DEF 14A 1 d472792ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

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 Section 240.14a-12

McDonald’s Corporation

(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:


Table of Contents

LOGO


Table of Contents
Contents
  3    Proxy Summary
  7    Notice of the Annual Shareholders’ Meeting
  8    Election of Directors
  8    Proposal No. 1. Election of Directors
  8    Director qualifications and biographical information
14    Executive compensation
14    Compensation Committee Report
14    Compensation discussion and analysis
27    Compensation tables
42    Proposal No. 2. Advisory vote to approve executive compensation
42    Other management proposal
42    Proposal No. 3. Advisory vote to approve the appointment of Ernst & Young LLP as independent auditor for 2013
43    Audit Committee matters
43    Audit Committee Report
44    Policy for pre-approval of audit and permitted non-audit services
45    Auditor fees and services
45    Shareholder proposals
45    Proposal No. 4. Advisory vote on a shareholder proposal requesting an annual report on executive compensation
47    Proposal No. 5. Advisory vote on a shareholder proposal requesting an executive stock retention policy
48    Proposal No. 6. Advisory vote on a shareholder proposal requesting a human rights report
50    Proposal No. 7. Advisory vote on a shareholder proposal requesting a nutrition report
53    Board and governance matters
53    Leadership structure
53    Director selection process
53    Board diversity
53    Succession planning
53    Director independence
54    Board Committees
56    Board and Committee meetings
56    Board and Committee evaluations
56    Risk oversight
57    Code of Conduct for the Board of Directors
57    Director compensation
59    Stock ownership
59    Stock ownership guidelines
59    Security ownership of certain beneficial owners
60    Security ownership of management
61    Compliance with Section 16(a) of the Exchange Act
61    Transactions with related persons, promoters and certain control persons
61    Policies and procedures for related person transactions
62    Related person transactions
62    Communications
62    Communications with the Board of Directors and non-management Directors
62    Consideration of Director nominations for the 2014 Annual Shareholders’ Meeting
63    Shareholder proposals for inclusion in next year’s Proxy Statement
63    Other shareholder proposals for presentation at the 2014 Annual Shareholders’ Meeting
64    Solicitation of proxies and voting
64    Notice and access
64    Record date
64    Voting prior to the Annual Shareholders’ Meeting
64    Voting at the Annual Shareholders’ Meeting
64    Quorum
64    Voting tabulation
65    Registered shareholders
65    Beneficial holders
65    Proxy solicitation
65    Confidential voting
66    Additional information
66    Executive officers
66    McDonald’s Corporation Annual Report on Form 10-K, other reports and policies
66    Householding of Annual Shareholders’ Meeting materials
67    Information about registering for and attending the Annual Shareholders’ Meeting
67    Pre-registration and admission policy
 

 

 

McDonald’s Corporation 2013    LOGO        1


Table of Contents

 

 

 

 

 

 

 

2        LOGO    McDonald’s Corporation 2013


Table of Contents

PROXY SUMMARY

This summary contains highlights about our Company and the upcoming 2013 Annual Shareholders’ Meeting. This summary does not contain all of the information that you should consider in advance of the meeting, and we encourage you to read the entire Proxy Statement and our 2012 Annual Report on Form 10-K carefully before voting.

 

GOVERNANCE HIGHLIGHTS

McDonald’s governance is guided by core values that have been part of our business for more than 50 years—integrity, fairness, respect and ethical behavior. The strength of our governance is key to our success, and we continually review our practices to ensure effective collaboration of management and our Board to yield value for shareholders. Highlights of our governance include:

Recent Updates

 

> Declassified Board phase in begins—Directors elected in 2013 to serve one-year terms

 

> Modifications to our long-term cash incentive plan (CPUP) and equity compensation program (see page 4)

Board of Directors

 

> Independent Chairman

 

> 13 Directors; 12 are independent

 

> Over 50% of Directors are women or minorities

 

> Committee members are independent (except Executive Committee, which has one management Director)

 

> Executive sessions of independent Directors at each regularly-scheduled meeting

 

> All Directors attended over 90% of all Board and committee meetings in 2012

 

> Limited membership on other public company boards

 

> Regular succession planning—oversaw successful transition of CEO in 2012 with promotion of strong internal candidate that enabled leadership continuity (see page 14)

 

> Majority of Audit Committee members are “financial experts”

 

> Regular Board self-assessments and Director peer review

 

> No former employees serve as Directors

Shareholder Interests

 

> Majority voting standard for uncontested Director elections

 

> No super-majority voting requirements

 

> No shareholder rights plan

 

> Shareholders hold right to call special meetings

 

> No exclusive forum selection clause

 

> Annual advisory vote to ratify independent auditor (see page 42)

 

> Confidential voting policy

 

> Publicly disclose corporate political contributions under Board’s policy

 

> Best practices in our executive compensation program noted below, including annual advisory vote to approve executive compensation

 

FINANCIAL HIGHLIGHTS

In 2012, McDonald’s grew its operating income, earnings per share and comparable sales in every one of its geographic segments, despite a challenging global economic and operating environment. We continue to manage our business for the long-term, while staying committed to driving near-term growth. McDonald’s cumulative five-year shareholder return was 175%. We returned $5.5 billion to our shareholders through dividends paid and share repurchases in 2012, and we returned $16.5 billion from 2010-2012. The charts below illustrate elements of our financial performance:

 

LOGO

 

 

 

 

 

 

McDonald’s Corporation 2013    LOGO        3


Table of Contents

EXECUTIVE COMPENSATION PROGRAM HIGHLIGHTS

We believe our compensation program provides an appropriate mix of elements to incentivize our executives to drive the business forward while aligning their interests with those of our shareholders. Currently, approximately 89% and 84% of our CEO’s and NEOs’ direct compensation opportunity, respectively, is performance-based. In 2012, our shareholders demonstrated strong support for our executive compensation program by approving it with over 94% of the votes.

Below is a chart that summarizes the significant elements of our executive compensation program:

 

 

Direct compensation
elements

   Performance-
based
   Primary metric(s)    Terms
 

 

Salary

       

 

n/a

  

 

•  Evaluated annually, based on

competitive benchmarks and individual

performance

 

 

Annual Cash Incentive (TIP)

  

 

X

  

 

•  Operating Income

  

 

•  Based upon various quantitative

performance measures

 

•  Includes an individual qualitative factor

 

 

Long-Term Cash Incentive (CPUP)

  

 

X

  

 

•  Operating Income

 

 

•  Return on Total

Assets (ROTA)*

 

  

 

•  Based solely upon financial

performance measures

 

•  Non-overlapping three-year cycles*

 

 

Restricted Stock Units (RSUs)**

  

 

X

  

 

•  Earnings per

share (EPS)

 

•  Stock Price

  

 

•  Cliff vest at end of three-year

service period

 

•  Vesting subject to financial

performance measures

 

 

Stock Options**

  

 

X

  

 

•  Stock Price

  

 

•  Vest 25% per year

 

•  Ten-year term

 

 

* Beginning in 2013, ROTA, one of the primary metrics for CPUP, has been replaced with the three-year Return on Incremental Invested Capital (ROIIC) because it measures the effects of incremental (rather than cumulative historical) capital investment decisions. CPUP has also transitioned to overlapping three-year cycles in an effort to maintain participants’ focus on long-term value creation while more closely aligning annual compensation with Company performance. Further, this more closely aligns CPUP with market practice. (see pages 20-22)

 

** Beginning in 2013, to further align our equity compensation program with market practice, equity awards to executives will be comprised of 50% of the grant date value in options and 50% in performance-based RSUs, rather than the prior mix of 70% in options and 30% in RSUs.

 

Indirect compensation elements include retirement programs with matching contributions and other limited, personal benefits.

Best practices associated with our executive compensation program include:

 

> Vast majority of total direct compensation tied to performance, thereby aligning a significant portion of executive compensation payouts with shareholder return

 

> Variety of quantitative metrics, including total shareholder return relative to S&P 500 Index in our long-term plan (CPUP)

 

> Significant stock ownership requirements for senior management; CEO is required to own six times his salary

 

> Incentive plans require growth in operating income to yield any payments

 

> Capped incentive payments

 

> Clawback provisions

 

> No employment agreements

 

> No intention to enter into new change in control agreements; existing agreements have a double trigger

 

> Compensation Committee is advised by independent compensation consultant

 

> Hedging and pledging policies in place. No executive has hedged or pledged shares

 

 

 

 

4        LOGO    McDonald’s Corporation 2013


Table of Contents

VOTING MATTERS

 

     

 

Board vote

recommendation

 

  

Page reference
(for more detail)

 

 

Management proposals

 

         

 

Election of four Directors, each for a one-year term expiring in 2014

  

 

FOR EACH DIRECTOR
NOMINEE

 

     8

 

 

Advisory vote to approve executive compensation

 

   FOR

 

   42

 

 

Advisory vote to approve the appointment of Ernst & Young LLP as independent auditor for 2013

 

  

 

FOR

 

  

 

42

 

 

Shareholder proposals

 

         

 

Advisory vote requesting an annual report on executive compensation, if presented

 

  

 

AGAINST

 

  

 

45

 

 

Advisory vote requesting an executive stock retention policy, if presented

 

  

 

AGAINST

 

  

 

47

 

 

Advisory vote requesting a human rights report, if presented

 

  

 

AGAINST

 

  

 

48

 

 

Advisory vote requesting a nutrition report, if presented

 

  

 

AGAINST

 

  

 

50

 

 

ELECTION OF DIRECTORS (PROPOSAL NO. 1)

The following table provides summary information about our nominees for election to the Board of Directors. Additional information for all of our Directors, including the nominees, may be found beginning on page 8.

 

Name

 

    

 

Director
since

 

  

Primary

occupation

 

  

Independent

 

  

Other public company
boards

 

 

Walter E. Massey

    

 

1998

  

 

• President, School of the Art

Institute of Chicago

 

  

 

X

    

 

John W. Rogers, Jr.

    

 

2003

  

 

• Founder, Chairman & CEO,

Ariel Investments

 

  

 

X

  

 

• Ariel Investment Trust

• Exelon

 

 

Roger W. Stone

    

 

1989

  

 

• Chairman & CEO, KapStone Paper

and Packaging

 

  

 

X

  

 

• KapStone Paper

and Packaging

 

 

Miles D. White

    

 

2009

  

 

• Chairman & CEO, Abbott

Laboratories

  

 

X

  

 

• Abbott

• Caterpillar

 

 

ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION (PROPOSAL NO. 2)

We are asking shareholders to cast an advisory, nonbinding vote to approve compensation awarded to our named executive officers. The key objectives of our executive compensation program are to motivate our executives to increase profitability and shareholder returns, to tie pay to performance effectively, and to compete effectively for and retain managerial talent. Additional information regarding our executive compensation may be found elsewhere in this Proxy Statement.

 

 

 

 

 

 

 

McDonald’s Corporation 2013    LOGO        5


Table of Contents

ADVISORY VOTE TO APPROVE INDEPENDENT AUDITOR (PROPOSAL NO. 3)

We are asking shareholders to approve the appointment of Ernst & Young LLP as independent auditor for 2013. Set forth below is information about its fees in 2012 and 2011.

 

 

Type of fees (In millions)

 

  

 

2012

 

      

2011

 

 

 

Audit fees

 

   $

 

11.3

 

  

 

     $

 

11.5

 

  

 

 

Audit-related fees

 

    

 

0.7

 

  

 

      

 

0.4

 

  

 

 

Tax fees

 

    

 

1.2

 

  

 

      

 

1.1

 

  

 

 

All other fees

 

    

 

0.1

 

  

 

      

 

0

 

  

 

 

Total

 

   $

 

13.3

 

  

 

     $

 

13.0

 

  

 

   

 

ADVISORY SHAREHOLDER PROPOSALS (PROPOSAL NOS. 4-7)

If presented at the meeting, shareholders will be asked to vote on each of the following advisory shareholder proposals:

 

> Annual report on executive compensation

 

> Executive stock retention policy

 

> Human rights report

 

> Nutrition report

For the reasons outlined in this Proxy Statement, we do not support these requests and ask shareholders to vote against each of these proposals.

 

MEETING INFORMATION

 

Date and time        May 23, 2013, 9:00 a.m. Central Time
Place    McDonald’s Office Campus, The Lodge, Prairie Ballroom
   2815 Jorie Boulevard
   Oak Brook, Illinois 60523
Record date    March 25, 2013
Voting    Shareholders at the close of business on the record date may vote at the Annual Shareholders’ Meeting. Each share is entitled to one vote on each matter to be voted upon.
Attendance    We encourage shareholders to listen to the meeting via live webcast as seating in the Prairie Ballroom is limited. If you decide to attend in person, please follow the pre-registration instructions on page 67.

 

 

 

 

 

 

 

 

6        LOGO    McDonald’s Corporation 2013


Table of Contents

Notice of the Annual Shareholders’ Meeting

TO McDONALD’S CORPORATION SHAREHOLDERS:

McDonald’s Corporation will hold its 2013 Annual Shareholders’ Meeting on Thursday, May 23, 2013, at 9:00 a.m. Central Time in the Prairie Ballroom at The Lodge at McDonald’s Office Campus, Oak Brook, Illinois. The registration desk will open at 7:30 a.m. At the meeting, shareholders will be asked to:

 

1. Elect four Directors, each for a one-year term expiring in 2014;

 

2. Cast an advisory vote to approve executive compensation;

 

3. Cast an advisory vote to approve the appointment of Ernst & Young LLP as independent auditor for 2013;

 

4. Cast an advisory vote on a shareholder proposal requesting an annual report on executive compensation, if presented;

 

5. Cast an advisory vote on a shareholder proposal requesting an executive stock retention policy, if presented;

 

6. Cast an advisory vote on a shareholder proposal requesting a human rights report, if presented;

 

7. Cast an advisory vote on a shareholder proposal requesting a nutrition report, if presented; and

 

8. Transact other business properly presented at the meeting, including any adjournment or postponement thereof, by or at the direction of the Board of Directors.

