DEF 14A 1 d493134ddef14a.htm DEF 14A DEF 14A
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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

(Amendment No.    )

Filed by the Registrant  ☒                            Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material under §240.14a-12

CENTURYLINK, INC.
(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):
  No fee required.
  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) 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)  

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  (5)   Total fee paid:
   
   

 

  Fee paid previously with preliminary materials.
  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:

   

 

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  (3)  

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LOGO

 

2017 Notice of Annual Meeting

and Proxy Statement

and

Annual Financial Report

 

 

May 24, 2017

10:00 a.m. local time

100 CenturyLink Drive

Monroe, Louisiana

 


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IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 24, 2017

This proxy statement and related materials are

available at www.envisionreports.com/ctl.

All references in this proxy statement or related materials to “we,” “us,” “our,” the “Company” or “CenturyLink” refer to CenturyLink, Inc. In addition, each reference to (i) the “Board” refers to our Board of Directors, (ii) our “executives” or “executive officers” refers to our nine executive officers listed in the tables beginning on page 3 of this proxy statement, (iii) “meeting” refers to the 2017 annual meeting of our shareholders described further herein, (iv) “named executives,” “named officers,” “named executive officers” or “NEOs” refers to the five executive officers listed in the Summary Compensation Table appearing on page 52 of this proxy statement, (v) “senior officers” refers to our executive officers and a limited number of additional officers whose compensation is determined by the Human Resources and Compensation Committee of our Board, (vi) “Embarq” refers to Embarq Corporation, which we acquired on July 1, 2009, (vii) “Qwest” refers to Qwest Communications International Inc., which we acquired on April 1, 2011, (viii) “Savvis” refers to Savvis, Inc., which we acquired on July 15, 2011, (ix) “Level 3” refers to Level 3 Communications, Inc., which we expect to acquire by the end of the third quarter of 2017, and (x) the “SEC” refers to the U.S. Securities and Exchange Commission. When used herein, “consolidated free cash flow” shall have the meaning ascribed to it in our quarterly earnings releases and “consolidated operating cash flow,” “consolidated core revenue” and “absolute revenue” shall have the meanings ascribed to them herein under the heading “Compensation Discussion and Analysis.” Unless otherwise provided, all information is presented as of the date of this proxy statement.


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CenturyLink, Inc.

100 CenturyLink Drive

Monroe, Louisiana 71203

 

 

Notice of Annual Meeting of Shareholders

 

 

 

TIME AND DATE    10:00 a.m. local time on May 24, 2017
PLACE   

Corporate Conference Room

CenturyLink Headquarters

100 CenturyLink Drive

Monroe, Louisiana

ITEMS OF BUSINESS   

(1)    Elect as directors the nine nominees named in the accompanying proxy statement

  

(2)    Ratify the appointment of KPMG LLP as our independent auditor for 2017

  

(3)    Conduct non-binding advisory votes:

  

(a)    to approve our executive compensation

  

(b)    regarding the frequency of our executive compensation votes

  

(4)    Act upon three separate shareholder proposals if properly presented at the meeting

  

(5)    Transact such other business as may properly come before the meeting and any adjournment.

RECORD DATE    You can vote if you were a shareholder of record on April 7, 2017.
PROXY VOTING    Shareholders are invited to attend the meeting in person. Even if you expect to attend, it is important that you vote by telephone or the Internet, or by completing and returning a proxy or voting instruction card.

 

 

LOGO

Stacey W. Goff

Secretary

April 10, 2017

 


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TABLE OF CONTENTS

 

     Page  

GENERAL INFORMATION ABOUT THE ANNUAL MEETING

     1  

ELECTION OF DIRECTORS

     3  

CORPORATE GOVERNANCE

     8  

Governance Guidelines

     8  

Independence

     10  

Committees of the Board

     10  

Director Nomination Process

     11  

Proposed Expansion of Board

     14  

Compensation Setting Process

     14  

Risk Oversight

     14  

Top Leadership Positions and Structure

     14  

Access to Information

     15  

RATIFICATION OF THE SELECTION OF THE INDEPENDENT AUDITOR

     16  

AUDIT COMMITTEE REPORT

     17  

ADVISORY VOTES ON EXECUTIVE COMPENSATION AND THE FREQUENCY OF SUCH VOTES

     18  

SHAREHOLDER PROPOSALS

     20  

OWNERSHIP OF OUR SECURITIES

     27  

Principal Shareholders

     27  

Executive Officers and Directors

     28  

COMPENSATION DISCUSSION AND ANALYSIS

     29  

Executive Summary

     29  

Our Compensation Philosophy and Linkage to Pay for Performance

     31  

Our Compensation Program Objectives and Components of Pay

     36  

Our Policies, Processes and Guidelines Related to Executive Compensation

     46  

COMPENSATION COMMITTEE REPORT

     51  

EXECUTIVE COMPENSATION

     52  

Overview

     52  

Incentive Compensation and Other Awards

     53  

Pension Benefits

     57  

Deferred Compensation

     59  

Potential Termination Payments

     60  

DIRECTOR COMPENSATION

     64  

Overview

     64  

Cash and Stock Payments

     66  

Other Benefits

     66  

Director Stock Ownership Guidelines

     67  

PERFORMANCE GRAPH

     68  

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     69  

TRANSACTIONS WITH RELATED PARTIES

     69  

Recent Transactions

     69  

Review Procedures

     69  

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     69  

ADDITIONAL INFORMATION ABOUT THE MEETING

     70  

Quorum

     70  

Vote Required to Elect Directors

     70  

Vote Required to Adopt Other Proposals at the Meeting

     70  

Effect of Abstentions

     70  

Effect of Non-Voting

     70  

 

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     Page  

Revocations

     70  

Voting by Participants in Our Benefit Plans

     71  

Cost of Proxy Solicitation

     71  

Other Matters Considered at the Meeting

     71  

Conduct of the Meeting

     71  

Postponement or Adjournment of the Meeting

     72  

OTHER MATTERS

     72  

Deadlines for Submitting Shareholder Nominations and Proposals for the 2018 Annual Meeting

     72  

Proxy Materials

     72  

Annual Financial Report

     73  

Appendix A — Annual Financial Report

     A-1  

 

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CenturyLink, Inc.

100 CenturyLink Drive

Monroe, Louisiana 71203

 

 

PROXY STATEMENT

April 10, 2017

 

 

GENERAL INFORMATION ABOUT THE ANNUAL MEETING

Why am I receiving these proxy materials?

Our Board of Directors is soliciting your proxy to vote at our 2017 annual meeting of shareholders because you owned shares of our stock at the close of business on April 7, 2017, the record date for the meeting, and are entitled to vote those shares at the meeting. Our proxy materials are being made available to you on the Internet beginning on or about April 13, 2017. This proxy statement summarizes information regarding matters to be considered at the meeting. For additional information on our proxy materials, see “Other Matters — Proxy Materials” appearing below.

When and where will the meeting be held?

The meeting will be held at 10:00 a.m. local time on Wednesday, May 24, 2017, in the corporate conference room at our corporate headquarters, 100 CenturyLink Drive, Monroe, Louisiana. If you would like directions to the meeting, please see our website, http://ir.centurylink.com. You do not need to attend the meeting to vote your shares.

What matters will be considered at the meeting?

Shareholders will vote on the following matters at the meeting:

 

Item and Page Reference

   Board Voting
Recommendation
 

Vote Required for Approval

•    Election of the nine director nominees named herein (Item 1, Page 3)

   For each nominee   Affirmative vote of a majority of the votes cast

•    Ratification of the appointment of KPMG LLP as our independent auditor for 2017 (Item 2, Page 16)

   For   Affirmative vote of a majority of the votes cast

•    Non-binding advisory vote to approve our executive compensation (Item 3(a), Page 18)

   For   Affirmative vote of a majority of the votes cast

•    Non-binding advisory vote regarding the frequency of our executive compensation votes (Item 3(b), Page 19)

   One Year   Plurality of the votes cast

•    A shareholder proposal regarding our equity retention policies, as further described in this proxy statement, if it is properly presented at the meeting (Item 4(a), Page 20)

   Against   Affirmative vote of a majority of the votes cast

•    A shareholder proposal regarding our lobbying activities, as further described in this proxy statement, if it is properly presented at the meeting (Item 4(b), Page 22)

   Against   Affirmative vote of a majority of the votes cast

•    An additional shareholder proposal regarding our lobbying activities, as further described in this proxy statement, if it is properly presented at the meeting (Item 4(c), Page 24)

   Against   Affirmative vote of a majority of the votes cast

 

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How many votes may I cast?

You may cast one vote for every share of our common stock or Series L preferred stock that you owned on the record date. Our common stock and Series L preferred stock vote together as a single class on all matters. In this proxy statement, we refer to these shares as our “Common Shares” and “Preferred Shares,” respectively, and as our “Voting Shares,” collectively. As of the record date, we had 548,863,468 Common Shares and 7,018 Preferred Shares outstanding.

What is the difference between holding shares as a shareholder of record and as a beneficial owner?

If shares are registered in your name with our transfer agent, Computershare Investor Services L.L.C., you are the “shareholder of record” of those shares and you may directly vote these shares, together with any shares credited to your account if you are a participant in our automatic dividend reinvestment and stock purchase service.

If your shares are held on your behalf in a stock brokerage account or by a bank or other nominee, you are the “beneficial owner” of shares held in “street name.” We have requested that our proxy materials be made available to you by your broker, bank or nominee, who is considered the shareholder of record of those shares.

If I am a shareholder of record, how do I vote?

If you are a shareholder of record, you may vote in person at the meeting or by proxy in any of the following three ways:

 

    call 1-800-652-8683 and follow the instructions provided;

 

    log on to the Internet at www.envisionreports.com/ctl and follow the instructions at that site; or

 

    request a paper copy of our proxy materials and, following receipt thereof, mark, sign and date your proxy card and return it to Computershare.

Please note that you may not vote by telephone or the Internet after 1:00 a.m. Central Time on May 24, 2017.

If I am a beneficial owner of shares held in street name, how do I vote?

As the beneficial owner, you have the right to instruct your broker, bank or nominee how to vote your shares by using any voting instruction card supplied by them or by following their instructions for voting by telephone, the Internet, or in person.

If I am a benefit plan participant, how do I vote?

Please see “Additional Information About the Meeting — Voting by Participants in Our Benefit Plans” appearing below.

Do I need identification to attend the meeting in person?

Yes. Please bring proper identification, together with the Important Notice Regarding Availability of Proxy Materials mailed to you, which will serve as your admission ticket. If your shares are held in street name, please bring acceptable proof of ownership, such as a letter from your broker or an account statement stating or showing that you beneficially owned Voting Shares on the record date.

Where can I find additional information about the conduct of the meeting, voting requirements, and other similar matters relating to the meeting?

Please see “Additional Information About the Meeting” appearing below.

 

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ELECTION OF DIRECTORS

(Item 1 on Proxy or Voting Instruction Card)

The first proposal for consideration at the meeting is the election of each of the nine candidates named below as a director for a one-year term expiring at our 2018 annual meeting of shareholders, or until his or her successor is duly elected and qualified.

Acting upon the recommendation of its Nominating and Corporate Governance Committee, the Board has nominated the nine below-named directors to stand for re-election to one-year terms at the meeting. Unless authority is withheld, all votes attributable to Voting Shares represented by each duly executed and delivered proxy will be cast for the election of each of the nine below-named nominees. Under our bylaw nominating procedures, these nominees are the only individuals who may be elected at the meeting. For additional information on our nomination process, see “Corporate Governance — Director Nomination Process.” If for any reason any such nominee should decline or become unable to stand for election as a director, which we do not anticipate, the persons named as proxies may vote instead for another candidate designated by the Board, without re-soliciting proxies.

As discussed further under “Additional Information About the Meeting — Vote Required to Elect Directors,” to be elected each of the nine nominees must receive an affirmative vote of a majority of the votes cast.

 

 

Nominees For Election to the Board:

Listed below is information on each of the nine individuals nominated to stand for election to the Board.

The Board recommends that you vote “FOR” each of the following nominees:

 

 

LOGO

 

Martha H. Bejar, age 55; a director since January 2016; co-founder and principal of Red Bison Advisory Group LLC, a telecommunications and technology advisory firm founded in early 2014; Chief Executive Officer and director of Flow Mobile, Inc., a telecommunications company offering rural broadband wireless access services, from January 2012 to December 2015; venture partner at The Prometheus Partners, a business services company, from April 2012 to May 2014; Chairperson and Chief Executive Officer of Wipro Infocrossing Inc., a U.S.-based cloud services affiliate of Wipro Limited, from January 2011 to March 2012; President of Worldwide Sales and Operations at Wipro Technologies Inc., an IT services affiliate of Wipro Limited, from June 2009 to January 2011; Corporate Vice President for the communications sector at Microsoft Corporation, from June 2007 to June 2009; held various positions at Nortel Networks Corporation, a telecommunications and data networking company, from 1997 to 2007, including Regional President and President of North America Sales, Sales Engineering and Sales Operations; currently a director of Mitel Networks Corporation; formerly a director of Polycom, Inc. within the past five years.

 

Key Qualifications, Experiences and Skills:

 

•     Executive experience in communications and technology industries

 

•     Experience as a former chief executive officer

 

•     International business and engineering experience

 

•     Qualifies as an “audit committee financial expert”

 

•     Director of another publicly-held company

 

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LOGO

 

Virginia Boulet, age 63; a director since 1995; a managing director at Legacy Capital LLC, an investment banking firm based in New Orleans, Louisiana, since March 2014; Special Counsel at Adams and Reese LLP, a law firm, from 2002 to March 2014; prior to then, practiced as a corporate and securities attorney for Phelps Dunbar, L.L.P. from 1992 to 2002 and Jones Walker LLP from 1983 to 1992; an adjunct professor of securities regulation law and merger and acquisition law at Loyola University-New Orleans College of Law since 2004; currently a director of W&T Offshore, Inc.

 

Key Qualifications, Experiences and Skills:

 

•     Legal experience representing telecommunications companies and regarding business combinations

 

•     Director of another publicly-held company

 

LOGO

 

Peter C. Brown, age 58; a director since 2009; Chairman of Grassmere Partners, LLC, a private investment firm, since July 2009; held several executive level positions, including Chairman of the Board, President and Chief Executive Officer, with AMC Entertainment Inc., a theatrical exhibition company, from 1991 to 2009; founded EPR Properties, a NYSE-listed real estate investment trust formerly known as Entertainment Properties Trust, in 1997 and served as a member of the Board of Trustees until 2003; currently a director of EPR Properties and Cinedigm Corp.; formerly a director of National CineMedia, Inc. within the past five years.

 

Key Qualifications, Experiences and Skills:

 

•     Experience as a former chief executive of a publicly-held company

 

•     Qualifies as an “audit committee financial expert”

 

•     Director of other publicly-held companies

 

LOGO

 

W. Bruce Hanks, age 62; a director since 1992; a consultant with Graham, Bordelon, Golson and Gilbert, Inc., an investment management and financial planning company, since 2005; Athletic Director of the University of Louisiana at Monroe from 2001 to 2004; held various executive positions at CenturyLink from 1980 through 2001, most notably Chief Operating Officer, Senior Vice President — Corporate Development and Strategy, Chief Financial Officer, and President — Telecommunications Services; worked as a certified public accountant with Peat, Marwick & Mitchell for three years prior to then; currently an advisory director of IberiaBank Corporation; also served in the past on the executive boards of several telecommunications industry associations and the boards of other publicly-held companies.

 

Key Qualifications, Experiences and Skills:

 

•     Prior executive experience with, and historical knowledge of, our Company

 

•     Former experience as a certified public accountant

 

•     Qualifies as an “audit committee financial expert”

 

•     Prior experience as a director of other publicly-held companies

 

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LOGO

 

Mary L. Landrieu, age 61; a director since November 2015; senior policy advisor at Van Ness Feldman, LLP, a Washington D.C.-based law firm, since May 2014; policy advisor at Walton Family Foundation, a philanthropic organization focused on improving K-12 education and supporting economic incentives for sustainable resource management, from 2014 to 2016; U.S. Senator from the State of Louisiana from 1996 to 2014, where she chaired the Senate Committee on Energy and Natural Resources, served on the Senate Committee on Appropriations, chaired the Subcommittees on Homeland Security, Financial Services and General Government, and the District of Columbia, chaired the Senate Committee on Small Business and Entrepreneurship, served on the Senate Committee on Homeland Security and chaired the Subcommittee on Disaster Recovery; Louisiana state treasurer from 1988 to 1996; Louisiana state legislative representative from 1980 to 1988; currently serves on the board of trustees or board of directors of several national organizations promoting education or children’s welfare.

 

Key Qualifications, Experiences and Skills:

 

•    Governmental and government relations experience

 

•    Public policy and governmental finance experience

 

LOGO

 

Harvey P. Perry, age 72; a director since 1990; non-executive Vice Chairman of the Board of Directors of CenturyLink since 2004; retired from CenturyLink in 2003; joined CenturyLink in 1984, serving as Secretary and General Counsel for approximately 20 years and Executive Vice President and Chief Administrative Officer for almost five years; prior to then, worked as an attorney in private practice for 15 years.

 

Key Qualifications, Experiences and Skills:

 

•    Prior executive experience with, and historical knowledge of, our Company

 

•    Legal experience representing telecommunications companies

 

LOGO

 

Glen F. Post, III, age 64; a director since 1985; Chief Executive Officer of CenturyLink since 1992, and President since 2009 (and from 1990 to 2002); Chairman of the Board of CenturyLink between 2002 and 2009; Vice Chairman of the Board of CenturyLink between 1993 and 2002; held various other positions at CenturyLink between 1976 and 1993, most notably Treasurer, Chief Financial Officer and Chief Operating Officer.

 

Key Qualifications, Experiences and Skills:

 

•    Executive experience in the telecommunications business

 

•    Experience as our chief executive

 

LOGO

 

Michael J. Roberts, age 66; a director since 2011; co-founder of LYFE Kitchen, an emerging chain of lifestyle restaurants, serving as a board member since May 2014 and as Chief Executive Officer from February 2011 to May 2014; Chief Executive Officer and founder of Westside Holdings LLC, a marketing and brand development company, from 2006 to 2013; served as President and Chief Operating Officer of McDonald’s Corporation, a foodservice retailer, from 2004 to 2006; served as Chief Executive Officer of McDonald’s USA during 2004 and as President of McDonald’s USA from 2001 to 2004; currently a director of W.W. Grainger, Inc.

 

Key Qualifications, Experiences and Skills:

 

•    Experience as a chief executive

 

•    Marketing and branding expertise

 

•    Director of another publicly-held company

 

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LOGO

 

Laurie A. Siegel, age 61; a director since 2009; a business and human resources consultant since 2012; retired in September 2012 from Tyco International Ltd., a diversified manufacturing and service company, where she served as Senior Vice President of Human Resources and Internal Communications since 2003; held various positions with Honeywell International Inc. from 1994 to 2002, including Vice President of Human Resources — Specialty Materials; prior to then, was director of global compensation at Avon Products and a principal of Strategic Compensation Associates; currently a director of FactSet Research Systems Inc. and Volt Information Sciences, Inc.

 

Key Qualifications, Experiences and Skills:

 

•    Executive experience with a multi-national company

 

•    Human resources and executive compensation expertise

 

•    Director of other publicly-held companies

Executive Officers Who Are Not Directors:

Listed below is information on each of our executive officers who are not directors. Unless otherwise indicated, each person has been engaged in the principal occupation shown for more than the past five years.

 

 

LOGO

 

  David D. Cole, age 59; Executive Vice President — Controller and Operations Support since May 2013; served as Senior Vice President — Controller and Operations Support from April 2011 to May 2013 and as Senior Vice President — Operations Support from 1999 to April 2011.

 

LOGO

 

  Dean J. Douglas, age 59; President — Enterprise Markets since January 2017; President — Sales and Marketing from February 2016 to January 2017; served as Chief Executive Officer at Unify GmbH & Co. KG, a provider of software-based enterprise unified communications services from January 2014 to January 2016; served in senior leadership positions at Westcon Group, Inc., a distributor of unified communications and security services, including President and Chief Executive Officer from April 2009 to January 2014 and Chief Operating Officer from June 2008 to March 2009; served as President and Chief Executive Officer at LCC International, Inc., a telecommunications services company, from October 2005 to June 2008; prior to then held leadership roles throughout his career at IBM Global Services, Motorola, Inc. and Newleaf Entertainment.

LOGO

 

  R. Stewart Ewing, Jr., age 65; Executive Vice President and Chief Financial Officer since 1999 and, in addition, Assistant Secretary since 2009; served as Senior Vice President and Chief Financial officer from 1989 to 1999; held various other positions at CenturyLink between 1983 and 1989, most notably Controller and Vice President of Finance. Upon completion of our pending acquisition of Level 3, Mr. Ewing plans to retire and Sunit Patel, Level 3’s Executive Vice President and Chief Financial Officer, plans to serve as our chief financial officer.

 

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LOGO

 

  Stacey W. Goff, age 51; Executive Vice President, General Counsel and Secretary since 2009 and, in addition, Chief Administrative Officer since November 1, 2014; served as Senior Vice President, General Counsel and Secretary prior to 2009.

LOGO

 

  Aamir Hussain, age 49; Executive Vice President, Chief Technology Officer since October 2014; served as Managing Director and Chief Technology Officer for the Europe division at Liberty Global plc from February 2012 to October 2014; served as Senior Vice President and Chief Technology Officer at Covad Communications from October 2008 to February 2012; prior to then he held leadership and technology design roles throughout his career at TELUS Corporation, Qwest, BellSouth Corporation, Samsung Electronics Co. Ltd. and Motorola Solutions Inc.

LOGO

 

  Maxine L. Moreau, age 55; President — Consumer Markets since January 2017; Executive Vice President — Global Operations and Shared Services from November 2014 to January 2017; served as Executive Vice President — Network Services from May 2013 to October 2014; served as Senior Vice President — Network Services from May 2012 to May 2013, as Senior Vice President, Integration and Process Improvement from 2010 to May 2012, and as Senior Vice President, Centralized Operations, from 2009 to 2010.

 

LOGO

 

  Scott A. Trezise, age 48; Executive Vice President — Human Resources since August 2013; served as Senior Vice President — Human Resources for The Shaw Group, Inc. from June 2010 until its acquisition by Chicago Bridge & Iron Company N.V. in February 2013; served as Vice President of Human Resources for Honeywell International Inc. from 2005 to June 2010.

 

LOGO

 

  Girish K. Varma, age 67; President — IT and Managed Services since January 2017; President — Global Information Technology Services and New Market Development from November 2014 to January 2017; served as Executive Vice President of Information Technology from 2011 to October 2014; served as Senior Vice President and Chief Information Officer of Qwest prior to then.

 

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CORPORATE GOVERNANCE

Governance Guidelines

Our Board has adopted corporate governance guidelines, which it reviews at least annually. For information on how you can obtain a complete copy of our guidelines, see “— Access to Information” below.

Among other things, our corporate governance guidelines provide as follows:

Director Qualifications

 

    The Board of Directors will have a majority of independent directors. The Nominating and Corporate Governance Committee is responsible for reviewing with the Board, on an annual basis, the requisite skills and characteristics of new Board members as well as the composition of the Board as a whole.

 

    The Board expects directors who change the job or responsibility they held when they were elected to the Board to volunteer to resign from the Board.

 

    On the terms and subject to the conditions specified in our bylaws, directors will be elected by a majority vote of the shareholders and any incumbent director failing to receive a majority of votes cast must promptly tender his or her resignation to the Board.

 

    No director may serve on more than two other unaffiliated public company boards, unless this prohibition is waived by the Board.

 

    No director may be appointed or nominated to a new term if he or she would be age 75 or older at the time of the election or appointment.

 

    Annually, the Board will determine affirmatively which of our directors are independent for purposes of complying with our corporate governance guidelines and the listing standards of the New York Stock Exchange, or NYSE. A director will not be independent for these purposes unless the Board affirmatively determines that the director does not, either directly or indirectly through the director’s affiliates or associates, have a material commercial, banking, consulting, legal, accounting, charitable, familial or other relationship with the Company or its affiliates, other than as a director.

Director Responsibilities

 

    The Board periodically reviews our long-term strategic plans and holds strategic planning sessions.

 

    Directors are required to hold confidential all non-public information obtained due to their directorship position absent the express permission of the Board to disclose such information.

 

    Unless otherwise determined by the Board, when a management director retires or ceases to be an active employee for any other reason, that director will be considered to have resigned concurrently from the Board.

Chairman; Lead Outside Director

 

    The Board elects a Chairman from among its members. The Chairman may be a director who also has executive responsibilities, including the CEO (an executive chair), or may be one of the Company’s independent directors (a non-executive chair). The Board believes it is in the best interests of the Company for the Board to remain flexible with respect to whether to elect an executive chair or a non-executive chair so that the Board may provide for succession planning and respond effectively to changes in circumstances.

 

   

The non-management directors meet in executive session at least quarterly. The lead outside director elected by the independent directors may call additional meetings of the non-management directors at

 

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any time. At all times during which the Chairman is a non-executive chair, all of the functions and responsibilities of the lead outside director shall be performed by the non-executive chair.

CEO Evaluation and Management Succession

 

    The Nominating and Corporate Governance Committee conducts an annual review of the CEO’s performance and provides a report of its findings to the Board.

 

    The Nominating and Corporate Governance Committee reports periodically to the Board on succession planning.

Recoupment of Compensation

 

    If the Board or any committee of the Board determines that any bonus, incentive payment, commission, equity award or other compensation awarded to or received by an executive officer was based on any financial or operating result that was impacted by the executive officer’s knowing or intentional fraudulent or illegal conduct, we may recover from the executive officer the compensation the Board or any committee of the Board considers appropriate under the circumstances.

Stock Ownership Guidelines

 

    We require our executive officers to beneficially own CenturyLink stock equal in market value to specified multiples of their annual base salary. All executive officers have three years from the date they first become subject to a particular ownership level to attain that target.

 

    We require our outside directors to beneficially own CenturyLink stock equal in market value to five times their annual cash retainer. Outside directors have five years from their election or appointment date to attain that target.

 

    For any year during which an executive or director does not meet his or her ownership target, the executive or director is required to hold a specified percentage of the CenturyLink stock that the executive or director acquires through our equity compensation programs, excluding shares sold to pay taxes associated with the acquisition thereof.

 

    The Human Resources and Compensation Committee administers the guidelines, and may modify their terms and grant hardship exceptions in its discretion.

 

    See “Compensation Discussion and Analysis — Our Policies, Processes and Guidelines Related to Executive Compensation — Stock Ownership Guidelines” for information on the executive ownership multiples and the holding percentages currently in effect.

Standards of Business Conduct and Ethics

 

    All of our directors, officers and employees are required to abide by our long-standing ethics and compliance policies and programs, which include standards of business conduct.

 

    Any waiver of our policies, principles or guidelines relating to business conduct or ethics for executive officers or directors may be made only by the Board or one of its duly authorized committees.

Other

 

    Directors have full access to our officers and employees.

 

    Like most other NYSE-listed companies, (i) all of the Board’s standing committees are comprised solely of independent directors, (ii) we provide orientation for new directors, (iii) we maintain a continuing education program for our directors, and (iv) the Board and each committee conducts annual self-reviews.

 

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Independence

Based on the information made available to it, the Board of Directors has affirmatively determined that each of our non-management directors qualifies as an independent director under the standards referred to above under “— Governance Guidelines.” In making these determinations, the Board, with assistance from counsel, evaluated responses to a questionnaire completed by each director regarding relationships and possible conflicts of interest. In its review of director independence, the Board considered all known commercial, banking, consulting, legal, accounting, charitable, familial or other relationships any director may have with us.

Some of our directors are employed by or affiliated with companies with which we do business in the ordinary course, either as a service provider, a customer or both. As required under the NYSE listing standards and our corporate governance guidelines, our Board examined the amounts spent by us with those companies and by those companies with us. In all cases the amounts spent under these transactions fell well below the materiality thresholds established in the NYSE listing standards and in our corporate governance guidelines. Consequently, our Board concluded that the amounts spent under these transactions did not create a material relationship with us that would interfere with the exercise of independent judgment by any of these directors.

