DEF 14A 1 d666434ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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  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
  13      Executive compensation
  13      Compensation Committee Report
  13      Compensation discussion and analysis
  26      Compensation tables
  39      Proposal No. 2. Advisory vote to approve executive compensation
  40      Other management proposals
  40      Proposal No. 3. Approval of Performance Goals for Awards under the McDonald’s Corporation 2009 Cash Incentive Plan
  42      Proposal No. 4. Advisory vote to approve the appointment of Ernst & Young LLP as independent auditor for 2014
  43      Audit Committee matters
  43      Audit Committee Report
  43      Policy for pre-approval of audit and permitted non-audit services
  44      Auditor fees and services
  45      Shareholder proposal
  45      Proposal No. 5. Advisory vote requesting the ability for shareholders to act by written consent
  47      Board and governance matters
  47      Leadership structure
  47      Director selection process
  47      Board diversity
  47      Succession planning
  48      Director independence
  48      Board Committees
  50      Meeting attendance
  50      Governance practices and evaluations
  50      Code of Conduct for the Board of Directors
  51      Shareholder outreach and engagement
  51      Board response to 2013 Shareholder Proposals
  51      Risk oversight
  52      Director compensation
  54      Stock ownership
  54      Director stock ownership guidelines and senior officer stock ownership and retention policy
  54      Security ownership of certain beneficial owners
  55      Security ownership of management
  56      Compliance with Section 16(a) of the Exchange Act
  56      Transactions with related persons, promoters and certain control persons
  56      Policies and procedures for related person transactions
  57      Related person transactions
  57      Communications
  57      Communications with the Board of Directors and non-management Directors
  57      Consideration of Director nominations for the 2015 Annual Shareholders’ Meeting
  58      Shareholder proposals for inclusion in next year’s Proxy Statement
  58      Other shareholder proposals for presentation at the 2015 Annual Shareholders’ Meeting
  59      Solicitation of proxies and voting
  59      Notice and access
  59      Record date
  59      Voting prior to the Annual Shareholders’ Meeting
  59      Voting at the Annual Shareholders’ Meeting
  59      Quorum
  59      Voting tabulation
  60      Registered shareholders
  60      Beneficial holders
  60      Proxy solicitation
  60      Confidential voting
  61      Additional information
  61      Executive officers
  61      McDonald’s Corporation Annual Report on Form 10-K, other reports and policies
  61      Householding of Annual Shareholders’ Meeting materials
  62      Information about registering for and attending the Annual Shareholders’ Meeting
  62      Pre-registration and admission policy
 

 

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PROXY SUMMARY

This summary contains highlights about our Company and the upcoming 2014 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 2013 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 important to our success, and we continually review our practices to ensure the Board is best positioned to provide effective oversight in order to yield value for shareholders. Highlights of our governance include:

 

 

Recent Updates

  Declassified Board phase-in continues—Directors elected in 2014 to serve one-year terms
  Enhanced stock ownership requirements to include retention feature (see page 24)

 

 

Board of Directors

  Independent Chairman
  13 Directors; 12 are independent
  Over 50% of Directors are women and minorities
  Committee members are independent (except Executive Committee, which has one management Director)
  Executive sessions of independent Directors occur at each regularly-scheduled meeting
  All Directors attended more than 75% of all Board and Committee meetings in 2013
  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
  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
  Governance Committee regularly reviews Corporate Governance Principles and related policies (see page 50)
  Ongoing shareholder outreach and engagement (see page 51)
  Best practices in our executive compensation program noted below, including annual advisory vote to approve executive compensation
  Publicly disclose corporate political contributions under Board’s policy
  Annual advisory vote to appoint independent auditor (see page 42)
  Confidential voting policy

Financial Highlights

 

In 2013, McDonald’s grew its operating income, earnings per share and global comparable sales, despite challenging economic and marketplace conditions. We are pursuing long-term opportunities by investing in the business to build upon the strong foundation that is already in place and drive future growth and value for our System and shareholders. We returned $4.9 billion to our shareholders through dividends and share repurchases in 2013, and we expect to return all free cash flow to investors through a combination of dividends and share repurchases over time.

 

 

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Board of Directors

 

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

 

     

Director

since

               Committee memberships   

Other public

company boards

Name       Primary occupation    Independent      AC      CC      GC      SCR      FC      EC     

 

Susan E. Arnold

(nominee)

  

 

2008

  

 

Operating Executive, Global Consumer & Retail Group, The Carlyle Group

 

  

 

X

       

 

X

       

 

X

            

 

NBTY
Walt Disney

 

Robert A. Eckert

  

 

2003

  

 

Former Chairman & CEO, Mattel

 

  

 

X

       

 

C

  

 

X

            

 

X

  

 

Amgen Levi Strauss

 

Enrique Hernandez, Jr.

  

 

1996

  

 

President & CEO,
Inter-Con Security Systems

 

  

 

X

  

 

C

F

       

 

X

            

 

X

  

 

Chevron
Nordstrom Wells Fargo

 

Jeanne P. Jackson

  

 

1999

  

 

President, Product & Merchandising, NIKE

 

  

 

X

            

 

X

       

 

C

       

 

Kraft

 

Richard H. Lenny

(nominee)

 

  

 

2005

  

 

Operating Partner, Friedman, Fleischer & Lowe

 

  

 

X

       

 

X

       

 

X

  

 

X

       

 

ConAgra Foods Discover

 

 

Walter E. Massey

(nominee)

  

 

1998

  

 

President, School of the Art Institute of Chicago

 

  

 

X

  

 

X

            

 

C

              

 

Andrew J. McKenna

  

 

1991

  

 

Chairman,
Schwarz Supply Source

 

  

 

X

            

 

C

            

 

X

  

 

Skyline

 

Cary D. McMillan

(nominee)

  

 

2003

  

 

CEO,
True Partners Consulting

 

  

 

X

  

 

F

                 

 

X

       

 

American Eagle Hyatt Hotels

 

 

Sheila A. Penrose

(nominee)

  

 

2006

  

 

Non-executive Chairman, Jones Lang LaSalle

 

  

 

X

  

 

X

            

 

X

            

 

Jones Lang LaSalle

 

John W. Rogers, Jr.

(nominee)

  

 

2003

  

 

Founder, Chairman & CEO, Ariel Investments

 

  

 

X

       

 

X

       

 

X

  

 

X

       

 

Ariel Investment
  Trust
Exelon

 

Roger W. Stone

(nominee)

  

 

1989

  

 

Chairman & CEO, KapStone Paper and Packaging

 

  

 

X

  

 

F

       

 

X

       

 

X

       

 

KapStone Paper
  and Packaging

 

 

Donald Thompson

  

 

2011

  

 

President & CEO, McDonald’s

 

                                 C     

 

Miles D. White

(nominee)

  

 

2009

  

 

Chairman & CEO,
Abbott Laboratories

 

  

 

X

       

 

X

  

 

X

                 

 

Abbott
Caterpillar

 

2013 meetings

 

            

 

9

  

 

7

  

 

6

  

 

3

  

 

2

  

 

1

    
AC    Audit Committee    SCR  Sustainability and Corporate Responsibility Committee    C    Chair
CC    Compensation Committee    FC     Finance Committee    F    Financial expert
GC    Governance Committee    EC     Executive Committee      

 

 

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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 91% and 86% of our CEO’s and NEOs’ direct compensation opportunity, respectively, is performance-based. In 2013, our shareholders demonstrated strong support for our executive compensation program by approving it with over 95% 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 based on individual performance, including responsibility and tenure

• Executives did not receive 2014 base salary increases as part of annual review process

 

Annual Cash Incentive (TIP)    X   

• Operating Income

  

• Based upon various quantitative performance measures

• Includes an individual performance factor

 

Long-Term Cash Incentive (CPUP)    X   

• Operating Income

• Return on Incremental Invested Capital (ROIIC)

 

  

• Based solely upon financial performance measures, including a relative total shareholder return measure

• Overlapping three-year cycles

 

Performance-Based Restricted Stock Units (RSUs)

 

   X   

• Earnings per share (EPS)

• Share Price

  

• Cliff vest at end of three-year service period

• Vesting subject to financial performance measures

Stock Options    X   

• Share Price

  

• Vest 25% per year

• Ten-year term

 

 

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

Best practices associated with our executive compensation program also include:

 

 

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

 

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

 

  Variety of quantitative metrics

 

  Incentive plans require growth in operating income to yield any payments

 

  Capped incentive payments

 

  Clawback provisions

 

  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

 

  No employment agreements

 

  No tax gross-ups on perquisites

 

 

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Voting Matters

 

 

Management proposals   

Board vote

recommendation

   Page reference     (for more detail)    

Election of eight Directors, each for a one-year term expiring in 2015

 

   FOR EACH DIRECTOR NOMINEE    8

Advisory vote to approve executive compensation

 

   FOR    39

Approval of performance goals for awards under the McDonald’s
Corporation 2009 Cash Incentive Plan

 

   FOR    40

Advisory vote to approve the appointment of Ernst & Young LLP
as independent auditor for 2014

 

   FOR    42

Shareholder proposal

 

         

Advisory vote requesting the ability for shareholders to act by
written consent, if presented

 

   AGAINST    45

Election of Directors (Proposal No. 1)

 

We are asking shareholders to elect each of our nominees for the Board of Directors. Our nominees include: Susan E. Arnold, Richard H. Lenny, Walter E. Massey, Cary D. McMillan, Sheila A. Penrose, John W. Rogers, Jr., Roger W. Stone and Miles D. White. The Directors will serve a one-year term that expires in 2015.

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 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. Additional information regarding our executive compensation may be found elsewhere in this Proxy Statement.

Approval of Performance Goals for Awards Under the McDonald’s Corporation

2009 Cash Incentive Plan (Proposal No. 3)

 

We are asking shareholders to approve the performance goals for awards under the McDonald’s Corporation 2009 Cash Incentive Plan (Plan). This action is required by the terms of the Plan; we are not amending or altering the Plan.

Advisory Vote to Approve Independent Auditor (Proposal No. 4)

 

We are asking shareholders to approve the appointment of Ernst & Young LLP as independent auditor for 2014. Set forth below is information about its fees in 2013 and 2012.

 

 Type of fees (in millions)    2013      2012  

 Audit fees

   $ 11.8       $ 11.3   

 Audit-related fees

     0.9         0.7   

 Tax fees

     0.6         1.2   

 Other fees

             0.1   

 Total

   $ 13.3       $ 13.3   
   

Meeting Information

 

 

Date and time    May 22, 2014, 8:00 a.m. Central Time
Place    McDonald’s Office Campus, The Lodge, Prairie Ballroom, 2815 Jorie Boulevard, Oak Brook, Illinois 60523
Record date    March 24, 2014
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 a live webcast as seating in the Prairie Ballroom will be very limited. If you decide to attend in person, please follow the pre-registration and admission policy on page 62.

 

 

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Notice of the Annual Shareholders’ Meeting

To McDonald’s Corporation Shareholders:

McDonald’s Corporation will hold its 2014 Annual Shareholders’ Meeting on Thursday, May 22, 2014, at 8:00 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 7:00 a.m. At the meeting, shareholders will be asked to:

 

1. Elect eight Directors, each for a one-year term expiring in 2015;

 

2. Cast an advisory vote to approve executive compensation;

 

3. Approve performance goals for awards under the McDonald’s Corporation 2009 Cash Incentive Plan;

 

4. Cast an advisory vote to approve the appointment of Ernst & Young LLP as independent auditor for 2014;

 

5. Cast an advisory vote on a shareholder proposal requesting the ability for shareholders to act by written consent, if presented; and

 

6. 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 performance goals for awards under the McDonald’s Corporation 2009 Cash Incentive Plan, FOR the approval of the independent auditor and AGAINST the shareholder proposal.

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 62 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 11, 2014

 

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Election of Directors

PROPOSAL NO. 1.

 

Election of Directors

 

The nominees for Director are: Susan E. Arnold, Richard H. Lenny, Walter E. Massey, Cary D. McMillan, Sheila A. Penrose, John W. Rogers, Jr., Roger W. Stone and Miles D. White.

The Board is currently divided into two 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 eight current nominees are standing for election as Directors to hold office for a one-year term expiring in 2015.

Information about the voting standard for this proposal appears on page 59. Each of the incumbent Directors who is nominated for re-election tendered an irrevocable resignation for the 2014 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 eight 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 eight 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 47.

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.

 

 

 

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Susan E. Arnold, 60

Director since 2008

Class 2014 (Nominee)

Other current directorships: NBTY, Inc. and The Walt Disney Company

     

Career highlights:

The Carlyle Group, a global alternative asset manager

    Operating Executive, Global Consumer & Retail Group (2013–Present)

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.

 

 

 

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Robert A. Eckert, 59

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.