Your Board of Directors recommends that you vote FOR the Board’s nominees for Director, FOR the approval of our executive compensation, FOR the approval of the independent auditor and AGAINST all of the shareholder proposals.

Your vote is important. Please consider the issues presented in this Proxy Statement and vote your shares as promptly as possible.

If you plan to attend the meeting in person, please be aware that you must pre-register with McDonald’s Shareholder Services prior to the meeting. See page 67 for information about how to pre-register.

As an alternative to attending the meeting in person, you may listen to a live webcast by going to www.investor.mcdonalds.com and selecting the “Webcasts and Podcasts” icon and clicking on the appropriate link. The Annual Shareholders’ Meeting webcast will be available for a limited time after the meeting.

Thank you.

By order of the Board of Directors,

 

LOGO

Gloria Santona

Corporate Secretary

Oak Brook, Illinois

April 12, 2013

 

 

 

McDonald’s Corporation 2013    LOGO        7


Table of Contents

Election of Directors

 

 

PROPOSAL NO. 1.

ELECTION OF DIRECTORS

 

 

The nominees for Director are: Walter E. Massey, John W. Rogers, Jr., Roger W. Stone and Miles D. White.

The Board is currently divided into three classes. We are in the process of declassifying our Board, and beginning at the 2015 Annual Shareholders’ Meeting each Director will be elected for a one-year term. The four current nominees are standing for election as Directors to hold office for a one-year term expiring in 2014.

Information about the voting standard for this proposal appears on page 64. Each of the incumbent Directors who is nominated for re-election tendered an irrevocable resignation for the 2013 Annual Shareholders’ Meeting that will be effective if (i) the nominee is not re-elected; and (ii) the Board accepts the resignation following the meeting. The Governance Committee will determine whether to recommend that the Board accept the resignation.

The Board of Directors expects all four nominees to be available for election. If any of them should become unavailable to serve as a Director for any reason prior to the Annual Shareholders’ Meeting, the Board may substitute another person as a nominee. In that case, your shares will be voted for that other person.

The Board of Directors recommends that shareholders vote FOR all four nominees.

 

DIRECTOR QUALIFICATIONS AND BIOGRAPHICAL INFORMATION

Our Board of Directors currently consists of 13 Directors, 12 of whom are independent. Our Directors have qualifications, skills and experience relevant to our business as the leading branded global quick service restaurant retailer. Each Director has senior executive experience in large organizations, many of which have significant global operations, and has held directorships at other U.S. public companies and at not-for-profit organizations. In these positions, our Directors have demonstrated leadership, intellectual and analytical skills and gained deep experience in management and corporate governance.

For information about our Director selection process, please see page 53.

Biographical information for our Directors is set forth below, including the qualifications, skills and experiences considered by the Governance Committee when recommending them for election.

 

 

 

LOGO   

Susan E. Arnold, 59

Director since 2008

Class 2014

OTHER CURRENT DIRECTORSHIPS: The Walt Disney Company

 

 

CAREER HIGHLIGHTS:

The Procter & Gamble Company, a manufacturer and marketer of consumer goods

 

    > Special assignment reporting to Chief Executive Officer (2009)

 

    > President–Global Business Units (2007–2009)

 

    > Vice Chair, P&G Beauty and Health (2006–2007)

 

    > Vice Chair, P&G Beauty (2004–2006)

EXPERIENCE AND QUALIFICATIONS: Ms. Arnold was a senior executive responsible for major consumer brands in a large, global brand management company. She has knowledge of product development, strategy and business development, finance, marketing and consumer insights and sustainability.

 

 

 

 

 

8        LOGO    McDonald’s Corporation 2013


Table of Contents

 

 

LOGO   

Robert A. Eckert, 58

Director since 2003

Class 2015

OTHER CURRENT DIRECTORSHIPS: Amgen Inc. and Levi Strauss & Co.

FORMER DIRECTORSHIPS (within past five years): Mattel, Inc.

 

 

CAREER HIGHLIGHTS:

Mattel, Inc., a designer, manufacturer and marketer of toy products

 

    > Chairman of the Board (2000–2012)

 

    > Chief Executive Officer (2000–2011)

EXPERIENCE AND QUALIFICATIONS: Having served as chief executive officer of large, global branded companies (consumer branded and food products), Mr. Eckert has knowledge of product development, marketing and consumer insights, corporate governance, leadership development and succession planning, finance, risk assessment, supply chain management and distribution and strategy and business development.

 

 

 

LOGO   

Enrique Hernandez, Jr., 57

Director since 1996

Class 2015

OTHER CURRENT DIRECTORSHIPS: Chevron Corporation, Nordstrom, Inc. and Wells Fargo & Company

 

 

CAREER HIGHLIGHTS:

Inter-Con Security Systems, Inc., a provider of high-end security and facility support services to government, utilities and industrial customers

 

    > President and Chief Executive Officer (1986–Present)

Nordstrom, Inc.

 

    > Non-executive Chairman (2006–Present)

EXPERIENCE AND QUALIFICATIONS: Mr. Hernandez is the chief executive officer of a global security company and has been a director of several large public companies in various industries. He has knowledge of strategy and business development, corporate governance, finance, risk assessment, and leadership development and succession planning.

 

 

 

LOGO   

Jeanne P. Jackson, 61

Director since 1999

Class 2015

OTHER CURRENT DIRECTORSHIPS: Kraft Foods Group, Inc.

FORMER DIRECTORSHIPS (within past five years): Harrah’s Entertainment, Inc., Motorola Mobility Holdings, Inc., NIKE, Inc. and Nordstrom, Inc.

 

 

CAREER HIGHLIGHTS:

NIKE, Inc., a designer, marketer and distributor of athletic footwear, equipment and accessories

 

    > President, Direct to Consumer (2009–Present)

MSP Capital, a private investment company

 

    > Chief Executive Officer (2002–2009)

EXPERIENCE AND QUALIFICATIONS: Ms. Jackson is a senior executive for a major consumer retailer and has experience as a senior executive in global brand management with several other major consumer retailers. She also has been a director of several large, public companies, primarily involved in consumer goods and services. She has knowledge of product development, strategy and business development, leadership development and succession planning, finance, and marketing and consumer insights.

 

 

 

 

 

McDonald’s Corporation 2013    LOGO        9


Table of Contents

 

 

LOGO   

Richard H. Lenny, 61

Director since 2005

Class 2014

OTHER CURRENT DIRECTORSHIPS: ConAgra Foods, Inc. and Discover Financial Services

 

 

CAREER HIGHLIGHTS:

Friedman, Fleischer & Lowe, LLC, a private equity firm

 

    > Operating partner (2011–Present)

The Hershey Company, a manufacturer, distributor and marketer of candy, snacks and candy-related grocery products

 

    > Chairman, President and Chief Executive Officer (2001–2007)

EXPERIENCE AND QUALIFICATIONS: Mr. Lenny has experience as a chief executive officer for a global retail food company that is a major consumer brand. He has knowledge of strategy and business development, finance, marketing and consumer insights, supply chain management and distribution, risk assessment and sustainability.

 

 

 

LOGO   

Walter E. Massey, 75

Director since 1998

Class 2013 (Nominee)

FORMER DIRECTORSHIPS (within past five years): Bank of America Corporation, BP p.l.c.

and Delta Airlines, Inc.

 

 

CAREER HIGHLIGHTS:

School of the Art Institute of Chicago

 

    > President (2010–Present)

Morehouse College

 

    > President Emeritus

 

    > President (1995–2007)

EXPERIENCE AND QUALIFICATIONS: Dr. Massey has experience in chief executive roles of several large academic organizations and as a director of multiple large, global public companies in various industries. He has knowledge of strategy, policy and government relations matters, sustainability, leadership development and succession planning, risk assessment, finance and shareholder relations.

 

 

 

LOGO   

Andrew J. McKenna, 83

Director since 1991

Non-Executive Chairman Since 2004

Class 2015

OTHER CURRENT DIRECTORSHIPS: Skyline Corporation

FORMER DIRECTORSHIPS (within past five years): Aon Corporation

 

 

CAREER HIGHLIGHTS:

Schwarz Supply Source, a printer, converter, producer and distributor of packaging and promotional material

 

    > Chairman (1992–Present)

EXPERIENCE AND QUALIFICATIONS: Mr. McKenna has experience as the chief executive officer of a large global provider of paper-based goods. He has knowledge of strategy and business development, corporate governance, risk assessment, leadership development and succession planning, shareholder relations and finance. He also has experience as a director of multiple large public companies, charities and civic organizations.

 

 

 

 

 

10        LOGO    McDonald’s Corporation 2013


Table of Contents

 

 

LOGO   

Cary D. McMillan, 55

Director since 2003

Class 2014

OTHER CURRENT DIRECTORSHIPS: American Eagle Outfitters, Inc.

FORMER DIRECTORSHIPS (within past five years): Hewitt Associates, Inc.

 

 

CAREER HIGHLIGHTS:

True Partners Consulting LLC, a professional services firm providing tax and other financial services

 

    > Chief Executive Officer (2005–Present)

Sara Lee Branded Apparel, a branded apparel company

 

    > Chief Executive Officer (2001–2004)

Sara Lee Corporation, a branded packaged goods company

 

    > Executive Vice President (2000–2004)

EXPERIENCE AND QUALIFICATIONS: In addition to serving as chief executive officer of a professional services firm, Mr. McMillan has experience as a senior executive of a large, globally branded consumer and food products company. He is also a certified public accountant. He has knowledge of strategy and business development, finance and accounting, risk assessment, product development, leadership development and succession planning, and supply chain management and distribution.

 

 

 

LOGO   

Sheila Penrose, 67

Director since 2006

Class 2014

OTHER CURRENT DIRECTORSHIPS: Jones Lang LaSalle Incorporated

 

 

CAREER HIGHLIGHTS:

Jones Lang LaSalle Incorporated, a global real estate services and investment management firm

 

    > Non-executive Chairman (2005–Present)

Penrose Group, a provider of strategic advisory services on financial and organizational strategies

 

    > President (2000–2007)

Boston Consulting Group, a global management consulting firm

 

    > Executive Advisor (2001–2008)

EXPERIENCE AND QUALIFICATIONS: Ms. Penrose has experience as a senior executive of a large investment services and banking company, as executive advisor to a leading global consulting firm and as a Chairman of a large, global real estate services and investment management firm. She has knowledge of strategy and business development, finance, risk assessment, real estate, leadership development and succession planning and sustainability.

 

 

 

 

 

McDonald’s Corporation 2013    LOGO        11


Table of Contents

 

 

LOGO   

John W. Rogers, Jr., 55

Director since 2003

Class 2013 (Nominee)

OTHER CURRENT DIRECTORSHIPS: Ariel Investment Trust and Exelon Corporation

FORMER DIRECTORSHIPS (within past five years): Aon Corporation and Commonwealth Edison Company

 

 

CAREER HIGHLIGHTS:

Ariel Investments, LLC, a privately held institutional money management firm

 

    > Founder, Chairman of the Board and Chief Executive Officer (1983–Present)

Ariel Investment Trust

 

    > Trustee (1986–1993; 2000–Present)

EXPERIENCE AND QUALIFICATIONS: Mr. Rogers is the chief executive officer of an institutional money management firm. He has knowledge of finance, shareholder relations, risk assessment, leadership development and succession planning, corporate responsibility, and strategy and business development. He also has experience as a director of multiple public companies, charities and civic organizations.

 

 

 

LOGO   

Roger W. Stone, 78

Director since 1989

Class 2013 (Nominee)

OTHER CURRENT DIRECTORSHIPS: KapStone Paper and Packaging Corporation

 

 

CAREER HIGHLIGHTS:

KapStone Paper and Packaging Corporation, formerly Stone Arcade Acquisition Corporation, a producer of paper, packaging and forest products

 

    > Chairman and Chief Executive Officer (2005–Present)

Stone Tan China Holding Corporation, an investment holding company

 

    > Chairman (2010–Present)

Stone Tan China Acquisition (Hong Kong) Co. Ltd.

 

    > Chairman (2010–Present)

Stone-Kaplan Investment, LLC

 

    > Manager (2004–2008)

EXPERIENCE AND QUALIFICATIONS: Mr. Stone is the chief executive officer of a large, global paper and packaging business. He has experience in the sourcing and sale of product packaging and related commodities, supply chain management and distribution, sustainability, strategy and business development, finance, leadership development and succession planning and risk assessment.

