DEF 14A 1 d369672ddef14a.htm DEF 14A DEF 14A
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SCHEDULE 14A

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934 (Amendment No. )

Filed by the Registrant  

Filed by a Party other than the Registrant  

Check the appropriate box:

 

Preliminary Proxy Statement

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Proxy Statement

 

Definitive Additional Materials

 

Soliciting Material Pursuant to § 240.14a-12

WESTERN DIGITAL CORPORATION

 

 

(Name of Registrant as Specified In Its Charter)

 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

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   Fee paid previously with preliminary materials.
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LOGO

2017 Proxy Statement

 


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LOGO

September 18, 2017

Dear Fellow Stockholders:

On behalf of our Board of Directors, we want to thank you for your continued investment in Western Digital and for your support throughout our multi-year transformation. Fiscal 2017 was an important year for our company — we made substantial progress in our integration of SanDisk and HGST and focused the execution of our strategy to position the company for long-term growth.

 

    Integrated product and technology platform drove growth. The world we live in increasingly depends on data; data continues to grow at an astronomical rate; and access to and storage of data are fundamental to creating value. We are well-positioned to take advantage of the ever-increasing demand for data storage because we have developed and acquired the critical intellectual property and technology necessary for the end-to-end infrastructure that enables our customers to optimize how they generate, transform and access data. Our broad storage portfolio, including HDDs, SSDs, embedded and removable flash memory and storage-related systems, is backed by more than 14,000 patents worldwide. We offer a vertically-integrated business model to maximize operational efficiency resulting in consistent profitable performance and a strong free cash flow. We have built a strong platform, a broad array of highly valuable products and capabilities, critical intellectual property and technology and a talented team, all of which contributed to strong revenue growth and increased profitability in fiscal 2017.

 

    Recognized value from our growth strategy and ongoing transformation. During fiscal 2017, we continued to make progress on our integration efforts and remain on-track to continue to achieve savings and synergies with the integration of SanDisk and HGST. Our strong financial performance during fiscal 2017 validates our growth strategy and our ongoing transformation into a comprehensive provider of diversified storage products.

During this transformative time for our company, our Board remains highly engaged in strategic oversight and is very supportive of the management team’s focused execution on a strategy that has successfully positioned Western Digital for long-term growth. Over the past year, the Board and management team have also engaged with a number of stockholders to discuss long-term strategy as well as our compensation and governance practices. The discussion and feedback received during these engagements is invaluable as we consider this feedback during our Board deliberations. We appreciate the opportunity to engage with our stockholders, particularly during this very important time for our company, and we look forward to continuing this highly valued dialogue.

As our data-centric world continues to evolve, Western Digital is uniquely positioned to help our customers unlock the increasing value of data. We are highly confident in our management team’s ability to execute on our transformation strategy and create long-term value for our stockholders.

We are excited about the future of Western Digital and we thank you for the trust you have placed in our Board.

 

 

LOGO

Matthew E. Massengill

Chairman of the Board

  

LOGO

Len J. Lauer

Lead Independent Director


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Notice of Annual Meeting of Stockholders

 

Date and Time:    Place:

November 2, 2017

8:00 a.m. PT

  

The Fairmont San Jose

170 S. Market Street

San Jose, California 95113

Matters to be voted on:

 

  🌑   Election of the eight director nominees named in the attached Proxy Statement to serve until our next annual meeting of stockholders and until their respective successors are duly elected and qualified

 

  🌑   Approval on an advisory basis of the named executive officer compensation disclosed in the attached Proxy Statement

 

  🌑   Approval on an advisory basis of the frequency of future advisory votes on named executive officer compensation

 

  🌑   Approval of the amendment and restatement of our 2004 Performance Incentive Plan that would, among other things, rename the plan as the “2017 Performance Incentive Plan” and increase by fourteen million (14,000,000) the number of shares of our common stock available for issuance under the plan

 

  🌑   Ratification of the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending June 29, 2018

 

  🌑   Any other business that may properly come before our annual meeting or any postponement or adjournment of the meeting

Record date: Stockholders of record at the close of business on September 6, 2017 will be entitled to notice of and to vote at our annual meeting and any adjournments or postponements of the meeting.

Your vote is very important. Please submit your proxy as soon as possible via the Internet, telephone or mail. Submitting your proxy by one of these methods will ensure your representation at our annual meeting regardless of whether you attend the meeting.

 

How to Vote Your Shares

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Via the Internet

Visit the website listed on your proxy card, notice or voting instruction form

   LOGO   

By Phone

Call the phone number listed on your proxy card or voting instruction form

 

     LOGO

  

 

By Mail

Complete, sign, date and return your proxy card or voting instruction form in the envelope provided

  

 

LOGO

  

 

In Person

Attend our annual meeting and vote by ballot

By Order of the Board of Directors,

 

 

  LOGO

MICHAEL C. RAY

Executive Vice President, Chief Legal Officer and Secretary

September 18, 2017

 

Important notice regarding the availability of proxy materials for our

annual meeting of stockholders to be held on November 2, 2017:

Our Proxy Statement and 2017 Annual Report to stockholders are available on the Internet at

www.proxyvote.com.

 

Western Digital Corporation

5601 Great Oaks Parkway, San Jose, CA 95119


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PROXY SUMMARY

     i  

PROXY STATEMENT

     1  

GENERAL INFORMATION ABOUT THE ANNUAL MEETING

     2  

PROPOSAL 1: ELECTION OF DIRECTORS

     7  

Identifying and Evaluating Director Candidates

     8  

Nominees for Election

     10  

CORPORATE GOVERNANCE

     16  

Corporate Governance Guidelines and Code of Business Ethics

     16  

Director Independence

     16  

Board Leadership Structure

     16  

Board and Committee Evaluation

     17  

Director Education

     18  

Committees

     19  

Meeting Attendance

     21  

Stockholder Engagement

     21  

Communicating with Directors

     22  

Chief Executive Officer Evaluation and Succession Planning

     22  

Risk Oversight and Compensation Risk Assessment

     23  

DIRECTOR COMPENSATION

     25  

Executive Summary

     25  

Director Compensation Table for Fiscal 2017

     25  

Fiscal 2017 Director Compensation Program

     27  

EXECUTIVE OFFICERS

     29  

COMPENSATION DISCUSSION AND ANALYSIS

     32  

Our Named Executive Officers

     33  

Executive Summary

     33  

Our Executive Compensation Philosophy and Objectives

     35  

Allocation of Target Total Direct Compensation

     36  

Determination of Executive Compensation

     36  

Elements of Our Executive Compensation Program

     41  

Executive officer Compensation for Fiscal 2017

     45  

Other Features of Our Executive Compensation Program

     56  

Other Executive Compensation Program Policies

     58  

Subsequent Events

     59  
  

REPORT OF THE COMPENSATION COMMITTEE

     61  

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     62  

EXECUTIVE COMPENSATION TABLES AND NARRATIVES

     62  

Fiscal Years 2015 — 2017 Summary Compensation Table

     62  

Fiscal 2017 Grants of Plan-Based Awards Table

     64  

Description of Compensation Arrangements for Named Executive Officers

     65  

Outstanding Equity Awards at Fiscal 2017 Year-End Table

     68  

Fiscal 2017 Option Exercises and Stock Vested Table

     69  

Fiscal 2017 Non-Qualified Deferred Compensation Table

     70  

Potential Payments Upon Termination or Change in Control

     71  

PROPOSAL 2: ADVISORY VOTE ON EXECUTIVE COMPENSATION

     77  

PROPOSAL 3: ADVISORY VOTE ON THE FREQUENCY OF FUTURE ADVISORY VOTES ON EXECUTIVE COMPENSATION

     79  

PROPOSAL 4: APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE WESTERN DIGITAL CORPORATION 2004 PERFORMANCE INCENTIVE PLAN

     80  

EQUITY COMPENSATION PLAN INFORMATION

     95  

SECURITY OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT

     97  

SECTION  16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     99  

REPORT OF THE AUDIT COMMITTEE

     100  

PROPOSAL 5: RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     102  

TRANSACTIONS WITH RELATED PERSONS

     103  

Policies and Procedures for Approval of Related Person Transactions

     103  

Certain Transactions with Related Persons

     103  

ANNUAL REPORT

     104  
 


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Forward-Looking Statements

This Proxy Statement contains forward-looking statements, including but not limited to, statements concerning: our expectations regarding the anticipated benefits from the acquisition of SanDisk Corporation (“SanDisk”) and the integration of SanDisk and HGST; our views with respect to the growth of digital data; and our beliefs regarding our business strategy and our ability to execute that strategy. These forward-looking statements are based on our current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements, including: uncertainties with respect to the company’s business ventures with Toshiba Corporation; volatility in global economic conditions; business conditions and growth in the storage ecosystem; impact of competitive products and pricing; market acceptance and cost of commodity materials and specialized product components; actions by competitors; unexpected advances in competing technologies; our development and introduction of products based on new technologies and expansion into new data storage markets; risks associated with acquisitions, mergers and joint ventures; difficulties or delays in manufacturing; and other risks and uncertainties listed in Western Digital’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017 and our other reports filed with the Securities and Exchange Commission, to which your attention is directed. You should not place undue reliance on these forward-looking statements, which speak only as of the date hereof, and we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances.


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PROXY SUMMARY

 

 

PROXY SUMMARY

This summary highlights information contained elsewhere in this Proxy Statement. This summary does not contain all of the information that you should consider. We encourage you to read the entire Proxy Statement for more information about these topics prior to voting.

STOCKHOLDER VOTING MATTERS

 

 

Proposal

 

Board’s Voting

Recommendation

 

Page

Reference

           

Annual Meeting of
Stockholders

 

Time and Date:

November 2, 2017

8:00 a.m. PT

 

Place:

The Fairmont San Jose

170 S. Market Street

San Jose, California 95113

 

Record Date:

September 6, 2017

Proposal 1: Election of eight director nominees

  FOR each nominee   7          

Proposal 2: Approval on an advisory basis of our named executive officers’ compensation

  FOR   77          

Proposal 3: Approval on an advisory basis of the frequency of future advisory votes on named executive officer compensation

 

1 YEAR

  79          

Proposal 4: Approval of the amendment and restatement of our 2004 Performance Incentive Plan

  FOR   80          

Proposal 5: Ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal 2018

  FOR   102          

BOARD AND GOVERNANCE HIGHLIGHTS

Our Board of Director Nominees

You are being asked to vote on the election of the eight director nominees listed below, each of whom is currently serving on our Board of Directors. Directors are elected by a majority of votes cast. Detailed information about each director’s background, skills and expertise can be found in Proposal 1: Election of Directors. The chart below reflects each director’s current committee membership.

 

 

Name and Current Position

 

 

    Age    

 

 

    Director    

Since

 

 

  Independent  

 

 

Executive

  Committee  

 

 

Audit

  Committee  

 

 

  Compensation  

Committee

 

 

  Governance  

Committee

Martin I. Cole

Former Group Chief Executive, Technology

Accenture plc

  61   2014   Yes       M          M   

Kathleen A. Cote

Former Chief Executive Officer

Worldport Communications, Inc.

  68   2001   Yes           M      M   

Henry T. DeNero

Former Chairman and Chief Executive Officer

Homespace, Inc.

  71   2000   Yes   M      C           

Michael D. Lambert

Former Senior Vice President

Dell Inc.

  70   2002   Yes           C       

Len J. Lauer

Chairman and Chief Executive Officer

Memjet

  60   2010   Yes           M      C   

Matthew E. Massengill

Former President and Chief Executive Officer

Western Digital Corporation

  56   2000   Yes   M               

Stephen D. Milligan

Chief Executive Officer

Western Digital Corporation

  54   2013   No   C               

Paula A. Price

Senior Lecturer

Harvard University

  55   2014   Yes       M           

 

Number of Meetings in Fiscal 2017

 

  –      12      12      5   

C = Chair; M = Member

 

 

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PROXY SUMMARY

 

 

Highly Engaged Directors

(Fiscal 2017 Meeting Attendance*)

 

 

LOGO

 

% = Average percentage of meetings attended by directors

* The Executive Committee did not meet during fiscal 2017.

CORPORATE GOVERNANCE INFORMATION

 

  All directors elected annually by a simple majority of votes cast  

 

  Independent Board leadership, including Lead Independent Director with clearly defined roles and responsibilities  

 

  Seven of eight Board members are independent  

 

  Over 97% Board and committee meeting attendance in fiscal 2017  

 

  Commitment to Board refreshment and diversity  

 

  Mandatory director retirement policy, with three directors reaching the retirement age in the next four years  

 

  Active Board oversight of strategic planning and risk management  

 

  Succession planning for directors, chief executive officer and other key officers  

 

  Annual third-party facilitated Board and committee self-evaluations  

 

  Robust year-round stockholder engagement program that informs Board decisions  

 

  Code of conduct for directors, officers and employees  

 

  All executive officers have achieved stock ownership requirements pursuant to our guidelines  

For additional corporate governance information, please also see the Investor Relations section of our website at investor.wdc.com.

 

Stockholder Engagement

 

Our Board of Directors and management are committed to regular engagement with our stockholders and soliciting their views and input on important performance, executive compensation, governance, environmental, social, human capital management and other matters.

 

Over the past year, our Chairman of the Board, Lead Independent Director and management met with our major stockholders and key stakeholders to obtain their input and discuss their views on important issues to our stockholders, including:

 

    the progress of the transformation of our business and how the evolution of our business has been reflected in our executive compensation program;

 

    our Board of Directors’ independent oversight of management;

 

    our Board of Directors’ composition, director succession planning and recruitment, and self-assessment process; and

 

    our Board of Directors’ oversight of strategic planning, risk management, human capital management and environmental initiatives.

 

 

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PROXY SUMMARY

 

 

KEY BUSINESS PERFORMANCE HIGHLIGHTS

Fiscal 2017 was an important year for our company. As we continued to embark on our multi-year transformation, we made substantial progress in the integration of SanDisk and HGST. We also continued to focus on the execution of our strategy to position our company for long-term growth. The significance of these events in fiscal 2017 provided important context for the Compensation Committee’s decisions regarding executive pay, including our ability to retain, incentivize and reward our named executive officers during this critical time.

 

 

LOGO

 

1. “Non-GAAP net income” is net income under generally accepted accounting principles (“GAAP”), excluding $1.162 billion related to amortization of acquired intangible assets; $382 million in stock-based compensation expense; $232 million for employee termination, asset impairment and other charges; $154 million for charges related to cost savings initiatives; $35 million for acquisition-related charges; $274 million in debt extinguishment costs; $6 million in convertible debt activity; $67 million in other charges; and less $11 million attributed to the related tax effect of these items. Fiscal 2017 GAAP net income was $397 million.

 

2. “Non-GAAP earnings per share” is non-GAAP net income divided by the diluted average weighted shares outstanding. Fiscal 2017 GAAP earnings per share was $1.34.

 

3. “Non-GAAP gross margin” is non-GAAP gross profit of $7.215 billion divided by revenue. Non-GAAP gross profit is gross profit under GAAP of $6.072 billion less $1.003 billion related to amortization of acquired intangible assets; $49 million in stock-based compensation expense; $68 million for charges related to cost savings initiatives; $18 million for acquisition-related charges; and $5 million in other charges.

 

4. “Free cash flow” is cash provided by operating activities under GAAP, less $557 million in purchases of property, plant and equipment, net of proceeds from disposals, and $277 million of investments and notes receivable issuances to Flash Ventures (a business venture we have with Toshiba Corporation) net of notes receivable proceeds from Flash Ventures.

 

 

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PROXY SUMMARY

 

 

COMPENSATION

Pay Aligned with Performance

Our overriding executive compensation philosophy is clear and consistent — we pay for performance. Our executives are accountable for the performance of the company and the operations they manage and are compensated primarily based on that performance. Approximately 90% of our Chief Executive Officer’s target total direct compensation for fiscal 2017, and approximately 85% (on average) of our other named executive officers’ target total direct compensation for fiscal 2017, was “at risk” and variable based on our stock price performance and achievement of other specified financial and strategic performance goals.

 

 

LOGO

 

Core Components of Fiscal 2017 Compensation

 

Base Salary

 

  

 

Designed to be competitive with market and industry norms and to reflect individual performance

 

 

Short-Term Incentive Compensation

 

  

 

Performance-based cash bonus opportunity based on adjusted earnings per share (“EPS”) for a semi-annual performance period

 

 

Long-Term Incentive Compensation

  

 

   Performance Stock Units (“PSUs”) —

 

  

   Annual PSUs based on pre-established financial metrics (revenue, adjusted EPS and adjusted cash flow from operations in fiscal 2017-2018), with a relative total stockholder return (“TSR”) hurdle capping payout at target level if relative TSR is below the median, and subject to automatic adjustment in a relative proportion by which the total available market (“TAM”) exceeds or falls short of the TAM adopted by our Board at the time the targets were set

 

  

   Stock Options — Vest over 4 years

 

  

   Restricted Stock Units (“RSUs”) — Vest over 4 years

 

Key Compensation Changes for Fiscal 2017

 

  Increased performance-based compensation: We increased the use of performance-based long-term incentive equity awards for our named executive officers compared to fiscal 2016, with PSUs comprising 75% of our Chief Executive Officer’s equity award mix

 

 

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PROXY SUMMARY

 

 

 

  Performance metrics aligned to our business strategy: We revised the performance metrics for our fiscal 2017-2018 PSU awards to align performance-based compensation to our business strategy:

 

    Performance metrics updated to include revenue, adjusted EPS and adjusted cash flow from operations (previously included revenue and operating income for fiscal 2016-2017 PSU awards)

 

    Automatic TAM adjustment factor based on revenue (previously based on hard disk drive units sold)

 

  Lengthened RSU Vesting Period: We increased RSU vesting from 3-year ratable vesting to 4-year ratable vesting

 

  Targeted compensation adjustments: In connection with increased responsibilities and to align with our pay positioning strategy, we increased the salary and target bonus levels for certain named executive officers

Effective Corporate Governance Reinforces our Executive Compensation Program

We believe that our executive compensation governance practices also help drive performance and align with our stockholders’ long-term interests.

 

 

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WHAT WE DO   WHAT WE DON’T DO
 

Pay for performance by requiring that a substantial portion of our executives’ compensation be earned based on performance goals

 

Link compensation program to corporate strategy and key drivers of value creation

 

Use a mix of performance measures, cash bonus opportunities and equity award vehicles to balance short- and long-term incentives

 

Cap maximum payout levels under performance-based and incentive awards

 

Review summaries of prior and potential future compensation levels (referred to as “tally sheets”) when making compensation determinations

 

Maintain executive stock ownership guidelines

 

Maintain a compensation recovery (clawback) policy applicable in the event an officer’s misconduct leads to an accounting restatement

 

Provide limited and modest perquisites

 

 

Р No tax gross-up payments in connection with severance or change in control pay

 

Р No automatic vesting of equity awards on a change in control

 

Р No repricing of stock options without stockholder approval (other than certain equitable adjustments permitted under our equity incentive plans)

 

Р No hedging or short-sale transactions by executive officers or directors

 

Р No dividends on awards that have not vested (or, with respect to performance-based awards, have not been earned)

 

 

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PROXY STATEMENT

 

 

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS

November 2, 2017

Our Board of Directors (which we also refer to as our “Board”) is soliciting your proxy for the 2017 Annual Meeting of Stockholders (the “Annual Meeting”), to be held at 8:00 a.m., PT, on November 2, 2017 at The Fairmont San Jose, 170 S. Market Street, San Jose, California 95113, and at any and all adjournments or postponements of the Annual Meeting, for the purposes set forth in the “Notice of Annual Meeting of Stockholders.” On or about September 18, 2017, proxy materials for the Annual Meeting, including this Proxy Statement and our Annual Report for the fiscal year ended June 30, 2017 (our “2017 Annual Report”), are being made available to stockholders entitled to vote at the Annual Meeting.

Unless the context otherwise requires, references in this Proxy Statement to “Western Digital,” “company,” “we,” “our,” “us,” and similar terms refer to Western Digital Corporation, a Delaware corporation. Western Digital is the parent company of our storage business, which includes SanDisk, HGST and WD in its family of brands.

This Proxy Statement and our 2017 Annual Report are available on the Internet at www.proxyvote.com. These materials are also available on our corporate website at investor.wdc.com. The other information on our corporate website does not constitute part of this Proxy Statement.

 

 

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GENERAL INFORMATION ABOUT THE ANNUAL MEETING

 

 

GENERAL INFORMATION ABOUT THE ANNUAL MEETING

Who Can Vote

Only stockholders of record at the close of business on September 6, 2017, the record date, will be entitled to notice of and to vote at the Annual Meeting. At the close of business on the record date, 295,178,114 shares of our common stock were outstanding and entitled to vote. Each share of common stock is entitled to one vote at the Annual Meeting.

Voting Your Proxy

At the Annual Meeting. If your shares are registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, LLC, you are considered the “stockholder of record” and you have the right to vote in person at the Annual Meeting. If you choose to do so, you can vote using the ballot that will be provided at the Annual Meeting, or, if you received a printed copy of the proxy materials by mail, you can complete, sign and date the proxy card enclosed with the proxy materials you received and submit it at the Annual Meeting. If you hold your shares through a broker, bank, trustee or other nominee (that is, in “street name”) rather than directly in your own name, you are a “beneficial stockholder” and you may not vote your shares in person at the Annual Meeting unless you obtain a “legal proxy” from the bank, broker, trustee or other nominee that holds your shares, giving you the right to vote the shares at the Annual Meeting. Even if you plan to attend the Annual Meeting, we recommend that you submit your proxy or voting instructions in advance of the meeting as described below so that your vote will be counted if you later decide not to attend the Annual Meeting.

Without Attending the Annual Meeting. Whether you are a stockholder of record or a beneficial stockholder, you may direct how your shares are voted without attending the Annual Meeting. If you are a stockholder of record, you may submit a proxy to authorize how your shares are voted at the Annual Meeting. You can submit a proxy over the Internet by following the instructions provided in the “Notice of Internet Availability of Proxy Materials” (which we also refer to as the “Notice”), or, if you received a printed copy of the proxy materials, you can also submit a proxy by mail or telephone pursuant to the instructions provided in the proxy card enclosed with the proxy materials. If you are a beneficial stockholder, you may submit your voting instructions over the Internet by following the instructions provided in the Notice, or, if you received a printed copy of the proxy materials, you can also submit voting instructions by telephone or mail by following the instructions provided in the voting instruction form sent by your bank, broker, trustee or other nominee.

Submitting your proxy or voting instructions via the Internet, by telephone or by mail will not affect your right to vote in person should you decide to attend the Annual Meeting, although beneficial stockholders must obtain a “legal proxy” from the bank, broker, trustee or nominee that holds their shares giving them the right to vote the shares in person at the Annual Meeting.

If you submit a signed proxy or voting instruction form but do not indicate your specific voting instructions on one or more of the proposals listed in the Notice of Annual Meeting of Stockholders, your shares will be voted as recommended by our Board of Directors on those proposals and as the proxyholders may determine in their discretion with respect to any other matters properly presented for a vote at the Annual Meeting.

Special Voting Instructions for 401(k) Plan Shares

If you are one of our employees or former employees who participates in the Western Digital Common Stock Fund under the 401(k) Plan, you will receive a request for voting instructions with respect to all of the shares allocated to your plan account. You are entitled to direct T. Rowe Price Company, the plan trustee, how to vote your plan shares. If T. Rowe Price does not receive voting instructions for shares in your plan account, your shares will be voted by T. Rowe Price in the same proportion as other shares in the Western Digital Common Stock Fund are affirmatively voted by plan participants.

 

 

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GENERAL INFORMATION ABOUT THE ANNUAL MEETING

 

 

Matters to Be Presented

The items of business scheduled to be voted on at the Annual Meeting are:

 

    Proposal 1: The election of the eight director nominees named in this Proxy Statement to serve until our next annual meeting of stockholders and until their respective successors are duly elected and qualified;

 

    Proposal 2: The approval on an advisory basis of the named executive officer compensation disclosed in this Proxy Statement;

 

    Proposal 3: The approval on an advisory basis of the frequency of future advisory votes on named executive compensation;

 

    Proposal 4: The approval of the amendment and restatement of our 2004 Performance Incentive Plan that would, among other things, rename the plan to the “2017 Performance Incentive Plan” and increase by fourteen million (14,000,000) the number of shares of our common stock available for issuance under the plan; and

 

    Proposal 5: The ratification of the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending June 29, 2018.

