DEF 14A 1 ss170887_def14a.htm DEFINITIVE PROXY STATEMENT
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

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Quest Diagnostics Incorporated


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Action from Insight

 

V I S I O N

Empowering better health 
with diagnostic insights

 

2 - P O I N T
S T R A T E G Y

Accelerate growth 

• Grow General Diagnostics

• Expand Advanced Diagnostics 

• Extend Diagnostic Services

Drive operational excellence

• Enhance the Quest customer experience

• Deliver Invigorate operational efficiencies

 

 

G O A L S

Promote a healthier world

Build value

Create an inspiring workplace

 

 

 

 

 

 

H O W  W E  O P E R A T E
 
Our principles Our behaviors Our values

• Focus on diagnostic information services

 

• Strengthen organizational capabilities

 

 Deliver disciplined capital deployment

 

• Agile

 

• Customer Focused

 

• Transparent

 

• United as One Team

 

• Performance Oriented

 

• Quality

 

• Integrity

 

• Innovation

 

• Accountability

 

• Collaboration

 

• Leadership

 

   

 

 

 

 

Notice of 2020 Annual Meeting of Stockholders


Quest Diagnostics Incorporated

500 Plaza Drive

Secaucus, New Jersey

May 19, 2020, 10:30 a.m. local time

 

As part of our precautions regarding the coronavirus, or COVID-19, we are planning for the possibility that the annual meeting may be held solely by means of virtual communication. If we take this step, we will publicly announce the decision to do so in advance by press release, which will be posted on our website at www.questdiagnostics.com, as soon as practicable before the meeting. In that event, the annual meeting would be conducted virtually, on the above date and time, via live audio webcast. Details on how you can participate in the annual meeting will be available at www.CESvote.com, including information on how you can vote your shares if you elect not to do so in advance of the annual meeting.

 

April 8, 2020

 

Dear Fellow Stockholder:

 

It is our pleasure to invite you to attend Quest Diagnostics’ 2020 Annual Meeting of Stockholders. At the meeting, stockholders will vote:

 

to elect ten directors;

 

to approve, on an advisory basis, the executive officer compensation disclosed in the Company’s 2020 proxy statement; and

 

to ratify the appointment of our independent registered public accounting firm for 2020.

 

 

Stockholders also will transact any other business as may properly come before the meeting or any adjournment or postponement thereof.

 

Attendance at the meeting is limited to stockholders at the close of business on March 20, 2020, or their duly appointed proxy holder.

 

We enclose our proxy statement, our Annual Report and a proxy card; distribution of these materials is scheduled to begin on April 8, 2020. Your vote is very important. We urge you to submit your proxy even if you plan to attend the annual meeting. Most stockholders may submit a proxy via mail, telephone or the Internet. Instructions on how to submit your proxy are included with your proxy card and these proxy materials. Please submit your proxy promptly.

 

Thank you for your continued support of Quest Diagnostics.

 

Sincerely,

   
Stephen H. Rusckowski   Daniel C. Stanzione, Ph.D.

Chairman of the Board,

Chief Executive Officer and President

  Lead Independent Director

 

   

 

 

PROXY SUMMARY

 

This summary highlights information contained elsewhere in this proxy statement. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting.

 

2020 Annual Meeting of Stockholders

 

Time and Date: 10:30 a.m., May 19, 2020
   
Place:

Quest Diagnostics Incorporated

500 Plaza Drive, Secaucus, NJ 07094

   
Record date: March 20, 2020
   
Voting:

Record date stockholders only;

One vote per share

 

As part of our precautions regarding the coronavirus, or COVID-19, we are planning for the possibility that the annual meeting may be held solely by means of virtual communication. If we take this step, we will publicly announce the decision to do so in advance by press release, which will be posted on our website at www.questdiagnostics.com, as soon as practicable before the meeting. In that event, the annual meeting would be conducted virtually, on the above date and time, via live audio webcast. Details on how you can participate in the annual meeting will be available at www.CESvote.com, including information on how you can vote your shares if you elect not to do so in advance of the annual meeting.

 

Meeting Agenda Our Board’s Recommendation
   
1.    Elect ten directors FOR EACH DIRECTOR NOMINEE
   
2.    Approve, on an advisory basis, the executive officer compensation disclosed in our 2020 proxy statement FOR
   
3.    Ratify the appointment of our independent registered public accounting firm for 2020 FOR
   

Board Proposals

 

Advisory Resolution to Approve Executive Officer Compensation. We are asking our stockholders to approve, on an advisory basis, the compensation of our named executive officers disclosed in our 2020 proxy statement.

 

Ratify the Appointment of Independent Registered Public Accounting Firm for 2020. We are asking our stockholders to ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2020.

 

2021 Annual Meeting of Stockholders

 

Stockholder proposals submitted pursuant to SEC Rule 14a-8 must be received by the Company by December 9, 2020. 

 

Notice of stockholder proposals outside of SEC Rule 14a-8, including nominations (other than proxy access nominations) for the Board of Directors (the “Board”), must be received by the Company no earlier than January 19, 2021 and no later than February 18, 2021.

 

Notice of proxy access director nominations must be received by the Company no earlier than November 9, 2020 and no later than December 9, 2020. 

 

    i 03     2020 Proxy Statement
   

 

Board Nominees

 

The following table provides summary information about our director nominees.

 

 

          Other Public
    Director   Committee Company
Name Age Since Occupation Memberships Boards
           
Vicky B. Gregg 65 2014 Partner, CC • Acadia Healthcare Company
      Guidon Partners LLC and QSC  
      Retired CEO,    
      Blue Cross and Blue    
      Shield of Tennessee    
           
Wright L. Lassiter III 56 2020 President and CEO, QSC  
      Henry Ford Health    
      System    
           
Timothy L. Main 62 2014 Chairman, AFC • Jabil Circuit, Inc.
      Jabil Circuit, Inc. GC  
        CS (Chair)  
           
Denise M. Morrison 66 2019 Founder, Denise CC • Visa, Inc.
      Morrison & Associates and QSC • MetLife, Inc.
      Retired President      
      and CEO,    
      Campbell Soup    
      Company    
Gary M. Pfeiffer 70 2004 Retired Senior AFC/FE (Chair) • Internap Corporation
      Vice President GC  
      and Chief EX  
      Financial Officer, CS  
      E.I. du Pont de    
      Nemours and Company    
Timothy M. Ring 62 2011 Retired Chairman and CC (Chair) • Becton, Dickinson and
      CEO, GC  Company
       C. R. Bard, Inc.    
           
Stephen H. Rusckowski 62 2012 Chairman, CEO EX •N/A
      and President,    
      Quest Diagnostics    
       Incorporated    
           
Daniel C. Stanzione, Ph.D. 74 1997 President Emeritus, AFC •N/A
      Bell Laboratories GC (Chair)  
        EX (Chair)  
        CS  
           
Helen I. Torley, M.B. Ch.B, 57 2018 President and CEO, CC • Halozyme Therapeutics, Inc.
 M.R.C.P.     Halozyme QSC  
      Therapeutics, Inc.    
           
           
Gail R. Wilensky, Ph.D. 76 1997 Senior Fellow, AFC • UnitedHealth Group
      Project Hope GC • ViewRay, Inc.
        QSC (Chair)  
           

 

 

 

AFC Audit & Finance Committee FE Financial Expert
CC Compensation Committee GC Governance Committee
EX Executive Committee QSC Quality, Safety and Compliance Committee
CS Cybersecurity Committee    

 

03     2020 Proxy Statement ii  
   

 

2019 Executive Compensation Highlights

 

Type   Form       Terms
             
Equity Performance Shares 40% of total Performance metrics for 2019-2021 performance
        equity award   cycle: revenue growth, 50%; average return on
            invested capital, 50%
          Vest after 3-year performance period
  Stock Options 40% of total Vest ratably over three years from the grant date
        equity award    
  Restricted Share Units 20% of total Vest 25% on each of the first and second
        equity award   anniversaries of the grant date and 50% on the third
            anniversary of the grant date
Cash Salary     Reviewed and approved annually
 

Annual Incentive Compensation

 

Based on financial and non-financial goals
Retirement 401(k) Plan Company matching contributions
  Supplemental Deferred Compensation Plan Company matching contributions

 

Our Board is firmly committed to pay for performance. The table above outlines the main components of our compensation program for executive officers in 2019. We are making changes in the program, highlighted in the Compensation Discussion and Analysis, for 2020. The objectives of our program are to attract and retain talented executives who have the skills and experience required to help us achieve our strategic objectives, and to align the interests of our executives to those of our stockholders, in each case to advance the long-term interests of our stockholders. The compensation opportunity for our named executive officers is directly tied to corporate performance, including both financial and non-financial results, and individual performance.

 

The average 2019 annual incentive payout for our named executive officers (excluding the annual incentive payment to Mr. Mendez, because it was set at a guaranteed level as part of his recruitment package in late 2019) on our annual cash incentives under the Senior Management Incentive Plan (“SMIP”) was 83% of target. Payout on performance share awards for the 3-year performance period ended December 31, 2019 was 80% of target. The following table summarizes annual incentive plan and performance share payouts for the two most recent performance periods for our named executive officers.

 

    Performance Share
    Payout for 3-year
  Annual Incentive Payout performance period
Incentive Program (% of target) (% of target)
     
Performance period ended December 31, 2019 83 (average) 80
Performance period ended December 31, 2018 48 85

 

Our Compensation Discussion and Analysis, which includes a discussion of our program’s “Best Practices,” begins on page 24. The 2019 compensation of our named executive officers is set forth in tables beginning at page 45.

 

2019 Business Performance Highlights

 

2-Point Strategy

 

In 2019, we continued to make progress executing our business strategy and delivered on our commitments. We improved on financial and operating metrics and met several key financial targets, despite continuing to face challenges as a result of increased reimbursement headwinds, including from the Protecting Access to Medicare Act. Our Compensation Discussion and Analysis, beginning on page 24, discusses our 2019 business performance.

 

    iii 03     2020 Proxy Statement
   

 

The following highlights 2019 progress on our 2-point strategy.

 

Accelerate Growth

·In 2019, we increased revenues by 2.6% and achieved record full year revenues of $7.73 billion.
·Effective January 1, 2019, we established a long-term strategic partnership with UnitedHealthcare, including collaboration on a variety of value-based programs, became a preferred provider to Horizon Blue Cross Blue Shield of New Jersey for most products, and became a participating provider to Blue Cross Blue Shield of Georgia. Effective July 1, 2019, we were selected to be one of only five lab companies named participants in the UnitedHealthcare Preferred Lab Network. These partnerships expand our in-network reach to 43 million additional lives.
·We forged several new strategic relationships; continued to expand our pipeline of hospitals and independent delivery networks interested in working with us; and implemented new professional laboratory services relationships with Catholic Health Services of Long Island and Regional Medical Center of Orangeburg, South Carolina.
·We also fostered growth with clinical franchises, including tuberculosis and sexually transmitted disease testing in our infectious disease and immunology offerings, prescription drug monitoring and toxicology testing, HemePath blood cancer testing and Cardio IQ® testing.
·We made progress in 2019 executing our strategy to be the provider of choice for consumers, including advancing our consumer-centric initiatives such as: our partnerships with Walmart and Safeway to expand access to testing and a partnership with Walmart to expand access to basic healthcare services; increasing the number of registered users in the MyQuest app to over 8.7 million; making QuestDirectTM, a service that allows consumers to order their own tests, available in nearly all states; and improving on-line pre-registration and appointment scheduling.
·In collaboration with hc1, the bioinformatics leader in precision testing, we introduced Quest Lab StewardshipTM, an innovative new service that employs machine learning to help optimize laboratory test utilization.

 

Drive Operational Excellence.

·In 2019, we made strong progress on our operational efficiency initiatives.
·We continued to drive productivity improvements (e.g., improved electronic order rates; increased electronic enabling of our workflow) across logistics, consumer services, and lab services, enabling us to reduce our overall costs per lab requisition.
·We also began implementation of our program to consolidate and simplify our immunoassay platforms, moving to a single supplier to provide greater throughput, autonomy and a more efficient footprint.
·We continued to make progress on our lab system optimization through investments in our new 250,000 square foot flagship laboratory in Clifton, New Jersey, which will provide greater capacity, increased throughput and improved productivity.
·Through our Invigorate cost excellence program, we aim to save approximately 3% of our costs annually, and in 2019 we achieved that goal.

 

3 Operating Principles

 

The following are highlights on our three operating principles: strengthening organizational capabilities, remaining focused on diagnostic information services, and delivering disciplined capital deployment.

 

03     2020 Proxy Statement iv  
   

 

Strengthen organizational capabilities.

·We continued to use the Quest Management System, which provides a foundation for day-to-day management and includes best-in-class business performance tools to help develop new capabilities and support our efforts to build a high-performance culture.
·Our entire organization continued participation in our Everyday Excellence program, which includes guiding principles to support a superior customer experience, and to inspire our employees to be their best every day, with every person and with every customer interaction. These principles are integrated into our performance assessments and frontline employee behavioral standards.
·We continued to offer leadership training and development programs, which are designed to strengthen our more senior employee leaders and other employees, to create a high-performance culture and sharpen the capabilities needed to lead our organization.

 

Remain focused on diagnostic information services. We maintained a sharp focus on providing diagnostic information services in 2019.

 

Deliver disciplined capital deployment.

·We returned a majority of our free cash flow to stockholders through dividends and repurchases of our common stock.
·In January 2020, we announced the ninth increase in our quarterly common stock cash dividend since 2011, increasing the dividend by approximately 6%, from $0.53 per common share to $0.56 per common share.
·We consummated the acquisition of certain assets of the clinical laboratory services business of Boyce & Bynum Pathology Laboratories, P.C.
·We have returned approximately $3.1 billion to stockholders through common stock repurchases since the beginning of 2013.

 

 

    v 03     2020 Proxy Statement
   

 

 

 

PROXY STATEMENT

QUEST DIAGNOSTICS INCORPORATED

500 Plaza Drive, Secaucus, New Jersey 07094

 

    Page
Proxy Summary   i
Information About Our Corporate Governance   1
Proposal No. 1—Election of Directors   1
Governance Practices   7
Inclusion, Diversity and Corporate Social and Environmental Responsibility   8
Director Independence   8
Stockholder Access   9
Board Nomination Process   10
Board Committees   13
Board Leadership Structure   16
Board Oversight of Company Culture   17
Board, Committee and CEO Evaluation Process   17
Board Role in Risk Oversight   17
Related Person Transactions   18
Policies Regarding Hedging and Pledging our Common Stock   19
2019 Director Compensation Table   19
Stock Ownership Information   21
Information Regarding Executive Compensation   23
Proposal No. 2—Advisory Resolution to Approve Executive Officer Compensation   23
Compensation Discussion and Analysis   24
Executive Summary   24
Executive Compensation Philosophy   27
Setting Executive Compensation   31
Pay Components   32
Base Salary   32
Annual Cash Incentive Compensation   32
Long-Term Incentive Awards   37
Other   42
Executive Share Ownership and Retention Guidelines   43
Policies Regarding Hedging our Common Stock   44
Compensation Committee Report   44
2019 Summary Compensation Table   45
2019 Grants of Plan-Based Awards Table   46
Additional Information Regarding 2019 Summary Compensation and Grants of Plan-Based Awards Tables   47
Outstanding Equity Awards at 2019 Fiscal Year-End   49
2019 Option Exercises and Stock Vested Table   50
2019 Nonqualified Deferred Compensation Table   51
2019 Potential Payments Upon Termination or Change in Control   52
Pay Ratio   55
Delinquent Section 16(a) Reports   55
Equity Compensation Plan Information   55
Audit   57
Proposal No. 3—Ratification of Appointment of Independent Registered Public Accounting Firm   57
Pre-Approval of Audit and Permissible Non-Audit Services   58
Fees and Services of PricewaterhouseCoopers LLP   59
Audit and Finance Committee Report   60
Frequently Asked Questions   61
Annex A Reconciliation of Non-GAAP and GAAP Information   A-1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

INFORMATION ABOUT OUR CORPORATE GOVERNANCE

 

Proposal No. 1—Election of Directors

 

The Board of Directors recommends that you vote

FOR each of the nominees described below

 

Our Board has ten directors. Directors are elected annually for a one-year term concluding on the date of the next subsequent annual meeting of stockholders. Each director holds office until his or her successor has been elected and qualified or the director’s earlier resignation, death or removal.

 

After considering the recommendation of the Governance Committee, the Board nominated the nominees below to serve as directors of Quest Diagnostics Incorporated (“Quest Diagnostics,” the “Company,” “we” or “our”). Each nominee currently is a director of the Company whose term expires at the 2020 annual meeting of stockholders (the “annual meeting”). The biography of each nominee contains information regarding the person’s service as a director of the Company, business experience, other public company director positions and the experience, qualifications, attributes and skills that led the Board to conclude that the person should serve as a director of the Company. The Board believes that each nominee possesses the qualities and experience that nominees should possess in accordance with the Company’s Corporate Governance Guidelines, which set forth the Company’s philosophy regarding Board composition and identify key qualifications and other considerations for the nomination of directors (the relevant portion of the Company’s Corporate Governance Guidelines is set forth below under the heading “Board Nomination Process” beginning on page 10). Each nominee has consented to serve if elected.

 

 

 

Vicky B. Gregg
     

 

Partner

Guidon Partners LLC

Retired CEO

Blue Cross and Blue Shield of Tennessee

 

Age: 65

Director since: 2014

 

Ms. Gregg is a partner with Guidon Partners LLC. She retired as Chief Executive Officer of Blue Cross Blue Shield of Tennessee in 2012. Prior to becoming CEO in 2003, Ms. Gregg served in a number of other leadership roles, including President and Chief Operating Officer. Before that, she held a series of senior roles at Humana Health Plans. Ms. Gregg served as a member of the U.S. National Institutes of Health Commission on Systemic Interoperability. She currently serves on the boards of Acadia Healthcare Company, Inc. and the Electric Power Board of Chattanooga, as well as the boards of several private companies. Previously, Ms. Gregg served on several national boards, including TeamHealth Holdings, Inc. from 2013 to 2017 and First Horizon National Corporation from 2011 to 2015. She has also served as Chair of America’s Health Insurance Plans, as a member of the BlueCross BlueShield Association, as Chair of the Board of the National Institute for Healthcare Management, and as a member of the Healthcare Leadership Council.

 

Qualifications, Skills and Expertise

 

Ms. Gregg has extensive executive and advisory experience, including in general management and strategic planning, with a range of health care organizations, and extensive experience with healthcare issues and the operation of the U.S. healthcare system, including as a practicing nurse.

 

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Wright L. Lassiter III
     

Lassiter III Wright sm

 

President and CEO
Henry Ford Health System.

