tender offer of the Company’s common stock, accelerated stock repurchase and special cash dividend programs.

 

   

Worked successfully with the Board to define the Company’s strategies and effectively communicated strategies to the Company’s investors and government groups.

Arthur Minson

 

   

In CFO role led Company to significant financial strength achieving revenue growth for first time in 8 years, led key acquisitions and business development transactions that accelerated the implementation of our business strategy.

 

   

Instrumental in structuring the successful $1.056 billion patent transaction and returning proceeds to stockholders through a modified Dutch auction tender offer and stock repurchase program.

 

   

Led the efforts to implement a tax asset protection plan to protect certain of our tax assets.

 

   

Completed a significant cost mitigation program which significantly reduced our expenses.

 

   

Effectively communicated Company strategies to investors.

 

   

Instrumental in building a finance organization that achieved a best in class level of Sarbanes-Oxley Act compliance.

 

   

In role of President of AOL Services and then COO of the Company, instrumental in leading strong subscription revenue trends and implementing improvements to our search products.

Karen Dykstra (joined Company as an employee on September 19, 2012)

 

   

Led efforts to fulfill the Company’s commitment to operate and report on separate segments beginning in the fourth quarter of 2012.

 

   

Led efforts to continue returning proceeds from the patent transaction to stockholders through a special cash dividend program.

 

   

Effectively supervised the internal financial and accounting functions and continued a cost rationalizing program in an effort to reduce costs in 2013.

 

   

Effectively managed the annual budgeting process with focus on revenue and Adjusted OIBDA growth in 2013 and beyond.

 

   

Effectively managing a finance organization that achieved a best in class level of Sarbanes-Oxley Act compliance.

Curtis Brown

 

   

Continued successfully building and operating all of the Company’s technology products and was instrumental in identifying and delivering significant technology based product innovations to our customers in 2012.

 

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Continued successfully shifting more products to AOL’s cloud architecture at an accelerated pace and responsible for enabling successful launch of global search in the United States, Canada, Germany, France, United Kingdom and Japan on one common platform.

 

   

Responded quickly during Hurricane Sandy and ensured that Company’s systems continued running with minimal disruption.

 

   

Completed a significant cost savings program while continuing to deliver high level technical services.

Julie Jacobs

 

   

Continued leading a world-class Legal Department and providing best in class legal services that support the strategic business units in achieving their objectives while appropriately managing risks.

 

   

Led legal team and corporate development group in executing acquisitions and other transactions that accelerated the Company’s business strategy including the successful $1.056 billion patent transaction, a modified Dutch auction tender offer, $600 million accelerated stock repurchase program, special cash dividend, design of the tax asset protection plan and negotiation of various key executive employment agreements, including for our CEO, former COO, CFO and CTO.

 

   

Under her direction, the Legal Department maintained a strong ethics and compliance program supporting the values of the Company.

 

   

Continued to successfully maintain a streamlined and efficient Board planning process to allow Board to best fulfill its obligation of oversight of the Company.

 

   

Drove process improvements to increase efficiency and cut costs.

 

   

In her role as head of the Corporate Service Department, successfully led crisis management team response to ensure continuity of operations during Hurricane Sandy.

John Reid-Dodick

 

   

Responsible for recruiting and filling key executive level positions in the Company, including CFO and President of Patch positions.

 

   

Led negotiations of other key employment arrangements including our CEO, former COO, CFO and CTO and the reorganization of other senior level positions to support the overall business reorganization.

 

   

Effectively built a program that advances leadership development and focuses on sustainable high performance and succession planning.

 

   

Led the compensation team in their efforts to successfully submit to the Company’s stockholders a proposal to increase the numbers of shares available under the Amended and Restated AOL Inc. 2010 Stock Incentive Plan (“2010 Stock Incentive Plan”) and a proposal to approve an employee stock purchase plan, both of which were approved by stockholders at the Company’s 2012 Annual Meeting.

ABP Funding

The ABP is funded based on achievement of Adjusted OIBDA and Free Cash Flow. For purposes of calculating the funding levels under the ABP, the ABP requires that certain adjustments be applied to Adjusted OIBDA and Free Cash Flow. The Compensation Committee determined that these adjustments, required under the ABP, were appropriate in order to measure the core performance of the Company. For purposes of calculating performance under the ABP, the ABP defines Adjusted OIBDA as operating income before depreciation and amortization, and Free Cash Flow as cash provided by continuing operations, less capital expenditures, product development costs and principal payments on capital leases, adjusted for certain items. For each of these

 

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measures, the plan provides for excluding the impact of certain items: (i) noncash impairments of goodwill; intangible and fixed assets and investments; (ii) gains and losses on sales of operating assets and investments; (iii) external expensed transaction costs and the direct impact on the Company’s OIBDA and Free Cash Flow related to mergers, acquisitions, investments or dispositions, as well as costs related to retention agreements and contingent consideration related to such transactions; (iv) amounts related to securities litigation, government investigations, natural disasters and terrorism; (v) restructuring charges or reductions in restructuring charges greater than $3 million; (vi) reserves larger than $3 million established in connection with litigation, fraud investigations, tax audits and similar governmental proceedings; (vii) recoveries greater than $3 million in litigation and similar proceedings; (viii) gains or losses recognized from the forgiveness of debt; (ix) the impact of current year changes to accounting standards and tax laws; (x) gains or losses related to the recognition of cumulative foreign currency translation adjustments; (xi) non-cash equity based compensation; (xii) any other extraordinary item under GAAP; and (xiii) the impact of taxes on the items described in (i) through (xii).

Adjusted OIBDA and Free Cash Flow are non-GAAP financial measures and may be different than similarly-titled non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. Adjusted OIBDA and Free Cash Flow are calculated differently for compensation purposes, pursuant to the ABP, than these non-GAAP measures as reported in our Form 10-K and earnings releases. A reconciliation of our GAAP to non-GAAP results can be found in Annex B attached hereto.

The threshold funding level for 2012 under the ABP was set at $280 million for the Adjusted OIBDA metric and $130 million for the Free Cash Flow metric, which would have resulted in a funding level of 50%. There is no guarantee of a payout if a threshold is not met. Any funding below those levels would be subject to approval by the Compensation Committee. In addition, for purposes of calculating the funding levels under the ABP, the ABP requires that certain adjustments (described below) be applied to Adjusted OIBDA and Free Cash Flow. The Compensation Committee determined that these adjustments, required under the ABP, were appropriate in order to measure the core performance of the Company.

The ABP target was established as $350 million in Adjusted OIBDA and $165 million in Free Cash Flow, which achievement would have resulted in a funding level of 100%, subject to approval by the Compensation Committee. Achievement of $365 million in Adjusted OIBDA and $175 million in the Free Cash Flow would have resulted in a funding level of 110% subject to approval by the Compensation Committee. Achievement of $400 million in Adjusted OIBDA and $185 million in Free Cash Flow would have resulted in a funding level of 150%, subject to approval by the Compensation Committee. Bonuses for NEOs are subject to the maximum payment level of 200% of target bonus under the ABP for all participants except for Mr. Armstrong as described above.

In 2012, we achieved eligibility for a Company performance funding level of 150% under the ABP. Specifically, our Adjusted OIBDA in 2012 was approximately $415 million and our Free Cash Flow achievement in 2012 was approximately $195 million. Although achieving the financial levels made us eligible for 150% funding level as described above, the Compensation Committee, based on the recommendation of management, exercised its discretion permitted under the ABP to reduce the payout amount under the ABP for Company performance from 150% to 140% because, while the Company exceeded its financial targets under the ABP, the Company did not achieve all of its strategic revenue objectives in 2012, including Global Display revenue targets.

 

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The Compensation Committee awarded the following amounts to NEOs for 2012:

 

Executive

   Target Bonus
(as a %  of
base salary)
    ABP Target
Bonus
     Individual
Funding  (25%)
     Company
Funding  (75%)
     Special
Individual  Cash
Performance
Award
     Total Bonus  

Tim Armstrong*

     200   $ 2,000,000       $ 650,000       $ 2,100,000       $ 500,000       $ 3,250,000   

Arthur Minson*

     200   $ 1,700,000       $ 488,750       $ 1,785,000       $ 150,000       $ 2,423,750   

Karen Dykstra**

     100   $ 198,907       $ 59,672       $ 208,852         —         $ 268,524   

Curtis Brown***

     100   $ 387,918       $ 111,526       $ 407,314         —         $ 518,840   

Julie Jacobs*

     100   $ 600,000       $ 195,000       $ 630,000       $ 500,000       $ 1,325,000   

John Reid-Dodick*

     100   $ 500,000       $ 143,750       $ 525,000         —         $ 668,750   

 

* Total bonus payout amount includes a full-year bonus award under the ABP based on the executive’s target bonus at the executive’s year end salary.
** Total bonus payout amount for Ms. Dykstra includes a bonus award under the ABP prorated on a daily basis beginning on the starting date of employment (September 19, 2012).
*** Total bonus payout amount for Mr. Brown includes a full-year bonus award under the ABP prorated on a daily basis to reflect his salary and bonus target percentage increase on May 9, 2012.

Special Cash Performance Payments

During 2012 the Compensation Committee approved a special individual cash performance award for Mr. Armstrong in the amount of $500,000 in recognition of the role he played in the Company’s return to growth, completion of the patent transaction and the special cash dividend paid to stockholders of the Company during December 2012. During 2012 our CEO, with the approval of the Compensation Committee, also made special cash performance awards in connection with filling key executive positions in the Company and to recognize individual performance that played a material role in the achievement of significant objectives of the Company such as the consummation of strategic transactions or initiatives. Mr. Minson received a special individual cash performance award in the aggregate amount of $150,000 in recognition of his leadership role in the patent transaction valued at $1.056 billion. Ms. Jacobs received special individual cash performance awards in the aggregate amount of $500,000 in recognition of her leadership role in the patent transaction.

Restricted Stock Unit Make Good Program

In January 2010, the Compensation Committee approved a cash award program designed to compensate our employees, including certain of our NEOs, who forfeited RSUs of Time Warner upon the Spin-off as provided for in the terms and conditions of the Time Warner equity award agreements. The total value of an employee’s forfeited Time Warner RSUs was determined by multiplying the total number of forfeited RSUs that would have otherwise vested on or prior to April 13, 2012 by $31.05, the average of the high and low market prices of Time Warner common stock on the date of the Spin-off.

The following NEO was eligible to participate in the program and received cash payments in the following amounts:

 

Named Executive Officer

   April 15, 2010      April 15, 2011      April 13, 2012  

Ms. Jacobs

   $ 24,724       $ 24,724       $ 49,448   

Long-Term Incentives

Long-term equity incentive awards are designed not only to provide executives with an opportunity to earn a competitive level of compensation, but also to advance the principle of pay-for-performance, to align the executive’s interests with those of our stockholders and to provide a significant retention tool. In 2012, the Compensation Committee approved three new performance–based long term equity awards: performance–based stock options, TSR PSUs and Rev PSUs. Mr. Armstrong received performance–based stock options, TSR PSUs and Rev PSUs. Messrs. Minson and Brown and Ms. Dykstra received TSR PSUs in connection with entering into new employment agreements with us.

 

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Stock options are granted to executives as an incentive to create incremental stockholder value. RSUs are intended to reward and retain key talent, as well as to align executives’ interests with those of stockholders even during periods of stock market fluctuations. Performance stock units are intended to retain and motivate key talent, as well as to align executives’ interests with the Company’s strategic plan and total stockholder return. The Compensation Committee determined to award long-term equity incentives through a balanced portfolio of stock options, RSUs, and PSUs, to balance the emphasis on sustained operating performance, stock price performance, executive equity ownership and retention of top executives. The size of these awards for each of the NEOs was based on reference to competitive market values and internal equity considerations.

The Company does not backdate stock options or grant options retroactively. Additionally, the Company does not coordinate equity grants around the release of favorable or unfavorable Company information. For further details on the equity grants made to the NEOs in 2012, see the “Grants of Plan-Based Awards in 2012” table below and the description of these awards under the “Potential Payments Upon a Termination of Employment or Change in Control for 2012” beginning on page 70 of this Proxy Statement.

