DEF 14A 1 a2019proxy.htm DEF 14A Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant x 
Filed by a Party other than the Registrant  o
 
 
 
Check the appropriate box:
 
 
 
 
o
Preliminary Proxy Statement
 
 
 
o
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
 
 
 
x
Definitive Proxy Statement
 
 
 
o
Definitive Additional Materials
 
 
 
o
Soliciting Material Pursuant to §240.14a-11(c) or §240.14a-12
 
DISCOVER FINANCIAL SERVICES
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
x
No fee required.
 
 
o
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1)
Title of each class of securities to which transaction applies:

(2)
Aggregate number of securities to which transaction applies:

(3)
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

(4)
Proposed maximum aggregate value of transaction:

(5)
Total fee paid:

o
Fee paid previously with preliminary materials.
 
 
o
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
(1)
Amount Previously Paid:

(2)
Form, Schedule or Registration Statement No.:

(3)
Filing Party:

(4)
Date Filed:







2019
Proxy Statement






















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Learn More
 
 
 
 
 
 
 
 
 
 
2018 Annual Report*
 
 
2017 Corporate
Responsibility Report*
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https://investorrelations.discover.com/
investor-relations/financials/annual-reports/default.aspx
 
 
https://www.discover.com/company/
corporate-responsibility/cr-report_2017.pdf
 
 
 
 
 
*    The information in the Annual Report and Corporate Responsibility Report is not incorporated by reference into, and does not form part of, this proxy statement.



Message from our Independent Chairman
 
March 25, 2019
Dear Fellow Shareholder,
I cordially invite you to attend Discover Financial Services’ 2019 Annual Meeting of Shareholders to be held at 9:00 a.m., local time, May 16, 2019, at our corporate headquarters located at 2500 Lake Cook Road, Riverwoods, Illinois 60015.
All shareholders of record of our outstanding shares of common stock at the close of business on March 18, 2019 will be entitled to vote at the Annual Meeting.
Your vote is important! Whether or not you plan to attend the Annual Meeting, please read the enclosed proxy statement and vote as soon as possible via the Internet, by telephone or, if you receive a paper Proxy Card or voting instruction form in the mail, by mailing the completed Proxy Card or voting instruction form. Using the Internet or telephone voting systems or mailing your completed Proxy Card will not prevent you from voting in person at the meeting if you are a shareholder of record and wish to do so.
Important information about the matters to be acted upon at the meeting is included in the notice of meeting and proxy statement. Our 2018 Annual Report contains information about our Company and its financial performance.
I am very much looking forward to our 2019 Annual Meeting of Shareholders.

Very truly yours, 
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Lawrence A. Weinbach 
Independent Chairman
 
This proxy statement is dated March 25, 2019 and is first being sent or made available to shareholders on or about April 3, 2019.

1       www.discover.com


Notice of 2019 Annual
Meeting of Shareholders
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You are cordially invited to attend the Annual Meeting, but whether or not you expect to attend in person, you are urged to vote. Your prompt action will aid the Company in reducing the expense of proxy solicitation.
 
 
 
 
 
 
 
Date and Time
May 16, 2019
9:00 a.m., local time
Place
Discover Financial Services
2500 Lake Cook Road
Riverwoods, IL 60015
Record Date
You are entitled to notice of and to vote at the meeting and at any adjournment or postponement of the meeting if you were a shareholder of record as of the close of business on March 18, 2019.
 
 
 
 
 
 
 
 
Items of Business
Board Recommendation
 
 
1
To elect 11 members of the Board of Directors named in the Proxy Statement as nominees, each for a term of one year.
FOR each director nominee
 
 
2
To conduct an advisory, non-binding vote to approve named executive officer compensation.
FOR
 
 
3
To ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2019.
FOR
 
 
4
To amend the Company's Amended and Restated Certificate of Incorporation to eliminate supermajority voting requirements.
FOR
 
 
5
To amend the Company's Amended and Restated Certificate of Incorporation to grant shareholders the right to call special meetings.
FOR
 
 
6
To consider an advisory vote on one shareholder proposal, if properly presented.
AGAINST
 
 
To transact any other business as may properly come before the meeting or any adjournment or postponement of the meeting.
 
 
It is important that your shares be represented and voted at the Annual Meeting. You can vote your shares by completing and returning your Proxy Card or by voting on the Internet or by telephone. The only voting securities of the Company are shares of our common stock, $0.01 par value per share (the "Common Stock"), of which there were 326,237,525 shares outstanding as of the Record Date (excluding treasury stock). See the Questions and Answers About the Annual Meeting and Voting section beginning on page 60 for more details.
 
Advance Voting Methods
 
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Internet
Go www.investorvote.com/dfs
 
Webcast
A live audio webcast of our Annual Meeting will be available through our investor relations page of our internet site, www.discover.com, starting at 9:00 a.m., local time, on May 16, 2019. Information included on our website, other than our Proxy Statement and form of proxy, is not a part of our proxy solicitation materials.
 
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Telephone
Call toll free 1-800-652-VOTE (8683) within the USA, territories & Canada
 
 
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Mail 
Follow the instructions on your proxy card
 
This booklet contains our Notice of Annual Meeting and 2019 Proxy Statement. Our 2018 Annual Report contains information about our Company and its financial performance. Our Annual Report is not a part of our proxy solicitation materials.
By Order of the Board of Directors,
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D. Christopher Greene
Vice President, Acting General Counsel & Secretary

March 25, 2019

2019 Proxy Statement       2



Proxy Highlights
This summary highlights selected information about the matters to be voted on at the Annual Meeting. You should read the entire Proxy Statement before voting. For more complete information regarding the Company’s 2018 performance, please review the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Voting Roadmap
 
PROPOSAL 1
Election of Directors
Our Board recommends a vote FOR each director nominee
See Page 8 
Director Nominees
 
 
 
Committees
 
Name
Age
Director Since
AC
C&LD
N&G
ROC
Other Public Company Boards
JEFFREY S. ARONIN Independent 
Chairman and CEO of Paragon Pharmaceutical Capital, LLC and Paragon Biosciences, LLC
51
2007
 
¢
 
 
•    None
MARY K. BUSH Independent 
Chairman of Bush International, LLC
70
2007
 
 
¢
¢
•    Bloom Energy
•    ManTech International Corporation
•    Marriott International, Inc.
•    T. Rowe Price Group, Inc.
GREGORY C. CASE Independent 
CEO of Aon plc
56
2007
 
 
 
•    Aon plc
CANDACE H. DUNCAN Independent 
Former Managing Partner
KPMG LLP, Washington D.C. Metropolitan Area
65
2014
¢
 
¢
 
•    FTD Companies, Inc.
•    Teleflex Inc.
JOSEPH F. EAZOR Independent 
CEO of Rackspace
56
2016
¢
 
 
 
•    None
CYNTHIA A. GLASSMAN Independent 
Former Under Secretary for Economic Affairs
U.S. Department of Commerce
71
2009
 
 
 
•    Navigant Consulting, Inc.
ROGER C. HOCHSCHILD 
CEO and President,
Discover Financial Services
54
2018
 
 
 
 
•    Principal Financial Group
THOMAS G. MAHERAS Independent 
Managing Partner
Tegean Capital Management, LLC
56
2008
 
 
 
¢
•    None
MICHAEL H. MOSKOW Independent 
Retired President and CEO
Federal Reserve Bank of Chicago
81
2007
 
 
 
•    Commonwealth Edison Company
MARK A. THIERER Independent 
Managing Partner,
AssetBlue Investment Group
59
2013
 
¢
 
 
•    None
LAWRENCE A. WEINBACH Independent Chairman 
Chairman, Great Western Products Holdings, LLC
Managing Director, Yankee Hill Capital Management, LLC
79
2007
¢
 
 
•    None
AC
Audit Committee
Chairperson of the Committee
C&LD
Compensation and Leadership Development Committee
¢
Member of the Committee
N&G
Nominating and Governance Committee
 
 
ROC
Risk Oversight Committee
 
 

2019 Proxy Statement       3


Proxy Highlights


DIRECTOR NOMINEE SNAPSHOT
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SKILLS AND EXPERIENCE
All Director nominees exhibit:
 
As a group, our Director nominees have the following characteristics, skills, and experience:
•    Broad and relevant spectrum of experience and expertise
•    A reputation for integrity
•    Experience in positions with a high degree of responsibility
•    Commitment to represent the interests of shareholders
 
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CEO or CFO
Public Board
Financial
Services
Industry
Technology
Finance,
Accounting
and Financial
Reporting
Government/
Regulatory
 
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Risk
Management
Corporate
Governance
International
Marketing
Strategy and
Business
Development
Compensation
and Succession
Planning
Corporate Governance Highlights
The Board believes strong corporate governance is critical to achieving the Company’s long-term goals and maintaining the trust and confidence of investors, employees, customers, regulatory agencies, and other stakeholders. The following are highlights of our Corporate Governance Program:
 
 
Board Independence
ü    All directors are independent except CEO; Board committees are 100% independent
ü    Non-Executive Board Chairman is independent
ü    Executive sessions of directors held at all in-person Board meetings
Board Performance
ü    All directors attended more than 75% of the Board and their committee meetings
ü    Diverse Board with mix of skills, tenure and age; 27% of our directors are women
ü    Annual Board, committee and director performance evaluations
ü    Director education and access to experts
 
 
Best Practices
ü    Risk aware culture overseen by a separate Risk Oversight Committee
ü    Significant shareholder ownership requirements for Executives and Board
ü    Longstanding commitment to sustainability
Shareholder Rights
ü    Annual election of directors with majority voting standard
ü    Shareholders have proxy access with market standard conditions for director nominations
ü    In response to shareholders' vote at the 2018 Annual Meeting, Board is recommending that shareholders eliminate supermajority voting requirements
ü    Board is recommending that shareholders approve the right of shareholders to call special meetings

2019 Proxy Statement       4


Proxy Highlights


 
PROPOSAL 2
Advisory Vote to Approve Named Executive Officer Compensation
Our Board recommends a vote FOR this Proposal
See Page 22 
Business Highlights
In 2018, the Company’s accomplishments included:
Achieved profit target with higher revenues offsetting higher credit losses
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Based on net income of $2,742 million, the Company achieved profit before taxes and reserves (“PBTR”) of $4,020 million(1) 
Continued strong card loan and sales growth while maintaining a disciplined approach to credit
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The Company achieved year-over-year loan growth of 7% and card sales growth of 8% while progressing new underwriting capabilities
Accelerated volume growth in Payment Services, led by PULSE
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Payment Services transaction dollar volume grew 15% year-over-year
Strong return on equity and significant capital deployment
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The Company achieved return on equity of 25% for the full year while increasing quarterly dividend by 14% to $0.40 per share of Common Stock and repurchased approximately 28 million shares
Executive Compensation Highlights
The Company structured its 2018 executive compensation program to align with shareholder interests and the long-term interests of the Company, appropriately balance risk and reward, and attract and retain a talented executive team. The program was designed on the following principles:
 
 
 
Pay for Performance
Our compensation should reflect Company, business segment, and individual performance.
Balanced Compensation Structure
We seek to deliver a mix of fixed and variable compensation that is aligned with shareholder interests and the long-term interests of the Company and that appropriately balances risk and reward.
Market-Competitive Pay Opportunity
Our compensation should be competitive relative to our peers in order to attract, motivate and retain a talented executive team.
 
 
(At Risk)
 
 
 
Element
Base Salary
Short-Term Cash Incentive
Long-Term Equity Incentive
Highlights
Fixed compensation based on scope of responsibility, impact on the organization, expertise, experience, and individual performance.
Annual cash bonus opportunity based on Company financial performance, primarily PBTR, and other performance factors, risk and individual performance.
Annual stock award opportunity based on financial performance, other performance factors, risk and individual performance. The award is granted using a mix of PSUs and RSUs.
2018 CEO Target Pay Mix
14.9%
21.5%
RSUs 19.1%
PSUs 44.5%
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____________________
(1) 
Profit before taxes and reserves ("PBTR") is a non-GAAP financial measure which should be viewed in addition to, not as a substitute for, the Company's reported results. PBTR is derived by adding the increase in the allowance for loan losses of $423 million and income tax expense of $855 million to net income of $2,742 million. The Compensation and Leadership Development Committee believes that PBTR is a better measure of the core operating performance of the business that increases focus on factors the Company's incentive-eligible employees are most able to directly impact and influence and controls for variability in significant macroeconomic impacts.

5       www.discover.com

Proxy Highlights


Highlights of our program include:
We Do
We Do Not
ü    Pay for performance
ü    Align compensation with the shareholder interests
ü    Have oversight by an independent Compensation & Leadership Development Committee
ü    Apply share ownership guidelines to NEOs
ü    Apply share retention requirements to NEOs
ü    Apply incentive award limits to NEOs
ü    Clawback incentive compensation under certain circumstances
ü    Regularly evaluate risk performance in incentive compensation design and decisions for our NEOs
ü    Provide a balanced change in control with a double trigger and no excise tax gross-ups
ü    Include non-competition and non-solicitation provisions in our long-term incentive awards
ü    Limit perquisites
û    Have employment contracts for our named executive officers (the “NEOs”)
û    Provide special benefit plans to our executives not generally available to other employees
û    Directors and NEOs are prohibited from hedging or pledging Company securities
û    Have single trigger severance arrangements or provide excise tax gross-ups
 
PROPOSAL 3
Ratify the Appointment of Deloitte & Touche LLP as Independent Auditors for 2019
Our Board recommends a vote FOR this Proposal
See Page 49 
 
PROPOSAL 4
Amend the Company's Amended and Restated Certificate of Incorporation to Eliminate Supermajority Voting Requirements
Our Board recommends a vote FOR this Proposal
See Page 52 
 
PROPOSAL 5
Amend the Company's Amended and Restated Certificate of Incorporation to Grant Shareholders the Right to Call Special Meetings
Our Board recommends a vote FOR this Proposal
See Page 53 
 
PROPOSAL 6
Advisory Vote on One Shareholder Proposal, if Properly Presented
Our Board recommends a vote AGAINST this Proposal
See Page 56 
Questions and Answers
Please see the Questions and Answers About the Annual Meeting and Voting section beginning on page 60 for important information about the proxy materials, voting, and the Annual Meeting.

2019 Proxy Statement       6



Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





Except as otherwise indicated or unless the context otherwise requires, “Discover Financial Services,” “Discover,” “DFS,” “we,” “us,” “our,” and “the Company” refer to Discover Financial Services and its subsidiaries.
We own or have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but not limited to: Discover®, PULSE®, Cashback Bonus®, Discover Cashback Checking®, Discover it®, College Covered®, and Diners Club International®. All other trademarks, trade names and service marks included in this proxy statement are the property of their respective owners.

7       www.discover.com


Board and Governance Matters
 
 
 
PROPOSAL 1
Election of Directors
The Board of Directors recommends that you vote “FOR” the election of each director nominee. Proxies solicited by our Board will be voted “FOR” the election of each nominee unless otherwise instructed.
The Board believes strong corporate governance is critical to achieving the Company’s long-term goals and maintaining the trust and confidence of investors, employees, customers, regulatory agencies, and other stakeholders. The Board oversees the Company’s business and directs its management. The non-employee directors of the Board are not involved in day-to-day operations. Instead, the Board meets periodically with management to review the Company’s Annual Operating Plan (the “Annual Plan”), multi-year strategic plan and performance against such plans, risks, and business strategies. Directors also consult with management about the Company’s performance outside of formal meetings, which include opportunities for directors to have in-depth conversations with management about particular areas of the business.
All of the director nominees set forth below are standing for election at the Annual Meeting. Director nominees stand for election at each annual meeting of shareholders. Each director holds office until his or her successor has been duly elected and qualified or the director’s earlier resignation, death or removal. In August 2018, Director David W. Nelms informed the Company that he intended to retire as the Company's Chairman and CEO, and the Board elected the Company's then-President and Chief Operating Officer Roger C. Hochschild as a Director. Subsequently, in October 2018, Mr. Hochschild succeeded Mr. Nelms as the Company's CEO, and effective December 31, 2018, Mr. Nelms retired from the Board. As a result of Mr. Nelms' retirement, the Board elected Director Lawrence A. Weinbach to serve as the Board's Independent Chairman. The nominees below are current directors of the Company, and each such nominee has indicated that he or she will serve if elected. We do not anticipate that any nominee will be unable or unwilling to stand for election, but if that happens, your proxy will be voted for another person nominated by the Board. The Board may also choose to reduce the number of directors to be elected, as permitted by our Bylaws. The experience, qualifications, attributes and skills of each of the Company’s director nominees are set forth below.
The Board believes that an effective board consists of a diverse group of individuals who bring a variety of complementary skills and experiences. The Nominating and Governance Committee and the Board consider the skills and experiences of the directors in the broader context of the Board’s overall composition, with a view toward constituting a board that has the best skill set and experience to oversee the Company’s business. As indicated below, our directors have a combined wealth of leadership experience derived from extensive service guiding large, complex organizations as executive leaders or board members, and in government. They collectively have substantive knowledge and skills applicable to our business, including in the areas of regulation, public accounting and financial reporting, finance, risk management, business development, technology, marketing, operations, strategic planning, management development and succession, compensation, corporate governance, public policy, international matters, banking, and financial services.
The Nominating and Governance Committee regularly reviews the composition of the Board and its assessment of the Board’s performance in light of our evolving business requirements to maintain a Board with the appropriate mix of skills and experiences needed for the broad set of challenges that the Company confronts. Annually, the Lead Director (now Independent Chairman) conducts individual interviews with each director that include topics such as Board and committee performance and effectiveness, leadership of the Board and committees, and the performance of individual directors. The Lead Director (now Independent Chairman) then reports the results of these interviews to the full Board during its self-evaluation. The full Board evaluates such results and also conducts an evaluation of the Lead Director (now Independent Chairman) and Chair of the Nominating and Governance Committee. In addition, each committee annually conducts a self-evaluation.
 