Stockholders will also be asked to consider and transact such other business as may properly come before the Annual Meeting or any postponement or adjournment of the meeting. The deadline under our By-laws for stockholders to notify us of any proposals or director nominations to be presented at the Annual Meeting has passed. Our Board of Directors does not know of any other matters to be presented for action at the Annual Meeting. Should any other matters come before the Annual Meeting or any adjournments or postponements thereof, the proxyholders will have discretionary authority to vote all proxies received with respect to such matters in accordance with their judgment.

Board Recommendations

Our Board of Directors recommends that you vote your shares:

 

    Proposal 1: “FOR” each of the eight director nominees named in this Proxy Statement to be elected to our Board of Directors;

 

    Proposal 2: “FOR” the approval on an advisory basis of the named executive officer compensation disclosed in this Proxy Statement;

 

    Proposal 3: “1 YEAR” for the frequency of future advisory votes on named executive compensation;

 

    Proposal 4: “FOR” the approval of the amendment and restatement of our 2004 Performance Incentive Plan that would, among other things, rename the plan to the “2017 Performance Incentive Plan” and increase by fourteen million (14,000,000) the number of shares of our common stock available for issuance under the plan; and

 

    Proposal 5: “FOR” the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending June 29, 2018.

Voting Deadline

If you are a stockholder of record, your proxy must be received by telephone, the Internet or mail by 11:59 p.m. Eastern time on November 1, 2017 in order for your shares to be voted at the Annual Meeting. If you are a beneficial stockholder, please follow the voting instructions provided by the bank, broker, trustee or nominee who holds your shares. If you hold shares in the 401(k) Plan, to allow sufficient time for voting by the plan trustee, your voting instructions must be received by telephone, the Internet or mail by 11:59 p.m. Eastern time on October 30, 2017.

Revoking Your Proxy

You have the power to revoke your proxy or voting instructions before your shares are voted at the Annual Meeting. If you are a stockholder of record, you may revoke your proxy by submitting a written notice of revocation to our Secretary at

 

 

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Western Digital Corporation, 5601 Great Oaks Parkway, San Jose, California 95119, or, to change how your shares will be voted at the Annual Meeting, by mailing a duly executed written proxy bearing a date that is later than the date of your original proxy or by submitting a later dated proxy via the Internet or by telephone.

A previously submitted proxy will not be voted if the stockholder of record who executed it is present at the Annual Meeting and votes the shares represented by the proxy in person at the Annual Meeting. For shares you hold beneficially in street name, you may change your vote by submitting new voting instructions to your bank, broker, trustee or nominee, or, if you have obtained a legal proxy from your bank, broker, trustee or nominee giving you the right to vote your shares, by attending the Annual Meeting and voting in person. Please note that attendance at the Annual Meeting will not by itself constitute revocation of a proxy. Any change to your proxy or voting instructions that is provided by telephone, the Internet or mail must be received by 11:59 p.m. Eastern time on November 1, 2017, unless you are voting shares held in our 401(k) Plan, in which case the deadline is 11:59 p.m. Eastern time on October 30, 2017.

Quorum

The holders of a majority of our shares of common stock outstanding on the record date and entitled to vote at the Annual Meeting, present in person or represented by proxy, will constitute a quorum for the transaction of business at the Annual Meeting and any adjournments or postponements thereof. If you submit a proxy or voting instructions, your shares will be counted for purposes of determining the presence or absence of a quorum, even if you abstain from voting your shares. If a broker indicates on a proxy that it lacks discretionary authority to vote your shares on a particular matter, commonly referred to as “broker non-votes,” those shares will also be counted for purposes of determining the presence of a quorum at the Annual Meeting. If a quorum is not present, the Annual Meeting will be adjourned until a quorum is obtained.

Voting Requirements

Each share of our common stock outstanding at the close of business on the record date is entitled to one vote on each of the eight director nominees and one vote on each other matter that may be presented for consideration and action by the stockholders at the Annual Meeting.

 

    Proposal 1: You may vote FOR, AGAINST or ABSTAIN with respect to each director nominee. Each director nominee receiving the affirmative approval of a majority of the votes cast with respect to his or her election (that is, the number of shares voted “for” the nominee exceeds the number of votes cast “against” that nominee) will be elected as a director.

 

    Proposals 2, 4 and 5: You may vote FOR, AGAINST or ABSTAIN. Each of these proposals requires the affirmative approval of a majority of the shares present in person or represented by proxy and entitled to vote on the proposal at the Annual Meeting.

 

    Proposal 3: You may vote 1 YEAR, 2 YEARS, 3 YEARS or ABSTAIN. If no option receives the affirmative vote of at least a majority of the shares present in person or represented by proxy and entitled to vote on the proposal at the Annual Meeting, then our Board of Directors will consider the option receiving the highest number of votes as the preferred option of the stockholders.

Please be aware that Proposals 2, 3 and 5 are advisory only and are not binding on the company. Our Board of Directors will consider the outcome of the vote on each of these proposals in considering what action, if any, should be taken in response to the advisory vote by stockholders.

Abstentions and Broker Non-Votes

Abstentions.

 

    Proposal 1: Shares voting “abstain” will be entirely excluded from the vote and will not be counted in determining the outcome of a director nominee’s election.

 

    Proposals 2, 4 and 5: We treat abstentions as shares present or represented and entitled to vote on these proposals, so abstaining has the same effect as a vote “against” these proposals.

 

 

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    Proposal 3: Abstentions will not be counted in determining the frequency option receiving the highest number of votes.

Broker Non-Votes. If you are a beneficial stockholder that holds your shares through a brokerage account and you do not submit voting instructions to your broker, your broker may generally vote your shares in its discretion on routine matters. However, a broker cannot vote shares held for a beneficial stockholder on non-routine matters, unless the broker receives voting instructions from the beneficial stockholder. Proposal 5 (ratification of KPMG LLP as our independent registered public accounting firm) is considered routine and may be voted upon by your broker if you do not submit voting instructions. However, all other proposals to be voted on at the Annual Meeting are considered non-routine matters. Consequently, if you hold your shares through a brokerage account and do not submit voting instructions to your broker, your broker may exercise its discretion to vote your shares on Proposal 5, but will not be permitted to vote your shares on any of the other proposals at the Annual Meeting. If your broker exercises this discretion, your shares will be counted as present for determining the presence of a quorum at the Annual Meeting and will be voted on Proposal 5 in the manner directed by your broker, but your shares will constitute broker non-votes on each of the other proposals at the Annual Meeting and will not be counted for purposes of determining the outcome of each such proposal.

Voting Results

We intend to announce preliminary voting results at the Annual Meeting and disclose final results in a Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) no later than four business days following the date of the Annual Meeting.

Costs of Proxy Solicitation

The accompanying proxy is being solicited on behalf of our Board of Directors. The cost of preparing, assembling and mailing the Notice of Annual Meeting of Stockholders, the Notice of Internet Availability of Proxy Materials, this Proxy Statement and form of proxy and our 2017 Annual Report, the cost of making such materials available on the Internet and the cost of soliciting proxies will be paid by us. In addition to use of the mails, we may solicit proxies in person or by telephone, facsimile or other means of communication by certain of our directors, officers and regular employees who will not receive any additional compensation for such solicitation. We have also engaged Morrow Sodali LLC to assist us in connection with the solicitation of proxies for the Annual Meeting for a fee that we do not expect to exceed $15,000 plus a reasonable amount to cover expenses. We have agreed to indemnify Morrow Sodali LLC against certain liabilities arising out of or in connection with this engagement. We will also reimburse brokers or other persons holding our common stock in their names or the names of their nominees for the expenses of forwarding soliciting material to their principals.

Attending the Annual Meeting

You are entitled to attend the Annual Meeting if you were a stockholder of record or a beneficial stockholder as of the close of business on September 6, 2017, the record date, or you hold a valid legal proxy for the Annual Meeting. You should be prepared to present photo identification for admission.

Submission of Stockholder Proposals and Director Nominations

Proposals for Inclusion in Proxy Materials. For your proposal to be considered for inclusion in the proxy statement and form of proxy for our 2018 annual meeting of stockholders, your written proposal must be received by our Secretary at our principal executive offices no later than May 21, 2018 and must comply with Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding the inclusion of stockholder proposals in company-sponsored proxy materials. If we change the date of the 2018 annual meeting of stockholders by more than 30 days from the date of this year’s Annual Meeting, your written proposal must be received by our Secretary at our principal executive offices a reasonable time before we begin to print and mail our proxy materials for our 2018 annual meeting of stockholders.

Nomination of Director Candidates and Proposals Not Intended for Inclusion in Proxy Materials. If you intend to nominate an individual for election to our Board of Directors at our 2018 annual meeting of stockholders or wish to present a

 

 

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proposal at the 2018 annual meeting of stockholders but do not intend for such proposal to be included in the proxy statement for such meeting, our By-laws require that, among other things, stockholders give written notice of the nomination or proposal to our Secretary at our principal executive offices no earlier than the close of business on July 5, 2018 (the 120th day prior to the first anniversary of the Annual Meeting) and no later than the close of business on August 4, 2018 (the 90th day prior to the first anniversary of the Annual Meeting).

Notwithstanding the foregoing, in the event that we change the date of the 2018 annual meeting of stockholders to a date that is more than 30 days before or more than 70 days after the anniversary of the Annual Meeting, written notice by a stockholder must be given no earlier than the close of business 120 days prior to the date of the 2018 annual meeting of stockholders and no later than the close of business on the later of 90 days prior to the date of the 2018 annual meeting of stockholders or the tenth day following the day on which public announcement of the 2018 annual meeting of stockholders is made. Stockholder proposals not intended to be included in the proxy statement or nominations for director candidates that do not meet the notice requirements set forth above and further described in Section 2.11 of our By-laws will not be acted upon at the 2018 annual meeting of stockholders.

Eliminating Duplicative Proxy Materials

We have adopted a procedure called “householding,” which the SEC has approved. Under this procedure, stockholders of record who have the same address and last name and did not receive a Notice or otherwise receive their proxy materials electronically will receive only one copy of our proxy materials unless we receive contrary instructions from one or more of such stockholders. Upon oral or written request, we will deliver promptly a separate copy of the proxy materials to a stockholder at a shared address to which a single copy of proxy materials was delivered. If you are a stockholder of record at a shared address to which we delivered a single copy of the proxy materials and you desire to receive a separate copy of the proxy materials for the Annual Meeting or for our future meetings, or if you are a stockholder at a shared address to which we delivered multiple copies of the proxy materials and you desire to receive one copy in the future, please submit your request to the Householding Department of Broadridge Financial Solutions, Inc. at 51 Mercedes Way, Edgewood, New York 11717, or at 1-866-540-7095. If you are a beneficial stockholder, please contact your bank, broker, trustee or other nominee directly if you have questions, require additional copies of the proxy materials, wish to receive multiple reports by revoking your consent to householding or wish to request single copies of the proxy materials in the future.

 

 

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PROPOSAL 1: ELECTION OF DIRECTORS

Our Board of Directors is presenting eight nominees for election as directors at the Annual Meeting. Each of the nominees is currently a member of our Board of Directors and was elected to our Board of Directors at the 2016 annual meeting of stockholders. Each director elected at the Annual Meeting will serve until our 2018 annual meeting and until a successor is duly elected and qualified. Each of the nominees has consented to be named in this Proxy Statement and to serve as a director if elected. If any nominee is unable or unwilling for good cause to stand for election or serve as a director if elected, the persons named as proxies may vote for a substitute nominee designated by our existing Board of Directors, or our Board of Directors may choose to reduce its size.

 

 

Name and Current Position

 

 

    Age    

 

 

    Director    

Since

 

 

  Independent  

 

 

Other

Public
  Company  

Boards

 

 

Executive

  Committee  

 

 

Audit

  Committee  

 

 

  Compensation  

Committee

 

 

  Governance  

Committee

Martin I. Cole

Former Group Chief Executive,

Technology

Accenture plc

  61   2014   Yes   2       M       M

Kathleen A. Cote

Former Chief Executive Officer

Worldport Communications, Inc.

  68   2001   Yes   1           M   M

Henry T. DeNero

Former Chairman and Chief

Executive Officer

Homespace, Inc.

  71   2000   Yes   None   M   C        

Michael D. Lambert

Former Senior Vice President

Dell Inc.

  70   2002   Yes   None           C    

Len J. Lauer

Chairman and Chief Executive

Officer

Memjet

  60   2010   Yes   None           M   C

Matthew E. Massengill

Former President and Chief

Executive Officer

Western Digital Corporation

  56   2000   Yes   1   M            

Stephen D. Milligan

Chief Executive Officer

Western Digital Corporation

  54   2013   No   1   C            

Paula A. Price

Senior Lecturer

Harvard University

  55   2014   Yes   2     M    

C = Chair; M = Member

 

 

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IDENTIFYING AND EVALUATING DIRECTOR CANDIDATES

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Succession Planning and the Director Recruitment Process

Our Board of Directors is focused on ensuring it has individuals with the right skills and experience to exercise independent judgment in overseeing our business. Over the next four years, we expect that three of our current directors will be retiring in accordance with our director retirement policy described below. The Governance Committee is responsible for identifying and recommending candidates for membership on our Board of Directors, including nominees for reelection, and has developed a long-range succession plan to identify and recruit new directors. The Governance Committee also plans for the orderly succession of the chairs of our Board’s committees, providing for their identification and development and the transition of responsibilities.

Assess. Our Board of Directors, led by the Governance Committee, evaluates the size and composition of our Board of Directors at least annually, giving consideration to evolving skills, perspective and experience needed on our Board of Directors to perform its governance role and provide oversight as the business transforms and the underlying risks change over time. Among other factors, the Governance Committee considers our company’s strategy and needs, as well as our directors’ skills, expertise, experiences, gender, race, ethnicity, tenure and age. As part of the process, our Board of Directors develops a skills matrix identifying the skills and expertise of our current directors to then develop criteria for potential candidates to be additive and complementary to the overall composition of our Board of Directors. Please see the section entitled “Corporate Governance — Board and Committee Evaluation” for additional information on our Board of Director’s self-assessment process.

Identify. The Governance Committee is authorized to use any methods it deems appropriate for identifying candidates for membership on our Board of Directors, including considering recommendations from incumbent directors and stockholders and engaging the services of an outside search firm to identify suitable potential director candidates. To drive effective Board renewal and succession planning, the Governance Committee has developed and regularly reviews a list of potential director candidates.

Evaluate. The Governance Committee has established a process for evaluating director candidates that it follows regardless of who recommends a candidate for consideration. Through this process, the Governance Committee reviews available information regarding each candidate, including the candidate’s personal and professional ethics, integrity and values and the candidate’s intellect, judgment, foresight, skills, experience (including understanding of marketing, finance, our company’s technology and other elements relevant to the success of a company such as ours) and achievements, all of which are viewed in the context of the overall composition of our Board of Directors. The Governance Committee also reviews the candidate’s independence and absence of conflicts of interests or legal impediment to, or restriction on, the candidate serving as a director. In addition, the Governance Committee takes into account the representation of the long-term interests of our stockholders as a whole and the diversity of backgrounds and expertise which are most needed and beneficial to our company and our Board of Directors. While our Board of Directors has not established specific diversity standards, the Governance Committee is focused on promoting diversity in the context of our Board of Directors as a whole and takes into account the personal characteristics, experience and skills of current and prospective directors to ensure that a broad range of perspectives are represented on our Board of Directors.

Our Board of Directors understands the significant time commitment involved in serving on our Board of Directors and its committees. The Governance Committee assesses whether candidates and current directors are able to devote the time necessary to discharge their duties as directors, taking into account primary occupations, memberships on other boards and other responsibilities. Once elected, directors who have a significant change in occupation, retire from his or her

 

 

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principal employment or become unavailable for active participation on our Board of Directors must offer to resign, subject to consideration by our Board of Directors, upon recommendation of the Governance Committee.

Our Corporate Governance Guidelines provide that no director shall be nominated for re-election after the director has reached the age of 72, unless our Board of Directors determines in a particular instance that longer tenure is in the best interests of our Board of Directors or the company.

A stockholder may recommend a director candidate to the Governance Committee by delivering a written notice to our Secretary at our principal executive offices and including the following in the notice: (1) the name and address of the stockholder as they appear on our books or other proof of share ownership; (2) the class and number of shares of our common stock beneficially owned by the stockholder as of the date the stockholder gives written notice; (3) a description of all arrangements or understandings between the stockholder and the director candidate and any other person(s) pursuant to which the recommendation or nomination is to be made by the stockholder; (4) the name, age, business address and residence address of the director candidate and a description of the director candidate’s business experience for at least the previous five years; (5) the principal occupation or employment of the director candidate; (6) the class and number of shares of our common stock beneficially owned by the director candidate; (7) the consent of the director candidate to serve as a member of our Board of Directors if elected; and (8) any other information required to be disclosed with respect to a director nominee in solicitations for proxies for the election of directors pursuant to applicable rules of the SEC. The Governance Committee may require additional information as it deems reasonably required to determine the eligibility of the director candidate to serve as a member of our Board of Directors. Stockholders recommending candidates for consideration by our Board of Directors in connection with the next annual meeting of stockholders should submit their written recommendation no later than June 1 of the year of that meeting.

The Governance Committee will evaluate director candidates recommended by stockholders for election to our Board of Directors in the same manner and using the same criteria as used for any other director candidate. If the Governance Committee determines that a stockholder-recommended candidate is suitable for membership on our Board of Directors, it will include the candidate in the pool of candidates to be considered for nomination upon the occurrence of the next vacancy on our Board of Directors or in connection with the next annual meeting of stockholders.

Stockholders who wish to nominate a person for election as a director in connection with an annual meeting of stockholders (as opposed to making a recommendation to the Governance Committee as described above) must deliver written notice to our Secretary in the manner described in Section 2.11 of our By-laws and within the time periods set forth in the section entitled “General Information About the Annual Meeting — Submission of Stockholder Proposals and Director Nominations.”

 

 

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NOMINEES FOR ELECTION

Our Board of Directors believes our nominees’ breadth of experience and their mix of qualifications, attributes and skills strengthen our Board of Director’s independent leadership and effective oversight of management.

 

 

LOGO

Each of our nominees has:

 

    Experience as a director of another public company

 

    Experience as a chief executive officer or other senior executive

 

    Leadership experience involving international operations

 

    Strategic planning experience

 

    Financial management experience

 

Diverse Range of Qualifications and Skills Represented by Our Nominees

 

Strategic Planning

 

 

 

Sales and Marketing

 

 

 

Industry Experience

 

 

 

Business Development

 

 

Research and Development

 

 

Human Resources Management

 

Global Perspective

 

Manufacturing and Operations

 

Financial Reporting

 

 

Legal, Regulatory and Compliance

 

Information Technology and Cybersecurity

 

Public Company Board Service

 

Risk Management

 

 

Corporate Governance

 

Succession Planning

 

Government and Public Policy

Our nominees:

 

    are seasoned leaders who have held a diverse array of leadership positions in complex businesses

 

    have served as chief executives and in senior positions in the areas of risk, operations, finance, technology and human resources

 

    bring deep and diverse experience developed through positions at public and private companies, nonprofit organizations and other domestic and international businesses

 

    represent diverse backgrounds and viewpoints

 

    strengthen our Board of Director’s oversight capabilities by having varied lengths of tenure that provide historical and new perspectives about our company

 

 

Our Board is highly engaged and well qualified, and all director nominees possess the

skills and experiences necessary to oversee our evolving and growing business.

 

 

 

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The following biographical information for each of the eight nominees includes information about the director’s age, his or her principal occupations and employment during at least the last five years, the names of other publicly-held companies of which he or she currently serves as a director or has served as a director during the past five years, and the specific experience, qualifications, attributes or skills that led our Board of Directors to conclude that the individual should serve as a director.

 

      
MARTIN I. COLE   

   Mr. Cole served as the chief executive of the technology group of Accenture plc, a leading global management consulting and professional services company, with responsibility for the full range of Accenture’s technology consulting and outsourcing solutions and delivery capabilities, including its global delivery network, from March 2012 until he retired in August 2014.

   Prior to that, Mr. Cole served as the chief executive of Accenture’s communications, media and technology operating group from September 2006 to March 2012, the chief executive of its government operating group from September 2004 to August 2006, the managing partner of its outsourcing and infrastructure delivery group from September 2002 to August 2004 and in a variety of capacities at Accenture since 1980.

   Mr. Cole currently serves as a director of The Western Union Company and Cloudera, Inc.

 

Skills and Qualifications: Mr. Cole brings to our Board of Directors extensive senior executive leadership experience across a variety of operating groups and geographies. This demonstrates his ability to provide strategic advice and lead multiple teams across a variety of business sectors, and provides him with wide-ranging insights, including technology solutions, which are an important part of our business. His financial skills and prior experience as a chief executive officer qualify him as an audit committee financial expert under SEC rules. We believe these experiences, qualifications, attributes and skills qualify him to serve as a member of our Board of Directors.

 

         LOGO         

 

   COMMITTEES:

   Audit

   Governance

 

   DIRECTOR SINCE DECEMBER 2014

   AGE: 61

 

  
      
KATHLEEN A. COTE   

   Ms. Cote was the chief executive officer of Worldport Communications, Inc., a European provider of Internet managed services, from May 2001 to June 2003.

   Prior to that, Ms. Cote served as president of Seagrass Partners, a provider of expertise in business planning and strategic development for early stage companies, from September 1998 to May 2001. From November 1996 to January 1998, she served as president and chief executive officer of Computervision Corporation, an international supplier of product development and data management software.

   Ms. Cote currently serves as a director of VeriSign, Inc. Within the last five years, she served as a director of GT Advanced Technologies, Inc.

 

Skills and Qualifications: Ms. Cote is a seasoned business executive with numerous years of experience overseeing global companies focused on technology and operations, which is directly relevant to our business. She has served on numerous public company boards of directors, including on the audit and governance committees of those boards, providing our Board of Directors with valuable board-level experience. Her tenure on our Board of Directors also provides us with specific expertise and insight into our business and the transformations it has undergone. We believe these experiences, qualifications, attributes and skills qualify her to serve as a member of our Board of Directors.

 

 

         LOGO         

 

   COMMITTEES:

   Compensation

   Governance

 

   DIRECTOR SINCE JANUARY 2001

   AGE: 68

 

  
      

 

 

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HENRY T. DENERO   

   Mr. DeNero was chairman and chief executive officer of Homespace, Inc., a provider of Internet real estate and home services, from January 1999 until substantially all of its assets were acquired by LendingTree, Inc. in August 2000.

   Prior to that, Mr. DeNero was executive vice president for First Data Corporation, a provider of information and transaction processing services, from July 1995 to January 1999. Prior to 1995, he was vice chairman and chief financial officer of Dayton Hudson Corporation, a general merchandise retailer, and was previously a senior partner of McKinsey & Company, a management consulting firm.

   Within the last five years, Mr. DeNero has served as a director of DataDirect Networks, Inc. and THQ, Inc.

 

Skills and Qualifications: Mr. DeNero has executive level experience in a broad range of industries, which demonstrates to our Board of Directors his ability to lead and provide strategic input on a wide range of issues. His extensive experience at McKinsey & Company, a leading management consulting firm, provides our Board of Directors with valuable insights into corporate strategy and problem resolution. He has significant experience working in Japan and Europe in his positions with McKinsey & Company, which are two important geographic locations for our company. His financial skills and prior experience as a chief financial officer qualify him as an audit committee financial expert under SEC rules. We believe these experiences, qualifications, attributes and skills qualify him to serve as a member of our Board of Directors.