 

Age: 56

Director since: 2020

 

Mr. Lassiter is President and CEO of Henry Ford Health System, a Michigan based health system comprised of six hospitals, a health plan and a wide range of ambulatory and retail and related health services. Mr. Lassiter joined Henry Ford Health System in December 2014 as President and assumed the additional role of CEO in 2016. Prior to joining Henry Ford Health System, he was CEO of Alameda Health System in Oakland, California from 2005 to 2014. Mr. Lassiter currently serves as Board Vice Chair for the Federal Reserve Bank of Chicago, chairs its Governance and Nominating Committee, and also serves on its Audit Committee. He also serves on the board of the Henry Ford Health System and several non-profit organizations, including Invest Detroit, LeMoyne College, Motown Museum, Downtown Detroit Partnership and Detroit Regional Chamber of Commerce. Mr. Lassiter has extensive executive experience in the U.S. healthcare system, including in governance, strategic planning, market expansion, mergers and acquisitions, performance improvement and corporate turnaround.

 

Qualifications, Skills and Expertise

 

Mr. Lassiter has extensive executive experience in the U.S. healthcare system, including in governance, strategic planning, market expansion, mergers and acquisitions, performance improvement and corporate turnaround.

 

 


Timothy L. Main
     

 

Chairman
Jabil Circuit, Inc.

 

Age: 62

Director since: 2014

 

Mr. Main is Chairman of the Board of Directors of Jabil Circuit, Inc., an electronic product solutions company providing comprehensive electronics design, manufacturing and management services to global electronics and technology companies. Mr. Main was Chief Executive Officer of Jabil from 2000 until 2013. As CEO, Mr. Main led Jabil’s growth strategy, increasing annual revenues nearly five-fold to reach $17 billion in 2012, and expanding in Asia and other emerging markets.

 

Qualifications, Skills and Expertise

 

Mr. Main has extensive executive experience, including in international, capital markets, technology, operations, corporate governance, strategic planning and general management in a complex industry.

 

03     2020 Proxy Statement 2  
   

 

 

Denise M. Morrison
     

 

Founder, Denise Morrison & Associates

Retired President and CEO

Campbell Soup Company

 

Age: 66

Director since: 2019

 

Ms. Morrison is the founder of Denise Morrison & Associates, LLC, a consulting firm. She retired in 2018 as the President and Chief Executive Officer of Campbell Soup Company. Ms. Morrison joined Campbell in 2003, where she held positions of increasing responsibility. Prior to joining Campbell, she held executive management positions at Kraft Foods, Inc. from 2001 to 2003. Ms. Morrison is a director of Visa, Inc. and MetLife, Inc., and served as a director of Campbell Soup Company from 2010 to 2018 and a director of The Goodyear Tire & Rubber Company from 2005 to 2010. She is a member of the Board of Trustees for Boston College, the Advisory Counsel for Just Capital, and the Advisory Board for Tufts Friedman School of Nutrition Science and Policy and is a member of The Business Council. Ms. Morrison served on President Trump’s Manufacturing Jobs Initiative as well as President Obama’s Export Council.

 

Qualifications, Skills and Expertise

 

Ms. Morrison has extensive executive experience, including in consumer focus, corporate governance, general management and strategic planning, operations and marketing, with multinational corporations operating in consumer-focused, regulated industries.

 

 

Gary M. Pfeiffer
     

 

Retired Senior
Vice President
and CFO

E.I. du Pont de Nemours and Company

 

Age: 70

Director since: 2004

 

Mr. Pfeiffer retired in 2006 as the Senior Vice President and Chief Financial Officer of E.I. du Pont de Nemours and Company. He joined DuPont in 1974, where he held positions of increasing responsibility in finance and international operations, as well as in various DuPont divisions. Mr. Pfeiffer served as Secretary of Finance for the state of Delaware from January through June 2009. Mr. Pfeiffer is Lead Independent Director of Internap Corporation, and served as a director of TerraVia Holdings, Inc. from 2014 to 2017 and Talbots, Inc. from 2005 to 2012. He served as the non-executive Chair of the Board of Directors of Christiana Care Health System, a regional hospital system located in Delaware, from 2012 to 2016.

 

Qualifications, Skills and Expertise

 

Mr. Pfeiffer has extensive executive experience, including in capital markets, corporate finance, accounting, international operations, and strategic planning, with a multinational corporation operating in complex industries.

 

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Timothy M. Ring
     

 

Retired Chairman and CEO

C. R. Bard, Inc.

 

Age: 62

Director since: 2011

 

Mr. Ring retired in 2017 as Chairman and Chief Executive Officer of C. R. Bard, Inc., positions in which he had served since 2003. He is a director of Becton, Dickinson and Company, and was director of C. R. Bard, Inc. from 2003 to 2017 and CIT Group Inc. from 2005 to 2009. Mr. Ring is a co-founder of TeamFund, Inc., an impact fund and non-profit focused on delivering medical technology to Sub-Saharan Africa and India.

 

Qualifications, Skills and Expertise

 

Mr. Ring has extensive executive experience, including in strategic planning and international operations, with a multinational corporation operating in the healthcare industry.

 

 

Stephen H. Rusckowski
     

 

 

Chairman,
CEO and President
Quest Diagnostics Incorporated

 

Age: 62

Director since: 2012

 

Mr. Rusckowski has been Chief Executive Officer and President of Quest Diagnostics since May 2012 and Chairman of the Board since January 2017. From November 2006 to May 2012, Mr. Rusckowski was the Chief Executive Officer of Philips Healthcare, the largest unit of Royal Philips Electronics, and a member of the Board of Management of Royal Philips Electronics and its Executive Committee. He joined Philips when it acquired Agilent’s Healthcare Solutions Group in 2001, and was the CEO of Philips Imaging Systems business group before assuming his role as CEO of Philips Healthcare. Mr. Rusckowski served as the Chairman of the American Clinical Laboratory Association from March 2014 to March 2017. He was a director of Xerox Corporation from 2015 to 2018 and was a director of Covidien plc from December 2013 to January 2015.

 

Qualifications, Skills and Expertise

 

Mr. Rusckowski has extensive executive experience, including in strategic planning and international operations, with multinational corporations operating in the healthcare industry.

 

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Daniel C. Stanzione, Ph.D.
     

 

President Emeritus Bell Laboratories

 

Age: 74

Director since: 1997

 

Dr. Stanzione retired from Lucent Technologies Incorporated in 2000 and is President Emeritus of Bell Laboratories and an independent consultant. Dr. Stanzione began his career in 1972 with Bell Laboratories, where he led the teams working on the first microprocessors and digital signal processors. He was appointed President of Network Systems, Lucent’s largest business unit, in 1996 and was appointed Chief Operating Officer of Lucent in 1997. Dr. Stanzione served as a director of Internap Corporation from 2005 to 2018 and served as a director of Avaya Inc. from 2000 until 2007. He has served on the boards of a number of private companies and currently is a director of Catheter Precision, Inc. Dr. Stanzione has been Lead Independent Director since January 1, 2017 and served as Chairman from May 1, 2012 until January 1, 2017.

 

Qualifications, Skills and Expertise

 

Dr. Stanzione has extensive executive experience, including in corporate governance, general management and strategic planning, with multinational corporations operating in complex industries.

 

 

Helen I. Torley, M.B. Ch.B., M.R.C.P
     

 

President

and CEO

Halozyme Therapeutics, Inc.

 

Age: 57

Director since: 2018

 

Dr. Torley has, since 2014, been President and Chief Executive Officer of Halozyme Therapeutics, Inc., a biotechnology company focused on novel biological and drug delivery approaches. Prior to joining Halozyme, Dr. Torley served as Executive Vice President and Chief Commercial Officer for Onyx Pharmaceuticals from August 2011 to December 2013, where she was responsible for the development of Onyx’s commercial capabilities in the United States, Europe and Asia Pacific regions. Prior to Onyx, Dr. Torley spent 10 years in management positions at Amgen Inc., most recently serving as Vice President and General Manager of the US Nephrology business unit from 2003 to 2009 and the U.S. Bone Health business unit from 2009 to 2011. Prior to 2003, she held various senior management positions at Bristol-Myers Squibb and Sandoz/Novartis, and was in medical practice as a senior registrar in rheumatology at the Royal Infirmary in Glasgow, Scotland. Dr. Torley is a director of Halozyme Therapeutics, Inc., and she served as a director of Relypsa, Inc. from 2015 to 2016.

 

Qualifications, Skills and Expertise

Dr. Torley has extensive executive experience, including in general management, strategic planning and commercial operations, with multinational corporations operating in the healthcare industry.

 

 

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Gail R. Wilensky, Ph.D.
     

 

Senior Fellow
Project Hope

 

Age: 76

Director since: 1997

 

Dr. Wilensky is a Senior Fellow at Project HOPE, an international non-profit health foundation, which she joined in 1993. From 2008 through 2009, Dr. Wilensky served as President of the Defense Health Board, an advisory board in the Department of Defense. From 1997 to 2001, she was the chair of the Medicare Payment Advisory Commission. From 1995 to 1997, she chaired the Physician Payment Review Commission. In 1992 and 1993, Dr. Wilensky served as a deputy assistant to the President of the United States for policy development relating to health and welfare issues. From 1990 to 1992, she was the administrator of the Health Care Financing Administration where she directed the Medicare and Medicaid programs. Dr. Wilensky is a director of UnitedHealth Group and ViewRay, Inc. She served as a director of Manor Care Inc. from 1998 until 2009, Gentiva Health Services, Inc. from 2000 until 2009, Cephalon Inc. from 2002 to 2011 and SRA International, Inc. from 2005 to 2011. Dr. Wilensky also served as a Commissioner of the World Health Organization’s Commission on the Social Determinants of Health and as the Non-Department Co-Chair of the Defense Department’s Task Force on the Future of Military Health Care.

 

Qualifications, Skills and Expertise

 

Dr. Wilensky has extensive experience, including in strategic planning, as a senior advisor to the U.S. government and private enterprises regarding healthcare issues and the operation of the U.S. healthcare system.

       

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH NOMINEE. PROXIES SOLICITED BY THE BOARD WILL BE VOTED FOR EACH NOMINEE UNLESS OTHERWISE INSTRUCTED.

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Governance Practices

 

The Board believes that good corporate governance, designed to protect and enhance stockholder value, is important. The Company has strong corporate governance structures, processes, policies and practices. We engage with our stockholders and listen to their concerns. Our Board benefits from knowledgeable independent directors.

 

The Board has adopted Corporate Governance Guidelines to enhance its own effectiveness and to demonstrate its commitment to strong corporate governance for the Company. The Board reviews these Guidelines no less frequently than annually, including in response to changing regulatory requirements, evolving practices and the concerns of our stockholders. The Company also has adopted a Code of Ethics applicable to all directors, officers and employees. The Corporate Governance Guidelines and Code of Ethics are published on our website at www.QuestDiagnostics.com.

 

Corporate Governance Highlights
Board Practice
Commitment to board refreshment – 6 new directors since 2014, each with significant CEO experience
9 of 10 directors are independent
5 of 10 directors are women or ethnically diverse
Established ad hoc Cybersecurity Committee of the Board in 2019
Annual election of entire board
Majority voting standard for director elections
Annual assessment of Board and Committee structure and performance
Lead Independent Director with clearly defined role and robust responsibilities
Regular executive sessions for independent directors only, presided over by Lead Independent Director

Independent directors receive a majority of their annual compensation in equity to further align their interests with our stockholders’ interests

Committee assignments are regularly reviewed and selected with a view to continuity and diversity
Annual reviews of succession planning and development of management personnel
   
Stockholder Matters
Proxy access right for stockholders
Stockholder right to call a special meeting of stockholders
No “poison pill” stockholders’ rights plan
No supermajority voting requirements
Annual say-on-pay vote
Active stockholder engagement
   
Procedural Best Practices
Committees report on their activities to the Board at each Board meeting
Director education programs conducted by third parties provided for our directors
Public disclosure of corporate political contributions policy and information regarding corporate political expenditures
Board materials provided to directors in advance of meetings to allow preparation for discussion of items
Board portal enhances the Board’s efficiency, access to information, security and communication
Independent directors have unlimited access to officers and employees of the Company
Board and committees have access to and the authority to retain independent legal, financial or other advisors

 

    7 03     2020 Proxy Statement
   

 

Inclusion, Diversity and Corporate Social and Environmental Responsibility

 

The Company and the Board take seriously the responsibility of corporate stewardship, which includes promoting a healthier world, building value for all stakeholders, and creating an inspiring and inclusive workplace. The Company has a deep commitment to its patients, employees, communities and the environment. The Company aims to do business in an environmentally sustainable, socially responsible manner and make a difference in the communities in which it operates.

 

Inclusion, Diversity, and Corporate Social and Environmental Responsibility Highlights
Awards and Recognition
Named as one of Fortune’s World’s Most Admired Companies in 2020 for the sixth consecutive year

Received a perfect score on the Human Rights Campaign Foundation Corporate Equality Index 2020 earning the distinction of being a Best Place to Work for LGBTQ Equality

Ranked as one of Forbes America’s Best Employers
Achieved Gold status in American Heart Association’s Workplace Health Achievement Index in 2019 and 2018
Included on the annual Newsweek Green Rankings for the 6th consecutive year
Achieved Cancer Gold Standard accreditation from the CEO Roundtable on Cancer
Included in the Dow Jones Sustainability Index from 2004 (DJSI World) and 2005 (North America Index) to 2019
Named a DiversityInc Noteworthy Company in 2017, 2018 and 2019
Promoting a Healthier World, Building Value, and Creating an Inspiring Workplace
More than 70% of employees are women and more than 50% of employees are ethnically diverse.

Nine Employee Business Networks (including African-American Business Leaders, DiverseAbilities, Hispanic/Latino and Women in Leadership) work closely with talent acquisition team to bring in diverse talent and support them through targeted mentoring and training programs

GreenQuest Sustainability Policy works to conserve resources and minimize the negative impact of our operations and facilities on the environment through pollution prevention, energy efficiency, fleet conservation, and strategic sourcing.

Environment, Health and Safety program reduces risk of employee injury
Patient Assistance Program tailors solutions for uninsured or underinsured patients based on individual circumstances

“Action with Integrity” Code of Ethics reflects the Company’s commitment to operate as a trustworthy, transparent and ethical organization

Collaborations with nonprofit organizations improve access to care through donated services, charitable giving, and thought leadership

Employee volunteer program Quest Community Action Network, with chapters across the country, has raised millions of dollars for worthwhile causes

Further support employee service with the Company’s “Dollars for Doers” and Matching Gifts program, which provide grants to nonprofit organizations that share the Company’s commitment to empowering better health

 

More information regarding the Company’s commitment to inclusion and diversity and corporate, social and environmental responsibility can be found in the Company’s annual Inclusion, Diversity & Corporate Social Responsibility Report, which is available on the Company’s website at www.QuestDiagnostics.com.

 

Director Independence

 

The Board assesses the independence of each director annually, and of each director nominee, in accordance with the Company’s Corporate Governance Guidelines and New York Stock Exchange (“NYSE”) listing standards. The independence guidelines in the Corporate Governance Guidelines are consistent with the independence requirements in the NYSE listing standards and include guidelines as to categories of relationships that are considered not material for purposes of director independence.

 

All members of the Audit and Finance Committee, the Governance Committee, and the Compensation Committee must be independent under NYSE listing standards and the Company’s Corporate Governance Guidelines. Pursuant to the charters of the Audit and Finance Committee and the Compensation Committee, respectively, members of these committees also must satisfy separate independence standards based on requirements of the Securities and Exchange Commission (“SEC”) and NYSE, respectively.

 

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The Board has determined that a substantial majority (nine of ten) of our directors are independent. Each member, including the chair, of each of the Audit and Finance Committee, the Compensation Committee, the Governance Committee, and the Quality, Safety and Compliance Committee qualifies as independent, including under the committee-specific independence requirements discussed above. In making its determinations as to the independence of the directors, the Board reviewed relationships between the Company and each of them, including ordinary course commercial relationships in the last three years between the Company and the entities of which each of Mr. Lassiter and Dr. Torley is an executive officer; these relationships did not exceed a certain amount of that entity’s gross revenues in any year.

 

The Board has determined the following directors to be independent:

 

Vicky B. Gregg Timothy M. Ring
Wright L. Lassiter III Daniel C. Stanzione, Ph.D.
Timothy L. Main Helen I. Torley, M.B. Ch.B, M.R.C.P.
Denise M. Morrison Gail R. Wilensky, Ph.D.
Gary M. Pfeiffer    

 

Mr. Rusckowski, who is the Company’s Chief Executive Officer and President, is not independent.

 

Stockholder Access

 

Stockholders and any other person may communicate with the Board by sending comments to our Lead Independent Director through the web form available at www.questdiagnostics.com/home/contact/Lead-Independent-Director, or by writing to the full Board or any individual director or any group or committee of directors, c/o Corporate Secretary, 500 Plaza Drive, Secaucus, New Jersey 07094. Communications received are automatically routed to our Lead Independent Director with a copy to our General Counsel and Corporate Secretary. The Lead Independent Director determines whether any such communication should be distributed to other members of the Board. Communications received by the Corporate Secretary addressed as set forth above, other than communications unrelated to the duties and responsibilities of the Board, are forwarded to the intended directors. Further, our Corporate Governance Guidelines publicly affirm the Board’s long-standing approach of being available for discussions with stockholders in appropriate circumstances.

 

The Audit and Finance Committee established a procedure whereby complaints and concerns with respect to accounting, internal controls and audit matters may be submitted to the Audit and Finance Committee. All communications received by a director relating to the Company’s accounting, internal controls or audit matters are immediately forwarded to the Chairman of the Audit and Finance Committee and are investigated and responded to in accordance with the procedures established by the Audit and Finance Committee. In addition, the Company has established a hotline (known as CHEQline) pursuant to which employees can anonymously report accounting, internal controls, and financial irregularities (as well as compliance concerns on other laws).

 

Our Corporate Governance Guidelines provide that directors are encouraged and expected to attend the annual stockholders meeting. All of our directors then in office attended the 2019 annual stockholders meeting.

 

We recognize the importance of giving stockholders the opportunity to participate in our annual meeting. As part of our precautions regarding COVID-19, we are planning for the possibility that the annual meeting may be held solely by means of virtual communication. If we take this step, our stockholders will continue to have the opportunity to participate in the annual meeting. Details on how stockholders can participate in the annual meeting will be available at www.CESvote.com, including information on how you can vote your shares if you elect not to do so in advance of the annual meeting.

 

 

    9 03     2020 Proxy Statement
   

 

Board Nomination Process

 

The Governance Committee is responsible for reviewing with the Board, on an annual basis, the composition of the Board as a whole and whether the Company is being well served by the directors, taking into account each director’s independence, skills, experience, tenure, availability for service to the Company and other factors the Governance Committee deems appropriate. The Governance Committee is responsible for recommending director nominees to the Board, including re-nomination of persons who are already directors. The Governance Committee does not set specific, minimum qualifications that nominees must meet in order for the Governance Committee to recommend them to the Board, but rather believes that each nominee should be evaluated based on his or her own merits, taking into account the Company’s needs, Board succession planning considerations, and the overall composition of the Board, which includes an analysis of current directors’ skills and experience. Recommendations are made by the Governance Committee in accordance with the Company’s Corporate Governance Guidelines, which set forth the Company’s philosophy regarding Board composition and identify key qualifications and other considerations. The Governance Committee believes that the Board should be comprised of individuals whose backgrounds and experience complement those of other Board members, and considers whether a prospective nominee promotes a diversity of talent, skill, tenure, expertise, background, perspective and experience, as well as diversity with respect to age, gender identity, race, ethnicity, place of residence, sexual orientation and specialized experience. The Governance Committee does not assign specific weights to particular criteria and nominees are not required to possess any particular attribute.