 

 

 

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Enrique Hernandez, Jr., 58

Director since 1996

Class 2015

Other current directorships: Chevron Corporation, Nordstrom, Inc. and Wells Fargo & Company

     

Career highlights:

Inter-Con Security Systems, Inc., a privately owned 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.

 

 

 

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Jeanne P. Jackson, 62

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, Product & Merchandising (2013–Present)
    President, Direct to Consumer (2009–2013)

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.

 

 

 

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Richard H. Lenny, 62

Director since 2005

Class 2014 (Nominee)

Other current directorships: ConAgra Foods, Inc. and Discover Financial Services

      

Career highlights:

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

    Operating partner (2011–Present)

Information Resources, Inc., a market research firm

    Non-executive Chairman (2013–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.

 

 

 

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Walter E. Massey, 76

Director since 1998

Class 2014 (Nominee)

Former directorships (within past five years): Bank of America Corporation

      

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.

 

 

 

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Andrew J. McKenna, 84

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.

 

 

 

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Cary D. McMillan, 56

Director since 2003

Class 2014 (Nominee)

Other current directorships: American Eagle Outfitters, Inc. and Hyatt Hotels Corporation

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.

 

 

 

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Sheila A. Penrose, 68

Director since 2006

Class 2014 (Nominee)

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.

 

 

 

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John W. Rogers, Jr., 56

Director since 2003

Class 2014 (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.

 

 

 

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Roger W. Stone, 79

Director since 1989

Class 2014 (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.

 

 

 

LOGO  

Donald Thompson, 51

Director since 2011

Class 2015

Former directorships (within past five years): Exelon Corporation

     

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.

 

 

 

LOGO  

Miles D. White, 59

Director since 2009

Class 2014 (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.

 

 

 

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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, 2013.

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 key global growth priorities—optimizing the menu, modernizing the customer experience and broadening accessibility to our Brand—within our long-term execution framework, the Plan to Win. 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. 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.

n  Pay for performance

We believe that our executive compensation program has been effective at appropriately aligning pay and performance. We seek to utilize an effective mix of metrics and incentives that further our main objective of long-term sustainable growth and that are designed to mitigate excessive risk. Our programs are designed so that when financial performance lags, executives’ actual pay declines. 2013 results and payouts illustrate this strong alignment between pay and performance. Our 2013 financial performance was below our expectations and compensation targets for each of our primary metrics, which negatively impacted executive compensation. Our below target operating income performance resulted in annual incentive compensation awards for 2013 that are significantly below target levels (please refer to the chart on page 18 for further details). In addition, as our program focuses principally on driving long-term results and the majority of our direct compensation opportunity is not paid out in the first year, our 2013 performance will negatively impact future payouts under our long-term plans. As a reflection of our pay for performance philosophy, officers did not receive 2014 base salary increases in connection with our annual review process.

 

McDonald’s Corporation 2014    LOGO       13


Our total direct compensation package for executives includes salary, our annual incentive plan, which we refer to as TIP, our long-term cash incentive plan, which we refer to as CPUP, stock options and performance-based 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        

 

Performance-Based

RSUs

  

 

 

Primary performance measure

           

Operating income

     X         X         

Return on incremental invested capital (ROIIC)

        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

 

    

 

X

 

  

 

        

 

 

 

* As discussed in more detail on page 20, the executives received a special RSU grant that has the same performance conditions as the 2013 CPUP awards.

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 (stock options and RSUs) 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 17 and 31. For example, Mr. Thompson’s 2013 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 2013 target total direct compensation opportunity, using his 2013 salary, target 2013 TIP award, target 2013-2015 CPUP award and Financial Accounting Standards Board values for equity awards granted in 2013. Ninety-one percent (91%) of Mr. Thompson’s 2013 target total direct compensation opportunity was based on Company performance.

DON THOMPSON TARGET COMPENSATION

 

 

LOGO

 

 

We evaluate our executive compensation program annually. Among other things, we consider 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 95% of the votes cast, demonstrating strong shareholder support for our approach to executive compensation.

Based on our evaluation, we did not make any significant changes to our executive compensation program for 2013. However, we incorporated modest changes in our long-term incentives, as described on page 21. These changes are intended to further strengthen pay for performance alignment and to bring certain aspects of our long-term incentive plans more in line with evolving market practice.

 

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n  Best practices

The following policies and practices highlight best practices in our executive compensation program:

 

  Pay for Performance. The vast majority of total direct compensation is tied to performance, including short-term and long-term metrics and a relative TSR multiplier in CPUP.

 

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

 

  Cash Incentives. TIP and CPUP both require growth in operating income to yield any payout. Assuming such growth is achieved, payouts are then further impacted by performance against other distinct metrics. Both programs also utilize caps on potential payouts.

 

  Clawbacks. TIP, CPUP and our severance plan contain clawback provisions.

 

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

 

  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.

 

  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.

 

  Employment Agreements. No executive has an employment agreement.

 

  No Tax Gross-up on Perquisites. The Company does not provide tax gross-ups on perquisites.

n  Total Shareholder Return

Our compensation program is designed to support the Company’s objective of long-term sustainable growth and to link the interests of our executives with the interest of shareholders. Over the last five years, we have produced year-over-year growth in operating income despite a challenging global economic and operating environment, particularly in 2012 and 2013. The following graph illustrates 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, 2008–December 31, 2013 (based on $100 investment and reinvestment of all dividends).

TOTAL SHAREHOLDER RETURN

 

 

LOGO

 

 

 

McDonald’s Corporation 2014    LOGO       15


DEFINITIONS

 

n  Quantitative measures of Company performance

Operating income, ROIIC 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 21.

 

  Operating income. Profit attributed to the operations.

 

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

 

  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).

 

  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.

 

  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.

 

  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.

 

  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.

 

  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.

 

  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.

n   Groups of Company employees

 

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

 

  Officers. Officers of McDonald’s Corporation or a business unit subsidiary.

 

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

 

  Executives. The 11 most senior executives of the Company.

 

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

> Donald Thompson, President and CEO

> Peter J. Bensen, Chief Financial Officer or CFO

> Timothy J. Fenton, Chief Operating Officer or COO

> Douglas Goare, President of McDonald’s Europe

> David Hoffmann, President of McDonald’s APMEA

n   Other

 

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

 

  Total direct compensation opportunity for 2013. The targeted value of total direct compensation that the NEOs had an opportunity to earn in 2013 for target performance.

 

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

 

  AOWs. Areas of the World, the Company’s business unit subsidiaries; namely, the U.S., Europe and Asia, Pacific, Middle East and Africa (“APMEA”).

 

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McDONALD’S EXECUTIVE COMPENSATION PROGRAM

 

n  Elements of McDonald’s Executive Compensation

ALLOCATION OF TOTAL DIRECT COMPENSATION AMONG THE ELEMENTS

Approximately 86% of the NEOs’ total direct compensation opportunity for 2013 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. Consistent with our approach to manage our business for the long term, the majority of total direct compensation opportunity is not realized in the year of grant.

Beginning in 2013, to more closely align our equity compensation program with market practice, the mix of our annual equity awards was modified so that they are now 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 performance-based RSUs. We believe this further promotes retention and supports our desire to grant one-third of long-term incentive compensation in the form of stock options, one-third in the form of performance-based RSUs and one-third in the form of cash compensation.

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 (approximately 0.5x 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 2013 was $96.5 billion (at the 71st percentile of our peer group) and revenue was $28.1 billion (at the 42nd percentile of our peer group). Please refer to page 23 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

  Annual compensation

> Annual salary

Executive salaries vary based on individual circumstances (such as level of responsibility, individual performance, tenure in position) 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 executives is also an important factor in determining their actual TIP payout, which 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 flow chart and actual chart on pages 31 and 32). In addition to Company performance, TIP pay-outs are adjusted based on the application of an individual performance factor (IPF) which acts as a multiplier and can have a significant effect, whether positive or negative, in determining the final payout. Final payouts

 

McDonald’s Corporation 2014    LOGO       17


are capped at 250% of target. Additional details on how each element of performance affects actual 2013 TIP payouts can be found in the description following the Grants of Plan Based Awards table on page 32.

In 2013, operating income growth was below the TIP targets for each AOW as well as Corporate, which negatively impacted payouts. The calculations of operating income for 2013 TIP payouts were adjusted for certain items that are not indicative of ongoing results, as more fully described on page 21. Furthermore, the aggregate performance against the pre-established targets for the modifiers benefitted TIP results for Europe and Corporate, but negatively impacted the U.S. and had no impact for APMEA. More detailed information regarding the impact of the modifiers can be found in the chart on page 32.

The following table shows the operating income targets and results under the 2013 TIP:

 

 

 

(Dollars in millions)

 

  

Target 2013
operating income

 

    

2013
operating income

 

    

 

Target 2013
operating
income growth
over 2012

 

   

2013
operating
income growth
over 2012

 

 

 

 

Corporate

     $9,156         $8,860         6.4     3.0

U.S.

     3,908         3,779         4.2        0.8   

Europe

     3,389         3,304         6.1        3.4   

APMEA

 

    

 

1,703

 

  

 

    

 

1,605

 

  

 

    

 

8.8

 

  

 

   

 

2.5

 

  

 

 

 

 

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

 

  

 

 

Named executive officer

 

  

2013 target

TIP award

 

    

2013 final

TIP payout

 

    

TIP final payment
as percentage

of target

 

       

 

 

 

Donald Thompson

  

 

 

 

   $2,000,000

 

  

  

 

 

 

    $1,400,000

 

  

  

 

 

 

70

 

 

Peter J. Bensen

     775,000         569,000         73     

Timothy J. Fenton

     968,750         640,000         66     

Douglas Goare

     484,500         408,000         84     

David Hoffmann

 

    

 

437,750

 

  

 

    

 

207,000

 

  

 

    

 

47

 

  

 

 

 

 

Additional detail about the NEOs’ 2013 TIP awards, including the IPF for each NEO, begins on page 31.

 

  Long-term incentive compensation

Our long-term incentive program for executives currently includes three vehicles—stock options, performance- based RSUs and CPUP. As discussed in more detail below, each vehicle has its own objective and we allocate approximately one-third of the total long-term incentive value to each of these vehicles (without consideration of any special awards).

> Stock options

Stock options align executives’ compensation to the stock price, thereby incentivizing executives to increase shareholder value over the long term. Options, including those granted in 2013, 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 25.

> 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 require the executives to achieve the Company’s strategic objectives in order to vest in the awards. The Company believes that three-year EPS growth is a good indicator of long-term profitability.

The RSUs granted to executives in 2013 as part of the annual cycle 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 2013 is 6% compounded annual growth in EPS on a cumulative basis over baseline 2012 EPS of $5.36. If target performance is achieved (cumulative 3-year EPS of $18.08), the full number of RSUs covered by the 2013 awards will vest. Achievement

 

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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 2010 vested fully in 2013 based on the achievement of 12% 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 February 2013, the Committee approved new CPUP awards for the performance period January 1, 2013 to December 31, 2015. Participants will not receive any payout under the 2013-2015 plan until after the performance period ends. The Committee determined a target award for each NEO based on his respective level of responsibility and consistent with our practice of allocating approximately one third of long-term incentive compensation opportunities to CPUP. Final payouts will be determined based on the following three quantitative measures over the three-year performance period: consolidated compound annual growth in operating income (weighted 75%), three-year ROIIC (weighted 25%) and TSR relative to the S&P 500 Index (+/-15% multiplier). The Committee determined that three-year ROIIC is a preferable investment return metric to ROTA (the metric used in the 2010-2012 performance period) for CPUP awards beginning in 2013 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. No final awards will be earned unless threshold levels of the operating income and ROIIC measures are both met. Final CPUP payouts will be determined as shown below:

 

 

 

LOGO

 

 

The Company believes the combination of operating income growth and ROIIC provide the appropriate balance in a long-term plan as operating income growth focuses on the key elements of growing our business (as previously discussed) and ROIIC measures the effectiveness of our capital investments. Further, the Company believes it is important to use a relative performance metric in a long-term plan and that the TSR multiplier is appropriate because it rewards above-market performance (relative to the S&P 500) while holding senior management accountable for below-market performance.

The matrix below shows examples of 2013-2015 CPUP payouts (prior to adjustment based on the relative TSR multiplier) as a percentage of the target award at different levels (threshold, target and maximum) of operating income and ROIIC:

 

 

 

Average 2013-2015

 

  

Threshold
0%

 

   

Target
100%

 

   

Maximum
200%

 

 

 

 

Consolidated compound operating income growth*

     2.5     6.5     10.5

ROIIC*

     12        18        24   

 

 

 

  * Adjusted for compensation purposes as described on page 21. Payout percentage will be interpolated for results that fall between each of the thresholds specifically identified.

