DEF 14A 1 a-def14a_20170315.htm DEF 14A a-def14a_20170315.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934

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5301 Stevens Creek Boulevard
Santa Clara, California 95051
(408) 553-2424

Notice of Annual Meeting of Stockholders

 

TIME

:

8:00 a.m., Pacific Time, on Wednesday, March 15, 2017

 

 

 

PLACE

:

Corporate Headquarters

 

 

5301 Stevens Creek Boulevard, Building No. 5

 

 

Santa Clara, California 95051 USA

 

 

 

AGENDA

:

1.   To elect three directors to a three-year term. At the annual meeting, the Board of Directors intends to present the following nominees for election as directors:

 

 

  Heidi Kunz;

  Sue H. Rataj; and

  George A. Scangos, PhD

 

 

 

 

 

2.   To approve, on a non-binding advisory basis, the compensation of our named executive officers.

 

 

 

 

 

3.   An advisory vote on the frequency of the stockholder vote to approve the compensation of our named executive officers.

 

 

 

 

 

4.   To ratify the Audit and Finance Committee’s appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm.

 

 

 

5.   To consider such other business as may properly come before the annual meeting.

 

RECORD DATE

:

You are entitled to vote at the annual meeting and at any adjournments, postponements or continuations thereof if you were a stockholder at the close of business on Tuesday, January 17, 2017.

 

 

 

VOTING

:

For instructions on voting, please refer to the instructions on the Notice of Internet Availability of Proxy Materials you received in the mail or, if you received a hard copy of the Proxy Statement, on your enclosed proxy card.

 

 

 

ADMISSION

:

To be admitted to the annual meeting you must present proof of ownership of our stock as of the record date. This can be a brokerage statement or letter from a bank or broker indicating ownership on January 17, 2017, the Notice of Internet Availability of Proxy Materials, a proxy card, or legal proxy or voting instruction card provided by your broker, bank or nominee. You may also be asked to present a form of photo identification such as a driver’s license or passport. The annual meeting will begin promptly at 8:00 a.m. Limited seating is available on a first come, first served basis.

 

 

 

WEBCAST

:

If you are unable to attend the annual meeting in person, you may listen through the Internet or by telephone. To listen to the live webcast, log on at www.investor.agilent.com and select the link for the webcast. To listen by telephone, please call (877) 312-5529 (international callers should dial (253) 237-1147).  The meeting identification number is 23657112. The webcast will begin at 8:00 a.m. and will remain on the company’s website for one year. You cannot record your vote or ask questions on this website or at this phone number.

 

 

By Order of the Board of Directors

 

 

MICHAEL TANG

 

Senior Vice President, General Counsel and Secretary

 

 

This Proxy Statement and the accompanying proxy card are being sent or made available
on or about February 2, 2017.

 


SUMMARY INFORMATION

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement contains forward-looking statements as defined in the Securities Exchange Act of 1934 and is subject to the safe harbors created therein. The forward-looking statements contained herein are generally identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on the beliefs and assumptions of our management and on currently available information. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our annual report on Form 10-K for the fiscal year ended October 31, 2016.  We undertake no responsibility to publicly update or revise any forward-looking statement.

PROXY SUMMARY

The following is a summary which highlights information contained elsewhere in this Proxy Statement. This summary does not contain all of the information you should consider, and you are urged to read the entire Proxy Statement carefully before voting.

Voting Matters and Vote Recommendations

We currently expect to consider four items of business at the Annual Meeting. The following table lists those items of business and our Board’s vote recommendation.

 

 

PROPOSAL

BOARD RECOMMENDATION

REASONS FOR RECOMMENDATION

MORE INFORMATION

(1)

Election of three directors to a three-year term

FOR

The Board and the Nominating/Corporate Governance Committee believe our nominees possess the skills, experience and qualifications to effectively monitor performance, provide oversight and support management’s execution of our long-term strategy.

Page 5

(2)

Advisory vote to approve the compensation of our named executive officers

FOR

Our executive compensation program incorporates a number of compensation governance best practices and reflects our commitment to pay for performance.

Page 51

(3)

Advisory vote on the frequency of the stockholder vote to approve the compensation of our named executive officers

1 YEAR

The Board and the Compensation Committee believe that conducting the advisory vote on executive compensation every year will lead to more meaningful and timely communication between the company and our stockholders on the compensation of our named executive officers.

Page 52

(4)

Ratification of the independent registered public accounting firm

FOR

Based on its assessment, the Board and the Audit and Finance Committee believe that the appointment of PricewaterhouseCoopers LLP is in the best interests of the company and our stockholders.

Page 53

 

 

2


SUMMARY INFORMATION

 

Director Nominees

Our Board is currently divided into three classes serving staggered three-year terms. The following table provides summary information about each of the three director nominees who are being voted on at the Annual Meeting.

 

 

 

DIRECTOR

SINCE

 

COMMITTEE

MEMBERSHIPS

NAME

AGE

OCCUPATION

Heidi Kunz

62

2000

Retired Executive Vice President

  Audit and Finance (Chair)

 

 

 

and Chief Financial Officer of

  Nominating/Corporate Governance

 

 

 

Blue Shield of California

 

Sue H. Rataj

59

2015

Retired Chief Executive,

  Compensation

 

 

 

Petrochemicals for BP

  Nominating/Corporate Governance

 

 

 

 

 

George A. Scangos, PhD

68

2014

Chief Executive Officer

  Compensation

 

 

 

of Biogen Inc.

  Nominating/Corporate Governance

 

 

 

 

 

 

 

 

 

 

Corporate Governance Highlights

The Board is committed to sound and effective governance practices that promote long-term stockholder value and strengthen Board and management accountability to our stockholders, customers and other stakeholders. The following table highlights many of our key governance practices.  Specific details on our corporate governance can be found starting on page 14.

 

 

Nine of our 10 directors are independent

 

 

Annual board self-assessment process, including peer evaluations

 

Independent standing board committees

 

 

Majority voting and director resignation policy in uncontested director elections

 

Strong independent lead director

 

 

Continued assessment of highly qualified, diverse and independent candidates for nomination to the board

 

Regular meetings of our independent directors without management present

 

 

Strong focus on pay-for-performance

 

Diverse board with an effective mix of skills, experience and perspectives

 

 

Proactive stockholder engagement

 

Three new independent directors added during the past three years

 

 

Policies prohibiting hedging, short selling and pledging of our common stock

 

Varied lengths of Board tenure with an average tenure of 10 years

 

 

Stock ownership guidelines for executive officers and directors

 

 

 

3


TABLE OF CONTENTS

 

2017 ANNUAL MEETING OF STOCKHOLDERS

NOTICE OF ANNUAL MEETING AND PROXY STATEMENT

TABLE OF CONTENTS

 

 

Page

PROPOSAL 1 – ELECTION OF DIRECTORS

5

Director Nominees for Election to New Three-Year Terms That Will Expire in 2020

5

Directors Whose Terms Will Expire in 2018

7

Directors Whose Terms Will Expire in 2019

9

COMPENSATION OF NON-EMPLOYEE DIRECTORS

11

Summary of Non-Employee Director Annual Compensation for the 2016 Plan Year

11

Non-Employee Director Compensation for Fiscal Year 2016

12

Non-Employee Director Reimbursement Practice for Fiscal Year 2016

13

Non-Employee Director Stock Ownership Guidelines

13

CORPORATE GOVERNANCE

14

Board Leadership Structure

14

Board’s Role in Risk Oversight

14

Majority Voting for Directors

14

Board Communications

15

Director Stockholder Meeting Attendance

15

Director Independence

15

Compensation Committee Member Independence

15

Director Nomination Criteria: Qualifications and Experience

16

Compensation Committee Interlocks and Insider Participation

16

Committees of the Board of Directors

17

Related Person Transactions Policy and Procedures

18

Transactions with Related Persons

18

COMPENSATION DISCUSSION AND ANALYSIS

21

Executive Summary

22

Determining Executive Pay

26

Fiscal Year 2016 Compensation

29

Additional Information

35

COMPENSATION COMMITTEE REPORT

38

EXECUTIVE COMPENSATION

39

Summary Compensation Table

39

Grants of Plan-Based Awards

41

Outstanding Equity Awards at Fiscal Year-End

42

Option Exercises and Stock Vested

43

Pension Benefits

44

Non-Qualified Deferred Compensation in Last Fiscal Year

46

Termination and Change of Control Arrangements

48

PROPOSAL 2 – ADVISORY VOTE ON EXECUTIVE COMPENSATION

51

PROPOSAL 3 – ADVISORY VOTE ON THE FREQUENCY OF VOTE ON EXECUTIVE COMPENSATION

52

PROPOSAL 4 – RATIFICATION OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

53

AUDIT MATTERS

54

Fees Paid to PricewaterhouseCoopers LLP

54

Policy on Preapproval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

54

AUDIT AND FINANCE COMMITTEE REPORT

55

BENEFICIAL OWNERSHIP

56

Stock Ownership of Certain Beneficial Owners

56

Stock Ownership of Directors and Officers

57

Section 16(a) Beneficial Ownership Reporting Compliance

57

GENERAL INFORMATION

58

APPENDIX A

A-1

 

 

4


PROPOSAL 1 - ELECTION OF DIRECTORS

 

PROPOSAL 1 – ELECTION OF DIRECTORS

Our Board is divided into three classes serving staggered three-year terms. Directors for each class are elected at the annual meeting of stockholders held in the year in which the term for their class expires.  Our Bylaws, as amended, allow the Board to fix the number of directors by resolution. Our Board currently consists of ten directors divided into three classes.

The terms of the three director nominees will expire at this Annual Meeting. The current composition of the Board and the term expiration dates for each director is as follows:

 

 

 

 

 

Class

 

Directors

Term Expires

II

 

Heidi Kunz, Sue H. Rataj and George A. Scangos, PhD

2017

III

 

Robert J. Herbold, Koh Boon Hwee, Michael R. McMullen and Daniel K. Podolsky, M.D.

2018

I

 

Paul N. Clark, James G. Cullen and Tadataka Yamada, M.D.

2019

Director Nominees for Election to New Three-Year Terms That Will Expire in 2020

 

Directors elected at the 2017 annual meeting will hold office for a three-year term expiring at the annual meeting in 2020 (or until their respective successors are elected and qualified, or until their earlier death, resignation or removal). All nominees are currently serving as our directors. To the best knowledge of the Board, all of the nominees are able and willing to serve.  Each nominee has consented to be named in this proxy statement and to serve if elected.  Information regarding each nominee is provided below as of December 31, 2016. There are no family relationships among our executive officers and directors.

HEIDI KUNZ

 

Age: 62
Director Since: February 2000

 

Board Committees:

 

Other Public Directorships:

   

   

Audit and Finance (Chair)

Nominating/Corporate Governance

   

   

 

Financial Engines, Inc.

Halyard Health, Inc.

 

 

Ms. Kunz served as Executive Vice President and Chief Financial Officer of Blue Shield of California from 2003 through 2012 and as Executive Vice President and the Chief Financial Officer of Gap, Inc. from 1999 to 2003. Prior thereto, Ms. Kunz served as the Chief Financial Officer of ITT Industries, Inc. from 1995 to 1999. From 1979 to 1995, she held senior financial management positions at General Motors Corporation, including Vice President and Treasurer.

Qualifications

Ms. Kunz possesses significant experience and experience in management and financial matters, having served as the Chief Financial Officer of both public and private companies. Ms. Kunz is the chairperson of our Audit and Finance Committee and is qualified as a financial expert under SEC guidelines. In addition, Ms. Kunz has considerable experience and expertise with our company having been a member of our board of directors for over 10 years.  

 

SUE H. RATAJ

 

Age: 59
Director Since: September 2015

 

Board Committees:

 

Other Public Directorships:

   

   

Compensation

Nominating/Corporate Governance

   

   

 

Cabot Corporation

Bayer A.G.

 

 

Ms. Rataj was Chief Executive, Petrochemicals for BP, a global energy company, until she retired in April 2011. In this role, she held responsibility for all of BP’s global petrochemical operations. Prior thereto, Ms. Rataj held a variety of senior management positions with BP, most recently serving as Group Vice President, Health, Safety, Operations and Technology for the Refining and Marketing Segment.

5


PROPOSAL 1 - ELECTION OF DIRECTORS

 

Qualifications

Ms. Rataj possesses significant leadership experience and business expertise from her executive positions with BP. Ms. Rataj has lived and worked extensively in the Asia Pacific and European regions and brings a global perspective to our Board. In addition, Ms. Rataj brings public company director experience and knowledge of public company management and governance practices.