 

The key qualifications and other considerations set forth in the Company’s Corporate Governance Guidelines are set forth below.

 

Key Qualifications and Other Considerations for Directors
 

 

•  Reputation for highest ethical standards and integrity consistent with Quest Diagnostics’ values of Quality, Integrity, Innovation, Accountability, Collaboration and Leadership

 

•  Independence

 

•  Prior experience as a director or executive officer of a public company

 

•  Number of current board positions and other time commitments

 

•  Overall range of skills, experience and seniority represented by the Board as a whole

 

•  Relevant experience such as:

 

◦  Chief Executive Officer or Chief Operating Officer (or similar responsibilities), current or past

 

◦  Demonstrated expertise in business function(s) such as sales, operations, finance, strategy, legal or human resources

 

◦  Medical practitioner and/or science and health thought leader

 

 

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In recruiting and selecting a Board candidate, as a supplement to the key qualifications and other considerations for director candidates outlined in the Corporate Governance Guidelines, the Governance Committee considers other important skills and professional experiences to determine whether a candidate has skills and experience well-suited for the expected needs of the Board, including whether the skills and experience complement those of the other Board members or nominees. The table below includes, for each director nominee, an illustrative, non-exhaustive listing of supplemental skills and experiences that the Board considered most relevant when nominating that nominee. Although a check mark indicates that the Board relied upon the specific skill or experience in making its decision, the absence of a check mark does not mean the nominee does not possess the specific skill or experience. The biographies beginning on page 1 provide more information on each nominee’s skills and experience.

 

  Gregg Lassiter Main Morrison Pfeiffer Ring Rusckowski Stanzione Torley Wilensky
  Skills and Experience
Accounting         ü          
Advisory ü                  
Capital Markets     ü   ü          
Consumer Focus       ü            
Corporate Governance   ü ü ü       ü    
Executive ü ü ü ü ü ü ü ü ü  
Finance         ü          
General Management ü ü ü ü   ü ü ü ü  
Government                   ü
Healthcare ü ü       ü ü   ü ü
International     ü ü ü ü ü   ü  
Operations   ü ü ü   ü ü   ü  
Strategic Planning ü ü ü ü ü ü ü ü ü ü
                       

 

The Governance Committee regularly reviews the Board’s composition to ensure that we continue to have the right mix of skills, diversity, background and tenure reflected on the Board. Our Board’s membership represents a balanced approach to director tenure, allowing the Board to benefit from the experience of longer-serving directors as well as the fresh perspectives of newer directors. The composition of the director nominee group with respect to tenure and ethnic and gender diversity are shown below:

 

   

 

 

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The Board is committed to fostering diversity of the Board. In addition to valuing diversity of talent, skill, tenure, expertise and experience, the Board seeks to include directors with diverse backgrounds, including with respect to race, ethnicity, age, gender identity and sexual orientation, in order to ensure that diverse perspectives are included on the Board. When conducting searches for new directors, it is the Board’s policy to actively and routinely seek a diverse candidate pool, including women and ethnically diverse candidates. The Board assesses the effectiveness of this process each time a new director is nominated to join the Board.

 

 

Process for Nominating New Candidates for Director
Board identifies the need to add a new Board member

 

Governance Committee identifies, assesses, and ranks candidates

·   Seeks input from Board members

·   Considers recommendations submitted by other sources, including stockholders

·   May hire third-party search firms to assist in identifying and evaluating candidates for nomination

 

Interview of candidates by
·   Chief Executive Officer and ·   Lead Independent Director
Chairman ·   Other Board members
·   Members of senior management may also interview candidates

Governance Committee reassesses the candidates

and makes recommendation to the Board

 

Board determines whether candidate is elected to the Board or

is nominated for election by stockholders

 

The Governance Committee considers suggestions from many sources, including stockholders, regarding possible candidates for director. Stockholders may recommend candidates for consideration as director by sending comments to our Lead Independent Director through the web form available at www.questdiagnostics.com/home/contact/Lead-Independent-Director or writing to the full Board or any independent Board member, c/o Corporate Secretary, 500 Plaza Drive, Secaucus, New Jersey 07094. The recommendation should contain the proposed nominee’s name, biographical information and relationship to the stockholder. The Governance Committee evaluates stockholder recommendations for director candidates in the same manner as other director candidate recommendations. Stockholders may also nominate director candidates. See “Frequently Asked Questions” beginning on page 61 for information regarding the process and deadline for stockholders to submit director nominations for the 2021 annual meeting of stockholders.

 

 

03     2020 Proxy Statement 12  
   

 

Board Committees

 

During 2019, the Board held five meetings. In order to fulfil its responsibilities, the Board has delegated certain authority and responsibilities to its standing committees. There are five standing committees. In 2019, each nominee attended at least 75% of the meetings of the Board and the Board committees on which he or she served held during the period such director was in office. Any director may attend meetings of any committee of which the director is not a member.

 

For each year, a schedule of Board meetings is established before the year begins. Committee meetings are generally scheduled for the day before, or the day of, meetings of the full Board, except that meetings of the Executive Committee are scheduled only when needed. The Board and each committee also hold such additional meetings as the Board or committee, respectively, determines necessary or appropriate.

 

Set forth below is a brief description of each standing committee and its function, its membership and the number of meetings it held during 2019. Additional information about the committees can be found in their charters, which are available on our website at www.QuestDiagnostics.com.

 

Audit and Finance Committee

 

Number of 2019 Meetings: 9

 

Gary M. Pfeiffer (Chair)

Jenne K. Britell*

Timothy L. Main

Daniel C. Stanzione

Gail R. Wilensky**

 

 

*Ceased service upon

retirement in May 2019

 

**Became a member of the committee in May 2019

 

 

 

 

 

This committee:

 

•  Monitors the quality and integrity of the financial statements and financial reporting procedures of the Company.

 

•  Oversees management’s accounting for the Company’s financial results and reviews the timeliness and adequacy of the reporting of those results and related judgments.

 

•  Oversees the internal audit function and makes inquiry into the audits of the Company’s books performed internally and by the outside independent registered public accounting firm.

 

•  Has primary oversight responsibility for the Company’s enterprise risk management program.

 

•  Appoints the independent registered public accounting firm, monitors its qualifications, independence and performance, approves its compensation and pre-approves the services it performs.

 

•  Reviews with the Company’s independent registered public accounting firm, and informs the Board of, any significant accounting and audit matters, including critical accounting policies and judgments.

 

•  Advises and makes recommendations with regard to certain financing transactions and other significant financial policies and actions.

 

•  Establishes procedures for the receipt, retention and treatment of complaints relating to accounting and internal accounting controls, and for the confidential, anonymous submission by employees of concerns regarding accounting or audit matters.

 

•  Reviews and reports to the Board on the Company’s management of its financial resources.

 

•  Annually reviews its own performance.

 

The Board has determined that Mr. Pfeiffer qualifies as an “audit committee financial expert” as defined by the SEC. For a description of the experience of Mr. Pfeiffer, see “Proposal No. 1—Election of Directors” beginning on page 1. 

 

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Compensation Committee

 

Number of 2019 Meetings: 4

 

Timothy M. Ring (Chair)

Vicky B. Gregg

Jeffrey M. Leiden*

Denise M. Morrison**

Helen I. Torley***

Gail R. Wilensky****

 

 

*Ceased service upon

retirement in May 2019

 

**Became a member of the

committee in February 2019

 

***Became a member of the

committee in May 2019

 

****Ceased service on the committee in May 2019

 

 

 

This committee:

 

•  Reports to the Board with respect to the performance of the Chief Executive Officer and reviews and approves the compensation of the Chief Executive Officer based on the directors’ evaluation of the Chief Executive Officer and the Company’s financial performance, competitive compensation data and other factors.

 

•  Oversees the performance of the Company’s other senior management team members and annually reviews and approves their annual base salary, annual incentive compensation and long-term incentive compensation.

 

•  Annually reviews the compensation arrangements for the Company’s senior management team members to assess whether they encourage risk taking that is reasonably likely to have a material adverse effect on the Company.

 

•  Annually reviews and recommends to the Board the compensation of the Company’s non-employee directors.

 

•  Administers, or makes recommendations to the Board regarding, the equity-based, incentive compensation and retirement plans, policies and programs of the Company. The committee may delegate the administration of plans, policies and programs as appropriate, including to executive officers of the Company and to the Company’s Human Resources department.

 

•  Supports the Board in the senior management succession planning process.

 

•  Reviews and approves, for senior management team members, employment agreements, severance benefits and other special benefits.

 

•  Annually reviews its own performance.

 

For more information regarding the Company’s processes and procedures for executive compensation, including regarding the role of executive officers and compensation consultants in connection with determining or recommending executive and director compensation, see “Compensation Discussion and Analysis” beginning on page 24.

 

 

Executive Committee

 

Number of 2019 Meetings: 0

 

Daniel C. Stanzione (Chair)

Gary M. Pfeiffer

Stephen H. Rusckowski

 

This committee may act for the Board, except with respect to certain major corporate matters, such as mergers, election of directors, removal of directors or the Chief Executive Officer, amendment of the Company’s charter or by-laws, declaration of dividends and matters delegated to other Board committees.

 

 

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Governance Committee

 

Number of 2019 Meetings: 4

 

Daniel C. Stanzione (Chair)

Timothy L. Main

Gary M. Pfeiffer

Timothy M. Ring

Gail R. Wilensky

 

 

This committee:

 

•  Identifies individuals qualified to become Board members, and reviews and recommends possible candidates for Board membership, taking into account such criteria as independence, diversity, age, skills, occupation and experience in the context of the needs of the Board.

 

•  Reviews the structure of the Board, its committee structure and overall size.

 

•  Monitors developments in corporate governance.

 

•  Reviews the Company’s Corporate Governance Guidelines and recommends to the Board such changes to the Guidelines, if any, as the committee may determine.

 

•  Recommends to the Board assignments of directors to Board committees.

 

•  Reviews relationships and transactions of directors, executive officers and senior financial officers for possible conflicts of interest.

 

•  Reviews and approves transactions or proposed transactions in which a related person is likely to have a direct or indirect material interest pursuant to the Company’s Statement of Policy and Procedures for the Review and Approval of Related Person Transactions.

 

•  Oversees the Board and each Board committee in their annual self-evaluation.

 

•  Annually reviews its own performance.

 

Quality, Safety and Compliance Committee

 

Number of 2019 Meetings: 4

 

Gail R. Wilensky (Chair)

Jenne K. Britell*

Vicky B. Gregg

Wright L. Lassiter**

Jeffrey M. Leiden*

Denise M. Morrison***

Helen I. Torley

 

 

*Ceased service upon

retirement in May 2019.

 

**Became a member of the

Committee in March 2020

 

***Became a member of the

committee in February 2019

 

 

 

This committee:

 

•  Reviews the organization, responsibilities, plans, results, budget and staffing of the Company’s Compliance Department, and reviews significant reports to management, or summaries thereof, regarding the Company’s compliance policies, practices, procedures and programs and management’s responses thereto.

 

•  Reviews the adequacy, performance, and effectiveness of our medical quality policies and programs.

 

•  Reviews the Company’s policies, programs and performance relating to environmental health and safety, equal opportunity employment practices, fraud and abuse, and corporate political contributions.

 

•  Monitors significant external and internal investigations of the Company’s business as they relate to possible violations of law by the Company or its directors, officers, employees or agents.

 

•  Monitors significant regulatory, legislative and legal developments affecting the Company’s business.

 

•  Monitors material legal matters and compliance with legal and regulatory requirements, and coordinates with the Audit and Finance Committee regarding the same.

 

•  Annually reviews its own performance.

 

 

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Cybersecurity Committee

In February 2019, the Board proactively established an ad hoc Cybersecurity Committee of the Board for the purpose of assisting the Board’s oversight of the Company’s cybersecurity program and practices and risks related to cybersecurity.

 

Mr. Main, who has completed the NACD/Carnegie Mellon CERT certification in cybersecurity oversight, serves as chair of the committee.

 

Number of 2019 Meetings: 3

 

Timothy L. Main (Chair)

Gary M. Pfeiffer

Daniel C. Stanzione

 

This committee:

 

• Reviews the effectiveness of the Company’s cybersecurity program and the Board’s oversight thereof.

 

• Oversees risk management and regulatory compliance with respect to information security systems and processes.

 

• Oversees management’s implementation of enhancements, as necessary, to the Company’s cybersecurity program.

 

• Reports to the Board the committee’s findings and makes recommendations as appropriate regarding the Company’s cybersecurity program and the Board’s oversight of the program.

 

 

 

Board Leadership Structure

 

At Quest Diagnostics, we recognize the importance of good corporate governance and value the leadership and input of the independent members of our Board of Directors. Stephen H. Rusckowski, our Chief Executive Officer and President, serves as Chairman of the Board of Directors, and Dr. Daniel C. Stanzione, Ph.D. serves as Lead Independent Director. The Board of Directors currently believes that having our CEO and President serve as Chairman as well as having a Lead Independent Director helps the administration and organization of the Board and facilitates the effective performance of its duties, including the activities of the independent directors. The Board has revised its leadership structure from time to time and retains the flexibility to revise its leadership structure if, in the exercise of its fiduciary duties, the Board believes that such revision is appropriate. Our Lead Independent Director has a robust set of responsibilities, set forth in our Corporate Governance Guidelines.

 

Principal Responsibilities of the Lead Independent Director

 

•  Participates with the Chairman of the Board and CEO in the preparation of the agendas for Board meetings, and has the authority to call meetings of the independent directors

 

•  Serves as a member of the Board’s Executive Committee

 

•  Coordinates providing timely feedback from the directors to the Chairman of the Board

 

•  Presides over all executive sessions of the independent directors and all Board meetings in the absence of the Chairman of the Board

 

•  Takes a leading role in the process of evaluating the Board, and leads the independent directors in the annual evaluation of the performance of the CEO and President

 

•  Interviews candidates for the Board

 

•  Serves as the principal contact for stockholder communications with the independent directors

 

•  Monitors, and if appropriate discusses with the other independent directors, communications received from stockholders and others

 

We also have other mechanisms in place to promote the appropriate level of independence and oversight in Board decisions. See “Corporate Governance Highlights” on page 7. 

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Board Oversight of Company Culture

 

The Board is committed to fostering a strong culture of compliance and ethical conduct and has structured its committees and their activities to support its commitment. The Board supports management’s promotion of a corporate culture of integrity, ethical behavior and compliance with laws and regulations and for ensuring that the Company’s culture and its strategy are aligned. The Board expects all directors, as well as officers and employees, to conduct themselves in a manner consistent with our Code of Ethics and our values. The Board believes that a strong culture of integrity, ethics and compliance is fundamental to the conduct of the Company’s business, and is necessary for effective risk management, maintaining investor trust, and successful corporate governance.

 

Board, Committee and CEO Evaluation Process

 

The Board conducts an annual self-evaluation of its performance and effectiveness. Each of the Audit and Finance Committee, the Compensation Committee, the Governance Committee, and the Quality, Safety and Compliance Committee, pursuant to its charter, also conducts an annual self-evaluation of its performance and effectiveness, and reports to the Board the results of the self-evaluation. The Governance Committee is tasked with establishing criteria and processes for and overseeing the annual self-evaluation of the Board and the committees. Each year, the Governance Committee discusses the appropriate approach for that year’s Board and committee evaluations.

 

Prior to the meeting at which each annual self-evaluation occurs, each member of the Board and the committees receives a discussion outline, which encourages the directors to consider the Board’s or committee’s structure, processes, overall effectiveness, and improvement since the previous year’s assessment. In addition, the General Counsel discusses individually with each director the self-evaluation items and compiles feedback received for discussion with the Lead Independent Director. At the meeting, the Lead Independent Director or the committee chair, as applicable, leads a discussion guided by the outline provided, and the Board or committee, as applicable, identifies action items as well as items for further review.

 

Periodically, the Board engages an independent consultant to assist with the evaluation, including evaluating individual director performance. When the Board evaluates individual director performance, input from other directors and senior management is considered, in a process that protects anonymity to ensure honest feedback. In these situations, the independent consultant and the Lead Independent Director together review the results of the individual director evaluations with the individual directors. The Lead Independent Director reviews the remaining items with the Board and assists the Board in identifying action items as well as items for further review.

 

In addition, the Compensation Committee, pursuant to its charter, conducts an annual review of the Chief Executive Officer’s performance, receives input on the review from the Board, and reports the results of its review to the Board. Pursuant to our Corporate Governance Guidelines, the Board, led by the Lead Independent Director, reviews the Compensation Committee’s report in order to ensure that the Chief Executive Officer is providing the necessary leadership for the Company in light of the Company’s current and longer term goals. The Board then provides feedback to the Chief Executive Officer regarding his performance.

 

Board Role in Risk Oversight

 

The Board and its committees play an active role in overseeing the Company’s key risks, as discussed in the table below. The Board has considered its role in risk oversight in determining the current Board leadership structure. The Company’s management is responsible for risk management, which it does through a committee of senior managers that leads the Company’s enterprise risk management program; the program is discussed in the Company’s Annual Report on Form 10-K. The program is designed to identify and address the Company’s key risks from time to time; key risks currently include without limitation: medical quality, cybersecurity and business continuity.


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Roles of the Board and its Committees in Risk Oversight
Board of Directors

•  Annually reviews our enterprise risk management program.

•  Receives regular updates from management and the committees below regarding their activities with respect to the program.

Audit and Finance Committee   Quality, Safety and Compliance Committee

•  Has been delegated primary responsibility for overseeing our enterprise risk management program by the Board.

•  Receives regular updates from management regarding our enterprise risk management program, including with respect to cybersecurity and business continuity.

•  Regularly oversees compliance with securities and accounting rules and regulations.

•  Reviews the adequacy and effectiveness of policies and programs to ensure compliance with laws and regulations applicable to our business (other than with respect to securities and accounting).

•  Oversees the Company’s data security program.

•  Reviews the adequacy and effectiveness of our medical quality program.

•  Receives regular reports from management regarding these topics.

Compensation Committee   Cybersecurity Committee

•  Annually reviews compensation arrangements for members of our senior management team.

•  Assesses whether such compensation arrangements encourage risk taking that is reasonably likely to have a material adverse effect on the Company.

 

•  Oversees risk management and compliance with respect to information security systems and processes.

•  Reviews effectiveness of our cybersecurity program and the Board’s oversight thereof.

 

 

Related Person Transactions

 

The Company has a written policy pursuant to which it evaluates proposed transactions involving a related person and the Company in which the amount involved exceeds $120,000. A related person is any director or executive officer of the Company, any immediate family member of a director or executive officer, or any person who owns 5% or more of the Company’s outstanding common stock. The office of the General Counsel is primarily responsible for the administration of the policy and for determining, based on the facts and circumstances, whether the Company or a related person has a direct or indirect material interest in the transaction. Certain transactions are defined not to be related person transactions under the policy.