Committees of the Board

During 2016, the Board of Directors held 14 meetings.

During 2016, the Board’s Audit Committee held eight meetings. The Audit Committee is currently composed of three independent directors, all of whom the Board has determined to be audit committee financial experts, as defined under the federal securities laws. The Audit Committee’s functions are described further below under “Audit Committee Report.”

The Board’s Human Resources and Compensation Committee (which in most instances we hereinafter refer to below as the “Compensation Committee”) met six times during 2016. The Compensation Committee is currently composed of four independent directors, all of whom qualify as “non-employee directors” under Rule 16b-3 promulgated under the Securities Exchange Act of 1934 and as “outside directors” under Section 162(m) of the Internal Revenue Code. The Compensation Committee is described further below under “Compensation Discussion and Analysis — Our Policies, Processes and Guidelines Related to Executive Compensation — Our Compensation Decision-Making Process — Role of Compensation Committee.”

The Board’s Nominating and Corporate Governance Committee (which in most instances we hereinafter refer to below as the “Nominating Committee”) is currently composed of three independent directors. It met five times during 2016. The Nominating Committee is responsible for, among other things, (i) recommending to the Board nominees to serve as directors and officers, (ii) monitoring the composition and size of the Board and its committees, (iii) periodically reassessing our corporate governance guidelines described above, (iv) leading the Board in its annual review of the Board’s performance, (v) reviewing shareholder proposals and making recommendations to the Board regarding how to respond, (vi) conducting an intensive annual review of the performance of our Chief Executive Officer, including interviewing each of our other senior officers, and (vii) reporting to the Board on succession planning for executive officers and appointing an interim CEO if the Board does not make such an appointment within 72 hours of the CEO dying or becoming disabled. For information on the director nomination process, see “— Director Nomination Process” below.

The Board also maintains a Risk Evaluation Committee, which met four times during 2016. This Committee is described further below under the heading “— Risk Oversight.”

Each of the committees listed above is composed solely of independent directors under the standards referred to above under “— Governance Guidelines.”

 

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The table below lists the Board’s standing committees and their membership as of the date of this proxy statement:

 

Outside Director(1), (2)

  

Audit
Committee
Member

  

Human Resources
and Compensation
Committee
Member

  

Nominating and
Corporate
Governance
Committee
Member

  

Risk Evaluation
Committee
Member

Martha H. Bejar

           

Virginia Boulet

         Chair   

Peter C. Brown

           

W. Bruce Hanks

   Chair         

Mary L. Landrieu

           

William A. Owens

           

Harvey P. Perry

           

Michael J. Roberts

           

Laurie A. Siegel

      Chair      

 

(1) Glen F. Post, III does not serve on any board committees, other than the Special Pricing Committee described below.
(2) Gregory J. McCray, who formerly chaired the Risk Evaluation Committee, resigned from the Board effective February 23, 2017, and William A. Owens will retire from the Board on May 24, 2017. As soon as practicable, the Board plans to name a new chairman of the Risk Evaluation Committee and make any other changes to the composition of the committees as it sees fit.

 

 

If you would like additional information on the responsibilities of the committees listed above, please refer to the committees’ respective charters, which can be obtained in the manner described below under “— Access to Information.”

The Board has also established a Special Pricing Committee that has authority to approve the terms and offering prices of any CenturyLink securities sold pursuant to our outstanding shelf registration statement. This ad hoc committee is comprised of Peter C. Brown, W. Bruce Hanks and Glen F. Post, III.

During 2016, all of our directors attended at least 75% of the aggregate number of all board meetings and all meetings of board committees on which they served. In addition, each of our directors then in office attended the 2016 annual shareholders’ meeting.

Director Nomination Process

General. Nominations for the election of directors at our annual shareholders’ meetings may be made by the Board (upon the receipt of recommendations of the Nominating Committee) or by any shareholder of record who complies with our bylaws, which are summarized below. For the meeting this year, the Board has nominated the nine nominees listed above under “Election of Directors” to stand for election as directors, and no shareholders submitted any nominations. For further information on procedures governing the submission of shareholder proposals, see “— Bylaw Requirements” and “Other Matters — Deadlines for Submitting Shareholder Nominations and Proposals for the 2018 Annual Meeting.”

Bylaw Requirements. If timely notice is provided, our bylaws permit shareholders to nominate a director or bring other matters before a shareholders’ meeting. The written notice required to be sent by any shareholder nominating a director must include various information, including, as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is being made, (i) the name and address of such

 

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shareholder, any such beneficial owner, and any other parties affiliated, associated or acting in concert therewith, (ii) their beneficial ownership interests in our Voting Shares, including disclosure of arrangements that might cause such person’s voting, investment or economic interests in our Voting Shares to differ from those of our other shareholders, (iii) certain additional information concerning such parties required under the federal proxy rules, (iv) a description of all agreements with respect to the nomination among the nominating shareholder, any beneficial owner, any person acting in concert with them, each proposed nominee and certain other persons, and (v) a representation whether any such person intends to solicit proxies or votes in support of their proposed nominees. With respect to each proposed nominee, the written notice must also, among other things, (i) set forth biographical and other data required under the federal proxy rules and a description of various compensation or other arrangements or relationships between each proposed nominee and the nominating shareholder and its affiliated parties and (ii) furnish both a completed and duly executed questionnaire and a duly executed agreement designed to disclose various aspects of the proposed nominee’s background, qualifications and certain specified arrangements with other persons, as well as to receive the proposed nominee’s commitment to abide by certain specified agreements and undertakings. We may require a proposed nominee to furnish other reasonable information or certifications. Shareholders interested in bringing before a shareholders’ meeting any matter other than a director nomination should consult our bylaws for additional procedures governing such requests. We may disregard any nomination or submission of any other matter that fails to comply with these bylaw procedures.

In addition, our bylaws provide that under certain circumstances a shareholder or group of shareholders may include director candidates that they have nominated in our annual meeting proxy materials. These proxy access provisions of our bylaws provide, among other things, that a shareholder or group of up to ten shareholders seeking to include director candidates in our annual meeting proxy materials must own 3% or more of our outstanding Common Shares continuously for at least the previous three years. The number of shareholder-nominated candidates appearing in any of our annual meeting proxy materials cannot exceed 20% of the number of directors then serving on the Board. If 20% is not a whole number, the maximum number of shareholder-nominated candidates would be the closest whole number below 20%. Based on the anticipated size of our Board in late 2017, two is the maximum number of proxy access candidates that we would be required to include in our 2018 proxy materials for the 2018 annual meeting. The nominating shareholder or group of shareholders also must deliver the information required by our bylaws, and each nominee must meet the qualifications required by our bylaws.

Shareholder requests to nominate directors or to bring any other matter before our 2018 annual shareholders’ meeting, whether or not they wish to include their candidate or proposal in our proxy materials, must be received by our Secretary by the deadlines specified in “Other Matters — Deadlines for Submitting Shareholder Nominations and Proposals for the 2018 Annual Meeting.”

The summaries above of the advance notification and proxy access provisions of our bylaws are qualified in their entirety by reference to the full text of Section 5 of Article IV of our bylaws. You may obtain a full copy of our bylaws by reviewing our reports filed with the SEC, by accessing our website at www.centurylink.com, or by contacting our Secretary in the manner specified below under “Other Matters.”

Role of Nominating Committee. The Nominating Committee will consider candidates properly and timely nominated by shareholders in accordance with our bylaws. Upon receipt of any such nominations, the Nominating Committee will review the submission for compliance with our bylaws, including determining if the proposed nominee meets the bylaw qualifications for service as a director. These provisions disqualify any person who (i) fails to respond satisfactorily to any inquiry for information to enable us to make certifications required by the Federal Communications Commission under the Anti-Drug Abuse Act of 1988, (ii) has been arrested or convicted of certain specified drug offenses or engaged in actions that could lead to such an arrest or conviction or (iii) fails to furnish any materials or agreements required to be provided by director nominees under our bylaws, or makes false statements or materially misleading statements or omissions in connection therewith.

 

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From time to time, we have added to our Board directors who previously served as directors of companies we acquired. For instance, in connection with acquiring Embarq in 2009 and Qwest in 2011, we added several new directors to our Board who previously served as directors of those companies, three of whom are nominees to be re-elected at the meeting. See “— Proposed Expansion of Board” for information about four additional individuals who we expect to add to the Board upon the completion of our pending acquisition of Level 3.

Under our corporate governance guidelines, the Nominating Committee assesses director candidates based on their independence, diversity, character, skills and experience in the context of the needs of the Board. Although the guidelines permit the Nominating Committee to adopt additional selection guidelines or criteria, it has chosen not to do so. Instead, the Nominating Committee annually assesses skills and characteristics then required by the Board based on its membership and needs at the time of the assessment. In evaluating the needs of the Board, the Nominating Committee considers the qualifications of incumbent directors and consults with other members of the Board and senior management. In addition, the Nominating Committee seeks candidates committed to representing the interests of all shareholders and not any particular constituency. The Nominating Committee believes this flexible approach enables it to respond to changes caused by director vacancies and industry developments.

In connection with assessing the needs of the Board, the Nominating Committee has sought individuals who possess skill and experience in a diverse range of fields. The Nominating Committee also has sought a mix of individuals from inside and outside of the communications industry. The table above listing biographical data about our directors includes a listing of the key qualifications, experiences and skills that the Nominating Committee and Board reviewed in connection with nominating or re-nominating them for service on the Board. In light of our current business and operations, we believe the following skills and experience are particularly important:

 

    senior leadership experience

 

    industry or technical expertise

 

    financial, accounting or capital markets expertise

 

    public company board experience

 

    business combination experience

 

    brand marketing expertise

 

    government, labor or human resources expertise

 

    international business experience

 

    legal expertise.

In connection with determining the current composition of the Board, the Nominating Committee has assessed the diverse range of skills and experience of our directors outlined above, coupled with the judgment that each has exhibited and the knowledge of our operations that each has acquired in connection with their service on the Board. Although it does not have a formal diversity policy, the Nominating Committee believes that our directors possess a diverse range of backgrounds, perspectives, skills and experiences.

Although we do not have a history of receiving director nominations from shareholders, the Nominating Committee envisions that it would evaluate any such candidate on the same terms as other proposed nominees, but would place a substantial premium on retaining incumbent directors who are familiar with our management, operations, business, industry, strategies and competitive position, and who have previously demonstrated a proven ability to provide valuable contributions to the Board and CenturyLink.

 

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Proposed Expansion of Board

As previously disclosed, we have agreed to appoint to our Board, on or prior to the effective time of our pending acquisition of Level 3, (i) one member of Level 3’s board of directors designated by Level 3’s principal stockholder, STT Crossing Ltd. (“STT Crossing”), in accordance with the terms of our shareholder rights agreement with STT Crossing, and (ii) three members of Level 3’s board selected by us from any of Level 3’s directors who are unaffiliated with or not designated by STT Crossing. Upon completion of our pending acquisition of Level 3, we expect the following current Level 3 directors to join the Board:

 

    Jeff K. Storey, Level 3’s president and chief executive officer

 

    T. Michael Glenn, retired executive officer of FedEx Corporation

 

    Kevin P. Chilton, former commander of the U.S. Strategic Command

 

    Steven T. Clontz, senior executive vice president of Singapore Technologies Telemedia Pte. Ltd. (and designee of STT Crossing).

For additional information on our pending acquisition of Level 3 and these four designees, please see the definitive joint proxy statement/prospectus filed with the SEC on February  13, 2017, including the reports of Level 3 incorporated by reference therein.

Compensation Setting Process

The Compensation Committee hires consulting firms to assist it in setting executive and director compensation. In June 2015, the Committee retained Meridian Compensation Partners, LLC, following a nationwide search to replace Hay Group, which advised the Committee for the previous six years. For additional information on the processes used by the Committee to set executive compensation, see “Compensation Discussion and Analysis — Our Policies, Processes and Guidelines Related to Executive Compensation.”

Risk Oversight

Our Board oversees our Company’s risk management function, which is a coordinated effort among our business units, our senior leadership, our risk management personnel and our internal auditors. Our directors typically discharge their risk oversight responsibilities by having management provide periodic briefing and educational presentations. In some cases, including major new acquisitions, capital expenditures or strategic investments, the full Board participates in risk oversight. In most cases involving recurring systemic risk, a Board committee is primarily responsible for risk oversight. For several decades, our Board has maintained a Risk Evaluation Committee, which is responsible for assisting management to identify, monitor, and manage recurring risks to our business, properties and employees. The Risk Evaluation Committee regularly monitors our litigation, cybersecurity initiatives, enterprise risk assessments, network operations, systems integration initiatives, insurance coverages and the status of our labor relations, and is also responsible for overseeing our ethics and compliance program. The Board’s other committees are responsible for overseeing specific risks, particularly the Audit Committee with respect to financial, tax and accounting risks and the Compensation Committee with respect to compensation risks. For a discussion of the Compensation Committee’s risk analysis, see “Compensation Discussion and Analysis — Our Policies, Processes and Guidelines Related to Executive Compensation — Our Compensation Decision-Making Process — Risk Assessment.” The Board regularly receives reports from each of these committees, and periodically receives enterprise risk assessment reports from management.

Top Leadership Positions and Structure

For several years, the Board has annually elected a non-executive Chairman who also acts as our lead outside director. Admiral William A. Owens has served in these capacities since 2009, and will retain these positions through the date of the meeting, when he will retire from the Board. As soon as practicable, the Board plans to name a replacement non-executive Chairman and lead outside director.

 

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The Board believes that the separation of the Chairman and CEO positions has functioned effectively over the past several years. Separating these positions has allowed our CEO to have primary responsibility for the operational leadership and strategic direction of our business, while allowing our Chairman to lead the Board in its fundamental role of providing guidance to and independent oversight of management. While our bylaws and corporate governance guidelines do not require our Chairman and CEO positions to be separate, the Board believes that delegating responsibilities between our Chairman and our CEO has been the appropriate leadership structure for our Company over the past seven years, which have been marked by rapid growth in our operations and a substantial change in our product offerings. Our Board periodically reviews its leadership structure and may make such changes in the future as it deems appropriate. The Board believes that its programs for overseeing risk would be effective under a variety of top leadership structures, and, accordingly, this factor has not materially affected its current choice of leadership structure.

As explained further on our website, you may contact our Chairman by writing a letter addressed to the Chairman and Lead Outside Director, c/o Post Office Box 5061, Monroe, Louisiana 71211, or by sending an email to boardinquiries@centurylink.com.

Access to Information

The following documents are posted on our website at www.centurylink.com:

 

    Amended and restated articles of incorporation

 

    Bylaws

 

    Corporate governance guidelines

 

    Charters of our Board committees

 

    Corporate ethics and compliance program documents, including the CenturyLink Code of Conduct.

 

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RATIFICATION OF THE SELECTION OF THE INDEPENDENT AUDITOR

(Item 2 on Proxy or Voting Instruction Card)

The Audit Committee of the Board has appointed KPMG LLP as our independent auditor for the fiscal year ending December 31, 2017, and we are submitting that appointment to our shareholders for ratification on an advisory basis at the meeting. Although shareholder ratification of KPMG’s appointment is not legally required, we are submitting this matter to the shareholders, as in the past, as a matter of good corporate practice. In determining whether to reappoint KPMG as our independent auditor, the Audit Committee considered a number of factors, including, among others, the firm’s qualifications, industry expertise, prior performance, control procedures, proposed staffing and the reasonableness of its fees on an absolute basis and as compared with fees paid by comparable companies.

If the shareholders fail to vote on an advisory basis in favor of the appointment, the Audit Committee will reconsider whether to retain KPMG, and may appoint that firm or another without re-submitting the matter to the shareholders. Even if the shareholders ratify the appointment, the Audit Committee may, in its discretion, select a different independent auditor at any time during the year if it determines that such a change would be in the Company’s best interests.

In connection with the audit of the 2017 financial statements, we entered into an engagement letter with KPMG which sets forth the terms by which KPMG will provide audit services to us. Any future disputes between KPMG and us under that letter will be subject to certain specified alternative dispute resolution procedures, none of which are intended to restrict the remedies that our shareholders might independently pursue against KPMG.

The following table lists the aggregate fees and costs billed to us by KPMG and its affiliates for the 2015 and 2016 services identified below:

 

     Amount Billed  
     2015      2016  

Audit Fees(1)

   $ 9,146,142      $ 11,316,096  

Audit-Related Fees(2)

     274,417        118,178  

Tax Fees(3)

     967,076        2,079,160  

Other

             
  

 

 

    

 

 

 

Total Fees

   $ 10,387,635      $ 13,513,434  
  

 

 

    

 

 

 

 

(1) Includes the cost of services rendered in connection with (i) auditing our annual consolidated financial statements, (ii) auditing our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, (iii) reviewing our quarterly financial statements, (iv) auditing the financial statements of several of our subsidiaries, (v) reviewing our registration statements and issuing related comfort letters, (vi) statutory audits for certain of our foreign subsidiaries, and (vii) consultations regarding accounting standards. Additionally, the amount billed in 2016 includes $1,891,000 for services rendered in connection with auditing separate carve-out financial statements related to divestiture-related transactions.
(2) Includes the cost of preparing agreed upon procedures reports and providing general accounting consulting services.
(3) Includes costs associated with (i) general tax planning, consultation and compliance (which were approximately $960,000 in 2015 and $700,000 in 2016), (ii) tax planning and consultation related to transactions and divestitures (which were $0 in 2015 and $1,370,085 in 2016), and (iii) assistance in preparing income tax returns and related matters (which were approximately $7,000 in 2015 and $0 in 2016).

 

 

 

 

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The Audit Committee maintains written procedures that require it to annually review and pre-approve the scope of all services to be performed by our independent auditor. This review includes an evaluation of whether the provision of non-audit services by our independent auditor is compatible with maintaining the auditor’s independence in providing audit and audit-related services. The Committee’s procedures prohibit the independent auditor from providing any non-audit services unless the service is permitted under applicable law and is pre-approved by the Audit Committee or its Chairman. The Chairman is authorized to pre-approve projects expected to cost no more than $100,000, provided the total cost of all projects pre-approved by the Chairman during any fiscal quarter does not exceed $150,000. The Audit Committee has pre-approved the Company’s independent auditor to provide up to $75,000 per quarter of miscellaneous permitted tax services that do not constitute discrete and separate projects. The Chairman and the Chief Financial Officer are required periodically to advise the full Committee of the scope and cost of services not pre-approved by the full Committee. Although applicable regulations waive these pre-approval requirements in certain limited circumstances, the Audit Committee did not use these waiver provisions in either 2015 or 2016.

KPMG has advised us that one or more of its partners will be present at the meeting. We understand that these representatives will be available to respond to appropriate questions and will have an opportunity to make a statement if they desire to do so.

Ratification of KPMG’s appointment as our independent auditor for 2017 will require the affirmative vote of the holders of at least a majority of the votes cast on the proposal at the meeting.

The Board unanimously recommends a vote FOR this proposal.

AUDIT COMMITTEE REPORT

Management is responsible for our internal controls and financial reporting process. Our independent auditor is responsible for performing an independent audit of our consolidated financial statements and the effectiveness of our internal control over financial reporting, and to issue reports thereon. As more fully described in its charter, the Audit Committee is responsible for assisting the Board in its general oversight of these processes and for appointing and overseeing the independent auditor, including reviewing their qualifications, independence and performance.

In this context, the Committee has met and held discussions with management and our internal auditors and independent auditor for 2016, KPMG LLP. Management represented to the Committee that our consolidated financial statements were prepared in accordance with generally accepted U.S. accounting principles. The Committee has reviewed and discussed with management and KPMG the consolidated financial statements, and management’s report and KPMG’s report and attestation on internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. The Committee also discussed with KPMG matters required to be discussed by Auditing Standard No. 1301, Communications with Audit Committees.

Among other matters, over the course of the past year, the Committee also:

 

    reviewed the scope of and overall plans for the annual audit and the internal audit program, including a review of critical accounting policies, critical accounting estimates, and significant unusual transactions;

 

    reviewed a report by the independent auditor describing the independent auditor’s internal quality control procedures;

 

    reviewed the performance of the lead engagement partner of our independent auditor;

 

    reviewed and discussed each quarterly and annual earnings press release before issuance;

 

    received periodic reports from the director of internal audit, and met with other members of the internal audit staff;

 

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    received periodic reports pursuant to our policy for the submission and confidential treatment of communications from employees and others about accounting, internal controls and auditing matters;

 

    reviewed with management the scope and effectiveness of our disclosure controls and procedures;

 

    met quarterly in separate executive sessions, including private sessions with the Company’s independent auditors, internal auditors and top executives;

 

    received a report with regard to any hiring of former employees of KPMG; and

 

    as discussed in greater detail under “Corporate Governance — Risk Oversight,” coordinated with the Risk Evaluation Committee to oversee the Company’s risk management function, especially with respect to the financial, tax and accounting risks.

KPMG also provided to the Committee the written disclosures required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditor’s communications with audit committees concerning independence. The Committee discussed with KPMG that firm’s independence, and considered the effects that the provision of non-audit services may have on KPMG’s independence.

Based on and in reliance upon the reviews and discussions referred to above, and subject to the limitations on the role and responsibilities of the Committee referred to in its charter, the Committee recommended that the Board of Directors include the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016.

In addition to the Company’s corporate compliance program and hotline, the Audit Committee has established procedures for the receipt and evaluation, on a confidential basis, of any complaints or concerns regarding our accounting, auditing, financial reporting or related matters. To report such matters, please send written correspondence to Audit Committee Chair, c/o Post Office Box 4364, Monroe, Louisiana 71211.

If you would like additional information on the responsibilities of the Audit Committee, please refer to its charter, which you can obtain in the manner described above under “Corporate Governance — Access to Information.”

Submitted by the Audit Committee of the Board of Directors.

 

W. Bruce Hanks (Chair)   Martha H. Bejar   Peter C. Brown

ADVISORY VOTES ON EXECUTIVE COMPENSATION

AND THE FREQUENCY OF SUCH VOTES

(Items 3(a) and 3(b) on Proxy or Voting Instruction Card)

Advisory Vote to Approve Our Executive Compensation (Item 3(a))

Each year since 2011 we have provided our shareholders the opportunity to vote on a non-binding, advisory resolution to approve the compensation of our named executive officers as disclosed in our annual proxy statements pursuant to the rules of the SEC.

Under our executive compensation programs, our named executive officers are rewarded for achieving specific annual and long-term goals, as well as increased shareholder value. We believe this structure aligns executive pay with our financial performance and the creation of sustainable shareholder value. The Compensation Committee of our Board continually reviews our executive compensation programs to ensure they achieve the goals of aligning our compensation with both current market practices and your interests as shareholders. For additional information on our executive compensation, we urge you to read the “Compensation Discussion and Analysis” and “Executive Compensation” sections of this proxy statement.

 

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At the meeting, we will ask you to vote, in an advisory manner, to approve the overall compensation of our named executive officers, as described in this proxy statement, including the Compensation Discussion and Analysis, the Summary Compensation Table and the other related tables and disclosures. This proposal, commonly known as a “say-on-pay” proposal, gives you the opportunity to express your views. This advisory vote is not intended to address any specific element of compensation, but rather relates to the overall compensation of our named executive officers and our executive compensation policies and practices as described in this proxy statement. Accordingly, your vote will not directly affect or otherwise limit any existing compensation or award arrangement of any of our named executive officers.

While this “say-on-pay” vote is advisory and will not be binding on our Company or the Board, it will provide valuable information for future use by our Compensation Committee regarding shareholder sentiment about our executive compensation. We understand that executive compensation is an important matter for our shareholders. Accordingly, we invite shareholders who wish to communicate with our Board on executive compensation or any other matters to contact us as provided under “Corporate Governance — Top Leadership Positions and Structure.”

Approval of this proposal will require the affirmative vote of the holders of at least a majority of the votes cast on the proposal at the meeting.

The Board recommends that you vote FOR the overall compensation of our named executive officers as described in this proxy statement.

Advisory Vote Regarding the Frequency of Our Executive Compensation Votes (Item 3(b))

This year we are once again providing our shareholders with the opportunity to cast an advisory vote regarding the frequency of our advisory votes on executive compensation, commonly known as “say-on-pay” votes. Shareholders may vote on whether our say-on-pay votes should occur every one, two, or three years.

We are required to provide our shareholders with an advisory vote on the frequency of our say-on-pay votes at least every six years. In 2011, the last time we held such a vote, a majority of our shareholders voted in favor of an annual say-on-pay vote, which was the frequency recommended by the Board at that time. Following that vote, the Board adopted annual say-on-pay votes as its standard.

We believe that say-on-pay votes should be conducted annually so that you may express your views on our executive compensation programs each year. An annual advisory vote is consistent with our policy of seeking input from you on corporate governance and executive compensation matters. We understand you may have different views as to what is the best compensation approach for our executives, and we believe annual advisory votes will facilitate a continued dialogue. For additional information about our say-on-pay votes, see “— Advisory Vote to Approve Our Executive Compensation” immediately above.

The proxy card provides four choices for this frequency vote: shareholders may indicate a preference for say-on-pay votes to be held every one, two, or three years, or may abstain from voting. The frequency that receives the highest number of votes cast will be the frequency approved by our shareholders. Please be advised that this vote is advisory only, and the Board may ultimately decide that it is in the best interests of our shareholders to hold an advisory vote on executive compensation more or less frequently than the option selected by our shareholders. However, the Board intends to take into consideration the outcome of the vote when making future decisions about how frequently to schedule our say-on-pay votes.

The Board unanimously recommends that you vote to hold an advisory vote on executive compensation every YEAR.

 

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SHAREHOLDER PROPOSALS

(Items 4(a), 4(b), and 4(c) on Proxy or Voting Instruction Card)

We periodically receive suggestions from our shareholders, some as formal shareholder proposals. We give careful consideration to all suggestions, and assess whether they promote the best long-term interests of CenturyLink and its shareholders.

We expect Items 4(a), 4(b), and 4(c) to be presented by shareholders at the meeting. Following SEC rules, we are reprinting the proposals and supporting statements as they were submitted to us, other than minor formatting changes. We take no responsibility for them. On request to the Secretary at the address listed under “Other Matters — Annual Financial Report,” we will provide information about the sponsor’s shareholdings, as well as the names, addresses, and shareholdings of any co-sponsors. Adoption of each of these three proposals requires the affirmative vote of the holders of at least a majority of the votes cast on the proposal at the meeting.

The Board recommends that you vote AGAINST Items 4(a), 4(b), and 4(c) for the reasons we give after each one below.

Equity Retention Proposal (Item 4(a))

The following proposal was submitted by the Board of Trustees of the International Brotherhood of Electrical Workers Pension Fund, located at 900 Seventh Street, NW, Washington D.C., 20001.

“RESOLVED: Shareholders of CenturyLink (the “Company”) urge the Compensation Committee of the Board of Directors (the “Committee”) to adopt a policy requiring that senior executives retain a significant percentage of shares acquired through equity compensation programs until reaching normal retirement age or terminating employment with the Company. For the purpose of this policy, normal retirement age shall be defined by the Company’s qualified retirement plan that has the largest number of plan participants. The shareholders recommend that the Committee adopt a share retention percentage requirement of at least 50 percent of net after-tax shares. The policy should prohibit hedging transactions for shares subject to this policy which are not sales but reduce the risk of loss to the executive. This policy shall supplement any other share ownership requirements that have been established for senior executives, and should be implemented so as not to violate the Company’s existing contractual obligations or the terms of any compensation or benefit plan currently in effect.

Supporting Statement: Equity-based compensation is an important component of senior executive compensation at our Company. While we encourage the use of equity-based compensation for senior executives, we are concerned that our Company’s senior executives are generally free to sell shares received from our Company’s equity compensation plans. In our opinion, the Company’s current share ownership guidelines for its senior executives do not go far enough to ensure that the Company’s equity compensation plans continue to build stock ownership by senior executives over the long-term.

For example, our Company’s share ownership guidelines require the CEO to hold an amount of shares equivalent to six times his base salary, or approximately 306,623 shares based on the current trading price. In comparison, the CEO currently owns more than 1.6 million shares. In other words, the CEO’s total shares held are more than five times greater than the share ownership requirement.