 

McDonald’s Corporation 2014    LOGO       19


The following table provides the impact of the relative TSR multiplier on 2013-2015 CPUP payouts:

CUMULATIVE TOTAL SHAREHOLDER RETURN (TSR) VS. S&P 500 INDEX

 

 

 

80 -100%-tile

     15.0        

  60 -79%-tile

     7.5           

 40 - 59%-tile

     0.0           

 20 - 39%-tile

     -7.5           

    0 -19%-tile

     -15.0           

 

 

As part of its regular review process, in 2012 the Committee reviewed the structure of CPUP and the merits of discrete performance cycles compared to overlapping performance cycles. The Committee decided to transition to overlapping three-year CPUP cycles beginning with 2013 awards. 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 more closely aligns the Company’s long-term incentive program structure with market practice. The Committee considered that overlapping cycles provide the opportunity to review and update the structure of CPUP 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.

Commencing with the 2013-2015 CPUP cycle, a new three-year cycle begins 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). The following chart provides details on our currently outstanding CPUP awards.

 

       

Performance targets

    

Relative measure

               

Performance
period

 

    

Compound annual operating
income growth

 

 

3-yr
ROIIC

 

    

Cumulative TSR
vs S&P 500

 

    

Projected
payout

 

    

Payout
date

 

 

2013–2015

    

 

6.5%

 

 

18.0%

    

 

40 - 59th%-tile

    

 

Below target

    

 

March 1, 2016

 

 

> Special RSU Grant

In connection with the transition from discrete to overlapping CPUP cycles in 2013 (described above), the Committee approved a special one-time grant of performance-based RSUs (“Special RSUs”). The transition from discrete to overlapping performance cycles adversely affected 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 believed it was important to address this benefit reduction. Second, in the initial transition, 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 under the discrete cycle. The Committee determined it was 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.

To address these transition issues the Committee made a one-time grant in early February 2013 of Special RSUs to CPUP participants affected by this change. Fifty percent of the Special 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 the Company, depending on the circumstances of the separation. The Special RSU grant is subject to the same three-year performance metrics as the 2013-2015 CPUP awards (described on pages 19 and 20), so that the number of shares underlying the Special 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 Special RSUs covered by the award will vest. Performance below target will result in a pro rata reduction in the number of shares underlying the Special RSUs that will vest, but above-target performance will not increase the number of Special 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 the Special RSU award, based upon when during the performance cycle they separate from the Company and the circumstances of the separation. The treatment of the Special RSUs upon separation from the Company is consistent with the terms of our standard performance-based RSUs.

 

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  Retirement savings arrangements

We believe a competitive retirement program aligns with market practices, and thereby contributes to the recruitment and retention of top executive talent. 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 certain staff participate.

 

  Severance and change in control arrangements

> Severance plan

All of the NEOs 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 36.

> 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 36. The Company has not entered into any change in control agreements since 2009 and does not intend to enter into new change in control agreements.

 

  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 pages 27 and 28 for a discussion of perquisites received by NEOs in 2013. Executives also participate in all of the broad-based benefit and welfare plans available to McDonald’s staff in general.

 

  2014 Changes

> Retirement Treatment for Stock Options

Based upon a review of retirement benefits, the Company determined that it was appropriate to align more closely with market practice. Beginning in 2014, if conditions for retirement are satisfied (generally, 68 years of combined age and Company service), all retiring employees, including executives, will be entitled to an extended stock option exercise period. Previously, the Company provided for continued exercisability of vested stock options for three years following retirement. This change will allow exercisability for the full remaining life of the vested stock option upon retirement.

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 may apply to exclusions from EPS and when calculating ROIIC.

 

  Consistent with the Committee’s guidelines, 2013 TIP payouts included certain adjustments to operating income for purposes of calculating TIP payouts as follows:

> APMEA: “regulatory” item (minus $3.9 million) and “external” items (plus $55 million) and

> Europe: “regulatory” item (minus $8.6 million).

In addition, the Company excluded $13.5 million from APMEA operating income as a result of an operational decision that did not reflect underlying business performance (negatively impacting TIP payouts). Each of the above adjustments or exclusions impacted the respective AOW as well as the Corporate TIP team factor and the net impact of Committee’s adjustments on TIP team factors was Corporate (+2.7 points), Europe (-2.1 points), APMEA (+44.1 points) and the U.S. (no impact).

 

  There were no significant items excluded from EPS calculations with respect to the performance-based RSUs granted to executives in 2010 and 2013.

 

McDonald’s Corporation 2014    LOGO       21


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 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 (including opportunities and payouts) for executives other than the CEO to the Committee. The CEO recommends compensation packages for the NEOs who reported directly to him: Messrs. Bensen and Fenton. The COO does the same for the NEOs who reported directly to him: Douglas Goare and David Hoffmann. The head of human resources also provides input on compensation for each of the executives other than himself. In 2013, 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 and regulatory 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.

Consistent with its Charter, the Committee regularly considers FWC’s independence and whether its work raised conflicts of interest under NYSE listing standards and 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. (in particular with U.S. healthcare matters), Equilar and Aon Hewitt, which also provides significant plan administration services to McDonald’s.

 

22        LOGO    McDonald’s Corporation 2014


COMPANIES IN OUR PEER GROUP IN 2013

As previously discussed on page 17, each year the Committee selects a peer group of companies with which we compete for talent and based upon specific criteria. The tables below illustrate our peer group, along with a financial measurement summary comparing McDonald’s size and performance to our peer group.

 

    

 

BRANDED CONSUMER

PRODUCTS

                  

MAJOR

RETAILERS

                  

DIRECT

COMPETITORS

    
   

 

3M Company

             Best Buy Co., Inc.              Burger King Worldwide, Inc.    
   

 

The Coca-Cola Company

             FedEx Corporation              Dunkin’ Brands Group, Inc.    
   

 

Colgate-Palmolive Company

             The Home Depot, Inc.              Starbucks Corporation    
   

 

General Mills, Inc.

             Lowe’s Companies, Inc.              The Wendy’s Company    
   

 

Johnson & Johnson

             Target Corporation              Yum! Brands, Inc.    
   

 

Kellogg Company

             Walgreen Co.                 
   

 

Kraft Foods Group, Inc.

             Wal-Mart Stores, Inc.                 
   

 

Mondélez International, Inc.

                             
   

 

Nestlé (United States)

                             
   

 

NIKE, Inc.

                             
   

 

PepsiCo, Inc.

                             
   

 

The Procter & Gamble Company

                             
   

 

Unilever (United States)

                             
   

 

The Walt Disney Company

 

                                     

 

     
    

FINANCIAL COMPARISONS

      
          McDonald’s        McDonald’s vs. comparator group*            
         (Dollars in billions)         Percentile         Rank           
   

 

     
    Revenues (most recent fiscal year)      $28,106         42nd         15 of 25           
    Market capitalization (12/31/13)      $96,548         71st         8 of 25           
    Systemwide sales (most recent fiscal year)      $89,125         96th         2 of 25           
    1-year TSR (12/31/13)      13.6%         8th         23 of 25           
    3-year TSR (12/31/13)      38.8%         19th         18 of 22           
    5-year TSR (12/31/13)      83.2%         29th         16 of 22           
   

 

     
   

 

*  Financial data for Nestlé (United States) and Unilever (United States) is unavailable as their headquarters are not located in the United States. For purposes of considering compensation of our CEO, COO and CFO we reviewed the data for the global organization. Data generally as of March 7, 2014 as reported on Bloomberg.com.

 

In 2013, the Committee removed Sears Holding Corporation as a result of differences in corporate structure.

 

    

  

   

 

McDonald’s Corporation 2014    LOGO  

    23


COMPENSATION POLICIES AND PRACTICES

 

n    Policy regarding management’s stock ownership and retention

Historically, the Company has maintained stock ownership requirements for senior management as we believe they will more effectively pursue the long-term interests of shareholders if they are shareholders themselves. In early 2014, the Committee enhanced these requirements by adding a retention component for equity awards. This policy, including the new retention component is described below. The following table provides our stock ownership requirements.

 

     Stock ownership requirements     
Level    (multiple of salary)   

 

President & CEO    6X   
COO    5X   
CFO    4X   
President U.S./Europe/APMEA    4X   
Executive Management (EVP)    4X   
Division President–U.S. paid    4X   
Division President–non-U.S. paid    3X   
Senior Management (SVP)–U.S. paid    3X   

Senior Management (SVP)–non-U.S. paid

 

   2X     

Annually, the Committee reviews share ownership requirements and where members of senior management stand against their respective requirements. Once a member of senior management becomes subject to the 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. The retention component of our policy provides that if a member of senior management is not on track to meet his/her ownership requirement following the third year (of the five-year period), he/she must retain up to 50% of the net after-tax shares received upon the vesting of an RSU award. Further, if a member of senior management is not in compliance with his/her ownership requirement after the five year period, he/she must retain 100% of the net after-tax shares received upon the vesting of an RSU award and/or a stock option exercise until the required ownership level is attained.

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 AND FORFEITURE PROVISIONS

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.

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.

 

24        LOGO    McDonald’s Corporation 2014


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 not less often than annually 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. In particular, our executive compensation program seeks to provide an appropriate balance of short-term and long-term incentives. Our incentive program is generally applied Company-wide and we maintain the same incentive plan design framework for different business units. In addition, our incentive program incorporates performance metrics related to various measures of operational performance. By diversifying the time horizons and the applicable performance metrics of our incentives, we seek to mitigate the risk of significant compensation payments based on accomplishments in one area that may have a negative consequence for our business as a whole.

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). Although our executive pay decisions are based on individual performance and other criteria, we consider the potential impact of internal pay equity on morale, incentive, management alignment, and succession planning. In addition, from time to time we make special onetime awards to executives in connection with their hiring or promotion. These awards permit us to meet one-time business objectives with minimum impact to long-term pay equity.

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.

 

McDonald’s Corporation 2014    LOGO       25


Compensation tables

 

SUMMARY COMPENSATION TABLE

 

The table below summarizes the total compensation earned by or paid to our NEOs in 2011, 2012 and 2013.

 

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)

 

Donald Thompson

    2013        $1,225,000        $4,667,552        $1,769,687      Annual:     $1,400,000        $434,425        $9,496,664   

President and Chief

          Long-term:     0       

Executive Officer

          Total:     1,400,000       
    2012        979,167        660,129        3,206,663 (6)    Annual:     1,400,000        324,816        13,751,919   
          Long-term:     7,181,144       
          Total:     8,581,144       
    2011        829,167        625,165        785,902      Annual:     1,526,000        307,514        4,073,748   
          Long-term:     0       
                                    Total:    

 

1,526,000

 

  

 

               

Peter J. Bensen

    2013        765,000        1,511,447        589,899      Annual:     569,000        164,298        3,599,644   

Chief Financial

          Long-term:     0       

Officer

          Total:     569,000       
    2012        708,333        465,904        818,945      Annual:     679,000        196,308        7,331,690   
          Long-term:     4,463,200       
          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

 

  

 

               

Timothy J. Fenton

    2013        770,833        1,778,202        589,899      Annual:     640,000        235,467        4,014,401   

Chief Operating

          Long-term:     0       

Officer

          Total:     640,000       
    2012        684,167        407,474        716,270      Annual:     677,000        198,455        5,888,819   
          Long-term:     3,205,453       
          Total:     3,882,453       
    2011        601,500        401,969        505,299      Annual:     667,000        302,468        2,478,236   
          Long-term:     0       
                                    Total:    

 

667,000

 

  

 

               

Douglas Goare

    2013        566,000        969,078        383,437      Annual:     408,000        1,592,893        3,919,408   

President, McDonald’s

          Long-term:     0       

Europe(7)

          Total:     408,000       
    2012        542,500        298,856        525,266      Annual:     500,000        889,836        4,508,723   
          Long-term:     1,752,265       
                                    Total:    

 

2,252,265

 

  

 

               

David Hoffmann

    2013        507,500        724,635        221,212      Annual:     207,000        1,578,609        3,238,956   

President, McDonald’s

          Long-term:     0       

Asia, Pacific, Middle

          Total:     207,000       

East and Africa(8)

 

                                                           

 

26        LOGO    McDonald’s Corporation 2014


(1) Reflects annual increases in salary that took effect during 2013. Annual base salaries as of December 31, 2013 were as follows:

 

 

Donald Thompson

   $ 1,250,000      

Peter J. Bensen

     775,000      

Timothy J. Fenton

     775,000      

Douglas Goare

     570,000      

David Hoffmann

     515,000      
               

 

(2) Computed in accordance with FASB ASC Topic 718, this represents the aggregate grant date fair value 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 (as described on pages 18 and 19); however, 50% of the special RSUs vest on the third anniversary and 50% vest upon separation from the Company and the performance conditions are the same as 2013 CPUP awards (as described on pages 19 and 20). Additional information is disclosed in the Grants of Plan-Based Awards table on pages 29 and 30 and the Outstanding Equity Awards at 2013 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 41 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

(3) Computed in accordance with FASB ASC Topic 718, this represents the aggregate grant date fair value 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 2013 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 20.6%; an expected annual dividend yield of 3.5%; a risk-free return of 1.2%; and expected option life based on historical experience of 6.1 years. Additional information about options is disclosed in the Grants of Plan-Based Awards table on pages 29 and 30 and the Outstanding Equity Awards at 2013 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 31 and 41 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

(4) Our annual cash incentive plan is referred to as TIP and our long-term cash incentive plan is referred to as CPUP. Prior to 2013, CPUP operated on non-overlapping three-year cycles and payouts listed in 2012 are for the 2010-2012 cycle.