 

The Governance Committee reviews any proposed transaction in which a related person has a direct or indirect material interest, except for any compensation arrangements involving an immediate family member of a director or an executive officer. In the event that the General Counsel becomes aware of a related person transaction not approved in advance, the General Counsel will arrange for the related person transaction to be reviewed at the next regularly scheduled meeting of the Governance Committee. Any member of the Governance Committee who is a related person with respect to a transaction under review may not participate in any review, consideration or approval of the transaction.

 

In considering any related person transaction, the Governance Committee determines whether the transaction is fair to the Company. In considering a proposed transaction involving a director or the immediate family member of a director, the Governance Committee also assesses whether the proposed transaction could reasonably be expected to impact the independence of the director under the Company’s Corporate Governance Guidelines, the NYSE listing standards or other applicable rules.

 

Compensation arrangements involving an immediate family member of an executive officer are reviewed and approved by the Chief Executive Officer and the Senior Vice President, Chief Human Resources Officer, unless such

 

03     2020 Proxy Statement 18  
   

 

person is an immediate family member of the Chief Executive Officer, in which case the compensation arrangement is approved by the Compensation Committee. Compensation arrangements involving an immediate family member of a director are reviewed and approved by the Compensation Committee.

 

Policies Regarding Hedging and Pledging our Common Stock

 

Our directors and executive officers are prohibited from pledging the Company’s common stock to secure a loan and from holding such stock in a margin account. Our directors and employees, including executive officers, are prohibited from entering into transactions or purchasing financial instruments that are expected to hedge or offset, or designed to hedge or offset, a decline in our common stock price, including, but not limited to, the use of financial derivatives (including, for example, prepaid forward contracts, equity swaps, collars, puts and calls or exchange funds). Our directors and employees, including executive officers, also are prohibited from entering into transactions (including, for example, short sales) that establish downside price protection for our common stock. In addition, our directors and executive officers, as well as certain other employees, generally may purchase or sell Company securities only during permitted window periods (generally beginning on the business day following the issuance of our quarterly earnings releases and continuing until the end of the second month of the fiscal quarter).

 

 

2019 Director Compensation Table

 

Director Compensation Program for 2019. No changes were made in the compensation program for directors for 2019, other than the inclusion of additional retainer fees for directors who served as members and/or chair of the ad hoc Cybersecurity Committee, as detailed below. The Board determined not to make any other changes for 2019 after considering the recommendation of the Compensation Committee, which acted after receiving input from its independent compensation consultant, Pearl Meyer & Partners, LLC.

 

The following table sets forth the 2019 compensation of our non-employee directors then in office. Mr. Rusckowski, our only employee director during 2019, received no additional compensation for serving as director. None of our non-employee directors receives any consulting or other non-director fees from the Company.

 

Director   Fees Earned or
Paid in Cash ($)
  Stock Awards
($)(1)(2)
  Total ($)  
               
Jenne K. Britell       58,250     N/A     58,250    
Vicky B. Gregg       113,000     167,981     280,981    
Jeffrey M. Leiden       56,500     N/A     56,500    
Timothy L. Main       130,125     167,981     298,106    
Denise M. Morrison       98,875     209,779     308,654    
Gary M. Pfeiffer       155,063     167,981     323,044    
Timothy M. Ring       123,500     167,981     291,481    
Daniel C. Stanzione       172,563     167,981     340,544    
Helen I. Torley       107,063     167,981     275,044    
Gail R. Wilensky       131,812     167,981     299,793    

 

 

 

(1)Represents the aggregate grant date fair values of the awards. Each of our non-employee directors then in office received a single award of 1,722 RSUs, except for Ms. Morrison, who also received a pro rata award for the period between her joining the Board and the date of the annual RSU grant, consistent with past practice. RSUs reported in this column were valued based on the average of the high and low prices of our common stock on the grant date. As of December 31, 2019, each non-employee director in office during 2019 held the number of RSUs set forth beside his or her name below.

 

Dr. Britell   2,007   Mr. Pfeiffer   21,526
Ms. Gregg   6,140   Mr. Ring   20,372
Dr. Leiden   1,621   Dr. Stanzione   3,343
Mr. Main   3,343   Dr. Torley   2,818
Ms. Morrison   2,242   Dr. Wilensky   3,343

 

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(2)No stock options were awarded to our non-employee directors during 2019. As of December 31, 2019, each non-employee director in office during 2019 held options to purchase the number of shares of the Company’s common stock set forth beside his or her name below.

 

Dr. Britell   6,111   Mr. Pfeiffer   -
Ms. Gregg   -   Mr. Ring   23,755
Dr. Leiden   -   Dr. Stanzione   -
Mr. Main   2,037   Dr. Torley   3,260
Ms. Morrison   -   Dr. Wilensky   18,333

 

 

Annual Cash Retainer Fees. During 2019, our non-employee directors received an annual cash retainer fee. Directors serving on Board committees also received additional retainers for such service, and directors who served as Lead Independent Directors and committee chairs each received an additional fee for such service. All such cash retainer fees were paid at annual rates as set forth in the table below.

 

  Members Chair
Board of Directors ·  $96,500, payable in quarterly installments of $24,125 ·  $40,000 (Lead Independent Director)
Audit and Finance Committee ·  $13,000 ·  $30,000
Compensation Committee ·  $9,500 ·  $10,000
Governance Committee ·  $7,500 ·  $7,500
Quality, Safety and Compliance Committee ·  $7,000 ·  $10,000
Executive Committee ·  $1,500 ·  N/A
Cybersecurity Committee ·  $7,500 ·  $7,500

 

 

        Equity Awards. Each non-employee director participates in the Company’s Long-Term Incentive Plan for Non-Employee Directors (the “Director Plan”). The Director Plan currently authorizes the grant to each non-employee director, on the date of the annual stockholders meeting, of stock options and stock awards covering shares of common stock having an aggregate value on the date of grant not exceeding $500,000. If a person is appointed or elected as a director other than on the date of the annual stockholders meeting, the Board may grant to such director a prorated equity award, in such proportions as the Board may determine. The Director Plan also permits (although the Company has not done this) a one-time grant to a non-employee director of an equity award covering a limited number of shares of common stock of the Company upon initial election to the Board. Annual option grants become exercisable, and annual RSUs generally vest and convert to shares of our common stock, in three equal annual installments, beginning on the first anniversary of the grant date, regardless of whether the non-employee director remains a director. The exercise price of all stock options issued under the Director Plan is the fair market value of our common stock on the grant date. Options, once vested, will be exercisable through the tenth anniversary of the date of grant even if the director’s service on the Board terminates.

 

For 2019, the Board fixed the value of the annual equity award to non-employee directors at $168,000 and determined that the award would be delivered entirely in the form of restricted share units (“RSUs”). The 2019 award was granted effective May 14, 2019, with each non-employee director receiving an award of 1,722 RSUs.

 

A non-employee director may elect to receive annual retainer fees in stock awards (or, prior to 2020, stock options) in lieu of cash. The number of shares issued in lieu of cash for the retainer fees is based on the fair market value of the stock on the date that the cash payment would otherwise be made. Prior to 2020, the number of options issued in lieu of cash for the retainer fees was based on the estimated value on the grant date of such options using the Black-Scholes pricing model. Options granted in lieu of retainer fees vested immediately.

 

03     2020 Proxy Statement 20  
   

 

Opportunity to Defer Compensation. Under the Company’s Deferred Compensation Plan for Non-Employee Directors, each non-employee director may elect to defer, until a date specified by the director or until the director’s termination of service as a director, the director’s cash compensation or any stock grants awarded pursuant to the Director Plan. Beginning in 2020, if a director specifies a deferral date that is prior to the director’s termination of service, the payout will occur or commence, as applicable, upon termination of service as a director. Cash amounts deferred may be indexed to (i) a cash account under which amounts deferred earn interest, compounded quarterly, at a rate in effect on the first date of each calendar quarter or (ii) the Company’s common stock.

 

Changes in Director Compensation Program for 2020. After considering the recommendation of the Compensation Committee, which received input from its independent compensation consultant, the Board determined not to make any changes to the director compensation program for 2020, except that, beginning in 2020, directors will no longer have the ability to (i) elect to receive annual retainer fees in stock options or (ii) defer annual retainer fees to a date that is prior to their termination of service as a director.

 

Stock Ownership Information

 

We encourage our directors, officers, and employees to own our common stock, which aligns their interests with the interests of our stockholders. The Company maintains stock ownership and retention guidelines for its directors and executive officers. The guidelines call for our directors to beneficially own not less than 6,000 shares of our common stock. Until a director satisfies the minimum shareholding requirement, directors are required to maintain 75% of net shares received from vesting of RSUs and from the exercise of options. For purposes of determining whether a director has met the minimum shareholding requirements, we count shares subject to unvested RSUs, but not shares subject to stock options. The guidelines for our executive officers are discussed in “Compensation Discussion and Analysis” beginning on page 24.

 

The following tables show the number of shares of the Company’s common stock beneficially owned by (1) each person who is known to the Company to own beneficially more than 5% of the Company’s common stock, (2) each director of the Company and each nominee, (3) each named executive officer and (4) all directors, nominees and executive officers as a group. Information in the table regarding the Company’s directors, nominees and executive officers is provided as of March 10, 2020.

Name   Number of Shares
Beneficially Owned
  Percentage
of Class
The Vanguard Group (1)     15,394,930       11.42  
BlackRock, Inc. (2)     13,093,605       9.7  

 

 
(1)The business address of The Vanguard Group is 100 Vanguard Blvd., Malvern, PA 19355. The ownership information is based on the information contained in the Schedule 13G filed by The Vanguard Group with the SEC on February 12, 2020.

 

(2)The business address of BlackRock, Inc. is 55 East 52nd Street, New York, New York 10055. The ownership information is based on the information contained on a Schedule 13G filed by BlackRock with the SEC on February 6, 2020.

 

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Name     Shares(1)    

Shares Subject to Stock Options Exercisable within

60 days(2)

      Total(3)      

Shares Underlying

RSUs(4)

 
Named Executive Officers                                
Stephen H. Rusckowski     194,817       676,833       871,650       42,931  
Mark J. Guinan     61,311       266,886       328,197       12,270  
Manuel O. Mendez     188       5,323       5,511       29,665  
James E. Davis     29,599       107,613       137,212       12,000  
Carrie Eglinton Manner     12,968       79,713       92,681       14,423  
Directors and Nominees                                
Vicky B. Gregg     8,917             8,917       3,343  
Wright L. Lassiter III                       351  
Timothy L. Main     14,714       2,037       16,751       3,343  
Denise M. Morrison                       3,272  
Gary M. Pfeiffer                       23,810  
Timothy M. Ring           23,755       23,755       27,895  
Daniel C. Stanzione     34,698             34,698       3,343  
Helen I. Torley     548       3,260       3,808       2,818  
Gail R. Wilensky     24,983       18,333       43,316       3,343  
All directors, nominees and executive officers as a group (16 persons)     485,963       1,509,892       1,995,855       197,677  

 

(1)Each person has sole voting power and sole dispositive power.

 

(2)Includes shares of common stock which are subject to options issued under the Amended and Restated Employee Long-Term Incentive Plan (the “Employee Plan”) or the Director Plan, as applicable, that were exercisable as of, or would become exercisable within 60 days of, March 10, 2020.

 

(3)Each executive officer, director and nominee beneficially owned less than 1% of the shares of common stock outstanding. All directors, nominees and executive officers as a group beneficially owned approximately 1.49% of the shares of common stock outstanding.

 

(4)Shares of common stock corresponding to RSUs reported in this column are not considered beneficially owned under SEC rules and are not included in the total column in this table. This column also includes phantom stock units held by directors under the Deferred Compensation Plan for Non-Employee Directors.

 

03     2020 Proxy Statement 22  
   

 

INFORMATION REGARDING EXECUTIVE COMPENSATION

 

Proposal No. 2—Advisory Resolution to Approve Executive Officer Compensation

 

 

The Board of Directors recommends that you vote

FOR approval of our 2019 executive compensation.

 

Section 14A of the Securities Exchange Act entitles stockholders to vote to approve or not approve, on an advisory (non-binding) basis, our executive officer compensation as disclosed in the Compensation Discussion and Analysis and accompanying compensation tables and narrative. We are asking stockholders to approve the following resolution:

 

RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed in this proxy statement pursuant to the compensation disclosure rules of the SEC, including the Compensation Discussion and Analysis, compensation tables and related narrative disclosure, is hereby APPROVED.

 

Pay for Performance. As discussed in “Compensation Discussion and Analysis” below, our executive compensation program is designed to pay for performance, to align the interests of our executive officers with the interests of our stockholders and to support the Company’s long- and short-term business goals. Our program reflects many “best practices,” and our executive compensation structure and levels in 2019 clearly demonstrate our commitment to aligning pay and performance.

 

Advisory Vote. This vote is advisory. We conduct an advisory vote to approve executive officer compensation annually; the next stockholder advisory vote to approve executive compensation will take place at the Company’s 2021 annual meeting of stockholders. This vote is not intended to address any specific item of compensation, but rather the overall compensation of our named executive officers and the executive compensation policies and practices described in this proxy statement. The Board and the Compensation Committee value the opinions of the Company’s stockholders and will take into account the outcome of the vote, in conjunction with such other factors as the Board and the Compensation Committee consider appropriate, in connection with the Company’s executive compensation program.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THIS PROPOSAL. PROXIES SOLICITED BY THE BOARD WILL BE VOTED FOR THIS PROPOSAL UNLESS OTHERWISE INSTRUCTED.

 

 

 

    23 03     2020 Proxy Statement
   

 

Compensation Discussion and Analysis

 

Executive Summary

 

Introduction

 

The Compensation Committee (the “Committee”) determined 2019 compensation for the Company’s named executive officers after considering, among other things, the Company’s performance, the competitive market for executive talent, and the current environment in the healthcare industry, including in diagnostic information services. We believe that our executive compensation structure, compensation opportunity levels, and pay outcomes in 2019 reflect our firm commitment to align pay with performance, the Company’s financial results and the interests of stockholders, and also focus management’s attention on implementing our business strategy. Our named executive officers are listed below.

 

Officer   Title
Stephen H. Rusckowski   Chairman, Chief Executive Officer and President
Mark J. Guinan   Executive Vice President and Chief Financial Officer
Manuel O. Mendez   Senior Vice President and Chief Commercial Officer
James E. Davis   Executive Vice President, General Diagnostics
Carrie Eglinton Manner   Senior Vice President, Advanced Diagnostics

 

 

2019 Company Performance

 

In 2019, we continued to make progress executing our business strategy and delivered on our commitments. The Company improved on financial and operating metrics and met several key financial targets, despite continuing to face challenges as a result of increased reimbursement headwinds, including from the Protecting Access to Medicare Act.

 

2019 Financial Highlights
  Results Change
Reported:    
Net revenues $7,726MM 2.6%
Operating income as a percentage of net revenues 15.9% 130 bps
Diluted earnings per share from continuing operations $6.13 15.9%
Cash provided by operations $1,243MM 3.6%
     
Adjusted:    
Operating income as a percentage of net revenues 17.0% (50) bps
Diluted earnings per share from continuing operations $6.56 4.0%

 

Annex A includes reconciliations of adjusted measures to measures reported under accounting principles generally accepted in the United States.

 

 

03     2020 Proxy Statement 24  
   

 

The following table highlights 2019 progress on our two-point strategy.

 

2-Point Strategy   Summary Highlights of 2019 Progress
     
Accelerate Growth We increased revenues by 2.6% and achieved record full year revenues of $7.73 billion.
  We established a long-term strategic partnership with UnitedHealthcare, including collaboration on a variety of value-based programs; became a preferred provider to Horizon Blue Cross Blue Shield of New Jersey for most products; and became a participating provider to Blue Cross Blue Shield of Georgia. Effective July 1, 2019, we were selected to be one of only five lab companies named participants in the UnitedHealthcare Preferred Lab Network. These partnerships expand our in-network reach to 43 million additional lives.
  We forged several new strategic relationships; continued to expand our pipeline of hospitals and independent delivery networks interested in working with us; and implemented new professional laboratory services relationships with Catholic Health Services of Long Island and Regional Medical Center of Orangeburg, South Carolina.
  We fostered growth with clinical franchises, including tuberculosis and sexually transmitted disease testing in our infectious disease and immunology offerings, prescription drug monitoring and toxicology testing, HemePath blood cancer testing and Cardio IQ® testing.
  We made progress executing our strategy to be the provider of choice for consumers, including advancing our consumer-centric initiatives such as: our partnerships with Walmart and Safeway to expand access to testing and a partnership with Walmart to expand access to basic healthcare services;  increasing the number of registered users in the MyQuest app to over 8.7 million; making QuestDirectTM, a service that allows consumers to order their own tests, available in nearly all states; and improving on-line pre-registration and appointment scheduling.
  In collaboration with hc1, the bioinformatics leader in precision testing, we introduced Quest Lab StewardshipTM, an innovative new service that employs machine learning to help optimize laboratory test utilization.
     
Drive Operational
Excellence
We made strong progress on our operational efficiency initiatives. We continued to drive productivity improvements (e.g., improved electronic order rates; increased electronic enabling of our workflow) across logistics, consumer services, and lab services, enabling us to reduce our overall costs per lab requisition. We also began implementation of our program to consolidate and simplify our immunoassay platforms, moving to a single supplier to provide greater throughput, autonomy and a more efficient footprint.
  We continued to make progress on lab system optimization through investments in our new 250,000 square foot flagship laboratory in Clifton, New Jersey, which will provide greater capacity, increased throughput and improved productivity.
  We achieved our goal to save approximately 3% of our costs annually through our Invigorate cost excellence program.

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The following table provides 2019 highlights on our three operating principles: strengthening the organization, focusing on diagnostic information services, and delivering disciplined capital deployment.

 

3 Operating
Principles
  2019 Highlights
     

Strengthen
organizational

capabilities

 

We continued to use the Quest Management System, which provides a foundation for day-to-day management and includes best-in-class business performance tools to help develop new capabilities and support our efforts to build a high-performance culture.
Our entire organization continued participation in our Everyday Excellence program, which includes guiding principles to support a superior customer experience, to inspire our employees to be their best every day, with every person and with every customer interaction.
These principles are integrated into our performance assessments and frontline employee behavioral standards.
We continued to offer leadership training and development programs, which are designed to strengthen our more senior employee leaders and other employees, to create a high-performance culture and sharpen the capabilities needed to lead our organization.
     
Focus on diagnostic information services •  In 2019, we maintained a sharp focus on providing diagnostic information services.
     
Deliver disciplined
capital deployment
We returned a majority of our free cash flow to stockholders, through dividends and repurchases of our common stock.
In January 2020, we announced the ninth increase in our quarterly common stock cash dividend since 2011, increasing the dividend by approximately 6%, from $0.53 per common share to $0.56 per common share.
  We have returned approximately $3.1 billion to stockholders through common stock repurchases since the beginning of 2013.
  In 2019, we consummated the acquisition of certain assets of the clinical laboratory services business of Boyce & Bynum Pathology Laboratories, P.C.

