PRE 14A 1 d330632dpre14a.htm PRE 14A PRE 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a – 101)

INFORMATION REQUIRED IN

PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934 (Amendment No.    )

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Definitive Additional Materials

 

Soliciting Material Pursuant to R240.14a-12

VMware, Inc.

 

 

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VMWARE, INC.

NOTICE OF THE ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON JUNE 8, 2017

To the Stockholders of VMware, Inc.:

Notice is hereby given that the annual meeting of stockholders of VMware, Inc., a Delaware corporation, will be held on Thursday, June 8, 2017, at 8:30 a.m. Pacific time (the “Annual Meeting”). This year’s Annual Meeting will be a completely virtual, live, audio webcast meeting of stockholders.

We will also offer a webcast of the Annual Meeting on the Investor Relations page of our website at http://ir.vmware.com. A recording of the webcast will be available on our website for approximately 60 days following our meeting.

We are holding the meeting for the following purposes:

 

  1. to elect three members nominated by us to the Board of Directors to serve as Class I directors, of which two are Group I directors to be elected by our sole Class B common stockholder and one is a Group II director to be elected by our Class A common stockholders and our sole Class B common stockholder voting together as a class, each for a three-year term expiring at the 2020 annual meeting of stockholders;

 

  2. to vote, on an advisory basis, to approve named executive officer compensation;

 

  3. to vote, on an advisory basis, on the frequency of future advisory votes on named executive officer compensation;

 

  4. to approve the Amended and Restated 2007 Equity and Incentive Plan;

 

  5. to approve the Amended and Restated 2007 Employee Stock Purchase Plan;

 

  6. to approve the Amended and Restated Certificate of Incorporation;

 

  7. to ratify the selection by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP as our independent auditor for the fiscal year ending February 2, 2018; and

 

  8. to transact any and all other business that may properly come before the meeting or any adjournments thereof.

All stockholders of record of our common stock at the close of business on April 12, 2017, the record date, are entitled to notice of and to vote at the Annual Meeting and any adjournments thereof.

Class A common stockholders may cast their votes by completing a proxy. Whether or not you plan to participate in the meeting, please cast your vote as instructed in the notice regarding the availability of proxy materials over the Internet or by telephone, as promptly as possible. You may also request a paper proxy card to submit your vote by mail, if you prefer. We encourage you to vote via the Internet prior to the meeting by visiting www.proxyvote.com. Internet voting is convenient, helps reduce the environmental impact of our Annual Meeting and saves us significant postage and processing costs.

Stockholders of record as of April 12, 2017 will be able to participate in the Annual Meeting by visiting www.virtualshareholdermeeting.com/VMW and entering the 16-digit control number included in your notice of internet availability of the proxy materials, on your proxy card or on the instructions that accompanied your proxy materials.

The Annual Meeting will begin promptly at 8:30 a.m. Pacific time. Online check-in will available beginning at 8:15 a.m. Pacific time, and you should allow ample time for the online check-in procedures.

 

By order of the Board of Directors

/s/ S. DAWN SMITH

S. DAWN SMITH
Senior Vice President, Chief Legal Officer and Secretary

Palo Alto, California

April [*], 2017

 


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Table of Contents

 

    Page

General

    1  

Our Board of Directors and Nominees

    1  

Corporate Governance

    7  

Board of Directors Independence and Committees

    10  

Proposal 1—Vote to Elect Directors

    13  

Proposal 2—Advisory Vote to Approve Named Executive Officer Compensation

    13  

Proposal 3—Advisory Vote on the Frequency of Future Advisory Votes on Named Executive Officer Compensation

    14  

Proposal 4—Vote to Approve the Amended and Restated 2007 Equity and Incentive Plan

    15  

Proposal 5—Vote to Approve the Amended and Restated 2007 Employee Stock Purchase Plan

    25  

Proposal 6—Vote to Approve the Amended and Restated Certificate of Incorporation

    28  

Proposal 7—Vote to Ratify the Selection of Independent Auditor

    29  

Equity Compensation Plan Information

    30  

Security Ownership of Certain Beneficial Owners and Management

    31  

Compensation Discussion and Analysis

    33  

Compensation of Executive Officers

    57  

Summary Compensation Table

    57  

Grants of Plan-Based Awards

    59  

Outstanding Equity Awards at Fiscal Year-End

    60  

Option Exercises and Stock Vested

    62  

Nonqualified Deferred Compensation

    63  

Potential Payments Upon Termination or Change in Control

    64  

Indemnification Agreements and Director and Officer Insurance

    66  

Compensation and Corporate Governance Committee Report

    66  

Director Compensation

    66  

Review and Approval of Transactions with Related Persons

    68  

Transactions with Related Persons

    69  

Audit Committee Report

    71  

Section 16(A) Beneficial Ownership Reporting Compliance

    71  

Information About the Meeting

    71  

10-K Report

    80  

Appendix A: Amended and Restated 2007 Equity and Incentive Plan

    A-1  

Appendix B: Amended and Restated 2007 Employee Stock Purchase Plan

    B-1  

Appendix C: Amended and Restated Certificate of Incorporation

    C-1  

Appendix D: Reconciliation of GAAP to Non-GAAP Data

    D-1  

 

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VMWARE, INC.

3401 Hillview Avenue

Palo Alto, California, 94304

PROXY STATEMENT

 

 

GENERAL

We invite our stockholders to participate in our 2017 annual meeting of stockholders (an “Annual Meeting”) and to vote on the proposals described in this proxy statement. The Annual Meeting will take place on Thursday, June 8, 2017 at 8:30 a.m. Pacific time via live audio webcast at www.virtualshareholdermeeting.com/VMW. You will need the 16-digit control number provided on the notice of Internet availability of proxy materials (the “Proxy Notice”) or your proxy card in order to participate in the meeting at that website. We will also offer a webcast of the Annual Meeting on the Investor Relations page of our website at http://ir.vmware.com that will allow you to listen to the Annual Meeting but will not provide the opportunity to participate.

If you owned VMware Class A common stock (“Class A Stock”) or Class B common stock (“Class B Stock”) at the close of business on April 12, 2017 (“Record Date”), then you may participate in and vote at the meeting. There are seven items that are scheduled to be voted on at the Annual Meeting:

 

   

election of three members nominated by us to the Board of Directors (“Board”) to serve as Class I directors, of which two are Group I directors to be elected by our sole Class B common stockholder and one is a Group II director to be elected by our Class A common stockholders and our Class B common stockholder voting together as a class, each for a three-year term expiring at the 2020 Annual Meeting;

 

   

an advisory vote to approve named executive officer compensation;

 

   

an advisory vote to approve the frequency of future advisory votes on named executive officer compensation;

 

   

vote to approve the Amended and Restated 2007 Equity and Incentive Plan;

 

   

vote to approve the Amended and Restated 2007 Employee Stock Purchase Plan;

 

   

vote to approve the Amended and Restated Certificate of Incorporation; and

 

   

ratification of the selection by the Audit Committee of the Board of PricewaterhouseCoopers LLP (“PwC”) as our independent auditor for the fiscal year ending February 2, 2018.

Dell Technologies Inc. (“Dell”) is our parent company through its ownership of EMC Corporation (“EMC”), our majority stockholder and an indirect wholly owned subsidiary of Dell. Accordingly, as of the Record Date, Dell controls all of the outstanding Class B Stock and [*] shares, or approximately [*]%, of the outstanding Class A Stock, representing approximately [*]% of the combined voting power of our common stock. Class B Stock is entitled to ten votes per share on each proposal, except the election of the Class I, Group II director, in which Class B Stock is entitled to one vote per share. Additionally, the election of the Class I, Group I directors nominated for election at the Annual Meeting will be voted on solely by Dell, through its control of Class B Stock.

We are not aware of any matters to be presented at the Annual Meeting other than those described in this proxy statement. If any matters not described in the proxy statement are properly presented at the meeting, the proxy holders will use their discretion to determine how to vote your shares. For additional information about the Annual Meeting see “Information About the Meeting.” References to “VMware,” the “Company,” “we” and “our” in this proxy statement refer to VMware, Inc., a Delaware corporation.

OUR BOARD OF DIRECTORS AND NOMINEES

The Board is currently composed of nine members. The number of directors constituting the Board may be set by resolution of the Board from time to time. However, the Board may not consist of less than six directors nor more than twelve directors.

 

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The Board is divided into two groups, Group I and Group II. The holder of Class B Stock, voting separately as a class, is entitled to elect directors representing a minimum of 80% of the total number of the directors constituting the Board, without vacancies. These directors are Group I directors. Holders of Class A Stock and Class B Stock, voting together as a single class, are entitled to elect the remaining number of directors. These directors are Group II directors.

The Board is also divided into three classes, with each class serving for a staggered three-year term. The Board consists of three Class I directors, three Class II directors and three Class III directors. At each Annual Meeting, a class of directors is elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the Class I directors, Class II directors and Class III directors expire upon the election and qualification of successor directors at the Annual Meetings held during the calendar years 2017, 2018 and 2019, respectively. The following table lists the current members of the Board, the committees, group and class to which they belong and designates which directors the Board determined to be independent under the New York Stock Exchange (“NYSE”) corporate governance standards (“NYSE Rules”):

 

Director  

Audit

Committee

 

Compensation and
Corporate

Governance

Committee

 

Mergers and

Acquisitions

Committee

  Related
Persons
Transactions
Committee
 

Independent

Director

 

Director

Class

 

Director

Group

Anthony Bates

            ✓(C)       Class I   Group II

Michael Brown

      ✓(C)               Class II   Group I

Donald Carty

                  Class III   Group I

Michael Dell*

                      Class I   Group I

Egon Durban

                    Class I   Group I

Karen Dykstra

                ✓(C)     Class II   Group I

Patrick Gelsinger

                    Class II   Group I

Paul Maritz

                    Class III   Group I

Paul Sagan**

        ✓(C)             Class III   Group I

 

(C) Chair of the committee.
  * Chairman of the Board
 ** Lead Director

Directors Standing For Election

Messrs. Bates, Dell and Durban have each been nominated by the Board for election at the Annual Meeting, and each has agreed to stand for election for an additional three-year term.

Information concerning the nominees is presented below:

Anthony Bates

Class I, Group II

Term expires: 2017 Annual Meeting

Mr. Bates, age 49, has served as a director of VMware since February 2016. From June 2014 until December 2016, Mr. Bates served as President of GoPro, Inc., a maker of video and photo capture devices. From June 2013 until March 2014, Mr. Bates was Executive Vice President, Business Development and Evangelism of Microsoft Corporation, a software company. Mr. Bates was Chief Executive Officer (“CEO”) of Skype Inc. from October 2010 until its acquisition by Microsoft in 2011, subsequent to which Mr. Bates served as President of Microsoft’s Skype Division until June 2013. From 1996 to October 2010, Mr. Bates served in various roles at Cisco Systems, Inc., most recently as Senior Vice President and General Manager of Enterprise, Commercial and Small Business. Mr. Bates currently serves on the board of directors of GoPro and eBay Inc.

 

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Mr. Bates has extensive executive leadership experience in the technology industry, including in managing worldwide operations, sales, service and support areas. His previous leadership positions and current service on the board of directors of other companies brings to our Board strong leadership expertise and unique industry insight.

Michael Dell

Class I, Group I

Term expires: 2017 Annual Meeting

Mr. Dell, age 52, has served as a director and Chairman of the Board (“Chairman”) of VMware since September 2016 when Dell, a provider of scalable IT systems, acquired EMC, VMware’s parent company (the “Dell Acquisition”). Mr. Dell serves as Chairman and CEO of Dell. Mr. Dell has held the title of Chairman of Dell Inc. since he founded the company in 1984. Mr. Dell also served as CEO of Dell Inc. from 1984 until July 2004 and resumed that role in January 2007. In 1998, Mr. Dell formed MSD Capital, L.P. for the purpose of managing his and his family’s investments, and, in 1999, he and his wife established the Michael & Susan Dell Foundation to provide philanthropic support to a variety of global causes. Mr. Dell also serves as a director and non-executive Chairman of the board of SecureWorks Corp., a majority owned subsidiary of Dell.

As the Chairman, CEO and founder of Dell, Mr. Dell oversees one of the world’s largest technology companies and is recognized as one of the leading innovators and influencers in the business world. Mr. Dell has decades of experience leading a complex, international technology enterprise and possesses extensive knowledge of internet-based technologies and the needs and expectations of enterprise customers. Having successfully led Dell Inc. through many transitions in information technology and enterprise computing, Mr. Dell brings extensive and valuable experience to our Board.

On October 13, 2010, a federal district court approved settlements by Dell Inc. and Mr. Dell with the Securities and Exchange Commission (the “SEC”) resolving an SEC investigation into Dell’s disclosures and alleged omissions before fiscal year 2008 regarding certain aspects of its commercial relationship with Intel Corporation and into separate accounting and financial reporting matters. Dell Inc. and Mr. Dell entered into the settlements without admitting or denying the allegations in the SEC’s complaint, as is consistent with common SEC practice. The SEC’s allegations with respect to Mr. Dell and his settlement were limited to the alleged failure to provide adequate disclosures with respect to Dell Inc.’s commercial relationship with Intel Corporation prior to fiscal year 2008. Mr. Dell’s settlement did not involve any of the separate accounting fraud charges settled by Dell Inc. and others. Moreover, Mr. Dell’s settlement was limited to claims in which only negligence, and not fraudulent intent, is required to establish liability, as well as secondary liability claims for other non-fraud charges. Under his settlement, Mr. Dell consented to a permanent injunction against future violations of these negligence-based provisions and other non-fraud based provisions related to periodic reporting. Specifically, Mr. Dell consented to be enjoined from violating Sections 17(a)(2) and (3) of the Securities Act of 1933 (“Securities Act”) and Rule 13a-14 under the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 12b-20, 13a-1 and 13a-13 under the Exchange Act. In addition, Mr. Dell agreed to pay a civil monetary penalty of $4 million, which has been paid in full. The settlement did not include any restrictions on Mr. Dell’s continued service as an officer or director of Dell, Inc.

Egon Durban

Class I, Group I

Term expires: 2017 Annual Meeting

Mr. Durban, age 43, has served as a director of VMware since the Dell Acquisition in September 2016. Mr. Durban has been a member of the boards of directors of Dell and Dell Inc. since the closing of Dell Inc.’s going-private transaction in October 2013. Mr. Durban is a Managing Partner and Managing Director of Silver Lake, a global private equity firm. Mr. Durban joined Silver Lake in 1999 as a founding principal. Mr. Durban also serves on the board of directors of Motorola Solutions, Inc., Pivotal Software, Inc., an indirect majority owned subsidiary of Dell in which VMware has an ownership interest (“Pivotal”), and SecureWorks Corp., a majority owned subsidiary of Dell.

As the Managing Partner, Managing Director and a founding principal of one of the leading global technology investment funds, Mr. Durban possesses considerable financial acumen, deep knowledge of global trends in information technology and expertise in conducting complex business transactions. Mr. Durban also brings valuable experience from his service on other public company boards to his service on our Board.

 

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Directors Not Standing For Election

Information concerning our continuing directors is presented below:

Michael Brown

Class II, Group I

Term expires: 2018 Annual Meeting

Mr. Brown, age 71, has served as a director of VMware since April 2007. Mr. Brown was a director of EMC from August 2005 until May 2016. From August 1994 until his retirement in July 1997, Mr. Brown served as Vice President and Chief Financial Officer (“CFO”) of Microsoft Corporation. He was Vice President, Finance of Microsoft from April 1993 to August 1994. He joined Microsoft in December 1989. After retiring from Microsoft, Mr. Brown served as Chair of the board of directors of the NASDAQ Stock Market and as a past governor of the National Association of Securities Dealers. Prior to joining Microsoft, Mr. Brown spent 18 years with Deloitte & Touche LLP in various positions. Mr. Brown is currently a director of Insperity, Inc., where he serves on the Nominating and Corporate Governance Committee and the Compensation Committee. He is also a director of Stifel Financial Corp, where he serves on the Audit Committee.

Mr. Brown brings to our Board substantial financial expertise that includes extensive knowledge of the complex financial and operational issues facing large companies, and a deep understanding of accounting principles and financial reporting rules and regulations. He acquired this knowledge in the course of serving as the CFO of a global technology company, working with a major international accounting and consulting firm for 18 years and serving as a member of the audit committees of other public company boards. Mr. Brown’s experience at Microsoft and on the boards of other technology companies also provides insight into the information technology industry. His experience as an independent auditor provides our Board and the Audit Committee with significant insight into the preparation of financial statements and knowledge of audit procedures. Through his many senior management positions, including as Chair of The NASDAQ Stock Market and as a governor of the NASD, Mr. Brown has demonstrated his leadership and business acumen.

Donald Carty

Class III, Group I

Term expires: 2019 Annual Meeting

Mr. Carty, age 70, has served as a director of VMware since December 2015. Mr. Carty is currently a private investor. Mr. Carty served as a director of EMC from January 2015 until the Dell Acquisition in September 2016. Mr. Carty served as Chairman of Virgin America Inc. from February 2006 to December 2016, when Virgin was acquired by Alaska Air Group, Inc. He served as Vice Chairman and CFO of Dell, Inc. from January 2007 to June 2008, and as Chairman and CEO of AMR Corporation and American Airlines from May 1998 to April 2003. Mr. Carty is currently a director of Hawaiian Holdings, Inc., the parent company of Hawaiian Airlines, Inc., where he serves on the Audit Committee, Compensation Committee and Executive Committee, and is a director of Canadian National Railway Company, where he is Chair of the Audit Committee and serves on the Corporate Governance and Nominating Committee, the Environment, Safety and Security Committee, the Human Resources and Compensation Committee, and the Strategic Planning Committee.

Mr. Carty is a seasoned executive who brings to our Board significant financial acumen, industry insight and strategic planning experience gained from his previous leadership positions. His service on other public company boards also provides him with valuable experience.

Karen Dykstra

Class II, Group I

Term expires: 2018 Annual Meeting

Ms. Dykstra, age 58, has served as a director of VMware since March 2016. Ms. Dykstra served as CFO and Administrative Officer of AOL, Inc., a global media technology company, from November 2013 until July 2015, and as Executive Vice President and CFO of AOL from September 2012 until November 2013. Ms. Dykstra served on the board of directors of AOL from 2009 until September 2012. From January 2007 until December 2010, Ms. Dykstra was a Partner of

 

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Plainfield Asset Management LLC (“Plainfield”), an asset management company, and she served as Chief Operating Officer (“COO”) and CFO of Plainfield Direct LLC, Plainfield’s business development company, from May 2006 to 2010, and as a director from 2007 to 2010. She previously spent over 25 years with Automatic Data Processing, Inc., a provider of human capital management solutions to employers, from 1981 through 2006, serving most recently as CFO from January 2003 to May 2006, and previously as Vice President – Finance, Corporate Controller and in other capacities. Ms. Dykstra is currently a director of Gartner, Inc., where she serves on the Audit Committee, and is a director of Boston Properties, Inc., where she also serves on the Audit Committee.

Ms. Dykstra brings to our Board substantial financial expertise that includes extensive knowledge of the complex financial and operational issues facing large companies, and a deep understanding of accounting principles and financial reporting rules and regulations. She acquired this knowledge in the course of serving as the CFO of two global companies, working with a major business services firm for 25 years and serving as a member of the audit committee of several other public company boards.

Patrick Gelsinger

Class II, Group I

Term expires: 2018 Annual Meeting

Mr. Gelsinger, age 56, has served as CEO and a director of VMware since September 1, 2012. Prior to joining VMware, he served as President and COO, EMC Information Infrastructure Products at EMC from September 2009 to August 2012. Mr. Gelsinger joined EMC from Intel Corporation, a designer and manufacturer of advanced integrated digital technology platforms, where he was Senior Vice President and Co-General Manager of Intel Corporation’s Digital Enterprise Group from 2005 to September 2009 and served as Intel’s Senior Vice President, Chief Technology Officer from 2002 to 2005. Prior to that, Mr. Gelsinger led Intel’s Desktop Products Group.

As CEO of VMware, Mr. Gelsinger has in-depth knowledge of our business and brings to our Board insight and knowledge of our operations and strategic opportunities. In addition, Mr. Gelsinger’s extensive experience as part of executive management teams for global information technology companies provides our Board with significant expertise on a variety of issues important to our business.

Paul Maritz

Class III, Group I

Term expires: 2019 Annual Meeting

Mr. Maritz, age 62, has served as a director of VMware since July 2008 when he joined VMware as CEO. Mr. Maritz was VMware’s CEO from July 2008 through August 2012 and President from July 2008 to January 2011. Mr. Maritz is currently the Executive Chairman of Pivotal. Mr. Maritz served as Pivotal’s CEO from April 2013 through August 2015. From September 2012 through March 2013, Mr. Maritz served as Chief Strategist at EMC. Prior to joining VMware, he was President of EMC’s Cloud Infrastructure and Services Division after EMC acquired Pi Corporation in February 2008. Mr. Maritz was a founder of Pi, a software company focused on building cloud-based solutions, and served as its CEO. Before founding Pi, Mr. Maritz spent 14 years working at Microsoft Corporation, where he served as a member of the five-person Executive Committee that managed the company. As Vice President of the Platform Strategy and Developer Group, among other roles, at Microsoft, he oversaw the development and marketing of System Software Products (including Windows 95, Windows NT, and Windows 2000), Development Tools (Visual Studio) and Database Products (SQL Server) and the complete Office and Exchange Product Lines. Prior to Microsoft, Mr. Maritz spent five years working at Intel Corporation as a software and tools developer.

Mr. Maritz’s experience serving in various executive positions at VMware, Pivotal and other global technology companies provides him an in-depth knowledge of our business and the issues we face. In addition, Mr. Maritz’s substantial experience in the information technology sector ranging from development of software products to founding a company developing cloud computing software provides our Board with significant expertise on a variety of issues important to our business.

 

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Paul Sagan

Class III, Group I

Term expires: 2019 Annual Meeting

Mr. Sagan, age 58, has served as a director of VMware since April 2014 and was elected VMware’s Lead Director in February 2015. Mr. Sagan was a director of EMC from December 2007 until the Dell Acquisition in September 2016. Mr. Sagan has been an Executive In Residence (XIR) at General Catalyst Partners, a venture capital firm, since January 2014. From April 2005 to January 2013, Mr. Sagan served as CEO of Akamai Technologies, Inc., a provider of services for accelerating the delivery of content and applications over the Internet, and was President from May 1999 to September 2010 and from October 2011 to December 2012. Mr. Sagan joined Akamai in October 1998 as Vice President and COO. In December 2010, President Barack Obama appointed Mr. Sagan as a member of the President’s National Security Telecommunications Advisory Committee. From July 1997 to August 1998, Mr. Sagan was Senior Advisor to the World Economic Forum. Previously, Mr. Sagan held senior executive positions at global media and entertainment companies Time Warner Cable and Time Inc., affiliates of Time Warner, Inc., as well as at CBS, Inc. Mr. Sagan is currently a director of Akamai.

As the former President, COO and CEO of a fast-growing, industry-leading S&P 500 company, Mr. Sagan has significant experience leading a complex, international technology enterprise, extensive knowledge of internet-based technologies and business acumen. During his career, Mr. Sagan has led visionary technology and media companies and consulted with the World Economic Forum. In addition, Mr. Sagan’s service on other public company boards enables him to bring valuable experience from those directorships to his service on our Board.

Selection and Nomination of Directors

Our entire Board is responsible for nominating members for election to the Board and for filling vacancies on the Board that may occur between Annual Meetings.

The Compensation and Corporate Governance Committee (the “CCG Committee”) identifies, evaluates and recommends director candidates to the entire Board. The CCG Committee reviews and assesses the skills and characteristics it believes are or may be required on the Board based on the needs of our business. The CCG Committee identifies director candidates through numerous sources, including recommendations from directors, executive officers and stockholders of VMware. The CCG Committee identifies those individuals most qualified to serve as members of the Board and considers many factors with regard to each candidate, including judgment, integrity, diversity, prior experience, the interplay of the candidate’s experience with the experience of other members of the Board, the extent to which a director candidate would be desirable as a member of any committees of the Board, and a candidate’s willingness to devote substantial time and effort to the Board. As such, the Board believes that diversity of viewpoints and experiences is an important consideration in determining the composition of the Board. The effectiveness of the Board’s efforts to recruit members with appropriate skill sets and experiences and to promote the exchange of differing viewpoints is reviewed as part of the Board’s periodic self-assessment process. The Board believes that a board having no fewer than six and no more than twelve directors enables needed expertise, diversity of experiences, and independence, without hindering effective discussion or diminishing individual accountability. In considering director candidates, the Board considers the entirety of each candidate’s credentials in the context of these standards. With respect to the nomination of continuing directors for re-election, the individual’s contributions to the Board are also considered.