We believe that requiring senior executives to only hold shares equal to a set target loses effectiveness over time. After satisfying these target holding requirements, senior executives are free to sell all the additional shares they receive in equity compensation.

Our proposal seeks to better link executive compensation with long-term performance by requiring a meaningful share retention ratio for shares received by senior executives from the Company’s equity compensation plans. A 2009 report by the Conference Board Task Force on Executive Compensation observed that such hold-through-retirement requirements give executives ‘an ever growing incentive to

 

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focus on long-term stock price performance as the equity subject to the policy increases’ (available at http://www.conference-board.org/pdf_free/ExecCompensation2009.pdf).

We urge shareholders to vote FOR this proposal.”

The Board recommends that you vote AGAINST this proposal for the following reasons:

For the fifth consecutive year (and for the sixth time in seven years), you are being asked to vote on this same topic. The proponent’s proposal this year is substantially similar to its proposal in prior years. None of those proposals has ever received the support of more than 32% of the shares voted at our annual meetings. For the reasons discussed below, we continue to believe that our existing compensation policies adequately address the concerns addressed in this proposal.

The Board strongly agrees with the proponent that equity ownership by executive officers serves to align the long-term interests of our senior executives and shareholders. We believe, however, that sensible stock ownership and compensation programs should strive to balance the importance of aligning the long-term interests of executives and shareholders with the need to permit executives to prudently manage their personal financial affairs. As described further below, the Board believes that our stock ownership guidelines, in conjunction with our performance-based compensation plans and policies, successfully strike this balance effectively, making the adoption of the current proposal unnecessary. By contrast, the rigid mandate inherent in this proposal could be harmful in several respects, and could potentially put us at a competitive disadvantage for attracting and retaining executive officers.

As the proponent acknowledges, our executives are already subject to share ownership requirements. Our stock ownership guidelines (which are discussed further in “Corporate Governance — Governance Guidelines” and “Compensation Discussion and Analysis — Our Policies, Processes and Guidelines Related to Executive Compensation — Stock Ownership Guidelines”) mandate significant stock ownership for all of our executives, and require executives not in compliance with these ownership thresholds to hold specified percentages of newly-issued stock grants. Our Compensation Committee’s independent consultant advised us in 2016 that our ownership and holding requirements were more rigorous than the average ownership and holding thresholds adopted by a group of 18 surveyed peer companies. Moreover, all of our top executives own CenturyLink stock at levels well in excess of these requirements, including our CEO, who currently holds stock valued at nearly 30 times his current salary. We believe that our stock ownership guidelines accomplish the proponent’s intended purpose of aligning executive and shareholder interests through at-risk equity ownership.

Our executive compensation plans and policies are carefully designed to further align the long-term interests of our senior executives and shareholders. As discussed in greater detail elsewhere herein, a substantial majority of our annual executive compensation typically consists of awards of restricted stock, the value of which is directly tied to our long-term performance and the appreciation of our stock price over the awards’ vesting periods. In addition, we have implemented both anti-hedging and anti-pledging policies to ensure that our executives bear the full economic risk and reward of their stock ownership, and that their economic interests remain fully aligned with the economic interests of our other shareholders. We also have implemented recoupment policies designed to further assure a linkage between our executive compensation and our long-term performance.

Adoption of the proponent’s proposal could be harmful in several respects. The adoption of this policy would limit our executive officers’ abilities to engage in customary and prudent estate planning, portfolio diversification or charitable giving. Worse yet, these restrictions could create an incentive for senior executives to resign in order to realize the value of their prior service. We believe that the type of retention policy described in this proposal is, not surprisingly, uncommon among our peers and that its adoption would put us at a competitive disadvantage relative to our peers who do not have such restrictions.

 

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Our current guidelines, plans and policies have been developed under the guidance of our independent directors, who we believe are best suited to formulate programs that promote long-term, sustainable value creation without excessive risk-taking. We believe that our current mix of guidelines, plans and policies provide for an appropriate balance between aligning the long-term interests of our management and shareholders, while also permitting our executives to prudently manage their own affairs.

For all these reasons, our Board believes this proposal is unnecessary and undesirable, and contrary to your best interests.

Lobbying Proposal (Item (4(b))

The following proposal was submitted by the AFL-CIO Reserve Fund, located at 816 16th Street, NW, Washington D.C., 20006.

“Whereas, we believe in full disclosure of our company’s direct and indirect lobbying activities and expenditures to assess whether our company’s lobbying is consistent with CenturyLink’s expressed goals and in the best interests of shareholders.

Resolved, the shareholders of CenturyLink request the preparation of a report, updated annually, disclosing:

 

  1. Company policy and procedures governing lobbying, both direct and indirect, and grassroots lobbying communications.
  2. Payments by CenturyLink used for (a) direct or indirect lobbying or (b) grassroots lobbying communications, in each case including the amount of the payment and the recipient.
  3. CenturyLink’s membership in and payments to any tax-exempt organization that writes and endorses model legislation.
  4. Description of management’s and the Board’s decision making process and oversight for making payments described in sections 2 and 3 above.

For purposes of this proposal, a “grassroots lobbying communication” is a communication directed to the general public that (a) refers to specific legislation or regulation, (b) reflects a view on the legislation or regulation and (c) encourages the recipient of the communication to take action with respect to the legislation or regulation. “Indirect lobbying” is lobbying engaged in by a trade association or other organization or which CenturyLink is a member. Both “direct and indirect lobbying” and “grassroots lobbying communications” include efforts at the local, state and federal levels. The report shall be presented to the Audit Committee of the Board or other relevant oversight committees of the Board and posted on the Company’s website.

Supporting Statement

As shareholders, we encourage transparency and accountability in CenturyLink’s use of corporate funds to influence legislation and regulation. Transparent reporting of all lobbying activity will reveal whether company assets are being used for objectives contrary to CenturyLink’s long-term interests.

According to the Center for Responsive Politics, CenturyLink spent more than $4 million dollars annually on federal lobbying expenditures in 2014 and 2015 (http://www.opensecrets.org/lobby/clientsum.php?id=D000024683). These figures do not include lobbying expenditures to influence legislation in states where CenturyLink operates and disclosure requirements are uneven or absent.

For these reasons, we urge you to vote FOR this proposal.”

The Board recommends that you vote AGAINST this proposal for the following reasons:

We believe our continued success and long-term profitability are substantially dependent upon our ability to actively engage in political, legislative and regulatory processes to advocate in favor of laws and policies that are in the best interests of our company, shareholders and customers.

 

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For the reasons discussed further below, we believe that we currently disclose a substantial amount of information on our lobbying activities and that the preparation and publication of the report contemplated by this proposal is neither necessary nor an efficient use of our resources.

 

    Information regarding our participation in the political process is set forth in our semi-annual Political Contributions Reports (the “Semi-Annual Reports”), which are available for review on our website. Our Semi-Annual Reports outline the core principles governing our political participation.

 

    In addition to furnishing our Semi-Annual Reports, we file substantial amounts of information about our lobbying activity under federal, state and local laws. At the federal level, we file quarterly reports under the Lobbying Disclosure Act disclosing our lobbying expenditures and detailing the entities we lobbied and the subject matter of our lobbying efforts. Any lobbying firms hired by us file similar reports, and trade associations to which we contribute are separately subject to strict public disclosure requirements regarding their lobbying activities. We and our in-house and external lobbyists also file reports disclosing political contributions and honorary payments. Furthermore, we file all lobbying reports required by state laws, which in some cases have broader disclosure requirements than federal law. Shareholders can access this information through websites maintained by the U.S. House of Representatives, the U.S. Senate, the Federal Election Commission, and various state governmental bodies.

 

    Our policies and procedures governing lobbying and political activities are subject to rigorous internal controls designed to ensure, among other things, that our applicable disclosures are full and complete. As noted in our Semi-Annual Reports, our Senior Vice President, Public Policy and Government Relations, together with senior management, the Board, and various public policy and legal personnel, oversees and manages our corporate political activities in an effort to attain our public policy objectives and comply with all applicable laws.

 

    We believe we significantly benefit by participating in a number of industry and trade associations, which provide us with access to valuable industry data and expertise. These groups are independent organizations that represent the diverse interests of their members. These organizations frequently make expenditures or take action contrary to our preferences, often without our knowledge. As such, our membership in these organizations should not be viewed as an endorsement of any particular organization or policy. Disclosure of the information contemplated by the proposal could be used to unfairly suggest that we support every position taken by organizations to which we contribute. For these reasons, we do not believe that additional disclosures regarding our contributions to such organizations would be helpful to shareholders.

 

    We expend significant resources in connection with our political and lobbying activities. We believe the information that we currently furnish in our Semi-Annual Reports and file with state and federal agencies strikes an appropriate balance between transparency and avoiding excessive burden and cost. We believe that requiring us to gather and disclose additional information would result in an unproductive consumption of valuable time and corporate resources by tracking insignificant activities without materially enhancing existing disclosures.

 

    We also oppose the proposal because many of its aspects are vague or unworkable, and may create confusion. We believe the proposal’s definition of lobbying and lobbying expenditures are ambiguous and could, depending on the jurisdiction, include items such as office rent, business travel expenses, and even employee salaries. As a result, the disclosures required by the proposal could be inconsistent and confusing, because a particular expenditure might be lobbying-related in one jurisdiction, but not in another.

 

    The proposal seeks to impose unnecessary line-item disclosures on lobbying expenditures that are not required by law and are not standard among other companies, including our competitors. Complying with the requirements of this proposal could put us at a relative disadvantage to our competitors. Any new requirements should be addressed by lawmakers and uniformly imposed on all entities.

 

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The Board is confident that the Company’s current lobbying activities are effective and fully aligned with the shareholders’ long-term interests. For the reasons set forth above, the Board believes that this proposal is overly burdensome, would result in an unproductive use of our resources, and is not in the best interests of our shareholders.

Lobbying Proposal (Item 4(c))

The following proposal was submitted by Friends Fiduciary Corporation, located at 1650 Arch Street, Suite 1904, Philadelphia, Pennsylvania, 19103.

“Whereas, we believe in full disclosure of our company’s direct and indirect lobbying activities and expenditures to assess whether our company’s lobbying is consistent with CenturyLink’s expressed goals and in the best interests of shareholders.

Resolved, the stockholders of CenturyLink request the preparation of a report, updated annually, disclosing:

 

  1) Company policy and procedures governing lobbying, both direct and indirect, and grassroots lobbying communications.
  2) Payments by CenturyLink used for (a) direct or indirect lobbying or (b) grassroots lobbying communications, in each case including the amount of the payment and the recipient.
  3) Description of management’s and the Board’s decision making process and oversight for making payments described in section 2 above.

For purposes of this proposal, a “grassroots lobbying communication” is a communication directed to the general public that (a) refers to specific legislation or regulation, (b) reflects a view on the legislation or regulation and (c) encourages the recipient of the communication to take action with respect to the legislation or regulation. “Indirect lobbying” is lobbying engaged in by a trade association or other organization of which CenturyLink is a member.

Both “direct and indirect lobbying” and “grassroots lobbying communication” is a communication directed to the general public that (a) refers to specific legislation or regulation, (b) reflects a view on the legislation or regulation and (c) encourages the recipient of the communication to take action with respect to the legislation or regulation. “Indirect lobbying” is lobbying engaged in by a trade association or other organization of which CenturyLink is a member.

Both “direct and indirect lobbying” and “grassroots lobbying communications” include efforts at the local, state, and federal levels.

This report shall be presented to the Audit Committee or other relevant oversight committees and posted on CenturyLink’s website.

Supporting Statement

As shareholders, we encourage transparency and accountability in CenturyLink’s use of corporate funds to influence legislation and regulation, both directly and indirectly. According to Senate reports, CenturyLink spent more than $15,000,000 between 2012 and 2015 on federal lobbying activities (OpenSecrets.org). This figure does not include lobbying expenditures to influence legislation in 38 states where CenturyLink lobbies, for which disclosure is uneven or absent.

Absent a system of accountability, company assets could be used for objectives contrary to CenturyLink’s long-term interests, such as lobbying on issues impacting the company’s inmate calling services operations, which could expose the company to greater reputational and regulatory risk.”

The Board recommends that you vote AGAINST this proposal for the following reasons:

 

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This proposal is substantially identical to the proposal submitted by the AFL-CIO Reserve Fund reproduced above under the heading for Item 4(b). As we noted in response to that proposal, we believe our continued success and long-term profitability are substantially dependent upon our ability to actively engage in political, legislative and regulatory processes to advocate in favor of laws and policies that are in the best interests of our company, shareholders and customers.

For the reasons discussed further below, we believe that we currently disclose a substantial amount of information on our lobbying activities and that the preparation and publication of the report contemplated by this proposal is neither necessary nor an efficient use of our resources.

 

    Information regarding our participation in the political process is set forth in our semi-annual Political Contributions Reports (the “Semi-Annual Reports”), which are available for review on our website. Our Semi-Annual Reports outline the core principles governing our political participation.

 

    In addition to furnishing our Semi-Annual Reports, we file substantial amounts of information about our lobbying activity under federal, state and local laws. At the federal level, we file quarterly reports under the Lobbying Disclosure Act disclosing our lobbying expenditures and detailing the entities we lobbied and the subject matter of our lobbying efforts. Any lobbying firms hired by us file similar reports, and trade associations to which we contribute are separately subject to strict public disclosure requirements regarding their lobbying activities. We and our in-house and external lobbyists also file reports disclosing political contributions and honorary payments. Furthermore, we file all lobbying reports required by state laws, which in some cases have broader disclosure requirements than federal law. Shareholders can access this information through websites maintained by the U.S. House of Representatives, the U.S. Senate, the Federal Election Commission, and various state governmental bodies.

 

    Our policies and procedures governing lobbying and political activities are subject to rigorous internal controls designed to ensure, among other things, that our applicable disclosures are full and complete. As noted in our Semi-Annual Reports, our Senior Vice President, Public Policy and Government Relations, together with senior management, the Board, and various public policy and legal personnel, oversees and manages our corporate political activities in an effort to attain our public policy objectives and comply with all applicable laws.

 

    We believe we significantly benefit by participating in a number of industry and trade associations, which provide us with access to valuable industry data and expertise. These groups are independent organizations that represent the diverse interests of their members. These organizations frequently make expenditures or take action contrary to our preferences, often without our knowledge. As such, our membership in these organizations should not be viewed as an endorsement of any particular organization or policy. Disclosure of the information contemplated by the proposal could be used to unfairly suggest that we support every position taken by organizations to which we contribute. For these reasons, we do not believe that additional disclosures regarding our contributions to such organizations would be helpful to shareholders.

 

    We expend significant resources in connection with our political and lobbying activities. We believe the information that we currently furnish in our Semi-Annual Reports and file with state and federal agencies strikes an appropriate balance between transparency and avoiding excessive burden and cost. We believe that requiring us to gather and disclose additional information would result in an unproductive consumption of valuable time and corporate resources by tracking insignificant activities without materially enhancing existing disclosures.

 

    We also oppose the proposal because many of its aspects are vague or unworkable, and may create confusion. We believe the proposal’s definition of lobbying and lobbying expenditures are ambiguous and could, depending on the jurisdiction, include items such as office rent, business travel expenses, and even employee salaries. As a result, the disclosures required by the proposal could be inconsistent and confusing, because a particular expenditure might be lobbying-related in one jurisdiction, but not in another.

 

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    The proposal seeks to impose unnecessary line-item disclosures on lobbying expenditures that are not required by law and are not standard among other companies, including our competitors. Complying with the requirements of this proposal could put us at a relative disadvantage to our competitors. Any new requirements should be addressed by lawmakers and uniformly imposed on all entities.

The Board is confident that the Company’s current lobbying activities are effective and fully aligned with the shareholders’ long-term interests. For the reasons set forth above, the Board believes that this proposal is overly burdensome, would result in an unproductive use of our resources, and is not in the best interests of our shareholders.

 

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OWNERSHIP OF OUR SECURITIES

Principal Shareholders

The following table sets forth information regarding ownership of our Common Shares by the persons known to us to have beneficially owned more than 5% of the outstanding Common Shares on December 31, 2016, unless otherwise noted.

 

Name and Address

   Amount and
Nature of
Beneficial
Ownership of
Common Shares(1)
  Percent of
Outstanding
Common
Shares(1)

Blackrock, Inc.

55 East 52nd Street

New York, New York 10055

       41,643,280 (2)       7.6 %

The Vanguard Group

100 Vanguard Blvd.

Malvern, Pennsylvania 19355

       39,167,308 (3)       7.2 %

State Street Corporation

State Street Financial Center

One Lincoln Street

Boston, Massachusetts 02111

       30,869,623 (4)       5.7 %

 

(1) The figures and percentages in the table above have been determined in accordance with Rule 13d-3 of the SEC based upon information furnished by investors listed, except that we have calculated the percentages in the table based on the actual number of Common Shares outstanding on December 31, 2016, as opposed to the estimated percentages set forth in the reports of the investors referred to below in notes 2 through 4. In addition to Common Shares, we have outstanding Preferred Shares that vote together with the Common Shares as a single class on all matters. One or more persons beneficially own more than 5% of the Preferred Shares; however, the percentage of total voting power held by such persons is immaterial. For additional information regarding the Preferred Shares, see “General Information About the Annual Meeting — How many votes may I cast?”
(2) Based on information contained in a Schedule 13G/A Report dated as of January 19, 2017 that this investor filed with the SEC. In this report, the investor indicated that, as of December 31, 2016, it held sole voting power with respect to 36,426,600 of these shares and sole dispositive power with respect to all of the above-listed shares.
(3) Based on information contained in a Schedule 13G Report dated as of February 9, 2017 that this investor filed with the SEC. In this report, the investor indicated that, as of December 31, 2016, it held sole voting power with respect to 857,601 of these shares, shared voting power with respect to 97,391 of these shares, sole dispositive power with respect to 38,215,203 of these shares and shared dispositive power with respect to 952,105 of the above-listed shares.
(4) Based on information contained in a Schedule 13G Report dated as of February 6, 2017 that this investor filed with the SEC. In this report, the investor indicated that, as of December 31, 2016, (i) it shared voting power with respect to 23,733,890 shares and shared dispositive power with respect to all of the above-listed shares with various of its subsidiaries and (ii) it held 7,135,733 of these shares as investment manager for our broad-based 401(k) plans.

 

 

 

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Executive Officers and Directors

The following table sets forth information, as of the record date, regarding the beneficial ownership of Common Shares by our executive officers and directors. Except as otherwise noted, all beneficially owned shares are held with sole voting and investment power and are not pledged to third parties.

 

     Components of Total
Shares Beneficially Owned
        

Name

   Unrestricted
Shares

Beneficially
Owned(1)
     Unvested
Restricted
Stock(2)
     Total Shares
Beneficially

Owned(3), (4)
 

Executive Officers:

        

David D. Cole

     121,501        104,837        226,338  

Dean J. Douglas

     8,950        170,916        179,866  

R. Stewart Ewing, Jr.

     149,881        143,461        293,342  

Stacey W. Goff

     74,883        115,873        190,756  

Aamir Hussain

     56,659        180,986        237,645  

Maxine L. Moreau

     22,579        84,854        107,433  

Glen F. Post, III

     830,507        781,673        1,612,180  

Scott A. Trezise

     18,905        54,992        73,897  

Girish K. Varma

     27,261        62,534        89,795  

Continuing Outside Directors:

        

Martha H. Bejar

     8,250        4,859        13,109  

Virginia Boulet

     27,304        4,859        32,163  

Peter C. Brown(5)

     19,438        4,859        24,297  

W. Bruce Hanks(6)

     37,981        4,859        42,840  

Mary L. Landrieu

            4,859        4,859  

Harvey P. Perry(7)

     71,168        4,859        76,027  

Michael J. Roberts

     22,771        4,859        27,630  

Laurie A. Siegel

     27,179        4,859        32,038  

Retiring Director:

        

William A. Owens(8)

     83,714        11,561        95,275  

All directors and executive officers as a group (18) persons)(9)

     1,608,931        1,750,559        3,359,490  

 

(1) This column includes the following number of shares allocated to the individual’s account under one of our qualified 401(k) plans: 21,446 — Mr. Ewing; 6,426 — Mr. Goff; 2,405 — Ms. Moreau; and 166,681 — Mr. Post. Participants in these plans are entitled to direct the voting of their plan shares, as described in greater detail elsewhere herein.
(2) Reflects (i) for all shares listed, unvested shares of restricted stock over which the person holds sole voting power but no investment power, and (ii) with respect to our performance-based restricted stock granted to our executive officers, the number of shares that will vest if we attain target levels of performance.
(3) Excludes (i) shares that might be issued under restricted stock units if our performance exceeds target levels and (ii) “phantom units” held by Mr. Roberts that are payable in cash upon the termination of his service as a director, as described further under “Director Compensation — Other Benefits.”
(4) None of the persons named in the table beneficially owns more than 1% of the outstanding Common Shares. The shares beneficially owned by all directors and executive officers as a group constituted 0.6% of the outstanding Common Shares as of the record date.
(5) Includes 19,438 shares held by a tax-exempt charitable foundation, as to which Mr. Brown has voting and dispositive powers by virtue of his control of the foundation.
(6) Includes 3,810 shares beneficially held by Mr. Hanks’ mother, as to which Mr. Hanks has voting and dispositive powers under a durable power of attorney granted to him by his mother.

 

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(7) Includes 709 shares beneficially held by Mr. Perry’s spouse, as to which Mr. Perry disclaims beneficial ownership, and 27,959 shares held by Mr. Perry through our dividend reinvestment plan (as of the most recent date practicable).
(8) Mr. Owens is scheduled to retire from the Board on May 24, 2017.
(9) As described further in the notes above, includes (i) 19,438 shares held beneficially through a foundation, (ii) 3,810 shares held beneficially through a power of attorney, (iii) 709 shares held beneficially by a spouse of one of these individuals, as to which beneficial ownership is disclaimed, and (iv) 27,959 shares held through our dividend reinvestment plan (as of the most recent date practicable), excluding 2,400 shares held through such plan by two of our executive officers who no longer participate in such plan.

 

 

COMPENSATION DISCUSSION AND ANALYSIS

Our named executive officers for 2016 were:

 

Current Executives:

  

•    Glen F. Post, III

   Chief Executive Officer and President

•    Dean J. Douglas

   President — Enterprise Markets

•    R. Stewart Ewing, Jr.

   Executive Vice President, Chief Financial Officer and Assistant Secretary

•    Aamir Hussain

   Executive Vice President, Chief Technology Officer

•    Stacey W. Goff

   Executive Vice President, Chief Administrative Officer, General Counsel and Secretary

This Compensation Discussion and Analysis is organized into four subsections:

 

Subsection                                                                                                                                                        

   Page  

I.

 

Executive Summary

     29  

II.

 

Our Compensation Philosophy and Linkage to Pay for Performance

     31  

III.

 

Our Compensation Program Objectives and Components of Pay

     36  

IV.

 

Our Policies, Processes and Guidelines Related to Executive Compensation

     46  

I. Executive Summary

As described further below, the central goals of our executive pay programs are to incentivize our executives to attain objectives that we believe will create shareholder value, to reward performance that contributes to the execution of our business strategies, and to attract and retain the right executives for our business.

2016 Business Highlights. During 2016, we achieved several significant accomplishments, including the following:

 

    Generated solid 2016 consolidated free cash flow of $1.8 billion and paid dividends of nearly $1.2 billion to shareholders.

 

    Invested in our network to improve transmission speed availability across our broadband service footprint, resulting in the growth of the percent of addressable units receiving service with transmission speeds of 100 megabits per second (Mbps) or higher and 1 gigabit per second (Gbps) or higher by 31% and 53%, respectively. We ended the year with 3.3 million addressable units capable of speeds of 100 Mbps or higher and approximately 1.3 million addressable units capable of 1 Gbps or higher. We also finished 2016 with 14,000 multi-tenant units in more than 600 cities enabled with fiber-ready broadband speeds up to 1 Gbps.

 

    Announced a transformational acquisition of Level 3 which we expect to close in the third quarter of 2017.

 

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    Launched over 60 new Business products and services – including a fully managed SD-WAN solution, Managed Security Services Suite to help organizations detect, prevent and respond to cyberattacks, and Relational DB Service on CenturyLink’s Cloud platform.

 

    Expanded the availability of our IPTV product (Prism TV) to over 430,000 new homes in existing markets, bringing total homes enabled to over 3.6 million. We also added approximately 40,000 Prism TV customers during the year.

 

    Reached agreements to (i) sell our data centers and colocation business and (ii) outsource our towers to Vertical Bridge under a 20-year strategic arrangement.

2016 Executive Compensation Highlights. During 2016, the Human Resources and Compensation Committee of our Board (which we refer to from time to time as the “Committee” in this portion of the Proxy Statement) took the following steps to (i) maintain the strong linkage between executive pay and our performance and strategic goals and (ii) review and refine as necessary the compensation packages of our senior officers to ensure that they remained targeted at the 50th percentile of market compensation levels. Our recent key executive compensation decisions and highlights are summarized below.

 

    Our executive compensation program for 2016 continued to emphasize variable “at risk” compensation, with a majority of our named executive officers’ compensation delivered through a combination of short- and long-term performance-driven incentives (which, for our CEO, represented over 90% of his total target compensation).

 

    As in prior years, the Committee set challenging performance targets under our incentive programs to ensure that payouts track corporate performance. Specifically:

 

    Our short-term incentive bonus payouts for 2016 were 80.2% of targeted amounts for our named executive officers.

 

    Approximately 30% of the performance-based restricted shares originally granted to our named executives in 2014 were forfeited based upon our actual performance over the three-year performance period ending December 31, 2016.

 

    The long-term incentives granted to our named executive officers in 2016 consisted of a combination of performance-based restricted stock (60% of the target grant value) and time-based restricted stock (40% of the target grant value).

 

    In May 2016, our shareholders cast approximately 89% of their votes in favor of our annual “say on pay” proposal.

 

    Other than relatively modest increases to annual salaries that were necessary to address a limited number of below-market pay packages, the Committee maintained levels of target total compensation in 2016 that were substantially similar to levels awarded in prior years.

 

    In February 2016, the Committee approved a one-time increase to the equity grant value for Mr. Hussain in order to recognize his outstanding performance.

 

    In February 2016, Dean Douglas began his employment with CenturyLink as President, Sales and Marketing. Mr. Douglas has more than 30 years of experience in the communications, entertainment and information technology sectors, and a track record of facilitating revenue growth. His compensation is described in Subsection III below.

For further information on our recent performance goals, see “— Short-Term Incentive Bonuses” and “— Long-Term Equity Incentive Compensation” under Subsection III below. For more information on our recent financial performance, see Appendix A to this proxy statement.

Assessment of “Say on Pay” Voting Results and Shareholder Outreach. In May 2014, 2015 and 2016, our shareholders cast approximately 93%, 95% and 89%, respectively, of their votes in favor of our “say on pay”

 

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proposal. The Committee takes the results of these votes into consideration when making executive compensation decisions. Although this high level of support indicates that our shareholders are generally satisfied with the scope and structure of our compensation programs, our senior management began a shareholder outreach program with our top institutional investors in 2014. Most recently, in May 2016, we contacted our top institutional investors, holding approximately 20% of our outstanding shares, and offered shareholder outreach calls. None of our top institutional investors took advantage of this offer so no calls were held. We remain committed to offering an opportunity for open dialogue with our shareholders on compensation matters and other issues relevant to our business.

II. Our Compensation Philosophy and Linkage to Pay for Performance

Our Compensation Philosophy

We compensate our senior management through a mix of programs designed to be market-competitive and fiscally responsible. More specifically, our executive compensation programs are designed to:

 

    provide an appropriate mix of fixed and variable compensation to attract, retain and motivate key executives,

 

    ensure that a majority of our executive compensation is performance-based to support creation of long-term shareholder value, revenue growth and operational efficiency without encouraging excessive risk taking,

 

    target compensation at the 50th percentile of market levels, when targeted levels of performance are achieved, for similarly-situated and comparably skilled executives at peer companies selected by the Committee,

 

    recognize and reward outstanding contributions and results, both on an individual basis and a company or divisional basis, compared to peer compensation and performance benchmark levels,

 

    promote internal equity by offering comparable pay to executives whom we expect to make roughly equivalent contributions, while differentiating executives’ compensation arrangements when appropriate, and

 

    monitor share dilution.