 

(5) “All other compensation” for 2013 includes the Company’s contributions to the Profit Sharing Plan and Excess Benefit and Deferred Bonus Plan as follows:

 

 

Donald Thompson

   $ 236,250      

Peter J. Bensen

     129,960      

Timothy J. Fenton

     130,305      

Douglas Goare

     95,940      

David Hoffmann

     72,665      
               

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; 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

 

McDonald’s Corporation 2014    LOGO       27


to the Company in 2013 of $155,705 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.

In the case of the Company’s named executive officers based overseas, Messrs. Goare and Hoffmann, the amount in this column for 2013 also includes certain benefits in connection with their international assignments, as follows:

For Mr. Goare: Company-provided housing (in the amount of $171,283), which includes rent, rental furniture, utilities, cleaning and maintenance; a cost-of-living adjustment (in the amount of $152,947); home leave travel allowance; relocation and related allowances; and tax equalization (in the amount of $1,099,147) which is designed to satisfy tax obligations arising solely as a result of his international assignment. Certain amounts were paid in local currency and in each case the amount reported reflects the exchange rate on the date the respective payments were made.

For Mr. Hoffmann: Company-provided housing (in the amount of $518,694), which includes rent, rental furniture, utilities and maintenance; a cost-of-living adjustment (in the amount of $76,352); home leave travel allowance (in the amount of $76,140); educational expenses (in the amount of $160,951); transportation expenses; relocation and related allowances; moving expenses (such as storage and shipment of goods); an expatriate membership; and tax equalization (in the amount of $567,644) which is designed to satisfy tax obligations arising solely as a result of his international assignment. Certain amounts were paid in local currency and in these cases the amount reported reflects the exchange rate on the date the respective payments were made or the average monthly exchange rate.

Mr. Fenton previously performed an international assignment in Hong Kong, and as a result, he received certain tax-related benefits. 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 2013 arising from his international assignment. In 2013, the cost of Mr. Fenton’s tax equalization was $52,432, and consistent with Company policy, Mr. Fenton also received tax preparation services paid for by the Company.

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 reimburses 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 two times the Standard Industry Fare Level (SIFL) rate per person or (ii) 200% of the actual fuel cost.

 

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

 

(7) Mr. Goare was not a NEO in 2011.

 

(8) Mr. Hoffmann was not a NEO in 2011 or 2012.

 

28        LOGO    McDonald’s Corporation 2014


GRANTS OF PLAN-BASED AWARDS — FISCAL 2013

 

In 2013, the NEOs received annual cash awards under TIP and long-term cash awards under CPUP. The formula for determining payouts under the TIP and CPUP 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 for TIP are in column (g) of the Summary Compensation Table. In 2013, the NEOs also received two types of equity awards: RSUs subject to performance-based vesting criteria, including a one-time Special RSU award, (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
     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 (3)

(#)(j)

     awards
($/Sh)(k)
     awards (4)
($)(l)
 

Donald

   CPUP         0       $ 3,000,000       $ 6,900,000                     

Thompson

   TIP         0         2,000,000         5,000,000                     
   Equity                              
   Plan(1)      2/13/13                  0         31,915         31,915             $ 2,667,137   
   Equity                              
   Plan(2)      2/13/13                  0         23,937         23,937               2,000,415   
   Equity                              
   Plan      2/13/13                           159,575         $94.00         1,769,687   
                                                                                                

Peter J.

   CPUP         0         933,000         2,145,900                     

Bensen

   TIP         0         775,000         1,937,500                     
   Equity                              
   Plan(1)      2/13/13                  0         10,639         10,639               889,101   
   Equity                              
   Plan(2)      2/13/13                  0         7,447         7,447               622,346   
   Equity                              
   Plan      2/13/13                           53,192         94.00         589,899   
                                                                                                

Timothy J.

   CPUP         0         1,333,000         3,065,900                     

Fenton

   TIP         0         968,750         2,421,875                     
   Equity                              
   Plan(1)      2/13/13                  0         10,639         10,639               889,101   
   Equity                              
   Plan(2)      2/13/13                  0         10,639         10,639               889,101   
   Equity                              
   Plan      2/13/13                           53,192         94.00         589,899   
                                                                                                

table continued on next page

  

                    

 

McDonald’s Corporation 2014    LOGO       29


continued

  

                                                              
                Estimated future payouts
under non-equity incentive
plan awards
     Estimated future payouts
under equity incentive
plan awards
     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 (3)

(#)(j)

     awards
($/Sh)(k)
     awards (4)
($)(l)
 

Douglas

   CPUP        0       $ 585,000       $ 1,345,500                     

Goare

   TIP        0         484,500         1,211,250                     
   Equity                             
   Plan(1)     2/13/13                  0         6,915         6,915               577,887   
   Equity                             
   Plan(2)     2/13/13                  0         4,681         4,681               391,191   
   Equity                             
   Plan     2/13/13                           34,575         94.00         383,437   
                                                                                               

David

   CPUP        0         585,000         1,345,500                     

Hoffmann

   TIP        0         437,750         1,094,375                     
   Equity                             
   Plan(1)     2/13/13                  0         3,990         3,990               333,444   
   Equity                             
   Plan(2)     2/13/13                  0         4,681         4,681               391,191   
   Equity                             
   Plan     2/13/13                           19,947         94.00         221,212   
                                                                                               

 

(1) Reflects grants of RSUs subject to performance-based vesting conditions under the Current Plan. The RSUs vest on February 13, 2016, subject to achievement of a specified EPS growth target during the performance period ending on December 31, 2015. The performance target for these RSU awards granted to the NEOs in 2013 is compounded annual EPS growth of 6% on a cumulative basis. 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, as established by the Committee.

 

(2) Reflects grants of Special RSUs, as described on page 20, subject to performance-based vesting conditions under the Current Plan. The RSUs vest 50% on February 13, 2016 and 50% upon a covered separation from the Company, subject to achievement of performance conditions, which are the same as the 2013-2015 CPUP performance conditions described on pages 19 and 20.

 

(3) Reflects grants of options in 2013. For details regarding options, please refer to footnote 3 to the Summary Compensation Table on page 27.

 

(4) 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 on page 27.

 

30        LOGO    McDonald’s Corporation 2014


n   TIP Awards

Target TIP awards for 2013 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 2013). 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

 

 

The table below shows how increases in operating income determined the team factor for each business segment in 2013, 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 Europe were included in the calculation for Mr. Goare, and the results for APMEA were included in the calculation for Mr. Hoffmann.

TIP TEAM FACTOR AND GROWTH IN OPERATING INCOME FOR 2013

 

Team factor as % of target    0%     100%
(Target)
    175%
(Maximum)
      

Growth in operating income over 2012:

        

Corporate factor

     0     6.4     10.7  

U.S. factor

     0        4.2        8.0     

Europe factor

     0        6.1        10.7     

APMEA factor

     0        8.8        15.2     
                              

For purposes of calculating TIP (as described on page 21), operating income growth in 2013 was 3.0% (Corporate), 0.8% (U.S.), 3.4% (Europe) and 2.5% (APMEA). The resulting Corporate, U.S., Europe and APMEA team factors were 72.9%, 53.9%, 79.2% and 45.3%, respectively, before the application of modifiers.

 

McDonald’s Corporation 2014    LOGO       31


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 2013 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)

 

 

Donald Thompson

     160.0     Corporate         72.9     0.5     73.4     95     70.0
                                                           

Peter J. Bensen

     100.0        Corporate         72.9        0.5        73.4        100        73.4   
                                                           

Timothy J. Fenton

     125.0        Corporate         72.9        0.5        73.4        90        66.1   
                                                           

Douglas Goare

     85.0        Corporate         72.9        0.5        73.4        100        84.2   
       (weighted 25%)              
       Europe         79.2        8.4        87.6       
       (weighted 75%)              
                                                           

David Hoffmann

     85.0        Corporate         72.9        0.5        73.4        90        47.3   
       (weighted 25%)              
       APMEA         45.3        0.0        45.3       
       (weighted 75%)              
                                                           

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      
                

 

32        LOGO    McDonald’s Corporation 2014


OUTSTANDING EQUITY AWARDS AT 2013 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)

 

 

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           
    47,820        0        57.08        02/11/2019           
    26,275        0        57.08        02/11/2019           
    54,766        18,255        63.25        02/10/2020           
    32,262        32,262        75.93        02/09/2021           
    21,252        63,756        100.05        02/08/2022           
    42,349        127,047        88.53        06/29/2022           
    0        159,575        94.00        02/13/2023            72,357        $7,020,800   
                                                         

Peter J.

    15,870        0        $36.37        02/14/2016           

Bensen

    15,157        0        45.02        02/14/2017           
    24,100        0        56.64        02/13/2018           
    40,463        0        57.08        02/11/2019           
    37,341        12,446        63.25        02/10/2020           
    23,053        23,052        75.93        02/09/2021           
    14,999        44,997        100.05        02/08/2022           
    0        53,192        94.00        02/13/2023            29,816        $2,893,046   
                                                         

Timothy J.

    24,492        0        56.64        02/13/2018           

Fenton

    47,820        0        57.08        02/11/2019           
    34,851        11,617        63.25        02/10/2020           
    20,744        20,742        75.93        02/09/2021           
    13,120        39,354        100.05        02/08/2022           
    0        53,192        94.00        02/13/2023            31,703        $3,076,142   
                                                         

Douglas

    12,050        0        $56.64        02/13/2018           

Goare

    15,634        0        57.08        02/11/2019           
    12,447        4,149        63.25        02/10/2020           
    8,644        8,642        75.93        02/09/2021           
    9,621        28,860        100.05        02/08/2022           
    0        34,575        94.00        02/13/2023            17,365        $1,684,926   
                                                         
table continued on next page           

 

McDonald’s Corporation 2014    LOGO       33


continued                                   
     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)

 

 

David

    4,906        0        36.37        02/14/2016           

Hoffmann

    5,247        0        45.02        02/14/2017           
    5,562        0        56.64        02/13/2018           
    7,357        0        57.08        02/11/2019           
    6,846        2,282        63.25        02/10/2020           
    4,150        4,148        75.93        02/09/2021           
    2,626        7,869        100.05        02/08/2022           
    1,750        5,247        100.05        02/08/2022           
    0        19,947        94.00        02/13/2023        2,686        $260,623        8,671        $841,347   
                                                                 

 

(1) In general, options expire on the tenth anniversary of grant. For details regarding equity treatment upon termination, see pages 38 and 39.

 

(2) Mr. Hoffmann’s RSUs reflected in columns (g) and (h) are not subject to performance-based vested conditions because they were granted prior to Mr. Hoffmann serving as President of McDonald’s APMEA. Our practice is to grant RSUs subject to performance-based vesting conditions to our executives. 1,186 of these RSUs vested on February 9, 2014 and 1,500 RSUs are scheduled to vest on February 8, 2015.

 

(3) Calculated by multiplying the number of shares covered by the award by $97.03, the closing price of Company stock on the New York Stock Exchange on December 31, 2013.

 

(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 2014).

 

Named executive officer

 

  

Vesting date

 

   

Number of
performance-based
RSUs

 

    

Vesting date

 

   

Number of
performance-based
RSUs

 

 

Donald Thompson

     2/9/2014        9,218         2/13/2016        31,915   
     2/8/2015        7,287         2/13/2016 (1)      23,937   
                                   

Peter J. Bensen

     2/9/2014        6,587         2/13/2016        10,639   
     2/8/2015        5,143         2/13/2016 (1)      7,447   
                                   

Timothy J. Fenton

     2/9/2014        5,927         2/13/2016        10,639   
     2/8/2015        4,498         2/13/2016 (1)      10,639   
                                   

Douglas Goare

     2/9/2014        2,470         2/13/2016        6,915   
     2/8/2015        3,299         2/13/2016 (1)      4,681   
                                   

David Hoffmann

     2/13/2016        3,990        
     2/13/2016 (1)      4,681        
                                   

 

(1)   Reflects the vesting date for 50% of these RSUs. The remaining RSUs will vest upon the executive’s retirement.