Our stockholders may recommend individuals to the Board for consideration as potential director candidates by submitting the suggested candidate’s name and appropriate background and biographical information to the VMware CCG Committee, 3401 Hillview Avenue, Palo Alto, California, 94304. Assuming that the appropriate information has been timely provided, the CCG Committee will consider these candidates substantially in the same manner as it considers other candidates it identifies.

Our stockholders also may nominate director candidates by following the procedures set forth in the advance notice provisions of VMware’s bylaws. For additional information, see “Information About the Meeting—What is the deadline to propose actions for consideration at the 2018 Annual Meeting or to nominate individuals to serve as directors?

 

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CORPORATE GOVERNANCE

For purposes of the NYSE Rules, VMware is a “controlled company” because more than 50% of the voting power of VMware is held by Dell. Accordingly, pursuant to section 303A.00 of the NYSE Rules, we are exempt from certain NYSE corporate governance requirements and do avail ourselves of these exemptions. In particular, as a controlled company under the NYSE Rules, we are exempt from the requirements to have a:

 

   

majority of independent directors on our Board; and

 

   

nominating and corporate governance committee and a compensation committee that are each composed entirely of independent directors and that each have a charter addressing the respective committee’s purpose and responsibilities.

In light of our position as a controlled company, we have opted to establish a combined CCG Committee, instead of a separate compensation committee and a nominating and corporate governance committee. However, our CCG Committee is voluntarily comprised entirely of independent directors.

Our Board is committed to maintaining strong corporate governance practices. Our Board has adopted Corporate Governance Guidelines to provide a framework for the effective governance of VMware. Additionally, our Board has adopted written charters for its standing committees (Audit, Compensation and Corporate Governance, Mergers and Acquisitions and Related Persons Transactions), as well as Business Conduct Guidelines applicable to all directors, officers and employees. Our Board reviews the Corporate Governance Guidelines, the committee charters and the Business Conduct Guidelines periodically and implements changes as appropriate. Information about our corporate governance practices and copies of the Corporate Governance Guidelines, committee charters and Business Conduct Guidelines are available in the Governance subsection of the Investor Relations page of our website at http://ir.vmware.com. VMware will provide stockholders with a copy of its Corporate Governance Guidelines, committee charters and Business Conduct Guidelines, without charge, upon written request to our Investor Relations at VMware, Inc., 3401 Hillview Avenue, California, 94304.

Our Board has adopted corporate governance practices that the Board believes are in the best interests of VMware and our stockholders, as well as compliant with the rules and regulations of the SEC and the NYSE Rules. Highlights include:

 

   

Our Board believes that board membership requires a significant time commitment. As a result, directors may generally not serve on the board of directors of more than three public companies. Our CCG Committee considers the number of other public company boards on which a director or director candidate serves.

 

   

Any time a director changes his or her job responsibility outside VMware, he or she must promptly inform the CCG Committee. The CCG Committee then assesses the appropriateness of the director remaining on the Board and recommends to the Board whether to request that the director tender his or her resignation. If so requested, the director is expected to promptly tender his or her resignation from the Board and all committees thereof.

 

   

We have adopted a majority voting policy for the election of directors. The policy, which is included in our Corporate Governance Guidelines and our bylaws, requires any director who receives more votes cast “AGAINST” than “FOR” his or her election in an uncontested election to promptly offer to tender his or her resignation from the Board and all committees thereof following certification of the stockholder vote. The policy provides that the CCG Committee will assess the appropriateness of such director continuing to serve and will recommend to the Board the action to be taken with respect to such resignation. The Board will consider the CCG Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of certification of the stockholder vote.

 

   

Our Corporate Governance Guidelines require the CCG Committee to review committee assignments annually and, with the Chairman of the Board, make recommendations to the Board regarding such assignments. The Board reviews those recommendations and annually appoints the members and chair of each committee. Our current committee membership is set forth in “Board of Directors Independence and Committees—Committees of the Board.

 

   

The Lead Director, if any, and, if none, the CCG Committee, oversees an annual evaluation process of the Board and each committee of the Board as follows:

 

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  -  

each director annually evaluates the Board as a whole;

 

  -  

each member of the Audit Committee, CCG Committee, Mergers and Acquisitions Committee (the “M&A Committee”) and Related Persons Transactions Committee (the “RPT Committee”) annually evaluates the committees on which he or she serves;

 

  -  

each director annually prepares an individual self-evaluation; and

 

  -  

the Lead Director, if any, and, if none, the CCG Committee, reports on, and makes recommendations to the Board with respect to, the evaluations.

 

   

To enable open communications with stockholders and other interested parties, we provide various means to contact the non-management directors, the entire Board, and the Audit Committee (see “Information About the Meeting—How do I contact VMware’s Board Directors”). Our Board strives to provide clear, candid and timely responses to any substantive communication from such persons.

 

   

In addition to the communications above, it is our Board’s policy pursuant to our Corporate Governance Guidelines to provide a response to any stockholder proposal that receives a majority vote.

 

   

Our Board believes that director education is integral to board and committee performance and effectiveness. Directors are expected to participate in continuing educational programs to maintain the necessary level of expertise to perform their responsibilities as directors.

 

   

Our non-management directors meet in executive session without management at least twice each year. The Chairman acts as presiding director for such executive sessions of the non-management directors. Independent directors meet in executive session at least once each year. The Lead Director, if any, and, if none, the Chair of the CCG Committee, acts as the presiding director for executive sessions of the independent directors.

 

   

Our Board believes that our non-employee directors should have a meaningful financial stake in VMware. Accordingly, we include equity awards as a component of the compensation we provide to our non-employee directors and have established stock ownership guidelines that require such directors to own at least 5,000 shares of our Class A Stock and hold at least 50% of the net shares acquired from us in compensation for their Board service until they reach such ownership level. Non-employee directors who do not receive compensation for their service on our Board are exempt from our stock ownership guidelines.

Our Leadership Structure

Our current leadership structure separates the roles of CEO and Chairman. The CEO is responsible for setting the strategic direction for the Company and the day-to-day leadership and performance of the Company, while the Chairman provides guidance to the CEO, sets the agenda for Board meetings and presides over meetings of the full Board. Our leadership structure also includes a Lead Director role to facilitate effective performance of the Board and its oversight of our business. We believe that having a separate Chairman and Lead Director structure allows the Board to effectively address governance issues by providing another channel for the Board to express its views to management and provide feedback to the CEO on company performance. The Board’s oversight of risk management has not affected the leadership structure of the Board.

Lead Director

Mr. Sagan has been our Lead Director since February 2015. The responsibilities of our Lead Director include:

 

   

serving as chair of any meeting, or portion of a meeting, at which the Chairman is not present;

 

   

providing the Chairman and the CEO with input on the preparation of Board meeting agendas, including those portions of Board meetings not attended by the Chairman and Board committee meetings;

 

   

providing feedback to the Chairman and the CEO in the form of assessments of Board meetings and management presentations at Board meetings;

 

   

consulting with the Chairman and the CEO on matters relating to corporate governance and Board performance;

 

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communicating regularly with the CEO regarding information to be provided to the Board so that the Board can perform its duties and as to feedback from the Board for the CEO;

 

   

supervising the Board’s annual self-evaluations, including providing each Board member with feedback on such Board member’s performance and reporting overall results of the evaluations to the CCG Committee and, where appropriate, to the Board as a whole; and

 

   

performing such other duties as may be requested from time to time by the Board.

Oversight of Risk Management

The Board’s role in the Company’s risk oversight process includes receiving regular reports from members of senior management on areas of material risk to the Company, including operational, financial, legal and regulatory, and strategic and reputational risks.

Our M&A Committee assesses risks to the Company in connection with proposed acquisitions, divestitures and investments. The M&A Committee reviews management’s assessment of potential risks raised during due diligence and management’s related risk mitigation plans before granting approval to enter into definitive transaction agreements.

Our Audit Committee oversees management of financial risk exposures, including the integrity of our accounting and financial reporting processes and controls. As part of this responsibility, the Audit Committee meets periodically with the independent auditor, our internal auditors and our financial and accounting personnel to discuss significant financial risk exposures and the steps management has taken and will take to monitor, control and report such exposures. Additionally, the Audit Committee reviews significant findings prepared by the independent auditor and our internal auditors, together with management’s related responses. Our Audit Committee also oversees management’s compliance with applicable legal and regulatory requirements and the risks related to potential non-compliance. The Audit Committee reviews periodic reports from our Chief Ethics and Compliance Officer, our Chief Information Security Officer, our internal auditors and our independent auditor. Finally, the Audit Committee has primary oversight responsibility for matters relating to enterprise risk. As such, the charter for our Audit Committee provides for periodic reviews and discussion of our practices and policies with respect to risk assessment and risk management with an enterprise risk management committee comprised of senior members of the Company’s management team.

The enterprise risk management committee reviews the adequacy and effectiveness of the Company’s risk management and controls framework and processes, provides that risk management activities are integrated, consistent and managed at a level consistent with the risk, makes recommendations for, and tracks and reports on progress of, changes in the risk management framework, and assists the CEO in assuring that significant risks to the Company are identified and risk benefit trade-offs are managed appropriately to protect the Company’s assets and shareholder value. The CFO serves as the enterprise risk management committee chairman and the members include the CEO and senior leaders of the Company’s legal, audit, compliance, information security, product security, human resources, information, customer and products organizations. The enterprise risk management Committee meets and reports to the Audit Committee no less than quarterly.

Our management also reviews the compensation plans and programs that could have a material impact on VMware for each of our functional groups with the CCG Committee. Our management review considers whether any of these plans or programs may encourage inappropriate risk-taking or give rise to risks that are reasonably likely to have a material adverse effect on us, and whether it would recommend any changes to the plans or programs. Long-term, equity-based compensation, which we believe discourages excessive short-term risk taking and strongly aligns employee interests with the creation of long-term increased stockholder value, is an important feature in the compensation packages we offer our executive officers and employees. Management also reviews with the CCG Committee risk-mitigating controls, such as our compensation recovery policy for executive officer bonus and equity compensation, the degree of committee and senior management oversight of each program, and the level and design of internal controls over such programs. Based on these reviews, we have concluded that our compensation plans and programs are not reasonably likely to have a material adverse effect on our company.

 

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BOARD OF DIRECTORS INDEPENDENCE AND COMMITTEES

Board Independence

As a controlled company, under the NYSE Rules, we are exempt from the requirement to have a majority of independent directors on the Board. The Board has affirmatively determined that five of our nine directors are independent of VMware under the NYSE Rules. Specifically, each of Messrs. Bates, Brown, Carty and Sagan and Ms. Dykstra are independent directors. The Board considered all facts and circumstances it deemed relevant in making such determinations of independence, including business relationships between VMware and companies on which our independent directors serve as board members. The Board affirmatively concluded that none of these relationships are of a material nature or are of a nature that would preclude such directors from being deemed independent under NYSE Rules.

Ownership interests of our directors or officers in the common stock of Dell, or service as both a director of Dell and VMware, or as a director of VMware and an officer or employee of Dell could create, or appear to create, potential conflicts of interest when directors and officers are faced with decisions that could have different implications for us and Dell. Since VMware’s initial public offering (“IPO”), in order to address potential conflicts of interest between us and EMC with respect to corporate opportunities, our certificate of incorporation has contained provisions regulating and defining the conduct of our affairs as they may involve EMC and its officers and directors, and our powers, rights, duties and liabilities and those of our officers, directors and stockholders in connection with our relationship with EMC. Our certificate of incorporation also contains provisions limiting the liability any of our directors and officers who are also directors or officers of EMC in the event they learn of a transaction that may be a corporate opportunity for both VMware and EMC, provided they comply with the policies set forth in our certificate of incorporation. These provisions are applicable to Mr. Dell, who serves as CEO of EMC. Transactions with Dell are also subject to review by our RPT Committee pursuant to our Related Persons Transactions Policy. Additionally, pursuant to resolutions adopted by our RPT Committee, we have renounced any expectancy or interest in being offered an opportunity to participate in corporate opportunities of which Mr. Dell becomes aware through his personal capacity, his capacity as Chairman and CEO of Dell, his capacity as the founder and controlling owner of MSD Capital or through any other entity in which MSD Capital or its affiliates has an interest, and of which Mr. Durban becomes aware through his personal capacity, his capacity as a member of the board of directors of Dell, his capacity as Managing Partner and Managing Director of Silver Lake or through any other entity in which Silver Lake or its affiliates has an interest. Pursuant to resolutions adopted by the Board, we have renounced any expectancy or interest in being offered an opportunity to participate in corporate opportunities of which Mr. Sagan becomes aware through his personal capacity and or his capacity as XIR of General Catalyst Partners or through any other entity in which General Catalyst Partners or its affiliates has an interest. For more information, see “Review and Approval of Transactions with Related Persons.

Attendance at Board, Committee and Annual Stockholder Meetings

The Board expects that each director will prepare for, attend and participate in all Board and applicable committee meetings and that each director will ensure that other commitments do not materially interfere with his or her service on the Board. During the fiscal year ended December 31, 2016 (“FY16”), the Board held ten meetings. Each incumbent director serving during FY16 attended at least 75% of the Board and applicable committee meetings held during the period in which he or she served. VMware’s Corporate Governance Guidelines provide that each director is expected to attend the Annual Meeting . All members of the then-current Board attended our 2016 Annual Meeting.

 

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Committees of the Board

The Board has established four standing committees: the Audit Committee, the CCG Committee, the M&A Committee and the RPT Committee. Each committee operates pursuant to a written charter that is available on the Governance subsection of the Investor Relations page of our website at http://ir.vmware.com. The current membership of each committee is listed below.

 

Audit Committee        Compensation and Corporate
Governance Committee
        Mergers and Acquisitions
Committee
        Related Persons
Transactions Committee

Michael Brown(C)*

    

Anthony Bates*

      Anthony Bates(C)*       Anthony Bates*

Donald Carty*

    

Michael Brown*

      Egon Durban       Karen Dykstra(C)*

Karen Dykstra*

    

Paul Sagan(C)*

      Patrick Gelsinger      

Paul Sagan*

           Paul Maritz      

 

(C) Chair of the committee.
* Independent director under the NYSE Rules.

Audit Committee

The Board has determined that our Audit Committee is comprised solely of independent directors within the meaning of the applicable SEC rules and regulations and the NYSE Rules. The Board has determined that all current Audit Committee members meet the additional, heightened independence criteria of Rule 10A-3 of the Exchange Act applicable to audit committee members. The Board has also determined that each of Messrs. Brown, Carty and Sagan and Ms. Dykstra is an “audit committee financial expert” as defined by the SEC and that all Audit Committee members are financially literate under the current listing standards of the NYSE.

The Audit Committee held 14 meetings in FY16. This committee reviews with management and our auditors our financial statements, the accounting principles applied in their preparation, the scope of the audit, any comments made by our independent auditor on our financial statements and our accounting controls and procedures, the independence of our auditors, our internal controls, other matters as set forth in the Audit Committee charter, as adopted by the Board, and such other matters as the committee deems appropriate.

In accordance with its charter, the Audit Committee is responsible for the appointment, compensation, retention and oversight of the work of our independent auditor for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for us and pre-approves such audit, review or attest engagements. The Audit Committee also pre-approves non-audit services to be performed by our independent auditor in accordance with the Audit Committee’s pre-approval policy. Pursuant to its charter, our Audit Committee recommends, establishes and monitors procedures designed to facilitate the receipt, retention and treatment of complaints relating to accounting, internal accounting controls or auditing matters and the receipt of confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters. The Audit Committee also oversees management of financial risk exposures, including the integrity of our accounting and financial reporting processes and controls. In addition, the Audit Committee appoints and oversees the Company’s internal audit function, reviews the appointments of our Chief Ethics and Compliance Officer and our Chief Information Security Officer, and receives periodic reports on ethics and compliance and information security matters.

During FY16, senior members of our financial and legal management participated in each of the Audit Committee’s regularly scheduled meetings. During the course of the year, the Audit Committee had separate executive sessions with our CFO and members of his staff, our Chief Legal Officer and Chief Compliance Officer, the head of our internal audit department and our independent auditor at which candid discussions regarding legal matters, financial reporting, compliance, internal controls and accounting systems and processes took place. The Audit Committee discussed with VMware’s independent auditor the overall scope and plans for its audit.

 

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The Audit Committee reviewed and discussed our FY16 financial statements with our management and our independent auditor. The meeting included a discussion of the quality and not just the acceptability of the accounting principles applied, the reasonableness of the significant accounting judgments and estimates and the clarity of disclosures in the financial statements.

Additionally, the Audit Committee has primary oversight responsibility for matters relating to enterprise risk. As such, the charter for our Audit Committee provides for the committee to periodically review and discuss our practices and policies with respect to risk assessment and risk management with the enterprise risk management committee.

In performing all of these functions, the Audit Committee acts in an oversight capacity. The Audit Committee reviews our quarterly and annual reports on Form 10-Q and Form 10-K prior to filing with the SEC. In its oversight role, the Audit Committee relies on the work and assurances of our management, which has the primary responsibility for establishing and maintaining adequate internal control over financial reporting and for preparing the financial statements. The Audit Committee also relies on the work and assurances of our independent auditor who is engaged to audit and report on our consolidated financial statements and the effectiveness of our internal control over financial reporting.

Compensation and Corporate Governance Committee

The Board has determined that our CCG Committee is comprised solely of independent directors within the meaning of the applicable SEC rules and regulations and the NYSE Rules, although we are not required to maintain the independent composition of this committee in light of our position as a controlled company. The CCG Committee held 12 meetings in FY16. In accordance with its charter, the CCG Committee evaluates and sets compensation for our executive officers and monitors our general compensation programs. Subject to the terms of our compensation plans and the consent of the holder of our Class B Stock to the aggregate size of the annual equity award pool pursuant to the terms of our certificate of incorporation, the CCG Committee has discretion to determine the amount, form, structure and implementation of compensation payable to our executive officers, including, when appropriate, discretion to increase or decrease awards or to award compensation absent the attainment of performance goals and to award discretionary cash compensation outside of the parameters of our compensation plans. In exercising such discretion, the CCG Committee consults with our management. The CCG Committee approves transactions under our equity plans and has the authority to administer and interpret the provisions of our equity and other compensation plans. The CCG Committee is also responsible for overseeing and reporting to the Board on succession planning for the CEO and other senior management positions. Additionally, the CCG Committee reviews compensation of our non-employee directors and recommends changes for approval by the Board, and also oversees our non-employee director stock ownership guidelines.

Our CCG Committee is also responsible for overseeing and advising the Board with respect to corporate governance matters, assisting the Board in identifying and recommending qualified director candidates, making recommendations to the Board with respect to Board committee assignments, and, if no Lead Director has been appointed, overseeing the Board evaluations.

The CCG Committee has engaged an independent consultant, Frederic W. Cook & Co. (“FWC”), to advise the Committee on an as-needed basis with respect to executive compensation matters. FWC reports directly to the CCG Committee and does not provide services to VMware management. For more information on the processes and procedures followed by the CCG Committee for the consideration and determination of executive compensation, see “Compensation Discussion and Analysis.”

Mergers and Acquisitions Committee

The M&A Committee, pursuant to its charter, reviews and assesses, with our management, potential acquisitions, divestitures and investments and, where appropriate, will make recommendations to the Board regarding potential target candidates. In connection with such review and assessment, our M&A Committee may approve acquisitions, divestitures and investments up to a specified applicable dollar limit and in accordance with any other relevant parameters as established by the Board. The M&A Committee also assesses risk to the Company in connection with proposed acquisitions, divestitures and investments.

 

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Related Persons Transactions Committee

The RPT Committee, pursuant to its charter, is responsible for reviewing transactions by the Company involving related persons in accordance with the Company’s Related Persons Transactions Policy. For more information on related persons transactions, see “Transactions with Related Persons.

Compensation Committee Interlocks and Insider Participation

During FY16, the CCG Committee was comprised of Messrs. Bates, Brown and Sagan. No executive officer of VMware during FY16 served, or currently serves, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on the Board or the CCG Committee.

PROPOSAL 1

ELECTION OF DIRECTORS

We are asking stockholders to elect three Class I directors, of which two directors are Group I directors and one is a Group II director, each to serve for an additional three-year term. The current term of office for Class I directors expires at the Annual Meeting. The Board has nominated the following three persons, each an incumbent Class I director, for election as Class I directors at the Annual Meeting:

 

   

Anthony Bates—Class I, Group II director (elected by holders of Class A Stock and Class B Stock voting together as a single class)

 

   

Michael Dell—Class I, Group I director (elected by Class B common stockholders only)

 

   

Egon Durban—Class I, Group I director (elected by Class B common stockholders only)

Mr. Bates, the Class I, Group II nominee, must be elected by a majority of the aggregate of the votes of the Class A Stock and Class B Stock cast with respect to each nominee at the Annual Meeting, with each Class A share and Class B share entitled to one vote per share in such election.

Messrs. Dell and Durban must be elected by a majority of the votes of the Class B Stock cast with respect to such nominee at the Annual Meeting.

We expect each nominee for election as a director at the Annual Meeting to be able to accept such nomination. For more information about the nominees, see “Our Board of Directors and Nominees.

Each Class I director elected at the 2017 Annual Meeting will serve until the 2020 Annual Meeting or special meeting in lieu thereof and until that director’s successor is elected and qualified.

The Board unanimously recommends that you vote “FOR” the election of the Class I, Group I and Group II nominees.

PROPOSAL 2

ADVISORY VOTE TO APPROVE NAMED EXECUTIVE OFFICER COMPENSATION

In accordance with Section 14A of the Exchange Act, we are asking our stockholders to vote, on a non-binding advisory basis, on the compensation of our named executive officers as disclosed in this proxy statement (in accordance with the compensation disclosure rules of the SEC). This proposal, commonly known as a “Say-on-Pay” proposal, gives our stockholders the opportunity to express their views on the compensation of our named executive officers listed in the “Summary Compensation Table” (each a “NEO”). See “Compensation of Executive Officers—Summary Compensation Table.

 

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The objectives of our executive compensation program are to:

 

   

motivate our executives to achieve our strategic, operational and financial goals;

 

   

reward superior performance;

 

   

attract and retain exceptional executives; and

 

   

reward behaviors that result in long-term increased stockholder value.

To achieve these objectives, we have implemented and maintained compensation plans that tie a substantial portion of our executive compensation to the achievement of pre-determined performance goals and increases in total stockholder return. Stockholders are urged to read the “Compensation Discussion and Analysis” section of this proxy statement for greater detail about our executive compensation programs, including our compensation philosophy, policies and practices and information about the FY16 compensation of our NEOs.

We are asking our stockholders to indicate their support for the compensation of our NEOs as described in this proxy statement by voting in favor of the following resolution:

“RESOLVED: That the stockholders approve, on an advisory basis, the compensation of the Company’s named executive officers as disclosed in the Compensation Discussion and Analysis section, the Summary Compensation Table, and the other related tables as set forth in the proxy statement in accordance with the compensation disclosure rules of the Securities and Exchange Commission relating to the Company’s 2017 Annual Meeting of Stockholders.”

Even though your vote is advisory, and therefore will not be binding on the Company, the CCG Committee and the Board value the opinions of our stockholders and will consider the outcome of the vote when determining future executive compensation. We have adopted a policy providing for annual advisory votes to approve the compensation of our NEOs. Unless this policy is modified, the next advisory vote to approve the compensation of our NEOs will be at the 2018 Annual Meeting of stockholders.

The Board unanimously recommends that you vote “FOR” approval of the compensation of the Company’s named executive officers.

PROPOSAL 3

ADVISORY VOTE ON THE FREQUENCY OF FUTURE ADVISORY VOTES ON NAMED EXECUTIVE OFFICER COMPENSATION

In accordance with Section 14A of the Exchange Act, we are asking our stockholders to provide their input with regard to the frequency of future stockholder advisory votes on our executive compensation programs, such as the proposal contained in “Proposal 2Advisory Vote to Approve Named Executive Officer Compensation.” This proposal, commonly known as a “say-on-frequency” proposal, gives our stockholders the opportunity to express their views on whether an advisory vote on executive compensation should occur once every year, every two years or every three years.

In 2011, VMware stockholders recommended one year as the frequency with which stockholder advisory votes on executive compensation should be offered. In each subsequent year, we have provided our stockholders the opportunity to vote, on an advisory basis, on our executive compensation programs. After considering this item, the Board has determined that a vote every year on executive compensation is still appropriate. By providing an advisory vote on executive compensation on an annual basis, our stockholders will be able to provide us with direct input on our compensation philosophy, policies and practices as disclosed in the proxy statement every year.

When you vote in response to this proposal, you may cast your vote on your preferred voting frequency by choosing among the following four options: once every one year, two years or three years, or you may abstain from voting. The Board recommends that the advisory vote on executive compensation be held every year. We are asking our stockholders to indicate

 

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their support for the annual frequency of an advisory vote on executive compensation of our NEOs as described in the proxy statement.