 

GEORGE A. SCANGOS, PhD

 

Age: 68
Director Since: September 2014

 

Board Committees:

 

Other Public Directorships:

   

   

Compensation

Nominating/Corporate Governance

   

   

 

Biogen Inc.

Exelixis, Inc.

 

 

Dr. Scangos has served as the Chief Executive Officer and a director of Biogen Inc. since July 2010. From 1996 to July 2010, Dr. Scangos served as the President and Chief Executive Officer of Exelixis, Inc., a drug discovery and development company. From 1993 to 1996, Dr. Scangos served as President of Bayer Biotechnology, where he was responsible for research, business development, process development, manufacturing, engineering and quality assurance of Bayer’s biological products. Before joining Bayer in 1987, Dr. Scangos was a Professor of Biology at Johns Hopkins University for six years.  Dr. Scangos served as the Chair of the California Healthcare Institute in 2010 and was a member of the Board of the Global Alliance for TB Drug Development from 2006 until 2010. He is also a member of the National Board of Visitors of the University of California, Davis School of Medicine and is currently an Adjunct Professor of Biology at Johns Hopkins University.

Qualifications

Dr. Scangos has extensive training as a scientist, significant knowledge and experience with respect to the biotechnology, healthcare and pharmaceutical industries, and a comprehensive leadership background resulting from service on various boards of directors and as an executive in the pharmaceutical industry.

Vote Required

Under our majority voting standard, in uncontested elections of directors, such as this election, each director must be elected by the affirmative vote of a majority of the votes cast by the shares present in person or represented by proxy and entitled to vote. A “majority of the votes cast” means that the number of votes cast “FOR” a director must exceed 50% of the votes cast with respect to that director. Abstentions and broker non-votes will not count as a vote “FOR” or “AGAINST” a nominee’s election and thus will have no effect in determining whether a director nominee has received a majority of the votes cast.

The Board of Directors recommends a vote FOR the election to the Board of each of the
foregoing nominees.


6


PROPOSAL 1 - ELECTION OF DIRECTORS

 

The directors whose terms are not expiring this year are listed below. They will continue to serve as directors for the remainder of their terms or such other date, in accordance with our Bylaws. Information regarding each of such directors is provided below as of December 31, 2016.

Directors Whose Terms Expire in 2018

 

ROBERT J. HERBOLD

 

Age: 74
Director Since: June 2000

 

Board Committees:

Other Public Directorships:

   

   

Audit and Finance

Nominating/Corporate Governance

 

   

 

 

None

 

 

 

 

 

 

Former Public Directorships Held During the Past Five Years:

 

 

   

 

Neptune Orient Lines Limited

 

Mr. Herbold has served as the Managing Director of the consulting firm The Herbold Group, LLC since 2003. He served as Executive Vice President and Chief Operating Officer of Microsoft Corporation from 1994 to 2001 and served as an Executive Vice President of Microsoft Corporation until 2003. Prior to joining Microsoft, Mr. Herbold was employed by The Procter & Gamble Company for twenty-six years and served as a Senior Vice President at The Procter & Gamble Company from 1990 to 1994.

Qualifications

Mr. Herbold possesses significant leadership experience and business expertise from his executive leadership positions with Microsoft Corporation and The Procter & Gamble Company. Having been a member of our board for over 10 years, Mr. Herbold has a strong knowledge of our business. In addition, Mr. Herbold brings considerable public and private company director experience and perspective on public company management and governance issues and practices.

 

KOH BOON HWEE

 

Age: 66
Director Since: May 2003

 

Board Committees:

Other Public Directorships:

   

   

Compensation (Chair)

Nominating/Corporate Governance

 

   

   

AAC Technologies Holdings, Inc. Sunningdale Tech, Ltd.

Yeo Hiap Seng Ltd.

Far East Orchard Ltd.

 

 

 

 

Former Public Directorships Held During the Past Five Years:

 

 

   

 

Yeo Hiap Seng (Malaysia) Bhd.

 

Mr. Koh is the managing partner of Credence Capital Fund II (Cayman) Ltd., a private equity fund. Mr. Koh has served as the non-Executive Chairman of Sunningdale Tech Ltd. since January 2009 and previously served as its Executive Chairman and Chief Executive Officer from July 2005 to January 2009. He has served as the non-Executive Chairman of Yeo Hiap Seng Ltd. since April 2010, the non-Executive Chairman of Rippledot Capital Advisers Pte. Ltd. since February 2011 and the non-Executive Chairman of Far East Orchard Ltd. since April 2013. He served as Executive Director of MediaRing Limited from February 2002 to August 2009; Chairman of DBS Bank Ltd. from January 2006 to April 2010; Chairman of Singapore Airlines from July 2001 to December 2005 and Chairman of Singapore Telecom from April 1992 to August 2001. Mr. Koh spent fourteen years with Hewlett-Packard Company in its Asia Pacific region.


7


PROPOSAL 1 - ELECTION OF DIRECTORS

 

Qualifications

Mr. Koh possesses a strong mix of leadership and operational experience from his various senior positions with Sunningdale Tech, AAC Technologies, MediaRing Limited, DBS Bank, Singapore Airlines and Singapore Telecom. In addition, Mr. Koh has deep experience in the Asia Pacific region and brings that knowledge and perspective to the Board. Mr. Koh has extensive experience with our company and its predecessor, Hewlett-Packard, having served on our board for over 10 years and having spent 14 years with Hewlett-Packard.

 

MICHAEL R. MCMULLEN

 

Age: 55
Director Since: March 2015

 

Board Committees:

 

Other Public Directorships:

   

   

Executive

   

   

 

None

 

 

 

Mr. McMullen has served as our Chief Executive Officer since March 2015 and as President since September 2014. From September 2014 to March 2015 he also served as our Chief Operating Officer. From September 2009 to September 2014 he served as Senior Vice President, Agilent and President, Chemical Analysis Group. From January 2002 to September 2009, he served as our Vice President and General Manager of the Chemical Analysis Solutions Unit of the Life Sciences and Chemical Analysis Group. Prior to assuming this position, from March 1999 to December 2001, Mr. McMullen served as Country Manager for our China, Japan and Korea Life Sciences and Chemical Analysis Group. Prior to this position, Mr. McMullen served as the Controller for the Hewlett-Packard Company and Yokogawa Electric Joint Venture from July 1996 to March 1999.

Qualifications

Mr. McMullen has broad and deep experience with the company and its businesses having been an employee of the company and its predecessor, Hewlett-Packard, for over 20 years. During the course of his career, he has developed considerable expertise in, and in-depth knowledge of, our businesses, having seen them as an individual contributor and at numerous levels of management. This perspective gives valuable insight to our board.

 

DANIEL K. PODOLSKY, M.D.

 

Age: 63
Director Since: July 2015

 

Board Committees:

Other Public Directorships:

   

   

Audit and Finance

Nominating/Corporate Governance

 

   

 

 

None

 

 

 

 

 

 

Former Public Directorships Held During the Past Five Years:

 

 

   

 

GlaxoSmithKline PLC

 

Dr. Podolsky has served as President of the University of Texas Southwestern Medical Center, a leading academic medical center, patient care provider and research institution, since September 2008. Previously Dr. Podolsky also served concurrently as Mallinckrodt Professor of Medicine at Harvard Medical School, the Chief of Gastroenterology at Massachusetts General Hospital. From 2005 to 2008, Dr. Podolsky served as Chief Academic Officer and Faculty Dean, Academic Programs of Partners Healthcare System, Inc., a non-profit health care system committed to patient care, research, teaching and service. Dr. Podolsky holds the Philip O’Bryan Montgomery, Jr., M.D. Distinguished Presidential Chair in Academic Administration, and the Doris and Bryan Wildenthal Distinguished Chair in Medical Science. He is a member of the National Academy of Medicine of the US National Academy of Sciences, member of the Board of the Southwestern Medical Foundation and is a member of the Scientific Advisory Board of Antibe Therapeutics, Inc., a company focused on the treatment of diseases characterized by inflammation, pain and/or vascular dysfunction. Dr. Podolsky is also a member of the National Academies of Sciences Board on Army Science and Technology.

8


PROPOSAL 1 - ELECTION OF DIRECTORS

 

Qualifications

Dr. Podolsky’s current responsibilities in leading a large academic medical center give him relevant insight into healthcare delivery and bring scientific expertise to the Board.

Directors Whose Terms Expire in 2019

 

PAUL N. CLARK

 

Age: 69
Director Since: May 2006

 

Board Committees:

Other Public Directorships:

   

   

Audit and Finance

Nominating/Corporate Governance

 

   

 

 

Biolase, Inc.

Keysight Technologies, Inc.

 

 

 

 

 

 

Former Public Directorships Held During the Past Five Years:

 

 

   

 

Amylin Pharmaceuticals, Inc.

 

Mr. Clark was a Strategic Advisory Board member of Genstar Capital, LLC from August 2007 to December 2016 and was an Operating Partner from August 2007 to January 2013.  Genstar Capital LLC is a middle market private equity firm that focuses on investments in selected segments of life sciences and healthcare services, industrial technology, business services and software. Prior to that, Mr. Clark was the Chief Executive Officer and President of ICOS Corporation, a biotherapeutics company, from June 1999 to January 2007, and the Chairman of the Board of Directors of ICOS from February 2000 to January 2007. From 1984 to December 1998, Mr. Clark worked in various capacities for Abbott Laboratories, a health care products manufacturer, retiring from Abbott Laboratories as Executive Vice President and a board member. His previous experience included senior positions with Marion Laboratories, a pharmaceutical company, and Sandoz Pharmaceuticals (now Novartis Corporation), a pharmaceutical company.

Qualifications

 

Mr. Clark has significant experience in the pharmaceutical and biotechnology industries, including his experience serving in senior management positions with ICOS Corporation, Abbott Laboratories, Marion Laboratories and Sandoz Pharmaceuticals.  In addition, Mr. Clark brings considerable public company director experience as well as his extensive experience within our industry and expertise in business finance.  Mr. Clark received his M.B.A. from Dartmouth College and his B.S. in finance from the University of Alabama.

 

JAMES G. CULLEN

 

Age: 74
Director Since: April 2000

 

Board Committees:

Other Public Directorships:

   

   

Executive (Chair)

Nominating/Corporate Governance (Chair)

 

   

   

Avinger, Inc.

Keysight Technologies, Inc.

Neustar, Inc.

Prudential Financial, Inc.

 

 

 

 

 

 

Former Public Directorships Held During the Past Five Years:

 

 

Johnson & Johnson

 

Mr. Cullen has served as Non-Executive Chairman of our Board since March 2005. Mr. Cullen was President and Chief Operating Officer of Bell Atlantic Corporation (now Verizon) from 1997 to June 2000 and a member of the office of chairman from 1993 to June 2000. Prior to this appointment, Mr. Cullen was the President and Chief Executive Officer of the Telecom Group of Bell Atlantic from 1995 to 1997. Prior to the creation of Bell Atlantic on January 1, 1984, Mr. Cullen held management positions with New Jersey Bell from 1966 to 1981 and AT&T from 1981 to 1983.


9


PROPOSAL 1 - ELECTION OF DIRECTORS

 

Qualifications

Mr. Cullen has considerable managerial and operational experience and expertise from his senior leadership position with Bell Atlantic and its predecessors. In addition, Mr. Cullen brings significant public company director experience and perspective on public company management and governance. Mr. Cullen has a strong understanding of the company having served on our board for over 10 years, including more than five years as the non-executive chairman.

 

TADATAKA YAMADA, M.D.

 

Age: 71
Director Since: January 2011

 

Board Committees:

Other Public Directorships:

   

   

Compensation

Nominating/Corporate Governance

 

   

 

 

CSL Limited

 

 

 

 

 

 

Former Public Directorships Held During the Past Five Years:

 

 

Takeda Pharmaceutical Co. Ltd.

 

Dr. Yamada is currently a Venture Partner on the Life Sciences team of Frazier Healthcare Partners, a healthcare-focused investment firm. From June 2011 to June 2015 Dr. Yamada served as the Chief Medical and Scientific Officer of Takeda Pharmaceuticals International, Inc., a research-based global pharmaceutical company. Dr. Yamada previously served as President of the Global Health Program of the Bill & Melinda Gates Foundation from June 2006 to June 2011. From 2000 to 2006, Dr. Yamada was Chairman of Research and Development for GlaxoSmithKline Inc. and prior to that, he held research and development positions at SmithKline Beecham. Prior to joining SmithKline Beecham, Dr. Yamada was Chairman of the Department of Internal Medicine at the University of Michigan Medical School and Physician-in-Chief of the University of Michigan Medical Center.