8       www.discover.com

Board and Governance Matters

Our Director Nominees
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Jeffrey S. Aronin Independent
Biography
Mr. Aronin has been chairman and chief executive officer of Paragon Pharmaceutical Capital, LLC, a global pharmaceutical development company, since 2010. He is also chairman and chief executive officer of Paragon Biosciences, LLC, an affiliated global healthcare development and biopharmaceutical investment firm. From 2010 to 2017, Mr. Aronin was also chairman and chief executive officer of Marathon Pharmaceuticals, a research-based prescription biopharmaceutical company. From 2000 to 2009, Mr. Aronin was president and chief executive officer of Ovation Pharmaceuticals Inc., a biopharmaceutical company he founded in 2000.
In addition
Mr. Aronin has experience as a chief executive officer leading several global biopharmaceutical companies. His skills include strategy and business development, finance and brand marketing. He brings valuable leadership experience and knowledge in the operations and day-to-day management of a global corporation in a regulated industry. Mr. Aronin also has experience in the structuring and execution of strategic corporate transactions, including mergers and acquisitions.
 
 
AGE: 51
DIRECTOR SINCE: 2007
OTHER CURRENT PUBLIC COMPANY BOARDS: None
COMMITTEES: Compensation and Leadership Development
 
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Mary K. Bush Independent
Biography
Ms. Bush has served as the chairman of Bush International, LLC, a financial and business strategy advisory firm, since 1991. She advises U.S. companies and foreign governments on international financial markets, banking, and economic matters. Ms. Bush served as managing director of the Federal Housing Finance Board, where she established financial policies and oversaw management and safety and soundness for 12 Federal Home Loan Banks. She also served as vice president and head of international Finance of Fannie Mae, where she led funding transactions globally, and as the U.S. Alternate Executive Director of the International Monetary Fund Board.
In addition
Ms. Bush brings extensive financial market, banking, government and international experience to the Board. Additionally, she brings a broad understanding of the operations and business and economic challenges of public companies and the financial services industry.
 
 
AGE: 70
DIRECTOR SINCE: 2007
OTHER CURRENT PUBLIC COMPANY BOARDS: Bloom Energy, ManTech International Corporation, Marriott International, Inc., T. Rowe Price Group, Inc.
COMMITTEES: Nominating and Governance, Risk Oversight
 
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Gregory C. Case Independent
Biography
Mr. Case has been chief executive officer of Aon plc, a leading global professional services firm providing advice and solutions in risk, retirement and health, since 2005 and was president from 2005 to 2018. He is also a member of Aon’s board of directors. Prior to joining Aon, Mr. Case was with McKinsey & Company, an international management consulting firm, for 17 years, most recently serving as head of the Financial Services Practice.
In addition
Mr. Case has approximately 20 years of experience in the insurance and financial services industries, including in the areas of risk management services, insurance and reinsurance brokerage, and through his management consulting and banking experience. He brings valuable leadership experience and knowledge of business operations and the day-to-day management of a large, regulated global financial corporation. His skills include strategy and business development, risk management and people management.
 
 
AGE: 56
DIRECTOR SINCE: 2007
OTHER CURRENT PUBLIC COMPANY BOARDS: Aon plc
COMMITTEES: Compensation and Leadership Development (Chair)
 

9       www.discover.com

Board and Governance Matters


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Candace H. Duncan Independent
Biography
Ms. Duncan retired from KPMG LLP, a global network of professional firms providing audit, tax and advisory services, in November 2013 where she had been managing partner of the Washington, D.C. metropolitan area since 2009. Ms. Duncan also was on the KPMG LLP board of directors from 2009 to 2013, and served as chair of the board’s nominating committee as well as the partnership and employer of choice committee. Prior thereto, she served in various roles at the firm, including managing partner for audit for the Midatlantic area and audit partner in charge for the Virginia business unit.
In addition
Ms. Duncan has experience leading and managing a large accounting firm’s growth priorities across its audit, tax and advisory functions in key markets. She also has a strong financial and accounting background, gained through her many years of experience at KPMG LLP, including her experience as a lead audit partner for major international and domestic companies. She has served clients on a wide range of accounting and operational issues, public securities issuances and strategic corporate transactions. Her thorough knowledge of public company accounting, financial statements and corporate finance is of significant value to the Company.
 
 
AGE: 65
DIRECTOR SINCE: 2014
OTHER CURRENT PUBLIC COMPANY BOARDS: FTD Companies, Inc., Teleflex Inc.
COMMITTEES: Audit, Nominating and Governance
 
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Joseph F. Eazor Independent
Biography
Mr. Eazor has been the chief executive officer of Rackspace, a leading managed cloud company, since 2017. He previously served as the president and chief executive officer of EarthLink, Inc., a leading communications and IT services provider, and was a member of EarthLink’s board from January 2014 until February 2017. From 2011 to 2013, he served as executive vice president and chief operating officer of global sales and customer operations at EMC and prior to that he served in a variety of leadership roles at Hewlett Packard and Electronic Data Systems. Mr. Eazor also served on the board of Commvault, a data protection and information management company, from October 2015 to July 2018.
In addition
Mr. Eazor has a proven track record of leading successful global companies. He has extensive experience in international strategy and business development and in technology and IT services. In addition to his corporate roles, Mr. Eazor has management consulting experience from his time as a senior partner with McKinsey & Co. and as a partner and board member of A.T. Kearney, Inc.
 
 
AGE: 56
DIRECTOR SINCE: 2016
OTHER CURRENT PUBLIC COMPANY BOARDS: None
COMMITTEES: Audit
 
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Cynthia A. Glassman, Ph.D. Independent
Biography
Dr. Glassman was appointed by President Bush as Under Secretary for Economic Affairs at the U.S. Department of Commerce from 2006 to 2009 and as Commissioner of the U.S. Securities and Exchange Commission from 2002 to 2006, including serving as acting chair during the summer of 2005. Dr. Glassman is also a Senior Research Scholar at the Institute for Corporate Responsibility at the George Washington University School of Business. She held various positions over 12 years at the Federal Reserve, including as Chief of the Financial Reports Section and an Economist in the Capital Markets Section. She also has 15 years of experience in financial services consulting, including as a Principal of Ernst & Young LLP and Managing Director of Furash & Company.
In addition
Dr. Glassman brings extensive regulatory, corporate governance, risk management, financial services and banking experience to the Board. She holds a Ph.D. in economics and has spent over 40 years in the public and private sectors focusing on financial services regulatory and public policy issues.
 
 
AGE: 71
DIRECTOR SINCE: 2009
OTHER CURRENT PUBLIC COMPANY BOARDS: Navigant Consulting, Inc.
COMMITTEES: Audit (Chair)
 

2019 Proxy Statement       10


Board and Governance Matters

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Roger C. Hochschild
Biography
Mr. Hochschild has served as the chief executive officer and president of Discover since October 2018 and served as our president and chief operating officer from 2004 to 2018. He was executive vice president, chief administrative and strategic officer for Morgan Stanley from 2001 to 2004, and was executive vice president, chief marketing officer - Discover from 1998 to 2001, when Discover was a part of Morgan Stanley.
In addition
Mr. Hochschild's deep understanding of the Company’s business and the financial services industry provides valuable expertise to the Company. He also brings leadership experience in risk management, consumer financial services, including operating in the current regulatory environment, corporate finance, information technology and knowledge of operations and the day-to-day management of a global financial corporation, which plays a critical role in board discussions regarding strategic planning and business development for the Company.
 
 
AGE: 54
DIRECTOR SINCE: 2018
OTHER CURRENT PUBLIC COMPANY BOARDS: Principal Financial Group
COMMITTEES: None
 
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Thomas G. Maheras Independent
Biography
Mr. Maheras has been the managing partner of Tegean Capital Management, LLC, an investment advisory firm based in New York since 2008. Prior to that, he was chairman and co-chief executive officer of Citi Markets and Banking, the investment banking division of Citigroup, Inc., where he held roles of increasing responsibility after starting his career as a fixed-income trader at Salomon Brothers. He has served as chairman of the U.S. Treasury Department Borrowing Advisory Committee and as an executive committee member of the Board of Directors of the Securities Industry and Financial Markets Association.
In addition
Mr. Maheras has extensive risk management, banking and capital markets experience, including 23 years at Citigroup, Inc. where his responsibilities included leading the global capital markets business. He also brings valuable leadership experience and knowledge of operations and the day-to-day management of a global financial services organization. Mr. Maheras’ financial background and banking and financial services experience includes a knowledge of financial statements, corporate finance, accounting and capital markets.
 
 
AGE: 56
DIRECTOR SINCE: 2008
OTHER CURRENT PUBLIC COMPANY BOARDS: None
COMMITTEES: Risk Oversight

 
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Michael H. Moskow Independent
Biography
Mr. Moskow is currently Vice Chair and Distinguished Fellow, Global Economy at The Chicago Council on Global Affairs. He retired as president and chief executive officer of the Federal Reserve Bank of Chicago in 2007, where he had served since 1994. Mr. Moskow was a Deputy U.S. Trade Representative, following his appointment by President Bush in 1991, and earlier in his career, held a number of senior positions with the U.S. government, including undersecretary of labor at the U.S. Department of Labor, director of the Council on Wage and Price Stability and senior staff economist with the Council of Economic Advisers. Mr. Moskow serves on the board of directors of CityBase, Commonwealth Edison Company, a subsidiary of Exelon Corporation, and Cresset Private Equity Opportunity Fund. In the past five years, he has also served as a director of Taylor Capital Group Inc.
In addition
Mr. Moskow brings extensive regulatory, risk management, financial services and banking experience to the Board and has extensive knowledge of the economy and financial markets. Through his senior regulatory positions, particularly in the financial services arena, and service on the boards of other financial institutions, he brings a thorough and insightful perspective to a wide range of issues.
 
 
AGE: 81
DIRECTOR SINCE: 2007
OTHER CURRENT PUBLIC COMPANY BOARDS: Commonwealth Edison Company
COMMITTEES: Risk Oversight (Chair)
 

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Board and Governance Matters


a34646713discovernps_image65.jpg
 
Mark A. Thierer Independent
Biography
Mr. Thierer currently serves as the managing partner of AssetBlue Investment Group, a position he has held since June 2017. From October 2017 through February 2018, Mr. Thierer also served as the interim chief executive officer of Dentsply Sirona Inc., a manufacturer of dental implants. Mr. Thierer was chief executive officer of OptumRx, a pharmacy care services company, from July 2015 until September 2017. He previously served as chairman and chief executive officer of Catamaran Corporation, one of the nation’s largest pharmacy benefit management companies, from March 2011 until it combined with OptumRx in 2015.
In addition
Mr. Thierer has experience as a chief executive officer leading a national pharmacy benefit and healthcare information technology solutions company. His skills include strategy and business development, technology, finance and marketing. He brings valuable leadership experience and knowledge of operations and the day-to-day management of a national corporation. Mr. Thierer also has experience in the structuring and execution of strategic corporate transactions, including mergers and acquisitions.
 
 
AGE: 59
DIRECTOR SINCE: 2013
OTHER CURRENT PUBLIC COMPANY BOARDS: None
COMMITTEES: Compensation and Leadership Development

 
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Lawrence A. Weinbach Independent Chairman
Biography
Mr. Weinbach has been chairman of Great Western Products Holdings, LLC, a manufacturer and master distributor of food and nonfood concession products, since 2009, and has been a managing director of Yankee Hill Capital Management, LLC, a private equity firm, since 2006. Prior to that, he was the executive chairman of Unisys Corporation, a worldwide information services and technology company, from 2005 to 2006, and its chairman and chief executive officer from 1997 to 2004. He began his career at Arthur Andersen, ultimately serving as managing partner and chief executive of Andersen Worldwide, a global professional services organization, which included Arthur Andersen and the company now known as Accenture, from 1989 to 1997.
In addition
Mr. Weinbach has experience in the financial and accounting industry and the information technology and financial services sectors. Mr. Weinbach’s strong financial background, gained through his private equity, accounting, investment banking and financial services experience, includes knowledge of risk management, governance, financial statements, corporate finance, accounting and capital markets. As a former chief executive officer, he also brings valuable leadership experience and knowledge of operations, corporate governance and the day-to-day management of a global corporation.
 
 
AGE: 79
DIRECTOR SINCE: 2007
INDEPENDENT CHAIRMAN SINCE: 2019 (Lead Director from 2009-2018)
OTHER CURRENT PUBLIC COMPANY BOARDS: None
COMMITTEES: Audit, Nominating and Governance (Chair)
 

2019 Proxy Statement       12



Corporate Governance
Process for Nominating Directors
Nomination of Directors
The Nominating and Governance Committee is responsible for identifying, evaluating, and recommending candidates to the Board. The Nominating and Governance Committee may consider director candidates from a wide range of sources, including shareholders, officers, and directors. The Board is responsible for nominating directors for election by the shareholders and filling any vacancies on the Board that may occur. In August 2018, following Director David W. Nelms' announcement that he would retire as the Company's Chairman and CEO, the Board increased the size of the Board and elected Roger C. Hochschild, the Company's then-President and Chief Operating Officer, as a Director. Mr. Nelms subsequently retired from the Board in December 2018, and the Board decreased the size of the Board by one. Mr. Hochschild, now the Company's Chief Executive Officer ("CEO") and President, is standing as a Director nominee at the 2019 Annual Shareholders' Meeting. The Nominating and Governance Committee will continue to evaluate the composition of the Board, including the mix of skills and experiences of existing directors, as well as the potential benefits from new and different perspectives and skill sets.
Shareholder Recommendations for Director Candidates
Fulfilling its responsibility to identify, evaluate, and recommend director candidates, the Nominating and Governance Committee accepts shareholder recommendations of director candidates and evaluates such candidates in the same manner as other candidates. The Nominating and Governance Committee determines the need for additional or replacement Board members, then identifies and evaluates the director candidate under the Director Qualifications described below based on the information the Nominating and Governance Committee receives with the recommendation or which it otherwise possesses, which may be supplemented by certain inquiries. If the Nominating and Governance Committee determines, in consultation with other directors, including the Chairman of the Board, that a more comprehensive evaluation is warranted, the Nominating and Governance Committee may then obtain additional information about the director candidate’s background and experience, including by means of interviews. The Nominating and Governance Committee will then evaluate the director candidate further, again using the qualification criteria described herein. The Nominating and Governance Committee receives input on such director candidates from other directors, including the Chairman of the Board, and recommends director candidates to the full Board for nomination. The Nominating and Governance Committee may engage a third party to assist in identifying director candidates or to assist in gathering information regarding a director candidate’s background and experience. If the Nominating and Governance Committee engages a third party, the Company pays for these services.
Shareholders who wish to recommend a candidate for the Nominating and Governance Committee’s consideration must submit the recommendation in writing in accordance with the Policy Regarding Director Candidates Recommended by Shareholders, available through the investor relations page of our internet site, www.discover.com.
In 2018, there were no director candidates submitted by shareholders. Shareholders may make recommendations at any time, but recommendations for consideration as nominees at the annual meeting of shareholders must be received not less than 120 days before the first anniversary of the date that the proxy statement was released to shareholders in connection with the previous year’s annual meeting.
To submit a candidate for consideration for nomination at the 2020 Annual Meeting of Shareholders, shareholders must submit the recommendation, in writing, by December 5, 2019. The written notice must demonstrate that it is being submitted by a shareholder of record of the Company and include information about each proposed director candidate, including name, age, business address, principal occupation, principal qualifications, and other relevant biographical information. In addition, the shareholder must confirm the candidate’s consent to serve as a director. Shareholders must send recommendations to Discover Financial Services, 2500 Lake Cook Road, Riverwoods, Illinois 60015, Attention: Secretary and General Counsel, and they will be forwarded to the Nominating and Governance Committee.
In addition, shareholders may nominate director candidates by complying with the advance notice or proxy access Bylaw provisions discussed at the end of this Proxy Statement in the Shareholder Proposals and Director Nominations for the 2020 Annual Meeting section.