Stock Options

We grant stock options because we believe that they provide executives with a strong incentive to continue employment with us and focus on creating long-term stockholder value. The exercise price of options awarded is the closing price of our common stock on the date of grant. Because the ultimate value received by option holders is directly tied to increases in our stock price, stock options serve to link the interests of management and stockholders and to motivate executives to make decisions that will increase the long-term total return to stockholders. Time-based stock option grants to executives under the. 2010 Stock Incentive Plan include a four-year vesting schedule and termination provisions that the Compensation Committee believes will encourage option holders to remain employed with us on a long-term basis. In 2012, the Compensation Committee approved the grant of performance-based stock options to our CEO for the first time. Performance-based stock option grants under the 2010 Stock Incentive Plan vest over two years subject to performance and continued employment. Fifty percent of Mr. Armstrong’s performance-based stock options vest on or following the first anniversary of the grant date (subject to continued employment through such date) if the closing price per share during any 20 consecutive trading day period equals or exceeds a 20% increase from the average closing price of the Company’s common stock for the 20 trading days prior to the grant date; the remaining fifty percent of the performance-based stock options vest on or following the second anniversary of the grant date (subject to continued employment through such date) if the closing price per share during any 20 consecutive trading day period equals or exceeds a 30% increase from the average closing price of the Company’s common stock for the 20 trading days prior to the grant date. If performance targets are not achieved by the fourth anniversary of the grant date, all unvested options will terminate.

In December 2012, we declared a one-time special cash dividend of $5.15 per share. Stock options outstanding on December 5, 2012 were adjusted for the one-time special cash dividend by reducing the exercise price and increasing the number of shares subject to the awards through the issuance of “make-whole” shares in order to maintain the option’s intrinsic value in a manner consistent with tax code requirements and the terms of the 2010 Stock Incentive Plan. The performance goals of Mr. Armstrong’s performance-based stock options were also adjusted to account for the special dividend.

Restricted Stock Units

We also award RSUs representing full value shares of our common stock. RSUs are intended to promote retention and alignment of executive interests with the interests of our stockholders. The Compensation Committee believes that RSUs enhance retention value as they vest over time. RSUs granted to executives generally vest over a four-year period.

 

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RSUs outstanding on December 5, 2012 (other than deferred RSUs) were equitably adjusted in connection with the special dividend paid to stockholders by crediting “dividend equivalents” for each RSU that vests and becomes payable, in cash, at the time that the underlying RSU vests. Deferred RSUs were awarded additional RSUs in connection with the special dividend as discussed further below.

Performance Units

In 2012, the Compensation Committee approved, for the first time, the grant of (i) performance units with vesting based on Company’s Total Shareholder Return as compared to the Total Shareholder Return of companies in the Morgan Stanley High Technology Index measured over a three-year period of time (TSR PSUs) and (ii) performance units with vesting based on revenue goals that align with the Company’s revenue goals measured over a three-year period of time (Rev PSUs, and together with the TSR PSUs, the “PSUs”). For TSR PSUs, the Compensation Committee determined that the Morgan Stanley High Technology Index was an appropriate relative benchmark as it includes several of the companies against which the Company typically benchmarks its stock price performance. NEO’s receiving awards in 2012 were granted a target number of shares under each PSU award. The target awards were set based on reference to competitive market values and internal equity considerations as further described under the section “Use of Compensation Surveys and Other Comparative Data” above. Subject to the NEO’s continuous employment through the vesting date, actual PSUs earned could be anywhere from 0 to 200% of the target number of shares. In structuring long-term equity incentives to include PSUs, the Compensation Committee determined that it was important to require certain levels of performance before awards were earned, such that performance falling below these levels would result in zero payout. This structure emphasized the Compensation Committee’s focus on sustained operating performance, stock price performance, executive equity ownership and retention of top executives.

PSUs outstanding on December 5, 2012 were equitably adjusted by crediting “dividend equivalents” for each PSU; dividend equivalents vest and become payable, in cash, at the time that the original PSU vests (and only to the extent of such vesting).

TSR PSUs:

The three year performance period for the TSR PSUs granted in 2012 will end on December 31, 2014, and between zero and 200% of the TSR PSU’s will be earned and will vest based on the following payout scale:

 

AOL’s Relative

Total Shareholder
Return Percentile

Rank

 

TSR PSU’s

Earned as a %

of Target*

<25%ile

  0%

25th %ile

  50%

40th %ile

  75%

50th %ile

  100%

75th %ile

  150%

90th %ile

  180%

>90 %ile

  200%

 

* The number of TSR PSUs earned is scaled if results are between specified percentages.

The three-year period for the TSR PSUs granted in 2012 will end on December 31, 2014. In order to determine the number of TSR PSUs earned at the end of the three year performance period, we will calculate the Company’s Total Shareholder Return and compare it to the Total Shareholder Return of companies in the Morgan Stanley High Technology Index. For purposes of the calculation, “Total Shareholder Return” is equal to the appreciation in the stock price of a company from the beginning of the performance period to the end of the performance period, plus dividends deemed reinvested in company stock on a cumulative basis. The effect of

 

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taxes resulting from the payment of dividends or the deemed sale or exchange of underlying shares are not to be taken into consideration. The stock prices at the beginning and end of the performance period will be determined using the trailing average stock price over the 30 days prior to the beginning and end of the performance period, as applicable.

Rev PSUs:

The Rev PSUs granted to Mr. Armstrong in 2012 vest based on the following payout scale following the end of the three-year performance period if the minimum performance thresholds for both goals are achieved:

 

Ad Revenue Goal        Revenue  Maintenance Goal

Ad Revenues

net of TAC as a

% of 2012-2014

Total

Cumulative

Consolidated

AOL Revenues

 

Rev RSUs

Earned as a %

of 50% of

Target

      

2014 Total

Consolidated

AOL Revenues

as a % of 2011

Total

Consolidated

AOL Revenues

 

Rev RSUs

Earned as a %

of 50% of

Target

  60%*

  50%      100%**   50%

70%

  75%      110%   75%

80%

  100%      120%   100%

90%

  150%      130%   150%

100%

  200%      140%   200%

 

* Minimum performance level for the Ad Revenue Goal.
** Minimum performance level for the Revenue Maintenance Goal. If a participant’s employment is terminated in 2013 (or it had been terminated in 2012) as a result of death or disability or within one year after a change in control without cause, for good reason or upon death or disability, then the minimum performance level for purposes of earning shares with respect to the Ad Revenue Goal will be 85% and 90%, respectively.

In connection with the special dividend paid to stockholders on December 14, 2012, PSUs outstanding on December 5, 2012 were equitably adjusted by crediting “dividend equivalents” for each PSU that vests and becomes payable, in cash, at the time that the original PSU vests (and only to the extent of such vesting).

Termination Payments and Benefits

All of our NEOs are parties to employment agreements with the Company that provide for termination payments and benefits in the event of an involuntary termination of employment without “cause” or resignation for “good reason” (each as defined in the employment agreements with our NEOs) or due to the executive officer’s death or disability. The severance payment amounts and other post-termination provisions of the employment agreements generally reflect the Company’s negotiations with each individual executive officer, our belief that the terms are appropriate under the circumstances based on the significance of the executive officer’s position with us, our ability to attract and retain talent as a result of executive management changes and the amount of time it would take the executive to locate another position. Certain of the NEOs’ employment agreements provide more favorable terms than what is provided in the applicable award agreements for the treatment of some of their equity awards upon various employment termination events as further described below under “Potential Payments Upon a Termination of Employment or Change in Control for 2012” beginning on page 70 of this Proxy Statement.

We believe that the provisions in the employment agreements with our NEOs governing termination and severance arrangements in various circumstances, as described under the “Potential Payments Upon a Termination of Employment or Change in Control for 2012,” are consistent with our compensation objectives to attract, motivate and retain highly talented executive officers in a competitive environment and are generally consistent with arrangements being offered by other companies in the technology industry to similarly situated

 

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executives. None of our NEOs are entitled to receive a gross-up payment for any payments following a change in control that may constitute “parachute payments,” as defined in Section 280G or 4999 of the Internal Revenue Code. With respect to our NEOs who entered into new employment agreements in 2012, amounts payable following a change in control that would constitute “parachute payments” may be reduced to the extent necessary to avoid adverse tax consequences or excise taxes if a reduction would result in a greater after-tax benefit to the executive.

We have not generally considered a NEO’s right to receive payments and benefits upon an involuntary termination of employment as a factor in annual compensation decisions. We do not view the post-termination benefits as a factor in overall compensation setting due to the fact that a termination without cause or another triggering event may never occur during the applicable NEO’s term of employment. For a discussion of the termination and severance packages for our NEOs, see “Potential Payments Upon a Termination of Employment or Change in Control for 2012” beginning on page 70 of this Proxy Statement.

Retirement Programs

The Company maintains the AOL Savings Plan, a defined contribution 401(k) retirement plan in which almost all of the United States-based employees of AOL and its affiliates are eligible to participate. The purpose of this plan is to provide a tax efficient means of saving for retirement. Contributions are limited by law and/or the plan document. For plan year 2012, the Company matched a certain percentage of the value of employee contributions to the AOL Savings Plan. All NEOs participated in the AOL Savings Plan in 2012. AOL does not maintain a non-qualified deferred compensation plan for its employees or a defined benefit pension plan.

Health and Welfare Programs

Our NEOs participate in health and welfare programs that are generally available to all of our employees in the United States. These include medical coverage, dental coverage, vision coverage, medical and dependent care, flexible spending account programs and similar benefit programs. In offering these programs to our employees, our goal is to provide benefit programs that are competitive and that promote the hiring and retention of qualified employees.

Perquisites and Personal Benefits

Except as reflected in the “All Other Compensation” column in the 2012 Summary Compensation Table, we do not generally provide perquisites or personal benefits to our NEOs that are not available to all of our employees. Under Mr. Armstrong’s prior employment agreement (entered into prior to the Spin-off), he was entitled to an annual payment equal to two times his annual premium for coverage under our Group Universal Life Insurance program. In February 2012, he received his last premium payment in the amount of $5,184. Mr. Armstrong is no longer entitled to receive this benefit under the terms of his new employment agreement. Under Mr. Brown’s employment agreement he is entitled to a commuting and transportation allowance in the amount of $187,500 to reimburse Mr. Brown’s commuting expenses for travel between his home in California and New York, his primary work location, to be paid in three installments over the twelve month period following the effective date of the employment agreement. To the extent Mr. Brown resigns or is terminated for cause within fifteen months of the first day of the employment term, he will be required to repay a pro rata portion of the paid allowance.

Employee Stock Purchase Plan

In 2012 we implemented an Employee Stock Purchase Plan for all eligible domestic employees holding 5% or less of the Company’s stock. All NEOs are eligible to participate, other than our CEO based on his share holdings as of December 31, 2012. In offering this plan to eligible employees, we encourage ownership of the Company’s common stock and align such persons’ interest with the success of the Company.

 

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Code Section 162(m) Considerations

Code Section 162(m) generally limits our ability to deduct compensation over $1 million to certain of our executives unless the compensation qualifies as “performance-based compensation,” as defined in Code Section 162(m). In structuring the compensation programs that apply to those executives, we considered the requirements and consequences of Code Section 162(m). In this regard, we adopted the Executive AIP, which provides for the payment of performance-based annual bonuses to certain of our executive officers. Although we have taken into account the potential application of Code Section 162(m) on incentive compensation awards and other compensation decisions, we may approve, in our sole discretion, compensation in excess of $1 million for certain of our executives that does not qualify as “performance-based compensation” for purposes of Code Section 162(m) in order to maintain flexibility to provide competitive levels of compensation for our executive officers.

Other Executive Compensation Practices

Special Dividend Equity Adjustment

In December 2012, we declared a one-time special cash dividend of $5.15 per share. Stock options outstanding on December 5, 2012 were adjusted for the one-time special cash dividend by reducing the exercise price and increasing the number of shares subject to the awards through the issuance of “make-whole” shares in order to maintain the option’s intrinsic value in a manner consistent with tax code requirements and the terms of the 2010 Stock Incentive Plan. RSUs, other than director deferred RSUs (granted to Ms. Dykstra during her term as a director of the Company) and PSUs outstanding on December 14, 2012 were equitably adjusted by crediting cash “dividend equivalents” for each respective RSU and PSU in order to maintain its intrinsic value. With respect to RSUs deferred pursuant to our AOL Inc. 2011 Directors’ Deferred Compensation Plan (“Directors’ Deferred Compensation Plan”) and outstanding on December 14, 2012, additional deferred RSUs were credited to participants’ deferral accounts in order to maintain the director deferred RSUs’ intrinsic value, as required under the terms of the Directors’ Deferred Compensation Plan.