 

         LOGO         

 

   COMMITTEES:

   Executive

   Audit (chair)

 

   DIRECTOR SINCE JUNE 2000

   AGE: 71

 

  
      
MICHAEL D. LAMBERT   

   Mr. Lambert served as senior vice president for the enterprise systems group of Dell Inc., a computer system company, from 1996 until he retired in May 2002. During that period, he also participated as a member of a six-man operating committee at Dell, which reported to the office of the chairman.

   Prior to that, Mr. Lambert served as vice president, sales and marketing, for Compaq Computer Corporation, a global information technology company, from 1993 to 1996. He also ran the large computer products division at NCR/AT&T Corporation as vice president and general manager. Mr. Lambert began his career with NCR Corporation, where he served for 16 years in product management, sales and software engineering capacities.

 

Skills and Qualifications: Mr. Lambert has extensive experience serving in numerous executive positions with several technology companies, which provides our Board of Directors with valuable executive-level insights. He has particular expertise in areas of sales, marketing and operations, especially in the enterprise systems business, which is an important part of our company. He also has direct experience managing merger and acquisition transactions gained through his positions at Dell and NCR/AT&T Corporation. We believe these experiences, qualifications, attributes and skills qualify him to serve as a member of our Board of Directors.

 

         LOGO         

 

   COMMITTEES:

   Compensation (chair)

 

   DIRECTOR SINCE AUGUST 2002

   AGE: 70

 

  
      

 

 

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LEN J. LAUER   

   Mr. Lauer is the chairman and chief executive officer of Memjet, a color printing technology company.

   Prior to joining Memjet in January 2010, Mr. Lauer was executive vice president and chief operating officer of Qualcomm, Inc., a developer and manufacturer of digital telecommunications products and services, from August 2008 to December 2009, and he was executive vice president and group president from December 2006 to July 2008. From August 2005 to December 2006, he was chief operating officer of Sprint Nextel Corp., a global communications company, and he was president and chief operating officer of Sprint Corp. from September 2003 until the Sprint-Nextel merger in August 2005. Prior to that, he was president-Sprint PCS from October 2002 to October 2004, and was president-long distance (formerly the global markets group) from September 2000 to October 2002. Mr. Lauer also served in several executive positions at Bell Atlantic Corp. from 1992 to 1998 and spent the first 13 years of his business career at IBM in various sales and marketing positions.

 

Skills and Qualifications: Mr. Lauer brings to our Board of Directors significant senior executive leadership experience from large, multi-national public technology companies, which provides a valuable perspective to our Board of Directors. Mr. Lauer’s experience provides our Board of Directors with insight into the role of technology solutions for the consumer products market, which is an important part of our business. He has also served on other public company boards and board committees, providing our Board of Directors with important board-level experience. We believe these experiences, qualifications, attributes and skills qualify him to serve as a member of our Board of Directors.

 

         LOGO         

 

 

LEAD INDEPENDENT DIRECTOR

 

   COMMITTEES:

   Compensation

   Governance (chair)

 

   DIRECTOR SINCE AUGUST 2010

   AGE: 60

 

  
      
  MATTHEW E. MASSENGILL     

   Mr. Massengill served as our President from January 2000 to January 2002 and our Chief Executive Officer from January 2000 to October 2005. Mr. Massengill previously also served as Chairman of our Board of Directors from November 2001 to March 2007.

   Prior to that, Mr. Massengill served as our Chief Operating Officer from October 1999 to January 2000 and in various executive capacities since joining the company in 1985.

   Mr. Massengill currently serves as a director of Microsemi Corporation. Within the last five years, he served as a director of GT Advanced Technologies, Inc.

 

Skills and Qualifications: Mr. Massengill’s 31 years of service to Western Digital, including 17 years as either an executive or Board member, provide our Board of Directors with extensive and significant experience directly relevant to our business. As our former Chief Executive Officer, he has a deep understanding of our operations, provides valuable knowledge to our Board of Directors on the issues we face to achieve our strategic objectives and has extensive international experience. His service on numerous other public company boards of directors also provides our Board of Directors with important board-level perspective. We believe these experiences, qualifications, attributes and skills qualify him to serve as a member of our Board of Directors.

 

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CHAIRMAN OF THE BOARD

 

   COMMITTEES:

   Executive

 

   DIRECTOR SINCE JANUARY 2000

   AGE: 56

 

  
      

 

 

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PROPOSAL 1: ELECTION OF DIRECTORS

 

 

      
STEPHEN D. MILLIGAN   

     Mr. Milligan has served as our Chief Executive Officer since January 2013 and served as our President from March 2012 to October 2015.

     Prior to that, Mr. Milligan served as HGST’s president and chief executive officer from December 2009 until our acquisition of HGST in March 2012 and its president from March 2009 to December 2009. From September 2007 to October 2009, Mr. Milligan served as HGST’s chief financial officer. From January 2004 to September 2007, he served as our Chief Financial Officer and from September 2002 to January 2004, he served as our Senior Vice President, Finance. From April 1997 to September 2002, he held various financial and accounting roles of increasing responsibility at Dell Inc. and was employed at Price Waterhouse for 12 years prior to joining Dell.

     Mr. Milligan currently serves as a director of Ross Stores, Inc.

 

Skills and Qualifications: Mr. Milligan’s experience in our industry, including more than four years in senior management positions at HGST as its president and chief executive officer, in addition to other senior management roles, contributes indispensable knowledge and expertise to our Board of Directors. He has served Western Digital and HGST in numerous executive capacities, providing our Board of Directors with valuable operations, manufacturing and finance experience. We believe these experiences, qualifications, attributes and skills qualify him to serve as a member of our Board of Directors.

 

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CHIEF EXECUTIVE OFFICER

 

   COMMITTEES:

   Executive (chair)

 

   DIRECTOR SINCE JANUARY 2013

   AGE: 54

 

  
      
          PAULA A. PRICE              

     Ms. Price has served as a senior lecturer for Harvard Business School in the Accounting and Management Unit since July 2014.

     Prior to that, Ms. Price was executive vice president and chief financial officer at Ahold USA, a retailer that operates more than 700 supermarkets and an online grocery delivery service, where she was responsible for finance and accounting, strategic planning, real estate and information technology, from May 2009 to January 2014. From July 2006 to August 2008, she was the senior vice president, controller and chief accounting officer at CVS Caremark and from August 2002 to September 2005, she was the senior vice president and chief financial officer for the institutional trust services division of JPMorgan Chase. Prior to that, she held several other senior management positions in the U.S. and the U.K. in the financial services and consumer products industries at Prudential Insurance Co. of America, Diageo and Kraft Foods.

   Ms. Price is a certified public accountant.

   Ms. Price currently serves as a director of Dollar General Corporation and Accenture plc.

 

Skills and Qualifications: Ms. Price’s numerous years of experience as a certified public accountant, former chief financial officer and former chief accounting officer provide our Board of Directors with valuable experience and insight into accounting and finance matters, and that experience qualifies her as an audit committee financial expert under SEC rules. She also brings expertise and knowledge of the complexities of growing and managing a global business. She has extensive experience overseeing and integrating merger and acquisition transactions at the executive level, which is experience highly valued by our Board of Directors. We believe these experiences, qualifications, attributes and skills qualify her to serve as a member of our Board of Directors.

 

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   COMMITTEES:

   Audit

 

   DIRECTOR SINCE JULY 2014

   AGE: 55

 

  

 

 

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PROPOSAL 1: ELECTION OF DIRECTORS

 

 

Vote Required and Recommendation of our Board of Directors

Under our By-laws, in an uncontested election, each director nominee will be elected as a director if the nominee receives the affirmative vote of a majority of the votes cast with respect to his or her election (in other words, the number of shares voted “for” a director must exceed the number of votes cast “against” that director). In a contested election where the number of nominees exceeds the number of directors to be elected as of ten days before the proxy statement is mailed to stockholders, a plurality voting standard will apply and the nominees receiving the greatest number of votes at the Annual Meeting, up to the number of directors to be elected, will be elected as directors. Because the election of directors at the Annual Meeting is not contested, the majority vote standard will apply.

If a nominee who is serving as a director is not elected at the Annual Meeting by the requisite majority of votes cast, Delaware law provides that the director would continue to serve on our Board of Directors as a “holdover director.” However, under our By-laws, any incumbent director who fails to be elected must offer to tender his or her resignation to our Board of Directors. If the director conditions his or her resignation on acceptance by our Board of Directors, the Governance Committee will then make a recommendation to our Board of Directors on whether to accept or reject the resignation or whether other action should be taken. Our Board of Directors will act on the Governance Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date the election results are certified. The director who tenders his or her resignation will not participate in our Board’s or the Governance Committee’s decision. A nominee who was not already serving as a director and is not elected at the Annual Meeting by a majority of the votes cast with respect to such director’s election will not be elected to our Board of Directors.

 

 

Our Board recommends that stockholders vote “FOR”

election of each of the above nominees for director.

 

 

 

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CORPORATE GOVERNANCE

 

 

CORPORATE GOVERNANCE

CORPORATE GOVERNANCE GUIDELINES AND CODE OF BUSINESS ETHICS

Our Board of Directors has adopted Corporate Governance Guidelines, which provide the framework for the governance of our company and represent our Board of Director’s current views with respect to selected corporate governance issues considered to be of significance to stockholders, including:

 

    the role and responsibilities of our Lead Independent Director;

 

    director nomination procedures and qualifications;

 

    director independence;

 

    director orientation and continuing education;

 

    annual performance evaluations of our Board and committees; and

 

    succession planning and management development.

Our Board of Directors has also adopted a Code of Business Ethics that applies to all of our directors, employees and officers, including our Chief Executive Officer, Chief Financial Officer (our principal financial and accounting officer), President and Controller. The current versions of the Corporate Governance Guidelines and the Code of Business Ethics are available on our website under the Investor Relations section at investor.wdc.com. To the extent required by applicable rules adopted by the SEC or the NASDAQ Stock Market LLC (the “NASDAQ Stock Market”), we intend to promptly disclose future amendments to certain provisions of the Code of Business Ethics, or waivers of such provisions granted to executive officers and directors, on our website under the Investor Relations section at investor.wdc.com.

DIRECTOR INDEPENDENCE

Our Board of Directors has reviewed and discussed information provided by the directors and our company with regard to each director’s business and personal activities, as well as those of the director’s immediate family members, as they may relate to Western Digital or its management. The purpose of this review is to determine whether there are any transactions or relationships that would be inconsistent with a determination that a director is independent under the listing standards of the NASDAQ Stock Market. Based on its review, our Board of Directors has affirmatively determined that, except for serving as a member of our Board of Directors, none of Messrs. Cole, DeNero, Lambert, Lauer or Massengill or Mses. Cote or Price has any relationship that, in the opinion of our Board of Directors, would interfere with the director’s exercise of independent judgment in carrying out his or her responsibilities as a director, and that each such director qualifies as “independent” as defined by the listing standards of the NASDAQ Stock Market. Our Board of Directors previously determined that Sanjay Mehrotra qualified as “independent” as defined by the listing standards of the NASDAQ Stock Market during the period of his service on our Board of Directors until February 2017. Mr. Milligan is currently a full-time, executive-level employee of Western Digital and, therefore, is not “independent” as defined by the listing standards of the NASDAQ Stock Market.

BOARD LEADERSHIP STRUCTURE

Our Board of Directors does not have a policy with respect to whether the roles of Chairman of the Board and Chief Executive Officer should be separate and, if it is to be separate, whether the Chairman of the Board should be selected from our directors who are not our employees (referred to in this Proxy Statement as our “non-employee directors”) or be an employee. We currently separate the roles of Chief Executive Officer and Chairman of the Board, with Mr. Massengill currently serving as Chairman of the Board. Our Board of Directors believes this is the appropriate leadership for our company at this time because it permits Mr. Milligan, as our Chief Executive Officer, to focus on setting the strategic direction of the company and the day-to-day leadership and performance of the company, while permitting our Chairman of the Board to focus on providing guidance to our Chief Executive Officer and setting the agenda for Board meetings. Our Board of Directors also believes that the separation of the Chief Executive Officer and Chairman of the Board roles assists our Board of Directors in providing robust discussion and evaluation of strategic goals and objectives.

Our Corporate Governance Guidelines provide that our Board of Directors will appoint a Lead Independent Director if the Chairman of our Board of Directors is not an independent director under the NASDAQ Stock Market listing standards or if

 

 

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our Board of Directors otherwise deems it appropriate. Although our Board of Directors has determined that Mr. Massengill is independent under the NASDAQ Stock Market listing standards, because he is a former Chairman of the Board, President and Chief Executive Officer of our company, our Board of Directors determined it was appropriate to appoint Mr. Lauer as our Lead Independent Director. The duties of our Lead Independent Director include:

 

    acting as a liaison between our independent directors and management;

 

    assisting our Chairman of the Board in establishing the agenda for meetings of our Board of Directors;

 

    coordinating the agenda for, and chairing, the executive sessions of our independent directors; and

 

    performing such other duties as may be specified by our Board of Directors from time to time.

Our Board of Directors acknowledges that no single leadership model is right for all companies at all times. As such, our Board of Directors periodically reviews its leadership structure and may, depending on the circumstances, choose a different leadership structure in the future.

BOARD AND COMMITTEE EVALUATION

Our Board of Directors believes that it is important to assess the performance of our Board of Directors and its committees and to solicit and act upon feedback. Accordingly, the Governance Committee oversees an annual evaluation of the performance of our Board of Directors and its committees. The Governance Committee approves written evaluation questionnaires, with input from other members of our Board of Directors, which are distributed to each director. The questionnaires cover various topics, including, but not limited to, the selection and evaluation of Board candidates, committee structure and performance, Board practices and relationships with management, review and approval of strategic operating plans and management performance, compensation and succession. The results of each written evaluation are provided to, and compiled by, an outside firm. The outside firm discusses the written Board evaluation results with each director to solicit additional feedback. The results of these discussions are further compiled with the results of the written Board evaluations by the outside firm. The outside firm discusses the combined results of the written Board evaluations and individual director discussions with our Lead Independent Director and, when appropriate, our Chairman of the Board. The results of the performance evaluations of our Board of Directors are also discussed with the full Board.

 

 

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Our Board of Directors utilizes the results of these evaluations in making decisions on agendas and structure for our Board of Directors, committee responsibilities and agendas, improvements in effectiveness of our Board of Directors and continued service of individual directors on our Board of Directors. For example, in response to Board evaluations, management has implemented enhancements to improve communications between directors and management and the reporting and materials provided to directors. To this end, significant effort has been devoted to the following actions to ensure clear, timely and regular communication between directors and management:

 

    Lead Independent Director. Our Lead Independent Director regularly speaks with other directors, our Chief Executive Officer and with management members.

 

    Committee Chairs and Other Directors. Our committee chairs regularly communicate with management to discuss the development of meeting agendas and presentations.

 

    Board of Directors and Committees. In between meetings of our Board of Directors and committees, directors receive prompt updates from management on developing matters affecting the company and its business.

 

    Reference Materials. Directors also regularly receive quarterly strategy updates, securities analysts’ reports, investor communications, company publications, news articles and other reference materials.

 

 

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DIRECTOR EDUCATION

Because our Board of Directors believes that director education is vital to the ability of directors to fulfill their roles, the Governance Committee has led the development of a program promoting directors’ continuous learning. Speakers are invited to present during our Board of Director’s regularly scheduled meetings on relevant topics of interest. In addition, directors are given access to online technical training portals to review presentations that have been compiled by the business teams on developing technologies. Further, periodic visits by our Board of Directors to important company facilities provides the directors additional insight into our operations. In addition to our internal program, our Board of Directors encourages directors to participate annually in external continuing director education programs, and we reimburse directors for their expenses associated with this participation.

All new directors also participate in an extensive director orientation program. New directors engage with members of the executive team and senior management to review, among other things, our historical business and go-forward strategy, technology, finance (tax, treasury and accounting), internal audit and enterprise risk, human resources and legal practices and procedures. Based on input from our directors, we believe our director orientation program, coupled with participation in regular Board and committee meetings, provides new directors with a strong foundation in our business, connects directors with members of management with whom they will interact and accelerates their effectiveness to engage fully in deliberations of our Board of Directors. Directors are provided additional orientation and educational opportunities upon acceptance of new or additional responsibilities on our Board of Directors and in committees.

 

 

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COMMITTEES

Our Board of Directors has standing Audit, Compensation, Governance and Executive Committees. Each of the standing committees operates pursuant to a written charter that is available on our website under the Investor Relations section at investor.wdc.com. Our Board of Directors has affirmatively determined that all members of the Audit, Compensation and Governance Committees are independent as defined under the listing standards of the NASDAQ Stock Market. The following table identifies the current members of each standing committee, its key responsibilities and the number of meetings held during fiscal 2017.

 

 

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(1) Mr. Massengill serves as Chairman of our Board of Directors and Mr. Lauer serves as our Lead Independent Director.

Audit Committee

In addition to determining that all members of the Audit Committee are independent as defined under the listing standards of the NASDAQ Stock Market, our Board of Directors has affirmatively determined that all members of the Audit Committee are independent as defined under the applicable rules of the SEC and all members are “audit committee financial experts” as defined by rules of the SEC.

 

 

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As described in further detail in the Audit Committee’s written charter, the key responsibilities of the Audit Committee include, among other functions: (1) sole responsibility for the appointment, compensation, retention, oversight, independence and annual evaluation of our independent accountants; (2) pre-approval of all auditing services and permissible non-auditing services to be performed by the independent accountants; (3) review and discussion with management and the independent accountants of our annual and quarterly financial statements prior to their filing or public distribution; (4) periodic review of the adequacy of our accounting and financial personnel resources; (5) periodic review and discussion of our internal control over financial reporting and review and discussion with our principal internal auditor of the scope and results of our internal audit program; (6) review and discussion of our policies with respect to risk assessment and risk management; and (7) oversight of our ethics and compliance program, including review of material legal proceedings, conflicts of interest and related-party transactions.

Compensation Committee

In making its independence determination for each member of the Compensation Committee, our Board of Directors 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 compensation committee member.

As described in further detail in the Compensation Committee’s written charter, the Compensation Committee assists our Board of Directors in defining our executive compensation policy and in carrying out various responsibilities relating to the compensation of our executive officers and directors, including: (1) evaluating and approving compensation for our Chief Executive Officer and for all other executive officers; (2) reviewing and making recommendations to our Board of Directors regarding non-employee director compensation; (3) reviewing and approving the corporate goals and objectives for our Chief Executive Officer’s compensation and evaluating our Chief Executive Officer’s performance in light of those goals and objectives; (4) overseeing the development and administration of our incentive and equity-based compensation plans, including the short-term incentive program under the Incentive Compensation Plan, the 2004 Performance Incentive Plan, which we are seeking to amend and restate pursuant to Proposal 4, the Deferred Compensation Plan and the 2005 Employee Stock Purchase Plan; (5) reviewing and making recommendations to our Board of Directors regarding changes to our benefit plans that require the approval of our Board of Directors; and (6) periodically reviewing and approving any compensation recovery (clawback) policy or stock ownership guidelines applicable to our executive officers. The Compensation Committee charter authorizes the Compensation Committee to delegate any of its responsibilities to a subcommittee, but the subcommittee must be comprised only of one or more members of the Compensation Committee. Under our equity award guidelines, however, the Compensation Committee may not delegate its authority to grant equity awards to any other committee, subcommittee or individual. The Compensation Committee has no current intention to delegate any of its other responsibilities to a subcommittee.

The Compensation Committee’s practice has been to retain compensation consultants to provide objective advice and counsel to the Compensation Committee on all matters related to the compensation of executive officers and directors. Please see the section entitled “Compensation Discussion and Analysis — Role of the Compensation Consultant” for information regarding the role of Mercer (US) Inc. (“Mercer”), the compensation consultant retained by the Compensation Committee for fiscal 2017. Certain of our executive officers and other employees also assist the Compensation Committee in the administration of our executive compensation program, as explained in more detail in the section entitled “Compensation Discussion and Analysis — Role of Executive Officers.” Information concerning the Compensation Committee’s processes and procedures for consideration and determination of non-employee director compensation is included in the section entitled “Director Compensation.”

Governance Committee

The Governance Committee, among other things, performs functions similar to a nominating committee. As described in further detail in the Governance Committee’s written charter, the key responsibilities of the Governance Committee include: (1) developing and recommending to our Board of Directors a set of corporate governance principles; (2) evaluating and recommending to our Board of Directors the size and composition of our Board of Directors and the size, composition and functions of the committees of our Board of Directors; (3) developing and recommending to our Board of Directors a set of criteria for membership; (4) identifying, evaluating, attracting and recommending director candidates for membership on our Board of Directors, including directors for election at the annual meeting of

 

 

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stockholders; (5) making recommendations to our Board of Directors on such matters as the retirement age, tenure and resignation of directors; (6) managing our Board of Directors performance review process and reviewing the results with our Board of Directors on an annual basis; (7) overseeing the evaluation of our Chief Executive Officer by the Compensation Committee; (8) developing and overseeing our Chief Executive Officer succession planning process; and (9) reviewing and making recommendations to our Board of Directors regarding proposals of stockholders that relate to corporate governance.

MEETING ATTENDANCE

During fiscal 2017, there were nine meetings of our Board of Directors. Each of the directors attended 75% or more of the aggregate number of meetings of our Board of Directors and the committees of our Board of Directors on which he or she served during the period that he or she served in fiscal 2017. Our Board of Directors strongly encourages each director to attend our annual meeting of stockholders. All of our directors standing for election at last year’s annual meeting of stockholders were in attendance.

STOCKHOLDER ENGAGEMENT

Our Board of Directors and management are committed to regular engagement with our stockholders and soliciting their views and input on important performance, executive compensation, governance, environmental, social, human capital management and other matters.

 

    Board-Driven Engagement. The Governance Committee oversees the stockholder engagement process and the periodic review and assessment of stockholder input, and our directors have also engaged with our stockholders by participating in the outreach.

 

    Year-Round Engagement and Board Reporting. Our legal and investor relations teams, together with executive management members and directors, conduct outreach to stockholders throughout the year to obtain their input on key matters and to inform our management and our Board of Directors about the issues that our stockholders tell us matter most to them.

 

    Transparency and Informed Compensation Decisions and Governance Enhancements. The Compensation and Governance Committees routinely review our executive compensation design and governance practices and policies, respectively, with an eye towards continual improvement and enhancements. Stockholder input is regularly shared with our Board of Directors, its committees and management, facilitating a dialogue that provides stockholders with transparency into our executive compensation design and governance practices and considerations, and informs our company’s enhancement of those practices.

Over the past year, our Chairman of the Board, Lead Independent Director and management met with our major stockholders and key stakeholders to obtain their input and to discuss their views on important issues to our stockholders, including:

 

    the progress of the transformation of our business and how the evolution of our business has been reflected in our executive compensation program;

 

    our Board of Directors’ independent oversight of management;

 

    our Board of Directors’ composition, director succession planning and recruitment, and self-assessment process; and

 

    our Board of Directors’ oversight of strategic planning, risk management, human capital management and environmental initiatives.

These views were shared with our Board of Directors and its committees, where applicable, for their consideration.

 

 

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Stockholder Engagement Efforts Over the Past Year

 

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COMMUNICATING WITH DIRECTORS

Our Board of Directors provides a process for stockholders to send communications to our Board of Directors or to individual directors or groups of directors. In addition, interested parties may communicate with our Chairman of the Board or Lead Independent Director (who presides over executive sessions of our independent directors) or with our independent directors as a group. Our Board of Directors recommends that stockholders and other interested parties initiate any communications with our Board of Directors (or individual directors or groups of directors) in writing. These communications should be sent by mail to the company’s Secretary at Western Digital Corporation, 5601 Great Oaks Parkway, San Jose, California 95119. This centralized process will assist our Board of Directors in reviewing and responding to stockholder and interested party communications in an appropriate manner. The name of any specific intended Board of Directors recipient or recipients should be clearly noted in the communication (including whether the communication is intended only for our non-executive Chairman of the Board or for the non-management directors as a group). Our Board of Directors has instructed the Secretary to forward such correspondence only to the intended recipients; however, our Board of Directors has also instructed the Secretary, prior to forwarding any correspondence, to review such correspondence and not to forward any items deemed to be of a purely commercial or frivolous nature (such as spam) or otherwise obviously inappropriate for the intended recipient’s consideration. In such cases, the Secretary may forward some of the correspondence elsewhere within Western Digital for review and possible response.