Qualifications

Dr. Yamada brings a unique perspective to our Board with his experience as the former President of the Global Health Program of the Bill & Melinda Gates Foundation as well as his significant research and development experience. Dr. Yamada’s extensive pharmaceutical industry knowledge gives him a unique insight into a number of issues we face.

 

 

 

10


COMPENSATION OF NON-EMPLOYEE DIRECTORS

 

COMPENSATION OF NON-EMPLOYEE DIRECTORS

Directors who are employed by us do not receive any compensation for their Board services. As a result, Mr. McMullen, our Chief Executive Officer, received no additional compensation for his services as a director. The general policy of the Board is that compensation for non-employee directors should be a mix of cash and equity-based compensation that is competitive with the compensation paid to non-employee directors within our peer group. The non-employee director’s compensation plan year begins on March 1 of each year (the “Plan Year”).

The table below sets forth the annual retainer, equity grants and committee premiums for the non-employee directors and the Non-Executive Chairman for the 2016 Plan Year:

Summary of Non-Employee Director Annual Compensation for the 2016 Plan Year

 

The following table sets forth the compensation that we provide to non-employee directors:

 

 

 

 

 

 

 

Committee Chair

Audit

Committee

 

 

Cash Retainer (1)

Equity Grant (2)

Premium (3)

Member Premium (4)

 

Non-employee director

$90,000

 

Stock Grant with a value

equivalent to $180,000

 

$15,000 - Audit and Finance Committee and

Nominating/ Corporate Governance Committee

$20,000 – Compensation Committee

$10,000

 

Non-Executive

Chairman

$245,000

 

Stock Grant with a value

equivalent to $180,000

 

Not eligible

$10,000

 

(1)

Each non-employee director may elect to defer all or part of the cash compensation to the 2005 Deferred Compensation Plan for Non-Employee Directors (“Director Deferral Plan”). Any deferred cash compensation is converted into shares of our common stock.

(2)

The stock will be granted on the later of (i) March 1 or (ii) the first trading day after each Annual Meeting of Stockholders. The number of shares underlying the stock grant is determined by dividing $180,000 by the average fair market value of our common stock over 20 consecutive trading days up to and including the day prior to the grant date. The stock grant vests immediately upon grant and may be deferred pursuant to the Director Deferral Plan.  

(3)

Non-employee directors (excluding the Non-Executive Chairman) who serve as the chairperson of a Board committee receive a committee chair premium which is payable in cash at the beginning of each Plan Year.  

(4)

Non-employee directors (including the Non-Executive Chairman) who serve as a member of the Audit and Finance Committee receive an additional premium which is payable in cash at the beginning of each Plan Year.

A non-employee director who joins the Board of Directors after the start of the Plan Year will have his or her cash retainer, equity grant and committee chair premium pro-rated based upon the remaining days in the Plan Year that the director will serve.

In September 2016, the Compensation Committee and the Board, based on the recommendation of the Compensation Committee’s independent compensation consultant, F.W. Cook, increased the annual cash retainer (excluding the Chairman) from $90,000 to $100,000 and the annual equity grant from a value of $180,000 to $200,000 in order to remain competitive with the market.  The increases will be effective on March 1, 2017.  

 

 

11


COMPENSATION OF NON-EMPLOYEE DIRECTORS

 

Non-Employee Director Compensation for Fiscal Year 2016

The table below sets forth information regarding the compensation earned by each of our non-employee directors during the fiscal year ended October 31, 2016:

 

 

 

 

 

 

 

 

 

 

Cash

Committee

 

Audit Committee

 

Stock

 

 

Retainer (1)

Chair Premium (1)

 

Member Premium (1)

 

Awards (2)(3)

Total

Name

($)

($)

 

($)

 

($)

($)

Paul N. Clark

90,000

-

 

10,000

 

184,820

284,820

James G. Cullen (4)

245,000

-

 

-

 

184,820

429,820

Robert J. Herbold

90,000

-

 

10,000

 

184,820

284,820

Koh Boon Hwee

90,000

22,500

 

-

 

184,820

297,320

Heidi Kunz

90,000

15,000

 

10,000

 

184,820

299,820

Daniel K. Podolsky, M.D. (5)

84,480

-

 

10,000

 

184,820

279,300

Sue H. Rataj (6)

87,540

-

 

-

 

184,820

272,360

George A. Scangos, PhD

90,000

-

 

-

 

184,820

274,820

Tadataka Yamada, M.D.

90,000

-

 

-

 

184,820

274,820

 

(1)

Reflects all cash compensation earned during fiscal year 2016, including amounts deferred pursuant to the Director Deferral Plan. The number of shares of our common stock received in lieu of cash is determined by dividing the dollar value of the deferred cash amount by the twenty (20) day average fair market value for the applicable deferral date. The aggregate number of shares of our common stock deferred by each non-employee director is set forth in the footnotes to the Beneficial Ownership Table included in this proxy statement.

(2)

Reflects the aggregate grant date fair value for stock awards granted in fiscal year 2016 calculated in accordance with FASB ASC Topic 718. For more information regarding our application of FASB ASC Topic 718, including the assumptions used in the calculations of these amounts, please refer to Note 4 of Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K filed with the SEC on December 20, 2016.

(3)

A supplemental table following these footnotes sets forth: (i) the aggregate number of stock awards and option awards outstanding at fiscal year-end; (ii) the aggregate number of stock awards granted during fiscal year 2016; and (iii) the grant date fair market value of equity awards granted by us during fiscal year 2016 to each of our non-employee directors.

(4)

Mr. Cullen has served as the Non-Executive Chairman of the Board since March 1, 2005.

(5)

Dr. Podolsky joined the board on July 21, 2015.  This amount reflects the pro-rated cash retainer.

(6)

Ms. Rataj joined the board on September 15, 2015.  This amount reflects the pro-rated cash retainer.

 

12


COMPENSATION OF NON-EMPLOYEE DIRECTORS

 

Additional Information with Respect to Director Equity Awards

The following table provides additional information on the outstanding equity awards at fiscal year-end and awards granted during fiscal year 2016 to non-employee directors.

 

 

 

 

 

 

 

 

Grant Date Fair

 

Option Awards

Stock Awards

Value of Stock

 

Outstanding at

Granted During

Awards Granted in

 

Fiscal Year-End

Fiscal Year 2016 (1)

Fiscal Year 2016 (1)(2)

Name

(#)

(#)

($)

Paul N. Clark

-

4,704

184,820

James G. Cullen

15,482

4,704

184,820

Robert J. Herbold

24,107

4,704

184,820

Koh Boon Hwee

24,107

4,704

184,820

Heidi Kunz

24,107

4,704

184,820

Daniel K. Podolsky, M.D.

-

4,704

184,820

Sue H. Rataj

-

4,704

184,820

George A. Scangos, PhD

-

4,704

184,820

Tadataka Yamada, M.D.

-

4,704

184,820

 

(1)

Stock awards granted to non-employee directors vest immediately upon grant.

(2)

Reflects the aggregate grant date fair value for stock awards granted in fiscal year 2016 calculated in accordance with FASB ASC Topic 718. The assumptions used by the company in calculating these amounts are included in Note 4 under the heading “Valuation Assumptions” of the Notes to the Consolidated Financial Statements in the company’s 2016 Annual Report on Form 10-K.

Non-Employee Director Reimbursement Practice for Fiscal Year 2016

Non-employee directors are reimbursed for travel and other out-of-pocket expenses incurred in connection with their service on our Board.

Non-Employee Director Stock Ownership Guidelines

Non-employee directors are required to own shares of our common stock having a value of at least six times an amount equal to the annual cash retainer. The shares counted toward the ownership guidelines include shares owned outright and the shares of our common stock in the non-employee director’s deferred compensation account. For recently appointed non-employee directors, these ownership levels must be attained within five years from the date of their initial election or appointment to the board of directors. All of our incumbent non-employee directors have either achieved the recommended ownership level or are expected to achieve the recommended ownership level within five years of their initial election or appointment to our Board.

 

 

13


CORPORATE GOVERNANCE

 

CORPORATE GOVERNANCE

We have had formal corporate governance standards in place since our inception in 1999. We have reviewed internally and with the Board the provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), the rules of the SEC and the NYSE’s corporate governance listing standards regarding corporate governance policies and processes and are in compliance with the rules and listing standards.

We have adopted charters for our Audit and Finance Committee, Compensation Committee, Executive Committee and Nominating/Corporate Governance Committee consistent with the applicable rules and standards. Our committee charters, Amended and Restated Corporate Governance Standards and Standards of Business Conduct are located in the Investor Relations section of our website and can be accessed by clicking on “Governance Policies” in the “Corporate Governance” section of our web page at www.investor.agilent.com.

Board Leadership Structure

We currently separate the positions of chief executive officer and chairman of the Board. Since March 2005, Mr. Cullen, one of our independent directors, has served as our chairman of the Board. The responsibilities of the chairman of the Board include: setting the agenda for each Board meeting, in consultation with the chief executive officer; chairing the meetings of independent directors; and facilitating and conducting, with the Nominating/Corporate Governance Committee, the annual self-assessments by the Board and each standing committee of the Board, including periodic performance reviews of individual directors. Separating the positions of chief executive officer and chairman of the Board allows our chief executive officer to focus on our day-to-day business, while allowing the chairman of the Board to lead the Board in its fundamental role of providing advice to and independent oversight of management. The Board believes that having an independent director serve as chairman of the Board is the appropriate leadership structure for the company at this time.

However, our Corporate Governance Standards permit the roles of the chairperson of the Board and the chief executive officer to be filled by the same or different individuals. This provides the Board with flexibility to determine whether the two roles should be combined in the future based on our needs and the Board’s assessment of our leadership from time to time. Our Corporate Governance Standards provide that, in the event that the chairperson of the Board is also the chief executive officer, the Board may consider the election of an independent Board member as a lead independent director.

In 2014, we amended the Corporate Governance Standards to raise the mandatory retirement age for directors from 72 to 75.  The Board made the change in recognition of the contribution that experienced directors, with knowledge of the company, bring to effective board oversight.

Board’s Role in Risk Oversight

The Board executes its risk management responsibility directly and through its committees.  The full Board is kept abreast of risk oversight and other activities of its committees through reports of the committee chairpersons to the full Board during Board meetings.  The Audit and Finance Committee has primary responsibility for overseeing our enterprise risk management process. The Audit and Finance Committee receives updates and discusses individual and overall risk areas during its meetings, including our financial risk assessments, risk management policies and major financial risk exposures and the steps management has taken to monitor and control such exposures.

The Compensation Committee oversees risks associated with our compensation policies and practices with respect to both executive compensation and compensation generally.  The Compensation Committee receives reports and discusses whether our compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company.

Majority Voting for Directors

Our Bylaws provide for majority voting of directors regarding director elections. In an uncontested election, any nominee for director shall be elected by the vote of a majority of the votes cast with respect to the director. A “majority of the votes cast” means that the number of shares voted “FOR” a director must exceed 50% of the votes cast with respect to that director. The “votes cast” shall include votes to withhold authority and exclude votes to “ABSTAIN” with respect to that director’s election. If a director is not elected due to a failure to receive a majority of the votes cast and his or her successor is not otherwise elected and qualified, the director shall promptly tender his or her resignation following certification of the stockholder vote.

14


CORPORATE GOVERNANCE

 

The Nominating/Corporate Governance Committee will consider the resignation offer and recommend to the Board whether to accept or reject it, or whether other action should be taken. The Board will act on the Nominating/Corporate Governance Committee’s recommendation within 90 days following certification of the stockholder vote. Thereafter, the Board will promptly disclose their decision and the rationale behind it in a press release to be disseminated in the same manner as company press releases typically are distributed.  Any director who tenders his or her resignation pursuant to this provision shall not participate in the Nominating/Corporate Governance Committee recommendation or Board action regarding whether to accept the resignation offer.

Board Communications

Stockholders and other interested parties may communicate with the Board and our Non-Executive Chairperson of the Board of Directors by filling out the form at “Contact Chairman” under “Corporate Governance” at www.investor.agilent.com or by writing to James G. Cullen, c/o Agilent Technologies, Inc., General Counsel, 5301 Stevens Creek Blvd., MS 1A-11, Santa Clara, California 95051. The General Counsel will perform a legal review in the normal discharge of duties to ensure that communications forwarded to the Non-Executive Chairperson preserve the integrity of the process. For example, items that are unrelated to the duties and responsibilities of the Board such as spam, junk mail and mass mailings, product complaints, personal employee complaints, product inquiries, new product suggestions, resumes and other forms of job inquiries, surveys, business solicitations or advertisements (the “Unrelated Items”) will not be forwarded to the Non-Executive Chairperson. In addition, material that is unduly hostile, threatening, illegal or similarly unsuitable will not be forwarded to the Non-Executive Chairperson.