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Corporate Governance


Director Qualifications
Our Corporate Governance Policies describe our director qualifications. The Board seeks members who combine a broad and relevant spectrum of experience and expertise with a reputation for integrity. Directors should have experience in positions with a high degree of responsibility and be leaders in the companies or institutions with which they are affiliated. Directors should be selected based upon their potential contributions to the Board and management and their ability to represent the interests of shareholders. Also, the Board will consider the diversity of a candidate’s perspectives, background, and other demographics. Generally, no director is permitted to serve on more than four additional public company boards (in addition to the Company’s Board).
Information Concerning Nominees for Election as Directors
Director Independence
Our Board of Directors adopted our Corporate Governance Policies, which contain the director independence guidelines and provide that a majority of the members of the Board and each member of the Audit Committee, the Compensation and Leadership Development Committee (the “Compensation Committee”), the Nominating and Governance Committee and the Risk Oversight Committee must consist of directors who are independent. The Board uses these guidelines to assist it in determining whether directors qualify as “independent” pursuant to the guidelines and the requirements set forth in the New York Stock Exchange’s ("NYSE") Corporate Governance Rules (the “Rules”). In each case, the Board broadly considers all relevant facts and circumstances and applies the guidelines and the Rules in determining whether directors qualify as “independent.” Our Corporate Governance Policies are available through the investor relations page of our internet site, www.discover.com, and in print free of charge to any shareholder who requests a copy.
Pursuant to our Corporate Governance Policies and the Rules, the Board reviewed the independence of all of our current directors. During this review, the Board considered transactions and relationships between each director or any member of his or her immediate family (or any entity of which a director or an immediate family member is an executive officer, general partner or significant equity holder) and the Company and its subsidiaries and affiliates. The Board also considered whether there were any transactions or relationships between directors or any member of their immediate family and members of the Company’s senior management. The purpose of this review was to determine whether any such relationships or transactions existed that were inconsistent with a determination that the director is independent.
As a result of this review, the Board affirmatively determined that Jeffrey S. Aronin, Mary K. Bush, Gregory C. Case, Candace H. Duncan, Joseph F. Eazor, Cynthia A. Glassman, Thomas G. Maheras, Michael H. Moskow, Mark A. Thierer and Lawrence A. Weinbach are independent of the Company and its management under the standards set forth in the Corporate Governance Policies and the Rules. Additionally, Richard H. Lenny, who retired from the Board effective May 2, 2018, was independent of the Company and its management under the standards set forth in the Corporate Governance Policies and the Rules while he served on the Board in 2018. The Board determined that one of our directors, Roger C. Hochschild, is not independent because of his employment as our CEO and President. Additionally, David W. Nelms who retired from the Board effective December 31, 2018, was not independent while he served on the Board in 2018 because of his employment as our CEO.
In determining that each of the directors other than Mr. Hochschild is independent, the Board considered, among other things, certain relationships, which it determined were immaterial to the directors’ independence. The Board considered that the Company and its subsidiaries in the ordinary course of business have, during the last three years, sold products and services to, and/or purchased products and services from, companies at which some of our directors were officers during 2018. In each case, the amount paid to or received from these companies in each of the last three years did not exceed the greater of $1,000,000 or 2% of that organization’s consolidated gross revenues, the threshold set forth in our Corporate Governance Policies and the Rules.

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Corporate Governance


Board Roles and Responsibilities
Board and Committee Meetings
Our Board held 11 meetings during 2018. Each director attended at least 75% or more of the total number of meetings of the Board and the standing committees on which such director served that were held while the director was a member. Our Board has established the following standing committees: Audit, Compensation and Leadership Development, Nominating and Governance, and Risk Oversight. The membership and function of each committee and the number of meetings held by each committee during 2018 is described below.
AUDIT COMMITTEE
9 Meetings in 2018
REPORT: Page 50
 
MEMBERS
Dr. Glassman (Chair)
Ms. Duncan
Mr. Eazor
Mr. Weinbach
Primary Responsibilities
 
    Oversee the integrity of our consolidated financial statements, our system of internal control over financial reporting, our risk management, and the qualifications and independence of our independent registered public accounting firm.
    Oversee the internal audit function, including the performance of our internal audit executive.
    Sole authority and responsibility to select, determine the compensation of, evaluate the performance of, and, when appropriate, replace our independent registered public accounting firm.
    Oversee the Company's compliance with legal and regulatory requirements.
COMPENSATION AND LEADERSHIP DEVELOPMENT
7 Meetings in 2018
REPORT: Page 39
MEMBERS
Mr. Case (Chair)
Mr. Aronin
Mr. Thierer
Primary Responsibilities
 
    Annually review and approve the corporate goals and objectives relevant to the compensation of the CEO and evaluate his performance in light of these goals.
    Determine the compensation of our executive officers and other appropriate officers.
    Oversee risk management associated with our compensation practices.
    Administer our incentive and stock-based compensation plans.
    Oversee plans for management development and succession.
NOMINATING AND GOVERNANCE
4 Meetings in 2018
MEMBERS
Mr. Weinbach (Chair)
Ms. Bush
Ms. Duncan
Primary Responsibilities
 
    Identify and recommend candidates for election to our Board and each Board committee.
    Consider matters of corporate governance and make recommendations or take action.
    Oversee the annual evaluation of the members of our Board and its committees, and management.
    Recommend director compensation and benefits.
    Review annually our Corporate Governance Policies.
RISK OVERSIGHT
8 Meetings in 2018
MEMBERS
Mr. Moskow (Chair)
Ms. Bush
Mr. Maheras
Primary Responsibilities
 
    Oversee the enterprise-wide risk management framework, make recommendations to the Board on risk management policies and the Company’s risk appetite and tolerance, oversee risk management governance and policies and perform other functions pursuant to the Federal Reserve’s regulations.
    Oversee the performance of our Chief Risk Officer.
    Oversee capital planning, liquidity risk management and resolution planning activities.

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Corporate Governance


Our Board has adopted a written charter for each of the Audit, Compensation and Leadership Development, Nominating and Governance and Risk Oversight Committees setting forth the roles and responsibilities of each committee. The committee charters are available through the investor relations page of our internet site, www.discover.com.
All members of the Audit, Compensation and Leadership Development, Nominating and Governance, and Risk Oversight Committees satisfy the standards of independence applicable to members of such committees. In addition, the Board has determined that all members of the Audit Committee are financially literate and are “audit committee financial experts” as such term is defined in Item 407(d) of Regulation S-K under the Exchange Act and have accounting or related financial management expertise.
Board Leadership Structure
In August 2018, then-Chairman and CEO David W. Nelms announced that he planned to retire in early 2019. The Board determined that it would be in the best interests of the Company and its shareholders for Mr. Nelms to continue to serve as Chairman of the Board to allow for continuity of Board leadership during the transition of the CEO role. The Board immediately elected then-President and Chief Operating Officer Roger C. Hochschild to join the Board as a new Director and to succeed Mr. Nelms as CEO in October. Following the successful transition of the CEO role, Mr. Nelms announced in December 2018 that he would retire as Executive Chairman and as a Director at the end of 2018. The Board elected then-Lead Director Lawrence A. Weinbach to be its new Independent Chairman, effective January 1, 2019.
The Company's Bylaws, as well as the Board of Directors Corporate Governance Policies, provide that the office of the Chairman and the office of the CEO may be, but need not be, held by the same person. The Company has a strong independent Board, with all directors except for Mr. Hochschild having been determined to be independent under New York Stock Exchange listing standards. Further, as previously noted, all standing committees of the Board are composed solely of independent directors. In light of the recent CEO transition, and given the tenure that Mr. Weinbach has had serving as our Lead Director, the Board believes that having an Independent Chairman, separate from the CEO role, is the most appropriate leadership structure at this time. Although the Board believes that this best serves the interests of the Company and its shareholders, the Board retains the flexibility to combine the roles in the future. The Board recognizes its responsibility for the establishment and maintenance of the most effective leadership structure for the Company, taking into account all relevant facts and circumstances. Pursuant to the Board of Directors Corporate Governance Policies, the Board has indicated that it will appoint a Lead Director whenever the position of Chairman is not held by an independent director.
The Independent Chairman:
presides at all meetings of the Board, and has the authority to call, and will lead, non-employee director sessions and independent director sessions;
approves Board meeting agenda items and the schedule of Board meetings;
helps facilitate communication between senior management and the independent directors;
acts as a mentor to the CEO; and
participates and provides leadership on CEO performance evaluation and succession planning.
Non-Employee Director Meetings
In accordance with our Corporate Governance Policies, the non-employee directors meet regularly in executive sessions without management present. Our Corporate Governance Policies also require that if any non-employee directors are not independent, then the independent directors will meet in a separate independent director session at least once per year. Currently, all non-employee directors are independent. The Lead Director (effective 2019, the Independent Chairman), who is independent, presides over executive and independent director sessions.

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Corporate Governance


Board Role in Risk Oversight
The Board is responsible for approving the Company’s enterprise-wide risk management framework, which is described in the Company’s Enterprise Risk Management Policy and certain additional risk management policies. The Board receives reports of material exceptions to such policies. Additionally, the Board approves the risk appetite and limits, and capital targets and thresholds of the Company. It also appoints the Chief Risk Officer, and other risk management function leaders, as appropriate. The Board regularly devotes time during its meetings to review and discuss the most significant risks facing the Company, and management’s responses to those risks. During these discussions, the CEO, the General Counsel, the Chief Financial Officer and/or the Chief Risk Officer present management’s assessment of risks, a description of the most significant risks facing the Company, and any mitigating factors and plans or practices in place to address and monitor those risks. In addition to these discussions, the Board receives annual information security training and, in 2018, had an independent third party provide training tailored specifically to cybersecurity issues and risks that the Company faces. The Board has also delegated certain of its risk oversight responsibilities to its committees as set forth below, and regularly receives reports from the committees on risk management matters.
RISK OVERSIGHT COMMITTEE
The Risk Oversight Committee is responsible for overseeing our risk management policies and the operations of the Company’s enterprise-wide risk management framework and capital planning, liquidity risk management and resolution planning activities. The Risk Oversight Committee is responsible for, among other things:
    approving and periodically reviewing our risk management policies;
    overseeing the operation of policies and procedures which establish risk management governance, and risk-control infrastructure;
    overseeing the operation of processes and systems for implementing and monitoring compliance with such policies and procedures;
    reviewing and making recommendations to the Board, as appropriate, regarding the Company’s risk management framework, key risk management policies and the Company’s risk appetite and tolerance;
    receiving and reviewing regular reports from our Chief Risk Officer on current and emerging risks, the status of and changes to risk exposures, policies, procedures and practices, and the steps management has taken to monitor and control risk exposures;
    reviewing and approving the Company’s information security program, which seeks to mitigate information security risks, including cybersecurity risks; and
    receiving reports regarding compliance with risk appetite limits, risk management policies, procedures and controls.
The Risk Oversight Committee shares information with (which it may do through the Chair of the Committee) and meets in joint session with the Audit Committee as necessary or desirable to provide the committees with the information necessary to permit them to fulfill their duties and responsibilities with respect to oversight of risk management matters. For example, at least quarterly, the Risk Oversight and Audit Committees meet in joint session and receive updates on the Company’s information security program, including trends and developments regarding information security risks.
The Risk Oversight Committee also authorizes the Company’s Risk Committee, which is comprised of the members of the Company’s Executive Committee and the Discover Bank President. The Chief Risk Officer, a member of the Executive Committee, serves as the Risk Committee chair. The Risk Committee provides a forum for key members of our executive management team to review and discuss credit, market, liquidity, operational, legal and compliance and strategic risks across the Company and for each business unit.

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Corporate Governance


AUDIT COMMITTEE
Our Audit Committee assists the Board in the oversight of, among other things, the integrity of our consolidated financial statements, our compliance with legal and regulatory requirements, our system of internal controls and the qualifications and independence of our independent registered public accounting firm. With respect to compliance matters, our Audit Committee approves our Compliance Policy and reinforces the importance of compliance risk management. The Audit Committee assists the Board in its oversight of the Company’s anti-money laundering program. In addition, the Audit Committee receives reporting on the effectiveness of our Compliance Risk Management Program. Our Audit Committee also, taking into consideration the Board’s allocation of the review of risk among various committees of the Board, receives and reviews reports from the Chief Risk Officer and other members of management as the Audit Committee deems appropriate. These reports include a review of the guidelines and policies for assessing and managing the Company’s exposure to risks, the corporation’s major financial risk exposures, and the steps management has taken to monitor and control such exposures. The Audit Committee shares information with (which it may do through the Chair of the Committee) and meets in joint session with the Risk Oversight Committee as necessary or desirable to provide the committees with the information necessary to permit them to fulfill their duties and responsibilities with respect to oversight of risk management matters.
The Audit Committee provides oversight of the Company’s internal audit function. The Audit Committee reviews and approves the appointment, replacement and compensation of the head of Internal Audit and the charter, budget and staffing levels of the Company’s internal audit function. The Audit Committee reviews and approves the annual audit plan. The Audit Committee also receives periodic reports from the head of Internal Audit on the status of the annual audit plan, including significant results and the status of corrective actions.
COMPENSATION AND LEADERSHIP DEVELOPMENT COMMITTEE
The Compensation Committee is responsible for overseeing risk management associated with the Company’s employee compensation practices, including an annual review of the Company’s risk assessment of its compensation plans and practices to assess whether employee plans have features that might encourage excessive risk-taking that could threaten the value of the Company, are reasonably likely to have a material adverse effect on the Company or could result in a failure to comply with regulatory requirements. The Compensation Committee reviews reports from and meets with the Company’s Chief Risk Officer and the Risk Oversight and Audit Committees of the Board of Directors to discuss the annual employee incentive compensation risk assessment and to review outcomes of certain risk events and any impact to compensation decisions.
Separately, the Compensation Committee meets with the Company’s Chief Risk Officer to monitor the results of the Company’s incentive compensation program payments for certain employees, including our NEOs.
The Compensation Committee also oversees the Company’s succession planning process. On an annual basis, management conducts succession planning for all of the Company’s officer level roles, including our NEOs. Management further identifies critical roles beyond the officer level where there are uniquely strong needs for immediate successors, where restructuring is not likely to be a viable succession plan, and where having the role unfilled for a period of time could create regulatory, risk management or business continuity gaps. Annually, our CEO and President and Chief Human Resources Officer partner to conduct succession planning for our NEOs and other executives. For each of our NEOs, the role is reviewed to determine options for succession and development needed to increase succession readiness. Consideration is given to external hiring where appropriate. Management then reviews NEO succession plans with the Compensation Committee and the Board.
COMPENSATION AND LEADERSHIP DEVELOPMENT COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served on our Compensation Committee during 2018: Messrs. Case, Aronin, Lenny(1) and Thierer. During 2018, no member of the Compensation Committee was an officer or employee or former officer of the Company or any of our subsidiaries. None of our executives served as a member of (i) the compensation committee of another entity in which one of the executive officers of such entity served on our Compensation Committee or (ii) the compensation committee of another entity in which one of the executive officers of such entity served as a member of our Board.




____________________
(1) 
Mr. Lenny retired from the Board, effective May 2, 2018

2019 Proxy Statement       18


Corporate Governance


Board Attendance at Annual Shareholder Meeting
The Company’s Corporate Governance Policies state that each director will attend annual meetings of shareholders unless he or she is unable to attend a meeting due to extenuating circumstances. All of our directors last year attended the 2018 Annual Meeting of Shareholders.
Code of Ethics and Business Conduct
The Company maintains a Code of Ethics and Business Conduct applicable to all directors, officers and employees, including senior financial officers, and provides a statement of Discover's policies for conducting business legally and ethically. The Code of Ethics and Business Conduct is available without charge through the investor relations page of our internet site, www.discover.com, or by writing to the attention of: Investor Relations, Discover Financial Services, 2500 Lake Cook Road, Riverwoods, Illinois 60015. Any waivers of the provisions of this Code of Ethics and Business Conduct for directors or executive officers may be granted only in exceptional circumstances by the Board, or an authorized committee thereof, and will be promptly disclosed to the Company’s shareholders as may be required under the Securities and Exchange Commission ("SEC") or NYSE rules.
Board and Director Evaluations
In order to monitor and improve its effectiveness, and to solicit and act upon feedback they receive, the Board and its committees annually engage in a formal self-evaluation process. The Nominating and Governance Committee begins the process each year by reviewing and approving the self-evaluation procedures to ensure the independence and integrity of the process. In addition, they consider the substantive topics that will be part of the self-evaluation, which may include how directors feel about board operations, regulatory requirements, strategic and financial oversight, oversight of risk management, executive compensation, succession planning, and governance matters, among many other topics. For the past several years, the Nominating and Governance Committee has assigned the Lead Director (effective 2019, the Independent Chairman) with the task of interviewing each director in these areas. The Lead Director (effective 2019, the Independent Chairman) then reports the findings to the Nominating and Governance Committee and full Board to facilitate a discussion of the results.
Each standing committee then conducts its own self-evaluations. They evaluate their performance against the requirements of their charters and other aspects of their responsibilities. The full Board and each committee then discuss the results of their respective self-evaluations, frequently in executive session, highlighting actions to be taken in response to the discussion. Finally, the full Board conducts an evaluation of the Lead Director (effective 2019, the Independent Chairman) to ensure that he continues to satisfy the Board's obligations and expectations of the role.
Board Education
We provide orientation to new Directors to help familiarize them with our industry and lines of business as well as our legal, compliance, regulatory, and risk profile. Similarly, we provide Directors joining a new committee orientation on the requirements and responsibilities relevant to that particular committee. Discover also periodically offers educational sessions on a variety of topics throughout the year for all members of the Board, including legal and regulatory training as well as annual information security training. These sessions are designed to allow Directors to develop a deeper understanding of a business issue or a complex financial product. For example, in 2018, an independent third party provided training to the Board tailored specifically to information security and cybersecurity. Finally, Directors are encouraged to attend additional continuing education opportunities offered by third parties.
Communications with Directors
Shareholders and other interested parties may contact any member of our Board by writing to: Discover Financial Services, 2500 Lake Cook Road, Riverwoods, Illinois 60015, Attention: Secretary and General Counsel. All communications should be accompanied by the following information: (i) if the person submitting the communication is a shareholder, a statement of the type and amount of the securities of the Company that the person beneficially owns; (ii) if the person submitting the communication is not a shareholder and is submitting the communication to the non-management directors as an interested party, the nature of the person’s interest in the Company; (iii) any special interest, meaning an interest not in the capacity of a shareholder of the Company, of the person in the subject matter of the communication; and (iv) the address, telephone number and e-mail address, if any, of the person submitting the communication. The Board’s Policy Regarding Communications by Shareholders and Other Interested Parties with the Board of Directors is available through the investor relations page of our internet site, www.discover.com. Shareholder and interested party communications received in this manner will be handled in accordance with applicable procedures.