 

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Overview of Pay Elements and Linkage to Compensation Philosophy and Objectives

We believe the following elements of our compensation program help us to realize our compensation philosophy and objectives:

 

Pay Element

 

Characteristics

 

Compensation Philosophy and Objectives

Salary

  Annual fixed cash compensation   Provides a competitive and stable component of income to our executives

Short-Term Incentive Bonus

  Annual variable cash compensation based on the achievement of annual performance measures. For 2016 half of these payments were based on operating cash flow and the other half on core revenue. For each executive, the Committee has an opportunity to make a positive or negative adjustment based on the executive’s performance against individual objectives   Provides competitive short-term incentive opportunities for our executives to earn annual cash bonuses based on performance objectives that, if attained, can reasonably be expected to (i) promote our business and strategic objectives and (ii) correspond to those paid to similarly-situated and comparably skilled executives at peer companies

Performance-Based Restricted Stock (60% of long-term incentive grant value)

  Annual long-term variable equity awards that cliff vest three years from the date of grant with half the number of shares based on our relative three-year total shareholder return (“TSR”) versus our custom industry peer group and the other half based on a three-year revenue target   Fosters a culture of ownership, aligns the long-term interests of our executives with our shareholders and rewards or penalizes executives based on our long-term relative TSR and absolute revenue performance

Time-Based Restricted Stock (40% of long-term incentive grant value)

  Annual long-term equity awards that vest based on years of service   Provides variable compensation that helps to retain executives and ensures our executives’ interests are aligned with those of shareholders to promote the creation of long-term value

The Committee feels our incentive programs supported our strategic and cultural priorities for 2016 as described below:

 

    Our senior officers’ pay is linked to similar performance objectives for both short-term incentive compensation and performance-based restricted shares, as we feel revenue stabilization is critical and is derived by the execution of our short- and long-term strategies.

 

    We believe our generation of core revenue is critical to our goal of stabilizing and ultimately increasing our consolidated revenues with a view to attain strategic revenue growth sufficient to offset our continuing legacy revenue losses. Core revenue is a performance measure in both our short-term incentive bonus and performance-based restricted shares, representing 28% to 31% of our executive officers’ 2016 target total compensation.

 

    Total shareholder return relative to our peers is one of the performance measures used in our performance-based restricted shares, representing 16% to 21% of our executive officers’ 2016 target total compensation. We believe this compensation will ultimately be realized only if we successfully execute our strategic plans and perform satisfactorily in relation to our industry peers.

 

   

Operating cash flow enables us to, among other things, (i) fund strategic capital investments designed to expand our business opportunities, (ii) return cash to our shareholders through dividends or periodic

 

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share repurchases, and (iii) meet our debt and pension obligations. Operating cash flow is a performance measure in our short-term incentive bonus, representing 9% to 12% of our executive officers’ 2016 target total compensation.

 

    The individual performance objectives provide “line of sight” to each senior officer’s performance regarding their specific areas of responsibility. In addition, we utilize this aspect of the short-term incentive plan design to reinforce leadership behaviors promoting our Unifying Principles and expectations of our broader workforce. We believe that successfully executing on clearly defined individual performance objectives will help us improve team collaboration, expand our product lines, refine our market strategies, strengthen our network, execute expansion opportunities, reduce costs and otherwise improve our operations.

The following chart illustrates the approximate allocation of our CEO and other named executive officers (“NEOs”) total target compensation opportunity for 2016 between elements that are fixed pay and variable or performance-based pay:

 

LOGO

 

    A fixed annual salary represents 11% of our CEO’s total target compensation and 22% of our other NEOs’ average target total compensation.

 

    Variable pay is comprised of a short-term incentive (“STI”) bonus, time-based restricted stock awards (“RSAs”) and performance-based restricted stock awards (“PSAs”), and represents 89% of our CEO’s total target compensation and 78% of our other NEOs’ average target total compensation.

 

    Performance-based pay is comprised of an STI bonus and PSAs, and represents 61% of our CEO’s total target compensation and 56% of our other NEOs’ average target total compensation.

Short-Term Incentive Performance. The Committee sets target levels of performance based on its assessment of the difficulty of achieving such levels and the potential impact of such achievement on enhancing shareholder value. The percentages in the table below represent the actual payouts to our senior officers for each of the past three years as a percentage of the target opportunity set for him by the Committee for that performance year.

 

Performance Year

  Actual
Payout as a
% of Target
Opportunity

2014

      96.8 %

2015

      77.6 %

2016

      80.2 %

 

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Linkage of Long-Term Incentive Performance Objectives with our Compensation Philosophy. We believe we can increase shareholder value if we outperform our industry peers’ three-year total shareholder return and surpass the sum of our annual revenue targets over three-year performance periods. Since 2013, the Committee has granted performance-based restricted stock measuring our performance against these two objectives over a three-year performance period. In 2014, the Committee increased the percentage of the value of the executives’ long-term awards in the form of performance-based restricted stock from 50% to 60%.

The percentages in the tables below represent the percentage of the target value of the executives’ long-term awards granted in the form of performance-based restricted stock and time-vested restricted stock, including, for grant years 2013 and later, the portion based upon total shareholder return and absolute revenue performance objectives.

Grant Date Allocation of Long-Term Incentive Awards

 

Grant Year

   Performance
Period
     % of Total Fair
Value Awarded in
Time-Vested
Restricted Shares
    % of Total Fair
Value Awarded in
TSR Performance-
Based Restricted
Shares(1)
    % of Total Fair
Value Awarded in
Absolute  Revenue
Performance-Based
Restricted Shares
 

2010

     2010 — 2012        50     50      

2011

     2011 — 2013        50     50      

2012

     2012 — 2014        50     50      

2013

     2013 — 2015        50     25     25

2014

     2014 — 2016        40     30     30

2015

     2015 — 2017        40     30     30

2016

     2016 — 2018        40     30     30

 

(1)  As noted in the table and commentary below, the applicable TSR peer group was the S&P 500 index prior to 2013, and a self-constructed peer group since then.

Actual Payouts of Performance-Based Restricted Stock. The actual payouts of our previous grants of performance-based restricted stock provide further evidence of our “pay for performance” philosophy. As described in greater detail in “— Long-Term Equity Incentive Compensation” under Subsection III below, we grant amounts of our performance-based restricted stock awards based upon target performance levels, but the ultimate payout of those awards can range between 0% to 200% depending on our actual performance.

The payout percentages in the tables below represent the percentage of the target number of performance-based restricted stock granted to our senior officers that ultimately vested, with all remaining shares being forfeited. To further enhance the pay for performance linkage, any dividends granted on these shares are not paid currently, but rather accumulate during the restricted period and vest or are forfeited in tandem with the related shares.

Actual Payouts of TSR Performance-Based Restricted Stock

 

Grant Year

   Performance
Period
     Peer Group      CTL TSR     Percentile
Rank
    Actual
Payout
%
 

2010

     2010 — 2012        S&P 500        35.29     46 th      92

2011

     2011 — 2013        S&P 500        -14.42     9 th      0

2012

     2012 — 2014        S&P 500        33.32     19 th      0

2013

     2013 — 2015        TSR Peer Group        -19.47     16 th      0

2014

     2014 — 2016        TSR Peer Group        -5.34     25 th      50

 

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Actual Payouts of Absolute Revenue Performance-Based Restricted Stock

 

Grant Year

   Performance
Period
     Performance Goal(1)    Absolute Revenue
Target
     Company’s
Performance
    Actual
Payout
%
 

2013

     2013 — 2015      Sum of Core Revenue

Targets over Three-Year
Performance Period

   $ 49.125 million        99.5     92.6

2014

     2014 — 2016      Sum of Core Revenue
Targets over Three-Year
Performance Period
   $ 48.525 million        99.2     89.1

 

(1)  For additional information, see “— Long-Term Equity Incentive Compensation” below.
 

Realizable Pay for our CEO. The chart below illustrates the realizable pay for 2014, 2015 and 2016 for our CEO, most of which was “at risk” variable compensation. We calculate realizable pay for a given year by adding together the (i) actual salary paid during the year, (ii) STI bonus that was ultimately paid out for performance during that year, (iii) the value of RSAs and PSAs that vested during the year and (iv) the RSAs and PSAs that are projected to vest based on actual performance through the end of the year, valuing the shares based on the closing price of our common stock on the last business day of the year.

 

 

LOGO

As this chart illustrates, our CEO’s realizable pay was 82%, 54% and 68% of his total target compensation for years 2014, 2015 and 2016, respectively.

Significant Stock Ownership. Stock ownership guidelines further align executives and shareholders and focus the executives on long-term success. We established our executive stock ownership guidelines after discussions with some of our shareholders. Under our stock ownership guidelines as of the record date:

 

    Mr. Post held approximately $39.5 million in stock (including restricted shares), which was approximately 31.6 times his base salary and approximately 5.3 times greater than his target ownership level of six times base salary.

 

    Our other NEOs held an aggregate of approximately $22.1 million in stock (including restricted shares), which was, on average, over 10 times their respective base salaries and over 3.4 times greater than their respective target ownership level of three times base salary.

 

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III. Our Compensation Program Objectives and Components of Pay

Our Compensation Practices

To assist us in achieving our broad compensation goals, we apply the following practices (many of which are described further elsewhere in this Compensation Discussion and Analysis):

What We Do

 

 

    Focus on performance-based compensation weighted heavily towards long-term equity awards

 

    Benchmark against 50th percentile peer compensation levels

 

    Maintain robust stock ownership guidelines applicable to our executive officers and outside directors

 

    Annually review our compensation programs to avoid encouraging excessively risky behavior

 

    Conduct annual “say-on-pay” votes

 

    Periodically seek input on our executive compensation from shareholders

 

    Maintain a compensation “clawback” policy

 

    Review the composition of our peer groups annually

 

    Conduct independent and intensive performance reviews of our senior officers

 

    Limit the maximum number of performance shares to vest if our total shareholder return is negative

 

    Review realizable pay of our senior officers and total compensation “tally” sheets

 

    Require shareholders to approve any future severance agreements valued at more than 2.99 times the executive’s target cash compensation

 

    Impose compensation forfeiture covenants broader than those mandated by law

What We Don’t Do…

 

 

    Enter into employment agreements with our executives

 

    Maintain a supplemental executive retirement plan

 

    Permit our directors or employees to hedge our stock, or our directors or senior officers to pledge our stock

 

    Pay dividends on unvested restricted stock

 

    Permit the Committee’s compensation consultant to provide other services to CenturyLink

 

    Pay, provide or permit:

 

  (i) excessive perquisites,

 

  (ii) excise tax “gross-up” payments, or

 

  (iii) single-trigger change of control equity acceleration benefits.

Summary of 2016 Compensation for our Named Executive Officers

Two of the core principles of our compensation philosophy are to offer competitive compensation to our named executive officers at the 50th percentile of market levels with an appropriate mix of fixed and variable compensation.

Our 2016 annual incentive bonus target percentages and the total fair value of our 2016 equity grants for our executive officers were based on these principles.

 

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Each element of our 2016 compensation is discussed further below in this Subsection under the headings “— Salary,” “— Short-Term Incentive Bonuses” and “— Long-Term Equity Incentive Compensation.” In each case, more information on how we determined specific pay levels is located in Subsection IV under the heading “— Our Compensation Decision-Making Process.”

Salary

General. Early each year, the Committee takes a number of steps in connection with setting annual salaries, including reviewing compensation tally sheets and benchmarking data, discussing with the CEO each senior officer’s pay and performance relative to other senior officers, and considering when the officer last received a pay increase. More information on how we determined specific pay levels is located under the heading “— Our Compensation Decision-Making Process” in Subsection IV below.

In September 2015, the Committee approved an annual salary of $800,010 for Mr. Douglas to be effective with the start of his employment with CenturyLink in February 2016. The salary level was based on the Committee’s review of compensation benchmarking data and was established as part of preparing a comprehensive market-competitive compensation package for Mr. Douglas. In February 2016, the Committee conducted a comprehensive benchmarking review of the compensation for all other executive officers. Based on that review, the Committee awarded a salary increase of 5.3% to Mr. Hussain in recognition of his performance demonstrated in 2015. This resulted in a salary of $500,000 for Mr. Hussain for 2016. No further salary increases were awarded at that time to the executive officers. See the additional discussion under the heading “— Use of ‘Benchmarking’ Data — Performance Benchmarking” in Subsection IV below.

Recent Actions. In February 2017, the Committee reviewed the updated compensation benchmarking data for all executive officers and awarded a salary increase of 10% for Mr. Hussain, and left unchanged the salary for our other named executive officers. See further discussion under the heading “— Use of ‘Benchmarking’ Data — Performance Benchmarking” in Subsection IV below.

Short-Term Incentive Bonuses

General. With the assistance of management and its compensation consultant, the Committee sets STI bonus targets annually. Annually in the first quarter, the Committee approves (i) the performance objectives for prospective bonuses, (ii) the “threshold,” “target” and “maximum” threshold levels of performance, (iii) the weighting of the performance objectives, (iv) the amount of bonus payable if the target level of performance is attained and (v) the finally determined amount of bonus payments attributable to performance for the prior year.

In September 2015, the Committee approved an STI bonus target of 125% for Mr. Douglas as part of his overall competitive compensation package and the Committee’s review of compensation benchmarking data. Mr. Douglas began his employment with us in February 2016, at which time he commenced accruing the right to receive a bonus for the portion of 2016 during which he provided service. In February 2016, the Committee determined that each named executive’s then-prevailing STI bonus target continued to be generally within an acceptable range of targeting an STI bonus opportunity at the 50th percentile for peers in similarly situated positions based on data compiled by its compensation consultant. Accordingly, the Committee made no changes in 2016 to our named executive officers’ prior bonus targets.

 

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The table below summarizes the 2016 STI bonus opportunities for our named executive officers.

 

Named Officer

   2016
Salary(1)
     x      Bonus
Target
%
    =      Target Bonus
Opportunity
 

Glen F. Post, III

   $ 1,250,000           175      $ 2,187,500  

Dean J. Douglas

     699,462           125        874,327  

R. Stewart Ewing, Jr.

     666,266           110        732,892  

Aamir Hussain

     496,049           100        496,049  

Stacey W. Goff

     540,758           110        594,834  

 

(1) Salary reflected in this table represents earned salary during 2016 and includes a salary increase, effective on February 28, 2016, which increased the salary of Mr. Hussain from $475,000 to $500,000. Salary for Mr. Douglas represents salary earned during 2016 from his first day of work on February 16, 2016 through December 31, 2016.

Performance Objectives and Targets. Each year, the Committee reviews in detail the relevance of our STI performance objectives for alignment with our business goals and objectives. In February 2016, the Committee reaffirmed its decision from the prior two years to offer STI bonuses for all senior officers based upon our attainment of consolidated operating cash flow and consolidated core revenue targets. See the further discussion under the heading “— Overview of Pay Elements and Linkage to Compensation Philosophy and Objectives” in Subsection II above.

In February 2016, the Committee, after discussion with our CEO, approved (i) a target level of 6% of operating cash flow return on average assets for purposes of fixing the maximum amount of potential annual bonuses for 2016 payable to our senior officers in accordance with Section 162(m) of the Internal Revenue Code, and (ii) the following threshold, target, and maximum performance levels for 2016 operating cash flow and core revenue.

 

          Performance Levels (in billions)  

Financial Performance Objectives

  Weighting     Threshold     Target(1)     Maximum  

Consolidated Operating Cash Flow(2)

    50   $ 6.365     $ 6.700     $ 7.035  

Consolidated Core Revenue(3)

    50     15.319       15.875       16.431  

 

(1) Based upon the same forecasts used in connection with our publicly-disclosed guidance.
(2) Represents operating income plus depreciation and amortization expenses.
(3) Represents the sum of strategic revenues and legacy revenues (excluding our data integration and other revenues), all as reported in our publicly-filed financial statements.

In February 2016, the Committee, in collaboration with our CEO, also approved guidelines designed to enable the Committee, in its discretion, to increase or decrease the bonus of each senior officer by up to 10%, based on the officer’s individual performance during 2016 with respect to (i) assisting the Company to meet its expense budget, (ii) exhibiting collaboration and leadership skills, (iii) attaining three to four specific pre-selected individual performance objectives and (iv) the officer’s individual scoring under our management performance rating system.

2016 Performance Results. In February 2017, the Committee reviewed audited results of the Company’s performance as compared to the financial performance targets established for 2016. Based on the calculations described below, the Committee determined that the aggregate earned performance for these performance targets was 80.2% for our named executive officers, as described further below.

 

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During 2016, we achieved the financial results described below which, based on the financial objective payout scale in the table below under heading “— Calculation of Bonuses,” resulted in the following earned performance level for each financial objective:

 

 

LOGO

 

    162(m) Target — Operating Cash Flow Return on Average Assets. We attained a 13.8% operating cash flow return on average assets, which exceeded the target level established by the Committee in February 2016 for purposes of fixing the maximum amount of potential annual bonuses for 2016 payable to our senior officers in accordance with Section 162(m) of the Internal Revenue Code.

 

    Operating Cash Flow. We achieved consolidated operating cash flow results of $6.527 billion (which reflects certain adjustments for the reasons noted below), which was below our target of $6.7 billion, thereby resulting in earned performance of 74.2% of the target level.

 

    Core Revenue. We achieved consolidated core revenue results of $15.722 billion, which was below our target of $15.875 billion, thereby resulting in earned performance of 86.2% of the target level.

 

    Individual Performance Objectives. The Committee reviewed with management the degree to which each senior officer met certain specific individual performance objectives and benchmarks, as well as qualitative assessments of each officer’s performance. As noted below under “— Committee Discretion,” the Committee elected not to make individual performance adjustments with impact to any of our named executive officers’ 2016 bonus awards.

We used the following scale, which was approved in 2016, to calculate bonus amounts payable with respect to company performance.

 

Financial Objective Payout Scale

 

Performance Level

   Consolidated
Operating
Cash Flow
    Consolidated
Core
Revenue
    Payout as %
of Target
Award (1)
 

Maximum

     ³ 105.0     ³ 103.5     200

Target

     100.0     100.0     100

Threshold

     95.0     96.5     50

Below Threshold

     < 95.0     < 96.5     0

 

(1) Linear interpolation is used when our performance is between the threshold, target and maximum amounts to determine the corresponding percentage of the target award earned.

Upon completion of each fiscal year, if necessary, our actual operating results are adjusted up or down, as appropriate, in accordance with the Committee’s long-standing guidelines that are designed to eliminate the effects of extraordinary or non-recurring transactions that were not known, anticipated or quantifiable on the date the performance goals were established. For 2016, the Committee adjusted our operating cash flow, in accordance with such guidelines, for items which were not considered or included in the establishment of the

 

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original 2016 targets. These adjustments were the same adjustments publicly announced by us in connection with releasing our 2016 operating results in early 2017, including, among others, adjustments for severance costs associated with recent headcount reductions ($189 million), costs related to our pending acquisition of Level 3 ($52 million) and termination of depreciation expense related to our pending sale of the colocation business ($36 million).

Calculation of Bonuses. The STI bonus payments are calculated using the above-described financial objective payout scale and other criteria approved in the first quarter of the year by the Committee. After our internal audit personnel have reviewed these determinations and calculations, they are provided in writing to the Committee for its review and approval.

The 2016 bonuses paid to our named executives were calculated under a three-step process. In step one, the Committee determined that we had exceeded our target of operating cash flow return on average assets under 162(m) and, therefore, each of our named executives qualified for potential annual bonuses up to a fixed maximum amount defined as a percentage of the executive’s 2016 salary. In step two, the Committee calculated bonuses by measuring the company’s performance against the operating cash flow and core revenue goals described above under the heading “— 2016 Performance Results.” In step three, the Committee authorized actual bonuses for our named executives, which were substantially lower than the maximum potential bonuses calculated in step one.

The actual amounts of the named executive officers’ 2016 bonuses were calculated as follows:

 

Named Officer

   Target Bonus
Opportunity(1)
     x      Earned
Company
Performance
%(2)
    +      Discretionary
Adjustment
for Individual
Performance(3)
     =      Bonus(4)  

Glen F. Post, III

   $ 2,187,500           80.2      $ 0         $ 1,754,375  

Dean J. Douglas

     874,327           80.2      $ 0           701,211  

R. Stewart Ewing, Jr.

     732,892           80.2      $ 0           587,780  

Aamir Hussain

     496,049           80.2      $ 0           397,831  

Stacey W. Goff

     594,834           80.2      $ 0           477,057  

 

(1) Determined in the manner reflected in the chart above under the heading “— Short-Term Incentive Bonuses — General.”
(2) Calculated or determined as discussed above under “— 2016 Performance Results.”
(3) Determined based on achievement of individual performance objectives as described further above in this Subsection.
(4) These bonus amounts are reflected in the Summary Compensation Table appearing below under the column “Non-Equity Incentive Plan Compensation.”

 

 

Committee Discretion. As noted above, we exceeded our target for our 162(m) objectives which set the maximum 2016 bonuses payable to each of our senior officers. The Committee maintains the discretion, subject to certain limits, to either increase or decrease the bonus amounts determined on the basis of actual performance earned for financial and individual targets and objectives. Nonetheless, the Committee elected not to apply discretionary adjustments for the 2016 annual incentive bonus payments to any our named executive officers.

Under our annual bonus programs, the Committee may authorize the payment of annual bonuses in cash or stock. Since 2000, the Committee has paid these bonuses entirely in cash, principally to diversify our compensation mix and prevent us from over-utilizing equity grants.

Recent Actions. In connection with establishing 2017 annual incentive bonus targets, the Committee made no changes to our named executive officers’ bonus target percentages; however, the amount of Mr. Hussain’s bonus target incrementally increased in proportion with his base salary increase described above.

 

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Long-Term Equity Incentive Compensation

General. Our shareholder-approved long-term incentive compensation programs authorize the Committee to grant a variety of stock-based incentive awards to key personnel. We believe stock incentive awards (i) encourage key personnel to focus on sustainable long-term performance, (ii) strengthen the relationship between compensation and growth in the market price of the company’s common shares and thereby align management’s financial interests with those of the shareholders and (iii) help attract and retain talented personnel.

As it did in 2014 and 2015, the Committee in 2016 granted 60% of our senior officers’ target equity incentive compensation in the form of performance-based restricted stock, which is ultimately payable only if we attain certain specified goals. The remaining portion of our senior officers’ long-term equity incentive compensation awarded in 2014, 2015 and 2016 was granted in time-vested restricted stock, the value of which is dependent on our performance over an extended vesting period.

Performance Benchmarks. On an annual basis, the Committee reviews the relevance of our performance benchmarks for alignment with our long-term strategic plan. In 2016, we kept the same two performance benchmarks, relative TSR and absolute revenue, that we used for our 2014 and 2015 performance-based restricted shares. See further discussion under the heading “— Overview of Pay Elements and Linkage to Compensation Philosophy and Objectives” in Subsection II above.

An overview of our TSR performance-based restricted shares granted in 2016 is outlined below.

 

    Performance Benchmark: Our benchmark is our percentile rank versus the below-described 26-company TSR peer group. See further discussion under the heading “— Use of ‘Benchmarking’ Data — Performance Benchmarking” in Subsection IV below.

 

    Performance Period: January 1, 2016 through December 31, 2018.

 

    Performance Vesting: The ultimate number of TSR performance-based restricted shares that vest will be based on our total shareholder return during the above-described performance period relative to the total shareholder return of the TSR peer group over the same period, as illustrated in the table below.

 

Relative Total Shareholder Return

 

Performance Level

   Company’s Percentile Rank      Payout as % of
Target
Award(1)
 

Maximum

     ³ 75th Percentile        200%  

Target

     50th Percentile        100%  

Threshold

     25th Percentile        50%  

Below Threshold

     < 25th Percentile        0%  

 

(1) Linear interpolation is used when our relative TSR performance is between the threshold, target and maximum amounts to determine the corresponding percentage of the target award earned.

An overview of our absolute revenue performance-based restricted shares granted in 2016 is outlined below.

 

    Performance Benchmark: Our benchmark is an absolute revenue target over the below-described three-year performance period, which is equal to the sum of three annual absolute revenue targets separately established by the Committee during the first quarter of the years 2016, 2017, and 2018. “Absolute revenue” is defined as the sum of our consolidated legacy and strategic revenue, in each case defined in the same manner we report such amounts in our Annual Report on Form 10-K for the prior year.

 

    Performance Period: January 1, 2016 through December 31, 2018.

 

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    Performance Vesting: The ultimate number of our absolute revenue performance-based restricted shares that vest will be based on our achievement of the aggregate three-year absolute revenue target, as illustrated in the table below; provided, however, none of our absolute revenue performance-based restricted shares will vest unless we attain a 6% operating cash flow annual return on average assets during the performance period. Upon completion of each fiscal year within the three-year performance period, the Committee intends to adjust our actual operating, to the extent necessary, in accordance with the Committee’s long-standing guidelines that are designed to eliminate the effects of extraordinary or non-recurring transactions that were not known, anticipated or quantifiable on the date the performance goals were established.

 

Absolute Revenue

 

Performance Level

   Company’s Performance(1)      Payout as % of
Target
Award(2)
 

Maximum

     ³ 103.5%        200%  

Target

     100.0%        100%  

Threshold

     96.5%        50%  

Below Threshold

     < 96.5%        0%  

 

(1) Determined by dividing (i) the sum of our absolute revenue actually attained for the years 2016, 2017 and 2018 by (ii) the sum of our absolute revenue targets separately established for each of the years 2016, 2017 and 2018.
(2) Linear interpolation is used when our absolute revenue performance is between the threshold, target and maximum amounts to determine the corresponding percentage of target award earned.

For additional information on the above-described grants, see “Executive Compensation — Incentive Compensation and Other Awards.”

2016 Executive Grants. Following its deliberations in February 2016, the Committee formally approved an increase to the targeted aggregate grant date fair value of Mr. Hussain’s equity award from $1,400,000 to $2,100,000. This increase was primarily the result of the Committee’s recognition of Mr. Hussain’s overall leadership and performance demonstrated in 2015, but also reflected the Committee’s review of compensation benchmarking. See further discussion under the heading “— Use of ‘Benchmarking’ Data — Performance Benchmarking” in Subsection IV below. During 2016, the Committee granted equity awards to our other senior officers on terms and in amounts substantially similar to the awards granted to them in 2015.

During 2016, the Committee granted our named officers the following number of (i) restricted shares that will vest over a three-year period principally in exchange for continued service (“time-based restricted shares”), (ii) performance-based restricted shares that will vest in 2019 based on our relative total shareholder return (the “TSR performance-based restricted shares”) and (iii) performance-based restricted shares that will vest in 2019

 

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principally based on our attainment of absolute revenue targets over the above-described three-year performance period (the “absolute revenue performance-based restricted shares”):

 

            Performance-Based Restricted Shares         

Named Officer

  

 

Time-Based Restricted
Shares

     No. of TSR
Performance-
Based
Restricted
Shares(2)
     No. of
Absolute
Revenue
Performance-
Based
Restricted
Shares(2)
     Fair
Value(1)
     Total Fair
Value(1)
 
   No. of
Shares
     Fair Value(1)              

Glen F. Post, III

     130,326      $ 3,400,000        97,745        97,745      $ 5,100,000      $ 8,500,000  

Dean J. Douglas

     35,264        920,000        26,449        26,449        1,380,000        2,300,000  

R. Stewart Ewing, Jr.

     23,918        624,000        17,939        17,939        936,000        1,560,000  

Aamir Hussain

     32,198        840,000        24,149        24,149        1,260,000        2,100,000  

Stacey W. Goff

     19,319        504,000        14,489        14,489        756,000        1,260,000  

 

(1) For purposes of these grants, we determined both the number of time-vested and performance-based restricted shares by dividing the total fair value granted to the executive by the volume-weighted average closing price of our Common Shares over a 15-trading day period ending five trading days prior to the grant date. In the Summary Compensation Table, however, our 2016 grants of time-vested restricted stock are valued based on the closing stock price of our Common Shares on the day of grant, and our 2016 grants of performance-based restricted shares are valued as of the grant date based on probable outcomes, in each case in accordance with mandated SEC disclosure rules. See footnote 1 to the Summary Compensation Table for more information.
(2) Represents the number of restricted shares granted in 2016. As discussed further below, the actual number of shares that vest in the future may be lower or higher.