 

 

 

 

 

12        LOGO    McDonald’s Corporation 2013


Table of Contents

 

 

LOGO   

Donald Thompson, 50

Director since 2011

Class 2015

OTHER CURRENT DIRECTORSHIPS: Exelon Corporation (until April 23, 2013, as he will not stand for re-election at the Exelon 2013 Annual Meeting of Shareholders)

 

 

CAREER HIGHLIGHTS:

McDonald’s Corporation

 

    > President and Chief Executive Officer (2012–Present)

 

    > President and Chief Operating Officer (2010–2012)

 

    > President, McDonald’s USA (2006–2010)

 

    > Executive Vice President and Chief Operations Officer, McDonald’s USA (2005–2006)

EXPERIENCE AND QUALIFICATIONS: Mr. Thompson provides a Company perspective in Board discussions about the business, particularly with respect to worldwide operations, competitive landscape, senior leadership and strategic opportunities and challenges for the Company. In addition, as an independent director of another public company, Mr. Thompson has gained additional perspectives, including on governance and operational matters relevant to the Company.

 

 

 

LOGO   

Miles D. White, 58

Director since 2009

Class 2013 (Nominee)

OTHER CURRENT DIRECTORSHIPS: Abbott Laboratories and Caterpillar, Inc.

FORMER DIRECTORSHIPS (within past five years): Motorola, Inc.

 

 

CAREER HIGHLIGHTS:

Abbott Laboratories, a global pharmaceuticals and biotechnology company

 

    > Chairman and Chief Executive Officer (1999–Present)

EXPERIENCE AND QUALIFICATIONS: Mr. White is the chief executive officer of a large pharmaceutical, biotechnology and nutritional health products company. He has knowledge of strategy and business development, risk assessment, finance, leadership development and succession planning and corporate governance.

 

 

 

 

 

McDonald’s Corporation 2013    LOGO        13


Table of Contents

Executive compensation

 

 

Compensation Committee Report

DEAR FELLOW SHAREHOLDERS:

The Compensation Committee reviewed and discussed the Company’s Compensation Discussion and Analysis with McDonald’s management. Based on 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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Respectfully submitted,

The Compensation Committee

Robert A. Eckert, Chairman

Susan E. Arnold

Richard H. Lenny

John W. Rogers, Jr.

Miles D. White

 

 

Compensation discussion and analysis

 

EXECUTIVE SUMMARY

McDonald’s executive compensation program supports our long-term business plan, the Plan to Win, which includes our key global priorities—optimizing the menu, modernizing the customer experience and broadening accessibility to our Brand. The main objectives of our executive compensation program are to motivate our executives to increase profitability and shareholder returns, to pay compensation that varies based on performance and to compete for and retain managerial talent.

Management remained focused on successfully executing the Company’s Plan to Win and its global priorities throughout 2012, despite a change in leadership mid-year. In June 2012, Jim Skinner retired after 41 years with the Company, including eight as Vice Chairman and CEO. During his tenure as CEO, Mr. Skinner was a driving force behind the Plan to Win and shareholders benefitted significantly, as we achieved 278% cumulative shareholder return and, for the first time in the Company’s history, a market capitalization exceeding $100 billion. Mr. Skinner also played a key role in developing a strong management team, which enabled leadership continuity with Don Thompson’s promotion to CEO.

Mr. Thompson, a 22-year veteran of McDonald’s, continues to drive our business forward. He has held various leadership positions in the Company, including most recently as President and Chief Operating Officer (COO) of McDonald’s Corporation from January 2010 until June 2012.

We remain focused on advancing the strategic direction of our business and motivating our executives to achieve strong business results and drive shareholder value through our executive compensation program.

Pay for performance

We believe that our executive compensation program has been effective at appropriately aligning pay and performance, resulting in incentivizing strong results. We seek to utilize metrics and a mix of incentives that further our main objective of long-term sustainable growth and that are designed to mitigate excessive risk. 2012 results illustrate the strong alignment between pay and performance. Payouts under our 2012 TIP were generally below target levels due to below target performance of the primary performance metric of operating income growth as described in more detail on page 19. Further, our 2010-2012 CPUP paid out above target, driven by robust performance well above targets in both 2010 and 2011, partially offset by below target 2012 performance.

 

 

 

14        LOGO    McDonald’s Corporation 2013


Table of Contents

Our total direct compensation package for executives includes salary, our annual bonus plan, which we refer to as TIP, our long-term cash incentive plan, which we refer to as CPUP, stock options and restricted stock units, each as described below. The following table lists the quantitative performance measures the Company uses in its executive compensation program. The rationale for the use of each primary measure is explained below in the detailed discussions of each element of compensation.

 

     

 

TIP

 

    

 

CPUP

 

    

 

Stock options

 

    

 

RSUs        

 

       

Primary performance measure

              

Operating income

     X         X            

Return on total assets (ROTA)

        X            

Earnings per share (EPS)

              X              

Share price

 

                      

 

X

 

  

 

    

 

X        

 

  

 

    

Secondary performance measure

              

Total Shareholder Return (TSR)

        X            

Comparable Guest Counts

     X               

Customer Satisfaction Opportunity

     X               

G&A Expense Control

     X               

People Modifier

 

    

 

X

 

  

 

                               

In addition to the quantitative factors, determinations of TIP payouts take into account qualitative aspects of individual performance, and the grants of annual equity-based compensation incorporate potential for future performance. For TIP, a multiplier based on the assessment of individual performance is used in calculating final awards, as described on pages 19 and 31. For example, Mr. Thompson’s 2012 individual performance results were based on progress achieved as related to the following initiatives: sustained profitable growth, talent and leadership development and our Brand ambition of good food, good people and good neighbor.

The pie chart below shows Mr. Thompson’s 2012 total direct compensation, using his 2012 TIP award and annualized 2010-2012 CPUP award (one-third of a three-year payout) and Financial Accounting Standards Board values for equity awards granted. Eighty-nine percent (89%) of Mr. Thompson’s 2012 total direct compensation was based on Company performance.

 

 

2012 CEO total direct compensation

 

LOGO

 

 

Best practices

We evaluate our executive compensation program annually, taking into account the outcome of our most recent Say on Pay vote and any feedback we receive in our shareholder outreach program. Last year, our executive compensation program was approved by over 94% of the votes, demonstrating strong shareholder support for the approach we have taken.

Based on our evaluation and strong Say on Pay results, we did not make any significant changes to our executive compensation program for 2012. However, beginning in 2013, we plan to incorporate modest changes in our long-term incentives, as described on pages 18, 21 and 22. These changes are intended to further strengthen pay for performance alignment and to bring certain aspects more in line with evolving market practice.

 

 

 

McDonald’s Corporation 2013    LOGO        15


Table of Contents

The following policies and practices are important elements of our executive compensation program:

 

n   Pay for Performance. The vast majority of total direct compensation is tied to performance.

 

n   Stock Ownership. We have stock ownership requirements for our senior management, which include requiring our CEO to own stock equal in value to at least six times his annual salary.

 

n   Bonuses. TIP and CPUP both require growth in operating income to yield any payout, and payouts are further impacted by performance against other distinct metrics. Both programs also utilize caps on potential payouts.

 

n   Clawbacks. TIP and CPUP contain clawback provisions.

 

n   Change in Control. We do not intend to enter into any new change in control severance agreements, and our current agreements are double-trigger.

 

n   Independent Consultant. The Committee benefits from engaging an independent compensation consultant and the compensation consultant acts at the sole direction of the Board and/or the Committee.

 

n   Hedging and Pledging Policies. Senior management is prohibited from engaging in derivative transactions to hedge the risk associated with their stock ownership. Company approval is required to hold Company shares in a margin account and no executive has pledged shares or holds shares in a margin account.

 

n   Employment Agreements. No executive has an employment agreement.

Performance highlights

The following graph shows the TSR for McDonald’s, our peer group’s average, the Standard & Poor’s 500 Stock Index and the DJIA for the period from December 31, 2007–December 31, 2012 (based on $100 investment and reinvestment of all dividends).

 

 

Total shareholder return

 

LOGO

 

Over the last five years, we have produced consistent year-over-year growth in operating income despite an exceptionally challenging global economic and operating environment, particularly in 2012. For the five-year period ending December 31, 2012, our total return to shareholders was 175%.

We manage our business for the long term and believe our compensation programs support that approach as the majority of total direct compensation opportunity is not paid out within the first year. The information below highlights our performance for certain short- and long-term measures we use to determine executive compensation:

 

> One-year operating income increased by 1% (4% in constant currencies).*

 

> 2012 earnings per share was $5.36, an increase of 2% (5% in constant currencies).*

 

> 2010-2012 earnings per share increased on average by 9% per year in constant currencies.

 

> Stock price increased by $42, growth of 74%, over the 2009-2012 RSU vesting period.

 

* See page 14 of 2012 Annual Report on Form 10-K for reconciliation between GAAP and non-GAAP financial measures.

 

 

 

16        LOGO    McDonald’s Corporation 2013


Table of Contents

Further highlights of our performance:

 

> 2012 was McDonald’s ninth consecutive year of positive comparable sales growth in every geographic segment, with a global increase of 3.1% over 2011.

 

> We returned $5.5 billion to our shareholders through dividends paid and share repurchases in 2012 and we have returned $16.5 billion from 2010-2012.

 

> Our market capitalization increased by more than $21 billion during the period from 2010 through 2012.

 

DEFINITIONS

Quantitative measures of Company performance

Operating income, ROTA and EPS are based on the corresponding measures reported in our financial statements and are adjusted for purposes of our compensation program. For more information about adjustments in measuring performance, see page 23.

 

n   Operating income. Profit attributed to the operations.

 

n   ROTA. Return on total assets (operating income divided by average assets).

 

n   ROIIC. Return on incremental invested capital (change in operating income plus depreciation and amortization divided by the weighted average of cash used for investing activities during the performance period). ROIIC will replace ROTA as a performance metric for CPUP beginning in 2013, for the reasons described in the discussion of CPUP beginning on page 20.

 

n   EPS. Earnings per share (net income divided by diluted weighted-average shares). Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of share-based compensation.

 

n   Comparable guest counts. Represents the percent change in transactions from the same period for the prior year for all restaurants in operation at least 13 months.

 

n   Customer satisfaction opportunity. Represents the percentage of times that quality, service or cleanliness critical drivers are missed in a customer visit, as measured by independent mystery shoppers.

 

n   G&A expense control. Represents a way that the corporate function can contribute to operating income. If spending is at or below plan, this modifier has no impact on the Corporate TIP team factor, but if spending is above plan, it will have a negative impact on the Corporate TIP team factor.

 

n   People modifier. Represents the satisfaction level of our restaurant employees with their employment experience or the perceptions of our consumers regarding McDonald’s as an employer.

 

n   TSR. Total shareholder return. The total return on our shares (change in stock price and dividends paid) over a specified period, assuming reinvestment of dividends.

Groups of Company employees

n   Staff. Company employees, including home office, divisional office and regional office employees.

 

n   Senior management. Employees at the level of senior vice president and above; about 50 employees.

 

n   Executives. The 10 most senior executives of the Company.

 

n   Named executive officers (NEOs). The following seven executives whose compensation is described in this Proxy Statement, pursuant to requirements of the Securities and Exchange Commission (SEC).

 

   > James A. Skinner, former Vice Chairman and Chief Executive Officer or CEO (retired, effective June 30, 2012)

 

   > Donald Thompson, President and CEO (effective July 1, 2012)

 

   > Peter J. Bensen, Chief Financial Officer or CFO

 

   > Timothy J. Fenton, Chief Operating Officer or COO (effective July 1, 2012)

 

   > Douglas Goare, President of McDonald’s Europe

 

   > Gloria Santona, Executive Vice President, General Counsel and Secretary

 

   > Janice L. Fields, former President of McDonald’s USA (effective November 30, 2012)

 

 

 

McDonald’s Corporation 2013    LOGO        17


Table of Contents

Other

n   Total direct compensation. The aggregate value of salary, TIP and CPUP as well as stock options and RSUs granted.

 

n   Total direct compensation opportunity for 2012. The targeted value of total direct compensation that the NEOs had an opportunity to earn in 2012 for target performance.

 

n   Committee. The Compensation Committee of the Company’s Board of Directors.

 

n   AOWs. Areas of the World, the Company’s geographic business units; namely, the U.S., Europe and APMEA.

 

McDONALD’S EXECUTIVE COMPENSATION PROGRAM

Elements of McDonald’s Executive Compensation

ALLOCATION OF TOTAL DIRECT COMPENSATION AMONG THE ELEMENTS

Approximately 84% of the NEOs’ total direct compensation opportunity for 2012 was allocated to variable compensation that is at-risk based on performance, including short-term and long-term incentive compensation. Short-term incentive compensation is provided under our TIP program and long-term incentive compensation is allocated approximately two-thirds to equity-based compensation (stock options and performance-based RSUs) and one-third to long-term cash incentive compensation under the CPUP.

Beginning in 2013, to more closely align our equity compensation program with market practice, the Committee has determined that equity awards will be comprised of 50% of the grant date value in options and 50% in RSUs, rather than the prior mix of 70% in options and 30% in RSUs. We believe this change will also further promote retention.

COMPENSATION APPROACH AND PAY POSITION

Consistent with our goal of providing competitive compensation, we review our executives’ total direct compensation compared to executive compensation levels at a peer group of companies. The companies in the peer group are companies with which we compete for talent, including our direct competitors, major retailers, producers of consumer branded goods and companies with a significant global presence.

The Committee reviews our peer group annually based on the following criteria: industry, comparable size based on revenue and market capitalization (.5x to 2x); global presence; high performing companies that compete with us for talent; and availability of data. McDonald’s market capitalization as of the end of 2012 was $88.5 billion (at the 75th percentile of our peer group) and revenue was $27.6 billion (at the 40th percentile of our peer group). Please refer to pages 24 and 25 for more details on the composition of our peer group.