 

 

Incentive Compensation Outcomes and Alignment with Performance

 

The Committee’s approach to annual incentive compensation generally has been to tie annual incentive compensation to key operating goals and to establish targets that are challenging, yet attainable. The average 2019 annual incentive payout for our named executive officers (excluding the annual incentive payment to Mr. Mendez, because it was paid at target in connection with his joining the Company; see “2019 Compensation Actions for New Hire” beginning on page 30) on our annual cash incentives under the Senior Management Incentive Plan (“SMIP”) was 83% of target. Payout on performance share awards for the three-year performance period ended December 31, 2019 was 80% of target. The following table summarizes annual incentive and performance share payouts for the two most recent performance periods for our named executive officers.

 

Incentive Program Annual Incentive Payout
(% of target)
Performance Share
Payout for 3-year
performance period

(% of target)
Performance period ended December 31, 2019 83  (average) 80
Performance period ended December 31, 2018 48 85
       

 

03     2020 Proxy Statement 26  
   

 

Our total stockholder return for recent periods, relative to relevant publicly traded comparator groups, is set forth below.

 

  1-Year
TSR (%)
(2019)
3-Year
TSR (%)
(2017-19)
5-Year
TSR (%)
(2015-19)
Quest Diagnostics Incorporated 31.1%   23.3% 76.3%
Compensation Peer Group Median 27.7%   74.8% 90.3%
S&P 500 Index 31.5%   53.1% 73.8%

 

The total stockholder return shown combines stock price appreciation and dividends paid during the relevant performance period, thereby allowing for the effect of divergent dividend policies.

 

Taken in the aggregate, the results of our annual and long-term incentive programs demonstrate that the Committee sets challenging performance goals and that our named executive officers receive compensation based on the achievement of those goals. Please also see the charts, on pages 33 and 39, respectively, discussing historical payouts for our annual incentive compensation and performance share awards.

 

Executive Compensation Philosophy

  Core Principles of Our Executive Compensation Philosophy
Effectively align executive interests with the interests of stockholders, including total stockholder return, with performance measured by key financial metrics;
Utilize performance-based metrics, with the majority of compensation at risk;
Motivate executives to achieve results that appropriately balance short-term operating goals and long-term stockholder value creation;
Support our long-term business strategy and financial objectives;
Set performance targets that are challenging, yet achievable in the context of both our strategic plan and market and healthcare industry conditions;
Attract, motivate and reward talented executives; and
Target total compensation levels in the context of peer group and market data, as well as consideration of individual executives’ performance, tenure, breadth of responsibilities and succession planning.

 

The principal components of compensation for our named executive officers are discussed in the following table.

 

Component   Form   Purpose
Base Salary   Cash (Fixed)   Provides a competitive level of pay that reflects the executive’s experience, role and responsibilities
Annual Cash Incentive
(SMIP)
  Cash (Variable)   Rewards achievement of overall corporate financial and, to a lesser extent, non-financial results for the most recently completed fiscal year; for certain named executive officers, also rewards achievement of individual results
Long-Term Incentives   Equity Awards (Variable)   Provide meaningful alignment with long-term financial and strategic growth goals that drive stockholder value creation and support the Company’s retention strategy

 

Our program is designed to align executive compensation with the Company’s performance. The Committee has built a strong foundation for our executive compensation program and has taken numerous steps over time to structure the program to align pay with performance. We believe that a balanced compensation program which encourages a long-term

 

    27 03     2020 Proxy Statement
   

 

focus supports sustained long-term corporate performance. Our long-term awards provide alignment with stockholder interests and help attract and retain critical employee talent.

As shown in the chart below, the bulk of our senior executives’ compensation is performance based and variable in nature (90% for our CEO and an average of 83% for our other NEOs in 2019). The chart reflects 2019 target direct compensation (including, in the case of Mr. Mendez, his annual salary rate) and excludes the value of other benefits and perquisites.

 

 

 

 

The chart below shows the mix of our 2019 long-term incentive equity awards for executive officers, consisting of performance shares, stock options, and restricted share units (“RSUs”).

 

 

The Committee annually awards a significant number of equity awards to eligible employees under the Employee Plan. These equity awards are designed to foster an alignment of stockholder interests with a broader group of employees, to incentivize these employees to continue to perform at a high level and to promote a culture of employee ownership. Components of these awards may include performance shares, stock options and RSUs. Additionally, a significant number of employees at all levels of the Company own our common stock through our Employee Stock Purchase Plan, under which employees may purchase our common stock at a discount, and our Quest Diagnostics Profit Sharing Plan (the “401(k) Plan”).

 

We make very limited use of employment agreements with executive officers. Of our named executive officers, only Mr. Rusckowski, our Chairman, Chief Executive Officer and President, has an employment agreement (the employment agreement is discussed under the heading “Employment Agreement” on page 48). Our other named executive officers are “at will” employees.

 

03     2020 Proxy Statement 28  
   

 

Best Practices

 

Our program reflects many best practices.

 

What We Do   What We Don’t Do

Link executive pay with performance

Maintain a clawback policy that covers both equity and cash incentive awards to current and former executive officers and key employees

Maintain share ownership and retention guidelines for executives and members of senior management

 Use three-year vesting for equity awards

 Measure performance for performance share awards over a single three-year performance period

 Provide for “double trigger” change-in-control vesting in equity awards: awards vest following a change in control only if the employee experiences a qualifying termination of employment

 Require a minimum vesting period of at least one year following grant (except for up to 5% of awards)

 Utilize an independent compensation consultant

 Maintain an investor outreach program to incorporate feedback in our compensation programs

 Provide stockholders an annual “say on pay” vote

Evaluate management succession and leadership development efforts on an ongoing basis

 

û   No excise tax gross-ups upon a change in control

û   No supplemental pension benefits for executives

û   No single-trigger vesting in connection with a change in control for equity awards

û   No hedging or pledging or speculative transactions in our securities by directors and executive officers

û   No repricing of equity awards without stockholder approval

û   No excessive perquisites

û   No payment of dividends or dividend equivalents on performance shares

û   No encouraging imprudent risk taking

û   No employment agreements for executive officers except our CEO

 

 

    29 03     2020 Proxy Statement
   

 

Independent Compensation Consultant

 

The Committee has retained Pearl Meyer & Partners, LLC (“Pearl Meyer”) as its independent compensation consultant to assist it in carrying out its responsibilities. The following table provides information regarding the Committee’s independent compensation consultant.

 

Independent Compensation Consultant
•     Reports directly to, and is directly accountable to, the Committee, which has sole authority to retain and terminate it, at Company expense
•     February 2020: the Committee assessed Pearl Meyer in accordance with SEC and NYSE rules and determined that it is independent and there are no conflicts of interest
What They Do
 Provide analyses and information regarding the three-year realizable pay of the Company’s executive officers and the three-year stockholder returns of the peer group  Provide analyses and information regarding market practices and trends in executive and non-employee director compensation for companies in our peer group
 Advise on the design of our executive compensation programs to ensure the linkage between pay and performance  Periodically participate in private sessions of the Committee (without Company employees present)
 Provide related executive compensation advice and services to the Committee (e.g., advice regarding compensation peer group)  Periodically meet with the Committee’s Chairman to discuss compensation matters
What They Don’t Do
û   Provide services to the Company (other than their services to the Committee) û   Have ties to management that could jeopardize their fully independent status

 

Say on Pay, Stockholder Outreach, and Feedback

 

At the Company’s 2019 annual meeting of stockholders, approximately 92% of votes cast on the say-on-pay proposal voted in favor of the compensation of our named executive officers. We continued to monitor market practices and trends and to engage with our investors. We reached out to stockholders holding over 75% of the Company’s outstanding common stock, and held discussions with those that accepted our invitation. These discussions addressed topics such as executive pay, company strategy, and the Company’s approach to environmental, social and governance issues. In these discussions, investors generally shared positive feedback regarding the Company’s structuring of and overall approach to executive pay, as well as the other topics discussed. The Committee also received advice from its independent compensation consultant and considered management recommendations based on the Company’s strategic direction. Insights gained from these efforts, including the feedback from our investors regarding executive pay, were taken into account by the Committee in taking action regarding the Company’s compensation programs, including changes to the compensation program for 2020 discussed under the heading “Changes to Compensation in 2020” on page 42.

 

2019 Compensation Actions for New Hire

 

In October 2019, Mr. Mendez joined the Company as Senior Vice President and Chief Commercial Officer. The Committee determined Mr. Mendez’s base salary, annual incentive award and ongoing long-term compensation after considering, among other things, compensation packages provided at the time to executives in comparable positions in the Company’s peer group. To induce Mr. Mendez to join the Company and to compensate him for certain forfeitures incurred with the termination of his employment with his immediately preceding employer, the Company made: a one-time cash payment of $800,000, a sign-on award of RSUs, and a guaranteed target payout for his 2019 annual incentive compensation. The one-time cash payment is refundable in full during the first two years of his employment in the event such refund is determined to be appropriate by the Senior Vice President, Chief Human Resources Officer. The sign-on award of 23,379 RSUs vests 50% on each of the first anniversary and second anniversary of the grant date in order to align his interest with the interest of the Company’s stockholders. Mr. Mendez’s 2019 annual incentive compensation, equal to 80% of his base salary, was paid out at target value of $480,000. Mr. Mendez’s annual incentive compensation

 

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for 2020 and going forward will not be guaranteed. Neither the one-time cash payment nor the sign-on RSU award received by Mr. Mendez in 2019 will be repeated in 2020, because they are not part of his “normal” compensation.

 

Setting Executive Compensation

 

The Committee establishes the Company’s general compensation philosophy, oversees our executive compensation program and regularly monitors our executive compensation to ensure adherence to our compensation philosophy. The Committee is supported in its work by our Senior Vice President, Chief Human Resources Officer and her staff and the Committee’s independent compensation consultant.

 

Within the framework of the executive compensation programs approved by the Committee, the Chief Executive Officer recommends to the Committee individual compensation for the executive officers, other than himself. These recommendations are based on market data and Company and individual performance. The Chief Executive Officer also recommends incentive compensation performance measures to align compensation with our corporate objectives. At the Committee’s request, he is present during the portions of Committee meetings in which compensation decisions regarding the named executive officers other than the Chief Executive Officer are reviewed and decided, but the Committee retains the final authority for all such decisions. The Chief Executive Officer does not make any recommendations to the Committee regarding his own compensation and does not participate in portions of Committee meetings when his compensation is reviewed and decided.

 

For each named executive officer, the Committee annually reviews performance and approves all elements of compensation, including base salary, annual incentive awards and long-term incentive awards, except for our broad-based employee benefit programs. After the Committee approves the compensation of our named executive officers, the Committee reports its compensation determinations to the full Board.

 

To assist the Committee with its review, our Human Resources department, in consultation with the Committee’s independent compensation consultant, annually prepares analyses of each named executive officer’s compensation, including tally sheets. The review includes current and prior year compensation information regarding base salary, target and paid annual incentive compensation, deferred compensation activity and balances, aggregate equity grant values, perquisites, and all other compensation, as well as estimates of the amounts payable to each named executive officer upon termination of employment under various circumstances, including in connection with a change in control.

 

The compensation targets for, and compensation earned by, each named executive officer are analyzed relative to market data for comparable positions in a peer group. In 2019, the Committee reviewed, but did not make any changes in, the Company’s peer group. The peer group continues to consist of the following 14 companies, which generally are in the healthcare services, equipment and distribution industries.

 

• Agilent Technologies, Inc. • Laboratory Corporation of America Holdings
• Baxter International Inc. • Owens & Minor, Inc.
• Becton, Dickinson and Company • PerkinElmer, Inc.
• Boston Scientific Corporation • Stryker Corporation
• DaVita Inc. • Tenet Healthcare Corporation
• Henry Schein, Inc. • Varian Medical Systems, Inc.
• Hologic, Inc. • Zimmer Biomet Holdings, Inc.

 

 

For the named executive officers, the Committee establishes target compensation consistent, to the extent possible, with comparable positions in the peer group. Our practice is to target total direct compensation (including base salary, annual cash incentive targets and long-term incentive awards) at market competitive levels, depending upon the named executive officer’s responsibilities, expertise and experience, along with individual and Company performance.

 

Specific consideration is given to the weighting of fixed and at-risk components of pay relative to the peer group. No single element of compensation is set without considering the total direct compensation of the named executive officers relative to the marketplace, as well as the impact of any change on the other components of our pay model. When setting each participant’s annual compensation package, the grant date values of prior equity awards are considered, but realized or unrealized gains from prior equity awards are not taken into account.

 

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For 2019, the target total direct compensation for Mr. Rusckowski, the Chief Executive Officer, was between the 25th percentile and the 50th percentile of the peer group, and the target total direct compensation, on average, for the other named executive officers was between the 25th percentile and the 50th percentile.

 

Pay Components

 

Base Salary

 

We pay base salary to our executives to provide them a steady source of income for their services to the Company. The Committee annually reviews and approves base salaries for the named executive officers. Consistent with our executive compensation philosophy, base salaries are set at levels competitive with the peer group. The Committee determined, based on an assessment of each named executive officer’s position, performance, scope of responsibility, current salary level, and market comparables, that the 2019 base salary for each named executive officer (other than Mr. Mendez, who joined the Company in October 2019) would not be increased from the 2018 level. 2019 adjustments and base salary rates for each named executive officer are set forth in the following table.

.

 

    Increase in
Base Salary (%)
  2019 Base
Salary Rate ($)
         
Stephen H. Rusckowski     1,100,000
Mark J. Guinan     620,000
Manuel O. Mendez   N/A   600,000
James E. Davis     590,000
Carrie E. Eglinton Manner     575,000

 

The total base salary paid to each named executive officer in 2019 is reported in the “2019 Summary Compensation Table” beginning on page 45.

 

Annual Cash Incentive Compensation

 

Introduction

 

Our annual cash incentives reward the achievement of annual performance, including operating and strategic goals (both financial and non-financial). We generally pay annual incentives to our executive officers in accordance with the SMIP. Annual cash incentive payments to our named executive officers generally are subject to the achievement of specific performance goals and, if achieved, are scheduled to be paid on or before March 15th of the year following the completion of the performance year. The Committee generally has set performance goals with targets based on the Company’s operating plan and aligned with our two-point business strategy; non-financial goals may be objective or subjective in nature.

 

The Committee’s approach to annual incentive compensation generally has been to:

 

• Tie annual incentive compensation to key operating goals;

 

• Establish targets that are challenging, yet attainable; and

 

• Provide for a maximum payout of 200% of target upon achievement of extraordinary performance.

 

In recent years, the primary focus of the annual incentive plan has been on revenue and profitability. Because the Committee believes that non-financial business objectives also are important, it also has incorporated non-financial metrics in the annual plan.

 

The following table sets forth, for each of the past five years, the aggregate annual cash incentive payments as compared to target for the named executive officers, except that for 2019, the comparison is based on the average compensation for the named executive officers. The Committee believes that these results demonstrate the rigor of the targets adopted, that targets have been set at reasonable levels and that annual incentive compensation has been sensitive to Company performance. Since 2005, even in years that the Company had strong financial performance, annual incentive compensation payouts never reached 150% of target.

 

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Year

Incentive Payment as
Compared to Target

(%)

   
2015 89
2016 94
2017 97
2018 48
2019 (average) 83 *

 

 

*Excludes the annual incentive payment to Mr. Mendez, because it was paid at a guaranteed level in connection with his joining the Company.

 

Annual Incentive Compensation for 2019

 

For 2019, we paid annual incentive compensation under the SMIP to all the named executive officers. The Committee determined the incentive target for annual incentive compensation for each named executive officer, after considering the factors discussed above, early in 2019, except that the Committee approved Mr. Mendez’s incentive target in connection with Mr. Mendez joining the Company in October 2019. Because the 2019 annual incentive award for Mr. Mendez was paid at a guaranteed level, to induce Mr. Mendez to join the Company and to compensate him for certain forfeitures incurred with the termination of his employment with his immediately preceding employer, the discussion below regarding 2019 annual incentive compensation for named executive officers generally does not apply to Mr. Mendez. A discussion of Mr. Mendez’s 2019 compensation can be found under the heading “2019 Compensation Actions for New Hire” on page 30.

 

For 2019, the target values of our named executive officers’ annual incentive awards were not changed from 2018 levels. For each named executive officer, the threshold, target and maximum performance criteria were established with payout opportunities set at one-quarter (25%), one-time (100%), and two-times (200%) target incentive, respectively. For non-discretionary goals, rewards for performance levels between these levels were interpolated.

 

The Committee may adjust performance measures based on objective criteria to focus on the operating performance of the Company, to avoid unintended compensation results and to ensure that participants are not inadvertently given incentives to avoid taking actions that are in the long-term interest of the Company and its stockholders.

 

 For 2019, annual cash incentive payouts for the named executive officers were based on performance measured against both financial and non-financial goals. The principal financial goals related to achieving budget targets, including adjusted diluted earnings per share (“EPS”), revenues for existing portfolio and acquired revenue. The financial goals were weighted heavily, as compared to non-financial goals, in order to provide a meaningful incentive for management to generate profitable growth. The non-financial goals related to key elements of the Company’s strategy. For example, medical quality and customer experience goals were included to drive operational excellence, to improve the customer experience and to position the Company for the future. The medical quality goals included measures such as missed specimen pickups, electronic ordering, and revised reports; the customer experience goals included service quality measures such as patient waiting time, first call resolution and turn-around times. Employee engagement and voluntary turnover levels are linked to our strategy to accelerate growth and drive operational excellence, and our effort to deliver a superior customer experience. Employee engagement was assessed based on indices built from employee survey questionnaires.

 

For 2019, the Committee determined that each of Mr. Davis and Ms. Eglinton Manner should have, in addition to financial and non-financial business objectives applicable to the other named executive officers, a business specific individual performance metric, based on their individual responsibilities, having a 20% weight. The Committee determined that after the end of 2019, it would determine the business specific individual performance metric for each of Mr. Davis and Ms. Eglinton Manner based on an individualized assessment of the person’s 2019 performance, considering factors determined appropriate by the Committee. Each of the named executive officers had the same goals, excluding the business specific individual performance metrics included for Mr. Davis and Ms. Eglinton Manner. The Committee set the weights for each goal based on its relative importance for each executive officer.

 

The 2019 annual cash incentive payouts for Mr. Davis and Ms. Eglinton Manner were based in part on the Committee’s individualized assessment of his or her business specific individual performance. In assessing the business specific individual performance of Mr. Davis, the Committee evaluated a number of factors, including revenue growth from

 

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particular Company offerings, savings from the Company’s Invigorate program, and Mr. Davis’ individual performance. In assessing the business specific individual performance of Ms. Eglinton Manner, the Committee evaluated a number of factors, including revenue growth from one or more acquired businesses, the performance of areas of the Company’s business for which Ms. Eglinton Manner has responsibility, and Ms. Eglinton Manner’s individual performance.

 

The Committee also approved a supplemental bonus opportunity (the “Supplemental Bonus”) for executive officers under the SMIP for 2019, to be determined following the performance period at the Committee’s discretion. The Supplemental Bonus included a target payout of 10 points and a maximum payout of 20 points. In assessing whether to award any payout for the Supplemental Bonus, the Committee assessed the acquisition pipeline for driving future growth, over and above the Company’s target revenue growth of 2% annually, and the work performed by each of the named executive officers, including Mr. Rusckowski, in support of that key strategic initiative during 2019. After deliberation, the Committee determined to award each of Mr. Rusckowski, Mr. Guinan and Mr. Davis 5 points in Supplemental Bonus and to award Ms. Eglinton Manner 12 points in Supplemental Bonus. The Supplemental Bonus awarded to each named executive officer reflected the Committee’s assessment of the initiative and its individualized assessment of the work performed by each named executive officer in support of that initiative.