 

 

Types of Awards. We strive to pay equity compensation in forms that create appropriate incentives to optimize performance at reasonable cost, that minimize enterprise risk, that align the interests of our officers and shareholders, that foster our long-term financial and strategic objectives and that are competitive with incentives offered by other companies. Since 2008, the Committee has elected to issue all of our long-term equity compensation grants in the form of restricted stock for a variety of reasons, including:

 

    the Committee’s recognition of the prevalent use of restricted stock by our peers,

 

    the Committee’s desire to minimize the dilution associated with our rewards, and

 

    the retentive value of restricted stock under varying market conditions.

In an effort to increase the link between our performance and executive compensation, since 2010, the Committee has issued at least half of the value of our senior officers’ long-term awards in the form of performance-based restricted stock, with the rest being in the form of time-vested restricted stock.

In connection with structuring its equity grants, the Committee also reviews tax, accounting and other considerations that it deems to be relevant.

For additional information on the vesting and other terms of our equity awards (including certain voluntary limits on the number of performance-based restricted shares that vest if our total shareholder return over the performance period is negative and our intent to comply with Section 162(m) of the Internal Revenue Code) with respect to certain aspects our executive compensation, see the preceding discussion in this Compensation Discussion and Analysis and “Executive Compensation — Incentive Compensation and Other Awards.”

Recent Actions. At its February 2017 meeting, the Committee granted equity awards on terms similar to the awards granted to them in 2016. The Committee elected to grant equity awards for our named executive officers

 

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at substantially the same amounts granted to them in 2016, except for Mr. Hussain, whose 2017 grant date fair value was lower than his 2016 grant date fair value (a portion of which included a non-recurring grant for meritorious performance, as described further above).

Other Benefits

As a final component of executive compensation, we provide a broad array of benefits designed to be competitive, in the aggregate, with similar benefits provided by our peers. We summarize these additional benefits below.

Retirement Plans. We maintain one or more traditional qualified defined benefit retirement plans for most of our employees who meet certain eligibility requirements, plus one or more traditional qualified defined contribution 401(k) plans for a similar group of our employees. With respect to these qualified plans, we maintain nonqualified plans that permit our officers to receive or defer supplemental amounts in excess of federally-imposed caps that limit the amount of benefits highly-compensated employees are entitled to receive under qualified plans. Additional information regarding our retirement plans is provided in the tables and accompanying discussion included below under the heading “Executive Compensation.”

Change of Control Arrangements. We have agreed to provide cash and other severance benefits to each of our executive officers who is terminated under certain specified circumstances following a change of control of CenturyLink. If triggered, benefits under these change of control agreements include payment of (i) a lump sum cash severance payment equal to a multiple of the officer’s annual cash compensation, (ii) the officer’s annual bonus, based on actual performance and the portion of the year served, (iii) certain welfare benefits are continued for a limited period, and (iv) the value or benefit of any long-term equity incentive compensation, if and to the extent that the exercisability, vesting or payment thereof is accelerated or otherwise enhanced upon a change of control pursuant to the terms of any applicable long-term equity incentive compensation plan or agreement.

Under these agreements, change of control benefits are payable to our executive officers if within a certain specified period following a change in control (referred to as the “protected period”) the officer is terminated without cause or resigns with “good reason,” which is defined to include a diminution of responsibilities, an assignment of inappropriate duties, and a transfer of the officer exceeding 50 miles. We have filed with the SEC copies of our change of control agreements.

The table below shows (i) the length of the “protected period” afforded to officers following a change of control and (ii) the multiple of salary and bonus payment and years of welfare benefits to which officers will be entitled if change of control benefits become payable under our agreements and related policies:

 

     Protected
Period
     Multiple of
Annual Cash
Compensation
     Years of
Welfare
Benefits
 

CEO

     2 years        3 times        3 years  

Other Executives

     1.5 years        2 times        2 years  

Other Officers

     1 year        1 time        1 year  

 

 

For more information on change of control arrangements applicable to our executives, including our rationale for providing these benefits, see “Executive Compensation — Potential Termination Payments — Payments Made Upon a Change of Control.” For information on change of control severance benefits payable to our junior officers and managers, see “— Severance Benefits” in the next subsection below.

Severance Benefits. Our executive severance plan provides cash severance payments equal to two years of total targeted cash compensation (defined as salary plus the targeted amount of annual incentive bonus) for our CEO or one year of total targeted cash compensation for any other senior officer in the event that the senior officer is involuntarily terminated by us without cause in the absence of a change of control.

 

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Payments to senior officers terminated in connection with a change of control are separately governed by the change of control arrangements discussed immediately above under the heading “— Change of Control Arrangements.”

Under our executive severance plan, subject to certain conditions and exclusions, more junior officers or managers receive certain specified cash payments and other benefits if they are either (i) involuntarily terminated without cause in the absence of a change of control or (ii) involuntarily terminated without cause or resign with good reason in connection with a change of control. Our full-time non-union employees not covered by our executive severance plan may, subject to certain conditions, be entitled to certain specified cash severance payments in connection with certain qualifying terminations.

Under a policy that we adopted in 2012, we are required to seek shareholder approval of any future senior executive severance agreements providing for cash payments, perquisites and accelerated health or welfare benefits with a value greater than 2.99 times the sum of the executive’s base salary plus target bonus.

Life Insurance Benefits. We sponsor a long-standing supplemental life insurance plan that we closed to new participants in 2008. Under this plan, four of our senior officers hold supplemental life insurance policies for which we are obligated to pay the premiums. We have not paid any premiums to fund these benefits since 2011. Over the past several years, predecessor policies were converted to newer, lower-cost policies. Due to these conversions, we currently expect to resume paying premiums during 2017 on behalf of our four grandfathered senior executives under this plan. In consultation with the Compensation Committee, we plan to continue to evaluate other options to minimize the cost of providing these benefits to the four grandfathered plan participants.

Perquisites. Officers are entitled to be reimbursed for the cost of an annual physical examination, plus related travel expenses.

Our aircraft usage policy permits the CEO to use our aircraft for personal travel without reimbursing us, and permits each other executive officer to use our aircraft for up to $10,000 per year in personal travel without reimbursing us. In all such cases, personal travel is permitted only if aircraft is available and not needed for superseding business purposes. Periodically, the Committee receives a report on the personal use of aircraft by senior management, and determines whether or not to alter our aircraft usage policy. In connection with electing to retain this policy, the Committee has determined that the policy (i) provides valuable and cost-effective benefits to our executives residing in a small city with limited commercial airline service, (ii) enables our executives to travel in a manner that we believe is more expeditious than commercial airline service, and (iii) is being implemented responsibly by the executives.

For purposes of valuing and reporting the use of our aircraft, we determine the incremental cost of aircraft usage on an hourly basis, calculated in accordance with applicable guidelines of the SEC. The incremental cost of this usage, which may be substantially different than the cost as determined under alternative calculation methodologies, is reported in the Summary Compensation Table appearing below.

From time to time, we have scheduled one of our annual regular board meetings and related committee meetings over a multi-day period. These meetings are often held in an area where we conduct operations, and frequently include site visits that enable our directors and senior officers to meet with local personnel. The spouses of our directors and executive officers are invited to attend these retreats, and we typically schedule recreational activities for those who are able and willing to participate.

For more information on the items under this heading, see the Summary Compensation Table appearing below.

Other Employee Benefits. We maintain certain broad-based employee welfare benefit plans in which the executive officers are generally permitted to participate on terms that are either substantially similar to those

 

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provided to all other participants or which provide our executives with enhanced benefits upon their death or disability. We also maintain a supplemental disability plan designed to ensure disability payments to our officers in the event payments are unavailable from our disability insurer.

IV. Our Policies, Processes and Guidelines Related to Executive Compensation

Our Compensation Decision-Making Process

As described further below, the Compensation Committee of our Board establishes, evaluates and monitors our executive compensation programs, subject to the Board’s oversight. The compensation decision-making process includes input from the Committee’s compensation consultant, our CEO and management, and requires a careful balancing of a wide range of factors, which include, but are not limited to, the following:

 

Compensation Decision-Making Considerations

   Input From  

Structure and Elements of Pay Programs

  

The competitive compensation practices of peer companies

     Consultant  

Performance of our Company in relation to our peers and our internal goals

     Management  

The financial impact and risk characteristics of our compensation programs

    
Consultant
and CEO
 
 

The strategic and financial imperatives of our business

     CEO  

Setting Competitive Compensation Pay Levels

  

Market data regarding the officer’s base salary, short-term incentive target, long-term incentive target and total target compensation paid to comparable executives at peer companies reflected in the benchmarking data

     Consultant  

The officer’s scope of responsibility, industry experience, particular set of skills, vulnerability to job solicitations from competitors and anticipated degree of difficulty of replacing the officer with someone of comparable experience and skill

    
Consultant
and CEO
 
 

The officer’s pay and performance relative to other officers and employees

     CEO  

The officer’s demonstrated leadership characteristics, ability to act as a growth agent within the company and ability to think strategically

     CEO  

Internal equity issues that could impact cohesion, teamwork or the overall viability of the executive group

     CEO  

The potential of these senior officers to assume different, additional or greater responsibilities in the future

     CEO  

The officer’s realized and realizable compensation in recent years and, to a limited degree, his or her accumulated wealth under our programs

    
CEO and
Management
 
 

The role these senior officers play in achieving our operational and strategic goals

     CEO  

Pay for Performance

  

Performance of our Company in relation to our peers and our key performance objectives (operating cash flow, core revenues and total shareholder return)

    

Consultant,
CEO and
Management
 
 
 

The business performance under the officer’s leadership and scope of responsibility

     CEO  

The officer’s overall performance is assessed based on individual results, the role the officer plays in maintaining a cohesive management team and improving the performance of others, and the officer’s relative strengths and weaknesses compared to the other senior officers

    
CEO and
Management
 
 

The role the officer may have played in any recent extraordinary corporate achievements

    
CEO and
Management
 
 

 

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For additional information on the compensation decision-making process of the Committee, see the remaining discussion in this Subsection appearing below.

Role of Human Resources and Compensation Committee. The Committee establishes, evaluates and monitors our executive compensation programs and oversees our human resources strategies, subject to the Board’s ultimate oversight. Specifically, the Committee approves:

 

    the compensation payable to each executive officer, as well as any other senior officer;

 

    for our short-term incentive and performance-based restricted shares (i) the performance objectives, (ii) the “threshold,” “target” and “maximum” threshold levels of performance, (iii) the weighing of the performance objectives, (iv) the amount of bonus payable and shares to vest if the target level of performance is attained and (v) the finally determined amount of cash bonus payments or fully-vested shares;

 

    the peer group for compensation benchmarking and the peer group for performance benchmarking; and

 

    delegation of authority to the CEO for awards of equity to our non-senior officers.

Among other things, the Committee also establishes, implements, administers and monitors our director cash and equity compensation programs. For more information, see “Director Compensation.”

Role of Compensation Consultants. The Committee engages the services of a compensation consultant to assist in the design and review of executive compensation programs, to determine whether the Committee’s philosophy and practices are reasonable and compatible with prevailing practices, and to provide guidance on specific compensation levels based on industry trends and practices.

The Committee has used Meridian Compensation Partners, LLC (“Meridian”) as its compensation consultant since June 2015. Representatives of Meridian actively participated in the design and development of our 2016 executive compensation programs and attended all of the Committee’s meetings in 2016. Meridian provides no other services to the Company, and, to our knowledge, has no prior relationship with any of our named executive officers. As required by SEC rules and New York Stock Exchange listing standards, the Committee has assessed the independence of Meridian and concluded that its work has not raised any conflicts of interest.

Role of CEO and Management. Although the Compensation Committee is responsible for all executive compensation decisions, each year it receives the CEO’s recommendations, particularly with respect to senior officers’ salaries and performance in the key areas outlined above in “ — Our Compensation Decision-Making Process.”

Senior Officers. The CEO and the executive management team, in consultation with the Committee’s compensation consultant, recommend to the Committee business goals to be used in establishing incentive compensation performance targets and awards for our senior officers. In addition, our Executive Vice President, Human Resources, works closely with the Committee and its compensation consultant to ensure that the Committee is provided with appropriate information to discharge its responsibilities.

Non-Senior Officers. The Committee oversees our processes and receives an annual report from the CEO on the compensation programs for our non-senior officers. The CEO, in consultation with the executive management team, is responsible for approval of:

 

    individual compensation levels for all of our vice presidents;

 

    the total cash compensation paid to our non-senior officers;

 

    all equity compensation awards to the non-senior officers, acting under authority delegated by the Committee in accordance with our shareholder approved long-term incentive plans.

 

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Timing of Equity Incentive Awards. Annual grants of stock awards to executives are typically made during the first quarter after we publicly release our earnings, although the Committee may defer grants for a variety of reasons, including to request additional information or conduct further reviews of management’s performance. Grants of stock awards to newly-hired executive officers who are eligible to receive such awards are typically made at the next regularly scheduled Committee meeting following their hire date.

Tally Sheets. Each year, we compile lists of compensation data relating to each of our executives. These “tally sheets” include the executive’s salary, annual cash incentive award, equity-based compensation, and realizable pay. These tally sheets also contain performance highlights on results and behaviors for each of our executives. The Committee uses these tally sheets to (i) review the total annual compensation of the executive officers and (ii) assure that the Committee has a comprehensive understanding of all elements of our compensation programs.

Risk Assessment. As part of its duties, the Committee assesses risks arising out of our employee compensation policies and practices. Based on its most recent assessment, the Committee does not believe that the risks arising from our compensation policies and practices are reasonably likely to materially adversely affect us. In reaching this determination, we have taken into account the risk exposures of our operations and the following design elements of our compensation programs and policies:

 

    our balance of annual and long-term compensation elements at the executive and management levels,

 

    our use of a diverse mix of performance metrics that create incentives for management to attain goals well aligned with the shareholders’ interests,

 

    the multi-year vesting of equity awards, which promotes focus on our long-term performance and mitigates the risk of undue focus on our short-term results,

 

    “clawback” policies and award caps that provide safeguards against inappropriate behavior, and

 

    bonus arrangements that generally permit either the Committee (for compensation payable to senior officers) or senior management (for compensation payable to other key employees) to exercise “negative discretion” to reduce the amount of certain incentive awards.

We believe these features, as well as the stock ownership requirements for our executive officers, result in a compensation program that aligns our executives’ interests with those of our shareholders and does not promote excessive risk-taking on the part of our executives or other employees.

Use of “Benchmarking” Data

General. With assistance from its compensation consultant, the Committee reviews each year “peer groups” of other companies comparable to CenturyLink for purposes of assessing our comparative compensation and performance. We generally endeavor to perform this analysis in the second half of each year in order to ensure they remain well-suited for its intended purposes and uses during the upcoming year.

Compensation Benchmarking. The Committee, based on input from its compensation consultant, reviewed peer group and survey data in support of pay decisions for our senior officers in 2016 in order to benchmark compensation levels for our executives against individuals who work in similarly-situated positions at companies that are comparable to ours based on revenue size, market cap, industry and business model.

 

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For our named executive officers, our compensation consultant utilized the compensation data publicly disclosed by companies included within the peer group below:

 

Peer Group for 2016 Compensation Benchmarking

BCE Inc.

   Liberty Global plc

Cablevision Systems Corporation

   Motorola Solutions, Inc.

Charter Communications, Inc.

   QUALCOMM Incorporated

CISCO Systems Inc.

   Sprint Corporation

Comcast Corporation

   Telus Corporation

Computer Sciences Corporation

   Time Warner Cable Inc.

DISH Network Corporation

   T-Mobile US Inc.

Frontier Communications Corp.

   Windstream Holdings, Inc.

Level 3 Communications, Inc.

   Xerox Corporation

In selecting these 18 peer companies, the Committee focused principally on telecommunications, cable and other communications companies that are generally comparable to us in terms of size, markets and operations. Prior to the start of 2016, the Committee reviewed the prior year’s comparable peer group and elected to remove DIRECTV and to add BCE Inc., Frontier Communications Corp., Telus Corporation, T-Mobile US Inc. and Xerox Corporation.

In addition to the peer group described above, our compensation consultant utilized, to a lesser degree, survey data containing compensation information for companies in the telecommunications industry and general industry that are generally similar in size to us.

For additional information about how we set pay levels, see “— Our Compensation Decision-Making Process.”

Performance Benchmarking. With the aid of its compensation consultant, the Committee annually reviews the broad industry peer group that it introduced in 2013 for purposes of benchmarking our relative performance based upon our historical three-year total shareholder return. This peer group is focused principally on telecommunications, cable and other communications companies that are generally comparable to us in terms of size, markets and operations. Prior to adopting the peer group for use in 2016 performance benchmarking, the Committee revised it by removing Cogent Communications Holding Inc., Ciena Corporation and Finisar Corp. and adding QUALCOMM Incorporated. Thereafter, it approved the below-listed 26-company TSR Peer Group for 2016 performance benchmarking. The peer group for compensation benchmarking is somewhat constrained by the number of companies and revenue and market cap size. In contrast, the peer group for performance benchmarking is comprised of companies we believe investors are considering when they decide whether to invest in us or our industry.

 

TSR Peer Group for Performance Benchmarking Relating to 2016 Awards

AT&T, Inc.

   Level 3 Communications, Inc.*

Cablevision Systems Corporation*

   Liberty Global plc*

Cincinnati Bell Inc.

   Motorola Solutions, Inc.*

CISCO Systems Inc.*

   QUALCOMM Incorporated *

Comcast Corporation*

   Rackspace Hosting, Inc.

Consolidated Communications Holdings Inc.

   Sirius XM Holdings Inc.

Crown Castle International Corp.

   Spok Holdings, Inc.

DISH Network Corporation*

   Sprint Corporation*

Equinix Inc.

   Telephone & Data Systems Inc.

Frontier Communications Corp.*

   United States Cellular Corporation

General Communication Inc.

   Verizon Communications Inc.

IDT Corporation

   Viacom, Inc.

JDS Uniphase Corporation

   Windstream Holdings, Inc.*

 

* Also included in the Committee’s above-listed Peer Group used for 2016 compensation benchmarking.

 

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Forfeiture of Prior Compensation

For approximately 20 years, all recipients of our equity compensation grants have been required to contractually agree to forfeit certain of their awards (and to return to us any cash, securities or other assets received by them upon the sale of Common Shares they acquired through certain prior equity awards) if at any time during their employment with us or within 18 months after termination of employment they engage in activity contrary or harmful to our interests. The Committee is authorized to waive these forfeiture provisions if it determines in its sole discretion that such action is in our best interests. We have filed with the SEC copies of our form of equity incentive agreements containing these forfeiture provisions. Our 2015 Executive Officers Short-Term Incentive Plan contains substantially similar forfeiture provisions.

Our Corporate Governance Guidelines authorize the Board to recover, or “clawback,” compensation from an executive officer if the Board determines that any bonus, incentive payment, equity award or other compensation received by the executive was based on any financial or operating result that was impacted by the executive’s knowing or intentional fraudulent or illegal conduct. Certain provisions of the Sarbanes-Oxley Act of 2002 would require our CEO and CFO to reimburse us for incentive compensation paid or trading profits earned following the release of financial statements that are subsequently restated due to material noncompliance with SEC reporting requirements caused by misconduct. In addition, provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 will, upon the completion of related rulemaking, require all of our current or former executive officers to make similar reimbursement payments in connection with certain financial statement restatements, irrespective of whether such executives were involved with the mistake that caused the restatement.

Stock Ownership Guidelines

Under our current stock ownership guidelines, our executive officers are required to beneficially own CenturyLink stock in market value equal to a multiple of their annual salary, as outlined in the table below, and each outside director must beneficially own CenturyLink stock equal in market value to five times the annual cash retainer payable to outside directors. Each executive officer and outside director has three and five years, respectively, to attain these targets.

 

Executive Officer

  Stock Ownership Guidelines    Stock
Ownership
Guidelines

CEO

  6 times base salary    $7.5 million(1)

All Other Executive Officers

  3 times base salary    $1.6 million(2)

Outside Directors

  5 times annual cash retainer    $325,000

 

(1) Based on annual salary as of December 31, 2016
(2) Based on average annual salary for all other executive officers as of December 31, 2016

For any year during which an executive or outside director does not meet his or her ownership target, the executive or director is required to hold 65% of the CenturyLink stock that he or she acquires through our equity compensation programs, excluding shares sold to pay related taxes.

As of the record date for the meeting, all of our executive officers and all of our directors were in compliance with, and in most cases significantly exceeded, our stock ownership guidelines. For additional information on our stock ownership guidelines, see “Governance Guidelines.”

Use of Employment Agreements

We have a long-standing practice of not providing employment agreements to our officers, and none of our long-standing executives have been granted an employment agreement. In connection with our recent mergers, however, we have assumed several employment agreements formerly granted by Embarq, Qwest or Savvis to its officers, and in a couple of instances have extended or renewed these arrangements to retain officers critical to our future plans.

 

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Tax Gross-ups

We eliminated the use of tax “gross-up” benefits in our executives’ change of control agreements and split-dollar insurance policies in 2010, and in our outside directors’ executive physical program in early 2012. We continue to provide these tax benefits to a limited number of our officers under legacy employment agreements that are expected to lapse over the next couple of years and to all of our employees who qualify for relocation benefits under our broad-based relocation policy. Subject to these limited exceptions, we do not intend to provide tax gross-up benefits in any new compensation programs.

Anti-Hedging and Anti-Pledging Policies

Under our insider trading policy, our employees and directors may not:

 

    purchase or sell short-term options with respect to CenturyLink shares,

 

    engage in “short sales” of CenturyLink shares, or

 

    engage in hedging transactions involving CenturyLink shares which allow employees to fix the value of their CenturyLink shareholdings without all the risks of ownership or cause them to no longer have the same interests or objectives as our other shareholders.

In addition, under our insider trading policy, our senior officers and directors are prohibited from holding our securities in a margin account or otherwise pledging our securities as collateral.

We believe that all of our senior officers and directors are currently in compliance with our anti-hedging and anti-pledging policies.

Deductibility of Executive Compensation

Section 162(m) of the Internal Revenue Code (the “Code”) limits the amount of compensation paid to our CEO and our other three most highly compensated executive officers, other than our CFO, that may be deducted by us for federal income tax purposes in any fiscal year to $1,000,000. “Performance-based” compensation that has been approved by our shareholders and otherwise satisfies the performance-based requirements under Section 162(m) of the Code is not subject to the Code’s $1,000,000 deduction limit. While the Committee believes that it is important for compensation paid to such covered employees to be tax deductible under the Code, the Committee also recognizes the need to retain flexibility to make compensation decisions, in the exercise of its business judgment, that may not meet the standards of Section 162(m) in order to enable us to continue to attract, retain, reward and motivate highly-qualified executives. Section 162(m) is highly technical and complex, so that even when we seek favorable tax treatment thereunder, we cannot assure you that our tax position will prevail.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed with management the report included above under the heading “Compensation Discussion and Analysis.” Based on this review and discussion, the Committee recommended to the Board that the Compensation Discussion and Analysis report be included in this proxy statement and incorporated into our Annual Report on Form 10-K for the year ended December 31, 2016.

Submitted by the Human Resources and Compensation Committee of the Board of Directors.

 

Laurie A. Siegel (Chair)

   Virginia Boulet

William A. Owens

   Michael J. Roberts

 

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EXECUTIVE COMPENSATION

Overview

The following table sets forth certain information regarding the compensation of (i) our principal executive and financial officers and (ii) each of our three most highly compensated executive officers other than our principal executive and financial officers. Following this table is additional information regarding incentive compensation, pension benefits, deferred compensation and potential termination payments pertaining to the named officers. For additional information on the compensation summarized below and other benefits, see “Compensation Discussion and Analysis.”

Summary Compensation Table

 

Name and Principal

Position

   Year     Salary      Bonus     Restricted
Stock
Awards(1)
    Non-Equity
Incentive Plan
Compensation(2)
     Change in
Pension
Value(3)
     All Other
Compensation(4)
     Total  

Glen F. Post, III

Chief Executive Officer

and President

     2016     $ 1,250,000      $     $ 10,518,344     $ 1,754,375      $ 333,816      $ 109,679      $ 13,966,214  
     2015       1,250,000              7,277,717       1,697,500        330,649        108,645        10,664,511  
     2014       1,100,000              9,581,227       1,597,200        745,535        107,486        13,131,448  

Dean J. Douglas

President — Enterprise

Markets

     2016 (5)      699,462        125,000       2,986,244       701,211               9,275        4,521,192  

R. Stewart Ewing, Jr.

Executive Vice President, Chief Financial Officer and Assistant Secretary

     2016       666,266              1,930,420       587,780        186,454        43,456        3,414,376  
     2015       663,138              1,335,661       566,480        191,830        47,520        2,804,629  
    
2014
 
   
650,000
 
    

 
   
1,992,894
 
   
692,120
 
    
462,796
 
    
44,710
 
    
3,842,520
 

Aamir Hussain

     2016       496,049              2,598,654       397,831               13,548        3,506,082  

Executive Vice President,

     2015       475,010              1,198,665       368,607               9,275        2,051,557  

Chief Technology Officer

     2014 (6)      85,892        100,000       2,486,653       83,144               344,945        3,100,634  

Stacey W. Goff

Executive Vice President,

Chief Administrative

Officer, General Counsel

and Secretary

     2016       540,758              1,559,195       477,057        161,857        36,146        2,775,013  
     2015       537,728              1,078,819       459,417               54,279        2,130,243  
     2014       520,890              1,609,657       611,942        339,053        45,600        3,127,142  
                    

 

(1) The amounts shown in this column reflect the fair value of awards of restricted stock made in early 2016, 2015 and 2014 in connection with our program of making annual long-term incentive compensation grants (except, with respect to Mr. Douglas, as otherwise noted in Note 5 below). The fair value of the awards presented in the table above has been determined in accordance with FASB ASC Topic 718. For purposes of this table, in accordance with SEC disclosure rules we determined the fair value of shares of:

 

    time-vested restricted stock using the closing trading price of our Common Shares on the day of grant;

 

    relative performance-based restricted stock (as defined below) as of the grant date based on probable outcomes using Monte Carlo simulations; and

 

    absolute performance-based restricted stock (as defined below) based on probable outcomes (subject to future adjustments based upon changes in the closing trading price of our Common Shares at the end of each reporting period).

The aggregate value of the restricted stock awards granted to these named executives in 2016, based on the grant date closing trading price of our Common Shares and assuming maximum payout of his or her performance-based restricted shares, would be as follows: Mr. Post, $15,248,259, Mr. Douglas, $4,254,998, Mr. Ewing, $2,798,523, Mr. Hussain, 3,767,225, and Mr. Goff, $2,260,352. See Note 10 titled “Share-based Compensation” of the notes to our audited financial statements included in Appendix A for an explanation of material assumptions that we used to calculate the fair value of these stock awards.

