DEF 14A 1 d40074ddef14a.htm DEF 14A DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934 (Amendment No.      )

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Definitive Proxy Statement

 

  

 

Definitive Additional Materials

 

  

 

Soliciting Material under §240.14a-12

KILROY REALTY CORPORATION

(Name of Registrant as Specified in Its Charter)

N/A

(Name of Person(s) Filing Proxy Statement, If Other Than the Registrant)

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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

 

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LOGO


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LOGO


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O N  T H E          

C OV E R          

 

    

Located in one of the most sought after places to live, work, and play, One Paseo is designed with life’s little luxuries in mind. One Paseo is Del Mar’s first true Class A mixed-use development, where a two-minute stroll takes you from your luxury apartment to your office. One Paseo is more than a convenient lifestyle; it is an attitude and spirit of community that, even if you don’t live or work here, invites you to meet up, hang out, and join in. The project consists of two office buildings totaling ~285,000 square feet, over 40 carefully curated shops and restaurants, and 608 luxury apartment units ranging from studios to three-bedroom townhomes.

 

    
 
         

A B O U T          

K I L R O Y          

 

    

Kilroy Realty is a place where innovation works. We have made it our mission to provide creative work environments that spark inspiration and productivity for the country’s very best thinkers and doers. Home to approximately 270 employees. we are building and managing approximately 24 million square feet of innovative, sustainable properties across the Pacific Northwest, San Francisco Bay Area, Greater Los Angeles and Greater San Diego; spaces that redefine life for the better.

 

    
 
         
         


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KILROY REALTY CORPORATION

12200 W. Olympic Boulevard, Suite 200

Los Angeles, California 90064

April 8, 2020

To Our Fellow Stockholders:

On behalf of the entire Board of Directors of Kilroy Realty Corporation (NYSE: KRC), we are pleased to present you with KRC’s 2020 Proxy Statement and invite you to attend KRC’s 2020 annual meeting of stockholders to be held on May 19, 2020.

First and foremost, our thoughts go out to those impacted by the COVID-19 virus, both globally and in the communities in which we live, work and operate. The recent virus outbreak represents an unprecedented period of uncertainty. While it is not clear what the ultimate impact will be on our economy and society, we believe that we are well-positioned to weather this challenging moment in time. We have a strong balance sheet, ended the year with our stabilized portfolio 97% leased and have prefunded the majority of our under-construction development program. We have secured lease commitments on 89% of the office and life science space under construction. In 2019, we fully leased 333 Dexter in the South Lake Union submarket of Seattle, phase 1 of Kilroy Oyster Point in South San Francisco and 9455 Towne Centre in the University Towne Center submarket of San Diego. We replenished our future development pipeline with three acquisitions totaling $359 million in our region’s best submarkets. We also advanced the entitlement process for our approximately 2.3 million square-foot Flower Mart project in the Central SOMA district of San Francisco, receiving unanimous approval from the City’s board of supervisors.

Our solid execution translated to strong financial results, including a 37% total shareholder return during 2019. We generated $886 million in new capital from our capital recycling program and both debt and equity issuances, maintaining the strength of our balance sheet while addressing future funding needs. We also increased our common dividend by 6.6% on an annualized basis. Our total stockholder returns for the one-year, the three-year and the five-year periods ended December 31, 2019 outperformed the returns of both the SNL US REIT Office and BBG REIT Office Property Indices for the corresponding period of time.

Our commitment to and leadership position in sustainability continues to be recognized by various industry groups across the world. We were recognized by GRESB as the North American Listed Office leader for the sixth year in a row. We further deepened our focus on building a more sustainable enterprise by being the first North American REIT to make a commitment to achieve carbon neutral operations by year-end 2020.

The accompanying proxy materials contain detailed information about the matters on which you are being asked to vote at the 2020 annual meeting. We encourage you to submit your vote as soon as possible, whether or not you expect to attend the annual meeting. We urge you to read the materials carefully and vote in accordance with the Board’s recommendations. Your vote is very important to us.

Sincerely,

 

LOGO

John Kilroy

Chairman of the Board,

President and Chief Executive Officer


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KILROY REALTY CORPORATION

12200 W. Olympic Boulevard, Suite 200

Los Angeles, California 90064

April 8, 2020

To Our Fellow Stockholders:

On behalf of the Board, I would like to thank you for your investment in KRC. The Board is steadfast in its commitment to building and protecting the long-term value of the company, particularly during this period of global uncertainty. We take seriously our oversight responsibilities, including overseeing KRC’s strategy as well as KRC’s operating, financial and liquidity risks. Our long-standing commitment to maintaining a conservative balance sheet and focusing on long-term success, as well as diversity, sustainability, best-in-class governance, and linking compensation for our executive leadership team to performance, continue as we believe this is the best way to handle the recent turbulence in the market and drive long-term value for stockholders. We further believe that KRC’s strong long-term financial performance is a testament to our strategy and the performance of the KRC team during a time when the need for effective leadership within organizations has never been greater.

Since KRC’s 2019 annual meeting of stockholders, we reached out to stockholders who together own approximately 80% of KRC’s outstanding common stock and requested meetings to solicit their input on key items of stockholder interest, including our executive compensation program and sustainability initiatives. I personally led meetings with stockholders owning collectively approximately 43% of KRC’s outstanding common stock. Feedback from these meetings helped inform key Board discussions and decisions for 2020.

Our Executive Compensation Committee made changes to the KRC executive compensation structure for 2019 based on feedback received from stockholders in 2018 and at the start of 2019, and made further changes to the executive compensation structure for 2020 based on feedback received from stockholders after the 2019 annual meeting. As discussed in more detail in this Proxy Statement, these included changes to the executive annual cash incentive program to make it simpler and more objective, modifying John Kilroy’s annual equity award opportunity to be entirely linked to Company performance and stockholder returns, and a commitment regarding future equity awards.

During these unprecedented times, our values as a company matter more than ever and we maintain our focus on ensuring that we are a leader in environmental, social and governance issues. Last year, KRC made important progress toward our goal of carbon neutral operations by year-end 2020, a timeframe that exceeds both California and Federal standards by multiple decades. KRC has now achieved LEED-certification for 64% of its existing properties and ENERGY STAR certification for 70%. KRC has also been awarded Fitwel certifications for 42% of its properties, a key measure of how workplaces support human health. Our commitment to sustainability, to diversity and inclusion in our workplaces, and to community engagement in our operations, continues to win us recognition from industry groups and government agencies. For six years running, KRC has been chosen as the North American office leader in sustainability by GRESB, the most widely recognized standard for sustainability practices in our industry. KRC has also been awarded the EPA’s highest ENERGY STAR honor, Partner of the Year Sustained Excellence, for the past five years and NAREIT’s Leader in Light award in the Office Sector for the past six years. Additionally, KRC has also been included in the Dow Jones Sustainability World Index for four years and Bloomberg recently added KRC to its 2020 Gender Equality Index.

We greatly value the feedback we receive from stockholders. Our practice of regularly engaging with stockholders will continue as we want to ensure that your voice is heard. We encourage you to reach out with any questions or concerns that you have whether or not you expect to attend the annual meeting.

Our commitment to our stockholders remains as strong as ever. Thank you for your trust and continued support. We look forward to your participation at the annual meeting.

Sincerely,

 

 

LOGO

Edward Brennan, PhD

Lead Independent Director


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CONTENTS

 

NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
     1  
PROXY SUMMARY      2  
VOTING INFORMATION      9  
PROPOSAL 1 — ELECTION OF DIRECTORS      10  
PROPOSAL 2 — ADVISORY APPROVAL OF OUR
EXECUTIVE COMPENSATION
     19  
PROPOSAL 3 — APPROVAL OF AMENDED AND RESTATED 2006 INCENTIVE AWARD PLAN      21  
PROPOSAL 4 — APPROVAL OF AMENDMENT AND RESTATEMENT OF CHARTER TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 150,000,000 TO 280,000,000      34  
PROPOSAL 5 — RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITOR
     37  
CORPORATE GOVERNANCE      38  

Board Composition and Governance

     39  

Board Committees

     45  

Director Selection, Evaluation and Communications

     46  
AUDIT AND NON-AUDIT FEES      49  

Principal Accountant Fees and Services

     49  
AUDIT COMMITTEE REPORT      50  
OUR EXECUTIVE OFFICERS      51  
COMPENSATION DISCUSSION AND ANALYSIS      53  

Introduction

     53  

Extensive Stockholder Engagement and Response to 2019 Vote

     53  


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CONTENTS

 

2019 Company Performance

     55  

Compensation Philosophy and Objectives

     58  

What We Pay and Why: Executive Compensation Elements

     59  

Design Features of the 2019 Executive Compensation Program

     60  

2019 Named Executive Officer Compensation

     62  

How We Make Compensation Decisions

     75  

Compensation Governance Practices

     78  
COMPENSATION COMMITTEE MATTERS      80  

Compensation Committee Report

     80  

Compensation Committee Interlocks and Insider Participation

     81  
NAMED EXECUTIVE OFFICER COMPENSATION
TABLES
     81  

Summary Compensation Table — 2017, 2018 and 2019

     82  

Grants of Plan-Based Awards — 2019

     88  

Description of Plan-Based Awards

     89  

Outstanding Equity Awards at Fiscal Year End — 2019

     91  

Option Exercises and Stock Vested — 2019

     93  

Nonqualified Deferred Compensation — 2019

     94  

Potential Payments Upon Termination or Change in Control

     96  

Estimated Severance and Change in Control Benefits

     101  
CEO PAY-RATIO DISCLOSURE      103  
EQUITY COMPENSATION PLAN INFORMATION      104  
DIRECTOR COMPENSATION      105  

Director Compensation Table — 2019

     106  


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CONTENTS

 

BENEFICIAL OWNERSHIP OF CERTAIN
STOCKHOLDERS
     107  
OTHER MATTERS      110  

Certain Relationships and Related Party Transactions

     110  

Proposals and Nominations for 2021 Annual Meeting of
Stockholders

     111  
QUESTIONS AND ANSWERS ABOUT THE ANNUAL
MEETING AND VOTING PROCEDURES
     113  
GENERAL INFORMATION      116  

Proxy Solicitation Expenses

     116  

Available Information

     116  

Other Matters

     117  
APPENDIX A — DEFINITIONS AND
RECONCILIATIONS OF NON-GAAP FINANCIAL
MEASURES
     A-1  

Funds From Operations (“FFO”), FFO Per Share,
Adjusted FFO and Adjusted FFO Per Share

     A-1  

Net Operating Income and Same Store Net Operating
Income (on a GAAP and Cash Basis)

     A-3  

Funds Available for Distribution (“FAD”), FAD Per
Share, and FAD Payout Ratio

     A-5  

Adjusted Net Income Available to Common
Stockholders and EBITDA, as Adjusted

     A-7  
APPENDIX B — AMENDED AND RESTATED 2006 INCENTIVE AWARD PLAN      B-1  
APPENDIX C — ARTICLES OF AMENDMENT AND RESTATEMENT      C-1  


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This Proxy Statement contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on our current expectations, beliefs and assumptions, and are not guarantees of future performance. Forward-looking statements are generally identified through the inclusion of words such as “believe,” “expect,” “goals” and “target” or similar statements or variations of such terms and other similar expressions. Numerous factors could cause actual future performance, results and events to differ materially from those indicated in the forward-looking statements, including, among others: global market and general economic conditions and their effect on our liquidity and financial conditions and those of our tenants; adverse economic or real estate conditions generally, and specifically, in the States of California and Washington; risks associated with our investment in real estate assets, which are illiquid, and with trends in the real estate industry; defaults on or non-renewal of leases by tenants; any significant downturn in tenants’ businesses; our ability to re-lease property at or above current market rates; costs to comply with government regulations, including environmental remediations; the availability of cash for distribution and debt service and exposure to risk of default under debt obligations; increases in interest rates and our ability to manage interest rate exposure; the availability of financing on attractive terms or at all, which may adversely impact our future interest expense and our ability to pursue development, redevelopment and acquisition opportunities and refinance existing debt; a decline in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing, and which may result in write-offs or impairment charges; significant competition, which may decrease the occupancy and rental rates of properties; potential losses that may not be covered by insurance; the ability to successfully complete acquisitions and dispositions on announced terms; the ability to successfully operate acquired, developed and redeveloped properties; the ability to successfully complete development and redevelopment projects on schedule and within budgeted amounts; delays or refusals in obtaining all necessary zoning, land use and other required entitlements, governmental permits and authorizations for our development and redevelopment properties; increases in anticipated capital expenditures, tenant improvement and/or leasing costs; defaults on leases for land on which some of our properties are located; adverse changes to, or enactment or implementations of, tax laws or other applicable laws, regulations or legislation, as well as business and consumer reactions to such changes; risks associated with joint venture investments, including our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers; environmental uncertainties and risks related to natural disasters; and our ability to maintain our status as a REIT; uncertainties regarding the impact of the COVID-19 pandemic on our business and the economy generally; and the other factors discussed in the risk factors section of Kilroy Realty Corporation’s most recent annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. All forward-looking statements are based on currently available information, and speak only as of the dates on which they are made. We assume no obligation to update any forward-looking statement that becomes untrue because of subsequent events, new information or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws.


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NOTICE OF ANNUAL MEETING

OF STOCKHOLDERS

 

Date and Time:  

Tuesday, May 19, 2020 at 8:30 a.m. local (Pacific) time

Place:  

Our principal executive offices at 12200 West Olympic Boulevard, Suite 200, Los Angeles,

   

California 90064.

Items of

Business:

 

1.

 

Elect as directors the six nominees named in the attached Proxy Statement.

 

 

2.

 

 

Approve, on an advisory basis, the compensation of our named executive officers.

 

 

3.

 

 

Approval of Amended and Restated 2006 Incentive Award Plan.

   

4.

 

Approval of an amendment and restatement of our Charter to increase the number of shares of

       

common stock that we are authorized to issue from 150,000,000 to 280,000,000.

   

5.

 

Ratify the appointment of Deloitte & Touche LLP as our independent auditor for the year

       

ending December 31, 2020.

Record Date:  

The Board of Directors has fixed the close of business on March 6, 2020 as the record date for determining the stockholders entitled to receive notice of and to vote at the 2020 annual meeting of stockholders (the “Annual Meeting”), or any adjournment(s) or postponement(s) thereof.

Proxy Voting:  

Your vote is very important to us. Whether or not you plan to attend the Annual Meeting, we urge you to submit your proxy or voting instructions as soon as possible to ensure your shares are represented at the Annual Meeting. If you vote at the Annual Meeting, your proxy or voting instructions will not be used.

 

IMPORTANT NOTICE — CONTINGENT VIRTUAL MEETING

 

 

By Order of the Board of Directors,

 

LOGO

 

 

Tyler Rose

Executive Vice President,

Chief Financial Officer and Secretary

April 8, 2020 :: Los Angeles, California

We are closely monitoring the developments regarding the coronavirus (COVID-19). Although we currently intend to hold our Annual Meeting in person, we are sensitive to the public health and travel concerns stockholders may have and the protocols that federal, state, and local governments are imposing. In the event we determine that we need to conduct our Annual Meeting solely by means of remote communication, we will announce the change and provide instructions on how stockholders can participate in the Annual Meeting via press release and by filing additional solicitation materials with the Securities and Exchange Commission. The press release will also be available on the Investors section of our website at http://www.kilroyrealty.com. If you currently plan to attend the Annual Meeting in person, please check our website one week prior to the Annual Meeting.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF  
PROXY MATERIALS  

 

The Notice of Annual Meeting, Proxy Statement and our 2019 Annual Report on Form 10-K are available at www.proxyvote.com. Copies of these proxy materials are also available in the Investors — Financial Reports section of our website at http://www.kilroyrealty.com. You are encouraged to access and review all of the important information contained in our proxy materials before voting.

 

 

KILROY REALTY    PROXY STATEMENT    1


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PROXY SUMMARY

This section highlights information about Kilroy Realty Corporation (“we,” “our,” “us” or the “Company”) and our Board of Directors (the “Board”) that is contained elsewhere in this Proxy Statement. This section does not contain all of the information that you should consider and you should read the entire Proxy Statement before voting.

BUSINESS HIGHLIGHTS

We had another successful year in 2019, generating total stockholder return (“TSR”)(1) of 36.8%, Adjusted FFO Per Share(2) growth of 5.1% and dividend growth of 6.6%. Notably, we had another record-breaking year with respect to our leasing performance. We executed a new Company record of 3.5 million square feet of leases across our stabilized and development portfolios, ending 2019 with our stabilized portfolio 97.0% leased. Our highly experienced leadership team, led by John Kilroy (who brings over 50 years of experience to the organization), continued to invest in both existing and new value-creating opportunities and delivered solid financial results while maintaining a strong balance sheet. Overall, the Company’s executive management has an average tenure of 28 years in the real estate industry.

 

YEAR-END % LEASED

AND OCCUPANCY

  

TOTAL LEASES

EXECUTED

   ADJUSTED FFO PER SHARE GROWTH(2)   

YEAR-END

DEBT / EBITDA,

as adjusted(3)

97.0% &    3.5MM SF    5.1%    6.5x
94.6%

 

Year-End % Leased

Above 95% for Seventh

Consecutive Year

  

Highest in Company History;

Includes Two Leases Totaling

795,000 SF with a Fortune

50 Company

   Year-Over-Year    Continued Focus on Maintaining a Strong Balance Sheet

In addition, our TSR for the five-year period ended December 31, 2019 of 40% outperformed the SNL US REIT Office Index, the BBG REIT Office Property Index and the five-year TSR performance of the median peer(4) in our peer group as shown below.

 

     

TSR for the One-

Year Period Ended

December 31, 2019

 

  

TSR for the Three-

Year Period Ended

December 31, 2019

 

  

TSR for the Five-

Year Period Ended

December 31, 2019

 

 

Kilroy Realty Corporation

 

     36.8      23.2      40.0

 

Median Peer

 

     38.5      6.7      31.2

 

SNL US REIT Office Index

 

     27.5      8.0      21.6

 

BBG REIT Office Property Index

 

     26.5      10.0      21.4

 

MSCI US REIT Index

 

     25.8      26.2      40.5

More information on the Company’s 2019 performance is detailed on pages 55 - 58.

 

 

(1)

For purposes of this Proxy Statement, TSR is calculated assuming dividend reinvestment.

(2)

See Appendix A for the definition of “Adjusted FFO Per Share” and a reconciliation of net income available to common stockholders computed in accordance with generally accepted accounting principles (“GAAP”) to Adjusted FFO.

(3)

The debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio is calculated as the Company’s consolidated debt balance for the applicable period described below, divided by the Company’s EBITDA, as adjusted, for such period. See Appendix A for a definition of EBITDA, as adjusted,” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to EBITDA, as adjusted. The Company’s consolidated debt balance for the applicable period is net of the cash proceeds received from the physical settlement of approximately $252.0 million of at-the-market forward equity transactions executed throughout 2019, and the Company’s EBITDA, as adjusted, reflects our pro rata share of joint ventures and assumes the stabilization of The Exchange on 16th as of the beginning of 2019.

(4)

The peer group identified on page 77 consists of an even number of companies. The “median peer” TSR for the applicable period of time represents the average of the TSRs for the applicable period of time of the middle two companies included in that peer group, when those companies are ranked based on TSR for the applicable period.

 

2    PROXY STATEMENT    KILROY REALTY


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EXTENSIVE STOCKHOLDER ENGAGEMENT AND RESPONSIVENESS

The Executive Compensation Committee (the “Compensation Committee”) values input from the Company’s stockholders regarding the Company’s executive compensation program and made changes to our executive compensation program based on the feedback we received from stockholders in 2019.

 

   

No Intent to Grant Future Special Equity Awards. The Compensation Committee has heard the concerns of certain stockholders with respect to the Company’s equity awards granted in December 2018 and confirmed that there is no current intent to provide any one-time special equity grants to our CEO or any of the named executive officers identified on page 53 (our “NEOs”) in the course of the Company’s ordinary operations.

 

   

Enhanced the Performance-Based Component of our NEOs’ Equity Awards. To further enhance the performance-based nature of our NEOs’ long-term equity compensation opportunities, our CEO’s entire 2020 annual equity award will be subject to performance-based vesting requirements and approximately three-fourths of the 2020 annual equity awards for our other NEOs will be subject to performance-based vesting requirements.

 

   

Simplified Our Annual Cash Incentive Program. We also received feedback from certain stockholders following our 2018 and 2019 annual meetings of stockholders that they would like to see more clarity, simplicity and objectivity in our annual cash incentive program for NEOs.

In response to the feedback received in 2018, the Compensation Committee designed our 2019 annual cash incentive program for NEOs to include objective goals for most of the performance metrics (which was also included in our prior approach) and to assign a weighting to each measurement category. The weighting assigned to each category also produced a maximum bonus opportunity corresponding to that category, thereby reducing the degree of qualitative judgment applied in determining final payouts. In addition, a new environmental, social and governance (“ESG”) category was included as a performance goal (which considers the Company’s achievement of LEED certifications on new developments and the Company’s continued focus on diversity within the Company), and a new general and administrative expense (“G&A Expense”) metric was also added in the operations category. (See pages 65 - 66 for additional details.)

In designing our 2020 annual cash incentive program for NEOs and in response to the feedback received in 2019, the Compensation Committee simplified the number of metrics to be used in evaluating performance to promote a focused alignment of financial goals with Company strategy, with goal weightings varying between the NEOs based on each executive’s area of responsibility. In addition, in an effort to remain aligned with stockholder focus on ESG issues, we again included an ESG-focused category in the 2020 annual cash incentive program metrics with expanded goals including establishment of carbon-neutral operations by the end of 2020, achievement of LEED certifications on new development, annual progress on human capital initiatives (including employee engagement, talent development and diversity), and implementation and efficacy of in-season and off-season stockholder outreach.

 

KILROY REALTY    PROXY STATEMENT    3


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Changes to Annual Cash Incentive Plan Since 2019

 

 

LOGO

COMPENSATION HIGHLIGHTS

The Compensation Committee approved the 2019 compensation arrangements for our NEOs. Below are highlights of our 2019 compensation arrangements for our NEOs from the Compensation Discussion and Analysis (the “CD&A”) section of this Proxy Statement:

Enhanced Operating and Financial Goals

 

   

Key operating and financial goals used to determine 2019 short-term incentives for our NEOs were generally set at levels above the performance goals used for 2018. See the discussion on page 64.

 

   

The FFO target used in the 2019 performance-based long-term incentive awards for our NEOs was set above the FFO target used for 2018.

 

   

Vesting for the 2019 performance-based long-term incentive awards is also contingent on our TSR compared to other office-focused REITs over a three-year period (50% of the performance-based awards) and our average ratio of debt to EBITDA over that period (for the remaining 50% of the performance-based awards).

Continued Emphasis on Long-Term Incentive Awards and Performance-Based Compensation

 

   

Long-term equity compensation, tied to three-year vesting periods, is the largest component of each NEO’s total compensation opportunity.

 

   

Three-quarters of the 2019 annual equity award for our CEO, and the entire 2020 annual equity award for our CEO, is subject to performance-based vesting requirements and includes a performance measure indexed to our relative TSR.

 

   

Approximately two-thirds of the 2019 annual equity awards for our other NEOs, and approximately three-fourths of the 2020 annual equity awards for our other NEOs, are subject to performance-based vesting requirements and include a performance measure based on our relative TSR.

 

4    PROXY STATEMENT    KILROY REALTY


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Approximately 88% of our CEO’s target TDC(5) for 2019 was not guaranteed but rather was tied to metrics related to Company performance and/or stock price, and therefore meaningfully “at risk.”

 

   

Approximately 80% of our other NEOs’ target TDC for 2019 was not guaranteed but rather was tied to metrics related to Company performance and/or stock price, and therefore meaningfully “at risk.”

2019 Target

Total Direct Compensation

 

 

LOGO

 

(5)

As used in this Proxy Statement, “target TDC” means target total direct compensation, which is the executive’s base salary, target annual cash incentive and grant date fair value (based on the value approved by the Compensation Committee and used to determine the number of shares subject to the award) of annual long-term incentive awards granted to the executive in 2019.

 

KILROY REALTY    PROXY STATEMENT    5


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CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY HIGHLIGHTS

The Company and its Board maintain a focus on corporate social responsibility and sustainability. We continuously look for new and better ways to foster a diverse and inclusive work environment, improve employee health and safety, engage our surrounding communities and minimize our environmental impact, all while creating value for our stockholders. As a result, in April 2018, we formed the Corporate Social Responsibility and Sustainability Committee (the “CSR&S Committee”) of our Board. Below are some recent highlights of our diversity and sustainability initiatives. For additional information, see “Corporate Governance — Board Composition and Governance — Corporate Social Responsibility and Sustainability” beginning on page 42.

Diversity at the Company

 

   

We have several women in key leadership roles, including our EVP, Chief Administrative Officer, our Chief Accounting Officer and Controller, our Treasurer, and multiple Senior Vice Presidents, among others. As of December 31, 2019, 50% of supervisors at the Company were women.

 

   

We strive to have a workforce that reflects the diversity of qualified talent that is available in the markets that we serve.

 

   

Multiple women in the Company have received awards for their leadership in the real estate industry and/or the local business regions in which we operate, as further described in our annual sustainability report on our website at https://kilroyrealty.com/commitment-sustainability.

KRC WORKFORCE          

 

 

LOGO

 

LOGO

BLOOMBERG GENDER EQUALITY INDEX

Member 2020; Listed for Superior Diversity and

Inclusion Projects and Results

 

 

Diversity on the Board

 

   

Our Corporate Governance Guidelines and Board Membership Criteria include diversity as a criteria considered by the Nominating/Corporate Governance Committee (the “Governance Committee”) and the Board in considering Board nominations. The Governance Committee and the Board consider diversity, in its broadest sense, reflecting, but not limited to, profession, geography, gender, ethnicity, skills and experience.

 

   

Our Governance Committee and Board will endeavor to include women and individuals from minority groups in the qualified pool from which new director candidates are selected the next time that the Board undergoes Board refreshment.

 

   

One of our six directors (or 17%) is female and serves as the Chair of the Company’s CSR&S Committee.

Human Capital Development

Our human capital development goals are focused on enhancing employee growth, satisfaction and wellness while maintaining a diverse and thriving culture. Several of our human capital development initiatives include the following:

 

   

Diversity. We are committed to cultivating a diverse culture of inclusion that makes a positive difference in our employees’ lives by helping to build meaningful relationships.

 

   

Training and Education. We support the continual improvement of training and education programs for our employees throughout their tenure at the Company, from onboarding to career growth to team management. We also conduct annual performance and career development reviews for all employees.

 

   

Employee Health. The health and wellness of our employees is of central importance to our culture and we conduct an annual wellness survey to help us better tailor our employee health programs.

More information regarding our human capital development goals and initiatives can be found in our annual sustainability report on our website located at the address above.

 

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Sustainability

 

   

We remain a committed leader in the effort to building and operating environmentally sound properties, which has resulted in wide recognition amongst our peers.

 

 

LOGO

 

KILROY REALTY    PROXY STATEMENT    7


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CORPORATE GOVERNANCE HIGHLIGHTS

The Company is committed to good corporate governance, which promotes the long-term interests of stockholders, strengthens accountability of the Board and helps build public trust in the Company. Highlights include the following:

 

Independent Board Leadership and Practices

 

   

Lead Independent Director with a well-defined role and robust responsibilities

 

   

Majority of directors are independent (5 out of 6 current directors)

 

   

Established a CSR&S Committee in April 2018 responsible for advising the Board and consulting with, and generally advising management on, matters related to, among other things, sustainability, diversity and inclusion, philanthropy and community involvement, good corporate citizenship, health and wellness, and other non-financial issues that are of significance to the Company and its stockholders

 

   

Commitment to include women and individuals from minority groups in the qualified pool from which new director candidates are selected

 

   

Commitment to Board refreshment with three new independent directors in the last six years

 

   

Average independent director tenure of 8.4 years

 

   

Comprehensive risk oversight practices, including cybersecurity and insurance

 

   

Regular strategic updates from the CEO

 

   

Regular executive sessions of independent directors

 

   

Regular Board and committee self-evaluations

 

   

Succession Planning Committee oversees regular succession planning efforts

 

   

CEO may only serve on the board of directors of one other public company

 

   

All principal Board committees are composed solely of independent directors

Robust Stockholder Rights

 

   

Stockholder proxy access amended in 2017 to align with best practices and respond to stockholder feedback

 

   

Majority voting for directors in uncontested elections

 

   

Annual director elections (declassified Board)

 

   

Annual Say-on-Pay voting

 

   

Stockholder right to call a special meeting

 

   

Stockholder right to amend Bylaws by a majority vote

 

   

No stockholder rights plan

Best Practices Compensation and Governance Practices

 

   

Independent compensation consultant

 

   

Robust stock ownership guidelines for executives and non-employee directors

 

   

Stock holding requirements

 

   

Anti-hedging policy

 

   

Anti-pledging policy

 

   

Clawback policy

 

   

Related party transactions policy

 

   

No single trigger change in control provisions

 

   

No excise tax gross-ups

 

   

No repricing of underwater stock options without stockholder approval

 

   

Regular engagement with investors; since our 2019 annual meeting, we reached out to stockholders who together own approximately 80% of our outstanding common stock and requested meetings to solicit their input, and our Lead Independent Director and Chair of the Compensation Committee personally led meetings with stockholders who together own approximately 43% of our outstanding common stock

 

 

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VOTING INFORMATION

VOTING MATTERS AND BOARD RECOMMENDATIONS

Our Board is soliciting your proxy to vote on the following matters at our Annual Meeting to be held at 8:30 a.m. local (Pacific) time on Tuesday, May 19, 2020 at our principal executive offices located at 12200 West Olympic Boulevard, Suite 200, Los Angeles, California 90064*, and any adjournments or postponements of the Annual Meeting:

 

        Vote Required    Vote Required     

Board
Recommendation

 

     Page

 

    Proposal No. 1

    

 

Election of Six Director Nominees

  

 

Majority of Votes Cast

    

 

For

    

 

10

 

    Proposal No. 2

    

 

Advisory Approval of Compensation

of NEOs

  

 

Majority of Votes Cast

    

 

For

    

 

19

 

    Proposal No. 3

    

 

Approval of Amended and Restated 2006 Incentive Award Plan

  

 

Majority of Votes Cast

    

 

For

    

 

21

 

    Proposal No. 4

    

 

Approval of Amendment and Restatement of the Company’s Charter to Increase the Number of Shares of Common Stock that the Company is Authorized to Issue From 150,000,000 to 280,000,000

  

 

Two-Thirds of Votes Entitled to be Cast

    

 

For

    

 

34

 

    Proposal No. 5

    

 

Ratification of Appointment of Deloitte & Touche LLP as Independent Auditor for 2020

  

 

Majority of Votes Cast

    

 

For

    

 

37

* We are closely monitoring the developments regarding the coronavirus (COVID-19). In the event we determine that we need to conduct our Annual Meeting solely by means of remote communication, we will announce the change and provide instructions on how stockholders can participate in the Annual Meeting via press release and by filing additional solicitation materials with the Securities and Exchange Commission (the “SEC”). The press release will also be available on the Investors section of our website at http://www.kilroyrealty.com.