CHIEF EXECUTIVE OFFICER EVALUATION AND SUCCESSION PLANNING

The Governance Committee is responsible for developing and overseeing the process for annually evaluating our Chief Executive Officer’s performance. Our Chairman of the Board, our Lead Independent Director and the Compensation Committee review and approve our Chief Executive Officer’s goals and objectives and evaluate our Chief Executive Officer’s performance in light of those goals and objectives, with input from our Board of Directors. The annual Chief Executive Officer performance evaluation is conducted shortly after the completion of the fiscal year. Following the evaluation of our Chief Executive Officer’s performance, the Compensation Committee determines and approves our Chief Executive Officer’s compensation.

Our Board of Directors oversees Chief Executive Officer and key management personnel succession planning, which is reviewed at least annually. Our Chief Executive Officer and Chief Human Resources Officer provide our Board of Directors with recommendations and evaluations of potential Chief Executive Officer successors, and review their development plans. Our Board of Directors reviews potential internal candidates with our Chief Executive Officer and Chief Human Resources Officer, including the qualifications, experience and development priorities for these individuals. Directors engage with potential Chief Executive Officer and key management personnel successors at Board and committee meetings and in less formal settings to allow directors to personally assess candidates. Further, our Board periodically reviews the overall composition of our key management personnel’s qualifications, tenure and experience.

 

 

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Our Board of Directors has also adopted an emergency Chief Executive Officer succession plan. The plan will become effective in the event our Chief Executive Officer becomes unable to perform his or her duties in order to minimize potential disruption or loss of continuity to our company’s business and operations. Our emergency Chief Executive Officer succession plan is reviewed annually by the Governance Committee and our Board of Directors.

RISK OVERSIGHT AND COMPENSATION RISK ASSESSMENT

Board’s Role in Risk Oversight. Our Board of Directors’ role in risk oversight involves both our full Board of Directors and its committees. The Audit Committee, whose charter requires it to review and discuss the company’s policies with respect to risk assessment and risk management, has primary responsibility for oversight of our enterprise risk management (“ERM”) process on behalf of our Board of Directors. Our chief internal audit executive, who reports directly to the Audit Committee, facilitates the ERM process as part of our strategic planning process. As part of the ERM process, each of our major business unit and functional area heads, with the assistance of their staff, meet periodically with representatives from our internal audit department to identify risks that could affect achievement of our business goals and strategy. These meetings also include discussion and development of risk mitigation measures and contingency plans. After input from these individuals is received, our internal audit function summarizes the results of these meetings, creates a consolidated risk profile, and provides the risk profile to our Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer for final review. The risk profile is reviewed and discussed by the Audit Committee on a quarterly basis. Senior management also makes the analysis available to our Board of Directors on a quarterly basis. The final analysis, including any input from the Audit Committee and full Board, is reviewed and used by our internal audit function in its internal audit planning. In addition to the formal ERM process, each of the other Board committees is charged with identifying potential risks to the company during the course of their respective committee work. If a committee identifies a potential risk during the course of its work, the potential risk is raised to the Audit Committee and full Board for inclusion in the ERM process discussed above. Finally, our Board of Directors as a whole is updated throughout the year on specific risks and mitigating measures in the course of its review of our strategy and business plan, and through reports to our Board of Directors by its respective committees and senior members of management.

Our Board of Directors believes that the processes it has established for overseeing risk would be effective under a variety of leadership frameworks, and therefore do not materially affect its choice of leadership structure as described in the section entitled “Board Leadership Structure” above.

Compensation Risk Assessment. Consistent with SEC disclosure requirements, we reviewed our fiscal 2017 compensation policies and practices to determine whether they encourage excessive risk taking. Although all compensation programs worldwide were reviewed, the focus was on the programs with variability of payout. Based on this comprehensive review, we concluded that our compensation programs do not create risks that are reasonably likely to have a material adverse effect on the company for the following reasons:

 

    We believe our compensation programs appropriately balance short- and long-term incentives;

 

    Our long-term incentive grants for our senior executives are allocated between stock options, RSUs and PSUs, which provide a balance of incentives;

 

    Our long-term incentive awards generally are granted on an annual basis with long-term, overlapping vesting periods to motivate eligible recipients to focus on sustained stock price appreciation;

 

    Cash and equity incentive plans contain a cap on the maximum payout;

 

    The Compensation Committee generally retains authority to reduce the incentive plan payouts in its discretion;

 

    In determining whether to exercise its authority to reduce cash incentive plan payouts, the Compensation Committee may consider qualitative factors beyond the quantitative financial metrics, including compliance and ethical behaviors;

 

    Our long-term incentive awards are not reliant on just one performance measure and generally include a mix of sales and profitability targets to mitigate the risk of employees focusing exclusively on short-term top-line growth at the expense of sustained profitability;

 

 

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    Our Chief Executive Officer’s significant equity holdings help protect against short-term risk taking at the expense of long-term growth and stability;

 

    Our executive stock ownership guidelines require that all of our senior executives hold a significant amount of our equity to further align their interests with stockholders over the long term, and all of our senior executives are in compliance with the guidelines;

 

    We have a compensation recovery (clawback) policy applicable in the event an executive officer’s misconduct leads to an accounting restatement;

 

    The Compensation Committee has retained an independent compensation consultant to provide objective advice and counsel to the Compensation Committee on matters related to the compensation of our executive officers and non-employee directors, including best practices and governance issues;

 

    The Compensation Committee annually reviews competitive benchmarking data in setting the pay mix targets and long-term incentive vehicles used to compensate our executives officers; and

 

    We do not permit hedging or short-sale transactions by our executive officers or non-employee directors.

 

 

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DIRECTOR COMPENSATION

 

 

DIRECTOR COMPENSATION

EXECUTIVE SUMMARY

We believe that it is important to attract and retain exceptional and experienced directors who understand our business, and to offer compensation opportunities that further align the interests of those directors with the interests of our stockholders. To that end, we established a compensation program for fiscal 2017 for each of our non-employee directors that consisted of a combination of:

 

    annual retainer fees; and

 

    equity incentive awards in the form of RSUs.

We also permit directors to participate in our Deferred Compensation Plan. Any director who is employed by us is not entitled to additional compensation under our director compensation program for serving as a director.

The Compensation Committee reviews our non-employee director compensation on at least a biannual basis and periodically reviews trends concerning director compensation. As part of this review, the Compensation Committee’s compensation consultant, Mercer, reviews and evaluates the competitiveness of our director compensation program in light of general director compensation trends and director compensation programs of the peer group companies we use to evaluate our executive compensation program, which are listed in the section entitled “Compensation Discussion and Analysis.” After receiving input from Mercer, the Compensation Committee makes recommendations to the full Board of Directors regarding any changes in our non-employee director compensation program that the Compensation Committee determines are advisable. After reviewing this input, our Board of Directors determined it was appropriate to make modest changes to our director compensation program for fiscal 2017:

 

    The additional annual retainer paid to our Lead Independent Director was paid in the form of RSUs rather than a cash retainer, and the amount was increased from $20,000 to $30,000; and

 

    The additional annual retainer for each Governance Committee member was increased from $7,500 to $10,000.

Our director compensation program for fiscal 2017 is described in more detail in the tables and narrative that  follow.

DIRECTOR COMPENSATION TABLE FOR FISCAL 2017

The table below summarizes the compensation for fiscal 2017 for each of our non-employee directors. Mr. Milligan was one of our named executive officers for fiscal 2017 and information regarding his compensation for fiscal 2017 is presented in the “Fiscal Years 2015 — 2017 Summary Compensation Table” and the related explanatory tables. As our employee, Mr. Milligan did not receive any additional compensation for his services as a director during fiscal 2017.

 

    

 

Fees

Earned

or Paid in

  Cash ($)(1)  

 

 

Stock

  Awards  

($)(2)

 

 

Option

  Awards  

($)(3)

 

 

Non-Equity

Incentive Plan

  Compensation  

($)

 

 

Change in

Pension

Value and

Nonqualified

Deferred

  Compensation  

Earnings ($)

 

 

All Other

  Compensation  

($)

 

 

  Total ($)  

Martin I. Cole

  100,000   224,977           324,977

Kathleen A. Cote

    97,500   224,977           322,477

Henry T. DeNero

  115,000   224,977           339,977

Michael D. Lambert

  110,000   224,977           334,977

Len J. Lauer

  110,000   254,963           364,963

Matthew E. Massengill

  175,000   274,990           449,990

Sanjay Mehrotra(4)

    75,000   224,977           299,977

Paula A. Price

    90,000   224,977           314,977

 

(1) For a description of the fees earned by the non-employee directors during fiscal 2017, see the disclosure in the section entitled “Fiscal 2017 Director Compensation Program” below.

 

 

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DIRECTOR COMPENSATION

 

 

 

(2) The amounts shown reflect the aggregate grant date fair value of equity awards granted in fiscal 2017 computed in accordance with ASC 718. These amounts were calculated using the closing stock price of a share of our common stock on the date of grant (as determined for accounting purposes), multiplied by the number of units granted to each director. On November 4, 2016, each non-employee director at the time was automatically granted an award of 4,089 RSUs (4,998 RSUs for our Chairman of the Board and 4,634 RSUs for our Lead Independent Director) under our Non-Employee Director Restricted Stock Unit Grant Program under our 2004 Performance Incentive Plan. The grant date fair value of each of these awards, computed as noted above, was $224,977 ($274,990 for our Chairman of the Board and $254,963 for our Lead Independent Director). Our Non-Employee Director Restricted Stock Unit Grant Program is more fully described below in the section entitled “Non-Employee Director Equity Awards.”

 

     In addition, the following table presents the aggregate number of shares of our common stock covered by stock awards held by each of our non-employee directors on June 30, 2017:

 

 

Name

  

 

Aggregate Number

of Unvested
Restricted
  Stock Units  

    

 

Aggregate
Number of
Deferred
Stock Units(a)

        

 

Martin I. Cole

 

    

 

4,164         

 

 

 

    

 

—       

 

 

 

 

 

Kathleen A. Cote

 

    

 

4,164         

 

 

 

    

 

29,188       

 

 

 

 

 

Henry T. DeNero

 

    

 

4,164         

 

 

 

    

 

45,487       

 

 

 

 

 

Michael D. Lambert

 

    

 

4,164         

 

 

    

 

—       

 

 

 

 

 

Len J. Lauer

 

    

 

4,719         

 

 

 

    

 

—       

 

 

 

 

 

Matthew E. Massengill

 

    

 

5,090         

 

 

    

 

—       

 

 

 

 

 

Sanjay Mehrotra

 

    

 

—         

 

 

 

    

 

—       

 

 

 

 

 

Paula A. Price

 

    

 

4,164         

 

 

 

    

 

3,485       

 

 

 

 

 

  (a) This amount consists of stock units (and corresponding dividend equivalents) that the director has elected to defer under our Deferred Compensation Plan pursuant to (i) our Non-Employee Directors Stock-for-Fees Plan in lieu of all or a portion of annual retainer or meeting fees earned by the director during the year of the election, and/or (ii) our Non-Employee Director Restricted Stock Unit Grant Program. The deferred stock units are fully vested and payable in an equivalent number of shares of our common stock on the payment date specified in accordance with the non-employee director’s deferral election. For a description of the Non-Employee Director Restricted Stock Unit Grant Program and the Deferred Compensation Plan, see the section entitled “Fiscal 2017 Director Compensation Program” below. The Non-Employee Directors Stock-for-Fees Plan expired on December 31, 2012, and no new awards are permitted under that plan.  

 

(3) We terminated our Non-Employee Director Option Grant Program in fiscal 2013. Accordingly, no stock options were granted to non-employee directors in fiscal 2017. The following table presents the aggregate number of shares of our common stock covered by stock options granted in prior years and held by each of our non-employee directors on June 30, 2017:

 

    Aggregate Number of Securities
Underlying Stock Options
        

 

Name

 

 

Vested and
Exercisable
(#)

    

 

Unvested
(#)

    

 

Total
(#)

         

 

Martin I. Cole

 

   

 

—     

 

 

    

 

—      

 

 

 

    

 

—   

 

 

 

  

 

Kathleen A. Cote

 

   

 

8,530     

 

 

 

    

 

—      

 

 

    

 

8,530   

 

 

 

  

 

Henry T. DeNero

 

   

 

7,024     

 

 

 

    

 

—      

 

 

    

 

7,024   

 

 

 

  

 

Michael D. Lambert

 

   

 

12,605     

 

 

 

    

 

—      

 

 

    

 

12,605   

 

 

 

  

 

Len J. Lauer

 

   

 

—     

 

 

    

 

—      

 

 

    

 

—   

 

 

 

  

 

Matthew E. Massengill

 

   

 

2,164     

 

 

 

    

 

—      

 

 

    

 

2,164   

 

 

 

  

 

Sanjay Mehrotra

 

   

 

—     

 

 

    

 

—      

 

 

    

 

—   

 

 

 

  

 

Paula A. Price

 

   

 

—     

 

 

    

 

—      

 

 

    

 

—   

 

 

  

 

(4) Effective February 6, 2017, Sanjay Mehrotra resigned as a member of our Board of Directors. His RSU grant in connection with his service as a director for fiscal 2017 was forfeited due to his resignation.

 

 

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DIRECTOR COMPENSATION

 

 

FISCAL 2017 DIRECTOR COMPENSATION PROGRAM

The following section describes the elements and other features of our director compensation program for fiscal 2017 for non-employee directors.

Non-Employee Director Retainer Fees

The director retainer fees are payable based on Board of Directors and committee service from annual meeting to annual meeting and are paid in a lump sum immediately following the annual meeting marking the start of the year. Directors who are appointed to our Board of Directors during the year are paid a pro-rata amount of the annual director retainer fees based on service to be rendered for the remaining part of the year after appointment.

The following table sets forth the schedule of the annual retainer and committee membership fees for non-employee directors for fiscal 2017.

 

Type of Fee

  

 

Current
Annual Fee

 

Annual Retainer

   $ 75,000  

Additional Non-Executive Chairman of the Board Retainer

   $ 100,000  

Additional Committee Retainers

        

Audit Committee

   $ 15,000  

Compensation Committee

   $ 12,500  

Governance Committee

   $ 10,000  

Additional Committee Chairman Retainers

        

Audit Committee

   $ 25,000  

Compensation Committee

   $ 22,500  

Governance Committee

   $ 12,500  

If our Chairman of the Board is not one of our employees, he or she is entitled to the additional Non-Executive Chairman of the Board Retainer referred to above.

Non-employee directors do not receive a separate fee for each Board of Directors or committee meeting they attend. However, we reimburse our non-employee directors for reasonable out-of-pocket expenses incurred to attend each Board of Directors or committee meeting.

Non-Employee Director Equity Awards

Non-Employee Director Restricted Stock Unit Grant Program. Our Board of Directors has adopted a Non-Employee Director Restricted Stock Unit Grant Program under our 2004 Performance Incentive Plan. For fiscal 2017, the Non-Employee Director Restricted Stock Unit Grant Program provided that each of our non-employee directors automatically receive, immediately following each annual meeting of stockholders if he or she has been reelected as a director at that annual meeting, an award of RSUs equal in value to $225,000 (or, in the case of our non-employee director serving as Chairman of the Board, $275,000, or Lead Independent Director, $255,000), based on the closing market value of an equivalent number of shares of our common stock on the grant date, rounded down to the nearest whole share. We award non-employee directors who are newly elected or appointed to our Board of Directors after the date of the annual meeting for a given year a prorated award of RSUs for that year. We also award members of our Board of Directors a prorated award of RSUs upon or as soon as practical after first becoming a non-employee director by virtue of retiring or otherwise ceasing to be employed by us after the annual meeting for a given year. The number of RSUs subject to this prorated award is equal to the following, rounded down to the nearest whole share: (i) the number of units subject to the immediately preceding annual unit award, divided by (ii) 365, multiplied by (iii) the number of days from the date such individual first becomes a non-employee director until the anticipated date for the immediately following annual meeting of stockholders. Each award of RSUs represents the right to receive an equivalent number of shares of our common stock on the applicable vesting date.

 

 

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DIRECTOR COMPENSATION

 

 

The RSUs granted in fiscal 2017 vest 100% upon the earlier of (i) the first anniversary of the grant date, or (ii) immediately prior to the first annual meeting of stockholders held after the grant date. If dividends are paid prior to the vesting and payment of any RSUs granted to our non-employee directors, the director is credited with additional RSUs as dividend equivalents that are subject to the same vesting requirements as the underlying RSUs.

Director Stock Ownership Guidelines. Under our director stock ownership guidelines, directors are prohibited from selling any shares of our common stock (other than in a same-day sale in connection with an option exercise to pay the exercise price of the option or to satisfy any applicable tax withholding obligations) unless they own “qualifying shares” with a market value of at least $375,000. Common stock, RSUs, deferred stock units and common stock beneficially owned by the director by virtue of being held in a trust, by a spouse or by the director’s minor children are considered qualifying shares for purposes of the stock ownership requirement. Shares the director has a right to acquire through the exercise of stock options (whether or not vested) are not counted towards the stock ownership requirement.

Deferred Compensation Plan for Non-Employee Directors

For each calendar year, we permit each non-employee director to defer payment of between a minimum of $2,000 and a maximum of 80% of any cash compensation to be paid to the director during the following calendar year in accordance with our Deferred Compensation Plan. We also permit non-employee directors to defer payment of any RSUs awarded under our Non-Employee Director Restricted Stock Unit Grant Program beyond the vesting date of the award. RSUs and other amounts deferred in cash by a director are generally credited and payable in the same manner as amounts deferred by our executive officers and other participants in our Deferred Compensation Plan as further described in the “Fiscal 2017 Non-Qualified Deferred Compensation Table.”

 

 

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EXECUTIVE OFFICERS

 

 

EXECUTIVE OFFICERS

Listed below are all of our executive officers, followed by a brief account of their business experience during the past five years. Executive officers are normally appointed annually by our Board of Directors at a meeting of the directors immediately following the annual meeting of stockholders. There are no family relationships among these officers nor any arrangements or understandings between any officer and any other person pursuant to which an officer was selected.

 

Name

  Age  

Position

Stephen D. Milligan

  54  

Chief Executive Officer

Michael D. Cordano

  53  

President and Chief Operating Officer

Mark P. Long

  50  

President WD Capital, Chief Strategy Officer and Chief Financial Officer

Manish H. Bhatia

  45  

Executive Vice President, Silicon Operations

Jacqueline M. DeMaria

  55  

Executive Vice President and Chief Human Resources Officer

Martin R. Fink

  52  

Executive Vice President and Chief Technology Officer

Michael C. Ray

  50  

Executive Vice President, Chief Legal Officer and Secretary

Srinivasan Sivaram

  57  

Executive Vice President, Memory Technology

 

      
STEPHEN D. MILLIGAN   

     Mr. Milligan was appointed Chief Executive Officer in January 2013. Biographical information regarding Mr. Milligan is set forth in the section entitled “Proposal 1: Election of Directors.”

 

             LOGO             

 

   Chief Executive Officer

 

  
      
MICHAEL D. CORDANO   

     Mr. Cordano has served as our President and Chief Operating Officer since October 2015, having previously served as President of our HGST subsidiary from July 2012 to October 2015.

     Prior to that, Mr. Cordano served as HGST’s executive vice president, sales & marketing, and president, branded business, from April 2009 to March 2012. From February 2005 to April 2009, he served as chief executive officer and co-founder of Fabrik, Inc., which was acquired by HGST in April 2009. From 1994 to February 2005, he served in various roles of increasing responsibility at Maxtor Corporation, including as the executive vice president of worldwide sales and marketing from April 2001 to February 2005, where he formed and managed the branded products business unit.

 

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   President and Chief Operating
   Officer

 

  
      

 

 

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EXECUTIVE OFFICERS

 

 

      
MARK P. LONG   

   Mr. Long has served as our President WD Capital, Chief Strategy Officer and Chief Financial Officer since November 2016, having previously served as our Executive Vice President, Chief Financial Officer and Chief Strategy Officer from September 2016 to October 2016, our Executive Vice President, Finance and Chief Strategy Officer from July 2016 to September 2016, our Executive Vice President and Chief Strategy Officer from August 2015 to July 2016, our Executive Vice President, Strategy & Corporate Development from February 2013 to August 2015 and in various consulting capacities for Western Digital from March 2012 to February 2013.

   Prior to that, Mr. Long served as HGST’s senior vice president, strategy and corporate development from July 2010 to March 2012. From August 2005 to July 2010, he served as managing director of VisionPoint Capital, where he provided merger and acquisition and corporate finance services to a range of technology companies, including Fabrik, Inc., which was acquired by HGST in April 2009. Mr. Long previously served as a senior executive with both public and private venture-backed technology companies and was an investment banker with Credit Suisse First Boston and Deutsche Bank Securities.

 

 

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   President WD Capital, Chief
   Strategy Officer and Chief Financial
   Officer

 

  
      
MANISH H. BHATIA   

   Mr. Bhatia has served as our Executive Vice President, Silicon Operations, since May 2016.

   Prior to that, Mr. Bhatia served as SanDisk’s executive vice president, worldwide operations, from April 2016 until our acquisition of SanDisk in May 2016, senior vice president, worldwide operations, from March 2012 to April 2016, vice president, worldwide operations, from March 2010 to March 2012, vice president of the strategic program office from March 2009 to March 2010, senior director of the strategic program office from March 2008 to March 2009, senior director of silicon procurement from January 2007 to January 2008, and director of silicon procurement from January 2006 to January 2007. Mr. Bhatia previously served as director of operations for Matrix Semiconductor, Inc. from August 2000 until it was acquired by SanDisk in January 2006. Prior to Matrix Semiconductor, he held positions at McKinsey & Company and Saint Gobain Corporation.

 

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   Executive Vice President, Silicon
   Operations

 

  
      
 JACQUELINE M. DEMARIA    

   Ms. DeMaria has served as our Executive Vice President and Chief Human Resources Officer since November 2015, having previously served as our Senior Vice President, Global Human Resources from November 2009 to November 2015, and as our Vice President, Human Resources from July 2005 to November 2009.

   Prior to that, Ms. DeMaria served as senior vice president, human resources, at Earth Tech from April 2004 to July 2005, chief people officer at Overture from January 2001 to April 2003, and vice president, human resources, at Mitsubishi Motors North America from October 1997 to December 2000. Before joining Mitsubishi, she held various senior human resources roles with Southern California Edison.

 

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   Executive Vice President and Chief
   Human Resources Officer

 

  
      

 

 

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EXECUTIVE OFFICERS

 

 

      
MARTIN R. FINK   

   Mr. Fink has served as our Executive Vice President and Chief Technology Officer since February 2017, having previously served as our Chief Technology Officer from January 2017 to February 2017.

   Prior to that, Mr. Fink served as executive vice president and chief technology officer of HP Labs at Hewlett Packard Enterprise from November 2012 until his retirement in November 2016. Mr. Fink previously served as senior vice president and general manager of business critical systems at Hewlett Packard Enterprise from November 2006 to November 2012, vice president and general manager of the nonstop enterprise division and open source and Linux organization at Hewlett Packard Enterprise from November 2000 to November 2006 and in a number of business and technology leadership roles at Hewlett Packard Enterprise since joining the company in 1985.

   Mr. Fink currently serves as a director of Hortonworks, Inc.

 

 

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   Executive Vice President and Chief

   Technology Officer

 

  
      
MICHAEL C. RAY   

   Mr. Ray has served as our Executive Vice President, Chief Legal Officer and Secretary since November 2015, having previously served as our Senior Vice President, General Counsel and Secretary from April 2011 to November 2015, our Vice President, General Counsel and Secretary from October 2010 to April 2011, and in a number of positions in our legal department, ranging from Senior Counsel to Vice President, Legal Services, from September 2000 to October 2010.

   Prior to that, Mr. Ray served as corporate counsel for Wynn’s International, Inc. from September 1998 to September 2000. Mr. Ray previously served as a judicial clerk to the U.S. District Court, Central District of California, and practiced law at O’Melveny & Myers LLP.