The option of one year, two years or three years that receives the highest number of votes cast will be deemed the frequency of the vote on the compensation of our named executive officers that has been approved by stockholders on an advisory basis. Even though your vote is advisory and therefore will not be binding on the Company, the CCG Committee and the Board value the opinions of our stockholders. The CCG Committee and the Board may decide in the future that it is in our best interests and in the best interests of our stockholders to hold an advisory vote on executive compensation more or less frequently, as applicable, than the option approved by our stockholders and will consider the outcome of the vote in its decisions.

The Board unanimously recommends that you vote for “ONE YEAR” as the frequency with which stockholders are provided with future advisory votes on named executive compensation.

PROPOSAL 4

APPROVAL OF AMENDED AND RESTATED 2007 EQUITY AND INCENTIVE PLAN

The Board, based on the recommendation of the CCG Committee, approved the amendment and restatement of the Amended and Restated 2007 Equity and Incentive Plan (the “Incentive Plan”), effective June 5, 2017, subject to stockholder approval at the Annual Meeting. The amendment and restatement of the Incentive Plan implements the following changes to the Incentive Plan:

 

   

extends the term of the Incentive Plan from June 7, 2017 to June 5, 2027 (the tenth anniversary of the date the Board approved as the adoption date of the Incentive Plan, as amended and restated);

 

   

provides maximum annual limits of $1,000,000 and $1,250,000, on the combined value of awards granted under the Incentive Plan and cash fees paid in a single fiscal year to each of our non-employee directors and our lead director, respectively;

 

   

increases the number of shares of Class A Stock under the Incentive Plan by 4,500,000 to 126,050,000 shares;

 

   

updates the list of performance goals that may be utilized as objectives for performance-based equity and cash awards granted under the Incentive Plan;

 

   

enables the CCG Committee to permit employees to utilize Class A Stock to satisfy tax withholding requirements in an amount that exceeds the minimum amount required to be withheld for awards granted under the Incentive Plan;

 

   

updates the “clawback” provision in the Incentive Plan to expressly address the CCG Committee’s ability to determine if recoupment of awards or compensation derived from awards granted to executive officers under the Incentive Plan is necessary or appropriate under applicable laws or regulations, in case of a restatement of incorrect financial results or in case of termination of employment for “cause,” as defined in the Incentive Plan;

 

   

provides that holders of awards granted under the Incentive Plan may only receive dividends, if any, declared by the Company on Class A Stock subject to awards granted under the Incentive Plan only to the extent such awards have vested;

 

   

clarifies the effect of corporate transactions such as a merger, acquisition, sale of substantially all assets or dissolution on awards granted under the Incentive Plan; and

 

   

enacts miscellaneous updates to provisions of the Incentive Plan.

We are asking our stockholders to approve these amendments. Additionally, in order for us to retain the ability to grant awards that may be exempt from the federal income tax deduction limitations under Section 162(m) (“Section 162(m)”) of the Internal Revenue Code (the “Code”), as described below, Section 162(m) requires that, among other things, stockholders approve certain material terms of the Incentive Plan at least every five years. Therefore, we are also asking stockholders to

 

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approve such material terms of the Incentive Plan so that we retain the ability to grant awards under the Incentive Plan that may be exempt from the deduction limitations under Section 162(m). The material terms were most recently approved by stockholders for purposes of Section 162(m) at the 2013 Annual Meeting.

We are also asking our stockholders to authorize us to grant French tax-qualified restricted stock units (“RSUs”) to eligible participants in France under applicable French law that should provide more favorable income tax or social insurance contribution treatment to our local employer subsidiary in France and its employees.

Purpose of the Incentive Plan

The purpose of the Incentive Plan is to attract, motivate and retain our employees, consultants, advisors and non-employee directors and to provide compensation opportunities to reward superior performance. We believe that equity is a key element of our compensation package and that equity awards encourage participant loyalty and align participant interests directly with those of our stockholders. The Incentive Plan has allowed us to provide our service providers with equity-based incentive awards and non-equity based compensation that are competitive with those of companies with which we compete for talent.

Purpose of the Extension of the Term of the Incentive Plan

The Incentive Plan enables us to grant stock options that are intended to be “incentive stock options” within the meaning of Section 422 of the Code (“Section 422”). Under Section 422, an equity plan that provides for grants of incentive stock options must be approved by stockholders and may have a maximum duration of ten years from the earlier of the adoption date of the plan and the date of stockholder approval. The tenth anniversary of the original adoption date of the Incentive Plan is June 7, 2017 and we may only grant awards under the Incentive Plan after that date if the stockholders approve its extension. In accordance with Section 422, we are requesting the extension of the Incentive Plan for an additional ten years, through June 5, 2027, the tenth anniversary of the date the Board approved as the adoption date of the amendment and restatement of the Incentive Plan.

Purpose of the Maximum Annual Limit on Non-Employee Director and Lead Director Compensation

We typically grant equity awards under the Incentive Plan to our non-employee directors who are considered “outside” directors, including our Lead Director, and we also pay them cash fees for their services on the Board and its committees. Our CCG Committee engages its independent compensation consultant, FWC, to survey director compensation practices at our peer companies and annually recommends the level of compensation awarded to directors for approval by the Board based on such data. The annual limits included in the amendment and restatement will establish a maximum on the value of equity awards granted to our non-employee directors in a single fiscal year that, taken together with any cash fees for Board and committee service paid to our non-employee directors during that fiscal year, may not exceed $1,000,000, and with respect to our Lead Director, may not exceed $1,250,000. We believe that establishing a stockholder-approved maximum limit on director compensation is in accordance with current best corporate governance practices. For more information on the compensation that we pay to our outside directors and our Lead Director, see “Director Compensation.

Purpose of the Increase in the Number of Shares Reserved Under the Incentive Plan

The Incentive Plan is our sole plan for providing equity incentive compensation to eligible employees, consultants and non-employee directors. The Incentive Plan is a vital component of our compensation programs, and increasing the number of shares of Class A Stock that may be issued under equity awards ensures that we have an adequate reserve of shares available for issuance in order to attract, motivate and retain personnel and to provide compensation opportunities to reward superior performance. If the amendment and restatement of the Incentive Plan is not approved and we are unable to grant equity compensation in the future, we may need to consider other compensation alternatives, such as increasing cash compensation.

The Board, based on the recommendation of the CCG Committee, is recommending that stockholders approve an additional 4,500,000 shares of Class A Stock under the Incentive Plan. The members of our CCG Committee, which administers the Incentive Plan, possess significant experience in the review and oversight of equity compensation plans at

 

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global technology companies and at VMware. Based on that experience, the CCG Committee has exercised its business judgment in concluding that increasing the number of shares of Class A Stock reserved under the Incentive Plan is in the Company’s best interests. The Company is committed to effectively managing our equity compensation share reserve while minimizing stockholder dilution.

Each year the CCG Committee and our management review our overall compensation strategy and determine allocations of cash and equity compensation in light of our pay-for-performance philosophy and an equity budget for the year. In determining the annual equity budget, the CCG Committee reviews, among other things, the annual “gross burn rate” for the past three years, the “shareholder value transfer percentage,” the “issued overhang” percentage, historical share utilization and expectations regarding our future headcount and hiring needs. Gross burn rate means the total number of equity awards granted during the fiscal year divided by the number of shares outstanding. Shareholder value transfer percentage means the value of all outstanding equity awards shares available for grant under the Incentive Plan divided by the Company’s market capitalization. Issued overhang means the total number of all outstanding equity awards divided by our total outstanding shares. As a general matter, we strive to achieve a gross burn rate, shareholder value transfer percentage and issued overhang percentage that approximate the average rates for our peer group companies identified in “Compensation Discussion and Analysis” as well as for the software and services industry more generally, and that these measures are within the limits recommended by independent shareholder advisory groups, such as Institutional Shareholder Services (“ISS”). The CCG Committee has exercised its business judgment in determining that the Company’s equity awards are reasonable and generally competitive based on, among other things, consideration of the foregoing measures with the benefit of the extensive experience that the CCG Committee has in understanding the benefits and limitations of such measurements, making compensation decisions and evaluating the Company’s performance, business objectives and strategic goals.

In reaching its decision regarding the appropriate number of shares of Class A Stock by which to increase the share reserve, the CCG Committee considered these same factors and determined a number that it believes complies with ISS’s guidelines while providing the Company with a sufficient share reserve to cover the awards we anticipate granting to eligible participants for approximately two years, although the actual number of shares utilized will depend on a variety of factors, including our headcount growth rate, employee turnover, the level of equity compensation offered by other companies with whom we are competing for talent, our stock price and the mix of RSUs, Performance Stock Units (“PSUs”) and stock options granted.

Purpose of the Request for Approval Under Section 162(m) of the Code

We believe that it is in the best interests of the Company and its stockholders to provide an incentive plan under which equity-based compensation awards and non-equity based compensation awards made to our executive officers can be designed to qualify for deductibility for federal income tax purposes. As discussed in greater detail in “Compensation Discussion and Analysis,” the CCG Committee has adopted two programs under the Incentive Plan that are intended to qualify as performance-based compensation under Section 162(m): our Executive Bonus Program, under which our NEOs are eligible to receive semi-annual cash bonuses, and our performance-based long-term equity program, under which our NEOs have been granted PSUs.

In general, under Section 162(m), in order for a company to deduct compensation in excess of $1 million paid in any one year to a company’s CEO or any of the company’s three other most highly compensated executive officers (other than a company’s CFO), the compensation must qualify as “performance based.” In order to qualify as “performance based” compensation for purposes of Section 162(m), among other things, the material terms of the performance goals under which compensation may be paid must be disclosed to and approved by our stockholders. For purposes of Section 162(m), such material terms include (1) the employees eligible to receive compensation, (2) a description of the business criteria on which the performance goal is based and (3) the maximum amount of compensation that can be paid to an employee under the performance goal (or the formula used to calculate the amount of compensation to be paid to the employee if the performance goal is attained). With respect to the various types of awards under the Incentive Plan, each of these aspects is discussed below, and stockholder approval of the Incentive Plan will be deemed to constitute approval of each of these aspects of the Incentive Plan for purposes of the approval requirements of Section 162(m).

In addition, we are asking stockholders to approve an amendment to clarify that the performance goals to be utilized for awards under the Incentive Plan (1) will be based on objective formulae or standards and (2) may only be adjusted pursuant

 

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to pre-established objectively verifiable metrics, a non-exclusive list of which is included in the Incentive Plan. Additionally, the amendment updates the list of performance goals to accord with current generally accepted accounting principles and terminology.

Purpose of the Additional Amendments to the Incentive Plan

The additional amendments to the Incentive Plan are designed to update the Incentive Plan for recent changes in accounting standards and corporate governance and regulatory developments and to clarify certain provisions, as follows:

Enable the delivery or forfeiture of otherwise-deliverable Class A Stock by employees to satisfy above-minimum tax withholding requirements. In 2016, Accounting Standards Update 2016-09 amended accounting standard ASC-718, CompensationStock Compensation, to provide additional flexibility in the amount of tax withholdings the holder of a stock award may satisfy through the delivery or forfeiture of the right to receive stock. The amendment and restatement of the Incentive Plan enables the CCG Committee to permit more than the minimum amounts to be withheld, to be limited by the extent necessary to avoid adverse accounting consequence.

Update the “clawback” provision in the Incentive Plan. The Incentive Plan is being amended to clarify (1) that the CCG Committee has the authority to review awards granted under the Incentive Plan to all “executive officers” of the Company, within the meaning of Rule 3b-7 of the Exchange Act, and (2) the circumstances, including a restatement of incorrect financial results or a grantee’s termination for cause, that allow the CCG Committee to rescind or cancel awards or recoup the value of proceeds from the sale of such awards.

Prohibit receipt of dividends on unvested shares. The amendment and restatement of the Incentive Plan provides that should the Company ever grant dividends on shares of its Class A Stock, such dividends will not be deliverable on unvested shares subject to awards granted under the Incentive Plan. The Company has not granted dividends on shares of its stock since prior to its IPO in 2007, and we do not currently anticipate declaring any cash dividends in the foreseeable future.

Clarifies effect of a corporate transaction on outstanding awards. The amendment and restatement of the Incentive Plan clarifies the existing provisions of the Incentive Plan regarding the effect of a corporate transaction on outstanding awards. If the Company is the surviving corporation in any merger or consolidation (other than a merger or consolidation in which the Company survives but in which a majority of its outstanding shares are converted into securities of another corporation or are exchanged for other consideration), any award granted thereunder will pertain and apply to the securities which a holder of the number of shares of stock of the Company then subject to the award is entitled to receive. In the event of a (1) dissolution or liquidation of the Company, (2) sale or transfer of all or substantially all of the Company’s assets or (3) merger or consolidation in which the Company is not the surviving corporation or in which a majority of its outstanding shares are converted into securities of another corporation or are exchanged for other consideration, the Company must, contingent upon consummation of such transaction, either (1) arrange for any corporation succeeding to the business and assets of the Company to either (A) assume each outstanding award, or (B) issue to the participants replacement awards (which, in the case of incentive stock options, satisfy, in the determination of the CCG Committee, the requirements of Section 424 of the Code), for such corporation’s stock that will preserve the value, liquidity and material terms and conditions of the outstanding awards; or (2) make the outstanding awards fully exercisable or cause all of the applicable restrictions to which outstanding stock awards are subject to lapse, in each case, on a basis that gives the holder of the award a reasonable opportunity, as determined by the CCG Committee, following the exercise of the award or the issuance of shares of Class A Stock, as the case may be, to participate as a stockholder in any such dissolution, liquidation, asset sale or transfer, merger or consolidation, and the award will terminate immediately following consummation of any such transaction.

Additional Updates. We are also amending the Incentive Plan to (1) clarify the application of Section 409A of the Code (“Section 409A”) to the Incentive Plan; (2) remove references to the exchange offer that took place in connection with our IPO in 2007; and (3) update references to our parent company to refer to Dell.

Purpose of the Stockholder Authorization of Tax-qualified RSUs Under Recent French Tax Law

We believe that stockholder authorization of French tax-qualified RSUs under applicable French law should provide more favorable income tax or social insurance contribution treatment to our local employer subsidiary in France and its employees

 

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than non-qualified RSUs. French tax law provides that these French tax-qualified RSUs may only be granted pursuant to a plan authorized by stockholders after August 8, 2015 (and other conditions are met). Although we have granted tax-qualified RSUs in France in the past, the existing RSUs are generally on less favorable terms to employees than are allowed under the currently applicable law. We are not required to grant French tax-qualified RSUs, and we are not proposing any amendments to the Incentive Plan for purposes of granting French tax-qualified RSUs. However, if the amended and restated Incentive Plan is approved by our stockholders, we may choose to grant French tax-qualified RSUs in our sole discretion by having the CCG Committee adopt a sub-plan pursuant to this stockholder-approved resolution that complies with the new French tax-qualified RSU requirements.

Key Data

As of March 1, 2017, a total of 11,929,074 shares of Class A Stock remained available for future awards under the Incentive Plan. As of March 1, 2017, approximately 20,000 employees (including executive officers) were eligible to participate in the Incentive Plan. All six non-employee directors are eligible to participate in the Incentive Plan. Consultants that provide services to us are also eligible to receive equity awards under the Incentive Plan. As of March 1, 2017, we had approximately 7,800 consultants eligible to participate in the Incentive Plan. However, historically, only in very limited circumstances have consultants been granted equity awards under the Incentive Plan. The following table sets forth, as of March 1, 2017, information regarding outstanding equity awards (including awards under the Incentive Plan and equity awards assumed by VMware in connection with acquisitions) and shares of Class A Stock available for future equity awards under the Incentive Plan (without giving effect to approval of the proposed amendment and restatement of the Incentive Plan):

 

  Total shares of Class A Stock underlying outstanding stock options

     1,933,984  

  Weighted-average exercise price of outstanding stock options

     $69.85  

  Weighted-average remaining contractual life of outstanding stock options

     4.33 years  

  Total shares of Class A Stock underlying outstanding unvested restricted stock, RSUs and PSUs

     22,698,466  

  Total shares of Class A Stock currently available for grant

     11,929,074  

The additional 4,500,000 shares of our Class A Stock for which stockholder approval is sought represents approximately 4.1% of our 109,223,400 outstanding shares of Class A Stock (measured as of March 1, 2017).

The closing price of our Class A Stock on March 1, 2017 was $90.76.

In administering our equity compensation program, we take into consideration the number of shares we utilize. Each year, we measure our “burn rate”, which we define as the sum of the number of stock options and RSUs granted in each year, as well as the number of PSUs earned and released (i.e. vested) in each year, divided by the weighted-average basic common stock shares outstanding (“CSO”) for the applicable year. This metric provides insight into our stewardship of equity in order to attract and retain talent critical to achieving business results. The table below details our utilization in each of fiscal years 2014, 2015 and 2016.

 

  Fiscal

  Year

   Granted
Appreciation
Awards (Stock
Options)(1)
   Granted
Time-Based
RSUs(1)
     Earned
Performance-
Based
Restricted
Stock (PSUs)(1)
     Total Granted
Options and
RSUs; and
Earned PSUs
     Weighted-
Average Basic
CSO
     Burn Rate  

  2016

   0      12,361,813        214,278        12,576,091        420,520,000        2.99

  2015

   12,720      12,460,361        305,866        12,778,947        424,003,000        3.01

  2014

   1,304,356      5,741,347        25,640        7,071,343        430,355,000        1.64

 

(1) Reflects stock options and RSUs granted in each year as well as PSUs earned and released in each year only from VMware’s Incentive Plan.

 

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The table reflects our transition from granting stock options and full-value shares in the form of RSUs and PSUs to only full-value shares. In addition, the increase in burn rate in 2015 and 2016 coincides with a decline in our stock price, which utilized more shares to deliver comparable value to employees to promote retention.

Plan Summary

The following is a summary of the material terms and conditions of the Incentive Plan, as amended and restated. This summary, however, does not purport to be a complete description of all provisions of the Incentive Plan and is qualified in its entirety by reference to the full text of the Incentive Plan, which is attached to this proxy statement as Appendix A and is marked to show all proposed changes (additions are underlined and deletions are struck through).

Awards under the Incentive Plan may be in the form of stock options (either incentive stock options or non-qualified stock options) or other stock-based awards, including awards of restricted stock, restricted stock units and stock appreciation rights. The Incentive Plan also provides for the grant of cash-based awards.

Authorized Shares. Subject to stockholder approval of the amendment and restatement of the Incentive Plan, 126,050,000 shares of our Class A Stock (not including 4,270,617 shares of Class A Stock previously added to the Incentive Plan pursuant to the assumption or substitution of equity awards of acquired entities in connection with the acquisitions of other companies (“Acquired Awards”)) are reserved for the grant or settlement of awards under the Incentive Plan, subject to adjustment in the event of an extraordinary dividend or other distribution, recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange or other similar corporate transaction (“Recapitalization”). Any shares of Class A Stock subject to awards that are cancelled, forfeited or otherwise terminated or satisfied without the issuance of shares will again be available for grants under the Incentive Plan. The number of shares of Class A Stock available for issuance under the Incentive Plan will also be increased by the number of shares subject to Acquired Awards. Shares subject to Acquired Awards that are cancelled, forfeited or otherwise terminated or satisfied without the issuance of shares do not again become available for grants under the Incentive Plan.

Eligibility. Substantially all of our employees, non-employee directors and consultants are eligible to participate in the Incentive Plan. Accordingly, each member of the Board and each executive officer has an interest in this proposal.

Types of Awards Under the Incentive Plan. The following principal types of awards are available under the Incentive Plan:

Stock Options. Stock options represent the right to purchase shares of our Class A Stock within a specified period of time at a specified price and may be subject to vesting conditions. The exercise price for a stock option may not be less than 100% of the fair market value of the Class A Stock on the date of grant. Stock options will have a maximum term of ten years from the date of grant. Stock options granted may include those intended to be “incentive stock options” within the meaning of Section 422 of the Code. Stock options awarded under the Incentive Plan may vest as determined by the CCG Committee. The purchase price of stock as to which an option is exercised must be paid in full at the time of exercise. Payment may be made in cash, which may be paid by check or other instrument acceptable to the Company, or, with the consent of the CCG Committee, in shares of Class A Stock, or the CCG Committee may permit such payment of the purchase price by any other method it deems satisfactory in its discretion.

Restricted Stock and Restricted Stock Units. Restricted stock is a share of our Class A Stock that is subject to a risk of forfeiture or other restrictions that will lapse subject to the recipient’s continued employment or the attainment of performance goals or other events. RSUs represent the right to receive shares of our Class A Stock in the future, with the right to future delivery of the shares also subject to the recipient’s continued employment or the attainment of performance goals or other events. Vesting requirements of restricted stock and RSUs vary and are established by the CCG Committee.

Stock Appreciation Rights. Stock appreciation rights entitle the holder upon exercise to receive shares of our Class A Stock having a value equal to the excess of (1) the value of the number of shares with respect to which the right is being exercised (which value is based on fair market value at the time of such exercise) over (2) the exercise or base price applicable to such shares. The exercise price for a stock appreciation right will be not less than 100% of the fair market value of our Class A Stock on the date of grant. Stock appreciation rights under the Incentive Plan may vest as determined by the CCG Committee.

 

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Other Stock-Based or Cash-Based Awards. The CCG Committee is authorized to grant awards in the form of other stock-based awards or other cash-based awards, as deemed to be consistent with the purposes of the Incentive Plan. The maximum value of the aggregate payment to any Covered Employee (defined below) with respect to cash-based awards under the Incentive Plan in respect of an annual performance period is $5,000,000 (with proportional adjustment for longer performance periods, as described below).

Performance Based Awards. The CCG Committee may grant awards under the Incentive Plan subject to the satisfaction of performance goals (the “Performance Goals”). The CCG Committee may designate employees as participants whose compensation for a given fiscal year may be subject to the limit on deductible compensation imposed by Section 162(m). In the case of awards intended to qualify for exemption from such limit imposed by Section 162(m), the CCG Committee will use one or more objectively determinable Performance Goals that relate to one or more performance criteria and will administer the awards in accordance with the applicable requirements of Section 162(m). The performance criteria available under the Incentive Plan may consist of any or any combination of the following areas of performance: an objective formula or standard determined by the CCG Committee with respect to each performance period utilizing one or more of the following factors and any objectively verifiable adjustment(s) thereto permitted and pre-established by the CCG Committee: (1) (A) earnings including operating income, (B) earnings before or after (i) taxes, (ii) interest, (iii) depreciation, (iv) amortization, or (v) special items or book value per share (which may exclude nonrecurring items), or (C) growth in earnings before interest, tax, depreciation or amortization; (2) pre-tax income or after-tax income; (3) earnings per common share (basic or diluted); (4) operating profit; (5) revenue, revenue growth or rate of revenue growth; (6) return on assets (gross or net), return on investment, return on capital, return on invested capital or return on equity; (7) returns on sales or revenues; (8) operating expenses; (9) stock price appreciation; (10) cash flow, free cash flow, cash flow from operations, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital; (11) implementation or completion of critical projects or processes; (12) economic value created; (13) cumulative earnings per share growth; (14) operating margin or profit margin; (15) common stock price or total stockholder return; (16) cost targets, reductions, savings, productivity or efficiencies; (17) strategic business criteria, consisting of one or more objectives based on meeting specified market penetration, geographic business expansion, customer satisfaction, employee satisfaction, human resources management, supervision of litigation, information technology, goals relating to acquisitions, divestitures, joint ventures or similar transactions, research or development collaborations or budget comparisons; (18) personal professional objectives, including any of the foregoing Performance Goals, the implementation of policies and plans, the negotiation of transactions and the development of long-term business goals; and (19) any combination of, subset or component of, or a specified increase in, any of the foregoing. Where applicable, the Performance Goals may be expressed in terms of attaining a specified level of the particular criteria or the attainment of a percentage increase or decrease in the particular criteria, and may be applied to one or more of the Company, a subsidiary or affiliate, or a division or strategic business unit of the Company, or may be applied to the performance of the Company relative to a market index, a group of other companies or a combination thereof, all as determined by the CCG Committee. The Performance Goals may include a threshold level of performance below which no payment will be made (or no vesting will occur), levels of performance at which specified payments will be made (or specified vesting will occur), and a maximum level of performance above which no additional payment will be made (or at which full vesting will occur). Objectively verifiable adjustment(s) to Performance Goals can include but are not limited to adjustment(s) to reflect: (1) the impact of specific corporate transactions; (2) accounting or tax law changes; (3) asset write-downs; (4) significant litigation or claim adjustment; (5) foreign exchange gains and losses; (6) disposal of a segment of a business; (7) discontinued operations; (8) refinancing or repurchase of bank loans or debt securities; or (9) unbudgeted capital expenditures. Each of the foregoing Performance Goals will be subject to certification by the CCG Committee; provided that, to the extent an award is intended to satisfy the performance-based compensation exception to the limits of Section 162(m) and then to the extent consistent with such exception, the CCG Committee has the authority to make equitable adjustments to the Performance Goals in recognition of unusual or non-recurring events affecting the Company, any subsidiary or affiliate or the financial statements of the Company or any subsidiary or affiliate, in response to changes in applicable laws or regulations, related to the disposal of a segment of a business or related to a change in generally accepted accounting principles (“GAAP”).