HOW TO CAST YOUR VOTE

 

INTERNET    PHONE    MAIL      IN PERSON

Follow the instructions provided in the notice or separate proxy card or voting instruction form you received.

  

Follow the instructions provided in the separate proxy card or voting instruction form you received.

  

Send your completed and signed proxy card or voting instruction form to the address on your proxy card or voting instruction form.

    

Ballots will be provided to anyone who attends and wants to vote at the Annual Meeting.

 

 

 

 

On April 8, 2020, the proxy materials for our Annual Meeting, including this Proxy Statement and our 2019 Annual Report on Form 10-K (the “2019 Annual Report”), were first sent or made available to our stockholders entitled to vote at the Annual Meeting.

 

 

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PROPOSAL 1 –

ELECTION OF DIRECTORS

 

The Board presently consists of six directors. Each director is serving a term that continues until the Annual Meeting and until his or her successor is duly elected and qualified. As further described below, our Board has selected all six of our incumbent directors for re-election at the Annual Meeting.

NOMINEES FOR DIRECTOR

Upon the recommendation of the Governance Committee, the Board nominated John Kilroy, Edward Brennan, PhD, Jolie Hunt, Scott Ingraham, Gary Stevenson and Peter Stoneberg for election to the Board for a term continuing until the annual meeting of stockholders to be held in 2021 and until their respective successors are duly elected and qualified. All of our director nominees are currently directors of the Company and were previously elected to serve on the Board by our stockholders. In this Proxy Statement, references to “John Kilroy” or our CEO are to John B. Kilroy, Jr.

Except as otherwise instructed, proxies solicited by this Proxy Statement will be voted “FOR” the election of each of the nominees to the Board. The nominees have consented to be named in this Proxy Statement and to serve as directors if elected. If any nominee of the Board is unable to serve, or for good cause will not serve, as a director at the time of the Annual Meeting, the persons who are designated as proxies intend to vote, in their discretion, for any other persons that may be designated by the Board. As of the date of this Proxy Statement, the Board has no reason to believe that any of the director nominees named above will be unable or unwilling to stand as a nominee or to serve as a director if elected.

BOARD COMPOSITION

Board Snapshot

The following provides a snapshot of our six director nominees:

 

 

LOGO

 

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Director Nominee Skills, Experience and Background

We believe each of the six director nominees possesses the professional and personal qualifications necessary for effective service as a director. In addition to each nominee’s specific experience, qualifications and skills, we believe that each nominee has a reputation for integrity, honesty and adherence to high ethical standards and has demonstrated business acumen and an ability to exercise sound business judgment. We believe all nominees have a commitment to the Company and to building long-term stockholder value. The following chart shows a summary of the director nominees’ skills and core competencies:

 

Skill/Qualification

 

 

Kilroy

 

 

Brennan

 

 

Hunt

 

 

Ingraham

 

 

Stevenson

 

 

Stoneberg

 

 

Target Tenant Industry Experience

 

Knowledge and experience with the top five industries that make up the majority of our tenant base (Technology; Life Science & Healthcare; Media; and F.I.R.E. — Finance, Insurance and Real Estate)

 

           

 

Executive Leadership

 

Leadership role as company CEO or President

 

           

 

Public Company Board Service

 

Experience as a board member of another publicly traded company

 

                 

 

Investment Experience

 

Relevant investment, strategic and deal structuring experience

 

             

 

Financial Literacy/Accounting Experience

 

Financial or accounting experience and an understanding of financial reporting, internal controls and compliance

 

               

 

Finance/Capital Markets Experience

 

Experience navigating our capital-raising needs

 

             

 

Risk Management Experience

 

Experience overseeing and managing company risk

 

           

 

Advanced Degree/Professional Accreditation

 

Possesses an advanced degree or other professional accreditation that brings additional perspective to our business and strategy

 

               

 

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DIRECTOR NOMINEE

 

LOGO

 

John Kilroy

 

President, Chief Executive Officer

and Chairman of the

Board

 

Age: 71

 

Director Since 1996

 

Committees: CSR&S

 

John Kilroy was elected to serve as our Chairman of the Board (“Chairman”) in February 2013 and has been our President, CEO and a director since our incorporation in September 1996. Having led its private predecessor, Kilroy Industries, in a similar capacity, he became its President in 1981 and was elected CEO in 1991. Mr. Kilroy has been involved in all aspects of commercial real estate acquisition, entitlement, development, construction, leasing, financing and dispositions for the Company and its predecessor since 1967. With Mr. Kilroy’s expertise and guidance, the Company entered the San Francisco and Seattle markets in 2009 and 2010, respectively, very early in the cycle. Mr. Kilroy has actively led the Company to become one of the premier landlords on the West Coast with one of the largest LEED-certified portfolios, spanning some of the strongest markets in the country, from Seattle to San Diego.

 

Mr. Kilroy currently serves on the board of directors of MGM Resorts International (NYSE: MGM), the Policy Advisory Board for the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley and the Advisory Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) and is a member of The Real Estate Roundtable. Mr. Kilroy previously served on the board of New Majority California and as Chairman of New Majority Los Angeles. He is a past trustee of the El Segundo Employers Association, Viewpoint School, Jefferson Center for Character Education and the National Fitness Foundation. He was also a member of the San Francisco America’s Cup Organizing Committee. Mr. Kilroy attended the University of Southern California.

 

Specific Qualifications, Attributes, Skills and Experience:

 

Mr. Kilroy was nominated to serve on our Board because of his more than 50 years of experience with our Company and its predecessor, including 22 years as our President and CEO and approximately 17 and seven years as our predecessor’s President and CEO, respectively, as well as his experience in acquiring, owning, developing and managing real estate, and his service on the board of governors of a national real estate trade organization.

 

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DIRECTOR NOMINEE

 

LOGO

 

Edward Brennan,

PhD

 

Lead Independent Director

 

Age: 68

 

Director Since 2003

 

Committees: Audit,

Compensation (C),

Governance

 

Edward Brennan, PhD has been a member of our Board since July 2003 and our Lead Independent Director since March 2014. He is currently the acting CEO and a director of Abram Scientific, a privately held medical diagnostics company, and a Venture Partner with Strategic Healthcare Investment Partners, a venture capital partnership focused on medical devices and imbedded IT technologies. Until March 2014, Dr. Brennan was CEO of Nexus Dx, Inc. (“Nexus”), a medical diagnostics company located in San Diego, California. In November 2011, Nexus was acquired by Samsung Electronics Co., Ltd. from ITC Nexus Holding Company, where Dr. Brennan had been Chief Integration Officer following the merger of Nexus and International Technidyne Corporation. Previously, he was President and Chief Operating Officer of CryoCor, Inc. until June 2008, when the company was sold to Boston Scientific Corporation. From January 2004, he served as chairman of HemoSense Inc. until its sale to Inverness Medical Innovations in November 2007. While a director of HemoSense since 2000, he was also a Managing Partner of Perennial Ventures, a Seattle-based venture capital firm beginning in 2001. Prior to that time, he served as Vice President at Tredegar Investments. Dr. Brennan has participated in the development, management and financing of new medical technology ventures for over 30 years, including scientific and executive positions with Syntex, Inc., UroSystems, Inc., Medtronic Inc., DepoMed Systems, Inc. and CardioGenesis Corp. Dr. Brennan also works as a House Manager for the Center for the Performing Arts in the City of Mountain View, serves on the board of directors of several private companies and previously served on the Board of Trustees of Goucher College, Baltimore, Maryland. Dr. Brennan holds Bachelor’s Degrees in Chemistry and Biology and a PhD in Biology from the University of California, Santa Cruz.

 

Specific Qualifications, Attributes, Skills and Experience:

 

Dr. Brennan was nominated to serve on our Board because of his executive management and board of directors experience with both public and private companies and specifically, his over 30 years of experience with companies in the health sciences and medical industries, which have historically been target tenants of the Company.

 

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DIRECTOR NOMINEE

 

LOGO

 

Jolie Hunt

 

Independent Director

 

Age: 41

 

Director Since 2015

 

Committees:

Compensation,

Governance, CSR&S (C)

 

Jolie Hunt has been a member of our Board since May 2015. She is the CEO of Hunt & Gather, a marketing and communications agency that helps launch startup ventures, revive the strategic marketing and communications efforts of established brands and utilizes discreet influencer relations to pair like-minded people and places together where there is mutual benefit. Before founding Hunt & Gather in 2013, Ms. Hunt served as Chief Marketing & Communications Officer for AOL, Inc. from 2012 to 2013, and held the role of Senior Vice President, Global Head of Brand & Public Relations at Thomson Reuters from 2008 to 2012. Prior to that time, Ms. Hunt was the Global Director of Corporate & Business Affairs at IBM Corporation from 2006 to 2008 and served as Director of Public Relations for the Financial Times from 2002 to 2006. Ms. Hunt currently serves on the boards of The Lowline and the Civilian Public Affairs Council for West Point Military Academy. Ms. Hunt earned a Bachelor’s Degree in Mass Communication from Boston University and completed the Global Executive Program at Dartmouth University Tuck School of Business and Spain’s IE Business School in 2010.

 

Specific Qualifications, Attributes, Skills and Experience:

 

Ms. Hunt was nominated to serve on our Board because of her significant marketing and communications experience, knowledge about trends in the media, entertainment and technology world and the use of technology to advance company brands, which she acquired through her experience working with multiple multinational corporations and as the founder and Principal of Hunt & Gather. The Board believes these positions and experience bring additional, unique skills, perspective and connections to our Board.

 

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DIRECTOR NOMINEE

 

LOGO

 

Scott Ingraham

 

Independent Director

 

Age: 66

 

Director Since 2007

 

Committees: Audit (C),

Governance

 

Scott Ingraham has been a member of our Board since June 2007. He is the co-owner of Zuma Capital, a firm engaged in private equity and angel investing. He was the co-founder (1999), Chairman and CEO of Rent.com, an Internet-based multi-family real estate site, before it was sold to eBay in 2005. Mr. Ingraham was also a co-founder and previously served as the President and CEO of Oasis Residential (“Oasis”), a public apartment REIT founded in 1992 that merged with Camden Property Trust (“Camden”) in 1998. In addition to serving on the Company’s Board, Mr. Ingraham serves on the board of trust managers of Camden (NYSE: CPT) (since 1998), the audit committee of Camden (for six years previously and beginning again in 2016) and the board of directors of RealPage, Inc. (Nasdaq: RP) (since 2012). He also served on the board of directors of LoopNet (Nasdaq: LOOP) for six years before it was acquired by Co-Star in 2012. Prior to co-founding Oasis, Mr. Ingraham’s career was devoted to real estate finance, mortgage and investment banking. He earned a Bachelor’s Degree in Business Administration from the University of Texas at Austin in 1976.

 

Specific Qualifications, Attributes, Skills and Experience:

 

Mr. Ingraham was nominated to serve on our Board because he possesses extensive financial and real estate knowledge based on his experience as Chairman and CEO of Rent.com, President and CEO of Oasis, a member of the board of trustees and a member of the nominating and corporate governance committee, audit committee and compensation committee of Camden, a member of the board of directors and audit committee of LoopNet and a member of the board of directors and audit committee of RealPage, Inc.

 

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DIRECTOR NOMINEE

 

LOGO

 

Gary Stevenson

 

Independent Director

 

Age: 63

 

Director Since 2014

 

Committees:

Compensation, Governance

 

Gary Stevenson has been a member of our Board since May 2014. Mr. Stevenson is currently the Deputy Commissioner of Major League Soccer and has been President and Managing Director of MLS Business Ventures of Major League Soccer since 2013. Prior to such time, Mr. Stevenson served as President of PAC-12 Enterprises (“Pac-12”) from 2011 to 2013, where he managed a diversified and integrated company, including the Pac-12 Networks and Pac-12 Properties. Before joining Pac-12, Mr. Stevenson was Chairman and CEO of OnSport Strategies, a sports and entertainment consulting company that he founded in 1997 and later sold to Wasserman Media Group in 2007. From 2007 to 2010, Mr. Stevenson served as Principal for Wasserman Media Group to help handle the integration of OnSport Strategies. Mr. Stevenson previously also served as President of NBA Properties, Marketing and Media for the National Basketball Association from 1995 to 1997, as Chief Operating Officer and Executive Vice President of the Golf Channel from 1994 to 1995 and as Executive Vice President, Business Affairs for PGA Tour from 1987 to 1994. Mr. Stevenson received his Bachelor’s Degree from Duke University and his Master’s Degree in Business Administration from George Washington University.

 

Specific Qualifications, Attributes, Skills and Experience:

 

Mr. Stevenson was nominated to serve on our Board because of his extensive business and operational experience, including his founding role at OnSport Strategies, and his roles as President of Pac-12 and currently as President and Managing Partner of MLS Business Ventures of Major League Soccer. The Board believes these positions and Mr. Stevenson’s entrepreneurship success bring a diverse set of skills, experiences and relationships to our Board.

 

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DIRECTOR NOMINEE

 

LOGO

 

Peter Stoneberg

 

Independent Director

 

Age: 64

 

Director Since 2014

 

Committees: Audit,

Governance (C), CSR&S

 

Peter Stoneberg has been a member of our Board since May 2014. Mr. Stoneberg is currently Managing Partner with Dresner Partners, LLC, an investment banking firm that he joined in 2018. He is also Managing Partner of Velocity Ventures, LLC (“Velocity Ventures”), an investment and consulting firm that he founded in 2000. From 2000 to 2006, Mr. Stoneberg was with Bank of America Capital Investors (“BACI”), a private equity firm where he was an investment partner specializing in growth and buyout capital for public and private technology companies. Mr. Stoneberg also served as Senior Managing Director of Montgomery Securities, where he founded and led the Technology M&A group, beginning in 1994 until its acquisition by Bank of America in 1999. Previously, Mr. Stoneberg served in various other investment banking and management roles, including as Managing Director of Broadview Associates, Co-Founder and President of Data/Voice Solutions Corp and Product Marketing Manager for IBM and ROLM Corp. He was also an investor and on the board of directors of Cupertino Electric, Osprey Ventures, Historic Motorsports Productions, Saleslogix Corp. and Netcom Systems. Additionally, Mr. Stoneberg has served as a founder of the San Francisco America’s Cup Organizing Committee and Chair of the Investment Committee of the St. Francis Sailing Foundation. Mr. Stoneberg received his Bachelor’s Degree in Business from the University of Colorado and has completed the Stanford Law School Directors’ College.

 

Specific Qualifications, Attributes, Skills and Experience:

 

Mr. Stoneberg was nominated to serve on our Board because of his significant relationships, experience with and knowledge of large and small companies in the high-technology industry, particularly those within the San Francisco Bay Area, which have become target tenants of the Company. Mr. Stoneberg also possesses extensive knowledge in the areas of raising equity and debt capital, and mergers and acquisitions based on his experience at BACI, Montgomery Securities and Velocity Ventures. Mr. Stoneberg also has experience as an active board member at three companies, including as a member of the audit and compensation committees of Netcom Systems and Cupertino Electric.

 

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VOTE REQUIRED

Each director nominee will be elected at the Annual Meeting if he or she receives a majority of the votes cast with respect to his or her election (that is, the number of votes cast “FOR” the nominee must exceed the number of votes cast “AGAINST” the nominee). The majority voting standard does not apply, however, in a contested election where the number of director nominees exceeds the number of directors to be elected at an annual meeting of stockholders. In such circumstances, directors will instead be elected by a plurality of all the votes cast in the election of directors at the annual meeting at which a quorum is present. The election of directors at the Annual Meeting is not contested.

Under Maryland law, if an incumbent director is not re-elected at a meeting of stockholders at which he or she stands for re-election, then the incumbent director continues to serve in office as a holdover director until his or her successor is elected. To address this “holdover” issue, our Bylaws provide that if an incumbent director is not re-elected due to his or her failure to receive a majority of the votes cast in an uncontested election, the director will promptly tender his or her resignation as a director, subject to acceptance by the Board. The Governance Committee will then make a recommendation to our Board as to whether to accept or reject the tendered resignation, or whether other action should be taken. Our Board will act on the Governance Committee’s recommendation and publicly disclose its decision, along with its rationale, within 90 days after the date of the certification of the election results.

RECOMMENDATION

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” EACH OF THE DIRECTOR NOMINEES.

 

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PROPOSAL 2 –

ADVISORY APPROVAL OF OUR EXECUTIVE COMPENSATION

We are asking our stockholders to approve the compensation of our NEOs (as identified in the CD&A) as disclosed pursuant to the SEC’s executive compensation disclosure rules and set forth in this Proxy Statement (including in the compensation tables, the narratives accompanying those tables and the CD&A). This is commonly referred to as a “Say-on-Pay” vote.

Our executive compensation philosophy is designed to achieve the following objectives:

 

   

To align executive compensation with the Company’s corporate strategies, business objectives and the creation of long-term value for our stockholders without encouraging unnecessary or excessive risk-taking;

 

   

To provide an incentive to achieve key strategic and financial performance measures by linking short-term incentive award opportunities and a substantial portion of long-term incentive award opportunities to the achievement of corporate and operational performance objectives in these areas;

 

   

To set total compensation to be competitive with companies in our peer group identified on page 77, taking into account our active portfolio management strategy and the skill set required to implement that strategy;

 

   

To provide a majority of target TDC(6) for our NEOs in the form of long-term incentive equity awards; and

 

   

To help the Company attract, retain and incentivize talented and experienced individuals in the highly competitive West Coast employment and commercial real estate markets.

The Compensation Committee values input from the Company’s stockholders regarding the Company’s executive compensation program and, as discussed in more detail on pages 53 - 54, made changes to our executive compensation program based on the feedback we received from stockholders in 2019. These changes included enhancing the performance-based component of our NEOs’ 2020 annual equity awards, and refinements to our 2020 annual cash incentive program for NEOs. In addition, the Compensation Committee confirmed that there is no current intent to provide any one-time special equity grants to any of our NEOs in the course of the Company’s ordinary operations.

Below are highlights of the 2019 compensation arrangements for our NEOs as approved by the Compensation Committee.

 

   

Annual Short-Term Incentives Based on Performance Measurement Framework. The Compensation Committee determines annual short-term incentives based on a rigorous performance measurement framework that measures the Company’s actual performance against pre-established financial and operational goals and each NEO’s contribution to that performance. We received feedback from certain stockholders following our 2018 and 2019 annual meetings of stockholders that they would like to see more clarity, simplicity and objectivity in our annual cash incentive program for NEOs. In response to the feedback received, the Compensation Committee made changes to the structure of our annual short-term incentive program as discussed in more detail on pages 65 - 67. Based on the Company’s performance (as reflected on pages 65 - 67), the Compensation Committee determined that the final 2019 short-term incentive amounts for our NEOs would be between 117% and 138% of their target payout levels, and in all cases below the maximum payout opportunities. See “Short-Term Incentives — Decisions for 2019; 2019 Key Operating and Financial Goal Setting and Performance” on pages 63 - 68 for more information about how the goals are set and the Company’s performance.

 

   

Majority of Target TDC is “At Risk”. Approximately 88% of our CEO’s and approximately 80% of our other NEOs’ target TDC for 2019 was not guaranteed but rather was tied directly to the performance of the Company, the Company’s stock price and/or individual performance, as shown in the pay mix charts on page 60.

 

(6)

As used in this Proxy Statement, “target TDC” and “target total direct compensation” mean the executive’s base salary, target annual cash incentive and grant date fair value (based on the value approved by the Compensation Committee and used to determine the number of shares subject to the award) of annual long-term incentive awards granted to the executive in 2019.

 

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Majority of Target TDC is in the Form of Long-Term Incentives. The most significant component of each NEO’s total compensation opportunity is in the form of RSUs that vest over a three-year period. In 2019, approximately 59% of our CEO’s (and approximately 51% of our other NEOs’) target TDC was in the form of RSUs. We believe equity compensation helps to align the interests of our NEOs with those of our stockholders.

 

   

Majority of Long-Term Incentives are Performance-Based. Three-quarters of our CEO’s annual long-term incentive award for 2019, and the entire 2020 annual equity award for our CEO, is subject to performance-based vesting requirements. Approximately two-thirds of the 2019 annual equity awards for our other NEOs, and approximately three-fourths of the 2020 annual equity awards for our other NEOs, are subject to performance-based vesting requirements. Vesting levels of the 2019 annual equity awards with performance-based vesting requirements were contingent on achievement of a threshold level of FFO per share for 2019. If that goal was achieved, vesting will be determined based on our TSR compared to other office-focused REITs over a three-year period (for 50% of the performance-based awards) and our average ratio of debt to EBITDA over that period (for the remaining 50% of the performance-based awards).

 

   

No Additional Equity Awards. The Compensation Committee did not make any additional equity awards to our NEOs in 2019 other than the annual long-term incentive awards described above. The Compensation Committee has confirmed that there is no current intent to provide any one-time special equity grants to any of our NEOs in the course of the Company’s ordinary operations.

We also maintain a range of executive compensation and governance-related policies, which are listed beginning on page 78, that we believe reflect current best practices.

In accordance with the requirements of Section 14A of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the related rules of the SEC, our Board requests your advisory Say-on-Pay vote to approve the following resolution at our Annual Meeting:

RESOLVED, that the compensation paid to the Company’s NEOs, as disclosed in this Proxy Statement pursuant to the Securities and Exchange Commission’s executive compensation disclosure rules (which disclosure includes the “Compensation Discussion and Analysis” section, the compensation tables and the narrative discussion that accompanies the compensation tables), is hereby approved.

This vote is an advisory vote only and will not be binding on the Company, the Board or the Compensation Committee, and will not be construed as overruling a decision by, or creating or implying any additional fiduciary duty for, the Company, the Board or the Compensation Committee. However, the Compensation Committee will consider the outcome of this vote when making future compensation decisions for our NEOs.

The Company’s current policy is to provide our stockholders with an advisory Say-on-Pay vote to approve the compensation of our NEOs each year at the annual meeting of stockholders. It is expected that the next advisory Say-on-Pay vote will be held at the 2021 annual meeting of stockholders.

VOTE REQUIRED

The compensation of our NEOs will be approved, on an advisory basis, if a majority of the votes cast at the Annual Meeting are cast in favor of the proposal.

RECOMMENDATION

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE RESOLUTION APPROVING, ON AN ADVISORY BASIS, THE COMPENSATION OF THE COMPANY’S NEOs.

 

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PROPOSAL 3 –

APPROVAL OF AMENDED AND RESTATED 2006 INCENTIVE AWARD PLAN

General

At the Annual Meeting, stockholders will be asked to approve an amendment and restatement of the 2006 Plan. The amended and restated 2006 Plan was adopted, subject to stockholder approval, by the Board on February 12, 2020.

As of March 25, 2020, 21,707 shares of the Company’s common stock remained available for new award grants under the 2006 Plan. Our Board approved the proposed amended and restated 2006 Plan to provide us with sufficient authority and flexibility to adequately provide for future incentives because we believe that equity awards, denominated in shares of common stock or with a value derived from the value of our common stock, are a critical component of the overall pay package for our executives and select key employees, as such awards align the interests of award recipients with those of our stockholders. The Board believes that increasing the number of shares of the Company’s common stock available for grant under the 2006 Plan by an additional 1,500,000 shares will allow us to continue to grant awards under the 2006 Plan that are payable in shares of common stock into 2024. Please see the disclosure under “Potential Dilution” on page 29 below.

In evaluating our request to approve the amendment and restatement of the 2006 Plan, we ask that you consider the following:

 

   

Responsible Share Usage. The total number of shares of our common stock subject to awards granted under the 2006 Plan per year over the last three years has, on average, been 0.58% of the weighted-average number of shares of our common stock issued and outstanding for the corresponding year (calculated as discussed on page 30), which we believe is very reasonable. In addition, the Compensation Committee has confirmed that there is no current intent to provide any one-time special equity grants to any of our NEOs in the course of the Company’s ordinary operations.

 

   

Significant Focus on Performance-Based Vesting Equity Awards. All of our CEO’s (and approximately three-quarters of our other NEOs’) annual equity awards granted in 2020, and approximately three-quarters of our CEO’s (and approximately two-thirds of each of our other NEOs’) annual equity awards granted in 2018 and 2019, are subject to performance-based vesting requirements, with the vesting of the awards based on FFO Per Share, relative TSR and Average Debt to EBITDA Ratio measures.

 

   

Responsible Share Request Size. We believe that we are asking for enough shares to be able to continue to grant equity awards under the 2006 Plan into 2024 (as discussed on page 31). We want our stockholders to have the ability to regularly validate their support of our approach to equity awards.

The amended and restated 2006 Plan reflects the following amendments that are subject to stockholder approval of this proposal:

 

   

Increase in Aggregate Share Limit. The 2006 Plan currently limits the aggregate number of shares of the Company’s common stock that may be delivered pursuant to all awards granted under the 2006 Plan to 9,220,000 shares. As of March 25, 2020, however, a total of 3,401,011 shares of common stock were subject to outstanding awards granted under the 2006 Plan and, as noted above, only 21,707 shares of common stock were then available for new award grants under the 2006 Plan. The proposed amendments would increase the number of shares of the Company’s common stock that may be delivered pursuant to awards granted under the 2006 Plan by an additional 1,500,000 shares so that the new aggregate share limit for the 2006 Plan would be 10,720,000 shares (the “Share Limit”).

 

   

Section 162(m) of the Internal Revenue Code. The Tax Cut and Jobs Act of 2017 removed the performance-based compensation deductibility exception under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The proposed amendment and restatement would remove certain provisions of the 2006 Plan that provided flexibility to grant performance-based compensation intended to satisfy the compensation deductibility

 

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exception under Section 162(m) of the Internal Revenue Code since that deductibility exception is no longer applicable to any new award grant. The Company may continue to grant performance-based awards under the 2006 Plan; only the provisions related to the performance-based compensation exception of Section 162(m) have been removed since that exception no longer applies to new award grants.

If stockholders do not approve this 2006 Plan proposal, the current share limits under, and the other terms and conditions of, the 2006 Plan will continue in effect.

The principal terms of the 2006 Plan are summarized below. The following summary is qualified in its entirety by the full text of the 2006 Plan, which appears as Appendix B to this Proxy Statement.

Shares Available for Awards; Limits on Awards

Subject to certain adjustments set forth in the 2006 Plan, the maximum number of shares of the Company’s common stock that may be issued or awarded under the 2006 Plan will be increased from 9,220,000 shares to 10,720,000 shares if stockholders approve the proposed amendments to the 2006 Plan.

The following other limits are also contained in the 2006 Plan:

 

   

The maximum number of shares that may be delivered pursuant to options qualified as incentive stock options granted under the plan is 8,320,000 shares.

 

   

The maximum number of shares subject to those options and stock appreciation rights that are granted under the plan during any one calendar year to any one individual is 1,500,000 shares.

 

   

The maximum number of shares subject to awards granted under the plan during any one plan year to any one individual is 1,500,000 shares and the maximum amount that may be paid in cash during any one plan year to any one individual is $30,000,000.

 

   

The maximum grant date fair value for awards granted to a non-employee director under the 2006 Plan during any one calendar year is $300,000, except that this limit is $500,000 as to (1) a non-employee director who is serving as an independent Chair of the Board or as our Lead Independent Director at the time the applicable grant is made or (2) any new non-employee director for the calendar year in which the non-employee director is first elected or appointed to the Board. For purposes of this limit, the “grant date fair value” of an award means the value of the award on the date of grant of the award determined using the equity award valuation principles applied in the Company’s financial reporting. This limit does not apply to, and will be determined without taking into account, any award granted to an individual who, on the grant date of the award, is an officer or employee of the Company or one of its subsidiaries. This limit applies on an individual basis and not on an aggregate basis to all non-employee directors as a group.