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Corporate Governance


Director Compensation
Director Compensation and Role of the Nominating and Governance Committee
Our Directors’ Compensation Plan was approved by our shareholders in 2011, and provides for a specific amount of annual compensation for our non-employee directors. Directors who also are our employees do not receive any compensation under the Directors’ Compensation Plan. The compensation paid to our non-employee directors further advances the interests of the Company and its shareholders by encouraging increased share ownership to promote long-term shareholder value. The Nominating and Governance Committee maintains guidelines which recommend that directors hold five times the annual cash retainer in Company stock and reviews director ownership levels annually.
The Nominating and Governance Committee is responsible for reviewing the effectiveness of the non-employee director compensation and benefit programs in supporting the Company’s ability to attract, retain, and motivate qualified directors. The Nominating and Governance Committee reviews director compensation at least every other year and considers a variety of factors, including our financial performance, general market conditions, director compensation at companies with which we compete for talent, director responsibilities, and trends in director compensation practices. Any recommendations for changes in director compensation are made to our Board.
In early 2018, Willis Towers Watson, the Company’s compensation consultant, conducted a market review of vesting provisions of equity awards made to the non-employee directors of our peers and a broad-based industry group. The Nominating and Governance Committee reviewed the market data, and after consideration of the same, recommended that the Board amend (i) the Directors’ Compensation Plan; (ii) the May 2017 RSU awards granted to our non-employee directors; and (iii) the form of award for future RSU grants to provide for a vesting date that is the earlier of (1) the first anniversary of the date of grant; or (2) immediately prior to the first annual meeting of shareholders following the date of grant. The Board considered the recommendation and amended the vesting date accordingly, effective February 22, 2018.
Later in 2018, Willis Towers Watson conducted a general market review of the director compensation of the Company’s proxy peers, and after considering the same, the Nominating and Governance Committee recommended changes to the director compensation program, as follows: (i) increase the annual retainer fee from $100,000 to $105,000; (ii) increase the annual grant of RSUs from a value of $140,000 to $150,000; and (iii) eliminate the Lead Director retainer fee and replace it with an Independent Chairman annual retainer of $210,000. The Board considered the recommendation and amended the director compensation accordingly, effective January 1, 2019.
The compensation payable under the Directors’ Compensation Plan is described below.
Cash Compensation
Each non-employee director receives the following cash compensation under the Directors’ Compensation Plan for service on our Board and each standing committee of our Board:
An annual retainer fee of $100,000 (increased to $105,000, effective January 1, 2019);
A Lead Director retainer fee of $75,000 (replaced with an Independent Chairman annual retainer of $210,000, effective January 1, 2019);
A committee chair retainer fee of: (i) $30,000 each for the chairpersons of the Audit Committee and Risk Oversight Committee; (ii) $25,000 for the chairperson of the Compensation Committee; and (iii) $20,000 for the chairperson of the Nominating and Governance Committee; and
A non-chair committee membership fee of: (i) $20,000 for each member of each of the Audit Committee and Risk Oversight Committee; (ii) $10,000 for each member of the Compensation Committee; and (iii) $5,000 for each member of the Nominating and Governance Committee.
Each non-employee director may elect to defer receipt of his or her cash compensation under the Directors’ Voluntary Nonqualified Deferred Compensation Plan until the director terminates all services for the Company. A bookkeeping account is maintained for each participant and interest is credited to the deferred amount based on 120% of the quarterly long-term applicable federal rate in effect.
Stock Compensation
Pursuant to the Directors’ Compensation Plan, we may issue awards of up to a total of 1,000,000 shares of our Common Stock to our non-employee directors. Each non-employee director receives an annual grant of $140,000 in RSUs for service on our Board, beginning with the first annual meeting at which the director is elected to our Board. For those directors joining our Board on a date other than the date of an annual meeting, each director receives a grant of $140,000 in RSUs on the date on which the director becomes a member of our Board, adjusted on a pro-rata basis by multiplying such award by a fraction where the numerator is the number of months between such date and the next annual meeting of shareholders and the denominator is twelve. Effective January 1, 2019, the annual grant of RSUs will be $150,000, or pro rata as described above.

2019 Proxy Statement       20


Corporate Governance


The number of RSUs granted is determined by dividing the dollar amount by our share closing price on the date of grant. Effective February 22, 2018, each grant vests in its entirety on the earlier of the first anniversary of its date of grant or immediately prior to the first annual meeting of shareholders following the date of grant, subject to the director’s continued service through such date. Unless provided otherwise in the RSU agreement, RSUs granted to each non-employee director may become fully vested before the end of the regular restriction period if (i) such director is terminated due to disability or death or (ii) a change in control occurs. Upon vesting, the RSUs are converted into shares of our Common Stock. RSUs include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Discover common shareholders. Each non-employee director may elect to defer the receipt of his or her stock compensation until the director terminates all services for the Company. A bookkeeping account is maintained for each participant, which reflects the number of RSUs to which the participant is entitled under the terms of the Directors’ Compensation Plan.
Reimbursements
Directors are reimbursed for reasonable expenses incurred in attending Board, committee and shareholder meetings, including reasonable expenses for travel, meals and lodging.
2018 Non-Employee Director Compensation Table
The table below sets forth cash and stock compensation (including deferred compensation) paid to non-employee directors for their Board service in the year ended December 31, 2018.
Director
Fees Earned or
Paid in Cash
($)
Stock Awards
($)(1)

Total
($)
Jeffrey S. Aronin
110,000
139,943

249,943
Mary K. Bush
125,000
139,943

264,943
Gregory C. Case(2)
125,000
139,943

264,943
Candace H. Duncan(2)
123,324
139,943

263,267
Joseph F. Eazor
120,000
139,943

259,943
Cynthia A. Glassman
130,000
139,943

269,943
Richard H. Lenny (3)
38,860

38,860
Thomas G. Maheras
120,000
139,943

259,943
Michael H. Moskow
130,000
139,943

269,943
Mark A. Thierer(2)
110,000
139,943

249,943
Lawrence A. Weinbach
215,000
139,943

354,943
(1) 
Reflects RSUs granted under the Directors’ Compensation Plan described above. Amounts reflect the grant date fair value of the 2018 RSUs, which were granted on May 2, 2018 for all non-employee directors. These amounts reflect the RSUs’ grant date fair value in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Stock Compensation (“FASB ASC Topic 718”) and may not correspond to the actual value that might be realized by the named individuals. Additional details on accounting for stock-based compensation can be found in Note 2: “Summary of Significant Accounting Policies - Stock-based Compensation” and Note 10: “Stock-Based Compensation Plans” of our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018. As of December 31, 2018, each non-employee director held the following number of RSUs, including deferred RSUs: Mr. Aronin held 59,292; Ms. Bush held 54,060; Mr. Case held 66,195; Ms. Duncan held 11,179; Mr. Eazor held 1,985; Dr. Glassman held 1,985; Mr. Lenny held 0; Mr. Maheras held 42,947; Mr. Moskow held 46,975; Mr. Thierer held 14,120; and Mr. Weinbach held 51,007.
(2) 
The amounts listed for these individuals in the “Fees Earned or Paid in Cash” column were deferred under the Directors’ Voluntary Nonqualified Deferred Compensation Plan.
(3) 
Mr. Lenny retired from the Board, effective May 2, 2018.

21       www.discover.com


Executive Compensation
 
 
 
PROPOSAL 2
Advisory Vote to Approve Named Executive Officer Compensation
The Board of Directors recommends a vote “FOR” approval of the NEO compensation as disclosed pursuant to Item 402 of SEC Regulation S-K, including in the "Compensation Discussion and Analysis," the compensation tables, and any related information contained in this Proxy Statement. Proxies solicited by the Board will be voted “FOR” this proposal unless otherwise instructed.
 
What are shareholders being asked to approve?
Pursuant to SEC rules, we must conduct an advisory, non-binding vote on the compensation of our NEOs at least once every three years. At our 2017 annual meeting, we recommended, and our shareholders overwhelmingly supported an annual frequency for this advisory, non-binding vote. As such, the Board has determined that the Company will continue to hold this advisory, non-binding vote on the compensation of our NEOs each year.
Therefore, we are asking you to approve the compensation of our NEOs as disclosed in the “Compensation Discussion and Analysis” (beginning on page 23), the compensation tables (beginning on page 40), and any related material contained in this Proxy Statement. This proposal, commonly known as a “Say-on-Pay” proposal, gives you, as a shareholder, the opportunity to endorse or not endorse our executive pay program and policies through the following resolution:
“Resolved, that the shareholders approve, on an advisory, non-binding basis, the compensation of our NEOs, as disclosed in the ‘Compensation Discussion and Analysis,’ the compensation tables and any related narrative contained in this Proxy Statement.”
What is the Board’s recommendation on voting on this proposal?
The Board unanimously recommends a vote “FOR” approval of the NEO compensation as disclosed pursuant to Item 402 of SEC Regulation S-K, including in the “Compensation Discussion and Analysis,” the compensation tables, and any related information contained in this Proxy Statement. Proxies solicited by the Board will be voted “FOR” this proposal unless otherwise instructed.
As previously described in detail in the “Compensation Discussion and Analysis” (beginning on Page on 23), our compensation program for our NEOs is substantially performance based and designed to attract, retain and motivate our NEOs, who are critical to our success. The compensation our NEOs earned in 2018 reflected Company performance and remained consistent with our balanced compensation structure and commitment to aligning NEO’s interests with those of our shareholders. The Board continues to believe the compensation program for our NEOs are effective in achieving the desired results.
Is the shareholder advisory vote to approve NEO compensation binding on the Company?
No. Under the SEC rules, your vote is advisory and will not be binding upon the Company or the Board. However, the Compensation Committee values the opinions of our shareholders and will review and consider the voting results when considering future executive compensation arrangements.
How many votes are required to approve this proposal?
This advisory vote requires the affirmative vote of a majority of the shares of Common Stock represented at the Annual Meeting and entitled to vote thereon. You may “abstain” from voting on this proposal. Shares voting “abstain” on this proposal will be counted as present at the Annual Meeting for purposes of this proposal and your abstention will have the effect of a vote against this proposal.

2019 Proxy Statement       22



Compensation Discussion and Analysis
This Compensation Discussion and Analysis focuses on the Company's NEOs who are named in the 2018 Executive Compensation Tables below. We summarize below our executive compensation program and provide an overview of how and why the Compensation and Leadership Development Committee (the "Committee") made specific compensation decisions involving the NEOs' compensation. We also refer you to our Annual Report on Form 10-K for the year ended December 31, 2018, for additional information regarding the Company's 2018 financial results.
Overview of Performance and Compensation
Achieved profit target with higher revenues offsetting higher credit losses
a34646713discovernps_image98.jpg
Based on net income of $2,742 million, the Company achieved profit before taxes and reserves (“PBTR”) of $4,020 million(1) 
Continued strong card loan and sales growth while maintaining a disciplined approach to credit
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The Company achieved year-over-year loan growth of 7% and card sales growth of 8% while progressing new underwriting capabilities
Accelerated volume growth in Payment Services, led by PULSE
a34646713discovernps_image96.jpg
Payment Services transaction dollar volume grew 15% year-over-year
Strong return on equity and significant capital deployment
a34646713discovernps_imagf27.jpg
The Company achieved return on equity of 25% for the full year while increasing quarterly dividend by 14% to $0.40 per share of Common Stock and repurchased approximately 28 million shares
The Committee uses our executive compensation programs to motivate our leadership team to achieve our strategic objectives and to create shareholder alignment. We believe our financial results and executive incentives demonstrate our continued success in achieving this outcome.
Specifically, in 2018, we delivered a 25% return on equity to our shareholders while investing in profitable growth and new capabilities. Highlights of 2018 results include:
Based on net income of $2,742 million, the Company achieved profit before taxes and reserves ("PBTR") of $4,020 million(1), relatively flat to the 2018 Annual Operating Plan ("Annual Plan") target of $4,050 million, with revenue favorability more than offset by higher credit losses.
The Company continued its strong loan growth with year-over-year growth of 7%, in line with the Annual Plan target. The growth was supported by double digit growth in the Company's credit card new accounts and 8% growth in card sales.
Credit performance, on average, was in line with most competitors, but unfavorable compared to the prior year and the Annual Plan as credit losses continued to increase to long-run levels as the supply of consumer credit grows. Total provision expense increased $456 million year-over-year primarily due to higher levels of net charge-offs, partially offset by a lower reserve build. The total net charge-off rate on average loans outstanding was 3.06%, up from the prior year rate of 2.70%.
The Company continued to make progress in addressing the Written Agreement with the Federal Reserve relating to the Company's AML program.
Other non-interest expenses in our Direct Banking segment slightly exceeded the Annual Plan target and were higher than the prior year by 8% as the Company invested in profitable loan growth, global acceptance, new capabilities, and product enhancements.

____________________
(1) 
Profit before taxes and reserves ("PBTR") is a non-GAAP financial measure which should be viewed in addition to, not as a substitute for, the Company's reported results. PBTR is derived by adding the increase in the allowance for loan losses of $423 million and income tax expense of $855 million to net income of $2,742 million. The Committee believes that PBTR is a better measure of the core operating performance of the business that increases focus on factors the Company's incentive-eligible employees are most able to directly impact and influence and controls for variability in significant macroeconomic impacts.

2019 Proxy Statement       23


Compensation Discussion and Analysis

Payment Services segment pre-tax income increased $7 million, primarily driven by revenue growth due to higher volume at PULSE and Network Partners. Transaction dollar volume for the segment was higher by 15% from the prior year, primarily driven by increases in PULSE network volume. Diners Club International volumes increased 7% over the prior year driven by growth in the EMEA (Europe, Middle East, and Africa) and Asia Pacific regions. In Network Partners, volume increased 33% from the prior year based on continued expansion with our AribaPay product.
Direct-to-consumer deposit balances increased 13% year-over-year and represented 47% of the Company’s funding at year-end.
Discover Bank issued approximately $4.8 billion of public credit card asset-backed securities and approximately $10.4 billion of brokered deposits. The Company issued $1.7 billion of senior unsecured debt and $0.5 billion of subordinated unsecured debt. These wholesale funding activities are part of the Company's strategy to maintain access to a broad and diverse set of funding channels that complement growth in core deposit funding.
The Company increased its quarterly dividend by 14% to $0.40 per share of Common Stock and repurchased approximately 28 million shares, or approximately 8%, of the Company’s outstanding Common Stock in 2018. The Company had a 93% payout ratio(1). This is the eighth year in a row that we have increased our dividend.
The Company’s continued focus on delivering outstanding customer satisfaction resulted in its distinction as being ranked “Highest in Customer Satisfaction with Credit Card Companies” for the fourth time in five years by J.D. Power.(2) 
In 2018, the Company launched the Discover it® Business credit card, offering an unlimited 1.5 percent cash back on all purchases with no annual fee. The Discover it® Business credit card is the latest addition to the Discover it® family of credit cards and includes all the features and benefits that Discover it® credit cards are known for, including no foreign transaction fees, Social Security Number alerts, Freeze, and FICO credit scores. This new card also includes free business features to help small business owners manage their finances; employers can get free employee cards with spending limits for each employee and the ability to earn rewards on all of their purchases, as well as the ability to download transactions directly into QuickBooks, Quicken, and Excel.
In 2018, the Company relaunched Identity Theft Protection, a digital fee product that notifies Discover cardmembers of potential threats to their identity.  Identity Theft Protection monitors the three major credit bureaus and other data sources to provide bank account, loan, criminal court, address change, credit utilization alerts, and more. The product also includes $1MM in Identity Theft insurance(3) for legal expenses, reimbursement of stolen funds, and other covered expenses.
We believe the compensation that our senior executives earned for 2018 reflected Company performance and remained consistent with our balanced compensation structure and commitment to aligning our NEOs' interests with those of our shareholders. A significant portion of NEO compensation is granted as restricted stock units ("RSUs") and at-risk performance-based stock units ("PSUs") with vesting tied to cumulative earnings per share performance over a three-year performance period.
The Company's Employee Compensation Policy provides that the RSUs and PSUs are subject to a clawback that allows the Company to reclaim previously granted awards under certain circumstances. Additionally, the policy provides for share ownership guidelines and share retention requirements that tie a portion of our executives’ net worth to the Company's stock price and provide a continuing incentive to achieve superior long-term stock price performance.
The Committee also grants NEOs annual cash incentive awards using PBTR as the primary measure of the Company's financial performance to assess award levels. The Committee believes that PBTR is the best measure of the core operating performance of the business that focuses on factors the Company's incentive-eligible employees are most able to directly impact and influence and controls for variability in significant macroeconomic events.
During 2018, the Committee was advised by Pearl Meyer and Pay Governance, collectively referred to as “Compensation Consultant," and our Chief Risk Officer to consider whether any element of the compensation structure, design, review, or decision-making process could be reasonably likely to have a material adverse effect on the Company. The Committee found that incentive compensation continues to be firmly tied to current and future Company performance and is designed to appropriately balance risk and reward. At the end of 2018, in connection with making compensation decisions, the Committee used reports from and met with the Chief Risk Officer and the Risk Oversight and Audit Committees of the Board of Directors to discuss the annual incentive compensation risk assessment, and to review outcomes of certain risk events and any related impact on compensation decisions. The Committee evaluated our NEOs' performance against risk goals before determining compensation for our NEOs, creating a direct link between our incentive compensation and risk management.