Any communication that is relevant to the conduct of our business and is not forwarded will be retained for one year (other than Unrelated Items) and made available to the Non-Executive Chairperson and any other independent director on request. The independent directors grant the General Counsel discretion to decide what correspondence shall be shared with our management and specifically instruct that any personal employee complaints be forwarded to our Human Resources Department.

Director Stockholder Meeting Attendance

We encourage, but do not require, our Board members to attend the annual meeting of stockholders. Last year, all of our directors who were serving at such time, attended the annual meeting of stockholders.

Director Independence

We have adopted standards for director independence in compliance with the NYSE corporate governance listing standards.  These independence standards are set forth in our Corporate Governance Standards.  The Board has affirmatively determined that all of our directors meet these independence standards with the exception of Michael R. McMullen because of his role as our President and Chief Executive Officer.

Our non-employee directors meet at regularly scheduled executive sessions without management. As the Non-Executive Chairman of the Board, James G. Cullen was chosen to preside at executive sessions of the non-management directors.

Compensation Committee Member Independence

We have adopted standards for compensation committee member independence in compliance with the NYSE corporate governance listing standards. In affirmatively determining the independence of any director who will serve on the compensation committee, the board of directors considers all factors specifically relevant to determining whether such director has a relationship to the company or any of its subsidiaries which is material to such director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to:

 

the source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the company to such director; and

 

 

whether such director is affiliated with the company, or an affiliate of a subsidiary of the company.

 

15


CORPORATE GOVERNANCE

 

Director Nomination Criteria: Qualifications and Experience

The Nominating/Corporate Governance Committee will consider director candidates for nomination by stockholders, provided that the recommendations are made in accordance with the procedures described in the section entitled “General Information about the Meeting” located at the end of this proxy statement.  Candidates recommended for nomination by stockholders that comply with these procedures will receive the same consideration as other candidates recommended by the Nominating/Corporate Governance Committee.

We typically hire a third-party search firm to help identify and facilitate the screening and interview process of candidates for director.  To be considered by the Nominating/Corporate Governance Committee, a director must have:

 

a reputation for personal and professional integrity and ethics;

 

executive or similar policy-making experience in relevant business or technology areas or national prominence in an academic, government or other relevant field;

 

breadth of experience;

 

soundness of judgment;

 

the ability to make independent, analytical inquiries;

 

the willingness and ability to devote the time required to perform Board activities adequately;

 

the ability to represent the total corporate interests of the company; and

 

the ability to represent the long-term interests of stockholders as a whole.

In addition to these minimum requirements, the Nominating/Corporate Governance Committee will also consider whether the candidate’s skills are complementary to the existing Board members’ skills; the diversity of the Board in factors such as age, experience in technology, manufacturing, finance and marketing, international experience and culture; and the Board’s needs for specific operational, management or other expertise. The Nominating/Corporate Governance Committee from time to time reviews the appropriate skills and characteristics required of board members, including factors that it seeks in board members such as diversity of business experience, viewpoints and, personal background, and diversity of skills in technology, finance, marketing, international business, financial reporting and other areas that are expected to contribute to an effective Board of Directors. In evaluating potential candidates for the Board of Directors, the Nominating/Corporate Governance Committee considers these factors in the light of the specific needs of the Board of Directors at that time.  The search firm screens the candidates, does reference checks, prepares a biography for each candidate for the Nominating/Corporate Governance Committee to review and helps set up interviews.  The Nominating/Corporate Governance Committee and our Chief Executive Officer interview candidates that meet the criteria, and the Nominating/Corporate Governance Committee selects candidates that best suit the Board’s needs.  We do not use a third-party to evaluate current Board members.

 

 

Compensation Committee Interlocks and Insider Participation

The current members of the Compensation Committee are Koh Boon Hwee, Sue H. Rataj, George A. Scangos, PhD and Tadataka Yamada, M.D. During the most recent fiscal year, none of our executive officers served on the compensation committee (or equivalent), or the board of directors, of another entity whose executive officer(s) served on our Compensation Committee.

The members of the Compensation Committee are considered independent under the company’s Board of Directors and Compensation Committee Independence Standards as set forth in the company’s Amended and Restated Corporate Governance Guidelines.

 

 

16


CORPORATE GOVERNANCE

 

Committees of the Board of Directors

Our Board met six times in fiscal 2016.  Each director attended at least 75% of the aggregate number of Board and applicable committee meetings held when the director was serving on the Board.  Set forth below are the four standing committees of the Board, their primary duties, their current members and the number of meetings held during fiscal 2016.

 

Audit and Finance Committee

Members

Meetings

Responsible for the oversight of:

Heidi Kunz† (Chair)

Paul N. Clark

Robert J. Herbold

Daniel K. Podolsky, M.D.

12

 

o

the quality and integrity of our consolidated financial statements;

 

o

compliance with legal and regulatory requirements, including our Standards of Business Conduct;

 

o

qualifications and independence of our independent auditor;

 

o

performance of our internal audit function and independent registered public accounting firm; and

 

o

other significant financial matters, including borrowings, currency exposures, dividends, share issuance and repurchase and the financial aspects of our benefit plans.

Has the sole authority to appoint, compensate, oversee and replace the independent registered public accounting firm, reviews its internal quality-control procedures, assesses its independence and reviews all relationships between the independent auditor and the company;

Approves the scope of the annual internal and external audit;

Pre-approves all audit and non-audit services and the related fees;

Reviews our consolidated financial statements and disclosures in our reports on Form 10-K and Form 10-Q;

Monitors the system of internal controls over financial reporting and reviews the integrity of the company’s financial reporting process;

Reviews funding and investment policies and their implementation and the investment performance of our benefit plans;

Establishes and oversees procedures for (a) complaints received by the company regarding accounting, internal accounting controls or auditing matters, and (b) the confidential anonymous submission by employees of the company of concerns regarding questionable accounting or auditing matters; and

Reviews disclosures from our independent registered public accounting firm required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independence of accountant’s communications with the audit committee.

Compensation Committee

Members

Meetings

Approves the corporate goals and objectives related to the compensation of the chief executive officer and other executives, evaluates their performance and approves their annual compensation packages;

Koh Boon Hwee (Chair)

Sue H. Rataj

George A. Scangos, PhD

Tadataka Yamada, M.D.

4

Monitors and approves our benefit plan offerings;

Reviews and approves the Compensation Discussion and Analysis;

Oversees the administration of our incentive compensation, variable pay and stock programs;

Assesses the impact of our compensation programs and arrangements on company risk;

Recommends to the Board the annual retainer fee as well as other compensation for non-employee directors; and

Has sole authority to retain and terminate executive compensation consultants.

Nominating/Corporate Governance Committee

Members

Meetings

Recommends the size and composition of the Board, committee structures and membership;

James G. Cullen (Chair)

Paul N Clark

Robert J. Herbold

Koh Boon Hwee

Heidi Kunz

Daniel K. Podolsky, M.D.

Sue H. Rataj

George A. Scangos, PhD

Tadataka Yamada, M.D.

5

Establishes criteria for the selection of new directors and proposes a slate of directors for election at each annual meeting;

Reviews special concerns which require the attention of non-employee directors;

Oversees the evaluation of Board members and make recommendations to improve the Board’s effectiveness; and

Develops and reviews corporate governance principles.

Executive Committee

Members

Meetings

Meets or takes written action between meetings of the Board; and

James G. Cullen (Chair)

Michael R. McMullen

0

Has full authority to act on behalf of the Board to the extent permitted by law with certain exceptions.

 

 

† Financial Expert

17


CORPORATE GOVERNANCE

 

Related Person Transactions Policy and Procedures

Our Standards of Business Conduct and Director Code of Ethics require that all employees and directors avoid conflicts of interests that interfere with the performance of their duties or the best interests of the company. In addition, we have adopted a written Related Person Transactions Policy and Procedures (the “Related Person Transactions Policy”) that prohibits any of our executive officers, directors or any of their immediate family members from entering into a transaction with the company, except in accordance with the policy. For purposes of the policy, a “related person transaction” includes any transaction involving the company and any related person that would be required to be disclosed pursuant to Item 404(a) of the Securities and Exchange Commission’s Regulation S-K.

Under our Related Person Transactions Policy, the General Counsel must advise the Nominating/Corporate Governance Committee of any related person transaction of which he becomes aware. The Nominating/Corporate Governance Committee must then either approve or reject the transaction in accordance with the terms of the policy. In the course of making this determination, the Nominating/Corporate Governance Committee shall consider all relevant information available to it and, as appropriate, must take into consideration the following:

 

the size of the transaction and the amount payable to the related person;

 

the nature of the interest of the related person in the transaction;

 

whether the transaction may involve a conflict of interest; and

 

whether the transaction involved the provision of goods or services to the company that are available from unaffiliated third parties and, if so, whether the transaction is on terms and made under circumstances that are at least as favorable to the company as would be available in comparable transactions with or involving unaffiliated third parties.

Under the Related Person Transactions Policy, company management screens for any potential related person transactions, primarily through the annual circulation of a Director and Officer Questionnaire (“D&O Questionnaire”) to each member of the Board of Directors and each officer of the company that is a reporting person under Section 16 of the Securities Exchange Act of 1934. The D&O Questionnaire contains questions intended to identify related persons and transactions between the company and related persons. If a related person transaction is identified, such transaction is brought to the attention of the Nominating/Corporate Governance Committee for its approval, ratification, revision, or rejection in consideration of all of the relevant facts and circumstances.

The Nominating/Corporate Governance Committee must approve or ratify each related person transaction in accordance with the policy. Absent this approval or ratification, no such transaction may be entered into by the company with any related person.  The Related Person Transactions Policy provides for standing pre-approval of the following transactions with related persons:

 

(a)

Any transaction with another company at which a related person’s only relationship is as an employee (other than an executive officer or an equivalent), director or beneficial owner of less than 10% of that company’s shares, if the aggregate amount involved does not exceed the greater of (i) $1,000,000, or (ii) 2 percent of that company’s total annual revenues.

 

(b)

Any charitable contribution, grant or endowment by the company to a charitable organization, foundation or university at which a related person’s only relationship is as an employee (other than an executive officer or an equivalent), a director or a trustee, if the aggregate amount involved does not exceed the lesser of $500,000, or 2 percent of the charitable organization’s total annual receipts.

We will disclose the terms of related person transactions in our filings with the SEC to the extent required.

Transactions with Related Persons

We purchase services, supplies, and equipment in the normal course of business from many suppliers and sell or lease products and services to many customers. In some instances, these transactions occur with companies with which members of our management or Board have relationships as directors or executive officers. For transactions entered into during fiscal year 2016, no related person had or will have a direct or indirect material interest.   None of the fiscal year 2016 transactions exceeded or fell outside of the pre-approved thresholds set forth in our Related Person Transactions Policy except for the transactions with Biogen Inc. (“Biogen”) and the University of Texas Southwestern Medical Center (“UTSW”).  


18


CORPORATE GOVERNANCE

 

George A. Scangos, PhD is the Chief Executive Officer of Biogen and Daniel K. Podolsky, M.D., is the President of UTSW. The members of the Nominating/Corporate Governance Committee, excluding Dr. Scangos and Dr. Podolsky for their respective transactions only, reviewed, approved and ratified the transactions with Biogen and UTSW in accordance with the policy.

The following list identifies companies who have either purchased from or sold to us more than $120,000 in products and/or services in fiscal 2016.

 

Bayer A.G. (“Bayer”). Ms. Sue H. Rataj is a director of Bayer. Bayer, or its affiliates, purchased an aggregate of approximately $17.5 million of products and/or services from us.

 

Beijing Genomics Institute (“BGI”). Dr. Tadataka Yamada serves as a director of BGI.  BGI, or its affiliates, purchased an aggregate of approximately $518,437 of products and/or services from us.

 

Biogen Inc. (“Biogen”). Mr. George A. Scangos, PhD is the Chief Executive Officer and a director of Biogen. Biogen, or its affiliates, purchased an aggregate of approximately $4.0 million in products and/or services from us.

 

CSL Limited (“CSL”). Dr. Tadataka Yamada has served as a director of CSL since September 2016.  CSL, or its affiliates, purchased an aggregate of approximately $340,401 of products and/or services from us.

 

GlaxoSmithKline (“GSK”). Dr. Daniel K. Podolsky served as a director of GSK until May 2016. GSK, or its affiliates, purchased from an aggregate of approximately $16.2 million of products and/or services from us.

 

Johns Hopkins University (“JHU”). Mr. George A. Scangos, PhD is an adjunct professor with the JHU Department of Biology. JHU, or its affiliates, purchased an aggregate of approximately $2.1 million of products and/or services from us and we purchased approximately $75,000 in products and/or services from JHU.