 

For 2019, the Committee determined that, unless the Company achieved 2% growth measured against 2018 existing portfolio revenues, the annual incentive payment (excluding the Supplemental Bonus) would be multiplied by a factor of 90%. The Company did not achieve 2% growth measured against 2018 existing portfolio revenues. Accordingly, the annual incentive payment (excluding the Supplemental Bonus) was multiplied by a factor of 90%.

 

The following chart shows the goals, the relative weight allocated to each goal, results and resulting payout factors for 2019 for Mr. Rusckowski and Mr. Guinan.

 

 

 

Weight
(%)
Measure/Objective   Threshold     Target     Results     Weighted Payout
Factor %
                         
  40   Adjusted diluted EPS   $ 6.34     $ 6.60     $ 6.56       35.2  
  20  

Revenue attainment:

existing portfolio

  $ 0MM     $ 75MM     $ 77MM       20.2  
  20  

Revenue attainment:

Acquired revenue

  $ 75MM     $ 151MM     $ 119MM       13.6  
  10   Medical quality and customer
experience
    multiple       multiple       multiple       10.7  
  5   Employee engagement     66.2       73.6       71.8       4.1  
  5   Voluntary turnover     15 %     13.6 %     14.3 %     3.2  
      Preliminary Total                             87.0  
      Preliminary total including 90% Multiplier                        78.3  
      Supplemental Bonus       5.0  
      Total                             83.3  

 

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The following chart shows the goals, the relative weight allocated to each goal, results and resulting payout factors for 2019 for Mr. Davis.

 

 

Weight
(%)
Measure/Objective   Threshold     Target     Results     Weighted Payout
Factor %
                         
  30   Adjusted diluted EPS   $ 6.34     $ 6.60     $ 6.56       26.4  
  15  

Revenue attainment:

existing portfolio

  $ 0MM     $ 75MM     $ 77MM       15.1  
  15  

Revenue attainment:

Acquired revenue

  $ 75MM     $ 151MM     $ 119MM       10.2  
  20   Individual business specific                       19.4  
  10   Medical quality and customer
experience
    multiple       multiple       multiple       10.7  
  5   Employee engagement     66.2       73.6       71.8       4.1  
  5   Voluntary turnover     15 %     13.6 %     14.3 %     3.2  
      Preliminary Total                             89.1  
      Preliminary total including 90% Multiplier       80.2  
      Supplemental Bonus                        5.0  
      Total       85.2  
                                 

 

 

The following chart shows the goals, the relative weight allocated to each goal, results and resulting payout factors for 2019 for Ms. Eglinton Manner.

 

 

Weight
(%)
Measure/Objective   Threshold     Target     Results     Weighted Payout
Factor %
                         
  30   Adjusted diluted EPS   $ 6.34     $ 6.60     $ 6.56       26.4  
  15  

Revenue attainment:

existing portfolio

  $ 0MM     $ 75MM     $ 77MM       15.1  
  15  

Revenue attainment:

Acquired revenue

  $ 75MM     $ 151MM     $ 119MM       10.2  
  20   Individual business specific                       8.2  
  10   Medical quality and customer
experience
    multiple       multiple       multiple       10.7  
  5   Employee engagement     66.2       73.6       71.8       4.1  
  5   Voluntary turnover     15 %     13.6 %     14.3 %     3.2  
      Preliminary Total                             77.9  
      Preliminary total including 90% Multiplier       70.1  
      Supplemental Bonus                        12.0  
      Total       82.1  
                                 

 

From time to time, the Committee makes adjustments to the Company’s results based on objective criteria for purposes of calculating performance under the SMIP. Set forth in the following table are items, identified by the Committee, for which it may make adjustments. As a matter of policy, the Committee seeks to apply these principles consistently from year to year.

 

 

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Quest Diagnostics Policy: Items for Which the Committee May Make Adjustments
Gains and losses from the sale of a business Material legal settlements
Charges related to the impairment of goodwill or intangible assets Cumulative or one-time effect from accounting changes
Charges related to reorganization and restructuring programs Effects of changes in tax laws or the rate on deferred tax assets and liabilities
Charges related to the acquisition or integration of a company or business Items included in or excluded from ordinary income (including significant unusual or infrequently occurring items) or described in Management’s Discussion and Analysis of Financial Performance included in the Company’s Annual Report on Form 10-K

 

 

The Committee may make adjustments based on these items because:

 

• These items may be outside the control of participants and could create “windfall” benefits or undue penalties (for example, changes in tax laws or accounting standards); and

 

• Impact from these items could distract management from focusing on operating performance by penalizing participants for taking actions in the long-term interest of the Company and its stockholders (for example, a restructuring of operations) that might in the short term negatively impact a performance measure.

 

In accordance with this policy, the Committee made the adjustments set forth in the table below to the Company’s results for fiscal year 2019 for purposes of calculating performance under the SMIP.

 

Items Adjusted for in 2019 Annual Incentive Calculations
    Diluted EPS ($)  
Diluted EPS, as reported   6.13  
Add back: amortization expense   0.61  
Diluted EPS   6.74  
Charges related to reorganization and restructuring programs   0.42  
Business Disposals/Impairments   0.03  
Legal, tax and miscellaneous matters   (0.03)  
Excess tax benefit related to stock-based compensation   (0.10)  
Other   (0.50)  
Total adjustments   (0.18)  
Adjusted financials for incentive purposes   6.56  

 

 

The adjustments made by the Committee are the same as those disclosed when reporting our 2019 financial performance.

 

For 2019, the target incentives and payouts for the named executive officers are summarized in the following table.

 

    2019 Target Incentive
as a % of Salary
  2019 Actual Payment
as a % of Target
  2019 Actual Payment
as a % of Salary
  2019 Actual
Payment ($)
Mr. Rusckowski     150       83.3       125       1,373,790  
Mr. Guinan     90       83.3       75       464,563  
Mr. Mendez     80       100.0       80       480,000  
Mr. Davis     80       85.2       68       402,097  
Ms. Eglinton Manner     75       82.1       62       354,099  

 

 

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Had the Committee not made the adjustments discussed, the payouts would have been:

 

    2019 Payment
as a % of Target
  2019 Payment
as a % of Salary
  2019
Payment ($)
Mr. Rusckowski     52       77       850,987  
Mr. Guinan     52       46         287,816  
Mr. Mendez     100       80         480,000  
Mr. Davis     61       49          289,950  
Ms. Eglinton Manner     58       44         251,634  

 

 2019 Conclusion

 

Overall, the Committee believes that the annual incentive payments made to our named executive officers for 2019 were consistent with the objectives of our executive compensation program.

 

 

Long-Term Incentive Awards

 

Introduction

 

We design our long-term incentive awards to:

 

• Align management’s compensation opportunities with the interests of our stockholders;

 

• Provide long-term compensation opportunities consistent with market practice; and

 

• Incent and reward long-term value creation.

 

To achieve these objectives, for 2019 and previous years, we have awarded long-term incentives to our named executive officers annually in the form of equity awards as follows (for information on 2020 long-term incentive awards, see “Changes to Compensation in 2020” on page 42):

 

Component   Weight
(% of
Award
Value)
  Time
Horizon
for Value
Creation
  Vesting   Purpose
Performance
Shares
  40   3 years  

Performance-based

3-year cliff vesting

 

•   Align executives with stockholders

•   Provide strong links with strategy and operating metrics

•   Performance-based vesting

RSUs   20   3 years  

25% after 1 year,
25% after 2 years,
and remaining

50% after 3 years

 

•   Align executives with stockholders

•   Provide retention incentives

•   Provide incentives to preserve stock value

•   Balance long-term incentive package

Stock Options   40   10 years   In 1/3rd increments
annually over 3 years
 

•   Align executives with stockholders

•   Highlight stock price appreciation as a key indicator of success

 

The time horizons shown operate in conjunction with, and in addition to, our stock ownership and retention requirements.

 

In determining the value of the long-term incentive component of each named executive officer’s compensation, the Committee considers, among other factors:

 

The value of similar incentive awards to executive officers in the peer group;

 

The executive’s scope of responsibility and experience, as well as market opportunities that may be available to the executive; and

 

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The performance of the Company and the executive, and the executive’s contribution to meeting the Company’s objectives.

 

The Committee is responsible in its use of equity as long-term incentive compensation and regularly monitors the use of equity compensation for executives and the Company as a whole from a competitive standpoint. The Committee believes that our equity awards, which have emphasized performance shares and options for our most senior employees, including all of our executive officers, reflect a focus on pay for performance and competitive considerations in support of our business strategy. The program also fosters the ownership culture that the Committee seeks to encourage among our employees, including our senior management.

 

Timing of Equity Awards; Awards Committee

 

It has been the Committee’s practice to make annual equity grants at a meeting held shortly after we announce our prior year’s earnings. It also has been the Committee’s practice to make equity grants to new hires and promoted employees, and other grants in special cases, from time to time as appropriate.

 

The Awards Committee, created by the Board, consists of one director and has authority to grant certain equity awards under the Employee Plan and to make corrections to awards approved by the Compensation Committee, to the extent the Awards Committee determines that corrections are necessary or appropriate to carry out the Compensation Committee’s intentions. At this time, the Awards Committee consists of Mr. Rusckowski.

 

The Awards Committee is authorized to grant the full range of awards that can be issued under the Employee Plan. There are, however, significant limits on awards that the Awards Committee may grant. These include: (i) a prohibition on awards to executive officers; (ii) a prohibition on awards to any individual whose base salary exceeds a threshold amount; (iii) an annual limit on awards granted to any individual; and (iv) an annual limit on aggregate awards granted. It is expected that the Awards Committee will approve awards from time to time as it determines appropriate, and that the awards will be issued for, among other purposes, new hires, promoted employees, employee retention and special recognition awards, including for high-performing employees who generally are not eligible for annual equity awards. The Awards Committee regularly reports to the Compensation Committee awards granted by, and corrections made by, the Awards Committee. In 2019, 49,351 options, 2,868 performance shares, and 10,751 RSUs were granted by the Awards Committee.

 

Approach to Performance Share Awards

 

For each year since 2005, the Committee has included an annual grant of performance shares in the long-term incentive awards to our employees, including our executive officers. Performance shares encourage a long-term view and reinforce the link between financial results and rewards. Our performance shares have been generally based on a single three-year performance period and reward financial and operational performance during that period. The value that they provide depends on the level of achievement of predefined performance goals over the multi-year performance period. If minimum performance levels are not achieved, the performance shares are forfeited and provide no value. New performance share awards are made each year, and accordingly participating named executive officers will participate in up to three overlapping performance periods during each year.

 

For each performance share award, the Committee establishes base year performance levels, target performance levels and the measurement period. When the Committee is determining the payout under the performance measure, it may adjust items in the Company’s operating results and base year performance levels using objective criteria (generally under the same categories identified above in the discussion of annual incentive compensation, and for the same reasons). No performance shares will be earned if a specified minimum performance level is not achieved. For performance above the threshold level, payment will vary with actual performance achieved, up to a maximum payment of 2 times the target level. Determination of the shares payable pursuant to each award is made after the end of the performance period.

 

The Committee’s approach to performance share awards has been to establish targets that are challenging, yet attainable, and to provide that a maximum payout of 200% of target requires extraordinary performance. The following table sets forth the aggregate performance share award payouts over the past five years, as compared to target, for the

 

03     2020 Proxy Statement 38  
   

 

named executive officers then in office. Since 2005, although in some cases targets have been exceeded, performance share award payouts have never reached 160% of target.

 

Performance Period   Year Paid   Performance Share
Payout as Compared
to Target (%)
2013 – 15   2016   19
2014 – 16   2017   93
2015 – 17   2018   111
2016 – 18   2019   85
2017 – 19   2020   80

 

The Committee believes that these results demonstrate the rigor of the targets adopted, that targets have been set at reasonable levels and that performance share award payouts have been sensitive to Company performance.

        

Determination of February 2016 Performance Share Awards

 

In February 2019, the Committee determined payment for performance share awards made in February 2016. At the time of grant, the Committee established base year performance levels, performance measures, target performance levels and the measurement period. The performance measures were the compound annual growth rate (“CAGR”) of the Company’s revenue (50% weight) and average return on invested capital (“ROIC”) (50% weight) during the performance period (calculated in accordance with the plan, subject to adjustment as discussed above). The measurement period was January 1, 2016 to December 31, 2018.

 

The following table shows the targeted performance levels (awards for performance between these percentiles are interpolated on a straight-line basis).

 

Performance Shares Earned (as multiple of target

number of shares)

  Adjusted Revenue CAGR (%)   Average Adjusted ROIC (%)  
0.5   1.0   8.6  
1.0   2.7   9.1  
2.0   4.4   9.6  

 

 

The following table shows the actual performance levels for each of the performance measures during the measurement period, as determined by the Committee. As a result of these performance levels, the number of performance shares earned during the performance period was 85% of target.

 

  Results (%)   Weighted Payout
Factor (%)
Adjusted Revenue CAGR 2.57   48.0
Average Adjusted ROIC 8.84   37.0

 

The following table shows the 2016 performance shares actually earned by each of the named executive officers.

 

    2016 Performance
Shares Earned
 
Mr. Rusckowski   38,341    
Mr. Guinan   10,736    
Mr. Mendez   N/A    
Mr. Davis   10,225    
Ms. Eglinton Manner   N/A    

 

The table below reconciles revenues used for calculating the Company’s adjusted revenue CAGR for purposes of the performance share awards with reported revenues for both 2015, which was the baseline year, and 2018. Revenues for incentive purposes were calculated, in accordance with Quest Diagnostics policy, (i) to remove from base year revenues

 

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any amounts associated with businesses that were divested or wound-down during the performance period so as to reflect the underlying operating performance, (ii) to reflect accounting changes due to adoption of a new accounting standard related to revenue recognition, and (iii) to reflect the impact of the enactment of the Protecting Access to Medicare Act (“PAMA”).

 

    2015 Baseline Revenues
($) MM
  2018 Revenues
($) MM
Revenues per award agreement1     7,364       7,531  
Focus Products revenues2     (63 )     -  
Revenue accounting change3     -       331  
PAMA adjustment4                 -                  16  
Total adjustments     (63 )     347  
Revenues for incentive purposes     7,301       7,878  

 

 

 

 

 

(1)The 2015 base year revenues per the award agreement excluded revenue associated with businesses disposed of or wound down prior to the grant date.

 

(2)Business disposed of during the performance period.

 

(3)Represents the impact of new revenue recognition accounting rules that became effective January 1, 2018.

 

(4)Represents the impact of PAMA.

 

ROIC is defined for purposes of performance share awards as (i) net operating profit after tax (“NOPAT”) divided by (ii) the sum of average total debt and stockholders’ equity (Invested Capital). The table below shows the Company’s adjusted ROIC results for each of the three years during the performance period.

 

  2016   2017   2018   3 Year Average
ROIC % 9.07   9.22   8.23   8.84

 

In accordance with the Company’s policy, in determining the Company’s ROIC for purposes of performance share awards, NOPAT (i.e., net income attributable to the Company excluding interest expense) for each year in the performance period was adjusted to reflect the same adjustments used to calculate net income for purposes of the annual incentive plan for the relevant year. Additionally, adjustments were made to remove the effects of significant transactions not contemplated or completed at the time performance measures were set, as follows: NOPAT was reduced and invested capital was adjusted to remove the benefit associated with the enactment of the Tax Cuts and Jobs Act of 2017 (“TCJA”); and Invested Capital was adjusted to eliminate the benefit of a one-time accelerated share repurchase using the proceeds from a business disposed of during the performance period. The Committee made these adjustments based on the same pre-determined objective criteria, and for the same reasons, as described above in connection with the SMIP.

 

The adjustments made by the Committee had the effect of increasing the revenue CAGR and decreasing ROIC for the performance period. The following table shows the performance levels for each of the performance measures during the period had the adjustments described above not been made.

 

  Results (%)   Weighted Payout
Factor (%)
Adjusted Revenue CAGR 0.75   0.0
Average Adjusted ROIC (%) 9.45   85.0

 

As a result of these performance levels, the number of performance shares earned during the performance period would have been 85% of target, and the shares earned by each executive officer would have been the same as those actually earned. 

 

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2019 Equity Awards

 

In February 2019 (and October 2019, in the case of Mr. Mendez), the Committee awarded long-term compensation for 2019 to the named executive officers, resulting in the equity awards shown for them in the “2019 Summary Compensation Table” and the “2019 Grants of Plan-Based Awards Table” beginning on pages 45 and 46, respectively.

 

In considering the size of the award for each of these named executive officers, the Committee considered the factors described above.

 

For 2019, the Committee granted equity awards to the more senior equity award recipients, including all of our executive officers, consisting of 40% stock options, 40% performance shares, and 20% RSUs. Less senior participants in the program received equity awards consisting solely of stock options and RSUs.

 

We continued to use stock options as a component of our equity awards because they align incentives with stockholder interests by rewarding appreciation in stock price. We believe that stock options are an appropriate incentive to motivate our employees.

 

The performance measures for the 2019 performance share awards are: the revenue CAGR (50% weight) and average ROIC (50% weight), which support key tenets of our 2-point strategy. The target performance shares subject to the 2019 performance share awards will be earned over a single three-year period ending December 31, 2021 and will be paid out in shares of the Company’s common stock after the end of the performance period to the extent that the performance level is achieved. Determination of the shares payable pursuant to the 2019 performance share award will be made after the end of the performance period.

 

ROIC

The Committee adopted the use of ROIC, along with revenue CAGR, as the performance share metrics in 2012 and has continued to use these metrics. The key building blocks of our ROIC metric are:

(1) adjusted NOPAT, and

(2) adjusted Invested Capital, defined as average total debt and stockholders’ equity.

ROIC is calculated as NOPAT/Invested Capital. In addition to being well supported by our stockholders, use of ROIC holds management accountable for efficient use of capital and further links executive compensation to value creation.

 

Since 2012, when we began issuing performance share awards with performance metrics based on average ROIC and on the revenue CAGR over the performance period, it has been the Company’s practice to disclose the performance targets for these measures at the conclusion of the performance period, but not at the inception of the performance period. We believe that disclosure of average ROIC and revenue CAGR performance targets at the inception of a single three-year performance cycle could work to our competitive disadvantage. Our targets are linked to our budget and to forecasts and projections that we, like other companies with which we compete, do not routinely disclose publicly or disclose only in general terms. If we were to disclose our specific targets, our competitors would gain an informational advantage that could enable competitors to anticipate our strategies and take steps to counter them. In this regard, we note that our performance metrics— average ROIC and revenue CAGR— are absolute, not relative to performance of other companies, and different from other measures that may not be as competitively sensitive (e.g., relative total stockholder return). Thus, the Company currently believes that it is in the best interest of its stockholders to continue its practice of disclosing the performance targets relating to average ROIC and revenue CAGR at the conclusion of the performance period, but not at the inception of the performance period.