 

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   Executive Vice President, Chief
   Legal Officer and Secretary

 

  
      
SRINIVASAN SIVARAM   

   Dr. Sivaram has served as our Executive Vice President, Memory Technology, since May 2016.

   Prior to that, Dr. Sivaram served as SanDisk’s executive vice president, memory technology, from February 2015 until our acquisition of SanDisk in May 2016, senior vice president, memory technology, from June 2013 to February 2015 and vice president, technology, from January 2005 to March 2007. Dr. Sivaram previously served as chief operating officer for Matrix Semiconductor, Inc. from November 1999 until it was acquired by SanDisk in January 2006. From July 1986 to October 1999, Dr. Sivaram held various engineering and management positions at Intel Corporation. Dr. Sivaram also served as chief executive officer of Twin Creeks Technologies, Inc. from January 2008 to December 2012.

 

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   Executive Vice President, Memory

   Technology

 

  
      

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

COMPENSATION DISCUSSION AND ANALYSIS

Compensation Discussion and Analysis Table of Contents

 

Our Named Executive Officers

        33  

Executive Summary

        33  

Our Executive Compensation Philosophy and Objectives

        35  

Allocation of Target Total Direct Compensation

        36  

 

Determination of Executive Compensation

    Role of the Compensation Committee       36  
    Role of Executive Officers       37  
    Role of the Compensation Consultant       37  
    Comparative Market Data         38  

 

Elements of Our Executive Compensation Program

    Base Salary       42  
    Short-Term Incentives       42  
    Long-Term Incentives         43  

 

Executive Officer
Compensation for Fiscal 2017

    Base Salary       45  
    Short-Term Incentives       46  
    Long-Term Incentives       48  
    Executive Departures         56  

 

Other Features of our Executive Compensation Program

    Perquisites       56  
    Post-Employment Compensation         57  

 

Other Executive Compensation Program Policies

    Employment Agreement       58  
    Compensation Recovery Policy       58  
    Equity Grant and Ownership Guidelines and Policies       58  
    Internal Revenue Code Section 162(m)         59  

 

Subsequent Events    

    Base Salary Level Adjustments       59  
    LTI Awards         60  

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

OUR NAMED EXECUTIVE OFFICERS

When we refer to our “named executive officers,” “executives” or “executive officers” in this section, we mean:

 

Stephen D. Milligan

  Chief Executive Officer

Michael D. Cordano

  President and Chief Operating Officer

Mark P. Long

  President WD Capital, Chief Strategy Officer and Chief Financial Officer

Martin R. Fink

  Executive Vice President and Chief Technology Officer

Michael C. Ray

  Executive Vice President, Chief Legal Officer and Secretary

Olivier C. Leonetti

  Former Chief Financial Officer, who left the role effective as of September 1, 2016

Under SEC rules, the individuals listed above are our named executive officers for fiscal 2017 and are listed in the “Fiscal Years 2015 — 2017 Summary Compensation Table.”

EXECUTIVE SUMMARY

Business Highlights

We are rapidly moving into a data-centric world, and the volume and value of data continue to increase. In response to this evolution, we have transformed our company into a global leading developer, manufacturer and provider of data storage devices and solutions.

Managing our global business to provide long-term value for our stockholders requires a team of passionate, innovative, dedicated and experienced executives. Our overriding executive compensation philosophy is clear and consistent —we pay for performance. Our executives are accountable for the performance of the company and the operations they manage and are compensated primarily based on that performance. We believe that our executive compensation program contributes to a high-performance culture where executives are expected to deliver results that drive sustained profitable growth.

As we continued to embark on our multi-year transformation, our executive leadership team made substantial progress in the integrations of SanDisk and HGST. We also continued to focus on the execution of our strategy to position our company for long-term growth. During fiscal 2017, our management team drove strong performance and made significant progress toward our long-term goals.

Multi-Year Strategic Transformation With Critical Integration Efforts in Fiscal 2017

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

Core Components of Fiscal 2017 Compensation

To appropriately incentivize, retain and reward our management team at this critical time, the Compensation Committee continues to make compensation decisions in the context of an overarching pay-for-performance philosophy.

 

Core Components of Fiscal 2017 Compensation

 

 

Performance Link

 

     
Base Salary  

        Competitive with market and industry norms

        Reflects individual experience and contributions

  Fixed compensation
Short-Term Incentive (STI)     Compensation      

        Provides incentive to drive near-term financial goals that support long-term objectives

        Measured semi-annually to ensure goals reflect the impact of rapidly

         evolving industry-related externalities

  Adjusted EPS
Long-Term Incentive (LTI) Compensation Awards  

       Performance Stock Units (PSUs) —

 
 

 

O     Annual LTI PSUs: Measures performance over two years, which
represents a   long-term performance period in the context of our rapidly evolving industry; cliff   vesting after two years

 

 

O  Revenue, adjusted EPS and adjusted   cash flow from
operations

O  Relative TSR hurdle

O  TAM adjustment factor

 

 

 

O      Integration PSUs: Measures performance over 27 months

 

Reported synergies

 

 

      Stock Options —

O      Provides alignment with stockholders and long-term stock value

O     Vest over 4 years

    Stock price increase
 

      Restricted Stock Units (RSUs) —

O      Provides alignment with stockholders and retention value

O     Vest over 4 years

  Stock price

Key Compensation Changes in Fiscal 2017

We believe that executive officer compensation for fiscal 2017 was consistent with the objectives of our compensation philosophy and with our performance and strategic goals. The changes effective for fiscal 2017 further align our program with our business evolution and reflect stockholder feedback.

 

 

Component

 

  

 

Key Change

 

  

 

Rationale

 

       
Base Salary   

Increased base salary levels for four named executive
officers:

      Mr. Milligan’s salary increased by 9.5%

      Mr. Cordano’s salary increased by 10.3%

      Mr. Ray’s salary increased by 10%

      Mr. Long’s salary increased by 25%

  

       Changes align with our pay positioning strategy

       Reflects increased responsibilities in connection with integration activities and executing on transformation and growth strategy

       For Mr. Long, also reflects increased responsibilities in connection with his appointment as both Chief Financial Officer and Chief Strategy Officer

 

STI   

 

Increased target bonus level for Mr. Long by 10%

  

 

       Reflects increased responsibilities in connection with his appointment as both Chief Financial Officer and Chief Strategy Officer

 

LTI Grants   

 

Increased usage of PSUs (comprising 75% of
Mr. Milligan’s award mix)

  

 

       Further aligns executives’ interests with stockholder interests and underscores performance link to compensation

 

  

 

Lengthened RSU vesting to four years

  

 

       Encourages retention and aligns executives’ interests with stockholder interests

 

  

 

Granted fiscal 2017-2018 PSUs with (i) TAM adjustment factor based on revenue and (ii) performance goals based on revenue, adjusted EPS and adjusted cash flow from operations

 

  

 

        Aligns with business strategy to drive execution

 

 

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COMPENSATION DISCUSSION AND ANALYSIS                         

 

 

Performance-Based Award Achievement and Payouts in Fiscal 2017

As further described below under the discussion relating to our STI and LTI programs, the Compensation Committee approved the following payouts with respect to performance-based awards in fiscal 2017:

 

Fiscal 2017 Payout Decisions

 

Award

 

 

 

Achievement

 

  

 

Rationale

 

 

 STI Payouts

 

 

 First Half

 Fiscal 2017

 

 

Paid out at 200% of target level

  

 

    Based on achievement of adjusted EPS goal above maximum performance level

   Payout capped at 200%

 

 

 Second Half
 Fiscal 2017

 

 

Paid out at 140% of target level

  

 

   Based on achievement of adjusted EPS goal above maximum performance level

    Compensation Committee exercised downward discretion, reducing payout from 200% to 140%

 

 

 PSU Achievement and Payout

 

 

 Fiscal 2016-

 2017 PSU

 Awards

 

 

Paid out at 90% of target level

  

 

Based on achievement of pre-established cumulative revenue and operating income goals over two-year period, with consideration given to changes in our business

 

 Mr. Long’s  Strategic PSU

 Award

 

 

 

Credited at 297% and 150% of target level for two performance goals

 

  

 

Based on above-target achievement of pre-established strategic and financial metrics over each performance period

 

 

 Integration

 PSU Awards

 

 

Credited at 300% of target level for first performance period

 

  

 

Based on above-target achievement of pre-established reported synergies and cost savings metrics over performance period

 

Say-on-Pay Advisory Vote and Stockholder Engagement

At our 2016 annual meeting of stockholders, more than 93% of the votes cast on the advisory Say-on-Pay proposal indicated approval of the fiscal 2016 compensation of our named executive officers. The Compensation Committee believes that the vote outcome is an indication that stockholders generally approve of the structure of our executive compensation program.

In addition, during the past year, our directors and management contacted the holders of approximately 54% of our outstanding shares, and engaged in discussions with investors representing approximately 45% of our outstanding shares. During these discussions, we obtained stockholder input on a number of issues, including our transformation progress and how the evolution in our business has been reflected in our executive compensation program. Stockholders were broadly supportive of our compensation program and the structural changes made for fiscal 2017, including the use of a higher proportion of PSUs and the lengthening of the RSU vesting schedule. The Compensation Committee values this direct input from our stockholders and welcomes ongoing feedback. Stockholders will have an opportunity to cast an advisory vote in connection with named executive officer compensation. For additional information about our stockholder engagement program, please see the section entitled “Corporate Governance — Stockholder Engagement.”

OUR EXECUTIVE COMPENSATION PHILOSOPHY AND OBJECTIVES

Our compensation philosophy for our executive officers is based on the belief that the interests of our executives should be closely aligned with our long-term performance and return to our stockholders. To support this philosophy, a large portion of each executive officer’s compensation is placed “at risk” and linked to the accomplishment of specific financial or operational goals that we expect will lead to increased long-term value for our stockholders.

Our compensation policies and programs are designed to:

 

    attract, develop, reward and retain highly qualified and talented individuals;

 

 

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    motivate executives to improve the overall performance and profitability of our company as well as the business group for which each executive is responsible, and reward executives when specific measurable results have been achieved;

 

    encourage accountability by giving the Compensation Committee flexibility to take each executive’s individual contribution and performance into account in determining salaries and incentive awards;

 

    tie incentive awards to financial and strategic metrics that we believe drive the performance of the company over the long term to further reinforce the linkage between the interests of our stockholders and our executives; and

 

    help ensure compensation levels are both externally competitive and internally equitable.

ALLOCATION OF TARGET TOTAL DIRECT COMPENSATION

The Compensation Committee does not use a specific formula for allocating total direct compensation between variable and fixed compensation, between annual and long-term compensation and between cash and non-cash compensation. However, the Compensation Committee believes that a substantial portion of total direct compensation should be at-risk compensation, with the percentage of the executive’s compensation that is at risk increasing as the executive’s responsibility increases. The Compensation Committee believes that this philosophy assists in achieving the compensation objectives of motivating executives to improve our overall performance over the long term, encouraging accountability and better linking the interests of our stockholders with those of our executives.

As illustrated in the charts below, approximately 90% of Mr. Milligan’s target total direct compensation for fiscal 2017, and approximately 85% (on average) of our other named executive officers’ target total direct compensation for fiscal 2017, was “at risk” in that it was variable and based on our stock price performance or achievement of other specified financial and strategic performance goals. We use “target total direct compensation” to mean the executive’s base salary for fiscal 2017, annual STI target bonus opportunity for fiscal 2017 and LTI compensation grant at midpoint of fiscal 2017 grant guidelines, as discussed below.

 

 

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DETERMINATION OF EXECUTIVE COMPENSATION

Role of the Compensation Committee

Our executive compensation program is administered by the Compensation Committee. The Compensation Committee is responsible for approving all elements of compensation for our executive officers. The Compensation Committee generally reviews the performance and compensation of our executive officers on an annual basis and at the time of hiring, promotion or other change in responsibilities. The Compensation Committee’s annual review typically occurs near the end of the prior fiscal year and beginning of the new fiscal year, with the review for fiscal 2017 compensation occurring at the end of fiscal 2016 and continuing early into fiscal 2017.

 

 

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Except as otherwise noted in this Compensation Discussion and Analysis, the Compensation Committee’s executive compensation decisions are subjective and the result of the Compensation Committee’s business judgment. The Compensation Committee’s business judgment is informed by the experiences of the Compensation Committee members as well as input from Mercer, its independent compensation consultant. In addition, in setting the compensation for our executives, the Compensation Committee generally considers a variety of factors, with no one factor being determinative or carrying a specified weight. These factors include our target pay positioning strategy relative to our peers (described below), all elements of compensation, our compensation philosophy and objectives and a subjective evaluation of other relevant facts and circumstances, including the following:

 

    the executive’s experience, performance and judgment;

 

    survey and peer company market data prepared by the Compensation Committee’s independent compensation consultant, as explained in more detail below;

 

    for executives other than our Chief Executive Officer, our Chief Executive Officer’s recommendations;

 

    internal pay equity;

 

    tally sheets;

 

    succession planning and retention objectives;

 

    past and expected future contributions of the executive;

 

    current and historical company performance and strategic and financial goals;

 

    feedback from our stockholders; and

 

    market performance and general economic conditions.

Role of Executive Officers

While no executive participates in any discussions or decisions regarding his or her own compensation, certain of our executive officers and other employees assist the Compensation Committee in the administration of our executive compensation process. Our Chief Executive Officer works with our Chief Human Resources Officer in reviewing the performance of the other named executive officers and developing recommendations to the Compensation Committee regarding the base salaries, bonuses, equity awards and other incentive compensation for these executives for consideration by the Compensation Committee at its annual review. While the Compensation Committee considers these recommendations, the Compensation Committee is solely responsible for making the final decision regarding the compensation of our executive officers.

Our Chief Human Resources Officer or her designee also may provide internal and external compensation data to the Compensation Committee and Mercer. Our Chief Financial Officer or his designee may provide input to the Compensation Committee on the financial targets for our performance-based compensation programs and may present data regarding the impact of compensation programs on our financial statements. Our Chief Legal Officer or his designee generally assesses and advises the Compensation Committee regarding legal implications or considerations involving our compensation program.

The Compensation Committee alone is charged with approving the compensation of our Chief Executive Officer, although in determining our Chief Executive Officer’s compensation, the Compensation Committee confers with other members of our Board of Directors, led by our Chairman of the Board and Lead Independent Director, who conduct the evaluation of our Chief Executive Officer’s performance. Our Chief Executive Officer does not participate in deliberations or decisions concerning his own compensation. For a discussion of the process relating to the annual performance evaluation of our Chief Executive Officer, please see the section entitled “Corporate Governance — Chief Executive Officer Evaluation and Succession.”

Role of the Compensation Consultant

The Compensation Committee’s practice has been to retain a compensation consultant to provide objective advice and counsel to the Compensation Committee on all matters related to the compensation of our executive officers and directors, as well as our compensation programs generally. Mercer, a wholly owned subsidiary of Marsh & McLennan

 

 

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Companies, Inc. (“MMC”), has been retained by the Compensation Committee as its compensation consultant. The Compensation Committee’s relationship with Mercer is reviewed annually and was continued in fiscal 2017. Mercer communicates regularly with management to gather information and review management proposals but is retained by and reports directly to the Compensation Committee. Mercer attended all in-person meetings of the Compensation Committee held during fiscal 2017. Mercer’s fees for executive compensation consulting in fiscal 2017 were approximately $891,000.

Mercer’s responsibilities for fiscal 2017 generally included:

 

    providing recommendations regarding the composition of our peer group (described below);

 

    gathering and analyzing publicly available data for the peer group;

 

    analyzing pay survey data;

 

    providing advice regarding executive compensation practices and trends, including proxy advisory firms’ evolving positions on executive pay;

 

    reviewing and advising on director compensation;

 

    reviewing and advising on the structure and design of, including the performance measures to be used in, bonus and incentive plans;

 

    reviewing and advising on management recommendations regarding target bonus levels, actual bonuses paid and the design and size of equity awards for our executive officers;

 

    reviewing and advising on management recommendations regarding the global equity program;

 

    advising on the director and executive stock ownership guidelines; and

 

    advising on the Compensation Committee’s charter.

During fiscal 2017, Mercer and certain affiliates of MMC were retained by company management to provide other services, including welfare plan consulting, insurance brokerage and actuarial and plan administration services to the company with respect to the company’s general employee benefit plans and programs, as well as compensation and benefits consulting services in connection with the integration of HGST and SanDisk. The aggregate fees paid for the other services in fiscal 2017, either directly by the company or via commissions from third-party insurers, were approximately $5,972,506. These services were approved by company management in the ordinary course of business. Because these other services were in the ordinary course of business, the Compensation Committee did not specifically approve such services, although the Compensation Committee is aware of these other services. Mercer and its affiliates committed to establish and follow safeguards between the executive compensation consultants engaged by the Compensation Committee and the other service providers to the company. Specifically, Mercer provided to the Compensation Committee an annual update on Mercer’s financial relationship with the company, as well as written assurances that, within the MMC organization, the Mercer consultants who perform executive compensation services for the Compensation Committee have a reporting relationship and compensation determined separately from MMC’s other lines of business and from its other work for the company. These safeguards were designed to help ensure that the Compensation Committee’s executive compensation consultants continued to fulfill their role in providing objective, unbiased advice. In addition, in August 2017, the Compensation Committee assessed Mercer’s independence pursuant to applicable SEC and NASDAQ rules. Taking the foregoing safeguards into account, the Compensation Committee concluded that the engagement did not raise any conflicts of interest during fiscal 2017 and currently does not raise any conflicts of interest.

Comparative Market Data

To assist the Compensation Committee during its annual review of the competitiveness of compensation levels and the appropriate mix of compensation elements to our executive officers, Mercer uses comparative market data on compensation practices and programs and provides guidance on industry practices. The Compensation Committee, with guidance from Mercer and input from management, determines the composition of our peer group and reevaluates this group on an annual basis.

 

 

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In February 2016, the Compensation Committee approved the following changes to our peer group for fiscal 2017:

 

    Removed Broadcom Corporation from the peer group due to its acquisition by Avago Technologies.

 

    Added four companies to the peer group based on revenue and industry focus:

 

    Flextronics International

 

    Corning Inc.

 

    NCR Corp.

 

    Motorola Solutions Inc.

Accordingly, the peer group for fiscal 2017 consists of 17 U.S.-based technology companies with size (primarily based on revenue) and business characteristics that we believe are comparable to us and who compete with us for executive talent. Most of the companies included in our fiscal 2017 peer group are, like us, included in the Dow Jones US Technology, Hardware & Equipment Index, which the company has selected as the industry index for purposes of the stock performance graph appearing in our 2017 Annual Report. Below are the companies in our peer group for fiscal 2017:

 

Fiscal 2017 Peer Group Companies  
       Revenue(1)
($MM)
       Market Value(2)
($MM)
     Employees(3)  

Advanced Micro Devices, Inc.

       $  4,619          $  11,756        8,200  

Applied Materials Inc.

       $12,942          $  44,393        16,700  

Cisco Systems, Inc.

       $48,510          $156,437        73,700  

Corning Inc.

       $  9,855          $  27,646        40,700  

EMC Corporation

       $24,586          $  56,846        72,000  

Flextronics International

       $23,994          $    8,665        200,000  

Intel Corporation

       $61,711          $158,882        106,000  

Micron Technology Inc.

       $17,401          $  33,145        31,400  

Motorola Solutions Inc.

       $  6,126          $  14,179        14,000  

NCR Corp.

       $  6,550          $    4,950        33,500  

NetApp Inc.

       $  5,519          $  10,773        10,100  

Qualcomm Inc.

       $23,533          $  81,560        30,500  

SanDisk Corporation(4)

       $  5,565          $  15,460        8,790  

Seagate Technology

       $10,771          $  11,493        45,500  

TE Connectivity

       $12,989          $  27,956        75,000  

Texas Instruments Incorporated

       $14,184          $  76,755        29,865  

Xerox Corporation

       $10,610          $    7,302        37,600  
            

Summary Statistics

    

Revenue(1)

($MM)

       Market Value(2)
($MM)
     Employees(3)  

75th Percentile

       $23,533          $56,846        72,000  

50th Percentile

       $12,942          $27,646        33,500  

25th Percentile

       $  6,550          $11,493        16,700  

Western Digital Corporation

       $19,093          $25,783        67,629  

 

(1) Represents the most recent four quarters of revenue as of the June 30, 2017 quarter for which public data was available through quarterly and annual reports filed by each company with the SEC. For EMC Corporation and Xerox Corporation, represents revenue based on data that was publicly available as of the date that each such company’s shares ceased to be publicly traded.

 

(2) Represents market value as of June 30, 2017, based on publicly traded common stock prices. For EMC Corporation and Xerox Corporation, represents market value based on the common stock price as of the date that each such company’s shares ceased to be publicly traded.

 

(3) Represents the number of employees as disclosed in the most recent Form 10-K filed with the SEC as of July 31, 2017. For Western Digital, represents the number of employees as of the end of fiscal 2017, as reported in our 2017 Annual Report on Form 10-K.

 

(4) SanDisk was removed as our peer company in May 2016 in connection with our acquisition of SanDisk.

 

 

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Western Digital Compared to Peer Group

 

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For fiscal 2017, market data was also collected from the Radford Executive Survey, an independent published survey.

The survey data was filtered for high-technology companies (where such data was not available, the survey was filtered for durable manufacturing companies or general industry), and adjusted to screen for companies with revenue levels comparable to ours. In reviewing this market data, the Compensation Committee did not focus on any particular company used in the survey (other than the peer companies noted above). For individuals who were executive officers at the time of the annual review, the survey data and the peer group data were averaged (with the survey and peer group data weighted equally) to create what we refer to in this section as “composite market data.” The composite market data, along with our target pay positioning strategy outlined below, provided the Compensation Committee a reference point, which was one of several factors (as described above) that it used to make subjective compensation decisions during its fiscal 2017 annual compensation review.

Peer Group Changes Made During Fiscal 2017 for Fiscal 2018 Compensation Decisions

In February 2017, the Compensation Committee approved the following changes to our peer group for fiscal 2018:

 

    Removed Xerox Corporation due to the spinning off of its business services unit in January 2017.

 

    Removed EMC Corporation due to its acquisition by Dell Inc. in September 2016.

 

    Added Broadcom Limited and Hewlett Packard Enterprise (“HPE”) based on revenue and industry focus. The most recently reported trailing four quarter revenue as of the June 30, 2017 quarter for Broadcom Limited and HPE were $16.26 billion and $39.69 billion, respectively, based on public data available through quarterly and annual reports filed by each company with the SEC.

 

 

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ELEMENTS OF OUR EXECUTIVE COMPENSATION PROGRAM

Our current executive compensation program consists of several elements. Actual pay for individual executive officers can and does vary from our target pay positioning based on circumstances the Compensation Committee considers appropriate, including, without limitation, to attract or retain critical talent and incentivize and reward an executive’s expected future performance and contributions to the company. As outlined below, we position base pay conservatively against the market, but position short- and long-term incentives based on achievement of what we believe are more aggressive goals. In addition, given our above-median positioning for revenue and employee population relative to our peer group, and our median positioning for market cap relative to our peer group, we believe it is appropriate to target incentive compensation to range from median to above median based on composite market data to offer competitive pay.

We also believe our emphasis on variable compensation is aligned with our focus on operating excellence, allowing our compensation expense to flex up or down more significantly depending on company performance. While actual pay positioning varies by executive from below median to above median, we believe that our broad positioning strategy is necessary to provide the Compensation Committee with the flexibility it needs to attract, retain and motivate a talented and seasoned executive team.

 

                   
    Element of Direct
Compensation
      Characteristics           Purpose           Target Pay Positioning        
LOGO   Base Salary      

   Fixedcomponent.

    Annually reviewed by Compensation Committee and adjusted, if and when appropriate.

         

   Toattract, develop and retain highly-qualified executive talent and to maintain a stable management team.

    Tocompensate executives for sustained individual performance.

          Generally targeted at the median based on composite market data.         LOGO
  Short-Term Incentives (STI)      

   Performance-basedshort-term cash bonus opportunity (typically semi-annual).