Executive Compensation Recovery Policy (“Clawback Policy”)

The Company has adopted an Executive Compensation Recovery Policy pursuant to which, if the Company is required to prepare an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the United States securities laws as a result of the intentional misconduct by an officer of the Company having a title of Executive Vice President or higher, the Board (or a committee thereof) may require such officer to reimburse the Company for any bonus or other incentive-based or equity-based compensation, including any profits realized from the sale of the Company’s securities, that was paid to such officer during the 12-month period following the first public issuance or filing with the SEC of the financial document of the Company in which the material noncompliance was contained. The independent directors of the Company will determine whether material noncompliance with a financial reporting requirement is the result of intentional misconduct of the officer.

Executive Stock Ownership Guidelines

We maintain stock ownership guidelines for our senior executives. These guidelines specify the following, as may be applicable:

 

   

Chief Executive Officer—must own Company equity equal to or greater than six (6) times his base salary

 

   

Chief Operating Officer(1)—must own Company equity equal to or greater than the lesser of (i) 40,000 shares or (ii) two (2) times his base salary

 

   

Other Named Executive Officers—must own Company equity equal to or greater than the lesser of (i) 18,000 shares or one (1) times his or her base salary

 

(1) These guidelines were applicable to the COO prior to his stepping down from the role on February 26, 2013

 

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Each executive officer has five years from the date they become subject to the guidelines to meet the applicable threshold. For this purpose, ownership of AOL common stock includes only shares that the executive owns outright and unvested RSUs. Until an executive has met the ownership threshold, the executive must retain all shares delivered upon settlement of RSUs. As of March 1, 2013, each of the NEOs had met or was on track to meet the ownership requirements within the required timeline.

Restrictions on Hedging and Pledging Arrangements for Named Executive Officers

Under our Insider Trading Policy our employees, directors and officers, including our NEOs, bear the economic risk as well as the benefits of owning AOL common stock. In this regard, no director, employee, or officer, including NEOs, may (i) enter into options, warrants, puts and calls or similar instruments with respect to the Company’s securities, (ii) enter into hedging arrangements, or (iii) sell such securities “short.” Additionally, our employees, directors and officers, including our NEOs, may not pledge AOL common stock as collateral for a loan, without first obtaining pre-clearance from our General Counsel.

Restriction on Stock Repricing

Under our 2010 Stock Incentive Plan, the repricing of stock options or stock appreciation rights awarded under such Plan is prohibited, unless such action is approved by the Company’s stockholders. As a result, our NEOs, as well as our other officers, directors and employees, bear the economic risk associated with owning such stock options or stock appreciation rights.

Role of Compensation Committee

Our Compensation Committee oversees the Company’s compensation and benefit plans and policies and equity incentive plans, determines executive compensation including reviewing and approving employment agreements and annual compensation relating to the CEO and certain senior executives including the NEOs, reviews and approves corporate goals relevant to such executives and evaluates performance in light of such goals and objectives, and exercises oversight over the disclosures regarding executive compensation.

Role of Management

Our CEO, assisted by input from members of our Human Resources, Finance and Legal Departments, regularly reviews the Company’s executive compensation philosophy with the Compensation Committee. Our CEO, with the assistance of the Human Resources Department, annually reviews the performance and compensation of the other NEOs and makes recommendations to the Compensation Committee as described in greater detail below. Our Human Resources staff provides information to the Compensation Committee on peer group practices and on survey data.

Role of Compensation Consultants

CAP was identified and selected by the Compensation Committee as its independent executive compensation advisor pursuant to the Compensation Committee charter. CAP works with the Chairperson of the Compensation Committee and management to provide strategic guidance to the Compensation Committee regarding executive and director compensation.

We retain the executive compensation firm Exequity LLP (“Exequity”) to provide guidance to our management on executive compensation matters. Specific services provided by Exequity include, but are not limited to, the identification of relevant peer groups, a review of our executive compensation practices, recommendations on non-employee director compensation, as well as modeling of potential equity pool designs. For the purposes of assessing the appropriateness and competitiveness of our executive compensation programs with respect to pay and program design, Exequity conducts and/or validates external benchmarking analyses

 

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relative to peer companies selected and approved by management and the Compensation Committee. Management utilizes Exequity as a strategic consultant on key decisions and market trends relating to our executive compensation philosophy and programs. Exequity does not provide advice to the Compensation Committee regarding the amount or form of executive compensation.

Compensation Committee Report

The Compensation Committee has discussed and reviewed the foregoing Compensation Discussion and Analysis with management. Based upon this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference into the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC.

Submitted by the Compensation Committee of the Company’s Board of Directors:

James Stengel (Chair)

Richard Dalzell

Susan Lyne*

Compensation Committee Interlocks and Insider Participation

None of the directors who served on the Compensation Committee in 2012 was during 2012 or previously an officer or employee of the Company or of any of its subsidiaries, or since the beginning of 2012 was a participant in a related person transaction that requires disclosure under SEC rules. During 2012, none of the Company’s executive officers served on the board of directors, the compensation committee or any similar committee of another entity (not including entities exempt from tax under Section 501(c)(3) of the Internal Revenue Code) that has one or more of its executive officers serving on our Board or Compensation Committee.

 

 

* The Compensation Committee Report was approved by the Compensation Committee prior to Ms. Lyne’s resignation from the Compensation Committee.

 

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Tabular Executive Compensation Disclosure

2012 SUMMARY COMPENSATION TABLE

The following table presents information concerning total compensation paid to each of the NEOs for his or her service to us for the fiscal years ended December 31, 2012, December 31, 2011 and December 31, 2010, to the extent he or she was a NEO during such year or such information has been previously included in the Company’s filings with the SEC. For additional information regarding salary, incentive compensation and other components of the NEOs’ total compensation, see “Compensation Discussion and Analysis” on page 33 of this Proxy Statement.

 

Name and Principal Position(1)

  Year     Salary
($)(2)
    Bonus
($)(3)
    Stock
Awards
($)(4)
    Option
Awards
($)(4)
    Non-Equity
Incentive
Plan
Compensation
($)(5)
    All
Other
Compensation
($)(6)
    Total
($)
 

Tim Armstrong

Chairman and Chief Executive Officer

    2012      $ 1,000,000      $ 500,000      $ 2,757,575     $ 5,051,163      $ 2,750,000      $ 12,684      $ 12,071,422   
    2011      $ 1,000,000        —         —         —       $ 2,204,000      $ 12,534      $ 3,216,534   
    2010      $ 1,000,000        —       $ 4,868,244      $ 7,075,139      $ 2,337,500      $ 15,738      $ 15,296,621   

Arthur Minson(7)

Former Executive Vice President and Chief Operating Officer

    2012      $ 781,667      $ 150,000      $ 5,151,750      $ 1,942,293      $ 2,273,750      $ 106,599      $ 10,406,059   
    2011      $ 750,000      $ 100,000      $ 88,781      $ 1,630,333      $ 1,840,500      $ 6,375      $ 4,415,989   
    2010      $ 750,000      $ 500,000      $ 192,623      $ 247,471      $ 1,753,125      $ 7,313      $ 3,450,532   

Karen Dykstra

Executive Vice President and Chief Financial Officer

    2012      $ 287,917      $ 275,000      $ 1,910,260      $ 571,759      $ 268,524        —        $ 3,313,460   

Curtis Brown

Executive Vice President and Chief Technology Officer

    2012      $ 450,409      $ 23,665      $ 1,286,726      $ 477,747      $ 518,841      $ 167,293      $ 2,924,681   

Julie Jacobs

Executive Vice President, Corporate Development, General Counsel and Corporate Secretary

    2012      $ 600,000      $ 549,448      $ 199,988      $ 274,191      $ 825,000      $ 21,155      $ 2,469,782   
    2011      $ 495,833      $ 324,724      $ 88,781      $ 125,250      $ 608,794      $ 8,030      $ 1,651,412   
    2010      $ 409,271      $ 219,724      $ 1,499,995      $ 1,406,526      $ 324,913      $ 8,250      $ 3,868,679   

John Reid-Dodick(8)

Executive Vice President and Chief People Officer

    2012      $ 500,000        —          —          —        $ 668,750        —        $ 1,168,750   

 

(1) The Summary Compensation Table reports information for the CEO, CFO, prior CFO, and up to three other individuals who were serving as executive officers at the end of 2012. Mr. Minson served in the role of CFO until Ms. Dykstra joined the company and assumed the role of CFO in September 2012. Ms. Dykstra resigned as a director of the Company immediately after assuming the role of CFO. Mr. Brown was promoted to Chief Technology Officer in May 2012.
(2) Ms. Dykstra’s salary includes fees received for serving as a director of the Board in the amount of $89,583. The amount for Mr. Brown reflects his prior base salary through May 9, 2012 and the increase in base salary as of that date as a result of his promotion to the role of Chief Technology Officer.
(3) The amount reported for Mr. Armstrong reflects a special individual performance cash award in the amount of $500,000 in recognition of his leadership role in the Company’s return to growth, completion of the $1.056 billion patent transaction and the special cash dividend paid to stockholders of the Company on December 14, 2012. The amount reported for Mr. Minson reflects a special individual performance cash award in the amount of $150,000 in recognition of his leadership role in the patent transaction. The amount reported for Ms. Jacobs reflects special individual performance cash awards in the amount of $500,000 in recognition of her leadership role in the patent transaction and a $49,448 payment pursuant to the RSU Make Good Program. The amount reported for Mr. Brown reflects a special individual performance cash award in the amount of $23,665 in recognition of his promotion from Senior Vice President to Interim Chief Technology officer in March, 2012. The amount reported for Ms. Dykstra reflects a special individual cash sign-on bonus in the amount of $200,000 in connection with joining the company in September 2012 as CFO. The amount reported for Ms. Dykstra reflects an additional special cash bonus of $75,000 for her role as a member of the Special Committee of the Board of Directors which played an important role in the Company’s patent transaction.
(4) These amounts represent the aggregate grant date fair value of equity awards granted in the specified fiscal year as calculated pursuant to Financial Accounting Standards Codification Topic 718 (“ASC 718”). We determined the number of shares subject to each of our NEO’s option grants on the grant date by multiplying the fair market value (as defined in the 2010 Stock Incentive Plan) of a share of our common stock on the grant date by a multiplier. The grant date “fair value,” as calculated in accordance with ASC 718, results in a different per share value for accounting purposes than does this methodology. For additional information about the valuation assumptions with respect to equity awards in accordance with ASC 718, refer to Note 8 of our financial statements in our 2012 Form 10-K.

The values reflected with respect to RSUs and PSUs are consistent with the estimate of aggregate compensation costs to be recognized over the service period determined as of the grant date under FASB ASC Topic 718, excluding the effect of estimated forfeitures. If PSUs had been earned at the maximum level of 200% of target, the value would have been: Mr. Armstrong—$5,515,150 (includes both TSR PSUs and Rev PSUs); Mr. Minson—$6,570,238; Ms. Dykstra—$2,203,982; and Mr. Brown—$1,406,030.

 

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(5) The amounts set forth in the Non-Equity Incentive Plan Compensation column for 2012 reflect annual cash incentive awards made to the executives under the Executive AIP, except for the amounts set forth for Messrs. Minson and Brown and Ms. Dykstra, which reflect annual cash incentive awards under the ABP.
(6) The amounts shown in the All Other Compensation column for 2012 include the following:
  (a) The amount set forth in this column with respect to Mr. Armstrong includes 401(k) matching contributions and reimbursement for premiums under the Company’s Group Universal Life insurance program, as required by his employment agreement which was entered into prior to the Spin-off.
  (b) The amount set forth in this column with respect to Mr. Minson reflects amounts consisting of 401(k) matching contributions; and $99,349 of cash received on December 31, 2012 upon the vesting of RSU dividend equivalents that were issued in connection with the special cash dividend equity adjustment.
  (c) The amount set forth in this column with respect to Mr. Brown reflects perquisite amounts consisting of $150,000 in commuting and transportation costs, $7,500 of 401(k) matching contributions and $780 of Long Term Disability reimbursements; and $9,013 of cash received upon the vesting of RSU dividend equivalents that occurred on December 15, 2012.
  (d) The amount set forth in this column with respect to Ms. Jacobs reflects perquisite amounts consisting of 401(k) matching contributions and Long Term Disability reimbursements; and $12,875 of cash received on December 31, 2012 upon the vesting of RSU dividend equivalents that were issued in connection with the special cash dividend equity adjustment.
(7) Mr. Minson stepped down from his position as EVP and COO effective February 26, 2013.
(8) Mr. Reid-Dodick received an equity grant in December 2011 upon his hire as Chief People Officer. As a result he did not receive an equity grant in 2012.