We set executive compensation targets annually in support of our executive compensation objectives. The market median for each compensation element serves as a reference point and indicator of competitive market trends, which are initial considerations by the Committee when setting compensation. Although the Committee targets direct compensation opportunity within a reasonable range of the median of our peer group, the Committee applies judgment in establishing each element of compensation. Any element of compensation may vary from the market median based upon individual factors the Committee considers relevant in a given year, including, for example, individual contributions to the accomplishment of the long-term business plan, tenure in a particular position, additional responsibilities and internal pay equity considerations.

DETAILED INFORMATION ABOUT ELEMENTS OF COMPENSATION

n   Annual compensation

 

  > Annual salary

 

   In setting annual salary levels, we take into account competitive considerations, individual performance, tenure in position, internal pay equity, and the effect on our general and administrative expenses. Executive salaries vary based on individual circumstances and may be above or below our stated competitive consideration of the median of our peer group.

 

  > Target Incentive Plan (referred to as TIP)

 

   Our TIP is designed primarily to reward growth in annual operating income, which measures the success of the most important elements of our business strategy. If there is no growth in operating income, the TIP formula results in no payouts. Operating income growth requires the Company to balance increases in revenue with financial discipline to produce strong margins and a high level of cash flow. The individual performance of our

 

 

 

18        LOGO    McDonald’s Corporation 2013


Table of Contents
     executives is also an important factor in determining their TIP award. As discussed above, the Company considers the median annual bonus opportunity of comparable executives within our peer group in setting TIP targets, but it is not the sole factor in its decision. Actual payouts may be above or below our stated competitive consideration based upon actual Company and/or individual performance results.

For purposes of determining an executive’s TIP payout, operating income growth is measured on a consolidated (referred to as Corporate) basis or an AOW basis, or a combination of the two, depending on the executive’s responsibilities. In addition to operating income growth, final TIP payouts take into account pre-established “modifiers” reflecting other measures of Corporate and/or AOW performance that are important drivers of our business (see chart on pages 32 and 33). In addition to Company performance, TIP payouts are adjusted based on the application of an individual performance factor (IPF) (from 0 up to 150% in 2012) which acts as a multiplier and can have a significant effect, whether positive or negative, in determining the final payout. Final payouts are capped at 250% of target. Additional details on how each element of performance affects actual 2012 TIP payouts can be found in the description following the Grants of Plan Based Awards table on pages 31 and 32.

In 2012, operating income growth was below the TIP targets for each AOW as well as Corporate, which negatively impacted payouts. TIP results for each AOW and Corporate benefitted by the aggregate performance against the pre-established targets for the modifiers, as detailed in the chart on page 32.

The following table shows the operating income targets and results under the 2012 TIP:

 

(Dollars in millions)

 

  

Target 2012
operating income*

 

    

2012
operating income*

 

    

 

Target 2012
operating
income growth
over 2011*

 

   

2012
operating
income growth
over 2011*

 

      

Corporate

     $9,073         $8,865         6.4     4.0  

U.S.

     3,824         3,750         4.3        2.3     

Europe

     3,473         3,427         7.6        6.2     

APMEA

 

    

 

1,677

 

  

 

    

 

1,567

 

  

 

    

 

10.2

 

  

 

   

 

3.0

 

  

 

   

* Adjusted for compensation purposes as described on page 23.

The target awards and final TIP payouts for the NEOs are shown in the following table:

 

Named executive officer

 

  

2012 target
TIP award

 

    

2012 TIP
final payout

 

    

 

TIP final payment
as percentage
of target

 

      

James A. Skinner (pro-rated)

     $1,133,844         $1,000,000         88.2  

Donald Thompson

     1,513,270         1,400,000         92.5     

Peter J. Bensen

     715,000         679,000         95.0     

Timothy J. Fenton

     788,325         677,000         85.9     

Douglas Goare

     464,100         500,000         107.7     

Gloria Santona

     539,750         513,000         95.0     

Janice L. Fields

     527,765         445,000         84.3     

 

 

Additional detail about the NEOs’ 2012 TIP awards, including the IPF for each NEO, begins on page 31.

 

 

 

McDonald’s Corporation 2013    LOGO        19


Table of Contents
n   Long-term incentive compensation

 

   Our long-term incentive program for executives include three vehicles—stock options, performance-based RSUs and CPUP—each with their own objectives. The chart below illustrates the approximate 2012 target opportunity of cash and stock components of our long-term incentive programs, as well as the split among stock options and RSUs as a percentage of total long-term incentive compensation opportunity.

 

 

2012 long-term incentive component mix

 

LOGO

 

 

 

  > Stock options

Options align executives’ compensation to the stock price, thereby incentivizing executives to increase shareholder value over the long term. Options, including those granted in 2012, have an exercise price equal to the closing price of our common stock on the grant date, a term of ten years and vest ratably over four years. The Company’s policies and practices regarding option grants, including the timing of grants and the determination of the exercise price, are described on page 26.

 

  > Performance-based Restricted Stock Units (referred to as RSUs)

An RSU provides the right to receive a share of McDonald’s stock upon vesting. RSUs granted to executives generally have both service- and performance-based vesting requirements. The value of RSUs is linked to our stock price. The performance-based vesting conditions based upon EPS growth require the executives to achieve the Company’s strategic objectives in order to vest in the awards. The Company believes that EPS growth is an indicator of profitability.

The RSUs granted to executives in 2012 are scheduled to vest in full at the end of a three-year service period, subject to the Company’s achievement of an EPS growth target over that period. The target performance level for the RSUs granted to executives in 2012 is 6% compounded annual growth in EPS on a cumulative basis over baseline 2011 EPS of $5.28. If target performance is achieved (cumulative EPS of $17.82), the full number of RSUs covered by the 2012 awards will vest. Achievement of below-target performance reduces the number of RSUs that will vest, but above-target performance does not increase the number of RSUs earned.

All of the RSUs granted to the executives in 2009 vested fully in 2012 based on the achievement of 13% compounded annual EPS growth over the performance period, which exceeded the target of 6%.

 

  > Cash Performance Unit Plan (referred to as CPUP)

We believe it is important to have a long-term incentive pay component based on measures that support our long-term business goals and are not focused on stock price. Towards that end, in 2010 we granted three-year cash awards under CPUP. During the 2010-2012 performance cycle, the primary performance measures for these awards were operating income and ROTA. Operating income measures management’s performance on the key elements associated with driving our business and ROTA measures the efficiency with which management utilizes the company’s cumulative capital. 2010-2012 CPUP also incorporated a TSR multiplier that rewards strong shareholder returns relative to the S&P 500 Index, while holding senior management accountable for below-market TSR performance.

 

 

 

20        LOGO    McDonald’s Corporation 2013


Table of Contents

Senior management has been eligible for a long-term cash incentive award under CPUP every three years, with a cumulative payout at the end of each successive three-year cycle. CPUP award cycles have not overlapped. Our most recent three-year CPUP cycle ended on December 31, 2012. The 2012 Summary Compensation Table reflects payouts to the NEOs under CPUP for this cycle. Final CPUP payouts were determined as shown below:

 

 

 

LOGO

 

 

McDonald’s results for the period covered by the 2010-2012 performance cycle exceeded target performance. The three-year results were driven by significantly above target performance in both 2010 and 2011, which was partially offset by below-target performance in 2012. The target level of compound annual operating income growth for the 2010-2012 CPUP was 6.5%. The Company achieved compound annual operating income growth of 8.1%. Target average ROTA for the 2010-2012 CPUP was 25%. The Company achieved average ROTA of 27.5%. The Company’s TSR was in the 66th percentile of the S&P 500 Index during the 2010-2012 performance period. Final CPUP payouts were 159.4% of the target awards, reflecting very strong overall performance over the three-year period.

As part of its regular review process, in 2012 the Committee reviewed the structure of CPUP. The Committee continues to believe the combination of an operating income metric, as well as a return on capital metric with a market-based relative performance multiplier, serves our fundamental focus of driving sustained, profitable growth. Although the Committee believes the structure of CPUP remains aligned with our business objectives, the Committee considered the merits of currently used discrete performance cycles compared to overlapping performance cycles. The Committee decided to transition to overlapping three-year CPUP cycles beginning in 2013. The Committee believes this change will maintain participants’ focus on long-term value creation while more closely aligning annual compensation with Company performance. Further, this change will more closely align the Company’s long-term incentive program structure with market practice. The Committee considered that overlapping cycles give the Committee the opportunity to review and update the CPUP structure as well as performance measures each year, including the ability to take into account the then-current business environment. This allows the Company to sharpen senior management focus on the most current and relevant performance goals. The Committee has no current intention to make any changes to CPUP’s structure or performance metrics, except as provided below.

Commencing in 2013, a new three-year cycle will begin each year and will result in smaller annual CPUP targets, rather than a larger target every three years. Accordingly, once we complete the transition to overlapping cycles in 2015, our long-term cash component of total compensation will consist of three, three-year performance cycles running concurrently (i.e., 2013-2015; 2014-2016; 2015-2017).

In addition, the Committee determined that, beginning in 2013, three-year Return on Incremental Invested Capital (ROIIC) is a preferable investment return metric to ROTA for future CPUP awards because it measures the effects of incremental capital investment decisions, rather than the effects of cumulative historical capital investment decisions, and is therefore more reflective of the decisions made during the then-current performance cycle.

 

 

 

McDonald’s Corporation 2013    LOGO        21


Table of Contents

The Committee approved new CPUP awards in February 2013 for the performance period January 1, 2013 to December 31, 2015. Participants will not receive any payouts under CPUP until after the 2013-2015 performance period ends (if performance targets are met). Awards are scheduled to be paid in 2016 following completion of the three-year performance cycle.

The transition from discrete to overlapping performance cycles will adversely affect current CPUP participants in two ways. First, the prorated CPUP award will be reduced upon a participant’s retirement. We believe it is important that all of our compensation programs provide competitive treatment upon retirement, and, since the majority of current participants are retirement eligible under CPUP we believe it is important to address this benefit reduction. Second, it will take five years for participants to be eligible for the same potential benefits under overlapping cycles as they would be eligible for in three years if we were to continue to use discrete cycles. The Committee believes it is important to replicate a significant portion of the value provided by CPUP in prior years using a different compensation vehicle within the structure of our current executive compensation program.

The Committee determined that it was appropriate to address these transition issues by making a one-time, performance-based RSU grant in 2013 to CPUP participants affected by this change. Fifty percent of these RSUs will be eligible to vest on the third anniversary of the grant and fifty percent will generally be eligible to vest upon the participant’s separation from McDonald’s, depending on the circumstances of the separation. This one-time RSU grant will be subject to the same three-year performance metrics as the 2013-2015 CPUP awards, so that the number of shares underlying the RSUs will be definitively determined at the end of the 2013-2015 cycle based on performance. If target performance, or above, is achieved, the full number of shares underlying the RSUs covered by the award will vest. Performance below target will result in a pro rata reduction in the number of shares underlying the RSUs that will vest, but above-target performance will not increase the number of RSUs earned. This grant is intended to restore approximately three-quarters of participants’ lost CPUP retirement benefits, if targets are achieved. Participants whose employment with the Company terminates during the 2013-2015 cycle may continue to be eligible for only a prorated portion of this one-time transition RSU award, based upon when in the applicable three-year performance cycle they separate from McDonald’s and the circumstances of the separation.

 

n   Retirement savings plans

 

   The NEOs participate in our tax-qualified defined contribution retirement savings plan (Profit Sharing Plan) and a supplemental non-qualified deferred compensation retirement plan that are the same as those in which staff participate. We believe a competitive retirement program aligns with market practices, and thereby contributes to the recruitment and retention of top executive talent.

 

n   Severance and change in control arrangements

 

  > Severance plan

 

   Messrs. Bensen, Fenton, Goare and Thompson and (prior to her separation) Ms. Fields participate in our broad-based U.S. severance plan. Benefits under the severance plan are described under “Potential Payments Upon Termination of Employment or Change in Control” beginning on page 37.

 

  > Change in control employment agreements

 

   The Company has change in control employment agreements with some of its NEOs. Benefits under the change in control employment agreements are described under “Potential Payments Upon Termination of Employment or Change in Control” beginning on page 37. The Company does not intend to enter into new change in control agreements.

 

  > Executive Retention Replacement Plan (ERRP)

 

   The benefits provided under the ERRP were established in 1999 to retain executive talent. Ms. Santona is the sole remaining participant in this program as the Committee stopped offering ERRP benefits to new participants in 2003. Under the ERRP, Ms. Santona is entitled to retire and receive certain cash benefits, as well as the vesting of all of her outstanding equity awards. Stock options would continue to become exercisable on their originally scheduled dates and RSUs would be paid out on the originally scheduled dates, based on the Company’s achievement of the applicable performance goals. In addition, Ms. Santona would receive substantially similar benefits if her employment is terminated for any reason other than death, disability or “cause.” Ms. Santona’s receipt of benefits under the ERRP is subject to the execution of an agreement that includes covenants not to compete, not to solicit employees, nondisparagement and nondisclosure covenants as well as a release of claims.