 

Keysight Technologies, Inc. (“Keysight”). Messrs. Paul N. Clark and James G. Cullen are directors of Keysight. We, or our affiliates, purchased an aggregate of approximately $11.1 million of products and/or services and Keysight, or its affiliates, purchased an aggregate of approximately $114,799 in products and/or services from us. These amounts exclude payments for rents and utilities covered under certain cost sharing agreements between us and Keysight which are set forth below under “Agreements with Keysight.”

 

Nanyang Technological University (“Nanyang”). Mr. Koh Boon Hwee is the Chair of the Board of Trustees of Nanyang. Nanyang, or its affiliates, purchased an aggregate of approximately $1.9 million of products and/or services from us.

 

University of Texas Southwestern Medical Center (“UTSW”). Daniel K. Podolsky, PhD is the President of UTSW. UTSW, or its affiliates, purchased an aggregate of approximately $190,279 of products and/or services from us.

Agreements with Keysight

On November 1, 2014, we completed the spin-off of Keysight Technologies, Inc. (“Keysight”), our electronic measurement business (the “Spin-off”). Following the Spin-off, the company and Keysight have operated as separate publicly-traded companies and neither entity has any ownership interest in the other. However, two of our directors, James G. Cullen and Paul N. Clark, serve on the board of directors of Keysight. In connection with the Spin-off, the company and Keysight entered into various agreements, as described below.

In connection with the Spin-off, we entered into a separation and distribution agreement with Keysight and various other agreements to effect the Spin-off and provide a framework for our relationship with Keysight after the Spin-off, including a services agreement, a tax matters agreement, an employee matters agreement, an intellectual property matters agreement, a trademark license agreement and a real estate matters agreement (collectively, the “Agreements”).

These Agreements provide for the allocation between us and Keysight of our assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after Keysight’s separation from us and govern certain relationships between us and Keysight after the Spin-off. The summaries of the Agreements are qualified in their entirety by reference to the full text of the applicable Agreements, which have been filed as exhibits to our Current Report on Form 8-K filed with the Securities Exchange Commission on August 5, 2014.  Pursuant to the Agreements, the company and Keysight share certain costs related to rents and utilities. In fiscal 2016, we paid approximately $5.3 million in rent/utilities to Keysight and Keysight paid approximately $12.3 million in rent/utilities to us.

 

 

19


COMPENSATION DISCUSSION AND ANALYSIS

 

Dear Stockholder,

We are very pleased with our results after our first full year under CEO Mike McMullen and our second year as a stand-alone Life Sciences company. Operating margins expanded and are on track to meet our CEO’s commitment of 22% in FY17, and the company continues to create stockholder value through dividends, stock buy-backs and smart acquisitions that bolster our market position.  Meanwhile, the leadership team that Mike appointed in FY15 has built tremendous momentum throughout the year, expanding our product portfolio, extending into adjacent markets, and improving the customer experience by streamlining processes, modernizing systems and making the company more efficient and customer friendly.

FY16 was also the first year for our new executive compensation program.  Based on input from many of our stockholders, we changed our short-term incentive plan from a semi-annual plan to an annual plan, increased the percentage of long-term incentives delivered through performance shares, introduced a financial metric to supplement relative TSR in our long-term performance plan, and added a mandatory one-year post vest holding period to all executive equity awards.  We believe these changes further strengthened executive alignment with stockholders and support our CEO’s strategy of above market growth, expanded operating margins, and efficient capital management.  We previewed these changes in our 2016 Compensation Discussion and Analysis and were very pleased with the response from our stockholders, including 93% support for our 2016 Say-on-Pay proposal.  We also believe these changes helped focus our executive team to deliver superior results in FY16 and put the company on a strong growth trajectory for the years ahead.

During the past year, we continued to engage with our stockholders to discuss our executive compensation program.  We believe that the company is best served by an executive compensation program that encourages and rewards consistent, long-term performance.  As such, we consider any change very carefully to ensure optimal alignment with the company’s strategy and long-term benefit to stockholders.  To collect input on the changes under consideration for FY17, we hosted a meeting for our largest stockholders to preview the ideas we were considering and were pleased that 13 of our largest stockholders representing 25% of shares outstanding participated.  With this support, we are implementing two modifications to our program in FY17 that we believe further strengthen executive alignment with stockholders and the company’s strategy.  First, we are replacing return on invested capital with operating margin in the short-term incentive plan, which we believe is the optimal vehicle to maintain management focus on profitability.  Second, we are replacing operating margin with earnings per share in the long-term performance plan as it aligns with management’s guidance to investors and encourages superior long-term growth.  The balance of our executive compensation program remains unchanged.

In the Compensation Discussion and Analysis that follows, we discuss our FY16 CEO and Officer compensation in more detail and share additional information about the program refinements we will implement for FY17.  You will see that our commitment to both pay for performance and clear, transparent disclosure is strong.  We encourage you to review this analysis carefully and hope you agree that our executive compensation programs are achieving our objectives of supporting the company’s growth strategy and creating long-term stockholder value.

Koh Boon Hwee
(Compensation Committee Chair)
Sue H. Rataj
Dr. George A. Scangos
Tadataka Yamada, M.D.

 

 

 

20


COMPENSATION DISCUSSION AND ANALYSIS

 

COMPENSATION DISCUSSION AND ANALYSIS

This section of the proxy statement describes the compensation arrangements for our Named Executive Officers (NEOs) for fiscal year 2016, which were exclusively determined by our independent Compensation Committee and which are further detailed in the 2016 Summary Compensation Table and other compensation tables contained in this proxy statement. This Compensation Discussion and Analysis (CD&A) also includes additional information on how the Compensation Committee arrived at their FY16 compensation decisions for the NEOs and an overview of our executive compensation philosophy and our executive compensation program.

 

Our NEOs for fiscal year 2016 are as follows:

 

 

Michael R. McMullen, President and Chief Executive Officer (CEO)

 

Didier Hirsch, Senior Vice President, Chief Financial Officer (CFO)

 

Mark Doak, Senior Vice President, President Cross-Lab Group (ACG)

 

Patrick Kaltenbach, Senior Vice President, President Life Sciences and Applied Markets Group (LSAG)

 

Jacob Thaysen, Senior Vice President, President Diagnostics and Genomics Group (DGG)

 

 

In this CD&A, we provide the following:

 

Executive Summary

 

Determining Executive Pay

 

Fiscal Year 2016 Compensation

 

Additional Information

 


21


COMPENSATION DISCUSSION AND ANALYSIS

 

Executive Summary

Fiscal Year 2016 at a glance:

Performance and Compensation Highlights

CEO and NEO Compensation

   First full year with Mike McMullen as CEO and Messrs. Doak, Kaltenbach and Thaysen leading Business Groups

   Delivered on financial plan outlined to investors, including strong growth, expanding margins, balanced use of capital and stockholder value creation

   Strong stock performance

   Completed first year of redesigned executive compensation program

On aggregate, the total target compensation for our NEOs was right above the 40th percentile of our peer group

Mr. McMullen

$8,310,000 at the 41st percentile of our peer group and ~88% performance-based

Other NEOs (average)

$2,494,250 at the 43rd percentile of our peer group and ~80% performance-based

Executive Compensation Program Changes for FY16

Pay for Performance

   Short-term incentive now an annual program instead of semi-annual

   Operating Margin added as LTI award metric

   Increased amount of performance-based awards for the NEOs LTI by eliminating stock option grants and adding RSUs for retention

   One-year post vest holding period added to LTI awards

   Added cap to performance-based award payouts to lesser of 2x target shares or 3x target dollar value

Due to strong financial performance that beat our plan, the Short-Term Incentive program (financial targets) paid out at 103% of target.

Our Long-Term Performance Plan for the period ended October 31, 2016 paid out at 96% as our three-year relative TSR was at the 49th percentile of our S&P 500 Health Care, Industrials and Materials Sectors peer group.

 

Stockholder Engagement

Strong stockholder support on our Say-on-Pay proposal is important to us. We continued to engage with stockholders for feedback on our fiscal year 2016 executive compensation program and received 93% support for our Say-on-Pay proposal at our 2016 stockholder meeting.   In response to our stockholders’ feedback, we have made significant changes to our executive compensation programs which demonstrate a strong commitment to pay for performance.  We met with stockholders again in July 2016 to review the program changes for fiscal year 2017.

Financial Performance Highlights

Year-over-year financial results improved as compared to fiscal year 2015 results:

 

Measure

Fiscal 2015

Fiscal 2016

YOY %

 

 

S&P 500 TSR*

3,871.33

4,045.89

4.5%

 

 

Agilent TSR*

$37.36

$43.57

12.6%

 

 

Revenue (Actual)

$4.0B

$4.2B

4.1%

 

 

Operating Margin (non-GAAP)

19.0%

20.4%

7.4%

 

 

Diluted EPS

$1.31

$1.40

6.9%

 

 

Diluted EPS (non-GAAP)**

$1.74

$1.98

13.8%

 

*Stock prices shown for fiscal years 2015 and 2016 are as of 10/31/2015 and 10/31/2016 respectively.

**Non-GAAP Diluted EPS is further defined and reconciled to the most directly comparable GAAP financial measures in Appendix A to this proxy statement.

22


COMPENSATION DISCUSSION AND ANALYSIS

 

Changes in CEO Compensation

In fiscal year 2014, we were a $7 billion company and pay for our former long-term CEO, who had been in his role for seven years, compared appropriately to our officer peer group at the time. At the beginning of fiscal year 2015, we spun-off 40% of our business and created Keysight Technologies. Following the spin-off, we became a $4 billion company and we adjusted our officer peer group to better align with companies in the S&P 500 Health Care sector of similar revenue size.  At this time, our former CEO retired, and we set pay for our current CEO slightly below our new peer group median.

 

 

As the following charts illustrate, our performance has been strong during this three-year period and well-correlated to CEO pay considering the spin-off of Keysight and transition to a new CEO. Revenue has grown modestly despite the disruption of the spin-off, while net income (and corresponding margins) have improved significantly and our total stockholder return has been strong.  

 

 

* Non-GAAP net income is further defined and reconciled to the most directly comparable GAAP financial measure in Appendix A to this proxy statement.

 


23


COMPENSATION DISCUSSION AND ANALYSIS

 

 

The chart below demonstrates how the historical compensation of our CEO compares to our three-year indexed TSR.  The TSR shown below assumes reinvestment of the Keysight spin-off dividend on November 3rd, 2014, the ex-dividend date, not the end of the month or the quarter, as some reporting agencies may use.

 


In addition to the performance highlights noted above, we delivered year-over-year improvements on a number of other financial measures, including ROIC, Return on Equity and Return on Assets, which further attest to strong company performance across a range of financial measures.  

 

 

Aligning CEO and NEO Pay with Performance

For fiscal year 2016, approximately 88% of Mr. McMullen’s and 80% of our other NEOs’ total direct compensation consisted of short-term and long-term incentives and is “at-risk”— which means that this component can vary year to year depending on the performance of the company and our stock price performance.

 

24


COMPENSATION DISCUSSION AND ANALYSIS

 

Stockholder Outreach – Program Changes

We received a 93% stockholder support on our 2016 Say-on-Pay proposal, along with support from the major stockholder advisory firms. While pleased with these results, our Compensation Committee Chair and members of management believe ongoing dialog with stockholders regarding executive compensation is crucial and met with many of our largest stockholders again in 2016 to recap the changes made for fiscal year 2016 and to preview changes under consideration for fiscal year 2017.

A summary of our short and long-term incentive program is set forth below with certain design changes (in bold) approved by the Compensation Committee to take effect in fiscal year 2017.

 

Program / Feature

FY16 Design

FY17 Design

Short-
Term
Incentive (STI)

Performance Period

Annual

No change

Primary Financial Metrics

ROIC / Revenue

Operating Margin / Revenue

Key Business Initiatives

0% - 25% of target bonus

No change

Long-Term Incentives (LTI)

Stock Options
(Time-Based Vesting)

Not Granted

No change

LTPP Shares
(Relative TSR)

30% of target LTI value

No change

LTPP Shares
(Financial Metric)

30% of target LTI value
(Financial Metric = OM)

30% of target LTI value
(Financial Metric = EPS)

RSUs
(Time-Based Vesting) 

40% of target LTI value

No change

One Year Post-Vest
Holding Period 

Apply to LTPP and RSUs

No change

Payout Caps

Lower of:
  2X cap on # of LTPP shares

  3X cap on LTPP payout
dollar value

No change

For fiscal year 2016, we changed our executive compensation program to directly align with the company’s goals of above market growth, expanded operating margins and balanced capital allocation. We diversified our long-term incentive plan and created greater line of sight for our executives by adding operating margin as a financial metric. We then added ROIC to our short-term incentive program to focus our executives on efficient use of capital and portfolio management. To support long-term value creation for our stockholders, we added a one-year post vest holding period to all of our long-term incentive awards and added a cap on performance share payouts to be the lesser of 2X the number of target payout shares or 3X the target payout value. The 2X cap on performance shares was already in place since the inception of the program.