To the extent that an award terminates, expires, lapses for any reason, or is settled in cash, any shares subject to the award will again be available for the grant of awards pursuant to the 2006 Plan. Except with respect to awards of stock options and stock appreciation rights (or “SARs”), any shares of common stock tendered by an award-holder or withheld by the Company to satisfy the grant or exercise price or tax withholding obligations with respect to any award will again be available for the grant of new awards pursuant to the 2006 Plan. To the extent that shares are delivered pursuant to the exercise of a stock option or SAR granted under the 2006 Plan, the number of underlying shares as to which the exercise related count against the shares available for grant or issuance under the 2006 Plan, without regard to the number of shares actually delivered to the participant upon exercise of the award. The Company may not increase the applicable share limits of the 2006 Plan by repurchasing shares of common stock on the market (by using cash received through the exercise of stock options or otherwise).

Awards

The 2006 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, profits interest units in Kilroy Realty, L.P., our operating partnership (the “Operating Partnership”), as described below, performance bonus awards and other incentive awards to eligible individuals.

 

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Stock Options

Stock options, including incentive stock options, as defined under Section 422 of the Internal Revenue Code, and nonqualified stock options, may be granted pursuant to the 2006 Plan. The option exercise price of all stock options granted pursuant to the 2006 Plan will not be less than 100% of the fair market value of our stock on the date of grant. No incentive stock option may be granted to a grantee who owns more than 10% of our stock unless the exercise price is at least 110% of the fair market value at the time of grant. Notwithstanding whether an option is designated as an incentive stock option, to the extent that the aggregate fair market value of the shares with respect to which such option is exercisable for the first time by any optionee during any calendar year exceeds $100,000 (or the option otherwise fails to qualify as an incentive stock option), such option will be treated as a nonqualified stock option. Stock options may be exercised as determined by the plan administrator, but in no event after the tenth anniversary of the date of grant. However, in the case of an option granted to a person who owns more than 10% of our stock on the date of grant, such term will not exceed five years.

Restricted Stock

Awards of restricted stock may be granted under the 2006 Plan. Restricted stock will be subject to restrictions on transferability and other such restrictions as the plan administrator may determine, including, without limitation, limitations on the right to vote restricted stock or the right to receive dividends on the restricted stock. These restrictions may lapse separately or in combination at such times, pursuant to such circumstances, in such installments, or otherwise, as the plan administrator determines at the time of grant of the award or thereafter.

Stock Appreciation Rights

A SAR is the right to receive payment of an amount equal to the excess of the fair market value of a share of our stock on the date of exercise of the SAR over the fair market value of a share of common stock on the date of grant of the SAR. The plan administrator may issue SARs in such amounts and on such terms and conditions as it may determine, consistent with the terms of the 2006 Plan, except that SARs may not be exercised more than ten years after the applicable date of grant. The plan administrator may elect to pay SARs in cash, in common stock or in a combination of cash and common stock.

Other Awards Under the Plan

The 2006 Plan provides that the plan administrator may also grant or issue performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, profits interest units, performance bonus awards, and other incentive awards or any combination thereof to eligible employees, consultants and directors. The terms of each such grant or issuance will be set by the plan administrator in its discretion. The plan administrator may establish the exercise price or purchase price, if any, of any such award.

Any such award will only vest or be exercisable or payable while the participant is an employee or consultant of the Company, the Operating Partnership, or Kilroy Realty TRS, Inc. (the “TRS”) or any of their subsidiaries, or a director of the Company or the TRS, except that the plan administrator may provide that such an award may vest or be exercised or paid subsequent to a termination of employment or service, as applicable, or following a change in control (as defined in the 2006 Plan) of the Company, or because of the participant’s retirement, death or disability, or otherwise.

Payments with respect to any such award, other than profits interest units, will be made in cash, in common stock or a combination of both, as determined by the plan administrator. Each award granted under the 2006 Plan will be subject to such additional terms and conditions as determined by the plan administrator and will be evidenced by a written award agreement.

Performance Shares. Awards of performance shares are denominated in a number of shares of our stock and may be linked to any performance criterion or criteria determined appropriate by the plan administrator, in each case on a specified date or dates or over any period or periods determined by the plan administrator.

Performance Stock Units. Awards of performance stock units are denominated in units equivalent to shares of our stock and/or units of value, including dollar value of shares of our stock, and may be linked to any performance criterion or criteria determined appropriate by the plan administrator, in each case on a specified date or dates or over any period or periods determined by the plan administrator.

 

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Dividend Equivalents. Dividend equivalents are rights to receive the equivalent value (in cash or our stock) of dividends paid on our stock. They represent the value of the dividends per share paid by us, calculated with reference to the number of shares that are subject to any award held by the participant, provided that as to any dividend equivalent rights granted in connection with an award granted under the 2006 Plan after April 4, 2017 that is subject to vesting requirements, no dividend equivalent payment will be made unless the related vesting conditions of the award are satisfied (or, in the case of a restricted stock or similar award where the dividend must be paid as a matter of law, the dividend payment will be subject to forfeiture or repayment, as the case may be, if the related vesting conditions are not satisfied).

Stock Payments. Stock payments include payments in the form of our stock or options or other rights to purchase our stock, in each case made in lieu of all or any portion of the compensation that would otherwise be paid to the participant. The number of shares will be determined by the plan administrator and may be based upon specific performance criteria determined appropriate by the plan administrator, determined on the date such stock payment is made or on any date thereafter.

Deferred Stock. Deferred stock may be awarded to participants and may be linked to any performance criteria determined to be appropriate by the plan administrator. Stock underlying a deferred stock award will not be issued until the deferred stock award has vested, pursuant to a time-based vesting schedule or upon the satisfaction of performance criteria set by the plan administrator. Unless otherwise provided by the plan administrator, recipients of deferred stock generally will have no rights as a stockholder with respect to such deferred stock until the time the vesting conditions are satisfied and the stock underlying the deferred stock award has been issued.

Restricted Stock Units. Restricted stock units, or “RSUs,” may be granted to any participant in such amounts and subject to such terms and conditions as determined by the plan administrator. At the time of grant, the plan administrator will specify the date or dates on which the RSUs will become fully vested and nonforfeitable, and may specify such conditions (if any) to vesting as it deems appropriate. At the time of grant, the plan administrator will specify the maturity date applicable to each grant of RSUs which will be no earlier than the vesting date or dates of the award and may be determined at the election of the participant. On the maturity date, we will transfer to the participant one unrestricted, fully transferable share of our stock (or, if provided in the award, the cash value of a share of our stock at that time) for each RSU scheduled to be paid out on such date and not previously forfeited. The plan administrator will specify the purchase price, if any, to be paid by the participant to us for such shares of our stock.

Profits Interest Units. To the extent authorized by the partnership agreement of the Operating Partnership, the 2006 Plan authorizes the grant of units in the Operating Partnership that are intended to constitute “profits interests” within the meaning of the Internal Revenue Code and published Internal Revenue Service guidance. Profits interests may only be granted to participants for the performance of services to or for the benefit of the Operating Partnership in the participant’s capacity as a partner in the Operating Partnership, in anticipation of the participant becoming a partner of the Operating Partnership, or as otherwise determined by the plan administrator, provided that the profits interest units would constitute “profits interests” within the meaning of the Internal Revenue Code, Treasury Regulations promulgated thereunder and any published guidance by the Internal Revenue Service. At the time of grant, the plan administrator will specify the number of profits interest units subject to the award, the purchase price, if any, of the units and the date and conditions on which the profits interest units will vest. The plan administrator may impose transferability restrictions and other restrictions upon profits interest units.

Other Incentive Awards. Participants as selected by the plan administrator may be granted other incentive awards that provide for shares of common stock or the right to purchase shares of common stock or that have a value derived from the value of, or an exercise or conversion privilege at a price related to, or that are otherwise payable in or based on, shares of common stock, stockholder value or stockholder return. Other incentive awards may also be linked to any performance criterion or criteria determined appropriate by the plan administrator. Amounts payable under other incentive awards may be in cash, common stock, units of the Operating Partnership or a combination of any of the foregoing, as determined by the plan administrator.

Performance Bonus Awards. Any participant selected by the plan administrator may be granted a cash bonus payable upon the attainment of performance goals that are established by the plan administrator and relate to any performance criterion or criteria determined appropriate by the plan administrator on a specified date or dates or over any period or periods determined by the plan administrator.

 

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Administration

The Board or one or more committees appointed by the Board administers the 2006 Plan. The Board has delegated general administrative authority for the 2006 Plan to the Compensation Committee. The Compensation Committee may delegate some or all of its authority with respect to the 2006 Plan to another committee of directors, and certain limited authority to grant awards to employees may be delegated to one or more officers of the Company. The appropriate acting body, be it the Board, a committee within its delegated authority, or an officer within his or her delegated authority, is referred to in this proposal as the “Administrator.”

The Administrator has broad authority under the 2006 Plan with respect to award grants including, without limitation, the authority:

 

   

To select participants and determine the type(s) of award(s) that they are to receive;

 

   

To determine the number of shares that are to be subject to awards and the terms and conditions of awards, including the price (if any) to be paid for the shares or the award and any vesting conditions applicable to the award (or determine that the award is to be fully vested at grant);

 

   

To cancel, modify or waive the Company’s rights with respect to, or modify, discontinue, suspend or terminate any or all outstanding awards, subject to any required consents;

 

   

To accelerate or extend the vesting or exercisability or extend the term of any or all outstanding awards;

 

   

Subject to the other provisions of the 2006 Plan, to make certain adjustments to an outstanding award and to authorize the conversion, succession or substitution of an award; and

 

   

To determine whether an award may be settled in, or the purchase price of an award or shares of the Company’s common stock to be paid in, the form of cash, shares, other awards, or such other form as the Administrator may authorize and as permitted by law, and to provide for the deferred payment of awards and any terms applicable to deferrals.

While all of our employees are technically eligible to receive awards under the 2006 Plan, in 2019 we granted awards to 63 employees and each of our non-employee directors. The Administrator uses its judgment to determine who will receive awards, the type(s) of award grants, and the size and particular terms and conditions of those awards. These determinations may change based on any number of variables, including, without limitation, changes in compensation practices at companies that we consider in our peer group from time to time or changes in compensation practices in the market generally, the need to attract, retain and incentivize key talent, the benefit of enhancing the link between the interests of award recipients with those of our stockholders and the potential dilutive impact of those awards.

No Repricing

In no case (except due to an adjustment to reflect a stock split or other event referred to under “Adjustments” below, or any repricing that may be approved by stockholders) will the 2006 Plan administrator (1) amend an outstanding stock option or stock appreciation right to reduce the exercise price or base price of the award, (2) cancel, exchange, or surrender an outstanding stock option or stock appreciation right in exchange for cash or other awards for the purpose of repricing the award, or (3) cancel, exchange, or surrender an outstanding stock option or stock appreciation right in exchange for an option or stock appreciation right with an exercise or base price that is less than the exercise or base price of the original award.

Eligibility

Employees and consultants of the Company, the TRS, the Operating Partnership or their subsidiaries, and directors of the Company or the TRS, are eligible to be granted non-qualified stock options, restricted stock, stock appreciation rights, performance share awards, performance stock units, dividend equivalents, stock payments, deferred stock, RSUs, profits interest units, other incentive awards and performance bonus awards under the 2006 Plan. Currently, approximately 270 officers and employees of the Company and its subsidiaries (including all of the Company’s NEOs), and each of the Company’s five non-employee directors, are considered eligible under the 2006 Plan. Only employees of the Company and its qualifying corporate subsidiaries are eligible to be granted options that are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code.

 

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Adjustments

As is customary in incentive plans of this nature, each share limit and the number and kind of shares available under the 2006 Plan and any outstanding awards, as well as the exercise or purchase prices of awards, and performance targets under certain types of performance-based awards, are subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, stock splits, stock dividends, or other similar events that change the number or kind of shares outstanding, and extraordinary dividends or distributions of property to the stockholders.

Assumption and Termination of Awards

Generally, and subject to limited exceptions set forth in the 2006 Plan, if the Company dissolves or undergoes certain corporate transactions such as a merger, business combination, or other reorganization or a sale of substantially all of its assets, the outstanding awards granted under the 2006 Plan will not automatically accelerate and become vested under the terms of the 2006 Plan as long as there is provision for the awards to be substituted for, assumed or otherwise continued after the event. If there is no such provision for the awards to be substituted for, assumed or otherwise continued after the event (that is, the awards are to be terminated in connection with the change in control event), the awards would generally become fully vested and, in the case of options, exercisable. The Administrator also has the discretion to establish other change in control provisions with respect to awards granted under the 2006 Plan.

Transfer Restrictions

Subject to certain exceptions contained in Section 10.3 of the 2006 Plan, awards under the 2006 Plan generally are not transferable by the recipient other than by will or the laws of descent and distribution and are generally exercisable, during the recipient’s lifetime, only by the recipient. Any amounts payable or shares issuable pursuant to an award generally will be paid only to the recipient or the recipient’s beneficiary or representative. The Administrator has discretion, however, to establish written conditions and procedures for the transfer of awards to other persons or entities, provided that such transfers comply with applicable federal and state securities laws and are not made for value (other than nominal consideration, settlement of marital property rights, or for interests in an entity in which more than 50% of the voting securities are held by the award recipient or by the recipient’s family members).

No Limit on Other Authority

The 2006 Plan does not limit the authority of the Board or any committee to grant awards or authorize any other compensation, with or without reference to the Company’s common stock, under any other plan or authority.

Termination of or Changes to the 2006 Plan

The Board may amend or terminate the 2006 Plan at any time and in any manner. Stockholder approval for an amendment will be required only to the extent then required by applicable law or any applicable listing agency or required under Sections 422 or 424 of the Internal Revenue Code to preserve the intended tax consequences of the 2006 Plan. For example, and as reflected by this Proposal No. 3, stockholder approval will be required for any amendment that proposes to increase the maximum number of shares that may be delivered with respect to awards granted under the 2006 Plan. Adjustments as a result of stock splits or similar events will not, however, be considered an amendment requiring stockholder approval. Unless terminated earlier by the Board, the authority to grant new awards under the 2006 Plan will terminate on April 3, 2027. Outstanding awards, as well as the Administrator’s authority with respect thereto, generally will continue following the expiration or termination of the 2006 Plan. Generally speaking, outstanding awards may be amended by the Administrator (except for a repricing), but the consent of the award holder is required if the amendment (or any 2006 Plan amendment) materially and adversely affects the holder.

Federal Income Tax Consequences

Stock Options

A participant receiving a stock option will not recognize taxable income upon grant. With respect to nonqualified stock options, the participant will recognize taxable income at the time of exercise in an amount equal to the difference between the option exercise

 

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price and the fair market value of the shares at the time of exercise, and the Company, the Operating Partnership or the participant’s employer, as applicable, is generally entitled to deduct the amount recognized by the participant as taxable income. If applicable holding period requirements are met, the participant receiving incentive stock options will not recognize taxable income at the time of exercise. However, the excess of the fair market value of the shares received over the option price is an item of tax preference income potentially subject to the alternative minimum tax. If stock acquired upon exercise of an incentive stock option is held for a minimum of two years from the date of grant and one year from the date of exercise, the gain or loss (in an amount equal to the difference between the fair market value on the date of sale and the exercise price) upon disposition of the stock will be treated as a long-term capital gain or loss, and the Company, the Operating Partnership or the participant’s employer, as applicable, will not be entitled to any deduction. If the holding period requirements are not met, the incentive stock option will be treated as one which does not meet the requirements of the Internal Revenue Code for incentive stock options and the tax consequences described for nonqualified stock options will apply. Certain additional special rules apply if the exercise price for an option is paid in stock previously owned by the participant rather than in cash.

Other Awards

The current federal income tax consequences of other awards authorized under the 2006 Plan generally follow certain basic patterns: SARs are taxed and deductible in substantially the same manner as nonqualified stock options; nontransferable restricted stock subject to a substantial risk of forfeiture results in income recognition equal to the excess of the fair market value over the price paid, if any, only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant); stock-based performance awards, dividend equivalents and other types of awards are generally subject to tax at the time of payment. Compensation otherwise effectively deferred is taxed when paid. In each of the foregoing cases, the Company, the Operating Partnership or the participant’s employer, as applicable, will generally have a corresponding deduction at the time the participant recognizes income.

Profits Interest Units

Profits interest units that constitute “profits interests” within the meaning of the Internal Revenue Code and published Internal Revenue Service guidance (“PIUs”) will generally not be taxed at the time of grant, though the holder will be required to report on his or her income tax return his or her allocable share of the issuing partnership’s income, gain, loss, deduction and credit, regardless of whether the issuing partnership makes a distribution of cash. Instead, such PIUs are generally taxed upon a disposition of the PIU or distributions of cash to the extent that such amounts received exceed the basis in the PIUs. Generally, no deduction is available to the Company upon the grant, vesting or disposition of the PIUs. If PIUs are granted to a recipient who is an employee of the Company, the issuance of those profits interests may cause wages paid to the recipient to be characterized and subject to taxation as self-employment income. If treated as a self-employed partner, the recipient will be required to make quarterly income tax payments rather than having amounts withheld by the Company, the Operating Partnership or the participant’s employer, as applicable. Additionally, if self-employed, the recipient must pay the full amount of all “FICA” employment taxes on the employee’s compensation (in the form of “SECA” taxes rather than “FICA” taxes), whereas regular employees are only responsible for 50% of these taxes. To date, the Internal Revenue Service has not issued definitive guidance regarding the treatment of wages paid to partner-employees.

Code Section 409A

Certain types of awards under the 2006 Plan may constitute, or provide for, a deferral of compensation under Section 409A. Unless certain requirements set forth in Section 409A are complied with, holders of such awards may be taxed earlier than would otherwise be the case (e.g., at the time of vesting instead of the time of payment) and may be subject to an additional 20% penalty tax (and, potentially, certain interest penalties and penalties under applicable state tax laws). To the extent applicable, we intend to structure awards granted under the 2006 Plan to comply with Section 409A and the Department of Treasury regulations and other interpretive guidance that may be issued pursuant to Section 409A or an available exemption from Section 409A. There can be no assurance, however, that the requirements of Section 409A will, in fact, be satisfied.

Tax Deductibility and Section 162(m) of the Internal Revenue Code

Section 162(m) of the Internal Revenue Code generally prohibits a publicly-held company from deducting compensation paid to a current or former named executive officer that exceeds $1 million during the tax year. Certain awards granted before November 2,

 

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2017 that were based upon attaining pre-established performance measures that were set by the Compensation Committee under a plan approved by our stockholders, as well as amounts payable to former executives pursuant to a written binding contract that was in effect on November 2, 2017, may qualify for an exception to the $1 million deductibility limit.

The Company notes this deductibility limitation as one of the factors in its consideration of compensation matters. However, the Company generally has the flexibility to take any compensation-related actions that it determines are in the Company’s and its stockholders’ best interest, including designing and awarding compensation for our employees that is not fully deductible for tax purposes. In addition, we believe that we qualify as a REIT under the Internal Revenue Code and are not subject to federal income taxes, meaning that the payment of compensation that is not deductible under Section 162(m) should not have a material adverse consequence to us, provided we continue to remain qualified as a REIT under the Internal Revenue Code.

Other Considerations

Awards that are granted, accelerated or enhanced upon the occurrence of a change in control may give rise, in whole or in part, to excess parachute payments within the meaning of Section 280G of the Internal Revenue Code to the extent that such payments, when aggregated with other payments subject to Section 280G, exceed the limitations contained in that provision. Such excess parachute payments are not deductible by the Company and are subject to an excise tax of 20% payable by the recipient.

The 2006 Plan is not subject to any provision of the Employee Retirement Income Security Act of 1974, as amended, and is not qualified under Section 401(a) of the Internal Revenue Code.

The preceding discussion of federal income tax consequences does not purport to be a complete analysis of all of the potential tax effects of the 2006 Plan. It is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change. No information is provided with respect to foreign, state or local tax laws, or estate and gift tax considerations.

Specific Benefits Under the 2006 Plan

The Company has not granted any awards that are conditioned on stockholder approval of this Proposal No. 3. Except for the non-employee director awards discussed below, the Company is not currently considering any new award grants under the 2006 Plan and the number and type of awards that the Company may grant in the future under the 2006 Plan (within the express limits of the 2006 Plan, discussed above) is not determinable. If the proposed share increase for the 2006 Plan had been in effect in 2019, the Company expects that its award grants for 2019 would not have been different from those actually made in 2019 under the 2006 Plan. For more information regarding those awards, please see the following discussion and, for more detailed information on the awards granted to our NEOs during 2019, see the material under “Compensation Discussion and Analysis” below and the executive compensation tables under “Named Executive Officer Compensation Tables” below.

Non-Employee Director Awards

The Company is not currently considering any new award grants under the 2006 Plan except for the annual grants of shares of common stock to non-employee directors described under “Director Compensation” below. These annual grants are determined based on the closing price of our common stock on the date of the grant as described below. Assuming, for illustrative purposes only, that the price of the common stock used for the conversion of the dollar amount for the annual grants under the non-employee director program ($100,000) into shares was $60.19 (the closing price of a share of our common stock on April 1, 2020), the number of shares that would be allocated to the Company’s five non-employee directors as a group pursuant to the annual grant formula over the remaining six-year term of the 2006 Plan (2020 through 2026) is approximately 49,860 shares. This figure represents the continuation of the current non-employee director equity awards for the five non-employee directors over that six-year period. The actual number of shares that we may issue depends on, among other future variables, the number of our non-employee directors from time to time, the price of our common stock on the applicable grant date that is used to convert the applicable grant-date value into a number of shares, and whether the Board changes the $100,000 grant date value or other aspects of our non-employee director compensation program in the future.

 

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Potential Dilution

The following paragraphs include additional information to help you assess the potential dilutive impact of the Company’s equity awards and the proposed amendments to the 2006 Plan. The 2006 Plan is the Company’s only equity compensation plan.

“Overhang” refers to the number of shares of our common stock that are subject to outstanding awards or remain available for new award grants. The following table shows the total number of shares of our common stock that were subject to outstanding RSU awards granted under the 2006 Plan, that were subject to outstanding stock options granted under the 2006 Plan, and that were then available for new award grants under the 2006 Plan as of December 31, 2019 and as of March 25, 2020. None of the outstanding awards covered interests in our Operating Partnership. In this 2006 Plan proposal, the number of shares of the Company’s common stock subject to RSU awards granted during any particular period or outstanding on any particular date is presented based on the actual number of shares of the Company’s common stock covered by those awards. As to the number of shares of the Company’s common stock subject to RSU awards outstanding on any particular date, the information is presented including the crediting of dividend equivalents on the awards through that date, to the extent the dividend equivalents are payable in shares of common stock. For awards subject to performance-based vesting requirements, the number of shares are presented as follows: (1) with respect to any such award granted during 2017, at 129.5% (or 144.8% in the case of the award for our CEO) of the “target” number of shares subject to the award, which is the actual number of shares that vested due to performance during the three-year performance period, (2) with respect to any such award granted in February 2018, at 200% (or 262.5% in the case of the award for our CEO) of the “target” number of shares subject to the award, based on the Company’s FFO Per Share performance for 2018 and assuming maximum performance for the other performance measures applicable to the award (while the final vesting of the awards may range from approximately 100% to 200% (between 87.5% to 262.5% in the case of the award for our CEO) of the “target” number of shares awarded based on performance over the three-year performance period applicable to the awards), (3) with respect to any such award granted in December 2018, at 200% of the “target” number of shares subject to the award (while the final vesting of the awards may range from approximately 0% to 200% of the “target” number of shares awarded based on performance over the four-year performance period applicable to the awards), and (4) with respect to any such award granted during 2019, at 200% (or 262.5% in the case of the award for our CEO) of the “target” number of shares subject to the award, based on the Company’s FFO Per Share performance for 2019 and assuming maximum performance for the other performance measures applicable to the award (while the final vesting of the awards may range from approximately 100% to 200% (between 87.5% to 262.5% in the case of the award for our CEO) of the “target” number of shares awarded based on performance over the three-year performance period applicable to the awards).

 

     

As of December 31, 2019

    

As of March 25, 2020

 

Shares subject to outstanding RSU awards (including vested but deferred RSUs and excluding performance-based vesting awards)

     1,615,226        1,613,628  

Shares subject to outstanding performance-based vesting RSU awards

  

 

1,562,378

 

  

 

1,778,382

 

Shares subject to outstanding stock options

  

 

9,000

  

 

9,000

Shares available for new award grants

  

 

388,641

 

  

 

21,707

 

As of March 25, 2020, the weighted-average exercise price of the outstanding Company stock options was $42.61 and the weighted-average remaining term of the outstanding Company stock options was 1.9 years. The weighted-average number of shares of the Company’s common stock issued and outstanding in each of the last three years was 98,133,561 shares issued and outstanding in 2017 (100,246,567 shares assuming the conversion of all common units of the Operating Partnership); 99,972,359 shares issued and outstanding in 2018 (102,025,276 shares assuming the conversion of all common units of the Operating Partnership); and 103,200,568 shares issued and outstanding in 2019 (105,223,975 shares assuming the conversion of all common units of the Operating Partnership). The number of shares of the Company’s common stock issued and outstanding as of December 31, 2019 and March 25, 2020 was 553,333 shares and 115,067,924 shares, respectively (108,039,574 and 117,089,211, respectively, assuming the conversion of all common units of the Operating Partnership). In this 2006 Plan proposal and except as noted above, the number of shares of the Company’s common stock that are outstanding for any particular period or on any particular date do not include common units of the Operating Partnership that are convertible into our common stock.

 

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“Burn rate” refers to how many shares are subject to awards that we grant over a particular period of time. The total number of shares of the Company’s common stock subject to awards that the Company granted under the 2006 Plan in each of the last three years, and to date (as of March 25, 2020) for 2020, are as follows:

 

   

320,061 shares in 2017 (which was 0.33% of the weighted-average number of shares of the Company’s common stock issued and outstanding in 2017), of which no shares were subject to stock option awards, 142,101 shares were subject to RSU awards (excluding performance-based vesting awards) and 177,960 shares were subject to performance-based vesting RSU awards (presented at 129.5% (or 144.8% in the case of the award for our CEO) of the “target” number of shares subject to the award which is the actual number of shares that vested due to performance during the three-year performance period);

 

   

1,038,228 shares in 2018 (which was 1.04% of the weighted-average number of shares of the Company’s common stock issued and outstanding in 2018), of which no shares were subject to stock option awards, 437,216 shares were subject to RSU awards (excluding performance-based vesting awards), and 601,012 shares were subject to performance-based vesting RSU awards (presented at 150% (or 175% in the case of the award for our CEO) of the “target” number of shares subject to the awards granted in February 2018, while the final vesting of the awards may range from approximately 100% to 200% (between 87.5% to 262.5% in the case of the award for our CEO) of the “target” number of shares subject to the awards based on performance over the three-year performance period applicable to the awards, after giving effect to FFO Per Share achieved by the Company for 2018; and presented at the “target” number of shares subject to the awards granted in December 2018, while the final vesting of the awards may range from 0% to 200% of the “target” number of shares subject to the awards based on performance over the four-year performance period applicable to the awards);

 

   

384,196 shares in 2019 (which was 0.37% of the weighted-average number of shares of the Company’s common stock issued and outstanding in 2019), of which no shares were subject to stock option awards, 153,005 shares were subject to RSU awards (excluding performance-based vesting awards), and 231,191 shares were subject to performance-based vesting RSU awards (presented at 150% (or 175% in the case of the award for our CEO) of the “target” number of shares subject to the awards, while the final vesting of the awards may range from approximately 100% to 200% (between 87.5% to 262.5% in the case of the award for our CEO) of the “target” number of shares subject to the awards based on performance over the three-year performance period applicable to the awards, after giving effect to FFO Per Share achieved by the Company for 2019); and

 

   

263,626 shares in 2020 through March 25, 2020 (which was 0.23% of the number of shares of the Company’s common stock issued and outstanding on March 25, 2020), of which no shares were subject to stock option awards, 109,359 shares were subject to RSU awards (excluding performance-based vesting awards), and 154,267 shares were subject to performance-based vesting RSU awards (presented at the “target” number of shares subject to the awards, while the final vesting of the awards may range from zero to 225% (zero to 306.3% in the case of the award for our CEO) of the “target” number of shares subject to the awards based on performance over the three-year performance period applicable to the awards).

Thus, the total number of shares of our common stock subject to awards granted under the 2006 Plan per year over the last three years (2017, 2018 and 2019) has, on average, been 0.58% of the weighted-average number of shares of our common stock issued and outstanding for the corresponding year, and this percentage is consistent with the Company’s 2020 awards under the 2006 Plan through March 25, 2020 (which, as noted above, cover 0.23% of the number of shares of the Company’s common stock issued and outstanding on March 25, 2020). Performance-based vesting awards have been included above in the year in which the award was granted. The actual number of performance-based vesting restricted stock and RSU awards that became eligible to vest each year because the applicable performance-based condition was satisfied in that year (subject to the satisfaction of any applicable time-based vesting requirements) was as follows: 374,815 in 2017, 758,564 in 2018, 395,270 in 2019 and 316,094 to date (as of March 25, 2020) in 2020. No performance-based vesting stock options vested or were outstanding in any of those years.