 

 

 

22        LOGO    McDonald’s Corporation 2013


Table of Contents
n   Perquisites and other fringe benefits

 

   McDonald’s provides the following perquisites to executives: company-provided car or a car allowance, financial planning, annual physical examinations (which are also available for the executives’ spouses), executive security (only three executives), matching charitable donations, limited personal items and, generally in the case of the CEO only, personal use of the Company’s aircraft (CEO is required to reimburse a portion of the cost). The Company does not provide any tax gross-ups with respect to perquisites. See footnote 5 to the Summary Compensation Table on page 29 for a discussion of perquisites received by NEOs in 2012. Executives also participate in all of the broad-based benefit and welfare plans and perquisites available to McDonald’s staff in general.

LEADERSHIP CHANGES

As described above, Mr. Skinner retired as CEO, effective June 30, 2012, after 41 years of service to the Company. Mr. Skinner participated in the ERRP, and qualified for certain benefits upon retirement, including a cash payment of approximately $10 million. In exchange for these benefits, Mr. Skinner satisfied both a multi-year retention period as well as a retirement age of 62. Mr. Skinner satisfied all of his commitments, including agreeing to ongoing post-termination restrictive covenants, in exchange for the benefits provided by the ERRP. The benefits provided under the ERRP were established in 1999 to retain executive talent. The Committee stopped offering benefits to new participants in 2003 and Ms. Santona is the sole remaining participant.

In connection with his promotion to CEO, Mr. Thompson received a 26% salary increase as well as increases in his TIP and CPUP target awards consistent with the target awards approved for our prior CEO. In addition, in an effort to align the amount of compensation Mr. Thompson ultimately receives with shareholders’ interests, the Committee made a promotional grant of stock options to Mr. Thompson valued at approximately $2 million, with an exercise price equal to the closing price of a share of Company stock on June 29, 2012, which aligned with our stock price when he became CEO.

The Board of Directors elected Jeffrey Stratton to succeed Jan Fields as President of McDonald’s USA, with effect on December 1, 2012. As described on page 39, Ms. Fields is entitled to benefits under our broad-based U.S. severance plan; which requires agreement to certain restrictive covenants. Pursuant to the terms of the awards, Ms. Fields would have been entitled to vest in a pro rata portion of her RSUs. In exchange for a two-year agreement not to compete, the Company agrees to allow Ms. Fields to vest in all of her remaining RSUs, subject to the original performance conditions.

The ERRP cash payment to Mr. Skinner is included in the Summary Compensation Table beginning on page 27 and benefits under the ERRP are detailed under the “Benefits under the Executive Retention Replacement Plan” on page 39 and the payments to which Ms. Fields is eligible in connection with her separation from McDonald’s are described under “Potential Payments Upon Termination of Employment or Change in Control” beginning on page 39.

CERTAIN ADJUSTMENTS IN MEASURING PERFORMANCE

In measuring financial performance the Committee focuses on the fundamentals of the underlying business performance and adjusts for items that are not indicative of ongoing results. For example, operating income and EPS are expressed in constant currencies (i.e., excluding the effects of foreign currency translation), since we believe that period-to-period changes in foreign exchange rates can cause our reported results to appear more or less favorable than business fundamentals indicate. The Committee’s approach to other types of adjustments is subject to pre-established guidelines, including materiality, to provide clarity and consistency on how it views the business when evaluating performance. Charges/credits that may be excluded from operating income include: “strategic” items (such as restructurings, acquisitions and divestitures); “regulatory” items (changes in tax or accounting rules); and “external” items (extraordinary, non-recurring events such as natural disasters). Similar principles apply to exclusions from EPS and when calculating ROTA.

 

> There were no items excluded in calculating operating income for 2012 TIP.

 

> There were no significant items excluded from the operating income or ROTA calculations with respect to the 2010-2012 CPUP.

 

> There were no significant items excluded from the EPS calculations with respect to the performance-based RSUs granted to executives in 2009 and 2012.

THE PROCESS FOR SETTING COMPENSATION

The Committee is responsible for reviewing and approving senior management’s compensation. This includes approving the goals and payouts under the short- and long-term incentive plans, target compensation opportunities and actual payouts for the executives, as well as the design of programs in which the executives participate. The

 

 

 

McDonald’s Corporation 2013    LOGO        23


Table of Contents

Chairmen of the Governance Committee and Compensation Committee lead the Board’s independent directors in the evaluation of the CEO’s performance. Based upon the results of this performance evaluation, and informed by input from the Committee’s independent consultant and the head of human resources, the Committee reviews and approves CEO compensation.

THE ROLE OF MANAGEMENT

Management recommends compensation for executives other than the CEO to the Committee. The CEO recommends compensation packages for the NEOs who report directly to him: Messrs. Bensen and Fenton and Ms. Santona. The COO does the same for the NEOs who report directly to him: Mr. Goare and, prior to her departure, Ms. Fields. The head of human resources also provides input on compensation for each of the executives other than himself. In 2012, prior to each Committee meeting, the CEO and the CFO provided input on the materials prepared by management and presented to the Committee (except with respect to their own compensation).

THE ROLE OF COMPENSATION CONSULTANTS

The Committee has adopted a policy under which it has the sole authority to select, evaluate, retain and dismiss an independent compensation consultant. Management may not engage the Committee’s consultant for any purpose. Frederic W. Cook & Co., Inc. (FWC) is the Committee’s independent compensation consultant. FWC advises the Committee regarding (i) trends in executive compensation; (ii) specific compensation recommendations for the CEO, CFO and COO; (iii) applicable legislative developments; and (iv) other matters as requested by the Committee from time to time. FWC also provides assistance to the Board in compiling and summarizing the results of certain Board and director evaluations and advice on director fees.

In December 2012, the Committee considered FWC’s independence and whether its work raised conflicts of interest under newly-adopted NYSE listing standards and new SEC rules. Based on information received from FWC and other relevant considerations, the Committee concluded that FWC is independent and that its work for the Committee did not raise any conflicts of interest.

In addition, to identify and evaluate external trends and practices related to compensation and benefits strategy, design and administration, management considers survey data and other similar research obtained from various sources, including Towers Watson & Co., Equilar and Aon Hewitt, which also provides significant plan administration services to McDonald’s.

COMPANIES IN OUR PEER GROUP IN 2012

As previously discussed on page 18, each year the Committee selects a peer group of companies with which we compete for talent and based upon specific criteria. The table below illustrates the type of companies chosen (i.e., branded consumer products) as well as market capitalization and annual revenues for each of our peer group companies for 2012 (except for Nestlé and Unilever, for which such information is not available).

McDonald’s 2012 peer group companies  (Dollars in billions)

 

Peer

 

  

Market capitalization ($)(1)

 

    

 

Revenues (2)

 

       

Branded Consumer Products:

        

3M Company

     $  64.2         $  29.9      

The Coca-Cola Company

     162.6         48.8      

Colgate-Palmolive Company

     49.4         17.1      

The Walt Disney Company

     88.2         42.3      

General Mills, Inc.

     26.1         16.7      

Johnson & Johnson

     194.3         67.2      

Kellogg Company

     20.0         14.2      

Kraft Foods Group, Inc. (3)

     26.9         18.3      

Mondeléz International, Inc. (3)

     26.9         35.0      

Nestlé (United States) (4)

                  

NIKE, Inc.

     41.9         24.1      

PepsiCo, Inc.

     105.9         65.5      

The Procter & Gamble Company

     185.6         83.7      

Unilever (United States) (4)

 

                    

Table continued on next page

 

 

 

24        LOGO    McDonald’s Corporation 2013


Table of Contents

Table continued from previous page

 

Peer

 

  

Market capitalization ($)(1)

 

    

 

Revenues (2)

 

       

Major Retailers/Services:

        

Best Buy Co., Inc.

     $    4.0         $  50.7      

FedEx

     28.8         42.7      

The Home Depot, Inc.

     92.5         74.8      

Lowe’s Companies Inc.

     39.9         50.2      

Sears Holding Corporation

     4.4         39.9      

Target Corporation

     38.5         73.3      

Walgreen Co.

     35.0         71.6      

Wal-Mart Stores, Inc.

 

     228.2         466.1        

Key Competitors:

        

Burger King Worldwide, Inc.

     $    5.8         $    2.0      

Starbucks Corporation

     39.9         13.3      

Wendy’s Company

     1.8         2.5      

Dunkin’ Brands Group

     3.5         0.7      

Yum! Brands, Inc.

 

     30.0         13.6        

McDonald’s

 

     $  88.5         $  27.6        

 

(1) Source for market capitalization: Bloomberg.com. Data as of December 31, 2012.

 

(2) Reflects revenues, sales or comparable data as publicly disclosed by the applicable company in its annual report filed with the SEC for its most recently completed fiscal year for which an annual report has been filed prior to the date hereof.

 

(3) Kraft Foods Inc. was included in the peer group prior to the company splitting into Mondeléz International and Kraft Foods Group in 2012. Both companies remain in our peer group.

 

(4) Unlisted U.S. division of non-U.S. company.

In 2012, the Committee removed Costco as a result of general differences in compensation structure and philosophy and Sara Lee due to a pending divestiture. It also added FedEx and Dunkin’ Brands Group. FedEx has a large global presence and Dunkin’ Brands Group is considered a brand and direct competitor in the coffee and breakfast segments.

 

COMPENSATION POLICIES AND PRACTICES

Policy regarding stock ownership of management

The Company has adopted stock ownership requirements for senior management because we believe they will more effectively pursue the long-term interests of shareholders if they are shareholders themselves. The following table provides our current stock ownership requirements, by level.

 

Level

 

  

 

Stock ownership requirements
(multiple of salary)

 

       

President & CEO

     6 X      

COO

     5 X      

CFO

     4 X      

President U.S./Europe/APMEA

     4 X      

Executive Management (EVP)

     4 X      

Division President–U.S. paid

     4 X      

Division President–non-U.S. paid

     3 X      

Senior Management (SVP)–U.S. paid

     3 X      

Senior Management (SVP)–non-U.S. paid

 

    

 

2 X

 

  

 

    

The Committee reviews share ownership requirements and where members of senior management stand against their respective requirements annually. Once a member of senior management becomes subject to the

 

 

 

McDonald’s Corporation 2013    LOGO        25


Table of Contents

stock ownership requirements, he/she has five years to satisfy the requirements. The five-year period to comply restarts when an executive is promoted to a position with a higher ownership requirement. Currently, all executives meet or are on track to meet their respective stock ownership requirements.

Further, the Company has adopted restrictions that prohibit certain employees, including all of senior management, from engaging in derivative transactions to hedge the risk associated with their stock ownership. These restrictions also require approval in order to hold Company shares in a margin account.

CLAWBACKS

The Company’s compensation plans contain clawback provisions that apply to senior management.

Senior management may be required to repay compensation previously awarded under TIP and CPUP in certain circumstances (for example, the commission of fraud) and to the extent permitted under applicable law.

Payments under the ERRP, including some stock option gains and RSU payouts, are also subject to forfeiture and repayment in certain circumstances, such as violation of an applicable restrictive covenant or the commission of an act that would have resulted in termination for “cause.”

Under our severance plan, the Company may cease payment of any future benefits and require repayment of any previously paid severance amounts upon violation of an applicable restrictive covenant or commission of an act that would have resulted in termination for “cause.”

Unexercised stock options and unpaid RSUs are subject to forfeiture if the Company determines that any employee committed an act or acts involving dishonesty, fraud, illegality or moral turpitude. Further, if an executive violates a restrictive covenant, the Company has the right to cancel outstanding awards.

POLICY REGARDING FUTURE SEVERANCE PAYMENTS

The Company has a policy under which we will seek shareholder approval for severance payments to a NEO if such payments, including tax gross-ups, would exceed 2.99 times the sum of (i) the NEO’s annual base salary as in effect immediately prior to termination of employment; and (ii) the highest annual bonus awarded to the NEO by the Company in any of the three full fiscal years immediately preceding the fiscal year in which termination of employment occurs. Certain types of payments are excluded from this policy, such as amounts payable under arrangements that apply to classes of employees other than the NEOs or that predate the implementation of the policy, as well as any payment that the Committee determines is a reasonable settlement of a claim that could be made by a NEO.

RISK AND COMPENSATION PROGRAMS

In considering the risks to the Company and its business that may be implied by our compensation plans and programs, the Committee focuses primarily on senior management, but also considers the design, operation and mix of the plans and programs at all levels of the Company. Our compensation program is designed to mitigate the potential to reward excessive risk-taking that may produce short-term results that appear in isolation to be favorable, but that may undermine the successful execution of our long-term business strategy and erode shareholder value.

INTERNAL PAY EQUITY

Compensation opportunities reflect our executives’ positions, responsibilities and tenure in a given position and are generally similar for executives who have comparable levels of responsibility (although actual compensation delivered may differ depending on relative performance). In 2012, Mr. Skinner and then Mr. Thompson had ultimate responsibility for the strategic direction of the Company and therefore were the most highly paid.

POLICY WITH RESPECT TO DEDUCTIBILITY OF COMPENSATION

We intend that our compensation programs usually will permit the Company to deduct compensation expense under Section 162(m) of the Internal Revenue Code (Code), which limits to $1 million the tax deductibility of annual compensation paid to NEOs, unless the compensation is performance-based. However, the Company may from time to time pay compensation that does not qualify as performance-based compensation under Section 162(m) of the Code.

POLICIES AND PRACTICES REGARDING EQUITY AWARDS

Equity awards cannot be granted when the Company possesses material non-public information. The Company generally makes broad-based equity grants at approximately the same time each year following our release of financial information; however, the Company may choose to make equity awards outside of the annual broad-based grant (i.e., for certain new hires or promotions). Stock options may be granted only with an exercise price at or above the closing market price of the Company’s stock on the date of grant.