 

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GRANTS OF PLAN-BASED AWARDS IN 2012

The following table presents information with respect to each award of plan-based compensation to each NEO in 2012. The material terms of our annual and long-term incentive programs are described in the Compensation Discussion and Analysis beginning on page 33 of this Proxy Statement. There can be no assurance that the Grant Date Fair Value of stock and option awards will ever be realized.

 

Name

(a)

  Grant
Date
    Compensation
Committee
Approval
Date
    Estimated Future
Payouts Under
Non-Equity Incentive
Plan Awards(1)
    Estimated Future
Payouts Under
Equity Incentive
Plan Awards
   

All
Other
Stock
Awards
Or
Units

(#)

   

All
Other
Option
Awards

(#)

    Exercise
or Base
Price of
Option
Awards
($)(2)
   

Grant
Date

Fair Value
of Stock
& Option
Awards
($)(3)

 
     

Threshold

($)

   

Target

($)

   

Maximum

($)

   

Threshold

(#)

   

Target

(#)

   

Max.

(#)

         
  (b)       (c)     (d)     (e)     (f)     (g)     (h)     (i)     (j)     (k)     (l)  

Tim Armstrong

    —          —          —        $ 2,000,000      $ 4,000,000        —          —          —          —          —          —          —     
    6/15/2012 (4)      3/28/2012        —          —          —          19,238        38,476        76,952        —          —          —        $ 999,991   
    6/15/2012 (5)      3/28/2012        —          —          —          19,238        38,476        76,952        —          —          —        $ 1,757,584   
    6/15/2012 (6)      3/28/2012        —          —          —          —          —          —          —          213,219      $ 25.99      $ 2,051,167   
    6/15/2012 (7)      3/28/2012        —          —          —          —          372,439        —          —          —        $ 25.99      $ 2,999,996   

Arthur Minson

    —          —          —        $ 1,700,000      $ 3,400,000        —          —          —          —          —          —          —     
    2/15/2012 (8)      1/24/2012        —          —          —          —          —          —          10,649        —          —        $ 199,988   
    2/15/2012 (6)      1/24/2012        —          —          —          —          —          —          —          38,510      $ 18.78      $ 274,191   
    9/14/2012 (5)      9/7/2012        —          —          —          24,575        49,149        98,298        —          —          —        $ 3,285,119   
    9/14/2012 (8)      9/7/2012        —          —          —          —          —          —          49,149        —          —        $ 1,666,643   
    9/14/2012 (6)      9/7/2012        —          —          —          —          —          —          —          143,678      $ 33.91      $ 1,668,102   

Karen Dykstra

    —          —          —        $ 198,907      $ 397,814        —          —          —          —          —          —          —     
    6/26/2012 (9)(10)      6/26/2012        —          —          —          —          —          —          5,504        —          —        $ 149,984   
    9/14/2012 (9)(10)      8/16/2012        —          —          —          —          —          —          2,211        —          —        $ 74,975   
    10/1/2012 (5)      9/18/2012        —          —          —          8,244        16,487        32,974        —          —          —        $ 1,101,991   
    10/1/2012 (8)      9/18/2012        —          —          —          —          —          —          16,487        —          —        $ 583,310   
    10/1/2012 (6)      9/18/2012        —          —          —          —          —          —          —          48,209      $ 35.38      $ 571,759   

Curtis Brown

    —          —          —        $ 387,918      $ 775,836        —          —          —          —          —          —          —     
    2/15/2012 (8)      1/24/2012        —          —          —          —          —          —          9,783        —          —        $ 183,725   
    2/15/2012 (6)      1/24/2012        —          —          —          —          —          —          —          10,108      $ 18.78      $ 67,521   
    6/15/2012 (5)      5/7/2012        —          —          —          7,695        15,390        30,780        —          —          —        $ 703,015   
    6/15/2012 (8)      5/7/2012        —          —          —          —          —          —          15,390        —          —        $ 399,986   
    6/15/2012 (6)      5/7/2012        —          —          —          —          —          —          —          42,643      $ 25.99      $ 410,226   

Julie Jacobs

    —          —          —        $ 600,000      $ 1,200,000        —          —          —          —          —          —          —     
    2/15/2012 (8)      1/24/2012        —          —          —          —          —          —          10,649        —          —        $ 199,988   
    2/15/2012 (6)      1/24/2012        —          —          —          —          —          —          —          38,510      $ 18.78      $ 274,191   

John Reid-Dodick(11)

    —          —          —        $ 500,000      $ 1,000,000        —          —          —          —          —          —          —     

 

(1) For Mr. Armstrong and Mr. Minson, amounts reflect terms pursuant to their employment agreements in conjunction with the terms of the ABP. Pursuant to the terms of the ABP, the amounts shown generally reflect amounts that would be payable based on each executive’s year end salary, except that (pursuant to the terms of the ABP) the amount for Mr. Brown reflects a full year target bonus under the ABP pro rated on a daily basis to reflect a salary and bonus target level increase as of May 9, 2012 in conjunction with his promotion to CTO. Pursuant to the terms of Ms. Dykstra’s employment agreement, the amounts for Ms. Dykstra reflect a bonus prorated on a daily basis beginning on the starting date of her employment term. There is no threshold payment in the ABP and the maximum payout under the ABP guidelines is 200% of the bonus target. See “—Compensation Discussion and Analysis—Elements of Compensation for 2012—2012 Annual Cash Bonus.”
(2) The exercise price of options awarded under the 2010 Stock Incentive Plan is the closing price of our common stock on the date of grant.
(3) Represents the grant date fair value of each of these awards calculated in accordance with ASC 718. See footnote 4 to the 2012 Summary Compensation Table above.
(4) Reflects awards of Rev PSUs.
(5) Reflects awards of TSR PSUs.
(6) Reflects awards of time-based stock options. Does not reflect a reduction in exercise price or options awarded in connection with the special cash dividend equitable adjustment.
(7) Reflects awards of performance-based stock options. Does not reflect a reduction in exercise price or options awarded in connection with the special cash dividend equitable adjustment.
(8) Reflects awards of RSUs.
(9) Reflects deferred Director RSUs granted to Ms. Dykstra during her term as a director of the Company prior to joining the Company as CFO on September 19, 2012. Does not reflect RSUs awarded in connection with the special cash dividend equitable adjustment.
(10) Grants approved by the Board of Directors.
(11) Mr. Reid-Dodick received an equity award in December 2011 upon his commencement of employment as Executive Vice President and Chief People Officer. As a result he was not granted an equity award in 2012. See “Outstanding Equity Awards at 2012 Fiscal Year End” table below.

 

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NARRATIVE TO THE 2012 SUMMARY COMPENSATION TABLE AND THE GRANTS OF PLAN-BASED AWARDS IN 2012 TABLE

The grants of options to purchase AOL common stock and the awards of RSUs and PSUs were made under the 2010 Stock Incentive Plan. Unless otherwise provided in his or her employment agreement, the options were granted and RSUs and PSUs were awarded to the NEOs on the following terms and conditions:

 

   

The per share exercise price for each time-based option is the closing price of a share of our common stock on the date of the grant and the shares underlying each of the options will vest over a four-year period with 25% vesting on the first anniversary of the grant date and thereafter in equal monthly installments for the remaining 36 months. The per share exercise price for each performance-based option is the closing price of a share of our common stock on the date of the grant. The shares underlying each of the performance-based option will vest over a two-year period, subject to continued employment with the Company, with (i) 50% of the options vesting on or following the first anniversary of the grant date if the following is achieved: a price per share equals or exceeds a 20% increase from the average closing price of Company common stock for the 20 trading days prior to the date of grant and equaling or exceeding such closing price for 20 consecutive trading days; and (ii) the remaining 50% of the options vesting on or following the second anniversary of the grant date if the following is achieved: a price per share equals or exceeds a 30% increase from the average closing price of AOL common stock for the 20 trading days prior to the date of grant and equaling or exceeding such closing price for 20 consecutive trading days. Unvested options terminate on the fourth anniversary of the grant date. Holders of time-based and performance-based options are not entitled to receive dividends or dividend equivalents and do not have any voting rights with respect to the shares of Company common stock underlying the stock options.

 

   

RSUs vest 50% on the second anniversary of the grant date and the remaining 50% vest in two equal installments on each of the third and fourth anniversaries of the grant date. Each RSU, once vested, entitles the holder to receive one share of our common stock within 60 days of the relevant vesting date. Holders of the RSUs are eligible to receive dividend equivalents on unvested RSUs, if and when regular cash dividends are paid on outstanding shares of Company common stock and at the same rate. The awards of RSUs confer no voting rights on holders and are subject to restrictions on transfer and forfeiture prior to vesting.

 

   

TSR PSUs vest on the date the Committee certifies the achievement of certain performance criteria based on the Company’s Total Shareholder Return as compared to the Total Shareholder Return of companies in the Company’s peer group over a three-year period of time (“Performance Period”), subject to continued employment with the Company, which certification date shall be no later than March 15 of the year following the Performance Period. The number of performance shares actually earned pursuant to the TSR PSU is based on the relative Total Shareholder Return of the Company as compared to the Total Shareholder Return each of the companies in the Company’s peer index over the period beginning January 1, 2012 and ending December 31, 2014 and subject to the Compensation Committee’s certification of performance and the NEO’s continuous employment through the vesting date. Actual performance shares earned could be anywhere from 0 to 200% of the target amount of shares. Other material terms of the TSR PSUs are described in the “Compensation Discussion and Analysis” above. Holders of TSR PSUs are eligible to receive dividend equivalents on unvested TSR PSUs, if and when regular cash dividends are paid on outstanding shares of Company common stock underlying the TSR PSUs and at the same rate. The awards of TSR PSUs confer no voting rights on holders and are subject to restrictions on transfer and forfeiture prior to vesting.

 

   

Rev PSUs vest on the date the Committee certifies the achievement of certain performance criteria based on revenue goals that align with the Company’s revenue goals at the end of the Performance Period, subject to continued employment with the Company, which certification date shall be no later than March 15 of the year following the Performance Period. The number of performance shares actually earned pursuant to the Rev PSU is based on achievement of revenue goals that align with the

 

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Company’s revenue goals over the period beginning January 1, 2012 and ending December 31, 2014 and subject to the Compensation Committee’s certification of performance and NEO’s continuous employment through the vesting date. Actual performance shares earned could be anywhere from 0 to 200% of the target amount of shares. Other material terms of the Rev PSUs are described in the “Compensation Discussion and Analysis” above. Holders of the Rev PSUs are eligible to receive dividend equivalents, if and when regular cash dividends are paid on outstanding shares of Company common stock underlying the Rev PSUs and at the same rate. The awards of Rev PSUs confer no voting rights on holders and are subject to restrictions on transfer and forfeiture prior to vesting.

Employment Agreements with Named Executive Officers

Consistent with our goal of attracting and retaining executives in a competitive environment, we have entered into employment agreements with each of our NEOs. The employment agreements with the NEOs who continue to be employed by us are described below.

Employment Agreement with Mr. Armstrong

General. On March 12, 2009, AOL LLC and Time Warner entered into an employment agreement with Mr. Armstrong, which became effective on April 7, 2009, as amended on December 15, 2009 (the “2009 Armstrong Agreement”). The 2009 Armstrong Agreement, pursuant to which Mr. Armstrong served as our Chairman and CEO, had an initial term ending on April 7, 2012 and then continued on a month-to-month basis until either party provided the other party with 60-days’ written notice of termination. The 2009 Armstrong Agreement provided for a minimum annual base salary of $1,000,000, an annual cash bonus with a target amount of $2,000,000 and a maximum amount of $4,000,000 and participation in our savings and welfare benefit plans and $50,000 of group life insurance. The 2009 Armstrong Agreement also provided for an annual cash payment to him equal to twice the premium he would have had to pay to obtain life insurance under the Group Universal Life insurance program made available by AOL. The 2009 Armstrong Agreement was assigned by AOL LLC to AOL in connection with the Spin-off and, effective upon the Spin-off, Time Warner ceased to have any obligations thereunder.