Limitation on Awards. The following limits apply to awards granted under the Incentive Plan:

Awards to Non-employee Directors. The maximum value of awards granted during a single fiscal year under the Incentive Plan or under any other equity plan maintained by the Company, taken together with any cash fees paid during

 

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such fiscal year for services on the Board, will not exceed $1,000,000 in total value for any non-employee director, except that such limit will be $1,250,000 for any non-employee director serving as the Lead Director of the Board or Chairman. Such applicable limit will include the value of any stock awards that are received in lieu of all or a portion of any annual committee cash retainers or other similar cash-based payments.

Awards to Other Participants. Awards covering no more than 3,000,000 shares may be granted to any plan participant under the Incentive Plan in any fiscal year, subject to adjustment in the event of a Recapitalization. The maximum aggregate payment which any Covered Employee (defined below) may receive pursuant to a cash-based award will be $5,000,000 in any annual performance period, and for any performance period in excess of one year, such amount multiplied by a fraction, the numerator of which is the number of months in the performance period and the denominator of which is twelve. Currently, our CEO and our three other highest compensated officers (other than our principal financial officer) are considered Covered Employees under Section 162(m). With respect to a performance-based award (other than a stock option or stock appreciation right) made to a Covered Employee that is intended to be exempt from the deduction limitation under Section 162(m), no payment will be made prior to certification by the CCG Committee that the Performance Goals have been attained. The CCG Committee may, in certain circumstances, exercise its discretion to reduce the amount of the performance-based award.

Administration. The CCG Committee administers the Incentive Plan. The CCG Committee has the ability to: select individuals to receive awards; select the types of awards to be granted; determine the terms and conditions of the awards, including the number of shares, the purchase price of the awards and restrictions and performance goals relating to any award; establish the time when the awards or restrictions become exercisable, vest or lapse; determine whether options will be incentive stock options or nonqualified stock options; determine whether and to what extent an award may be settled, cancelled, forfeited, accelerated, exchanged or surrendered (including upon a “change in control” or similar transaction); and make all other determinations deemed necessary or advisable for the administration of the Incentive Plan.

Effects of Certain Corporate Transactions. The CCG Committee may grant awards that, upon the occurrence of certain events specified by the CCG Committee, become fully vested and exercisable. If the Company is the surviving corporation in any merger or consolidation (other than a merger or consolidation in which the Company survives but in which a majority of its outstanding shares are converted into securities of another corporation or are exchanged for other consideration), any award granted thereunder will pertain and apply to the securities that a holder of the number of shares of stock of the Company then subject to the award is entitled to receive. In the event of a (1) dissolution or liquidation of the Company, (2) sale or transfer of all or substantially all of the Company’s assets or (3) merger or consolidation in which the Company is not the surviving corporation or in which a majority of its outstanding shares are converted into securities of another corporation or are exchanged for other consideration, the Company must, contingent upon consummation of such transaction, either (1) arrange for any corporation succeeding to the business and assets of the Company to (A) assume each outstanding award, or (B) issue to the participants replacement awards (which, in the case of incentive stock options, satisfy, in the determination of the CCG Committee, the requirements of Section 424 of the Code), for such corporation’s stock that will preserve the value, liquidity and material terms and conditions of the outstanding awards; or (2) make the outstanding awards fully exercisable or cause all of the applicable restrictions to which outstanding stock awards are subject to lapse, in each case, on a basis that gives the holder of the award a reasonable opportunity, as determined by the CCG Committee, following the exercise of the award or the issuance of shares of Class A Stock, as the case may be, to participate as a stockholder in any such dissolution, liquidation, asset sale or transfer, merger or consolidation, and the award will terminate immediately following consummation of any such transaction.

In the event of a Recapitalization, the CCG Committee will make such equitable changes or adjustments as necessary or appropriate to any or all of (1) the number and kind of shares of stock or other property (including cash) that may thereafter be issued in connection with awards or the total number of awards issuable under the Incentive Plan, (2) the number and kind of shares of stock or other property issued or issuable in respect of outstanding awards, (3) the exercise price, grant price or purchase price relating to any award, (4) the performance goals and (5) the individual limitations applicable to awards; provided that, with respect to incentive stock options, any adjustment will be made in accordance with the provisions of Section 424(h) of the Code, and provided further that no such adjustment will cause any award which is or becomes subject to Section 409A to fail to comply with the requirements of such section. The CCG Committee may also make such modifications to the Incentive Plan and the awards granted thereunder as necessary in order to conform each with the laws and regulations of jurisdictions outside of the United States.

 

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Clawback Provision for Executive Officers. All awards granted under the Incentive Plan will be subject to recoupment in accordance with any clawback policy that the Company determines to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law. In addition, the CCG Committee may impose additional clawback, recovery or recoupment provisions in an award agreement as the CCG Committee determines necessary or appropriate, including but not limited to a reacquisition right in respect of previously acquired shares of stock or other cash or property upon the occurrence of cause as determined by the CCG Committee.

In the event of a restatement of incorrect financial results, the CCG Committee will review all awards held by executive officers (within the meaning of Rule 3b-7 of the Exchange Act) of the Company that (1) were earned based on performance or were vesting during the course of the financial period subject to such restatement or (2) were granted during or within one year following such financial period. If any award would have been lower or would not have vested, been earned or been granted based on such restated financial results, the CCG Committee will, if it determines appropriate in its sole discretion and to the extent permitted by governing law, (1) cancel such award, in whole or in part, whether or not vested, earned or payable or (2) require the participant to repay to the Company an amount equal to all or any portion of the value of any gains from the grant, vesting or payment of the award that would not have been realized had the restatement not occurred.

If a participant’s employment or service is terminated for cause (as defined in the Incentive Plan), all unvested (and, to the extent applicable, unexercised) portions of awards will terminate and be forfeited immediately without consideration. In addition, the CCG Committee may in its sole discretion and to the extent permitted by applicable law cause the cancellation of all or a portion of any outstanding vested awards held by such participant or payable to such participant or require such participant to reimburse the Company for all or a portion of the gains from the exercise of, settlement or payment of any of the participant’s awards realized after the event giving rise to cause first occurred.

For more information regarding our incentive compensation recovery policies, see “Compensation Discussion and Analysis—Compensation Recovery Policies.”

Transferability. Under the Incentive Plan, awards are generally non-transferable other than by will or by the laws of descent and distribution.

Amendment and Termination. The Board can amend, alter or discontinue the Incentive Plan, but no amendment, alteration or discontinuation can be made that would impair the rights of a participant under any award granted without such participant’s consent or that would increase the total number of shares of Class A Stock reserved under the Incentive Plan (other than pursuant to the adjustment provisions summarized above). In addition, stockholder approval may be required with respect to certain amendments, due to stock exchange rules or requirements of applicable law. The Incentive Plan, unless sooner terminated by the Board, will remain in effect through June 5, 2027.

U.S. Federal Income Tax Consequences

Incentive Stock Options. In general, neither the grant nor the exercise of an incentive stock option granted under the Incentive Plan will result in taxable income to the option holder or a deduction to us. In general, if the option holder does not dispose of stock received upon exercise of an incentive stock option within two years after the date the option is granted and within one year after the date of exercise, any later sale of such stock will result in a capital gain or loss (and we are not entitled to a corresponding deduction).

If stock received upon the exercise of an incentive stock option is disposed of before the holding period requirements described above have been satisfied, the option holder will generally realize ordinary income at the time of disposition. The amount of such ordinary income will generally be equal to the difference between the fair market value of the Class A Stock on the date of exercise and the exercise price (or, if less, the difference between the amount realized on disposition of the stock and the exercise price). In the case of a disqualifying disposition in which a loss (if sustained) would be recognized, then the amount of ordinary income will not exceed the excess of the amount realized on the sale over the adjusted basis of the stock (that is, in general, the price paid for the stock). We will generally be entitled to a deduction for Federal income tax purposes equal to the amount of ordinary income realized by the option holder, subject to any necessary withholding and reporting requirements.

 

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Certain option holders exercising incentive stock options may become subject to the alternative minimum tax, under which the difference between (1) the fair market value of stock purchased under incentive stock options, determined on the date of exercise, and (2) the exercise price, will be an item of tax preference in the year of exercise for purposes of the alternative minimum tax.

Non-Qualified Stock Options. Options granted under the Incentive Plan which are not incentive stock options are “non-qualified options.” In general, no income results upon the grant of a non-qualified option. When an option holder exercises a non-qualified option, he or she will generally realize ordinary income subject to withholding. Generally, such income will be realized at the time of exercise and in an amount equal to the excess, measured at the time of exercise, of the then fair market value of our Class A Stock over the option price. We will generally be entitled to a deduction for Federal income tax purposes equal to the amount of ordinary income realized by the option holder, subject to certain withholding and reporting requirements.

Restricted Stock. Generally, restricted stock is not taxable to a participant at the time of grant, but instead is included in ordinary income (at its then fair market value less any amount paid for the stock) when the restrictions lapse. A participant may elect to recognize income at the time of grant, in which case the fair market value of our Class A Stock at the time of grant is included in ordinary income and there is no further income recognition when the restrictions lapse. We are generally entitled to a tax deduction in an amount equal to the ordinary income recognized by the participant.

Restricted Stock Units. Generally, the participant will not be subject to tax upon the grant of an award of RSUs but will recognize ordinary income in an amount equal to the fair market value of any shares received on the date of delivery of the underlying shares of Class A Stock. We will generally be entitled to a corresponding tax deduction.

Stock Appreciation Rights. Generally, the participant will not be subject to tax upon the grant of a stock appreciation right. However, upon the receipt of shares pursuant to the exercise of a stock appreciation right, the participant, generally, will recognize ordinary income in an amount equal to the fair market value of the shares received. The ordinary income recognized with respect to the receipt of shares upon exercise of stock appreciation rights will be subject to any necessary withholding and reporting requirements. Generally, we will not be entitled to a tax deduction upon the grant or termination of stock appreciation rights. However, we will, generally, be entitled to a deduction for Federal income tax purposes equal to the amount of ordinary income realized by the participant.

Section 162(m). Section 162(m) limits to $1 million the deduction a public company may claim in any year for compensation to any of certain key officers. There are a number of exceptions to this deduction limitation, including an exception for qualifying performance-based compensation. Awards under the Incentive Plan may be designed, at the discretion of the CCG Committee, with the intention to be eligible for this performance-based exception.

Section 409A. Awards held by participants that are subject to, but fail to comply with, Section 409A are subject to a penalty tax of 20% in addition to ordinary income tax, as well as to interest charges and, potentially, state-level penalties. In addition, the failure to comply with Section 409A may result in an acceleration of the timing of income inclusion in respect of awards for income tax purposes. Awards granted under the Incentive Plan are intended to be exempt from or comply with the rules of Section 409A and will be administered accordingly. The CCG Committee intends to administer any award resulting in a deferral of compensation subject to Section 409A consistent with the requirements of Section 409A to the maximum extent possible, as determined by the CCG Committee.

This summary is not a complete description of the U.S. Federal income tax aspects of the Incentive Plan. Moreover, this summary relates only to Federal income taxes; there may also be Federal estate and gift tax consequences associated with the Incentive Plan, as well as foreign, state and local tax consequences.

New Plan Benefits

The future benefits or amounts that would be received under this amendment to the Incentive Plan are discretionary and are therefore not determinable at this time. Similarly, the benefits or amounts which would have been received by or allocated to executive officers and our other employees for the last completed fiscal year if this amendment to the Incentive Plan had

 

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been in effect cannot be determined. For more information about awards granted in FY16 to the NEOs, see “Compensation of Executive Officers—Grants of Plan-Based Awards.” For more information about awards granted in FY16 to our outside directors, see “Director Compensation.

The Board unanimously recommends that you vote “FOR” the approval of the Amended and Restated 2007 Equity and Incentive Plan.

PROPOSAL 5

APPROVAL OF THE AMENDED AND RESTATED 2007 EMPLOYEE STOCK PURCHASE PLAN

In February 2017, the Board, based on the recommendation of the CCG Committee, approved amendments to the 2007 Employee Stock Purchase Plan (the “Purchase Plan”), subject to stockholder approval at the Annual Meeting, to (i) increase the number of shares of Class A Stock authorized for issuance under the Purchase Plan by 9,000,000, (ii) increase the deadline for employees to withdraw from the Purchase Plan from 15 days to 31 days, or such other number of days as the CCG Committee determines, prior to a purchase date and (iii) make other clarifying changes, technical corrections and non-substantive modifications.

Reasons for the Amendments

We adopted the Purchase Plan to offer employees of VMware and eligible subsidiaries the opportunity to purchase shares of Class A Stock at a discounted price as an incentive for continued employment. The Purchase Plan also provides eligible employees with the opportunity to become VMware stockholders and participate in our success, which aligns the interests of participating employees with those of stockholders. As of March 1, 2017, there were 622,895 shares of Class A Stock available for future purchase under the Purchase Plan. Additional shares of Class A Stock are needed for use in the Purchase Plan so that it can continue to be used as a benefit to attract and retain employees. In reaching its decision regarding the appropriate number of shares of Class A Stock by which to increase the Purchase Plan share reserve, the CCG Committee considered a number of factors, including historical purchases under the Purchase Plan, the percentage of the Company’s outstanding shares represented by the share reserve, forecasts of expected share utilization and the expected length of time before the share reserve is depleted.

The purpose of amending the Purchase Plan to increase the deadline for employees to withdraw from the Purchase Plan from 15 days to 31 days, or such other number of days as the CCG Committee determines, prior to the next purchase date applicable to any particular Option Period (as defined below) is to minimize employee confusion during the enrollment period for the next Option Period by minimizing any overlap with the period for withdrawing from the current Option Period.

Our forecast indicates that the addition of 9,000,000 shares of Class A Stock will allow continued employee participation for at least two years, although the actual number of shares utilized will depend on a variety of factors, including our headcount growth rate, employee participation levels and our stock price. If these amendments to the Purchase Plan are not approved by the stockholders, the Board will suspend future employee participation in the Purchase Plan and employee contributions for the current Purchase Period (as defined below) will need to be refunded to the extent that the Purchase Plan lacks sufficient shares for all participants to exercise their current options under the Purchase Plan. The proceeds received by VMware from the sale of Class A Stock under the Purchase Plan are used for the general corporate purposes of VMware.

Summary of the Purchase Plan

The following is a summary of the material terms and conditions of the Purchase Plan, as amended. This summary, however, does not purport to be a complete description of all provisions of the Purchase Plan and is qualified in its entirety by reference to the full text of the Purchase Plan, which is attached to this proxy statement as Appendix B and is marked to show all proposed changes (additions are underlined and deletions are struck through).

 

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Up to 14,300,000 shares of Class A Stock are currently authorized for issuance under the Purchase Plan. If the proposed amendment is approved by the stockholders at the Annual Meeting, an additional 9,000,000 shares of Class A Stock will be available for issuance under the Purchase Plan for a total of 23,300,000 shares of Class A Stock.

As of March 1, 2017, 622,895 shares of Class A Stock were available for future purchases under the Purchase Plan. As of March 1, 2017, approximately 20,000 employees were eligible to participate in the Purchase Plan, and approximately 12,550 employees were participating. The closing price of the Class A Stock on the NYSE on March 1, 2017 was $90.76.

Eligibility. Currently, any individual who has completed two or more months of continuous service at VMware (or any eligible and participating subsidiary) and whose customary employment is more than 20 hours a week and more than five months in any calendar year is eligible to participate in the Purchase Plan, subject to the limitations described below under “—Special Limitations.” Individuals employed outside the United States are subject to similar eligibility restrictions, unless prohibited by the laws of the jurisdiction in which they are employed. Employees participate in the Purchase Plan by electing payroll deductions that accumulate to purchase shares of Class A Stock at a discount. Non-employee directors are not eligible to participate in the Purchase Plan.

Employees (including employee directors and executive officers) are eligible to participate in the Purchase Plan. Accordingly, each employee member of the Board, each executive officer and each person who previously served as an executive officer during FY16 and remains employed by VMware has an interest in this proposal.

Option Periods. Shares of Class A Stock are offered through the Purchase Plan through a series of successive option periods established by the Board, not to exceed 27 months. Currently, each option period commencing under the Purchase Plan (each, an “Option Period”) is approximately 12 months in duration and is divided into two consecutive approximately six-month option periods at the end of which purchases are made (each, a “Purchase Period”). We are in the process of transitioning from Purchase Periods beginning on February 1 and August 1 of each year to Purchase Periods beginning on March 1 and September 1 of each year as a result of our recent change of fiscal year. Purchase Periods commencing after July 31, 2017 will end on February 28 and August 31 of each year, subject to adjustment by the CCG Committee.

Purchase Price and Amount of Stock Purchased. When a participant enrolls in the Purchase Plan, the participant receives an option to purchase shares of Class A Stock on the last day of each upcoming Purchase Period at the lower of 85% of the fair market value of the shares on the offering date (the first business day of the Option Period) or the purchase date. The number of shares of Class A Stock a participant will be able to purchase will generally be equal to the payroll deductions during the Purchase Period, divided by the purchase price per share, subject to the limitations described below in “—Special Limitations.

If the number of shares of Class A Stock available in any Option Period under the Purchase Plan is otherwise insufficient to fully exercise the options based on participants’ accumulated payroll deductions, the number of shares of Class A Stock each participant is entitled to purchase will be proportionately reduced, and the remaining cash balance in each participant’s contribution account will be returned to such participant.

Payroll Deductions and Withdrawal. Options are exercisable at the end of each Purchase Period through accumulations of payroll deductions. The amount of payroll deduction is determined by each eligible employee. Eligible employees can select payroll deduction rates in 1% increments from 2% to 15% of their compensation (subject to a maximum of $7,500, pro-rated for longer or shorter periods) each Purchase Period. No interest accrues on payroll deductions. After an eligible employee enrolls in the Purchase Plan, the employee is automatically enrolled in subsequent Option Periods unless the employee actively withdraws. A participant may withdraw from any Option Period up to 31 days, or such other number of days as the CCG Committee determines, before the end of the applicable Purchase Period, and upon such cancellation, all accumulated payroll deductions in the participant’s contribution account will be returned. For purposes of the Purchase Plan, compensation generally includes base salary, bonuses, commissions and overtime pay.

If a participant’s employment is terminated for any reason prior to the end of a Purchase Period, no stock will be purchased, and all accumulated payroll deductions will be returned to the participant (or to the participant’s legal representative in the event of the participant’s death). Additionally, nothing in the Purchase Plan grants eligible employees the right to be retained in the services of VMware.

 

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If a participant holds any option under the Purchase Plan at the time of his or her death, his or her legal representative may, pursuant to a written request delivered on or before the date such option is exercisable, elect either (i) to cancel any such option and receive in cash the balance in the participant’s contribution account, or (ii) to have the balance in the withholding account applied as of the last day of the Purchase Period to the exercise of such option, and have the balance, if any, in excess of the total purchase price of the whole shares of Class A Stock returned in cash.

Special Limitations. The Purchase Plan imposes certain limitations upon a participant’s right to acquire VMware’s Class A Stock, including the following:

 

   

A participant is ineligible to receive an option pursuant to the Purchase Plan if, immediately after the grant of such option, the participant would be deemed under section 423 or 424 of the Code to own 5% or more of the total combined voting power or value of all classes of stock of the Company or any of its affiliates;

 

   

A participant cannot be granted options to purchase more than $25,000 worth of Class A Stock (valued at the time each option is granted) in any calendar year;

 

   

A participant cannot be granted options to purchase more than 750 shares of Class A Stock under the Purchase Plan in any Purchase Period, pro-rated for longer or shorter periods; and

 

   

A participant’s accumulated payroll deductions cannot exceed $7,500 in any Purchase Period, pro-rated for longer or shorter periods, or $15,000 per a calendar year, less any rollover amounts.

Special Provisions Applicable to International Employees. The Purchase Plan is generally intended to provide eligible employees of VMware’s eligible foreign subsidiaries with the opportunity to participate in the Purchase Plan in a manner that is intended to qualify under Code Section 423. However, the Purchase Plan also authorizes the establishment of alternative terms and conditions to facilitate participation in the Purchase Plan by eligible employees residing outside the United States in a manner that does not comply with Code Section 423 if necessary or desirable to achieve tax, securities law or other objectives or as necessary to comply with local laws, regulations or rules.

Transferability. Awards granted under the Purchase Plan are not transferable except by will or the laws of descent and distribution.

Changes in Capitalization. In the event of any change to our outstanding Class A Stock, such as a recapitalization, stock split, merger in which we are the surviving corporation or similar event, the aggregate number of shares of Class A Stock available under the Purchase Plan and other relevant provisions of the Purchase Plan will be appropriately adjusted. If we sell substantially all of our assets or merge with another corporation and are not the surviving corporation, the Board may designate a date for the open Option Periods to terminate and allow each participant to purchase shares of Class A Stock with accumulated payroll deductions or, if there is a surviving corporation, the Board may arrange for equivalent option to be substituted by the successor corporation. Otherwise, prior to the effective date of the merger or sale, the participant’s accumulated payroll deductions will be returned and all outstanding options will terminate.

Administration, Amendment and Termination. The Board or a committee of the Board (currently the CCG Committee) administers the Purchase Plan, makes determinations regarding all questions arising thereunder, and adopts, administers and interprets such rules and regulations relating to the Purchase Plan as it deems necessary or advisable. The Board may generally amend or terminate the Purchase Plan at any time. However, the Board must obtain stockholder approval for any amendment to the Purchase Plan that increases the number of shares of Class A Stock issuable under the Purchase Plan, reduces the option price of outstanding options or the price at which options can be granted, or modifies the requirements for eligibility to participate in the Purchase Plan.

U.S. Federal Income Tax Information. The following information is a general summary of some of the current federal income tax consequences of the Purchase Plan to U.S. based participants and to VMware. Tax laws may change, and actual tax consequences will depend on a participant’s individual circumstances as well as foreign, state and local tax laws. VMware encourages all participants to seek tax advice when they participate in the Purchase Plan. The Purchase Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Code.

 

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Tax Treatment of U.S. Participants. Participants will not recognize income when they enroll in the Purchase Plan or when they purchase shares of Class A Stock. All tax consequences are deferred until the participant disposes of the shares of Class A Stock. If the participant holds the shares for one year or more after the purchase date and two years or more after the offering date, or if the participant dies while owning the shares, the participant will generally recognize ordinary income when disposing of the shares equal to the difference between the purchase price and the fair market value of the shares on the date of disposition, or 15% of the fair market value of the shares on the offering date, whichever is less. Any additional gain will be taxed as long-term capital gain. If the shares of Class A Stock are sold for less than the purchase price, there is no ordinary income, but the participant will have a long-term capital loss for the difference between the purchase price and the sale price. If a participant disposes of the shares less than one year after the purchase date or less than two years after the offering date, the participant will generally have ordinary income equal to the difference between the purchase price and the fair market value on the purchase date. The difference between the sale price and the fair market value on the purchase date will be a capital gain or loss.

Tax Treatment of VMware. When a participant recognizes ordinary income by disposing of shares before the one-year or two-year holding period ends, we will generally be entitled to a tax deduction in the amount of the ordinary income.

New Plan Benefits

Participation in the Purchase Plan is voluntary and each eligible employee will make his or her own decision whether and to what extent to participate in the Purchase Plan. It is therefore not possible to determine the benefits or amounts that will be received in the future by individual employees or groups of employees under the Purchase Plan.

The Board unanimously recommends that you vote “FOR” the approval of the Amended and Restated 2007 Employee Stock Purchase Plan.

PROPOSAL 6

APPROVAL OF OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO PROVIDE MORE FLEXIBILITY WITH RESPECT TO CLASS B COMMON STOCK, TO DELETE CERTAIN OBSOLETE PROVISIONS AND TO EFFECT CERTAIN OTHER CLARIFYING CHANGES

General

On February 17, 2017, the Board declared advisable and adopted, subject to stockholder approval, an amended and restated certificate of incorporation that reflects a number of changes and clarifications as described below (as amended, the “New Certificate” or “Amended and Restated Certificate of Incorporation”). If the New Certificate is approved by the stockholders, it will become effective upon filing with the Secretary of State of the State of Delaware, which we expect to do as soon as practicable after the Annual Meeting assuming stockholders approve the New Certificate.

Reasons for and Effect of the Proposed Changes

The New Certificate is designed to (1) provide more flexibility to the Company in the event Class B Stock is distributed to public shareholders and the Company subsequently determines that it wishes to obtain a stockholder vote to convert the shares of Class B Stock into shares of Class A Stock, (2) delete certain obsolete provisions relating to our IPO and (3) effect certain other clarifying changes as summarized below, including addressing a definitional change necessitated by the Dell Acquisition.