 

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(2) The amounts shown in this column reflect cash payments made under our annual incentive bonus plans for actual performance in the respective years. For additional information, see “— Incentive Compensation and Other Awards — 2016 Awards.”
(3) Reflects the net change during each of the years reflected in the present value of the named executives’ accumulated benefits under the defined benefit plans discussed below under the heading “— Pension Benefits.” In 2015, the present value of the accumulated benefits under those defined pension plans decreased by $123,573 for Mr. Goff (primarily due to (i) an additional year of benefit accrual, (ii) a one year decrease in the discount period and (iii) changes in both the discount rate and mortality assumption from 2014 to 2015). SEC rules dictate that the 2015 decreases be treated as a $0 Change in Pension Value for purposes of calculating total compensation.
(4) The amounts shown in this column are comprised of (i) reimbursements for the cost of an annual physical examination, (ii) personal use of our aircraft, (iii) contributions or other allocations to our defined contribution plans, and (iv) reimbursements of the cost of relocating one of our named executives and his family from Europe to the site of our headquarters office in 2014, including without limitation residential closing costs, travel costs, moving expenses, loss on the sale of a vehicle and lease termination penalties (aggregating to $324,903), plus related tax-gross up payments of $20,042, in each case for and on behalf of the named executives as follows:

 

Name

  Year      Physical
Exam
     Aircraft
Use
     Contributions
to Plans
     Relocation
Costs
     Total  

Mr. Post

    2016      $ 4,011      $ 2,640      $ 103,028      $      $ 109,679  
    2015        3,035        6,120        99,490               108,645  
    2014        2,831        7,500        97,155               107,486  

Mr. Douglas

    2016                      9,275               9,275  

Mr. Ewing

    2016        3,753               39,703               43,456  
    2015        3,775               43,745               47,520  
    2014                      44,710               44,710  

Mr. Hussain

    2016        4,273               9,275               13,548  
    2015                      9,275               9,275  
    2014                             344,945        344,945  

Mr. Goff

    2016               1,140        35,006               36,146  
    2015        7,441        6,600        40,238               54,279  
    2014               7,758        37,842               45,600  

In accordance with applicable SEC and accounting rules, we have not reflected the accrual or payment of dividends relating to unvested restricted stock as compensation in the Summary Compensation Table. In addition, the amounts shown in the Summary Compensation Table do not reflect any benefits associated with the named officers or their family members participating in recreational activities scheduled during board retreats. For additional information, see “Compensation Discussion and Analysis — Our Compensation Program Objectives and Components of Pay — Other Benefits — Perquisites.”

(5) Mr. Douglas commenced employment with us on February 16, 2016. As part of his negotiated employment package, Mr. Douglas received a signing bonus valued at $250,000, 50% of which was paid in cash and 50% of which was paid in the form of shares of time-vested restricted stock granted on March 7, 2016. Mr. Douglas’ annual incentive bonus with respect to 2016 was prorated based on the number of days worked during 2016.
(6) Mr. Hussain commenced employment with us on October 27, 2014. Mr. Hussain received a cash signing bonus of $100,000 as part of his negotiated employment package. Mr. Hussain’s annual incentive bonus with respect to 2014 was prorated based on the number of days worked during 2014.

 

 

Incentive Compensation and Other Awards

2016 Awards. The table and discussion below summarize:

 

    the range of potential cash payouts under short-term incentive bonus awards that were granted to each named officer on the dates indicated below with respect to performance during 2016, and

 

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    grants of long-term compensation awarded to each named officer on the dates indicated below, consisting of (i) the number of shares of time-vested restricted stock awarded, (ii) the range of potential share payouts under relative performance-based restricted stock awards and (iii) the range of potential share payouts under absolute performance-based restricted stock awards, which for purposes of the table below are referred to as the time-vested awards, the relative performance awards and the absolute performance awards, respectively.

Grants of Plan-Based Awards

 

Name

 

Type of Award

and Grant Date(1)

  Range of Payouts Under 2016 Non-
Equity Incentive Plan Awards(2)
    Estimated Future Share Payouts Under
Equity Incentive Plan  Awards(3)
    All other
Stock
Awards:
Unvested
Shares
(#)(4)
    Grant
Date Fair
Value
of Stock
Awards
($)(5)
 
    Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
(#)
    Target
(#)
    Maximum
(#)
     

Glen F. Post, III

  Annual Bonus   $ 1,093,750     $ 2,187,500     $ 4,375,000                                
  Time-Vested Award                                         130,326     $ 3,812,036  
  Relative Performance Award                       48,873       97,745       195,490             4,381,908  
  Absolute Performance Award                       48,873       97,746       195,492             2,324,400  

Dean J. Douglas

  Annual Bonus     437,164       874,328       1,748,655                   —-                
  Time-Vested Award                                         39,674       1,171,578  
  Relative Performance Award                       13,225       26,449       52,898             1,185,709  
  Absolute Performance Award                       13,225       26,449       52,898             628,957  

R. Stewart Ewing, Jr.

  Annual Bonus     366,446       732,892       1,465,784                                
  Time-Vested Award                                         23,918       699,602  
  Relative Performance Award                       8,970       17,939       35,878             804,205  
  Absolute Performance Award                       8,970       17,940       35,880             426,613  

Aamir Hussain

  Annual Bonus     248,025       496,049       992,098                                
  Time-Vested Award                                         32,198       941,792  
  Relative Performance Award                       12,075       24,149       48,298             1,082,600  
  Absolute Performance Award                       12,075       24,149       48,298             574,263  

Stacey W. Goff

  Annual Bonus     297,417       594,834       1,189,668                                
  Time-Vested Award                                         19,319       565,081  
  Relative Performance Award                       7,245       14,489       28,978             649,542  
  Absolute Performance Award                       7,245       14,490       28,980             344,572  

 

(1) Each of these awards was granted on February 23, 2016 with respect to each named officer, except, with respect to Mr. Douglas, as otherwise noted in Note 5 to the Summary Compensation Table appearing above.
(2) These columns provide information on the potential bonus payouts approved with respect to 2016 performance. For information on the actual amounts paid based on 2016 performance criteria, see the column of the Summary Compensation Table labeled “Non-Equity Incentive Plan Compensation.” As described further herein, the failure to meet the “threshold” level of performance would result in no annual bonus payment.
(3) Represents the relative performance awards and absolute performance awards granted on February 23, 2016 to each named executive, as described in greater detail below.
(4) Represents the time-vested awards granted in 2016 to each named executive, as described in greater detail below.
(5) Calculated in accordance with FASB ASC Topic 718 in the manner described in Note 1 to the Summary Compensation Table above.

 

 

Terms of 2016 Restricted Stock Awards. The restricted stock issued to our executive officers in 2016 consisted of awards of:

 

    time-vested restricted stock

 

    performance-based restricted stock, the ultimate payout of which will be based on our total shareholder return relative to the peer group referred to below (“relative performance-based restricted stock”)

 

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    performance-based restricted stock, the ultimate payout of which will be based on our attainment of the absolute financial goals described below (“absolute performance-based restricted stock” and, collectively with the relative performance-based restricted stock, the “performance-based restricted stock”).

Vesting. For each named officer, the shares of time-vested restricted stock awarded in 2016 will vest in three equal installments on February 23, 2017, 2018 and 2019, subject to the named officer’s continued employment with us (except that a small portion of the total number of such shares awarded to Dean Douglas in 2016 will vest under a slightly different schedule). For each named officer, the shares of their 2016 performance-based restricted stock will, subject to their continued employment, vest on February 23, 2019, but only upon attaining the performance goals specified below with respect to the period between January 1, 2016 and December 31, 2018 (the “performance period”).

In addition to the vesting described above, all of the shares of the time-vested restricted stock and performance-based restricted stock awarded in 2016 also vest upon the death or disability of the named officer, and some or all of these shares may under certain circumstances vest or remain subject to future vesting upon the retirement of the named officer at his or her early or normal retirement age. In addition, upon certain terminations of employment following a change of control of the Company, the shares of the 2016 time-vested restricted stock will vest and the shares of the 2016 performance-based restricted stock will remain subject to future vesting, all as described in greater detail below under “— Potential Termination Payments.” The vesting terms for our outstanding restricted stock granted in earlier years is substantially the same as noted above.

Shares Issuable Under Performance-Based Restricted Stock. In the preceding “Grants of Plan-Based Awards” table, the number of performance-based restricted shares listed under the “target” column for each named executive officer represents the number of shares actually granted to that officer that will vest if we perform at the targeted performance level. Generally speaking, the actual number of shares of performance-based restricted stock that will vest will depend upon whether our relative and absolute performance over the performance period is less than, equal to or more than the relative and absolute targets established by the Committee in connection with granting these awards.

All shares of the relative performance-based restricted stock will vest if we perform at the “target” performance level, which is attaining total shareholder return over the three-year performance period equal to the 50th percentile of the total shareholder return of the companies in a 26-company TSR peer group for the same three-year period. Each named executive officer will receive a greater or lesser number of shares of relative performance-based restricted stock depending on our actual total shareholder return in relation to that of the 26 TSR peer companies, as discussed further under “Compensation Discussion and Analysis — Our Compensation Program Objectives and Components of Pay — Long-Term Equity Incentive Compensation.”

None of the shares of absolute performance-based restricted stock will vest unless we attain at least a 6% operating cash flow annual return on average assets during the performance period. If we do, all shares of the absolute performance-based restricted stock will vest if we attain the “target” amount of our consolidated legacy and strategic revenue (as defined in our federal securities law reports) over the three-year performance period. This target amount of such revenue over this three-year period will equal the sum of (i) the amounts of targeted legacy and strategic revenue for 2016 and 2017 as previously determined by the Committee in early 2016 and 2017, respectively, and (ii) the amount of targeted legacy and strategic revenue for 2018 to be determined by the Committee in early 2018. Each named executive officer will receive a greater or lesser number of shares of absolute performance-based restricted stock depending on our actual absolute revenues over the performance period, as discussed further under “Compensation Discussion and Analysis — Our Compensation Program Objectives and Components of Pay — Long-Term Equity Incentive Compensation.”

Any contingent right of a named executive officer to receive more than the number of shares actually granted on February 23, 2016 are treated by us as restricted stock units under the terms of the CenturyLink 2011 Equity Incentive Plan.

 

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Other Terms. All dividends related to shares of the above-described time-vested and performance-based restricted stock will be paid to the holder only upon the vesting of such shares. Unless and until forfeited, these shares may be voted by the named executive officers.

All of these above-described restricted shares are subject to forfeiture if the officer competes with us or engages in certain other activities harmful to us, all as specified further in the forms of incentive agreements that we have filed with the SEC. See “— Potential Termination Payments.”

For additional information about our grants of time-vested restricted stock, relative performance-based restricted stock (including the 26-company TSR peer group referred to above) and absolute performance-based restricted stock, see “Compensation Discussion and Analysis — Our Compensation Program Objectives and Components of Pay — Long-Term Equity Incentive Compensation.”

Outstanding Awards. The table below summarizes information on stock options and unvested restricted stock outstanding at December 31, 2016.

Outstanding Equity Awards at December 31, 2016(1)

 

    Option Awards     Stock Awards  
          Equity Incentive Plan Awards(3)     All Other Stock Awards  

Name

  Number of
Securities
Underlying
Unexercised
Options(2)
    Option
Exercise
Price
    Option
Expiration
Date
    Grant
Date
    Unvested
Shares
    Market
Value of
Unvested
Shares
    Unvested
Shares(4)
    Market
Value of
Unvested
Shares
 

Glen F. Post, III

    200,000     $ 45.90       2/26/2017       2/20/2014       155,418     $ 3,695,840       34,537     $ 821,290  
          2/23/2015       131,640       3,130,399       58,507       1,391,296  
          2/23/2016       195,491       4,648,776       130,326       3,099,152  

Dean J. Douglas

                      2/23/2016       52,898       1,257,914       35,264       838,578  
          3/7/2016 (5)                  4,410       104,870  

R. Stewart Ewing, Jr.

    62,500       45.90       2/26/2017       2/20/2014       32,327       768,736       7,184       170,836  
          2/23/2015       24,160       574,525       10,738       255,350  
          2/23/2016       35,879       853,203       23,918       568,770  

Aamir Hussain

                      11/7/2014                   21,022       499,903  
          2/23/2015       21,682       515,598       9,636       229,144  
          2/23/2016       48,298       1,148,526       32,198       765,668  

Stacey W. Goff

    40,500       45.90       2/26/2017       2/20/2014       26,111       620,920       5,802       137,972  
          2/23/2015       19,514       464,043       8,673       206,244  
          2/23/2016       28,979       689,121       19,319       459,406  

 

(1) All information on exercisability, vesting and market value is solely as of December 31, 2016. This table does not reflect (i) lapses of options, vesting of restricted stock or other changes in the equity awards since such date or (ii) any additional equity grants since such date.
(2) We have not granted options to executives since 2007. All of the options summarized under this column were exercisable as of December 31, 2016 and all of them lapsed on February 26, 2017 without being exercised.
(3)

Represents performance-based restricted shares granted on February 20, 2014, February 23, 2015, and February 23, 2016. The table above assumes, as of December 31, 2016, that we would perform at “target” levels such that all performance-based shares granted to each named executive would vest fully. In early 2017, we determined that (i) 50% of the TSR performance-based restricted stock granted on February 20, 2014 would vest and the remaining shares would be forfeited and (ii) 89.1% of the absolute revenue performance-based restricted stock granted on February 20, 2014 would vest and the remaining shares would be forfeited.

 

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  For additional information on the vesting and other terms of our most recent grant of performance-based restricted shares, see “— 2016 Awards” and “— Terms of 2016 Restricted Stock Awards.”
(4) All shares listed under this column are shares of time-vested restricted stock that generally vest at a rate of one-third per year during the first three years after that grant date. For additional information on the vesting and other terms of our most recent grant of time-vested restricted shares, see “— Terms of 2016 Restricted Stock Awards.”
(5) See Note 5 to the Summary Compensation Table appearing above.

2016 Exercises and Vesting. The following table provides information on Common Shares acquired by the named officers during 2016 in connection with the exercise of options and the vesting of restricted stock.

Option Exercises and Stock Vested During 2016

 

     Option Awards      Stock Awards  

Name

   Number of
Shares
Acquired
on Exercise
     Value Realized
on Exercise
     Number of
Shares
Acquired
on Vesting(1)
     Value Realized
on Vesting(2)
 

Glen F. Post, III

          $        133,983      $ 3,771,329  

Dean J. Douglas

                           

R. Stewart Ewing, Jr.

                   29,143        817,058  

Aamir Hussain

                   25,840        631,160  

Stacey W. Goff

                   22,900        642,747  

 

(1) Represents the vesting of (i) time-vested restricted shares granted in 2013, 2014 and 2015, and (ii) performance-based restricted shares granted in 2013, the vesting conditions of which are described in “Compensation Discussion and Analysis — Our Compensation Philosophy and Linkage to Pay for Performance — Overview of Pay Elements and Linkage to Compensation Philosophy and Objectives —Actual Payouts of Performance-Based Restricted Stock.”
(2) Based on the closing trading price of the Common Shares on the applicable vesting date.

 

 

Pension Benefits

Amount of Benefits. The following table and discussion summarize pension benefits payable to the named officers under (i) the CenturyLink Component of the CenturyLink Combined Pension Plan, qualified under Internal Revenue Code Section 401(a), which permits eligible participants (including officers) who have completed at least five years of service to receive a pension benefit upon attaining early or normal retirement age, and (ii) our nonqualified supplemental defined benefit plan, which is designed to pay supplemental retirement benefits to certain officers in amounts equal to the benefits such officers would otherwise forego due to federal limitations on compensation and benefits under qualified plans. We refer to these particular defined benefit plans below as our “Qualified Plan” and our “Supplemental Plan,” respectively, and as our “Pension Plans,” collectively.

 

Name(1)

  

Plan Name

   Number of
Years of Credited
Service
     Present
Value of
Accumulated
Benefit(2)
     Payments During
Last Fiscal Year
 

Glen F. Post, III

   Qualified Plan      18      $ 2,129,404      $  
   Supplemental Plan      18        2,724,257         

R. Stewart Ewing, Jr.

   Qualified Plan      18        1,536,161        644,603 (3) 
   Supplemental Plan      18        1,108,812        13,627 (4) 

Stacey W. Goff

   Qualified Plan      18        674,394         
   Supplemental Plan      18        463,241         

 

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(1) Neither Dean J. Douglas nor Aamir Hussain are currently eligible to participate in either of our Pension Plans.
(2) These figures represent accumulated benefits as of December 31, 2016 based on several assumptions, including the assumption that the executive remains employed by us and begins receiving retirement benefits at the normal retirement age of 65, with such accumulated benefits being discounted from the normal retirement age to December 31, 2016 using discount rates ranging between 3.95% and 4.10%. No adjustments have been made to reflect reductions required under any qualified domestic relations orders. See Note 9 titled “Employee Benefits” of the notes to our audited financial statements included in Appendix A for additional information.
(3) Pursuant to a qualified domestic relations order, Mr. Ewing’s former wife received a lump sum payment in the amount of $644,603 on August 1, 2015, which was not previously reported. No further benefits are owed to her under the Qualified Plan.
(4) As part of the qualified domestic relations order referenced in note 3, Mr. Ewing’s former wife is receiving payments under the Supplemental Plan, which commenced on August 1, 2015, in the amount of approximately $800 per month. The amount shown in the table represents payments made to her during 2016 ($9,619) plus an additional amount ($4,008) paid to her in 2015, which was not previously reported. The present value of the annuity of Mr. Ewing’s former wife is included in the Present Value of Accumulated Benefit column.

 

 

Pension Plans. With limited exceptions specified in the Pension Plans, we “froze” our Qualified Plan and Supplemental Plan as of December 31, 2010, which means that no additional monthly pension benefits have accrued under such plans since that date (although service after that date continues to count towards vesting and benefit eligibility and a limited transitional benefit for eligible participants continued to accrue through 2015).

Prior to this freezing of benefit accruals, the aggregate amount of these named officers’ total monthly pension benefit under the Qualified Plan and Supplemental Plan was equal to the participant’s years of service since 1999 (up to a maximum of 30 years) multiplied by the sum of (i) 0.5% of his or her final average pay plus (ii) 0.5% of his or her final average pay in excess of his or her Social Security covered compensation, where “final average pay” was defined as the participant’s average monthly compensation during the 60 consecutive month period within his or her last ten years of employment in which he or she received his or her highest compensation. Effective December 31, 2010, the Qualified Plan and Supplemental Plan were amended to cease all future benefit accruals under the above formula (except where a collective bargaining agreement provides otherwise). In lieu of additional accruals under the above-described formula, each affected participant’s accrued benefit as of December 31, 2010 increases 4% per year, compounded annually through the earlier of December 31, 2015 or the termination of the participant’s employment.

Under both Pension Plans, “average monthly compensation” is determined based on the participant’s salary plus annual cash incentive bonus. Although the retirement benefits described above are provided through separate plans, we have in the past transferred benefits from the Supplemental Plan to the Qualified Plan, and reserve the right to make further similar transfers to the extent allowed under applicable law. The value of benefits transferred to the Qualified Plan, which directly offset the value of benefits in the Supplemental Plan, will be payable to the recipients in the form of enhanced annuities or supplemental benefits and are reflected in the table above under the “Present Value of Accumulated Benefits” column.

The normal form of benefit payment under both of our Pension Plans is (i) in the case of unmarried participants, a monthly annuity payable for the life of the participant, and (ii) in the case of married participants, an actuarially equivalent monthly annuity payable for the lifetime of the participant and a survivor annuity payable for the lifetime of the spouse upon the participant’s death. Participants may elect optional forms of annuity benefits under each Pension Plan and, in the case of the Qualified Plan, an annuity that guarantees ten

 

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years of benefits, all of which are actuarially equivalent in value to the normal form of benefit. The enhanced annuities described in the prior paragraph may be paid in the form of a lump sum, at the participant’s election.

The normal retirement age is 65 under both of the Pension Plans. Participants may receive benefits under both of these plans upon “early retirement,” which is defined as attaining age 55 with five years of service. Under both of these plans, the benefit payable upon early termination is calculated under formulas that pay between 60% to 100% of the base plan benefit and 48% to 92% of the excess plan benefit, in each case with the lowest percentage applying to early retirement at age 55 and proportionately higher percentages applying to early retirement after age 55. For additional information on early retirement benefits, please see the applicable early retirement provisions of the Pension Plans, copies of which are filed with the SEC.

Other. R. Stewart Ewing, Jr., age 65, is currently eligible to retire under the Qualified Plan and Supplemental Plan. Mr. Ewing currently plans to retire upon completion of our pending acquisition of Level 3, which we expect to close by the end of the third quarter of 2017. The Compensation Committee has preliminarily discussed the compensation to be paid to Mr. Ewing in connection with his retirement, but has not yet approved a definitive retirement package. The Potential Termination Payments table that appears below sets forth estimates of payments and benefits that Mr. Ewing would have received if he retired as of December 31, 2016. The actual amounts to be paid to Mr. Ewing in connection with his upcoming retirement will differ from the estimated amounts shown in such table, and are expected to be higher in the aggregate.

Glen F. Post, III, age 64, is currently eligible for early retirement under the Qualified Plan and Supplemental Plan.

Deferred Compensation

The following table and discussion provides information on our Supplemental Dollars & Sense Plan, which is designed to permit officers to defer a portion of their salary in excess of the amounts that may be deferred under federal law governing qualified 401(k) plans.

Non-Qualified Deferred Compensation

 

Name(1)

   Aggregate
Balance at
December 31,
2015
     Executive
Contributions
in 2016(2)
     CenturyLink
Contributions
in 2016(3)
     Aggregate
Earnings
in 2016(4)
     Aggregate
Withdrawals/
Distributions
     Aggregate
Balance at
December 31,
2016
 

Glen F. Post, III

   $ 3,645,520      $ 250,519      $ 94,749      $ 323,286      $      $ 4,314,074  

R. Stewart Ewing, Jr.

     1,311,713        124,467        30,428        145,819               1,612,427  

Stacey W. Goff

     1,419,289        91,698        32,094        136,933               1,680,014  

 

(1) Dean J. Douglas and Amir Hussain are both eligible to participate in our Supplemental Dollars & Sense Plan, but have not yet chosen to participate.
(2) All of these amounts in this column reflect contributions by the officer of salary paid in 2016 and reported as 2016 salary compensation in the Summary Compensation Table.
(3) This column includes our partial match of the officer’s contribution under the terms of the plan. We have reflected all of these amounts as 2016 compensation in the column of the Summary Compensation Table labeled “All Other Compensation.”
(4) Aggregate earnings in 2016 include interest, dividends and distributions earned with respect to deferred compensation invested by the officers in the manner described in the text below.

 

 

Under our Supplemental Dollars & Sense Plan, certain of our senior officers may defer up to 50% of their salary in excess of the federal limit on annual contributions to a qualified 401(k) plan. For every dollar that an eligible participant contributes to this plan up to 6% of his or her excess salary, we add an amount equal to the

 

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total matching percentage then in effect for matching contributions made by us under our qualified 401(k) plan (which for 2016 equaled the sum of all of the initial 1% contributed and half of the next 5% contributed). All amounts contributed under this supplemental plan by the participants or us are allocated among deemed investments which follow the performance of the same broad array of funds offered under our qualified 401(k) plan. This is reflected in the market value of each participant’s account. Participants may change their deemed investments in these funds at any time. We reserve the right to transfer benefits from the Supplemental Dollars & Sense Plan to our qualified 401(k) or retirement plans to the extent allowed under Treasury regulations and other guidance. The value of benefits transferred to our qualified plans directly offsets the value of benefits in the Supplemental Dollars & Sense Plan. Participants in the Supplemental Dollars & Sense Plan normally receive payment of their account balances in a lump sum once they cease working full-time for us, subject to any deferrals mandated by federal law.

Potential Termination Payments

The materials below discuss payments and benefits that our officers are eligible to receive if they (i) resign or retire, (ii) are terminated by us, with or without cause, (iii) die or become disabled or (iv) become entitled to termination benefits following a change of control of CenturyLink.

Notwithstanding the information appearing below, you should be aware that our officers have agreed to forfeit their equity compensation awards (and profits derived therefrom) if they compete with us or engage in other activity harmful to our interests while employed with us or within 18 months after termination. Certain other compensation might also be recoverable by us under certain circumstances after termination of employment. See “Compensation Discussion and Analysis — Our Policies, Processes and Guidelines Related to Executive Compensation — Forfeiture of Prior Compensation” for more information.

Payments Made Upon All Terminations. Regardless of the manner in which our employees’ employment terminates prior to a change of control, they are entitled to receive amounts earned during their term of employment (subject to the potential forfeitures discussed above). With respect to each such terminated employee, such amounts include his or her:

 

    salary and earned but unused vacation pay through the date of termination, payable immediately following termination in cash

 

    annual incentive bonus, but only if such employee served for the entire bonus period or through the date such bonus is payable (unless this service requirement is waived or more favorable treatment is applicable in the case of retirement, death or disability)

 

    restricted stock that has vested

 

    benefits accrued and vested under our qualified and supplemental defined benefit pension plans, with payouts generally occurring at early or normal retirement age

 

    vested account balance held in our qualified and supplemental defined contribution plans, which the employee is generally free to receive at the time of termination

 

    rights to continued health care benefits to the extent required by law.

Payments Made Upon Voluntary or Involuntary Terminations. In addition to benefits described under the heading immediately above, employees involuntarily terminated by us without cause prior to a change of control are also entitled, subject to certain conditions, to:

 

    exercise all vested options within 190 days of the termination date

 

    accelerated vesting of all, or a portion of, unvested time-vested restricted stock if approved by our Compensation Committee

 

   

a cash severance payment in the amount described under “Compensation Discussion and Analysis — Our Compensation Program Objectives and Components of Pay — Other Benefits — Severance

 

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Benefits” plus the receipt of any short-term incentive bonus payable under their applicable bonus plan and outplacement assistance benefits.

None of the benefits listed immediately above are payable if the employee resigns or is terminated for cause, except that resigning employees are entitled to exercise their vested options within 190 days and employees terminated for cause could request the Compensation Committee to accelerate their unvested time-vested restricted stock (which is unlikely to be granted).

Payments Made Upon Retirement. Employees who retire in conformity with our retirement plans and policies are entitled, subject to certain conditions, to:

 

    exercise all of their options, all of which accelerate upon retirement, within three years of their retirement date

 

    accelerated vesting of all, or a portion of, unvested time-vested restricted stock if approved by our Compensation Committee

 

    payment of their annual incentive bonus or a pro rata portion thereof, depending on their retirement date

 

    post-retirement life, health and welfare benefits

 

    all of the benefits described under the heading “— Payments Made Upon All Terminations.”

In addition, an employee who retires from the Company will continue to vest in his or her unvested performance-based restricted stock for the remainder of the applicable performance period. If the employee takes early retirement, this continued vesting opportunity only applies to a reduced pro rata number of unvested shares, based on the number of days he or she was employed during the performance period.

Payments Made Upon Death or Disability. Upon death or disability, officers (or their estates) are generally entitled to (without duplication of benefits):

 

    payments under our disability or life insurance plans, as applicable

 

    exercise all of their options, all of which accelerate upon death or disability, within two years

 

    keep all of their time-vested restricted stock, whether vested or unvested

 

    payment of their annual incentive bonus or a pro rata portion thereof, depending on their date of death or disability

 

    continued rights to receive (i) life, health and welfare benefits at early or normal retirement age, in the event of disabilities of employees with ten years of prior service, or (ii) health and welfare benefits payable to surviving eligible dependents, in the event of death of employees meeting certain age and service requirements

 

    all of the benefits described under the heading “— Payments Made Upon All Terminations,” except that (i) upon death benefits under our retirement plans are generally available only to surviving spouses and (ii) benefits payable to mentally disabled employees under our nonqualified defined benefit retirement plans may be paid prior to retirement age.

Payments Made Upon a Change of Control. We have entered into agreements that entitle each of our executive officers who are terminated without cause or resign under certain specified circumstances within certain specified periods following any change in control of CenturyLink to (i) receive a lump sum cash severance payment equal to a multiple of such officer’s annual cash compensation (defined as salary plus the average annual incentive bonus over the past three years), (ii) receive such officer’s currently pending bonus or pro rata portion thereof, depending on the date of termination, and (iii) continue to receive, subject to certain

 

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exceptions, certain welfare benefits for certain specified periods. See “Compensation Discussion and Analysis — Our Compensation Program Objectives and Components of Pay — Other Benefits — Change of Control Arrangements” for a description of the benefits under our change of control agreements.

Under CenturyLink’s above-referenced agreements, a “change in control” of CenturyLink would be deemed to occur upon (i) any person (as defined in the Securities Exchange Act of 1934) becoming the beneficial owner of 30% or more of the outstanding Common Shares, (ii) a majority of our directors being replaced, (iii) consummation of certain mergers, substantial asset sales or similar business combinations, or (iv) approval by the shareholders of a liquidation or dissolution of CenturyLink.

The above-referenced agreements provide the benefits described above if we terminate the officer’s employment without cause or the officer resigns with “good reason,” which we describe further under the heading “Compensation Discussion and Analysis — Our Compensation Program Objectives and Components of Pay — Other Benefits — Change of Control Arrangements.” We have filed copies or forms of these agreements with the SEC.