On March 29, 2012, the Company negotiated and the Committee approved, in consultation with CAP, a new employment agreement with Mr. Armstrong, effective as of March 29, 2012 (the “2012 Armstrong Agreement”) that supersedes and replaces the 2009 Armstrong Agreement. The 2012 Armstrong Agreement provides for Mr. Armstrong to serve as the Company’s CEO through March 28, 2016. If, at the end of the term, Mr. Armstrong’s employment has not been terminated previously and Mr. Armstrong and the Company have not agreed to an extension or renewal of the Agreement or to the terms of a new employment agreement, Mr. Armstrong’s employment term shall continue on a month-to-month basis subject to termination by either party on 30 days’ written notice. The 2012 Armstrong Agreement sets a total target compensation for Mr. Armstrong at a level appropriate for his position and consistent with benchmarks for CEOs of comparable companies as determined by evaluating proxy data for our Industry Peer Group. Mr. Armstrong’s base salary continues to be $1,000,000 and his target annual bonus opportunity continues to be equal to 200% of base salary, earned in accordance with the Executive AIP, and is not guaranteed. Mr. Armstrong continues to be able to participate in the Company’s retirement and welfare benefit plans. He is no longer entitled to any payments with respect to life insurance. The 2012 Armstrong Agreement substantially conforms to the material terms established by the Company with respect to all of its executive officers. As a result, the 2012 Armstrong Agreement reduces some benefits to Mr. Armstrong compared to the 2009 Armstrong Agreement including lower cash severance benefits, the payment of cash severance benefits over time rather than in a lump sum, and no acceleration of vesting for future equity awards upon a termination without cause. For a further discussion of the terms of the 2012 Armstrong Agreement, see page 74 of this Proxy Statement.

In connection with entering into the 2012 Armstrong Agreement, on March 28, 2012, the Committee approved an award of a time-based stock option valued at $2,000,000 (213,219 shares), a performance-based stock option valued at $3,000,000 (372,439 shares), TSR PSUs valued at $1,000,000 (38,476 TSR PSUs) and

 

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Rev PSUs valued at $1,000,000 (38,476 Rev PSU), each granted on June 15, 2012. Mr. Armstrong did not receive a grant in 2011 or 2012. The number of shares subject to the time-based stock option and performance-based stock option was determined by dividing the approved value by a conversion factor based on the Black-Scholes value of the options, which for the time-based stock option results in a slightly different value than that determined under ASC 718 due to timing differences as to when the Black-Scholes value was determined for each purpose. For the TSR PSUs and the Rev PSUs, the target number of shares covered by each award was determined by dividing the approved value of the award by the closing price of the Company common stock on the grant date. The Company determined the fair value for the TSR PSU awards using a Monte Carlo simulation model (consistent with ASC 718), for purposes of the Summary Compensation Table and the Grants of Plan-Based Awards Table, which results in a value different than the value used by the Committee to determine the target number of shares subject to the award). The time-based option vests over four years with 25% vesting on June 15, 2013, and the remainder thereafter vesting in equal monthly installments for the remaining 36 months. The performance-based stock option vests over a two-year period with (i) 50% of the options vesting on or following the first anniversary of the grant date if the closing price per share during any 20 consecutive trading day period equals or exceeds a 20% increase from the average closing price of the Company’s common stock for the 20 trading days prior to the date of grant, subject to continued employment with the Company; and (ii) the remaining 50% of the options vesting on or following the second anniversary of the grant date if the closing price per share during any 20 consecutive trading day period equals or exceeds a 30% increase from the average closing price of AOL common stock for the 20 trading days prior to the date of grant, subject to continued employment with the Company. Unvested options terminate on the fourth anniversary of the grant date. The per share exercise price for the options is the closing price of our common stock on the date of grant. The number of performance shares actually earned pursuant to the TSR PSU is based on the relative Total Shareholder Return of the Company as compared to the Total Shareholder Return of each of the companies in the Company’s peer index over the period beginning January 1, 2012 and ending December 31, 2014, and subject to the Compensation Committee’s certification of performance and Mr. Armstrong’s continuous employment through the vesting date. Actual performance shares earned could be anywhere from 0 to 200% of the target amount of shares. The number of performance shares actually earned pursuant to the Rev PSU is based on achievement of revenue goals that align with the Company’s revenue goals over the period beginning January 1, 2012 and ending December 31, 2014, and subject to the Compensation Committee’s certification of performance and Mr. Armstrong’s continuous employment through the vesting date. Actual performance shares earned pursuant to the TSR PSU could be anywhere from 0 to 200% of the target amount of shares based on the relative Total Shareholder Return of the Company as compared to the Total Shareholder Return of each of the companies in the Company’s peer index over the period beginning January 1, 2012 and ending December 31, 2014, and subject to the Compensation Committee’s certification of performance and Mr. Armstrong’s continuous employment through the vesting date. In approving the 2012 Armstrong Agreement and the awards, the Committee reviewed peer group and salary survey data and consulted with its independent compensation consultant.

Employment Agreement with Mr. Minson

General. Mr. Minson stepped down from his position as EVP and COO effective February 26, 2013.

On August 24, 2009, AOL LLC entered into an employment agreement with Mr. Minson, which became effective on September 8, 2009 (“2009 Minson Agreement”). The 2009 Minson Agreement, pursuant to which Mr. Minson served as our Executive Vice President and CFO, had an initial term through September 7, 2012, and then continued on a month-to-month basis until either party provided the other party with 60-days’ written notice of termination. The agreement provided for a minimum annual base salary of $750,000, an annual cash bonus with a target amount equal to 200% of base salary and a maximum amount equal to 300% of base salary and participation in our retirement and welfare benefit plans.

On September 10, 2012, the Company negotiated and the Committee approved, in consultation with CAP a new employment agreement with Mr. Minson, effective as of September 7, 2012 (the “2012 Minson

 

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Agreement”) that supersedes and replaces the 2009 Minson Agreement. The 2012 Minson Agreement provides for Mr. Minson to serve as the Company’s Executive Vice President and COO through September 6, 2016. If at the end of the term, Mr. Minson’s employment has not been terminated previously and Mr. Minson and the Company have not agreed to an extension or renewal of the Agreement or to the terms of a new employment agreement, Mr. Minson’s employment term shall continue on a month-to-month basis subject to termination by either party on 30 days’ written notice. The 2012 Minson Agreement provides for an annual base salary of $850,000 and target annual bonus opportunity of 200% of his base salary, although the bonus is fully discretionary and is not guaranteed. The 2012 Minson Agreement substantially conforms to the material terms established by the Company with respect to all of its executive officers. As a result, the 2012 Minson Agreement reduces some benefits to Mr. Minson compared to the 2009 Minson Agreement including lower cash severance benefits, the payment of cash severance benefits over time rather than in a lump sum, and no acceleration of vesting upon a termination without cause for equity awards granted in the future.

In connection with entering into the 2012 Minson Agreement, on September 7, 2012, the Committee approved an equity award valued at $5,000,000, with 33 1/3% in each of stock options, RSUs and TSR PSUs (143,678 stock options, 49,149 RSUs and 49,149 TSR PSUs), each granted on September 14, 2012. The actual number of shares subject to each type of award was determined in a manner similar to that for Mr. Armstrong’s awards as described above. The option vests over 4 years with 25% vesting on September 14, 2013 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months. The per share exercise price for the options is the closing price of our common stock on the date of grant. The RSU vests over four years with 50% vesting on September 14, 2014 and the remaining 50% vesting in two equal installments on September 14, 2015 and September 14, 2016. Actual performance shares earned pursuant to the TSR PSU could be anywhere from 0 to 200% of the target amount of shares based on the relative Total Shareholder Return of the Company as compared to the Total Shareholder Return of each of the companies in the Company’s peer index over the period beginning January 1, 2012 and ending December 31, 2014, and subject to the Compensation Committee’s certification of performance and Mr. Minson’s continuous employment through the vesting date. In approving the 2012 Minson Agreement and the awards, the Committee reviewed peer group and salary survey data and consulted with its independent compensation consultant.

In connection with the annual 2012 Company equity grant, on January 24, 2012, the Committee approved an award of (i) stock options with an aggregate grant date value of $300,000 (38,510 stock options) and with 25% vesting on February 15, 2013 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months; (ii) RSUs with a grant date value of $200,000 (10,649 RSUs), with 50% vesting on February 15, 2014 and the remaining 50% vesting in two equal installments on February 15, 2015 and February 15, 2016. The actual number of shares subject to each type of award was determined in a manner similar to that for Mr. Armstrong’s awards as described above. The per share exercise price for the options is the closing price of our common stock on the date of grant.

On March 5, 2013, we entered into a Separation Agreement with Mr. Minson pursuant to which he will remain with the Company as Vice Chairman for a transition period ending no later than December 31, 2013.

Employment Agreement with Ms. Dykstra

On September 19, 2012, we entered into an employment agreement (the “Dykstra Agreement”) with Ms. Dykstra when she commenced employment as our Executive Vice President and CFO effective September 19, 2012.

Ms. Dykstra’s employment term is from September 19, 2012 to September 18, 2016, and then continues on a month-to-month basis until either party provides the other party with 30 days’ written notice of termination. The initial term for Ms. Dykstra was set at four years to reflect our standard practice. The Compensation Committee consulted with CAP to approve the total target compensation for Ms. Dykstra. The Dykstra Agreement provides for an annual base salary of $700,000 and target annual bonus opportunity of 100% of her base salary. In order to compensate Ms. Dykstra for forgone compensation related to Board roles and lost

 

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vacation time and expenses, and as a hiring incentive, the Compensation Committee approved a cash sign-on payment equal to $200,000. If Ms. Dykstra voluntarily terminates her employment or is terminated for cause within the first year of her employment, Ms. Dykstra is required to repay the full amount of the sign-on bonus. Ms. Dykstra’s agreement provides that to the extent a newly hired officer of the Company holding the title of Executive Vice President of the company receives equity with more favorable vesting terms than Ms. Dykstra’s initial equity grant terms or a current executive officer receives new equity with more favorable vesting terms than Ms. Dykstra’s initial equity grant terms, then Ms. Dykstra’s initial equity grants shall be amended to provide the same such vesting terms, unless in the case of the newly hired executive, the differing equity terms are in order to compensate for equity incentives from a previous employer that will be forfeited. The Agreement otherwise substantially conforms to the material terms established by the Company with respect to all of its executive officers.

On September 18, 2012, the Compensation Committee approved the material terms of the proposed compensation and the terms of the Dykstra Agreement. In addition, in connection with entering into the Dykstra Agreement, the Compensation Committee approved an equity award valued at $1,750,000, with 33 1/3% in each of stock options, RSUs and TSR PSUs (48,209 stock options, 16,487 RSUs and 16,487 TSR PSUs), each granted on October 1, 2012. The actual number of shares subject to each type of award was determined in a manner similar to that for Mr. Armstrong’s awards as described above. The shares subject to the option vest over a four-year period with 25% vesting on October 1, 2013 and the remaining shares vesting on a pro rata monthly basis for the 36 month period thereafter. The per share exercise price for the option award is the closing price of the common stock on the grant date. The RSUs vest over four years with 50% vesting on October 1, 2014 and the remaining 50% vesting in two equal installments on October 1, 2015 and October 1, 2016. Actual performance shares earned pursuant to the TSR PSU could be anywhere from 0 to 200% of the target amount of shares based on the relative Total Shareholder Return of the Company as compared to the Total Shareholder Return of each of the companies in the Company’s peer index over the period beginning January 1, 2012 and ending December 31, 2014, and subject to the Compensation Committee’s certification of performance and Ms. Dykstra’s continuous employment through the vesting date. In approving Ms. Dykstra’s agreement and the awards, the Committee reviewed peer group and salary survey data and consulted with its independent compensation consultant.

Additionally, in her role as a director of the Company prior to commencing employment with AOL on September 19, 2012, Ms. Dykstra was awarded an annual director grant of 5,504 RSUs on June 26, 2012 and 2,211 RSUs on September 14, 2012 for her role on the Special Committee of the Board.

