DEF 14A 1 a08-3118_1def14a.htm DEF 14A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934

 

Filed by the Registrant  x

Filed by a Party other than the Registrant  o

Check the appropriate box:

o

Preliminary Proxy Statement

o

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

x

Definitive Proxy Statement

o

Definitive Additional Materials

o

Soliciting Material Pursuant to §240.14a-12

 

THE RYLAND GROUP, INC.

(Name of Registrant as Specified In Its Charter)

 

Payment of Filing Fee (Check the appropriate box):

x

No fee required.

o

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

(1)

Title of each class of securities to which transaction applies:

 

 

 

 

(2)

Aggregate number of securities to which transaction applies:

 

 

 

 

(3)

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

 

 

 

 

(4)

Proposed maximum aggregate value of transaction:

 

 

 

 

(5)

Total fee paid:

 

 

 

o

Fee paid previously with preliminary materials.

o

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

 

(1)

Amount previously paid:

 

 

 

 

(2)

Form, Schedule or Registration Statement No.:

 

 

 

 

(3)

Filing Party:

 

 

 

 

(4)

Date Filed:

 

 

 

 



 

THE RYLAND GROUP, INC.


24025 Park Sorrento, Suite 400
Calabasas, California 91302

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To the Stockholders:

 

                Notice is given that the Annual Meeting of Stockholders of The Ryland Group, Inc. (“Ryland”) will be held at The Ritz-Carlton, 4375 Admiralty Way, Marina del Rey, California, on April 23, 2008, at 8:00 a.m., local time, for the following purposes:

 

1.           To elect eight Directors to serve until the next Annual Meeting of Stockholders or until their successors are elected and shall qualify.

 

2.           To approve The Ryland Group, Inc. 2008 Equity Incentive Plan.

 

3.           To re-approve Ryland’s Senior Executive Performance Plan to comply with the requirements of Section 162(m) of the Internal Revenue Code. Compliance with Section 162(m) of the Internal Revenue Code results in the tax deductibility of related compensation expense.

 

4.           To re-approve Ryland’s TRG Incentive Plan to comply with the requirements of Section 162(m) of the Internal Revenue Code. Compliance with Section 162(m) of the Internal Revenue Code results in the tax deductibility of related compensation expense.

 

5.           To re-approve Ryland’s Performance Award Program to comply with the requirements of Section 162(m) of the Internal Revenue Code. Compliance with Section 162(m) of the Internal Revenue Code results in the tax deductibility of related compensation expense.

 

6.           To consider a proposal from The Nathan Cummings Foundation (a stockholder) requesting stockholder approval of a request that the Board of Directors adopt quantitative goals for reducing greenhouse gas emissions from Ryland’s products and operations.

 

7.           To ratify the appointment of Ernst & Young LLP as Ryland’s independent registered public accounting firm for the fiscal year ending December 31, 2008.

 

8.           To act upon other business properly brought before the meeting.

 

                Stockholders of record at the close of business on February 12, 2008 are entitled to vote at the meeting or any adjournment thereof. Please date and sign the enclosed proxy and return it in the accompanying postage-paid return envelope. You may revoke your proxy at any time prior to its exercise by filing with the Secretary of Ryland a notice of revocation or a duly executed proxy bearing a later date. Your proxy may also be revoked by attending the meeting and voting in person.

 

By Order of the Board of Directors

Timothy J. Geckle

Secretary

March 5, 2008

 



 

PROXY STATEMENT

 

The enclosed proxy is being solicited by The Ryland Group, Inc. (“Ryland”) for use at the Annual Meeting of Stockholders on April 23, 2008. This Proxy Statement and proxy are first being distributed to stockholders on approximately March 5, 2008. Ryland’s Annual Report to Stockholders for the year ended December 31, 2007, including financial statements and accompanying notes, is enclosed with this Proxy Statement. If a proxy is properly executed and received by Ryland prior to voting at the meeting, the shares represented by the proxy will be voted in accordance with the instructions contained on the proxy. In the absence of instructions, the shares will be voted FOR the management proposals and AGAINST the stockholder proposal set forth in this Proxy Statement. A proxy may be revoked by a stockholder at any time prior to its exercise by filing with the Secretary of Ryland a notice of revocation or a duly executed proxy bearing a later date. It may also be revoked by attendance at the meeting and election to vote in person.

 

The election of Directors requires a plurality of the votes cast with a quorum present. For the election of Directors, abstentions and broker non-votes are not votes cast and have no effect on the plurality vote required.

 

Approval of The Ryland Group, Inc. 2008 Equity Incentive Plan, Ryland’s Senior Executive Performance Plan, TRG Incentive Plan and Performance Award Program, The Nathan Cummings Foundation proposal, and ratification of Ernst & Young LLP as Ryland’s independent registered public accounting firm for the fiscal year ending December 31, 2008, require the affirmative vote of a majority of the votes cast in person or by proxy with a quorum present. Abstentions and broker non-votes will not be considered votes cast for the foregoing purposes.

 

Ryland will utilize the services of Georgeson Shareholder Communications in the solicitation of proxies for this Annual Meeting of Stockholders for a fee of $7,500, plus expenses. Ryland may also solicit proxies by mail, personal interview or telephone by officers and other management employees of Ryland, who will receive no additional compensation for their services. The cost of solicitation of proxies is borne by Ryland. Arrangements will be made by Ryland for the forwarding to beneficial owners, at Ryland’s expense, of soliciting materials by brokerage firms and others.

 

Only stockholders of record at the close of business on February 12, 2008 are entitled to vote at the meeting or any adjournment thereof. The only outstanding securities of Ryland entitled to vote at the meeting are shares of Common Stock. There were 42,237,765 shares of Common Stock outstanding as of the close of business on February 12, 2008. Ryland’s Common Stock does not have cumulative voting rights. Holders of Common Stock are entitled to one vote per share on all matters. The representation in person or by proxy of at least a majority of the outstanding shares entitled to vote is necessary to provide a quorum at the meeting.

 

Please read this important notice regarding the availability of proxy materials for the Annual Meeting of Stockholders to be held on April 23, 2008. This Proxy Statement and the Annual Report to Stockholders for the year ended December 31, 2007, are available at investor.shareholder.com/ryl/sec.cfm.

 

1



 

PROPOSAL NO. 1
ELECTION OF DIRECTORS

 

The Directors listed below (eight in number) are nominated for election to hold office until the next Annual Meeting of Stockholders or until the election and qualification of their successors. The proxies solicited, unless directed to the contrary, will be voted FOR the eight Directors named below.

 

Management has no reason to believe that any nominee is unable or unwilling to serve as a Director; but if that should occur for any reason, the proxy holders reserve the right to vote for another person of their choice.

 

The Board is required under SEC and New York Stock Exchange rules to affirmatively determine the independence of each Director and to disclose such determination in the Proxy Statement for each Annual Meeting of Stockholders. The Board has established Guidelines on Significant Corporate Governance Issues which require independent Directors to meet all elements of the New York Stock Exchange corporate governance standards. These Guidelines are available on Ryland’s Web site at www.ryland.com and will be provided to stockholders upon request. During 2007, Ryland purchased building materials and labor in a competitive bid process from Building Materials Holding Corporation (“BMHC”), a company in which Director Robert E. Mellor is the Chairman of the Board and Chief Executive Officer. The purchases represented approximately 2.5 percent of BMHC’s revenues. Based on the Board’s Guidelines and the New York Stock Exchange corporate governance standards, the Board, at its meeting held on February 27, 2008, has determined that all non-employee Directors except Mr. Mellor meet the definition of “independence.”

 

The nomination process for Directors is supervised by Ryland’s Nominating and Governance Committee. The Committee seeks out appropriate candidates to serve as Directors of Ryland, and the Committee interviews and examines Director candidates and makes recommendations to the Board regarding candidate selection. Once the Committee has selected appropriate candidates for election as a Director, it presents the candidates to the full Board of Directors for election if the selection occurs during the course of the year, or for nomination if the Director is elected by the stockholders. Directors are nominated each year for election by the stockholders and are included in Ryland’s Proxy Statement.

 

Ryland’s Bylaws provide the procedure for stockholders to make Director nominations. A nominating stockholder must give appropriate notice to Ryland of the nomination not less than 75 days prior to the date of the Annual Meeting of Stockholders. If less than 100 days’ notice of the date of the Annual Meeting of Stockholders is given by Ryland, then Ryland must receive notice of the nomination not later than the close of business on the 10th day following the date Ryland first mailed the notice or made public disclosure of the meeting. The stockholders’ notice shall set forth, as to

 

(a)          each person whom the stockholder proposes to nominate for election as a Director:

 

·                  name, age, business address and residence address of the person,

 

·                  the principal occupation or employment of the person,

 

·                  the number of shares of Ryland stock which are beneficially owned, if any, by the person, and

 

·                  any other information relating to the person which is required to be disclosed in solicitations for proxies for the election of Directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (“Exchange Act”), or any successor act or regulation; and

 

(b)         the stockholder giving the notice:

 

·                  the name and record address of the stockholder, and

 

·                  the number of shares of Ryland stock which are beneficially owned by the stockholder.

 

Ryland may require any proposed nominee to furnish such other information as may be reasonably required by Ryland to determine the qualifications of such proposed nominee to serve as a Director of Ryland.

 

2



 

Name, Age and
Year in which
First Elected
a Director

 

Principal Occupation for Five Prior Years and Other Information

R. Chad Dreier

 

Chairman of the Board of Directors, President and Chief Executive Officer of Ryland; and Director of

60 (1993)

 

Occidental Petroleum Corporation

 

 

 

Leslie M. Frécon

 

Chief Executive Officer and President of LFE Capital, LLC; and Director of Associated Packaging

54 (1998)

 

Technologies, Inc., M.A. Gedney Company, Inc., API Outsourcing, Inc. and Avant Holdings, Inc.

 

 

 

Roland A. Hernandez

 

Chairman of the Board of Directors and Chief Executive Officer of Telemundo Group, Inc. until

50 (2001)

 

2000; and Director of Wal-Mart Stores, Inc., Vail Resorts, Inc., MGM Mirage and Lehman Brothers

 

 

Holdings, Inc.

 

 

 

William L. Jews

 

President and Chief Executive Officer of CareFirst Blue Cross Blue Shield until 2006; and Director of

56 (1995)

 

Choice Hotels International, Inc. and Fortress International Group Inc.

 

 

 

Ned Mansour

 

President of Mattel, Inc. until 2000

59 (2000)

 

 

 

 

 

Robert E. Mellor

 

Chairman of the Board of Directors and Chief Executive Officer of Building Materials Holding

64 (1999)

 

Corporation; and Director of Coeur d’Alene Mines Corporation

 

 

 

Norman J. Metcalfe

 

Director of The Tejon Ranch Company (real estate development) and Building Materials Holding

65 (2000)

 

Corporation

 

 

 

Charlotte St. Martin

 

Executive Director of the Broadway League since July 2006; President and Chief Executive Officer of

62 (1996)

 

St. Martin Enterprises from 2005 to 2006; and Executive Vice President of Loews Hotels until 2005

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR EACH OF THE NOMINEES LISTED ABOVE.

 

3



 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

To the knowledge of Ryland, the only beneficial owners of more than five percent of the outstanding shares of Common Stock, as of February 14, 2008, are:

 

 

 

Amount and Nature

 

 

 

Name and Address

 

of Beneficial Ownership

 

Percent of Class

 

LMM LLC

 

7,262,931(1)

 

17.2%

 

Legg Mason Capital Management, Inc.

 

 

 

 

 

100 Light Street

 

 

 

 

 

Baltimore, MD 21202

 

 

 

 

 

 

 

 

 

 

 

FMR LLC

 

6,312,600(2)

 

14.9%

 

82 Devonshire Street

 

 

 

 

 

Boston, MA 02109

 

 

 

 

 

 

 

 

 

 

 

Janus Capital Management LLC

 

4,789,221(3)

 

11.3%

 

Janus Worldwide Fund

 

 

 

 

 

151 Detroit Street

 

 

 

 

 

Denver, CO 80206

 

 

 

 

 

 

 

 

 

 

 

Morgan Stanley

 

3,011,418(4)

 

7.1%

 

1585 Broadway

 

 

 

 

 

New York, NY 10036

 

 

 

 

 

 

 

 

 

 

(1)          Based on information contained in a Schedule 13G/A filed with the Securities and Exchange Commission (“SEC”) on February 14, 2008 jointly as a group, investment advisers LMM LLC (through the management of Legg Mason Opportunity Trust) and Legg Mason Capital Management, Inc. have reported that they have shared power to direct the vote and disposition of 3,800,000 shares and 3,462,931 shares of Ryland’s Common Stock, respectively.

 

(2)          Based on information contained in a Schedule 13G/A filed with the SEC on February 14, 2008, FMR LLC (“FMR”) has reported that it beneficially owns the number of shares indicated in the table above. FMR’s wholly-owned subsidiary, Fidelity Management and Research Company (“Fidelity”) beneficially owns 6,215,200 shares of Common Stock. The interest of one investment company, Growth & Income Fund, amounted to 3,700,000 shares of Common Stock. Edward C. Johnson 3d, Chairman of FMR, FMR and certain affiliated funds each has sole power to dispose of the shares owned by Fidelity, but none of these entities has sole voting power with respect to these shares (which power rests with the Boards of Trustees of various Fidelity funds). Pyramis Global Advisors Trust Company (“PGATC”), an indirect wholly-owned subsidiary of FMR, is the beneficial owner of 95,900 shares of Common Stock in its role as investment manager. Mr. Johnson and FMR each has sole power to dispose, vote or direct the vote of the shares owned by PGATC. Fidelity International Limited, a related investment adviser, beneficially owns 1,500 shares of Common Stock.

 

(3)          Based on information contained in a Schedule 13G/A filed with the SEC on February 14, 2008, Janus Capital Management LLC has reported that it has sole power to direct the vote and disposition of all of the shares of Common Stock indicated above in its role as investment advisor to certain managed portfolios including Enhanced Investment Technologies LLC, Perkins, Wolf, McDonnell and Company, LLC, and Janus Worldwide Fund, which beneficially owns 3,386,820 shares of Common Stock.

 

(4)          Based on information contained in a Schedule 13G filed with the SEC on February 14, 2008, Morgan Stanley has reported that it has sole voting and dispositive power over all of the shares of Common Stock indicated above, which include 2,558,077 shares of Common Stock beneficially owned by its wholly-owned subsidiary, Morgan Stanley Capital Services Inc.

 

4



 

The following table sets forth, as of February 12, 2008, the number of shares of Ryland’s Common Stock beneficially owned by Ryland’s Directors, each of the executive officers named in the Summary Compensation Table, and by the Directors and executive officers as a group:

 

 

 

Number of Shares

 

Name of Beneficial Owner

 

Beneficially Owned (1)

 

R. Chad Dreier

 

776,926

 

Daniel T. Bane

 

85,497

 

Leslie M. Frécon

 

108,269

 

Roland A. Hernandez

 

70,141

 

William L. Jews

 

107,640

 

Ned Mansour

 

97,351

 

Robert E. Mellor

 

158,083(2)

 

Norman J. Metcalfe

 

206,351

 

Charlotte St. Martin

 

68,807

 

Gordon A. Milne

 

198,400

 

Larry T. Nicholson

 

72,942

 

Daniel G. Schreiner

 

156,822

 

Keith E. Bass

 

21,264

 

Directors and executive officers as a group (20 persons)

 

2,813,877

 

 

(1)          With the exception of Mr. Dreier, no other Director, nominee or executive officer beneficially owns more than one percent of Ryland’s outstanding Common Stock. Mr. Dreier beneficially owns 1.8 percent of Ryland’s outstanding Common Stock. Directors, nominees and executive officers as a group beneficially own 6.7 percent of Ryland’s outstanding Common Stock. All of the shares in the table are owned individually with sole voting and dispositive power.

 

Includes shares subject to stock options which may be exercised within 60 days of February 12, 2008, as follows: Mr. Dreier, 320,000 shares; Mr. Bane, 80,000 shares; Ms. Frécon, 90,000 shares; Mr. Hernandez, 60,000 shares; Mr. Jews, 100,000 shares; Mr. Mansour, 75,000 shares; Mr. Mellor, 128,000 shares; Mr. Metcalfe, 140,000 shares; Ms. St. Martin, 60,000 shares; Mr. Bass, 20,000; Mr. Milne, 130,100 shares; Mr. Nicholson, 48,000 shares; Mr. Schreiner, 106,900 shares; and Directors and executive officers as a group, 1,833,178 shares.

 

Includes shares represented by restricted stock units as follows: Mr. Dreier, 120,000 shares; Mr. Milne, 21,000 shares; Mr. Nicholson, 14,000 shares; Mr. Schreiner, 11,000 shares; and Directors and executive officers as a group, 210,000 shares.

 

Includes shares of Common Stock which have been allocated to participants’ accounts under Ryland’s Retirement Savings Opportunity Plan as follows: Mr. Dreier, 2,926 shares; Mr. Nicholson, 575 shares; and Directors and executive officers as a group, 18,243 shares.

 

Includes shares of Common Stock that have been allocated to the Directors’ deferred compensation plan accounts as follows: Mr. Bane, 3,000 shares; Ms. Frécon, 11,245 shares; Mr. Hernandez, 4,935 shares; Mr. Jews, 226 shares; Mr. Mansour, 11,351 shares; Mr. Mellor, 9,196 shares; and Mr. Metcalfe, 11,351 shares.

 

(2)          Does not include 2,000 shares of Common Stock owned by Mr. Mellor’s wife as to which he disclaims beneficial ownership.