Summary of the Proposed Changes

The following is a summary of the proposed amendments contained in the New Certificate. It is qualified in its entirety by reference to the full text of the New Certificate, which is attached to this proxy statement as Appendix C and is marked to show all proposed changes (additions are underlined and deletions are struck through). The New Certificate:

 

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defines the terms “transfer” and “Pledge” and makes other technical changes in order to provide more clarity regarding the circumstances under which shares of Class B Stock convert into Class A Stock prior to the date of a Distribution (as defined in the New Certificate);

 

   

allows the Company, following a Distribution, to submit for stockholder approval a proposal to convert all outstanding shares of Class B Stock into shares of Class A Stock if the Company receives an opinion of counsel satisfactory to EMC (currently the sole holder of Class B Stock), in its sole and absolute discretion, to the effect that that such conversion will not affect the intended tax treatment of the Distribution and details the scope of EMC’s discretion, which applies to the determination as to whether to accept either an opinion of counsel or a private letter ruling from the Internal Revenue Services, as contemplated by the current amended and restated certificate of incorporation;

 

   

clarifies that any outstanding shares of Class B Stock that are not distributed in a Distribution will be automatically converted into an equal number of shares of Class A Stock upon such Distribution; and

 

   

amends the term “Distribution” to reflect the fact that EMC was acquired by, and is now an indirect wholly owned subsidiary of, Dell and to reflect the intent of the current amended and restated certificate of incorporation that the term Distribution should refer to the tax-free distribution of shares to unaffiliated stockholders.

The New Certificate also deletes certain obsolete provisions relating to our IPO (see Sections A(v) and B(ii) of Article VI and Sections D and E of Article VII), effects certain other clarifying changes and makes other technical corrections and non-substantive modifications (see Section C(vi)(b) of Article IV, Sections D and E of Article VII and Section D of Article X).

The Board unanimously recommends that you vote “FOR” the approval of the Amended and Restated Certificate of Incorporation.

PROPOSAL 7

RATIFICATION OF SELECTION OF INDEPENDENT AUDITOR

We are asking our stockholders to ratify the selection by the Audit Committee of PwC as our independent auditor for the fiscal year ending February 2, 2018.

PwC, an independent registered public accounting firm, has served as our independent auditor since December 2002. We expect that representatives of PwC will be present at the Annual Meeting and will be given the opportunity to make a statement if they desire to do so and to respond to appropriate questions. PwC is also the independent auditor of Dell, our ultimate parent and controlling stockholder. We are required by the Master Transaction Agreement we entered into with EMC (which was acquired by Dell) at the time of our IPO to use our reasonable best efforts to use the same independent registered public accountant selected by EMC until such time as EMC is no longer required to consolidate our results of operations and financial position, determined in accordance with GAAP consistently applied. For further information, see “Transactions with Related Persons.”

Although ratification by the stockholders is not required by law, the Board has determined that it is desirable to request approval of this selection by the stockholders as a matter of good corporate governance. In the event the stockholders fail to ratify the appointment of PwC, the Audit Committee will consider this factor when making any determinations regarding PwC. Even though your vote is advisory and therefore will not be binding on the Company, the Audit Committee and the Board value the opinions of our stockholders.

The Board unanimously recommends that you vote “FOR” the ratification of the selection of PwC as our independent auditor for the fiscal year ending February 2, 2018.

Pre-Approval of Audit and Non-Audit Services

During FY16, the Audit Committee approved all audit, review and attest services performed by PwC.

 

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In accordance with the Audit Committee’s pre-approval policy, the Audit Committee pre-approves permissible non-audit services and audit, review or attest engagements. The Audit Committee has delegated to its Chair the authority to pre-approve any specific non-audit service that was not previously pre-approved by the Audit Committee. Any decisions of the Chair to pre-approve non-audit services are then presented to the Audit Committee at its next scheduled meeting. During FY16, the Audit Committee pre-approved all non-audit services in accordance with this policy.

For the fiscal years ended December 31, 2016 and December 31, 2015, fees for services provided by PwC were as follows:

 

      Audit Fees(1) ($)      Audit Related Fees(2) ($)      Tax Fees(3) ($)      All Other Fees(4) ($)  

    2016(5)

     5,992,183        1,438,687        2,261,189        64,226    

    2015(6)

     5,286,288        1,643,420        1,719,504        165,235    

 

(1) Includes fees in connection with the audit of our financial statements and internal control over financial reporting, review of interim financial statements included in our quarterly reports on Form 10-Q and other professional services provided in connection with statutory and regulatory filings or engagements.
(2) Includes fees in connection with acquisition-related support and other technical, financial reporting and compliance services.
(3) Includes fees in connection with tax compliance and tax consulting services.
(4) Includes fees principally for subscriptions to PwC’s web-based research program, training courses and conferences.
(5) Based on accrued and current estimates of fees for unbilled services.
(6) The prior-year tax fees have been adjusted to represent actual billings that were received in FY16 related to services that were underestimated during FY15.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain information regarding our equity compensation plans, including the Incentive Plan and Purchase Plan, as of December 31, 2016. Only shares of Class A Stock may be issued under these plans.

 

  Plan Category   

Number Of
Securities To Be
Issued Upon
Exercise Of
Outstanding
Options,
Warrants And
Rights

(a)

   

Weighted-Average

Exercise Price Per
Share Of
Outstanding
Options, Warrants
And Rights

(b)

    

Number Of
Securities
Remaining Available
For Future Issuance
Under Equity
Compensation Plans

(Excluding
Securities Reflected
In Column (a))

(c)

 

  Equity compensation plans approved by security holders

     24,037,418 (1)(2)     $ 67.93(3)          13,464,485(4)    

  Equity compensation plans not approved by security holders

           —             —       

  Total:

     24,037,418     $ 67.93             13,464,485       

 

(1) Includes 2,071,018 shares subject to outstanding options, 20,424,116 shares of Class A Stock subject to outstanding RSUs and 1,542,284 shares subject to outstanding PSUs (assuming achievement of the maximum performance).

Excludes shares assumed under:

 

   

the B-Hive Networks, Inc. 2006 Israeli Stock Option Plan (the “B-Hive 102 Plan”) in connection with our acquisition of B-Hive Networks, Inc. in July 2008; and

 

   

the SpringSource Global, Inc. 2007 Equity Incentive Plan (the “SpringSource US Plan”) in connection with our acquisition of SpringSource Global, Inc. (“SpringSource”) on September 15, 2009.

 

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Also excludes 4,375 shares subject to restricted stock awards issued under the Incentive Plan.

Each of the acquired company plans referenced above was terminated in connection with the acquisition as to any future awards but still continues to govern the existing options granted thereunder. As of December 31, 2016, the options outstanding under each acquired company plan, as well as the weighted-average exercise prices of the options outstanding under each such plan, are set forth in the following table.

 

  Plan Name    Number of Securities to be
Issued Upon Exercise of
Outstanding Options
   Weighted-Average
Exercise Price ($)

  B-Hive 102 Plan

   90            48.89        

  SpringSource US Plan

   5,745            4.17        
(2) Includes 785,497 shares issuable pursuant to equity awards outstanding under the Incentive Plan that were granted in substitution for outstanding grants of companies that we have acquired (the “Substitution Grants”). The Incentive Plan provides that the number of shares reserved for issuance under the Incentive Plan will be increased by the corresponding number of outstanding equity grants assumed or substituted for in connection with mergers and similar transactions. Substitution Grants typically remain subject to the terms that governed the grants when initially awarded by the acquired companies. When VMware makes Substitution Grants, VMware does not assume the stock plans of such acquired companies and does not make additional grants under such plans.
(3) Represents the weighted-average exercise price of outstanding options under the Incentive Plan and is calculated without taking into account the 21,966,400 shares of Class A Stock subject to outstanding RSUs and PSUs that become issuable as those units vest, without any cash consideration or other payment required for such shares.
(4) Represents the number of securities remaining available for issuance under the Incentive Plan and the Purchase Plan.

SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL

OWNERS AND MANAGEMENT

The following table sets forth information, as of March 1, 2017, about the beneficial ownership of Class A Stock and Class B Stock by (1) Dell, (2) each person who is known by us to own beneficially more than 5% of either class of our common stock, (iii) each of our directors and nominees for director, (iv) each of our NEOs and (v) all directors and executive officers of VMware as a group.

Applicable percentage ownership is based on 109,223,400 shares of Class A Stock and 300,000,000 shares of Class B Stock outstanding as of March 1, 2017. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed as outstanding shares of common stock subject to options, warrants, rights or conversion privileges related to securities beneficially owned by that person that are currently exercisable or exercisable within 60 days of March 1, 2017. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.

Unless otherwise indicated in the table or footnotes below, the address for each beneficial owner is c/o VMware, Inc., 3401 Hillview Avenue, Palo Alto, California, 94304.

 

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  Name of Beneficial Owner   Class A Shares
Beneficially
Owned(1) (#)
    Outstanding
Class A Shares
(%)
    Class B Shares
Beneficially
Owned (#)
    Outstanding
Class B Shares
(%)
   

Total Vote(2)    

(%)

 

  Principal Stockholders:

                                       

  Dell Technologies Inc.(3) (4)

    36,788,652       33.7       300,000,000       100       97.7  

  Michael Dell(5)

    36,788,652       33.7       300,000,000       100       97.7  

  SLP investment funds(6)

    36,788,652       33.7       300,000,000       100       97.7  

  Other 5% Beneficial Owners:

                                       

  Dodge & Cox(7)

    9,474,478       8.7             *     *

  Directors and Executive Officers:

                                       

  Anthony Bates*

    5,100       *           *     *

  Michael Brown(8)

    50,025       *           *     *

  Donald Carty

    5,515       *           *     *

  Jonathan Chadwick(9)

    90,389       *           *     *

  Michael Dell*(5)

    36,788,652       33.7       300,000,000       100       97.7  

  Egon Durban*

          *           *     *

  Karen Dykstra

    4,846       *           *     *

  Patrick Gelsinger(10)

    325,080       *           *     *

  Paul Maritz

    27,221       *           *     *

  Sanjay Poonen(11)

    205,812       *           *     *

  Rangarajan (Raghu) Raghuram(12)

    167,191       *           *     *

  Rajiv Ramaswami(13)

    40,888       *           *     *

  Zane Rowe

    10,562       *           *     *

  Paul Sagan

    8,985       *           *     *

  All directors and executive officers as a group (15 persons)(14)

    37,704,277       34.4       300,000,000       100       97.7  

 

* Nominee for director
**  Represents less than 1%

 

(1) All amounts shown in this column include shares obtainable upon exercise of stock options currently exercisable or exercisable within 60 days of March 1, 2017 and shares underlying RSUs vesting within 60 days of March 1, 2017. In addition to the amounts shown, each share of Class B Stock may be converted to one share of Class A Stock upon election of the holder. To our knowledge, except as noted above, no other person or entity is the beneficial owner of more than 5% of either the Class A Stock or the Class B Stock.
(2) Percentage of total voting power represents voting power with respect to all shares of Class A Stock and Class B Stock, as a single class, calculated on the basis of 10 votes per share of Class B Stock and one vote per share of Class A Stock. Each holder of Class B Stock is entitled to 10 votes per share of Class B Stock, and each holder of Class A Stock is entitled to one vote per share of Class A Stock on all matters submitted to our stockholders for a vote, with the exception of the election of Class I, Group II directors, in which Class A Stock and Class B Stock are each entitled to one vote per share. Additionally, following a Distribution, (i) Class B stockholders are entitled to only one vote per share on any proposal to require the conversion of all then-outstanding shares of Class B Stock to Class A Stock; and (ii) Class B stockholders may not vote in elections for the Board without obtaining the prior consent of the Board if they have acquired 10% or more of the then-outstanding shares of Class B Stock other than through the Distribution and do not also hold an equivalent percentage of shares of the then-outstanding Class A Stock, in each case as further set forth in our certificate of incorporation.
(3) EMC is the holder of record of 300,000,000 shares of Class B Stock and 35,139,359 shares of Class A Stock reported as held by Dell, and EMC Equity Assets LLC, a direct wholly owned subsidiary of EMC, is the holder of record of 1,649,293 of the shares of Class A Stock reported as held by Dell. EMC is indirectly wholly owned by Dell through its directly and indirectly held wholly owned subsidiaries, consisting of Denali Intermediate Inc., a Delaware corporation, and Dell Inc., a Delaware corporation. Dell, and each such subsidiary in the chain of subsidiaries through which Dell owns EMC (collectively, the “Dell Entities”), by reason of its ownership of the voting securities of the subsidiary below it in the chain, has the right to elect or appoint the members of the governing body of that subsidiary and, therefore, to direct the management and policies of that subsidiary. As a result, each Dell Entity shares, or has the right to acquire, voting and investment power over the Class A Stock and Class B Stock held of record by EMC and by EMC Equity Assets LLC. The address for each of EMC and Dell is c/o Dell Inc., One Dell Way, Round Rock, Texas, 78682.

 

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(4) EMC has pledged 77,033,442 shares of outstanding Class B Stock owned by it to certain financial institution lenders to secure indebtedness incurred to finance the Dell Acquisition that was completed in September 2016.
(5) As described in this proxy statement, Mr. Dell is the Chairman and CEO of Dell. Mr. Dell beneficially owns voting securities of Dell representing a majority of the voting power of all voting securities of Dell and has the power to elect directors who control a majority of the total votes entitled to be cast on the Dell board of directors. As a result, Mr. Dell may be deemed to be the beneficial owner of all of the shares of Class A Stock and Class B Stock beneficially owned by Dell. Mr. Dell’s address is c/o Dell Inc., One Dell Way, Round Rock, Texas, 78682.
(6) The SLP investment funds consist of Silver Lake Partners III, L.P., Silver Lake Technology Investors III, L.P., Silver Lake Partners IV, L.P., Silver Lake Technology Investors IV, L.P. and SLP Denali Co-Invest, L.P. The SLP investment funds have the right, under an agreement with Dell and other Dell stockholders, to approve the sale by Dell or specified subsidiaries of Dell of any shares of Class A Stock and Class B Stock held by them. As a result, the SLP investment funds may be deemed to share beneficial ownership of all of the shares of Class A Stock and Class B Stock beneficially owned by Dell. The general partner of each of Silver Lake Partners III, L.P. and Silver Lake Technology Investors III, L.P. is Silver Lake Technology Associates III, L.P., and the general partner of Silver Lake Technology Associates III, L.P. is SLTA III (GP), L.L.C.. The general partner of SLP Denali Co-Invest, L.P. is SLP Denali Co-Invest GP, L.L.C. and the managing member of SLP Denali Co-Invest GP, L.L.C. is Silver Lake Technology Associates III, L.P. The general partner of each of Silver Lake Partners IV, L.P. and Silver Lake Technology Investors IV, L.P. is Silver Lake Technology Associates IV, L.P., and the general partner of Silver Lake Technology Associates IV, L.P. is SLTA IV (GP), L.L.C. The managing member of SLTA III (GP), L.L.C. and SLTA IV (GP) L.L.C. is Silver Lake Group, L.L.C. The managing members of Silverlake Group, L.L.C. are Michael Bingle, James Davidson, Egon Durban, Kenneth Hao and Gregory Mondre. The address for each of the SLP investment funds and other entities named above is 2775 Sand Hill Road, Suite 100, Menlo Park, California, 94025.
(7) Based solely upon a Schedule 13G filed with the SEC on February 14, 2017 by Dodge & Cox. The address for Dodge & Cox is 555 California Street, 40th Floor, San Francisco, California, 94104.
(8) Includes 6,000 shares of Class A Stock subject to options exercisable within 60 days of March 1, 2017.
(9) Mr. Chadwick resigned his position as CFO, COO and Executive Vice President, effective as of March 1, 2016. Mr. Chadwick remained employed with VMware in a non-executive officer capacity until April 1, 2016. The information for Mr. Chadwick is based on information available to VMware as of his termination date and may not reflect current beneficial ownership as of March 1, 2017.
(10) Includes 156,483 shares of Class A Stock subject to options exercisable within 60 days of March 1, 2017 and 4,942 shares of Class A Stock issuable under RSUs that will vest within 60 days of March 1, 2017.
(11) Includes 171,945 shares of Class A Stock subject to options exercisable within 60 days of March 1, 2017.
(12) Includes 48,261 shares of Class A Stock subject to options exercisable within 60 days of March 1, 2017 and 1,582 shares of Class A Stock issuable under RSUs that will vest within 60 days of March 1, 2017.
(13) Includes 40,767 shares of Class A Stock issuable under RSUs that will vest within 60 days of March 1, 2017.
(14) Includes 411,460 shares of Class A Stock subject to options exercisable within 60 days of March 1, 2017 that are held by all executive officers and directors as a group and 63,614 shares of Class A Stock issuable under RSUs that will vest within 60 days of March 1, 2017. Does not include shares beneficially owned by Mr. Chadwick.

COMPENSATION DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis section (“CD&A”) discusses the compensation programs and policies for our NEOs. The CD&A also provides an overview of the CCG Committee and its role in the design and administration of these programs and policies and its role in making specific compensation decisions for our NEOs.

Executive Summary

Objectives of our Executive Compensation Program

The objectives of our executive compensation program are to:

 

   

motivate our executives to achieve our strategic, operational and financial goals

 

   

reward superior performance

 

   

attract and retain exceptional executives

 

   

reward behaviors that result in long-term increased stockholder value

 

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To achieve these objectives, we have implemented and maintain compensation plans that tie a substantial portion of our executive compensation to the achievement of pre-determined performance goals and increases in total stockholder return. As detailed below, our pay mix is balanced among base salary, short-term performance cash bonus awards and equity compensation. We may adopt other arrangements from time to time to best meet our compensation objectives.

Executive Compensation Highlights

 

     What We Do           What We Do Not Do
   94% of CEO’s target compensation is in the form of incentive-based compensation, with 84% tied to stock price performance         No employment agreements
   At least half of NEO target cash compensation opportunity is in the form of cash incentive bonuses that are funded on the basis of quantitative financial results         No guaranteed bonuses
   PSUs constitute 50% of total target value of long-term incentive compensation equity mix for the CEO and CFO         No excessive perquisites or tax gross-ups
   Ongoing PSU Plans utilize a three-year performance period         No single-trigger severance upon change-in-control
   Below-target performance in incentive plans results in disproportionately lower payouts         No hedging transactions allowed
   Independent compensation consultant is engaged by our CCG Committee to review executive compensation        
   Clawback provisions enable recovery of performance bonuses and gains on equity awards        

Fiscal Year 2016 Summary

 

   

Pay-for-performance yielded above-target annual incentive bonus plan and PSU payouts in alignment with corporate financial results and stockholder returns. Our incentive plans focused on revenue, non-GAAP operating margin and license and hybrid cloud Software-as-a-Service (“SaaS”) revenue metrics, which we believe investors focus on in evaluating our performance. In FY16, we exceeded targets for each of these metrics, and total stockholder return increased by 39% from the end of fiscal year 2015 (“FY15”).

 

   

Adjusted performance-based incentive plans to diversify performance metrics and reduce weighting of personal objectives (“MBO”) element. We replaced three-year revenue growth in our FY16 PSU Plan with three-year average growth in non-GAAP operating income in order to add diversity to our inventory of performance metrics by including a measure of long-term growth in profitability. In addition, we reduced the funding of the MBO component of our semi-annual executive bonus plan from 1.5 times the plan funding level in FY15 to 1.25 times the plan funding level in FY16 to increase the focus on achievement of corporate financial metrics as the primary driver of plan funding.

 

   

Performed well despite the uncertainty triggered by a change in control of our controlling stockholder and positioned the Company to achieve potential benefits from our relationship with Dell, our new controlling stockholder. In FY16, our controlling stockholder, EMC, was acquired by Dell. Our leadership team successfully piloted the Company through this transition period while maintaining and expanding the Company’s partner ecosystem, engaging in new strategic alliances and achieving financial goals and business objectives while working with Dell’s leadership team to realize synergies through Dell’s worldwide marketing and sales channels.

 

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Navigated executive transitions and realigned the Company to achieve growth through its new strategy. During FY16, we replaced two senior executives: our long-tenured President and COO and our CFO and COO. We also realigned our executive leadership overseeing product development to better drive our expanded focus on delivery of hybrid cloud and software-as-a-service based solutions. We implemented an operating and organizational model that consolidated engineering and product development under two COOs whose charter is the delivery of on-premises and hybrid-cloud based products and cloud services; and we aligned our go-to-market functions under a COO of customer operations.

Current Fiscal Year Plan Design Update

 

   

Lengthened non-equity incentive plan from semi-annual to annual performance period. Effective for the current year, which we are referring to as fiscal year 2018 (“FY18”) as a result of our realigned financial calendar, NEOs will participate in a non-equity incentive plan that reflects an annual performance period with annual goals and an annual payout opportunity. This replaces the plan design that had been in place in FY16 which featured semi-annual performance periods, semi-annual goals and semi-annual payouts. In making this design change, the CCG Committee took into consideration alignment with the Company’s annual operating plan as well as peer and governance best practices.

Advisory Vote on NEO Compensation

We conducted our annual non-binding advisory Say-on-Pay vote at our 2016 Annual Meeting held on May 26, 2016. Our stockholders demonstrated strong support for our executive compensation program, with over 99% of the total votes cast in support of our executive compensation program. In light of this strong support of our executive compensation practices and plans, we have maintained our existing compensation philosophy, which is focused on delivering compensation that rewards performance and helps to achieve the objectives of our executive compensation program described above, including attracting and retaining exceptional executives.

We have determined that our stockholders should vote on a Say-on-Pay proposal each year. Accordingly, the Board recommends that you vote FOR Proposal 2 regarding say-on-pay and vote for ONE YEAR frequency in Proposal 3 regarding the frequency of the Say-on-Pay vote at the Annual Meeting. For more information, see “Proposal 2 —Advisory Vote to Approve Named Executive Officer Compensation” and “Proposal 3—Advisory Vote on the Frequency of Future Advisory Votes on Named Executive Officer Compensation.

NEOs

Our NEOs for FY16 set forth in this proxy statement are:

 

Patrick Gelsinger

  CEO    

Zane Rowe(1)

  CFO and Executive Vice President    

Jonathan Chadwick(2)

  Former CFO, COO and Executive Vice President    

Sanjay Poonen(3)

  COO, Customer Operations    

Rangarajan (Raghu) Raghuram(4)

  COO, Products and Cloud Services    

Rajiv Ramaswami (5)

  COO, Products and Cloud Services  

 

(1) Mr. Rowe commenced employment effective February 26, 2016 and was appointed CFO effective March 1, 2016.
(2) Mr. Chadwick resigned from his executive officer position effective March 1, 2016 and his last day as an employee of VMware was April 1, 2016.
(3) Prior to his promotion effective October 26, 2016, Mr. Poonen’s title was Executive Vice President and General Manager, End-User Computing and Head of Global Marketing.
(4) Prior to his promotion effective October 26, 2016, Mr. Raghuram’s title was Executive Vice President, Software-Defined Data Center Division.

 

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(5) Mr. Ramaswami commenced employment effective April 1, 2016 with the title Executive Vice President & General Manager, Networking & Security Business Unit and was appointed COO, Products and Cloud Services effective October 26, 2016, at which time he became an “executive officer” (as defined by Rule 3b-7 of the Exchange Act) of the Company.

Corporate Performance During FY16

Our executive compensation programs are designed to reward strong corporate performance and align executive compensation opportunity with stockholder interests. Accordingly, our compensation decisions reflect both our performance and our outlook.

During FY16, the Company achieved financial and operational results that contributed to our stock price increasing from $56.57 on December 31, 2015 to $78.73 on December 31, 2016. In addition, after our fourth quarter results for FY16 were announced on January 26, 2017, our stock price increased to a closing price of $87.16 on the following trading day. Some of our FY16 highlights include:

 

   

Delivered positive financial results. VMware’s executive team remained focused on driving financial and operational results for VMware’s stockholders, as revenue, non-GAAP operating margin and license revenue each continued to increase year over year.

 

  Financials    FY16    FY15   

 

LOGO

  Revenue ($M)(1)

   $7,093    $6,647    +7%

  Non-GAAP operating margin

   32.3%    31.8%    +0.5%

  Non-GAAP operating income ($M)

   $2,294    $2,114    +9%

  License revenue ($M)

   $2,794    $2,720    +3%

  Unearned revenue balance(2) ($M)

   $5,624    $5,076    +11%

 

(1) Revenue figure for FY16 is GAAP and revenue figure for FY15 is non-GAAP. For a reconciliation of our non-GAAP revenue and operating margin to GAAP revenue and operating margin, respectively, see “Appendix D.”
(2) Balance as of fiscal year end.