To align with the company’s growth strategy for fiscal year 2017, we are replacing operating margin with earnings per share as the financial metric in the long-term incentive plan. We believe earnings per share places more direct emphasis on long-term growth and clearly aligns with stockholder value creation. While growth is a key priority, we want to maintain executive focus on profitability, so we will replace ROIC with operating margin in our short-term incentive plan. This will maintain management’s attention on expense discipline, simplification and efficiency measures.


25


COMPENSATION DISCUSSION AND ANALYSIS

 

Determining Executive Pay

Our executive pay decisions are grounded in a core philosophy that applies to all elements of compensation. Our compensation philosophy:

 

Aligns executive interests with stockholders;

 

Supports our short- and long-term business strategy;

 

Provides competitive total direct compensation targeted, in aggregate, around the 50th percentile of our peers to attract, retain and motivate the best employees; and

 

Provides pay for performance.

 

Elements of Pay

Base Pay

✓ Baseline for competitive total compensation.

✓ Normally 20% or less of total direct compensation for NEOs.

Short-Term Incentives

✓ Focuses executives on critical operating and strategic goals best measured annually.

✓ Provides downside risk for underperformance and upside reward for success.

✓ Leverages financial measures such as revenue, operating margin and ROIC, supplemented with select strategic initiatives.

Long-Term Incentives

✓ Performance pay representing majority of NEO target compensation.

✓ Motivates and rewards multi-year stockholder value creation.

✓ Facilitates executive stock ownership.

✓ Enables retention.

✓ Delivered through performance shares and RSUs, both with a mandatory one-year post-vest holding period.

✓ Performance measures include long-term financial objectives and relative performance of our TSR.

 

Our actual total compensation for each NEO varies based on (i) company performance measured against external metrics that correlate to long-term stockholder value, (ii) performance of the business organizations against specific targets, and (iii) individual performance. These three factors are considered in positioning salaries, determining earned short-term incentives and determining long-term incentive grant values.

26


COMPENSATION DISCUSSION AND ANALYSIS

 

Pay Practices

Our executive compensation program is supported by a set of strong governance provisions and pay practices.

 

Philosophy / Practice

Result

We structure compensation to create strong alignment with stockholder interests

    Majority of pay is delivered via performance-based vehicles such as long-term performance shares and annual cash incentives.

✓    Mandatory one-year post-vest holding period on annual LTI awards.

We design our programs to avoid excessive risk taking (1)

✓    Strong recoupment and anti-hedging policies in place.

✓    Robust stock ownership guidelines.

✓    Annual compensation risk assessment.

✓    Balanced internal and external goals.

We follow best practices in executive compensation design

✓    Limited perquisites.

✓    No single trigger on change in control benefit provisions or new tax gross-up agreements.

✓    No dividends / dividend-equivalents on unearned performance awards.

✓    Continued vesting of equity awards and earn out of LTPP shares based on performance (rather than acceleration of target) upon retirement.

✓    Independent Compensation Committee consultant.

 

(1)  See Compensation Risk Controls in Additional Information

Independent Compensation Committee and Consultant

The Compensation Committee is composed solely of independent members of the Board and operates under a Board-approved charter which outlines the Committee’s major duties and responsibilities. This charter is available on our Investor Relations website.

For fiscal year 2016, the Compensation Committee retained F.W. Cook as its independent compensation consultant. F.W. Cook does not perform any other work for us, does not trade our stock, has an independence policy that is reviewed annually by F.W. Cook’s Board of Directors, and proactively notifies the Compensation Committee chair of any potential or perceived conflicts of interest. The Compensation Committee found no conflict of interest with F.W. Cook during fiscal year 2016.

For fiscal year 2016, F.W. Cook advised the Compensation Committee on a number of compensation matters, including but not limited to:

 

Criteria used to identify peer companies for executive compensation and performance metrics;

 

Evaluation of our total direct compensation levels and mix for the NEOs and four other senior officers;

 

Mix of long-term incentives, grant types and allocation of equity awards;

 

Review of various other proposals presented to the Compensation Committee by management; and

 

Support for stockholder outreach campaign.

Process for Determining Compensation

To determine total compensation for the upcoming fiscal year, the Compensation Committee considered:

 

the performance of each individual executive for the last fiscal year;

 

the most recent peer group data from F.W. Cook;

27


COMPENSATION DISCUSSION AND ANALYSIS

 

 

our business and strategic goals for the coming fiscal year; and

 

detailed tally sheets for the CEO and each NEO.

F.W. Cook presents and analyzes market data for benchmarking each individual position and provides insight to market practices for the Compensation Committee’s actions, but it does not make any specific compensation recommendations on the individual NEOs. The Compensation Committee determines the form and amount of compensation for all executive officers after considering the market data and company, business unit and individual performance.

NEO Compensation Peer Group

Each year, the Compensation Committee meets with F.W. Cook to review and approve the peer group companies that satisfy our selection criteria. For fiscal year 2016, our peer group for NEO compensation consisted of those competitors in the S&P 500 Health Care Sector with revenues between 0.25x and 2.5x times our projected revenue, supplemented with two of our most direct competitors (Thermo Fisher and Danaher) resulting in a peer group of 27 companies. The range of annual revenues for peer group members was determined so that our annual revenue would be around the median of the peer group. We used this peer group data, targeting the market median in aggregate, to set each NEO’s compensation for fiscal year 2016.  Our peer group used for establishing fiscal year 2016 NEO compensation consists of the following 27 companies:

 

Alexion Pharma

Danaher

Mallinckrodt

Stryker

Bard (C.R.)

DENTSPLY Intl

Mylan

Thermo Fisher

Becton, Dickinson

Edwards Lifesciences

PerkinElmer

Varian Medical Systems

Biogen

Endo International

Perrigo

Waters

Boston Scientific

Hospira

Quest Diagnostics

Zimmer Holdings

Celgene

Intuitive Surgical

Regeneron Pharma

Zoetis

Cerner

Lab Corp of America

St. Jude Medical

 

Peer Group for the Long-Term Performance Program

The Compensation Committee believes that an expanded peer group is more appropriate for determining relative TSR under the company’s LTPP, as an expanded peer group provides a broader index for comparison and better alignment with stockholder investment choices. Therefore, the Compensation Committee uses the approximately 80 companies in the Health Care and Materials Sectors Indexes of the S&P 500 plus Danaher Corporation, for determining TSR under the LTPP. Only companies that are included in one of these sectors at the beginning of the performance period and have three years of stock price performance at the end of the performance period are included in the final calculation of results. Any change in the expanded peer group is solely due to Standard & Poor’s criteria for inclusion in the index.

Role of Management

The CEO and the Senior Vice President, Human Resources consider the responsibilities, performance and capabilities of each of our executive officers, other than the CEO, and what compensation package they believe will attract, retain and motivate. The Senior Vice President, Human Resources does not provide input on setting his own compensation. A comprehensive analysis is conducted using a combination of the market data based on our NEO compensation peer group and survey data, performance against targets, and overall performance assessment. This data is used to determine if an increase in compensation is warranted and the amount and type of any increase for each of the total compensation components for the then-current fiscal year. After consulting with the Senior Vice President, Human Resources, the CEO makes compensation recommendations, other than for his own compensation, to the Compensation Committee at its first meeting of the fiscal year.

28


COMPENSATION DISCUSSION AND ANALYSIS

 

CEO Compensation

The Compensation Committee establishes the CEO’s compensation based on a thorough review of the CEO’s performance that includes:

 

An objective assessment against predetermined metrics set by the Compensation Committee;

 

Tally sheets;

 

Market data from F.W. Cook;

 

A self-evaluation by the CEO that the Compensation Committee discusses with the independent directors; and

 

A qualitative evaluation of the CEO’s performance that is developed by the independent directors, including each member of the Compensation Committee, in executive session.

The Compensation Committee reviews the CEO’s total direct compensation package annually and presents its recommendation to the other independent directors for review and comment before making the final determinations on compensation for the CEO.

Fiscal Year 2016 Compensation

Base Salary

Our salaries reflect the responsibilities of each NEO, the competitive market for comparable professionals in our industry, and are set to create an incentive for executives to remain with us. Base salaries and benefits packages are the fixed components of our NEOs’ compensation and do not vary with company performance. Each NEOs’ base salary is set by considering benchmark market data as well as the performance of such NEO. For fiscal year 2016, NEO base salaries were on average between the 25th and 45th percentile, which we feel is appropriate since a majority of our NEOs are relatively new to their positions.

 

Name

FY15 Salary

FY16 Salary

Increase

Percentile

Michael R. McMullen

$950,000

$1,050,000

11%

38th

Didier Hirsch

$600,000

$600,000

0%

45th

Mark Doak

$425,000

$475,000

12%

25th

Patrick Kaltenbach

$475,000

$500,000

5%

<25th

Jacob Thaysen

$400,000

$440,000

10%

28th

Short-Term Cash Incentives

The Performance-Based Compensation Plan reflects our pay-for-performance philosophy and directly ties short-term incentives to short-term business performance. These awards are linked to specific annual financial goals and key business initiatives for the overall company and the three business groups (LSAG, ACG and DGG). Annual cash incentives are paid to reward achievement of critical shorter-term operating, financial and strategic measures and goals that are expected to contribute to stockholder value creation over time. Financial goals are pre-established by the Compensation Committee at the beginning of the period, based on recommendations from management. The financial goals are based on our fiscal year 2016 financial plan established by the Board of Directors and cannot be changed after they have been approved by the Compensation Committee. The Compensation Committee certifies the calculations of performance against the goals for each period and payouts, if any, are made in cash.

For fiscal year 2016, the awards under the Performance-Based Compensation Plan were determined by multiplying the individual’s base salary for the performance period by the individual’s target award percentage and the performance results, as follows:

 

  Financial Goals

Annual Salary

X

Individual Target Bonus % (varies by individual)

X

Financial Portion of Target Bonus
(75% to 100%)

X

Attainment %
(based on actual performance)

  Key Business
    Initiatives

Annual Salary

X

Individual Target Bonus % (varies by individual)

X

Strategic Portion of Target Bonus
(0% to 25%)

X

Attainment %
(based on actual performance)

 

29


COMPENSATION DISCUSSION AND ANALYSIS

 

Target Award Percentages and FY16 Actual Payouts

Our Compensation Committee set the fiscal year 2016 short-term incentive target amounts based on a percent of base salary pre-established for each NEO and considered the relative responsibility of each NEO.  For fiscal year 2016 our NEO’s short-term incentive target bonuses were set between 80% and 120% of base salary (depending on position).

The payouts under the Performance-Based Compensation Plan for fiscal year 2016 are provided in the table below and in the “Non-Equity Incentive Plan Compensation” column in the “Summary Compensation Table,”

 

 

Annual FY16

Financial Goals

 

Annual FY16

Key Business Initiatives

Target Short-

Term Incentive

Actual Short-Term

Incentives Paid

 

Target

Bonus

Target

Incentive

Actual

Award

 

Target

Incentive

Actual

Award

for the Fiscal

Year

for the

Fiscal Year

Name

(%)

($)

($)

 

($)

($)

($)

($)

Michael R. McMullen

120%

945,000

972,783

 

315,000

365,400

1,260,000

1,338,183

Didier Hirsch

80%

480,000

494,112

 

-

-

480,000

494,112

Mark Doak

80%

285,000

324,273

 

95,000

152,594

380,000

476,867

Patrick Kaltenbach

80%

300,000

281,085

 

100,000

137,000

400,000

418,085

Jacob Thaysen

80%

264,000

288,539

 

88,000

63,800

352,000

352,339

 

Financial Goals and Fiscal Year 2016 Operational Results

The Performance-Based Compensation Plan financial goals were based on (1) our ROIC percentage and our revenue and (2) the ROIC and revenue goals for each of the business units.  The Compensation Committee chose those metrics because:

 

ROIC emphasizes efficient use of capital and sound portfolio management; and

 

Revenue places focus on delivering superior long-term growth.

The financial targets that must be met to receive the target payout are based on our business plan.