 

5



 

INFORMATION CONCERNING THE BOARD OF DIRECTORS

 

During 2007, the Board of Directors held five meetings. All incumbent Directors attended at least 75 percent of the meetings of the Board of Directors and of the committees of the Board of Directors on which they served during 2007. Directors are expected to attend the 2008 Annual Meeting of Stockholders and the entire Board was present at last year’s meeting. The Board of Directors of Ryland has Audit, Compensation, Finance and Nominating and Governance Committees. Each of the committees has adopted a charter, all of which are available either for viewing on Ryland’s Web site at www.ryland.com or upon request from the Corporate Secretary’s office by phone at 818-223-7500 or by writing to The Ryland Group, Inc., 24025 Park Sorrento, Suite 400, Calabasas, California 91302.

 

The Audit Committee of the Board of Directors was composed of Directors Bane, Frécon, Hernandez and Mansour. The Audit Committee reviews Ryland’s financial statements and reports, the audit services provided by Ryland’s independent public accountants and the reports of Ryland’s internal auditors. During 2007, four meetings of the Audit Committee were held.

 

The Finance Committee of the Board of Directors was composed of Directors Bane, Frécon, Hernandez, Mellor and Metcalfe. The Finance Committee reviews and monitors the financial plans and capital structure of Ryland. There were two meetings of the Finance Committee during 2007.

 

The Nominating and Governance Committee recommends to the Board of Directors candidates to fill vacancies on the Board, makes recommendations about the composition of the Board’s Committees, monitors the role and effectiveness of the Board and oversees the corporate governance process. Directors Jews, Mansour, St. Martin and Varello were the members of the Nominating and Governance Committee, which held three meetings during 2007. The Nominating and Governance Committee will consider nominees proposed by stockholders for election to the Board of Directors. Recommendations by stockholders should be forwarded to the Secretary of Ryland, and should identify the nominee by name and provide information about the nominee’s background and experience.

 

The Compensation Committee of the Board of Directors determines and approves Ryland’s compensation plans and the amount and form of compensation awarded and paid to executive officers and key employees of Ryland, including awards and distributions under Ryland’s compensation plans. Directors Jews, Metcalfe, St. Martin and Varello served as Compensation Committee members during 2007. The Compensation Committee members do not have interlocking relationships with compensation committees of other companies. During 2007, the Compensation Committee held five meetings. For information regarding Ryland’s processes and procedures for evaluating and determining executive and Director compensation, please refer to the “Compensation Discussion and Analysis” and the section entitled “Compensation Governance” on page 9 of this Proxy Statement.

 

As required by the rules of the New York Stock Exchange, the Board of Directors has held, and will continue to hold, regularly scheduled executive sessions of the non-management Directors. The Chairperson of the Nominating and Governance Committee, which is currently Mr. Jews, presides at these independent sessions.

 

The Board of Directors has adopted a Code of Ethics which is applicable to the Board of Directors, senior officers (including Ryland’s principal executive, financial and accounting officers) and employees of Ryland. Any waiver of the Code of Ethics for Directors or executive officers will be promptly disclosed to stockholders on Ryland’s Web site. The Board has also adopted a Policy for the Review of Transactions with Related Persons which governs all transactions with related parties, given the potential for real or perceived conflicts of interest. The Nominating and Governance Committee is responsible for implementing the policy, and reviews, approves or ratifies all transactions with related persons. The policy governs any transaction or series of transactions over $120,000 in which Ryland is or would be a participant, and in which any Director, executive officer or five percent stockholder of Ryland or members of their immediate families would have a direct or indirect material interest. The Code of Ethics and Policy for the Review of Transactions with Related Persons are available on Ryland’s Web site at www.ryland.com and will be provided to stockholders upon written request.

 

6



 

AUDIT COMMITTEE REPORT

 

The Audit Committee oversees Ryland’s financial reporting process on behalf of the Board of Directors. The members of the Audit Committee are “independent” as defined in the listing standards of the New York Stock Exchange, which is the exchange on which Ryland’s Common Stock is listed. The Board of Directors has determined that Director Leslie M. Frécon, chairperson of the Audit Committee, is an “audit committee financial expert” as that term is defined in Item 407(d)(5) of Regulation S-K promulgated under the Exchange Act. Director Roland A. Hernandez, a member of the Audit Committee, serves on the audit committee of four public corporations. The Board of Directors has determined that Mr. Hernandez’s simultaneous service on the audit committees of four public corporations will not impair his ability to serve effectively on Ryland’s Audit Committee.

 

The Board of Directors recently updated and approved the written charter for the Audit Committee at the February 2008 Board meeting. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. In fulfilling its oversight responsibilities, the Committee reviewed and discussed the audited financial statements with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.

 

The Committee reviewed and discussed with the independent registered public accounting firm, Ernst & Young LLP, which is responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, its judgment as to the quality, not just the acceptability, of Ryland’s accounting principles and such other matters as are required to be discussed with the Committee under generally accepted auditing standards, as well as the matters required to be discussed by the Statement on Auditing Standards No. 61 (Communications with Audit Committees), as amended. The Committee discussed with Ryland’s internal auditors and independent registered public accounting firm the overall scope and plans for their respective audits. In addition, the Committee has discussed with the internal auditors and independent registered public accounting firm, with and without management present, the results of their examinations, their evaluations of Ryland’s internal controls, and the overall quality of Ryland’s financial reporting. The Committee received from the independent registered public accounting firm written disclosures regarding the auditors’ independence required by the Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and the Committee discussed with the independent registered public accounting firm that firm’s independence and considered the compatibility of non-audit services with the auditors’ independence. The Committee discussed and assessed with management and Ernst & Young LLP, management’s report and Ernst & Young LLP’s report and attestation on internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.

 

In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors and the Board of Directors approved the inclusion of the audited financial statements in the Annual Report on Form 10-K for the year ended December 31, 2007, for filing with the SEC. The Committee also approved the selection of Ernst & Young LLP as Ryland’s independent registered public accounting firm for 2008. The Audit Committee determined that since Ernst & Young LLP did not provide services subject to the category entitled “All Other Fees” set forth below, Ernst & Young LLP’s independence was maintained.

 

For the fiscal years ended December 31, 2007 and 2006, professional services were performed by Ernst & Young LLP.

 

Total fees paid to Ernst & Young LLP aggregated $1,252,700 and $1,355,500 for the fiscal years ended December 31, 2007 and 2006, respectively, and were composed of the following:

 

Audit Fees: The aggregate fees billed for the audit of the financial statements for the fiscal years ended December 31, 2007 and 2006 were $1,142,500 and $1,205,500, respectively. The audit fees also include reviews of the financial statements included in Ryland’s Quarterly Reports on Form 10-Q, testing and evaluating internal controls over financial reporting, and assistance with and review of documents filed with the SEC.

 

7



 

Audit-Related Fees: The aggregate fees billed for audit-related services for the fiscal years ended December 31, 2007 and 2006 were $107,000 and $147,000, respectively. These fees are for assurance and related services performed by Ernst & Young LLP that are reasonably related to the performance of the audit or review of Ryland’s financial statements, including employee benefit plan audits, attest services that are not required by statute or regulation, internal control reviews and other financial accounting/reporting matters.

 

Tax Fees: The aggregate fees billed for tax services for the fiscal years ended December 31, 2007 and 2006 were $3,200 and $3,000, respectively. These fees relate to professional services performed by Ernst & Young LLP with respect to tax compliance, tax advice and tax planning.

 

All Other Fees: No other fees were paid to Ernst & Young LLP in either fiscal year 2007 or fiscal year 2006.

 

The Audit Committee annually approves in advance each year’s engagement for audit services. The Committee also established procedures for pre-approval of all audit-related, tax and permitted non-audit services provided by and fees paid to Ernst & Young LLP. Fees for any of these services that will exceed the pre-approval fee limits or fees not contemplated by the original pre-approval must be separately approved by the Audit Committee. The Audit Committee may delegate pre-approval authority to one or more of its members. Any fees pre-approved in this manner are reported to the Audit Committee at its next scheduled meeting. All services and fees described above were pre-approved by the Audit Committee in fiscal year 2007.

 

Audit Committee of the Board of Directors

Leslie M. Frécon
Roland A. Hernandez
Ned Mansour

 

March 5, 2008

 

COMPENSATION COMMITTEE REPORT

 

The Committee reviewed and discussed with management the Compensation Discussion and Analysis set forth below as required by Item 402(b) of Regulation S-K promulgated under the Exchange Act. In reliance on the review and discussion referred to above, the Committee recommended to the Board of Directors and the Board of Directors approved the inclusion of the Compensation Discussion and Analysis in the Proxy Statement for Ryland’s Annual Meeting of Stockholders to be held on April 23, 2008.

 

Compensation Committee of the Board of Directors

William L. Jews
Norman J. Metcalfe
Charlotte St. Martin

 

March 5, 2008

 

8



 

COMPENSATION DISCUSSION AND ANALYSIS

 

General Overview

 

Annual and long-term compensation, equity awards and competitive benefits are the primary tools used by Ryland to attract, retain and motivate managers to deliver maximum performance in comparison to our competitors and enhance value to our stockholders. The quality and entrepreneurial culture fostered by Ryland in our management team helps assure the competitive edge we maintain in the marketplace. As a result, Ryland, through the leadership of the Compensation Committee of the Board of Directors, has developed and maintains a compensation program that rewards superior performance and seeks to encourage actions that drive our business strategy. Additionally, we seek to maintain the continuity of our management team, and especially the continuity of our senior executive officers.

 

Compensation Governance

 

The Compensation Committee is composed of Messrs. Jews and Metcalfe and Ms. St. Martin, all of whom are considered “independent directors” under the New York Stock Exchange corporate governance standards and “outside directors” under Section 162(m) of the Internal Revenue Code (“Code”). This committee has substantial business expertise and experience in overseeing our compensation programs and linking them to the objectives of our business.

 

The Compensation Committee is responsible for determining and approving Ryland’s compensation plans and programs. The Compensation Committee sets the amount and form of compensation awarded and paid to Ryland’s executive officers, managers and key employees, including establishing and approving awards and distributions under Ryland’s compensation plans and programs. The committee is solely responsible for approving all compensation for the executive officers listed in the Summary Compensation Table, including that of Mr. Dreier, Ryland’s Chairman of the Board of Directors, President and Chief Executive Officer.

 

The Compensation Committee utilizes independent research provided by an external compensation consultant, the POE Group, and comparative compensation data for similarly situated business organizations and Ryland’s peer group of national publicly-held homebuilders in order to perform its function and benchmark Ryland’s compensation plans and programs. Benchmark compensation and benefit information for the Board of Directors, senior executives and managers is examined annually. A variety of external compensation sources and data are used, which includes industry specific and general compensation surveys and compensation information extracted from our competitors’ proxy statements. The national homebuilder peer group companies we specifically track include: Beazer Homes USA, Inc., Centex Corporation, D.R. Horton, Inc., Hovnanian Enterprises, Inc., KB Home, Lennar Corporation, Meritage Homes Corporation, M/I Homes Inc., M.D.C. Holdings, Inc., NVR, Inc., Pulte Homes, Inc., Standard Pacific Corp. and Toll Brothers, Inc. These companies were chosen for comparison due to their similarity to Ryland in marketplace and principal business, and because they are our competition in the hiring and retention of senior executives and managers.

 

Executive Compensation Philosophy

 

Ryland’s executive compensation philosophy, plans and programs are designed to support our overall business strategy, objectives and goals in order to maintain our position as a leader in the homebuilding industry and a leader in maximizing stockholder value. Our approach emphasizes short- and long-term performance-based compensation, which increases or decreases based upon our business results at the local and national level. For Mr. Dreier, approximately 57.2 percent of 2007 total compensation was performance-based and 42.8 percent was fixed. For the other named executive officers, approximately 46.2 percent of 2007 average total compensation was performance-based and 53.8 percent was fixed.

 

9



 

The Compensation Committee annually reviews Ryland’s performance-based compensation payments (consisting of annual bonus incentive payments and the TRG Incentive Plan awards) and compares the payments to annual pre-tax income. This ratio has declined during the previous years when Ryland was achieving record earnings performance, reflecting a favorable trend towards an increasingly efficient use of performance-based compensation. It also emphasizes maximizing profitability while maintaining a variable compensation program tracking this profitability in a responsible manner. For 2007, the significant decrease in annual bonus incentive payments (short-term performance compensation) matches the decline in profitability during 2007. This decline confirms that Ryland’s historical variable compensation program is governed primarily by Ryland’s profitability performance. The decrease in the TRG Incentive Plan awards for 2007 is reflective of the decline in Ryland’s return on equity in 2007. This long-term incentive program integrates this performance with the longer-term performance of Ryland.

 

We generally seek to maintain continuity in our compensation programs so that executives and managers are aware of the compensation plan targets and performance criteria and how our plans reward the achievement of and are governed by these targets and criteria. We modify our plans when comparative and competitive conditions dictate the need for a change. Our business strategy supports simple, straightforward compensation programs and plan designs. Our plans generally have performance measures that are easily communicated and understood by all participants, including our senior executive officers and managers. Our performance measures are directly tied to the performance of our business and financial results. These performance measures are discussed and detailed below.

 

Base Salary

 

Each year the Compensation Committee reviews salary recommendations for the executive officers. Base salary levels are generally targeted at or slightly below the average of our industry benchmarks. Base salary, which is a fixed element of total pay, is not emphasized in our total compensation program because of our performance-based compensation philosophy. Base salaries are a necessary part of our compensation program and provide executives with a fixed portion of pay that is not performance-based. Our goal is to provide modest, yet competitive, base pay levels in comparison with our homebuilding peer group. Previously, annual salary increases for managers and executives were set at approximately the same percentage level of increase as our general employee population. For 2007, the Compensation Committee initially decided not to increase the base salaries of Ryland’s executive officers and senior managers and froze these salaries at the amounts set for 2006. In July 2007, the Compensation Committee provided increases averaging 15.7 percent of base salary to certain executive officers, other than Mr. Dreier, to recognize their performance during a challenging period in the homebuilding industry and enhance the competitive level of their base salary to assist with the retention of these key employees. Pursuant to his Employment Agreement, Mr. Dreier’s base salary has not increased since 2002.

 

Annual Bonus Incentives

 

Annual bonus incentives for executives and managers are intended to reward participants for Ryland’s annual profitability. Utilizing this component of pay focuses participants on short-term annual earnings and profitability. Historically, annual bonus incentives for all participants were driven by pre-tax income earned at either the Corporate, Region, or Division level of Ryland. The level (Corporate, Region, or Division) applicable to participants is determined by their position and level of responsibility within the organization. For Corporate executives in 2008, the Compensation Committee added net cash provided by operating activities as a factor in determining annual bonus incentives and incorporated that factor into the Senior Executive Performance Plan being proposed to stockholders in this Proxy Statement.

 

Corporate executives, including the CEO, CFO and COO, had their annual bonus payment for 2007 determined by corporate pre-tax income. Based on his Employment Agreement, Mr. Dreier’s annual bonus payment is set at two percent of Ryland’s consolidated earnings before taxes adjusted to eliminate the effect of bonus compensation. The annual bonus payments of Ryland’s CFO, Mr. Milne, and COO, Mr. Nicholson, are set at 0.3 percent and 0.75 percent, respectively, of Ryland’s adjusted consolidated earnings before taxes. The bonus payments will increase or decrease from the previous year and are directly related to pre-tax income results for Ryland as a whole. For 2007, Messrs. Dreier and Milne did not receive an annual bonus payment due to the decrease in Ryland’s pre-tax income and the loss related to inventory impairments during 2007.

 

10



 

Because Mr. Nicholson was promoted in July 2007 from President of the Southeast Region to COO, to compensate him for the annual bonus payment he would have received as President of the Southeast Region and as a result of his transition, he received and will receive a minimum bonus of $500,000 for 2007 and 2008.

 

The historical measurement of two percent of Ryland’s adjusted consolidated earnings before taxes is the same measurement that has been used to calculate the annual bonus payment for Mr. Dreier since 2002. Calculating annual bonus incentive based upon a percent of pre-tax income is a common measurement used in the homebuilding industry. Two percent of adjusted pre-tax income is within the range of measures used to determine the amount of annual bonus incentive payments for CEOs in the homebuilding industry.

 

Mr. Schreiner, President of Ryland Mortgage Company, received an annual bonus incentive payment of 3.0 percent of the adjusted consolidated pre-tax income of Ryland Mortgage Company for 2007. Mr. Bass, who was promoted from Orlando Division President to his position as President of the Southeast Region in July 2007, is eligible for an annual bonus incentive payment of 1.5 percent of the Southeast Region’s adjusted consolidated pre-tax income. For the 2007 transition year, he received the higher of the Region bonus or his bonus as Orlando Division President (three percent of the Division’s adjusted consolidated pre-tax income), and the Division bonus was determined to be greater.

 

Long-Term Incentives

 

Ryland uses two long-term incentive compensation vehicles for its executive compensation program. We employ a long-term compensation component to balance the short-term payment of compensation to management. These long-term incentive compensation programs also encourage the retention and stability of Ryland’s team of executive officers and senior managers.

 

The first long-term incentive compensation program consists of equity grants of stock options and restricted stock units. Equity incentive awards align executives and managers directly with stockholder interests. Ryland’s second long-term incentive compensation program for executive officers and senior managers is a long-term cash payment plan, referred to as the TRG Incentive Plan. The TRG Incentive Plan rewards participants based upon a comparison of Ryland’s three-year average return on equity in relation to other companies within the Fortune 500 and Ryland’s homebuilding industry peer group. A three-year average return on equity measure of performance is used for TRG Incentive Plan awards so that all participants have a common goal based upon the long-term performance of Ryland overall. Retention of executive talent is accomplished by three-year vesting requirements for both the equity incentive plan and TRG Incentive Plan.