Employment Agreement with Mr. Brown

On April 5, 2011, Mr. Brown joined the Company as Senior Vice President of Network, Publisher and Data Technologies. On March 20, 2012, Mr. Brown was promoted to Interim Chief Technology Officer. Mr. Brown did not receive a salary increase in this role but received a bonus payment of $10,000 per month until the time that he assumed the role of CTO on May 9, 2012. On May 9, 2012, AOL entered into an employment agreement (the “Brown Agreement”) with Mr. Brown in connection with his promotion to Executive Vice President and Chief Technology Officer, effective May 9, 2012. The Brown Agreement provides for an annual base salary of $500,000 and target annual bonus opportunity of 100% of his base salary. Mr. Brown’s employment term is from May 9, 2012 to May 8, 2016, and then continues on a month-to-month basis until either party provides the other party with 30 days’ written notice of termination. The initial term for Mr. Brown was set at four years to reflect our standard practice. The Brown Agreement substantially conforms to the material terms established by the Company with respect to all of its executive officers. On May 7, 2012, the Compensation Committee approved the material terms of the proposed compensation and the terms of the Brown Agreement. In addition, in connection with entering into the Brown Agreement, the Compensation Committee approved an equity award valued at $1,200,000, with 33 1/3% in each of stock options, RSUs and TSR PSUs (42,643 stock options, 15,390 RSUs and 15,390 TSR PSUs), each granted on June 15, 2012. The actual number of shares subject to each type of award was determined in a manner similar to that for Mr. Armstrong’s awards as described above. The shares subject to the option vest over a four-year period with 25% vesting on June 15, 2013 and the remaining shares

 

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vesting on a pro rata monthly basis for the 36 month period thereafter. The RSUs vest over four years with 50% vesting on June 15, 2014 and the remaining 50% vesting in two equal installments on June 15, 2015 and June 15, 2016. The per share exercise price for the option award is the closing price of the common stock on the grant date. Actual performance shares earned pursuant to the TSR PSU could be anywhere from 0 to 200% of the target amount of shares based on the relative Total Shareholder Return of the Company as compared to the Total Shareholder Return of each of the companies in the Company’s peer index over the period beginning January 1, 2012 and ending December 31, 2014, and subject to the Compensation Committee’s certification of performance and Mr. Brown’s continuous employment through the vesting date. In approving Mr. Brown’s agreement and the awards, the Committee reviewed peer group and salary survey data and consulted with its independent compensation consultant.

In connection with the annual 2012 Company equity grant to Mr. Brown in his role as Senior Vice President of Network, Publisher and Data Technologies, on January 24, 2012 the Committee approved an award to Mr. Brown of (i) a stock option with an aggregate grant date value of $67,521 (10,108 stock options) and with one-third vesting on February 15, 2013 and the remainder thereafter vesting in equal monthly installments for the remaining twenty-four months; and (ii) RSUs with a grant date value of $183,725 (9,783 RSUs) with one-third vesting on February 15, 2013 and the remaining two-thirds vesting in two equal installments on February 15, 2014 and February 15, 2015, each granted on February 15, 2012. The actual number of shares subject to each type of award was determined in a manner similar to that for Mr. Armstrong’s awards as described above. The per share exercise price for the options is the closing price of our common stock on the date of grant.

Employment Agreement with Ms. Jacobs

On June 11, 2010, the Company entered into an employment agreement (the “Jacobs Agreement”) with Ms. Jacobs in connection with her promotion to Executive Vice President, General Counsel and Corporate Secretary effective May 10, 2010 to set forth the key terms of her continued employment with us in her new role. Ms. Jacobs’ employment term is from May 10, 2010 to April 30, 2014, and then continues on a month-to-month basis until either party provides the other party with 30 days’ written notice of termination. The initial term for Ms. Jacobs was set at four years to reflect our standard practice. Pursuant to the terms of the Jacobs Agreement, effective May 10, 2010, Ms. Jacobs’ base salary was increased from $335,000 to $450,000 and her annual target bonus opportunity was increased from 50% to 75% of base salary.

In connection with entering into the Jacobs Agreement, on June 30, 2010, the Compensation Committee approved an equity award for Ms. Jacobs valued at $2,500,000, 60% in RSUs and 40% in a stock option (73,855 RSUs and a stock option for 164,122 shares), effective July 1, 2010. The actual number of shares subject to each type of award was determined in a manner similar to that for Mr. Armstrong’s awards as described above. The RSUs vest 50% on May 10, 2012 and the remaining 50% vests in two equal installments on each of May 10, 2013 and May 10, 2014. The per share exercise price for the option is the closing price of our common stock on the date of grant. The shares subject to the option vest over a four-year period with 25% having vested on May 10, 2011 and thereafter in equal monthly installments for the remaining 36 months. In approving Ms. Jacobs’ agreement and the related equity awards, the Committee reviewed peer group and salary survey data and consulted with its independent compensation consultant.

On March 30, 2011, the Compensation Committee approved a first amendment to Ms. Jacobs’ employment agreement. Effective as of April 1, 2011, Ms. Jacobs’ base salary was increased from $450,000 to $500,000 and her annual target bonus opportunity was increased from 75% to 100% of base salary. On December 5, 2011, the Compensation Committee approved a second amendment to Ms. Jacobs’ employment agreement. Effective as of December 1, 2011, Ms. Jacobs’ annual base salary was increased from $500,000 to $600,000 in connection with her expanded role as head of the Corporate Development and Corporate Services Departments. On December 12, 2012, the Compensation Committee approved a third amendment to Ms. Jacobs’ employment agreement. The amendment provided for a minor modification intended to ensure documentary compliance under section 409A of the Internal Revenue Code.

 

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Ms. Jacobs’ employment agreement also provides that she had twenty-four (24) months from the employment agreement effective date to elect to relocate to New York. Her relocation benefits would be in accordance with the relocation program for senior executives then in effect.

In connection with the annual 2012 Company equity grant, on January 24, 2012, the Committee approved an award of (i) a stock option with an aggregate grant date value of $300,000 (38,510 stock options) and with 25% vesting on February 15, 2013 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months; and (ii) RSUs with a grant date value of $200,000 (10,649 RSUs) with 50% vesting on February 15, 2014 and the remaining 50% vesting in two equal installments on February 15, 2015 and February 15, 2016, each granted on February 15, 2012. The actual number of shares subject to each type of award was determined in a manner similar to that for Mr. Armstrong’s awards as described above. The per share exercise price for the options is the closing price of our common stock on the date of grant.

Employment Agreement with Mr. Reid-Dodick

On December 1, 2011, we entered into an employment agreement with Mr. Reid-Dodick (the “Reid-Dodick Agreement”) to set forth the key terms of his employment as Executive Vice President and Chief People Officer. Mr. Reid-Dodick’s employment term is from December 5, 2012 to December 4, 2015, and then continues on a month-to-month basis until either party provides the other party with 30 days’ written notice of termination. The initial term was set at four years to reflect our standard practice. Mr. Reid-Dodick’s base salary was set at $500,000 and his annual target bonus opportunity was set at 100% of base salary. In order to compensate Mr. Reid-Dodick for certain benefits and payments that he forfeited when he ceased employment with his previous employer, the Compensation Committee approved a cash sign-on payment equal to $120,000. If Mr. Reid-Dodick voluntarily terminated his employment during the first twelve months of his employment, Mr. Reid-Dodick would have been required to repay the full amount of the sign-on bonus.

On December 5, 2011, the Compensation Committee approved the material terms of the proposed compensation, the terms of the Reid-Dodick Agreement and an equity award for Mr. Reid-Dodick reflecting a value of $1,200,000 (34,985 RSUs and 122,033 stock options) effective December 15, 2011. The actual number of shares subject to each type of award was determined in a manner similar to that for Mr. Armstrong’s awards as described above. The RSUs vest 50% on December 15, 2013 and the remaining 50% vests in two equal installments on each of December 15, 2014 and December 15, 2015. The per share exercise price for the option is the closing price of our common stock on the date of grant. The shares subject to the option vest over a four-year period with 25% having vested on December 15, 2012 and thereafter in equal monthly installments for the remaining 36 months. In approving Mr. Reid-Dodick’s agreement and the related awards, the Committee reviewed peer group and salary survey data and consulted with its independent compensation consultant.

On July 17, 2012 we entered into an amendment to the Reid-Dodick Agreement. Pursuant to this amendment, the provision in the Reid-Dodick Agreement that provided for pro rata vesting of certain equity awards upon a termination without cause or resignation for good reason was replaced with the Company’s standard provision providing for forfeiture of any unvested equity upon a termination of employment.

 

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OUTSTANDING EQUITY AWARDS AT 2012 FISCAL YEAR-END

The market or payout value of shares, units or other rights was calculated using the NYSE closing price of $29.61 per share of our common stock on December 31, 2012.

 

     Option Awards     Stock Awards  

Name

(a)

  Date of
Option
Grant
    Number of
Securities
Underlying
Options (#)
Exercisable
(43)

(b)
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
(43)

(c)
    Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options

(#)(43)
(d)
    Option
Exercise
Price
($)(44)

(e)
    Option
Expiration
Date

(f)
    Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)(45)

(g)
    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)

(h)
    Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)

Units or
other
rights
that have
not
vested
(45)

(i)
    Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
($)

(j)
 
                   

Tim Armstrong

    12/9/2009 (1)      542,314        —          —        $ 10.31        4/15/2019        —          —          —          —     
    12/31/2009 (2)      1,841,339        —          —        $ 20.16        12/30/2019        —          —          —          —     
    1/4/2010 (3)      805,222        —          —        $ 20.70        1/3/2020        —          —          —          —     
    6/15/2012 (4)      —          246,304        —        $ 22.50        6/14/2022        —          —          —          —     
    6/15/2012 (5)      —          —          430,231      $ 22.50        6/14/2022        —          —          —          —     
    6/15/2012        —          —          —          —          —          —          —          76,952 (6)    $ 2,278,549   
    6/15/2012        —          —          —          —          —          —          —          19,238 (7)    $ 569,637   

Arthur Minson

    12/31/2009 (8)      80,850        103,979        —        $ 20.16        12/30/2019        —          —          —          —     
    12/31/2009        —          —          —          —          —          18,000 (9)    $ 532,980        —          —     
    1/29/2010 (10)      22,368        7,472        —        $ 20.76        1/28/2020        —          —          —          —     
    1/29/2010        —          —          —          —          —          1,292 (11)    $ 38,256        —          —     
    2/15/2011 (12)      7,936        9,391        —        $ 18.84        2/14/2021        —          —          —          —     
    2/15/2011        —          —          —          —          —          4,080 (13)    $ 120,809        —          —     
    12/15/2011 (14)      73,421        220,266        —        $ 11.88        12/14/2021        —          —          —          —     
    2/15/2012 (15)      —          44,485        —        $ 16.26        2/14/2022        —          —          —          —     
    2/15/2012        —          —          —          —          —          10,649 (16)    $ 315,317        —          —     
    9/14/2012 (17)      —          165,972        —        $ 29.36        9/13/2022        —          —          —          —     
    9/14/2012        —          —          —          —          —          —          —          98,298 (18)    $ 2,910,604   
    9/14/2012        —          —          —          —          —          49,149 (19)    $ 1,455,302        —          —     

Karen Dykstra

    1/29/2010 (20)      12,048        —          —        $ 20.76        1/28/2020        —          —          —          —     
    6/26/2012        —          —          —          —          —          6,434 (21)    $ 190,511        —          —     
    9/14/2012        —          —          —          —          —          2,584 (22)    $ 76,512        —          —     
    10/1/2012 (23)      —          55,689        —        $ 30.63        9/30/2022        —          —          —          —     
    10/1/2012        —          —          —          —          —          —          —          32,974 (24)    $ 976,360   
    10/1/2012        —          —          —          —          —          16,487      $ 488,180 (25)      —          —     

Curtis Brown

    12/15/2010 (26)      7,670        7,693        —        $ 21.89        12/14/2020        —          —          —          —     
    12/15/2010        —          —          —          —          —          1,750 (27)    $ 51,818        —          —     
    2/15/2012 (28)      —          11,675        —        $ 16.26        2/14/2022        —          —          —          —     
    2/15/2012        —          —          —          —          —          9,783 (29)    $ 289,674        —          —     
    6/15/2012 (30)      —          49,260        —        $ 22.50        6/14/2022        —          —          —          —     
    6/15/2012        —          —          —          —          —          —          —          30,780 (31)    $ 911,396   
    6/15/2012        —          —          —          —          —          15,390 (32)    $ 455,698        —          —     

Julie Jacobs

    12/31/2009 (33)      799        1,929        —        $ 20.16        12/30/2019        —          —          —          —     
    12/31/2009        —          —          —          —          —          2,500 (34)    $ 74,025        —          —     
    7/1/2010 (35)      19,746        67,151        —        $ 17.59        6/30/2020        —          —          —          —     
    7/1/2010        —          —          —          —          —          36,928 (36)    $ 1,093,438        —          —     
    2/15/2011 (37)      1,442        9,338        —        $ 18.84        2/14/2021        —          —          —          —     
    2/15/2011        —          —          —          —          —          4,080 (38)    $ 120,809        —          —     
    2/15/2012 (39)      —          44,485        —        $ 16.26        2/14/2022        —          —          —          —     
    2/15/2012        —          —          —          —          —          10,649 (40)    $ 315,317        —          —     