Participants in our supplemental defined benefit plan whose service is terminated within two years of the change in control of CenturyLink will receive a cash payment equal to the present value of their plan benefits (after providing age and service credits of up to three years if the participant is terminated by us without cause or resigns with “good reason”), determined in accordance with actuarial assumptions specified in the plan. Certain account balances under our qualified retirement plans will also fully vest upon a change of control of CenturyLink.

Under the terms of our 2011 Equity Incentive Plan, incentives granted thereunder will not vest, accelerate, become exercisable or be deemed fully paid unless otherwise provided in a separate agreement, plan or instrument. None of our equity award agreements since 2011 have provided for any such accelerated recognition of benefits solely upon a change of control. Instead, our current award agreements provide that any holder of incentives who is terminated by us or our successor without cause or resigns with good reason following a change of control will be entitled to receive full vesting of his or her time-vested restricted shares and continued rights under his or her performance-based restricted shares (on the same terms as if he or she had not been terminated).

We believe the above-described change of control benefits enhance shareholder value because:

 

    prior to a takeover, these protections help us to recruit and retain talented officers and to help maintain the productivity of our workforce by alleviating concerns over economic security, and

 

    during or after a takeover, these protections (i) help our personnel, when evaluating a possible business combination, to focus on the best interests of CenturyLink and its shareholders, and (ii) reduce the risk that personnel will accept job offers from competitors during takeover discussions.

Estimated Potential Termination Payments. The table below provides estimates of the value of payments and benefits that would become payable if our current named executives were terminated in the manner described below, in each case based on various assumptions, the most significant of which are described in the table’s notes.

 

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Potential Termination Payments

 

        Type of Termination of Employment(1)  

Name

 

Type of

Termination

Payment(2)

  Involuntary
Termination
Without
Cause(3)
    Retirement(4)     Disability     Death     Termination
Upon a
Change of

Control(5)
 

Glen F. Post, III

  Annual Bonus   $ 1,754,375     $ 1,754,375     $ 1,754,375     $ 1,754,375     $ 1,754,375  
  Equity Awards(6)           9,038,826       16,786,754       16,786,754       16,786,754  
  Pension and Welfare(7)     76,900                         111,600  
  Cash Severance(8)     6,875,000                         10,312,500  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 8,706,275     $ 10,793,201     $ 18,541,129     $ 18,541,129     $ 28,965,229  

Dean J. Douglas

  Annual Bonus   $ 701,211     $     $ 701,211     $ 701,211     $ 701,211  
  Equity Awards(6)                 2,201,362       2,201,362       2,201,362  
  Pension and Welfare(7)     17,800                         28,100  
  Cash Severance(8)     1,800,023                         3,600,045  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 2,519,034     $     $ 2,902,573     $ 2,902,573     $ 6,530,718  

R. Stewart Ewing, Jr.

  Annual Bonus   $ 587,780     $ 587,780     $ 587,780     $ 587,780     $ 587,780  
  Equity Awards(6)           1,769,446       3,191,419       3,191,419       3,191,419  
  Pension and Welfare(7)     26,400                         45,300  
  Cash Severance(8)     1,399,141                         2,798,282  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 2,013,321     $ 2,357,226     $ 3,779,199     $ 3,779,199     $ 6,622,781  

Aamir Hussain

  Annual Bonus   $ 397,831     $     $ 397,831     $ 397,831     $ 397,831  
  Equity Awards(6)                 3,158,840       3,158,840       3,158,840  
  Pension and Welfare(7)     29,500                         51,500  
  Cash Severance(8)     1,000,022                         2,000,044  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 1,427,353     $     $ 3,556,671     $ 3,556,671     $ 5,608,215  

Stacey W. Goff

  Annual Bonus   $ 477,057     $     $ 477,057     $ 477,057     $ 477,057  
  Equity Awards(6)                 2,577,704       2,577,704       2,577,704  
  Pension and Welfare(7)     31,400                         55,300  
  Cash Severance(8)     1,135,583                         2,271,166  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 1,644,040     $     $ 3,054,761     $ 3,054,761     $ 5,381,227  

 

(1) All data in the table reflects our estimates of the value of payments and benefits assuming the named officer was terminated on December 31, 2016. The closing price of the Common Shares on such date was $23.78. The table reflects only estimates of amounts earned or payable through or at such date based on various assumptions. Actual amounts can be determined only at the time of termination. If a named officer voluntarily resigns or is terminated with cause, he or she will not be entitled to any special or accelerated benefits, but will be entitled to receive various payments or benefits that vested before the termination date. The table reflects potential payments based upon a physical disability; additional benefits may be payable in the event of a mental disability.
(2) As further described above, upon termination of employment, the named officers may become entitled to receive certain special, accelerated or enhanced benefits, including, subject to certain exceptions, the right to receive payment of their annual cash incentive bonus, an acceleration under certain circumstances of the vesting of their outstanding equity awards, current or enhanced pension and welfare benefits, or cash severance payments. The table excludes (i) payments or benefits made under broad-based plans or arrangements generally available to all salaried full-time employees and (ii) benefits, awards or amounts that the officer was entitled to receive prior to termination of employment.
(3)

The amounts listed in this column reflect payments to which the named officer would be entitled to under our executive severance plan if involuntarily terminated by us without cause prior to a change of control.

 

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  The amounts listed in this column would not be payable if the officer voluntarily resigns or is terminated for cause.
(4) Mr. Post is eligible to receive early retirement benefits, and Mr. Ewing is eligible to receive full retirement benefits, under CenturyLink’s defined benefit pension plans described above under the heading “— Pension Benefits.” The amounts reflected under the “Retirement” column do not reflect the amount of lifetime annuity payments payable upon retirement. Assuming early or full retirement as of December 31, 2016, Messrs. Post and Ewing would have been entitled to monthly annuity payments of approximately $29,965.93 and $15,759.51, respectively, over their lifetimes, some of which, in the case of Mr. Ewing, may be payable to his ex-wife under a qualified domestic relations order. For further information, see (i) the notes below and (ii) “— Pension Benefits — Other” above.
(5) The information in this column assumes each named officer became entitled at December 31, 2016 to the benefits under CenturyLink’s agreements in existence on such date described above under “— Payments Made Upon a Change of Control” upon an involuntary termination without cause or resignation with good reason. All amounts are based on several assumptions.
(6) The information in this row (i) reflects the benefit to the named officer arising out of the accelerated vesting of some or all of his or her restricted stock caused by the termination of employment based upon the intrinsic method of valuation, (ii) assumes that the Compensation Committee would not approve the acceleration of the named officer’s restricted stock in the event of an involuntary termination, and (iii) assumes that the Compensation Committee would approve, in the event of the early or normal retirement of Messrs. Post or Ewing, the acceleration of all of their restricted stock outstanding for at least one year. Assuming the Compensation Committee approved the acceleration of all of the named officers’ restricted stock in connection with an involuntary termination of employment at December 31, 2016, the amounts reflected in the table under the column “Involuntary Termination Without Cause” would have been higher by the following amounts: $16,786,754 for Mr. Post, $2,201,362 for Mr. Douglas, $3,191,419 for Mr. Ewing, $2,577,704 for Mr. Goff, and $3,158,840 for Mr. Hussain.
(7) The information in this row reflects only the incremental benefits that accrue upon an event of termination, and excludes benefits that were vested on December 31, 2016. For information on the present value of the named officers’ accumulated benefits under our defined benefit pension plans, see “— Pension Benefits,” and for information on the aggregate balances of the named officers’ non-qualified deferred compensation, see “— Deferred Compensation.” As indicated above, the named officer would also be entitled to receive a distribution of his or her 401(k) benefits and various other broad-based benefits.
(8) The information in this row excludes, in the case of disability or death, payments made by insurance companies.

DIRECTOR COMPENSATION

Overview

The Board believes that each director who is not employed by us (whom we refer to as outside directors or non-management directors) should be compensated through a mix of cash and equity-based compensation, which most recently has been granted in the form of restricted stock. The Compensation Committee, consisting entirely of independent directors, has primary responsibility for periodically reviewing and considering any revisions to director compensation. The Committee’s compensation consultant typically assists the Committee in connection with its review of director compensation. The Board reviews the Compensation Committee’s recommendations and determines the amount of director compensation.

 

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The table and the discussion below summarize how we compensated our outside directors in 2016.

2016 Compensation of Outside Directors

 

Name

   Fees Earned or
Paid in Cash
     Stock
Awards(1),(2)
     All Other
Compensation(3)
    Total  

Continuing Directors:

          

Martha H. Bejar

   $ 125,000      $ 130,804      $     $ 255,804  

Virginia Boulet

     138,000        130,804              268,804  

Peter C. Brown

     125,000        130,804              255,804  

W. Bruce Hanks

     152,000        130,804        5,828       288,632  

Mary L. Landrieu

     105,000        130,804              235,804  

Harvey P. Perry

     213,000        130,804        3,805       347,609  

Michael J. Roberts

     111,000        130,804              241,804  

Laurie A. Siegel

     133,750        130,804              264,554  

Retiring Director:(4)

          

William A. Owens

     123,000        311,222              434,222  

Former Directors:(5)

          

Gregory J. McCray

     129,250        130,804              260,054  

C. G. Melville, Jr.

     56,750               110,000 (6)      166,750  

Richard A. Gephardt

     40,500                     40,500  

Joseph R. Zimmel

     2,000                     2,000  

 

(1) For purposes of determining the number of restricted shares to grant to each outside director, the Compensation Committee valued each of these stock awards to equal $145,000 (or $345,000 in the case of Adm. Owens), based upon the volume-weighted average closing price of our Common Shares over a 15-day trading period ending prior to the grant date. For purposes of reporting the fair value of these awards in the table above, however, we valued each grant based upon the closing stock price of our Common Shares on the grant date in accordance with FASB ASC Topic 718. These grants vest on May 19, 2017 (subject to accelerated vesting or forfeiture in certain limited circumstances). See “— Cash and Stock Payments.”
(2) As of December 31, 2016, William A. Owens held 11,561 unvested shares of restricted stock and each of our other outside directors then in office held 4,859 unvested shares of restricted stock, which constituted the only unvested equity-based awards held by our outside directors as of such date (excluding equity awards granted to Michael J. Roberts prior to his commencement of service on our board following the Qwest merger). For further information on our directors’ stock ownership, see “Ownership of Our Securities — Executive Officers and Directors,” and for information on certain deferred fee arrangements pertaining to Mr. Roberts, see “— Other Benefits.”
(3) Includes (i) reimbursements for the cost of annual physical examinations and related travel of $5,828 for Mr. Hanks and $3,805 for Mr. Perry and (ii) the payments to Mr. Melville described further in Note 6 below. Except as otherwise noted in the prior sentence, the table above does not reflect (i) reimbursements for travel expenses or (ii) any benefits associated with the directors or their family members participating in recreational activities scheduled during board retreats (as described further under the heading “Compensation Discussion and Analysis — Our Compensation Program Objectives and Components of Pay — Other Benefits — Perquisites”).
(4) William A. Owens will be retiring from the Board at the meeting.
(5) Gregory J. McCray resigned from the Board effective February 23, 2017. C. G. Melville, Jr. and Richard A. Gephardt served as directors through May 18, 2016, when both of them retired from the Board. Joseph R. Zimmel resigned from the Board on January 19, 2016.
(6)

Represents payments made to Mr. Melville under the terms of our July 2016 consulting agreement with him. In May 2016, the Board, upon the recommendation of the Nominating Committee, named Mr. Melville a Founding Director in recognition of his 48 consecutive years of service as a CenturyLink director, which ended with his retirement from the Board in May 2016. In his capacity as a Founding Director, Mr. Melville

 

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  attends select company training, educational and leadership events at our request in exchange for payments under the above-referenced consulting agreement.

Cash and Stock Payments

Each outside director is paid an annual fee of $65,000 plus $2,000 for attending each regular board meeting, special board meeting (including each day of the Board’s annual planning session), committee meeting and separate director education program.

Over the past several years, Admiral William A. Owens, in his capacity as the non-executive Chairman of the Board, received supplemental board fees at the rate of $200,000 per year payable in shares of time-vested restricted stock (valued using the 15-trading day average closing price specified in note 1 of the table appearing above under “— Overview”). The restricted stock issued to the Chairman during 2016 vests on May 19, 2017 (subject to accelerated vesting in certain limited circumstances). The Chairman’s duties are set forth in our corporate governance guidelines. See “Corporate Governance.”

Over the past several years, Harvey P. Perry, in his capacity as non-executive Vice Chairman of the Board, received supplemental board fees at the rate of $100,000 cash per year. The Vice Chairman’s current duties include, among others, (i) assisting the Chairman by facilitating communications among the directors and monitoring the activities of the Board’s committees, (ii) serving at the Chairman’s request on the board of any company in which we have an investment, (iii) monitoring our strategies and (iv) performing certain executive succession functions.

As soon as practicable, the Board intends to name a new non-executive Chairman of the Board to replace Admiral Owens, who will retire from the Board at the meeting. The Compensation Committee has not yet decided how to compensate the Chairman or any Vice Chairman for service following the date of the meeting.

We also pay annual supplemental board fees to the chairs of each of our committees as follows: (i) the chair of the Audit Committee receives $25,000, (ii) the chair of the Compensation Committee receives $18,750, (iii) the chair of the Nominating Committee receives $15,000 and (iv) the chair of the Risk Evaluation Committee receives $12,500.

During 2016, the Compensation Committee authorized each outside director to receive shares of time-vested restricted stock valued at $145,000 (valued using the 15-trading day average closing price specified in Note 1 of the table appearing above under “– Overview”) that vest on May 19, 2017 (subject to accelerated vesting in certain limited circumstances). The Compensation Committee currently expects to authorize comparable equity grants in May 2017 to each outside director serving on the day after our 2017 annual meeting.

Other Benefits

Each outside director is entitled to be reimbursed (i) for expenses incurred in attending board and committee meetings, (ii) for expenses incurred in attending director education programs and (iii) up to $5,000 per year for the cost of an annual physical examination, plus related travel expenses.

In connection with our 2011 merger with Qwest, we assumed the Qwest Deferred Compensation Plan for Non-Employee Directors. Under this plan, Qwest outside directors could elect to defer all or a portion of their cash directors’ fees, which were then converted to a number of “phantom units” based the value of a share of Qwest stock, with credit for dividends paid to stockholders “reinvested” in additional phantom units. Certain plan balances were distributed to participants at the close of the merger, but plan balances attributable to amounts deferred on or after January 1, 2005 by Qwest directors who joined our Board following the merger were converted, based on the merger exchange ratio, to phantom units based on the value of one of our Common Shares. Other than the crediting and “reinvestment” of dividends for outstanding phantom units, CenturyLink

 

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does not make any contributions to, and no additional elective deferrals are permitted under, this plan. Subject to the terms of the plan, each participant’s account will be distributed as a lump sum in cash as soon as practicable following the end of his or her service as a director. As of December 31, 2016, Michael J. Roberts was the only remaining participant in this plan, with a balance of 5,566.88 phantom units with an aggregate value of $132,381 as of such date.

We supply company-owned tablets to our outside directors for use in reviewing materials posted to a dedicated portal that permits management to communicate with the Board.

Directors may use our aircraft in connection with company-related business. However, we generally do not permit either our directors or their family members to use our aircraft for personal trips (except when such use can be accommodated at no incremental cost to us or on terms generally available to all of our employees in connection with a medical emergency).

Our bylaws require us to indemnify our directors and officers so that they will be free from undue concern about personal liability in connection with their service to CenturyLink. We have signed agreements with each of those individuals contractually obligating us to provide these indemnification rights. We also provide our directors with customary directors and officers liability insurance.

Director Stock Ownership Guidelines

For information on our stock ownership guidelines for outside directors, see “Corporate Governance — Governance Guidelines — Stock Ownership Guidelines.”

 

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PERFORMANCE GRAPH

The graph below compares the cumulative total shareholder return on the Common Shares with the cumulative total return of the S&P 500 Index and the S&P 500 Integrated Telecommunication Services Index for the period from December 31, 2011 to December 31, 2016, in each case assuming (i) the investment of $100 on January 1, 2012 at closing prices on December 31, 2011, and (ii) reinvestment of dividends.

 

LOGO

 

     December 31,  
     2011      2012      2013      2014      2015      2016  

CenturyLink

   $ 100.00      $ 113.12      $ 98.32      $ 129.40      $ 88.46      $ 90.43  

S&P 500 Index

     100.00        115.98        153.51        174.47        176.88        197.98  

S&P 500 Integrated Telecommunication Services Index(1)

     100.00        118.25        131.66        135.59        140.09        172.97  

 

(1) As of December 31, 2016, the S&P 500 Integrated Telecommunication Services Index consisted of AT&T Inc., CenturyLink, Frontier Communications Corporation, Level 3 Communications, Inc. and Verizon Communications Inc.

 

 

 

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the last fiscal year, our Compensation Committee included Laurie A. Siegel, Virginia Boulet, William A. Owens, Gregory J. McCray (through February 24, 2016) and Michael J. Roberts (beginning February 24, 2016). No member of the Compensation Committee served as an officer or employee of the Company or any of our subsidiaries prior to or while serving on the Compensation Committee.

TRANSACTIONS WITH RELATED PARTIES

Recent Transactions

During 2016, we paid H. Parnell Perry, Jr., who serves as Manager — Technology Management, total gross compensation of approximately $141,841, consisting of approximately $124,133 in salary, $13,717 in annual incentive bonuses and $3,991 in matching contributions to his qualified 401(k) plan account. Mr. Perry is the son of Harvey P. Perry, one of our directors, and has been an employee of ours since 1987.

During 2016, we paid Rickey E. Lowery, who serves as Senior Lead IT Engineer, total gross compensation of approximately $133,091, consisting of approximately $117,493 in salary, $11,493 in annual incentive bonuses and $4,105 in matching contributions to his qualified 401(k) plan account. Mr. Lowery is the son-in-law of Harvey P. Perry, one of our directors, and has been an employee of ours since 1989.

During 2016, we paid Matthew J. Post, who serves as Senior Lead Architect, total gross compensation of approximately $122,968, consisting of approximately $109,275 in salary, $10,828 in annual incentive bonuses and $2,865 in matching contributions to his qualified 401(k) plan account. Mr. Post is the son of Glen Post, our Chief Executive Officer and President, and has been an employee of ours since 2014.

We are one of the largest employers in Monroe, Louisiana and in several of our other markets, and, as such, employ personnel related by birth or marriage throughout our organization. Several of our executive officers or directors have family members employed by us, although, none of them (other than H. Parnell Perry, Jr., Rickey E. Lowery and Matthew J. Post) earned 2016 compensation in excess of the $120,000 threshold that would require detailed disclosures under the federal proxy rules.

Review Procedures

Early each year, our management distributes to the Audit Committee a written report listing our payments to vendors, including a list of transactions with our directors, officers or employees. This annual report permits the independent directors to assess and discuss our related party transactions. Although we have no formal written pre-approval procedure governing related party transactions, our CEO typically seeks approval of the Board before engaging in any new related party transaction involving significant sums or risks.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Securities Exchange Act of 1934 requires our executive officers and directors, among others, to file certain beneficial ownership reports with the SEC. To our knowledge, based solely on our review of copies of reports received by us and written representations by certain reporting persons, we believe that all such reports were timely filed during fiscal year 2016, except for one report for W. Bruce Hanks covering one transaction.

 

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ADDITIONAL INFORMATION ABOUT THE MEETING

Quorum

Our bylaws provide that the presence at the meeting, in person or by proxy, of a majority of the outstanding Voting Shares constitutes a quorum to organize the meeting.

Vote Required to Elect Directors

Our bylaws provide that each of the nine director nominees will be elected if the number of votes cast in favor of the director exceeds the number of votes withheld with respect to the director. You may vote “for” all director nominees or withhold your vote for any one or more of the director nominees. If any of the nine directors fails to receive a majority of the votes cast at the meeting, our bylaws will require such director to tender his or her resignation to the Board for its consideration.

Vote Required to Adopt Other Proposals at the Meeting

With respect to Item 3(b), shareholders will be deemed to approve the frequency of our say-on-pay votes based upon which alternative receives the highest number of votes. With respect to all other matters to be submitted to a vote at the meeting, the matter will be approved if the votes cast in favor of such matter exceed the votes cast against such matter.

Effect of Abstentions

Shares as to which the proxy holders have been instructed to abstain from voting with respect to any particular matter will be treated under the Company’s bylaws as not being cast for purposes of such vote. Because all matters expected to be brought before the meeting for a vote must be approved by the holders of a majority of the votes cast, abstentions will not affect the outcome of any such vote. Shareholders abstaining from voting will be counted as present for purposes of constituting a quorum to organize the meeting.

Effect of Non-Voting

If you properly execute and return a proxy or voting instruction card, your shares will be voted as you specify. If you are a shareholder of record and make no specifications on your validly submitted proxy card, your shares will be voted against the shareholder proposal and in favor of all other matters. If you are a beneficial owner of shares and do not give voting instructions to your broker, bank or nominee, they will be entitled to vote your shares only to the extent specified below.

Under the rules of the New York Stock Exchange, brokers who hold shares in street name for customers may vote in their discretion on matters considered to be “routine” when they have not received voting instructions from beneficial owners. Under these rules, brokers who do not receive such instructions will be entitled to vote in their discretion at the meeting with respect to the ratification of the appointment of the independent auditor, but will not be entitled to vote in their discretion with respect to any of the other matters submitted to a vote. If brokers who do not receive voting instructions do not, or cannot, exercise discretionary voting power (a “broker non-vote”) with respect to any matter to be considered at the meeting, shares that are not voted will be treated as present for purposes of constituting a quorum to organize the meeting but not cast with respect to considering such matter. Because all matters to be considered at the meeting must be approved by the holders of a majority of the votes cast, broker non-votes will not affect the outcome of any such vote.

Revocations

Shareholders of record may revoke their proxy or change their votes at any time before their proxy is voted at the meeting by giving a written revocation notice to our secretary, by timely delivering a proxy bearing a later date or by voting in person at the meeting. Beneficial shareholders may revoke or change their voting instructions by contacting the broker, bank or nominee that holds their shares.

 

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Voting by Participants in Our Benefit Plans

If you beneficially own any of our Common Shares by virtue of participating in any retirement plan of CenturyLink, then you will receive a separate voting instruction card that will enable you to direct the voting of these shares. This voting instruction card entitles you, on a confidential basis, to instruct the trustees how to vote the shares allocated to your plan account. The plans require you to act as a “named fiduciary,” which requires you to exercise your voting rights prudently and in the interests of all plan participants. Plan participants who wish to vote should complete and return the voting instruction card in accordance with its instructions. If you elect not to vote the shares allocated to your accounts, your shares will be voted in the same proportion as voted shares regarding each of the items submitted to a vote at the meeting. Plan participants that wish to revoke their voting instructions must contact the trustee and follow its procedures.

If you beneficially own any of our Common Shares by virtue of previously participating in an employee stock purchase plan formerly maintained by us or a company that we have acquired, we have made arrangements for our proxy materials to be made available to you by the record owner of those shares. Consequently, you will be afforded the opportunity to vote those shares in the same manner as any other shares held in street name. See “General Information About the Annual Meeting.”

Cost of Proxy Solicitation

We will pay all expenses of soliciting proxies for the meeting. Proxies may be solicited personally, by mail, by telephone or by facsimile by our directors, officers and employees, who will not be additionally compensated therefor. We will also request persons holding Voting Shares in their names for others, such as brokers, banks and other nominees, to forward materials to their principals and request authority for the execution of proxies, and we will reimburse them for their expenses incurred in connection therewith. We have retained Innisfree M&A Incorporated, New York, New York, to assist in the solicitation of proxies, for which we will pay Innisfree fees anticipated to be $20,000 and will reimburse Innisfree for certain of its out-of-pocket expenses.

Other Matters Considered at the Meeting

Management has not timely received any notice that a shareholder desires to present any matter for action at the meeting in accordance with our bylaws (which are described below in “Other Matters — Deadlines for Submitting Shareholder Nominations and Proposals for the 2018 Annual Meeting — Other Proposals and Nominations”) other than the shareholder proposals described in this proxy statement, and is otherwise unaware of any matter to be considered by shareholders at the meeting other than those matters specified in the accompanying notice of the meeting. Our proxy and voting instruction cards, however, will confer discretionary voting authority with respect to any other matter that may properly come before the meeting. It is the intention of the persons named therein to vote in accordance with their best judgment on any such matter.

Conduct of the Meeting

The Chairman has broad responsibility and legal authority to conduct the meeting in an orderly and timely manner. This authority includes establishing rules for shareholders who wish to address the meeting. Copies of these rules will be available at the meeting. The Chairman may also exercise broad discretion in recognizing shareholders who wish to speak and in determining the extent of discussion on each item of business. In light of the need to conduct all necessary business and to conclude the meeting within a reasonable period of time, we cannot assure that every shareholder who wishes to speak on an item of business will be able to do so.

You will not be permitted to bring audio visual equipment, ampliphones or posters into the meeting. We reserve the right, to be exercised in our sole discretion, to admit guests, such as local politicians or the press, into the meeting.

 

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Postponement or Adjournment of the Meeting

The Chairman may postpone or adjourn the meeting. Your proxy will still be valid and may be voted at the postponed or adjourned meeting. You will still be able to change or revoke your proxy until it is voted.

OTHER MATTERS

Deadlines for Submitting Shareholder Nominations and Proposals for the 2018 Annual Meeting

Proxy Statement Proposals. In order to be eligible for inclusion in our 2018 proxy materials, any shareholder proposal to elect shareholder-nominated candidates as directors or to take any other action at such meeting must be received by December 14, 2017, and must comply with applicable federal proxy rules and our bylaws. See “Corporate Governance — Director Nomination Process.” These shareholder proposals must be in writing and received by the deadline described above at our principal executive offices at 100 CenturyLink Drive, Monroe, Louisiana 71203, Attention: Stacey W. Goff, Secretary. If we do not receive a shareholder proposal by the deadline described above, we may exclude the proposal from our proxy materials for our 2018 annual meeting.

Other Proposals and Nominations. In addition, our bylaws require shareholders to furnish timely advance written notice of their intent to nominate a director or bring any other matter before a shareholders’ meeting, whether or not they wish to include their candidate or proposal in our proxy materials. In general, notice must be received in writing by our Secretary, addressed in the manner specified in the immediately-preceding paragraph, between November 24, 2017 and February 22, 2018 and must contain various information specified in our bylaws. (If the date of the 2018 annual meeting is more than 30 days before or more than 60 days after May 24, 2018, notice must be delivered not earlier than the close of business on the 180th day prior to the date of such annual meeting and not later than the close of business on the later of the 90th day prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, then 10th day following the day on which such public announcement of the date of such meeting is first made by the Company.) Notices that are not delivered in accordance with our bylaws may be disregarded by us. For additional information on these procedures, see “Corporate Governance — Director Nomination Process.”

Our above-described advance notice bylaw provisions are in addition to, and separate from, the requirements that a shareholder must meet in order to have a candidate or proposal included in our proxy materials.

Proxies granted by a shareholder will give discretionary authority to the proxy holders to vote on any matters introduced pursuant to the above-described advance notice bylaw provisions, subject to applicable rules of the SEC.

The summaries above are qualified in their entirety by reference to the full text of our bylaws. You may obtain a full copy of our bylaws by reviewing our reports filed with the SEC, by accessing our website at www.centurylink.com, or by contacting our Secretary in the manner specified below.

Proxy Materials

Most shareholders will receive only a written notice of how to access our proxy materials, and will not receive printed copies of the proxy materials unless requested. If you would like to receive a paper copy of our proxy materials, you should follow the instructions for requesting the materials in the notice.

The full set of our materials include:

 

    the notice and proxy statement for the meeting,

 

    a proxy or voting instruction card, and

 

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    our 2016 annual report furnished in the following two parts: (1) our 2016 Annual Financial Report, which constitutes Appendix A to this proxy statement, and (2) our 2016 review and CEO’s letter appearing at the beginning of this booklet.

Annual Financial Report

Appendix A includes our 2016 Annual Financial Report, which is excerpted from portions of our Annual Report on Form 10-K for the year ended December 31, 2016 that we filed with the SEC on February 23, 2017. In addition, we have provided you with a copy of or access to our 2016 review and CEO’s letter, which precedes this proxy statement at the beginning of this booklet. Neither of these documents is a part of our proxy soliciting materials.