The total number of shares of our common stock that was subject to awards granted under the 2006 Plan that terminated or expired, and thus became available for new award grants under the 2006 Plan, in each of the last three years, and to date (as of March 25, 2020) in 2020, are as follows: 5,263 in 2017, 1,171 in 2018, 112,937 in 2019, and 71 in 2020. The total number of shares of our common stock that were subject to awards granted under the 2006 Plan and that were withheld to cover tax

 

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withholding obligations arising with respect to the award (other than stock options and stock appreciation rights), and thus became available for new award grants under the 2006 Plan, in each of the last three years, and to date (as of March 25, 2020) in 2020, are as follows: 161,596 in 2017, 235,168 in 2018, 207,866 in 2019, and 118,990 in 2020. Shares subject to 2006 Plan awards that terminated or expired, or were withheld to cover tax withholding obligations arising with respect to the award (other than stock options and stock appreciation rights), and became available for new award grants under the 2006 Plan have been included when information is presented in this 2006 Plan proposal on the number of shares available for new award grants under the 2006 Plan.

The number of shares credited as dividend equivalents under the 2006 Plan with respect to then-outstanding restricted stock and RSU awards, to the extent the dividend equivalents are payable in shares of the Company’s common stock, in each of the last three years, and to date (as of March 25, 2020) in 2020, are as follows: 94,447 in 2017, 50,304 in 2018, 67,942 in 2019, and 15,338 in 2020.

The Compensation Committee anticipates that the 1,500,000 additional shares requested for the 2006 Plan (which represents 1.30% of the number of shares of the Company’s common stock issued and outstanding as of March 25, 2020) will provide the Company with flexibility to continue to grant equity awards under the 2006 Plan into 2024 (reserving sufficient shares to cover potential payment of performance-based awards at target payment levels and covering dividend equivalents that may be credited with respect to the awards based on the Company’s recent dividend payments). However, this is only an estimate, in the Company’s judgment, based on current circumstances. The total number of shares that are subject to the Company’s award grants in any one year or from year-to-year may change based on a number of variables, including, without limitation, the value of the Company’s common stock (since higher stock prices generally require that fewer shares be issued to produce awards of the same grant date fair value), changes in competitors’ compensation practices or changes in compensation practices in the market generally, changes in the number of employees, changes in the number of directors and officers, whether and the extent to which vesting conditions applicable to equity awards are satisfied, acquisition activity and the need to grant awards to new employees in connection with acquisitions, the need to attract, retain and incentivize key talent, the number of dividend equivalent rights outstanding, the extent to which they provide for settlement in stock and the amount and frequency of the Company’s dividend payments, the type of awards the Company grants, and how the Company chooses to balance total compensation between cash and equity awards.

As of April 1, 2020, the closing market price for a share of the Company’s common stock was $60.19 per share.

 

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Aggregate Past Grants Under the Plan

As of March 25, 2020, awards covering 8,114,374 shares of our common stock had been granted under the 2006 Plan. This number of shares includes shares subject to awards that expired or terminated without having been exercised and paid and became available for new award grants under the 2006 Plan, as well as shares that were withheld to cover the exercise price or tax withholding obligations in connection with an award and became available for new award grants under the 2006 Plan. This number of shares, as well as the number of shares subject to past awards and outstanding and unvested awards in the table below is presented as to performance-based vesting restricted stock and RSU awards based on the “maximum” number of shares subject to the award at the date of grant. The following table shows information regarding the distribution of all awards among the persons and groups identified below, option exercises, and restricted stock and RSUs vesting prior to that date, and option and unvested RSU holdings as of that date.

 

    STOCK OPTIONS           RESTRICTED STOCK/UNITS  
   

Number of
Shares
Subject to
Past Option

Grants

   

Number of
Shares
Acquired

On Exercise

    Number of Shares
Underlying Options as of
March 25, 2020
          

Number of
Shares/
Units
Subject to
Past

Awards

    Number of
Shares/
Units
Vested as of
March 25,
2020
    Number of
Shares/Units
Outstanding
and Unvested
as of
March 25,
2020
 

Name and Position

  Exercisable     Unexercisable  

Named Executive Officers:

               

John Kilroy

               

President and Chief Executive Officer

          750,000                     3,067,228       1,651,189       1,416,039  
                                                               

Jeffrey Hawken

               

Executive Vice President and Chief Operating Officer

          250,000                     778,801       612,690       166,112  
                                                               

Tyler Rose

               

Executive Vice President, Chief Financial Officer and Secretary

          125,000                     409,559       239,716       169,843  
                                                               

Stephen Rosetta(1)

               

Former Executive Vice President and Chief Investment Officer

                              113,314       16,215        
                                                               

Justin Smart

               

Executive Vice President, Development and Construction Services

          20,000                           354,084       203,571       150,512  

Total for All Current Executive Officers as a Group (6 persons):

    9,000       1,165,000       9,000                     4,913,293       2,831,421       2,081,872  

Edward Brennan, PhD

                              30,634       29,316       1,318  

Jolie Hunt

                              8,888       7,570       1,318  

Scott Ingraham

                              31,705       30,387       1,318  

Gary Stevenson

                              10,765       9,447       1,318  

Peter Stoneberg

                              10,569       9,251       1,318  

Total for all Current Non-Executive Directors as a Group (5 persons):

                                    92,561       85,971       6,590  

Each other person who has received 5% or more of the options, warrants or rights:

                                                 

All employees, including all current officers who are not executive officers or directors, as a group:

    112,000       264,000             112,000               1,445,206       899,817       362,861  

Total

    121,000       1,429,000       9,000       112,000               6,564,374       3,833,424       2,451,324  

 

(1)

Mr. Rosetta forfeited 97,099 restricted stock units in connection with his termination of employment.

Mr. Kilroy and each of the non-employee directors identified above is a nominee for re-election as a director at the Annual Meeting.

 

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Equity Compensation Plan Information

For additional information on the Company’s equity compensation plans, please see “Equity Compensation Plan Information” on page 104 below.

VOTE REQUIRED

The amendment and restatement of the 2006 Plan will be approved if a majority of the votes cast at the Annual Meeting are cast in favor of the proposal. Under applicable stock exchange rules, abstentions will be treated as votes cast and will have the effect of a vote “AGAINST” the proposal.

RECOMMENDATION

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE AMENDED AND RESTATED 2006 INCENTIVE AWARD PLAN.

The Board believes that the adoption of the proposed amendments to the 2006 Plan will promote the interests of the Company and its stockholders and will help the Company and its subsidiaries continue to be able to attract, retain and reward persons important to its success. For clarity, approval of the 2006 Plan proposal is not contingent on stockholder approval of Proposal No. 4 (the proposed amendment and restatement of our Charter), and vice versa.

All members of the Board and all of our executive officers are eligible for awards under the 2006 Plan and thus have a personal interest in the approval of the 2006 Plan proposal.

 

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PROPOSAL 4 –

APPROVAL OF AMENDMENT AND RESTATEMENT OF CHARTER TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 150,000,000 TO 280,000,000

On February 12, 2020, our Board approved and declared advisable the amendment and restatement of our Charter as set forth in Appendix C to this Proxy Statement to increase the number of authorized shares of our common stock from 150,000,000 to 280,000,000 and in accordance with Maryland law, directed that the proposed amendment and restatement be submitted to our stockholders for approval at the Annual Meeting. The proposed amendment and restatement would not change the number of authorized shares of our preferred stock.

For clarity, approval of this Proposal No. 4 is not contingent on stockholder approval of Proposal No. 3 (the proposed amendment and restatement of our 2006 Plan), and vice versa.

Form of the Proposed Amendment and Restatement

The proposed amendment and restatement of our Charter, among other things, amends the first paragraph of Article IV of the Charter to read as follows (additions shown as underlined and deletions shown as struck through):

“The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 180,000,000 310,000,000, consisting of 150,000,000280,000,000 shares of common stock, par value $.010.01 per share (the “Common Stock”), and 30,000,000 shares of preferred stock, par value $.010.01 per share (the “Preferred Stock”) which may be issued in one or more classes as described in Paragraph C of this Article IV. The aggregate par value of all of the Corporation’s authorized shares having par value if $1,800,0003,100,000. The Common Stock and each class of Preferred Stock shall each constitute a separate class of capital stock of the Corporation.”

The proposed amendment and restatement of our Charter also contains certain other conforming changes and minor updates that do not require the approval of our stockholders. The full text of the proposed amendment and restatement of our Charter appears as Appendix C to this Proxy Statement.

Purpose of the Proposed Amendment and Restatement

As of March 25, 2020, 115,067,924 shares of our common stock were issued and outstanding and 16,883,846 shares of common stock were reserved for issuance pursuant to existing agreements and transactions, including shares of common stock registered for issuance pursuant to our at-the-market stock offering program, shares of common stock that are subject to outstanding equity awards under our 2006 Plan and additional shares of common stock available for future issuance under that plan, and shares of common stock to be issued in connection with the potential exchange, at our option, of common units of the Operating Partnership for shares of the Company’s common stock. After giving effect to these reserves, the Company has 18,048,230 shares of authorized common stock that remain unreserved and available for issuance.

Over the past several years, the Company has issued common stock to fund its continued growth primarily pursuant to various underwritten offerings and its at-the-market stock offering program. The proceeds of these issuances have been used to, among

 

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other things, fund development projects and acquire land and properties, including the development projects and other investments highlighted in “Compensation Discussion and Analysis — 2019 Company Performance.”

The Company’s various underwritten offerings and its at-the-market stock offering program have from time to time involved forward transactions. For these offerings, we typically enter into forward equity sales agreements with one or more designated financial institutions or affiliates thereof, as forward purchasers, pursuant to which we agree to issue and sell a certain number of shares of our common stock at a certain price per share to the forward purchasers one year in the future. In connection with, and at the time we enter into, the forward equity sale agreements, the forward purchasers or their affiliates, at our request, borrow a like number of shares of our common stock from third parties and, acting as forward sellers, sell those borrowed shares to the various underwriters (in the case of an underwritten offering) or through the sales agents (in the case of our at-the-market stock offering program).

Pursuant to the terms of the forward equity sale agreements, we are generally required to reserve for issuance and sale to the forward purchaser, a number of shares of our common stock equal to two times the initial number of shares of common stock to be borrowed by the forward purchasers or their affiliates and sold by them or their affiliates, acting as forward sellers. As a result of the forgoing share reservation requirements, if this Proposal No. 4 is not approved by our stockholders at the Annual Meeting, the proposed amendment and restatement of our Charter will not become effective, and we may not have a sufficient number of remaining authorized and available shares of common stock to permit us to engage in future capital-raising transactions, including those involving forward transactions, which could delay or prevent us from being able to fund our development and redevelopment projects and execute on our business and growth strategies.

The Board believes that the availability of additional authorized shares of common stock will enhance the Company’s flexibility in planning for future business needs, such as investments and acquisitions, stock dividends, including for the purpose of effecting stock splits if determined advisable, grants of equity incentive awards to employees and to attract and retain top management talent, potential strategic transactions and other general corporate purposes, all as may be determined by the Board, in its discretion and subject only to applicable law, regulations or NYSE rules, to be necessary and in the best interest of the Company. There are no immediate plans, arrangements, commitments or understandings with respect to the issuance of any of the additional shares of common stock that would be authorized by the proposed amendment and restatement of our Charter. Additionally, the Board believes that these additional shares will provide the Company with the ability to issue shares in the future to take advantage of market conditions or favorable opportunities without the potential expense or delay incident to obtaining stockholder approval for a particular issuance.

The availability of additional authorized shares of common stock will also bring the Company closer in line with the companies included in its 2019 peer group with respect to its authorized common stock. Currently, the Company’s number of authorized shares of common stock is substantially lower than almost all of the companies included in its 2019 peer group, with the number of authorized shares of common stock of such companies ranging from 900,000,000 to 150,000,000, and the average being 417,364,706 authorized shares of common stock.

Further, based upon the number of shares of common stock of the Company outstanding as of March 25, 2020, only 23.29% of the Company’s authorized shares of common stock remain available for future issuance. This percentage drops to approximately 12.03% when shares of common stock of the Company reserved for issuance pursuant to existing agreements and transactions are considered. In contrast, based upon information derived from their most recent Forms 10-Ks filed with the SEC, the companies included in the 2019 peer group have, on average, a significantly greater percentage of their authorized shares of common stock unissued and available for future issuances, making them better able to take advantage of market conditions or favorable opportunities in a timely and efficient manner.

If our stockholders do not approve this Proposal No. 4, we believe that we may be substantially limited in our ability to advance our operational and future strategic plans, including our ability to access the capital markets, finance the acquisition, development and redevelopment of properties, complete other strategic transactions, attract, retain and motivate employees and pursue other business opportunities integral to our growth and success.

 

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Effect of the Proposed Amendment and Restatement

As a general matter, the increase in our authorized but unissued shares of common stock as a result of the proposed amendment and restatement of our Charter would enable the Board to issue additional shares of common stock in its discretion from time to time without further action or approval of our stockholders, subject to applicable law, regulations or NYSE rules. The issuance of additional shares of common stock, including the additional shares that will be authorized if this Proposal No. 4 is approved by our stockholders at the Annual Meeting, may dilute the equity ownership position of current holders of our common stock.

In addition, other future issuances of shares of common stock or securities convertible into shares of common stock could, under certain circumstances, be construed as having an anti-takeover effect (for example, by diluting the stock ownership of a person seeking to effect a change in the composition of the Board or contemplating a tender offer or other transaction for the combination of our Company with another company). While we do not intend for the amendment and restatement of our Charter to deter or to prevent a change in control, we could use the additional shares of common stock (as we could use the currently authorized but unissued shares of our common stock) to hinder persons seeking to acquire or take control of our Company or to dilute voting power of the outstanding shares. We are not aware of any efforts to obtain control of our Company and we have not made this Proposal No. 4 in response to any such efforts.

The additional authorized shares of common stock, if and when issued, would be part of the existing class of common stock, and would have the same rights and privileges as the shares of common stock currently outstanding. The holders of our common stock are not entitled to preemptive rights.

Effective Date of the Proposed Amendment and Restatement

If the amendment and restatement of our Charter is approved by our stockholders, it will become effective immediately upon the filing of the Articles of Amendment and Restatement with, and acceptance of such Articles for record by, the State Department of Assessments and Taxation of Maryland. If approved, we currently intend to file the Articles of Amendment and Restatement with the State Department of Assessments and Taxation of Maryland promptly after the Annual Meeting.

VOTE REQUIRED

The proposed amendment and restatement of our Charter to increase the number of authorized shares of common stock from 150,000,000 to 280,000,000 will be approved if two-thirds of all votes entitled to be cast at the Annual Meeting are cast in favor of the proposal. Abstentions will have the effect of a vote “AGAINST” the proposal.

RECOMMENDATION

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE PROPOSED AMENDMENT AND RESTATEMENT OF OUR CHARTER TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 150,000,000 TO 280,000,000.

 

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PROPOSAL 5 –

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR

We are seeking stockholder ratification of our appointment of Deloitte & Touche LLP (“Deloitte”), an independent registered public accounting firm, as our independent auditor for the fiscal year ending December 31, 2020. Deloitte has served as our independent auditor since 1995 when the Company was privately held and has continued to serve as such since the Company’s initial public offering in January 1997 and, prior to the Annual Meeting, the Audit Committee is expected to re-appoint Deloitte as our independent auditor for the year ending December 31, 2020.

Additional information about Deloitte, including the fees we paid to Deloitte in fiscal years 2019 and 2018, can be found in this Proxy Statement under the caption “Audit and Non-Audit Fees.” The report of the Audit Committee included in this Proxy Statement under the caption “Audit Committee Report” also contains information about the role of Deloitte with respect to the audit of the Company’s annual financial statements.

A representative of Deloitte is expected to be present at our Annual Meeting, be available to respond to appropriate questions and will have the opportunity to make a statement, if desired.

Stockholder ratification of the appointment of Deloitte as our independent auditor is not required by our Bylaws or otherwise. However, the Board is submitting the appointment of Deloitte to the stockholders for ratification as a matter of good corporate governance. If the stockholders fail to ratify the appointment, the Audit Committee may reconsider whether or not to retain Deloitte. Even if the appointment is ratified, the Audit Committee, in its discretion, may appoint a different independent auditor at any time during the year if the Audit Committee determines that such a change would be in the best interests of the Company and our stockholders

VOTE REQUIRED

Ratification of the appointment of Deloitte as our independent auditor will be approved if a majority of the votes cast at the Annual Meeting are cast in favor of the proposal. Abstentions will not be counted in determining the outcome of this proposal.

RECOMMENDATION

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF DELOITTE AS OUR INDEPENDENT AUDITOR FOR FISCAL 2020.

 

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CORPORATE GOVERNANCE

The Company is committed to good corporate governance, which promotes the long-term interests of stockholders, strengthens accountability of the Board and helps build public trust in the Company. Highlights include the following:

 

Independent Board Leadership and Practices

 

   

Lead Independent Director with a well-defined role and robust responsibilities

 

   

Majority of directors are independent (5 out of 6 current directors)

 

   

Established the CSR&S Committee in April 2018 responsible for advising the Board and consulting with, and generally advising management on, matters related to, among other things, sustainability, diversity and inclusion, philanthropy and community involvement, good corporate citizenship, health and wellness and other non-financial issues that are of significance to the Company and its stockholders

 

   

Commitment to include women and individuals from minority groups in the qualified pool from which new director candidates are selected

 

   

Commitment to Board refreshment with three new independent directors in the last six years

 

   

Average independent director tenure of 8.4 years

 

   

Comprehensive risk oversight practices, including cybersecurity and insurance

 

   

Regular strategic updates from the CEO

 

   

Regular executive sessions of independent directors

 

   

Regular Board and committee self-evaluations

 

   

Succession Planning Committee oversees regular succession planning efforts

 

   

CEO may only serve on the board of directors of one other public company

 

   

All principal Board committees are composed solely of independent directors

Robust Stockholder Rights

 

   

Stockholder proxy access amended in 2017 to align with best practices and respond to stockholder feedback

 

   

Majority voting for directors in uncontested elections

 

   

Annual director elections (declassified Board)

 

   

Annual Say-on-Pay voting

 

   

Stockholder right to call a special meeting

 

   

Stockholder right to amend Bylaws by a majority vote

 

   

No stockholder rights plan

 

 

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BOARD COMPOSITION AND GOVERNANCE

Director Attendance

The Board held five meetings during 2019. All directors who served on the Board during 2019 attended at least 75% of the total number of meetings of the Board and meetings of the Board committees on which each director served that were held during the period of the director’s service during the year. Directors are encouraged to attend the annual meeting of stockholders of the Company. All directors attended the 2019 annual meeting of stockholders.

Independent Directors

Under the corporate governance rules of the New York Stock Exchange (the “NYSE”), a majority of the members of the Board must satisfy the NYSE criteria for “independence.” No director qualifies as independent unless the Board affirmatively determines that the director has no material relationship with the Company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company). The Board has determined that each of Dr. Brennan, Ms. Hunt and Messrs. Ingraham, Stevenson and Stoneberg is independent under the current listing standards of the NYSE. In addition, pursuant to our Bylaws, each of Dr. Brennan, Ms. Hunt and Messrs. Ingraham, Stevenson and Stoneberg, comprising at least a majority of the members of the Board, is not an employee, officer or affiliate of the Company or any of its subsidiaries or divisions, or a relative of a principal executive officer, and is not an individual member of an organization acting as an advisor, consultant or legal counsel receiving compensation from the Company in addition to director’s fees. In this Proxy Statement, we refer to each of Dr. Brennan, Ms. Hunt and Messrs. Ingraham, Stevenson and Stoneberg as our “Independent Directors.”

Independent Director Meetings

The Independent Directors meet regularly in executive session without the presence of management. These meetings are generally held on the date of each regularly scheduled Board meeting and on an as-needed basis. Dr. Brennan, our Lead Independent Director, presides over these meetings.

Board Leadership Structure and Lead Independent Director

Our Corporate Governance Guidelines and our Bylaws permit the roles of Chairman and CEO to be filled by the same or different individuals. Our Board believes it is important to select our Chairman and our CEO in the manner it considers in the best interests of the Company and our stockholders at any given point in time. The Independent Directors on our Board assess the role of Chairman and CEO annually to ensure that the Company’s leadership structure best fits the Company’s specific circumstances and short and long-term challenges.

At this time, our Board believes that the Company and our stockholders are best served by having Mr. Kilroy serve as our Chairman and CEO. Mr. Kilroy’s combined role as Chairman and CEO demonstrates clearer accountability and provides a single leader who speaks with one voice to our stockholders, tenants, partners, employees, other stakeholders and the public. The combined Chairman and CEO role also enhances transparency between management and our Board by serving as an efficient and effective bridge for communication between the Board and management on significant business developments and time-sensitive matters, and provides unified leadership for carrying out our strategic initiatives and business plans. The combined Chairman and CEO role is balanced by the number of independent directors serving on our Board, our independent committee Chairs and our Lead Independent Director.

Our Corporate Governance Guidelines provide that if the Chairman is also our CEO, or if the Chairman is not otherwise an Independent Director, the Independent Directors will appoint annually from amongst themselves a Lead Independent Director. Dr. Brennan is currently our Lead Independent Director and brings to this role considerable skills and experience, as described above in “Proposal 1 — Election of Directors.” The role of our Lead Independent Director is designed to further promote the independence of our Board and appropriate oversight of management and to facilitate free and open discussion and communication among the Independent Directors.

 

 

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The responsibilities of our Lead Independent Director are clearly delineated in our Corporate Governance Guidelines and include:

 

   

Presiding at all meetings of our Board at which the Chairman is not present, including executive sessions of the Independent Directors;

 

   

Serving as liaison between the Chairman and the Independent Directors;

 

   

Approving information sent to our Board;

 

   

Approving agendas for meetings of our Board;

 

   

Approving meeting schedules of our Board to ensure that there is sufficient time for discussion of all agenda items;

 

   

Developing agendas for and calling meetings of the Independent Directors when necessary or appropriate; and

 

   

Being available for consultation and direct communication if requested by major stockholders.

We believe this current leadership structure with the combined Chairman and CEO leadership role and a Lead Independent Director enhances our Board’s ability to provide insight and direction on important strategic initiatives and, at the same time, promotes effective and independent oversight of management and our business.

 

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Board Oversight of Risk

Both our Board and management have key responsibilities in managing risk throughout the Company, as shown below. Oversight of risks inherent in their respective areas of oversight are delegated to the various Board committees, with each committee generally reporting to our Board at each regular Board meeting. Our Board believes that this structure is conducive to its risk oversight process.

 

 

LOGO

 

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Our Board believes that the process it has established to administer the Board’s risk oversight function would be effective under a variety of leadership frameworks and, therefore, does not have a material effect on our choice of the Board’s leadership structure described above under “Board Leadership Structure and Lead Independent Director.”

Code of Business Conduct and Ethics

Our Board has adopted a Code of Business Conduct and Ethics that applies to our directors, officers (including our CEO, Chief Financial Officer, Chief Accounting Officer and Controller, and other members of senior financial management), employees, agents and consultants. This Code of Business Conduct and Ethics satisfies the requirements of a “code of business conduct and ethics” under the NYSE listing standards and a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and applicable SEC rules. This Code of Business Conduct and Ethics is available in the Investors — Overview — Corporate Governance section of the Company’s website at http://www.kilroyrealty.com. Amendments to, or waivers from, a provision of this Code of Business Conduct and Ethics that apply to the Company’s directors or executive officers, including our CEO, Chief Financial Officer, Chief Accounting Officer and Controller, and other members of senior financial management, may be made only by the Board or a Board committee and will be promptly posted on our website to the extent required by applicable SEC rules and NYSE listing standards.

Corporate Governance Guidelines

Our Board has adopted Corporate Governance Guidelines, which provide the framework for the governance of our Company and represent the Board’s current views with respect to selected corporate governance issues considered to be of significance to our stockholders. The Corporate Governance Guidelines direct our Board’s actions with respect to, among other things, Board composition and director qualifications, selection of the Chairman of the Board and the Lead Independent Director, establishment of the Board’s standing committees, director stock ownership guidelines, succession planning and the Board’s annual performance evaluation. A current copy of the Corporate Governance Guidelines is available in the Investors — Overview — Corporate Governance section of our website at http://www.kilroyrealty.com.

Succession Planning

Pursuant to our Corporate Governance Guidelines, our Board and our CEO review succession planning, management performance and management development on a regular basis. To facilitate this succession planning oversight by the Board, the Board has established an ad hoc Succession Planning Committee of the Board that is responsible for reviewing the Company’s succession planning and management performance and development. The members of the Succession Planning Committee are Messrs. Kilroy and Stevenson and Dr. Brennan, with Mr. Stevenson serving as its Chair. The Succession Planning Committee reviews potential internal candidates with our CEO, including the qualifications, experience and development priorities for these individuals, and provides recommendations to our Board regarding potential CEO successors and reviews their development plans. Directors also engage with potential CEO and key management personnel successors at Board and committee meetings and in less formal settings to allow directors to personally assess potential successor candidates.

Our Board also maintains an emergency CEO succession plan. The plan will become effective in the event our CEO becomes unable to perform his or her duties in order to minimize potential disruption or loss of continuity to the Company’s business and operations. The Succession Planning Committee reviews the emergency succession plan periodically and makes recommendations to the Board regarding any changes or updates to the emergency succession plan.

Corporate Social Responsibility and Sustainability

Operating in a responsible and sustainable manner plays an important role in our business. Management and our Board, through the CSR&S Committee established in April 2018, take seriously their responsibility to oversee and advance the Company’s corporate social responsibility, human capital development and sustainability initiatives and recognize that community engagement and sustainable operations benefit all of our constituencies and are key to preserving our Company’s value and credibility. We believe that our governance foundation, coupled with our strong environmental and socially focused initiatives and accomplishments, stand out in our industry and create long-term value for our stockholders.

Commitment to Diversity at the Company and on the Board

We are focused on creating a diverse and inclusive workforce. Our priority is to attract, develop and retain the best talent, foster an inclusive culture and embrace diversity. Our employees are the foundation of our success and we strive to have a workforce that reflects the diversity of qualified talent that is available in the markets that we serve.

 

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As of December 31, 2019, women comprised 58% and minorities comprised 42% of the Company’s total workforce, and women comprised 50% of employees in supervisory roles at the Company. Additionally, the Company has several women in key leadership roles, including our EVP, Chief Administrative Officer, our Chief Accounting Officer and Controller, our Treasurer and multiple Senior Vice Presidents, among others.

In 2020, the Company was listed on the Bloomberg Gender Equality Index for the first time, which includes companies that score high on promoting gender equality across five dimensions: female leadership and talent pipeline, equal pay and gender pay parity, inclusive culture, sexual harassment policies and pro-women brand. In addition to our dedication to maintaining a diverse and inclusive workforce, our human capital development goals are focused on enhancing employee growth through corporate and sustainability trainings and education programs and maintaining a thriving culture.

We are also committed to diversity at the Board level. Our Board will consider diversity, including gender and ethnicity, when considering nominations to the Board and will endeavor to include women and individuals from minority groups in the qualified pool from which new director candidates are selected the next time that the Board undergoes Board refreshment. The Board’s objective is to have a Board comprised of individuals who by occupation, background and experience are in a position to make a strong, positive contribution to the Company and its stockholders.

Commitment to Sustainability

We continue to be recognized for our industry leading sustainability practices.

 

   

First North American REIT to make commitment to achieving carbon neutral operations by year-end 2020

 

   

Ranked 1st in sustainability performance among 152 responding companies in the Americas by GRESB, and our sixth year in a row achieving a number one ranking in the North American Listed Office category

 

   

Earned the highly competitive GRESB “Green Star” designation in each of the last seven years for ranking in the top 25% of companies worldwide in sustainability performance

 

   

Selected from approximately 6,000 ENERGY STAR Partners to receive the U.S. EPA’s ENERGY STAR Partner of the Year Sustained Excellence Award, the U.S. EPA’s highest honor, for each of the last five years

 

   

A winner of NAREIT’s 2019 Leader in the Light Award in the Listed Office category for the sixth year in a row

 

   

Named sector leader on Barron’s 2020 List of America’s Most Sustainable Companies

 

   

Included in the Dow Jones Sustainability World Index for the fourth year in a row, one of only six North American real estate companies listed

 

   

Increased our LEED certified square footage by more than 390,000 additional square feet in 2019, resulting in 64% of the stabilized portfolio being LEED certified at year-end 2019

 

   

Earned ENERGY STAR certifications for 70% of the stabilized portfolio in 2019

 

   

Received the Climate Leadership Award in the prestigious “Organizational” category from the Climate Registry and Center for Climate and Energy Solutions

 

   

Achieved Fitwel certification, a measure of how well workplaces support the health of occupants, for 42% of our stabilized portfolio

 

   

Awarded the Best in Building Health Award by The Center for Active Design for having the most Fitwel-certified buildings of any non-government real estate company worldwide

 

   

Pursuing LEED platinum or gold certification for all development projects

 

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We have aggressive goals to reduce the energy, greenhouse gas emissions, water consumption and waste to landfill impacts of our portfolio. In 2015, we met our goal of reducing energy consumption 10% from 2010 levels, and in that same year we met our goal of reducing water consumption by 10% from 2012 levels by 2017, two years early. We have built on that success by declaring that we will achieve carbon neutral operations(7) by the end of 2020 and are on track to achieve that goal.