____________________
(1) 
Payout ratio represents capital returned to common shareholders divided by net income allocated to common shareholders.
(2) 
Discover received the highest score in the J.D. Power 2014-2016 and 2018 Credit Card Satisfaction Studies of customers’ satisfaction with their primary credit card. Visit jdpower.com/awards.
(3) 
Identity Theft Insurance is underwritten by insurance company subsidiaries or affiliates of American International Group, Inc. (AIG) 175 Water Street, New York, New York 10038. Please refer to the actual policies for terms, conditions, and exclusions of coverage. Coverage may not be available in all jurisdictions.

2019 Proxy Statement       24


Compensation Discussion and Analysis


More details regarding our 2018 performance and executive compensation can be found in the sections below, including a summary of the compensation approach for our Chief Executive Officer and President ("CEO") under "Summary of Chief Executive Officer Compensation." We encourage you to read this section of the Proxy Statement in conjunction with the advisory, non-binding vote that we are conducting on the compensation of our NEOs.
Management Transition
In connection with its succession planning, on August 2, 2018, the Board of Directors appointed Roger C. Hochschild as Chief Executive Officer and President, effective October 1, 2018. Mr. Hochschild succeeded David W. Nelms as Chief Executive Officer. At the time of the August 2018 management transition announcement, Mr. Nelms continued to serve on the Board and remained the Company’s Executive Chairman. The Board increased the size of the Board and elected Roger C. Hochschild, the Company's then-President and Chief Operating Officer, as a Director. On December 12, 2018, Mr. Nelms notified the Board of Directors that following the Company’s successful CEO transition, he would step down as Executive Chairman and as a member of the Board, effective December 31, 2018, and would remain an executive officer of the Company until his retirement in March 2019. References throughout this Compensation Discussion and Analysis to “CEO” refer to Mr. Hochschild and references to “Executive Chairman” refer to Mr. Nelms as each was serving in such capacity as of December 31, 2018. In connection with Mr. Nelms’ retirement from the Company he became eligible for retirement vesting treatment with respect to his outstanding equity awards in accordance with the terms of the award agreements and did not receive any cash severance benefits as a result of his retirement. When Mr. Hochschild assumed the role as CEO and President, his compensation levels remained the same as when he served as Chief Operating Officer and President. In early 2019, in recognition of his service as CEO and President, the Committee approved a $95,500 increase to Mr. Hochschild’s base compensation, a 17% increase in his annual cash incentive target and a 46% increase in his long-term incentive target.
Effect of 2018 Advisory Vote on NEO Compensation
Each year we provide shareholders with a "Say-on-Pay" vote. The Committee values the opinions of our shareholders and will continue to review and consider the voting results of the shareholder advisory vote on NEO compensation in addition to other factors when considering future executive compensation arrangements. In light of the strong support for our NEO compensation at our 2018 annual meeting of shareholders, we did not make any changes to the Company's executive compensation program in response to the 2018 "Say-on-Pay" vote. We intend to continue to use PBTR, along with other secondary performance factors, to determine funding for our incentive compensation programs for 2019.

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Compensation Discussion and Analysis

Practices and Policies Supporting Strong Corporate Governance and Compensation Programs
We continue to maintain our disciplined approach to executive compensation with a focus on pay for performance, strong governance, risk management, and simplicity as evidenced by the following practices:
We Do
We Do Not
ü    Pay for performance: The majority of the compensation for our NEOs is in the form of variable compensation linked to the long-term financial and strategic goals of the Company over a three-year performance period. Incentive compensation metrics are tied to the Company’s Annual Plan and NEOs’ goals are designed to be aligned to the plan.
ü    Shareholder alignment: Our compensation program is designed to be aligned with our long-term interests and those of our shareholders with deferred long-term incentives (“LTI”) in the form of RSUs and PSUs linked to stock price appreciation. PSUs represent the majority of LTI for our NEOs, and in addition to being subject to time-based vesting for three years, are subject to Company performance, and stock price fluctuations over the three-year performance period.
ü    Independent oversight: Our Compensation Committee includes only directors who are independent under applicable NYSE listing standards and the Committee is advised by an independent compensation consultant.
ü    Share ownership guidelines for NEOs: Our CEO and Executive Chairman must own shares with a value of at least seven times their respective base salaries and our other NEOs must own shares with a value of at least three times their respective base salaries. Each NEO must achieve his or her ownership guideline within five years of appointment.
ü    Share retention requirements: NEOs must hold 100% of net shares received upon vesting for one year post-vesting to promote continued shareholder alignment.
ü    Incentive award limits: NEOs' incentive awards have a maximum payout cap.
ü    Clawback of incentive compensation: Our Employee Compensation Policy and equity awards provide for clawbacks that allow us to recover shares issued pursuant to RSUs and PSUs under certain circumstances.
ü    Risk management: We regularly evaluate the risk impact of the design of our incentive compensation program. The compensation decisions for our NEOs include a risk review that is considered before we make annual short-term incentive ("STI") and LTI awards and before the determination of vesting for all outstanding stock grants which may result in a reduction in the number of the shares vesting.
ü    Balanced change in control: Our change in control severance policy includes a double trigger and does not provide excise tax gross-ups for any employees.
ü    Restrictive covenants: LTI awards to NEOs are subject to non-competition and non-solicitation provisions.
ü    Limited perquisites: Perquisites provided to our NEOs are generally limited to access to an executive gym, charitable contributions and security. On occasion, our NEOs may use the Company’s tickets for sporting, cultural or other events for personal use when they are not otherwise used for business purposes.
û    No employment contracts for NEOs: We do not have individual employment agreements with any of our NEOs.
û    No special benefit plans: We do not provide any benefit plans to our executives that are not generally available to other employees and we do not provide any supplemental executive retirement plan benefits to any executive.
û    No hedging or pledging: Directors and executive officers, including NEOs, are prohibited from hedging Company securities, holding Company securities in a margin account or otherwise pledging Company securities, including as collateral for a loan.
û    No excise tax gross-ups: We do not provide excise tax gross-ups for any employee.

2019 Proxy Statement       26


Compensation Discussion and Analysis


Compensation Program and Objectives
The Company's 2018 executive compensation program and compensation decisions were based on the following principles:
 
 
 
Pay for Performance
Our compensation should reflect Company, business segment, and individual performance.
Balanced Compensation Structure
We seek to deliver a mix of fixed and variable compensation that is aligned with shareholder interests and the long-term interests of the Company and that appropriately balances risk and reward.
Market-Competitive Pay Opportunity
Our compensation should be competitive relative to our peers in order to attract, motivate and retain a talented executive team.
Pay for Performance
Our compensation program is grounded on a pay for performance philosophy and is designed to reward achievement of the Company's financial and strategic goals included in our business plans established before each performance cycle. In determining executive compensation, the Committee considers financial performance and strategic performance factors, relative performance, risk performance, internal pay equity and individual NEO performance. The majority of compensation for our NEOs is in the form of variable compensation, a substantial portion of which is paid in RSUs and PSUs tied to the long-term performance of the Company and designed to be aligned with shareholder interests. Performance factors considered by the Committee in setting and determining executive compensation include the following:
Financial Performance: How well the Company performed compared to its Annual Plan. For 2018, the main factor the Committee considered in evaluating financial performance was the Company's PBTR.
Other Performance Factors: How well the Company performed compared to other secondary financial metrics, key focus areas as well as relative to competitors.
Other Financial Metrics: How well the Company performed compared to other secondary financial metrics, including net income, return on equity ("ROE") (and risk-adjusted returns), earnings per share ("EPS"), total revenue (defined as net interest income plus other income), net charge-offs, and operating expenses.
Key Focus Areas: How well the Company accelerated profitable growth, enhanced capabilities and operating models, and matured risk management.
Relative Performance: How well the Company performed against a select group of competitors on profitability, credit performance, growth, total shareholder return, and other measures.
Risk Performance: How well the Company performed with respect to risk management, capital adequacy, and regulatory compliance.
Individual Performance: How well each NEO performed relative to individual objectives, including relative role impact, experience, and internal pay equity.

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Compensation Discussion and Analysis

Balanced Compensation Structure
The Committee determines compensation targets (sum of base salary, target STI and LTI opportunities) for the NEOs at the beginning of the year, based on Company and individual performance during the prior year as well as the overall skills and experiences of the executive, internal pay equity and the Committee's assessment of their future potential. Target STI and LTI opportunities are established for, and communicated to, the NEOs at the beginning of the year or, if later, at the time of any subsequent increase in STI or LTI opportunity. The actual year-end STI awards paid and LTI awards made to the NEOs are determined by the Committee based on its evaluation of financial performance, primarily PBTR, and other performance factors, risk performance and individual performance (as described above). The Committee also considers compensation levels of other executives in similar roles both within the Company and at industry peers before making compensation decisions. The Committee uses discretion to exercise its judgment instead of solely relying on a formulaic structure which it believes provides the right level of transparency while maintaining the flexibility necessary to pay amounts deemed appropriate for performance. The Committee has determined that a balance of the following pay components provides an effective combination of risk and reward:
 
 
(At Risk)
 
 
 
Element
Base Salary
Short-Term Cash Incentive
Long-Term Equity Incentive
Highlights
Fixed compensation based on scope of responsibility, impact on the organization, expertise, experience, and individual performance.
Annual cash bonus opportunity based on Company financial performance, primarily PBTR, and other performance factors, risk and individual performance.
Annual stock award opportunity based on financial performance, other performance factors, risk and individual performance. The award is granted using a mix of PSUs and RSUs.
2018 CEO Target Pay Mix
14.9%
21.5%
RSUs 19.1%
PSUs 44.5%
element-salary.jpg
element-stci.jpg
element-rsus.jpg
element-psus.jpg
Review of Compensation Policies and Practices Related to Risk Management
The Committee is responsible for overseeing risk management associated with the Company's compensation practices. The Committee annually meets with the Company's Chief Risk Officer to review all employee compensation plans, in which employees (including the NEOs) participate, and to evaluate whether these plans have any features that might encourage imprudent risk-taking that could threaten the value of the Company or are reasonably likely to have a material adverse effect on the Company.
The Committee also continues to monitor a separate, on-going risk assessment by senior management of the Company's employee compensation practices in order to evaluate compliance with Interagency Guidance on Sound Incentive Compensation Policies issued by the Federal Reserve Board and other bank regulators in 2010. Based on an assessment of enterprise risk events, the Company's Chief Risk Officer may direct senior leaders from the Company's Human Resources, Legal, and Risk Management teams to compile and analyze information about the Company's incentive compensation practices and payment history and to hold interviews with business line managers to understand how evaluation of business risk events affect certain STI and LTI performance measures and compensation decisions. After evaluation of the data, and prior to current year incentive compensation decisions, the Chief Risk Officer prepares a report of the risk assessment, which includes any recommendations for risk adjustments to incentive compensation in connection with risk events. In addition, prior to vesting, the Chief Risk Officer reviews a risk assessment of business and individual risk performance over the past three years and certifies whether outstanding LTI awards should vest without adjustment.
In 2018, in connection with making compensation decisions, the Committee reviewed reports from and met with the Company's Chief Risk Officer and the Risk Oversight and Audit Committees of the Board of Directors in a joint meeting (the "Joint Meeting") to discuss the annual incentive compensation risk assessment and to review outcomes of certain risk events and any impact on compensation decisions. The annual risk assessment did not result in the identification of any risks related to our incentive compensation plans that are, either individually or in the aggregate, reasonably likely to encourage imprudent risk-taking that could threaten the value of the Company or have a material adverse effect on the Company. Following the Joint Meeting, the Committee assessed and finalized incentive compensation decisions.


2019 Proxy Statement       28


Compensation Discussion and Analysis


Market-Competitive Pay Opportunity
The Committee reviewed and considered competitive market data from the following sources when approving NEO compensation: proxy data from an established peer group of companies (discussed below) and other market survey data from companies within the financial services industry. We use competitive market data as a reference point for elements of NEO compensation, and not to make any specific decisions. For the proxy data, the peer group used in the analysis consists of 16 financial services companies of a similar business nature and revenue size to the Company, from which the Company might expect to draw executive talent. Given that the Company has few direct competitors of similar scope, size, and business model, this peer group is somewhat varied in nature and primarily represents companies that are similar in business areas with a focus on credit card providers, regional financial institutions that have significant credit card and/or loan operations, and data/transaction processing companies. In 2018, the Committee reviewed the companies that met the foregoing criteria, along with all incumbent peers, and after evaluating these companies with the Compensation Consultant made no changes in the peer group.
In 2018, the peer group consisted of the following companies:
    Ally Financial, Inc.
    American Express Company
    Ameriprise Financial, Inc.
    Capital One Financial Corporation
    CIT Group Inc.
    Comerica Incorporated
    Fidelity National Information Services, Inc.
    Fifth Third Bancorp
    Fiserv, Inc.
    KeyCorp
    M&T Bank Corporation
    Mastercard Incorporated
    Regions Financial Corporation
    Synchrony Financial
    Visa Inc.
    The Western Union Company
2018 Decision-Making Process
Factors Affecting Compensation Decisions
The primary factor considered by the Committee when assessing performance for purposes of making variable compensation decisions for 2018 was the Company's PBTR. Although no set weight is assigned to any performance metric or goal, we believe that a profit-based measure best reflects overall Company performance and drives EPS, which we believe is the representative measure most directly tied to the return to our common shareholders. We believe PBTR is also a balanced measure aligned with total performance to motivate executives to focus on the overall returns of the Company and not drive performance on one measure or one business unit over another. In 2018, the Committee considered the Company's PBTR along with other performance factors, including: net income, ROE (and risk-adjusted returns), EPS, total revenue (defined as net interest income plus other income), net charge-offs and operating expenses, key focus areas, relative performance, risk performance, internal pay equity, and individual performance.
For the PSU portion of the LTI program, the primary metric the Committee established was cumulative EPS achievement over a three-year performance period. In making final award determinations, the Committee also factored in individual compliance with the Company's risk policies including an assessment of any imprudent risks taken over the three-year vesting period, inclusive of the performance period. The Committee retains discretion to adjust EPS performance for the impact of unusual or non-recurring events not reflected in business plan assumptions including legislative, accounting or other regulatory changes, one-time, unusual tax events, and significant changes in planned share repurchases where such events are not attributable to NEO performance for purposes of PSU vesting. In December 2017 and in December 2018, in light of the Tax Cuts and Jobs Act, the Committee confirmed their view that such extraordinary events included the impact of any tax code changes and would be appropriately adjusted. For additional detail on the PSU impact of the Tax Cuts and Jobs Act, please see 2016 PSU Payouts on page 37.
The Committee also considered the need to attract, motivate, and retain a talented management team and to design our compensation program in a way that remains competitive with other companies with which we compete for senior executive talent.
For 2018, after consideration of all the aforementioned factors and the Committee’s emphasis on pay for performance, the Committee made compensation decisions for each of the NEOs as detailed in the "2018 Summary Compensation Table." Consistent with past practice, STI was paid after the regularly scheduled Committee meeting in February 2019 and LTI was granted after the regularly scheduled Committee meeting in February 2018.


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Compensation Discussion and Analysis

Overall Company and Business Segment Performance
The Committee believes that the actions taken by the Company's CEO and the other NEOs throughout 2018 contributed greatly to the Company's results and better positioned the Company for 2019 and beyond. Furthermore, throughout 2018, the Company continued to benefit from certain strategic choices made by the Company's senior management in prior years. The following key strategic decisions, among other things, enabled the Company to be profitable during 2018 and we believe placed the Company in a strong position going forward:
Achieved operating efficiency ratio(1) of 38% driven by strong revenue growth in Direct Banking; revenue grew faster than expenses as the Company invested in profitable loan growth, global acceptance, new capabilities, and product enhancements.
Continued strong loan and revenue growth while maintaining a disciplined approach to credit.
Enhanced next generation analytical capabilities in customer acquisition, collections, and credit risk, driving strong new accounts and charge-off savings.
Improved network acceptance, domestically and internationally, through increased merchant and acquirer relationships and network-to-network partnerships.
Utilized deposit growth initiatives and capital markets transactions to maintain a balance sheet position to benefit from a rising interest rate environment.
Maintained strong capital position while returning over $2.6 billion(2) of capital to shareholders in buybacks and Common Stock dividends.
Maintained a disciplined focus on key initiatives including the launch of the Discover it® Business credit card with free business features to help small business owners manage their finances, and the relaunch of Identity Theft Protection, a digital fee product that helps Discover cardmembers protect themselves from identity theft or fraud and manage their credit.
Implemented new digital and mobile capabilities focused on operating efficiencies and customer service.
Financial Performance
The primary factor that our Committee considered in making 2018 compensation decisions was the Company's PBTR. The Company achieved PBTR of $4,020 million(3), which was relatively flat compared to our 2018 Annual Plan target of $4,050 million. The Committee considered that PBTR performance was driven by favorability in revenue partially offset by higher charge-offs.
Other Performance Factors
Other Financial Metrics
The Committee considered other secondary 2018 financial metrics set forth below. No single secondary financial metric was by itself significant to the Committee's determination of any individual's compensation. The Committee subjectively balanced 2018 financial performance across these secondary metrics in the aggregate in determining individual compensation.
The following financial metrics were considered by the Committee (dollars in millions, except per share amounts):
 
2018

Change from 2017

Total Revenue(4)
$10,709
8
%
Net Charge-off Dollars
$2,612
23
%
Operating Expense
$4,077
8
%
Net Income
$2,742
31
%
Diluted Earnings Per Share
$7.79
44
%
Return on Equity
25
%
6
%
____________________
(1) 
Operating efficiency ratio represents total other expense divided by revenue net of interest expense.
(2) 
The sum of Common Stock dividends and share repurchases, net of Common Stock issued under stock-based compensation plans.
(3) 
Profit before taxes and reserves ("PBTR") is a non-GAAP financial measure which should be viewed in addition to, not as a substitute for, the Company's reported results. PBTR is derived by adding the increase in the allowance for loan losses of $423 million and income tax expense of $855 million to net income of $2,742 million. The Committee believes that PBTR is a better measure of the core operating performance of the business that increases focus on factors the Company's incentive-eligible employees are most able to directly impact and influence and controls for variability in significant macroeconomic impacts.
(4) 
Total revenue equals the sum of net interest income and other income.