 

   

Introduced our cross-cloud strategy to address our customers’ evolving IT requirements and position us for continued growth. In FY16, we announced refinements to our strategy to bolster our growth in the mobile-cloud era. We identified how we would continue to grow our business in the software-defined data center and address market opportunities through our cross-cloud initiative, designed to build and deliver products and services that will enable customers to run applications across vSphere-based private, public and hybrid cloud environments, thereby furthering our strategic priority of integrating public clouds. During FY16, IBM became our first vCloud Air Network partner to provide our Cloud Foundation as-a-service offering, and we announced a strategic alliance with Amazon Web Services to deliver a future offering known as “VMware Cloud on AWS.”

 

   

Achieved operational objectives. In FY16, we achieved key business objectives intended to position the Company for future growth. We continued to scale our software-defined networking and security business, we introduced an integrated containers solution for our flagship vSphere product line and we expanded our software-defined storage and hyper-converged infrastructure offerings. Additionally, we continued to grow our leadership in the enterprise mobility management space while achieving objectives in engaging with our partner ecosystem, developers and the open-source community.

 

   

Returned capital to investors. In FY16, we returned $1.575 billion to our stockholders in the form of share repurchases.

Alignment of Corporate Performance and Incentive Compensation During FY16

During FY16, our NEOs were eligible to participate in both a semi-annual incentive plan and in PSU plans. In the case of the PSU plans, FY16 was a performance period in three overlapping multi-year PSU plans—our fiscal year 2014 (“FY14”) PSU Plan, which paid out based on performance during FY15 and FY16; our FY15 PSU Plan, which pays out based on performance during FY15, FY16 and FY18; and our FY16 PSU Plan, which pays out based on performance during FY16, FY18 and fiscal year 2019 (“FY19”). Each PSU plan includes performance tranches for individual fiscal years and a multi-

 

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year performance goal measured over the duration of the plan. Note that in connection with the Dell Acquisition, we realigned our fiscal years to correspond with the fiscal years of Dell. Accordingly, the period from January 1, 2017 through February 3, 2017 was a transition period for the Company. As a result, we will not have a 2017 fiscal year. Instead we commenced FY18 on February 4, 2017, and FY18 will continue through February 2, 2018. As a result, we adjusted our FY15 and FY16 PSU plans to track performance during FY18. For more information, see “—Long-Term Incentives.

In consideration of our financial, strategic, operational and stock price performance, we believe we demonstrated alignment in pay-for-performance during FY16 as described below.

 

  Plan   Achievement   Impact on Payout Funding
  H1 Bonus Plan  

•      101.2% of target revenue

 

•      Exceeded non-GAAP operating margin target by 0.8%

 

•      101.1% of target license revenue adjusted for change in unearned revenue

 

•      NEO payout from financial component of bonus plan was 110.5% of target, given over-achievement in each component

 

•      CEO payout from MBO component of bonus plan was 120% of target due to achievements in refining Company strategy and stabilizing leadership amid departure of our former President/COO and former CFO/COO

  H2 Bonus Plan  

•      104.8% of target revenue

 

•      Exceeded non-GAAP operating margin target by 0.4%

 

•      103.3% of target license revenue adjusted for change in unearned revenue

 

•      NEO payout from financial component of bonus plan was 120% of target, given over-achievement in each component

 

•      CEO payout from MBO component of bonus plan was 125% of target due to achievements in implementing cross-cloud product development model and providing leadership through a challenging period

  PSU Plans  

•      FY16 tranche applicable to FY14, FY15 and FY16 PSU plans: 103% of target adjusted revenue; exceeded non-GAAP operating margin by 0.8%

 

•      Multi-year revenue growth modifier applicable to FY14 PSU Plan: 97.1% of target

 

•      FY16 tranche: 157.2% of target due to overachievement in adjusted revenue and non-GAAP operating margin

 

•      Multi-year revenue growth modifier applicable to FY14 PSU Plan: 0.7x multiplier on PSUs otherwise subject to vest based on performance in FY15 and FY16 tranches (84.6% and 157.2% of target, respectively); shares paid out represented 85% of target PSUs issued at beginning of performance period, reflecting below-target performance against multi-year revenue growth objective

CEO Pay-for-Performance Alignment—“Granted” vs. “Realizable” Pay

The CCG Committee takes seriously its responsibility to maintain appropriate pay-for-performance alignment with emphasis on long-term shareholder value. Our compensation program is designed to achieve relative alignment between Company performance and CEO pay on the basis of performance relative to financial and operational plans and stock price, as well as the impact on CEO pay for the period from FY14 through FY16. In summary, our stock price declined in value by 12% over the three-year timeframe ending FY16, while the current realizable value of the compensation awarded to our CEO over the same period increased 13% from its value when granted in part due to the stock price increase in FY16 and the above-target performance on the FY16 performance period in the PSU plans. Of note, the stock price of our Class A Stock closed at $87.16 on the first trading day after we released earnings for FY16.

 

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Summary of Relationship Between CEO Pay and Company Stock Price(1)

 

LOGO

  Value of Granted Pay(2) vs. Value of Realizable Pay(3)

 

     

Value of CEO Realizable Pay from FY14 through FY16 increased 13% from value when granted in part due to stock price increase in FY16 and the above-target performance on the FY16 performance period in the PSU plans.

 

At the same time, the Company’s stock price has declined 12% from the end of fiscal year 2013 through FY16.

 

We note that in each year the stock price declined, the Realizable Pay to our CEO declined, and in FY16 our stock price increased 39% from FY15 through FY16.

  Granted Pay ($000)

  $ 37,450        

  Realizable Pay ($000)

  $ 42,385        

  Delta in Pay—Realizable vs. Granted

    +13.2%        
       

  Three-Year Stock Price (Through FY-end 2016)

 

     

  12/31/2013 Closing Price of VMware Class A Stock

  $ 89.71        

  12/31/2016 Closing Price of VMware Class A Stock

  $ 78.73        

  Delta in Stock Price

    -12.2%        
       
       
       
       

 

(1) Value of “Granted Pay” reflects compensation awarded and granted to our CEO during FY14, FY15 and FY16.
(2) The value of Granted Pay is calculated as the sum of Salary, Bonus, Stock Awards and Option Awards reported in the “Summary Compensation Table” of this proxy statement for each applicable year, as well as the target opportunity for Non-Equity Incentive Plan Compensation reported for each year in the “Grants of Plan-Based Awards” table of the applicable year’s proxy statement.
(3)

The value of “Realizable Pay” reflects the value of Salary and Bonus amounts delivered during FY14, FY15 and FY16, the earned value of non-equity incentive awards during FY14, FY15 and FY16 and the value of equity awards made during the period based on their value at the end of FY16. The Realizable Pay is calculated as the sum of Salary, Bonus and Non-Equity Incentive Compensation, reported for each year in the “Summary Compensation Table” of this proxy statement and the amounts of stock options, RSUs and PSUs granted in FY14, FY15 and FY16 valued as of the closing stock price of VMware’s Class A Stock as of December 31, 2016. Stock options are valued according to the Black Scholes method using the number of options granted in each year, the closing stock price of VMware’s Class A Stock at December 31, 2016 and a Black Scholes assumption based on the remaining term of the option grant, 31.22% stock price volatility, applicable risk-free rate (estimated to be 1.93% for the FY14 option grant) and dividend yield. No VMware stock options were exercised during the period. The value of PSUs is further adjusted to reflect the effect of the performance multiplier on shares subject to vest for completed tranches. In the case of PSUs granted in FY14 and FY15, the target number of PSUs granted in FY15 is adjusted by a performance multiplier equal to 84.6%, which reflects the performance modifier applicable to the FY15 performance tranche of the FY14 and FY15 PSU grants; and the target number of PSUs granted in FY16 is adjusted by a performance multiplier equal to 157.2%, which reflects the performance modifier applicable to the FY16 performance tranche of the FY14, FY15 and FY16 grants. In addition, the FY14 PSU Plan shares earned under each of the FY15 and FY16 tranches are further modified by a 0.7x performance multiplier based on multi-year revenue growth that was below target performance

 

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  objectives. Future tranches of the FY15 and FY16 PSU Plans are not included in this calculation because those future tranches will not be deemed granted until FY18, in the case of FY15 and FY16 PSU Plans, and FY19, in the case of the FY16 PSU Plan.

CEO Pay-for-Performance Alignment—Rigor in Evaluating MBO Achievement

As detailed below, our Executive Bonus Program balances a component based on formulaic achievement of corporate financial objectives and a component based on qualitative achievement of individual MBOs. During FY16, the MBO component was funded at 1.25 times the amount calculated by corporate financial achievement, thereby enabling the CCG Committee to use its negative discretion to determine payout for the MBO component based on its evaluation of NEO achievement of MBOs. As demonstrated in the table below detailing bonus payouts for our CEO, the CCG Committee has consistently utilized its negative discretion to calibrate MBO payouts within a narrow range of the funding yielded by achievement of corporate financial objectives.

Semi-Annual CEO Bonus Payout as Percentage of Target Payout

 

      Based on Corporate
Financial Results
     Based on Achievement of
MBOs/Individual Targets
 
  Fiscal Year    H1      H2      H1      H2  

  2016

     110.5      120.0      120      125

  2015

     102.0      101.4      103      78.6

  2014

     96.0      103.6      96      100

Overview of Compensation Setting Process

Compensation actions for our NEOs are determined by our CCG Committee. The members of our CCG Committee possess significant experience in the review and oversight of executive compensation at global technology companies and at VMware. The CCG Committee makes its determinations of executive compensation based on this experience and in consultation with management.

The CCG Committee has engaged FWC as its independent consultant to advise it on an as-needed basis with respect to executive compensation decisions. FWC reports directly to the CCG Committee and does not provide services to VMware management. The CCG Committee has assessed the independence of FWC pursuant to SEC and NYSE Rules and concluded that the firm’s work does not raise any conflict of interest that prevents them from providing independent advisory services to the CCG Committee.

FWC provides the CCG Committee analyses of our executive compensation program from time to time. FWC assists the CCG Committee’s review of our program’s effectiveness in supporting our business objectives and strategy, its relative reasonableness compared to competitive practice for companies in related businesses of similar size and market value and the changing business and regulatory environment.

FWC recommends a peer group, which is reviewed and approved annually by the CCG Committee for executive compensation comparisons. FWC compares our executive compensation structure and levels using data from proxy and other SEC filings of and additional data from Radford Consulting (“Radford”) on the peer group companies. The weightings between the peer group and the Radford survey data are based on FWC’s subjective assessment of the applicability and quality of each data source. In FY16, our CCG Committee also monitored a group of reference peer companies, primarily to assist the CCG Committee in evaluating competitive long-term incentive program design elements. The reference peer companies were not considered when setting executive compensation levels for the NEOs.

 

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VMware’s peer group and reference group for FY16 consisted of the following companies:

 

VMware peer companies

 

 

Adobe Systems, Amazon.com, Autodesk, CA, Cisco Systems, Citrix Systems, Cognizant Technology Solutions, eBay, Electronic Arts, Intuit, LinkedIn, Microsoft, NetApp, Oracle, Red Hat, Salesforce.com, Symantec and Yahoo

 

 

VMware reference companies

 

 

 

Facebook, Google and Twitter

The CCG Committee determined that the group of peer companies was representative of our executive talent pool and our product and market profile and appropriate from a size perspective. We modified our peer group to move Cisco Systems, LinkedIn and Microsoft from the reference company group to the peer company group to better reflect the companies with whom we compete for executive talent. Although we did not believe it appropriate to add the remaining companies in the reference group to our peer group due to differences in market capitalization and industry group, we believe that the reference company group is useful because, from time to time, we compete with these companies for executive talent due to the relative proximity of our headquarters on the West coast and overlaps in certain of our technologies.

The CCG Committee evaluated NEO compensation decisions in light of the FWC analysis to award compensation for our NEOs that is generally competitive with the identified peer group and the Radford survey data and sufficient to recruit and retain qualified executives. The CCG Committee does not target or benchmark compensation to any particular percentile of compensation paid by other companies, but rather considers the market data as one factor in making its compensation decisions. Other factors include our performance, an individual’s contribution, experience, potential, compensation history, internal pay equity and retention requirements. After taking these factors into account, the CCG Committee exercises its judgment in making compensation decisions. We believe that this approach gives us the flexibility to make compensation decisions based upon all of the relevant facts and circumstances.

Compensation Components

The compensation packages of our NEOs include a mix of cash and equity-based compensation. The major compensation components are as follows:

 

 

Base salaries

 

 

 

Primary fixed compensation portion of our NEO compensation packages

 

   

 

Annual cash bonuses

 

 

 

Based on semi-annual financial, strategic and operational performance measured against specific pre-established goals

 

   

 

Long-term performance-

based equity incentive compensation

 

 

 

PSUs that are tied to stock price appreciation and long-term performance objectives important to our company

 

   

 

Long-term equity incentive compensation

 

 

 

RSUs that are tied to stock price appreciation and enhance retention and long-term focus

 

   

Pay Mix

When designing the executive compensation program, the CCG Committee gives significant weight to cash bonuses and equity incentives, which reflects the CCG Committee’s belief that a large portion of executive compensation should be performance-based. This compensation is performance-based because payment and vesting are tied to achievement of individual or corporate performance metrics. In addition, with respect to the equity awards, the value ultimately realized by the

 

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recipient fluctuates with the price of our Class A Stock, thereby explicitly linking executive compensation opportunity with shareholder value. The CCG Committee believes that equity incentives are particularly significant because they drive the achievement of VMware’s long-term operational and strategic goals and align the executives’ interests with those of our stockholders, while the cash bonuses drive achievement of shorter-term performance goals.

The CCG Committee reviews NEO compensation packages on an annual cycle, taking into account peer group data, Company and individual performance, unvested equity holdings and internal pay equity. In its review, the CCG Committee may adjust the pay mix and typically considers apportioning annual equity awards (“Annual Equity Awards”) between PSUs and RSUs.

 

LOGO

The charts above reflect the pay mix applicable to our CEO and to the other NEOs on average. For purposes of determining the percentages shown above for the annual compensation opportunities of the NEOs, annual base salary rate reflects the pro-rated amount, where applicable, during FY16 and cash bonus target opportunity reflects amounts indicated in the “—Cash Compensation” section of this CD&A. The equity component reflects the “Selected Equity Value” indicated in the “—Long-Term Incentives” section of this CD&A. With respect to the other NEOs, the equity value includes new hire and promotion or retention awards. Accordingly, the equity target for other NEOs skewed higher during FY16 due to new hire and retention or promotion awards granted in connection with the realignment of our executive team.

Cash Compensation

During FY16, there were two primary components to cash compensation paid to our NEOs—base salary and semi-annual performance-based bonuses paid under our Executive Bonus Program.

Base Salary

Base salary serves as the primary form of fixed compensation for our NEOs. Base salary can also impact other compensation and benefit opportunities, including semi-annual bonuses, as such opportunities are expressed as a percentage of base salary.

In the first quarter of FY16, we conducted our annual review of executive compensation. During our annual review, the CCG Committee determined to make no adjustments to the base salaries of Messrs. Gelsinger, Poonen and Raghuram. Mr. Rowe was recruited to VMware in the first quarter of FY16. In connection with his recruitment, Mr. Rowe’s base salary was set at $750,000, with the amount based upon competitive peer group data and his compensation package with his prior employer, EMC. Mr. Ramaswami joined VMware in the second quarter of FY16. His base salary at the time he was appointed as a COO in October 2016 reflected peer group data, a competitive market and his increased responsibilities since joining VMware.

 

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In the course of FY16, we increased the base salaries for Messrs. Poonen and Raghuram. We increased the base salaries of both Mr. Poonen and Mr. Raghuram from $610,000 to $700,000 effective in November 2016 in connection with their promotions, together with Mr. Ramaswami, to COOs, taking into account competitive peer group data and the maintenance of pay parity among the COOs.

 

  NEO    Annual Salary
Rate In Effect at
Start of FY16 or
NEO Start Date
   Annual Salary
Rate In Effect
at End of
FY16
   % Change
  Patrick Gelsinger    $1,000,000    $1,000,000   
  Zane Rowe    $750,000    $750,000   
  Jonathan Chadwick    $685,000       N/A
  Sanjay Poonen    $610,000    $700,000    +15%
  Rangarajan (Raghu) Raghuram    $610,000    $700,000    +15%
  Rajiv Ramaswami(1)    $700,000    $700,000   

 

(1) Mr. Ramaswami became an executive officer (as defined by Rule 3b-7 of the Exchange Act) upon his promotion effective October 26, 2016.

Annual Performance-Based Bonus

Each of our NEOs is eligible to earn cash bonuses tied to our financial results and individual performance under our Executive Bonus Program. We believe it is important to provide rewards for specific results and behaviors that support our overall long-term business strategy.

 

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Incentive Plan Design

In FY16, the CCG Committee continued the prior-year bonus plan design while adjusting the weighting of corporate financial metrics and reducing the maximum bonus opportunity, as detailed in the “Payouts” section of the table below. The design of the first-half and second-half plans was similar in order to maintain consistency in the objectives and specific metrics in which we wanted to focus the attention of executives through the fiscal year. As illustrated below, the design of both first-half and second-half plans involved the following parameters:

 

Plan funding

 

 

•       Entirely funded on the basis of quantitative, algorithmic measurement of financial performance which yields a plan funding percentage (the “plan funding level”)

 

•       The payout algorithm provides for proportionately greater funding as performance achievement exceeds target goals, as well as disproportionate reductions in funding as performance achievement drops below target goals, with zero funding below threshold performance levels

 

Plan funding metrics

 

 

•       60% of the plan funding level is determined based upon achievement of GAAP revenue and non-GAAP operating margin. The CCG Committee placed primary focus on achievement of widely-recognized metrics that are tracked by our shareholders and analysts and that we believe are indicators of the performance and health of our company from growth and profitability perspectives

 

•       40% of the plan funding level is determined based upon achievement of adjusted license revenue. This metric is considered an indicator of customer willingness to adopt and expand their use of our products. License revenue is adjusted for the change in unearned license revenue during the measurement period to better reflect license sales that occurred during the period

 

•       In FY15, the weighting of the plan funding metrics was 80% revenue and non-GAAP operating margin and 20% adjusted license revenue. In FY16, the CCG Committee increased the weighting of the adjusted license revenue metric to drive more focus and pay-for-performance alignment on a metric that reflects customer willingness to adopt and expand their use of our products

 

Thresholds must be achieved for any funding

 

 

•       For any bonus amount to be paid out, a threshold level of achievement of each of the pre-established corporate financial objectives was required

 

•       No funding unless 90% of revenue and adjusted license revenue targets and ~92% of non-GAAP operating margin targets were achieved

 

•       At threshold performance, the plan funding level would equal only 34% of target

 

Cap on funding

 

 

•       Irrespective of actual performance, funding capped at 240% of target, reflecting the maximum funding applicable to each component of our incentive plan

 

CCG Committee can exercise negative discretion on funding and payouts

 

 

•       The CCG Committee has the authority to exercise negative discretion on actual plan funding irrespective of funding calculated on the basis of our formulaic approach

 

Payouts

 

 

•       50% of the bonus opportunity is payable to the executive formulaically at the plan funding level in order to reinforce the connection between objective financial results and bonus payouts

 

•       50% of the bonus opportunity is funded at 1.25 times the plan funding level and actual payouts to executives are subject to negative discretion based on assessment of individual performance relative to strategic and operational goals

 

•       The funding of the individual component of the payout was reduced from 1.5 times the plan funding level in FY15 to 1.25 times the plan funding level in FY16 to increase the focus on achievement of corporate financial metrics as the primary driver of plan funding

 

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The following is an illustration of the 2016 Cash Bonus Incentive Compensation Plan:

 

LOGO

Target Opportunity

In FY16, the CCG Committee determined that bonuses would be paid based on corporate financial performance metrics and individual goals applied separately to each half of the year due in part to the CCG Committee’s view that business conditions were rapidly changing and the CCG Committee wanted the opportunity to review goal achievement in the middle of the year and enable new, appropriately rigorous goals to be set for the second half of the year. The CCG Committee retained negative discretion to reduce actual payouts below the amounts calculated under the plan formulas.

The following table provides the target bonus amounts for FY16, expressed as a percentage of base salary at the start of each of the first and second halves of the year, for each of our NEOs under our Executive Bonus Program. Each executive’s target bonus percentage of base salary remained the same in both the first and second halves of FY16.

 

     H1 FY16 Bonus Target   H2 FY16 Bonus Target
NEO  

Annual
Salary
Rate
During

H1 FY16

  Target
Bonus
(as
percentage
of base
salary)
  H1 2016
Bonus
Target
 

Annual
Salary
Rate
During

H2 FY16

  Target
Bonus
(as
percentage
of base
salary)
  H2 2016
Bonus
Target
 

Patrick Gelsinger

  $1,000,000   150%   $750,000   $1,000,000   150%   $750,000
 

Zane Rowe(1)

  $750,000   100%   $259,615   $750,000   100%   $375,000
 

Jonathan Chadwick(2)

           
 

Sanjay Poonen(3)

  $610,000   100%   $305,000   $632,500   100%   $316,250
 

Rangarajan (Raghu) Raghuram(3)

  $610,000   100%   $305,000   $632,500   100%   $316,250
 

Rajiv Ramaswami(4)

           

 

(1) Mr. Rowe’s H1 FY16 target bonus opportunity reflects $750,000 annual rate and 100% target opportunity pro-rated to reflect the number of days in the H1 FY16 performance period from Mr. Rowe’s hire date.
(2) Mr. Chadwick resigned effective March 1, 2016 and did not participate in the Executive Bonus Program.
(3) Messrs. Poonen’s and Raghuram’s respective H2 FY16 target bonus opportunities reflects $610,000 annual rate and 100% target opportunity pro-rated to reflect the number of days from the July 1, 2016 start of the H2 FY16 performance period to November 16, 2016, on which date Messrs. Poonen’s and Raghuram’s annual salary rates were increased to $700,000, as well as the $700,000 annual rate and 100% target opportunity in effect from November 16, 2016 through the December 31, 2016 end of H2 FY16 performance period.
(4) As Mr. Ramaswami was not appointed an executive officer (as defined by Rule 3b-7 of the Exchange Act) until October 26, 2016, he did not formally participate in the Executive Bonus Program in FY16.

 

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Corporate Financial Metrics

The following table shows the revenue, non-GAAP operating margin and adjusted license revenue targets for each half year. Non-GAAP operating margin for the Executive Bonus Program utilizes the non-GAAP operating margin metric that we report in our quarterly earnings releases. That measure is calculated by excluding stock-based compensation, employer payroll taxes on employee stock transactions, amortization of intangible assets, acquisition-related items, restructuring charges, certain litigation and other contingencies and unusual non-recurring charges, if any, from our operating margin calculated in accordance with GAAP. Results were also adjusted to eliminate any impact on revenue and non-GAAP operating margin of acquisitions and foreign exchange rate fluctuations not provided for in VMware’s operating plan. Adjusted license revenue is adjusted for the change in deferred license revenue. Accordingly, the actual performance metrics calculated for purposes of the Executive Bonus Program listed in the table below differ from VMware’s reported financial results for the periods shown.

 

                                                                                                                                                               
     H1 FY16 Plan   H2 FY16 Plan
Metric   Threshold   Target   Maximum   Actual   Threshold   Target   Maximum   Actual

 

Revenue ($M)

(0%-200% funding)

 

  $2,890.5   $3,211.7   $3,532.8   $3,251.0   $3,234.2   $3,593.6   $3,952.9   $3,765.4

Non-GAAP Operating Margin

(0%-200% funding)

 

  26.9%   28.5%   34.1%   29.3%   32.9%   34.5%   40.1%   34.8%

Adjusted License Revenue ($M) (0%-250% funding)

  $1,144.6   $1,271.8   $1,462.5   $1,285.3   $1,464.6   $1,627.3   $1,871.4   $1,680.8

The performance targets and thresholds for the Executive Bonus Program were established based upon the Company’s operating plan and the prioritization we placed upon investing in our strategic initiatives in order to achieve revenue and license revenue growth. Additionally, the CCG Committee determined that, regardless of non-GAAP operating margin performance, payouts in excess of 100% of the target bonus amounts would be paid only if revenue exceeded 98% of the performance target, and payouts for adjusted license revenue achievement could exceed 100% only if the target non-GAAP operating margin goal was achieved.

Revenue, non-GAAP operating margin and license revenue performance for the first and second halves of FY16 yielded percentage bonus payouts of 110.5% and 123.7% of target amounts, respectively. The CCG Committee exercised negative discretion to reduce payouts for the second half of FY16 below the calculated percentage of 123.7% to instead reflect 120% of target, which the CCG Committee determined to better reflect the degree to which actual performance exceeded.