      

 

34        LOGO    McDonald’s Corporation 2014


OPTION EXERCISES AND STOCK VESTED — FISCAL 2013

 

 

     
     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)

 

 

Donald Thompson

     0       $ 0         10,435         $989,968   

Peter J. Bensen

     15,971         1,020,687         7,115         675,000   

Timothy J. Fenton

     20,000         811,747         6,641         630,032   

Douglas Goare

     0         0         2,372         225,032   

David Hoffmann

     1,771         115,557         1,305         123,805   
                                     

NON-QUALIFIED DEFERRED COMPENSATION — FISCAL 2013

 

 

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)

 

 

Donald Thompson

   $ 292,640         $213,300       $ 189,327         $0       $ 3,381,400   

Peter J. Bensen

     1,100,680         114,798         505,116         0         6,788,183   

Timothy J. Fenton

     2,084,627         114,472         439,772         0         9,947,102   

Douglas Goare

     83,600         74,740         392,385         0         2,368,095   

David Hoffmann

     63,239         55,315         193,254         0         869,837   
                                              

 

(1) Represents salary deferrals which are also reported as compensation for 2013 in the Summary Compensation Table on page 26: $83,333 for Mr. Thompson; $103,333 for Mr. Bensen; $96,875 for Mr. Fenton; $47,500 for Mr. Goare; and $42,917 for Mr. Hoffmann. The remaining amounts represent bonus deferrals under TIP and CPUP (only in the case of Messrs. Bensen and Fenton), which were previously reported in the Summary Compensation Table for 2012, except in the case of Mr. Hoffmann. 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:

 

     

Donald Thompson

   $ 1,624,087      

Peter J. Bensen

     3,740,691      

Timothy J. Fenton

     5,121,501      

Douglas Goare

     167,158      
               

n Excess Benefit and Deferred Bonus Plan (Excess Plan)

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 stable value fund, S&P 500 Index fund and the McDonald’s common stock fund.

 

McDonald’s Corporation 2014    LOGO       35


n   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.

 

n   Potential payments upon termination of employment

McDONALD’S CORPORATION SEVERANCE PLAN (SEVERANCE PLAN)

Under the Severance Plan, Messrs. Bensen, Fenton, Goare, Hoffmann and Thompson 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. 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 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 transitional 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 NEOs under the Severance Plan assuming a qualifying termination of employment on December 31, 2013 are included in the chart below. Pro rata 2013 TIP payments are not included because they would have earned these awards in full under the 2013 TIP.

 

Named executive officer

 

  

Salary
continuation

 

    

Benefit
continuation

 

    

CPUP

 

    

 

Other (sabbatical
and transitional
assistance)

 

    

Total

 

 

Donald Thompson

     1,105,769         11,941         1,000,000         204,308         2,322,018   

Peter J. Bensen

     506,731         9,533         311,000         12,000         839,264   

Timothy J. Fenton

     775,000         10,209         444,333         12,000         1,241,542   

Douglas Goare

     570,000         10,209         195,000         12,000         787,209   

David Hoffmann

     336,731         9,536         195,000         12,000         553,267   
                                              

 

n   Effect of termination of employment under Equity Incentive Plans

STOCK OPTIONS

Unvested options are generally forfeited on termination of employment, with vested options remaining outstanding and exercisable for 90 days, except on termination for “cause.”

If the executive qualifies for favorable treatment (by satisfying the conditions for retirement or “special circumstances,” which includes termination by the Company without “cause,” and agreeing to the restrictive covenants) the options continue to become exercisable on the originally scheduled dates and remain exercisable for an extended post-termination exercise period, as applicable. If an executive terminates employment as a result of death or disability, the options vest upon termination and remain exercisable for an extended post-termination exercise period. If an executive violates a restrictive covenant following termination, the Company may cancel any outstanding options. Further, if an executive terminates employment for any reason other than death or disability, all options granted in the last 12 months are generally forfeited.

 

36        LOGO    McDonald’s Corporation 2014


RSUs

Unvested RSUs are generally forfeited on termination of employment. In the case of certain termination events (including retirement and termination by the Company without “cause”), executives (and all other employees) are entitled to accelerated vesting of RSUs, prorated based upon the number of months worked during the vesting period. However, RSUs subject to performance-based vesting conditions are not accelerated on termination of employment; instead, any pro rata vesting is subject to the satisfaction of the applicable performance conditions, determined following completion of the performance period. As discussed on page 18, the Company’s practice is to grant executives RSUs with performance-based vesting conditions. Nonetheless, as discussed on page 34, Mr. Hoffmann holds RSUs that are not subject to performance-based vesting conditions because they were granted prior to Mr. Hoffmann serving as President of McDonald’s APMEA. If Mr. Hoffmann’s employment were terminated on December 31, 2013, he would have realized a value of $205,024 as a result of the accelerated pro rata vesting of these RSUs, based on the closing price of the Company’s common stock on that date. With respect to the RSUs subject to performance-based vesting conditions held by our NEOs, we are not able to calculate the hypothetical value that each NEO could have realized as a result of a termination of employment because the vesting is based not only on the portion of the vesting period in which the NEO remained employed but also on actual performance through the end of the entire performance period. Further, beginning in 2011, if an executive (or any other employee) terminates employment for any reason other than death or disability, all RSUs granted in the last 12 months are generally forfeited upon termination.

 

n   Deferred compensation

Following separation from service for any reason, the NEOs would receive distributions from their accounts under the Supplemental Plan and the Excess Plan in accordance with their elected distribution schedules, as described on pages 35 and 36.

 

n   Consequences of 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) AND OTHER PAYMENTS TRIGGERED UPON A CHANGE IN CONTROL

The Company has CIC Agreements with three NEOs, Messrs. Bensen, Fenton and Thompson. The Company does not intend to enter into any new CIC agreements. 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 pages 38 and 39. 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 annual bonus based upon actual performance, reduced (but not below zero) by any portion of the annual bonus for that year previously paid to the executive, if any; (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

 

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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.

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. Bensen, Fenton and Thompson would have been entitled to under the CIC agreements, assuming that on December 31, 2013 they had been terminated without cause or resigned with good reason in the protected period following a change in control. Pro rata 2013 TIP payments are not included because if the NEOs had terminated employment on December 31, 2013, they would have earned these awards in full under the 2013 TIP.

 

Named executive
officer

 

  

 

Severance payment
(3x salary, bonus
and Company
contribution to deferred
compensation plan) ($)

 

    

Benefit
continuation ($)

 

    

CPUP ($)

 

    

Sabbatical ($)

 

    

Tax gross-up
payments ($)

 

    

Total ($)

 

 

Donald Thompson

     $10,683,548         $121,214         $1,000,000         $192,308         $9,955,798         $21,952,868   

Peter J. Bensen

     5,175,826         121,005         311,000         0         4,217,462         9,825,293   

Timothy J. Fenton

     5,701,329         109,602         444,333         0         0         6,255,264   
                                                       

Messrs. Goare and Hoffmann have not entered into CIC Agreements with the Company. Following a change in control, Messrs. Goare and Hoffmann would be entitled to payments under our Severance Plan as described on page 36 in the event their employment is terminated and they otherwise qualify for the payments and benefits thereunder. In addition, pursuant to CPUP, they would be entitled to a pro rata CPUP payment following a change in control based on actual performance through the date of the change in control. Assuming that on December 31, 2013 a change in control occurred, based on actual performance through such date, Messrs. Goare and Hoffmann would each have been entitled to a CPUP payment of $68,055.

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.

 

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

If a change in control had occurred on December 31, 2013 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, 2013 are set forth in the Outstanding Equity Awards at 2013 Year-end table on pages 33 and 34.

The table below 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, 2013 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, 2013. 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.

 

       

Named executive officer

 

  

Stock options
(closing price on 12/31/13
minus exercise price) ($)

 

    

RSUs
(number of shares/target
number of shares multiplied by
closing price on 12/31/13) ($)

 

    

Total ($)

 

 

Donald Thompson

     $2,860,794         $7,020,800         $9,881,594   

Peter J. Bensen

     1,067,995         2,893,046         3,961,041   

Timothy J. Fenton

     991,250         3,076,142         4,067,392   

Douglas Goare

     427,262         1,684,926         2,112,188   

David Hoffmann

     225,048         1,101,970         1,327,018   
                            

PROPOSAL NO. 2.

 

ADVISORY VOTE to approve executive compensation

 

We are asking our shareholders to provide an advisory, nonbinding vote to approve the compensation awarded to our named executive officers for 2013, as described in the “Executive Compensation” section, beginning on page 13, which includes the Compensation Discussion and Analysis, the compensation tables and related material.

As described in the Compensation Discussion and Analysis section, the Compensation Committee oversees our executive compensation program, which supports our key global growth priorities. 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.

We are asking our shareholders to indicate their support for our named executive officer compensation. We believe the information we have provided in this Proxy Statement demonstrates that our executive compensation program was designed appropriately and is working to ensure that management’s interests are aligned with our shareholders’ interests to support long-term value creation.

This vote is not intended to address any specific item of compensation, but rather the overall compensation of our named executive officers and the philosophy, policies and procedures described in this Proxy Statement.

Information about the voting standard for this proposal appears on page 59. While this vote is advisory and not binding, the Board and the Compensation Committee will consider the outcome of the vote, along with other relevant factors, when considering future executive compensation decisions.

The Board of Directors recommends that shareholders vote FOR the approval of the compensation awarded to McDonald’s named executive officers for 2013, as disclosed under SEC rules, including the Compensation Discussion and Analysis, the compensation tables and related material included in this Proxy Statement.

 

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Other management proposals

PROPOSAL NO. 3.

 

Approval of Performance Goals for Awards under the McDonald’s Corporation 2009 Cash Incentive Plan

 

We are asking our shareholders to approve the performance goals (Performance Goals) for awards under the McDonald’s Corporation 2009 Cash Incentive Plan (Plan). We are not amending or altering the Plan.

Background

Section 162(m) of the Internal Revenue Code (Section 162(m)) limits the deductibility of certain executive compensation paid to the Company’s Chief Executive Officer and the three highest compensated officers (other than the Chief Financial Officer), as determined pursuant to the executive compensation disclosure rules under the Securities Exchange Act of 1934. These officers are referred to as covered employees. An exemption from this limitation (the Performance Exception) applies to “performance-based” compensation as defined in the regulations under Section 162(m).

The Plan gives the Board’s Compensation Committee (Committee) the ability to grant short-term and long-term cash incentive awards based upon the achievement of Performance Goals during specified periods that are designed to qualify for the Performance Exception. One of the requirements under the Performance Exception is shareholder approval of the Performance Goals pursuant to which the compensation is paid. The regulations under Section 162(m) require that, in order for awards under the Plan to continue to qualify for the Performance Exception, shareholders must approve the material terms of the applicable Performance Goals every five years. The Performance Goals for awards under the Plan were last approved on May 27, 2009. Therefore, we are asking for your approval of the Performance Goals again this year.

Nothing in the Plan or this Proxy Statement is intended to guarantee that the Company will always seek to ensure that its compensation qualifies as performance-based compensation, and no guarantee can be given that the terms of the Plan do in fact comply with the requirements for performance-based compensation, as they exist today or as they may change from time to time.

Performance Goals

The Performance Goals may be based upon the attainment of specified levels of one or more of the following measures, applied to the Company as a whole or to any subsidiary or other unit of the Company: revenue, operating income, net income, basic or diluted earnings per share, return on revenue, return on assets, return on equity, return on total capital, or total shareholder return. These Performance Goals may be absolute or relative to the performance of one or more other companies comparable to the Company or of an index covering multiple companies. In establishing Performance Goals, the Committee may specify that there shall be excluded the effect of restructuring charges, discontinued operations, extraordinary items, cumulative effects of accounting changes, and other unusual or nonrecurring items, and asset impairment and the effect of foreign currency fluctuations, in each case as those terms are defined under generally accepted accounting principles and provided in each case that such excluded items are objectively determinable by reference to the Company’s financial statements, notes to the Company’s financial statements and/or management’s discussion and analysis in the Company’s Annual Report.

Eligible employees

The Plan may be used to grant performance-based awards to any employee of McDonald’s and its subsidiaries. While the Committee considers cash incentives for approximately 20,000 employees, awards under the Cash Incentive Plan have historically been granted to a limited number of individuals. In recent years, the Committee granted awards under the Plan to approximately 11 individuals (generally, our executive officer group). See “Estimate of benefits” below. The Committee anticipates that a comparable number of individuals will be selected for awards in the future.

Maximum awards

In order to meet the requirements of the Performance Exception, the Plan imposes the following limitations. The maximum number of performance periods that end in any single calendar year for which any one participant will be eligible to earn awards is three. In addition, the maximum amount of cash that may be paid pursuant to any one award under the plan is $8 million times the number of years and fractions thereof in the applicable performance period.