John Reid-Dodick

    12/15/2011 (41)      35,241        105,728        —        $ 11.88        12/14/2021        —          —          —          —     
    12/15/2011 (42)      —          —          —          —          —          34,985      $ 1,035,906        —          —     

 

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(1) On April 15, 2009, pursuant to his employment agreement, Time Warner awarded Mr. Armstrong Time Warner stock options and RSUs. In connection with the conversion of Mr. Armstrong’s Time Warner former equity awards, these stock options and RSUs converted to AOL Inc. stock options and RSUs on December 9, 2009 under the same terms and conditions (including vesting) as the applicable Time Warner stock options and RSUs. The unvested stock options vested in two equal installments on January 15, 2010 and April 15, 2010. The RSUs vested in full on April 15, 2010.
(2) The stock options granted to Mr. Armstrong on December 31, 2009 vested over a three-year period, with one-third having vested on each of December 9, 2010 December 9, 2011 and, December 9, 2012.
(3) The stock options granted to Mr. Armstrong on January 4, 2010 vested over a two-year period in eight equal quarterly installments.
(4) The stock options granted to Mr. Armstrong on June 15, 2012 vest over a four-year period, with 25% vesting on June 15, 2013, and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(5) The stock options granted to Mr. Armstrong on June 15, 2012 vest as follows: 50% vest on June 15, 2013 if the closing price of the Company’s common stock during any 20 consecutive trading day period during the first year exceeds $32.52; and 50% vest on June 15, 2014 if the closing price of the Company’s common stock on the New York Stock Exchange during any 20 consecutive trading day period during the second year exceeds $30.50.
(6) The TSR PSUs granted to Mr. Armstrong on June 15, 2012 vest as follows: vesting is based on the relative Total Shareholder Return of the Company as compared to the Total Shareholder Return of each of the companies in the Company’s peer group over the period beginning January 1, 2012 and ending December 31, 2014. Vesting occurs upon Compensation Committee certification that performance criteria have been met. Actual performance rights earned under the TSR PSUs could be anywhere from 0 to 200% of the number of performance rights granted.
(7) The Rev PSUs granted to Mr. Armstrong on June 15, 2012 vest as follows: vesting is based on achievement of revenue goals that align with the Company’s revenue goals over the period beginning January 1, 2012 and ending December 31, 2014. Vesting occurs upon Committee certification that performance criteria have been met. Actual performance rights earned under the Rev PSUs could be anywhere from 0 to 200% of the number of performance rights granted.
(8) The stock options granted to Mr. Minson on December 31, 2009 vest over a four-year period with 25% having vested on December 31, 2010 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(9) The RSUs granted to Mr. Minson on December 31, 2009 vest as follows: RSUs will vest over a four-year period with 50% having vested on December 31, 2011, 25% having vested on December 31, 2012 and the remaining 25% vesting on December 31, 2013.
(10) The stock options granted to Mr. Minson on January 29, 2010 vest over a four-year period with 25% having vested on December 31, 2010 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(11) The RSUs granted to Mr. Minson on January 29, 2010 vest as follows: RSUs vest over a four-year period with 50% having vested on December 31, 2011, 25% having vested on December 31, 2012 and the remaining 25% vesting on December 31, 2013.
(12) The stock options granted to Mr. Minson on February 15, 2011 vest over a four-year period with 25% vesting on February 4, 2012 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(13) The RSUs granted to Mr. Minson on February 15, 2011 vest as follows: RSUs vest over a four-year period with 50% vesting on February 4, 2013 and the remaining 50% vesting in two equal installments on February 4, 2014 and February 4, 2015, respectively.
(14) The stock options granted to Mr. Minson on December 15, 2011 vest over a four-year period with 25% having vested on December 15, 2012, and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(15) The stock options granted to Mr. Minson on February 15, 2012 vest over a four-year period with 25% vesting on February 15, 2013 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(16) The RSUs granted to Mr. Minson on February 15, 2012 vest as follows: RSUs vest over a four-year period with 50% vesting on February 15, 2014 and the remaining 50% vesting in two equal installments on February 15, 2015 and February 4, 2016, respectively.
(17) The stock options granted to Mr. Minson on September 14, 2012 vest over a four-year period with 25% vesting on September 14, 2013 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(18) The TSR PSUs granted to Mr. Minson on September 14, 2012 vest as follows: TSR PSUs vesting is based on the relative Shareholder Return of the Company as compared to the Total Shareholder Return of each of the companies in the Company’s peer group over the period beginning January 1, 2012 and ending December 31,2014. Vesting occurs upon Compensation Committee certification that performance criteria have been met. Actual performance rights earned under the TSR PSUs could be anywhere from 0 to 200% of the number of performance rights granted.
(19) The RSUs granted to Mr. Minson on September 14, 2012 vest as follows: RSUs vest over a four-year period with 50% vesting on September 14, 2014 and the remaining 50% vesting in two equal installments on September 14, 2015 and September 14, 2016, respectively.
(20) The stock options were granted to Ms. Dykstra on January 29, 2010 in connection with her role as a director of the Company. The options vested on January 29, 2011.
(21) The RSUs were granted to Ms. Dykstra on June 26, 2012 in her role as a director. They vest on the earlier of (i) June 26, 2013 or (ii) the day before the 2013 AOL Inc. annual meeting of stockholders. Ms. Dykstra has elected to defer the settlement of the RSUs until after her separation of service pursuant to the AOL Inc. 2011 Directors’ Deferred Compensation Plan.
(22) The RSUs were granted to Ms. Dykstra on September 14, 2012 in her role as a director. They vest on September 14, 2013. Ms. Dykstra has elected to defer the settlement of the RSUs until after her separation of service pursuant to the AOL Inc. 2011 Directors’ Deferred Compensation Plan.
(23) The stock options granted to Ms. Dykstra on October 1, 2012 vest over a four-year period with 25% vesting on October 1, 2013 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(24) The TSR PSUs granted to Ms. Dykstra on October 1, 2012 vest as follows: vesting is based on the relative Total Shareholder Return of the Company as compared to the Total Shareholder Return of each of the companies in the Company’s peer group over the period beginning January 1, 2012 and ending December 31, 2014. Vesting occurs upon Compensation Committee certification that performance criteria have been met. Actual performance rights earned under the TSR PSUs could be anywhere from 0 to 200% of the number of performance rights granted.
(25) The RSUs granted to Ms. Dykstra on October 1, 2012 vest as follows: RSUs vest over a four-year period with 50% vesting on October 1, 2014 and the remaining 50% vesting in two equal installments on October 1, 2015 and October 1, 2016, respectively.
(26) The stock options granted to Mr. Brown on December 15, 2010 vest over a four-year period with 25% having vested on December 15, 2011 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.

 

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(27) The RSUs granted to Mr. Brown on December 15, 2010 vest as follows: RSUs vest over a four-year period with 50% having vested on December 15, 2012 and the remaining 50% vesting in two equal installments on December 15, 2013 and December 15, 2014, respectively.
(28) The stock options granted to Mr. Brown on February 15, 2012 vest over a three-year period with one-third vesting on February 15, 2013 with the remainder thereafter vesting in equal monthly installments for the remaining 24 months.
(29) The RSUs granted to Mr. Brown on February 15, 2012 vest as follows: RSUs vest over a three-year period such that one-third will vest on February 15, 2013 and the remaining two-thirds will vest on February 15, 2014 and February 15, 2015, respectively.
(30) The stock options granted to Mr. Brown on June 15, 2012 vest over a four-year period with 25% vesting on June 15, 2013 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(31) The TSR PSUs granted to Mr. Brown on June 15, 2012 vest as follows: TSR PSUs vesting is based on the relative Total Shareholder Return of the Company as compared to the Total Shareholder Return of each of the companies in the Company’s peer group over the period beginning January 1, 2012 and ending December 31, 2014. Vesting occurs upon Committee certification that performance criteria have been met. Actual performance rights earned under the TSR PSUs could be anywhere from 0 to 200% of the number of performance rights granted.
(32) The RSUs granted to Mr. Brown on June 15, 2012 vest as follows: RSUs vest over a four-year period with 50% vesting on June 15, 2014 and the remaining 50% vesting in two equal installments on June 15, 2015 and December 15, 2016, respectively.
(33) The stock options granted to Ms. Jacobs on December 31, 2009 vest over a four-year period with 25% having vested on December 31, 2010 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(34) The RSUs granted to Ms. Jacobs on December 31, 2009 vest as follows: RSUs vest over a four-year period with 50% having vested on December 31, 2011, 25% having vested on December 31, 2012 and the remaining 25% vesting on December 31, 2013.
(35) The stock options granted to Ms. Jacobs on July 1, 2010 vest over a four-year period with 25% having vested on May 10, 2011 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(36) The RSUs granted to Ms. Jacobs on July 1, 2010 vest as follows: RSUs vest over a four-year period with 50% having vested on May 10, 2012 and the remaining 50% vesting in two equal installments on May 10, 2013 and May 10, 2014, respectively.
(37) The stock options granted to Ms. Jacobs on February 15, 2011 vest over a four-year period with 25% having vested on February 4, 2012 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(38) The RSUs granted to Ms. Jacobs on February 15, 2011 vest as follows: RSUs vest over a four-year period with 50% having vested on February 4, 2013 and the remaining 50% vesting in two equal installments on February 4, 2014 and February 4, 2015, respectively.
(39) The stock options granted to Ms. Jacobs on February 15, 2012 vest over a four-year period with 25% vesting on February 15, 2013 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(40) The RSUs granted to Ms. Jacobs on February 15, 2012 vest as follows: RSUs vest over a four-year period with 50% vesting on February 15, 2014 and the remaining 50% vesting in two equal installments on February 15, 2015 and February 15, 2016, respectively.
(41) The stock options granted to Mr. Reid-Dodick on December 15, 2011 vest over a four-year period with 25% vesting on December 15, 2012 and the remainder thereafter vesting in equal monthly installments for the remaining 36 months.
(42) The RSUs granted to Mr. Reid-Dodick on December 15, 2011 vest as follows: RSUs vest over a four-year period with 50% vesting on December 15, 2013 and the remaining 50% vesting in two equal installments on December 15, 2014 and December 15, 2015, respectively.
(43) The amount of stock options reflect an equitable adjustment to the number of stock options outstanding on December 3, 2012 in connection with a special cash dividend paid to the Company’s stockholders on December 14, 2012.
(44) The exercise price of options awarded under the AOL Inc. 2010 Stock Incentive Plan is the closing price of our common stock on the date of grant, equitably adjusted to reflect the reduction in stock option exercise price in connection with a special cash dividend paid to the Company’s stockholders on December 14, 2012.
(45) In connection with a special cash dividend paid to the Company’s stockholders on December 14, 2012, each PSU and RSU, other than director deferred RSUs, outstanding on December 3, 2012 was credited a dividend equivalent that becomes payable at the time that the original PSU or RSU vests. Director deferred RSUs awarded to Ms. Dykstra in her role as a director of the Company were equitably adjusted and she was credited with additional deferred RSUs in accordance with the terms of the AOL Inc. 2011 Directors’ Deferred Compensation Plan.

 

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OPTION EXERCISES AND STOCK VESTED DURING 2012

The following table sets forth information concerning option exercises and RSUs that vested during fiscal 2012 by or for the NEOs.

 

     Option Awards             Stock Awards  

Name

   Number of  Shares
Acquired
on Exercise (#)
     Value Realized on
Exercise ($)
     Number of Shares
Acquired on Vesting (#)
    Value Realized on
Vesting($)
 

Tim Armstrong

     —           —           104,559      $ 1,569,431   

Arthur Minson

     207,758       $ 2,958,678         19,291      $ 571,207   

Karen Dykstra

     —           —           8,891 (1)    $ 244,325   

Curtis Brown

     —           —           1,750      $ 53,323   

Julie Jacobs

     98,828       $ 1,314,227         39,427      $ 1,044,467   

John Reid-Dodick

     —           —           —          —     

 

(1) Includes additional RSUs granted for deferred RSUs outstanding on December 14, 2012 as an equitable adjustment in connection with the special dividend paid to stockholders on such date.