We have several additional goals that we have adopted with the time frames, metrics, targets and baseline as set forth below.(8)

 

GOAL

 

2018 RESULTS

  

PROGRESS

ENERGY CONSUMPTION

 

Achieve a 10.3% reduction from 2015

energy consumption levels by 2020

 

5%

 

reduction of energy consumption since 2015

   LOGO

WASTE DIVERSION

 

Increase waste diverted from landfill to 50%

 

44.5%

 

of waste diverted from landfill

   LOGO

ENERGY STAR CERTIFICATION

 

Achieve ENERGY STAR certification for 75%
of eligible existing buildings

 

70%

 

of eligible existing buildings are ENERGY STAR certified

   LOGO

LEED CERTIFICATION

 

Achieve LEED Gold or Platinum Certification on 100%
of new construction projects

 

100%

 

of new construction projects achieved LEED Gold or Platinum certification

   LOGO

 

 

   LOGO          LOGO          LOGO         
   17.3%    64%    70%   
  

energy reductions

since 2010

   of our stabilized portfolio is
LEED certified
   of our stabilized portfolio is ENERGY STAR certified   

We are committed to providing our stockholders with transparency around our ESG sustainability indicators. We publish an annual sustainability report that is aligned with the Global Reporting Initiative (GRI) reporting framework. Additionally, we have recently expanded our voluntary ESG disclosure efforts by including certain ESG data in our Annual Report on Form 10-K aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB) and disclosing to the Dow Jones Sustainability Indices since 2017.

To learn more about the Company’s diversity, sustainability and human capital development efforts, please view our 2019 sustainability report on the Company’s website, by visiting https://kilroyrealty.com/commitment-sustainability.

 

(7)

Carbon neutral operations is zero Scope 1 and Scope 2 market-based greenhouse gas emissions. Scope 1 emissions represent those produced by consuming onsite natural gas procured by the Company. Scope 2 emissions represent those produced by consuming onsite electricity procured by the Company.

(8)

Full 2019 calendar year data verified by a third party is not yet available. 2018 is the most recent year for which complete energy and water data is available and verified by a third party.

 

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BOARD COMMITTEES

Our Board has four (4) standing committees: (i) the Audit Committee, (ii) the Compensation Committee, (iii) the Governance Committee and (iv) the CSR&S Committee. All members of the Audit Committee, Compensation Committee and Governance Committee are Independent Directors. Our Audit Committee, Compensation Committee, Governance Committee and CSR&S Committee each operate under a written charter adopted by our Board, which is available in the Investors — Overview — Corporate Governance section of the Company’s website at http://www.kilroyrealty.com.

 

Director Name

   Independent    Audit    Compensation    Governance   CSR&S     

 

 

Edward Brennan, PhD L

 

   X    M    C    M        

 

Jolie Hunt

 

   X         M    M   C    

 

Scott Ingraham

 

   X    F C         M        

 

John Kilroy

 

                      M    

 

Gary Stevenson

 

   X         M    M        

 

Peter Stoneberg

 

   X    M       C   M  

L Lead Independent Director                M Committee Member                 F Financial Expert                 C Committee Chair

Audit Committee

The Audit Committee’s purpose is to assist the Board in fulfilling its oversight responsibilities regarding (i) the quality and integrity of the Company’s financial statements; (ii) the Company’s compliance with legal and regulatory requirements; (iii) the independent auditor’s qualifications and independence; (iv) the Company’s accounting and system of internal controls; and (v) the performance of the Company’s internal audit function and independent auditor. Our Board has determined that each member of the Audit Committee satisfies the enhanced independence standards applicable to audit committees pursuant to Rule 10A-3(b)(1)(i) under the Exchange Act and the NYSE listing standards. In addition, each of Messrs. Ingraham and Stoneberg and Dr. Brennan is financially literate and each of Messrs. Ingraham and Stoneberg and Dr. Brennan is an “audit committee financial expert” as determined by the Board in accordance with applicable rules of the NYSE and the SEC. The Board based its determination on the qualifications and business experience of each of Messrs. Ingraham and Stoneberg and Dr. Brennan described above under “Proposal 1 — Election of Directors.”

The Audit Committee held six meetings during 2019. Additional information regarding the specific functions performed by the Audit Committee is set forth in the “Audit Committee Report” below.

Executive Compensation Committee

The purpose of the Compensation Committee is to formulate, evaluate and approve the compensation of our officers, as defined in the rules under Section 16 of the Exchange Act, and to discharge our Board’s duties and responsibilities relating to our compensation programs and practices, including its incentive and equity-based compensation plans and programs. The Compensation Committee is responsible for, among other things: (i) reviewing and making changes to our compensation philosophy; (ii) reviewing and approving corporate goals and objectives relevant to the compensation of our CEO, evaluating the performance of our CEO in light of those goals and objectives, and determining and approving our CEO’s compensation level based on such evaluation; (iii) reviewing and approving the compensation for our other executive officers and all executive officers’ employment agreements, severance arrangements or any other compensation-related agreements; (iv) reviewing and making recommendations to the Board regarding compensation for non-employee members of our Board; (v) reviewing and making recommendations to the Board regarding the adoption, amendment or any discontinuation of any compensation plans under which Company securities may be issued or which otherwise requires stockholder approval, and approving award grants under any such plan and the terms of any such awards; and (vi) preparing the Compensation Committee Report included in this Proxy Statement. The Compensation Committee held three meetings in 2019.

Our Board has determined that each member of the Compensation Committee satisfies the additional independence requirements specific to compensation committee membership under the NYSE listing standards. In making this determination, the Board considered whether the director has a relationship with the Company that is material to the director’s ability to be independent from management in connection with the duties of a member of the Compensation Committee.

 

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In fulfilling its responsibilities, the Compensation Committee may delegate any or all of its responsibilities to a separate committee of the Board or a subcommittee of the Compensation Committee. The Compensation Committee has not delegated any of its authority to set compensation levels of our executive officers or to grant equity awards, but has delegated certain limited administrative authority to management (i) with respect to the 2007 Deferred Compensation Plan, as amended; (ii) to address the settlement of fractional share interests arising under certain equity awards under our 2006 Plan; and (iii) to determine whether certain equity awards would be settled in cash or stock under such plan.

In accordance with the Compensation Committee’s charter, the Compensation Committee may retain independent compensation advisors and other management consultants. In 2019, the Compensation Committee retained Mercer (US) Inc. (“Mercer”) to assist it in reviewing our compensation programs and the evaluation of specific compensation-related matters. As discussed under “Compensation Discussion and Analysis — How We Make Compensation Decisions — Role of Independent Compensation Consultant” below, the Compensation Committee has assessed the independence of Mercer and has concluded that its engagement of Mercer does not raise any conflict of interest with the Company. The services provided by Mercer in 2019 are also discussed in that section.

At the request of the Compensation Committee, certain of our executive officers aid the Compensation Committee in reviewing and analyzing our executive compensation program. These services are discussed under “Compensation Discussion and Analysis — How We Make Compensation Decisions — Role of Management in Executive Compensation Planning” below.

Nominating/Corporate Governance Committee

The purpose of the Governance Committee is to (i) identify individuals qualified to become Board members consistent with criteria approved by the Board; (ii) recommend director nominees for the next annual meeting of stockholders for approval by the Board; (iii) develop and annually review the Corporate Governance Guidelines and recommend any proposed changes to the Board; (iv) oversee the evaluation of the Board; and (v) generally advise the Board on corporate governance and related matters. The Governance Committee also serves as the Independent Committee of our Board pursuant to Article III, Section 7 of our Bylaws and approves all transactions between the Company and John B. Kilroy, Sr. (or his estate) or John B. Kilroy, Jr. and their respective affiliates. The Governance Committee held two meetings in 2019.

Additionally, the Governance Committee has the authority to engage any independent counsel or other outside expert or advisors it deems desirable or appropriate.

Corporate Social Responsibility and Sustainability Committee

The purpose of the CSR&S Committee, which was formed in April 2018, is to (i) generally advise the Board and management of the Company on matters related to the Company’s corporate social responsibility objectives, including but not limited to, sustainability, diversity and inclusion, philanthropy and community involvement, good corporate citizenship, health and wellness and other non-financial issues that are of significance to the Company and its stockholders and (ii) develop and oversee Company goals, policies and procedures, and initiatives to ensure alignment with, and promote the achievement of, such objectives. The key objectives identified by the CSR&S Committee include human capital management, including employee engagement and talent development, community service and the health, safety and sustainability of our buildings. The CSR&S Committee held three meetings in 2019 at which the foregoing objectives were reviewed and discussed.

DIRECTOR SELECTION, EVALUATION AND COMMUNICATIONS

Qualifications of Director Nominees

The Board is committed to having a membership comprised of individuals who by occupation, background and experience are in a position to make a strong, positive contribution to the Company and its stockholders, and will endeavor to include women and individuals from minority groups in the qualified pool from which director candidates are selected. In considering candidates for nomination or appointment to the Board, the Governance Committee and the Board seek director candidates who, both individually and collectively, have such knowledge, experience and education based on criteria determined by the Governance Committee to be appropriate in the context of the perceived objectives of the Company at a given point in time and to provide

 

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balance to the Board’s knowledge, perspective, experience and expertise. The Governance Committee has established board membership criteria (the “Membership Criteria”), which it uses as a guideline in considering nominations to the Company’s Board. The criteria include, but are not limited to:

 

   

commitment to promoting the long-term interests of the Company’s stockholders,

 

   

reputation and character,

 

   

knowledge, experience and education,

 

   

mature business judgment,

 

   

sufficient time, energy and attention to dedicate to the Company’s affairs,

 

   

diversity, in its broadest sense, reflecting, but not limited to, profession, geography, gender, ethnicity, skills and experience,

 

   

compliance with the Company’s stock ownership guidelines as set forth in the Corporate Governance Guidelines,

 

   

independence, and

 

   

Board balance.

In addition, the Company’s Bylaws and listing standards of the NYSE require the Board to be composed of a majority of directors who qualify as “independent directors” as defined therein. In considering director candidates, the Governance Committee and Board do not discriminate based on race, ethnicity, national origin, gender, religion or disability.

The Membership Criteria established by the Governance Committee are not exhaustive and the Governance Committee and the Board may consider other qualifications and attributes that they believe are appropriate in evaluating the ability of an individual to serve as a member of the Board. The Governance Committee reviews and assesses the Membership Criteria annually.

Process for Identifying Nominees for Director

At any appropriate time prior to each annual meeting of stockholders at which directors are to be elected, and whenever there is otherwise a vacancy on the Board, the Governance Committee will assess the qualifications and effectiveness of the current Board members and, to the extent there is a need, will seek other individuals qualified and available to serve as potential Board members. The Governance Committee will review each potential candidate’s qualifications in light of the Membership Criteria described above. In reviewing each potential candidate, the Governance Committee also considers the results of the annual Board and individual director evaluations for purposes of assessing the suitability of each Board member for continued service on the Board. See “Annual Board Evaluations” below for additional information regarding the annual Board evaluation process. The Governance Committee will select the candidate or candidates it believes are the most qualified to recommend to the Board for selection as a director nominee.

Stockholder-Recommended Director Candidates

The Governance Committee will consider director candidates recommended by stockholders of the Company. Candidates recommended by a stockholder are evaluated in the same manner as candidates identified by the Governance Committee. All recommendations must be directed to the Governance Committee c/o Secretary at 12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064. Recommendations for director nominees to be considered at the 2021 annual meeting of stockholders must be received in writing not later than November 30, 2020.

Each stockholder recommending a person as a director candidate must provide the Company with the following information for the Governance Committee to determine whether the recommended director candidate is independent from the stockholder, or each member of the stockholder group, that has recommended the director candidate:

 

   

If the recommending stockholder or any member of the recommending stockholder group is a natural person, whether the recommended director candidate is the recommending stockholder, a member of the recommending stockholder group, or a member of the immediate family of the recommending stockholder or any member of the recommending stockholder group;

 

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If the recommending stockholder or any member of the recommending stockholder group is an entity, whether the recommended director candidate or any immediate family member of the recommended director candidate is an employee of the recommending stockholder or any member of the recommending stockholder group or has been at any time during the current or preceding calendar year;

 

   

Whether the recommended director candidate or any immediate family member of the recommended director candidate has accepted directly or indirectly any consulting, advisory or other compensatory fees from the recommending stockholder or any member of the group of recommending stockholders, or any of their respective affiliates during the current or preceding calendar year;

 

   

Whether the recommended director candidate is an executive officer or director (or person fulfilling similar functions) of the recommending stockholder or any member of the recommending stockholder group, or any of their respective affiliates; and

 

   

Whether the recommended director candidate controls the recommending stockholder or any member of the recommending stockholder group.

The recommending stockholder must also provide supplemental information that the Governance Committee may request to determine whether the recommended director candidate (i) meets the standards of independence established by the NYSE; (ii) satisfies the Membership Criteria described above; and (iii) is qualified to serve on the Audit Committee. In addition, the recommending stockholder must include the consent of the recommended director candidate and the recommended director candidate must make himself or herself reasonably available to be interviewed by the Governance Committee. The Governance Committee will consider all recommended director candidates submitted to it in accordance with these established procedures, although it will only recommend to the Board as potential nominees those candidates it believes are most qualified. However, the Governance Committee will not consider any director candidate if his or her candidacy or, if elected, Board membership, would violate controlling state or federal law.

Annual Board Evaluations

Pursuant to our Corporate Governance Guidelines and the charter of the Governance Committee, the Governance Committee oversees an annual evaluation of the performance of the Board. Each standing committee also conducts a separate evaluation of its own performance and of the adequacy of its charter and reports to the Board on the results of this evaluation. The evaluation process is designed to assess the overall effectiveness of the Board and its committees and to identify opportunities for improving Board and Board committee operations and procedures. The Governance Committee also reviews the qualifications and effectiveness of individual directors each year when the directors stand for re-nomination. The review of individual directors includes an assessment of each director’s skills and experience in relationship to the Membership Criteria and that director’s commitment to the Board as evidenced by preparation for, understanding of, and attendance at Board meetings. The results of the individual director evaluations and the Governance Committee’s recommendations regarding director nominations are reported to the Board. The annual evaluations are generally conducted in the fourth quarter of each year or in the first quarter of the following year.

Communications with the Board

Stockholders or other interested parties who wish to contact the Board, the Lead Independent Director, any Board committee, or our Independent Directors as a group may send written correspondence c/o Board of Directors at 12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064. The name of any specific intended Board recipients should be clearly noted in the communication. All communications will be received, processed and then forwarded to the appropriate member(s) of our Board, except that, certain items unrelated to the Board’s duties and responsibilities, such as spam, junk mail, mass mailings, solicitations, resumes and employment inquiries and similar items will not be forwarded. Board members receiving communications will respond as such directors deem appropriate, including the possibility of referring the matter to management of our Company, to the full Board or to an appropriate committee of the Board. In addition, if requested by stockholders, when appropriate, the Lead Independent Director will also be available for consultation and direct communication with stockholders.

 

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AUDIT AND NON-AUDIT FEES

Deloitte has served as the Company’s independent auditor since 1995 when the Company was privately held and has continued to serve as such since the Company’s initial public offering in January 1997. Deloitte is expected to be reappointed by the Audit Committee for the current fiscal year at its meeting to be held during the second quarter, which will precede the Annual Meeting.

The Audit Committee of the Board has determined that Deloitte is independent with regard to the Company within the meaning of the Exchange Act and the applicable published rules and regulations thereunder and by the Public Company Accounting Oversight Board (the “PCAOB”). The Audit Committee annually reviews and pre-approves certain audit and non-audit services that may be provided by Deloitte and establishes a pre-approved aggregate fee level for these services. Any proposed services not included within the list of pre-approved services or any proposed services that will cause the Company to exceed the pre-approved aggregate amount requires specific pre-approval by the Audit Committee. Additionally, the Audit Committee may delegate to one or more designated members of the Audit Committee the authority to grant pre-approvals, provided such pre-approvals are presented to the Audit Committee at a subsequent meeting. The Audit Committee has delegated this pre-approval authority to Mr. Ingraham, the Chair of the Audit Committee, although such delegation does not limit the authority of the Audit Committee to pre-approve in its discretion any specific services to be provided by Deloitte.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The aggregate fees billed to the Company by Deloitte for professional services rendered in fiscal years 2019 and 2018 are as follows:

 

Fees(1)

 

    

 

2019

 

 

 

    

 

2018

 

 

 

 

Audit Fees(2)

 

   $ 1,769,649      $ 1,878,852                          

 

Audit-Related Fees

 

            —                          

 

Tax Fees(3)

 

            27,205                          

 

All Other Fees

 

            —                          

 

Total Fees

 

   $ 1,769,649      $ 1,906,057                          

 

  (1)

All services rendered for these fees were pre-approved by the Audit Committee in accordance with the Audit Committee’s pre-approval policies and procedures described above. The Audit Committee has concluded that the provision of non-audit services to the Company fees is compatible with maintaining Deloitte’s independence.

 

  (2)

Includes the aggregate fees billed for the audits of the Company’s and the Operating Partnership’s annual financial statements and internal control over financial reporting, review of financial statements included in their quarterly reports on Form 10-Q, consultations with management on technical accounting and regulatory issues, consultation and review of filings associated with the Company’s and the Operating Partnership’s 2019 and 2018 equity and bond offerings and services provided for assistance with and review of other regulatory filings.

 

  (3)

Tax fees rendered in 2018 include the aggregate fees billed relating to tax consulting projects.

 

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AUDIT COMMITTEE REPORT

The Audit Committee of the Company’s Board is composed of Independent Directors who satisfy the requirements of Section 10A(m)(3) of the Exchange Act and Rule 10A-3(b)(1)(i) thereunder and the current listing standards of the NYSE. The Audit Committee operates pursuant to a written charter.

The Audit Committee oversees the Company’s financial reporting process on behalf of the Board. In fulfilling its oversight responsibilities, the Audit Committee appoints the Company’s independent auditors and reviews and discusses the audited financial statements included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K with management, including the reasonableness of significant judgments and the clarity of disclosures in the financial statements. Management has primary responsibility for the financial statements and the reporting process, including the Company’s internal control over financial reporting.

The Company’s independent auditors are responsible for performing an audit of the Company’s consolidated financial statements and expressing an opinion on the conformity of those audited consolidated financial statements with generally accepted accounting principles. The Audit Committee reviewed and discussed the audited consolidated financial statements of the Company as of and for the year ended December 31, 2019 with management and the Company’s independent auditors. The Audit Committee discussed with the Company’s independent auditors their judgments as to the Company’s accounting principles and such other matters as are required to be discussed with the Audit Committee by the applicable requirements of the PCAOB. In addition, the Audit Committee received the written disclosures and the letter from the independent auditors required by the PCAOB regarding the independent auditors’ communications with the Audit Committee concerning the accountant’s independence, and it discussed with the Company’s independent auditors their independence from the Company. The Audit Committee also considered the compatibility of the independent auditors’ provision of audit, tax and non-audit services with the auditors’ independence.

The Audit Committee discussed with the Company’s independent auditors the overall scope of their respective audits. The Audit Committee meets with the independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of the Company’s internal control over financial reporting and the overall quality of the Company’s financial reporting. In the performance of their oversight function, the members of the Audit Committee relied upon the information, opinions, reports and statements presented to them by the Company’s management and by the Company’s independent auditors. The Audit Committee held six meetings during 2019.

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board (and the Board approved) that the audited financial statements as of and for the year ended December 31, 2019 be included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 13, 2020.

Audit Committee

Scott Ingraham, Chair

Edward Brennan, PhD

Peter Stoneberg

The foregoing report of the Audit Committee is not soliciting material, is not deemed filed with the SEC and is not incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, whether made before or after the date of this Proxy Statement and irrespective of any general incorporation language in such filing.

 

 

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OUR EXECUTIVE OFFICERS

 

John Kilroy

 

•   President, Chief Executive and Officer and Chairman of the Board

•   Age: 71

 

 

John Kilroy was appointed as Chairman in February 2013 and has served as our President and CEO since our incorporation in September 1996. Biographical information regarding Mr. Kilroy is set forth above under the caption “Proposal 1 — Election of Directors.”

 

Jeffrey Hawken

 

•   Executive Vice President and Chief Operating Officer

•   Age: 61

 

Jeffrey Hawken has served as our Chief Operating Officer since our inception as a public company in January 1997. Mr. Hawken is responsible for overseeing the Company’s overall operations, including asset and property management functions and legal affairs. Prior to our initial public offering, Mr. Hawken served in the same capacity for Kilroy Industries and was responsible for the management and operations of Kilroy Industries’ real estate portfolio and served on its acquisitions and executive committees. In 1980, after graduating from college, Mr. Hawken joined Kilroy Industries as a Senior Financial Analyst and has been involved in property and asset management with the Company since May 1983. Mr. Hawken is a member of the Young Presidents’ Organization, Angeleno Gold Chapter and has held leadership roles in Young Presidents’ Organization, Gold Santa Monica Bay Chapter. Mr. Hawken was a past Chairman of BOMA Greater Los Angeles and currently serves on the National Advisory Committee. Mr. Hawken serves on the Executive Committee at the University of Southern California Lusk Center for Real Estate. He is an active member of the City of Hope Los Angeles Real Estate and Construction Industries Council. Mr. Hawken holds a Bachelor of Science degree in Business Administration from the University of Southern California and he is a licensed Real Estate Broker in the state of California.

 

 

A. Robert Paratte

 

•   Executive Vice President, Leasing and Business Development

•   Age: 64

 

A. Robert Paratte was appointed Executive Vice President, Leasing and Business Development in January 2014 and is responsible for the Company’s leasing and business development activities from Seattle to San Diego. Across a two-decade plus career in commercial real estate, Mr. Paratte has held leadership roles in a variety of disciplines, including leasing, property acquisitions, development and property management. He joined the Company after seven years at Tishman Speyer where he was managing director for global leasing and business development from April 2007 to December 2013. Prior to Tishman Speyer, Mr. Paratte was a partner at San Francisco-based William Wilson and Associates. Mr. Paratte was named the San Francisco Business Times Deal Maker of the Year in 2002. He holds a Bachelor of Science degree in Environmental Planning from the University of California, Davis and an MBA from the University of San Francisco. He is a licensed California Real Estate Broker and a member of the Urban Land Institute.

 

 

Tyler Rose

 

•   Executive Vice President, Chief Financial Officer and Secretary

•   Age: 59

 

Tyler Rose was appointed Executive Vice President and Chief Financial Officer in December 2009 after serving as Senior Vice President and Treasurer since 1997. Prior to his tenure at the Company, Mr. Rose was Senior Vice President, Corporate Finance of Irvine Apartment Communities, Inc. from 1995 to 1997 and was appointed Treasurer in 1996. Prior to that, Mr. Rose was Vice President, Corporate Finance of The Irvine Company from 1994 to 1995. From 1986 to 1994, Mr. Rose was employed at J.P. Morgan & Co., serving in its Real Estate Corporate Finance Group until 1992 and as Vice President of its Australia Mergers and Acquisitions Group from 1992 to 1994. Mr. Rose also served for two years as a financial analyst for General Electric Company. He currently serves as a director of Rexford Industrial Realty, Inc. and on the Policy Advisory Board for the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley. Mr. Rose received a Master of Business Administration degree from The University of Chicago Booth School of Business and a Bachelor of Arts degree in Economics from the University of California, Berkeley.

 

 

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Heidi Roth

 

•   Executive Vice President, Chief Administrative Officer and Assistant Secretary

•   Age: 48

 

 

Heidi Roth was appointed Executive Vice President, Chief Administrative Officer in February 2019. Ms. Roth has been with the Company since 1997 and most recently held the role of Executive Vice President and Chief Accounting Officer following her appointment as Senior Vice President and Controller in July 2005. Prior to such time, Ms. Roth held various other positions with the Company, including serving as the Company’s Vice President, Internal Reporting and Strategic Planning. Prior to joining the Company, Ms. Roth was a CPA with Ernst & Young in Los Angeles. She is a Certified Public Accountant and a member of the AICPA. Ms. Roth currently serves on the Board of Directors of Crystal Stairs, Inc., a nonprofit child development organization and is an emeritus member of the National Association of Real Estate Investment Trust’s Best Financial Practices Council. Ms. Roth received her Bachelor of Science degree in Accounting from the University of Southern California.

 

 

Justin Smart

 

•   Executive Vice President, Development and Construction Services

•   Age: 60

 

 

Justin Smart was appointed Executive Vice President, Development and Construction Services in January 2013. He served as Senior Vice President of Development and Construction Services from August 2000 through December 2012. Mr. Smart has more than 25 years of real estate development experience covering a wide range of product types, including office, industrial, residential and resort properties throughout the United States. From June 1996 to August 2000, Mr. Smart was Vice President of Development with Intrawest Corporation, a leading developer of resorts and resort real estate. Prior to 1996, Mr. Smart served as Vice President of Construction with Kilroy Industries.

 

 

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COMPENSATION DISCUSSION

AND ANALYSIS

INTRODUCTION

This CD&A describes the material elements of our executive compensation program, the compensation decisions made under the program and the factors considered in making those decisions for the NEOs listed below for 2019.

 

Name

 

 

Title

 

 

John Kilroy

 

  President, Chief Executive Officer and Chairman of the Board

 

Jeffrey Hawken

 

  Executive Vice President and Chief Operating Officer

 

Tyler Rose

 

  Executive Vice President, Chief Financial Officer and Secretary

 

Justin Smart

 

  Executive Vice President, Development and Construction Services

 

Stephen Rosetta

 

  Former Executive Vice President and Chief Investment Officer

Our Business

We are a self-administered REIT that is active in the premier submarkets along the West Coast of the United States. With a more than 70 year history, we have built deep experience in the region through multiple business cycles and operating environments. In 1997, we became a publicly traded REIT and in 2013, we were added to the S&P MidCap 400 Index. We believe the following aspects of our business make us one of the leading office REITs in the United States:

 

   

A fully integrated real estate enterprise. Our core management capabilities encompass all aspects of real estate, including the acquisition, financing, development, redevelopment, construction management, leasing, asset management and disposition of office and mixed-use projects.

 

   

Strong development experience. We maintain an active, multi-year development program that focuses on economically dynamic locations where anticipated long-term demand is strong, supply is limited and barriers to entry are high.

 

   

A leader in sustainability. We are an advocate of sustainability practices and are an industry leader in LEED-certified design, development and property operations.

 

   

An innovator in work spaces. We strive to be a leader in rethinking and reshaping the physical work environment, which we believe is necessary to meet the needs of the fast-paced and knowledge-driven businesses that choose to locate in the coastal economies of the western United States.

EXTENSIVE STOCKHOLDER ENGAGEMENT AND RESPONSE TO 2019 VOTE

 

LOGO

The Compensation Committee values input from the Company’s stockholders regarding the Company’s executive compensation program and made changes to our executive compensation program based on the feedback we received from stockholders in 2019.

At each annual meeting, we hold a non-binding advisory vote to approve the compensation of our NEOs, which is commonly referred to as a “Say-on-Pay” vote. The Compensation Committee recognizes that the results of the 2019 Say-On-Pay vote demonstrate that some stockholders had some concerns about the 2018 compensation paid to our NEOs. Since our 2019 annual meeting of stockholders, we reached out to stockholders who together own approximately 80% of our outstanding common stock and requested meetings to solicit their input on a variety of topics, including market conditions, executive compensation, corporate strategy and corporate governance practices. Our Lead

 

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Independent Director and Chair of the Compensation Committee personally led meetings with stockholders who together own approximately 43% of our outstanding common stock. The following actions were taken based on the feedback received in these meetings:

 

   

No Intent to Grant Future Special Equity Awards. In the meetings, certain stockholders had questions regarding the equity awards granted in December 2018 to our CEO in connection with his new employment agreement although there was general support for the significant performance-based weighting of the grants. While the Board believes that it was and is in the best interests of the Company and our stockholders for John Kilroy to continue to serve as the Company’s CEO, and the Board believes his December 2018 equity awards were appropriate to incentivize him to delay his retirement, the Compensation Committee values the views of those stockholders who expressed concerns with respect to these grants and confirmed that there is no current intent to provide any one-time special equity grants to our CEO or any of our NEOs in the course of the Company’s ordinary operations.

 

   

Enhanced the Performance-Based Component of our NEOs’ Equity Awards. There was support for the significant performance-based weighting of the Company’s December 2018 equity awards and for the significant performance-based weighting of the Company’s executive compensation program in general. To further enhance the performance-based nature of our NEOs’ long-term equity compensation opportunities, our CEO’s entire 2020 annual equity award is subject to performance-based vesting requirements and approximately three-fourths of the 2020 annual equity awards for our other NEOs are subject to performance-based vesting requirements.

 

   

Simplified Our Annual Cash Incentive Program. We also received feedback from certain stockholders following our 2018 and 2019 annual meetings of stockholders that they would like to see more clarity, simplicity and objectivity in our annual cash incentive program for NEOs.

In response to the feedback received in 2018, the Compensation Committee designed our 2019 annual cash incentive program for NEOs to include objective goals for most of the performance metrics, which was consistent with our prior practices, and also elected to assign a weighting to each measurement category. The weighting assigned to each category also produced a maximum bonus opportunity corresponding to that category, thereby reducing the degree of qualitative judgment applied in determining final payouts. In addition, a new ESG category was included as a performance goal (which considers the Company’s achievement of LEED certifications on new developments and the Company’s continued focus on diversity within the Company), and a new G&A expense metric was also added in the operations category. (See pages 65 - 66 for additional details.)