Amendment and termination

The Plan and awards under it may be amended and the Plan may be terminated by our Board, and awards may be amended by the Committee, without shareholder approval. However, no amendment or termination may adversely affect outstanding awards without the consent of the affected grantee, unless the amendment does not materially

 

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decrease the value of the award or is made to comply with applicable law, stock exchange rules or accounting rules. Moreover, in no event may any award be amended in any manner that would cause it to cease to qualify for the Performance Exception. By its terms, the Plan requires that the material terms of Performance Goals be submitted to the Company’s shareholders for reapproval as required to meet the Performance Exception.

Estimate of benefits

Because the grant of awards pursuant to the Plan is within the discretion of the Committee, it is not possible to determine the awards that will be made under the Plan. The following table shows the dollar value of the annual incentive awards granted by the Committee to our named executive officers in January 2013 under the Plan for the performance period ending December 31, 2013, and the potential dollar value of the long-term incentive awards granted by the Committee in February 2013 under the Plan for the performance period ending on December 31, 2015.

 

      Long-term incentive  
      Annual incentive      Target      Maximum  

Donald Thompson

     $1,400,000         $3,000,000         $6,900,000   

President and

        

Chief Executive Officer

        
                            

Peter J. Bensen

     569,000         933,000         2,145,900   

Chief Financial Officer

        
                            

Timothy J. Fenton

     640,000         1,333,000         3,065,900   

Chief Operating Officer

        
                            

Douglas Goare

     408,000         585,000         1,345,500   

President of McDonald’s Europe

        
                            

David Hoffmann

     207,000         585,000         1,345,500   

President of McDonald’s APMEA

        
                            

Executive Officer Group

     5,029,732         9,031,000         20,771,301   

(11 persons)

        
                            

Non-Executive Director Group

     0         0         0   

(n/a)

        
                            

Non-Executive Officer Employee Group

     0         0         0   

(0 persons)

        
                            

The foregoing summary is qualified in its entirety by the full text of the Plan. The Plan is not part of this Proxy Statement. A copy of the Plan is available on the Company’s website at www.investor.mcdonalds.com, by clicking on “2014 Proxy Statement,” and the Securities and Exchange Commission’s website at www.sec.gov, where it is an exhibit to an electronic version of this Proxy Statement. We will provide you with a copy without charge if you call the Investor Relations Service Center at 630-623-7428, or write to us at McDonald’s Corporation, Investor Relations Service Center, One McDonald’s Plaza, Oak Brook, IL 60523-1928. Copies of the Plan will also be available at the Annual Shareholders’ Meeting.

The Board’s recommendation

The Board believes that the approval of the Performance Goals under the Plan will permit the Committee to continue to grant performance-based short-term and long-term incentive cash compensation designed to qualify for the Performance Exception to those employees upon whose judgment and efforts the Company is largely dependent for the successful conduct of its operations. The Board believes that this is in the best interest of the Company.

If shareholders do not approve the performance goals, management and the Committee will examine all of the available alternatives, including, but not limited to, paying cash incentive compensation under other arrangements that do not qualify for the Performance Exception.

The Board of Directors recommends that shareholders vote FOR the approval of the Performance Goals for awards under the McDonald’s Corporation 2009 Cash Incentive Plan.

 

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PROPOSAL NO. 4

 

ADVISORY VOTE to approve the appointment of Ernst & Young LLP as independent auditor for 2014

 

The Audit Committee is directly responsible for the appointment, compensation, retention, evaluation and termination of the independent external audit firm. The Committee has appointed Ernst & Young LLP as the Company’s independent external audit firm for 2014. In executing its responsibilities, the Committee engages in a thorough annual evaluation of Ernst & Young’s qualifications, performance and independence. Among other things, the Committee is informed by results of a comprehensive assessment survey of the firm by senior financial personnel from the Company’s headquarters and largest global markets, and discusses opportunities for improvement with the lead audit partner. The Committee has sole authority to approve all engagement fees to be paid to Ernst & Young. In assessing independence, the Committee reviews the fees paid, including those related to non-audit services, and annually reviews compliance with the Company’s Hiring Policy for Employees of External Audit Firm and Its Affiliates. The Committee regularly meets with the lead audit partner without members of management present, and in executive session with only the Committee members present, which provide the opportunity for continuous assessment of the firm’s effectiveness and independence and for consideration of rotating audit firms.

Ernst & Young or its predecessor, Arthur Young & Company, has been retained as the Company’s external audit firm continuously since 1964. In accordance with SEC rules and Ernst & Young policies, the firm’s lead engagement partner rotates every five years. The Audit Committee and its Chairman are directly involved in the selection of Ernst & Young’s lead engagement partner.

The Audit Committee and the Board of Directors believe that the continued retention of Ernst & Young LLP to serve as the Company’s independent external audit firm for 2014 is in the best interests of the Company and its shareholders, and the Board is asking shareholders to approve this appointment. A representative of the firm is expected to attend the Annual Shareholders’ Meeting, and will be available to answer shareholders’ questions and will have the opportunity to make a statement. If shareholders do not approve the appointment of Ernst & Young, the Audit Committee will reconsider the appointment.

The Board of Directors recommends that shareholders vote FOR the appointment of Ernst & Young LLP as independent auditor for 2014.

 

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Audit Committee matters

Audit Committee Report

 

DEAR FELLOW SHAREHOLDERS:

The Audit Committee is composed of five Directors, each of whom meets the independence and other requirements of the New York Stock Exchange. Enrique Hernandez, Jr., Cary D. McMillan, and Roger W. Stone qualify as “audit committee financial experts.” The Committee has the responsibilities set out in its charter, which has been adopted by the Board of Directors and is reviewed annually.

Management is primarily responsible for the Company’s financial statements, including the Company’s internal control over financial reporting. Ernst & Young LLP (Ernst & Young), the Company’s independent auditor, is responsible for performing an audit of the Company’s annual consolidated financial statements in accordance with generally accepted accounting principles (GAAP) and for issuing a report on those statements. Ernst & Young also reviews the Company’s interim financial statements in accordance with applicable auditing standards. The Committee oversees the Company’s financial reporting process and internal control structure on behalf of the Board of Directors. The Committee met nine times during 2013, including meeting regularly with Ernst & Young and the head of internal audit, both privately and with management present.

In fulfilling its oversight responsibilities, the Committee reviewed and discussed with management and Ernst & Young the audited and interim financial statements, including Management’s Discussion and Analysis, included in the Company’s Reports on Form 10-K and Form 10-Q.

In connection with its review of the Company’s annual consolidated financial statements, the Committee also discussed with Ernst & Young other matters required to be discussed with the auditor under Auditing Standard No. 16, as modified or supplemented (communication with audit committees), and those addressed by Ernst & Young’s written disclosures and its letter provided under the applicable requirements of the Public Company Accounting Oversight Board, as modified or supplemented (independence discussions with audit committees).

The Committee is responsible for the engagement of the independent auditor and appointed Ernst & Young to serve in that capacity during 2013 and 2014. In that connection, the Committee reviewed Ernst & Young’s independence from the Company and management, including Ernst & Young’s written disclosures described above.

Based on the reviews and discussions referred to above, the Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for filing with the SEC.

Respectfully submitted,

The Audit Committee

Enrique Hernandez, Jr., Chairman

Walter E. Massey

Cary D. McMillan

Sheila A. Penrose

Roger W. Stone

POLICY FOR PRE-APPROVAL OF AUDIT AND PERMITTED NON-AUDIT SERVICES

 

The Audit Committee has a policy for the pre-approval of all audit and permitted non-audit services to be provided to the Company by its independent auditor. The Audit Committee may pre-approve engagements on a case-by-case basis or on a class basis if the relevant services are predictable and recurring.

Pre-approvals for classes of services are granted at the start of each fiscal year and are applicable for the year. In considering these pre-approvals, the Audit Committee reviews a description of the scope of services falling within each class and imposes budgetary estimates that are largely based on historical costs.

Any audit or permitted non-audit service that is not included in an approved class, or for which total fees are expected to exceed the relevant budgetary estimate, must be pre-approved on an individual basis. Pre-approval of any individual engagement may be granted not more than one year before commencement of the relevant service. Pre-approvals of services that may be provided over a period of years must be reconsidered each year.

The Corporate Controller monitors services provided by the independent auditor and overall compliance with the pre-approval policy. The Corporate Controller reports periodically to the Audit Committee about the status of outstanding engagements, including actual services provided and associated fees, and must promptly report any noncompliance with the pre-approval policy to the Chairman of the Audit Committee.

 

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All services provided to the Company by Ernst & Young in 2012 and 2013 were pre-approved by the Audit Committee.

The policy is available on the Company’s website at www.governance.mcdonalds.com.

AUDITOR FEES AND SERVICES

 

The following table presents fees paid for professional services rendered for the audit of the Company’s annual financial statements for 2013 and 2012 and fees paid for other services provided by our independent auditor in those years:

 

 

(In millions)

 

  

 

2013

 

            

 

2012

 

       

Audit fees(1)

   $ 11.8            $ 11.3      

Audit-related fees(2)

     0.9              0.7      

Tax fees(3)

     0.6              1.2      

All other fees(4)

 

    

 

0

 

  

 

           

 

0.1

 

  

 

    

Total

 

   $

 

13.3

 

  

 

        $

 

13.3

 

  

 

  

 

 

(1) Fees for services associated with the annual audit (including internal control reporting), statutory audits required internationally, reviews of Quarterly Reports on Form 10-Q and accounting consultations.

 

(2) Fees for employee benefit plan audits and certain attestation services not required by statute or regulation.

 

(3) Primarily fees for tax compliance in various international markets.

 

(4) Fees for miscellaneous advisory services.

 

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Shareholder proposal

The text of the shareholder proposal and supporting statement appear exactly as received by the Company unless otherwise noted. All statements contained in the shareholder proposal and supporting statement are the sole responsibility of the proponent. The shareholder proposal may contain assertions about the Company or other matters that the Company believes are incorrect, but the Company has not attempted to refute all such assertions. The Board recommends a vote against the shareholder proposal based on the reasons set forth in the Company’s statement in opposition following the shareholder proposal.

The address of the proponent is available upon request by calling 1-630-623-2553 or by sending a request to McDonald’s Corporation, Shareholder Services, Department 720, One McDonald’s Plaza, Oak Brook, IL 60523.

PROPOSAL NO. 5.

 

ADVISORY VOTE requesting the ability for shareholders to act by written consent

 

John Chevedden advised the Company that he intends to present the following shareholder proposal at the Annual Shareholders’ Meeting. Mr. Chevedden owns 60 shares of the Company’s common stock.

Shareholder Proposal

Proposal 5 – Right to Act by Written Consent

Resolved, Shareholders request that our board of directors undertake such steps as may be necessary to permit written consent by shareholders entitled to cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all shareholders entitled to vote thereon were present and voting. This written consent is to be consistent with giving shareholders the fullest power to act by written consent in accordance with applicable law. This includes shareholder ability to initiate any topic for written consent consistent with applicable law.

Wet Seal (WTSLA) shareholders successfully used written consent to replace certain underperforming directors in 2012. This proposal topic also won majority shareholder support at 13 major companies in a single year. This included 67%-support at both Allstate and Sprint.

This proposal empowers shareholders by giving them the ability to effect change without being forced to wait until the annual meeting. Shareholders could replace a director using action by written consent. Shareholder action by written consent could save our company the cost of holding a meeting between annual meetings. McDonald’s shareholders supported another shareholder-friendly governance change at our 2012 annual meeting by voting 99% in favor to change our pervious 3-year terms for directors to one-year terms.

This proposal should also be more favorably evaluated due to our company’s clearly improvable corporate governance performance as reported in 2013:

GMI Ratings, an independent investment research firm, rated our company F for executive pay - $36 million for James Skinner. In regard to our board of directors, our board included 3 directors age 75 to 83 - combined with their 15 to 24-years long-tenure: Walter Massey, Roger Stone and Andrew McKenna. Jeanne Jackson and Enrique Hernandez also had more than 14-years tenure each. Director independence declines after 10 to 15-years. This long-tenure practice was compounded by 60% of audit committee members having 15 to 24-years long-tenure and 66% of our nomination committee members having 14 to 24-years long-tenure.

Returning to the core topic of this proposal from the context of our clearly improvable corporate governance, please vote to protect shareholder value:

Right to Act by Written Consent – Proposal 5

The Board’s Statement in Opposition

The Board recommends voting AGAINST the advisory proposal requesting that the Company take steps to allow shareholders to act by written consent because it is unnecessary and not in shareholders’ best interests.

The Board has carefully considered the proposal and for the reasons set forth below, believes that it is unnecessary in light of the Company’s strong corporate governance policies and practices, including the ability of shareholders to request a special meeting. In addition, the Board is concerned that the written consent process is inherently less transparent than the annual or special meeting process and deprives shareholders of a forum for discussion to make inquiries or otherwise debate proposed actions. Further, the written consent process puts the interests of shareholders at risk by potentially depriving many of them of being able to consider important decisions about the Company.