 

Equity Incentive Plan

 

Common Stock-based awards are viewed as an important component of total executive pay, aligning compensation with increasing stockholder value and, thus, providing an important benefit to stockholders. Over the years, we have used both stock options and restricted stock units to compensate executives and to link the interests of Ryland’s management to its stockholders. However, there are practical limitations as a result of measurement standards recommended by stockholder advocacy groups on the amount of equity plan-based incentive awards which they will recommend for approval by institutional stockholders. The amount of equity-based awards that stockholder advocacy groups will recommend for approval by stockholders is, among other things, based on factors unrelated to Ryland and its long-term performance and its performance related to its homebuilding peers. These factors require us to use less equity-based incentive awards as a component of Ryland’s executive and management compensation program than would otherwise be recommended in a comparative compensation analysis.

 

We historically viewed stock options as a cost-effective method for providing equity-based long-term incentive compensation for senior executives. Since 2001, we have periodically used restricted stock units for senior executives in our long-term equity incentive award program because restricted stock units deliver greater compensation per share. The greater value derived through restricted stock units has allowed us to utilize fewer shares in providing awards pursuant to our equity incentive plan.

 

11



 

Equity awards in the form of restricted stock units are provided to Mr. Dreier pursuant to his Employment Agreement and are subject to the terms and conditions of Ryland’s equity incentive plan. As of December 31, 2007, the outstanding grant of 120,000 restricted stock units under Mr. Dreier’s Employment Agreement is subject to annual vesting in three equal installments, one-third of the total grant each year, beginning on March 1, 2008. However, pursuant to the terms and conditions of his Employment Agreement, the vesting of these restricted stock unit grants is conditioned on the achievement of a target return on equity by Ryland as discussed further in the section entitled “Restricted Stock Unit Grants” under “Discussion of Compensation Agreements and Plans” on page 23 of this Proxy Statement. Because Ryland did not achieve the targeted return on equity during the fiscal year ended December 31, 2007, Mr. Dreier did not vest in the initial one-third installment of 40,000 restricted stock units on March 1, 2008 and this vesting of the restricted stock unit award was forfeited by Mr. Dreier.

 

If the target return on equity is achieved and vesting occurs, Mr. Dreier’s restricted stock unit award includes an amount equal to the federal and state income and Medicare taxes that are payable in connection with the vesting and receipt of the shares of Common Stock associated with the award. Based on comparative compensation information and data, the target equity compensation level appropriate for a comparable chief executive officer like Mr. Dreier could not be met with the available shares reserved for awards pursuant to Ryland’s Equity Incentive Plan. Therefore, Ryland provides the payment of taxes due upon receipt and vesting of the award in lieu of awarding additional restricted stock units, the value of which could be used for the payment of the taxes.

 

During 2007, equity compensation was provided to each of the senior executive officers, except Mr. Dreier, through the award on May 1, 2007 of stock options. On July 1, 2007, Messrs. Nicholson and Bass received an award of stock options in connection with their promotions. These stock option awards have a five-year term and vest over a three-year period. The exercise prices for these stock option awards granted on May 1, 2007 and July 1, 2007 was $44.65 and $37.37, respectively, which was the closing market price of Ryland’s Common Stock on the grant date of the awards. Previously, senior executive officers, including Messrs. Milne, Nicholson and Schreiner, received restricted stock unit grants in lieu of stock options because of the limited availability of equity compensation awards under Ryland’s equity incentive plan. Restricted stock unit awards granted in 2006 to senior executive officers met the required return on equity target for fiscal year 2006 and vest over three years, one-third of the total grant each year, beginning on May 1, 2007. There is no tax-related payment accompanying the restricted stock unit grants for these senior executive officers.

 

Each year the Compensation Committee reviews and approves proposed grants of awards for all equity incentive plan participants. For 2007, this meeting occurred in connection with the February Board of Directors meeting. The exercise price for all stock option awards is the closing price of Ryland’s Common Stock on the date the stock option award is granted to the optionee. In 2007, the Compensation Committee set May 1 as the grant date for all equity awards which is a date that is within two weeks of the announcement of Ryland’s first quarter 2007 results. Further, the equity incentive award grant date of May 1 created a distance in time between the date of receipt of the equity incentive awards and the payment date of the TRG Incentive Plan award.

 

In 2008, the Compensation Committee is planning to grant restricted stock units to senior executive officers, including the named executive officers in the Summary Compensation Table. These restricted stock unit awards are subject to the achievement of a performance factor that is based on net cash provided by operating activities and this performance factor was incorporated into the 2008 Equity Incentive Plan and the Performance Award Program being proposed to stockholders in this Proxy Statement.

 

TRG Incentive Plan

 

The TRG Incentive Plan provides cash awards based on a comparison of Ryland’s three-year return on equity to companies within the Fortune 500 as well as to large public homebuilders like Ryland. This plan complements Ryland’s long-term equity-based plan by offering compensation that is measured by the relationship of profitability to the stockholders’ equity of Ryland.

 

12



 

All participants in the plan are rewarded according to the same determinative reward criteria established by the Compensation Committee, which is based on the comparative return on equity performance for Ryland as a whole. This is important when considering that the short-term annual bonus incentive plan measures payouts based on either Corporate, Region, or Division profitability or Corporate cash flow. Retention of participants in the TRG Incentive Plan is accomplished by having payments vest ratably over a three-year period. All participants are at risk of forfeiting some or all of their potential award payout if they leave Ryland during the three-year vesting period. The delayed vesting of these payments is intended to enhance the retention of the executive officers and senior managers of Ryland.

 

The TRG Incentive Plan has a minimum payout threshold that must be achieved before any awards are given to participants. This minimum payout threshold is based on the achievement of 75 percent of the return on equity target established by the Compensation Committee. The plan also has a maximum award payment set at 300 percent of target performance. The return on equity target compares Ryland’s three-year average return on equity against the three-year average of two different external metrics. The first external comparison metric, which accounts for half of the potential award, compares Ryland’s three-year average return on equity to the median return on equity of the Fortune 500 over a three-year period. This provides a comparison to the broader business community. The second external comparison metric, which accounts for the remainder of the potential award, compares Ryland’s three-year average return on equity to the average return on equity of 10 comparable public homebuilding companies over a three-year period. The comparison companies (Beazer Homes USA, Inc., D.R. Horton, Inc., Hovnanian Enterprises, Inc., KB Home, Lennar Corporation, Meritage Homes Corporation, M.D.C. Holdings, Inc., Pulte Homes, Inc., Standard Pacific Corp. and Toll Brothers, Inc.) were selected for their similarity to Ryland in size and principal business, as well as the availability of pertinent annual financial results.

 

Target awards are based on a percentage of base salary. Mr. Dreier has an award target of 150 percent of base salary. The other named executives have award targets ranging from 80 percent to 110 percent of base salary.

 

Retirement

 

Ryland provides plans to meet the retirement needs of its executives. Retirement plans are an important part of our program design because we seek to provide executives with the ability to plan for their future while keeping them focused on the present success of Ryland.

 

All employees and officers may participate in Ryland’s Retirement Savings Opportunity Plan (“RSOP”). This plan is a 401(k) qualified retirement savings plan. Participants may contribute one percent to 50 percent of their salary and bonus. These contributions can then be directed into a variety of investments under the plan. Ryland provides matching contributions to the RSOP for 100 percent of a participant’s contributions up to six percent of a participant’s eligible compensation. Certain participants can be adversely affected by statutory limitations inherent in qualified plans because the IRS places limits on maximum annual deferrals, which for Ryland’s plan, equaled $13,500 for these participants in 2007. As a result, these participants cannot fully participate in this retirement savings plan and receive the full amount of the available matching contribution by Ryland under this plan.

 

The Executive and Director Deferred Compensation Plan (“EDDCP”) is a nonqualified deferred compensation plan that allowed participants to defer the receipt of additional income and receive the additional matching contributions by Ryland restricted by the RSOP. In January 2005, Ryland adopted the Executive and Director Deferred Compensation Plan II (“EDDCP II”) in order to comply with the requirements of Section 409A of the Code, as added by the American Jobs Creation Act of 2004, and the Treasury regulations or other authoritative guidance issued thereunder. As a result, all participant and Ryland matching contributions to Ryland’s nonqualified deferred compensation plan for compensation earned after December 31, 2004, were made to and governed by the EDDCP II. Prior contributions to the EDDCP were “grandfathered” and continue to be governed by the terms and conditions of the EDDCP. Funds contributed to the EDDCP and EDDCP II are directed by participants into a variety of investment funds available under these plans. Matching contributions by Ryland to the RSOP, EDDCP and EDDCP II vest one-third at the end of each of the participant’s first three years of service.

 

13



 

Certain of Ryland’s executive officers, except Mr. Dreier, are provided with a supplemental executive retirement plan to supplement the executives’ retirement planning under the RSOP, EDDCP and EDDCP II. This plan provides participants with the opportunity to receive either a payment of $150,000 annually for 15 years or a lump sum payment equal to the present value of these payments using an eight percent discount rate, at the participant’s option, within 60 days of January 1 following the participant’s 60th birthday. This benefit was granted in 2003 to certain executive officers of Ryland including Messrs. Milne and Schreiner. Mr. Nicholson began his participation as an executive officer in 2004. Participants vest in this benefit ratably in 20 percent increments over a five-year period of participation in the plan.

 

Mr. Dreier participates in a separate supplemental executive retirement plan. Mr. Dreier’s aggregate supplemental retirement benefit provides the opportunity for a retirement benefit of either up to $3.84 million per year for 15 years or a lump sum payment equal to the present value equivalent of such benefit using an eight percent discount rate, at his option. The supplemental retirement benefit vests ratably over eight years with the first year vesting on December 30, 2003, which means that for every year Mr. Dreier remains with Ryland through December 30, 2010, he vests in a retirement benefit of $480,000 per year for 15 years or its lump sum equivalent. Mr. Dreier is currently vested in a retirement benefit of $2.4 million per year for 15 years or a lump sum payment equal to the present value equivalent of such benefit using an eight percent discount rate.

 

Policy Regarding Extraordinary Retirement Benefits for Senior Executives

 

In response to a proposal approved by stockholders at the 2006 Annual Meeting of Stockholders, the Board of Directors adopted the following policy on December 6, 2006:

 

The Company, after the Effective Date of this Policy, will not, without seeking stockholder approval, agree with any Senior Executive:

 

·                  To provide, under any one or more defined benefit Retirement Plans of the Company, an annual benefit that will exceed one hundred percent (100%) of the Senior Executive’s Final Average Salary; or

 

·                  To grant service credit or vesting credit (or accelerate vesting) under any defined benefit Retirement Plan for any period of time that the Senior Executive was not actually employed by the Company or any subsidiary or affiliate of the Company for purposes of determining the Senior Executive’s retirement benefits.

 

For purposes of this Policy, the following terms shall have the following meanings:

 

“Final Average Salary” means the average of the highest five calendar years’ salaries of the Senior Executive.

 

“Retirement Plan” means any pension benefit plan, within the meaning of the Employee Retirement Income Security Act of 1974, of the Company, regardless of whether such plan is a tax-qualified plan or a nonqualified plan.

 

“Senior Executive” means a person who is an officer of the Company or a subsidiary who is required to file reports pursuant to Section 16 of the Securities Exchange Act of 1934, as amended.

 

In the event that the Board or Compensation Committee determines that the circumstances of a future agreement with a Senior Executive warrant extraordinary retirement benefits, service or vesting credits, or vesting acceleration in excess of that which is permitted under this Policy (the “Limits”), and the Board determines that it is impractical to submit the matter to a stockholder vote in a timely fashion, then in such event the Board may elect to seek stockholder approval after the parties have mutually agreed to the material terms of the relevant future agreement, provided that the payment of any retirement benefits in excess of the Limits under such agreement is conditioned on subsequent stockholder ratification. The Board may amend or terminate this Policy at any time if it determines in its sole discretion that such action would be in the best interests of the Company, provided that any such action shall be promptly disclosed on the Company’s Web site.

 

14



 

Personal Health and Services Allowance

 

Executive officers and senior managers are entitled to a Personal Health and Services Allowance (PHSA) provided as a percent of their base salary. The PHSA is intended as a means to motivate participants to monitor their physical health and financial stability by incentivizing them to receive an annual medical examination and to have a professional review of their personal finances and tax preparation. This program also communicates Ryland’s interest and concern for the well being of its management, in keeping with the overall goals and philosophy of Ryland’s executive compensation and benefit program. Participants are provided specific medical examination requirements and must maintain proof of their annual medical examination and tax return preparation. Beyond these two requirements, participants may use the PHSA based on their individual needs.

 

Mr. Dreier is provided eight percent of his base salary annually as a PHSA, and other executive officers, including the named executive officers, are provided seven percent of their base salary annually as a PHSA.

 

Change of Control Provisions

 

Mr. Dreier’s Employment Agreement and Senior Executive Severance Agreements for executive officers other than Mr. Dreier have change of control provisions that are intended to align management with stockholders’ interests by enhancing top management stability in the event of a merger or acquisition. Mr. Dreier is entitled to certain payments and benefits upon a “change of control” of Ryland. The payments and benefits for the other executive officers become payable upon the termination of their employment by Ryland without “cause” or by the officer with “good reason” in accordance with the terms of the agreement, provided that either of these events occurs within a “change of control period.” The “change of control period” begins on the date Ryland becomes aware of or enters into discussions that could involve a change of control and ends on the earlier of two years after the date of a change of control or on the date on which a proposed change of control is no longer discussed or proposed to occur.

 

The Compensation Committee determined that the benefits payable to Mr. Dreier are effective and payable as of the date of a “change of control” of Ryland. The Compensation Committee concluded that a “single trigger” for Mr. Dreier was appropriate because of his position as Chief Executive Officer of Ryland and the likelihood that a change of control would materially alter his position at Ryland. A further discussion of the terms of the change of control provisions and the benefits that they provide to the officers is set forth in the section entitled “Potential Payments Upon Termination or Change of Control” on pages 29 to 33 of this Proxy Statement.

 

Policy Regarding Stockholder Approval of Severance Agreements

 

In response to a second proposal approved by stockholders at the 2006 Annual Meeting of Stockholders, the Board of Directors adopted the following policy on December 6, 2006:

 

The Company, after the Effective Date of this Policy, will not enter into a Future Severance Agreement with a Senior Executive that provides for Benefits in an amount exceeding the Severance Benefits Limitation, unless such Future Severance Agreement is approved by a vote of the Company’s stockholders.

 

For purposes of this Policy, the following terms shall have the following meanings:

 

“Annual Compensation” means the sum of the annual base salary paid or earned and annual bonus paid or earned, even though paid in a subsequent year, by the Senior Executive and all amounts credited to the Senior Executive, vested and unvested, under any incentive compensation or other benefit or compensation plans in which the Senior Executive participates during a calendar year. In the event the Senior Executive has not been employed by the Company for a complete calendar year, the determination of Annual Compensation shall involve a pro forma projection of annual base salary, annual bonus and amounts that are projected to be credited, vested and unvested, under any incentive compensation or other benefit or compensation plan in which the Senior Executive participates.

 

15



 

“Benefits” means: (i) severance amounts payable in cash to a Senior Executive (including cash amounts payable for the uncompleted portion of an employment term under an agreement), and (ii) special benefits or perquisites provided to a Senior Executive at the time of such Senior Executive’s termination of employment for any reason other than death. The term “Benefits” includes both lump-sum payments and the estimated present value of any periodic payments made, or special benefits or perquisites provided, following and as a result of the termination of such Senior Executive’s employment.

 

Notwithstanding the foregoing, the term “Benefits” does not include:

 

(a)          the value of any accelerated vesting of any then-outstanding equity-based award;

 

(b)         the value of any accelerated vesting of any then-outstanding cash-based incentive award;

 

(c)          compensation and benefits earned, accrued or otherwise provided, including, without limitation, vacation pay, pro-rata bonuses, and deferred compensation accounts, for services rendered through the date of termination of employment (other than any such compensation or benefits awarded at the time and as a result of the Senior Executive’s termination of employment);

 

(d)         payments, including tax gross-ups, related to offsetting the Senior Executive’s excise taxes under Sections 409A or 4999 of the Internal Revenue Code (the “Code”), as amended from time to time;

 

(e)          any post-termination retirement and other benefits, special benefits or perquisites provided under plans, programs or arrangements of the Company applicable to one or more groups of employees in addition to the Senior Executives or which are provided consistent with the Company’s Policy Regarding Extraordinary Retirement Benefits for Senior Executives;

 

(f)            payments, including tax gross-ups, made with respect to relocation assistance and outplacement services; and

 

(g)         payments and other benefits that also would become payable or are otherwise provided on account of the Senior Executive’s disability or death.

 

“Future Severance Agreement” means an employment agreement between the Company (or one of its subsidiaries) and a Senior Executive pursuant to which the Senior Executive renders services to the Company (or one of its subsidiaries) as an employee (and not as a consultant or other independent contractor) or a severance agreement between the Company (or one of its subsidiaries) and a Senior Executive related to the termination of employment of the Senior Executive with the Company (or one of its subsidiaries), in either case, entered into on or after the Effective Date (as defined herein) of this Policy, and includes any material modification to increase the formula for determining severance Benefits under any existing agreement with a Senior Executive that is in effect as of the Effective Date.

 

“Senior Executive” means a person who is or becomes at the time of execution of a Future Severance Agreement an officer of the Company or a subsidiary who is required to file reports pursuant to Section 16 of the Securities Exchange Act of 1934, as amended.

 

“Severance Benefits Limitation” means 2.99 times the Senior Executive’s highest Annual Compensation for any of the three (3) calendar years immediately preceding the date of termination of employment. For purposes of the preceding sentence, the amount of annual bonus and all amounts credited to the Senior Executive, vested or unvested, under any incentive compensation or other benefit or compensation plans in which the Senior Executive participates shall be determined without regard to whether such amount is currently payable or is or was paid or deferred and without regard to the form of payment (e.g., in cash, equity or other property).

 

This Policy shall not cover (i) any agreement for future services to be rendered to the Company in a capacity other than as an employee (e.g., consulting or director agreements), or (ii) any agreement to refrain from certain conduct (e.g., covenants not to compete).