 

     H1 FY16 Bonus Payout   H2 FY16 Bonus Payout
NEO   Financial
Component
Target
Amount
(50% of
Total)
  Bonus
Calculated
Per
Formula
@ 110.5%
  Approved
Bonus @
110.5%
  Financial
Component
Target
Amount
(50% of
Total)
  Bonus
Calculated
Per
Formula
@ 123.7%
  Approved
Bonus @
120%
 

Patrick Gelsinger

  $375,000   $414,375   $414,375   $375,000   $463,875   $450,000
 

Zane Rowe

  $129,808   $143,438   $143,438   $187,500   $231,938   $225,000
 

Jonathan Chadwick(1)

           
 

Sanjay Poonen

  $152,500   $168,513   $168,513   $158,125   $195,601   $189,750
 

Rangarajan (Raghu) Raghuram

  $152,500   $168,513   $168,513   $158,125   $195,601   $189,750
 

Rajiv Ramaswami(2)

           

 

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(1) Mr. Chadwick resigned effective March 1, 2016 and did not participate in the Executive Bonus Program.
(2) As Mr. Ramaswami was not appointed an executive officer (as defined by Rule 3b-7 of the Exchange Act) until October 26, 2016, he did not formally participate in the Executive Bonus Program in FY16.

Individual Performance Assessments

Individual performance goals for the NEOs were set for each of the first and second halves of FY16.

 

Patrick Gelsinger

  Achievement of overall FY16 operating plan. Achievement of guidance and forecasts. Achievement of product and go-to-market objectives in the software-defined data center and end-user computing businesses. Achievement of objectives in scaling our SaaS capabilities, strengthening the Company’s solution selling and customer value capabilities and executing on capital allocation objectives via share repurchase.

Zane Rowe

  Achievement of overall FY16 operating plan, guidance and forecasts. Achievement of as-a-service financial and business model. Achievement of capital allocation objectives via share repurchase.

Jonathan Chadwick

  Mr. Chadwick resigned effective March 1, 2016 and did not participate in the Executive Bonus Program.

Sanjay Poonen

  Achievement of objectives in scaling the Desktop and mobile AirWatch businesses as well as redefining the end-user category with Workspace ONE products. Achievement of objectives related to marketing and customer success. At the same time, the CCG Committee held Mr. Poonen accountable for financial results in our end-user computing business that fell short of expectations.

Rangarajan (Raghu) Raghuram

  Achievement of results in our Software-Defined Data Center business, including objectives for compute, storage and networking technologies. Achievement of objectives in our cloud and as-a-service strategy and technology roadmap.

Rajiv Ramaswami

  As Mr. Ramaswami was not appointed an executive officer until October 26, 2016, he did not formally participate in the Executive Bonus Program in FY16.

As discussed above, our Executive Bonus Program provided that payouts for individual performance would be funded, subject to the CCG Committee’s potential use of negative discretion, at 1.25 times the same ratio as payouts based on the corporate financial metrics if threshold achievement of corporate financial goals sufficient to trigger a minimum payout was reached. There were no formulas or weightings assigned to individual performance objectives and achievement was assessed overall on a holistic basis that also took into account overall individual and company performance. As discussed above, during FY16, corporate financial goals above the threshold levels were achieved. With respect to payouts for individual goals, the CCG Committee exercised its negative discretion, in consultation with management, in determining payouts for both the first and second halves of FY16.

 

    

H1 FY16 Bonus Target

 

      

H2 FY16 Bonus Target

 

  NEO   Target
Amount
(50% of
Total
Target)
  Bonus
Calculated
Per Formula
@ 138.1%
  Approved
Bonus %
of MBO
Target
  Approved
Bonus
Value ($)
       Target
Amount
(50% of
Total
Target)
  Bonus
Calculated
Per Formula @
154.6%
  Approved
Bonus %
of MBO
Target
  Approved
Bonus
Value ($)
 

Patrick Gelsinger

  $375,000   $517,969   120%   $450,000       $375,000   $579,844   125%   $468,750
 

Zane Rowe

  $129,808   $179,297   115%   $149,279       $187,500   $289,922   130%   $243,750
 

Jonathan Chadwick(1)

                   
 

Sanjay Poonen

  $152,500   $210,641   90%   $137,250       $158,125   $244,501   90%   $142,313
 

Rangarajan (Raghu) Raghuram

  $152,500   $210,641   115%   $175,375       $158,125   $244,501   125%   $197,656
 

Rajiv Ramaswami(2)

                   

 

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(1) Mr. Chadwick resigned effective March 1, 2016 and did not participate in the Executive Bonus Program.
(2) As Mr. Ramaswami was not appointed an executive officer (as defined by Rule 3b-7 of the Exchange Act) until October 26, 2016, he did not formally participate in the Executive Bonus Program in FY16.

Total Bonus Payouts (Financial Component + MBO Component) for H1 and H2 FY16: Target vs. Actual

The table below details the total bonus payouts including both Financial and MBO components to each of our NEOs for each of the first and second halves of FY16.

 

    

 

H1 FY16 Total Bonus Target

 

      

 

H2 FY16 Total Bonus Target

 

  NEO   Total
Target
(Financial
+ MBO)
  Total
Actual
(Financial
+ MBO)
  Total
Actual
as %
of
Target
       Total
Target
(Financial
+ MBO)
  Total
Actual
(Financial
+ MBO)
  Total
Actual
as %
of
Target
 

Patrick Gelsinger

  $750,000   $864,375   115.3%       $750,000   $918,750   122.5%
 

Zane Rowe

  $259,615   $292,716   112.8%       $375,000   $468,750   125.0%
 

Jonathan Chadwick(1)

               
 

Sanjay Poonen

  $305,000   $305,763   100.3%       $316,250   $332,063   105.0%
 

Rangarajan (Raghu) Raghuram

  $305,000   $343,888   112.8%       $316,250   $387,406   122.5%
 

Rajiv Ramaswami(2)

               

 

(1) Mr. Chadwick resigned effective March 1, 2016 and did not participate in the Executive Bonus Program.
(2) As Mr. Ramaswami was not appointed an executive officer until October 26, 2016, he did not formally participate in the executive officer bonus plans in FY16.

Although Mr. Ramaswami was not a formal participant in the Executive Bonus Program for H2 FY16 because he was not appointed to an executive officer position until October 26, 2016, the CCG Committee based his bonus payout utilizing the parameters of the Executive Bonus Program. Mr. Ramaswami’s bonus payout for the second half of FY16 of $376,250 was based on the corporate financial metric component of 120% utilized for the other NEOs, and also took into consideration the achievement of objectives relating to the Company’s networking and security business.

Current Fiscal Year Plan Design

As noted at the beginning of this CD&A, effective for FY18, NEOs will participate in a non-equity incentive plan that reflects an annual performance period with annual goals and an annual payout opportunity. This replaces the plan design that had been in place in FY16 featuring semi-annual performance periods, semi-annual goals and semi-annual payouts. In making this design change, the CCG Committee took into consideration alignment with the Company’s annual operating plan, as well as peer and governance best practices.

Long-Term Incentives

We strongly believe that equity awards further align the interests of our NEOs with those of our stockholders. Equity awards are also an important part of the compensation packages that we use to recruit new executive hires. Additionally, we annually review the composition, value and vesting timeline of long-term equity-based incentive awards held by our NEOs, and our CCG Committee periodically approves refresh grants designed to promote long-term retention of our executive team and meet the objectives of our executive compensation program.

 

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Target Vehicle Mix

During FY16, our CCG Committee maintained the weighting of Annual Equity Awards tied to PSUs at 50% of overall Selected Equity Value (as defined below) for our CEO and CFO and used RSUs for the other 50% of overall Selected Equity Value. For our other NEOs, the CCG Committee used a weighting of 75% of Selected Equity Value tied to RSUs and 25% tied to PSUs. For NEOs excluding our CEO and CFO, the CCG Committee took into consideration the retention imperatives associated with maintaining leadership continuity at a time when the Company’s prior President and COO, as well as CFO and COO both announced their resignations from the Company.

 

Annual Equity Vehicle Mix for CEO and CFO:
50% PSU, 50% RSU

PSUs

 

(50% of overall target value for CEO and CFO)

 

•      Three-year performance period
•      Vest in the first quarter of FY19 subject to continued
employment and achievement of objective,
quantitative performance criteria

 

     

RSUs

 

(50% of overall target value for CEO and CFO)

 

•      Vest over four-year period subject to continued
employment

•      Value subject to fluctuation in alignment with
VMware’s stock price

 

Annual Equity Vehicle Mix for Other NEOs:
75% RSU, 25% PSU

PSUs

 

(25% of overall target value for Other NEOs)

 

•      Three-year performance period
•      Vest in the first quarter of FY19 subject to continued
employment and achievement of objective,
quantitative performance criteria

 

     

RSUs

 

(75% of overall target value for Other NEOs)

 

•      Vest over four-year period subject to continued
employment

•      Value subject to fluctuation in alignment with
VMware’s stock price

 

We believe that the mix of PSUs and RSUs for the CEO and CFO met the primary objectives of our Annual Equity Awards grant programs by aligning executive compensation with total stockholder return, focusing executive performance on metrics that are key to our success and promoting long-term retention. We believe that the mix of PSUs and RSUs for the other NEOs achieved the primary objective of attracting and engaging our executives at a time when we were undergoing significant change as a company and, as a result, recognizing these other NEOs for their increased responsibilities.

Equity Awards in FY16

The table below details equity awards approved by the CCG Committee for our NEOs during FY16. As noted above, awards for the CEO and CFO were weighted 50% to PSUs and 50% to RSUs. For other NEOs, Annual Equity Awards were weighted 25% to PSUs and 75% to RSUs. In granting equity awards to our NEOs, the CCG Committee selects a nominal dollar value for each award (the “Selected Equity Value”). The Selected Equity Value utilized for FY16 equity awards is set forth in the table below.

In addition to the Annual Equity Awards, Messrs. Poonen, Raghuram and Ramaswami received retention and promotion RSU awards. We determined the value of the equity awards granted to each NEO by taking into account a variety of factors, including data from our identified peer group of companies, the timeline for vesting in each of our NEOs’ existing equity grants, as well as talent acquisition and retention imperatives given the highly competitive market for senior executives. In the case of Mr. Ramaswami, the CCG Committee selected new hire and retention equity awards based on market data and the competitive market for senior executive talent, as well as a competitive compensation package available to Mr. Ramaswami at

 

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the time of his retention award. In the case of Messrs. Poonen and Raghuram, the CCG Committee took into consideration their promotions to COO, and also implemented a longer-term vesting cliff before value can be realized.

 

   

 

Annual

Equity

Awards

 

     

 

New Hire
Equity
Awards

 

     

Retention and

Promotion

RSU

Awards

 

  NEO  

Selected
Equity

Value

 

PSU

Selected
Value

 

RSU

Selected

Value

 

Selected

Equity

Value

 

PSU

Selected

Value

 

RSU

Selected

Value

 

Selected
Equity

Value

  Patrick Gelsinger

  $13,000,000   $6,500,000

(129,951
shares)

  $6,500,000

(129,951

shares)

       

  Zane Rowe

        $7,500,000   $3,750,000

(74,971

shares)

  $3,750,000

(74,971

shares)

 

  Jonathan Chadwick

             

  Sanjay Poonen

  $8,000,000   $2,000,000

(39,985
shares)

  $6,000,000

(119,955
shares)

        $3,000,000

(40,715
shares)

  Rangarajan (Raghu)

  Raghuram

  $7,000,000   $1,750,000

(34,986
shares)

  $5,250,000

(104,960
shares)

        $3,000,000

(40,715
shares)

  Rajiv Ramaswami

        $8,500,000     8,500,000

(163,068
shares)

  $10,000,000

(191,845
shares)

 

Note: The number of PSUs and RSUs covered by each award was determined by dividing the Selected Equity Value by the 45-day trailing average price of VMware Class A Stock as of the last day of the month preceding the month during which the award was granted to derive a quotient. The number of PSUs and RSUs was equal to 1x the quotient.

In the case of annual equity awards and new hire equity awards, RSU grants vest over a four-year period, subject to continued employment, with 25% of the shares vesting on the one-year anniversary of the vest base date and the remaining shares vesting semi-annually thereafter. In the case of PSU awards, shares vest subject to continued employment and achievement of performance goals after the completion of a multi-year performance period detailed further below. The retention RSU award for Mr. Ramaswami vests over a three-year period, subject to continued employment, in three equal annual tranches. Vesting of this award was determined in the context of retention imperatives for Mr. Ramaswami. The promotion RSU awards for Messrs. Poonen and Raghuram vest, subject to continued employment, on the third anniversary of the vest base date, November 1, 2019. Vesting of these awards was determined to ensure that value would be realized from the awards only upon completion of a three-year cliff vesting period, thereby linking the realizable value of the awards to the Company’s long-term stock price performance. For more information on the vesting schedules of equity awards granted to NEOs, see “Compensation of NEOs—Outstanding Equity Awards at Fiscal-Year End.

The CCG Committee approved the annual equity awards in March 2016 in order to time the grant of PSUs with a performance tranche applicable to FY16. The performance metrics for one-third of the FY16 PSU awards are applicable to performance periods that commenced in FY16. Those performance metrics were established in March 2016. Performance metrics for the second and third tranches of the FY16 PSU awards will be applicable to performance periods commencing in FY18 and FY19, respectively, reflecting our transition to a new financial calendar discussed above. The FY18 and FY19 performance metrics will be established in early FY18 and FY19, respectively.

Approved Award Value vs. Accounting Grant Date Fair Value for PSU Awards

Grant date fair values for PSUs are not determined until performance metrics are established. Accordingly, the grant date fair values for the second and third tranches of the FY16 PSU grants discussed below are not reflected in the “Summary

 

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Compensation Table” and the other tables in the “Compensation of Executive Officers” section of this proxy statement. Instead, one-third of the FY16 PSU grant date fair value is reflected in this proxy statement, one-third of the FY16 PSU grant date fair value will be reflected in our 2018 proxy statement and one-third of the FY16 PSU grant date fair value will be reflected in our 2019 proxy statement.

During FY16, the CCG Committee also established performance metrics for the second tranches of PSUs that it had awarded to our NEOs in FY14 and FY15 under each of the FY14 and FY15 PSU Plans. Accordingly, the grant date fair value for the second tranches of the FY14 and FY15 PSUs are reflected in the “Summary Compensation Table” and the other tables in the “Compensation of Executive Officers” section of this proxy statement. The FY18 performance metrics applicable to the third of the three tranches of the FY15 PSU Plan will be established in early FY18. Accordingly, grant date fair values for the third tranche of FY15 PSUs will not be determined until the FY18 tranche performance goals are established and therefore are not reflected in the “Summary Compensation Table” and other tables in the “Compensation of Executive Officers” section of this proxy statement. Instead the third of the three tranches of the FY15 PSU grant date fair value will be reflected in our 2018 proxy statement.

The table below, showing the value of RSU and PSU grants to our CEO from FY14 through FY16, illustrates how the practice under GAAP of assigning grant date fair value on the date that individual annual performance metrics are established rather than on the date that multi-year PSUs are awarded can make the value of each annual tranche of a single PSU award appear to fluctuate significantly when the number of units subject to each annual tranche of each award actually remains constant. Accordingly, we believe that it is important to factor in the target values of the equity grants to our CEO in order to fully understand how we implement VMware’s pay-for-performance compensation strategy to provide 50% of our CEO’s equity grants in the form of PSUs.

 

   

# of Shares Underlying

Equity Awards(1)

 

        

Value of Shares Underlying

Equity Awards ($M) (1)

 

 
Award and % of Approved
Issuance
 

PSUs/RSUs

Awarded(2)

   

PSUs/RSUs

Assigned an

Accounting Value(3)

        

Target Value at

Issuance (2)

   

Accounting

Value(3)

 
  FY14     FY15     FY16     FY14     FY15     FY16          FY14     FY15     FY16     FY14     FY15     FY16  

FY14 PSU (50% of Total)

    65,895             32,947       32,948         $ 6.25M           $ 2.69M     $ 1.70M  

FY14 RSU (30% of Total)

    39,537           39,537             $ 3.75M         $ 3.82M      

FY14 Option (20% of Total)

    87,860           87,860             $ 2.50M         $ 2.42M      

FY15 PSU (50% of Total)

      83,018           27,672       27,672           $ 6.75M         $ 2.30M     $ 1.43M  

FY15 RSU (50% of Total)

      83,018           83,018             $ 6.75M         $ 6.91M    

FY16 PSU (50% of Total)

        129,951           43,317             $ 6.50M         $ 2.23M  

FY16 RSU (50% of Total)

        129,951           129,951             $ 6.50M         $ 6.70M  

Total by Year

    193,292       166,036       259,902       127,397       143,637       233,888         $ 12.50M     $ 13.50M     $ 13.00M     $ 6.24M     $ 11.90M     $ 12.05M  

 

(1) The CCG Committee approved an annual selected equity value of awards to issue to our CEO in each of FY14, FY15 and FY16. The CCG Committee approved a target dollar value as well as the number of shares issued using a 45-day trailing stock price as the quotient to calculate number of shares issued.
(2) The Approved Issuance reflects the dollar value and number of shares awarded.
(3) The Accounting Value of awards reflects the number of options and RSUs granted in each fiscal year at the time the CCG Committee approves issuance of those awards. In the case of PSUs, the Accounting Value reflects the PSUs issued to be granted in the applicable fiscal year performance period multiplied by the closing stock price of VMware Class A Stock on the date of grant.

As illustrated in the table above, the CCG Committee has approved equity awards to our CEO with 50% of total approved award value tied to PSUs in each of FY14, FY15 and FY16. However, as a result of our PSU design, which features both successive annual performance tranches as well as a multi-year performance goal, the grant date accounting fair value of the PSU awards reflects the number of PSU awards issued to each applicable fiscal year tranche multiplied by the closing trading price of our stock on the date that each annual performance metric is determined. Accordingly, the awarded value accurately reflects that 50% of the total equity grants approved by the CCG Committee are in the form of PSUs, even though the CCG Committee’s compensation philosophy is not reflected in the grant date fair value of the awards.

 

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Performance Stock Units—FY14, FY15 and FY16 Plans

The design of the FY16 PSU Plan is substantially consistent with the FY15 PSU Plan, with the following design features and enhancements.

 

Focus on long-term performance   

•       Three successive annual performance tranches covering FY16, FY18 and FY19 to drive achievement of sustained results. Annual tranches enable more precise and meaningful goal-setting during a highly dynamic period

 

•      If an annual tranche is completed at below-target performance, a catch-up is not available in subsequent tranches

 

•      Multi-year goal to hold NEOs accountable for long-term performance

Focus on value creation   

•      Focus on total revenue adjusted for the change in deferred license revenue and hybrid cloud and SaaS revenue, as an indicator of future top-line growth prospects, and non-GAAP operating margin, as an indicator of NEOs’ stewardship of Company profitability in each tranche

 

•      Focus on long-term value non-GAAP operating income profit available for investment in Company growth or return of capital to stockholders through stock repurchases

 

•       Substantially penalizes NEOs for under-performing relative to three-year, non-GAAP operating income goal

 

•      Three-year non-GAAP operating income goal adds diversity to portfolio of performance metrics while maintaining cohesion with annual incentive plan and PSU tranches

We designed the metrics for our FY16 PSU awards to NEOs to focus on indicators that will measure the degree to which we successfully deliver on the core business opportunities we have identified for VMware in the software-defined data center delivered on-premises or in the cloud, as well as end-user and mobile computing. We selected the achievement of revenue targets, as adjusted for the change in unearned license and hybrid cloud and SaaS revenue, and non-GAAP operating margin as they have proven to be primary drivers of current and future stockholder returns. We selected non-GAAP operating income as the three-year performance modifier in order to hold NEOs accountable for total dollar value of profit generated by both top-line growth and bottom-line management over a long-term performance period. The CCG Committee continues to evaluate alternative structures with the goal of best aligning our PSU Plan with the long-term performance of the Company. The three-year performance modifier is critical to the plan design because it modifies the sum of shares otherwise subject to vest based on performance in each annual tranche. Performance achievement is adjusted for the impact of significant merger-, acquisition- and divestiture-related transactions and fluctuations in currency exchange ratios during the period. Taken together, the CCG Committee believes the balanced focus on sustained performance over individual annual tranches enables goals to be adjusted each year to reflect changing business conditions while a multi-year performance goal focused on total profitability incentivizes our NEOs to deliver results that drive shareholder value.

Performance in FY16 applied to the three PSU plans as follows: (1) the first annual tranche of the FY16 PSU Plan, (2) the second of three tranches of the FY15 PSU Plan and (3) the second of two tranches of the FY14 PSU Plan. Under each Plan, metrics for the FY16 performance tranche were total revenue plus change in unearned license revenue (weighted 70%) and non-GAAP operating margin (weighted 30%).

 

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An illustration of the staggered design of our PSU plans that were ongoing during FY16 is below.

 

LOGO

 

LOGO

 

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LOGO

Performance levels were adjusted to exclude the impact of merger-, acquisition- and divestiture-related transactions and fluctuations in currency exchange rates during the period. Achievement is measured following the end of each tranche in fiscal years 2015, 2016 and 2018, as applicable and achievement relative to the multi-year performance goal was measured following the end of FY16 in the case of the FY14 PSU Plan and will be measured following the end of FY18 in the case of the FY15 PSU Plan and following the end of FY19 in the case of the FY16 PSU Plan. Depending upon the level of achievement, the PSUs can convert into shares of common stock at ratios ranging from 0.25 shares (under the FY14 and FY15 PSU Plans) and 0.375 shares (under the FY16 PSU Plan) to two shares for each PSU (PSUs are capped at 2x target irrespective of actual performance). The change to the minimum conversion ratio in the FY16 PSU Plan reflected the selection of non-GAAP operating income growth as the multi-year performance goal and the greater difficulty in projecting the probability of achievement of the new goal as compared to the revenue growth metrics used in the FY14 and FY15 PSU Plans. If the minimum performance threshold is not met, then no shares will be issued. We believe that coupling performance metrics over a three-year period in the case of the FY15 and FY16 PSU Plans allows us to align our performance metrics to our strategic plan while also promoting longer-term executive retention.

In February 2017, the CCG Committee reviewed Company performance against metrics contained in the FY14, FY15 and FY16 PSU plans in connection with the FY16 performance tranche. Performance goals, actual results and earned shares under the FY14, FY15 and FY16 PSU Plans are described below. Results were adjusted to eliminate any impact on adjusted revenue and non-GAAP operating margin of acquisitions and divestitures.

 

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Performance Achievement vs. Goal

 

FY16 Performance Tranche Achievement  
    

Threshold

50%

   

Target

100%

    Maximum
200%
    Actual      Result      Funding
Weight
    Funding  

70% Weighting

on Adjusted

Revenue

     $6,599       $6,907       $7,215       $7,112.2        166.6%        70%       116.6%  
                   +  
    

Threshold

50%

   

Target

100%

    Maximum
200%
    Actual      Result      Funding
Weight
    Funding  
30% Weighting on Non-GAAP Operating Margin      30.0%       31.6%       33.6%       32.3%        135.3%        30%       40.6%  
                   =  

    Total FY16 Performance Tranche Funding

 

    157.2

 

FY14 PSU Plan Multi-Year Modifier
    

Min

0.5x

   Max
1.0x
   Actual
0.7x
   Result

FY16 Revenue in FY15 Plan FX Rates

   £$7.0B
(+7.7% CAGR)
   ³$7.4B
(+10.7% CAGR)
   $7.183B
(+9.1% CAGR)
   0.7x

PSU Conversion Based on Performance:

 

    

FY16 Tranche of PSU
Plan:

Target PSUs

 

    

FY16

 

   

PSU Achievement in
FY16 Tranche(1)

 

 
  Name    FY14
PSU
Plan
     FY15
PSU
Plan
     FY16
PSU
Plan
     Tranche
Modifier
    FY14
PSU
Plan
     FY15
PSU
Plan
     FY16
PSU
Plan
 

  Patrick Gelsinger

     32,948        27,672        43,317        157.20     51,794        43,500        68,094  

  Zane Rowe(2)

                   24,990        157.20                   39,284  

  Jonathan Chadwick(3)

                                               

  Sanjay Poonen

     7,907        7,174        13,328        157.20     12,429        11,277        20,951  

  Rangarajan (Raghu) Raghuram

     10,543        16,398        11,662        157.20     16,573        25,777        18,332  

  Rajiv Ramaswami(4)

                                               

 

(1) Achieved PSUs convert into shares depending upon annual revenue growth performance over the two-year period FY15 through FY16 (for the FY14 PSU Plan), the three-year period FY15 through FY18 (for the FY15 PSU Plan) and the three-year period FY16 through FY19 (for the FY16 PSU Plan). See discussion above.
(2) As Mr. Rowe was appointed CFO and Executive Vice President on March 1, 2016, the amounts in the table represent PSU awards for the time Mr. Rowe was employed by the Company.
(3) As Mr. Chadwick resigned effective March 1, 2016, he forfeited his previously awarded PSUs before performance goals for the 2016 tranches were established.
(4) As Mr. Ramaswami did not join the Company until April 1, 2016, he was not granted PSUs in 2016.