 

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The proponent states that without the ability to act by written consent, shareholders wishing to effect change would be “forced to wait until the annual meeting.” This statement is false. Both the Company’s Certificate of Incorporation and By-laws provide that shareholders holding 25% of the outstanding shares of the Company’s common stock have the ability to request a special meeting at any time. In addition to shareholders having the ability to call special meetings, the Company has several other governance provisions that empower shareholders. These include:

 

    a majority voting standard in uncontested Director elections;

 

    no supermajority voting provisions;

 

    transitioning to the annual election of all Directors by the 2015 Annual Shareholders’ Meeting;

 

    the ability of shareholders to propose Director nominees to the Board;

 

    an independent Chairman of the Board; and

 

    a mechanism for shareholders to communicate directly with the full Board, any Board Committee or individual Directors.

In the Board’s view, action at an annual or special meeting supports shareholders’ interests in ways that written consent does not. Meetings provide shareholders with advance notice, including of the date and time of the meeting and the matters to be voted on at the meeting. At meetings, all shareholders have the opportunity to express their views by voting on proposed actions. On the other hand, written consent, as requested by the shareholder proponent, can be used by a bare majority of shares to act on significant matters without any prior notice and without any discussion among the Company’s shareholders. Such a process does not permit an orderly debate on the merits of a proposed shareholder action.

In addition to disenfranchising many shareholders, the written consent process could lead to substantial confusion and disruption. The Company has more than 950 million shares currently outstanding and over 1.5 million shareholders. Under the proposal, multiple groups of shareholders would be able to solicit written consents at any time and as frequently as they choose on a range of issues, some of which may be duplicative or conflicting. This could lead to a disordered state of corporate affairs and impose significant administrative and financial burdens on the Company with little or no corresponding benefit to shareholders.

The Board believes that the Company’s existing corporate governance policies, including the right of shareholders to call a special meeting, provide the appropriate means to protect shareholders’ interests and enable the Board to oversee the Company’s business and affairs for the long-term benefit of all shareholders.

Therefore, your Board of Directors recommends that you vote AGAINST this proposal.

 

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Board and governance matters

LEADERSHIP STRUCTURE

 

Since 2004, our Board has been led by an independent Chairman, Andrew McKenna. This structure has worked well to assure constructive engagement among the Board and the Chief Executive Officer, and effective oversight of management. In addition, this structure allows the CEO to focus on the Company’s business, while the Chairman can focus on corporate governance matters, as well as leadership development and succession planning.

DIRECTOR SELECTION PROCESS

 

The Company has a policy for the consideration of Director candidates under which the Governance Committee establishes criteria for nominees, screens candidates and evaluates the qualifications of persons nominated or recommended by shareholders. The Governance Committee recommends Director nominees for approval by the Board. The Governance Committee considers candidates suggested by other Directors, senior management and shareholders. The Committee may, at the Company’s expense, retain search firms and other advisors to assist it.

The Governance Committee reviews the size and structure of the Board and considers Director tenure, skills and experience in determining the slate of nominees and as part of Director succession planning. All candidates are evaluated on the basis of qualifications. The Governance Committee seeks Directors with records of achievement in their chosen fields and experience relevant to the Company’s scope, strategy and operations. Director candidates also are expected to possess certain qualities, such as integrity, independence of mind, analytical skills, a commitment to serve the interests of all shareholders, and a willingness to challenge management in a constructive and collegial environment, as well as the ability to exercise good judgment and provide practical insights and diverse perspectives. Candidates also are evaluated in light of Board policies, such as those relating to Director independence and service on other boards.

Candidates with appropriate qualifications are interviewed in person, typically by the Chairman, the Chief Executive Officer, a majority of the members of the Governance Committee and other available Directors. The Governance Committee also periodically evaluates all Directors in light of the above considerations and their contributions to the Board.

Shareholders who wish to suggest candidates for nomination by the Board or who wish to directly nominate Director candidates for election at the Company’s 2015 Annual Shareholders’ Meeting should follow the procedures described in the section on Consideration of Director Nominations for the 2015 Annual Shareholders’ Meeting, appearing on page 57.

BOARD DIVERSITY

 

In selecting Director candidates, the Governance Committee and the Board take diversity into account, seeking to ensure a representation of varied perspectives and experience, although the Company’s nomination policy does not prescribe specific standards for diversity. Currently, over 50% of the Board is composed of women and individuals who are minorities.

SUCCESSION PLANNING

 

The Board regularly reviews short and long-term succession plans for the Chief Executive Officer and for other senior management positions. In assessing possible CEO candidates, the independent Directors identify the skills, experience and attributes they believe are required to be an effective CEO in light of the Company’s global business strategies, opportunities and challenges.

The Board also considers its own succession. In doing so, the Governance Committee and Board take into account, among other things, the needs of the Board and the Company in light of the overall composition of the Board with a view to achieving a balance of the skills, tenure, experience and attributes that would be beneficial to the Board’s oversight role.

 

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DIRECTOR INDEPENDENCE

 

Our Corporate Governance Principles require that all Directors except management Directors be independent under applicable law and listing standards, as well as under the Board’s Standards on Director Independence. The Board considers relationships involving Directors and their immediate family members and relies on information derived from Company records, questionnaires and other inquiries.

The relationships reviewed by the Board in its most recent determination involved commercial relationships with companies:

 

  at which Board members then served as officers (including Inter-Con Security Systems, Inc. and NIKE, Inc.);

 

  in which Board members or their immediate family members then held an aggregate 10% or more direct or indirect interest (including Inter-Con Security Systems, Inc.);

 

  at which Board members then served as outside Directors (including Chevron Corporation, ConAgra Foods, Inc., Discover Financial Services, Exelon Corporation, Hyatt Hotels Corporation, Jones Lang LaSalle Incorporated, Kraft Foods Group, Inc., Smart and Final, LLC, The Walt Disney Company and Wells Fargo & Company); and

 

  at which Board members then served as employees (including Schwarz Supply Source).

These relationships involved McDonald’s purchases of products and services in the ordinary course of business that were made on arm’s-length terms in amounts and under other circumstances that did not affect the relevant Directors’ independence.

The Board also reviewed Company donations to not-for-profit organizations with which Board members or their immediate family members were affiliated by membership or service as directors or trustees.

Based on its review, the Board determined that none of its non-management Directors has a material relationship with the Company and that all of them are independent. Currently, our non-management Directors are Susan E. Arnold, Robert A. Eckert, Enrique Hernandez, Jr., Jeanne P. Jackson, Richard H. Lenny, Walter E. Massey, Andrew J. McKenna, Cary D. McMillan, Sheila A. Penrose, John W. Rogers, Jr., Roger W. Stone and Miles D. White.

BOARD COMMITTEES

 

Our Corporate Governance Principles provide for six standing committees: Audit, Compensation, Governance, Sustainability and Corporate Responsibility, Finance and Executive. Committee charters are available on the Company’s website at www.governance.mcdonalds.com.

 

Committee

 

  

Current members

 

  

Primary responsibilities

 

  

 

Number of

2013 meetings

 

Audit   

Enrique Hernandez, Jr.

(Chairman)

 

Walter E. Massey

 

Cary D. McMillan

 

Sheila A. Penrose

 

Roger W. Stone

  

•   Oversees financial reporting, accounting, control and compliance matters.

 

•   Appoints and evaluates the independent auditor.

 

•   Reviews with the internal and independent auditors the scope and results of their audits and the adequacy and effectiveness of internal controls.

 

•   Reviews material financial disclosures.

 

•   Pre-approves all audit and permitted non-audit services.

 

•   Annually reviews the Company’s compliance programs and receives regular updates about compliance matters.

 

•   Annually reviews the Company’s disclosure controls and procedures.

 

   9

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continued

 

Committee

 

  

Current members

 

  

Primary responsibilities

 

  

 

Number of

2013 meetings

 

Compensation   

Robert A. Eckert

(Chairman)

 

Susan E. Arnold

 

Richard H. Lenny

 

John W. Rogers, Jr.

 

Miles D. White

  

•  Approves the CEO’s compensation based upon an evaluation of his performance by the independent Directors.

 

•  Reviews and approves senior management’s compensation and approves compensation guidelines for all other officers.

 

•  Administers incentive and equity compensation plans and, in consultation with senior management, approves compensation policies.

 

•  Reviews executive compensation disclosure.

 

   7
Governance   

Andrew J. McKenna

(Chairman)

 

Robert A. Eckert

 

Enrique Hernandez, Jr.

 

Jeanne P. Jackson

 

Roger W. Stone

 

Miles D. White

  

•  Monitors the Board’s structure and operations.

 

•  Sets criteria for Board membership.

 

•  Searches for and screens candidates to fill Board vacancies and recommends candidates for election.

 

•  Evaluates Director and Board performance and assesses Board composition and size.

 

•  Recommends to the Board non-management Director compensation.

 

•  Evaluates the Company’s corporate governance process.

 

•  Recommends to the Board whether to accept the resignation of incumbent Directors who fail to be re-elected in uncontested elections.

 

   6
Sustainability and Corporate Responsibility   

Walter E. Massey

(Chairman)

 

Susan E. Arnold

 

Richard H. Lenny

 

Sheila A. Penrose

 

John W. Rogers, Jr.

  

•  Oversees the Company’s policies and strategies related to sustainability and corporate responsibility matters that are of significance to the Company and its stakeholders, including matters related to community engagement, diversity, employment, the environment, human rights, public affairs, products, safety and sourcing.

 

•  Beginning in 2014, will report to the Compensation Committee regarding the Company’s progress in the areas of sustainability and corporate responsibility in connection with that Committee’s annual determination of executive compensation.

 

•  Considers shareholder proposals about the Company’s corporate responsibility and sustainability matters.

 

   3

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McDonald’s Corporation 2014    LOGO       49


continued

 

Committee

 

  

Current members

 

  

Primary responsibilities

 

  

 

Number of

2013 meetings

 

Finance   

Jeanne P. Jackson

(Chair)

 

Richard H. Lenny

 

Cary D. McMillan

 

John W. Rogers, Jr.

 

Roger W. Stone

  

•  Reviews the Company’s dividend policy and share repurchase program in light of the Company’s strategy and performance.

 

•  Oversees the Company’s Treasury activities, including reviewing and approving principal financial policies, such as those with respect to derivatives.

 

•  Annually reviews the Company’s banking arrangements.

 

   2
Executive   

Donald Thompson

(Chairman)

 

Robert A. Eckert

 

Enrique Hernandez, Jr.

 

Andrew J. McKenna

 

  

•  May exercise most Board powers during the periods between Board meetings.

   1

MEETING ATTENDANCE

 

Directors are expected to attend the Annual Shareholders’ Meeting and all Board meetings and meetings of the Committees on which they serve. Our Board met six times during 2013. At each regularly scheduled Board meeting, our independent Directors met in executive session. Each Director attended more than 75% of the total number of meetings of the Board and relevant Committees while the Director was a member. All Directors attended the 2013 Annual Shareholders’ Meeting.

GOVERNANCE PRACTICES AND EVALUATIONS

 

The Governance Committee regularly reviews the Company’s Corporate Governance Principles and other governing documents and policies to ensure their appropriateness in light of the Company’s current and expected long-term circumstances. Recently, the Committee undertook a thorough review that benchmarked the Company’s policies and practices in this regard against current practices for other publicly-traded companies. The review also included a study of publicly-available proxy voting policies for several of the Company’s largest investors, proxy advisory services and other survey data. Informed by this review, the Committee continues to believe that the Company’s governance practices are comprehensive and advisable for the long-term interests of the Company and its shareholders.

The Governance Committee conducts an annual evaluation of the performance of the Board of Directors. The Committee also conducts an annual peer evaluation for all of the Directors. In addition, each of the Audit, Compensation, Governance and Sustainability and Corporate Responsibility Committees annually conducts self-evaluations, and the Finance Committee conducts a self-evaluation at least every two years. Results of all evaluations are discussed at appropriate Committee meetings and with the full Board.

CODE OF CONDUCT FOR THE BOARD OF DIRECTORS

 

Each year, Directors confirm that they have read, and will comply with, the Code of Conduct for the Board of Directors.

 

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SHAREHOLDER OUTREACH AND ENGAGEMENT

 

The Company engages with shareholders, including on executive compensation, throughout the year through periodic efforts by management to reach out directly to shareholders. These communications generally cover a variety of topics, often at the request of individual shareholders. Management updates the Board regarding these engagement efforts. For more information on communication with the Board, please see “Communications with the Board of Directors and Non-Management Directors” on page 57.