 

16



 

The Board delegates to the Compensation Committee full authority to make determinations regarding the interpretation of the provisions of this Policy, in its sole discretion, including, without limitation, the determination of the value of any non-cash items, as well as the present value of any cash or non-cash benefits payable over a period of time.

 

Due to timing constraints or other reasons, the Board may determine that it would be in the best interests of the Company to enter into a Future Severance Agreement with a Senior Executive that exceeds the Severance Benefits Limitation. In this situation, the Board may elect to seek stockholder approval after the material terms of such an agreement have been agreed upon, provided that the payment of any Benefits in excess of the foregoing limits is contingent upon subsequent stockholder ratification. The Board may amend, waive or cancel this Policy at any time if it determines in its sole discretion that such action would be in the best interests of the Company, provided that any such action shall be promptly disclosed on the Company’s Web site.

 

Policy with Respect to the $1 Million Deduction Limit

 

It is the policy of the Compensation Committee to periodically evaluate the qualification of compensation for exclusion from the $1 million limitation on corporate tax deductions under Section 162(m) of the Code, as well as other sections of the Code, while maintaining flexibility to take actions with respect to compensation which it deems to be in the interest of Ryland and its stockholders which may not qualify for tax deductibility. Ryland’s stockholders previously approved the Senior Executive Performance Plan, the TRG Incentive Plan, as amended, and a Performance Award Program under the Equity Incentive Plan to comply with the requirements of Section 162(m) of the Code. The plans are being re-submitted as part of this Proxy Statement to maintain compliance with these requirements and the tax deductibility of Ryland’s related compensation expense. Compliance with Section 162(m) of the Internal Revenue Code results in the tax deductibility of related compensation expense.

 

17



 

SUMMARY COMPENSATION TABLE

 

Name and Principal Position

 

Year

 

Salary

 

Stock
Awards
(2)

 

Option
Awards
(3)

 

Non-Equity
Incentive Plan
Compensation

 

Change in
Pension
Value
(8)

 

All Other
Compensation 
(9)

 

Total

 

R. Chad Dreier — Chairman of the Board

 

2007

 

$

1,000,000

 

$

1,979,640

 

 

$

0

(4)

$

4,086,509

 

$

5,029,448

 

$

14,256,770

 

of Directors, President and Chief Executive

 

 

 

 

 

 

 

 

 

$

2,161,173

(5)

 

 

 

 

 

 

Officer of The Ryland Group, Inc.

 

2006

 

$

1,000,000

 

$

5,141,800

 

 

$

11,795,846

(6)

$

3,568,553

 

$

7,002,661

 

$

31,439,986

 

 

 

 

 

 

 

 

 

 

 

$

2,931,126

(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gordon A. Milne — Executive Vice

 

2007

 

$

538,462

 

$

410,536

 

$

149,303

 

$

0

(4)

$

249,363

 

$

213,045

 

$

2,416,188

 

President and Chief Financial Officer of

 

 

 

 

 

 

 

 

 

$

855,479

(5)

 

 

 

 

 

 

The Ryland Group, Inc.

 

2006

 

$

500,000

 

$

581,662

 

$

214,779

 

$

1,769,377

(6)

$

220,304

 

$

247,170

 

$

4,607,282

 

 

 

 

 

 

 

 

 

 

 

$

1,073,990

(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Larry T. Nicholson — Executive Vice

 

2007

 

$

441,635

 

$

273,681

 

$

232,698

 

$

500,000

(4)

$

168,069

 

$

1,679,612

 

$

3,981,875

 

President and Chief Operating Officer of

 

 

 

 

 

 

 

 

 

$

686,180

(5)

 

 

 

 

 

 

The Ryland Group, Inc.

 

2006

 

$

295,000

 

$

387,764

 

$

50,115

 

$

3,205,815

(6)

$

147,987

 

$

216,086

 

$

4,877,806

 

 

 

 

 

 

 

 

 

 

 

$

575,039

(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Daniel G. Schreiner — Senior Vice President

 

2007

 

$

300,000

 

$

215,033

 

$

89,195

 

$

1,302,717

(4)

$

166,161

 

$

180,469

 

$

2,642,469

 

of The Ryland Group, Inc.; President of

 

 

 

 

 

 

 

 

 

$

388,894

(5)

 

 

 

 

 

 

Ryland Mortgage Company

 

2006

 

$

300,000

 

$

304,669

 

$

107,389

 

$

2,039,554

(6)

$

146,798

 

$

189,536

 

$

3,615,211

 

 

 

 

 

 

 

 

 

 

 

$

527,265

(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Keith E. Bass — Senior Vice President

 

2007

 

$

231,058

 

 

$

254,986

 

$

765,930

(4)

 

$

603,343

 

$

2,108,838

 

of The Ryland Group, Inc.; President of

 

 

 

 

 

 

 

 

 

$

253,521

(5)

 

 

 

 

 

 

the Southeast Region of Ryland Homes (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)          Mr. Bass was promoted to the position of Senior Vice President of The Ryland Group, Inc. and President of the Southeast Region of Ryland Homes on July 1, 2007.

 

(2)          Mr. Dreier received a restricted stock unit grant according to his Employment Agreement pursuant to which 94,000 restricted stock units vested on each of March 1, 2006 and 2007. Pursuant to FAS 123(R), a pro rata portion of compensation expense related to each vesting tranche of these restricted stock units was recognized in 2006, and the remaining pro rata compensation expense for the tranche vesting in 2007 was recognized in 2007. On May 1 of 2005 and 2006, Messrs. Milne, Nicholson and Schreiner received a grant of restricted stock units that vest ratably on each May 1 of the three years following the grant date. The portions which vested on May 1, 2006 for the executive officers are as follows: Mr. Milne, 7,000; Mr. Nicholson, 4,667; and Mr. Schreiner, 3,667; the portions which vested on May 1, 2007 for the executive officers are as follows: Mr. Milne, 14,000; Mr. Nicholson, 9,333; and Mr. Schreiner, 7,333; and the portions vesting on May 1, 2008 for the executive officers are as follows: Mr. Milne, 14,000; Mr. Nicholson, 9,333; and Mr. Schreiner, 7,333. Pursuant to FAS 123(R), a pro rata portion of compensation expense related to the 2006 and 2007 vesting tranches of these restricted stock units was recognized in 2006; and a pro rata portion of compensation expense related to the 2007 and 2008 vesting tranches was recognized in 2007.

 

(3)          Messrs. Milne, Nicholson, Schreiner and Bass received grants of stock options in 2004 which vested one-third per year over a three-year period with the remaining installment of unexercisable options vesting on February 25, 2007. They also received grants of stock options on May 1, 2007 which vest one-third per year over a three-year period. In connection with their promotions, Messrs. Nicholson and Bass received grants of stock options on July 1, 2007 which vest one-third per year over a three-year period. Mr. Bass received stock option grants on each May 1 of 2005 and 2006 which vest one-third per year over a three-year period. Details regarding the outstanding stock options can be found in the section entitled “Outstanding Equity Awards at December 31, 2007” on page 24 of this Proxy Statement. The compensation expense recognized for the stock option grants was based upon the grant-date fair value, which was determined using the Black-Scholes-Merton option pricing formula pursuant to FAS 123(R). Further information regarding their valuation can be found in footnote I to the financial statements in Ryland’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

(4)          Messrs. Dreier and Milne did not earn an annual bonus incentive payment for 2007 due to the decrease in Ryland’s pre-tax income and the loss related to inventory impairments during 2007. For Messrs. Nicholson, Schreiner and Bass, this amount represents the annual bonus incentive payment earned in 2007 and paid out in January 2008. Further information about Ryland’s annual bonus incentive payments is contained in the section entitled “Annual Bonus Incentives” under “Compensation Discussion and Analysis” beginning on page 10 of this Proxy Statement.

 

(5)          This amount consists of the 2007 award determined according to the performance goals set pursuant to the TRG Incentive Plan as described in the section “TRG Incentive Plan” under “Compensation Discussion and Analysis” beginning on page 12 of this Proxy Statement. The first third of the 2007 award was paid out in February 2008 and the remaining two-thirds are expected to be paid out pro rata in February of 2009 and 2010 if the executives are employed by Ryland on January 1st of 2009 and 2010, respectively. This compensation also includes interest of 8.75 percent earned in 2007 on 2005 and 2006 TRG Incentive Plan awards that had not yet vested.

 

18



 

(6)          This amount represents the annual bonus incentives which were earned for 2006 and paid out in January 2007.

 

(7)          This amount consists of the 2006 award determined according to the performance goals set pursuant to the TRG Incentive Plan as described in the section “TRG Incentive Plan” under “Compensation Discussion and Analysis” beginning on page 12 of this Proxy Statement. The first third of the 2006 award was paid out in February 2007 and the remaining two-thirds are expected to be paid out pro rata in February of 2008 and 2009 if the executives are employed by Ryland on January 1st of 2008 and 2009, respectively. This compensation also includes interest of 10.1 percent earned in 2006 on 2004 and 2005 TRG Incentive Plan awards that had not yet vested.

 

(8)          The Change in Pension Value column consists of the aggregate change in the actuarial present value of the executive officers’ accumulated benefit under their supplemental executive retirement plans. Further information about Ryland’s supplemental executive retirement plans is contained in the section entitled “Retirement” under “Compensation Discussion and Analysis” beginning on page 13 of this Proxy Statement.

 

(9)          All Other Compensation includes the following components:

 

(a)          Tax assistance related to the receipt of stock upon the vesting of a restricted stock unit grant: Mr. Dreier, 2007 - $4,007,454 and 2006 - $5,752,050;

 

(b)         Mr. Dreier’s life insurance plan premium payment: 2007 - $26,428, 2006 - $26,428, and related tax assistance: 2007 - $23,202, 2006 - $23,202;

 

(c)          Value of term life insurance received under Ryland’s basic and executive life insurance plans: Mr. Dreier, 2007 - $20,544, 2006 - $17,022; Mr. Milne, 2007 - $12,372, 2006 - $8,097; Mr. Nicholson, 2007 - $6,762, 2006 - $3,595; Mr. Schreiner, 2007 - $3,627, 2006 - $3,492; and Mr. Bass, 2007 - $3,072;

 

(d)         Tax assistance for value of term life insurance received under Ryland’s executive life insurance plan: Mr. Dreier, 2007 - $11,431, 2006 - $10,641; Mr. Milne, 2007 - $6,558, 2006 - $4,807; Mr. Nicholson, 2007 - $3,635, 2006 - $1,081; Mr. Schreiner, 2007 - $1,683, 2006 - $1,564; and Mr. Bass, 2007 - $599;

 

(e)          Reimbursement and tax assistance for executive health and fitness costs: Mr. Dreier, 2007 and 2006 - $3,564; Mr. Milne, 2007 and 2006 - $1,017; and Mr. Nicholson, 2007 - $540, 2006 - $3,510;

 

(f)            Aircraft usage: Mr. Dreier received 2007 - $15,600, 2006 - $37,269, and related tax assistance in the amount of 2007 - $13,696, 2006 - $32,720, primarily for spousal and family travel to Ryland corporate-related functions. Ryland did not incur any incremental cost to have Mr. Dreier’s spouse and family accompany him on trips to corporate-related functions;

 

(g)         Executive medical reimbursement plan for expenses not covered by Ryland’s health insurance plan: Mr. Dreier, 2007 - $9,136, 2006 - $12,834; Mr. Milne, 2007 - $5,486, 2006 - $11,209; Mr. Nicholson, 2007 - $6,769, 2006 - $6,574; Mr. Schreiner, 2007 - $3,144, 2006 - $2,561; and Mr. Bass, 2007 - $6,511;

 

(h)         Personal Health and Services Allowance: Mr. Dreier, 2007 - $80,000, 2006 - $80,000; Mr. Milne, 2007 - $38,500, 2006 - $35,000; Mr. Nicholson, 2007 - $31,325, 2006 -$20,650; Mr. Schreiner, 2007 - $21,000, 2006 - $21,000; and Mr. Bass, 2007 - $15,300;

 

(i)             Ryland’s contributions to the Retirement Savings Opportunity Plan and the Executive and Director Deferred Compensation Plan II: Mr. Dreier, 2007 - $767,751, 2006 - $959,872; Mr. Milne, 2007 - $138,470, 2006 - $164,981; Mr. Nicholson, 2007 - $218,847, 2006 - $158,061; Mr. Schreiner, 2007 - $140,373, 2006 - $138,858; and Mr. Bass, 2007 - $173,829;

 

(j)             Reimbursement for relocation expenses in 2007: Mr. Nicholson, $746,082; and Mr. Bass, $250,000; and tax assistance related to reimbursements: Mr. Nicholson, $655,011; and Mr. Bass, $143,391;

 

(k)          For 2006, each executive officer received a discretionary cash award approved by the Compensation Committee in the amount of $10,000; and

 

(l)             Charitable contribution: For 2006 and 2007, each named executive officer was given the opportunity to designate where Ryland made a $10,000 contribution to a qualified charity on his behalf. Additionally, consistent with charitable contributions made by Ryland on behalf of Directors, Mr. Dreier received the opportunity in 2006 and 2007 to designate where Ryland made a $25,000 contribution to a qualified charity as a member of the Board of Directors. For 2007, Mr. Dreier and his wife also received the opportunity in connection with Ryland’s management conference to designate where Ryland made a $15,000 contribution to a qualified charity.

 

19



 

GRANTS OF PLAN-BASED AWARDS IN 2007

 

 

 

 

 

 

 

Estimated Future Payouts
Under Non-Equity Incentive Plan

 

Estimated Future
Payouts Under

 

Exercise
Price of

 

Grant
Date Value

 

 

 

 

 

Approval

 

Awards (TRG Incentive Plan) (1)

 

Equity Incentive

 

Option

 

of Option

 

Name

 

Grant Date

 

Date

 

Threshold

 

Target

 

Maximum

 

Plan Awards

 

Awards (4)

 

Awards (5)

 

R. Chad Dreier

 

2/27/07

 

2/27/07

 

$

1,125,000

 

$

1,500,000

 

$

4,500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gordon A. Milne

 

2/27/07

 

2/27/07

 

$

445,952

 

$

594,603

 

$

1,783,809

 

 

 

 

 

 

5/1/07

 

2/27/07

 

 

 

 

40,000(2

)

$

44.65

 

$

520,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Larry T. Nicholson

 

2/27/07

 

2/27/07

 

$

359,250

 

$

479,000

 

$

1,437,000

 

 

 

 

 

 

5/1/07

 

2/27/07

 

 

 

 

30,000(2

)

$

44.65

 

$

390,000

 

 

 

7/1/07

 

6/5/07

 

 

 

 

75,000(3

)

$

37.37

 

$

819,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Daniel G. Schreiner

 

2/27/07

 

2/27/07

 

$

202,500

 

$

270,000

 

$

810,000

 

 

 

 

 

 

5/1/07

 

2/27/07

 

 

 

 

25,000(2

)

$

44.65

 

$

325,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Keith E. Bass

 

2/27/07

 

2/27/07

 

$

132,433

 

$

176,577

 

$

529,731

 

 

 

 

 

 

5/1/07

 

2/27/07

 

 

 

 

14,000(2

)

$

44.65

 

$

182,000

 

 

 

7/1/07

 

6/5/07

 

 

 

 

20,000(3

)

$

37.37

 

$

218,600

 

 

 

 

 

 

(1)          The Compensation Committee met on February 27, 2007 and approved performance goals based on Ryland’s three-year average return on equity for the grant of awards for 2007 pursuant to the TRG Incentive Plan which is discussed in the “Compensation Discussion and Analysis” under the section entitled “TRG Incentive Plan” beginning on page 12 of this Proxy Statement. Ryland’s three-year average return on equity for the three years of 2005, 2006 and 2007 was 15.5 percent which is 142 percent of the TRG Incentive Plan target. As a result, the named executive officers received the following awards for 2007: Mr. Dreier, $2,130,000; Mr. Milne, $844,336; Mr. Nicholson, $680,180; Mr. Schreiner, $383,400; and Mr. Bass, $250,739. The first third of the 2007 awards was paid out in February 2008 and the remaining two-thirds are expected to be paid out pro rata in February of 2009 and 2010 if the executives continue to be employed by Ryland on January 1st of 2009 and 2010, respectively. In addition to the award grant, interest on amounts earned but not yet vested can be credited to the executive officer’s award at a rate established by the Compensation Committee that is reasonable under Section 162(m) of the Code.

 

(2)          These stock option awards, granted on May 1, 2007, have a five-year term and vest in one-third increments on each of May 1, 2008, 2009 and 2010 if the executive officer is employed by Ryland on those dates.

 

(3)          In connection with their promotions, Messrs. Nicholson and Bass were granted a stock option award on July 1, 2007. These stock option awards have a five-year term and vest in one-third increments on each of July 1, 2008, 2009 and 2010 if they are employed by Ryland on those dates.

 

(4)          The exercise price for these stock option awards was the closing market price of Ryland’s Common Stock on the grant date.

 

(5)          The grant date value of the stock option awards was determined using the Black-Scholes-Merton option pricing formula pursuant to FAS 123(R).