   Payablebased on level of achievement of Compensation Committee-approved company performance goals.

       

   Tomotivate executives to drive overall performance and encourage accountability by rewarding achievement of specific performance goals.

   Toprovide focus on, and reward achievement of, near-term financial objectives.

   To attract, develop and retain highly-qualified executive talent.

        Targeted at a level such that, when added to base salary, target total annual cash compensation is between the median and the 75th percentile based on composite market data.         LOGO  
   LOGO     

Long-Term Incentives (LTI)

   

   Entireaward is at-risk.

   Significantcomponent of the awards is based on performance against pre- established long-term financial goals.

   Generallygranted annually in the form of a combination of stock options, RSUs and PSUs.

   Amountsactually realized under awards will vary based on stock price changes.

     

   Tocreate direct alignment with stockholder interests.

   Toprovide focus on long-term value creation and multi-year financial objectives through achievement of specific performance goals.

   Toallow executives to share in value creation.

   To attract, develop, reward and retain highly-qualified executive talent.

      Targeted at a level such that, when added to target total annual cash compensation, target total direct compensation is between the median and the 75th percentile based on composite market data.    
                                             

 

ANNUAL LONG-TERM FIXED VARIABLE

 

 

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In addition to these elements of our direct compensation program, we also provide executives with relatively limited and modest perquisites and certain other indirect benefits, including participation in certain post-employment compensation arrangements. For a description of these other features of our compensation program, please refer to the section below entitled “Other Features of our Executive Compensation Program.”

The following sections describe each element of our direct compensation program in more detail.

Base Salary

Executive officers are paid a base salary that the Compensation Committee believes is competitive to attract highly-qualified executive talent and to maintain a stable management team. Base salaries are generally reviewed by the Compensation Committee as part of its annual compensation review and at the time of hiring, a promotion or other change in responsibilities. Base salary levels for our executive officers are determined by the Compensation Committee after considering our pay positioning strategy and a subjective evaluation of such factors as the competitive environment, our financial performance, the executive’s experience level and scope of responsibility, and the overall need and desire to retain the executive in light of current performance, expected future performance, future potential and the overall contribution of the executive. The Compensation Committee exercises its judgment based on all of these factors in making its decisions. No specific formula is applied to determine the weight of each criterion.

Short-Term Incentives

Our STI explicitly links cash bonuses for executive officers and other participating employees to our financial performance. We believe that the STI is a valuable component of our overall compensation program because it assists us in achieving our compensation objective of motivating our executives to achieve, in a consistent, regular manner, financial goals that help to drive our overall annual financial performance during the course of the fiscal year. The STI also encourages accountability by rewarding executives based both on the actual financial performance achieved as well as a subjective evaluation by the Compensation Committee of other discretionary factors such as individual and business group performance.

 

    The six-month performance period under our STI program reinforces our focus on strong operational execution of key near-term milestones that support our long-term goals.

 

    Setting goals on a six-month basis allows us to more aggressively recalibrate goals in the face of industry dynamics that unfold over the course of a year. In many instances, this can lead to more aggressive goal-setting than might otherwise be the case if goals are adjusted for industry dynamics over an annual period.

 

    The short-term focus of the STI provides balance to the long-term emphasis of our annual LTI program, although we believe that it is important to more heavily weight our annual LTI program than our STI program in each executive’s target total direct compensation opportunity to ensure an overarching long-term focus.

The Compensation Committee establishes target bonus opportunities under the STI for each executive officer that are expressed as a percentage of each executive’s base salary for the performance period, which is typically a semi-annual period. In establishing these target bonus opportunities, the Compensation Committee refers to our target pay positioning strategy for short-term incentives and its own subjective evaluation of the executive’s position and responsibility.

STI Target Setting Process

Shortly after the start of each performance period, the Compensation Committee establishes STI achievement levels of specific operating and/or financial performance goals that correspond to payout opportunities that range from 0% to 200% of the target bonus opportunity for executive officers for a semi-annual performance period.

The Compensation Committee establishes rigorous STI performance metrics that are directly tied to our executives’ ability to increase stockholder value. In setting the STI performance metrics semi-annually, the Compensation Committee considers the macro-economic environment, industry-specific conditions and prior-year actual performance, among other factors. The Compensation Committee also considers recent trends and developments in the business that are expected to impact financial results.

 

 

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The Compensation Committee establishes rigorous STI performance metrics and targets that are directly tied to long-term value drivers of our business. In setting the STI performance targets semi-annually, the Compensation Committee considers the macro-economic environment, industry-specific conditions, business changes and prior-year actual performance, among other factors. The Compensation Committee also considers how the transformation of our company is expected to impact financial results.

At the end of the applicable performance period, the Compensation Committee determines the STI achievement level for executive officers based upon our performance against the goals established for the period. The STI achievement rate determines the overall funding level for bonus payments to our executives for the applicable performance period.

The achievement rate ranges from a threshold of 80% to a maximum of 126% of achievement on the leverage curve. If performance results in an achievement rate that is less than 80%, no bonus is payable under the STI with respect to that performance goal. The achievement rate corresponds to a payout rate ranging from a threshold payout of 50% to a maximum payout of 200%. The Compensation Committee may adjust the payout rate percentage (subject to a cap of 200% for each semi-annual performance period) based upon the recommendation of our Chief Executive Officer (other than with respect to our Chief Executive Officer’s bonus) and/or a subjective evaluation of the company’s performance as well as changes in the business and industry that occur during the performance period and how well we and our executive officers were able to adapt to those changes.

The STI leverage curve is designed to reward higher achievement of performance, with a lower achievement rate resulting in a decline in the payout rate or no payout. An achievement rate above target results in a larger increase in the payout rate, subject to the 200% cap on the payout rate for the semi-annual performance period.

 

 

Performance Level

  

 

Achievement Rate

  

 

Payout Rate

 

Below Threshold

  

 

<80%

  

 

0%

 

Threshold

  

 

80%

  

 

50%

 

Target

  

 

100%

  

 

100%

 

Maximum

  

 

³126%

  

 

200%

(capped)

Actual bonus amounts to the executive officers for each performance period under the STI typically are calculated by multiplying the executive’s target semi-annual bonus opportunity by the STI payout rate percentage approved by the Compensation Committee based on achievement of the applicable performance metrics.

Long-Term Incentives

A substantial portion of each named executive officer’s compensation is comprised of long-term equity-based incentive compensation. Regular annual LTI awards, with long-term financial performance goals and vesting schedules, help link the officer’s interests with the long-term interests of our stockholders.

Annual LTI Program

Under our annual LTI program, a combination of stock options, RSUs and PSUs are generally granted on an annual basis to our executive officers. The Compensation Committee has established annual LTI grant guidelines for the grant date fair value (as determined for purposes of financial reporting) of the annual LTI awards granted to each of our executive officers in a particular fiscal year, which are based on the individual’s position level and our pay positioning strategy and are expressed as a percentage range of the individual’s annual base salary level. The annual LTI grant guidelines are reviewed and approved by the Compensation Committee during its annual compensation review after review of the composite market data and consultation with Mercer and management.

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

The following table presents the fiscal 2017 annual LTI grant guidelines for our named executive officers with respect to the grants made in August 2016:

 

Position   

Annual LTI Grant
Guideline As % of

Base Salary

    

 

Chief Executive Officer

 

  

 

600% – 1,000%

 

  

 

President and Chief Operating Officer

 

  

 

500% – 700%

 

  

 

Chief Strategy Officer and Chief Financial Officer(1)

 

  

 

400% – 600%

 

  

 

Executive Vice Presidents

 

  

 

200% – 500%

 

  

 

(1) In fiscal 2017, the Compensation Committee approved increasing Mr. Long’s annual LTI grant guideline midpoint from 400% to 500% of his base salary in connection with his appointment as both Chief Financial Officer and Chief Strategy Officer to reflect his increased responsibilities and better align with composite market data for his role as well as our pay positioning strategy.

These LTI ranges provide a guideline for the Compensation Committee when determining the grant value of the awards to each executive under the annual LTI program. In determining the actual grants made to each executive, the Compensation Committee also considers our target pay positioning strategy, the recommendation of our Chief Executive Officer (other than for our Chief Executive Officer’s annual LTI award), the current compensation package and the value of unvested equity awards, as well as a subjective evaluation of the executive’s individual performance, current responsibilities, expected future contributions and value to the company. No specific formula is applied to determine the weight of each criterion.

 

 

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Once the grant values for these executives are determined, the Compensation Committee determines the appropriate allocation of the grant value among our LTI award types. The following table explains in more detail the award types we granted in fiscal 2017 under our annual LTI program and how they help accomplish our compensation objectives.

 

Element of Annual

LTI Program

  Characteristics   Vesting   Purpose

 

  Fiscal 2017-2018 PSUs

 

 

Represent right to receive a number of shares that can vary from 0% to 200% or 300% of the target level based on achievement of certain performance milestones approved by the Compensation Committee, as further described below.

 

 

 

Cliff vest after two years.

 

 

Focus executives on the achievement of key financial operating objectives over a multi-year period. Help align executives’ interests with those of our stockholders.

 

  RSUs

 

 

Represent the right to receive shares at the time the award vests. Value of RSUs fluctuates as the value of our common stock increases or decreases.

 

 

 

Vest over a four-year period, contingent upon continued employment.

 

 

Help align executives’ interests with those of our stockholders. Serve as a retention incentive.

 

  Stock Options

 

 

Granted with an exercise price equal to the closing price of our common stock on the NASDAQ Stock Market on the date of grant.

 

 

Vest in periodic installments over a four-year period, contingent upon continued employment.

 

 

Inherently performance-based by providing value only if our stock price increases over time after the grant of an award. Motivate executives to contribute to long-term growth and profitability of the company thereby creating value for stockholders. Serve as a retention incentive.

 

Additional LTI Awards

In addition to our annual LTI program, special LTI cash and/or equity awards outside of our annual LTI program may be granted from time to time to achieve specific objectives. For example, in fiscal 2017, the Compensation Committee granted an Integration PSU award to Mr. Long in connection with his appointment as both Chief Financial Officer and Chief Strategy Officer, as further described below.

EXECUTIVE OFFICER COMPENSATION FOR FISCAL 2017

Base Salary

The Compensation Committee approved increases in the base salary levels of Messrs. Milligan, Cordano, Long and Ray after a review of the relevant composite market data, our pay positioning strategy and increased responsibilities in light of our transformative events and integrations relating to major acquisitions. The Compensation Committee determined it would be appropriate to position each executive’s total direct compensation to be between the median and the 75th percentile of our peer group, consistent with our pay positioning strategy.

 

 

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Specifically, the Compensation Committee determined it would be appropriate to increase Mr. Milligan’s base salary level in light of the fact that his total direct compensation fell below the median of our peer group for his position (taking into account the removal of SanDisk from our peer group after the acquisition of SanDisk). In addition, Mr. Milligan’s base salary level had not been adjusted for three years, with the last increase occurring in July 2013.

In addition, the Compensation Committee approved an increase to Mr. Long’s base salary in light of his additional role and increased responsibilities in connection with his appointment as both Chief Financial Officer and Chief Strategy Officer.

The Compensation Committee determined it was appropriate to approve a base salary level of $600,000 for Mr. Fink, who was appointed as our Chief Technology Officer during fiscal 2017, based on relevant composite market data for the role, as well as the increasing importance of the Chief Technology Officer role during this period of transformation and building our storage and memory leadership position.

Each named executive officer’s base salary level for fiscal 2017 is reflected below:

 

Named Executive Officer    Base Salary
Level
     Change from
Fiscal 2016

 

Stephen D. Milligan

 

    

 

$1,150,000    

 

 

 

   +$100,000 (9.5%)

 

 

Michael D. Cordano

 

    

 

$   800,000    

 

 

 

   +$75,000 (10.3%)

 

 

Mark P. Long

 

    

 

$   625,000    

 

 

 

   +$125,000 (25%)

 

 

Martin R. Fink

 

    

 

$   600,000    

 

 

 

   N/A

 

 

Michael C. Ray

 

    

 

$   550,000    

 

 

 

   +$50,000 (10%)

 

 

Olivier C. Leonetti

 

    

 

$   500,000    

 

 

 

   N/A

 

Short-Term Incentives

Target Bonus Level Opportunities

The Compensation Committee approved an increase in the target bonus level of Mr. Long, from 100% to 110% of base salary, in connection with his additional role and increased responsibilities as both Chief Financial Officer and Chief Strategy. The Compensation Committee concluded that the target bonus levels for our remaining named executive officers were within a reasonable range of our stated pay positioning strategy and, as a result, no adjustments were made to the target bonus levels for our remaining named executive officers.

Each named executive officer’s annual target bonus opportunity for fiscal 2017 is reflected below:

 

Named Executive Officer(1)   

    Annual Target Bonus    

Opportunity
(as Percentage
of Base Salary)

 

Stephen D. Milligan

 

   150%

 

 

Michael D. Cordano

 

   125%

 

 

Mark P. Long

 

   110%

 

 

Martin R. Fink

 

   110%

 

 

Michael C. Ray

 

     85%

 

 

(1) Mr. Leonetti was not eligible to earn a bonus opportunity in fiscal 2017 due to his departure from the company in October 2016.

STI Performance Goals

The Compensation Committee selected adjusted EPS as the financial measure under the STI because it believed that adjusted EPS is an appropriate holistic metric for corporate-level executives in order to measure the level of the company’s overall short-term performance.

For fiscal 2017, the Compensation Committee provided that adjusted EPS was calculated as EPS under GAAP, adjusted to exclude certain material, non-recurring or unusual items that were unrelated to the day-to-day execution of our

 

 

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business, including accounting charges relating to certain acquisitions and the other items noted below, and that we believe are not indicative of the underlying performance of the business. The adjusted EPS measure is a financial measure that is not based on GAAP. We believe that excluding certain items for purposes of the adjusted EPS measure used in our STI program provides a better understanding of the magnitude of the change in earnings between performance periods due to the underlying performance of the business. The footnotes to the STI achievement and payout tables that follow provide a reconciliation of the GAAP measure of EPS to the adjusted EPS measure used in determining the STI bonuses.

In setting the STI target for the first half of fiscal 2017, the Compensation Committee considered factors relating to the recent closing of the SanDisk acquisition, including the additional interest expense related to new debt issued in connection with the acquisition and the increase in our common shares outstanding. The Compensation Committee believed that these factors would, and they did, affect our adjusted EPS. For these reasons, the Compensation Committee believed it was appropriate to set the adjusted EPS target for STI for the first half of fiscal 2017 at $2.04, which was lower than the target for the prior year.

STI Achievement and Payout – First Half of Fiscal 2017

The Compensation Committee noted that the company’s adjusted EPS for the first half of fiscal 2017 was $3.14, compared to the target of $2.04, resulting in an achievement rate of 154% and a capped payout rate of 200% for Messrs. Milligan, Cordano, Long and Ray after applying the leverage curve.

The following table reflects the target goals under the STI for the first half of fiscal 2017, the achievement rates of the goals, the resulting bonus payout rates and the actual bonus payments to each named executive officer for the first half of fiscal 2017.

First Half of Fiscal 2017 STI Bonus Awards

 

Name(1)   Metric    

Target    

Goal    

  Achievement(2)     

Plan    

Achievement    

Rate    

 

Bonus    

Payout    

Rate    

 

Target  

STI  

Bonus %  

  Target
Semi-
Annual
STI Bonus
    Actual STI
Bonus
Amount
 

 

Stephen D. Milligan

 

   

 

Adj. EPS

 

 

 

  $2.04

 

  $3.14

 

  154%

 

  200%

 

  150%

 

  $

 

862,500

 

 

 

  $

 

1,725,000

 

 

 

 

Michael D. Cordano

 

   

 

Adj. EPS

 

 

 

  $2.04

 

  $3.14

 

  154%

 

  200%

 

  125%

 

  $

 

500,000

 

 

 

  $

 

1,000,000

 

 

 

 

Mark P. Long

 

   

 

Adj. EPS

 

 

 

  $2.04

 

  $3.14

 

  154%

 

  200%

 

  110%

 

  $

 

343,750

 

 

 

  $

 

687,500

 

 

 

 

Michael C. Ray

 

   

 

Adj. EPS

 

 

 

  $2.04

 

  $3.14

 

  154%

 

  200%

 

    85%

 

  $

 

233,750

 

 

 

  $

 

467,500

 

 

 

 

(1) Mr. Fink, who was hired in January 2017, was not eligible to participate in the STI for the first half of fiscal 2017. Mr. Leonetti was not eligible to earn a bonus opportunity under the STI in fiscal 2017 due to his departure from the company in October 2016.

 

(2) Net income under GAAP for the first half of fiscal 2017 was a loss of $131 million, or $0.46 per share, which included a net $1.048 billion in material or unusual charges that we believe are not indicative of the underlying performance of the business. These charges consisted of $519 million related to amortization of acquired intangible assets; $113 million for employee termination, asset impairment and other charges; $86 million for charges related to cost-savings initiatives; $33 million of acquisition-related charges; $267 million of debt extinguishment costs; $6 million of convertible debt activity; $14 million of other charges; and $10 million of income tax adjustments. As a result, the adjusted EPS for the first half of fiscal 2017 used in determining the STI bonuses was $3.14.

STI Achievement and Payout – Second Half of Fiscal 2017

For the second half of fiscal 2017, the Compensation Committee established an adjusted EPS target of $4.00. The company’s adjusted EPS for the second half of fiscal 2017 was $5.32, compared to the target of $4.00, resulting in an achievement rate of 133% and payout rate of 200% for our named executive officers after applying the leverage curve.

However, the Compensation Committee used downward discretion to reduce the payout to 140% of the target level for our named executive officers. The Compensation Committee noted that while our named executive officers achieved strong financial performance in the second half of fiscal 2017, downward discretion would be appropriate based on a number of factors, including the named executive officers’ total direct compensation in fiscal 2017 and various market factors.

 

 

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The following table reflects the target goals under the STI for the second half of fiscal 2017, the achievement rates of the goals, the resulting bonus payout rates and the actual bonus payments to each named executive officer for the second half of fiscal 2017.

Second Half of Fiscal 2017 STI Bonus Awards

 

Name   Metric    

Target

Goal

  Achievement(1)    

Plan

Achievement

Rate

   

Final

Bonus

    Payout    

Rate(2)

   

    Target    

STI

Bonus %

    Target
Semi-
Annual
    STI Bonus    
  Actual STI
Bonus
Amount
 

 

Stephen D. Milligan

 

   

 

Adj. EPS

 

 

 

  $4.00    

 

  $5.32    

 

   

 

133%    

 

 

 

   

 

140%    

 

 

 

   

 

150%    

 

 

 

  $862,500

 

  $

 

1,207,500

 

 

 

 

Michael D. Cordano

 

   

 

Adj. EPS

 

 

 

  $4.00    

 

  $5.32    

 

   

 

133%    

 

 

 

   

 

140%    

 

 

 

   

 

125%    

 

 

 

  $500,000

 

  $

 

700,000

 

 

 

 

Mark P. Long

 

   

 

Adj. EPS

 

 

 

  $4.00    

 

  $5.32    

 

   

 

133%    

 

 

 

   

 

140%    

 

 

 

   

 

110%    

 

 

 

  $343,750

 

  $

 

481,250

 

 

 

 

Martin R. Fink

 

   

 

Adj. EPS

 

 

 

  $4.00    

 

  $5.32    

 

   

 

133%    

 

 

 

   

 

140%    

 

 

 

   

 

110%    

 

 

 

  $289,315(3)

 

  $

 

405,041

 

 

 

 

Michael C. Ray

 

   

 

Adj. EPS

 

 

 

  $4.00    

 

  $5.32    

 

   

 

133%    

 

 

 

   

 

140%    

 

 

 

   

 

85%    

 

 

 

  $233,750

 

  $

 

327,250

 

 

 

 

(1) Adjusted EPS is based on net income under GAAP for the second half of fiscal 2017. Net income based on GAAP for the second half of fiscal 2017 was $528 million, or $1.76 per share, which included a net $1.069 billion in material or unusual charges that we believe are not indicative of our core operating results or the underlying performance of our business. These charges consisted of $643 million in charges related to the amortization of acquired intangible assets; $187 million of stock-based compensation; $119 million for employee termination, asset impairment and other charges; $68 million for charges related to cost saving initiatives; $2 million for acquisition-related charges; $7 million in debt extinguishment costs; and $53 million in other charges; partially offset by $10 million in income tax adjustments. As a result, the adjusted EPS for the second half of fiscal 2017 was $5.32.

 

(2) Presented after taking into account the Compensation Committee’s use of downward discretion, as discussed above. The formulaic achievement rate under STI for the second half of fiscal 2017, prior to the downward adjustment, was 200%.

 

(3) For Mr. Fink, reflects a target bonus amount prorated to his hire date of January 23, 2017.

Signing Bonus

In connection with Mr. Fink’s commencement of employment as our Executive Vice President and Chief Technology Officer, he received a signing bonus in the amount of $400,000, subject to repayment if he voluntarily terminates employment or we terminate his employment for cause within two years following January 23, 2017. The terms of Mr. Fink’s signing bonus were negotiated with Mr. Fink to induce him to accept our offer of employment.

Long-Term Incentives

Fiscal 2017 LTI Grants

Fiscal 2017-2018 LTI PSU Awards

The annual LTI PSU awards for fiscal 2017-2018 vest based on the achievement of pre-established corporate-level cumulative revenue, adjusted EPS and adjusted cash flow from operations goals, discussed in more detail below.

 

 

LOGO

 

   

Emphasis on Performance-Based Awards. For Messrs. Milligan, Cordano and Long, the Compensation Committee determined it would be appropriate to weight the mix more heavily toward PSUs to align their focus with our long-term corporate financial objectives and execution strategy, given their roles and overall responsibilities. The

 

 

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  Compensation Committee determined it would be appropriate to include PSUs in the award mix for Mr. Ray but place less emphasis on PSUs in his award mix given the corporate-level goals applicable to the PSUs in light of his role and area of responsibility. Mr. Fink received RSUs only due to the fact that he commenced employment with us following the start of the performance period for the annual LTI PSUs.

CEO PSU Award. In lieu of RSUs, Mr. Milligan was granted a PSU award comprising 25% of his overall annual LTI award. This PSU award (the “CEO PSU Award”) has similar terms as the annual LTI PSU award, but with a payout range from 0% to 300% and a relative TSR modifier described below. The Compensation Committee determined it was important to place greater emphasis on PSUs granted to Mr. Milligan during this critical time to incentivize Mr. Milligan to execute on our transformation strategy and drive strong financial growth during the fiscal 2017-2018 period. The 300% payout level for the CEO PSU Award can only occur if the company achieves both the maximum financial performance under the plan and the company is in the top quartile in terms of TSR relative to the peer group.

 

    Performance Metrics, Performance Period and Payout Range. The actual number of shares that may become earned and payable under the annual LTI PSU awards granted to our named executive officers will generally range from 0% to 200% (0% to 300% for the CEO PSU Award) of the target number of units based on achievement of the specified performance goals over the cumulative two-year period covering fiscal 2017 and 2018:

 

    Revenue (40%)

 

    Adjusted EPS (40%)

 

    Adjusted cash flow from operations (20%)

The Compensation Committee determined that revenue and adjusted EPS are appropriate performance metrics for the 2017-2018 LTI PSUs because they help measure our earnings performance and long-term stockholder value, which further aligns the compensation of our named executive officers to the interests of our stockholders. In addition, the Compensation Committee determined that adjusted cash flow from operations is an appropriate performance metric during this important period in our company’s multi-year transformation because it is representative of cash that is available for strategic opportunities including, among others, investing in our business, making strategic acquisitions, strengthening the balance sheet, servicing debt and paying dividends.

The Compensation Committee determined that a two-year performance period for our annual LTI PSU awards is appropriate because it balances our focus on multi-year financial performance with the need to establish appropriate performance goals in the face of a rapidly changing industry. In addition, utilizing a two-year performance period allows us to set more aggressive goals than might otherwise be the case if goals are probability adjusted for industry uncertainties over a performance period exceeding two years.