BOARD RESPONSE TO 2013 SHAREHOLDER PROPOSALS

 

At the 2013 Annual Shareholders’ Meeting, shareholders expressed some support of two advisory proposals; namely (i) requesting a report on McDonald’s process for identifying and analyzing human rights risks in McDonald’s operations, which received support of approximately 28% of shares voted; and (ii) requesting the Board to consider adopting a stock retention policy for executives, which received support of approximately 31% of shares voted.

As part of its oversight responsibilities with respect to human rights generally, and in addressing potential shareholder interest on the matter, the Board’s Sustainability and Corporate Responsibility Committee issued a report on the Committee’s assessment of management’s process for identifying and analyzing human rights risks in McDonald’s operations, among other topics. The report may be found on the Company’s website at http://www.aboutmcdonalds.com/mcd/investors/corporate_governance/board_and_committee_reports.html.

As part of its oversight responsibilities with respect to executive compensation, the Board’s Compensation Committee approves and regularly reviews stock ownership requirements for executives. Informed by the shareholder proposal and as part of its regular consideration of this matter, the Committee determined it would be appropriate to add a retention component for equity awards to the ownership requirements. As a result, the Committee adopted a Stock Ownership and Retention Policy that enhanced the stock ownership requirements to include a retention feature, which is further described under “Policy regarding management’s stock ownership and retention” on page 24.

RISK OVERSIGHT

 

The Board is actively engaged in overseeing and reviewing the Company’s strategic direction and objectives, taking into account (among other considerations) the Company’s risk profile and exposures. The Board conducts an annual in-depth review of the business, which includes consideration of certain risk exposures. In addition, the Board receives regular updates on risk exposures.

Although the Board as a whole has responsibility for risk oversight, including CEO succession planning, the Board’s Committees also oversee the Company’s risk profile and exposures relating to matters within the scope of their authority and report to the Board about their deliberations. The Audit Committee considers audit, accounting and compliance risk, and it receives reports from the head of internal audit, the head of corporate tax, the General Counsel, the Chief Compliance Officer and the Chief Information Officer. The Audit Committee annually reviews the Company’s policies with respect to financial risk assessment and financial risk management. The Audit Committee is also responsible for discussing audit, accounting and compliance risk exposures with management, internal audit and Ernst & Young, and for taking steps to monitor and control such exposures, and for evaluating management’s process to assess and manage enterprise risk issues. The Compensation Committee considers the level of risk posed by our compensation programs, including incentive compensation programs. The Governance Committee monitors potential risks to the effectiveness of the Board, notably Director succession and Board composition. The Sustainability and Corporate Responsibility Committee reviews risks to the business and the Company’s brand reputation that may result from trends in sustainability issues, such as community engagement, diversity, employment, the environment, human rights, public affairs, products, safety and sourcing. The Finance Committee monitors the Company’s risk profile through its review of our worldwide insurance program and other material financial matters.

 

McDonald’s Corporation 2014    LOGO       51


DIRECTOR COMPENSATION

 

The Governance Committee recommends to the Board the form and amount of compensation for non-management Directors. Only non-management Directors are paid for their service on the Board. In 2013, this compensation structure was as follows: (i) an annual cash retainer of $100,000; (ii) an annual retainer fee of $25,000 for each Director serving as Chair of the Audit, Compensation or Governance Committees, and an annual retainer fee of $15,000 for each Director serving as Chair of other Board Committees; and (iii) common stock equivalent units with a $140,000 value granted annually to each Director serving for the entire calendar year, under the Directors’ Deferred Compensation Plan. Directors serving for a portion of the year receive prorated grants of common stock equivalent units.

The Company reimburses non-management Directors for expenses incurred in attending Board, Committee, shareholder and other McDonald’s business meetings. On limited occasions, the Company may permit Directors to be joined by their spouses and reimburses the spouses’ travel expenses. The Company also reimburses expenses for Director continuing education.

The following table summarizes the compensation received by each non-management Director in 2013:

 

Name(a)

 

  

 

Fees earned

or paid in cash (1)

($)(b)

 

    

 

Stock

awards (2)(3)

($)(c)

 

    

 

All other

compensation (4)
($)(g)

 

    

 

Total

($)(h)

 

 

Susan E. Arnold

     $100,000         $140,000         $10,339         $250,339   

Robert A. Eckert

     125,000         140,000         10,348         275,348   

Enrique Hernandez, Jr.

     125,000         140,000         10,348         275,348   

Jeanne P. Jackson

     115,000         140,000         10,348         265,348   

Richard H. Lenny

     100,000         140,000         10,348         250,348   

Walter E. Massey

     115,000         140,000         10,348         265,348   

Andrew J. McKenna (5)

     125,000         900,000         10,348         1,035,348   

Cary D. McMillan

     100,000         140,000         10,348         250,348   

Sheila A. Penrose

     100,000         140,000         10,348         250,348   

John W. Rogers, Jr.

     100,000         140,000         10,348         250,348   

Roger W. Stone

     100,000         140,000         10,348         250,348   

Miles D. White

 

    

 

100,000

 

  

 

    

 

140,000

 

  

 

    

 

10,348

 

  

 

    

 

250,348

 

  

 

 

(1) Non-management Directors may defer all or a portion of their retainer(s) in the form of common stock equivalent units under our Directors’ Deferred Compensation Plan. Such deferrals, as well as the annual grant of common stock equivalent units described in footnote 2 below, are credited to an account that is periodically adjusted to reflect the gains, losses and dividends associated with a notional investment in our common stock. Common stock equivalent units so credited are based on a per-share price equal to the closing price of our common stock on the date of credit. Amounts credited are paid in a single lump-sum cash payment after retirement from the Board or death, or on a date specified by the Director with respect to their deferred retainer(s). If the Director has made a valid prior written election, all or a portion of the credited amount may be paid in equal annual installments over up to 15 years beginning after retirement from the Board.

 

(2) Represents the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (FASB ASC Topic 718) of (i) common stock equivalent units granted under the Directors’ Deferred Compensation Plan on December 31, 2013 to each non-management Director who served on the Board during 2013; and (ii) in the case of Director McKenna, a special grant of 8,637 restricted stock units (RSUs) on June 14, 2013, awarded in recognition of his service as non-executive Chairman of the Board, as described in footnote 5 on page 53.

 

52        LOGO    McDonald’s Corporation 2014


(3) Outstanding stock awards held by each non-management Director as of December 31, 2013 are set forth below. Stock awards include common stock equivalent units under the Directors’ Deferred Compensation Plan and, in the case of Director McKenna, both common stock equivalent units and RSUs.

 

Name

 

  

 

Outstanding stock awards

as of December 31, 2013

 

       

Susan E. Arnold

     10,396      

Robert A. Eckert

     43,611      

Enrique Hernandez, Jr.

     62,127      

Jeanne P. Jackson

     50,820      

Richard H. Lenny

     22,966      

Walter E. Massey

     31,235      

Andrew J. McKenna

     226,096      

Cary D. McMillan

     30,134      

Sheila A. Penrose

     16,425      

John W. Rogers, Jr.

     39,429      

Roger W. Stone

     101,763      

Miles D. White

 

    

 

7,510

 

  

 

    

Outstanding options held by each non-management Director as of December 31, 2013 are set forth below. The Company has not granted options to non-management Directors since May 20, 2004.

 

Name

 

  

 

Outstanding stock options

as of December 31, 2013

 

       

Susan E. Arnold

          

Robert A. Eckert

     5,000      

Enrique Hernandez, Jr.

          

Jeanne P. Jackson

          

Richard H. Lenny

          

Walter E. Massey

          

Andrew J. McKenna

          

Cary D. McMillan

          

Sheila A. Penrose

          

John W. Rogers, Jr.

     5,000      

Roger W. Stone

          

Miles D. White

 

    

 

 

  

 

    

 

(4) Represents Company matching gifts of charitable contributions to tax-exempt organizations for participating non-management Directors and certain personal items with an aggregate value up to $348 that were received in 2013. The matching gift program matches up to $10,000 of charitable contributions made to certain types of tax-exempt organizations. In 2013, total matching contributions were $120,000.

 

(5) The amount reported in the “Stock awards” column represents the sum of (i) the $140,000 credit to Director McKenna’s account under the Directors’ Deferred Compensation Plan on December 31, 2013; and (ii) the aggregate grant date fair value of $760,000 computed in accordance with FASB ASC Topic 718 relating to the special award of 8,637 RSUs described above. These RSUs will be paid out on the later of one year from the date of grant or his retirement date.

 

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Stock ownership

DIRECTOR STOCK OWNERSHIP GUIDELINES AND SENIOR OFFICER STOCK OWNERSHIP AND RETENTION POLICY

 

The Company has established stock ownership guidelines for Directors. The Company also imposes stock ownership and retention requirements for senior officers through its Stock Ownership and Retention Policy. The guidelines and the policy are available on the Company’s website at www.governance.mcdonalds.com, and the requirements for senior officers are discussed in the Compensation Discussion and Analysis section, beginning on page 24.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

 

The following table shows all beneficial owners of more than five percent of the Company’s common stock outstanding as of December 31, 2013:

 

 

Name and address of

beneficial owner

 

  

 

Amount and nature of
beneficial ownership

 

    

 

            Percent of
class (4)

 

       

BlackRock, Inc. (1)

     70,128,178         7.0%      

40 East 52nd Street

        

New York, NY 10022

 

                      

State Street Corporation (2)

     49,971,146         5.0%      

State Street Financial Center

        

One Lincoln Street

        

Boston, MA 02111

 

                      

The Vanguard Group, Inc. (3)

     57,759,626         5.8%      

100 Vanguard Blvd.

        

Malvern, PA 19355

 

                      

 

(1) Reflects shares deemed to be beneficially owned by BlackRock, Inc. (BlackRock), directly or through its subsidiaries, as of December 31, 2013, according to a statement on Schedule 13G/A filed with the SEC on February 10, 2014, which indicates that BlackRock, a parent holding company, has sole voting power with respect to 58,528,445 of the shares and sole dispositive power with respect to all of the shares. The Schedule 13G/A certifies that the securities were acquired in the ordinary course and not with the purpose or with the effect of changing or influencing the control of the Company.

 

(2) Reflects shares deemed to be beneficially owned by State Street Corporation (State Street), directly or through its subsidiaries, as of December 31, 2013, according to a statement on Schedule 13G filed with the SEC on February 3, 2014, which indicates that State Street, a parent holding company, has shared voting power and shared dispositive power with respect to all of the shares. The Schedule 13G certifies that the securities were acquired in the ordinary course and not with the purpose or with the effect of changing or influencing the control of the Company.

 

(3) Reflects shares deemed to be beneficially owned by The Vanguard Group, Inc. (Vanguard), directly or through its subsidiaries, as of December 31, 2013, according to a statement on Schedule 13G filed with the SEC on February 11, 2014, which indicates that Vanguard, an investment adviser, has sole voting power with respect to 1,628,405 of the shares, sole dispositive power with respect to 56,237,768 of the shares and shared dispositive power with respect to 1,521,858 of the shares. The Schedule 13G certifies that the securities were acquired in the ordinary course and not with the purpose or with the effect of changing or influencing the control of the Company.

 

(4) Based on the number of outstanding shares of common stock on December 31, 2013.

 

54        LOGO    McDonald’s Corporation 2014


SECURITY OWNERSHIP OF MANAGEMENT

 

The following table shows the ownership of the common stock and common stock equivalent units for the named individuals and the group as of March 1, 2014. Directors and executive officers as a group owned (directly, indirectly and through benefit plans) less than 1.0% of the Company’s common stock:

 

                                                                                                                   

Name

 

  

 

Common stock

(1)(2)(3)(4)(5)

 

    

Stock equivalents

(6)

 

    

Total

 

       

Susan E. Arnold

             10,396         10,396      

Peter J. Bensen

     236,755         22,055         258,810      

Robert A. Eckert

     15,000         43,611         58,611      

Timothy J. Fenton

     202,298         11,218         213,516      

Douglas M. Goare

     107,787         5,399         113,186      

Enrique Hernandez, Jr.

     2,000         62,127         64,127      

David L. Hoffmann

     60,019         1,105         61,124      

Jeanne P. Jackson

     1,666         50,820         52,486      

Richard H. Lenny

     2,288         22,966         25,254      

Walter E. Massey

     5,750         31,235         36,985      

Andrew J. McKenna

     49,408         226,096         275,504      

Cary D. McMillan

     3,919         30,134         34,053      

Sheila A. Penrose

     3,000         16,425         19,425      

John W. Rogers, Jr.

     92,600         39,429         132,029      

Roger W. Stone

     6,800         101,763         108,563      

Donald Thompson

     532,034         13,787         545,821      

Miles D. White

     5,000         7,510         12,510      

Directors and executive

officers as a group

(the Group) (24 persons)

 

    

 

2,034,580

 

  

 

    

 

790,203

 

  

 

    

 

2,824,783

 

  

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