To determine earned awards, we use payout matrices that link the metrics and reflect threshold-to-maximum opportunities based on various achievement levels of the metrics. No awards are paid unless the ROIC threshold is achieved and the maximum award under the plan is capped at 200% of the target award. The target metrics set for our short-term incentives and their corresponding results were as follows:

 

 

 

 

ROIC %

 

Revenue $

 

 

 

 

 

 

 

 

 

 

Threshold

 

Target

 

Max

Results

Goal

Attainment

 

Target

(Mil)

 

Max

(Mil)

 

Results

(Mil)

Goal

Attainment

Payout Percentage

(Per Matrix)

 

Agilent

 

8.3%

 

12.4%

 

14.5%

12.5%

101%

 

$4,190

 

$4,399

 

$4,200

100%

103%

 

LSAG

 

12.3%

 

17.7%

 

20.4%

16.9%

95%

 

$2,114

 

$2,220

 

$2,071

98%

85%

 

ACG

 

25.3%

 

34.3%

 

38.7%

35.6%

104%

 

$1,378

 

$1,447

 

$1,420

103%

125%

 

DGG

 

1.8%

 

3.1%

 

3.8%

3.3%

106%

 

$698

 

$733

 

$708

101%

116%

 

*ROIC is a non-GAAP measure defined as Earnings Before Interest and After Taxes (operating profit plus other income minus taxes) divided by Average Invested Capital

 


30


COMPENSATION DISCUSSION AND ANALYSIS

 

Payout Matrices to Measure Financial Metrics

We use payout matrices to determine payout percentages for our FY16 short-term incentive program. The payout matrices are designed to reward profitable growth and revenue growth by increasing payout percentages commensurate with increased ROIC and / or revenue achievement as illustrated in the table below.

 

 

 

 

 

 

FY16 - Revenue Achievement (% of plan)

 

 

 

 

 

 

0 - 90%

 

 

96.0%

 

 

100%

 

 

103.0%

 

 

105.0%

 

 

 

 

117%

 

 

120.00%

 

 

138.00%

 

 

150.00%

 

 

180.00%

 

 

200.00%

 

FY16 - ROIC

 

 

109%

 

 

105.88%

 

 

118.24%

 

 

126.47%

 

 

142.35%

 

 

152.94%

 

Achievement

 

 

101%

 

 

91.76%

 

 

98.47%

 

 

102.94%

 

 

104.71%

 

 

105.88%

 

(% of plan)

 

 

100%

 

 

90.00%

 

 

96.00%

 

 

100.00%

 

 

100.00%

 

 

100.00%

 

 

 

 

67%

 

 

10.00%

 

 

13.00%

 

 

15.00%

 

 

18.00%

 

 

20.00%

 

 

Note:  This specific payout matrix was used to determine the company level payout percentage. The payout percentage is determined by finding the intersection between goal attainments as a percentage of plan for each financial metric. Payout percentages are assigned to each intersection of Revenue and ROIC throughout the payout matrix. Payouts between the numbers represented in the table above are calculated on a linear payout matrix and threshold amounts for both Revenue and ROIC must be met in order for a payout to be made. Payout matrices vary by business group.  

 

Key Business Initiatives – Targets and Results

For fiscal year 2016, under the Performance-Based Compensation Plan, we continued to utilize annual key business initiatives to align NEOs’ objectives with strategic company priorities. These key business initiatives are established at the same time as the financial goals and account for 25% of the total target bonus for each NEO who was assigned to key business initiatives. The maximum payout per NEO for satisfaction of the strategic component is the lesser of (1) up to 200% of key business initiative performance results or (2) 0.75% of non-GAAP pre-tax earnings, and the Compensation Committee may exercise negative discretion to the maximum payout to determine the strategic award percentage.

Non-GAAP pre-tax earnings is defined as earnings before income taxes that exclude primarily the impact of acquisition and integration costs, restructuring costs, transformational initiatives, non-cash intangibles amortization as well as business exit and divestiture costs.

Fiscal year 2016 key business initiatives were selected to focus NEOs on strategic priorities such as revenue growth in specific markets and products, customer satisfaction scores and regulatory compliance. The following table (1) describes each key business initiative, including the threshold, target and maximum achievement levels for each (2) identifies the NEOs who were assigned to each key business initiative, and (3) reports the final attainment and payout percentage for each objective. If an NEO is assigned to more than one objective, the weighting is equally distributed. For competitive purposes, specific threshold, target and maximum amounts are not shown in the descriptions that follow.

 

Officer

Assigned

 

FY16 Key Business Initiative

Description

Threshold

(50%)

Target

(100%)

Maximum

(200%)

Attainment

Payout

Percentage

Mr. Doak

 

Agilent Customer Satisfaction Q4 FY16 exit

Brand Survey Index Score

20% below plan

96% of plan

Achieve Plan

Achieve Plan

40% above plan

104% of plan

8% below plan

1% below plan

83%

Mr. Doak

 

On-Line Order growth

70% of plan

Achieve Plan

150% of plan

130% of plan

160%

Messrs. McMullen,

Doak and Kaltenbach

 

BioPharma Revenue growth

80% of plan

Achieve Plan

125% of plan

175% of plan

200%

Messrs. McMullen, Doak and Kaltenbach

 

China Revenue growth (LSG / ACG)

67% of plan

Achieve Plan

133% of plan

267% of plan

200%

Messrs. McMullen and Kaltenbach

 

Project Secretariat Growth

87% of plan

Achieve Plan

113% of plan

73% of plan

0%

Mr. Kaltenbach

 

Cost of Poor Quality

7% below plan

Achieve Plan

10% above plan

10% above plan

200%

Messrs. McMullen, Kaltenbach and Thaysen

 

Regulatory Compliance

Below Plan

Achieve Plan

Exceed Plan

85% of plan

85%

Messrs. McMullen and Thaysen

 

China Revenue growth (DGG)

60% of plan

Achieve Plan

140% of plan

96% of plan

95%

Mr. Thaysen

 

SureSelect Revenue growth

75% of plan

Achieve Plan

150% of plan

105% of plan

110%

Mr. Thaysen

 

IHC Instrument capacity

67% of plan

Achieve Plan

167% of plan

0% of plan

0%

31


COMPENSATION DISCUSSION AND ANALYSIS

 

Actual payout tables for key business initiatives use a straight-line payout slope from threshold to target and from target to maximum. Final payouts for each business initiative are recommended by the CEO and approved by the Compensation Committee.

 

CEO Key Business Initiatives Performance Highlights – 116% Payout Percentage

For fiscal year 2016, Mr. McMullen was assigned five key business initiatives directly aligned with our strategic growth plan. The results for each of these initiatives varied and are explained in more detail below:

 

 

BioPharma Revenue Growth: BioPharma benefitted from an unforeseen, strong pharma investment cycle.  We created a market specific program with strong organizational focus which benefitted from a strong LC Infinity II portfolio. We established the BioPharma program in FY15 and this is the first full year of focused execution and measurement of this program.

 

China Revenue Growth (LSAG/ACG):  Our aim was to strengthen our market-leading position in China. We expanded our service and support footprint resulting in an increase in revenue in China.

 

China Revenue Growth (DGG): Revenue growth in China for this business segment performed well but did not quite meet financial plan.

 

Project Secretariat Growth: Revenue growth for this focus area did not meet the threshold goal established. Project Secretariat has been established as a key business initiative again for fiscal year 2017 to continue focus on this key growth area.

 

Regulatory Compliance:   We implemented new processes and procedures to improve regulatory readiness.  Some deliverables were delayed compared to original plan.

 

Long-Term Incentives – Performance Stock Units and Restricted Stock Units

Performance Stock Units Earned in Fiscal Year 2016

The performance stock units granted in fiscal year 2014 were measured based on relative TSR versus all companies in the S&P 500 Health Care, Industrials and Materials Sectors for fiscal years 2014 through 2016. The company did not establish an absolute TSR target as we believe performance is best measured on a relative basis against our selected peer group. Our performance as compared to the peer group was as follows:

 

 

 

 

 

 

 

 

 

 

Peer Group TSR

 

Payout Percentage

 

 

 

 

 

 

 

75th Percentile

 

58.8%

 

200%

 

Median

 

28.5%

 

100%

 

25th Percentile

 

7.4%

 

25%

 

Agilent

 

27.6%

 

96%

 

In November 2016, the Compensation Committee certified the TSR results and approved the payout at 96% for the FY14-FY16 performance period that ended on October 31, 2016, as follows:

 

 

 

Target

Awards

(Shares)

 

Target Award

(Shares) After

Adjustment /

Conversion (1)

 

Payout at

96% (Shares)

 

Cash Value

of Payout at

96% ($)

Michael R. McMullen

 

25,345

 

34,689

 

33,300

 

1,537,794

Didier Hirsch

 

15,565

 

21,303

 

20,450

 

944,381

Mark Doak

 

6,383

 

8,736

 

8,385

 

387,219

Patrick Kaltenbach

 

1,915

 

2,621

 

2,516

 

116,189

Jacob Thaysen

 

3,831

 

5,243

 

5,033

 

232,424

 

 

(1)

The target awards were adjusted following the November 2014 spin-off of Keysight Technologies to retain the original target value.

32


COMPENSATION DISCUSSION AND ANALYSIS

 

Our TSR performance relative to peers and the payout percentages for the LTPP for the past five years are set forth below:

 

Fiscal Year

Agilent TSR Relative

Rank to Peer Group

Payout Percentage

2014 - 2016

48.8%

96.0%

2013 - 2015

23.2%

0.0%

2012 - 2014

39.7%

69.0%

2011 - 2013

45.8%

87.0%

2010 - 2012

46.9%

91.0%

 

Long-Term Incentives Granted in Fiscal Year 2016

The Compensation Committee decided to place more emphasis on performance awards in fiscal year 2016, with 60% of the annual NEO grants consisting of performance awards, as opposed to 50% from the prior fiscal year. Stock options were eliminated and restricted stock units were added as retention. The target value of the long-term incentives for each NEO were on average between the 30th and 61st percentile of our peer group. Stock grant values were delivered as follows:

 

Equity Vehicle

Weighting

Metric

Vesting

Holding Period

Methodology for Determining

Target Award

Payout Range

 

Performance

Stock Units

 

 

30%

 

 

Relative Total

Shareholder

Return

 

 

100% after 3rd

year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance

Stock Units

 

 

30%

 

 

Operating

Margin %

 

 

100% after 3rd

year

 

 

One-year post-vest

holding period

 

 

Divide the target award amount

by the product of the 20-day

average stock price, preceding

the grant date, multiplied by the

applicable accounting valuation

 

 

Lesser of 2X share target or 3X dollar target value'

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted

Stock Units

 

 

40%

 

 

None

 

 

25% each

year over 4

years

 

 

 

 

 

 

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The target value of the long-term incentive awards is determined at the beginning of the then-current fiscal year for each NEO. The target value also reflects the Compensation Committee’s judgment on the relative role of each NEO’s position within the company, as well as the performance of each NEO and peer group data provided by F.W. Cook.

 

 

 

Number & Type of Award

 

 

Name

 

Performance Stock

Units - TSR (#)

 

Performance Stock

Units - OM (#)

 

Restricted Stock

Units (#)

 

Total Target Value of Long

Term-Incentive Awards ($)

Michael R. McMullen

 

44,085

 

52,143

 

70,278

 

6,000,000

Didier Hirsch

 

19,103

 

22,595

 

30,453

 

2,600,000

Mark Doak

 

11,388

 

13,740

 

18,155

 

1,550,000

Patrick Kaltenbach

 

10,286

 

12,166

 

16,398

 

1,400,000

Jacob Thaysen

 

5,878

 

6,952

 

9,370

 

800,000

 

Performance Conditions for Stock Units Granted in Fiscal Year 2016

The Compensation Committee has established rolling three-year performance periods for determining earned performance stock awards. Relative TSR aligns with stockholder interests as higher TSR results in higher potential returns for stockholders as well as ensuring a correlation between performance and payouts. As noted above, our fiscal year 2016 short-term incentive program focuses on ROIC and revenue, which drive internal business strategies that in turn impact our TSR. The addition of operating margin as a financial metric for 50% of the long-term performance shares provides a direct line of sight for our executives between the company’s financial performance and their long-term incentive rewards.