 

20



 

DISCUSSION OF COMPENSATION AGREEMENTS AND PLANS

 

Mr. Dreier’s Employment Agreement

 

On April 20, 2005, Ryland entered into an Amended and Restated Employment Agreement with Mr. Dreier for a period extending until December 30, 2010. The Employment Agreement provides for one-year extensions subject to a right of termination upon notice at least 180 days prior to the end of the agreement’s term. Under the Employment Agreement, Mr. Dreier receives a base salary of $1,000,000 per year and is eligible for an annual cash bonus equal to two percent of Ryland’s consolidated pre-tax income, as adjusted by the Compensation Committee to eliminate the effect of bonus and incentive compensation, changes in accounting methods and non-recurring or unusual expenses or charges. In addition, Mr. Dreier is entitled to participate in the TRG Incentive Plan with a target performance award equal to 150 percent of his base salary. Pursuant to the Employment Agreement, Mr. Dreier received an award of restricted stock units, subject to performance criteria related to Ryland’s return on equity as established pursuant to the Performance Award Program under Ryland’s Equity Incentive Plan. The performance criteria for 40,000 restricted stock units that would have vested on March 1, 2008 was not met and the award was forfeited. The remaining outstanding grant of 80,000 restricted stock units will vest one-half each on March 1 of 2009 and 2010 if the related performance criteria are met and if Mr. Dreier continues to be employed by Ryland on each of those dates. The award of restricted stock units includes payment of an amount equal to the applicable federal and state income and Medicare taxes related to the vesting of the restricted stock units, and of dividend equivalent payments with respect to the unvested restricted stock units as of each dividend payment date.

 

A discussion of the payments and benefits received by Mr. Dreier pursuant to his Employment Agreement in the event of a termination of employment or “change of control” of Ryland is set forth in the section entitled “Potential Payments upon Termination or Change of Control” on pages 29 through 33 of this Proxy Statement.

 

The Employment Agreement provides for payments to Mr. Dreier under a Supplemental Executive Retirement Plan (“SERP”) entered into and effective as of July 1, 2002. These payments occur within 60 days of Mr. Dreier’s retirement from employment with Ryland (“SERP Benefit”). The SERP Benefit is fully vested and will be paid at the election of Mr. Dreier as either an annual payment of $2,400,000 for a period of 15 years or a lump sum payment in the amount of the present value equivalent of the total SERP Benefit calculated using an eight percent discount rate. At the time that Mr. Dreier is eligible to receive the SERP Benefit, Mr. Dreier and his spouse are provided with an executive retirement health insurance program for a period of 15 years which shall provide the same continued coverage and benefits as Ryland’s executive health insurance program in which Mr. Dreier participated prior to his retirement or termination of employment with Ryland.

 

Additionally, the Employment Agreement provides for payments to Mr. Dreier under a Supplemental Executive Retirement Plan II (“SERP II”) entered into and effective as of January 1, 2005. These payments occur on the earlier of the date of a “change of control” or six months after the date of Mr. Dreier’s retirement (“SERP II Benefit”). The SERP II Benefit vests one-third per year on each December 30 of 2008, 2009 and 2010 if Mr. Dreier continues to be employed by Ryland on each of those dates, respectively, unless vesting is accelerated as a result of a “change of control” or termination of employment without “cause.” At the election of Mr. Dreier, the SERP II Benefit is paid as either an annual payment of $1,440,000 for a period of 15 years or a lump sum payment in the amount of the present value equivalent of all benefits to be provided by the SERP II Benefit calculated using an eight percent discount rate.

 

As of December 31, 2007, Ryland has deposited $17,359,955 into a grantor “rabbi” trust (“SERP Trust”) to fund benefits to be provided by Mr. Dreier’s SERP and SERP II. Ryland is depositing $3,471,991 per year into the SERP Trust to fund the benefits payable in connection with the SERP and SERP II. Before the date of a “change of control,” Ryland will deposit into the SERP Trust an amount equal to the present value equivalent of all benefits to be provided by the SERP and SERP II calculated using an eight percent discount rate.

 

 

21



 

Annual Bonuses for Executive Officers

 

Mr. Milne’s annual bonus for 2006 and 2007 was determined based upon 0.3 percent of Ryland’s consolidated pre-tax income, subject to the same adjustments listed above for Mr. Dreier. Because of the decrease in Ryland’s pre-tax income and the loss related to inventory impairments during 2007, Mr. Milne did not earn an annual bonus for 2007. The 2006 annual bonus for Mr. Nicholson was determined based upon 1.5 percent of the adjusted consolidated pre-tax income for the Southeast Region of Ryland Homes given that he was President of this Region. As a result of his promotion in July 2007, Mr. Nicholson’s annual bonus for 2007 was based upon the greater of 0.75 percent of Ryland’s consolidated pre-tax income, subject to the same adjustments listed for Mr. Dreier, or a $500,000 minimum bonus amount to compensate him for his transition. Mr. Schreiner’s annual bonus for 2006 and 2007 was based on 3.0 percent of the consolidated pre-tax income for Ryland Mortgage Company, subject to the same adjustments listed for Mr. Dreier. Mr. Bass, who was promoted from Orlando Division President to Southeast Region President of Ryland Homes in July 2007, received an annual bonus payment in 2007 based upon the greater of 1.5 percent of the Southeast Region’s adjusted consolidated pre-tax income or 3.0 percent of the Orlando Division’s adjusted consolidated pre-tax income. The Division bonus amount was determined to be greater.

 

TRG Incentive Plan

 

Each of the named executive officers is entitled to participate in the TRG Incentive Plan. At its February 2007 meeting, the Compensation Committee approved performance goals for the grant of awards for 2007. Awards under the TRG Incentive Plan are expressed as a percentage of the participant’s base salary. Target awards are based on two comparison metrics. The first comparison metric is based on the most recent three-year median return on equity performance for which information is available for Fortune 500 companies. As a result, 50 percent of the target awards for the 2007 plan year is based on the three-year median return on equity of the Fortune 500 industrial companies for the years 2004, 2005 and 2006, which was 14.7 percent. The second comparison metric is based on the average of the most recent three-year return on equity performance of 10 of Ryland’s comparative public homebuilding peer group companies. As a result, the remaining 50 percent of the target awards for the 2007 plan year is based on the average return on equity for 10 comparable public homebuilders in Ryland’s peer group for years 2005, 2006 and 2007, which was 8.6 percent. These percentages are the targets for a 100 percent performance award under the plan. There is a threshold for performance awards under the plan, which is 75 percent of the return on equity targets for calculation of awards under the plan. There is also a maximum limit for performance awards under the plan, which is 300 percent of the target awards under the plan. Performance awards are targeted as a percentage of base salary for participants. Pursuant to Mr. Dreier’s Employment Agreement, a target performance award under the TRG Incentive Plan is 150 percent of his base salary or $1.5 million. The other named executive officers have performance award targets between 80 percent and 110 percent of their base salaries.

 

Ryland’s three-year average return on equity using the three most recent fiscal years of 2005, 2006 and 2007 was 15.5 percent. As a result, the 2007 performance awards under the TRG Incentive Plan were calculated at 142 percent of the performance award targets for the respective participants. For the named executive officers, the 2007 performance awards are set forth in footnote (1) of the “Grants of Plan-Based Awards in 2007” table on page 20 of this Proxy Statement.

 

Once the performance awards are determined, they vest ratably over a three-year period. The first one-third of the performance award vests on January 1 of Ryland’s first fiscal year following the performance award year. For the 2007 performance award, this vesting date was January 1, 2008. Vesting requires that the participant be employed on the vesting date. The remaining two-thirds of the performance award are credited to an account for each participant and payout is deferred until vested. These deferred award payouts vest in two equal installments on January 1 of each of Ryland’s second and third fiscal years following the performance award year, provided the participant continues to be employed by Ryland on the vesting dates. For the 2007 performance award, the vesting dates for the second and third installments of these awards are January 1, 2009 and January 1, 2010, respectively. The Compensation Committee can credit earnings on amounts held in a participant’s deferred award account in a manner and at a rate that is reasonable under Section 162(m) of the Code.

 

Upon the death, disability or retirement of a participant, all amounts of deferred performance awards vest and are paid to a participant or a participant’s beneficiary. Upon a participant’s voluntary or involuntary termination of employment, all unvested deferred performance awards are forfeited, and all vested deferred awards are paid in accordance with the terms of the plan; however, if the termination is for “cause,” the participant shall also forfeit all vested unpaid deferred awards. Upon a “change of control” of Ryland, all unvested deferred performance awards vest and are paid within 14 days to the participants.

 

 

22



 

Equity Incentive Plan

 

Ryland’s stockholders approved Ryland’s 2007 Equity Incentive Plan (“Equity Incentive Plan”) at the Annual Meeting of Stockholders on April 25, 2007. The Equity Incentive Plan permits the granting of stock options, restricted stock awards, stock units or any combination of the foregoing to Ryland’s employees, officers and others providing services to Ryland. 2,047,001 shares of Common Stock were authorized for grant under the Equity Incentive Plan. Ryland has issued both stock options and restricted stock units to its executive officers and managers under the Equity Incentive Plan and its predecessor plans.

 

Restricted Stock Unit Grants

 

Pursuant to his Employment Agreement and the restricted stock units granted thereunder, Mr. Dreier received 94,000 shares of Ryland’s Common Stock on March 1, 2007, forfeited 40,000 restricted stock units that would have vested on March 1, 2008, and has the opportunity to receive 40,000 shares of Ryland’s Common Stock on each March 1of 2009 and 2010 subject to performance criteria and the terms of his Employment Agreement. To satisfy the performance criteria for vesting of the restricted stock units, Ryland’s return on equity for the year preceding the vesting date must be 60 percent or greater than the 10-year median return on equity of the Fortune 500 industrial companies for the 10-year period ending with the year prior to Ryland’s performance year. If the performance criteria are not met, that restricted stock unit grant is forfeited. Because the performance criteria for 2007 were not met, Mr. Dreier forfeited the restricted stock unit grant that would have vested on March 1, 2008. The award of restricted stock units to Mr. Dreier includes payment of an amount equal to the applicable federal and state income and Medicare taxes related to the vesting of the restricted stock units. With respect to unvested restricted stock units, Mr. Dreier shall receive cash dividend equivalent payments as of each dividend payment date related to Ryland’s Common Stock. In the case of a “change of control” of Ryland or termination of employment by Ryland without “cause” or termination of employment by Mr. Dreier for “good reason,” Mr. Dreier will vest in full and receive any unvested restricted stock units, including payment of applicable federal and state income and Medicare taxes.

 

On May 1 of 2005 and 2006, Ryland’s executive officers received grants of restricted stock units. Upon vesting, these awards are paid 50 percent in shares of Ryland’s Common Stock and 50 percent in cash equal to the fair market value of the restricted stock units on the date of vesting. Payment of the fair market value of the vested restricted stock units in cash permits the satisfaction of any applicable tax withholding required in connection with the vesting of these units. These grants of restricted stock units to executive officers vest ratably in annual installments over a three-year period with the first installments vesting on May 1, 2006 for the 2005 grant and May 1, 2007 for the 2006 grant. The performance criteria for these awards were met given that Ryland’s return on equity for 2005 and 2006 was greater than 60 percent of the 10-year median return on equity of the Fortune 500 industrial companies for the 10-year period ending with the 2004 and 2005 calendar years, respectively. Since the performance criteria for these awards were met, the only remaining condition for the vesting of each installment is the continued employment of the executive officer on the applicable vesting date. Restricted stock unit grants to executive officers include cash dividend equivalent payments with respect to the unvested restricted stock units as of each dividend payment date related to Ryland’s Common Stock. In the case of a “change of control” of Ryland, the unvested restricted stock units shall vest and be paid in full.

 

Stock Option Awards

 

On May 1, 2007, Ryland’s executive officers received grants of stock options to purchase shares of Common Stock at an exercise price of $44.65 per share, which was the closing market price of Ryland’s Common Stock on the grant date. On July 1, 2007, Messrs. Nicholson and Bass received grants of 75,000 and 20,000 stock options, respectively, in connection with their promotions. The stock options granted on July 1, 2007 have an exercise price of $37.37 per share, which was the closing market price of Ryland’s Common Stock on the grant date. These grants of stock options vest ratably in annual installments over a three-year period with the first installments vesting on May 1, 2008 and July 1, 2008, respectively, and must be exercised within five years of the date of grant. These awards for the named executive officers are included in the “Grants of Plan-Based Awards in 2007” table on page 20 of this Proxy Statement. In the case of a “change of control” of Ryland, any unvested stock option awards shall vest and become immediately exercisable.

 

Supplemental Executive Retirement Plan for Executive Officers

 

On July 1, 2003, Ryland established a Senior Executive Supplemental Retirement Plan (“SESRP”) for certain of Ryland’s executive officers including Messrs. Milne and Schreiner. Mr. Nicholson began his participation when he was promoted to an executive officer in 2004. The SESRP provides for payments within 60 days of the first day of January following the participant’s 60th birthday (“SESRP Benefit”). The SESRP Benefit vests at a rate of 20 percent per year on each anniversary date of commencement of participation in the SESRP, unless accelerated as a result of a “change of control” or termination of employment without “cause.” The SESRP Benefit will be paid at the election of the participants as either an annual payment of $150,000 for a period of 15 years or a lump sum payment in the amount of the present value equivalent of the benefit calculated using an eight percent discount rate.

 

23



 

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2007

 

 

 

Option Awards

 

Stock Awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Incentive Plan Awards

 

 

 

Number of Securities

 

 

 

 

 

Number of

 

Market Value of

 

Number of

 

Market Value of

 

 

 

Underlying

 

 

 

 

 

Shares or Units

 

Shares or Units of

 

Unearned Shares

 

Unearned Shares

 

 

 

Unexercised Options

 

Option

 

Option

 

of Stock That

 

Stock That Have

 

or Units That

 

or Units That Have

 

Name

 

Exercisable

 

Unexercisable

 

Exercise Price

 

Expiration Date

 

Have Not Vested

 

Not Vested (7)

 

Have Not Vested

 

Not Vested (7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

R. Chad Dreier

 

400,000

 

 

$6.38

 

4/21/09

 

 

 

120,000

(8)

$3,306,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gordon A. Milne

 

10,100

 

 

$6.04

 

9/1/10

 

7,000

(5)

$192,850

 

 

 

 

 

60,000

 

 

$20.99

 

2/26/13

 

14,000

(6)

$385,700

 

 

 

 

 

60,000

 

 

$40.00

 

2/25/14

 

 

 

 

 

 

 

 

40,000

(1)

$44.65

 

5/1/12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Larry T. Nicholson

 

20,000

 

 

$22.18

 

3/15/12

 

4,667

(5)

$128,576

 

 

 

 

 

14,000

 

 

$20.99

 

2/26/13

 

9,333

(6)

$257,124

 

 

 

 

 

14,000

 

 

$40.00

 

2/25/14

 

 

 

 

 

 

 

 

30,000

(1)

$44.65

 

5/1/12

 

 

 

 

 

 

 

 

75,000

(2)

$37.37

 

7/1/12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Daniel G. Schreiner

 

20,000

 

 

$6.30

 

9/17/08

 

3,667

(5)

$101,026

 

 

 

 

 

10,300

 

 

$5.97

 

2/5/09

 

7,333

(6)

$202,024

 

 

 

 

 

16,600

 

 

$6.04

 

9/1/10

 

 

 

 

 

 

 

30,000

 

 

$20.99

 

2/26/13

 

 

 

 

 

 

 

30,000

 

 

$40.00

 

2/25/14

 

 

 

 

 

 

 

 

25,000

(1)

$44.65

 

5/1/12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Keith E. Bass

 

6,000

 

 

$40.00

 

2/25/14

 

 

 

 

 

 

 

9,333

 

4,667

(3)

$61.40

 

5/1/10

 

 

 

 

 

 

 

4,667

 

9,333

(4)

$62.43

 

5/1/11

 

 

 

 

 

 

 

 

14,000

(1)

$44.65

 

5/1/12

 

 

 

 

 

 

 

 

20,000

(2)

$37.37

 

7/1/12

 

 

 

 

 

 

 

 

 

 

(1)   These unexercisable stock options were granted on May 1, 2007, and vest ratably in three annual installments on each May 1 of 2008, 2009 and 2010 if the executive officers continue to be employed by Ryland on those dates.

 

(2)   These unexercisable stock options were granted on July 1, 2007, and vest ratably in three annual installments on each July 1 of 2008, 2009 and 2010 if the executive officers continue to be employed by Ryland on those dates.

 

(3)   These unexercisable stock options were granted on May 1, 2005, and will vest in full on May 1, 2008 if Mr. Bass continues to be employed by Ryland on that date.

 

(4)   These unexercisable stock options were granted on May 1, 2006, and vest ratably in two remaining installments on each May 1 of 2008 and 2009 if Mr. Bass continues to be employed by Ryland on those dates.

 

(5)   These unvested restricted stock units were granted on May 1, 2005 and the performance criteria described in footnote (8) has been satisfied. Therefore, the executive officers will vest in these unvested restricted stock units on May 1, 2008 if they continue to be employed by Ryland on that date.

 

(6)   These unvested restricted stock units were granted on May 1, 2006 and the performance criteria described in footnote (8) has been satisfied. Therefore, the executive officers will vest in one-half of these unvested restricted stock on each of May 1, 2008 and 2009 if they continue to be employed by Ryland on those dates.

 

(7)   The market value of the restricted stock units equals the number of restricted stock units times the closing price of Ryland’s Common Stock on December 31, 2007, which was $27.55 per share.

 

(8)   These restricted stock units have not vested or been earned by Mr. Dreier and are subject to performance criteria which require Ryland’s return on equity for the applicable prior year in which the units vest to be equal to or greater than 60 percent of the ten-year median return on equity of the companies within the Fortune 500 for the ten-year period ending with the prior calendar year. Subject to satisfaction of the performance criteria, Mr. Dreier will vest in 40,000 restricted stock units per year on each of March 1, 2009 and 2010 provided he continues to be employed by Ryland on these dates. Because Ryland did not achieve the performance criteria applicable for 2007, Mr. Dreier did not vest in 40,000 of the restricted stock units on March 1, 2008.