 

 

 

26        LOGO    McDonald’s Corporation 2013


Table of Contents
 

Compensation Tables

 

  

SUMMARY COMPENSATION TABLE

  

The table below summarizes the total compensation earned by or paid to our NEOs in 2010, 2011 and 2012.

 

  

Name and principal
position (a)

 

 

Year
(b)

 

   

Salary (1)
($)(c)

 

   

 

Stock

awards (2)
($)(e)

 

   

Option

awards (3)
($)(f)

 

   

Non-equity incentive

plan compensation (4)

($)(g)

 

   

All other
compensation (5)
($)(i)

 

   

Total

($)(j)

 

 

James A. Skinner

    2012      $ 753,333      $ 1,720,304      $ 3,024,089      Annual:   $ 1,000,000      $ 10,632,529 (6)    $ 27,741,408   

Former Vice Chairman

          Long-term:     10,611,153       

and Chief Executive

          Total:     11,611,153       

Officer

               

(retired, effective

    2011        1,473,333        1,429,035        1,796,501      Annual:     3,300,000        752,024        8,750,893   

June 30, 2012)

          Long-term:     0       
          Total:     3,300,000       
    2010        1,433,333        1,415,255        1,752,389      Annual:     4,500,000        631,641        9,732,618   
          Long-term:     0       
          Total:     4,500,000       
                                                             

Donald Thompson

    2012        979,167        660,129        3,206,663 (7)    Annual:     1,400,000        324,816        13,751,919   

President and

          Long-term:     7,181,144       

Chief Executive

          Total:     8,581,144       

Officer

               

(effective

    2011        829,167        625,165        785,902      Annual:     1,526,000        307,514        4,073,748   

July 1, 2012)

          Long-term:     0       
          Total:     1,526,000       
    2010        794,952        583,838        722,908      Annual:     1,855,000        174,662        4,131,360   
          Long-term:     0       
          Total:     1,855,000       
                                                             

Peter J. Bensen

    2012        708,333        465,904        818,945      Annual:     679,000        196,308        7,331,690   

Chief Financial

          Long-term:     4,463,200       

Officer

          Total:     5,142,200       
    2011        670,833        446,730        561,559      Annual:     987,000        226,504        2,892,626   
          Long-term:     0       
          Total:     987,000       
    2010        641,667        398,084        492,891      Annual:     1,296,000        198,800        3,027,441   
          Long-term:     0       
          Total:     1,296,000       
                                                             

Timothy J. Fenton

    2012        684,167        407,474        716,270      Annual:     677,000        198,455        5,888,819   

Chief Operating

          Long-term:     3,205,453       

Officer

          Total:     3,882,453       

(effective

               

July 1, 2012)

    2011        601,500        401,969        505,299      Annual:     667,000        302,468        2,478,236   
          Long-term:     0       
          Total:     667,000       
    2010        581,083        371,564        460,033      Annual:     961,000        385,411        2,759,091   
          Long-term:     0       
          Total:     961,000       
                                                             

Table continued on next page

 

 

 

McDonald’s Corporation 2013    LOGO        27


Table of Contents

Table continued from previous page

 

Name and principal
position (a)

 

  

Year
(b)

 

    

Salary
(1) ($)(c)

 

    

 

Stock
awards
(2) ($)(e)

 

    

Option
awards
(3) ($)(f)

 

    

Non-equity incentive
plan compensation (4)
($)(g)

 

    

All other
compensation (5)
($)(i)

 

    

Total
($)(j)

 

 

Douglas Goare

     2012       $ 542,500       $ 298,856       $ 525,266       Annual:    $ 500,000         $889,836       $ 4,508,723   

President, McDonald’s

               Long-term:      1,752,265         

Europe (8)

               Total:      2,252,265         
                                                                     

Gloria Santona

     2012         632,500         233,632         410,660       Annual:      513,000         156,797         3,524,649   

Executive Vice

               Long-term:      1,578,060         

President, General

               Total:      2,091,060         

Counsel and

                       

Secretary (9)

                       
                                                                     

Janice L. Fields

     2012         616,917         353,210         620,775       Annual:      445,000         159,860         4,825,862   

Former President,

               Long-term:      2,630,100         

McDonald’s USA

               Total:      3,075,100         

(effective

                       

November 30, 2012)

     2011         593,333         321,602         404,242       Annual:      679,000         155,854         2,154,031   
               Long-term:      0         
               Total:      679,000         
     2010         573,351         291,947         361,459       Annual:      780,000         146,659         2,153,416   
               Long-term:      0         
               Total:      780,000         
                                                                     

 

(1) Reflects annual and promotional increases in salary that took effect during 2012. Annual base salaries as of December 31, 2012 were as follows:

 

 

 

 

Donald Thompson

  

 

$

 

1,100,000

 

  

  

Peter J. Bensen

     715,000      

Timothy J. Fenton

     750,000      

Douglas Goare

     546,000      

Gloria Santona

     635,000      

Janice L. Fields

     620,900      
               

 

(2) Represents the aggregate grant date fair value, as computed in accordance with FASB ASC Topic 718, based on the probable outcome of the applicable performance conditions and excluding the effect of estimated forfeitures during the applicable vesting periods, of RSUs granted under the McDonald’s Corporation Amended and Restated 2001 Omnibus Stock Ownership Plan, as amended (Prior Plan) or the McDonald’s Corporation 2012 Omnibus Stock Ownership Plan (Current Plan), as applicable. Values are based on the closing price of the Company’s common stock on the grant date, less the present value of expected dividends over the vesting period. Generally, RSUs vest on the third anniversary of the grant date and are subject to performance-based vesting conditions linked to the achievement of target levels of diluted EPS growth. Additional information is disclosed in the Grants of Plan-Based Awards table on page 30 and the Outstanding Equity Awards at 2012 Year-end table on pages 33 and 34. A more detailed discussion of the assumptions used in the valuation of RSU awards may be found in the Notes to Consolidated Financial Statements under “Share-based Compensation” on page 42 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

(3) Represents the aggregate grant date fair value, as computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures during the applicable vesting periods of options. Options have an exercise price equal to the closing price of the Company’s common stock on the grant date, vest in equal installments over a four-year period and are subject to the Prior Plan or the Current Plan, as applicable. Values for options granted in 2012 are determined using a closed-form pricing model based on the following assumptions, as described in the footnotes to the consolidated financial statements: expected volatility based on historical experience of 20.8%; an expected annual dividend yield of 2.8%; a risk-free return of 1.1%; and expected option life based on historical experience of 6.1 years. Additional information about options is disclosed in the Grants

 

 

 

28        LOGO    McDonald’s Corporation 2013


Table of Contents
     of Plan-Based Awards table on page 30 and the Outstanding Equity Awards at 2012 Year-end table on pages 33 and 34. A more detailed discussion of the assumptions used in the valuation of option awards may be found in the Notes to Consolidated Financial Statements under “Share-based Compensation” on pages 32 and 42 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

(4) Our annual cash incentive plan is referred to as TIP and our long-term cash incentive plan is referred to as CPUP. CPUP operates on non-overlapping three-year cycles and these payouts are for the 2010-2012 cycle.

 

(5) “All other compensation” for 2012 includes the Company’s contributions to the Profit Sharing Plan and Excess Benefit and Deferred Bonus Plan as follows:

 

 

James A. Skinner

   $ 364,800      

Donald Thompson

     225,465      

Peter J. Bensen

     152,581      

Timothy J. Fenton

     121,605      

Douglas Goare

     99,667      

Gloria Santona

     120,472      

Janice L. Fields

     116,632      
               

Also included are the following categories of perquisites: personal use of Company-provided cars or an allowance; life insurance; financial counseling; annual physical examinations for the executives and spouses; executive security; matching charitable donations; Olympic events tickets and personal items; limited miscellaneous items; and personal use (which includes travel for service on boards of directors other than our Board) of the Company’s aircraft, with a net cost to the Company in 2012 of $25,495 for Mr. Skinner and $50,331 for Mr. Thompson. In general, the CEO is the only executive permitted to use the aircraft for personal travel. However, in certain circumstances the CEO may at his discretion permit other executives to use the aircraft for personal travel. In addition, at the discretion of the CEO, other executives may be joined by their spouses on the aircraft. The Company does not provide any tax gross-ups on the perquisites described above.

As Mr. Goare was based overseas throughout 2012, the amount in this column also includes certain benefits in connection with his international assignment, as follows: Company-provided residence in Geneva (in the amount of $132,919); rental furniture; utilities for his Geneva residence; a cost-of-living adjustment (in the amount of $165,427); home leave travel allowance (in the amount of $27,670); relocation and family allowances; moving expenses (such as storage and shipment of goods); and tax equalization (in the amount of $326,623) which is designed to satisfy tax obligations arising solely as a result of his international assignment. Certain amounts were paid in Euro or Swiss Francs and in each case the amount reported reflects the exchange rate on the date the respective payments were made.

Mr. Fenton previously performed an international assignment in Hong Kong. As a result, he received certain tax-related benefits in connection with his international assignment. In particular, Mr. Fenton participated in the Company’s tax equalization program, which reimburses an executive’s tax obligations arising solely as a result of an international assignment, to the extent that those tax obligations are in excess of taxes that would have been due had the executive not performed the international assignment. Although Mr. Fenton returned to the U.S. in April of 2010, he continued to have tax liability in Hong Kong in 2012 arising from his international assignment. In 2012, the Company facilitated a Hong Kong tax payment as part of the tax equalization process; however, since this amount was withheld from Mr. Fenton there was no aggregate incremental cost to the Company as a result. Consistent with Company policy, the Company also provided Mr. Fenton with tax preparation services.

The incremental cost of perquisites is included in the amount provided in the table and based on actual charges to the Company, except as follows: (i) Company-provided cars includes a pro rata portion of the purchase price, fuel and maintenance, based on personal use, and (ii) corporate aircraft includes fuel, on-board catering, landing/handling fees and crew costs and excludes fixed costs, such as pilot salaries and the cost of the aircraft. In accordance with Company policy, the CEO must reimburse the Company for a portion of personal use of the corporate aircraft, calculated as the lower of (i) amount determined under the Code based on four times the Standard Industry Fare Level (SIFL) rate per person or (ii) 200% of the actual fuel cost.

 

(6) Includes Mr. Skinner’s ERRP payment of $10,222,839.

 

(7) Mr. Thompson received a grant of 169,396 stock options in connection with his promotion to President and CEO on July 1, 2012.

 

(8) Mr. Goare was not a NEO in 2010 or 2011.

 

(9) Ms. Santona was not a NEO in 2010 or 2011.

 

 

 

McDonald’s Corporation 2013    LOGO        29


Table of Contents

GRANTS OF PLAN-BASED AWARDS — FISCAL 2012

In 2012, the NEOs received annual cash awards under TIP. The formula for determining payouts under the TIP is described following the footnotes to the table. Columns (d) and (e) below show the target and maximum awards they could have earned. Actual payouts are in column (g) of the Summary Compensation Table. In 2012, the NEOs also received two types of equity awards: RSUs subject to performance-based vesting criteria (see columns (f), (g), (h) and (l)) and stock options (see columns ( j), (k) and (l)).

 

                            Estimated future payouts
under non-equity incentive
plan awards
     Estimated future payouts
under equity incentive
plan awards (1)
    

 

All other
option
awards:
number of
securities
underlying

    

Exercise
or base
price

of option

    

Grant date

fair value

of stock

and options

 

Name (a)

 

  

Plan

 

  

Grant
date (b)

 

    

Threshold
($)(c)

 

    

Target

($)(d)

 

    

Maximum
($)(e)

 

    

Threshold
(#)(f)

 

    

Target
(#)(g)

 

    

Maximum
(#)(h)

 

    

option (2)
(#)( j)

 

    

awards

($/Sh)(k)

 

    

awards (3)
($)(l)

 

 

James A.

   TIP         0       $ 1,133,844       $ 2,834,610                     

Skinner

   Equity                              
   Plan      2/8/12                  0         18,990         18,990             $ 1,720,304   
   Equity                              
   Plan      2/8/12                           221,545       $ 100.05         3,024,089   
                                                                                                

Donald

   TIP         0         1,513,270         3,783,175                     

Thompson

   Equity                              
   Plan      2/8/12                  0         7,287         7,287               660,129   
   Equity                              
   Plan      2/8/12                           85,008         100.05         1,160,359   
   Equity                              
   Plan      6/29/12                           169,396         88.53         2,046,304   
                                                                                                

Peter J.

   TIP         0         715,000         1,787,500                     

Bensen

   Equity                              
   Plan      2/8/12                  0         5,143         5,143               465,904   
   Equity                              
   Plan      2/8/12                           59,996         100.05         818,945   
                                                                                                

Timothy J.

   TIP         0         788,325         1,970,813                     

Fenton

   Equity                              
   Plan      2/8/12                  0         4,498         4,498               407,474   
   Equity                              
   Plan      2/8/12                           52,474         100.05         716,270   
                                                                                                

Douglas

   TIP         0         464,100         1,160,250                     

Goare

   Equity                              
   Plan      2/8/12                  0         3,299         3,299               298,856   
   Equity                              
   Plan      2/8/12                           38,481         100.05         525,266   
                                                                                                

Gloria

   TIP         0         539,750         1,349,375                     

Santona

   Equity                              
   Plan      2/8/12                  0         2,579         2,579               233,632   
   Equity                              
   Plan      2/8/12                           30,085         100.05         410,660   
                                                                                                

Janice L.