2019 Proxy Statement       30


Compensation Discussion and Analysis


Key Focus Areas
The Committee also considered the Company's progress on key focus areas, including accelerating profitable growth, enhancing capabilities and operating models, and maturing risk management when making overall compensation decisions. The Committee reviewed and subjectively balanced performance in these key focus areas with other secondary factors and PBTR in the aggregate in determining individual compensation.
The Committee considered the impact of credit normalization and loan growth, as well as total network transaction volume. The following secondary performance factors were reviewed by the Committee:
Total loan growth of 7%, supported by strong sales growth and balance transfer volume. Loan growth is considered a key driver of revenue and future profitability, and the Company continued its strong momentum after achieving 9% loan growth in 2017.
Direct Banking revenue was higher than 2017 by 8% driven by loan and sales growth as well as net interest margin expansion.
Total net charge-off rate on average loans outstanding of 3.06% was up from the prior year rate of 2.70% due primarily to supply-driven credit normalization and the seasoning of loan growth from the last few years.
The Company achieved a strong operating efficiency ratio(1) of 38% as revenue growth of 8% slightly outpaced that of expenses.
Total network volume was higher than the prior year by 12% driven by strong PULSE network volume growth of 14% and Network Partners volume growth of 33% driven by continued expansion of our AribaPay product.
Payment Services pre-tax earnings of $152 million were above 2017 by $7 million driven by higher revenue from volume growth at PULSE and Network Partners.
Continued progress was made on regulatory matters and maturing risk programs.
Relative Performance
The Committee also considers the Company's performance relative to our largest business competitors in the U.S. market in both the Direct Banking and Payment Services segments.
Risk Performance
The Committee considers risk performance across the Company and within each business segment in making final compensation decisions for each NEO, both as it relates to an individual’s specific objectives as well as contributions to the success of the business in strengthening its risk management, internal controls, and compliance practices. The Committee reviewed overall performance, risk adjusted returns, and capital levels relative to the Annual Plan and established risk appetite limits. The Committee also considered the Company's efforts to address previously disclosed legal and regulatory matters including the Written Agreement with the Federal Reserve relating to the Company's AML program and the consent order with the CFPB related to the Company’s Student Loan business.













____________________
(1) Operating efficiency ratio represents total other expense divided by revenue net of interest expense.

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Compensation Discussion and Analysis

Individual Performance
The Committee considers individual performance in making final compensation decisions for each NEO, both as it relates to an individual's specific objectives as well as each individual's relative role impact, experience, internal pay equity, and contributions to the success of the overall enterprise. The Committee believes this holistic approach optimizes the link between executive rewards and the benefits to shareholders. Highlights of individual performance and contributions are described below.
ROGER C. HOCHSCHILD 
CEO and President
 
 
 
2018 COMPENSATION
Key Achievements
 
a2018comphochschild.jpg
Ÿ    Executed smooth transition into CEO role
Ÿ    Met Annual Plan PBTR and EPS
Ÿ    Led operating areas to achieve strong lending, deposits and payments growth, and profitability
Ÿ    Progressed new capabilities across acquisitions, underwriting, and servicing
Ÿ    Continued progress on Company operating efficiency: achieved a flattening of headcount growth while achieving organizational efficiencies
Ÿ    Progressed Payments Strategy
Ÿ    Supported maturing risk management, including regulatory risk
R. MARK GRAF 
Executive Vice President, Chief Financial Officer
 
 
 
2018 COMPENSATION 
Key Achievements
 
a2018compgraf.jpg
Ÿ    Exceeded treasury funding goals in the aggregate
Ÿ    Fortified the balance sheet through effective risk and capital management; supported all governing and risk management committee requirements
Ÿ    Continued strength in investor relations, including industry recognition for this function
Ÿ    Drove positive operating leverage and drove savings through corporate procurement
Ÿ    Supported maturing risk management, including regulatory risk
DIANE E. OFFEREINS 
Executive Vice President, President - Payment Services
 
 
 
2018 COMPENSATION
Key Achievements
 
a2018compoffereins.jpg
Ÿ    Exceeded Payments Services Annual Plan volume and income target performance in the aggregate
Ÿ    Progressed Payments Strategy
Ÿ    Increased global acceptance through agreements with new and existing partners
Ÿ    Increased network acceptance, network-to-network partners, and issuer base for PULSE
Ÿ    Launched PayPal account linking and Pay with CBB; Launched Apple Business Chat
Ÿ    Installed Enterprise Payments Platform to improve Pulse dispute capabilities, align with industry standards, and enhance technology infrastructure
Ÿ    Supported maturing risk management, including regulatory risk

2019 Proxy Statement       32


Compensation Discussion and Analysis


CARLOS M. MINETTI 
Executive Vice President, President - Consumer Banking
 
 
 
2018 COMPENSATION
Key Achievements
 
a2018compminetti.jpg
Ÿ    Implemented strategies to balance growth, risk, and profitability across Consumer Banking
Ÿ    Met Consumer Banking Annual Plan target for PBTR
Ÿ    Exceeded Annual Plan target for New Deposits and met targets for other banking product new originations
Ÿ    Launched Cashback Checking
Ÿ    Led significant improvement in Discover Home Equity versus prior year
Ÿ    Continued focus on building next generation capabilities in banking system platform across Consumer Banking Products
Ÿ    Supported maturing risk management, including regulatory risk
JULIE LOEGER 
Executive Vice President, President - US Cards
 
 
 
2018 COMPENSATION
Key Achievements
 
a2018comploeger.jpg
Ÿ    Exceeded sales and receivables Annual Plan targets and met New Accounts, Revenue Margin, and Operating Plan goals
Ÿ    Led several successful continuous improvement initiatives including enhancements to 5% Cashback Bonus, Pay with Cashback Bonus, and Account Center & Mobile Redesigns
Ÿ    Improved capabilities in New Account Acquisition through improved analytical models, personalization, site experience, and speed
Ÿ    J.D. Power award for "Highest in Customer Satisfaction with Credit Card Companies", 4 out of 5 years in a row(1)
Ÿ    Launched Social Security Number Alert and New Account Alert benefits to cardholders
Ÿ    Introduced the Discover it® Business Card product
Ÿ    Supported maturing risk management, including regulatory risk
DAVID W. NELMS 
Executive
Chairman
 
 
 
2018 COMPENSATION
Key Achievements
 
a2018compnelms.jpg
Ÿ    Met Annual Plan target for PBTR and loan growth
Ÿ    Met EPS target, despite provision higher than Annual Plan
Ÿ    Achieved favorable company operating efficiency ratio(2) of 38%
Ÿ    Renewed payments volume and profit growth
Ÿ    Progressed Payments strategy
Ÿ    Supported maturing risk management, including regulatory risk
Ÿ    Transitioned seamlessly to the new CEO


____________________
(1) 
Discover received the highest score in the J.D. Power 2014-2016 and 2018 Credit Card Satisfaction Studies of customers’ satisfaction with their primary credit card. Visit jdpower.com/awards
(2) 
Operating efficiency ratio represents total other expense divided by revenue net of interest expense.

33       www.discover.com

Compensation Discussion and Analysis

Role of NEOs in Compensation Decisions
Our Executive Chairman, CEO, senior Company Human Resources personnel, Chief Risk Officer, and the Compensation Consultant met with the Committee to discuss preliminary compensation decisions for the NEOs and senior officers. They considered overall contribution to Company performance and individual responsibility for business segment, functional, and/or strategic goals during the Committee's December 2018 meeting and presented final recommendations to the Committee during the Committee's February 2019 meeting. The Committee also met with the Risk Oversight and Audit Committees of the Board of Directors to discuss the impact of risk performance on compensation recommendations. This allowed for ample review and consideration of Company, business segment, individual and risk performance in determining 2018 compensation decisions. No NEO was involved in his or her own pay recommendations or decisions. The role of the Committee and its consultant are discussed under "Other Compensation Decision ConsiderationsRole of the Compensation Consultants." The decisions of the Committee for 2018 performance are reflected below under "Components of Compensation."
Other Compensation Decision Considerations
Role of the Compensation and Leadership Development Committee
The Committee is responsible for the review and approval of all aspects of the Company’s executive compensation program and makes all decisions regarding the compensation of the Company’s NEOs. Specifically, the Committee has responsibility to, among other things:
Review, approve, and administer all compensation programs affecting NEOs and evaluate whether such plans are aligned with the Company’s compensation structure policies;
Annually review and approve:
Performance criteria, goals, and award vehicles used in our compensation plans for our NEOs, and
Performance of and compensation delivered to our NEOs;
Review the Company’s compensation practices to evaluate whether such practices take into account risk outcomes in making compensation determinations and do not encourage imprudent risk-taking;
Oversee the Company’s management development and succession planning efforts; and
Review and approve any contracts, policies, or programs related to compensation, contractual arrangements, or severance plans affecting NEOs.
As described under “2018 Decision-Making Process — Role of NEOs in Compensation Decisions,” the Compensation Committee consults with management with respect to the compensation of the NEOs, other than the CEO.
The Committee’s charter is available through the investor relations page of our internet site, www.discover.com.
Role of the Compensation Consultants
During 2018, Pearl Meyer & Partners, LLC ("Pearl Meyer") provided executive and director compensation consulting services to the Committee. In 2018, the Committee, with the aid of management, conducted a thorough and broad-based market evaluation of compensation consultants and, based on such review, in September selected Pay Governance, LLC ("Pay Governance") to replace Pearl Meyer as its compensation consultant. For purposes of this Compensation Discussion and Analysis, Pearl Meyer and Pay Governance are collectively referred to as “Compensation Consultant.”
The Committee regularly consults with its external independent Compensation Consultant in performing its duties. The Compensation Consultant attended Committee meetings, including executive sessions without management present. The Committee has broad authority to retain and dismiss its Compensation Consultant, and establish the scope of its consultant's work. While the Compensation Consultant reports to the Committee, the Compensation Consultant also works with the Company’s Human Resources department and senior management to facilitate Committee work, as approved by the Committee Chair. The Compensation Consultant provides experiential guidance to the Committee on what is considered fair and competitive practice in the industry, primarily with respect to the compensation of the CEO, but also for other senior Company officers. Pay Governance is and, while serving as the Compensation Consultant, Pearl Meyer was independent of management and under the terms of its agreement with the Committee, the Compensation Consultant generally provides services only to the Committee. Other than executive compensation consulting services noted above, the Compensation Consultant performs no other services for the Company and has no relationship with the Company or management except as it may relate to performing such services. The Committee has assessed the independence of the Compensation Consultant pursuant to SEC rules and concluded that no conflict of interest exists that would prevent the Compensation Consultant from independently representing the Compensation Committee.
During 2018, management retained the services of Willis Towers Watson to assist the Company in conducting an assessment of the competitiveness of the pay opportunity provided to Company executives. The Compensation Committee then evaluated the findings of Willis Towers Watson as a part of its review in making compensation decisions. The Company has assessed the independence of Willis Towers Watson and concluded that Willis Towers Watson’s work did not raise any conflict of interest.

2019 Proxy Statement       34


Compensation Discussion and Analysis


Components of Compensation
2018 compensation decisions for our NEOs were closely tied to our 2018 financial performance and consisted of three key components - base salary, STI, and LTI - with a significant portion of total compensation (PSUs and RSUs) tied to long-term Company performance. These components are summarized below.
Base Salary
We provide our NEOs and other executives with a market-competitive annual base salary to attract and retain an appropriate caliber of talent for the position. Annually, we review our competitive market, including market data provided by the Compensation Consultant for our proxy peer group and the broader market. The Committee uses market information as one data point to consider among many, and changes in base compensation are not made frequently. After considering market data provided by the Compensation Consultant, individual performance, relative role impact, experience, and internal pay equity amongst the Company's executive officers, the Committee approved a $50,000 increase in the 2018 base salaries for each of Messrs. Graf, Hochschild, and Minetti and Mses. Offereins and Loeger. The Company applies any applicable annual base salary increases for all employees, including NEOs, as of a specified date in the first two and a half months of each year. In connection with the assumption of additional responsibilities in October, the Committee approved an additional $50,000 increase in Ms. Loeger's 2018 base salary. See "2018 Summary Compensation Table" for a summary of 2018 NEO base salaries.
Short-Term Incentive Program
In 2018, we continued to offer our NEOs the opportunity to earn a market competitive annual cash award based on the Company's financial performance, as well as other secondary performance factors, risk performance, and individual performance. The STI opportunity is provided to motivate executives to achieve our annual business goals and to attract and retain an appropriate caliber of talent for the position, recognizing that similar annual STI opportunities are provided at other companies with which we compete for talent. Our NEOs have target STI opportunities, represented on the "2018 Grants of Plan-Based Awards" table, which were communicated to them at the beginning of the year.
The Committee again considered market data provided by the Compensation Consultant, including for our proxy peers. Market data is only one factor used by the Committee, and is generally not independently used as a basis for changes to STI targets. The Committee considered market changes, individual performance, experience, and internal pay equity amongst the Company's executive officers, and decided to increase the 2018 STI target for Messrs. Graf and Minetti and Ms. Offereins by 9% and Ms. Loeger by 15%, and the increases were communicated to them at the beginning of 2018. In connection with the assumption of additional responsibilities in October, the Committee approved an additional 9% increase in Ms. Loeger's 2018 STI target.
PBTR is the primary factor considered when funding incentive compensation. PBTR is derived by adding changes in the allowance for loan losses to pretax income. PBTR is a non-GAAP financial measure that should be viewed in addition to, and not as a substitute for, the Company's reported results. The Committee believes that PBTR is a better measure of the core operating performance of the business and is consistent with the evolution of our STI program in recent years to increase focus on factors the Company's incentive-eligible employees are most able to directly impact and influence and controls for variability in significant macroeconomic impacts.
As discussed above, the Committee also considered secondary Company financial performance metrics, including net income, ROE (and risk-adjusted returns), EPS, total revenue (defined as net interest income plus other income), net charge-offs, operating expenses, key focus areas, relative performance, risk performance, internal pay equity, and individual performance. The Committee believes this provides the right level of transparency while maintaining the flexibility to adjust for extraordinary circumstances that positively or negatively affect the Company's financial performance. This approach also allows the Committee to evaluate whether pay is commensurate with risks taken and the quality of performance results.
In 2018, the Company achieved PBTR of $4,020 million(1), relatively flat to the 2018 Annual Plan PBTR target of $4,050 million. Accordingly, when determining 2018 STI compensation decisions, the Committee assessed PBTR versus the Annual Plan target and made a discretionary judgment on appropriate 2018 STI compensation for each of the NEOs based on a number of factors, including strong loan growth.
The Company pays STI for eligible employees, including NEOs, as of a specified date in the first two and a half months of each year. See "2018 Decision-Making Process" above for more details on the factors considered by the Committee in compensation decisions and see "2018 Summary Compensation Table" for the actual STI decisions.
____________________
(1) 
Profit before taxes and reserves ("PBTR") is a non-GAAP financial measure which should be viewed in addition to, not as a substitute for, the Company's reported results. PBTR is derived by adding the increase in the allowance for loan losses of $423 million and income tax expense of $855 million to net income of $2,742 million. The Committee believes that PBTR is a better measure of the core operating performance of the business that increases focus on factors the Company's incentive-eligible employees are most able to directly impact and influence and controls for variability in significant macroeconomic impacts.

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Compensation Discussion and Analysis

Long-Term Incentive Program
The Committee, with input from the Compensation Consultant, continues to emphasize stock-based compensation for our NEOs to align their long-term interests with our shareholders. The Committee believes that the use of RSUs and PSUs that vest over a multi-year period focuses executives on the Company's long-term interests without leading to imprudent risk-taking. In addition, we believe time-vested RSUs and performance-vested PSUs represent an efficient method of delivering long-term stock compensation, generally using fewer shares than other types of stock-based award vehicles while having value that is ultimately tied to Company operational or stock price performance. LTI awards are made to eligible employees, including NEOs, as of a specified date in the first two and a half months of each year.
For 2018, the Committee approved a combination of RSUs that generally vest ratably over a three-year period and at-risk PSUs tied to a three-year Company performance and vesting period (pending evaluation against the Company's risk policies).
The Committee sets long-term stock compensation commensurate with level in the organization to appropriately motivate the individuals with the most impact on driving the success of the organization and creating shareholder value. The Committee established a target LTI value for the NEOs, represented as a percentage of their base salaries, and determined that 62% of the target compensation of the CEO, 67% of the target compensation of the Executive Chairman and, on average, 57% of the target compensation of the other NEOs, would be in the form of long-term stock compensation. In addition, the Committee established a target PSU and RSU mix as a percentage of the total target LTI of each NEO, as represented below.
LONG-TERM INCENTIVE AWARD MIX
CEO and Executive Chairman
All other NEOs
ltiawardceomix.jpg
ltiawardneomix.jpg
The LTI award consists of a forward-looking stock award with an initial value that varies based primarily on annual Company PBTR performance. Based primarily upon the 2017 PBTR results, the 2018 LTI award pool was funded at 105% of target. The Committee also considers secondary Company financial performance metrics, key focus areas and relative performance, risk performance, and other factors relevant to the year when setting the LTI award pool. The number of PSUs and RSUs granted is determined by dividing the dollar value of the award by the fair market value on the date of grant. The PSU and RSU grants were made in February 2018. In connection with the assumption of additional responsibilities in October, the Committee approved a 9% increase in Ms. Loeger's 2019 LTI target, effective with the 2019 LTI award. See "2018 Decision-Making Process" above for more details on how the factors considered by the Committee impacted compensation decisions and see "2018 Summary Compensation Table" for the actual LTI decisions.