In designing our 2020 annual cash incentive program for NEOs and in response to the feedback received in 2019, the Compensation Committee simplified the number of metrics to be used in evaluating performance to promote a focused alignment of financial goals with Company strategy, with goal weightings varying between the NEOs based on each executive’s area of responsibility. In addition, in an effort to remain aligned with stockholder focus on ESG issues, we again included an ESG-focused category in the 2020 annual cash incentive program metrics with expanded goals including establishment of carbon-neutral operations by the end of 2020, achievement of LEED certifications on new development, annual progress on human capital initiatives (including employee engagement, talent development and diversity), and implementation and efficacy of in-season and off-season stockholder outreach.

When making future compensation decisions for our NEOs, the Compensation Committee will continue to consider the views that stockholders express through annual Say-on-Pay votes and through direct communication with our Lead Independent Director, our Board and management.

 

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2019 COMPANY PERFORMANCE

During 2019, the Company achieved strong financial and operational results and further positioned itself for continued long-term growth. Below is a summary of our key achievements.

Outperforming TSR.

Our relative TSR performance has been strong. Our TSR for the three-year and five-year periods ended December 31, 2019 outperformed the median peer in our peer group identified on page 77(9), the SNL US REIT Office Index and the BBG REIT Office Property Index.

The following chart shows the value of a $100 investment at market close on December 31, 2014 in the Company, the SNL US REIT Office Index, the MSCI US REIT Index, the BBG REIT Office Property Index and the median peer in our peer group over the five-year period ended December 31, 2019 (assuming dividend reinvestment):

 

LOGO

 

YEAR-END % LEASED

AND OCCUPANCY

  

TOTAL LEASES

EXECUTED

  

ADJUSTED FFO PER

SHARE GROWTH(10)

  

YEAR-END

DEBT / EBITDA,

as adjusted(11)

97.0% &

94.6%

   3.5MM SF    5.1%    6.5X

Year-End % Leased

Above 95% for Seventh

Consecutive Year

   Highest in Company History;
Includes Two Leases Totaling
795,000 SF with a Fortune 50
Company
  

Year-Over-Year

   Continued Focus on
Maintaining a Strong Balance
Sheet

Strong 2019 Financial Performance. During 2019, we generated strong year-over-year financial results, which included the following:(10)(12)

 

   

Increased revenues by 12.1%

 

   

Increased Same Store GAAP NOI by 5.3%

 

   

Increased adjusted net income available to common stockholders by 12.6%(13)

 

(9)

The peer group identified on page 77 consists of an even number of companies. The “median peer” TSR for the applicable period of time represents the average of the TSRs for the applicable period of time of the middle two companies included in that peer group, when those companies are ranked based on TSR for the applicable period.

(10)

See Appendix A for the definition of “Adjusted FFO Per Share” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to Adjusted FFO.

(11)

The Company’s consolidated debt balance for the applicable period is net of the cash proceeds received from the physical settlement of approximately $252.0 million of at-the-market forward equity transactions executed throughout 2019, and the Company’s EBITDA, as adjusted, reflects our pro rata share of joint ventures and assumes the stabilization of The Exchange on 16th as of the beginning of 2019.

(12)

See Appendix A for the definition of “net operating income” or “NOI” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to net operating income, for the definition of “Same Store NOI (on a GAAP and cash basis)” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to Same Store NOI (on a GAAP and cash basis), and for the definition of “adjusted net income available to stockholders” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to adjusted net income available to common stockholders. Increases are reported as 2019 performance above 2018 levels.

(13)

Excluding gains on sales of depreciable operating properties, loss on early extinguishment of debt and a non-cash charge related to accrued future executive retirement benefits, in applicable periods.

 

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Increased Adjusted FFO Per Share by 5.1%

Strong Leasing Activity. During 2019, we generated strong leasing results, which included the following:

 

   

Signed approximately 3.5 million square feet of leases, including approximately 1.8 million square feet of new or renewing leases in the stabilized portfolio and approximately 1.7 million square feet of leases in the Company’s current development program. Major highlights in the stabilized portfolio include:

 

   

A 228,000 square foot renewal and expansion lease with an existing tenant for a term of five years at One Paseo Plaza. The tenant expanded its footprint by approximately 54% and change in rents were higher by approximately 48% and 18% on a GAAP and cash basis, respectively.

 

   

A 154,000 square foot, 10-year renewal with Lucile Packard Children’s Hospital at Menlo Corporate Center. Change in rents were higher by approximately 43% and 13% on a GAAP and cash basis, respectively.

 

   

Increased average rents on leases executed during 2019 by 29.6% on a cash basis and 52.3% on a GAAP basis, the highest in the Company’s history.(14)

 

   

Backfilled 747,000 square feet, or 52%, of 2020 expirations, reducing 2020 expirations to approximately 5% of total portfolio leases.

 

   

Stabilized office portfolio was 97% leased at year-end, the seventh consecutive year above 95%.

Efficiently Managed Development Projects and Positioned New Projects for Commencement. We continued to create significant value for our stockholders through our development program. Over the past seven years, we delivered $2.7 billion of projects encompassing approximately 3.6 million square feet of office space, 198,000 square feet of retail and production, distribution and repair space and 437 residential units. These projects were 98% leased upon stabilization and generated a stabilized cash return on cost that averaged approximately 7.0% to 7.5%. This included the following projects in 2019:

 

   

Commenced GAAP revenue recognition on 82% of the office component at The Exchange on 16th, a $585.0 million, 750,000 square foot development project located in San Francisco’s Mission Bay. The approximately 738,000 square feet office component of the project is 100% leased to Dropbox, Inc.

 

   

Stabilized 100 Hooper, a $275.0 million, 394,000 square foot office and production, distribution and repair project in San Francisco’s SOMA district. The 312,000 square foot office component is 100% leased to Adobe, Inc.

 

   

Made significant progress at our $680.0 million, 1.1 million square foot One Paseo mixed-used development in the Del Mar submarket of San Diego. We commenced tenant improvements at the retail components and delivered 237 of the 608 residential units. The $145.0 million, 237-unit complex is 63% leased as of February 2020. In addition, the $205.0 million, 285,000 square foot office component is 80% pre-leased and we expect to deliver the remaining 371 residential units in 2020.

 

   

Commenced GAAP revenue recognition on 89% of the retail component at One Paseo, a $100.0 million, 96,000 square foot development project located in San Diego’s Del Mar submarket. The project is 100% leased.

Additionally, in 2019, we commenced new projects and continued to improve the status and scope of the projects in our $2.2 billion of total estimated investment development projects under construction with substantial leases executed, bringing the total pipeline to 89% leased within the office and life science component, as highlighted below.

 

   

Fully leased our $410.0 million, 635,000 square foot 333 Dexter project in the South Lake Union submarket of Seattle to a Fortune 50 company under a long-term lease.

 

   

Commenced construction on our $110.0 million, 160,000 square foot 9455 Towne Centre Drive project in the University Towne Center submarket of San Diego. Nine months after construction commencement, we leased 100% of the project to a Fortune 50 company under a long-term lease.

 

(14)

Change in GAAP/cash rents (leases executed) is calculated as the change between GAAP/cash rents for signed leases and the expiring GAAP/cash rents for the same space. This excludes leases for which the space was vacant longer than one year, or vacant when the property was acquired by the Company.

 

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Commenced construction on our $570.0 million, 656,000 square foot phase 1 of Kilroy Oyster Point project in South San Francisco. Four months after construction commencement, we leased 235,000 square feet of the project to Cytokinetics, Inc. under a 12-year lease. Seven months after construction commencement, we leased the remaining 421,000 square feet of the project to Stripe, Inc. under a 12-year lease, resulting in the project being 100% leased.

 

   

Commenced construction on our $140.0 million, 200,000 square foot 2100 Kettner project in the Little Italy submarket of San Diego.

We also continued to make significant progress entitling our future development projects, including progress at the Flower Mart project in the SOMA submarket of San Francisco:

 

   

In 2019, we received an initial allocation of 1,750,000 square feet under San Francisco’s Prop M, which limits annual office development in the City, with priority allocation for an additional 350,000 square feet in 2021. The remainder will be allocated after 2021.

 

   

Received final approval in early 2020, including unanimous approval from the San Francisco Board of Supervisors and executed a development agreement with the City of San Francisco.

Further, we expanded our development program with three acquisitions:

 

   

Acquired a 2.3-acre land site in the East Village submarket of San Diego for $40.0 million. Fully entitled, the site offers flexible zoning for the development of a mixed-use project. The neighborhood has been increasingly attractive to San Diego’s millennial population, with proximity to retail amenities and cultural institutions, and easy access to public transportation options. Approximately 10,000 residential units have been delivered, are under construction or planned.

 

   

Acquired the 6.9-acre Blackwelder site in the Culver City submarket of Los Angeles for $186.0 million. The 19-building campus is currently 100% leased with in-place rents estimated to be 35% below market rental rates. We intend to significantly increase the project’s square footage through redevelopment of the campus over time. Culver City has become a magnet for technology and new media industries including Amazon, Apple, HBO and Sony Pictures. Further, the Blackwelder site is a five-minute walk to the Metro Expo Line, which runs across Los Angeles, and adjacent to The Cumulus project, a residential development comprised of 1,200 residential units, a one-acre public park and 100,000 square feet of retail space, 40% of which is currently leased to Whole Foods and is scheduled for delivery in 2021.

 

   

Acquired a 1.4-acre site in Seattle’s central business district for $133.0 million. Situated at the intersection of Denny Triangle, South Lake Union and Seattle’s downtown retail core, the five-parcel site is just blocks from Amazon’s corporate headquarters, the iconic Pike Place Market, newly renovated Pacific Place and Westlake Station, Seattle’s most used light rail station. We plan to seek entitlements to develop a mixed-use project consisting of 900,000 square feet of office, 25,000 square feet of retail and underground parking. Further, the current zoning allows for 575,000 square feet of residential development on one parcel and we have the option to either develop the site or option it to another developer.

Strong Execution of Capital Recycling Program. Capital recycling continues to play an important role in funding our activities and growth. Our general strategy has been to sell non-core assets and redeploy some or all of the capital into acquisitions, development and/or redevelopment where we can leverage our experience and add value to generate higher returns. In 2019, we sold two office buildings across two markets, fully exiting the Orange County market and the 101 Corridor submarket of Los Angeles. The total gross proceeds from these dispositions were approximately $134.0 million and the sales generated an aggregate gain of approximately $37.0 million.

Prudent Balance Sheet Management. During 2019, we continued to build and maintain a strong and flexible balance sheet that enables us to fund our development program and respond quickly to attractive opportunities as they arise. Below is a list of key achievements:

 

   

Completed several opportunistic financing transactions that lowered our cost of capital and enhanced our liquidity, including:

 

   

Executed 12-month forward equity sale agreements under the Company’s $500.0 million at-the-market (“ATM”) offering program totaling 3,147,110 shares at a weighted average price per share of $80.08. As of December 31, 2019, the approximately $252.0 million of such forward transactions had not settled.

 

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Raised $500.0 million through a public offering of 10-year senior unsecured notes at 3.050%.

 

   

Maintained our debt to EBITDA ratio and total debt as a percentage of total market capitalization during a period of extensive development spending of 6.5x and 26.3%, respectively, at year-end 2019 (pro forma for the physical settlement of approximately $252.0 million of ATM forward sale agreements executed throughout 2019 and stabilization of The Exchange on 16th, in which 82% of the project’s net operating income recognized GAAP revenue throughout 2019).

Business Values Take into Account Non-Financial Objectives. We are committed to pursuing corporate social responsibility objectives, including sustainability, diversity and inclusion, philanthropy and community involvement, good corporate citizenship, health and wellness and other non-financial issues that are of significance to the Company and its stockholders, as further described under “Corporate Governance — Board Composition and Governance — Corporate Social Responsibility and Sustainability” on page 42.

Maintained Leadership Position in Sustainability. We continue to be recognized for our industry leading sustainability practices. For a list of accomplishments, see “Corporate Governance — Board Composition and Governance — Corporate Social Responsibility and Sustainability — Commitment to Sustainability” on page 43.

Strong Company Leadership. The Company’s leadership team is comprised of individuals that have extensive real estate experience, and is led by the award-winning Chairman and CEO, John Kilroy. Overall, the Company’s executive management team has an average tenure of 28 years in the real estate industry.

COMPENSATION PHILOSOPHY AND OBJECTIVES

Our executive compensation philosophy is designed to achieve the following objectives:

 

   

To align executive compensation with the Company’s corporate strategies, business objectives and the creation of long-term value for our stockholders without encouraging unnecessary or excessive risk-taking;

 

   

To provide an incentive to achieve key strategic and financial performance measures by linking annual cash incentive award opportunities and a substantial portion of long-term incentive award opportunities to the achievement of corporate and operational performance objectives;

 

   

To set total compensation to be competitive with companies in our peer group, taking into account our active portfolio management strategy and the skill set required to implement that strategy;

 

   

To provide a majority of target total direct compensation for the NEOs in the form of long-term incentive equity awards; and

 

   

To help the Company attract, retain and incentivize talented and experienced individuals in the highly competitive West Coast employment and commercial real estate markets.

 

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WHAT WE PAY AND WHY: EXECUTIVE COMPENSATION ELEMENTS

The following table sets forth the key elements of our executive compensation program, along with the primary objective and key features associated with each element of compensation.

 

    Compensation Element    Primary Objective    Key Features   

Page

Reference

 

Base Salary

  

 

  

To provide a regular source of income so employees can focus on day-to-day responsibilities.

 

To recognize ongoing performance of job responsibilities.

 

  

  

Competitive pay, taking into account job scope, position, knowledge, tenure, skills and experience. Base salary is intended as the smallest key element of our executive compensation program, as we believe that a majority of each executive’s compensation opportunity should be directly tied to performance and/or the Company’s stock price.

 

   Page 62
                

Short-Term Incentives

(Annual Cash Bonuses)

  

  

To motivate and reward for achievement of annual financial and operational goals and other strategic objectives measured over the year.

  

  

Final payouts are awarded to our NEOs based on specific performance metrics and qualitative goals, with a weighting assigned to each measurement category, that are established at the beginning of each year based on the Company’s business plan. Each NEO can earn between 0% and 150% of their target cash incentive based on the Company’s performance against the pre-established goals.

 

   Page 62

Long-Term Incentives

(Annual Equity Awards)

  

  

To emphasize long-term performance objectives.

 

  

  

For 2019, three-quarters of our CEO’s annual long-term incentive award (and approximately two-thirds for our other NEOs) was subject to performance-based vesting requirements over a three-year period. The award would be forfeited if a minimum FFO per share threshold for 2019 is not achieved (without the opportunity to vest in any future year) and, if the FFO goal is achieved, 50% of the award is subject to vesting based on relative TSR performance over the entire three-year vesting period and 50% of the award is subject to vesting based on average ratio of debt to EBITDA performance over the entire three-year vesting period.

 

   Page 68
  

  

To encourage creation of stock value and further align the interests of our NEOs with stockholder interests.

 

  

  

To retain key executives through the performance and vesting periods.

 

                          

 

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DESIGN FEATURES OF THE 2019 EXECUTIVE COMPENSATION PROGRAM

We believe that our executive compensation program strikes an appropriate balance between attracting and retaining executives with the expertise and talent required to execute on our active portfolio management strategy, and linking compensation with the performance of the Company. Below is a summary of some of the key design features of our 2019 executive compensation program.

 

   

Majority of NEO Target TDC is “At Risk.” Approximately 88% of our CEO’s and approximately 80% of our other NEOs’ target TDC(15) for 2019 was not guaranteed but rather was tied directly to the performance of the Company, the Company’s stock price and/or individual performance, as shown below.

2019 Target

Total Direct Compensation

 

 

LOGO

 

(15)

As used in this Proxy Statement, “target TDC” means the executive’s base salary, target annual cash incentive and grant date fair value (based on the value approved by the Compensation Committee and used to determine the number of shares subject to the award) of annual long-term incentive awards granted to the executive in 2019.

 

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Short-term incentives are “at risk” because the amount awarded could range from 0% to 150% of the NEO’s target short-term incentive depending on Company and individual performance.

Annual long-term equity awards are “at risk” because the final award value depends on our stock price and continued service over a three-year vesting period. In addition, three-quarters of our CEO’s 2019 annual equity award (and approximately two-thirds of our other NEOs’ 2019 annual equity awards) is subject to performance-based vesting.

 

   

Annual Short-Term Incentives Based on Performance Measurement Framework. The Compensation Committee determines annual short-term incentives based on a rigorous performance measurement framework, assessing the Company’s actual performance against pre-established financial and operational goals and each NEO’s contribution to that performance. We also apply a specific weighting for each Company performance category in the short-term incentive plan to reduce the degree of qualitative judgment applied in determining final payouts. Based on the Company’s performance (as reflected on pages 65 - 67), the Compensation Committee determined that the final 2019 short-term incentives for our NEOs would be between 117% and 138% of target payout levels, and in all cases less than the maximum payout opportunities. See “Short-Term Incentives — Decisions for 2019; 2019 Key Operating and Financial Goal Setting and Performance” on pages 63 - 68 for more information about how the goals are set and the Company’s performance.

 

   

Majority of Target TDC is in the Form of Long-Term Incentives. The most significant component of each NEO’s total compensation opportunity is in the form of RSUs that vest over a three-year period. In 2019, approximately 59% of our CEO’s (and approximately 51% of our other NEOs’) target TDC was in the form of RSUs. We believe equity compensation helps to align the interests of our NEOs with those of our stockholders.

 

   

Majority of Long-Term Incentives are Performance-Based. Three-quarters of our CEO’s annual long-term incentive award for 2019 (and approximately two-thirds of the annual award grant to each of our other NEOs) was subject to performance-based vesting requirements. Vesting levels were contingent on achievement of a threshold level of FFO per share for 2019. If that goal was achieved, vesting levels will be determined based on (i) our TSR compared to other office-focused REITs over a three-year period (50% of the performance-based awards) and (ii) our average ratio of debt to EBITDA over that period (for the remaining 50% of the performance-based awards). The balance of each NEO’s total annual long-term incentive award vests in annual installments over a three-year period, subject to continued service through the applicable vesting date.

 

   

Enhanced Operating and Financial Goals. Key operating and financial goals used to determine 2019 short-term incentives for our NEOs were generally set at levels above the performance goals used for 2018 (see the discussion on page 64). The FFO target goal used in the 2019 long-term incentive award for our NEOs was set above the performance target goal used for 2018.

 

   

Target TDC Set Taking into Account Market Pay Levels and that Payouts are Linked to Performance. The Compensation Committee did not set 2019 target TDC levels at any specific percentile against our peer group. Rather, the Compensation Committee considered final 2018 peer group compensation data to inform its decision-making process for 2019. In setting the 2019 compensation levels, the Compensation Committee also considered the following factors:

 

   

Active Portfolio Management Strategy in Highly Competitive Markets. Our business model requires an active portfolio management strategy (see “2019 Company Performance” beginning on page 55 for a summary of our 2019 activities). Implementing this strategy requires a broader skill set than those of executives who focus primarily on managing cash flows of a more static investment portfolio.

 

   

Target TDC Realized Only if Goals Achieved. In 2019, approximately 73% of our CEO’s (and approximately 63% of our other NEOs’) target TDC was performance-based. As a result, our NEOs will only receive their target TDC if the Company performs.

 

   

Majority of NEO Target TDC is Subject to Forfeiture and Linked to Performance. As noted above, the payout of our short-term incentives and vesting of performance-based equity awards depends on our actual performance and may be forfeited if threshold goals are not achieved.

 

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Outperforming TSR. Our relative TSR performance has been strong. As indicated in the table on page 2 of the Proxy Summary, our TSR for the three-year period ended December 31, 2019 outperformed the median peer in our peer group(16), the SNL US REIT Office Index and the BBG REIT Office Property Index.

2019 NAMED EXECUTIVE OFFICER COMPENSATION

The Compensation Committee reviews and authorizes each NEO’s compensation on an annual basis. Executive compensation is not established at any particular level against peer group data. Rather, the Compensation Committee generally considers the following factors:

 

   

The performance of the Company (e.g., TSR, operations, financial performance, acquisitions, dispositions, development and balance sheet management);

 

   

The performance of each NEO;

 

   

The contribution of each NEO to our overall results;

 

   

Input from our CEO (with respect to our other NEOs);

 

   

Additional roles or responsibilities assumed;

 

   

Experience, skill set and tenure;

 

   

Base salary, target short-term incentive and long-term incentive grant levels for comparable positions at companies in our peer group;

 

   

The NEO’s employment agreement (if any); and

 

   

The relative need to retain the NEO.

Base Salary

General Description

As noted above, we provide base salaries as a regular source of income so employees can focus on day-to-day responsibilities and to recognize ongoing performance of job responsibilities.

Decisions for 2019

The Compensation Committee determined that the NEOs’ respective 2019 base salary levels would remain at the same level as in effect for 2018. The 2019 annual base salary for each of our NEOs was as follows: $1,225,000 for Mr. Kilroy, $675,000 for Mr. Hawken, $550,000 for each of Messrs. Rose and Smart and $600,000 for Mr. Rosetta.

Short-Term Incentives

General Description

Our short-term incentives (annual cash bonuses) are based on the annual performance of our Company and each individual’s contribution to the annual performance of our Company.

During the first quarter of the year, the Compensation Committee establishes a target short-term incentive amount for each NEO and approves a performance measurement framework for that year. This process typically takes place over several months, at multiple meetings of the Compensation Committee and typically involves an on-going dialogue between the Chair of the Compensation Committee and our CEO regarding the plan and outlook for the year. In establishing the performance measurement framework, the Compensation Committee considers the Company’s business plan for the year, the Company’s bonus goals and actual performance for the completed year, feedback received from stockholders and the discussions between the Chair of the

 

(16)

The peer group identified on page 77 consists of an even number of companies. The “median peer” TSR for the applicable period of time represents the average of the TSRs for the applicable period of time of the middle two companies included in that peer group, when those companies are ranked based on TSR for the applicable period.

 

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Compensation Committee and our CEO regarding the plan and outlook for the year. The Compensation Committee also receives direct input from management regarding the Company’s business plan and the business environment generally and from its independent compensation consultant, Mercer. Mercer is involved throughout the process in advising the Compensation Committee on the general structure of the program, as well as the specific metrics and goals under consideration.

The Compensation Committee selects the performance categories, metrics and goals that it believes will accurately assess the annual performance of the Company and strategic goals. In response to stockholder feedback, the Compensation Committee designed the 2019 annual cash incentive program to include an objective goal for each performance metric and to weight each metric relative to the others. The weighting produced a maximum bonus opportunity corresponding to each category, thereby further reducing the degree of qualitative judgment applied in determining final payouts. In addition, a new ESG category was included to take into account and incentivize the Company’s achievement of LEED certifications on new developments and the Company’s continued focus on diversity within the Company and a new G&A Expense metric was included in the operations category to directly take management of those expenses into account.

Following the performance year, the Compensation Committee compares the Company’s actual performance results to the pre-established goals. The Compensation Committee then rates the Company’s performance as to each performance goal based on operating results as follows:

 

   

Extraordinary – 150% of target

 

   

Superior – 125% of target

 

   

On Target – 100% of target

 

   

Below Expectations – 50% of target

 

   

Well Below Expectations – 0% of target

The Compensation Committee then applies the weighting for each performance goal to determine the Company’s overall achievement and potential bonus payout percentages. Like the process in establishing the performance measurement framework each year, the process to rate actual performance against the performance goals and determine the final short-term incentive award amounts typically takes place over several months at multiple meetings of the Compensation Committee. The Compensation Committee’s determination on the actual short-term incentive amount paid for each of the NEOs is based on a holistic assessment of results achieved and the business environment for the year, including consideration of the Company’s TSR and individual awards may vary based on the Compensation Committee’s assessment of each NEO’s contributions and achievements. The Compensation Committee engages in discussions with management regarding the Company’s business plan for the year, the goals that had been established for the performance measurement framework, actual performance results for the year and the general business environment for the year. The Compensation Committee also receives input from Mercer regarding these matters and our CEO provides the Compensation Committee with input regarding the performance of the NEOs (other than himself). The maximum amount that may be awarded to an NEO is 150% of the NEO’s target short-term incentive amount.

Since our business strategy requires us to actively manage our property portfolio, the Compensation Committee believes that a rigid short-term incentive formula could undermine opportunistic decisions that have a negative impact on short-term gains but create long-term stockholder value (e.g., midyear changes in our strategy or portfolio due to a shift in market conditions or unanticipated opportunities can significantly alter specific objective goals that are set early in the year). The Compensation Committee believes its approach in determining each NEO’s short-term incentive payout reflects an appropriate balance between applying objective criteria and preserving flexibility to keep each NEO focused on strategic decisions that are in the long-term best interests of our stockholders.

Decisions for 2019; 2019 Key Operating and Financial Goal Setting and Performance

The Compensation Committee determined that the NEOs’ 2019 target short-term incentive amounts would remain at the same level as in effect for 2018. The 2019 target short-term incentive level for each of our NEOs was as follows: $3,000,000 for Mr. Kilroy (which was the minimum amount required pursuant to his employment agreement), $1,350,000 for Mr. Hawken, $550,000 for each of Messrs. Rose and Smart and $1,200,000 for Mr. Rosetta.

 

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In developing the performance measurement framework and goals for 2019, the Compensation Committee selected performance measures that it considers to be common measures of REIT performance and the Company prepared a bottoms up, property-by-property budget that incorporated property specific assumptions for the Company’s stabilized portfolio. The Company then integrated those assumptions with the Company’s development and funding strategies against a backdrop of existing real estate conditions. As a result, the Company created financial and operational goals that were directly tied to the Company’s existing portfolio and business objectives for 2019.

The Compensation Committee then reviewed and approved the Company’s proposed 2019 financial and operational goals for inclusion in the performance measurement framework, each as described below. Goals are generally set at levels that are higher than the performance levels achieved in the prior year. However, since the composition of the Company’s portfolio changes from year to year (for example, the Company sold approximately $134.0 million of assets in 2019 as compared to $373.0 million in 2018), the performance level in the prior year may not accurately reflect the difficulty of achieving the specified level of performance in the current year (for example, because of occupancy levels, scheduled lease expirations, capital expenditure budgets, development activity, product mix or disposition timing). In these cases, the Compensation Committee may set performance goals at levels that are the same or lower than the performance results achieved in the prior year but at levels that, after taking into account the composition of the Company’s portfolio at the start of each year, the Compensation Committee believes are comparatively as, or more, rigorous. This was the case with the following 2019 metrics:

 

   

FFO, FAD, NOI and Leasing. An approximately $12.0 million recorded gain on sale related to a land parcel disposition in 2018, as well as planned downtime associated with two large known move-outs in 2018 totaling approximately 424,000 square feet and one large known move-out in 2019 totaling approximately 360,000 square feet, resulted in certain targets being set lower in 2019 than in 2018. Although the overall FFO target for 2019 of $397.0 million was higher than the actual FFO achieved for 2018 of $386.0 million, the FFO per share target for 2019 of $3.68 was lower than the FFO per share achieved for 2018 of $3.72 due to these items. Capital expenditure spending in 2019 resulting from greater leasing activities and the planned downtime associated with the known move-outs also resulted in the FAD and FAD per share targets for 2019 of $232.0 million and $2.15, respectively, being set lower than the actual FAD and FAD per share achieved in 2018 of $261.0 million and $2.51, respectively. The known move-outs (and, in the case of the leasing and year-end occupancy goals, the near-historical high leasing percentage for the Company of 96.6% at the end of 2018) also resulted in lower Same Store Cash NOI Growth, Leasing Square Footage and Year-End Occupancy goals for 2019.

 

   

Debt to EBITDA Ratio. The Company projected a higher debt to EBITDA ratio in 2019 than 2018 due to continued funding of our development pipeline in which the Company issued $500.0 million of debt and raised approximately $252.0 million of equity under a forward structure that delays the settlement, thus delaying the deleveraging impact into 2020.

 

   

Acquisition and Dispositions. The goals for acquisitions and dispositions may change from year to year (or we may not have a pre-set goal for one or both of these measures) based on the specific properties the Company holds, properties available in the market, shifts in market conditions and unanticipated opportunities.

 

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The design of the 2019 performance measurement framework is mainly consistent with the design of the 2018 performance measurement framework, with the notable exception of adding weighting of the performance metrics against each other, adding a new performance category for ESG goals, and adding a new G&A Expense metric within the operations performance category. The following table shows the 2019 performance measurement framework and 2019 goals approved by the Compensation Committee in February 2019 and the Company’s actual 2019 performance.

2019 Performance Measurement Framework

 

 

Category/Weighting

 

 

Metric

 

 

 

2019

Goals

 

 

 

2019

Performance

 

      

Why It Is Important

 

 

Operations
(20% weight)

 

  Revenue ($MM):   $823   $837      

 

Our operations performance demonstrates our ability to manage our Class A portfolio profitably and includes key metrics utilized by the REIT industry. We depend primarily on cash flows generated by leasing activity in both the stabilized portfolio and development program. Effective expense management further enhances our financial performance and drives our bottom line results. The amount of leasing, revenue and NOI (including Same Store Cash NOI) and occupancy demonstrate our effectiveness in lease execution and expense management. FFO and FAD, and their respective share metrics, indicate our ability to generate strong net cash flows after funding capital expenditures, corporate overhead and other corporate expenses, including dividends.