 

24



 

OPTION EXERCISES AND STOCK VESTED IN 2007

 

 

 

Option Awards

 

Stock Awards

 

 

 

Number of Shares

 

Value Realized

 

Number of Shares

 

Value Realized

 

Name

 

Acquired on Exercise

 

on Exercise

 

Acquired on Vesting

 

on Vesting

 

 

 

 

 

 

 

 

 

 

 

R. Chad Dreier

 

80,000 (1)

 

$

3,798,720

 

 

94,000 (3)

 

$

4,564,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80,000 (1)

 

$

3,229,672

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80,000 (1)

 

$

2,167,080

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80,000 (1)

 

$

1,730,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gordon A. Milne

 

10,000 (2)

 

$

384,700

 

 

7,000 (4)

 

$

625,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Larry T. Nicholson

 

 

 

 

 

4,666 (4)

 

$

416,718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Daniel G. Schreiner

 

 

 

 

 

3,666 (4)

 

$

327,418

 

 

 

 

 

 

 

(1)          Pursuant to Mr. Dreier’s Plan for Trading Securities in accordance with Rule 10b5-1(c)(1) under the Exchange Act, Mr. Dreier exercises his vested stock options or sells shares of Common Stock on a quarterly basis on a trading day that follows one trading day after the public release of Ryland’s quarterly or annual earnings. His quarterly exercises took place on January 26, April 27, July 27 and October 26, 2007. The option exercise price for these exercises was $6.38 per share from a grant dated April 21, 1999. The per share market value of the options upon exercise and sale was $53.86, $46.75, $33.47, and $28.01, respectively.

 

(2)          Mr. Milne exercised 10,000 options on May 18, 2007 from a September 1, 2000 grant with a $6.04 per share option exercise price. The per share market value of the options upon exercise and sale was $44.51.

 

(3)          Having met the performance requirement set forth in his Employment Agreement, Mr. Dreier was issued shares of Common Stock upon vesting on March 1, 2007. The per share market value of Mr. Dreier’s vested restricted stock units on March 1, 2007 was $48.56, which was the closing price of Ryland’s Common Stock on that date.

 

(4)          Having met the related performance requirements, Messrs. Milne, Nicholson and Schreiner, respectively, vested on May 1, 2007 in 7,000, 4,666 and 3,666 restricted stock units which were granted on May 1, 2005; and 7,000, 4,667 and 3,667 restricted stock units which were granted on May 1, 2006. The per share market value of the vested restricted stock units on May 1, 2007 was $44.65, which was the closing price of Ryland’s Common Stock on that date. The payment of these restricted stock units was provided 50 percent in stock and 50 percent in cash. Therefore, the market value of the shares of Common Stock received by Messrs. Milne, Nicholson and Schreiner was $312,550, $208,337 and $163,687, respectively, and the cash amount received by each of the officers was $312,550, $208,381 and $163,731, respectively.

 

25



 

2007 PENSION BENEFITS

 

 

 

 

 

 

 

Present Value of

 

 

 

 

 

Number of Years

 

Accumulated Benefit

 

Name

 

Plan Name

 

Credited Service

 

at December 31, 2007

 

R. Chad Dreier

 

  SERP

 

5

 

$

15,938,136

 

 

 

 

  SERP II

 

     0 (1)

 

 

 

 

 

  

 

 

 

 

 

 

Gordon A. Milne

 

  SESRP

 

4

 

$

833,806

 

 

 

 

 

 

 

 

 

 

 

Larry T. Nicholson

 

  SESRP

 

3

 

$

445,869

 

 

 

 

 

 

 

 

 

 

 

Daniel G. Schreiner

 

  SESRP

 

4

 

$

555,600

 

 

 

 

 

 

 

 

(1)

To the extent the SERP Benefit is governed by SERP II, Mr. Dreier is 100 percent vested under SERP II for the SERP Benefit.

 

Effective July 1, 2002, Ryland and Mr. Dreier entered into a Supplemental Executive Retirement Plan (“SERP”). The SERP gives him the opportunity to receive a benefit in the amount of $2,400,000 per year, payable in annual installments for a period of 15 years, or the present value equivalent of this benefit payment in the form of a lump sum cash payment, calculated using an eight percent discount rate (“SERP Benefit”). The SERP Benefit vested 20 percent per year beginning on December 30, 2003, such that Mr. Dreier fully vested in the SERP Benefit on December 30, 2007. Payment of the SERP Benefit will begin within 60 days of the date of Mr. Dreier’s retirement.

 

Effective January 1, 2005, Ryland and Mr. Dreier entered into a Supplemental Executive Retirement Plan II (“SERP II”).  The SERP II was entered into as a result of the amendment of Mr. Dreier’s Employment Agreement in 2005, which extended the term of his agreement for three years from December 30, 2007 to December 30, 2010. The SERP II provides him with the opportunity to receive a benefit in the amount of $1,440,000 per year, payable in annual installments for a period of 15 years, or the present value equivalent of the benefit payment in the form of a lump sum cash payment, calculated using an eight percent discount rate (“SERP II Benefit”). The SERP II Benefit vests one-third per year beginning on December 30, 2008, such that it will fully vest on December 30, 2010. Mr. Dreier is immediately 100 percent vested in the SERP II Benefit upon the occurrence of a “change of control” or termination of employment without “cause.” Payment of his vested SERP II Benefit will begin on the earlier of the date of a “change of control” or six months after the date of Mr. Dreier’s retirement.

 

The present value equivalent of Mr. Dreier’s accumulated benefit at December 31, 2007 under the SERP was calculated using 40 percent of the full-benefit payment stream, with payout beginning on January 1, 2011, and the remaining 60 percent payout beginning on July 1, 2011 for 15 years. Each payment stream was then discounted back to present value on December 31, 2007 using an eight percent discount rate in accordance with generally accepted accounting principles.

 

Effective July 1, 2003, Ryland established the Senior Executive Supplemental Retirement Plan (“SESRP”) for the benefit of designated executive officers. The SESRP gives participants the opportunity to receive a benefit in the form of 15 annual payments in the amount of $150,000 each, or the present value equivalent of this benefit payment in a lump sum cash payment, calculated using an eight percent discount rate (“SESRP Benefit”). Participants vest at the rate of 20 percent per year on each anniversary date of their participation in the SESRP, provided they are continuously employed by Ryland from commencement of participation in the SESRP through the date of vesting. Messrs. Milne and Schreiner are 80 percent vested in the SESRP Benefit because they were initial participants in the plan in 2003, and Mr. Nicholson is 60 percent vested in the SESRP Benefit because his participation began in 2004. Participants are immediately 100 percent vested in the SESRP Benefit upon the occurrence of a “change of control” or an involuntary termination without “cause” as defined in the plan.

 

26



 

Payment of a participant’s vested SESRP Benefit will begin within 60 days of January 1 following the participant’s 60th birthday or such later date elected by a participant, provided it is not later than January 1 following his 65th birthday. The present value equivalent of the accumulated benefit at December 31, 2007 for participants in the SESRP was calculated using the applicable vested percent of the full-benefit payment stream with payout beginning on the January 1 following the participant’s 60th birthday for 15 years, and then discounting such amount back to present value on December 31, 2007 using a seven percent discount rate in accordance with generally accepted accounting principles.

 

The terms of the SERP, SERP II and SESRP are set forth in the relevant plan documents, and the descriptions contained in this Proxy Statement are subject to and governed by the applicable plan documents. Additionally, there are descriptions of these plans set forth in detail under the sections entitled “Mr. Dreier’s Employment Agreement” and “Supplemental Executive Retirement Plan for Executive Officers” under “Discussion of Compensation Agreements and Plans” on pages 21 and 23 of this Proxy Statement, respectively.

 

27



 

2007 NONQUALIFIED DEFERRED COMPENSATION

 

 

 

Executive

 

Company

 

Aggregate

 

Aggregate Balance

 

Name

 

Contributions in 2007

 

Contributions in 2007 (1)

 

Earnings in 2007 (2)

 

at December 31, 2007 (3)

 

R. Chad Dreier

 

$

767,751

 

 

$

754,251

 

 

$

363,696

 

 

$

12,034,559

 

 

 

 

 

 

 

 

 

 

 

 

Gordon A. Milne

 

$

138,470

 

 

$

124,970

 

 

$

492,476

 

 

$

4,841,402

 

 

 

 

 

 

 

 

 

 

 

 

Larry T. Nicholson

 

$

218,847

 

 

$

205,347

 

 

$

208,645

 

 

$

3,646,470

 

 

 

 

 

 

 

 

 

 

 

 

Daniel G. Schreiner

 

$

233,956

 

 

$

126,873

 

 

$

206,214

 

 

$

2,952,315

 

 

 

 

 

 

 

 

 

 

 

 

Keith E. Bass

 

$

579,429

 

 

$

160,329

 

 

$

147,570

 

 

$

1,509,164

 

 

 

 

 

 

 

 

(1)

Matching contributions to the EDDCP II made by Ryland are also included in the “All Other Compensation” column of the “Summary Compensation Table” on page 18 of this Proxy Statement.

 

(2)

Represents earnings from participants’ accounts that are invested in a variety of independently managed investment funds available under the plan.

 

(3)

This aggregate balance represents the participants’ accounts in both the EDDCP and EDDCP II, which are the nonqualified deferred compensation plans maintained by Ryland.

 

All contributions set forth in the table above are pursuant to Ryland’s Executive and Director Deferred Compensation Plan II (“EDDCP II”). The EDDCP II was adopted by Ryland to comply with the requirements of Section 409A of the Code, as added by the American Jobs Creation Act of 2004, and the Treasury regulations or any other authoritative guidance issued thereunder. Any contributions to the predecessor nonqualified deferred compensation plan, the EDDCP, were “grandfathered” and are governed by the terms of the EDDCP. The EDDCP II allows executives to defer receipt of a portion of base salary and annual bonus and receive matching contributions by Ryland in an amount up to six percent of an executive’s annual base salary and bonus. These are contributions in excess of the limitations on contributions that apply to Ryland’s qualified deferred compensation plan known as the Retirement Savings Opportunity Plan. Ryland’s matching contributions vest upon the earlier of one-third at the end of each of the executive’s first three years of service, or the death, disability or retirement of the executive or a “change of control” of Ryland.  As of December 31, 2007, all of the named executive officers had fully vested in Ryland’s matching contributions due to their length of employment with Ryland.

 

Under the EDDCP II, executives make irrevocable deferral elections for their compensation prior to the end of the year preceding the plan year in which the services giving rise to the compensation to be deferred are performed or, at the discretion of the committee administering the plan, prior to six months before the end of the performance service period for the compensation being deferred if the compensation is determined to be “performance-based.” Executive participants may defer up to 100 percent of their annual base salary and bonus in the EDDCP II. For purposes of the EDDCP II, compensation that qualifies for deferral does not include amounts earned or paid under Ryland’s TRG Incentive Plan, personal health and services allowance, executive health and fitness benefit, discretionary bonuses, stock options, fringe benefits, relocation expenses, non-monetary awards and other allowances paid to an executive for employment services rendered.

 

The value of aggregate earnings in deferred accounts within the EDDCP and EDDCP II is determined based upon the performance of investment funds selected by the participant from a range of choices provided by Ryland and the plan administrator. Changes to investment fund elections may be made by the participants from time to time, and changes to the selection of funds available under the plan may be made by Ryland at any time upon a minimum of a month’s notice to plan participants.

 

Participants may elect to receive distributions from their accounts under the EDDCP II on a fixed payment date, upon determination of disability or the occurrence of a “change in control,” or after six months from the date of their termination of employment with Ryland in the form of a lump sum payment or up to 15 annual installments. Under the EDDCP, participants do not have to wait six months from the date of their termination of employment in order to receive payment. Under both plans, participants also may withdraw their funds due to an unforeseeable financial emergency at the sole discretion of Ryland.

 

28



 

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL

 

Potential Payments under Mr. Dreier’s Employment Agreement

 

In accordance with Mr. Dreier’s Employment Agreement, effective and payable on the date of a “change of control” of Ryland, Mr. Dreier receives a lump sum cash payment equal to his unpaid base salary for the remainder of the year in which the “change of control” occurs, a pro rata bonus through the date of the “change of control” based on the results of the preceding year, plus an amount equal to three times the highest annual compensation paid to him in any of the last three years prior to the “change of control” event. For purposes of this calculation, “annual compensation” is the sum of Mr. Dreier’s base salary, any bonus paid or earned even though paid in a subsequent year, vested and unvested, and all amounts and the cash value of any stock, credited or paid, vested and unvested, under any incentive compensation or other benefit or compensation plan of Ryland, including the TRG Incentive Plan or Equity Incentive Plan. Assuming a “change of control” of Ryland on December 31, 2007, an amount equal to three times the highest “annual compensation” paid to him in any of the three prior years is estimated to be $98,459,834. For purposes of calculating this amount it was determined that of the three prior years, Mr. Dreier received his highest “annual compensation” in 2005.

 

Mr. Dreier also receives accelerated vesting of all rights, awards and benefits under Ryland’s benefit, incentive and equity plans in the form of a cash lump sum payment equal to the amount of these rights, awards and benefits. Based upon an assumed “change of control” of Ryland on December 31, 2007, he would receive a cash lump sum payment of $10,087,155 in payment of these accelerated rights, awards and benefits. This amount includes the payment of the value of vested and unvested TRG Incentive Plan awards and unvested outstanding restricted stock units which include related tax assistance.

 

Mr. Dreier would also receive three years of continued participation, at no cost, in the life, accident and health insurance, employee welfare benefit plans, executive insurance programs, personal health and services allowance, health benefits and any other fringe benefits provided to Mr. Dreier prior to the “change of control.” The estimated cost of this participation in benefits is $513,274. If Mr. Dreier moves his residence to pursue professional or career opportunities within two years after the date of a “change of control,” he will be reimbursed for any expenses incurred in relocating, including taxes payable on the reimbursement, any costs or commissions related to selling his home, and payment of all moving expenses and any other benefits provided by Ryland under its relocation program. Mr. Dreier shall also receive reimbursement for the cost of all outplacement services used within two years of the date of a “change of control” up to 15 percent of his base salary for the calendar year prior to the date of a “change of control,” or a lump sum cash payment equal to 10 percent of his base salary. A lump sum cash payment equal to 10 percent of his base salary is $100,000.

 

For purposes of Mr. Dreier’s Employment Agreement, a “change of control” occurs when: a) a third party acquires beneficial ownership of i) over 50 percent of the fair market value or voting power of Ryland’s outstanding voting securities, or ii) 35 percent of the voting power of Ryland’s outstanding voting securities in a one-year period; b) a majority of the Board of Directors is replaced in a one-year period by Directors not endorsed or approved by a majority of the Directors prior to the initiation of replacements; or c) a third party acquires assets of Ryland in a one-year period with a gross fair market value of 40 percent or more of the total gross fair market value of Ryland’s assets prior to the initiation of the acquisition.  Mr. Dreier will also receive the foregoing payments, rights and benefits if his employment is terminated by Ryland without “cause,” or Mr. Dreier terminates his employment for “good reason,” if these terminations of employment occur during a “change of control period,” and a “change of control” occurs.  A “change of control period” is the period commencing with the date on which Ryland becomes aware of or enters into any discussions or negotiations that could involve a “change of control” or a proposed transaction which could result in a “change of control,” and ending on the first to occur of the effective date of the “change of control” or the date on which the proposed “change of control” is no longer discussed or proposed and is determined not to occur.

 

29



 

In the event that Mr. Dreier’s employment is terminated by reason of retirement or death, his benefits are determined in accordance with Ryland’s retirement, SERP and SERP II survivor’s benefits, insurance and other applicable programs then in effect. Upon the effective date of his termination of employment by reason of retirement or death, Ryland’s obligation to pay Mr. Dreier the compensation set forth in his Employment Agreement shall expire, except any benefits that continue after retirement or death, and Ryland will pay to him or his beneficiaries a pro rata share of his bonus for the year in which the termination occurs. “Retirement” is defined as voluntary or involuntary termination of employment for any reason other than death.

 

In the event that Mr. Dreier becomes “disabled” and is unable to perform his duties for more than 120 days during any 12-month period or, in the reasonable determination of the Board of Directors, Mr. Dreier’s “disability” would exist for more than 120 days, Ryland has the right to terminate his employment. Upon such termination, Ryland’s obligation to pay Mr. Dreier the compensation set forth in his Employment Agreement shall expire, except any benefits that continue after disability, and Ryland will pay to Mr. Dreier a pro rata share of his bonus for the year in which the termination occurs. “Disability” means the incapacity of Mr. Dreier, due to injury, illness, disease or bodily or mental infirmity, to engage in the performance of his duties with Ryland.

 

Mr. Dreier may terminate his Employment Agreement at any time by giving the Board of Directors 90 days written notice prior to the effective date of termination. Upon termination, Ryland would pay Mr. Dreier his base salary through the date of termination plus all benefits to which he has a vested right at that time, but not a bonus for the fiscal year in which the termination occurs.

 

If Mr. Dreier’s employment is terminated by Ryland for reasons other than death, disability, retirement or for “cause,” or if Mr. Dreier terminates his employment for “good reason,” Mr. Dreier receives a lump sum cash payment of his base salary and a continuation of his health and welfare benefits for the remaining term of the Employment Agreement or two years, whichever is greater. As of December 31, 2007, the greater amount is a lump sum cash payment of his base salary for the three-year remaining term of his Employment Agreement, which equals $3,000,000 for his base salary, and $273,274 for the continuation of his health and welfare benefits. The cost of continuation of benefits was based on three times the cost incurred for these benefits in 2007. Mr. Dreier would also receive a bonus payment equal to the bonus paid or payable in the fiscal year prior to termination multiplied by the remaining number of years within the term of the Employment Agreement, which, assuming a December 31, 2007 termination or resignation date, would be three times his 2006 bonus payment, for a total of $35,387,538. Ryland shall also pay Mr. Dreier all benefits to which he has a vested right. Mr. Dreier will fully vest in the grant of the stock award of 120,000 restricted stock units which, based upon the closing price of $27.55 for Ryland’s Common Stock on December 31, 2007, were valued at $3,306,000 on that date under his Employment Agreement. He would also receive tax assistance related to the vesting of this restricted stock unit award in the amount of $2,902,451. He will also fully vest in any prior year awards that remain unvested and any awards made for the fiscal year in which termination occurs under the TRG Incentive Plan. Assuming a December 31, 2007 termination or resignation date, the amount of prior awards for 2005 and 2006, including accumulated interest, that would fully vest is $3,878,705 and for fiscal year 2007, the amount of the 2007 award that would fully vest is $2,130,000. “Good reason” occurs when: a) Mr. Dreier is assigned duties materially inconsistent with, or has a reduction or alteration in the nature or status of, his duties, responsibilities or status as an executive officer from those in effect during the preceding year; b) Mr. Dreier is required to be based at a location that is greater than 50 miles away from his current primary residence; c) Mr. Dreier’s base salary, formula under which his bonus is determined, or other benefits provided in accordance with his Employment Agreement, are reduced; or d) Ryland fails to obtain an agreement from an acquirer to perform the Employment Agreement.