 

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FY14 PSU Plan Calculation of Shares Subject to Vest Based on Performance

 

     FY14 PSU Plan Awards
Achieved Per Annual Tranche
Modifiers
     Two-Year
Modifier
     Total Shares
Vested in FY14
PSU Plan
 
  Name    FY15
Tranche
(84.6%)
     FY16
Tranche
(157.2%)
     Sum of
Tranches
(120.9%)
     Per
Multi-
Year
Revenue
Growth
(0.7x)
     # of
Shares
     % of
Total
Target
Issued
 

  Patrick Gelsinger

     27,873        51,794        79,667        0.7x        55,766        84.6%  

  Zane Rowe(1)

                                         

  Jonathan Chadwick(2)

                                         

  Sanjay Poonen

     6,689        12,429        19,118        0.7x        13,382        84.6%  

  Rangarajan (Raghu) Raghuram

     8,919        16,573        25,492        0.7x        17,844        84.6%  

  Rajiv Ramaswami(3)

                                         

 

(1) As Mr. Rowe was appointed CFO and Executive Vice President on March 1, 2016, he did not participate in the FY14 PSU Plan.
(2) As Mr. Chadwick resigned effective March 1, 2016, he forfeited his previously awarded FY14 PSUs.
(3) Mr. Ramaswami joined the Company in 2016.

Benefits and Perquisites

We provide only minimal and select executive-level benefits or perquisites to our NEOs targeted to assist in recruitment of new executives and meet market practices.

During 2016, our NEOs were eligible to participate in a program for VMware to reimburse employees at the senior vice president level or above, including each NEO, for annual comprehensive physical examinations and medical screenings. We determined that offering such a benefit was in the best interests of VMware and our stockholders given the critical role of our senior staff to the ongoing performance of our business.

Our NEOs were also eligible to participate in a non-qualified deferred compensation program (“NQDC Program”) that was open to VMware employees at the level of senior director and above. The NQDC Program allows a participant to voluntarily defer between 5% and 75% of his or her base salary, between 5% and 100% of his or her commissions (if any) and between 5% and 100% of his or her eligible bonus (if any), in each case on a pre-tax basis. VMware may, but does not currently intend to, make matching contributions.

Our senior executives are obligated to undertake travel from time to time that is most efficient through use of a private jet. We did not incur any incremental expense during 2016 in connection with jet usage by our NEOs and their family members.

Other than with respect to relocation benefits, we do not generally provide NEOs with tax gross-ups or reimbursements.

Change-in-Control and Post-Termination Compensation

Severance Plan

During FY16, the CCG Committee approved a time-limited severance retention plan (“Severance Plan”) covering VMware executives, including each NEO. The Severance Plan is narrowly focused to provide stability to our executive team during the consummation of the Dell Acquisition and the subsequent integration of the two companies. Accordingly, the

 

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Severance Plan expires on December 31, 2017. In approving the Severance Plan, the CCG Committee took into consideration that the Dell Acquisition did not constitute a change in control for VMware under VMware’s existing change-in-control retention plan (“CIC Plan”), making the retention incentives under the CIC Plan inapplicable to the Dell acquisition. Provisions of the Severance Plan were intended to align with common market practices among companies in our peer group. The Severance Plan provides severance benefits to NEOs who are involuntarily terminated without “cause” or who terminate employment for “good reason” (each such term as defined in the Severance Plan) with benefits designed to be competitive with similar plans at VMware’s peer companies.

Upon a qualifying termination under the Severance Plan, each NEO is eligible to receive (1) a lump sum payment equal to annual base salary, target annual bonus, as well as the value of 12-months’ coverage in health insurance premiums and (2) full accelerated vesting of outstanding RSU and stock option awards (excluding PSUs) that were otherwise scheduled to vest within and including the 12 months following termination.

The CCG Committee expressly designed the Severance Plan to be time-limited, to not permit double-dipping with the CIC Plan described below and to not provide for any tax gross-ups. NEOs would be required to execute a release in favor of VMware in exchange for Severance Plan benefits. In connection with benefits, the monthly health insurance premium amount equals 100% of the monthly cost required to obtain continuation coverage for the NEO and his or her covered dependents. Additionally, under the Severance Plan, performance-based equity awards do not accelerate and instead, unvested performance grants are cancelled upon termination of employment.

CIC Plan

During FY15, following review by the CCG Committee, VMware’s Board approved the CIC Plan covering VMware executives, including each NEO. As part of the annual review of executive compensation relative to VMware’s peers, the CCG Committee identified that this was an area that was appropriate to address from a market competitiveness perspective. The CIC Plan is intended to encourage the retention of NEOs and reduce uncertainty regarding the personal consequences of a potential change in control. The CIC Plan provides severance benefits for NEOs who are involuntarily terminated without “cause,” or who terminate employment for “good reason,” within 12 months following a “change in control” of VMware (each such term as defined in the CIC Plan) with benefits designed to be competitive with similar plans at VMware’s peer companies.

Upon a qualifying termination under the CIC Plan following a change in control, each NEO is eligible to receive (1) a lump sum payment equal to a multiple of annual base salary, target annual bonus and monthly health insurance premiums and (2) full accelerated vesting of outstanding equity awards. VMware’s CEO, Mr. Gelsinger, is eligible to receive two times his annual base salary and target bonus and 24 months of the health insurance premium amount. Other NEOs are eligible to receive 1.5 times their annual base salary and target bonus and 18 months of the health insurance premium amount.

The monthly health insurance premium amount equals 150% of the monthly cost required to obtain continuation coverage for the NEO and his or her covered dependents. NEOs would be required to execute a release in favor of VMware in exchange for CIC Plan benefits. Performance-based equity awards will generally convert into shares at target amounts if a change in control occurs during a performance period, unless otherwise specified in the performance award agreement.

The CIC Plan does not provide for any tax gross-ups. In the event the NEO would be subject to an excise tax under Section 4999 of the Code (imposed on individuals who receive compensation in connection with a change of control that exceeds certain specified limits), the benefits to the NEO will be reduced to the extent that such benefits do not trigger the excise tax unless the NEO would retain greater value (on an after-tax basis) by receiving all benefits and paying applicable excise, income and payroll taxes.

In addition to the double-trigger acceleration provided under the CIC Plan, the PSU awards granted to NEOs provide that if a change in control occurs during a performance period, that performance period will terminate immediately prior to consummation of the change in control and the PSUs will convert into time-based vesting awards that convert into Class A Stock at the target level of achievement.

 

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Compensation Risk Assessment

We believe that the mix and design of the elements of our executive compensation are well balanced and do not encourage management to assume excessive risk. As detailed above, our pay mix is balanced among base salary, short-term performance cash bonus awards and equity compensation. NEO compensation is heavily weighted towards long-term, equity-based incentive compensation, which we believe discourages excessive short-term risk taking and strongly aligns NEO interests with the creation of long-term increased stockholder value. In addition, we maintain policies against the purchase of hedging instruments in order to help maintain the alignment of NEO interests with long-term changes in stockholder value by prohibiting NEOs from purchasing financial instruments that trade off the potential for upside gain in order to lock in the current market value of our securities. Additionally, as discussed below, our executive compensation plans also include compensation recovery provisions that enable us to recover performance bonuses, as well as gains on equity awards, that were earned due to activity detrimental to the Company.

Tax Deductibility

Section 162(m) of the Code, as amended, generally disallows a tax deduction to public corporations for compensation greater than $1 million paid for any fiscal year to the corporation’s CEO and certain other executive officers. However, performance-based compensation is not subject to the $1 million deduction limit if certain requirements are met. The CCG Committee may consider the impact of Section 162(m) when designing our cash and equity bonus program, but may elect to provide compensation that is not fully deductible as a result of Section 162(m) if it determines this is in our best interests. The CCG Committee structured our FY16 Executive Bonus Program for our NEOs and the PSUs and stock options granted in FY16 in order to allow each to qualify as performance-based compensation under Section 162(m). The RSUs granted in FY16 do not qualify as performance-based compensation.

Hedging Policy

We have adopted a policy prohibiting any of our directors or employees, including our NEOs, from “hedging” their ownership in shares of our Class A Stock or other equity-based interests in us, including by engaging in short sales or trading in derivative securities relating to our common stock and the shares of Class V common stock issued by Dell.

Compensation Recovery Policies

Our Executive Bonus Program for our executive officers, including our NEOs and the performance-based, long-term equity award program, were both adopted under the Incentive Plan. The Incentive Plan includes provisions that allow us to cancel outstanding equity awards or “clawback” the value of cash bonus awards recently realized if an officer, including each of our NEOs, engages in activity determined to be detrimental to VMware. Additionally, both programs include an incentive compensation recovery provision under which we can require reimbursement of any bonus paid under the plan where payment was predicated on financial results that were subject to a significant restatement and the individual engaged in fraud or misconduct that caused or partially caused the restatement. The policy applies to payments made within three years of the date when the applicable restatement is disclosed. We are proposing to update the clawback provision in the Incentive Plan to more specifically tie our ability to clawback outstanding equity awards to any restatements of VMware’s financial results and in case of termination for “cause,” as defined in the Incentive Plan. For more information, see “Proposal 4 —Vote to Approve Amended and Restated 2007 Equity and Incentive Plan.

COMPENSATION OF EXECUTIVE OFFICERS

Summary Compensation Table

The table below summarizes the compensation information for the fiscal years ended December 31, 2016, 2015 and 2014 for our NEOs—our CEO, our CFO, our former CFO and the three other most highly compensated individuals who were serving as executive officers of VMware at the end of FY16. The amounts shown in the Stock Awards column do not reflect

 

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compensation actually received by the NEOs, but instead include the aggregate grant date fair value of awards computed in accordance with GAAP.

 

Name and Principal Position   Year    

Salary

($)

   

Bonus

($)

   

Stock

Awards(1)

($)

   

Option

Awards(1)

($)

   

Non-Equity

Incentive Plan

Compensation(2)

($)

   

All Other

Compensation(3)

($)

   

Total

($)

 

Patrick Gelsinger

    2016       1,000,000       —          12,052,249             1,783,125       6,000       14,841,374  

CEO

    2015       1,000,000       650          11,904,314             1,443,750       10,479       14,359,193  
    2014       925,000       —          3,819,670       2,423,179       1,322,274       49,497       8,539,620  

Zane Rowe(4)

    2016       630,770       —          5,150,990             761,466       7,642       6,550,868  

CFO and Executive Vice President

                                                               

Jonathan Chadwick(5)

    2016       173,885       —                            1,500       175,385  

Former CFO, COO

    2015       680,000       650          6,536,808             628,375       6,000       7,851,833  

and Executive Vice President

    2014       650,000       —          1,527,791       969,272       646,613       7,372       3,801,048  

Sanjay Poonen

    2016       621,250       —          10,840,103             637,826       3,142       12,102,321  

COO, Customer Operations

    2015       605,000       650          3,034,494             668,750             4,308,894  
    2014       600,000       —          916,636       581,552       599,850       2,400       2,700,438  
Rangarajan (Raghu) Raghuram     2016       621,250       —          10,592,707             731,294             11,945,251  

COO, Products and Cloud Services

    2015       605,000       650          6,321,816             585,250             7,512,716  
    2014       550,000       —          1,222,213       775,412       551,850             3,099,475  

Rajiv Ramaswami(6)

    2016       504,168       1,597,248(7)       20,834,736                         22,936,152  

COO, Products and Cloud Services

                                                               

 

(1) Amounts shown represent the grant date fair values of stock awards granted in the fiscal year indicated, which were computed in accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Options (“ASC Topic 718”), without taking into account estimated forfeitures. The amounts disclosed may never be realized. Assumptions used in calculating these amounts are included in the note titled “Stockholders’ Equity” to our audited financial statements included in our Annual Report on Form 10-K for the applicable year.

 

     Amounts include the value of the 2016 performance tranches of the 2014 PSUs, 2015 PSUs and 2016 PSUs for which performance goals were set in March 2016. For more details on the 2014 PSUs, 2015 PSUs and 2016 PSUs see “Compensation Discussion and Analysis—Compensation Components—Long-Term Incentives” and Grants of Plan-Based Awards.”

 

     With respect to each of the 2014 PSUs, 2015 PSUs and 2016 PSUs, vesting is subject to the Company’s financial performance. Accordingly, the “Stock Awards” column above includes the grant date fair value based on the probable outcome of the performance-based conditions as of the grant date in accordance with ASC Topic 718. Assuming the maximum level of performance is achieved, the aggregate grant date fair value of the portion of the 2014, 2015 and 2016 PSU awards deemed granted in 2016 set forth in the table above would be as set forth in the table below.

 

     Due to his departure from the Company, Mr. Chadwick forfeited his previously awarded 2014 PSUs and 2015 PSUs before performance goals for the 2016 tranches were established.

 

Name    Grant      Date of Grant      Maximum
Conversion Ratio
     Assuming Highest Level of
Performance Conditions
Achieved ($)
 

Patrick Gelsinger

     2016 PSU        03/17/16        2.00        4,464,250  
     2015 PSU        03/17/16        2.00        2,851,876  
       2014 PSU        03/17/16        2.00        3,395,621  

Zane Rowe

     2016 PSU        03/17/16        2.00        2,575,469  

Sanjay Poonen

     2016 PSU        03/17/16        2.00        1,373,584  
     2015 PSU        03/17/16        2.00        739,352  
       2014 PSU        03/17/16        2.00        814,895  

Rangarajan (Raghu) Raghuram

     2016 PSU        03/17/16        2.00        1,201,886  
     2015 PSU        03/17/16        2.00        1,689,978  
       2014 PSU        03/17/16        2.00        1,086,562  

 

 

(2) Amounts shown represent cash incentive compensation earned for services rendered in the respective fiscal years under our annual cash incentive bonus plan. For more details on the annual cash incentive bonus plan, see “Compensation Discussion and Analysis—Compensation Components—Annual Performance-Based Bonus” and “—Grants of Plan-Based Awards.

 

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(3) Amounts shown in the “All Other Compensation” column for FY16 represent: (i) matching contributions made under the VMware 401(k) plan of $6,000 for Mr. Gelsinger, $4,500 for Mr. Rowe and $1,500 for Mr. Chadwick; and (ii) matching contributions under VMware’s Matching Gift Program, under which employees may contribute to qualified charitable organizations and VMware provides a matching contribution to the charity in an equal amount, of $3,141.59 for Mr. Rowe and Mr. Poonen.
(4) Mr. Rowe was appointed CFO and Executive Vice President on March 1, 2016. Accordingly, the amounts for 2016 represent compensation for the portion of the year that he was employed by VMware.
(5) Mr. Chadwick resigned from his position as CFO, COO and Executive Vice President, effective March 1, 2016, and his last day as an employee of VMware was April 1, 2016. Accordingly, amounts for 2016 represent compensation for the portion of the year that he was employed by VMware.
(6) Mr. Ramaswami joined the Company as a non-executive officer on April 1, 2016, and was appointed COO, Products and Cloud Services on October 26, 2016. Of the amounts shown in the table, the following amounts were earned by or awarded to Mr. Ramaswami prior to his appointment as an executive officer: Salary: $376,981; Bonus: $1,460,244; Stock Awards: $20,834,736.
(7) Amounts shown represent a sign-on bonus of $50,000, a bonus of $1,000,000 to promote retention and semi-annual bonus payments totaling $547,248.

Grants of Plan-Based Awards

The following table sets forth information concerning non-equity incentive plan grants to our NEOs under our Executive Bonus Program during the fiscal year ended December 31, 2016 and stock awards granted to our NEOs during 2016 under the Incentive Plan. For further information on our non-equity incentive plan grants, see “Compensation Discussion and Analysis—Compensation Components—Annual Performance-Based Bonus.” The actual amounts realized in respect of the non-equity plan incentive awards during the 2016 fiscal year are reported in the “—Summary Compensation Table” under the “Non-Equity Incentive Plan Compensation” column.

 

Name   Type(1)  

Grant

Date

  Estimated Possible Payouts
Under Non-Equity
Incentive Plan Awards(2)
    Estimated Future Payouts Under
Equity Incentive Plan Awards
   

All Other

Stock

Awards:

Number of

Shares of

Stock or

Units (#)

   

Grant Date

Fair Value

of Stock

Awards(3)
($)

 
      Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
(#)
    Target
(#)
    Maximum
(#)
     
Patrick Gelsinger   H1 Bonus   02/12/16     191,250       750,000       1,800,000                                
  H2 Bonus   08/12/16     191,250       750,000       1,800,000                                
  RSU Grant   03/17/16                                         129,951       6,696,375  
  2014 PSU(4)   03/17/16                       8,237       32,948       65,896             1,697,810  
  2015 PSU(5)   03/17/16                       6,918       27,672       55,344             1,425,938  
    2016 PSU(6)   03/17/16                       16,244       43,317       86,634             2,232,125  
Zane Rowe   H1 Bonus   02/12/16     66,202       259,615       623,076                                
  H2 Bonus   08/12/16     95,625       375,000       900,000                                
  RSU Grant   03/17/16                                         74,971       3,863,256  
    2016 PSU(6)   03/17/16                       9,371       24,990       49,980             1,287,735  
Jonathan Chadwick                                                    
Sanjay Poonen   H1 Bonus   02/12/16     77,775       305,000       732,000                                
  H2 Bonus   08/12/16     80,644       316,250       759,000                                
  RSU Grant   03/17/16                                         119,955       6,181,281  
  RSU Grant   11/16/16                                         40,715       3,194,906  
  2014 PSU(4)   03/17/16                       1,977       7,907       15,814             407,448  
  2015 PSU(5)   03/17/16                       1,794       7,174       14,348             369,676  
    2016 PSU(6)   03/17/16                       4,998       13,328       26,656             686,792  
Rangarajan (Raghu) Raghuram   H1 Bonus   02/12/16     77,775       305,000       732,000                                
  H2 Bonus   08/12/16     80,644       316,250       759,000                                
  RSU Grant   03/17/16                                         104,960       5,408,589  
  RSU Grant   11/16/16                                         40,715       3,194,906  
  2014 PSU(4)   03/17/16                       2,636       10,543       21,086             534,281  
  2015 PSU(5)   03/17/16                       4,100       16,398       32,796             844,989  
    2016 PSU(6)   03/17/16                       4,373       11,662       23,324             600,943  
Rajiv Ramaswami(7)   RSU Grant   05/13/16                                         163,068       9,444,899  
    RSU Grant   05/26/16                                         191,845       11,389,838  

 

(1) H1 Bonus” in the above table refers to grants under the Executive Bonus Program for performance between January 1, 2016 and June 30, 2016. “H2 Bonus” in the above table refers to grants under the Executive Bonus Program for performance between July 1, 2016 and December 31, 2016.
(2) Amounts shown are possible payouts under the Executive Bonus Program. These amounts were based on the individual’s 2016 base salary and position. The program included corporate and individual performance goals with 50% of each NEO’s target amount determined solely by corporate financial goals. Threshold payments were set at 51% of the target amounts and were based upon the achievement of corporate financial goals. Accordingly, threshold bonus amounts were 26% of the target amounts for our NEOs. Maximum payments were capped at 240% of the target amounts. For more information on the Executive Bonus Program, see “Compensation Discussion and Analysis—Compensation Components—Annual Performance-Based Bonus.”

 

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(3) Amounts shown represent the grant date fair values of each equity award computed in accordance with ASC Topic 718, without taking into account estimated forfeitures. The fair market values of these awards have been determined based on assumptions set forth in the note titled “Stockholders’ Equity” to our audited financial statements for the fiscal year ended December 31, 2016 included in our Annual Report on Form 10-K filed with the SEC on February 24, 2017. With respect to the PSU awards, the estimate of the grant date fair value in accordance with ACS Topic 718 assumes vesting at target.
(4) The 2014 PSUs were awarded in July 2014, but the performance targets for the FY15 performance period and the 2015-2016 two-year multiplier were not approved until March 2015 (the “First 2014 PSU Tranche”). Performance targets for the separate FY16 performance period (the “Second 2014 PSU Tranche”) were approved during 2016. Amounts in the “Estimated Future Payouts Under Equity Incentive Plan Awards” columns represent the range of shares of Class A Stock subject to the Second 2014 PSU Tranche that vested on February 28, 2017. Shares subject to the First 2014 PSU Tranche were considered granted during 2015 and are therefore not represented in the table. For more information regarding the PSU awards, see “Compensation Discussion and Analysis—Compensation Components—Long-Term Incentives.”
(5) The 2015 PSUs were granted and the performance targets for the FY15 performance period and the 2015-2017 three-year multiplier were approved in March 2015 (the “First 2015 PSU Tranche”). In connection with the transition of the Company’s fiscal year, the performance period covering calendar year 2017 is deemed to cover FY18. Performance targets for the separate FY16 performance period (the “Second 2015 PSU Tranche”) were approved in March 2016. Performance targets for the separate FY18 performance period (the “Third 2015 PSU Tranche”) were not established during 2016. Amounts in the “Estimated Future Payouts Under Equity Incentive Plan Awards” columns represent the range of shares of Class A Stock subject to the Second 2015 PSU Tranche that will become eligible to vest on February 28, 2018, if VMware meets the designated performance targets, assuming achievement at the threshold, target and maximum performance levels. Shares subject to the First PSU Tranches were considered granted in 2015 and shares subject to the Third 2015 PSU Tranche will not be considered granted until FY18, therefore those shares are not represented in the table. The 2015 PSUs will convert into Class A Stock at a ratio ranging from 0.5 to 2.0 shares per PSU, depending upon the degree of performance. Vesting in the 2015 PSUs is subject to continued employment, and no shares will be issued if actual performance is below minimum threshold performance levels. For more information regarding the PSU awards and the change in the Company’s fiscal year, see “Compensation Discussion and Analysis—Compensation Components—Long-term Incentives.”
(6) The 2016 PSUs were granted and the performance targets for the FY16 performance period and the 2016-2018 three-year multiplier were approved in March 2016 (the “First 2016 PSU Tranche”). In connection with the transition of the Company’s fiscal year, performance periods covering calendar years 2017 and 2018 are deemed to cover FY18 and FY19, respectively. Performance targets for the separate FY18 performance period (the “Second 2016 PSU Tranche”) and the separate FY19 performance period (the “Third 2016 PSU Tranche”) were not established during 2016. Amounts in the “Estimated Future Payouts Under Equity Incentive Plan Awards” columns represent the range of shares of Class A Stock subject to the First 2016 PSU Tranche that will become eligible to vest on February 28, 2019, if VMware meets the designated performance targets, assuming achievement at the threshold, target and maximum performance levels. Shares subject to the Second 2016 PSU Tranche and the Third 2016 PSU Tranche were not considered granted during 2016 and are therefore not represented in the table. The 2016 PSUs will convert into Class A Stock at a ratio ranging from 0.5 to 2.0 shares per PSU, depending upon the degree of performance. Vesting in the 2016 PSUs is subject to continued employment, and no shares will be issued if actual performance is below minimum threshold performance levels. For more information regarding the PSU awards and the change in the Company’s fiscal year, see “Compensation Discussion and Analysis—Compensation Components—Long-term Incentives.”
(7) As Mr. Ramaswami was not appointed an executive officer until October 26, 2016, he did not formally participate in the Executive Bonus Program in FY16. For more information, see “Compensation Discussion and Analysis—Compensation Components—Long-term Incentives.”

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information concerning stock options and stock awards held by our NEOs as of December 31, 2016. The market values for unvested stock awards are calculated based on a market value of $78.73 per share (the closing market price of VMware’s Class A Stock on December 30, 2016) multiplied by the number of shares subject to the award. For awards which are subject to performance-based conditions as described in the footnotes to the table, the number of shares reflects performance assuming achievement at target unless otherwise noted.

 

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    Outstanding Option Awards     Outstanding Stock Awards  
                                              Time-Based Vesting
Awards
    Performance-Based
Vesting Awards(1)
 
  Name   Grant Date     Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
    Option
Exercise
Price ($)
    Option
Expiration
Date
    Type     Grant Date     Number of
Shares or
Units of
Stock Held
That Have
Not Vested
(#)
   

Market
Value
of Shares
or Units
of Stock

Held That
have Not
Vested

($)

   

Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units
or Other
Rights  That
Have Not
Vested

(#)

   

Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units  or
Other Rights
That Have
Not Vested

($)

 
  Patrick Gelsinger     07/25/13(2)       80,951       11,565       84.04       07/25/20       RSU       07/25/13(3)       5,204       409,711              
    07/24/14(4)       56,742       31,118       96.61       07/24/21       RSU       07/24/14(5)       14,827       1,167,330              
                PSU       03/16/15(6)                   32,947       2,593,917  
                RSU       03/23/15(7)       51,887       4,085,064              
                PSU       03/23/15(8)                   27,672       2,178,617