33


COMPENSATION DISCUSSION AND ANALYSIS

 

Relative TSR Performance Awards

The performance stock units granted in fiscal year 2016 with relative TSR as a metric will be measured and paid out based on relative TSR versus all companies in our new peer group, the Health Care and Materials Sectors Indexes of the S&P 500, plus Danaher for fiscal year 2016 through fiscal year 2018. Since this grant was made, Danaher has been added to the S&P 500 Health Care Sector. The peer group companies are established at the beginning of the performance period and need to have three full years of stock price data to be used in the final relative TSR calculation. The company does not establish an absolute TSR target as we believe performance is best measured on a relative basis against our selected peer group. The payout schedule determined by the Compensation Committee in fiscal year 2016 was as follows:

 

 

 

Payout as a

 

 

Percentage of

Relative TSR Performance

 

Target

Below 25th Percentile Rank (threshold)

 

0%

 

25th Percentile Rank

 

25%

 

50th Percentile Rank (target)

 

100%

 

75th Percentile Rank and Above

 

200%

 

 

Relative TSR performance stock units are completely “at-risk” compensation because our performance must be at or above the 25th percentile in order for the individuals to receive a payout.

For purposes of determining the relative TSR awards, relative TSR reflects (i) the aggregate change in the 20-day average closing price of our stock versus each of the companies in our LTPP peer group, each as measured at the beginning and end of the three-year performance period plus (ii) the value (if any) returned to stockholders in the form of dividends or similar distributions, assumed to be reinvested on distribution date on a pre-tax basis.

Operating Margin Performance Awards

The operating margin performance awards will be determined by calculating the operating margin percentage attained at the end of each of the three fiscal years in the performance period compared to the targets (which were set at the beginning of the three-year performance period). We use non-GAAP operating margin adjusted to exclude material M&A during the performance period, subject to Compensation Committee approval. The final and only payout at the end of fiscal year 2018 will be an average of the payout percentage for each fiscal year. The threshold, target and maximum numbers are set forth in the table below:

 

 

Long-Term Performance Shares Operating Margin Percentage

 

Fiscal Year

 

Threshold

 

Target

 

Maximum

 

Actual

OM%

 

Attainment Percentage

 

FY16

 

19.50%

 

20.50%

 

21.50%

 

20.9%

 

140%

 

FY17

 

20.50%

 

21.50%

 

22.50%

 

TBD

 

TBD

 

FY18

 

21.00%

 

22.00%

 

23.00%

 

TBD

 

TBD

 

Payout

 

25%

 

100%

 

200%

 

TBD

 

TBD

Equity Grant Practices

The Compensation Committee generally makes grants of stock awards to our NEOs at the first Compensation Committee meeting of our fiscal year. Awards are neither timed to relate to the price of our stock nor to correspond with the release of material non-public information, although grants are generally made when our trading window is open. Grants to current employees are generally effective on the date of the Compensation Committee meeting approving such grants. Grants to new employees, including potential NEOs, are typically made at the next regularly scheduled Compensation Committee meeting following the employee’s start date. The standard vesting schedule for our equity grants is 100% after the third year for performance grants and 25% per year over four years for restricted stock grants. For awards granted to executive level employees and above, we added a one-year post vest holding period to our long-term performance shares and restricted stock units beginning in fiscal year 2016.


34


COMPENSATION DISCUSSION AND ANALYSIS

 

If an employee dies or becomes fully disabled, his or her unvested stock options or stock awards fully vest. In addition, when an employee retires after 55 years of age and 15 years of service, his or her stock options and stock awards continue to vest per their original vesting schedule rather than accelerate at termination. We believe continued vesting into retirement better aligns NEO interests with stockholders beyond the date they retire from the company. Performance stock units are earned based on the satisfaction of the performance metrics. In addition, within the first 12 months of a performance period, the entire performance stock unit award is pro-rated based upon completion of the first 12 months of the performance period. As of October 31, 2016, Messrs. McMullen, Hirsch and Doak were entitled to continued vesting if they retire. Finally, stock options and stock awards vest on a “double-trigger” basis in connection with a change in control as described below.

Additional Information

Compensation Risk Controls

F.W. Cook conducts an annual review of our compensation-related risks. The risk assessment conducted during fiscal year 2016 confirmed that our compensation program is well designed to encourage behaviors aligned with the long-term interests of stockholders. F.W. Cook also found an appropriate balance in fixed versus variable pay, cash and equity, corporate, business unit, and individual goals, financial and non-financial performance measures, and formulas and discretion. Finally, it was determined that there are appropriate policies and controls in place to mitigate compensation-related risk, as set forth below:

Recoupment Policy

We maintain an Executive Compensation Recoupment Policy that applies to all of our executive officers covered by Section 16 of the Securities Exchange Act. Under this Policy, in the event of (1) a material restatement of financial results (wherein results were incorrect at the time published due to mistake, fraud or other misconduct) or (2) fraud or misconduct by an executive officer, the Compensation Committee will, in the case of a restatement, review all short and long-term incentive compensation awards that were paid or awarded to executive officers for performance periods beginning after July 14, 2009 that occurred, in whole or in part, during the restatement period. In the case of fraud or misconduct, the Committee will consider actions to remedy the misconduct, prevent its recurrence, and impose discipline on the wrongdoers, in each case, as the Committee deems appropriate.

These actions may include, without limitation:

    requiring reimbursement of compensation;

    the cancellation of outstanding restricted stock or deferred stock awards, stock options, and other equity incentive awards;

    limiting future awards or compensation; and

    requiring the disgorgement of profits realized from the sale of our stock to the extent such profit resulted from fraud or misconduct.

Hedging and Insider Trading Policy

Our insider trading policy expressly prohibits:

    ownership of financial instruments or participation in investment strategies that hedge the economic risk of owning our stock;

    officers and directors from pledging our securities as collateral for loans; and

    officers, directors and employees from purchasing or selling our securities while in possession of material, non-public information, or otherwise using such information for their personal benefit.

Our executives and directors are permitted to enter into trading plans that are intended to comply with the requirements of Rule 10b5-1 of the Securities Exchange Act so that they can prudently diversify their asset portfolios and exercise their stock options before expiration.


35


COMPENSATION DISCUSSION AND ANALYSIS

 

Stock Ownership Guidelines

Our stock ownership guidelines are designed to encourage our NEOs and other executive officers to achieve and maintain a significant equity stake in our company and more closely align their interests with those of our stockholders. The guidelines provide that the CEO and CFO and other executive officers should accumulate and hold, within five years from election to his or her position, an investment level in our stock equal to a multiple of his or her annual base salary or accumulate a direct ownership of our stock as set forth below:

 

 

 

Investment Level =

 

Direct Ownership of

 

 

Multiple of Annual

 

Agilent Stock

 

Executive

Base Salary

 

(# of Shares)

 

CEO

6X

 

N/A

 

 

CFO

3X

 

80,000

 

 

All other executive officers

3X

 

40,000

 

 

An annual review is conducted to assess compliance with the guidelines. At the end of fiscal year 2016, all of our NEOs had either met or were on track to reach their stock ownership guideline requirements within the applicable timeframe.

 

Benefits

Our global benefits philosophy is to provide NEOs with protection and security through health and welfare, retirement, disability insurance and life insurance programs. During fiscal year 2016, the CEO and other NEOs were eligible to receive the same benefits that are generally available to our other employees.

In addition to the company-wide benefits, our NEOs have company-paid financial counseling through a third party service to assist with their personal finances. We believe that providing this service gives our NEOs a better understanding of their pay and benefits, allowing them to concentrate on our future success. Financial counseling is a benefit generally provided by our peer companies and is available at a reasonable group cost to us.

Generally, it is our Compensation Committee’s philosophy to not provide perquisites to our NEOs except in limited circumstances. For example, in fiscal year 2016, there were no special perquisites for our NEOs except for financial counseling and the occasional use by executive officers of company drivers to transport them and their family members to the airport for personal travel. In addition, we provided some relocation expenses for Messrs. McMullen, Kaltenbach and Thaysen to facilitate their relocations to the San Francisco Bay Area from New Jersey, Germany and Denmark, respectively. These perquisites are included in the “All other Compensation” column in the “Summary Compensation Table.”

Deferred Compensation

NEOs on the U.S. payroll are eligible to voluntarily defer base salary, short-term incentives in the form of awards under the Performance-Based Compensation Plan and long-term incentives in the form of stock awards under the LTPP. The deferrals are made through our 2005 Deferred Compensation Plan, which is available to all active employees on the US payroll whose total target compensation is greater than or equal to $265,000. This is a common benefit arrangement offered by our peer companies, and our plan does not guarantee above market or a specific rate of return on deferrals.

These benefits and an additional description of plan features are set forth in the section entitled “Non-Qualified Deferred Compensation in Last Fiscal Year” below and the narrative descriptions accompanying this section.

Pension Plans

We maintain the Agilent Technologies, Inc. Retirement Plan (“Retirement Plan”) for our current NEOs, as well as other eligible employees, who were hired onto the U.S. payroll before November 1, 2014. In addition, we provide the Agilent Technologies Supplemental Benefit Retirement Plan (the “SBRP”), which is an unfunded, non-qualified pension plan which pays amounts upon retirement that would be due under the regular Retirement Plan benefit formula, but are limited under the tax-qualified Retirement Plan by the Internal Revenue Code. Both the Retirement Plan and the SBRP were closed to new entrants effective November 1, 2014, and both Plans were frozen effective April 30, 2016 such that no future benefits will be earned in either plan as of this date. We also maintain a pension plan in Germany for eligible employees, including one NEO who participated in the German pension plan for a portion of FY16. The German pension plan is described in further detail on page 46.

36


COMPENSATION DISCUSSION AND ANALYSIS

 

Additionally, we maintain the Agilent Technologies, Inc. Deferred Profit-Sharing Plan that provides certain amounts to our NEOs and other employees who provided services to our predecessor company, Hewlett-Packard Company, prior to November 1, 1993. None of these plans provide any credit of benefits prior to the date of hire or where there is a break in service. Two of our NEOs are participants in this plan.

Retirement benefits are set forth in the table entitled “Pension Benefits” on page 44 and the narrative descriptions accompanying this table.

Policy Regarding Compensation in Excess of $1 Million per Year

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction for compensation in excess of $1 million paid to our CEO and the three other most highly compensated NEOs employed at the end of the year (other than our CFO). Certain compensation is specifically exempt from the deduction limit to the extent that it is “performance-based” as defined in Section 162(m) of the Code.

Our Compensation Committee considers the impact of Section 162(m) in setting and determining executive compensation because it is concerned with the net cost of executive compensation to the company (i.e., taking into account the tax treatment of the compensation), and its ability to effectively administer executive compensation in the long-term interests of stockholders.

For fiscal year 2016, short-term cash incentives, restricted stock units and long-term performance stock units are intended to comply with the exception for performance-based compensation under Section 162(m). However, in order to maintain flexibility in rewarding individual performance and contributions, the Compensation Committee will not limit all the amounts paid under all of our compensation programs to just those that qualify for tax deductibility. Further, we cannot guarantee that compensation that is intended to comply with the performance-based compensation exception under Section 162(m) of the Code will in fact so qualify.

Termination and Change of Control

Consistent with the practice of many of our peers, the Compensation Committee adopted change-of-control agreements designed to provide protection to the NEOs so they are not distracted by their personal, professional and financial situations at a time when we need them to remain focused on their responsibilities, our best interests and those of all our stockholders. These agreements provide for a “double-trigger” payout only in the event of a change of control and the executive officer is either terminated from his-or-her position or moved into a position that represents a substantial change in responsibilities within a limited period of time after the transaction (these agreements do not become operative unless both events occur).

We have eliminated excise tax gross-ups for our CEO, Mr. McMullen, and all officers entering into newly executed change-of-control agreements after July 14, 2009. Only one officer that had such protection under an ongoing agreement will continue to have this benefit as long as the existing agreement remains in effect without material amendment. Potential payments to our NEOs in the event of a change of control under our existing agreements are reported in the “Termination and Change of Control Table.”

In addition, we have a Workforce Management Program in place that is applicable to all employees, including NEOs. Employment security is tied to competitive realities as well as individual results and performance, but from time to time, business circumstances could dictate the need for us to reduce our workforce. The Workforce Management Program is intended to assist employees affected by restructuring by providing transition income in the form of severance benefits.


37


COMPENSATION DISCUSSION AND ANALYSIS

 

 

COMPENSATION COMMITTEE REPORT

 

The information contained in this report shall not be deemed to be “soliciting material,” to be “filed” with the SEC, or to be subject to Regulation 14A or Regulation 14C (other than as provided in Item 407 of Regulation S-K) or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in future filings with the SEC except to the extent that the company specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

The company’s executive compensation program is administered by the Compensation Committee of the Board (the “Compensation Committee”). The Compensation Committee, which is composed entirely of independent, non-employee directors, is responsible for approving and reporting to the Board on all elements of compensation for the executive officers. In this regard, the Compensation Committee has reviewed and discussed the “Compensation Discussion and Analysis” section of this Proxy Statement with management. Based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” section be included in this Proxy Statement and incorporated by reference into the company’s 2016 Annual Report on Form 10-K.