You may obtain a copy of our Form 10-K report without charge by writing to Stacey W. Goff, Secretary, CenturyLink, Inc., 100 CenturyLink Drive, Monroe, Louisiana 71203, or by visiting our website at www.centurylink.com.

You may view online this proxy statement and related materials at www.envisionreports. com/ctl.

By Order of the Board of Directors

 

LOGO

Stacey W. Goff

Secretary

Dated: April 10, 2017

 

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APPENDIX A

to Proxy Statement

CENTURYLINK, INC.

ANNUAL FINANCIAL REPORT

December 31, 2016

 

 

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INDEX TO ANNUAL FINANCIAL REPORT

December 31, 2016

The materials included in this Appendix A are excerpted from Items 5, 6, 7 and 8 of our Annual Report on Form 10-K for the year ended December 31, 2016. We filed the Form 10-K with the Securities and Exchange Commission on February 23, 2017, and have not updated any of the following excepted materials for any changes or developments since such date. Please see the Form 10-K for additional information about our business and operations.

 

INFORMATION ON OUR TRADING PRICE AND DIVIDENDS

     A-3  

SELECTED FINANCIAL DATA

     A-4  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     A-7  

CONSOLIDATED FINANCIAL STATEMENTS

     A-40  

Report Of Independent Registered Public Accounting Firm

     A-40  

Report Of Independent Registered Public Accounting Firm

     A-41  

Consolidated Statements Of Operations

     A-42  

Consolidated Statements Of Comprehensive Income (Loss)

     A-43  

Consolidated Balance Sheets

     A-44  

Consolidated Statements Of Cash Flows

     A-45  

Consolidated Statements Of Stockholders’ Equity

     A-46  

Notes To Consolidated Financial Statements*

     A-47  

 

* All references to “Notes” in this Appendix A refer to these Notes.

 

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INFORMATION ON OUR TRADING PRICE AND DIVIDENDS

Our common stock is listed on the New York Stock Exchange (“NYSE”) and the Berlin Stock Exchange and is traded under the symbol CTL and CYT, respectively. The following table sets forth the high and low reported sales prices on the NYSE along with the quarterly dividends, for each of the quarters indicated.

 

     Sales Price      Cash  Dividend
per

Common Share
 
     High      Low     

2016

        

First quarter

   $ 32.49        21.94        0.540  

Second quarter

     32.94        26.35        0.540  

Third quarter

     31.56        26.51        0.540  

Fourth quarter

     33.45        22.86        0.540  

2015

        

First quarter

   $ 40.59        34.04        0.540  

Second quarter

     37.00        29.28        0.540  

Third quarter

     31.13        24.29        0.540  

Fourth quarter

     29.37        24.11        0.540  

Dividends on common stock during 2016 and 2015 were paid each quarter. On February 21, 2017, our Board of Directors declared a common stock dividend of $0.54 per share.

As described in greater detail in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, the declaration and payment of dividends is at the discretion of our Board of Directors, and will depend upon our financial results, cash requirements, future prospects and other factors deemed relevant by our Board of Directors.

At February 16, 2017, there were approximately 122,000 stockholders of record, although there were significantly more beneficial holders of our common stock. At February 16, 2017, the closing stock price of our common stock was $24.28.

 

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SELECTED FINANCIAL DATA

The following tables of selected consolidated financial data should be read in conjunction with, and are qualified by reference to, our consolidated financial statements and notes thereto in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.

The tables of selected financial data shown below are derived from our audited consolidated financial statements. These historical results are not necessarily indicative of results that you can expect for any future period.

Selected financial information from our consolidated statements of operations is as follows:

 

     Years Ended December 31,(1)  
     2016(2)(3)      2015(2)      2014(4)      2013(5)     2012  
    

(Dollars in millions, except per share amounts

and shares in thousands)

 

Operating revenues

   $ 17,470        17,900        18,031        18,095       18,376  

Operating expenses

     15,139        15,295        15,621        16,642       15,663  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

   $ 2,331        2,605        2,410        1,453       2,713  

Income before income tax expense

     1,020        1,316        1,110        224       1,250  

Net income (loss)

     626        878        772        (239     777  

Basic earnings (loss) per common share

     1.16        1.58        1.36        (0.40     1.25  

Diluted earnings (loss) per common share

     1.16        1.58        1.36        (0.40     1.25  

Dividends declared per common share

     2.16        2.16        2.16        2.16       2.90  

Weighted average basic common shares outstanding

     539,549        554,278        568,435        600,892       620,205  

Weighted average diluted common shares outstanding

     540,679        555,093        569,739        600,892       622,285  

 

(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of unusual items affecting the results for the years ended December 31, 2016, 2015 and 2014.
(2) During 2016 and 2015, we recognized an incremental $201 million and $215 million, respectively, of revenue associated with the Federal Communications Commission (“FCC”) Connect America Fund Phase 2 support program as compared to the interstate USF program. For additional information, see Note 1—Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016.
(3) During 2016, we recognized $189 million of severance expenses and other one-time termination benefits associated with our workforce reductions and $52 million of expenses related to our pending acquisition of Level 3.
(4) During 2014, we recognized a $60 million tax benefit associated with a deduction for the tax basis for worthless stock in a wholly-owned foreign subsidiary and a $63 million pension settlement charge.
(5) During 2013, we recorded a non-cash, non-tax-deductible goodwill impairment charge of $1.092 billion for goodwill attributed to one of our previous operating segments and a litigation settlement charge of $235 million.

 

 

 

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Selected financial information from our consolidated balance sheets is as follows:

 

     As of December 31,  
     2016      2015      2014      2013      2012  
     (Dollars in millions)  

Net property, plant and equipment(1)

   $ 17,039        18,069        18,433        18,646        18,909  

Goodwill(1)(2)

     19,650        20,742        20,755        20,674        21,627  

Total assets(3)

     47,017        47,604        49,103        50,471        52,901  

Total long-term debt(3)(4)

     19,993        20,225        20,503        20,809        20,481  

Total stockholders’ equity(2)

     13,399        14,060        15,023        17,191        19,289  

 

(1) During 2016, as a result of the pending sale of our colocation business and data centers, we reclassified $1.071 billion in net property, plant and equipment and $1.141 billion of goodwill to assets held for sale which is included in other current assets on our consolidated balance sheet. See Note 3—Pending Sale of Colocation Business and Data Centers to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016 for additional information.
(2) During 2013, we recorded a non-cash, non-tax-deductible goodwill impairment charge of $1.092 billion for goodwill attributed to one of our previous operating segments.
(3) In 2015, we adopted both ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs” and ASU 2015-17 “Balance Sheet Classification of Deferred Taxes” by retrospectively applying the requirements of the ASUs to our previously issued consolidated financial statements. The adoption of both ASU 2015-03 and ASU 2015-17 reduced total assets by $1.044 billion, $1.316 billion and $1.039 billion in each year for the three years ended December 31, 2014, respectively, and ASU 2015-03 reduced total long-term debt by $168 million, $157 million and $124 million in each year for the three years ended December 31, 2014, respectively.
(4) Total long-term debt is the sum of current maturities of long-term debt, capital lease obligations of $305 million (associated with the pending sale of colocation business and data centers) included in current liabilities associated with assets held for sale and long-term debt on our consolidated balance sheets. For additional information on our total long-term debt, see Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016. For total contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Future Contractual Obligations” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.

 

 

Selected financial information from our consolidated statements of cash flows is as follows:

 

     Years Ended December 31,  
     2016     2015     2014     2013     2012  
     (Dollars in millions)  

Net cash provided by operating activities

   $ 4,608       5,152       5,188       5,559       6,065  

Net cash used in investing activities

     (2,994     (2,853     (3,077     (3,148     (2,690

Net cash used in financing activities

     (1,518     (2,301     (2,151     (2,454     (3,295

Payments for property, plant and equipment and capitalized software

     (2,981     (2,872     (3,047     (3,048     (2,919

 

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The following table presents certain of our selected operational metrics:

 

     As of December 31,  
     2016      2015      2014      2013      2012  
     (in thousands except for data centers, which are
actuals)
 

Operational metrics:

              

Total access lines(1)

     11,090        11,748        12,394        13,002        13,751  

Total broadband subscribers(1)

     5,945        6,048        6,082        5,991        5,851  

Prism TV subscribers

     325        285        242        175        106  

Total data centers(2)

     58        59        58        55        54  

 

(1) Access lines are lines reaching from the customers’ premises to a connection with the public network and broadband subscribers are customers that purchase broadband connection service through their existing telephone lines, stand-alone telephone lines, or fiber-optic cables. Our methodology for counting our access lines and broadband subscribers includes only those lines that we use to provide services to external customers and excludes lines used solely by us and our affiliates. It also excludes unbundled loops and includes stand-alone broadband subscribers. We count lines when we install the service.
(2) We define a data center as any facility where we market, sell and deliver either colocation services, multi-tenant managed services, or both. Our data centers are located in North America, Europe and Asia.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Certain statements in our Annual Report constitute forward-looking statements. See “Special Note Regarding Forward-Looking Statements and Related Matters” in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2016 for factors relating to these statements and “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of certain risk factors applicable to our business, financial condition, results of operations, liquidity or prospects.

OVERVIEW

We are an integrated communications company engaged primarily in providing an array of services to our residential and business customers. Our communications services include local and long-distance voice, broadband, Multi-Protocol Label Switching (“MPLS”), private line (including special access), Ethernet, colocation, hosting (including cloud hosting and managed hosting), data integration, video, network, public access, Voice over Internet Protocol (“VoIP”), information technology and other ancillary services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.

At December 31, 2016, we operated approximately 11.1 million access lines in 37 states and served approximately 5.9 million broadband subscribers and 325 thousand Prism TV subscribers. We also operated 58 data centers throughout North America, Europe and Asia. Our methodology for counting access lines, broadband subscribers and data centers, which is described further in the operational metrics table below under “Results of Operations”, and our methodology for counting Prism TV subscribers may not be comparable to those of other companies.

Pending Acquisition of Level 3

On October 31, 2016, we entered into a definitive merger agreement under which we propose to acquire Level 3 Communications, Inc. (“Level 3”) in a cash and stock transaction. Under the terms of the agreement, Level 3 shareholders will receive $26.50 per share in cash and 1.4286 of CenturyLink shares for each share of Level 3 common stock they own at closing. CenturyLink shareholders are expected to own approximately 51% and Level 3 shareholders are expected to own approximately 49% of the combined company at closing. On December 31, 2016, Level 3 had outstanding $10.9 billion of long-term debt.

Completion of the transaction is subject to the receipt of regulatory approvals, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, as well as approvals from the Federal Communications Commission (the “FCC”) and certain state regulatory authorities. The transaction is also subject to the approval of CenturyLink and Level 3 shareholders at meetings scheduled to be held on March 16, 2017, as well as other customary closing conditions. Subject to these conditions, we anticipate closing this transaction by the end of the third quarter 2017. If the merger agreement is terminated under certain circumstances, we may be obligated to pay Level 3 a termination fee of $472 million, or Level 3 may be obligated to pay CenturyLink a termination fee of $738 million.

As of December 31, 2016, we had recognized $52 million of expenses associated with our activities related to the pending Level 3 acquisition. We have not recognized certain other expenses that are contingent on completion of the acquisition. These expenses include financial advisory fees and compensation expense comprised of retention bonuses, severance and stock-based compensation for stock-based awards that will vest in connection with the acquisition. Most of these contingent expenses will be recognized in our consolidated financial statements in the period in which the acquisition occurs, with the remainder recognized thereafter. The final amount of compensation expense to be recognized is partially dependent upon personnel decisions that will be made as part of integration planning. These amounts may be material.

 

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Upon completion of the acquisition, Level 3’s assets and liabilities will be revalued and recorded at fair value. The assignment of fair value will require a significant amount of judgment. The use of fair value measures will affect the comparability of our post-acquisition financial information and may make it more difficult to predict earnings in future periods. For example, Level 3 has certain deferred costs and deferred revenues on its balance sheet associated with capacity leases. Based on the accounting guidance for business combinations, these existing deferred costs and deferred revenues are expected to be assigned little or no value in the purchase price allocation process and will thus be eliminated.

For unaudited pro forma condensed combined financial information relating to the acquisition, see the definitive joint proxy statement/prospectus filed with the SEC by us on February 13, 2017. This pro forma financial information is based upon preliminary purchase price allocations and various assumptions and estimates, all of which we urge you to carefully consider in connection with your review of such information.

Pending Sale of Colocation Business and Data Centers

On November 3, 2016, we entered into a definitive stock purchase agreement to sell our data centers and colocation business to a consortium led by BC Partners, Inc. and Medina Capital (“the Purchaser”) in exchange for cash and a minority stake in the consortium’s newly-formed global secure infrastructure company. During 2016, as a result of the pending sale, the assets to be sold to the Purchaser have been reclassified as assets held for sale in other current assets on our consolidated balance sheet. Additionally, the liabilities to be assumed by the Purchaser have been reclassified and presented as current liabilities associated with assets held for sale on our consolidated balance sheet. As part of the transaction, the Purchaser will assume our capital lease obligations, which amounted to $305 million as of December 31, 2016, related to the properties that we will sell. The sale is subject to regulatory approvals, including a review by the Committee of Foreign Investments in the United States, as well as other customary closing conditions.

Upon being completed, this transaction will result in the Purchaser acquiring 57 data centers. This business generated revenues of $622 million, $626 million and $643 million (excluding revenue with affiliates) for the years ended December 31, 2016, 2015 and 2014, respectively (a small portion of which will be retained by us). Based on certain estimates and assumptions regarding the closing date and various tax matters, we currently project that the net cash proceeds from the divestiture will be approximately $1.5 billion to $1.7 billion. We plan to use a portion of these net cash proceeds to partly fund our acquisition of Level 3.

The following tables present additional metrics related to our data centers:

 

     As of December 31,     Increase /
(Decrease)
    %
Change
 
     2016     2015      

Hosting data center metrics:

        

Number of data centers(1)

     58       59       (1     (2)

Sellable square feet, million sq ft

     1.54       1.58       (0.04     (3)

Billed square feet, million sq ft

     1.04       0.99       0.05      

Utilization

     67     63     4    
     As of December 31,     Increase /
(Decrease)
    %
Change
 
     2015     2014      

Hosting data center metrics:

      

Number of data centers(1)

     59       58       1       2

Sellable square feet, million sq ft

     1.58       1.46       0.12       8

Billed square feet, million sq ft

     0.99       0.92       0.07       8

Utilization

     63     63        

 

(1) We define a data center as any facility where we market, sell and deliver either colocation services, multi-tenant managed services, or both. Our data centers are located in North America, Europe and Asia.

 

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See Note 3—Pending Sale of Colocation Business and Data Centers to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016 for additional information on the pending sale.

We are organized into operating segments based on customer type, business and consumer. These operating segments are our two reportable segments in our consolidated financial statements:

 

   

Business Segment. Consists generally of providing strategic, legacy and data integration products and services to small, medium and enterprise business, wholesale and governmental customers, including other communication providers. Our strategic products and services offered to these customers include our MPLS, Ethernet, colocation, hosting (including cloud hosting and managed hosting), broadband, VoIP, information technology and other ancillary services. Our legacy services offered to these customers primarily include local and long-distance voice, including the sale of unbundled network elements (“UNEs”), private line (including special access), switched access and other ancillary services. Our data integration offerings include the sale of telecommunications equipment located on customers’ premises and related products and professional services, all of which are described further below under the heading “Operating Revenues”; and

 

   

Consumer Segment. Consists generally of providing strategic and legacy products and services to residential customers. Our strategic products and services offered to these customers include our broadband, video (including our Prism TV services) and other ancillary services. Our legacy services offered to these customers include local and long-distance voice and other ancillary services.

RESULTS OF OPERATIONS

The following table summarizes the results of our consolidated operations for the years ended December 31, 2016, 2015 and 2014:

 

     Years Ended December 31,  
     2016(1)(2)      2015(1)      2014(3)  
    

(Dollars in millions except

per share amounts)

 

Operating revenues

   $ 17,470        17,900        18,031  

Operating expenses

     15,139        15,295        15,621  
  

 

 

    

 

 

    

 

 

 

Operating income

     2,331        2,605        2,410  

Other expense, net

     1,311        1,289        1,300  

Income tax expense

     394        438        338  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 626        878        772  
  

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 1.16        1.58        1.36  

Diluted earnings per common share

   $ 1.16        1.58        1.36  

 

(1) During 2016 and 2015, we recognized an incremental $201 million and $215 million, respectively, of revenue associated with the FCC’s Connect America Fund Phase 2 support program as compared to the interstate USF program. For additional information, see Note 1—Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016.
(2) During 2016, we recognized $189 million of severance expenses and other one-time termination benefits associated with our workforce reductions and $52 million of expenses related to our pending acquisition of Level 3.
(3) During 2014, we recognized a $60 million tax benefit associated with a deduction for the tax basis for worthless stock in a wholly-owned foreign subsidiary and a $63 million pension settlement charge.

 

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The following table summarizes our access lines, broadband subscribers, Prism TV subscribers, data centers and number of employees:

 

     As of December 31,  
     2016      2015      2014  
     (in thousands except for data
centers, which are actuals)
 

Operational metrics:

        

Total access lines(1)

     11,090        11,748        12,394  

Total broadband subscribers(1)

     5,945        6,048        6,082  

Total Prism TV subscribers

     325        285        242  

Total data centers(2)

     58        59        58  

Total employees

     40        43        45  

 

(1) Access lines are lines reaching from the customers’ premises to a connection with the public network and broadband subscribers are customers that purchase broadband connection service through their existing telephone lines, stand-alone telephone lines, or fiber-optic cables. Our methodology for counting our access lines and broadband subscribers includes only those lines that we use to provide services to external customers and excludes lines used solely by us and our affiliates. It also excludes unbundled loops and includes stand-alone broadband subscribers. We count lines when we install the service.
(2) We define a data center as any facility where we market, sell and deliver either colocation services, multi-tenant managed services, or both. Our data centers are located in North America, Europe and Asia.

During the last decade, we have experienced revenue declines primarily due to declines in access lines, private line customers, switched access rates and minutes of use. To mitigate these revenue declines, we remain focused on efforts to, among other things:

 

   

promote long-term relationships with our customers through bundling of integrated services;

 

   

provide a wide array of diverse services, including enhanced or additional services that may become available in the future due to, among other things, advances in technology or improvements in our infrastructure;

 

   

provide our broadband and premium services to a higher percentage of our customers;

 

   

pursue acquisitions of additional assets if available at attractive prices;

 

   

increase prices on our products and services if and when practicable;

 

   

increase the capacity, speed and usage of our networks; and

 

   

market our products and services to new customers.

Operating Revenues

From time to time, we change the categorization of our products and services, and we may make similar changes in the future. During the second quarter of 2016, we determined that because of declines due to customer migration to other strategic products and services, certain of our business low-bandwidth data services, specifically our private line (including special access) services in our business segment, are more closely aligned with our legacy services than with our strategic services. As described in greater detail in Note 14—Segment Information in our Annual Report on Form 10-K for the year ended December 31, 2016, these operating revenues are now reflected as legacy services.

We currently categorize our products, services and revenues among the following four categories:

 

   

Strategic services, which include primarily broadband, MPLS, Ethernet, colocation, hosting (including cloud hosting and managed hosting), video (including our facilities-based video services, which we offer in 16 markets), VoIP, information technology and other ancillary services;

 

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Legacy services, which include primarily local and long-distance voice services, including the sale of UNEs, private line (including special access), Integrated Services Digital Network (“ISDN”) (which use regular telephone lines to support voice, video and data applications), switched access and other ancillary services;

 

   

Data integration, which includes the sale of telecommunications equipment located on customers’ premises and related products and professional services, such as network management, installation and maintenance of data equipment and the building of proprietary fiber-optic broadband networks for our governmental and business customers; and

 

   

Other operating revenues, which consists primarily of Connect America Fund (“CAF”) support payments, Universal Service Fund (“USF”) support payments and USF surcharges. We receive federal support payments from both Phase 1 and Phase 2 of the CAF program, and support payments from both federal and state USF programs. These support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services, including the costs of deploying, maintaining and operating voice and broadband infrastructure in high-cost rural areas where we are not able to fully recover our costs from our customers. We also collect USF surcharges based on specific items we list on our customers’ invoices to fund the FCC’s universal service programs. We also generate other operating revenues from the leasing and subleasing of space in our office buildings, warehouses and other properties. Because we centrally manage the activities that generate these other operating revenues, these revenues are not included in our segment revenues.

The following tables summarize our consolidated operating revenues recorded under our four revenue categories:

 

     Years Ended
December 31,
     Increase /
(Decrease)
    %
Change
 
     2016      2015       
     (Dollars in millions)  

Strategic services

   $ 8,050        7,753        297       4 %  

Legacy services

     7,672        8,338        (666     (8)%  

Data integration

     533        577        (44     (8)%  

Other

     1,215        1,232        (17     (1)%  
  

 

 

    

 

 

    

 

 

   

Total operating revenues

   $ 17,470        17,900        (430     (2)%  
  

 

 

    

 

 

    

 

 

   

 

     Years Ended
December 31,
     Increase /
(Decrease)
    %
Change
 
     2015      2014       
     (Dollars in millions)  

Strategic services

   $ 7,753        7,303        450       6 %  

Legacy services

     8,338        9,033        (695     (8)%  

Data integration

     577        692        (115     (17)%  

Other

     1,232        1,003        229       23 %  
  

 

 

    

 

 

    

 

 

   

Total operating revenues

   $ 17,900        18,031        (131     (1)%  
  

 

 

    

 

 

    

 

 

   

Our total operating revenues decreased by $430 million, or 2%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015 and decreased by $131 million, or 1%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. The decline in operating revenues for both periods was primarily due to lower legacy services revenues, which decreased by $666 million, or 8%, and $695 million, or 8%, for the respective periods.

The decline in legacy services revenues for both periods reflects the continuing loss of access lines, loss of long-distance revenues primarily due to the displacement of traditional wireline telephone services by other

 

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competitive products and services, including data and wireless communication services, and reductions in the volume of our private line (including special access) services. At December 31, 2016, we had approximately 11.1 million access lines, or approximately 5.6% less than the number of access lines we operated at December 31, 2015. At December 31, 2015, we had approximately 11.7 million access lines, or approximately 5.2% less than the number of access lines we operated at December 31, 2014. We estimate that the rate of our access lines losses will be between 4% and 6% over the full year of 2017.

For 2016, the growth in our strategic services revenues was primarily due to increased demand for our Ethernet, MPLS, facilities-based video and VoIP services and from rate increases on various services, which were partially offset by declines in our hosting services and losses of broadband customers. For 2015, the growth in our strategic services revenues was primarily due to increased demand for our Ethernet, MPLS, facilities-based video and IT Services and from rate increases on various services, which were partially offset by declines in our colocation and hosting services.

Data integration revenues, which are typically more volatile than our other sources of revenues, decreased by $44 million, or 8%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The decline in data integration revenues was primarily due to declines in governmental and business sales and professional and maintenance services. Data integration revenues decreased by $115 million, or 17%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. The decline in data integration revenues was primarily due to declines in governmental sales and professional services, which were partially offset by an increase in maintenance services.

Other operating revenues decreased by $17 million, or 1%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The decrease in other operating revenues was primarily due to lower high-cost support revenues. These declines were partially offset by higher USF surcharge revenues related to increased universal service fund contribution factors. Other operating revenues increased by $229 million, or 23%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. The increase in other operating revenues was primarily due to additional revenue recorded under the CAF Phase 2 support program. For additional information about the CAF Phase 2 support program, see the discussion below in “Liquidity and Capital Resources—Connect America Fund.”

We are aggressively marketing our strategic services in an effort to partially offset the continuing declines in our legacy services.

Further analysis of our segment operating revenues and trends impacting our performance are provided below in “Segment Results.”

Operating Expenses

Our current definitions of operating expenses are as follows:

 

   

Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees); facilities expenses (which include third-party telecommunications expenses we incur for using other carriers’ networks to provide services to our customers); rents and utilities expenses; equipment sales expenses (such as data integration and modem expenses); payments to universal service funds (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things, and to which we are often required to contribute); certain litigation expenses associated with our operations; and other expenses directly related to our operations; and

 

   

Selling, general and administrative expenses are corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions,

 

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benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; property and other operating taxes and fees; external commissions; litigation expenses associated with general matters; bad debt expense; and other selling, general and administrative expenses.

These expense classifications may not be comparable to those of other companies.

The following tables summarize our operating expenses:

 

     Years Ended
December 31,
     Increase /
(Decrease)
    %
Change
 
     2016      2015       
     (Dollars in millions)  

Cost of services and products (exclusive of depreciation and amortization)

   $ 7,774        7,778        (4     — %  

Selling, general and administrative

     3,449        3,328        121       4 %  

Depreciation and amortization

     3,916        4,189        (273     (7)%  
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 15,139        15,295        (156     (1)%  
  

 

 

    

 

 

    

 

 

   
     Years Ended
December 31,
     Increase /
(Decrease)
    %
Change
 
     2015      2014       
     (Dollars in millions)  

Cost of services and products (exclusive of depreciation and amortization)

   $ 7,778        7,846        (68     (1)%  

Selling, general and administrative

     3,328        3,347        (19     (1)%  

Depreciation and amortization

     4,189        4,428        (239     (5)%  
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 15,295        15,621        (326     (2)%  
  

 

 

    

 

 

    

 

 

   

Cost of Services and Products (exclusive of depreciation and amortization)

Cost of services and products (exclusive of depreciation and amortization) decreased by $4 million, or less than 1%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The decrease in costs of services and products (exclusive of depreciation and amortization) was primarily due to reductions in salaries and wages from lower headcount, professional fees, payment processing fees and customer premises equipment costs, which were substantially offset by increases in content costs for Prism TV (resulting from higher content volume and rates), network expense and USF rates. Cost of services and products (exclusive of depreciation and amortization) decreased by $68 million, or 1%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. Excluding the lower customer premises equipment costs, cost of services and products increased by $56 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014. The increase in costs of services and products was primarily due to increases in pension and postretirement costs, USF rate increases, higher network expenses and increases in content costs for Prism TV. These increases were partially offset by decreases in salaries and wages from lower headcount, professional fees and contract labor costs.

Selling, General and Administrative

Selling, general and administrative expenses increased by $121 million, or 4%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The increase in selling, general and administrative expenses was primarily due to increases in severance expenses associated with our recent workforce reduction, higher payments of employee health care claims, bad debt and other expenses (including fees related to the Level 3 acquisition), which were partially offset by reductions in professional fees and

 

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property and other taxes. Selling, general and administrative expenses decreased by $19 million, or 1%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. The decrease in selling, general and administrative expenses was primarily due to lower benefit expenses, insurance costs and asset impairment charges. These decreases were partially offset by increases in bad debt expense, external commissions and regulatory fines of $15 million associated with a 911 system outage.

Pension Lump Sum Offer

Our pension plan contains provisions that allow us, from time to time, to offer lump sum payment options to certain former employees in settlement of their future retirement benefits. These lump sum payments are paid from the trust that holds the plan’s assets. Under pension settlement accounting, we record an accounting settlement charge associated with these lump sum payments only if, in the aggregate, they exceed the sum of the annual service and interest costs for the plan’s net periodic pension benefit cost. There were no pension lump sum offerings in 2016, other than those to eligible employees who terminated during 2016. For the year ended December 31, 2015, we made cash settlement payments to former employees for lump sum offers of approximately $356 million, but pension settlement accounting was not triggered in 2015. For the year ended December 31, 2014, we made cash settlement payments to former employees for lump sum offers of approximately $460 million, which triggered pension settlement accounting and resulted in us recording additional pension expense of $63 million. Pension expense is allocated to cost of services and products (exclusive of depreciation and amortization), selling, general and administrative and to capital projects. See Note 9—Employee Benefits to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016 for additional information on the pension lump sum offers.

Depreciation and Amortization

The following tables provide detail of our depreciation and amortization expense:

 

     Years Ended
December 31,
     Increase /
(Decrease)
    %
Change
 
     2016      2015