2019 Proxy Statement       36


Compensation Discussion and Analysis


Performance Stock Units
2018 PSU Awards
At-risk PSUs are granted annually at the beginning of a three-year Company performance period to further reinforce the NEOs' accountability for the Company's future financial and strategic goals by tying a significant portion of compensation directly to the Company's EPS and ultimately the Company's stock price. The majority of the 2018 LTI awards for NEOs consisted of PSUs, which were granted under the Company's 2014 Omnibus Incentive Plan. Under this program, PSUs will generally vest and convert to shares of Common Stock if and to the extent the Company achieves specific cumulative EPS performance goals over a three-year performance period and the executive remains employed by the Company for the three-year period (with exceptions for certain termination events), and are subject to an evaluation of compliance with the Company's risk policies over the three-year period prior to vesting. The performance period for the 2018 award of PSUs began on January 1, 2018 and ends on December 31, 2020. The EPS performance target is established during the annual business planning process and incorporates a degree of stretch that is intended to push the Company and the NEOs to achieve higher performance within the Company's risk framework. Target PSU payout will be achieved if the Company meets its business plan goals, while achievement of maximum and threshold performance goals are each expected to be infrequent in occurrence. Participants will receive no portion of the award if the minimum performance threshold is not met. If the Company exceeds the target performance hurdles, the NEO can potentially earn an award in excess of the target, up to a maximum of one and one-half times the target award based on Company performance. The awards will receive dividend equivalents in cash which will accumulate and pay out if and when the underlying shares are released to the NEOs.
2016 PSU Payouts
The performance period for our PSUs granted in January 2016 was completed on December 31, 2018. The cumulative diluted EPS over the three-year period was $18.98 versus a target of $18.10. An EPS of $9.05 and $20.82 were required to receive a minimum and maximum payout, respectively. The actual EPS measured for the performance period would have resulted in a payout factor of 116% of the target amount. In assessing the appropriate payout for these PSUs, the Committee considered the EPS over the performance period attributable to effective NEO execution of key business decisions and strategies, including strong focus on growth and credit risk management. The Committee also considered the impact of the Tax Cuts and Jobs Act on the Company performance. Consistent with the Company's pay for performance philosophy, the Committee exercised discretion by lowering the payout factor to 108% of the target amount to reflect the impact of factors that Management can directly control and to ensure that payout factors are not artificially inflated or impaired by factors unrelated to the ongoing operations of the business such as the Tax Cuts and Jobs Act. The final payout of these PSUs was determined after confirmation of compliance with the Company’s risk policies, and employees received earned shares (which remain subject to clawback provisions, and for NEOs, subject to the share ownership guidelines and share retention requirements) when they vested in February 2019.
Restricted Stock Units
A portion of the LTI grant for 2018 consisted of RSUs. In addition, RSUs are subject to market risk tied to the Company stock price and are intended to align the interests of senior executives with the long-term interests of the Company and its shareholders as well as motivate future contributions and decisions aimed at increasing shareholder value. RSUs generally vest and convert to shares ratably over a three-year period, subject to compliance with the Company's risk policies and assuming the executive remains employed by the Company through the vesting date (with exceptions for certain termination events). The awards will receive dividend equivalents in cash, which are paid to the NEOs in the same amount and at the same time as dividends are paid to all Company common shareholders.

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Compensation Discussion and Analysis

Summary of Chief Executive Officer Compensation
Consistent with our philosophy, a large portion of NEO compensation is at-risk performance-based compensation. The chart below reflects the 2018 elements of compensation that composed total direct compensation for Mr. Hochschild. Approximately 85% of his 2018 total direct compensation was variable and tied to Company financial and/or stock price performance. See "2018 Decision-Making Process" above for more details on how the factors considered by the Committee impacted compensation decisions and see "2018 Summary Compensation Table" for the Committee's actual compensation decisions for Mr. Hochschild.
2018 CEO MIX OF COMPENSATION
ceocompmix.jpg
Other Arrangements, Policies and Practices Related to Our Executive Compensation Program
Share Ownership Guidelines
The Employee Compensation Policy provides for share ownership guidelines for NEOs and other executives. The guidelines recommend that the multiples set forth below of annual base salary be held in shares of Company Common Stock at the close of each year.
Shares to be counted toward ownership targets include actual Common Stock held, including stock held in "street" accounts, and unvested RSUs. The guidelines provide that recommended ownership must be attained within five years of appointment (or the inception or modification date of the guidelines, if later). To monitor progress toward meeting the guidelines, the Committee reviews current executive ownership levels at each December meeting, ahead of year-end executive compensation decisions. If a NEO or other executive is not on schedule to meet the guidelines, the Committee may award the executive compensation in the form of stock that would have otherwise been awarded as cash bonus year-end compensation.
As of December 2018, using the 10-day average closing stock price ending prior to December 31, 2018, the following multiples of base salary were held in shares of Company Common Stock by each of our NEOs:
Executive Officer
Required
Multiple
Actual
Multiple
Roger C. Hochschild
7X
53X
R. Mark Graf
3X
6X
Diane E. Offereins
3X
9X
Carlos M. Minetti
3X
10X
Julie Loeger
3X
3X
David W. Nelms
7X
54X
Share Retention Requirements
The Company's Employee Compensation Policy and equity awards provide that senior executives, including the NEOs, must hold 100% of net shares for one year after the vesting date. The Committee continues to believe share retention requirements further promote shareholder alignment.

2019 Proxy Statement       38


Compensation Discussion and Analysis


Clawbacks
Our Employee Compensation Policy and equity awards include clawback provisions that allow for the recovery of shares issued pursuant to a stock grant under certain circumstances. The Company is authorized to reclaim any shares received upon conversion of RSUs and PSUs for a three-year period preceding the date on which the Company restates its financial statements due to material noncompliance with financial reporting requirements. In addition, the Company may recover equity compensation paid to our NEOs within two years prior to termination with the Company if the NEO violates non-competition and non-solicitation covenants or breaches obligations to the Company under the confidentiality, intellectual property, or other restrictive covenants including breach of the Company's risk policies and Code of Conduct.
Prohibition on Hedging and Pledging
Under Company policy, directors and executives are prohibited from hedging Company securities, holding Company securities in a margin account, or otherwise pledging Company securities, including as collateral for a loan.
Retirement and Other Benefits
The Company offers benefits such as medical, disability, and life coverage to promote employee health and protect against catastrophic expenses. The Discover 401(k) Plan provides employees with the opportunity to save for retirement. We also maintain the Discover Pension Plan which was frozen as of December 31, 2008. All employees are offered a benefits package that is deemed to be competitive with those offered by companies with which we compete for talent, and our NEOs participate in our benefit plans on the same basis as our employees generally. The Company does not offer any supplemental benefits or deferred compensation programs to our NEOs.
Additional information regarding Company contributions to the Discover 401(k) Plan is provided in the footnotes to the "2018 Summary Compensation Table." Additional information regarding the Discover Pension Plan is provided after the "2018 Pension Benefits Table."
Executive Change in Control Severance Policy and Severance Pay Plan
The Company provides severance protection to our NEOs and other executives under a Change in Control Severance Policy to allow executives to focus on acting in the best interests of shareholders regardless of the impact on their own employment. Change in control severance protections are commonly provided at other companies with which we compete for talent. Benefits under our policy are paid in the event of a double trigger, meaning an involuntary termination (by the Company without just cause or by the executive for good reason or death or disability) within two years following or six months prior to a change in control. No excise tax gross-ups are provided for any employees.
The Company also sponsors a broad-based Severance Pay Plan that provides severance benefits to eligible employees, including NEOs, who are involuntarily terminated (without cause in connection with a workforce reduction, closure or other similar event) to provide security in the event of an unanticipated job loss. The Severance Pay Plan will not pay benefits to an employee receiving benefits under the Change in Control Severance Policy.
The Change in Control Severance Policy, the Severance Pay Plan, and the estimated payments for each of our NEOs are detailed in the "2018 Potential Payments upon a Termination or Change in Control Table."
Compensation Committee Report
The Compensation and Leadership Development Committee (the “Compensation Committee”) establishes the compensation program for the Chief Executive Officer and for the other named executive officers of Discover Financial Services (the “Company”). The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis of the Company with management and, based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Proxy Statement, its Annual Report on Form 10-K, and such other filings with the Securities and Exchange Commission as may be appropriate.
Submitted by the Compensation and Leadership Development Committee of the Board of Directors:
Gregory C. Case (Chair)
Jeffrey S. Aronin
Mark A. Thierer

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2018 Executive Compensation Tables
The narrative, tables, and footnotes below describe the total compensation paid for 2018 to the Chief Executive Officer, Chief Financial Officer, Executive Chairman, and the next three most highly compensated individuals (collectively, the "NEOs") who were serving as executive officers of the Company on December 31, 2018.
2018 Summary Compensation Table
The following table contains information regarding the components of total compensation of the NEOs for the Company’s years ended December 31, 2018, and to the extent required by SEC executive compensation disclosure rules, 2017 and 2016. The information included in this table reflects compensation earned by the NEOs for services rendered to the Company during the respective period.
Executive
Year
Salary(1)
($)

Stock
Awards
(2)
($)

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

Change in
Pension Value
and NQDC
Earnings
(4)
($)

All Other
Compensation
(5)
($)

Total
($)
Roger C. Hochschild
2018
840,385

3,569,969

1,211,250

0

42,498

5,664,102
CEO and President
2017
800,000

3,200,017

1,320,000

32,668

18,750

5,371,435

2016
798,077

3,199,992

1,254,000

14,457

18,550

5,285,076
R. Mark Graf
2018
690,385

2,204,990

831,250

0

39,658

3,766,283
EVP, Chief Financial
2017
650,000

1,950,058

822,250

0

18,750

3,441,058
Officer
2016
649,038

1,950,014

781,150

0

18,550

3,398,752
Diane E. Offereins
2018
690,385

2,204,990

962,500

0

34,758

3,892,633
EVP, President -
2017
650,000

1,950,058

863,375

28,228

18,750

3,510,411
Payment Services
2016
650,000

3,500,035

863,375

17,168

18,550

5,049,128
Carlos M. Minetti
2018
690,385

2,204,990

787,500

0

41,158

3,724,033
EVP, President -
2017
650,000

1,950,058

781,150

22,718

18,750

3,422,676
Consumer Banking
2016
650,000

3,500,035

781,150

10,344

18,550

4,960,079
Julie Loeger (6)
2018
648,077

1,876,885

897,850

0

44,366

3,467,178
EVP, President -
 
 
 
 
 
 
 
US Cards
 
 
 
 
 
 
 
David W. Nelms (7)
2018
1,100,000

6,930,013

2,090,000

0

48,758

10,168,771
Executive Chairman
2017
1,080,770

6,600,021

2,500,000

29,391

18,750

10,228,932

2016
1,000,000

6,000,039

1,741,250

16,184

18,550

8,776,023
(1) 
Represents the base salary earned during the year. Prior year base salary earned has been updated to reflect actual salary paid as follows: Mr. Hochschild's 2016 salary from $800,000 to $798,077; Mr. Graf's 2016 salary from $650,000 to $649,038; and Mr. Nelms' 2017 salary from $1,100,000 to $1,080,770.
(2) 
Represents the aggregate grant date fair value of RSU and PSU awards granted to the NEOs pursuant to FASB ASC Topic 718. The value of PSUs is based on the probable outcome of the performance conditions on the grant date. The grant date fair value of the PSUs granted for 2018, assuming the highest level of performance conditions is met was $3,748,483 for Mr. Hochschild; $1,984,491 for Mr. Graf; $1,984,491 for Ms. Offereins; $1,984,491 for Mr. Minetti; $1,689,197 for Ms. Loeger; and $7,796,304 for Mr. Nelms. Please see "Components of Compensation" for further details on our LTI program. Additional details on accounting for stock-based compensation can be found in Note 2: "Summary of Significant Accounting Policies — Stock-based Compensation" and Note 10: "Stock-Based Compensation Plans" of our consolidated financial statements in our Annual Report on Form 10-K.
(3) 
Represents the annual cash short-term incentive earned for the year and paid to the NEOs within the first two and a half months of the following year if employed on the payment date.
(4) 
Represents the actuarial increase during the year in the pension value, primarily due to the change in the Pension Plan discount rate and mortality tables. The change in pension value for eligible NEOs resulted in negative amounts in 2018 for Mr. Hochschild $(18,085), Ms. Offereins $(12,016), Mr. Minetti $(11,634), Ms. Loeger $(30,542), and Mr. Nelms $(14,808). For details on the valuation method and assumptions used in calculating the present value of accumulated benefit, please see Note 11: "Employee Benefit Plans" of our consolidated financial statements in our Annual Report on Form 10-K. There were no above market nonqualified deferred compensation earnings for the NEOs. A description of the Company's pension benefits is provided under "2018 Pension Benefits."

40       www.discover.com

2018 Executive Compensation Tables

(5) 
Represents the incremental cost to the Company of providing certain perquisites and other personal benefits. For 2018, these amounts include:
Executive
401(k) Contributions(a)
($)

Charitable Contributions(b)
($)

Other(c)
($)

Total
($)

Roger C. Hochschild
19,100

10,000

13,398

42,498

R. Mark Graf
19,100

10,000

10,558

39,658

Diane E. Offereins
19,100

4,500

11,158

34,758

Carlos M. Minetti
19,100

10,000

12,058

41,158

Julie Loeger
19,100

14,500

10,766

44,366

David W. Nelms
19,100

20,000

9,658

48,758

(a) 
Represents the Company's contributions to the Discover 401(k) Plan for each NEO during each calendar year.
(b) 
Represents contributions made by the Company to charitable organizations chosen by each NEO, as well as contributions made on behalf of certain NEOs under our charitable contribution matching programs, under which personal contributions meeting the guidelines of our program are eligible for Company matching contributions (exceeding the amount generally available to the broader employee population).
(c) 
Includes costs of perquisites or personal benefits that do not exceed the greater of $25,000 or 10% of the total amount of perquisites and personal benefits or have no aggregate incremental cost to the Company including the following: airline concierge keys, the Company’s cost for providing a personal security assessment and additional personal security services to each NEO, the aggregate incremental cost attributable to each NEO for access to/use of the Company’s Executive Fitness Center, the estimated resale value of gifts received from third parties, and estimated resale value of Company tickets for sporting, cultural or other events for personal use when they are not otherwise used for business purposes.
(6) 
Prior year compensation information has been intentionally omitted, as this is Ms. Loeger's first year as a Company NEO.
(7) 
Mr. Nelms served as the Company's Chief Executive Officer until October 1, 2018. Mr. Nelms continued to serve on the Board and remained the Company's Executive Chairman until December 31, 2018. Effective December 31, 2018, Mr. Nelms stepped down as Executive Chairman and as a Director, but remained an executive officer of the Company until his retirement in March 2019.

41       www.discover.com

2018 Executive Compensation Tables

Grants of Plan-Based Awards for 2018
The following table includes the 2018 target STI opportunities, and the RSU and PSU awards made to the NEOs in the year ending December 31, 2018. No options were awarded to the NEOs in 2018. For more information regarding these grants, see the discussion in the Compensation Discussion and Analysis beginning on page 23.
 