 

 

Adjusted FFO ($MM)(1):

 

  $397   $418    
 

 

Adjusted FFO Per Share(1):

 

  $3.68   $3.91    
 

 

Adjusted FAD ($MM)(3):

 

  $232   $249    
 

 

Adjusted FAD Payout Ratio(3):

 

  88%   81%    
 

 

Adjusted FAD Per Share(3):

 

  $2.15   $2.33    
 

 

NOI ($MM)(3):

 

  $572   $591    
 

 

Same Store Cash NOI Growth(3):

 

  (1%) to 0%   (0.6%)    
 

 

Leasing SF:

 

  748,000   3.5M(4)    
 

 

Year-End Occupancy:

 

  94.5% to 95%   94.6%  
 

 

G&A Expense:

 

 

$78.5M(5)

 

$78.3M(2)

   

 

Balance Sheet Management(6) (20% weight)

 

 

Debt/EBITDA(7):

 

  7.2x   6.5x(8)      

 

Prudently managing our balance sheet allows us to fund our in-place operations and future growth opportunities. Balancing various forms of capital and keeping a keen eye on leverage is critical to our business so that we are positioned well throughout market cycles. Our success in doing so is measured by our Debt/EBITDA ratio, a key metric used by our investors and rating agencies to evaluate financial risks in our business.

 

 

Equity Financing ($MM):

 

  $360(9)   $612(10)    
 

 

Debt Financing ($MM):

 

  $300   $500  
       
       
       
                 

 

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Category/Weighting

 

 

Metric

 

 

 

2019

Goals

 

 

 

2019

Performance

 

      

Why It Is Important

 

 

Acquisitions
(10% weight)

 

 

Total Acquisitions ($MM):

 

  Opportunistic   $359(11)      

 

Effectively allocating capital is a major driver of growth and value in our business that can significantly impact the quality of our portfolio, as well as generate meaningful cash flow and value over the long term — it allows us to acquire, sell and develop assets to fund development and other opportunities.

 

•  Acquisitions help generate current income and may play a strategic role in future development or redevelopment opportunities.

 

•  Dispositions, including joint ventures, not only help fund development and other strategic initiatives but can also enhance the quality of our portfolio depending on what we sell.

 

•  At certain points in the market cycle, development provides us with significant growth and future value creation opportunities.

 

Dispositions
(15% weight)

 

 

Total Dispositions ($MM):

 

  $150 to $350   $134    

 

Development
(20% weight)

 

 

Under-construction development was comprised of six projects encompassing 2.3 million square feet of office and life science space and 564 residential units representing a total investment of approximately $2.2 billion at year-end. Most notably, we fully leased 333 Dexter, phase 1 of Kilroy Oyster Point and 9455 Towne Centre Drive during 2019, totaling 1.5 million square feet. Further, we leased 80% of the 285,000 square feet at the office component of One Paseo. In total, the office and life science component of all development projects was 89% leased at the end of 2019.

 

We commenced GAAP revenue recognition on 82% of The Exchange on 16th, as well as 89% of the retail component of One Paseo, the mixed-use development project that is 100% leased.

 

We further replenished our development program with three acquisitions during 2019 across three submarkets for a total purchase price totaling $359.0 million.

 

We continued to make important progress in entitling our future development program, most notably at The Flower Mart project in San Francisco. In 2019, we received initial allocation of 1.75 million square feet under the City of San Francisco’s Prop M (with priority allocation for additional 350,000 square feet in 2021) and in early 2020 we received final approval for the project and completed our development agreement with the City of San Francisco.

 

   

 

ESG
(15% weight)

 

One key goal was that all development/redevelopment projects completed in 2019 would be certified LEED Gold or higher. We achieved this goal: 100% of our development/redevelopment projects completed in 2019 earned LEED Gold or better.

 

Another main goal was to maintain and enhance diversity and inclusion in our workforce. We accomplished this in 2019 first by increasing the transparency around our diversity metrics through disclosing increased diversity data to the Bloomberg Gender Equality Index (“Bloomberg GEI”). Bloomberg GEI ultimately selected us for inclusion for the first time in its 2020 Index for our superior diversity and inclusion programs and results. We also increased our employee training on this subject, with 99% of our employees having completed an unconscious bias training in 2019.

 

Additionally, we continue to be recognized by various industry groups across the world for our commitment to and leadership position in sustainability. In 2019, for the fifth year in a row, the Company was chosen as the North American office leader in sustainability by GRESB and received NAREIT’s Leader in the Light award in the Officer Sector. In 2019, for the fourth year in a row, the Company was awarded the EPA’s highest ENERGY STAR honor, Partner of the Year Sustained Excellence, and for the third year in a row, the Company was included in the Dow Jones Sustainability World Index. The Company has again received all of the awards and recognitions listed above for 2020 as well.

   

We maintain a focus on corporate social responsibility and sustainability. We continuously look for new and better ways to foster a diverse and inclusive work environment, improve employee health and safety, engage our surrounding communities and minimize our environmental impact, all while creating value for our stockholders.

 

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(1)

See Appendix A for the definition of “Adjusted FFO” and “Adjusted FFO Per Share” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to FFO and FFO Per Share and Adjusted FFO and Adjusted FFO Per Share. FFO Per Share is also used as a performance metric under the performance-based component of our NEO equity awards. The Compensation Committee believes it is nevertheless appropriate to take FFO Per Share into account in our short-term incentive award performance measurement framework because it is a key metric for the Company, frequently used by investors to assess REIT performance and is only one of many measures (disclosed above) used to assess performance under the framework.

 

(2)

Excludes $3.7 million of development overhead related to 2019 lease accounting charges, $2.2 million of acquisition-related expenses and $3.9 million of mark-to-market adjustment for deferred compensation plan.

 

(3)

See Appendix A for the definition of “FAD (or Funds Available for Distribution)”, “FAD Per Share”, “FAD Payout Ratio”, “NOI”, “Same Store NOI (on a GAAP and cash basis)” and reconciliations of net income available to common stockholders computed in accordance with GAAP to NOI and Same Store NOI (on a GAAP and cash basis) and net income available to common stockholders computed in accordance with GAAP to FAD and FAD Per Share and GAAP net cash provided by operating activities to FAD.

 

(4)

Includes development leasing of approximately 1.7 million square feet.

 

(5)

Excludes $2.3 million of development overhead related to 2019 lease accounting changes.

 

(6)

As of December 31, 2019.

 

(7)

Pro-rata for the Company’s share in the Company’s strategic ventures. The debt to EBITDA ratio is also used as a performance metric under the performance-based component of our NEO equity awards. The Compensation Committee believes it is nevertheless appropriate to take the debt to EBITDA ratio into account in our short-term incentive performance measurement framework because it is a key metric for the Company, frequently used by investors to assess REIT performance and is only one of many measures (disclosed above) used to assess performance under the framework. The debt to EBITDA ratio is calculated as the Company’s consolidated debt balance for the applicable period, divided by the Company’s EBITDA, as adjusted, for such period. See Appendix A for a definition of “EBITDA, as adjusted,” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to EBITDA, as adjusted.

 

(8)

The Company’s consolidated debt balance for the applicable period is net of the cash proceeds received from the physical settlement of approximately $252.0 million of at-the-market forward equity transactions executed throughout 2019, and the Company’s EBITDA, as adjusted, reflects our pro rata share of joint ventures and assumes the stabilization of The Exchange on 16th as of the beginning of 2019.

 

(9)

Includes $360.0 million physical settlement of forward equity transaction executed in August 2018.

 

(10)

Includes $360.0 million physical settlement of forward equity transaction executed in August 2018 and $252.0 million of at-the-market forward equity transactions executed throughout 2019.

 

(11)

Includes acquisition of The East Village, Blackwelder project and Seattle CBD Project.

In January 2020, the Compensation Committee determined the Company’s actual 2019 performance disclosed in the chart above and applied the goal weighting set forth above to determine the aggregate total annual bonuses that were earned based on the Company’s 2019 performance. As a result, the Compensation Committee determined that the Company’s overall performance for 2019 was between “Extraordinary” and “Superior.” The chart below describes the Compensation Committee’s assessment of the Company’s 2019 achievement of each performance goal category and the resulting percentage of the target bonus that was achieved (after applying the relevant weighting of each category).

 

Category/Weighting

 

  

2019 Assessment

 

    

Percentage of Target Bonus Achieved

 

 

Operations

(20% weight)

 

   Extraordinary (150% of Target)      30%

 

Balance Sheet Management

(20% weight)

 

   Superior (125% of Target)      25%

 

Acquisitions

(10% weight)

 

   Superior (125% of Target)      13%

 

Disposition

(15% weight)

 

   In-Line (75% of Target)      11%

 

Development

(20% weight)

 

   Extraordinary (150% of Target)      30%

 

ESG

(15% weight)

 

   Extraordinary (150% of Target)      23%

 

Total

 

        131%

The Compensation Committee considered each NEO’s individual performance, contributions toward achieving the performance goals and the Company’s overall TSR performance to determine the actual amount of the 2019 short-term incentive amount paid

 

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to each NEO. As a result, the 2019 short-term incentive amounts paid to the NEOs for 2019 were between 117% and 138% of target payout levels. The Compensation Committee determined that each of the NEOs made significant contributions to the Company in 2019, although the level of impact each NEO had on the Company’s 2019 results varied somewhat. Differences among the NEOs’ actual 2019 short-term incentive amounts also reflect the Compensation Committee’s overall qualitative assessment of each NEO’s performance and relative contribution to and responsibility for each of the performance categories and metrics.

The 2019 actual short-term incentive amount for each of our NEOs was as follows: $4,150,000 for Mr. Kilroy, $1,575,000 for Mr. Hawken and $745,000 for each of Messrs. Rose and Smart. Mr. Rosetta did not receive a bonus for 2019 as he separated from employment during 2019.

Long-Term Incentives

General Description

We grant annual long-term incentives to our NEOs in the form of RSUs that vest over a three-year period. Each RSU is paid in one share of our common stock, subject to the satisfaction of applicable vesting conditions, which further aligns our NEOs’ interests with those of our stockholders. The NEOs do not have the right to vote or dispose of any RSUs prior to the time the shares are issued. Each RSU is granted in tandem with a corresponding dividend equivalent right that entitles the NEO to be credited with additional RSUs upon the Company’s payment of dividends to stockholders if the dividend equivalent right is or was outstanding on the record date. Any such additional RSUs credited in respect of dividend equivalent rights are subject to the same vesting terms as the underlying RSUs and vest (if at all) together with the underlying RSU to which they relate. In addition to annual equity awards, we occasionally make grants of equity awards at other times at the discretion of the Compensation Committee, such as in recognition of service to the Company, in connection with the negotiation of an employment agreement or the hiring or promoting of employees. However, the Compensation Committee has confirmed that there is no current intent to provide any one-time special equity grants to any of our NEOs in the course of the Company’s ordinary operations.

Decisions for 2019

The 2019 annual equity awards to our NEOs consist of the following:

 

   

Approximately two-thirds of each NEO’s total annual equity award (and three-quarters for our CEO) are RSUs subject to performance-based vesting requirements (“performance-based RSUs”). The performance-based RSUs cliff vest, if and to the extent the performance goals are achieved, in one lump sum after the end of the three-year vesting period. The Compensation Committee set the 2019 operational goal (i.e., the FFO Per Share metric) for the performance-based RSUs above the goal used for the prior year.

 

   

Approximately one-third of each NEO’s annual equity award (and one-quarter for our CEO) are RSUs subject to a time-based vesting schedule (“time-based RSUs”). The time-based RSUs vest ratably in annual installments over a three-year vesting period and payouts are subject to continued service through the applicable vesting date.

The Compensation Committee also believed that a majority of each NEO’s total 2019 annual equity award should be subject to performance-based vesting requirements to accomplish the following objectives:

 

   

Align overall reward opportunity with actual performance delivered;

 

   

Require achievement of pre-defined operating goals using a performance measure that is reflective of management’s efforts (i.e., the FFO Per Share metric, which applies to all of the performance-based awards, and the debt to EBITDA ratio metric, which applies to 50% of the performance-based awards);

 

   

Require sustained longer-term performance of the Company’s share price by including a relative TSR modifier that measures the Company’s performance against other office REIT competitors in the SNL US REIT Office Index over the entire three-year vesting period (i.e., the TSR Percentile Ranking metric, which applies to the other 50% of the performance-based awards); and

 

   

Create an additional retention incentive, as vesting is contingent on each NEO’s continued service through the end of the three-year vesting period.

 

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2019 Annual Equity Award Values

In February 2019, the Compensation Committee granted each NEO a number of time-based RSUs and a “target” number of performance-based RSUs, each expressed as a dollar value that was then converted into a number of RSUs based on our stock price on the date of grant. These dollar values are set forth in the chart below and are the same values that were used to determine the number of shares subject to the NEO’s annual equity award in 2018. The Compensation Committee determined that the aggregate dollar value for each NEO’s 2019 annual equity award was appropriate based on its consideration of the factors listed on page 62.

 

Named Executive

  

Time-Based

RSUs(1)

    

Target

Performance-

Based

RSUs(1)

 

    

Total

Equity

Award

       

 

John Kilroy

 

   $ 1,500,000      $ 4,500,000      $ 6,000,000       

 

Jeffrey Hawken

 

   $ 617,000      $ 1,234,000      $ 1,851,000       

 

Tyler Rose

 

   $ 550,000      $ 1,100,000      $ 1,650,000       

 

Justin Smart

 

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

 

Stephen Rosetta

 

   $ 400,000      $ 800,000      $ 1,200,000     

(1)   These amounts are the values approved by the Compensation Committee in February 2019 and converted into the corresponding number of RSUs (the number of RSUs at the “target” level of performance in the case of the performance-based RSUs) based on the closing price of the Company’s common stock on the date of grant of the awards and rounded up to the nearest whole share. For the accounting fair value of these awards as reflected in the Summary Compensation Table, please refer to footnote (1) to the Summary Compensation Table.

2019 Performance-Based RSUs

The 2019 performance-based RSUs vest when the Compensation Committee determines if, and to the extent, the performance vesting conditions have been achieved by the Company. Such determination will be made by the Compensation Committee during January or February 2022. The total number of 2019 performance-based RSUs that ultimately vest will be determined as follows:

 

  1.

The target number of performance-based RSUs granted to each NEO is first multiplied by an FFO Per Share modifier that ranges from 0% to 150% (and 0% to 175% in the case of our CEO). This modifier is determined by the Company’s FFO Per Share for 2019 as shown in the table below (the number of RSUs resulting from this calculation is referred to as the “Banked Shares” subject to the award).

 

FFO Per Share (for 2019)*

  

FFO Per Share Modifier*

(for NEOs except CEO)

 

  

FFO Per Share Modifier*

(for CEO)

 

 

$3.78 or greater

 

   150%    175%

 

$3.68

 

   100%    100%

 

$3.58

 

   50%    25%

 

Less than $3.58

 

   0% (complete forfeiture)    0% (complete forfeiture)
* Determined on a pro-rata basis between points

 

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The Banked Shares subject to the award are then eligible to vest as follows:

 

  2.

50% of the Banked Shares are multiplied by a TSR Percentile Ranking modifier that ranges from 66.6667% to 133.3333% (and from 50% to 150% for our CEO). This modifier is determined as shown in the table below based on the percentile ranking of the Company’s TSR for the three-year performance period (2019-2021) among the TSRs for the companies in the SNL US REIT Office Index calculated in the manner described on page 90.

 

     TSR Percentile Ranking*

     (2019-2021) — 50% Weight

  

TSR Modifier*

(for NEOs except CEO)

 

  

TSR Modifier*

(for CEO)

 

     80th percentile or greater

 

   133.3333%    150%

 

     40th percentile or greater, but

     equal to or less than 60th

     percentile

 

   100%    100%

 

     20th percentile or lower

 

   66.6667%    50%
* Determined on a pro-rata basis between points

For example, if the TSR Percentile Ranking is at or above the 40th percentile, but equal to or less than the 60th percentile, then there is no modification up or down to the Banked Shares allocated to this metric. If the TSR Percentile Ranking is below the 40th percentile, then the Banked Shares allocated to this metric may be reduced by up to 50% for our CEO’s award and by up to 33% for our other NEOs’ awards. If the TSR Percentile Ranking is greater than the 60th percentile, then the Banked Shares allocated to this metric may be increased by up to 50% for our CEO’s award and by up to 33% for our other NEOs’ awards.

 

  3.

50% of the Banked Shares are multiplied by an Average Debt to EBITDA Ratio modifier that ranges from 66.6667% to 133.3333% (and from 50% to 150% for our CEO). This modifier is determined as shown in the table below based on the Company’s Average Debt to EBITDA Ratio for the three-year performance period (2019-2021) calculated in the manner described on page 90.

 

     Average Debt to EBITDA Ratio*

     (2019-2021) — 50% Weight

  

Average Debt to EBITDA Ratio
Modifier*

(for NEOs except CEO)

 

  

Average Debt to EBITDA Ratio
Modifier*

(for CEO)

 

     7.45x or less

 

   133.3333%    150%

 

     7.65x

 

   100%    100%

 

     7.85x or higher

 

   66.6667%    50%
* Determined on a pro-rata basis between points

The FFO Per Share measure applies to the year 2019 only. This measure was selected as a performance metric because it is a financial measure commonly used by analysts and investors to evaluate a REIT’s operating performance and overall management of its property portfolio. If the threshold level of FFO Per Share shown above is not achieved, the entire award is forfeited with no opportunity to vest in a future year.

The TSR Percentile Ranking modifier was included to further align executives’ interests and potential rewards with stock price performance on a relative basis over a longer-term performance period.

The Average Debt to EBITDA Ratio modifier was included to align the Company’s substantial growth plans with maintaining a conservative balance sheet. By including a key leverage metric, the Company is limited in its ability to incur significant additional debt to fund growth and grow earnings without negatively impacting this compensation metric.

The increased up-side and down-side leverage applied to the TSR modifier and the Average Debt to EBITDA Ratio modifier for the award to our CEO reflects his responsibility for the overall performance of the Company.

 

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Please see the discussion under “Named Executive Officer Compensation Tables — Description of Plan-Based Awards — Performance-Based RSUs” beginning on page 89 below for more information on determining FFO Per Share, TSR Percentile Ranking, Average Debt to EBITDA Ratio and related modifiers for purposes of these awards.

The following chart illustrates the operation of the performance-based RSUs awarded in 2019 and discussed above:

 

 

LOGO

2019 FFO Performance Under 2019 Annual Equity Awards

In January 2020, the Compensation Committee determined that the Company’s 2019 FFO Per Share, when adjusted in accordance with the 2019 RSU award agreement, was $3.96. As a result, 150% of the target number of performance-based RSUs awarded in 2019 to each NEO (and 175% of the target number of performance-based RSUs awarded in 2019 to our CEO) were Banked Shares and became eligible to vest, subject to (1) further adjustment (up or down) as follows: (a) 50% of the Banked Shares will be adjusted (up or down) based on the Company’s relative TSR performance against other office REIT competitors in the SNL US REIT Office Index over the entire three-year vesting period and (b) 50% of the Banked Shares will be adjusted (up or down) based on the Company’s Average Debt to EBITDA Ratio over the three-year performance period, and (2) continued service through the remainder of the three-year performance period.

2019 Performance Year Under 2018 Annual Equity Awards

In February 2018, the Compensation Committee awarded the NEOs RSUs that had a structure similar to the RSUs awarded to the NEOs in February 2019. The 2018 RSUs are described more fully in the Company’s 2019 Proxy Statement. In February 2019, the

 

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Compensation Committee determined that the Company’s 2018 FFO Per Share, when adjusted in accordance with the 2018 RSU award agreement, was $3.76. As a result, 150% of the target number of performance-based RSUs awarded in 2018 to each NEO (and 175% of the target number of performance-based RSUs awarded in 2018 to our CEO) were Banked Shares and became eligible to vest, subject to (1) further adjustment (up or down) as follows: (a) 50% of the Banked Shares will be adjusted (up or down) based on the Company’s relative TSR performance against other office REIT competitors in the SNL US REIT Office Index over the entire three-year vesting period and (b) 50% of the Banked Shares will be adjusted (up or down) based on the Company’s Average Debt to EBITDA Ratio over the three-year performance period, and (2) continued service through the remainder of the three-year performance period. If the Company’s 2018 FFO Per Share performance is taken into account, between approximately 100% and 200% of the target number of performance-based RSUs awarded in 2018 to each NEO (and between approximately 87.5% and 262.5% of the target number of performance-based RSUs awarded in 2018 to our CEO) will vest at the end of the three-year performance period, assuming continued service through the remainder of that period.

2019 Performance Year Under 2017 Annual Equity Awards

In January 2017, the Compensation Committee awarded the NEOs (other than Mr. Rosetta) RSUs that had a structure similar to the RSUs awarded to the NEOs in February 2019, except that an additional performance modifier (average FAD per share growth) was used. The 2017 RSUs are described more fully in the Company’s 2018 Proxy Statement. In January 2020, the Compensation Committee made a final determination that 129.5% (and 144.8% in the case of our CEO) of the target number of 2017 performance-based RSUs awarded to each NEO vested. The Compensation Committee’s final determination was based on (a) 125.3% (and 137.9% in the case of our CEO) of the target number of 2017 performance-based RSUs awarded to each NEO being Banked Shares as a result of the Company’s 2017 FFO Per Share performance and (b) an adjustment of 103.3% (105% in the case of our CEO) of the Banked Shares as a result of the Company’s TSR Percentile Ranking being at the 65th percentile (i.e., the average of the Company’s 2017, 2018 and 2019 TSR Percentile ranks as determined pursuant to the terms of these awards), the Company’s average FAD per share growth from 2016 to 2019 being (1.5%), and the Company’s Average Debt to EBITDA Ratio being 5.89x (i.e., the average of the Company’s 2017, 2018 and 2019 annual Debt to EBITDA Ratio).

Past TSR Performance Awards

In January 2016, the Company awarded Mr. Hawken a RSU award that included a component subject to both time-based and performance-based vesting conditions. The performance-based RSUs subject to the award were eligible to vest in substantially equal annual installments over a four-year period (2016-2019) based on the achievement of one of the following performance goals, subject to Mr. Hawken’s continued employment through the end of the applicable year: (1) achievement of an annual TSR equal to 7.5% for the applicable calendar year; (2) achievement of a TSR that exceeds the TSR for the SNL US REIT Office Index for the applicable calendar year; or (3) achievement of a cumulative stockholder return goal not later than December 31, 2019. The cumulative stockholder return goal is based on an annualized TSR over the applicable period of 7.5%. In December 2019, the Compensation Committee determined that the 2019 final installment of the performance-based RSUs vested for Mr. Hawken, as the Company achieved the annual TSR goal of at least 7.5% TSR in 2019.

Additional Compensation Elements

Indirect Elements of Compensation

To assist us in attracting and retaining key executives, our NEOs are eligible to participate in the same health, welfare and insurance benefit plans in which our other salaried employees are generally able to participate. In addition, we provide our NEOs with certain other benefits such as an automobile allowance, a medical allowance, supplemental life insurance, and certain reimbursements for club dues, financial planning services and home office expenses.

Stock Award Deferral Program

We maintain a Stock Award Deferral Program under which our directors and certain of our management employees, including our NEOs, may elect to receive RSUs in lieu of restricted shares granted under the 2006 Plan in order to defer receipt of these shares (or may elect to defer payment of RSUs that would otherwise be made when the RSUs vest). Each RSU issued under the deferral program represents the right to receive one share of our common stock in the future, subject in each case to the vesting

 

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conditions provided in the restricted stock or RSU award. In addition, deferred RSUs carry with them the right to receive dividend equivalents that credit participants, upon our payment of dividends in respect of the shares underlying the participant’s RSUs, with additional RSUs equal to the value of the dividend paid in respect of such shares. Shares of stock underlying RSUs will be paid to the participant on the earliest to occur of a change in control, the participant’s “separation from service” with us, the participant’s death or disability, or a pre-determined date, if specified by the participant. By electing to receive deferred RSUs, participants are generally able to defer income taxes on these awards, which we believe helps us to attract, retain and incentivize top talent without significant additional cost to the Company. Since RSUs are paid in our common stock and the deferral of payment of RSUs under the program may result in participants holding RSUs for a longer period, we believe the Stock Award Deferral Program enhances the alignment between management and stockholder interests.

Defined Contribution Plans

We maintain a Section 401(k) Savings/Retirement Plan (the “401(k) Plan”) that covers our eligible employees, including our NEOs, and those of certain designated affiliates. The 401(k) Plan permits our eligible employees to defer receipt of (and taxation on) a portion of their annual compensation, subject to certain limitations imposed by the 401(k) Plan and under the Internal Revenue Code. The employees’ elective deferrals are immediately vested and nonforfeitable upon contribution to the 401(k) Plan. We currently make matching contributions to the 401(k) Plan in an amount equal to fifty cents for each dollar of participant contributions, up to a maximum of 10% of the participant’s base salary (thus, the maximum match is 5% of the participant’s base salary) and subject to certain other limits under the tax laws. Participants vest immediately in the amounts contributed by us to their plan accounts. Our employees are eligible to participate in the 401(k) Plan after three months of credited service with us. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by employees to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan. This tax-preferential savings option helps us to attract, retain and incentivize top talent.

Deferred Compensation Plan

We maintain a cash deferred compensation plan, the 2007 Deferred Compensation Plan, as amended (the “Deferred Compensation Plan”), under which our directors, partners and certain of our management employees, including our NEOs, may defer receipt of their compensation, including up to 100% of their director fees and cash bonuses and up to 70% of their salaries or other types of eligible compensation, each as applicable. In addition, partners and eligible management employees, including our NEOs, will generally receive semi-monthly contributions from us to their Deferred Compensation Plan accounts equal to 10% of their respective gross semi-monthly base salaries (or certain guaranteed payments, in the case of partners). The Deferred Compensation Plan provides that we may also make additional discretionary contributions to participant accounts. We did not make any discretionary contributions to the Deferred Compensation Plan for 2019 for the benefit of any of our NEOs. The Deferred Compensation Plan fits into our compensation philosophy by providing our NEOs with the ability to accrue compensation and generate savings in a tax-efficient manner in excess of limits imposed on our 401(k) Plan, thereby providing additional financial security that enables our executives to focus on their work-related obligations. For additional information, refer to the Nonqualified Deferred Compensation table below.

Severance and Change in Control Arrangements

We have entered into employment agreements with each of our NEOs (other than Mr. Rosetta) that include certain severance benefits. Our equity awards also provide for continued or accelerated vesting in connection with certain terminations of the award holder’s employment or a change in control. We believe that these provisions help to ensure the day-to-day stability and focus of our management team. The Compensation Committee evaluates the level of severance benefits to provide our NEOs on a case-by-case basis, and in general, we consider these severance protections an important part of an executive’s compensation and consistent with competitive practices as of the date they were entered into.

We do not provide our NEOs with any “single trigger” severance or equity award acceleration arrangements, meaning that severance benefits and accelerated vesting of equity awards are not triggered simply because a change in control transaction occurs. Instead, time-based RSU awards granted to our NEOs generally vest in connection with a change in control transaction only if the award is to be terminated (and will not be continued, substituted for or assumed) in connection with the transaction. In the case of the performance-based RSUs granted to our NEOs, the RSUs will vest based on the Company’s performance through

 

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the transaction. The time-based RSUs granted to our NEOs also generally vest, and any severance benefits for our NEOs are generally triggered, upon a termination of the NEO’s employment by the Company without “cause,” by the NEO for “good reason,” or, in certain cases, due to the retirement, death or disability of the NEO.

For a description of the material terms of these arrangements, see “Named Executive Officer Compensation Tables — Employment Agreements — Salary and Short-Term Incentive (Annual Cash Bonus) Amounts,” “Named Executive Officer Compensation Tables — Grants of Plan-Based Awards — 2019,” “Named Executive Officer Compensation Tables — Description of Plan-Based Awards” and “Named Executive Officer Compensation Tables — Potential Payments Upon Termination or Change in Control” below.

Decisions for 2020

In January 2020, the Compensation Committee approved our executive compensation program for 2020 and made the following determinations:

 

   

None of our NEOs received an increase in base salary or target annual cash incentive amounts for 2020 compared to the corresponding levels approved by the Compensation Committee for our NEOs for 2019.

 

   

Similar to the design of our 2019 annual cash incentive program, the Compensation Committee designed the 2020 annual cash incentive program to include an objective goal for each performance metric and to weight each metric relative to the others. In response to stockholder feedback, the Compensation Committee simplified the number of metrics to be used in evaluating 2020 performance to promote a focused alignment of financial goals with Company strategy, with goal weightings to vary between the executive officers based on each executive’s area of responsibility. Building on the ESG goals included for the 2019 bonus program, the 2020 bonus program includes an ESG-focused category with expanded goals, including establishment of carbon-neutral operations by the end of 2020, achievement of LEED certifications on new development, annual progress on human capital initiatives (including employee engagement, talent development and diversity) and implementation and efficacy of in-season and off-season stockholder outreach.

The following chart outlines the key changes we have made to our annual cash incentive plan since 2019.