 

We also continued to use RSUs as a component of our equity awards in 2019 because they provide retention incentives under diverse scenarios. RSUs also foster an ownership culture, help motivate employees to perform across business cycles and are aligned with stockholder value creation.

 

Mr. Mendez

 

The equity awards made to Mr. Mendez in 2019 were awarded to him upon the commencement of his employment at the Company. Like our other named executive officers, Mr. Mendez received a grant of options, performance shares, and RSUs for 2019 (prorated for his period of employment in 2019) as a normal part of his 2019 compensation. In considering

 

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the size of the award for Mr. Mendez, the Committee considered the factors described above. The terms and conditions of these awards generally are the same as those awarded to the other named executive officers for 2019. When Mr. Mendez joined the Company, he also received a sign-on award of 23,379 RSUs that vest 50% on each of the first anniversary and second anniversary of the grant date. These sign-on RSUs were intended to compensate Mr. Mendez for certain forfeitures incurred in connection with the termination of his employment with his immediately preceding employer, to induce him to join the Company, and to align his interest with the interest of the Company’s stockholders.

 

2020 Actions

 

February 2017 Performance Share Payment Determination. In February 2020, the Committee determined payment for performance share awards made in February 2017. The performance period for those awards ended on December 31, 2019. The performance measures were the Company’s revenue CAGR (50% weight) and the Company’s average ROIC (50% weight) (in each case the results associated with each metric are subject to adjustment based on objective criteria as discussed above and calculated in accordance with the plan). The Committee determined that the earnings multiple applicable to these awards during the performance period was 80% of target. Determination of these awards will be discussed in the Compensation Discussion and Analysis included in our 2021 proxy statement.

 

Changes to Compensation in 2020. After discussion regarding the market competitiveness of the total compensation of our named executive officers, the Committee determined to make certain increases to compensation for our named executive officers.  For 2020, our CEO will receive a base salary increase of approximately 9%.  With respect to long-term incentive awards, the target value our CEO’s long-term incentive award has been increased by approximately 32%, and three of our other named executive officers will receive target value increases ranging from approximately 2% to approximately 14%, with the mix of awards revised to emphasize awards subject to performance conditions. In February 2020 the Committee determined to revise the mix of long-term incentive awards as follows: for our CEO, the mix consists of 50% performance shares (which will continue to have performance-based 3-year cliff vesting), 25% stock options (which will continue to vest in 1/3rd increments annually over 3 years) and 25% RSUs (which will also vest in 1/3rd increments annually over 3 years); and for our executive officers, other than the CEO, the mix consists of 40% performance shares, 30% stock options, and 30% RSUs (in each case consistent with the vesting schedules listed for CEO 2020 equity awards).  The 2020 performance share awards include a performance measure focused on relative stockholder return, measured relative to companies included in the S&P 500 Healthcare Index.  The performance measures for the 2020 performance share awards, and the relative weighting of the metrics, are: revenue CAGR (50% weight), average ROIC (30% weight), and relative total stockholder return (20% weight).

 

Other

 

Benefits

 

All employees who satisfy certain service requirements, including the named executive officers, are entitled to participate in the tax-qualified 401(k) Plan. All employees whose base salary exceeds a required threshold level, including the named executive officers, are entitled to participate in the non-qualified Supplemental Deferred Compensation Plan (“SDCP”). In the 401(k) Plan, participants may defer a portion of their eligible cash compensation up to limits established by law. The purposes of the 401(k) Plan and the SDCP are to provide eligible employees an opportunity to save for their retirement and, through Company matching contributions and credits, to provide supplemental retirement income to help us compete in the market for talented employees. For additional information regarding the SDCP, see “2019 Nonqualified Deferred Compensation Table” on page 51.

 

As part of his or her total compensation package, each named executive officer is eligible to participate in our broad-based employee benefit plans, such as medical, dental, group life insurance and disability plans and the Employee Stock Purchase Plan. Each of these benefits is provided on the same basis as available to other exempt employees. Our benefits are designed to attract and retain talented employees and to provide them with competitive benefits.

 

Perquisites

 

Perquisites represent a minor component of executive compensation. We provide perquisites that we believe are reasonable and competitive. In 2019, Ms. Eglinton Manner received tax and financial planning services. The Company has a security plan approved by the Committee for Mr. Rusckowski. Mr. Rusckowski and his family use Company aircraft for personal travel. Pursuant to an Aircraft Timesharing Agreement approved by the Committee, Mr. Rusckowski must

 

03     2020 Proxy Statement 42  
   

 

 

reimburse the Company for its aggregate incremental cost arising out of Mr. Rusckowski’s personal use of Company aircraft after the aggregate incremental cost to the Company of Mr. Rusckowski’s personal use exceeds $100,000 in a year. Pursuant to his employment agreement, the Company also reimbursed Mr. Rusckowski for driver and vehicle costs. These perquisites are disclosed in the “2019 Summary Compensation Table” beginning on page 45.

 

Severance

 

The Company’s Executive Officer Severance Plan (“Severance Plan”) covers the named executive officers. No named executive officer will receive any severance benefits solely as a result of a change in control. For additional information, see “2019 Potential Payments upon Termination or Change in Control” beginning on page 52. We believe that the severance benefits provided to our named executive officers are consistent with market practice and are appropriate recruiting and retention tools. The named executive officers have agreed to non-competition and non-solicitation covenants for a period following termination of employment.

 

Impact of Tax Treatment

 

Historically, Section 162(m) of the Internal Revenue Code precluded a public company from taking a tax deduction for annual compensation in excess of $1 million paid to its chief executive officer and the three most highly paid executive officers other than the chief financial officer; this limitation did not apply to compensation that satisfied tax code requirements for qualifying performance-based compensation. However, effective January 1, 2018, the TCJA mandates that the chief financial officer is no longer excluded from this limitation, and performance-based compensation is no longer exempted. Transition rules under the TCJA allow payments made pursuant to binding arrangements in effect as of November 2, 2017 to be deductible based on the pre-Act rules; the Company intends to take advantage of the deductibility of such payments as appropriate, but there is no guarantee that such payments will be deductible.

 

The Company’s annual cash bonuses and equity awards historically have been designed to satisfy the requirements for deductible compensation. Tax considerations did not significantly impact the compensation programs offered to our executives during 2019.

 

Risk Assessment

 

In August 2019, the Committee reviewed the compensation arrangements for the Company’s employees, including the Company’s executive officers, to assess whether the arrangements, individually or in combination, encourage risk taking that is reasonably likely to have a material adverse effect on the Company. In assessing the risk, the Committee considered plan designs, plan operation, plan controls, oversight and review and competitive norms. In assessing the risk of plans that apply to our executive officers, the Committee also considered the risk guidelines suggested by the Center on Executive Compensation. The Committee concluded that the compensation arrangements for the Company’s employees, including the arrangements for the Company’s executive officers, do not encourage risk taking that is reasonably likely to have a material adverse effect on the Company. Factors supporting this conclusion include the following: (i) by utilizing a variety of performance metrics in our incentive programs, we discourage excessive risk taking by removing the incentive to focus on a single performance goal to the detriment of the Company’s overall performance; (ii) under both the SMIP and our performance shares, payouts are capped at a maximum level, thereby reducing the risk that executives might be motivated to attain excessively high performance in order to maximize payouts; (iii) we maintain a balance between short-term and long-term incentives; (iv) we maintain stock ownership and retention guidelines that are designed to incentivize our management team to focus on the Company’s long-term sustainable growth; and (v) we maintain a clawback policy, discussed in “Clawback Policy” on page 48, designed to prevent misconduct relative to financial reporting.

 

Executive Share Ownership and Retention Guidelines

 

Since 2005 we have maintained senior management retention and ownership guidelines. Our current guidelines are set forth in the following table.

 

  Employee   Minimum Shareholding Requirement (X times base salary)
  CEO   6X
  Other Executive Officers   4X
  Other Senior Management   3X or 1X, depending upon position

 

 

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We determine the number of shares corresponding to these thresholds on April 1 of each year using the average annual price of our common stock during the preceding calendar year and the employee’s base salary as of the first business day in April. For purposes of determining whether an employee has met the minimum shareholding requirements, we count shares subject to unvested RSUs, but not shares subject to stock options or unvested performance share awards.

 

Under the guidelines, an employee’s ability to sell shares associated with equity awards is limited until the officer satisfies a minimum ownership position. Our executive officers are required to retain 75% of net shares received from vesting of RSUs and performance shares and from the exercise of stock options, until they achieve their minimum shareholding requirement. As of April 1, 2020, each of our named executive officers holds stock in excess of his or her minimum ownership.

 

The Committee periodically reviews these guidelines and may adjust them. Under our policy, if a named executive officer satisfies the minimum share ownership requirements in our guidelines, the Committee monitors future equity awards to that person to assure that the interests of the named executive officer and stockholders continue to be significantly aligned and, if warranted, adjusts the minimum share ownership requirements or adds retention requirements.

 

Policies Regarding Hedging our Common Stock

 

Our directors and executive officers are prohibited from hedging the economic risk of owning our Common Stock. For information regarding our policies relating to directors, executive officers and other employees hedging or pledging the Company’s common stock, see “Policies Regarding Hedging and Pledging our Common Stock” on page 19.

 

 

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis. Based on its review and discussions with management, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into the Company’s Annual Report on Form 10-K for 2019.

 

Compensation Committee

 

Timothy M. Ring, Chair
Vicky B. Gregg
Denise M. Morrison

Helen I. Torley

 

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2019 Summary Compensation Table

 

This table summarizes the compensation for 2019 for each of our named executive officers.

 

Name and Principal Position  Year Salary ($)(1)   Bonus ($)   Stock
Awards ($)(2)
  Option
Awards ($)(3)
  Non-Equity
Incentive Plan
Compensation
($)(4)
  All Other
Compensation
($)(5)
  Total ($)  
Stephen H. Rusckowski 2019   1,100,000               4,348,074       3,039,982       1,373,790       256,693       10,118,539  
Chairman, President and Chief 2018   1,100,000               4,650,086       3,099,916       788,700       314,585       9,953,287  
Executive Officer 2017   1,100,000               4,500,066       2,999,941       1,443,420       304,591       10,348,018  
Mark J. Guinan 2019   620,000               1,287,373       899,872       464,563       44,187       3,315,995  
Executive Vice President 2018   613,077               1,380,070       919,930       263,746       56,461       3,233,284  
and Chief Financial Officer 2017   590,000               1,380,023       919,985       516,132       54,258       3,460,398  
Manuel O. Mendez (6) 2019   147,962       800,000       2,888,517       266,635       480,000             4,583,114  
Senior Vice President and 2018                                          
Chief Commercial Officer 2017                                          
James E. Davis 2019   590,000               1,230,129       859,913       402,097       40,781       3,122,920  
Executive Vice President, 2018   590,000               1,320,103       879,899       225,616       51,006       3,066,624  
General Diagnostics 2017   590,000               1,320,151       879,852       430,110       50,132       3,270,245  
Carrie Eglinton Manner 2019   575,000               1,001,320       699,880       354,099       47,258       2,677,557  
Senior Vice President, 2018   575,000               1,050,097       699,914       206,137       354,875       2,886,023  
Advanced Diagnostics 2017   577,211               900,090       599,924       420,787       117,523       2,615,535  
                                                                 

 

 
(1)Includes amounts deferred by named executive officers into the 401(k) Plan and the SDCP (see “2019 Nonqualified Deferred Compensation Table” on page 51).

 

(2)Represents the aggregate grant date fair value, based on the average of the high and low prices of our common stock on the grant date, of the performance share awards and RSUs granted. Performance share awards are valued at target. The assumptions made when calculating the amounts in this column are found in footnote 17 to the Consolidated Financial Statements of Quest Diagnostics Incorporated and its Subsidiaries, as filed with the SEC in the Company’s Annual Report on Form 10-K for 2019. If the performance share awards were valued at maximum, the amounts shown in the column would be:

 

    2017 ($) 2018 ($) 2019 ($)
  Rusckowski 7,500,078 7,750,143 7,176,138
  Guinan 2,300,038 2,300,082 2,124,703
  Mendez 3,143,653
  Davis 2,200,220 2,200,137 2,030,226
  Eglinton Manner 1,500,150 1,750,127 1,652,568

 

(3)Represents the aggregate grant date fair values of the awards. The assumptions made when calculating the amounts in this column are found in footnote 17 to the Consolidated Financial Statements of Quest Diagnostics Incorporated and its Subsidiaries, as filed with the SEC in the Company’s Annual Report on Form 10-K for 2019.

 

(4)Represents payments of non-equity incentive plan compensation under the SMIP in respect of the year earned and includes amounts deferred under the SDCP. See the discussion regarding annual incentive compensation in “Compensation Discussion and Analysis” beginning on page 24 for further information regarding the performance measures.

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(5) All other compensation for 2019 consists of the following:

 

      Rusckowski
($)
  Guinan
($)
  Mendez
($)
  Davis
($)
  Eglinton Manner
($)
  Matching contributions under the 401(k) Plan     14,000       14,000             14,000       8,400  
  Matching credits under SDCP     80,435       30,187             26,781       25,057  
  Tax and financial planning                             13,801  
  Personal ground transportation     65,167 (a)                        
  Use of company aircraft     97,091 (b)                        
  Totals     256,693       44,187             40,781       47,258  

 

 

 

 
  (a) Includes the following expenses (determined as a percentage of the total use of the vehicle) attributable to Mr. Rusckowski’s personal use of a company vehicle: (i) the vehicle lease cost; (ii) the invoiced expenses of the vehicle’s driver, including tolls; and (iii) invoiced vehicle, fuel, insurance, repair and maintenance costs.
     
  (b) The Company has a security plan approved by the Compensation Committee for our Chief Executive Officer; Mr. Rusckowski and his family use Company-provided aircraft for personal travel. The Compensation Committee has adopted a policy regarding such personal use of the corporate aircraft by our Chief Executive Officer. In connection with the policy, Mr. Rusckowski entered into a time sharing agreement with the Company under which he reimburses the Company for its aggregate incremental costs related to his personal use of Company aircraft above $100,000. The amount shown in the chart is the incremental cost to the Company of personal use of the corporate aircraft. Incremental costs are based on the variable costs that the Company incurred: operating cost per flight hour, including fuel, lubricants and maintenance; landing and parking fees; crew expenses; and small supplies and catering. This excludes non-variable costs that would have been incurred regardless of whether there was any personal use of the aircraft. Personal use of our aircraft by other employees requires approval by the Chief Executive Officer.
     
(6) Mr. Mendez’s 2019 compensation includes the following one-time sign-on awards, awarded to Mr. Mendez to induce him to join the Company and to compensate him for certain forfeitures incurred in connection with the termination of his employment with his prior employer: (a) the cash payment under the heading “Bonus” and (b) a $2,500,000 award of RSUs, included in the $2,888,517 shown under the heading “Stock Awards,” (the balance of the value shown under the heading “Stock Awards” reflects the performance shares and RSUs that Mr. Mendez received as part of his annual 2019 equity award, which was granted when he joined the Company in October 2019). These one-time inducement awards are not part of Mr. Mendez’s normal compensation and will not be repeated in 2020.

 

2019 Grants of Plan-Based Awards Table

 

This table provides information about plan-based awards granted in 2019.

 

                                            All Other   All Other               Grant
                                            Stock   Option               Date
                                            Awards:   Awards:   Exercise   Closing   Fair
        Estimated Future Payouts   Estimated Future Payouts   Number   Number of   or Base   Market   Value of
        Under Non-Equity Incentive   Under Equity Incentive   of Shares   Securities   Price of   Price on   Stock and
        Plan Awards   Plan Awards   of Stock   Underlying   Option   Grant   Option
Name   Grant Date   Threshold
($)(1)
  Target
($)(1)
  Maximum
($)(1)
  Threshold
(#)(2)
  Target
(#)(2)
  Maximum
(#)(2)
  or Units
(#)(3)
  Options
(#)(4)
  Awards
($/Sh)(5)
  Date
($/Sh)
  Awards
($)(6)
Rusckowski   2/18/2019     412,500       1,650,000            3,300,000   8,773         35,092         70,184                                   2,828,064
    2/18/2019                                                             213,704       86.63       87.81     3,039,982
    2/18/2019                                                     17,546                             1,520,010
Guinan   2/18/2019     139,500       558,000         1,116,000   2,598         10,390         20,780                                   837,330
    2/18/2019                                                             63,259       86.63       87.81     899,872
    2/18/2019                                                     5,195                             450,043
Mendez (7)   10/01/2019     29,592       118,370         236,739   624         2,494         4,988                                   255,136
    10/01/2019                                                             15,970       106.94       106.32     266,635
    10/01/2019                                                     24,626                             2,633,381
Davis   2/18/2019     118,001       472,000            944,000   2,482         9,928         19,856                                   800,098
    2/18/2019                                                             60,450       86.63       87.81     859,913
    2/18/2019                                                     4,964                             430,031
Eglinton   2/18/2019     107,813       431,250            862,500   2,020         8,081         16,162                                   651,248
                                                                                           

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 Manner   2/18/2019                                                             49,200       86.63       87.81     699,880
    2/18/2019                                                     4,041                             350,072
                                                                                           
(1)  Represents the threshold, target, and maximum awards set for the 2019 SMIP. The actual amount of the non-equity plan award paid is included in the “2019 Summary Compensation Table” beginning on page 45 under the column titled “Non-Equity Incentive Plan Compensation.”
   
(2)  Represents threshold, target, and maximum awards for performance shares granted in 2019; for threshold, assumes that minimum performance required for payout is achieved for a single performance metric. The performance period for the performance shares granted during 2019 ends December 31, 2021. Dividends are not payable on performance shares. For further discussion of the performance metrics see “Compensation Discussion and Analysis” beginning on page 24.
   
(3) Represents the number of RSUs granted in 2019. The RSUs vest 25% on February 18, 2020, 25% on February 18, 2021, and 50% on February 18, 2022.
   
(4) Represents the number of options granted in 2019.
   
(5) For grants issued on February 18, 2019 (President’s Day), the exercise price is the average of the high and low sales price of the Company’s common stock on February 15, 2019.  For grants issued on October 1, 2019, the exercise price is the average of the high and low sale price on the date of grant.
   
(6) Represents the grant date fair market value of each award as determined pursuant to Financial Accounting Standards Board Accounting Standards Codification Topic 718, “Compensation—Stock Compensation.”
   
(7)

Mr. Mendez’s 2019 compensation included a one-time sign-on award of RSUs, having a value of approximately $2,500,000, awarded to Mr. Mendez to induce him to join the Company and to compensate him for certain forfeitures incurred in connection with the termination of his employment with his prior employer. This award is included in the RSUs shown under the heading “All Other Stock Awards: Number of Shares of Stock or Units” (the balance of the

award shown under the heading reflects the RSUs that Mr. Mendez received as part of his annual 2019 equity award). This one-time inducement award is not part of Mr. Mendez’s normal compensation and will not be repeated in 2020.

 

Additional Information Regarding 2019 Summary Compensation and Grants of Plan-Based Awards Tables

 

Please see “Compensation Discussion and Analysis,” beginning on page 24, for additional information regarding the material terms of targets noted in the 2019 Summary Compensation Table, regarding the amount of salary and bonus in proportion to total compensation and regarding our share ownership and retention guidelines. No named executive officer participates in a Company-sponsored tax-qualified defined benefit plan or non-qualified supplemental defined benefit plan.