 

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NON-QUALIFIED DEFERRED COMPENSATION FOR 2012

 

Name

   Executive
Contributions
in Last Fiscal
Year ($)(1)
     Company
Contributions
in Last Fiscal
Year ($)
     Aggregate
Earnings
in Last
Fiscal
Year
($)(2)
     Aggregate
Withdrawals/
Distributions
($)
     Aggregate
Balance
at
Last
Fiscal
Year
End ($)(3)
 

Karen Dykstra

   $ 209,013         —         $ 54,250         —         $ 263,263   

 

(1) Reflects the value (based on the per share closing price of our common stock on May 25, 2012 ($27.48)) of 7,606 RSUs awarded to Ms. Dykstra in 2011 for her service as a director of the Company and that vested on May 25, 2012. Ms. Dykstra elected to defer the receipt of these RSUs pursuant to the terms of the Directors’ Deferred Compensation Plan. For information regarding Ms. Dykstra’s deferred RSUs and the Directors’ Deferred Compensation Plan, see “Non-Employee Director Compensation” beginning on page 83 of this Proxy Statement. Ms. Dykstra resigned from our Board immediately after assuming the role of Executive Vice President and CFO on September 19, 2012.
(2) Aggregate earnings with respect to Ms. Dykstra’s deferred and vested RSUs include changes in the market value of the shares of common stock underlying all deferred and vested RSUs that are credited to Ms. Dykstra, and the value of any dividend equivalents earned in 2012 on those deferred and vested RSUs. These amounts are not included in the Summary Compensation Table because plan earnings were not preferential nor above market.
(3) Reflects the value of Ms. Dykstra’s vested account balance in the Directors’ Deferred Compensation Plan as of December 31, 2012 based on the per share closing price of our common stock on December 31, 2012 ($29.61).

 

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POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT OR CHANGE IN

CONTROL FOR 2012

The following summaries and tables describe and quantify the estimated dollar value of potential additional payments and other benefits that would be provided to our NEOs (or, in the case of death, to their respective estates or beneficiaries) under the executives’ respective employment agreements and equity agreements and our compensation plans following a termination of their employment or the Company’s change in control, in each case assumed to have occurred on December 31, 2012.

Under the terms of our 2010 Stock Incentive Plan, a “change in control” will generally be triggered upon:

 

   

The acquisition by a person or entity of 30% or more of the combined voting power of the Company’s then outstanding securities;

 

   

A change in the composition of the majority of the Board without the approval of the existing Board;

 

   

A transaction such as a merger, reorganization, recapitalization or consolidation unless following such transaction the persons who beneficially owned the Company’s voting securities immediately prior to the transaction beneficially own more than 60% of the voting securities of the corporation resulting from the transaction in substantially the same proportions; or

 

   

The sale of all or substantially all of the Company’s assets.

Amounts actually received should any of the above described triggering events actually occur will vary based on factors such as timing during the year of any such event, the Company’s stock price, and any changes to our benefit arrangements and policies. The actual amount to be paid can only be determined at the time of an actual termination of employment.

The calculations exclude payments and benefits to the extent they do not discriminate in scope, terms or operation in favor of our NEOs and are available generally to all of our salaried employees, including any accrued vacation pay and medical and other group insurance coverage following disability. Ms. Dykstra is also entitled to receive her vested account balance under the Directors’ Deferred Compensation Plan. For a description of the plan and her account balance as of December 31, 2012, please see “Non-Qualified Deferred Compensation for 2012” table on page 69 and “Non-Employee Director Compensation” on page 83 of this Proxy Statement.

Certain payments following a termination of employment without cause or for good reason will be delayed for six months following separation from service if required under Section 409A of the Internal Revenue Code. In addition, receipt of the payments and benefits upon a termination without cause or for good reason is conditioned on the executive’s execution of our standard separation agreement that includes a release of claims against us. If the executive does not execute a separation agreement, he or she would not be entitled to severance benefits upon a termination without cause or for good reason as further described below.

 

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TERMINATION WITHOUT CAUSE/FOR GOOD REASON

OR CHANGE IN CONTROL AND TERMINATION WITHOUT CAUSE/FOR GOOD REASON

 

Named Executive Officer

   Cash
Severance(1)
     Group  Benefits
Continuation(2)
     Equity
Awards:
Stock Options,
PSUs

and RSUs(3)
     Other
Benefits(4)
     Total(5)  

Tim Armstrong

              

Termination without Cause/for Good Reason

   $ 4,000,000       $ 32,167         —           —         $ 4,032,167   

Change in Control and Termination without Cause/for Good Reason

   $ 4,000,000       $ 32,167       $ 5,955,541         —         $ 9,987,708   

Arthur Minson

              

Termination without Cause/for Good Reason

   $ 3,400,000       $ 24,162       $ 5,127,581         —        $ 8,551,743   

Change in Control and Termination without Cause/for Good Reason

   $ 3,400,000       $ 24,162       $ 11,998,381         —        $ 15,422,543   

Karen Dykstra

              

Termination without Cause/for Good Reason

   $ 1,248,907       $ 20,526         —           —        $ 1,269,433   

Change in Control and Termination without Cause/for Good Reason

   $ 1,248,907       $ 20,526       $ 2,032,730         —        $ 3,302,163   

Curtis Brown

              

Termination without Cause/for Good Reason

   $ 1,137,918       $ 32,167         —         $ 15,000       $ 1,185,085   

Change in Control and Termination without Cause/for Good Reason

   $ 1,137,918       $ 32,167       $ 2,571,246       $ 15,000       $ 3,756,331   

Julie Jacobs

              

Termination without Cause/for Good Reason

   $ 1,500,000       $ 32,167       $ 413,853         —        $ 1,946,020   

Change in Control and Termination without Cause/for Good Reason

   $ 1,500,000       $ 32,167       $ 3,402,865         —        $ 4,935,032   

John Reid-Dodick

              

Termination without Cause/for Good Reason

   $ 1,250,000       $ 32,167         —         $ 15,000      $ 1,297,167   

Change in Control and Termination without Cause/for Good Reason

   $ 1,250,000       $ 32,167       $ 3,090,636       $ 15,000       $ 4,387,803   

 

(1) The NEOs’ employment agreements each provide for cash severance equal to the sum of (i) either 24 months of base salary (for Mr. Armstrong and Mr. Minson) or 18 months of base salary (for all other executives), (ii) if termination of employment occurs between January 1 and March 15, the prior year’s annual cash bonus (if not previously paid, and only to the extent it would have been payable to the executive and to other eligible employees), which amounts are not included in the above chart given a hypothetical termination date of December 31, and (iii) an annual bonus for the current year, prorated through the executive’s termination date. For each of Messrs. Armstrong, Minson and Reid-Dodick and Ms. Jacobs, the current year’s bonus is assumed to be the full amount of the executive’s target annual bonus based on a hypothetical termination of employment on December 31, 2012 and, in accordance with our annual bonus plan, is based on the executive’s base salary as of December 31, 2012; for Ms. Dykstra, the current year’s bonus is assumed to be her target bonus based on her base salary as of December 31, 2012, but (in accordance with our annual bonus plan) the amount has been prorated to reflect that she commenced employment with us on September 19, 2012; for Mr. Brown, the current year’s bonus is based on a full year of eligible service, but (in accordance with our annual bonus plan) the amount has been prorated to reflect the change in his base salary and bonus target level resulting from his promotion to CTO on May 9, 2012.
(2) Reflects the COBRA cost of medical, dental and vision benefit coverage for 18 months, based on the executive’s elected level of coverage for plan year 2013 and the rate applicable to such coverage effective as of January 1, 2013.
(3)

Pursuant to the terms of Mr. Armstrong’s employment agreement, the stock options granted to Mr. Armstrong in April 2009 and December 2009 will, to the extent then held by Mr. Armstrong, remain exercisable for 24 months following termination of employment (but in no event beyond the stock option’s expiration date). Mr. Armstrong’s employment agreement further provides that the stock options granted to Mr. Armstrong in January 2010 will, to the extent then held by Mr. Armstrong, remain exercisable for five years following termination of employment (but in no event beyond the stock option’s expiration

 

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  date). All such stock options were already vested by their terms prior to December 31, 2012 and their value is not included in the table above.
     The values set forth in the table above are based on (i) a hypothetical termination of employment without Cause or resignation for Good Reason (and the occurrence of a Change in Control, if applicable) on December 31, 2012, (ii) the excess (if any) of the closing sale price of our common stock on December 31, 2012 ($29.61 per share) over the exercise price with respect to stock options and performance–based options, and (iii) the closing sale price of our common stock on December 31, 2012 ($29.61 per share) with respect to RSUs and PSUs. For each RSU or PSU held by an executive as of December 5, 2012 that would vest based on a hypothetical termination of employment as of December 31, 2012, a dividend equivalent in the amount of $5.15 per RSU or PSU (as applicable) is included in the values specified above.
     Except as provided below, all unvested time–based options, performance–based options, RSUs and PSUs (and any related dividend equivalents) will be immediately forfeited upon termination of a NEO’s employment without Cause or his or her resignation for Good Reason. Our equity awards do not provide for any accelerated vesting based solely on the occurrence of a Change in Control.
     Time–Based Options and RSUs. Mr. Minson’s employment agreement provides that, in the event his employment is terminated without Cause or he resigns for Good Reason, any unvested stock option awards granted to him on or prior to September 10, 2012 will continue to vest for 24 months following termination, and any outstanding RSUs granted to him on or prior to September 10, 2012 whose forfeiture restrictions were scheduled to lapse during the 24 month period following his termination will immediately become vested on his termination date. In the event of Ms. Jacobs’ termination without Cause or resignation for Good Reason, Ms. Jacobs’ employment agreement and the award agreements governing her RSUs granted to her in December 2009 and July 2010 provide for accelerated vesting of a pro rata portion of such RSUs that were scheduled to vest on the next vesting date (and on any vesting date occurring during any severance period). In the event of a Change in Control, all unvested and outstanding time–based stock options and RSUs, including any related dividend equivalents, then held by our NEOs will fully vest upon the earlier of 12 months following the Change in Control or the executive’s termination without Cause or for Good Reason. With respect to Ms. Dykstra, the value set forth above includes the value of deferred RSUs (including any related dividend equivalents) awarded to her for service as a director of the Company and that remain unvested as of December 31, 2012. For information regarding Ms. Dykstra’s deferred RSUs, see “2012 Summary Compensation Table,” “Non-Qualified Deferred Compensation for 2012” table and “Non-Employee Director Compensation.”
     Performance–Based Options. If, within 12 months following a Change in Control, Mr. Armstrong’s employment is terminated without Cause, for Good Reason, or due to death or disability, Mr. Armstrong’s performance–based options would vest to the extent the applicable performance goals were achieved at or prior to the Change in Control, as follows: 50% of Mr. Armstrong’s performance–based option award would vest if, during the portion of the performance period preceding the change of control, the volume weighted average for a share of our stock equaled or exceeded $ 32.52 for 20 consecutive trading days (the “First Threshold”); the remaining 50% of the performance–based option award would vest if, during the portion of the performance period preceding the change of control, the volume weighted average for a share of our stock equaled or exceeded $35.23 (or $30.50, as equitably adjusted for periods beginning December 3, 2012 to reflect the special cash dividend declared in December 2012) for 20 consecutive trading days (the “Second Threshold”). If these stock achievement goals have not been satisfied prior to the Change in Control, then the applicable per share price threshold will be determined based on the total consideration of the Change in Control (assumed to be the closing price per share on December 31, 2012 for purposes of the above calculations), without reference to the prior 20 consecutive trading days. Applying these terms, the First Threshold was met on September 20, 2012 (prior to the special cash dividend distribution), but the Second Threshold has not been met as of December 31, 2012, and the closing price per share on December 31, 2012 ($29.61) did not exceed $30.50. Accordingly, the above chart reflects the value attributed to the accelerated vesting of 50% of Mr. Armstrong’s performance–based option award.
     PSUs. If, within 12 months following a Change in Control, a PSU holder’s employment is terminated without Cause, for Good Reason, or due to death or disability, any then outstanding and unvested PSUs, including any related dividend equivalents, will vest based on the actual performance level achieved with respect to the applicable performance criteria, as follows:
     TSR PSUs. Under the award agreements governing the TSR PSUs, the number of TSR PSUs that becomes vested is determined based on the percentile ranking of AOL’s Total Shareholder Return as compared to the Total Shareholder Return of the companies in the Morgan Stanley High Technology Index (determined to be a 100% percentile ranking as of December 31, 2012, based on a hypothetical termination of employment on December 31, 2012). At a relative percentile ranking of 100%, the award agreements governing the TSR PSUs provide that TSR PSU holders would be eligible to vest in 200% of their TSR PSU target, including any related dividend equivalents.
     Rev PSUs. Under the award agreements governing the Rev PSUs, the number of Rev PSUs that becomes vested is determined based on our level of achievement of (i) cumulative advertising revenues (net of traffic acquisition costs) for th