 

    TSR Hurdle and Modifier. The payout of the annual LTI PSUs will be capped at the target number of PSUs if our TSR is below the 50th percentile of our peer group. If our TSR relative to our peer group is at or above the 50th percentile but below the 60th percentile, the annual LTI PSU payout will be capped at 150%. If our TSR relative to our peer group is at or above the 60th percentile, the annual LTI PSU payout will be determined based on the achievement of the financial metrics alone. The Compensation Committee determined it would be appropriate to include the two relative TSR metric thresholds to help further align executives’ interests with those of our stockholders.

The 50th percentile TSR threshold ensures that payouts based on the operating metrics can only exceed the target level if our relative TSR over the same time period is at least at the median of the TSR of our peer group. The 60th percentile TSR threshold ensures that we pay out at the higher end of the spectrum based on the operating metrics only if our relative TSR over the same time period is also at the higher end of the peer group.

CEO PSU Award. The CEO PSU Award also contains a TSR modifier, which caps the payout at 200% of the target level if relative TSR is above the 60th percentile but below the 75th percentile. In order to achieve a payout above 200%, performance based on the operating metrics must be at or above the 150% payout achievement level and relative TSR must be at least the 75th percentile, in which case, a 50% modifier is applied to increase the operating performance achievement rate, subject to an overall cap of 300% payout for the entire award.

 

 

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The TSR modifier ensures that we pay out at the higher end of the range based on excellent operational achievement only if our relative TSR over the same period is at the highest end of the peer group.

The following example illustrates the TSR modifier in the CEO PSU Award:

 

Overall

Achievement

Based on

Financial

Performance

Metrics

      g       

Relative TSR over
Performance

Period

      x        TSR Modifier  

 

    =    

   Final Payout

150%

      g        <75th percentile       x              =        150%

150%

      g        ³75th percentile       x        50%       =        225% (= 150% + (50% x 150%))

 

    TAM Adjustment Factor. The cumulative performance goals are generally subject to automatic upward or downward adjustment at the end of the performance period in a relative proportion by which the total available market, or TAM, for revenue during the period exceeds or falls short of the TAM forecasted by our Board of Directors at the time the goals are established.

The TAM adjustment factor is a pre-established modifier that is approved as part of the terms of the annual LTI PSU award at the time the performance goals are approved by the Compensation Committee. After approving the award terms, the Compensation Committee does not use discretion to determine whether or not the adjustment should be applied.

The TAM adjustment factor helps ensure that we are paying for performance relative to the market demand and opportunity available to us and achievement of the goals is not affected by swings in the available market based on revenue. For the fiscal 2017-2018 LTI PSUs, the Compensation Committee determined to base TAM on revenue rather than hard disk drive units to reflect the redirection of our business, from a primarily hard disk drive business to a business focused on multiple data storage solutions, including hard disk drives, SSDs, embedded and removable flash memory and storage-related systems. In addition, the Compensation Committee recognized that a measurement based on units sold was becoming less relevant due to the increasing capacity of our units.

Fiscal 2017 Integration PSU Grant to Mr. Long

In connection with Mr. Long’s appointment as both Chief Financial Officer and Chief Strategy Officer in fiscal 2017, the Compensation Committee approved the grant of a promotion-related Integration PSU award in order to bring the total value of Mr. Long’s Integration PSU award in line with the value granted to other senior executives in fiscal 2016 (which was 75% of the midpoint of their pre-established LTI grant guidelines, as described in our proxy statement for our 2016 annual meeting of stockholders). Mr. Long’s initial Integration PSU award comprised only 25% of his new LTI grant guideline midpoint.

Mr. Long’s fiscal 2017 Integration PSU award has terms and conditions that are generally similar to the Integration PSU awards granted to our other senior executives in fiscal 2016, except that any payout of Integration PSUs is (i) calculated based on the average of the sum of the approved payout rates for first performance period and second performance period, and (ii) subject to cliff vesting in March 2019, rather than vesting in equal installments in March 2018 and March 2019. The Compensation Committee determined it would be appropriate to provide for cliff vesting because Mr. Long’s award was granted after the start of the first performance period. For a description of the Integration PSU program, including performance metrics, performance periods and crediting, please see the section below entitled “Achievement of Milestones under Integration PSU Awards for First Performance Period,” as well as our proxy statement for our 2016 annual meeting of stockholders.

 

 

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Prior Year LTI Grants Credited or Vested in Fiscal 2017

 

Executive    Grant Date    Description

 

Fiscal 2016-2017 LTI PSUs

 

 

 

Stephen D. Milligan

Michael D. Cordano

Michael C. Ray

  

 

August 2015

  

 

Annual performance-based LTI PSUs for fiscal 2016-2017

 

Fiscal 2016 Strategic PSUs

 

 

  

 

Mark P. Long

  

 

September 2015

  

 

Transaction-related PSUs granted in lieu of fiscal year 2016 LTI PSU award to incentivize Mr. Long to lead the efforts for a transformational acquisition and pursue a joint venture with a strategic partner

 

Fiscal 2016 Integration PSUs

 

 

  

 

Michael D. Cordano

Mark P. Long

Michael C. Ray

  

 

March 2016

  

 

Integration-related PSUs linked to objective performance metrics and designed to incentivize executives to streamline the company and achieve synergies and goals relating to the acquisition of HGST

Payout under Fiscal 2016-2017 LTI PSU Awards

In August 2015, the Compensation Committee approved the grant of annual LTI PSU awards to Messrs. Milligan, Cordano and Ray with a performance period comprised of fiscal 2016 and fiscal 2017. These PSU awards were granted with a pre-established cumulative revenue goal of $28.032 billion and cumulative operating income goal of $3.837 billion over fiscal 2016 and 2017, each goal with an equal weighting of 50%.

As described in our proxy statement for our 2016 annual meeting of stockholders, the fiscal 2016-2017 PSU award represents the right to receive a target number of shares of our common stock based on our cumulative revenue and operating income for the performance period against a pre-established milestone. Between 0% and 200% of the target number of units covered by this award could have been earned based on the level of achievement of the milestones. No amount could be paid in excess of 150% of target unless our TSR over the performance period is equal to or greater than the 60th percentile of our peer group.

 

 

Revenue

 

 

Performance Level

 

  

 

Achievement Rate

 

  

 

Payout Rate

 

 

Below Threshold

 

  

<85%

 

  

0%

 

 

Threshold

 

  

85%

 

  

50%

 

 

Target

 

  

100%

 

  

100%

 

 

Maximum

 

  

³119%

 

  

200%

(capped)

 

 

 

Operating Income

 

 

Performance Level

 

  

 

Achievement Rate

 

  

 

Payout Rate

 

 

Below Threshold

 

  

<85%

 

  

0%

 

 

Threshold

 

  

85%

 

  

50%

 

 

Target

 

  

100%

 

  

100%

 

 

Maximum

 

  

³126%

 

  

200%

(capped)

 

The performance goals are subject to automatic upward or downward adjustment at the end of the performance period in the same proportion by which the TAM for hard disk drives during the period exceeds or falls short of the TAM forecast included in the two-year plan approved by our Board of Directors at the time the goals are established. The actual TAM for hard disk drives for the performance period was less than the TAM forecasted when the PSU award goals were

 

 

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established by a difference of 7.7%. Accordingly, in fiscal 2017, the revenue and operating income goals were linearly adjusted by applying the TAM adjustment factor, causing the target cumulative revenue goal to be adjusted from $28.032 billion to $25.885 billion, and the target cumulative operating income goal to be adjusted from $3.837 billion to $3.543 billion.

After excluding revenue and operating income relating to SanDisk and expenses relating to extraordinary, unusual or non-recurring items and unforeseen material expenses, primarily relating to the impact of acquisitions or charges for restructuring or cost-saving initiatives, in accordance with the terms and conditions of the 2004 Performance Incentive Plan and the PSU award agreements governing the awards, the actual performance over fiscal 2016 and 2017 resulted in cumulative revenue of $23.633 billion and adjusted cumulative operating income of $2.724 billion, or an achievement rate against the target goals of 91% and 77%, respectively, which would have resulted in a payout rate of 71% for revenue and 0% for operating income, with each payout rate weighted equally resulting in an overall payout rate of 35%.

However, as described in detail below, the Compensation Committee evaluated the results in the context of our broader business performance and other factors and determined it would be appropriate to award additional shares in connection with the fiscal 2016-2017 awards to produce an aggregate payout rate of 90% of the target level. The Compensation Committee made this decision to better align the fiscal 2016-2017 PSU payout with the actual performance of our business. The financial measures and targets set at the time these PSUs were granted did not account for the subsequent significant evolution of our business. At the time the fiscal 2016-2017 PSU awards were granted, certain changes in our business were not anticipated in goal setting; however, the performance achieved since that time has produced strong returns for our stockholders. The Compensation Committee considered the following key factors in its use of discretion:

 

    At the time the original financial targets were established, prior to the SanDisk acquisition, the targets largely related to the expansion of the hard disk drive business.

 

    Following the SanDisk acquisition and the substantial lifting of the restrictions imposed by China’s Ministry of Foreign Commerce relating to our HGST acquisition, our business strategy had fundamentally shifted, with greater emphasis directed toward growing a business focused on multiple data storage solutions, including SSDs, flash memory and hard disk drives, rather than primarily hard disk drives.

 

    The original TAM adjustment factor based on hard disk drive units had become a less accurate adjustment factor for the performance period due to the redirection of our business, as well as the increasing capacity of our hard disk drive units, making the actual number of units sold less relevant.

In reviewing these factors, the Compensation Committee determined it would be appropriate to measure the fiscal 2016-2017 PSUs as if they had been adjusted based on revenue TAM for both flash and hard disk drives, similar to the methodology approved for the fiscal 2017-2018 PSUs, which more closely aligned to the direction of the business following the SanDisk acquisition in May 2016. Accordingly, applying this revenue TAM methodology for the fiscal 2016-2017 performance period, the cumulative revenue achievement would have been adjusted from 91% to 93%, and the cumulative operating income achievement would have been adjusted from 77% to 102%. This would have resulted in a payout rate for revenue and operating income of 75% and 105%, respectively, with an overall payout rate of 90%. Given the significant achievement by the executive leadership team in growing revenue and achieving significant returns for our stockholders over fiscal 2017, the Compensation Committee approved awards of additional shares so that, when considered together with the scheduled payout rate of 35% under the fiscal 2016-2017 PSU awards, it would reflect an aggregate payout at 90% of the target number of shares.

 

 

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The payout approved by the Compensation Committee is reflected in the following table.

Fiscal 2016-2017 PSU Payout

 

Cumulative Goals (Adj. by TAM)
(in billions)
 
     Threshold
(50%)
     Target
(100%)
     Maximum
(200%)
     Actual
Performance
     Achievement
Rate
     Final
Payout
Rate(2)
 

 

Revenue

 

  

 

 

 

 

$21.024

 

 

 

 

  

 

$

 

 

25.885

 

 

 

 

  

 

 

 

 

$33.336

 

 

 

 

  

 

 

 

 

$23.633

 

 

 

 

  

 

 

 

 

91%

 

 

 

 

  

 

 

 

 

75

 

 

 

 

Operating Income(1)

 

  

 

 

 

 

$  1.919

 

 

 

 

  

 

$

 

 

3.543

 

 

 

 

  

 

 

 

 

$  4.834

 

 

 

 

  

 

 

 

 

$  2.724

 

 

 

 

  

 

 

 

 

77%

 

 

 

 

  

 

 

 

 

105

 

 

 

 

Overall Payout:

 

                 

 

 

 

 

90

 

 

 

 

(1) Cumulative operating income under GAAP for fiscal 2016 and fiscal 2017 (excluding the operating income of SanDisk, which was acquired during fiscal 2016) was $2.42 billion. Cumulative operating income for purposes of the fiscal 2016-2017 PSU payout excludes the results of SanDisk and the related costs of the acquisition aggregating $676 million, as well as certain material or unusual items that we believe are not indicative of the underlying performance of the business, in accordance with the pre-established terms of the awards, including the amortization of acquired intangible assets of $150 million, expenses for restructuring or productivity initiatives of $851 million, partially offset by other significant items of $21 million.
(2) Presented after taking into account the award of the additional shares, as discussed above. The additional shares awarded to produce an aggregate payout at 90% of the target will be included in our proxy statement filed in 2018 as fiscal 2018 compensation for our named executive officers because the decision to award such additional shares was made in fiscal 2018.

Achievement of Milestones under Strategic PSU Award Granted to Mr. Long

In fiscal 2016, the Compensation Committee granted a strategic PSU award to Mr. Long relative to his role and responsibilities as our Chief Strategy Officer. Among the critical and significant responsibilities Mr. Long was tasked with during this transformative and historical time for our company were (i) leading the efforts for a transformative acquisition (the “Transformational Transaction”), which culminated in the acquisition of SanDisk in May 2016, and (ii) pursuing a joint venture with a strategic partner (the “Strategic Joint Venture”), which culminated in the joint venture agreement with Unisplendour Corporation Limited (“Unis”). The Compensation Committee believed that, at the time they were established, the targets corresponding to a 100% payout were challenging yet achievable based on expectations regarding opportunities and contributions by Mr. Long, and that the maximum targets would be achievable only with extraordinary efforts. For a detailed description of Mr. Long’s strategic PSU award, including the performance period, performance metrics, vesting, crediting and payout leverage, please see our proxy statement for our 2016 annual meeting of stockholders.

The crediting and vesting of Mr. Long’s strategic PSUs is based in part upon milestones related to realizing the benefits of the Transformational Transaction and Strategic Joint Venture during the performance period. Following the end of the performance period, the Compensation Committee determines the number of PSUs to be credited to Mr. Long with respect to any Transformational Transaction and Strategic Joint Venture milestones achieved during the performance period.

Once the number of PSUs to be credited based on achievement of the performance goals is determined, the credited PSUs are subject to service-based vesting and vest in three installments as follows: (i) 40% of the credited PSUs will vest as of the last day of the fiscal year for which the Compensation Committee has determined that the applicable performance milestones have been achieved, (ii) 40% of the credited PSUs will vest on the first anniversary of the first vesting date, and (iii) 20% of the credited PSUs will vest on the second anniversary of the first vesting date. Mr. Long is entitled to receive dividend equivalents with respect to outstanding PSUs, which are subject to the same vesting, forfeiture and termination conditions applicable to the PSUs. The Compensation Committee determined it was appropriate to include an additional service-based vesting requirement to provide an extended retention incentive in order to ensure Mr. Long’s engagement in helping us to realize the benefits of the transactions.

As described in our 2016 proxy statement, in connection with Mr. Long’s appointment as both Chief Financial Officer and Chief Strategy Officer, certain tranches relating to the “Other Significant Revenue Acquisition” and “Equity Infusion” performance goals were forfeited and terminated and no shares were paid out under these performance goals or the related milestones.

 

 

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Board Approved Plan Milestones. The performance milestones related to Mr. Long’s strategic PSUs are largely focused on the achievement of strategic and financial objectives of the Transformational Transaction and Strategic Joint Venture, as measured by the business plan goals that were approved by our Board of Directors in fiscal 2017 following the consummation of the specific transactions (the “Board Approved Plan”), as further described below. The Compensation Committee placed a strong emphasis on the achievement of the Board Approved Plan for each transaction to encourage accountability by rewarding Mr. Long for the realization of the intended goals of the transaction following the consummation of each transaction, including executing an implementation strategy that aligns with the long-term vision, synergies and goals approved by our Board of Directors in connection with each transaction.

Achieving the Board Approved Plan milestones represented the heaviest weighting of the tranches relating to the Transformational Transaction and Strategic Joint Venture:

 

Performance Goals, Milestones and Weighting
Performance Goal    Target Award Value    Fiscal 2017 Milestone / Weighting

Transformational Transaction

   18,171 shares at target level    Achieve Board Approved Plan
          40% weighting of overall tranche

Strategic Joint Venture

   1,747 shares at target level    Achieve Board Approved Plan
          50% weighting of overall tranche

The actual number of shares that may become earned and payable under Mr. Long’s strategic PSU award generally range from 0% to 300% of the target number of shares based on the timing of the achievement of the specified milestone during the performance period, as set forth in the table below. The Compensation Committee determined it would be appropriate to tie the 0% to 300% performance range to the timing of the achievement of the specified milestones to motivate Mr. Long to pursue the transactions outlined in the performance goals in accordance with our strategic timeline and roadmap. The achievement of threshold performance results in a payout of 50% of the target level, while the achievement of maximum performance results in a payout of 300% of the target level. Performance below the threshold level for the milestone will not result in a payout of PSUs pursuant to that milestone. In the event achievement of a milestone lies between two levels based on the time the milestone is achieved, the number of shares to be credited will be interpolated proportionately between the two levels.

Transformational Transaction Milestone and Payout

For the Board Approved Plan for the Transformational Transaction, the Compensation Committee established a SanDisk revenue goal of $6.296 billion for fiscal 2017 and operating income synergy goals of $103 million measured based on the fiscal 2017 fourth quarter run-rate. The Compensation Committee determined that these goals appropriately measure the synergies and benefits to be realized by the SanDisk acquisition because they contribute to our long-term vision and execution strategy.

Based on the fiscal 2017 achievements set forth in the following table, the Compensation Committee approved a payout rate of 297% for the Board Approved Plan milestone of the Transformational Transaction, noting that performance exceeded the SanDisk revenue targets with a successful integration into the broader company portfolio. The Compensation Committee also noted that performance significantly exceeded synergy targets and was driven by strong execution.

 

Transformational Transaction Board Approved Plan (SanDisk Acquisition)  
    Threshold
(50%)
    Target
(100%)
    Maximum
(300%)
    Actual
Performance
    Payout
Rate
 

Revenue(1)

  $  5.037 billion     $  6.296 billion     $  7.555 billion     $  7.515 billion       294

Synergy (Operating Income Impact)

  $ 82.4 million     $ 103 million     $  123.6 million     $ 335 million       300

Overall Payout:

            297

 

(1) Excludes revenue relating to our legacy eSSD unit.

 

 

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Strategic Joint Venture Milestone and Payout

For the Board Approved Plan for the Strategic Joint Venture with Unis, the Compensation Committee established a joint venture revenue goal of $60 million and a net income (loss) goal of ($13.9) million for the three fiscal quarters ending with the June 2017 fiscal quarter. In establishing the goals, the Compensation Committee took into consideration that a joint venture for new technology in its early stages focuses on developing a product roadmap, raising capital and building infrastructure. As such, the Compensation Committee determined that these goals appropriately measure the establishment of a solid foundation for a joint venture in its first year.

Based on the achievements during the measurement period set forth in the following table, the Compensation Committee approved a payout rate of 150% for the Board Approved Plan milestone of the Strategic Joint Venture. The Compensation Committee noted that, despite a net loss for the first year of the joint venture, Mr. Long worked closely with the joint venture partner through unanticipated delays to establish the proper infrastructure for the joint venture and position it for future revenue growth.

 

Strategic Joint Venture Board Approved Plan (Unis Joint Venture)  
    Threshold
(50%)
    Target
(100%)
    Maximum
(300%)
    Actual
Performance
    Payout
Rate
 

Revenue

  $  48 million     $ 60 million     $  72 million     $  41 million       0

Net Income (Loss)

  $ (16.7) million     $ (13.9) million     $ (11.1) million     $ (4) million       300

Overall Payout:

            150

Achievement of Milestones under Integration PSU Awards for First Performance Period

Goal Setting and Program Design. In fiscal 2016, the Compensation Committee approved the grant of a one-time, broad-based, integration-focused LTI award, referred to herein as the Integration PSUs, for senior leaders and key employees of the company, given the significant integration efforts relating to HGST and the critical importance to the company of incentivizing these individuals during this transformative time for us to help streamline the company and achieve the synergies and goals relating to our acquisition of HGST in 2012. As part of this broad-based award, the Compensation Committee approved the grant of Integration PSUs in fiscal 2016 to Messrs. Cordano, Long and Ray. In addition, as described above, in connection with his appointment as both Chief Financial Officer and Chief Strategy Officer, the Compensation Committee approved an Integration PSU award for Mr. Long in fiscal 2017.

Integration PSUs are subject to the achievement of cost synergy targets over a fifteen-month period (October 2015 to December 2016) and twenty-seven month period (October 2015 to December 2017). The actual number of shares that may become earned and payable under the Integration PSUs will generally range from 0% to 300% of the target number of units based on achievement of the specified synergies performance goals over the fifteen-month and twenty-seven-month periods, with the threshold payout at 80% of the target level. Fifty percent of the target PSUs are based on the first performance period and scheduled to vest in March 2018, the second anniversary following the grant date, and 50% of the target PSUs are based on the second performance period and scheduled to vest in March 2019, the third anniversary following the grant date. The following illustration represents the performance periods and vesting periods of the Integration PSUs:

 

 

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The cost synergy milestones relate to operating expense reduction and cost savings targets to be achieved during the performance periods. The Compensation Committee determined that operating expense reduction and cost savings are

 

 

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appropriate performance metrics because they provide objective measures of our company’s ability to integrate HGST and realize the synergies of the HGST acquisition.

Integration PSU Achievement and Crediting – First Performance Period

For the first performance period goals, the Compensation Committee selected the reported synergies relating to operating expense and cost savings targets as follows:

 

  Fiscal 2017 December Quarter Annualized Run Rate Synergies  
Reported Synergies    Payout         
<$325M    0%         
$325M    80%         
$400M    100%         
$500M    200%         
³$600M    300%         

For the first performance period (October 2015 – December 2016), having achieved at least $600 million in reported synergies, the Compensation Committee approved the crediting of the first tranche at 300%, subject to service-based vesting through March 2018. No shares will be payable if a minimum cumulative synergies threshold for the entire performance period is not achieved. In addition, the Integration PSUs are subject to a pre-established management by objective (“MBO”) modifier relating to employee engagement, which could cause the numbers of shares that may become earned and payable to increase or decrease by 10%, provided, in no event will the shares payable exceed 300% of the target number of units.

Executive Departures

Mr. Leonetti ceased serving as our Chief Financial Officer, effective as of September 1, 2016, and terminated employment with us on October 1, 2016. Mr. Leonetti received Tier I severance benefits under our Executive Severance Plan, as set forth in the Separation Agreement and General Release we entered into with Mr. Leonetti (the “Separation Agreement”) described herein. Please see the section entitled “Executive Compensation Tables and Narratives — Potential Payments Upon Termination or Change in Control” for additional details relating to payments under his Separation Agreement.

In addition, Mr. Leonetti received a transition bonus in the amount of $350,000. The Compensation Committee determined it would be appropriate to pay the transition bonus to Mr. Leonetti in order to retain Mr. Leonetti through a smooth transition period as Mr. Long prepared to assume the role of both Chief Financial Officer and Chief Strategy Officer.

OTHER FEATURES OF OUR EXECUTIVE COMPENSATION PROGRAM

In addition to direct compensation, we also provide executives with relatively modest perquisites and certain other benefits, including participation in certain post-employment compensation arrangements, which are described in more detail below.

Perquisites

We provide our executive officers with modest perquisites, consisting principally of a $5,000 annual allowance for financial planning services (net of taxes). In addition, executives are entitled to various other benefits that are available to all employees generally, including health and welfare benefits and participation in our 2005 Employee Stock Purchase Plan, a stockholder-approved plan that is intended to be tax-qualified and which allows employees to purchase a limited number of shares of our common stock at a discount.

We did not provide any tax gross-up payments to our executive officers, except as to (i) the modest financial planning services in accordance with the terms of the program, to the extent permitted by applicable tax law and to the extent

 

 

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these benefits are taxable to the participant, and (ii) a modest tax gross-up payment to Mr. Milligan in connection with a payment made to him in fiscal 2017 that was inadvertently delayed due to a company error and not due to any action taken by him, resulting in additional income tax to Mr. Milligan under Section 409A of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). Participation in the financial planning services and relocation benefit programs is not limited to our executive officers.