 

Key Terms of Equity Awards Granted in 2019. Performance shares, options and RSUs were awarded to the named executive officers in February 2019. Each option generally has a term of ten years, subject to earlier expiration upon termination of employment. Options generally vest ratably over a three-year period, performance shares generally vest on the third anniversary of the date of grant, and RSUs generally vest 25%, 25% and 50% on the first, second and third anniversary, respectively, of the grant date (except that the RSUs granted to Mr. Mendez as an inducement to join the Company vest 50% on each of the first and second anniversary of the grant date). Dividend equivalents are payable on the RSUs in the same amounts, if any, as dividends are paid on the Company’s outstanding shares of common stock. We do not pay dividend equivalents on performance shares. After RSUs and performance shares have vested and settled by the delivery of shares of common stock, those shares receive dividends on the same basis as all other outstanding shares of the Company’s common stock.

 

 

In general, any awards of options, RSUs or performance shares that have not vested as of the date of an employee’s termination of employment are cancelled. In the event of termination due to death, disability or retirement, however, awards vest in full; provided, that the retirement occurs after the one-year anniversary of the grant date. In the event of involuntary termination without “cause” or as a result of a divestiture, the employee will vest in a pro rata number of performance shares based on the number of months in the performance period that have lapsed from the grant date to the termination date. Performance shares that vest in connection with termination of employment remain nevertheless subject to the earn-out requirements based on Company performance during the performance period ending

 

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December 31, 2021 and are paid only at the end of the three-year performance period and only to the extent that the performance conditions have been satisfied. Retirement means the voluntary cessation of employment by the employee upon the attainment of age sixty (60) and the completion of not less than five (5) years of service with the Company; provided, however, that there is no basis for the Company to terminate the employment of the Employee for “cause” at the time of the employee’s voluntary cessation of employment. The definition of “cause” is provided under “2019 Potential Payments Upon Termination or Change in Control” beginning on page 52).

 

In addition, the awards vest following a “change in control” only if, within two years after the change in control, the named executive officer’s employment is terminated by the Company without “cause” or by the named executive officer for “good reason” (the definition of “good reason” is provided under “2019 Potential Payments Upon Termination or Change in Control” beginning on page 52), or if the surviving entity in the change in control does not agree to assume the awards or grant substitute awards that present similar economic opportunity. A “change in control” occurs if and when:

 

 (i)   any person becomes the beneficial owner of securities of the Company representing 40% or more of the combined voting power of the Company’s then outstanding securities; or

 

(ii)   a majority of the Company’s directors are not “continuing directors;” or

 

(iii)   the Company consummates any of the following transactions that are required to be approved by stockholders: (a) a transaction in which the Company ceases to be an independent publicly-owned corporation, (b) the sale or other disposition of all or substantially all of the Company’s assets or (c) a plan of partial or complete liquidation of the Company.

 

Clawback Policy. We maintain an Incentive Compensation Recoupment Policy (commonly known as a “clawback” policy). The recoupment policy covers all of our current and former executive officers, our principal accounting officer and any other employee who receives an equity award under our Employee Plan. Under the policy, incentive compensation (including without limitation cash and equity awards (whether vested or unvested)) is subject to recoupment and recovery by the Company, including after an award has been settled or paid, if a performance measure considered by the Compensation Committee in making the award is adjusted or restated in a manner that would have had the effect of reducing the size of the award when made. In addition, if a covered employee engaged in gross negligence or intentional misconduct that contributed to the award or payment of incentive compensation that is greater than would have been paid or awarded absent the misconduct, we may seek to recover the entire award or payment, or take other remedial and recovery action, as determined by the Compensation Committee. Thus, for example, if supervisory personnel were to engage in gross negligence or intentional misconduct, the policy would apply.

 

Employment Agreement. Mr. Rusckowski entered into an employment letter agreement with the Company on April 9, 2012 in connection with his appointment as CEO and President. As amended, at this time, the employment agreement provides that its term is automatically extended for successive additional one-year periods unless at least six months prior to the end of any applicable one-year extended term, either party shall have notified the other in writing that the agreement will expire on the last day thereof. The employment agreement provides for:

 

an annual base salary, subject to annual review by the Board (or a committee thereof);

 

participation in the SMIP, with a target amount of 130% of his annual base salary;

 

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eligibility for annual long-term incentive awards;

 

participation in the employee benefit programs generally available to senior executives of the Company, including health insurance, life and disability insurance, the Employee Stock Purchase Plan, a 401(k) plan and a flexible spending plan;

 

application of the Company’s share ownership and retention guidelines to Mr. Rusckowski;

 

reimbursement for the cost of a personal driver for business purposes (including transportation between Mr. Rusckowski’s personal residence and the Company’s offices);

 

Mr. Rusckowski’s participation in the Severance Plan as a Schedule A participant. In addition, pursuant to his employment agreement, Mr. Rusckowski is entitled to treat as a “qualifying termination” under the Severance Plan a termination by him for “good reason” prior to a “change in control,” and his severance in this case will include a pro rata bonus, based on actual performance, for his termination year. See “2019 Potential Payments Upon Termination or Change in Control” beginning on page 52; and

 

Mr. Rusckowski’s nomination for election to the Board.

 

Mr. Rusckowski’s employment agreement also provides that his performance-based and incentive-based compensation is subject to clawback by the Company pursuant to any Company corporate governance guidelines or policies, each as may be in effect from time to time. In addition, Mr. Rusckowski has entered into the Company’s standard restrictive covenant agreement, which includes a covenant not to compete with the Company and not to solicit the Company’s employees or customers for a period of one year following the termination of his employment.

 

 

 

Outstanding Equity Awards at 2019 Fiscal Year-End

 

This table provides information regarding stock option and unvested stock awards held at December 31, 2019.

 

                                Equity
                              Equity Incentive
                              Incentive Plan Awards:
                              Plan Awards: Market or
                          Market   Number of Payout Value
                        Number of Value of   Unearned of Unearned
        Number of   Number of           Shares or Shares or   Shares, Units Shares, Units
        Securities   Securities           Units of Units of   or Other or Other
        Underlying   Underlying           Stock That Stock That   Rights That Rights That
        Unexercised   Unexercised   Option   Option   Have Not Have Not   Have Not Have Not
        Options (#)   Options (#)   Exercise   Expiration   Vested Vested   Vested Vested
Name   Grant Date   Exercisable   Unexercisable(1)   Price ($)   Date   (#)(2) ($)(5)   (#) ($)(5)
Rusckowski   2/23/2015   241,995         $71.17   2/23/2025                
    2/25/2016   291,997         $66.51   2/25/2026                
    2/21/2017   125,230     62,615   $95.80   2/21/2027   32,915   3,514,984        
    2/19/2018   57,020     114,041   $103.57   2/19/2028   11,225   1,198,718   29,932 (3) 3,196,438
    2/18/2019         213,704   $86.63   2/18/2029   17,546   1,873,737   35,092 (4) 3,747,475
Guinan   2/23/2015   72,596         $71.17   2/23/2025                
    2/25/2016   81,756         $66.51   2/25/2026                
    2/21/2017   38,404     19,202   $95.80   2/21/2027        10,094   1,077,917        
    2/19/2018   16,921     33,843   $103.57   2/19/2028        3,332   355,824   8,883 (3) 948,616
    2/18/2019         63,259   $86.63   2/18/2029        5,195   554,774   10,390 (4) 1,109,548
Mendez   10/1/2019           15,970   $106.94   10/1/2029           2,494 (4) 266,334
    10/1/2019                     23,379   2,496,643        
    10/1/2019                     1,247   133,167        
Davis   2/23/2015   65,681         $71.17   2/23/2025                
    2/25/2016   77,856         $66.51   2/25/2026                
    2/21/2017   36,728     18,365   $95.80   2/21/2027   9,656   1,031,141        
    2/19/2018   16,185     32,370   $103.57   2/19/2028   3,187   340,340   8,497 (3) 907,395
    2/18/2019         60,450   $86.63   2/18/2029   4,964   530,106   9,928 (4) 1,060,211
Eglinton   12/30/2016                     4,352   464,750        
Manner   2/21/2017        25,043     12,522   $95.80   2/21/2027   6,583   703,048        

 

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    2/19/2018   12,874     25,749   $103.57   2/19/2028   2,535   270,713   6,759 (3) 721,794
    2/18/2019         49,200   $86.63   2/18/2029   4,041   431,538   8,081 (4) 862,970
(1) Each option generally vests in three equal installments on the first three anniversaries of the grant date, subject to earlier expiration following termination of employment. The consequences for 2019 awards of events such as termination of employment are described under “Key Terms of Equity Awards Granted in 2019” beginning on page 47. These terms also apply to the awards received by the named executive officers in prior years, except that for awards issued in prior years (i) the awards generally provide for partial vesting for the year of termination, except termination for cause, prorated based on the number of whole months served since the immediately preceding vesting date; and (ii) upon a termination of employment by the Company that would entitle the employee to severance benefits, the employee will vest in any outstanding options that would have vested if the employee had remained employed for an additional twelve months.
   
(2) Represents RSUs awarded in 2019, 2018 and 2017. RSUs generally vest 25% on each of the first anniversary and second anniversary of the grant date and 50% on the third anniversary of the grant date. The consequences for 2019 awards of events such as termination of employment are described under “Key Terms of Equity Awards Granted in 2019” beginning on page 47. These terms also apply to the awards received by the named executive officers in prior years, except that for awards issued in prior years (i) the awards generally provide for partial vesting for the year of termination, except termination for cause, prorated based on the number of whole months served since the immediately preceding vesting date; and (ii) upon a termination of employment by the Company that would entitle the employee to severance benefits, the employee will vest in any outstanding options that would have vested if the employee had remained employed for an additional twelve months.
   
  The grant date February 21, 2017 also includes performance shares awarded in 2017 and earned based on the performance period that began January 1, 2017 and ended on December 31, 2019. The number of shares issuable pursuant to the awards was determined in February 2020 and was subject to service-based vesting through February 28, 2020. The performance shares earned by each named executive officer were as follows: Mr. Rusckowski—25,085 shares; Mr. Guinan—7,693 shares; Mr. Mendez—no shares; Mr. Davis—7,359 shares; and Ms. Eglinton Manner—5,017 shares.
   
(3) Represents target performance shares awarded in 2018. The performance period began on January 1, 2018 and ends on December 31, 2020. If the performance goals are met, awards are made in stock in the first quarter following the end of the performance period.
   
(4) Represents target performance shares awarded in 2019. The performance period began on January 1, 2019 and ends on December 31, 2021. If the performance goals are met, awards are made in stock in the first quarter following the end of the performance period. Performance goals and calculation of performance awards are described in “Compensation Discussion and Analysis” beginning on page 24.

 

  (5) Represents fair market value of shares using the closing price on December 31, 2019 of $106.79.

 

2019 Option Exercises and Stock Vested Table

 

This table provides information regarding stock option exercises during 2019, including the number of shares of common stock acquired upon exercise and the aggregate amount realized on each exercise. The table also provides information regarding RSUs that vested and were paid during 2019 and performance share awards that were earned based on the performance period ending on December 31, 2018 and were determined and paid during 2019, including the number of shares awarded and the value realized as of February 28, 2019.

 

    Option Awards   Stock Awards
    Number of   Value   Number of   Value
    Shares   Realized   Shares   Realized
    Acquired   on Exercise   Acquired   on Vesting
Name   on Exercise   ($)   on Vesting   ($)
Rusckowski     244,565       11,698,767       18,933 (1)     1,666,698 (1)
                      38,341 (2)     3,330,299 (2)
                      57,274 (3)     4,996,998 (3)
Guinan     73,005       3,492,194       5,469 (1)     481,488 (1)
                      10,736 (2)     932,529 (2)
                      16,205 (3)     1,414,017 (3)

 

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Mendez     N/A       N/A       N/A (1)     N/A (1)
                      N/A (2)     N/A (2)
                      N/A (3)     N/A (3)
Davis     47,574       1,632,978       5,219 (1)     459,481 (1)
                      10,225 (2)     888,144 (2)
                      15,444 (3)     1,347,624 (3)
Eglinton Manner     N/A       N/A       5,979 (1)     607,250 (1)
                      N/A  (2)     N/A  (2)
                      5,979 (3)     607,250 (3)
 
  (1) RSUs that vested and were paid during 2019.

 

  (2) Performance share awards that were earned based on the performance period ending on December 31, 2018 and were determined and paid during 2019.

 

  (3) Total of (1) and (2).

 

2019 Nonqualified Deferred Compensation Table

 

This table provides information regarding participation by the named executive officers in the SDCP, the Company’s plan that provides for the deferral of compensation on a basis that is not tax-qualified. All named executive officers are eligible to participate in the SDCP. Under the SDCP, participants may defer up to 50% of their regular salary in excess of the Internal Revenue Service limit on compensation eligible for the 401(k) Plan. In addition, participants may defer up to 95% of their annual incentive compensation in excess of the Internal Revenue Service limit on compensation eligible for the 401(k) Plan. The Company provides a 100% matching credit on amounts deferred up to a maximum of 5% of eligible cash compensation, and may, in its discretion, credit additional amounts to a participant’s account. The SDCP is a non-qualified plan under the Internal Revenue Code and does not provide for guaranteed returns on plan contributions. A participant’s deferrals, together with Company matching credits, are adjusted for earnings or losses measured by the rate of return on the notional investments available under the plan to which participants allocate their accounts. Participants may change investment elections, selecting from among investment options offered under the SDCP, on any business day. Distributions are made after termination of employment or on a date, selected by the participant, prior to the termination of employment.

 

                Aggregate   Aggregate
    Executive   Registrant   Aggregate   Withdrawals/   Balance at
    Contributions in   Contributions in   Earnings in   Distributions   12/31/19
Name   2019 ($)(1)   2019 ($)(2)   2019 ($)(3)   ($)   ($)(4)
Rusckowski     690,573       80,435       1,614,450             10,778,774  
Guinan     30,187       30,187       83,407             544,034  
Mendez                              
Davis     251,435       26,781       146,151             1,994,885  
Eglinton Manner     25,057       25,057       29,550             176,969  

 

 
 (1) Amounts deferred at the election of the named executive officer. These amounts are included in the “2019 Summary Compensation Table” beginning on page 45 in 2019 salary and 2019 non-equity incentive plan compensation (payable in 2019).
   
(2) Company matching credits. These amounts may differ from those shown in the column “All Other Compensation” in the “2019 Summary Compensation Table” beginning on page 45 due to timing differences.
   
(3) Earnings (losses) on SDCP accounts. These earnings (losses) are not required to be reported as compensation in the “2019 Summary Compensation Table.”

 

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(4) All amounts contributed by a named executive officer and by the Company in prior years have been reported in the summary compensation table in our previously filed proxy statements in the year earned, to the extent that the executive was named in such proxy statement and the amounts were so required to be reported in such tables.

 

2019 Potential Payments Upon Termination or Change in Control

 

During 2019, the Severance Plan covered all named executive officers. The Severance Plan provides severance benefits in connection with a “qualifying termination,” which is defined to mean a termination of employment: (1) prior to a “change in control,” by the Company other than for “cause;” and (2) after a “change in control,” by the Company other than for “cause” or by the executive officer for “good reason.”

 

Unless the “qualifying termination” occurs in connection with a “change in control,” the severance benefit for Schedule A participants in the Severance Plan generally is a lump sum equal to two times the executive officer’s annual base salary at the annual rate in effect on the date of termination of employment plus two times the annual award of variable compensation at the most recent target level. For Schedule B participants, the severance benefit multiplier is one time, rather than two times, annual base salary plus the annual target award of variable compensation. Mr. Rusckowski is a Schedule A participant, and each of Mr. Guinan, Mr. Mendez, Mr. Davis, and Ms. Eglinton Manner is a Schedule B participant, in the Severance Plan.

 

The executive officer and eligible dependents would also be entitled to coverage under the Company’s group medical and life insurance benefit programs on the same terms the Company provides to similarly situated executives for up to 18 months (in the case of Schedule A participants) or up to 12 months (in the case of Schedule B participants) following a qualifying termination. In addition, the executive officer is entitled to receive outplacement assistance for one year and a lump sum payment equal to the amount of any matching contributions or credits made by the Company to the Company’s 401(k) Plan and the SDCP on behalf of the executive officer during the year preceding termination.

 

Executive officers are not entitled to cash severance benefits on a “change in control.” However, the cash payments due on an involuntary termination by the Company without “cause” or by the named executive officer for “good reason” are increased if the termination occurs in connection with a “change in control.” If the “qualifying termination” occurs during the 24-month period following a “change in control,” or under certain conditions during the 6-month period prior to a “change in control” in anticipation thereof, the severance benefit for Schedule A participants in the Severance Plan will be a lump sum equal to three times the executive officer’s annual base salary and three times the annual award of variable compensation at the most recent target level. For Schedule B participants, the multiplier is two times, rather than three times, the relevant amount. In addition, the executive officer would receive a prorated lump sum payment based on the target incentive award for the year of termination. There is no enhancement to the medical and life insurance coverage and 401(K) plan and SDCP benefits described above for terminations not in connection with a “change in control.” For the treatment of stock options, RSUs and performance share grants upon an executive officer’s termination of employment with rights to receive severance or on a change in control, see “Key Terms of Equity Awards Granted in 2019” beginning on page 47.

 

The Severance Plan uses the following defined terms:

 

  “Cause” means the executive officer’s (1) willful and continued failure to perform duties, (2) willfully engaging in illegal conduct or gross misconduct, (3) engaging in conduct or misconduct that materially harms the reputation or financial position of the Company, (4) obstruction or failure to cooperate with any investigations, (5) commission of a felony or (6) being found liable in any SEC or other civil or criminal securities law action.

 

  “Good reason” generally includes (1) any material adverse changes in the duties, responsibilities or status of the executive officer, (2) a material reduction in base salary or annual performance incentive target or equity incentive compensation target opportunities, (3) a relocation more than 50 miles from the executive officer’s original location that increases the executive officer’s commute by more than 50 miles, (4) the Company’s failure to continue any significant compensation and benefit plans or (5) the Company’s failure to obtain the assumption of the Company’s obligations from any successor.

 

“Change in control” is defined for purposes of the Severance Plan in a manner that is substantially identical to the definition used for purposes of our equity awards (see “Key Terms of Equity Awards Granted in 2019” beginning on page 47).

 

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Under the Severance Plan, the named executive officers are not entitled to any severance benefits on a voluntary termination unless the voluntary termination is in connection with a “change in control” and is for “good reason.” However, in addition to his benefits under the Severance Plan, Mr. Rusckowski is entitled, pursuant to his employment agreement, to treat as a “qualifying termination” under the Severance Plan a termination by him for “good reason” prior to a “change in control,” and his severance upon a “qualifying termination” will include a pro rata bonus, based on actual performance, for his termination year.

 

This table provides information regarding the potential payments that would become payable on an involuntary termination not for “cause” and not in connection with a “change in control.” The table assumes a December 31, 2019 termination date and the closing price of the Company’s common stock as of December 31, 2019, which was $106.79.

 

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        Accelerated   Accelerated