 

If the Employment Agreement is terminated by Ryland’s Board of Directors for “cause,” Ryland shall pay Mr. Dreier his base salary through the date of termination and Mr. Dreier shall forfeit all rights and benefits he is otherwise entitled to receive under the Employment Agreement, including any right to a bonus for the year in which the termination occurs but excluding any benefits in which he has a vested right at that time, including any vested benefits or rights under the SERP or SERP II. The Employment Agreement defines “cause” as the CEO’s willful and continued failure to perform the material duties of his position after receipt of notice and reasonable opportunity to cure such failure, willful misconduct demonstrably and materially injurious to Ryland, or conviction of a felony.

 

30



 

If any payment under the Employment Agreement would subject Mr. Dreier to an excise tax under Section 280G or Section 409A of the Code, Ryland or its successor shall pay Mr. Dreier an additional amount sufficient to cover the excise tax and any interest or penalties payable that may be imposed, as well as any applicable federal and state income, Medicare and employment taxes that apply to the additional amounts paid. Subject to an assumption of intended compliance of Mr. Dreier’s Employment Agreement with Code Section 409A, based upon a “change of control” on December 31, 2007, Mr. Dreier would receive approximately $13.8 million to cover applicable excise taxes and an additional payment of $23.7 million to cover all federal taxes, state income taxes and employment taxes as a result of the payment of the excise tax.

 

Pursuant to Mr. Dreier’s supplemental executive retirement plans (the SERP and SERP II), Mr. Dreier is fully vested in his SERP Benefit as of December 30, 2007, and vesting of the SERP II Benefit is accelerated immediately upon a “change of control” of Ryland and upon termination of employment by Ryland without “cause.” Payment of the SERP Benefit begins within 60 days of Mr. Dreier’s retirement or his voluntary or involuntary termination of employment with Ryland.  If Mr. Dreier elected a lump sum payment under the SERP, he would receive the present value equivalent of his SERP Benefit calculated using an eight percent discount rate which is $20,542,749. Payment of the SERP II Benefit occurs immediately upon a “change of control” or six months after the date of Mr. Dreier’s retirement or his voluntary or involuntary termination of employment with Ryland. If he elected a lump sum payment under the SERP II, he would receive the present value equivalent of his SERP II Benefit calculated using an eight percent discount rate which is $12,325,649. In addition, at the time that Mr. Dreier is eligible to receive the SERP Benefit, Mr. Dreier and his spouse are provided with an executive retirement health insurance program for a period of 15 years which provides the same coverage and benefits as the Ryland executive health insurance program in which Mr. Dreier participated prior to his retirement or termination of employment with Ryland. For purposes of the SERP, “change of control” is defined as described below for the Senior Executive Severance Agreements and “cause” is defined as described above for Mr. Dreier’s Employment Agreement. For purposes of the SERP II, “change of control” and “cause” are defined as described above for Mr. Dreier’s Employment Agreement.

 

Potential Payments under Senior Executive Severance Agreements

 

Prior to 2006, Ryland entered into Senior Executive Severance Agreements with certain of its executive officers, including Messrs. Milne, Nicholson and Schreiner. Pursuant to these agreements, upon a “termination of employment” within a “change of control period,” the executives receive a lump sum cash payment equal to their unpaid salary for the remainder of the year in which the termination of employment occurs, a pro rata bonus through the date of the termination of employment based on the highest bonus earned by the executives in any of the last three years prior to their termination, plus an amount equal to two times the highest “annual compensation” paid to them for any of the last three years prior to their termination. In 2006, Ryland revised its form of Senior Executive Severance Agreement to comply with the newly adopted “Policy Regarding Stockholder Approval of Severance Agreements,” as discussed beginning on page 15 of this Proxy Statement. Mr. Bass executed a revised form of Ryland’s Senior Executive Severance Agreement in June 2007 that is subject to the Policy.  Mr. Bass’s agreement provides that upon a “termination of employment” during a “change of control period,” Mr. Bass will receive a lump sum cash payment equal to a pro rata bonus through the date of the “termination of employment” based on the target annual bonus for the year in which the “termination of employment” occurs or in the absence of a specified target annual bonus for that year, the highest bonus earned by Mr. Bass in any of the last three years prior to termination, plus an amount equal to two times the highest “annual compensation” paid to Mr. Bass for any of the three years prior to termination. For purposes of all of the Senior Executive Severance Agreements, “annual compensation” means the sum of an executive’s annual base salary and bonus paid or earned even though paid in a subsequent year, and all amounts credited to the executive, vested and unvested, under any incentive compensation or other benefit or compensation plan of Ryland, including the TRG Incentive Plan and Equity Incentive Plan.  Based upon a “termination of employment” on December 31, 2007 within a “change of control period,” the executives would receive an amount equal to two times their highest “annual compensation” estimated to be as follows: Mr. Milne, $12,218,271; Mr. Nicholson, $9,058,702; Mr. Schreiner, $8,134,189; and Mr. Bass, $6,477,436. For purposes of calculating these amounts, it was determined that of the three years prior to 2007, Messrs. Milne and Schreiner received their highest “annual compensation” in 2005, and Messrs. Nicholson and Bass received their highest “annual compensation” in 2006.

 

31



 

Further, upon termination of employment during a “change of control period,” each of the executives receive two years participation, at no cost, in the life, accident and health insurance, employee welfare benefit plans, personal health and services allowance, health club benefits, benefits outlined in the executive’s compensation program and any other benefits provided to the executive prior to the “change of control.” The estimated cost of this participation in benefits is as follows: Mr. Milne, $144,861; Mr. Nicholson, $122,671; Mr. Schreiner, $74,828; and Mr. Bass, $80,750. If any of these executives move their residence in order to pursue professional or career opportunities within two years after the date of their termination of employment within a “change of control period,” they will be reimbursed for any expenses incurred in relocating, including taxes payable on the reimbursement, any costs or commissions related to selling their homes, all moving expenses and any other benefits provided by Ryland under its relocation program. Each of the executives shall also receive reimbursement for outplacement services used within two years of the date of the executive’s termination of employment during a “change of control period” up to 25 percent of the executive’s “annual compensation” for the calendar year prior to the date of the executive’s termination of employment during a “change of control period.”  Messrs. Milne, Nicholson and Schreiner may elect to receive a lump sum cash payment equal to 10 percent of their “annual compensation” for the calendar year immediately preceding their termination of employment in lieu of the reimbursement for outplacement services. A lump sum cash payment in lieu of the reimbursement for outplacement services for these executives is as follows: Mr. Milne, $394,243; Mr. Nicholson, $452,935; and Mr. Schreiner, $323,823. Under his revised form of Senior Executive Severance Agreement, Mr. Bass is not eligible to elect a lump sum cash payment in lieu of the reimbursement for outplacement services and payments under his agreement are subject to compliance with Code Section 409A.

 

The “change of control period” for all of the Senior Executive Severance Agreements begins on the date Ryland becomes aware of or enters into discussions or negotiations that could involve a “change of control” and ends on the earlier of two years after the effective date of a “change of control” or the date on which a proposed “change of control” is no longer proposed to occur. For purposes of all of the Senior Executive Severance Agreements, a “change of control” occurs when: a) a third party acquires beneficial ownership of 20 percent or more of the voting power of Ryland’s outstanding voting securities; b) the first purchase of shares of Ryland’s Common Stock is made under a tender or exchange offer by a third party; c) during any two-year period, members of the Board of Directors at the beginning of the period cease for any reason to constitute a majority of the Board, unless the election of each new Director was approved by two-thirds of the Board members at the beginning of the two-year period who are still in office; or d) Ryland’s stockholders approve a merger, consolidation, liquidation or dissolution of Ryland, or the sale of all or substantially all of Ryland’s assets. For purposes of all of the Senior Executive Severance Agreements, a “termination of employment” occurs when an executive’s employment is terminated by Ryland without “cause” or by the executive with “good reason.”  “Good reason” means a) the executive is assigned any duties or responsibilities that are inconsistent in any respect with his position, duties, responsibilities or status prior to a “change of control period;” b) Ryland requires the executive, without his consent, to be based at a location which is more than 50 miles from the executive’s then current primary residence; c) the executive’s base salary, bonus or any other benefits, incentive compensation or compensation plans are reduced; or d) the executive experiences in any year a reduction in the ratio of the executive’s incentive compensation, bonus or other such payments to his base compensation, or a reduction in the method of calculation of the executive’s incentive compensation, bonus or other such payment if these benefits or payments are calculated other than as a percentage of base salary.

 

All rights, awards and benefits of the executives under Ryland’s benefit, incentive and equity plans immediately vest in full, and the executives receive the amount of these rights, awards and benefits in a cash lump sum payment equal to the amount of these rights, awards and benefits upon a “termination of employment” within a “change of control period.” Based upon a “termination of employment” on December 31, 2007, the executives would receive cash lump sum payments as follows in payment of these accelerated rights, awards and benefits: Mr. Milne, $1,974,709; Mr. Nicholson, $1,136,679; Mr. Schreiner, $990,567; and Mr. Bass, $347,992.

 

32



 

If any payment under the Senior Executive Severance Agreements would subject the executive officers to an excise tax under Section 280G of the Code, Ryland or its successor shall pay the executives an additional amount sufficient to cover the excise tax and any interest or penalties payable that may be imposed, as well as any applicable federal and state income and employment taxes that apply to the additional amounts paid. Subject to an assumption of intended compliance of the agreements with Code Section 409A, assuming a “termination of employment” on December 31, 2007 during a “change of control period,” to cover applicable excise taxes, Messrs. Milne, Nicholson and Bass would receive approximately $1.8 million, $1.7 million and $1.3 million, respectively. Mr. Schreiner would not be subject to excise taxes because the value of his “change in control” payment is less than the safe harbor amount allowed pursuant to Code Section 280G. Messrs. Milne, Nicholson and Bass would also receive payments of approximately $3.1 million, $2.8 million and $1.7 million, respectively, to cover all federal taxes, state income taxes, and employment taxes as a result of the payment of the excise tax.

 

Pursuant to Ryland’s supplemental executive retirement plan for certain executive officers (the SESRP), vesting of benefits is accelerated immediately upon a “change of control” of Ryland and upon an involuntary termination of employment by Ryland without “cause.” The present value of the SESRP Benefits which would fully vest on December 31, 2007 assuming a “change in control” of Ryland or involuntary termination without “cause” on that date for Messrs. Milne, Nicholson and Schreiner is $988,652, $704,895 and $694,500, respectively. For purposes of the SESRP, “change of control” is defined as described above for the Senior Executive Severance Agreements and “cause” is defined as described above for Mr. Dreier’s Employment Agreement.

 

33


 


 

2007 DIRECTOR COMPENSATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Name (1)

 

Fees Earned or
Paid in Cash
(5)

 

Stock Awards (6)

 

All Other
Compensation
(7)

 

Total

Daniel T. Bane (2)

 

$   77,500

 

$   133,950

 

$   25,000

 

$   236,450

 

 

 

 

 

 

 

 

 

Leslie M. Frécon

 

$   85,000

 

$   133,950

 

$   25,000

 

$   243,950

 

 

 

 

 

 

 

 

 

Roland A. Hernandez

 

$   80,000

 

$   133,950

 

$   25,000

 

$   238,950

 

 

 

 

 

 

 

 

 

William L. Jews

 

$   85,000

 

$   133,950

 

$   25,000

 

$   243,950

 

 

 

 

 

 

 

 

 

Ned Mansour

 

$   80,000

 

$   133,950

 

$   25,000

 

$   238,950

 

 

 

 

 

 

 

 

 

Robert E. Mellor

 

$   77,500

 

$   133,950

 

$   25,000

 

$   236,450

 

 

 

 

 

 

 

 

 

Norman J. Metcalfe

 

$   85,000

 

$   133,950

 

$   25,000

 

$   243,950

 

 

 

 

 

 

 

 

 

Charlotte St. Martin

 

$   80,000

 

$   133,950

 

$   25,000

 

$   238,950

 

 

 

 

 

 

 

 

 

Paul J. Varello (3)

 

$   80,000

 

$   133,950

 

$   25,000

 

$   238,950

 

 

 

 

 

 

 

 

 

John O. Wilson (4)

 

$   17,500

 

            —

 

           —

 

$     17,500

 

 

 

 

 

 

(1)

Mr. Dreier is the Chairman of the Board of Directors, as well as Chief Executive Officer and President of Ryland. His compensation is disclosed in the preceding executive compensation tables. Since he does not receive compensation separately for his duties as a Director, other than the charitable contribution made on his behalf by Ryland, he is not included in the Director Compensation table.

 

 

(2)

Mr. Bane is not standing for re-election at the Annual Meeting of Stockholders on April 23, 2008.

 

 

(3)

Mr. Varello resigned from the Board of Directors effective December 31, 2007.

 

 

(4)

Mr. Wilson did not stand for re-election at the Annual Meeting of Stockholders on April 25, 2007.

 

 

(5)

The annual retainer fee, which is paid in quarterly installments, is $60,000. Half of the annual retainer fee is paid in cash. The other half is used to purchase Ryland’s Common Stock on the Directors’ behalf quarterly, such that Ryland instructed a broker to enter an order to purchase shares of Ryland’s Common Stock on the open market using an allocated quarterly amount of $7,500 for each Director so that the purchases occur immediately after the market opens on the date the retainer is paid by Ryland. Committee members receive a fee of $10,000 per committee per year which is paid in quarterly installments. Committee chairpersons receive a fee of $5,000 per year paid in quarterly installments. Subject to Section 409A of the Code, Directors are able to defer their annual retainer and meeting fees and the stock purchased as part of their annual retainer fee into Ryland’s nonqualified deferred compensation plan, the EDDCP II. Ryland does not match Director contributions into the EDDCP II.

 

 

(6)

On April 26, 2006, Ryland’s stockholders approved the 2006 Non-Employee Director Stock Plan pursuant to which each non-employee Director receives an automatic grant of 3,000 shares of Common Stock each May 1. On May 1, 2007, each of the nine non-employee Directors received 3,000 shares. Pursuant to FAS 123(R), the shares were valued at the closing price of Ryland’s Common Stock of $44.65 on that day.

 

 

(7)

Each of the Directors receives the ability to designate where Ryland will make a contribution to qualified charities up to $25,000 annually. These contributions are made directly by Ryland and are not included in the Directors’ income.

 

34



 

PROPOSAL NO. 2

PROPOSAL TO APPROVE THE RYLAND GROUP, INC.

2008 EQUITY INCENTIVE PLAN

 

On February 27, 2008, Ryland’s Board of Directors approved the 2008 Equity Incentive Plan (the “2008 Plan”) as recommended by the Compensation Committee and subject to approval by the stockholders of Ryland. Ryland’s stockholders are being asked to approve the 2008 Plan. If approved, the 2008 Plan will replace the 2007 Equity Incentive Plan (the “2007 Plan”) and no further awards will be issued under the 2007 Plan. If the 2008 Plan is not approved by the stockholders, the 2007 Plan will remain in force.

 

As of February 27, 2008, there are approximately 1,640,309 shares for future grant under the 2007 Plan. If the stockholders approve the 2008 Plan, the remaining shares available for future grant under the 2007 Plan or any shares which underlie awards granted under the 2007 Plan that are forfeited, expire or are canceled without delivery of shares, plus an additional 1,300,000 shares of Common Stock (subject to adjustment in the event of stock splits and similar events) will be available for issuance under the 2008 Plan. Based on the level of grants made in recent years, the 2008 Plan is expected to provide sufficient equity incentive award capacity for the next four years, which the Board of Directors currently believes is reasonable under the circumstances.

 

Ryland’s Board of Directors believes that the 2008 Plan is critical to Ryland’s ability to attract, retain and motivate the key executive and management personnel necessary to maintain Ryland’s success. The 2008 Plan will enable Ryland to attract and retain the highest caliber managers and employees, to link incentive rewards to corporate and stockholder performance, and to encourage capital accumulation and stock ownership by key managers and personnel in order to increase their proprietary interest in Ryland’s success.

 

In addition to advancing those interests, Ryland’s Board of Directors believes that the provisions of the 2008 Plan reflect Ryland’s continued commitment to strong corporate governance practices in the interest of its stockholders by maintaining the following provisions which were included in the 2007 Plan:

 

·          The 2008 Plan does not include liberal share counting provisions for stock options that could increase the number of shares available for grant without stockholder approval. For example, the proposed 2008 Plan prohibits making available for issuance under the 2008 Plan shares tendered for payment of the exercise price of an option or award, and holders of options or awards cannot satisfy their tax liability through the tender or withholding of shares of Common Stock.

 

·          The 2008 Plan does not include any evergreen provisions. That is, the maximum number of shares issuable under the 2008 Plan is fixed and cannot be increased without stockholder approval, a maximum term for the 2008 Plan is specified, and no new stock options will be awarded automatically upon the exercise of another stock option.

 

·          The 2008 Plan prohibits stock option repricing and issuing options with an exercise price below fair market value on the date granted.