Changes to Annual Cash Incentive Plan Since 2019

 

 

LOGO

 

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To further enhance the alignment of our NEOs’ interests with those of our stockholders, the Compensation Committee determined that a greater portion of the NEOs’ 2020 annual long-term incentive awards should be subject to performance-based vesting requirements. As a result, 100% of our CEO’s (up from 75% in 2019) and 75% of each of our other NEOs’ (up from approximately 66% in 2019) annual long-term incentive award granted in 2020 is subject to performance-based vesting requirements that cliff-vest at the end of a three-year vesting period, subject to continued service through the end of such performance period.

 

 

LOGO

 

 

  

 

LOGO

 

 

   

The balance of each NEO’s (other than our CEO’s) total annual long-term incentive award granted in 2020 vests ratably in annual installments over a three-year vesting period, subject to continued service through the applicable vesting date.

 

   

Each annual long-term incentive award granted to our NEOs in 2020 is generally subject to the same terms and conditions as the Company’s annual awards of RSUs granted to the NEOs in 2019, except that as to the performance-based awards, to further emphasize variability of compensation based on performance, the modifiers for above- or below-target relative TSR and Debt to EBITDA Ratio performance for the three-year performance period (2020-2022) were adjusted (when compared to the Company’s annual equity awards granted in 2019) so that the maximum performance modifier with respect to the portion of the awards corresponding to each of these measures is 150% (175% for the CEO’s award) of the target level and the modifier for attaining the threshold level of performance was reduced to 50% (25% for the CEO’s award) of the target level.

 

   

Additionally, the Compensation Committee has confirmed that there is no current intent to provide any one-time special equity grants to any of our NEOs in the course of the Company’s ordinary operations.

HOW WE MAKE COMPENSATION DECISIONS

Executive Compensation Committee

Our executive compensation program is established by, and executive compensation decisions are made by, the Compensation Committee. The Compensation Committee takes the views that stockholders have expressed through our Say-on-Pay votes and through our stockholder engagement efforts into account when making decisions on our executive compensation program.

Role of Independent Compensation Consultant

The Compensation Committee has sole authority to hire, retain and terminate the services of independent compensation consultants to assist in its decision-making process. The Compensation Committee retained Mercer as its independent compensation consultant in 2019.

Mercer performed a comprehensive review of our 2019 executive compensation program before it was established, including the composition of our peer group, amounts and nature of compensation paid to executive officers, structure of our various compensation programs, design of our short-term incentive performance measurement framework, performance vesting requirements for our annual long-term incentive awards and appropriate target total direct compensation levels and potential payment and vesting ranges for our executive officers. During 2019, Mercer also provided data to the Compensation Committee on the compensation and relative performance of our peer group, advised and provided peer group data regarding the Company’s

 

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compensation arrangements for its non-employee directors, reviewed certain peer group data provided by management and others, reviewed drafts of the CD&A and related compensation tables for inclusion in the Company’s Proxy Statement filed in 2019, provided advice as the Compensation Committee began its considerations of our executive compensation framework for 2020, and reviewed data in connection with the Compensation Committee’s determination of short-term incentive and performance-based incentive vesting levels for completed performance periods. A representative of Mercer regularly attends meetings of the Compensation Committee and regularly meets privately in executive session with the Compensation Committee to discuss its recommendations.

Mercer is a subsidiary of Marsh & McLennan Companies, Inc. (collectively, “MMC”), a diversified conglomerate of companies that provide insurance, strategy and human resources consulting services. During 2019, affiliates of MMC other than Mercer received $1,162,458 in fees for providing services to the Company, and Mercer received $138,000 for its services with respect to executive and director compensation described above. The decision to engage other MMC affiliates to provide services other than assisting the Compensation Committee with executive compensation matters was made by members of management. Although the Compensation Committee did not specifically approve these engagements, the Compensation Committee has reviewed the other services provided by other MMC affiliates and, after consideration of such services and other factors prescribed by the SEC for purposes of assessing the independence of compensation advisors, has determined that no conflicts of interest exist between the Company and Mercer (or any individuals working on the Company’s account on Mercer’s behalf). In reaching this determination, the Compensation Committee considered the following factors, all of which were confirmed by Mercer:

 

   

Other than the services identified above, MMC provided no services to the Company during 2019;

 

   

The aggregate amount of fees paid or payable by the Company to MMC for 2019 represented less than 1% of MMC’s total revenue for 2019;

 

   

Mercer has established Global Business Standards to manage potential conflicts of interest for executive rewards consulting services, which policies and procedures were provided to the Company;

 

   

There are no business or personal relationships between our Mercer executive remuneration advisors and any member of the Compensation Committee other than in respect of (1) the services provided to the Company by Mercer as described above, or (2) work performed by Mercer for any other company, board of directors or compensation committee for which such Compensation Committee member also serves as an independent director;

 

   

Our Mercer executive remuneration advisors do not own stock in the Company; and

 

   

There are no business or personal relationships between our Mercer executive remuneration advisors, Mercer or other MMC affiliates and any executive officer of the Company other than in respect of the services provided to the Company as described above.

Role of Management in Executive Compensation Planning

Our CEO provides recommendations to the Compensation Committee regarding the compensation of our executive officers (other than for himself). Our CEO further participates in the executive compensation decision-making process as follows:

 

   

Presents overall results of the Company’s performance and achievement of historical and go-forward business objectives and goals from management’s perspective;

 

   

Provides evaluations for all other executive officers (including our NEOs); and

 

   

Reviews peer group information and compensation recommendations and provides feedback regarding the potential impact of proposed compensation decisions.

Our Chief Financial Officer evaluates the financial implications and affordability of the Company’s compensation program. Other executive officers (including other NEOs) may periodically participate in the compensation process and in Compensation Committee meetings at the invitation of the Compensation Committee to advise on performance and/or activity in areas with respect to which these executive officers have particular knowledge or expertise. None of our NEOs are members of the Compensation Committee or otherwise had any role in determining the compensation of the other NEOs.

 

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Market Review and Compensation Peer Group

The Compensation Committee reviews peer group data to assess the competitiveness of our executive compensation program and to help inform its decision-making process. The 2019 peer group consisted of the 16 publicly-traded REITs shown in the table below (referred to as our “peer group” in this Proxy Statement) and was the same as our 2018 peer group, except that Empire State Realty Trust was added to the peer group because the Compensation Committee believed that it was an appropriate peer company based on it being an office-focused REIT with comparable revenues. The companies included in the 2019 peer group had equity market capitalization ranging from approximately $2.1 billion to approximately $25.0 billion as of December 31, 2019, and, as a group, had a median equity market capitalization of approximately $5.4 billion as of December 31, 2019. As of December 31, 2019, our equity market capitalization and total assets were above the median of the peer group, while our total revenues for 2019 were at approximately the 47.5th percentile of the peer group.

Peer Group: KRC Alignment Characteristics

 

                     

Comparable Categories

 

 

Company

 

 

Equity
Market
Cap(1)

   

 

Total
Revenues(2)

   

 

Total
Assets(3)

   

 

Office
REITS(4)

 

Equity
Market
Cap(5)

 

 

 

Total
Revenues(6)

 

 

Total
Assets(7)

 

 

W. Coast
Concen-

tration(8)

 

    

 

    (MM)       (MM)       (MM)                      

 

Digital Realty Trust, Inc.

 

  $ 24,992     $ 3,217     $ 23,068            

 

Boston Properties, Inc.

 

  $ 21,316     $ 2,950     $ 21,285            

 

Healthpeak Properties, Inc.(9)

 

  $ 17,061     $ 1,997     $ 14,033            

 

Alexandria Real Estate Equities, Inc.

 

  $ 18,606     $ 1,541     $ 18,391            

 

Realty Income Corporation

 

  $ 23,997     $ 1,492     $ 18,555            

 

SL Green Realty Corp.

 

  $ 7,361     $ 1,204     $ 12,766            

 

The Macerich Company

 

  $ 3,806     $ 976     $ 8,854            

 

Douglas Emmett, Inc.

 

  $ 7,698     $ 944     $ 9,349            

 

Hudson Pacific Properties, Inc.

 

  $ 5,808     $ 820     $ 7,467            

 

Paramount Group, Inc.

 

  $ 3,166     $ 765     $ 8,734            

 

Highwoods Properties, Inc.

 

  $ 5,074     $ 739     $ 5,138            

 

Empire State Realty Trust, Inc.

 

  $ 2,526     $ 727     $ 3,932            

 

Corporate Office Properties Trust

 

  $ 3,279     $ 643     $ 3,854            

 

Brandywine Realty Trust

 

  $ 2,775     $ 570     $ 4,072            

 

Piedmont Office Realty Trust, Inc.

 

  $ 2,797     $ 533     $ 3,517            

 

Mack-Cali Realty Corporation

 

  $ 2,094     $ 527     $ 5,721            

 

75th Percentile

 

  $ 17,447     $ 1,504     $ 15,122            

 

50th Percentile

 

  $ 5,441     $ 882     $ 8,794            

 

25th Percentile

 

  $ 3,074     $ 706     $ 4,872            

 

Kilroy Realty Corporation

 

  $ 8,894     $ 837     $ 8,900            

 

(1)

As of December 31, 2019, based on publicly-available information from the S&P Capital IQ database’s definition of Market Capitalization.

 

(2)

Per S&P Capital IQ database’s definition of Total Revenue, based on the trailing 12 months of publicly reported data as of February 21, 2020.

 

(3)

Per S&P Capital IQ database’s definition of Total Assets, based on the most recently reported fiscal quarter as of February 21, 2020.

 

(4)

Office REITS as defined by the GICS Office REIT Sub-Industry.

 

(5)

Comparable firms based on equity market capitalization defined as those that fall within 0.5x — 2.0x of the Company’s market capitalization as of December 31, 2019.

 

(6)

Comparable firms based on total revenue defined as those that fall within 0.5x — 2.0x of the Company’s revenue level based on the information summarized in the chart.

 

(7)

Comparable firms based on asset size defined as those that fall within 0.5x — 2.0x of the Company’s asset level based on the information summarized in the chart.

 

(8)

Defined as possessing a significant portfolio of properties on the West Coast and/or being a significant West Coast talent competitor.

 

(9)

Effective October 30, 2019, HCP, Inc. changed its name to Healthpeak Properties, Inc.

 

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The Compensation Committee uses peer group compensation analyses, together with other reports and information prepared by Mercer for the Compensation Committee, to evaluate our executive compensation program generally and to inform its decision-making process. Differences in compensation levels for our NEOs are driven by the Compensation Committee’s assessment, in its judgment, of each of our executive’s responsibilities, experience and compensation levels for similar positions at companies in the peer group. Our pay positioning versus the peer group also incorporates the degree of expertise and experience needed to oversee and direct our active portfolio management strategy. For example, our strategy requires different skill sets than executives who focus primarily on managing cash flows from a more static investment portfolio. Further, our compensation levels reflect the need to attract, retain and incentivize talented and experienced individuals in the highly competitive West Coast employment and commercial real estate markets.

For 2019, the Compensation Committee did not set compensation levels at any specific level or percentile against the peer group data. Except as otherwise noted in this CD&A, the Compensation Committee’s executive compensation determinations are subjective and the result of the Compensation Committee’s business judgment, which is informed by the experiences of the members of the Compensation Committee, the analysis and input from, and peer group data provided by, the Compensation Committee’s independent executive compensation consultant, as well as the Compensation Committee’s assessment of overall compensation trends and trends specific to the REIT market.

COMPENSATION GOVERNANCE PRACTICES

We maintain a number of compensation and governance-related policies described below that we believe represent current best practices.

Compensation Governance Practices

 

   

Clawback policy

 

   

Anti-hedging policy

 

   

Anti-pledging policy

 

   

Robust stock ownership guidelines for executives and non-employee directors

 

   

Stock holding requirements

 

   

No single trigger change in control provisions

   

No excise tax gross-ups

 

   

Related party transactions policy

 

   

No repricing of underwater stock options without stockholder approval

 

   

Independent compensation consultant

 

   

Regular stockholder engagement

 

 

Compensation Clawback Policy

Under our clawback policy, subject to the discretion and approval of our Board, we may require reimbursement and/or cancellation of any bonus or other incentive compensation, including equity-based compensation, awarded to an executive officer, in any case where all of the following factors are present: (i) the award was predicated upon the achievement of certain financial results during the three fiscal years preceding the date of the Company’s most recent audited balance sheet (or any interim or other portion of such period of three fiscal years, or any more recent period) that were subsequently the subject of an accounting restatement due to material noncompliance by us with any financial reporting requirements under securities laws; (ii) the Board determines that the executive officer engaged in misconduct that was a substantial contributing cause to the need for the restatement; and (iii) a lower award would have been made to the executive officer based upon the restated financial results. In each instance, we may recover the individual executive officer’s entire annual bonus or any gain received from the award within the relevant period, plus a reasonable rate of interest. These clawback provisions are in addition to the provisions of the Non-Competition, Non-Solicitation and Non-Disclosure Agreements we have entered into with our NEOs, described below under “Named Executive Officer Compensation Tables — Potential Payments Upon Termination or Change in Control” that provide for the executive to forfeit certain equity awards if he fails to comply with certain restrictive covenants in our favor.

Anti-Hedging Policy

We maintain a policy that restricts our directors, officers, certain other employees and their family members from engaging in any transaction that might allow them to gain from declines in the price of Company securities. Employees subject to our anti-hedging

 

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policy include employees that participate in our equity compensation plans, employees who, because of their job responsibilities, are considered more likely to have access to material non-public information (including employees in accounting, legal, and administration) and other employees who are in possession of material non-public information from time to time. Specifically, we prohibit transactions by these individuals using derivative securities, or otherwise participating in hedging, “stop loss” or other speculative transactions involving Company securities, including short-selling Company securities, trading in any puts, calls, covered calls or other derivative products involving Company securities, or writing purchase or call options, short sales and other similar transactions.

Anti-Pledging Policy

We have a policy prohibiting our NEOs and other Section 16 officers from pledging, or using as collateral, Company securities in order to secure personal loans, lines of credit or other obligations, which includes holding Company securities in an account that has been margined. Exceptions to this policy are granted where the securities pledged (i) are not needed to satisfy the minimum ownership level required by the Company’s stock ownership guidelines, as discussed below, (ii) do not total more than 10% of the individual’s total beneficial ownership of Company securities and (iii) are not utilized as part of any hedging strategy that would potentially immunize the individual against economic exposure to such securities. In addition, our Board may grant other exceptions to this policy in such circumstances as it may consider appropriate; however, no such other exceptions have been made.

Minimum Stock Ownership Guidelines

As part of our compensation philosophy, we believe that our NEOs should hold a significant amount of the Company’s stock to help align their long-term interests with those of our stockholders. Accordingly, we maintain minimum stock ownership guidelines applicable to all of our NEOs as reflected in the table below. Under the guidelines, each NEO has six years from the point of first being subject to the guidelines to satisfy the minimum guideline level of ownership. As of December 31, 2019, all of our NEOs who continue to serve as one of our executive officers had met the minimum required level of ownership.

 

Named Executive

  

Ownership

Requirement

as a % of

Base Salary

  

Ownership

Requirement

Met as of

December 31,

2019

 

     

 

John Kilroy

 

   600%    Yes     

 

Jeffrey Hawken

 

   300%    Yes     

 

Tyler Rose

 

   300%    Yes     

 

Justin Smart

 

   300%    Yes   

Stock Holding Requirements

Our stock ownership guidelines also provide that, if an executive falls short of the applicable level of stock ownership, the executive is expected to hold (and not sell) at least 50% of the net shares acquired upon exercise, vesting or payment, as the case may be, of any equity award granted by us to the executive. “Net shares” for this purpose means the total number of shares acquired by the executive pursuant to the award, after reduction for shares having a fair market value equal to the exercise price of the award (in the case of a stock option) and shares having a fair market value equal to the executive’s expected tax liability resulting from the award.

No Single Trigger Change in Control Severance Provisions

None of our executives have the benefit of any “single trigger” severance or equity award acceleration arrangements, meaning that severance benefits and accelerated vesting of equity awards are not triggered simply because a change in control transaction occurs.

 

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No Excise Tax Gross-Ups

None of our executives’ agreements with the Company provide for tax “gross-up” payments.

Tax Considerations

Section 162(m) of the Internal Revenue Code generally prohibits a publicly-held company from deducting compensation paid to a current or former named executive officer that exceeds $1 million during the tax year. Certain awards granted before November 2, 2017 that were based upon attaining pre-established performance measures that were set by the Compensation Committee under a plan approved by our stockholders, as well as amounts payable to former executives pursuant to a written binding contract that was in effect on November 2, 2017, may qualify for an exception to the $1 million deductibility limit.

The Compensation Committee notes this deductibility limitation as one of the factors in its consideration of compensation matters. However, the Compensation Committee generally has the flexibility to take any compensation-related actions that it determines are in the Company’s and its stockholders’ best interest, including designing and awarding compensation for our executive officers that is not fully deductible for tax purposes. In addition, we believe that we qualify as a REIT under the Internal Revenue Code and are not subject to federal income taxes, meaning that the payment of compensation that is not deductible under Section 162(m) should not have a material adverse consequence to us, provided we continue to remain qualified as a REIT under the Internal Revenue Code.

COMPENSATION COMMITTEE MATTERS

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed our Compensation Discussion and Analysis section with management and, based on the review and discussions, recommended to the Board that the Compensation Discussion and Analysis section be included in this Proxy Statement on Schedule 14A.

Executive Compensation Committee

Edward Brennan, PhD, Chair

Jolie Hunt

Gary Stevenson

The foregoing report of the Compensation Committee is not soliciting material, is not deemed filed with the SEC and is not incorporated by reference in any filing of the Company under the Securities Act or the Exchange Act, whether made before or after the date of this Proxy Statement and irrespective of any general incorporation language in such filing.

 

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Dr. Brennan, Mr. Stevenson and Ms. Hunt were members of the Compensation Committee during all of 2019. No one who served on the Compensation Committee at any time during 2019 is or has been an executive officer of the Company or had any relationships requiring disclosure by the Company under the rules of the SEC requiring disclosure of certain relationships and related party transactions. None of our executive officers who served as a director of the Company or as a member of the Compensation Committee during the year ended December 31, 2019 served as a director or a member of a compensation committee (or other committee serving an equivalent function) for any other entity.

NAMED EXECUTIVE OFFICER COMPENSATION TABLES

The Summary Compensation Table quantifies the value of the different forms of compensation earned by or awarded to our NEOs for 2017, 2018 and 2019. The primary elements of each NEO’s total compensation reported in the table are base salary, a short-term incentive (annual cash bonus) and long-term incentive equity awards. Our NEOs also received the other benefits listed in column (i) of the Summary Compensation Table, as further described in the footnotes to the table.

The Summary Compensation Table should be read in conjunction with the tables and narrative descriptions that follow. A description of the material terms of each NEO’s employment agreement regarding base salary and short-term incentive amounts is provided immediately following the Summary Compensation Table. The Grants of Plan-Based Awards table, and the accompanying disclosure following that table, provide information regarding the cash and equity awards granted to our NEOs in 2019. The Outstanding Equity Awards at Fiscal Year End and Option Exercises and Stock Vested tables provide further information on the NEOs’ potential realizable value and actual value realized with respect to their equity awards.

 

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SUMMARY COMPENSATION TABLE — 2017, 2018 AND 2019

The following table sets forth summary information regarding compensation of our NEOs for all services rendered to us in all capacities in 2017, 2018 and 2019.

 

Name & Principal

Position(s)

  Year   Salary ($)     Bonus
($)
    Stock
Awards(1)
($)
    Option
Awards
($)
   

Non-Equi-
ty Incen-
tive Plan
Compen-
sation(2)
($)

 

    Change in
Pension Value &
Non-qualified De-
ferred Compensa-
tion Earnings ($)
    All Other
Compen-
sation(3) ($)
    Total(4) ($)  

 

(a)

 

 

(b)

 

 

 

 

(c)

 

 

 

 

 

 

(d)

 

 

 

 

 

 

(e)

 

 

 

 

 

 

(f)

 

 

 

 

 

 

(g)

 

 

 

 

 

 

(h)

 

 

 

 

 

 

(i)

 

 

 

 

 

 

(j)

 

 

 

John Kilroy

 

  2019     1,225,000             6,105,975             4,150,000             605,011       12,085,986  

President and Chief
Executive Officer

 

 

2018

 

    1,225,000             37,924,107             3,775,000             858,985       43,783,092  
 

 

2017

 

    1,225,000             5,872,397             3,800,000             531,253       11,428,650  

 

Jeffrey Hawken

 

  2019     675,000             1,870,442             1,575,000             162,340       4,282,782  

Executive Vice
President
and Chief
Operating Officer

 

 

2018

 

    675,000             3,986,125             1,575,000             172,120       6,408,245  
 

 

2017

 

    675,000             1,874,898             1,600,000             149,051       4,298,949  

 

Tyler Rose

 

  2019     550,000             1,667,339             745,000             132,832       3,095,171  

Executive Vice
President,
Chief
Financial Officer and
Secretary

 

 

2018

 

    550,000             3,782,147             675,000             124,441       5,131,588  
 

 

2017

 

    500,000             1,671,387             700,000             113,448       2,984,835  
                                                                   

 

Justin Smart

 

  2019     550,000             1,515,788             745,000             115,674       2,926,462  

Executive Vice

President,
Development
and
Construction
Services

 

 

2018

 

    550,000             3,103,083             675,000             116,872       4,444,955  
 

 

2017

 

    500,000             1,519,457             700,000             110,962       2,830,419  
                 
                                                                   

 

Stephen Rosetta(5)

 

  2019     395,869 (6)      560,191 (7)      1,212,616 (8)                        1,716,105       3,884,781  

Former Executive Vice
President and Chief
Investment Officer

 

 

2018

 

    600,000       539,435 (7)      2,271,716             1,200,000             100,615       4,711,766  
 

 

2017

    323,077 (9)            2,000,009             650,000             52,430       3,025,516  
                 

 

  (1)

The amounts reported in column (e) of the table above for each year reflect the aggregate accounting fair value of stock awards granted in the applicable year as computed in accordance with FASB Accounting Standards Codification (“ASC”) Topic 718, Compensation — Stock Compensation (determined as of the grant date of the awards, as the grant date of the awards is determined for accounting purposes). For information on the assumptions used in the accounting fair value computations, refer to Note 15 “— Share-Based and Other Compensation” in the Notes to Consolidated Financial Statements in the Company’s 2019 Form 10-K filed with the SEC. The amounts included in the Summary Compensation Table above, and in the tables below in this footnote, may not be indicative of the realized value of the awards if they vest.

As discussed in the CD&A, in 2017, 2018 and 2019 the Company granted annual long-term incentive award RSUs to the NEOs, the vesting of which is subject, in part, to the Company’s performance. As required by applicable SEC rules, the accounting fair value of the performance-based RSUs awarded in these years was determined based on the probable outcome (determined as of the grant date of the awards, as the grant date of the awards is determined for accounting purposes) of the performance-based conditions applicable to the awards. For these purposes, as of the grant date of the awards (as determined for accounting purposes) we determined that, other than as to the Company TSR Percentile Ranking performance condition applicable to the awards, the “target” level of performance was the probable outcome of the applicable performance-based conditions. Accordingly, for such portion of these awards, the accounting fair value is included for the NEOs as Stock Award compensation for the year in which the grant was made based on the “target” number of shares subject to the awards. For the portion of the performance-based awards that vest based on the Company’s TSR Percentile Ranking, the accounting fair value was included for the NEOs as Stock Award compensation for the year in which the grant was made based on a Monte Carlo simulation pricing model (which probability weights multiple potential outcomes) as of such grant date of the awards. For more information on the assumptions made in the Monte Carlo simulation pricing model, refer to Note 15 “— Share-Based and Other Compensation” in the Notes to Consolidated Financial Statements in the Company’s Form 10-K for the year in which the awards were granted. Under the terms of the performance-based awards at grant, between 0% and 200% (between 0% and 262.5% in the case of the awards granted to our CEO) of the target number of shares subject to the awards can vest, based on performance and the other vesting conditions applicable to the awards. The following tables present the accounting fair value (determined as described above as of the grant date of the awards) of the annual long-term incentive performance-based RSUs awarded to the NEOs in 2017, 2018 and 2019 under two sets of assumptions: (a) assuming that the target level of performance would be achieved as to the performance-based conditions other than the Company’s TSR Percentile Ranking, which we originally judged to be the probable outcome, and using the Monte Carlo simulation pricing model to value the portion of the awards that vest based on the Company’s TSR Percentile Ranking, and (b) assuming that the highest level of performance would be achieved (200% of the target level for awards other than the CEO’s and 262.5% in the case of the awards granted to our CEO).

 

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2017 Annual Performance-Based RSUs

 

                            

 

Named Officer

  

 

Grant Date Fair
Value (Based on
Probable Outcome)

    

 

Grant Date Fair
Value (Based on
Maximum
Performance)

 

           

 

John Kilroy

 

   $ 4,372,330      $ 11,156,381             

 

Jeffrey Hawken

 

   $ 1,257,849      $  2,468,040             

 

Tyler Rose

 

   $ 1,121,313      $  2,200,140             

 

Justin Smart

 

   $ 1,019,383      $  2,000,142             

 

Stephen Rosetta

 

   $ 0      $ 0             

 

2018 Annual Performance-Based RSUs

 

                            

 

Named Officer

  

 

Grant Date Fair
Value (Based on
Probable Outcome)

    

 

Grant Date Fair
Value (Based on
Maximum
Performance)

 

           

 

John Kilroy

 

   $ 4,651,677      $ 11,812,517             

 

Jeffrey Hawken

 

   $ 1,261,696      $  2,468,058             

 

Tyler Rose

 

   $ 1,124,708      $  2,200,091             

 

Justin Smart

 

   $ 1,022,444      $  2,000,047             

 

Stephen Rosetta

 

   $  817,982      $  1,600,091             

 

2019 Annual Performance-Based RSUs

 

                            

 

Named Officer

  

 

Grant Date Fair
Value (Based on
Probable Outcome)

    

 

Grant Date Fair
Value (Based on
Maximum
Performance)

 

           

 

John Kilroy

 

   $ 4,605,926      $ 11,812,458             

 

Jeffrey Hawken

 

   $ 1,253,383      $  2,468,095             

 

Tyler Rose

 

   $ 1,117,304      $  2,200,137             

 

Justin Smart

 

   $ 1,015,725      $  2,000,112             

 

Stephen Rosetta

 

   $ 812,566      $  1,600,062             

 

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As discussed in the CD&A included in the Company’s 2019 Proxy Statement, the Company awarded additional RSUs to the NEOs in December 2018, the vesting of which is subject, in part, to the Company’s performance. For these purposes, the accounting fair value of the RSUs awarded in December 2018 that are subject to performance-based vesting conditions was included for the NEOs as Stock Award compensation for 2018 based on a Monte Carlo simulation pricing model (which probability weights multiple potential outcomes) as of the grant date of the awards. For more information on the assumptions made in this Monte Carlo simulation pricing model, refer to Note 15 “— Share-Based and Other Compensation” in the Notes to Consolidated Financial Statements in the Company’s 2018 Form 10-K filed with the SEC. Under the terms of these awards at grant, between 0% and 200% of the target number of shares subject to the awards can vest, based on performance and the other vesting conditions applicable to the awards. The following table presents the accounting fair value (determined as described above as of the grant date of the awards) of the December 2018 PRSUs awarded to the NEOs under two sets of assumptions: (a) using the Monte Carlo simulation pricing model, and (b) assuming that the highest level of performance would be achieved (200% of the target level).

 

December 2018 PRSUs

 

                            

 

Named Officer

  

 

Grant Date Fair
Value (Based on
Probable Outcome)

    

 

Grant Date Fair
Value (Based on
Maximum
Performance)

 

           

 

John Kilroy

 

   $ 18,272,486      $ 33,000,120             

 

Jeffrey Hawken

 

   $  1,107,417      $  1,999,996             

 

Tyler Rose

 

   $  1,107,417      $  1,999,996             

 

Justin Smart

 

   $  830,580      $  1,500,028             

 

Stephen Rosetta

 

   $  553,743      $  1,000,060             

 

(2)

As described in the CD&A, each of the NEOs, other than Mr. Rosetta, received a short-term incentive under the Company’s 2019 annual incentive program in the amount reported in column (g) of the table.

 

(3)

The following table identifies the items reported in the “All Other Compensation” column of the table for each NEO in 2019:

 

Executive

Officers

  Employee
Health-
care Pre-
miums
    Medical
Allow-
ance
    Life &
Disability
Insurance
Premiums
   

Company
Contribu-
tions to
Deferred
Compen-
sation
Plan

 

    Company
Contribu-
tions to
401(k)
   

Travel
and
Automo-
bile-Re-
lated
Expens-

es

   

Home
Office

/ Other
Expens-
es

    Finan-
cial
Planning
Services
    Club
Dues
    Reimburs-
ement of
Professi-
onal Fees
    Sever-
ance
Benefits
    Total
Benefits
 

 

John Kilroy

 

  $ 6,994     $ 25,000     $ 327,202     $ 122,500     $ 12,500     $ 85,964     $ 3,957           $ 13,744     $ 7,150           $ 605,011  

 

Jeffrey Hawken

 

  $ 6,994     $ 25,000           $ 67,500     $ 12,500     $ 23,866     $ 4,053     $ 8,887     $ 13,540