   TIP         0         527,765         1,319,413                     

Fields

   Equity                              
   Plan      2/8/12                  0         3,899         3,899               353,210   
   Equity                              
   Plan      2/8/12                           45,478         100.05         620,775   
                                                                                                

 

 

 

30        LOGO    McDonald’s Corporation 2013


Table of Contents
(1) Reflects grants of RSUs subject to performance-based vesting conditions under the Prior Plan or the Current Plan, as applicable. The RSUs vest on February 8, 2015, subject to achievement of a specified EPS growth target during the performance period ending on December 31, 2014. The performance target for all RSU awards granted to the NEOs in 2012 is compounded annual EPS growth of 6% on a cumulative basis, adjusted to exclude certain items as described on page 23. If target is achieved, 100% of the RSUs will vest. If no compounded EPS growth is achieved, no RSUs will vest. If compounded EPS growth is achieved, but below target, the awards will vest proportionally.

 

(2) Reflects grants of options in 2012. For details regarding options, please refer to footnote 3 to the Summary Compensation Table beginning on page 28.

 

(3) The values in this column for RSUs and options were determined based on the assumptions described in footnotes 2 and 3, respectively, to the Summary Compensation Table beginning on page 28.

TIP Awards

Target TIP awards for 2012 were equal to a percentage of salary. The final payouts (shown in column (g) to the Summary Compensation Table) were determined based on the following principles:

 

> TIP measures performance using a “team factor” that is initially determined based on growth in operating income. The team factor increases with growth in operating income up to 100% at the target level of growth and to higher percentages at higher levels of growth, up to the maximum (175% in 2012). The team factor can then be adjusted up or down, within specified limits, based on “modifiers” reflecting other measures of Corporate and/or AOW performance. The target amount is multiplied by the team factor, which includes the modifiers. The product is the “adjusted target award.”

 

> Each participant is assigned an individual performance factor determined based on a combination of both subjective and objective factors. The adjusted target award is multiplied by the individual performance factor, and the product is the final payout.

 

   The flowchart below illustrates this process:

 

 

 

LOGO

 

 

 

 

 

McDonald’s Corporation 2013    LOGO        31


Table of Contents

The table below shows how increases in operating income determined the team factor for each business segment in 2012, before the application of modifiers. The table shows the target and maximum levels of growth in operating income. Operating income at the Corporate level was included in the TIP team factor calculation for all of our executives. In addition, the results for the U.S. were included in the calculation for Ms. Fields, the results for Europe were included in the calculation for Mr. Goare, and the results for APMEA were included in the calculation for Mr. Fenton.

TIP team factor and growth in operating income for 2012

 

Team factor as % of target

 

  

0%

 

   

100%
(Target)

 

   

 

175%
(Maximum)

 

      

Growth in operating income over 2011:

        

Corporate factor

     0     6.4     11.1  

U.S. factor

     0        4.3        8.1     

Europe factor

     0        7.6        13.0     

APMEA factor

     0        10.2        17.9       

Operating income growth in 2012 was 4.0% (Corporate), 2.3% (U.S.), 6.2% (Europe) and 3.0% (APMEA). The resulting Corporate, U.S., Europe and APMEA team factors were 84.6%, 81.8%, 91.2% and 71.0%, respectively, before the application of modifiers.

The target TIP awards, the team factors (including the modifiers), the individual performance factors and the final payouts as a percentage of target awards for the NEOs in 2012 are summarized below.

 

     

 

Team factors (Corporate factor; AOW factor; blend)

               

Named

executive

officer

 

  

Target
TIP award
(% of salary)

 

   

Applicable
team factor(s)

 

   

Team factor(s)
before
application

of modifiers
(% of target
award)

 

   

Impact
of modifiers
(% added or
subtracted)

 

   

Final team
factor applied
to determine
TIP payout
(% of target
award)

 

   

Personal
factor (%)

 

   

Final
TIP payout
(% of target
award)

 

 

James A.

Skinner

     74.6     Corporate        84.6     1.7     86.3     102     88.2
                                                          

Donald

Thompson

     137.6        Corporate        84.6        1.7        86.3        107        92.5   
                                                          

Peter J.

Bensen

     100.0        Corporate        84.6        1.7        86.3        110        95.0   
                                                          

Timothy J.

Fenton

     105.1        Corporate        84.6        1.7        86.3        100        85.9   
       (weighted 63.1%)             
       APMEA             
       (weighted 36.9%)        71.0        13.8        84.8       
                                                          

Douglas

Goare

     85.0        Corporate        84.6        1.7        86.3        110        107.7   
       (weighted 25%)             
       Europe        91.2        10.4        101.6       
       (weighted 75%)             
                                                          

Gloria

Santona

     85.0        Corporate        84.6        1.7        86.3        110        95.0   
                                                          

Janice L.

Fields

     85.0        Corporate        84.6        1.7        86.3        100        84.3   
       (weighted 25%)             
       U.S.        81.8        1.7        83.5       
       (weighted 75%)             
                                                          

 

 

 

32        LOGO    McDonald’s Corporation 2013


Table of Contents

The applicable modifiers are described in the following table:

 

Team factor    Modifiers   

Potential weight of

each modifier (range)

   Potential overall adjustment of
team factor by modifiers (range)

Corporate factor

   > Comparable Guest Counts Growth    Up to +7.5 or -5    Up to +/-15
   > Customer Satisfaction Opportunity    percentage points    percentage points
   > G&A Expense Control      
                

AOW factor

   > Comparable Guest Counts Growth    Up to +/-10    Up to +/-25
   > Customer Satisfaction Opportunity    percentage points    percentage points
   > Improvements in People Modifier      
                

 

OUTSTANDING EQUITY AWARDS AT 2012 YEAR-END

 

     

 

Option awards

    Stock awards  

Name (a)

 

  

Number of
securities
underlying
unexercised
options
exercisable (1)
(#)(b)

 

   

Number of
securities
underlying
unexercised
options
unexercisable (1)
(#)(c)

 

   

Option
exercise
price
($)(e)

 

   

Option
expiration

date

(f)

 

   

Number
of shares
or units of
stock that
have not
vested (2)
(#)(g)

 

 

Market value
of shares
or units of
stock that
have not
vested (2)(3)
($)(h)

 

 

Equity incentive
plan awards:
number of unearned
shares, units
or other rights that
have not vested (4)

(#)(i)

 

   

Equity incentive
plan awards: market or
payout value of
unearned shares, units
or other rights that
have not vested (3)(4)
($)(j)

 

 

James A.

     62,500        0      $ 26.63        02/16/2014           

Skinner

     62,500        0        25.31        05/20/2014           
     250,000        0        31.21        12/01/2014           
     151,910        0        34.54        03/23/2016           
     116,589        0        45.02        02/14/2017           
     370,763        0        56.64        02/13/2018           
     173,805        57,935        57.08        02/11/2019           
     88,505        88,504        63.25        02/10/2020           
     36,874        110,622        75.93        02/09/2021           
      

 

0

 

  

 

   

 

221,545

 

  

 

   

 

100.05

 

  

 

   

 

12/30/2021

 

  

 

           

 

65,356

 

  

 

   

 

$5,765,053

 

  

 

Donald

     30,000        0        26.63        02/16/2014           

Thompson

     30,000        0        25.31        05/20/2014           
     25,299        0        32.60        02/16/2015           
     20,611        0        36.37        02/14/2016           
     24,984        0        45.02        02/14/2017           
     44,492        0        56.64        02/13/2018           
     35,865        11,955        57.08        02/11/2019           
     19,707        6,568        57.08        02/11/2019           
     36,511        36,510        63.25        02/10/2020           
     16,131        48,393        75.93        02/09/2021           
     0        85,008        100.05        02/08/2022           
      

 

0

 

  

 

   

 

169,396

 

  

 

   

 

88.53

 

  

 

   

 

06/29/2022

 

  

 

           

 

26,940

 

  

 

   

 

2,376,377

 

  

 

Table continued on next page

 

 

 

McDonald’s Corporation 2013    LOGO        33


Table of Contents

Table continued from previous page

 

      Option awards     Stock awards  

Name (a)

 

  

Number of
securities
underlying
unexercised
options
exercisable (1)
(#)(b)

 

   

Number of
securities
underlying
unexercised
options
unexercisable (1)
(#)(c)

 

   

Option
exercise
price
($)(e)

 

   

Option

expiration

date

(f)

 

   

Number
of shares
or units of
stock that
have not
vested (2)
(#)(g)

 

   

Market value
of shares
or units of
stock that
have not
vested (2)(3)
($)(h)

 

   

Equity incentive
plan awards:
number of unearned
shares, units
or other rights that
have not vested (4)
(#)(i)

 

   

Equity incentive
plan awards: market or
payout value of
unearned shares, units
or other rights that
have not vested (3)(4)
($)(j)

 

 

Peter J.

     15,971        0        32.60        02/16/2015           

Bensen

     15,870        0        36.37        02/14/2016           
     15,157        0        45.02        02/14/2017           
     24,100        0        56.64        02/13/2018           
     30,348        10,115        57.08        02/11/2019           
     24,895        24,892        63.25        02/10/2020           
     11,527        34,578        75.93        02/09/2021           
     0        59,996        100.05        02/08/2022            18,845        $1,662,317   
                                                                  

Timothy J.

     44,492        0        56.64        02/13/2018           

Fenton

     35,865        11,955        57.08        02/11/2019           
     23,234        23,234        63.25        02/10/2020           
     10,373        31,113        75.93        02/09/2021           
     0        52,474        100.05        02/08/2022            17,066        1,505,392   
                                                                  

Douglas

     12,050        0        56.64        02/13/2018           

Goare

     11,726        3,908        57.08        02/11/2019           
     8,298        8,298        63.25        02/10/2020           
     4,323        12,963        75.93        02/09/2021           
     0        38,481        100.05        02/08/2022        2,372      $ 209,234        5,769        508,883   
                                                                  

Gloria

     19,154        0        45.02        02/14/2017           

Santona

     24,100        0        56.64        02/13/2018           
     19,312        6,437        57.08        02/11/2019           
     12,032        12,032        63.25        02/10/2020           
     5,013        15,039        75.93        02/09/2021           
     0        30,085        100.05        02/08/2022            8,883        783,569   
                                                                  

Janice L.

     0        6,437        57.08        02/11/2019           

Fields

     0        18,254        63.25        02/10/2020           
     0        24,891        75.93        02/09/2021           
     0        45,478        100.05        02/08/2022            13,859        1,222,502   
                                                                  

 

(1) In general, options expire on the tenth anniversary of grant. For details regarding equity treatment upon termination, see page 40.

 

(2) These RSUs vested on February 10, 2013 and were not subject to performance-based vesting conditions as they were granted to Mr. Goare prior to serving as President of McDonald’s Europe.

 

(3) Calculated by multiplying the number of shares covered by the award by $88.21, the closing price of Company stock on the New York Stock Exchange on December 31, 2012.

 

(4) Reflects unvested performance-based RSUs that are scheduled to be paid out as follows if the targets are met (or were paid out, in the case of awards that vested in 2013).

 

 

 

34        LOGO    McDonald’s Corporation 2013


Table of Contents

Named executive officer

 

  

Vesting date

 

    

 

Number of

performance-based

RSUs

 

       

James A. Skinner

     02/10/2013         25,295      
     02/09/2014         21,071      
     02/08/2015         18,990      
                        

Donald Thompson

     02/10/2013         10,435      
     02/09/2014         9,218      
     02/08/2015         7,287      
                        

Peter J. Bensen

     02/10/2013         7,115      
     02/09/2014         6,587      
     02/08/2015         5,143      
                        

Timothy J. Fenton

     02/10/2013         6,641      
     02/09/2014         5,927      
     02/08/2015         4,498      
                        

Douglas Goare

     02/09/2014         2,470      
     02/08/2015         3,299      
                        

Gloria Santona

     02/10/2013         3,439      
     02/09/2014         2,865      
     02/08/2015         2,579      
                        

Janice L. Fields

     02/10/2013         5,218      
     02/09/2014         4,742      
     02/08/2015         3,899      
                        

 

OPTION EXERCISES AND STOCK VESTED — FISCAL 2012

 

     

 

Option awards

     Stock awards  

Name (a)

 

  

Number of shares
acquired on exercise
(#)(b)

 

    

Value realized
on exercise
($)(c)

 

    

Number of shares
acquired on vesting
(#)(d)

 

    

Value realized
on vesting
($)(e)

 

 

James A. Skinner

     146,193       $ 9,392,917         33,112       $ 3,293,651   

Donald Thompson

     42,300         2,210,711         6,833         679,679   

Peter J. Bensen

     18,000         1,144,080         5,782         575,136   

Timothy J. Fenton

     28,315         1,177,734         6,833         679,679   

Douglas Goare

     11,659         510,285         7,490         745,030   

Gloria Santona

     44,522         2,358,771         3,680         366,050   

Janice L. Fields

     168,894         7,297,230         3,680         366,050   
                                     

 

 

 

McDonald’s Corporation 2013    LOGO        35


Table of Contents

NON-QUALIFIED DEFERRED COMPENSATION — FISCAL 2012

 

Name

(a)

 

  

 

Executive
contributions
in last FY (1)
($)(b)

 

    

Registrant
contributions
in last FY (1)
($)(c)

 

    

Aggregate
earnings
in last FY
($)(d)

 

    

Aggregate
withdrawals/
distributions
($)(e)

 

    

Aggregate
balance

at last FYE (2)

($)( f)

 

 

James A. Skinner

     $585,500         $349,300       $ 1,542,061       $ 0       $ 41,044,638   

Donald Thompson

     295,727         205,590         -87,356         0         2,688,430   

Peter Bensen

     248,753         137,736         -63,810         0         5,062,463   

Timothy Fenton

     180,175         106,105         -21,176         0         7,310,065   

Douglas Goare

     88,241         78,917         83,884         0         1,816,442   

Gloria Santona

     87,967         97,972         186,829         0         5,250,920   

Janice Fields

     259,867         95,883         58,799         0         4,330,098   
                                              

 

(1) Represents salary deferrals which are also reported as compensation for 2012 in the Summary Compensation Table on page 27: $90,500 for Mr. Skinner; $67,200 for Mr. Thompson; $95,333 for Mr. Bensen; $87,500 for Mr. Fenton; $45,500 for Mr. Goare; $26,458 for Ms. Santona and $51,742 for Ms. Fields. The remaining amounts represent bonus deferrals under TIP, which were previously reported in the Summary Compensation Table for 2011, except in the case of Mr. Goare and Ms. Santona. The amounts reported in column (c) are included in “All other compensation” in column (i) of the Summary Compensation Table.