 
Estimated future
payouts under
non-equity
incentive plan
awards (1)
 
Estimated future payouts under
equity incentive plan awards(2)
All Other Stock
Awards:
Number of
Shares of Stock
or Units(3)
(#)

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

Name
Grant Date
Target
($)

 
Threshold
(#)
Target
(#)

Maximum
(#)

Roger C. Hochschild

1,275,000

 









 
2/22/2018


 





13,775

1,071,006

 
2/22/2018


 
0
32,141

48,212



2,498,963

R. Mark Graf

875,000

 









 
2/22/2018


 





11,344

881,996

 
2/22/2018


 
0
17,016

25,524



1,322,994

Diane E. Offereins

875,000

 









 
2/22/2018


 





11,344

881,996

 
2/22/2018


 
0
17,016

25,524



1,322,994

Carlos M. Minetti

875,000

 









 
2/22/2018


 





11,344

881,996

 
2/22/2018


 
0
17,016

25,524



1,322,994

Julie Loeger
 
816,219

 
 
 
 
 
 
 
2/22/2018
 
 
 
 
 
9,656

750,754

 
2/22/2018
 
 
0
14,484

21,726

 
1,126,131

David W. Nelms

2,200,000

 









 
2/22/2018


 





22,283

1,732,503

 
2/22/2018


 
0
66,849

100,274



5,197,510

(1) 
Represents the target payout under the annual STI program. Payments can range above or below target primarily based on annual Company PBTR. The Compensation Committee also considers other secondary Company-wide metrics as described in more detail under "Components of Compensation — Short-Term Incentive Program." Because there is no threshold or maximum payout, those columns have been omitted in accordance with SEC rules. Actual payout amounts for 2018 are included in the "Non-Equity Incentive Plan Compensation" column of the "2018 Summary Compensation Table."
(2) 
Represents PSUs awarded in February 2018 under the 2014 Omnibus Incentive Plan. PSUs will vest and convert to shares of Common Stock on February 1, 2021, within the represented threshold and maximum amounts, depending on the extent the Company exceeds specific cumulative EPS performance goals over the three-year period and provided the executive remains employed by the Company (with exceptions for certain termination events as detailed below), and are subject to an evaluation of compliance with the Company’s risk policies. The entire PSU award will be canceled if the minimum cumulative EPS performance threshold is not met. To the extent the NEO voluntarily terminates from the Company or is terminated for cause prior to the scheduled vesting date, other than as described below, none of the PSUs will vest and the entire award will be forfeited. In certain instances of a termination of the NEO’s employment prior to the scheduled vesting date, including due to (i) involuntary termination such as a reduction in force or elimination of the executive’s position, provided that a fully-executed irrevocable release agreement is executed or (ii) the executive's eligible retirement, a pro-rata portion of the PSUs will vest and convert to shares following the conclusion of the performance and vesting periods, based on actual performance. In the event of death or disability, the award will vest and shares will convert and be paid at the end of the performance period based on actual performance achieved. In the event of a change in control of the Company during the first year of the performance period, the award will convert to cash at target performance and be paid out according to the vesting schedule or sooner in the event of a qualified termination following the change in control event. In the event of a change in control of the Company during the second or third year of the performance period, performance will be measured through the last day of the Company’s quarter preceding the change in control and the award will then be converted to cash and paid out according to the vesting schedule or sooner in the event of a qualified termination following the change in control event.
(3) 
Represents RSUs awarded in February 2018 under the 2014 Omnibus Incentive Plan, which are expected to vest and convert in three equal installments on February 1, 2019, 2020 and 2021. In certain instances of a termination of the NEO’s employment prior to the scheduled vesting date, including due to (i) involuntary termination such as a reduction in force or elimination of the executive’s position, provided that a fully-executed irrevocable release agreement is executed or (ii) the executive's eligible retirement, a pro-rata portion of the RSUs will vest and convert to shares. Vesting of these RSUs will be accelerated in the event of termination of the executive’s employment due to (i) a change in control or (ii) the executive’s death or disability. Unvested RSUs will be canceled in the event of a termination of employment for any other reason.
(4) 
Represents the aggregate grant date fair value of the awards pursuant to FASB ASC Topic 718. Additional details on accounting for stock-based compensation can be found in Note 2: "Summary of Significant Accounting Policies - Stock-based Compensation" and Note 10: "Stock-Based Compensation Plans" of our consolidated financial statements contained in our Annual Report on Form 10-K.

2019 Proxy Statement       42


2018 Executive Compensation Tables

Outstanding Equity Awards at 2018 Year-End
The following table provides information regarding outstanding stock awards held by each of the NEOs as of December 31, 2018. There are no outstanding stock options as of December 31, 2018.
 
Stock Awards(1)
 
Number of Shares, Units or Other Rights That Have Not Vested
(#)

 
Market Value of Shares, Units or Other Rights 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
($)

Roger C. Hochschild(2)
100,000
(3) 
5,898,000

 
47,211
(8) 
2,784,505

 
6,585
(4) 
388,383

 
48,212
(9) 
2,843,544

 
8,992
(5) 
530,348

 
 
 
 
 
13,775
(6) 
812,450

 
 
 
 
 
49,788
(7) 
2,936,496

 
 
 
 
R. Mark Graf
17,149
(4) 
1,011,448

 
24,660
(8) 
1,454,447

 
5,351
(4) 
315,602

 
25,524
(9) 
1,505,406

 
7,306
(5) 
430,908

 
 
 
 
 
11,344
(6) 
669,069

 
 
 
 
 
26,005
(7) 
1,533,775

 
 
 
 
Diane E. Offereins
9,604
(4) 
566,444

 
24,660
(8) 
1,454,447

 
7,306
(5) 
430,908

 
25,524
(9) 
1,505,406

 
11,344
(6) 
669,069

 
 
 
 
 
46,677
(7) 
2,753,009

 
 
 
 
Carlos M. Minetti
9,604
(4) 
566,444

 
24,660
(8) 
1,454,447

 
7,306
(5) 
430,908

 
25,524
(9) 
1,505,406

 
11,344
(6) 
669,069

 
 
 
 
 
46,677
(7) 
2,753,009

 
 
 
 
Julie Loeger
4,665
(4) 
275,142

 
23,394
(8) 
1,379,778

 
6,932
(5) 
408,849

 
21,726
(9) 
1,281,399

 
9,656
(6) 
569,511

 
 
 
 
 
22,671
(7) 
1,337,136

 
 
 
 
David W. Nelms(2)
10,290
(4) 
606,904

 
104,328
(8) 
6,153,265

 
15,456
(5) 
911,595

 
100,274
(9) 
5,914,161

 
22,283
(6) 
1,314,251

 
 
 
 
 
100,021

(7) 
5,899,239

 
 
 
 
(1) 
All equity award values are based on a December 31, 2018 closing stock price of $58.98 per share of our Common Stock. RSUs include the right to receive dividend equivalents in the same amount and at the same time as dividends are paid to all Company common shareholders. PSUs include the right to receive dividend equivalents which will accumulate and pay out in cash if and when the underlying shares are released to the NEOs.
(2) 
Excludes 502,557 deferred RSUs for Mr. Nelms and 430,763 deferred RSUs for Mr. Hochschild, as described in "2018 Nonqualified Deferred Compensation Table." These shares will convert to shares of Common Stock when Mr. Nelms and Mr. Hochschild leave the Company.
(3) 
These RSUs are expected to vest and convert to shares of Common Stock on December 17, 2020.
(4) 
These RSUs vested and converted to shares of Common Stock on February 1, 2019.
(5) 
These RSUs vested or are expected to vest and convert to shares of Common Stock in equal installments on February 1, 2019 and 2020.
(6) 
These RSUs vested or are expected to vest and convert to shares of Common Stock in equal installments on February 1, 2019, 2020 and 2021.
(7) 
These PSUs vested and converted to shares of Common Stock on February 1, 2019, based on EPS performance and after a satisfactory risk policies review. Amounts reported reflect the actual vesting level as determined by the Committee following its review of performance and risk assessment.

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2018 Executive Compensation Tables

(8) 
These PSUs are expected to vest and convert to shares of Common Stock on February 1, 2020, if the performance conditions are met and the risk policies review is satisfactory. As required under applicable SEC guidance, because cumulative performance exceeded the target level, unvested PSUs are shown at the amounts corresponding to, and assuming achievement of, the maximum performance level for the full performance period. The final payout will be determined by the Committee and may be less than amount shown.
(9) 
These PSUs are expected to vest and convert to shares of Common Stock on February 1, 2021, if the performance conditions are met and the risk policies review is satisfactory. As required under applicable SEC guidance, because performance during the first year of the performance period exceeded the target level, unvested PSUs are shown at the amounts corresponding to, and assuming achievement of, the maximum performance level for the full performance period. The final payout will be determined by the Committee and may be less than amount shown.
Stock Vested for 2018
The following table provides information regarding the number of stock awards that vested and the subsequent value realized from the vesting of such stock awards during the 2018 year. There are no outstanding stock options as of December 31, 2018.
 
Stock Awards
Name
Number of Shares
Acquired on
Vesting
(#)

Value Realized on Vesting(1)
($)

Roger C. Hochschild
61,011

4,918,707

R. Mark Graf
52,101

4,200,383

Diane E. Offereins
42,697

3,442,232

Carlos M. Minetti
42,697

3,442,232

Julie Loeger
16,716

1,347,644

David W. Nelms
322,520

21,673,562

(1) 
The amount shown represents the closing price of a share of our Common Stock on the scheduled vesting date multiplied by the number of RSUs and PSUs that vested.
2018 Pension Benefits
The following table lists the amounts we estimate as the present value of accumulated benefits that the Discover Pension Plan will pay to each of the NEOs upon the normal retirement age of 65.
Name
Plan Name
Number of Years 
of Credited
Service(1)
(#)

Present Value of
Accumulated
Benefit(2)(3)
($)

Roger C. Hochschild
Discover Financial Services Pension Plan
9.1667

192,892

R. Mark Graf(4)
Discover Financial Services Pension Plan
n/a

n/a

Diane E. Offereins
Discover Financial Services Pension Plan
9.0833

242,109

Carlos M. Minetti
Discover Financial Services Pension Plan
7.0000

146,958

Julie Loeger
Discover Financial Services Pension Plan
16.8333

360,815

David W. Nelms
Discover Financial Services Pension Plan
9.3333

210,316

(1) 
For actuarial valuation purposes, credited service is attributed through the measurement date of December 31, 2008, the date that the Discover Pension Plan was frozen.
(2) 
Service credit and actuarial values are calculated as of December 31, 2018, the plan’s measurement date for the last year.
(3) 
For details on the valuation method and assumptions used in calculating the present value of accumulated benefit, please see Note 11: "Employee Benefit Plans" of our consolidated financial statements in our Annual Report on Form 10-K.
(4) 
Mr. Graf does not participate in the Discover Pension Plan as he was hired after it was frozen.
Effective December 31, 2008, the Discover Pension Plan, a defined benefit pension plan, was frozen for all participants, although additional service will count towards vesting and retirement eligibility for any participant, including NEOs, in the Discover Pension Plan as of December 31, 2008.

2019 Proxy Statement       44


2018 Executive Compensation Tables

Accrued, frozen benefits under the Discover Pension Plan are determined with reference to career-average pay limited to $170,000 per year, and for each calendar year of service prior to 2009 generally equal to: (i) 1% of the participant’s eligible annual pay; plus (ii) 0.5% of the participant’s eligible annual pay which exceeded the participant's Social Security covered compensation limit for that year. The estimated annual benefits payable under the Discover Pension Plan at the earliest age at which a participant may retire with an unreduced benefit (age 65) are set forth above. Early retirement terms under the Pension Plan vary depending upon service dates. Certain participants are eligible for early retirement upon reaching age 55 with 10 years of service. Other participants must reach age 55 with 20 years of service. Messrs. Nelms and Minetti and Mses. Offereins and Loeger are eligible for early retirement. In the event of early retirement, the accumulated benefit presented in the table above would be reduced under factors that vary based upon a participant's age at the time of early retirement commencement.
2018 Nonqualified Deferred Compensation
The founders' grants of RSU awards reflected in the table below were one time awards made under the 2007 Omnibus Incentive Plan in connection with the Company's spin-off. These RSUs vested and will convert to shares of Company common stock following a termination of service.
Name
Plan Name
Executive
Contributions
in Last FY
($)

Registrant
Contributions
in Last FY
($)

Aggregate
Earnings in
Last FY(1)
($)

Aggregate
Withdrawals/
Distributions
($)

Aggregate
Balance at
Last FYE
($)

Roger C. Hochschild
2007 Omnibus Incentive Plan


(7,727,888
)

25,406,402

David W. Nelms
2007 Omnibus Incentive Plan


(9,015,873
)

29,640,812

(1) 
Reflects decrease in value of deferred RSUs due to decline in stock price as compared to December 31, 2017. Excludes cash dividend equivalent payments of $753,836 and $646,145 paid on deferred RSUs for Mr. Nelms and Mr. Hochschild, respectively.
Potential Payments upon a Termination or Change in Control
Change in Control Severance Policy
The Company sponsors a Change in Control Severance Policy (the "Policy"), which applies to members of our management, including the NEOs.
If any NEO is involuntarily terminated, other than for cause (such as a material breach, fraud, violation of law, etc., as defined in the Policy), or voluntarily terminates for good reason (such as a material diminution in authority or base salary, target STI and/or target LTI compensation, etc., as defined in the Policy), or has a termination of employment due to death or disability, within six months prior to or two years following the occurrence of a change in control (as defined in the Policy), upon Discover's receipt of a fully-executed irrevocable release in a form satisfactory to Discover, such NEO would be entitled to receive:
A lump sum cash payment equal to 1.5 times the sum of his or her annual base salary plus average cash bonus paid in the prior three years or, if the NEO has been an employee for less than three years, the number of years the NEO has been employed by the Company;
A lump sum cash payment equal to the prorated target cash bonus under the Company’s incentive compensation plans for the year of termination, or if no target was established for the year of termination, the annual cash bonus for the prior year;
Full vesting of all stock-based awards granted to the NEO under the Company’s incentive compensation plans;
Outplacement services for a period of two years at the Company’s expense with a firm selected by the Company;
Certain legal fees if the NEO commences litigation after exhausting the internal administrative claims procedure and, as a result, becomes entitled to receive benefits in an amount greater than those offered by the Company prior to such litigation; and
A lump sum cash payment equal to the difference between COBRA (for medical, dental and vision) and active employee premiums for 24 months.
Any NEO eligible for change in control benefits described above will be given the opportunity to enter into a non-competition agreement with the Company, and if he or she enters into the non-competition agreement, he or she would be eligible to receive a salary continuation payment equal to 1.5 times the sum of his or her annual base salary plus average cash bonus paid in the prior three years or, if the NEO has been an employee for less than three years, the number of years the NEO has been employed by the Company.
If benefits payable under the Policy together with other Company benefits payable to the NEO would subject the NEO to an excise tax under the IRC, the benefits payable under the Policy will be reduced to the extent necessary to prevent any portion of the benefits from becoming nondeductible by the Company or subject to the excise tax, but only if, by reason of that reduction, the net after-tax benefit received by the NEO exceeds the net after-tax benefit the NEO would receive if no reduction was made. No excise tax gross-ups are provided for any employees.

45       www.discover.com

2018 Executive Compensation Tables

Severance Pay Plan
The Company sponsors a broad-based welfare benefits plan which provides severance benefits to eligible employees, including the NEOs, who are involuntarily terminated in connection with a workforce reduction, closure, or other similar event. The Severance Pay Plan will not pay benefits to an employee receiving benefits under the Change in Control Severance Policy.
If any NEO is terminated, other than for cause (as defined in the Severance Pay Plan), upon Discover’s receipt of a fully-executed irrevocable release in a form satisfactory to Discover, such NEO would be entitled to receive:
A lump sum cash payment of 12 months of his or her annual base salary plus target annual cash bonus;
A lump sum cash payment equal to the prorated target annual cash bonus under the Company’s incentive compensation plan for any prior year and the year of termination (to the extent earned and not yet paid);
Outplacement services for a period of one year at the Company’s expense with a firm selected by the Company; and
A lump sum cash payment equal to 12 months of the applicable premium for group health plan coverage in place prior to termination of employment, plus a payment for income taxes on such amount.
2018 Potential Payments upon a Termination or Change in Control Table
The following table sets forth the payments that each of our NEOs would have received under various termination scenarios on December 31, 2018. With regard to the payments upon a change in control, the amounts detailed below assume that each NEO's employment was terminated by the Company without "cause" or by the executive for "good reason" within the specified time period prior to or following the change in control. The table below assumes a stock price of $58.98, the closing price of a share of our Common Stock on December 31, 2018.
Pursuant to the terms of our stock plans and outstanding stock award agreements, the vesting of certain outstanding unvested stock awards is accelerated in whole or in part in the event of a termination of the NEO's employment in connection with (i) a change in control, (ii) the NEO's death, disability, retirement, or (iii) an involuntary termination such as a reduction in force or elimination of the NEO's position, provided that a fully-executed irrevocable release agreement is executed. The vesting of the special retention grant made to Mr. Hochschild in 2015 is accelerated in the event of a termination of employment in connection with a change in control, in the event of death or disability, or an involuntary termination without cause, provided a fully-executable irrevocable release agreement is executed. Mr. Hochschild's 2015 special retention grant does not provide for accelerated vesting upon retirement.
Unvested RSUs and PSUs will be canceled in the event of a termination of employment for any other reason. NEOs who violate non-competition, non-solicitation, confidentiality, intellectual property, or other restrictive covenants within one year after a termination of employment will be required to pay to the Company the value of any RSUs and PSUs that vested on or after, or within two years prior to such termination.
In connection with his retirement, Mr. Nelms became eligible to receive retirement vesting of his outstanding equity awards as displayed below and distribution of his founders' shares, as reflected in the 2018 Nonqualified Deferred Compensation table. Mr. Nelms will not participate in the 2019 annual incentive plan.
Executive
Payment Elements
Termination in
Connection
with a Change
in Control
($)
 
Involuntary
Termination
Without
Cause
($)
 
Death
($)
Disability
($)
Voluntary Termination or Involuntary Termination with Cause
($)
Retirement(7)
($)
Roger C. Hochschild
 
 
 
 
 
 
 
 
Salary and Other Cash Payments
6,080,250
(1) 
2,125,000

70,833
0
0
n/a
Target Annual Incentive Plan Payout (2)
1,275,000

1,275,000

1,275,000
1,275,000
0
n/a
Equity Awards(3)
15,331,751

15,584,457

15,584,457
15,584,457
0
n/a
Health Coverage(4)
29,290

30,921

0
0
0
n/a
Other(5)
25,000

12,500

0
0
0
n/a
Section 280G Cut-Back(6)
0

n/a

n/a
n/a
n/a
n/a
Total
22,741,291

19,027,878

16,930,290
16,859,457
0
n/a
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2019 Proxy Statement       46


2018 Executive Compensation Tables

Executive
Payment Elements
Termination in
Connection
with a Change
in Control
($)
 
Involuntary
Termination
Without
Cause
($)
 
Death
($)
Disability
($)
Voluntary Termination or Involuntary Termination with Cause
($)
Retirement(7)
($)
R. Mark Graf