Post-Employment Compensation

Retirement Benefits. We provide retirement benefits to our executive officers and other eligible employees under the terms of our 401(k) Plan. Eligible employees may contribute up to 30% of their annual cash compensation up to a maximum amount allowed by the Internal Revenue Code, and are also eligible for matching contributions, which vest over a two-year service period. Our executive officers participate in the 401(k) Plan on substantially the same terms as our other participating employees. The 401(k) Plan and our matching contributions are designed to assist us in achieving our compensation objectives of attracting and retaining talented individuals and ensuring that our compensation programs are competitive and equitable. We do not maintain any defined benefit supplemental retirement plans for our executive officers.

Deferred Compensation Opportunities. Our executives and certain other key employees who are subject to U.S. federal income taxes are eligible to participate in our Deferred Compensation Plan. Participants in the Deferred Compensation Plan can elect to defer certain compensation without regard to the tax code limitations applicable to tax-qualified plans. We did not make any company matching or discretionary contributions to the plan on behalf of participants in fiscal 2017. The Deferred Compensation Plan is intended to promote retention by providing employees with an opportunity to save for retirement in a tax-efficient manner. Please see the “Fiscal 2017 Non-Qualified Deferred Compensation Table” and related narrative section entitled “Executive Compensation Tables and Narratives — Non- Qualified Deferred Compensation Plan” for a more detailed description of our Deferred Compensation Plan and the deferred compensation amounts that our executives have deferred under the plan.

Severance and Change in Control Benefits. Our executive officers are eligible to receive certain severance and change in control benefits under various severance plans or agreements with us. We only provide full acceleration of equity awards held by our executive officers in connection with a change in control in the event of a qualifying termination of employment (not merely because the change in control occurred) or in certain circumstances where the award is to terminate in connection with the change in control.

Our philosophy is that, outside of a change in control context, severance protections are only appropriate in the event an executive is involuntarily terminated by us without “cause.” In such circumstances, we provide severance benefits to our executive officers under our Executive Severance Plan. Severance benefits in these circumstances generally consist of two years’ base salary, a pro-rata target bonus for the bonus cycle in which the termination occurs, six months’ accelerated vesting of time-based equity awards, vesting of any previously credited performance-based awards based on attained achievement, and certain continued health and welfare benefits.

We believe that the occurrence or potential occurrence of a change in control transaction will create uncertainty regarding the continued employment of our executive officers. This uncertainty results from the fact that many change in control transactions result in significant organizational changes, particularly at the senior executive level. In order to encourage executives to remain employed with us during an important time when their prospects for continued employment following the transaction are often uncertain, we provide our executives with additional severance protections under our Change of Control Severance Plan. We also provide severance protections under the plan to help ensure that executives can objectively evaluate change in control transactions that may be in the best interests of stockholders despite the potential negative consequences such transactions may have on them personally. Under the Change of Control Severance Plan, all of our executives are eligible to receive severance benefits if the executive is terminated by us without “cause” or if the executive voluntarily terminates his employment for “good reason” within one year after a “change in control” event occurs or prior to and in connection with, or in anticipation of, a change in control transaction. In the context of a change in control, we believe that severance is appropriate if an executive voluntarily terminates employment with us for a “good reason” because in these circumstances we believe that a voluntary termination for good reason is essentially equivalent to an involuntary termination by us without cause. “Good reason”

 

 

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generally includes certain materially adverse changes in responsibilities, compensation, benefits or location of work place. In such circumstances, we provide severance benefits to our named executive officers under our Change of Control Severance Plan generally consisting of an amount equal to two times the sum of the executive’s annual base salary and target bonus, accelerated vesting of equity awards and certain continued health and welfare benefits.

We believe that the severance benefits provided to our executive officers under the Executive Severance Plan and the Change of Control Severance Plan are appropriate in light of severance protections available to executives at our peer group companies and are an important component of each executive’s overall compensation as they help us to attract and retain our key executives who could have other job alternatives that may appear to them to be more attractive absent these protections. Our severance arrangements do not include tax gross-up provisions.

Executive officers are eligible for double trigger accelerated vesting of the equity awards only if there is both (1) a change in control event, and (2) the awards are to be terminated in connection with the change in control event or, within one year after the change in control event, the officer’s employment is terminated by the company without cause or by the officer for good reason. We believe these provisions are appropriate so that, in these situations, executives will remain focused on our best interests and the best interests of our stockholders despite the fact that equity awards could be terminated and the future terms of executives’ employment are often uncertain in change in control circumstances.

Please see the section entitled “Executive Compensation Tables and Narratives — Potential Payments Upon Termination or Change in Control” for a description and quantification of the potential payments that may be made to the executive officers in connection with their termination of employment or a change in control.

OTHER EXECUTIVE COMPENSATION PROGRAM POLICIES

Employment Agreement

The Compensation Committee does not have an established policy for entering into employment agreements with executive officers. Generally, absent other factors, the Compensation Committee’s intent is to retain the flexibility to review and adjust compensation to our executive officers on at least an annual basis. In certain circumstances, however, we have entered into employment agreements with our executive officers where we determined that the retention of the executive during the term of the agreement was critical to our future success. In these cases, we may agree to fix some or all of the executive’s compensation for the term of the agreement. The Compensation Committee determined that the employment agreement with Mr. Milligan was appropriate and advisable in order to help maintain consistent executive leadership following the acquisition of HGST.

In connection with Mr. Milligan’s appointment as our President and Chief Executive Officer effective as of January 2013, we entered into an amended and restated employment agreement with Mr. Milligan in September 2012, which has a five-year term. Mr. Milligan’s employment continues under the employment agreement through January 2, 2018. Under Mr. Milligan’s employment agreement, he is entitled to an annual base salary of $1 million (as may be increased from time to time), and to an annual target bonus under the STI equal to 150% of his base salary. Mr. Milligan’s agreement does not contain any severance protection (although he participates in our severance plans applicable to all executive officers), and it does not include any tax gross-up provisions.

Compensation Recovery Policy

Our Board of Directors adopted by resolution a compensation recovery policy whereby in the event of a restatement of the company’s audited financial statements involving misconduct by an executive officer, a committee of our Board of Directors will consider whether such officer engaged in intentional financial accounting misconduct such that the officer should disgorge any net option exercise profits or cash bonuses attributable to such misconduct.

Equity Grant and Ownership Guidelines and Policies

Equity Award Grant Policy. We recognize that the granting of equity awards presents specific accounting, tax and legal issues. In accordance with the equity award grant policy adopted by our Board of Directors, all equity awards to our

 

 

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executives and other employees will be approved and granted only by the Compensation Committee at telephonic or in-person meetings that are scheduled in advance and that occur outside of our established blackout periods. The authority to grant equity awards will not be delegated to any other committee, subcommittee or individual and will not occur by unanimous written consent. It is also our intent that all stock option grants will have an exercise price per share equal to the closing market price of a share of our common stock on the grant date.

Executive Stock Ownership Guidelines. To help achieve our compensation objective of linking the interests of our stockholders with those of our executive officers, we have established executive stock ownership guidelines covering our senior executives, including our named executive officers. The guidelines provide that each executive achieve ownership of a number of “qualifying shares” with a market value equal to the specified multiple of the executive’s base salary (in effect upon the later of February 6, 2008 or the date he or she first becomes subject to the guidelines) shown below.

 

Position

   Multiple  

Chief Executive Officer

     5 x Salary  

President and Division Presidents

     3 x Salary  

Executive Vice Presidents

     2 x Salary  

Senior Vice Presidents

     1 x Salary  

Each executive must achieve ownership of the required market value of shares before February 6, 2013 (or, if later, within three years of becoming subject to the guidelines). Thereafter, the executive must maintain ownership of at least the number of shares that were necessary to meet the executive’s required market value of ownership on the date the requirement was first achieved (subject to certain adjustments in the event of a change in base salary or position). Ownership that counts toward the guidelines includes common stock, RSUs, PSUs, restricted stock, deferred stock units and common stock beneficially owned by the executive by virtue of being held in a trust, by a spouse or by the executive’s minor children. Shares the executive has a right to acquire through the exercise of stock options (whether or not vested) are not counted toward the stock ownership requirement. All of our current executive officers subject to the guidelines have met their required ownership level as of the date of this Proxy Statement.

Internal Revenue Code Section 162(m)

Section 162(m) of the Internal Revenue Code (“Section 162(m)”) generally disallows a tax deduction to public companies for compensation in excess of $1 million paid to a company’s chief executive officer and certain other highly compensated executive officers unless certain tests are met. It is our current intention that, so long as it is consistent with our overall compensation objectives and philosophy, executive compensation generally will be structured in a manner intended to be deductible for federal income tax purposes to the extent reasonably possible. However, there can be no assurance that compensation intended to qualify for deductibility under Section 162(m) will, in fact, be deductible and exempt from Section 162(m) limitations, and the Compensation Committee may award non-deductible compensation when it determines that these plans and policies are in our best interests and the best interests of our stockholders to help us to achieve our compensation objectives. The Compensation Committee will, however, continue to consider, among other relevant factors, the deductibility of compensation when it reviews our compensation plans and policies.

SUBSEQUENT EVENTS

Base Salary Level Adjustments

The Compensation Committee approved the following increases in the base salary levels of our named executive officers, effective for fiscal 2018:

 

    Mr. Milligan’s base salary level was increased from $1,150,000 to $1,250,000;

 

    Mr. Long’s base salary level was increased from $625,000 to $675,000; and

 

    Mr. Ray’s base salary level was increased from $550,000 to $575,000.

 

 

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The Compensation Committee determined to adjust the base salary levels of Messrs. Milligan, Long and Ray, consistent with our pay positioning strategy, the composite market data for their positions, and each executive’s expected individual future contributions to the company.

LTI Awards

The following LTI awards were granted to our named executive officers in fiscal 2018 as part of our annual LTI program:

 

    Mr. Milligan was granted (i) 83,167 PSUs at target level and (ii) 55,445 RSUs.

 

    Mr. Cordano was granted (i) 31,516 PSUs at target level and (ii) 31,516 RSUs.

 

    Mr. Long was granted (i) 21,667 PSUs at target level and (ii) 21,667 RSUs.

 

    Mr. Fink was granted (i) 12,256 PSUs at target level and (ii) 12,256 RSUs.

 

    Mr. Ray was granted (i) 11,745 PSUs at target level and (ii) 11,745 RSUs.

The terms of the new RSU awards were substantially the same as the terms of our RSU awards granted under our fiscal 2017 annual LTI program. The terms of the new PSU awards granted under the fiscal 2018 annual LTI program generally were similar to the terms of our LTI PSU awards for fiscal 2017-2018, except that (i) the performance metrics did not include adjusted cash flow from operations, (ii) we retained the payout cap for the awards if our TSR is below the median of our peer group for the performance period and added a TSR modifier that increases the payout (subject to the overall payout cap applicable to the awards) if our TSR is above the median of our peer group for the performance period; and (iii) the payout for all awards is capped at 200%. Our named executive officers were not granted stock options as part of our fiscal 2018 annual LTI program.

 

 

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REPORT OF THE COMPENSATION COMMITTEE

 

 

The following report of the Compensation Committee shall not be deemed soliciting material or to be filed with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, nor shall any information in this report be incorporated by reference into any past or future filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, except to the extent that we specifically request that it be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act or the Exchange Act.

REPORT OF THE COMPENSATION COMMITTEE

Dear Fellow Stockholders,

The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management, and based on that review and discussion, the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in the Proxy Statement for our 2017 Annual Meeting of Stockholders and incorporated by reference into our 2017 Annual Report on Form 10-K.

 

COMPENSATION COMMITTEE
Michael D. Lambert, Chairman

Kathleen A. Cote

Len J. Lauer

September 5, 2017

 

 

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

 

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

All of the Compensation Committee members whose names appear on the Compensation Committee Report above were members of the Compensation Committee during all of fiscal 2017. All members of the Compensation Committee during fiscal 2017 were independent directors and none of them were our employees or former employees or had any relationship with us requiring disclosure under rules of the SEC requiring disclosure of certain transactions with related persons. There are no Compensation Committee interlocks between us and other entities in which one of our executive officers served on the compensation committee (or equivalent body) or the board of directors of another entity whose executive officer(s) served on the Compensation Committee or our Board of Directors.

EXECUTIVE COMPENSATION TABLES AND NARRATIVES

FISCAL YEARS 2015—2017 SUMMARY COMPENSATION TABLE

The following table presents information regarding compensation earned for fiscal years 2015, 2016 and 2017 by our named executive officers. Unless otherwise noted, the footnote disclosures apply to fiscal 2017 compensation. For an explanation of the amounts included in the table for fiscal years 2015 or 2016, please see the footnote disclosures in our proxy statement for our annual meeting of stockholders for the corresponding fiscal year.

 

 

Name and

Principal Position

 

 

Fiscal
Year

   

 

Salary
($)

   

 

    Bonus    
($)

   

 

Stock
Awards
($)(1)(2)

   

 

Option
Awards
($)(1)

   

 

Non-Equity
Incentive Plan
Compensation
($)(3)

   

 

Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings ($)

   

 

All Other
Compensation
($)(4)

   

 

Total
($)

 

Stephen D. Milligan

Chief Executive Officer

    2017       1,150,000           10,142,049       3,620,556       2,932,500           62,519       17,907,624  
    2016       1,050,000           6,397,567       2,421,583       669,375           7,867       10,546,392  
    2015       1,050,000           6,761,354       2,392,740       1,496,250           7,819       11,708,163  

Michael D. Cordano

President and Chief

Operating Officer

    2017       800,000           5,049,909       1,958,940       1,700,000           8,458       9,517,307  
    2016       725,000           5,821,514       1,430,144       338,938           6,625       8,322,221  
    2015       700,000           2,454,072       1,861,030       916,300           6,625       5,938,027  

Mark P. Long

President WD Capital,

Chief Strategy Officer and

Chief Financial Officer(5)

    2017       625,000           5,319,476 (6)(7)      979,470       1,168,750           8,910       8,101,606  
    2016       500,000           3,473,956           180,625           7,592       4,162,173  
   

 

2015

 

 

 

    475,000           1,546,227       883,964       383,563           7,466       3,296,220  

Martin R. Fink

Executive Vice President

and Chief Technology

Officer

    2017       265,385       400,000 (8)      2,948,710           405,041           1,782       4,020,918  

Michael C. Ray

Executive Vice President,

Chief Legal Officer and

Secretary

    2017       550,000           2,264,934       961,982       794,750           11,313       4,582,979  
   

 

2016

 

 

 

    500,000           2,682,911       740,450       159,375           8,857       4,091,593  

Olivier C. Leonetti

Former Executive Vice

President and Chief

Financial Officer(5)

    2017       125,000                           1,511,194       1,636,194  
    2016       500,000           2,979,327 (7)      558,107       212,500           48,785       4,298,719  
    2015       408,219       150,000       1,527,516       930,499       359,809           71,274       3,447,317  

 

(1) The amounts shown reflect the aggregate grant date fair value of stock and option awards granted in the applicable fiscal year computed in accordance with ASC 718. These amounts were calculated based on the assumptions described in Note 12 in the Notes to Consolidated Financial Statements included in our Form 10-K for the applicable fiscal year, but exclude the impact of estimated forfeitures related to service-based vesting conditions. No named executive officers except Messrs. Leonetti and Long forfeited any stock or option awards during fiscal 2017. See the section entitled “Compensation Discussion and Analysis — Long-Term Incentives” for a description of the portions of Mr. Long’s strategic PSU award that were forfeited relating to 13,978 shares. Mr. Leonetti forfeited 35,747 shares relating to unvested RSU and PSU awards and 25,914 unvested and unexercised stock options following his departure from the company. See the “Fiscal 2017 Grants of Plan-Based Awards Table” below for information on awards made in fiscal 2017.

 

(2) The amounts shown for our named executive officers include the grant date fair value for PSU awards granted during fiscal 2017, as more fully described in the “Grants of Plan-Based Awards Table” below and the narrative that follows that table. Consistent with ASC 718, the grant date fair value was based on target performance and the closing price of our common stock on the grant date.

 

 

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  2017 PROXY STATEMENT

 

 


Table of Contents

EXECUTIVE COMPENSATION TABLES AND NARRATIVES

 

 

 

     With respect to the annual LTI PSU awards granted to Messrs. Milligan, Cordano, Long and Ray on August 3, 2016, because certain performance goals were approved by the Compensation Committee on September 27, 2016, these annual LTI PSU awards are treated as having a grant date value under applicable SEC and accounting rules as September 27, 2016 rather than August 3, 2016. The intended grant values of the annual LTI PSU awards for Messrs. Milligan, Cordano, Long and Ray were approximately $7.76 million, $2.8 million, $1.4 million, and $687,500, respectively, based on the closing price of our stock on the NASDAQ Stock Market on August 3, 2016 ($44.78), which was the stock price used to determine the number of shares underlying the annual LTI PSU awards, rather than the closing price of our stock on September 27, 2016 ($58.86).

 

     The following amounts represent the grant date fair value of PSU awards granted during fiscal 2017 assuming maximum performance under the awards: Mr. Milligan ($23,664,781), Mr. Cordano ($7,316,651), Mr. Long ($12,041,919), and Mr. Ray ($1,796,407).

 

     See also footnotes (5) and (6) below.

 

(3) The table below summarizes the non-equity incentive plan compensation earned by our named executive officers in fiscal 2017. These amounts are more fully described in the sections entitled “Compensation Discussion and Analysis” and “Description of Compensation Arrangements for Named Executive Officers.”

 

 

Name

  

 

STI - 1st Half FY17           

 

 

STI - 2nd Half FY17           

Stephen D. Milligan

   $1,725,000             $1,207,500          

Michael D. Cordano

   $1,000,000             $   700,000          

Mark P. Long

   $   687,500             $   481,250          

Martin R. Fink

   $             —             $   405,041          

Michael C. Ray

   $   467,500             $   327,250          

Olivier C. Leonetti

   $             —             $             —          

 

(4) The table below summarizes all other compensation to each of our named executive officers in fiscal 2017:

 

 

Name

  

 

Perquisites(a)

    

 

401(k) Plan
Company
Matching
Contributions

    

 

Other

 

Stephen D. Milligan

     $17,810 (b)       $7,231          $ 37,478 (c) 

Michael D. Cordano

          $8,100           

Mark P. Long

          $8,100           

Martin R. Fink

          $1,257           

Michael C. Ray

          $8,100           

Olivier C. Leonetti

          —        $ 1,504,671 (d) 

 

  (a) In accordance with applicable SEC rules, no amount is reflected if the aggregate amount of perquisites and other personal benefits paid to such individual during fiscal 2016 was less than $10,000.  

 

  (b) The amount shown reflects a taxable life insurance benefit of $1,242, reimbursed financial planning services of $10,456, including $5,000 for financial services rendered and a tax gross-up payment of $5,456 pursuant to our financial services reimbursement policy, personal security services valued at $5,495, and a taxable fringe benefit (gift item) of $617.  

 

  (c) The amount shown reflects a tax gross-up payment to Mr. Milligan in connection with a payment made to him that was inadvertently delayed by us, resulting in an additional income tax to Mr. Milligan under Section 409A of the Internal Revenue Code.  

 

  (d) As described in more detail in the section entitled “Compensation Discussion and Analysis,” in connection with his departure from the company effective as of October 1, 2016, Mr. Leonetti entered into the Separation Agreement, which provided for the following lump sum cash separation payments: cash severance ($1,126,027), continuation of benefits ($28,644) and transition bonus ($350,000), in each case, subject to standard withholding and authorized deductions.  

 

(5) Our Board of Directors appointed Mr. Long to the role of President WD Capital, Chief Strategy Officer and Chief Financial Officer, and Mr. Leonetti ceased being our Chief Financial Officer, effective September 1, 2016, and Mr. Leonetti departed from the company on October 1, 2016.

 

(6) The amount shown reflects the accounting grant date fair value with respect to the portion of Mr. Long’s strategic PSU award for which the performance goals were established during fiscal 2017, consistent with ASC 718. See the section entitled “Compensation Discussion and Analysis — Long-Term Incentives” for a description of the portions of Mr. Long’s strategic PSU award that were forfeited in fiscal 2017. Mr. Long’s original strategic PSU award covered a total of 69,889 shares at the target level, which the Compensation Committee approved on September 17, 2015. However, because certain performance goals were not established as of that date, Mr. Long’s strategic PSU award is treated as separate grants coinciding with the dates each milestone target was set with separate grant date values for each under applicable SEC and accounting rules. The performance metrics for the portion of the strategic PSU that relates to the achievement of the Board Approved Plan for the Transformational Transaction, covering 18,171 shares at the target level, were approved on November 3, 2016 with a grant date fair value of approximately $1,001,949 (based on our closing stock price on that date). The performance metrics for the portion of the strategic PSU that relates to the achievement of the Board Approved Plan for the Strategic Joint Venture, covering 1,747 shares at the target level, were approved on September 27, 2016 with a grant date fair value of approximately $102,828 (based on our closing stock price on that date).

 

(7) In connection with his termination of employment, Mr. Leonetti forfeited his Integration PSU award with a grant date fair value of $1,504,865. In connection with his appointment as both Chief Financial Officer and Chief Strategy Officer, Mr. Long forfeited 13,978 shares under his strategic PSU award with an aggregate grant date fair value of $789,862. See the section entitled “Compensation Discussion and Analysis — Long-Term Incentives” for a description of the portions of Mr. Long’s strategic PSU award that were forfeited.

 

 

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Table of Contents

EXECUTIVE COMPENSATION TABLES AND NARRATIVES

 

 

(8) In connection with Mr. Fink’s commencement of employment as our Executive Vice President and Chief Technology Officer, he received a signing bonus of $400,000, subject to repayment if he voluntarily terminates his employment or we terminate his employment for cause within two years following January  23, 2017.

FISCAL 2017 GRANTS OF PLAN-BASED AWARDS TABLE

The following table presents information regarding all grants of plan-based awards made to our named executive officers during our fiscal year ended June 30, 2017.

 

              Estimated Future Payouts
Under Non-Equity Incentive Plan
Awards
    Estimated Future Payouts
Under Equity Incentive Plan
Awards
                   

 

Name

 

 

Award

Type(1)

 

 

Grant
Date

   

 

Threshold
($)

   

 

Target
($)

   

 

Maximum
($)

   

 

Threshold
(#)

   

 

Target
(#)

   

 

Maximum
(#)

   

 

All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#)(2)

   

 

All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)(3)

   

 

Exercise
or Base
Price of
Option
Awards
($/Sh)

   

 

Grant
Date Fair
Value of
Stock
and
Option
Awards
($)(4)

 

Stephen D. Milligan

  STI — 1st Half FY17     7/2/16       431,250       862,500       1,725,000                              
  PSUs — FY17-18(5)     8/3/16                   57,436       114,872       229,744                   6,761,366  
  CEO PSU Award(6)     8/3/16                   28,718       57,436       172,308                 3,380,683  
  Options     8/3/16                                   264,170       44.78       3,620,556  
  STI — 2nd Half FY17     12/31/16       431,250       862,500       1,725,000                              

Michael D. Cordano

  STI — 1st Half FY17     7/2/16       250,000       500,000       1,000,000                              
  PSUs — FY17-18(5)     8/3/16                   31,076       62,153       124,306                   3,658,326  
  RSUs     8/3/16                               31,076               1,391,583  
  Options     8/3/16                                   142,932       44.78       1,958,940  
  STI — 2nd Half FY17     12/31/16       250,000       500,000       1,000,000                              

Mark P. Long

  STI — 1st Half FY17     7/2/16       171,875       343,750       687,500                              
  PSUs — FY17-18(5)     8/3/16                   15,538       31,076       62,152                         1,829,133  
  Integration(7)     8/3/16                   30,188       37,735       113,205                   1,689,773  
  RSUs     8/3/16                               15,538               695,792  
  Options     8/3/16                                   71,466       44.78       979,470  
 

Strategic PSUs —

Transformational

Transaction Milestone(8)

    11/3/16                   9,086       18,171       54,513                   1,001,949  
 

Strategic PSUs —

Strategic Joint

Venture Milestone(8)

    9/27/16                   874       1,747       5,241                   102,828  
  STI — 2nd Half FY17     12/31/16       171,875       343,750       687,500                              

Martin R. Fink

  RSUs     2/1/17                               37,250