 

(2) Includes amounts previously reported in the Summary Compensation Table, in the aggregate, as follows:

 

 

 

 

James A. Skinner

  

 

$

 

20,277,450

 

  

  

Donald Thompson

     1,122,770      

Peter J. Bensen

     3,354,202      

Timothy J. Fenton

     4,835,221      

Douglas Goare

     0      

Gloria Santona

     0      

Janice L. Fields

     1,562,340      
               

Excess Benefit and Deferred Bonus Plan (Excess Plan)

The Company’s Excess Plan is a successor plan to the Supplemental Plan described below. The Excess Plan is a non-tax-qualified, unfunded plan that allows senior management and certain highly compensated staff employees to (i) make tax-deferred contributions from their salary, TIP and CPUP awards; and (ii) receive matching contributions (on deferrals of salary and TIP awards only), in excess of the Internal Revenue Service (IRS) limits under the Profit Sharing Plan.

At the time of deferral, participants may elect to receive distributions either in a lump-sum or in regular installments over a period of up to 15 years following separation from service. Commencement of distributions are delayed for six months following separation from service.

Deferrals are nominally invested in investment funds selected by participants and are credited with a rate of return based on the investment option(s) selected. The investment options are currently based on returns of the Profit Sharing Plan’s McDonald’s common stock fund, a stable value fund and an S&P 500 Index fund.

 

 

 

36        LOGO    McDonald’s Corporation 2013


Table of Contents

Supplemental Profit Sharing and Savings Plan (Supplemental Plan)

Prior to the Excess Plan, the Company’s Supplemental Plan allowed participants to defer compensation in excess of the IRS limits that applied to the Profit Sharing Plan. The Supplemental Plan allowed deferrals of salary and all or a portion of cash incentives as well as Company contributions on deferrals of salary and TIP. In 2004, the Company froze the Supplemental Plan. The investment options for existing accounts under the Supplemental Plan are identical to those under the Excess Plan. A participant may elect to have distributions in a single lump-sum, in installments commencing on a date of the participant’s choice or in an initial lump-sum payment with subsequent installment payments. Distributions may commence in the year following termination and must be completed within 25 years. If the participant does not file a distribution election in the year of termination, the participant’s entire Supplemental Plan balance is paid out in cash in the year following termination. In-service and hardship withdrawals are permitted subject to certain conditions.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

Our NEOs would become entitled to certain payments and benefits in connection with a change in control and/or if their employment with the Company were to terminate as described below.

Potential payments upon or in connection with a change in control

A “change in control” is generally defined as either (i) the acquisition of 20% or more of our common stock or voting securities by a single purchaser or a group of purchasers acting together; (ii) the incumbent members of the Board cease to constitute at least a majority of the Board as a result of an actual or threatened election contest; (iii) a significant merger or other business combination involving the Company; or (iv) a complete liquidation or dissolution of the Company.

CHANGE IN CONTROL EMPLOYMENT AGREEMENTS (CIC AGREEMENTS)

The Company has CIC Agreements with some of its NEOs. The Company does not intend to enter into any new CIC agreements. An executive who also participates in the ERRP would be entitled to receive the greater of the benefits under the ERRP or the benefits under the CIC Agreement, but not both. A minimum of two years’ notice is required to terminate a CIC Agreement.

The CIC Agreements provide that, during the three-year period following a change in control, referred to as the “protected period,” the executive’s (i) position and authority may not be reduced; (ii) place of work may not be relocated by more than 30 miles; (iii) salary may not be reduced; (iv) annual bonus opportunity may not be reduced; and (v) participation in benefit plans will continue on terms not less favorable than before the change in control. In addition, within 30 days after a change in control, if it is also a change in control under Code Section 409A, the Company will pay a prorated portion of (i) the target annual bonus and (ii) the target long-term incentive bonus, both for the partial performance period in which the change in control occurs. If it is not a change in control under Code Section 409A, the Company will pay (i) a prorated portion of the executive’s annual bonus, based on the Company’s actual performance; and (ii) a prorated portion of the executive’s long-term incentive bonus based on target performances, both on the date on which such bonuses are paid to Company employees generally. The treatment of outstanding equity awards is described under “Equity awards” on page 40. If the Company fails to comply with these provisions, the executive may terminate employment for “good reason” during the protected period.

If the executive terminates employment for good reason or is terminated by the Company without “cause” during the protected period, then, in addition to receiving accrued but unpaid salary, bonus, deferred compensation and other benefit amounts due on termination, the executive will be entitled to: (i) a lump-sum cash payment equal to three times the sum of the executive’s salary, target annual bonus and contribution received under the Company’s deferred compensation plan; (ii) a pro rata portion of the target annual bonus, reduced (but not below zero) by the amount of annual bonus paid for that year; (iii) a lump-sum payment equal to continued medical, life insurance, fringe and other benefits for three years after the termination; and (iv) a lump-sum cash payment for any accrued sabbatical leave. In addition, for purposes of determining eligibility for any post-retirement medical benefits, the executive will be treated as having three additional years of age and service. The executive will be eligible for these benefits, subject to execution of an agreement that includes restrictive covenants and a release of claims. Payment of these benefits will be delayed for six months.

The Company will reimburse an executive on an after-tax basis for excise tax payments that are considered to be contingent upon a change in control. If the aggregate after-tax amount of benefits is not more than 110% of what the executive would receive if benefits were reduced to a level that would not be subject to excise taxes, the executive will not be entitled to receive a reimbursement and the aggregate amount of benefits to which he/she is entitled will be reduced to the greatest amount that can be paid without triggering excise taxes.

 

 

 

McDonald’s Corporation 2013    LOGO        37


Table of Contents

In the case of the death or disability of an executive during the protected period, the executive or his/her estate would be entitled to receive accrued salary, bonus, deferred compensation and other benefit amounts due at levels provided to peers and at least as favorable as those immediately preceding the change in control.

If (i) the Company terminates an executive for cause following a change in control; (ii) an executive voluntarily terminates employment without good reason following a change in control; or (iii) an executive who is otherwise eligible to receive severance benefits fails to execute the requisite agreements, then that executive will receive only a lump-sum payment of accrued salary, bonus, deferred compensation and other benefit amounts.

The following table sets forth the benefits that Messrs. Thompson, Bensen, Fenton, Goare and Ms. Santona would have been entitled to under the CIC agreements, assuming that on December 31, 2012 they had been terminated without cause or resigned with good reason in the protected period following a change in control. Pro rata 2012 TIP and 2010-2012 CPUP payments are not included because if the NEOs had terminated employment on December 31, 2012, they would have earned these awards in full under the 2012 TIP and the 2010-2012 CPUP, respectively, and the pro rata payout they would have been entitled to would be zero.

 

    

 

Severance payment (3x salary,
bonus and
Company contribution to

deferred compensation plan) ($)

 

   

Benefit
continuation ($)

 

   

Sabbatical ($)

 

   

Tax gross-up
payments ($)

 

   

Total ($)

 

 

Donald Thompson

    $8,662,113        $121,898        $169,231      $ 0      $ 8,953,242   

Peter J. Bensen

    4,849,480        124,239        0        2,653,524        7,627,243   

Timothy J. Fenton

    5,143,790        112,342        0        0        5,256,132   

Douglas Goare (1)

    0        0        0        0        0   

Gloria Santona

    3,956,446        113,131        0        0        4,069,577   

 

 

 

(1) Mr. Goare does not have a change in control agreement.

EQUITY AWARDS

Under the Equity Plan, upon a change in control, outstanding unvested options and RSUs will be replaced by equivalent awards based on publicly-traded stock of the successor entity. The replacement awards will vest and become exercisable (in the case of options) or be paid out (in the case of service-based RSUs) if the grantee’s employment is terminated for any reason other than “cause” within two years following the change in control. In addition, if employment is terminated other than for “cause” within two years following the change in control, all options will remain outstanding for not less than two years following termination or until the end of the original term, if sooner.

If the awards are not replaced (e.g., because the acquirer does not have publicly-traded securities) or if the Committee so determines, vesting will be accelerated. RSUs would vest (performance-based RSUs at target) and be paid out upon a Code Section 409A change in control; otherwise, the RSUs would be paid out on the originally scheduled payment date or, if earlier, on the executive’s death, disability or termination of employment, subject to any required delay under Code Section 409A.

Terminations initiated by the employee will not result in accelerated vesting of replacement awards.

If a change in control had occurred on December 31, 2012 and either (i) if the outstanding options and RSUs held by the NEOs could not be replaced or (ii) if the Committee so determined, assuming that the transaction met the applicable definition of a change in control under the Equity Plan and Section 409A: (i) options would have vested and (ii) RSUs would have vested and been paid out immediately (performance-based RSUs at target). The awards held by the NEOs as of December 31, 2012 are set forth in the Outstanding Equity Awards at 2012 Year-end table on pages 33 and 34.

The table on the next page summarizes the value of the change in control payouts that the NEOs could have received based on (i) in the case of options, the “spread” between the exercise price and the closing price of the Company’s common stock on December 31, 2012 and (ii) in the case of RSUs, the target number of shares, multiplied by the closing price of the Company’s common stock on December 31, 2012. The table sets forth the hypothetical value that the NEOs could have realized as a result of the accelerated equity awards, based on these assumptions. If there were no change in control, the amounts shown would have vested over time, subject to continued employment and with respect to the RSUs subject to performance-based vesting conditions, except in the case of Ms. Santona, due to the ERRP.

 

 

 

38        LOGO    McDonald’s Corporation 2013


Table of Contents

Named executive officer

 

  

Stock options
(closing price on 12/31/12
minus exercise price) ($)

 

    

 

RSUs
(number of shares/target
number of shares multiplied by
closing price on 12/31/12) ($)

 

    

Total ($)

 

       

Donald Thompson

     $2,082,177         $2,376,377       $ 4,458,554      

Peter J. Bensen

     1,360,802         1,662,317         3,023,119      

Timothy J. Fenton

     1,334,147         1,505,392         2,839,539      

Douglas Goare

     487,960         718,118         1,206,078      

Gloria Santona

     685,381         783,569         1,468,950      
                                 

Potential payments upon termination of employment (other than following a change in control)

McDONALD’S CORPORATION SEVERANCE PLAN (SEVERANCE PLAN)

Under the Severance Plan, Messrs. Bensen, Fenton, Thompson and Goare would receive severance benefits if they were terminated by the Company without “cause,” due to a reduction in work force or job elimination; however, the Severance Plan excludes terminations for performance reasons. Ms. Fields became entitled to benefits under the Severance Plan in connection with her separation from service effective December 31, 2012. Mr. Skinner and Ms. Santona are entitled to benefits under the ERRP as described below. Applicable benefits consist of a lump-sum payment with respect to severance pay, based on final salary, and the continuation of medical and dental benefits. Amounts are based on position and length of service. In addition, in a covered termination, each eligible NEO would receive prorated TIP and CPUP payments based on actual performance (and paid at the same time payments are made to other participants), unused sabbatical leave; and outplacement assistance. Payments would be delayed for six months following termination of employment to the extent required under Section 409A.

The value of the benefits that would be payable to the named executive officers, other than Ms. Fields, under the Severance Plan on December 31, 2012, and the benefits to which Ms. Fields is entitled under the Severance Plan in connection with her separation from service, are as set forth below. Pro rata 2012 TIP payments and pro rata 2010-2012 CPUP payments are not included because they would have earned these awards in full under the 2012 TIP and the 2010-2012 CPUP, respectively.

 

     

Salary
continuation

 

    

Benefit
continuation

 

    

 

Other
(sabbatical and
out-placement)

 

    

Total

 

       

Donald Thompson

   $ 930,769         $55,248         $181,231       $ 1,167,248      

Peter J. Bensen

     440,000         36,908         12,000         488,908      

Timothy J. Fenton

     750,000         39,551         12,000         801,551      

Douglas Goare

     546,000         37,399         12,000         595,399      

Janice L. Fields

     620,900         10,209         12,000         643,109