 

·          To help manage future overhang levels, stock options granted under the 2008 Plan may not have a term longer than five years.

 

·          To ensure that awards are tied to retention incentives, all awards granted under the 2008 Plan must have a minimum three-year vesting period or, if vesting is based on performance criteria established by the Compensation Committee, at least a one-year vesting period.

 

The 2008 Plan, if approved by the stockholders, will be effective on the date of the 2008 Annual Meeting of Stockholders and will remain in effect until February 20, 2018, unless it is terminated by the Board of Directors or Compensation Committee at an earlier date.

 

As of February 27, 2008, Ryland had 1,640,309 shares available for grant under the 2007 Plan and 93,000 shares available for grant under the 2006 Non-Employee Director Stock Plan. The number of options outstanding under all plans as of February 27, 2008 is 3,934,902 with a weighted average exercise price of $35.99 and weighted average remaining term of 4.2 years. The number of restricted stock unit awards outstanding is 202,000 as of February 27, 2008. No further stock options, Common Stock or stock unit awards will be granted under the 2007 Plan or the 2006 Non-Employee Director Stock Plan prior to the 2008 Annual Meeting of Stockholders.

 

35



 

A copy of the 2008 Plan is attached to this Proxy Statement as Exhibit A. The following summary description is qualified by reference to the plan document.

 

Summary of Proposed Equity Incentive Plan

 

Number of Shares

 

The number of shares of Common Stock available for issuance under the 2008 Plan includes 1,640,309 shares carried over from the 2007 Plan plus 1,300,000 new shares. Any shares of Common Stock covered by an award (or portion of an award) granted under the 2008 Plan or the 2007 Plan that is forfeited, expires or is canceled without delivery of shares will again be available for award under the 2008 Plan. To the extent any shares covered by an award are not issued because the award is settled in cash, such shares will again be available for award under the 2008 Plan.

 

The following additional restrictions are imposed under the 2008 Plan.

 

·          The maximum number of shares of Common Stock that may be issued in conjunction with non-stock option awards  under the Plan (including shares carried over from the 2007 Plan) is 1,200,000 shares.

 

·          The maximum number of shares that may be issued in connection with incentive stock options intended to qualify under Code Section 422 is the number of shares initially available for award on the effective date of the 2008 Plan.

 

·          The maximum number of shares subject to awards of any combination that may be granted under the 2008 Plan during any calendar year to any one person is 500,000 shares.

 

The number of shares reserved for issuance under the 2008 Plan, and the limits on the number of awards that may be granted under the 2008 Plan to any one person or of a particular type, as described above, are subject to adjustment to reflect certain subsequent capital adjustments such as stock dividends, stock splits and share exchanges.

 

Administration; Eligibility

 

The selection of the participants in the 2008 Plan will be determined by the Compensation Committee of the Board of Directors. From time to time, one or more committees as may be appointed by the Board of Directors or Compensation Committee may serve as plan administrator, and, to the extent permitted by applicable law, the Compensation Committee may delegate authority to a committee of officers to make awards to persons who are not subject to Section 16 of the Exchange Act. Key employees and other individuals providing bona fide services to or for Ryland, or any affiliate of Ryland, are eligible to receive awards under the 2008 Plan. Approximately 96 employees at present are eligible to receive awards under the 2008 Plan.

 

Types of Awards

 

The 2008 Plan allows for the grant of stock options, restricted stock and stock unit awards in any combination, separately or in tandem. The Compensation Committee will determine the terms and conditions of awards granted under the 2008 Plan, including the times when awards vest and their exercise periods following certain events, such as termination of employment. The 2008 Plan specifies, however, that all awards must have a minimum three-year pro-rated vesting period or, if subject to performance criteria established by the Compensation Committee, at least a one-year vesting period. All awards granted under the 2008 Plan will fully vest and are exercisable following a “change in control” of Ryland.

 

Stock Options.  The Compensation Committee may grant either incentive stock options qualified under Code Section 422, or options not qualified under any section of the Internal Revenue Code (“nonqualified options”). All stock options granted under the 2008 Plan must have an exercise price at least equal to the fair market value of the underlying Common Stock on the grant date. No stock option granted under the 2008 Plan may have a term longer than five years. As of February 27, 2008, the fair market value of a share of Ryland’s Common Stock, determined by the last reported sale price per share on that date as quoted on the New York Stock Exchange, was $30.94. The exercise price of stock options may be paid in cash or by any other means the Compensation Committee approves.

 

36



 

Restricted Stock Awards.  Awards of shares of Common Stock may be issued with or without payment of consideration by the participant. Restricted stock awards will be subject to conditions and restrictions specified by the Compensation Committee. Generally, restricted stock awards will be subject to forfeiture if the recipient terminates his or her service relationship with Ryland before the restrictions lapse.

 

Stock Unit Awards.  Awards of stock units may be issued with or without payment of consideration by the participant. Stock units represent a promise to deliver shares, or an amount of cash equal to the value of the underlying shares, at a future date. Stock unit awards will be subject to conditions and restrictions specified by the Compensation Committee. Stock units granted to a participant will be credited to a bookkeeping reserve account solely for accounting purposes and shall not require a segregation of any of Ryland’s assets. Except as otherwise provided in the applicable award agreement, the participant will not have the rights of a stockholder with respect to any shares of Common Stock represented by a stock unit solely as a result of the grant of a stock unit.

 

Performance Factors.  In order to enable Ryland to avail itself of the tax deductibility of “qualified performance-based compensation,” within the meaning of Section 162(m) of the Code, paid to certain executive officers, the 2008 Plan provides that the Compensation Committee may determine that the granting, vesting, right to exercise or lapse of restrictions associated with an award (referred to as a “performance-based award”) under the 2008 Plan is contingent upon the attainment of one or more pre-established, objective performance goals based on any, or any combination of, specified business criteria. The criteria may apply to an individual, a business unit or Ryland. For this purpose, the specified business criteria are limited to the following:

 

·          return on stockholders’ equity

 

·          net cash provided by operating activities

 

·          return on investment

 

·          total revenue

 

·          earnings before interest and taxes (EBIT)

 

·          earnings before interest, taxes, depreciation and amortization (EBITDA)

 

·          profits

 

·          stock price

 

·          earnings per share, and

 

·          cost containment.

 

Performance goals may include minimum, maximum and target levels of performance. The size of the performance-based award or the lapse of restrictions with respect to the performance-based award generally will be based on the level of performance attained. The Compensation Committee may modify the measurement criteria as applied to performance-based awards to offset any unintended results arising from events not anticipated when the performance goals were established. However, any such modifications may be made with respect to an award granted to one of Ryland’s executive officers only to the extent permitted by Section 162(m) of the Code.

 

Performance awards may be payable, in whole or in part, in cash. The maximum cash amount that may be payable in combination with any performance-based award distributable in restricted stock or stock units is the cash amount equal to the sum of the fair market value of the underlying shares plus the federal and state income and Medicare taxes, assuming highest marginal tax rates associated with the grant, vesting or distribution of the related restricted stock or stock units.

 

37



 

Grants of Awards

 

No stock options or other awards have been granted under the 2008 Plan. However, the following table sets forth the stock options and restricted stock units that are anticipated to be granted on May 1, 2008, based on Compensation Committee approval on February 27, 2008.

 

NEW PLAN BENEFITS TABLE

PLAN NAME: 2008 EQUITY INCENTIVE PLAN

 

Name and Position

 

Value $ (1)

 

Number of Units (2)

 

Named Executive Officers

 

 

 

 

 

 

 

 

 

 

 

R. Chad Dreier Chairman of the Board of Directors, President

 

n/a

 

80,000

 

and Chief Executive Officer of The Ryland Group, Inc.

 

 

 

 

 

 

 

 

 

 

 

Gordon A. Milne Executive Vice President and

 

n/a

 

42,000

 

Chief Financial Officer of The Ryland Group, Inc.

 

 

 

 

 

 

 

 

 

 

 

Larry T. NicholsonExecutive Vice President and

 

n/a

 

42,000

 

Chief Operating Officer of The Ryland Group, Inc.

 

 

 

 

 

 

 

 

 

 

 

Daniel G. SchreinerSenior Vice President of The Ryland

 

n/a

 

28,000

 

Group, Inc.; President of Ryland Mortgage Company

 

 

 

 

 

 

 

 

 

 

 

Keith E. BassSenior Vice President of The Ryland Group,

 

n/a

 

28,000

 

Inc.; President of the Southeast Region of Ryland Homes

 

 

 

 

 

 

 

 

 

 

 

Executive Group (includes named executive officers)

 

n/a

 

392,000

 

 

 

 

 

 

 

Non-Executive Director Group (not eligible under the 2008 Plan)

 

n/a

 

n/a

 

 

 

 

 

 

 

Non-Executive Officer Employee Group

 

n/a

 

386,000

 

 

 

 

 

 

 

(1)

Not applicable since value of benefits or amounts is indeterminate at this time.

 

 

(2)

The named executive officers and executive group are anticipated to receive grants of restricted stock units and the non-executive officer employee group are anticipated to receive grants of stock options.

 

Amendments

 

The Board of Directors or the Compensation Committee may alter, amend, suspend, or discontinue the 2008 Plan or any portion of the 2008 Plan at any time, but no such action may be taken without stockholder approval if it materially increases the benefits to participants, materially modifies the requirements as to eligibility to receive awards, or materially increases the number of shares of Common Stock that may be issued under the 2008 Plan. The Compensation Committee may alter or amend awards under the 2008 Plan, but no such action may be taken without the consent of the participant if it would adversely affect an outstanding award, and no such action may be taken if it would result in repricing a stock option to a lower exercise price other than to reflect a capital adjustment such as a stock split.

 

38



 

Federal Income Tax Consequences

 

The following summary is intended only as a general guide to the United States federal income tax consequences under current law for or as they pertain to incentive stock options and nonqualified stock options, which are authorized for grant under the 2008 Plan. It does not attempt to describe all possible federal or other tax consequences of participation in the 2008 Plan.

 

Incentive Stock Options.  An optionholder recognizes no taxable income for regular income tax purposes as a result of the grant or exercise of an incentive stock option qualifying under Code Section 422. Optionholders who neither dispose of their shares within two years following the date the option was granted nor within one year following the exercise of the option will normally recognize a capital gain or loss upon a sale of the shares equal to the difference, if any, between the sale price and the purchase price of the shares. If an optionholder satisfies such holding periods upon a sale of the shares, Ryland will not be entitled to any deduction for federal income tax purposes. If an optionholder disposes of shares within two years after the date of grant or within one year after the date of exercise (a “disqualifying disposition”), the difference between the fair market value of the shares on the exercise date and the option exercise price (not to exceed the gain realized on the sale if the disposition is a transaction with respect to which a loss, if sustained, would be recognized) will be taxed as ordinary income at the time of disposition. Any gain in excess of that amount will be a capital gain. If a loss is recognized, there will be no ordinary income, and such loss will be a capital loss. Any ordinary income recognized by the optionholder upon the disqualifying disposition of the shares generally will result in a deduction by Ryland for federal income tax purposes.

 

Nonqualified Stock Options.  Options not designated or qualifying as incentive stock options will be nonqualified stock options having no special tax status. An optionee generally recognizes no taxable income as the result of the grant of such an option. Upon exercise of a nonqualified stock option, the optionee normally recognizes ordinary income in the amount of the difference between the option exercise price and the fair market value of the shares on the exercise date. If the optionee is an employee, such ordinary income generally is subject to withholding of income and employment taxes. Upon the sale of stock acquired by the exercise of a nonqualified stock option, any gain or loss, based on the difference between the sale price and the fair market value on the exercise date, will be taxed as a capital gain or loss. No tax deduction is available to Ryland with respect to the grant of a nonqualified stock option or the sale of the stock acquired pursuant to such grant. Ryland generally should be entitled to a deduction equal to the amount of ordinary income recognized by the optionee as a result of the exercise of a nonqualified stock option.

 

Other Considerations.  The Code allows publicly-held corporations to deduct compensation in excess of $1 million paid to the corporation’s chief executive officer and its four other most highly compensated executive officers if the compensation payable is payable solely based on the attainment of one or more performance goals and certain statutory requirements are satisfied. Ryland intends for compensation arising from grants of awards under the 2008 Plan that are based on performance goals, and stock options granted at fair market value, to be deductible by Ryland as performance-based compensation not subject to the $1 million limitation on deductibility.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL OF THE 2008 EQUITY INCENTIVE PLAN. APPROVAL OF THE PLAN REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE VOTES CAST WITH A QUORUM PRESENT.

 

39



 

PROPOSAL NO. 3

RE-APPROVE RYLAND’S SENIOR EXECUTIVE PERFORMANCE PLAN TO COMPLY

WITH THE REQUIREMENTS OF SECTION 162(M) OF THE CODE

 

The Ryland Group, Inc. Senior Executive Performance Plan (the “Performance Plan”) was adopted by the Compensation Committee of Ryland’s Board of Directors and approved by the stockholders at the Annual Meeting of Stockholders on April 23, 2003. It has been amended and approved by the Compensation Committee on February 27, 2008 to add an additional performance target related to net cash provided by operating activities. The Performance Plan is intended to comply with Section 162(m) of the Code and the regulations promulgated thereunder, resulting in the tax deductibility of amounts payable under the plan as performance-based compensation. In order to remain in compliance with Section 162(m) and maintain tax deductibility of its performance-based compensation, Ryland is re-submitting the plan to its stockholders for approval. Compliance with Section 162(m) of the Code results in the tax deductibility of related compensation expense.

 

Section 162(m) denies to a publicly-held corporation a deduction from taxable income for covered compensation in excess of $1,000,000 paid in any taxable year to the CEO or other executive officers whose compensation is reported in the Proxy Statement. Covered compensation does not include amounts payable upon the attainment of performance goals established by a committee of outside Directors if the material terms of the compensation are approved by Ryland’s stockholders and re-approved at least once every five years if the Compensation Committee is determined to have the authority to change the performance targets. The Compensation Committee has adopted an additional performance target related to net cash provided by operating activities and five years have passed since the stockholders’ initial approval. For these reasons, in order to comply with the requirements of Section 162(m), Ryland is re-submitting the Performance Plan for approval by its stockholders.

 

The Performance Plan promotes Ryland’s pay-for-performance philosophy by providing the CEO and other executive officers with direct financial incentives in the form of annual cash bonuses that are based either on Ryland’s cash flow or profitability and the profitability of Ryland’s business units. A copy of the Performance Plan is attached to this Proxy Statement as Exhibit B. This summary description of the Performance Plan is qualified by reference to the plan document.

 

The Performance Plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee determines the Performance Plan participants each year. Only officers of Ryland and its subsidiaries are eligible to participate. As of March 1, 2008, Ryland had twelve executive officers eligible to participate, all of which were selected by the Compensation Committee to participate for fiscal year 2008.

 

No later than 90 days after each fiscal year commences, the Compensation Committee will select the participants for that year and determine the formula under which each participant’s bonus will be determined, as well as any other objective terms and conditions that must be satisfied for the bonus to be earned. The bonus formula will be based on a percentage or amount of either Ryland’s net cash provided by operating activities or adjusted earnings before taxes and extraordinary items as reflected in the audited consolidated financial statements of Ryland for the fiscal year or such earnings with respect to one or more business units, all as determined by the Compensation Committee. The Compensation Committee will certify in writing the performance goals that have been satisfied. The maximum bonus payable under the Performance Plan to any one officer in any year may not exceed three percent of Ryland’s adjusted earnings before taxes and extraordinary items, all as determined by the Compensation Committee. The Compensation Committee may reduce or eliminate bonuses for any reason in its sole discretion, but may not increase the amount of bonus payable to any officer for a given year after the formula for that year has been established.

 

The Performance Plan may be amended at any time by the Compensation Committee, but it may not be amended without stockholder approval in any manner that would limit the deductibility of bonuses paid under the Performance Plan.

 

40



 

The actual amounts of bonus payments for the 2008 fiscal year under the Performance Plan are not currently determinable because such amounts are dependent on Ryland’s future cash flow or profitability. For fiscal year 2007, bonuses were awarded under the Performance Plan and paid out in January 2008 to the following executive officers and groups as set forth below.

 

PLAN BENEFITS

PLAN NAME: SENIOR EXECUTIVE PERFORMANCE PLAN

 

Name and Position

 

Value $

 

Named Executive Officers

 

 

 

 

 

 

 

R. Chad Dreier — Chairman of the Board of Directors, President and Chief Executive Officer of The Ryland Group, Inc.

 

0

 

 

 

 

 

Gordon A. Milne Executive Vice President and Chief Financial Officer of The Ryland Group, Inc.

 

0

 

 

 

 

 

Larry T. NicholsonExecutive Vice President and Chief Operating Officer of The Ryland Group, Inc.

 

0

 

 

 

 

 

Daniel G. SchreinerSenior Vice President of The Ryland Group, Inc.; President of Ryland Mortgage Company

 

$1,302,717

 

 

 

 

 

Keith E. BassSenior Vice President of The Ryland Group, Inc.; President of the Southeast Region of Ryland Homes

 

$765,930

 

 

 

 

 

Executive Group (includes named executive officers)

 

$2,164,621

 

 

 

 

 

Non-Executive Director Group (not eligible for plan)

 

n/a

 

 

 

 

 

Non-Executive Officer Employee Group (not eligible for plan)

 

n/a

 

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE RE-APPROVAL OF RYLAND’S SENIOR EXECUTIVE PERFORMANCE PLAN. RE-APPROVAL OF THE PLAN MAINTAINS TAX DEDUCTIBILITY IN COMPLIANCE WITH SECTION 162(M) OF THE CODE.

 

41



 

PROPOSAL NO. 4

RE-APPROVE RYLAND’S TRG INCENTIVE PLAN TO COMPLY

WITH THE REQUIREMENTS OF SECTION 162(M) OF THE CODE

 

The TRG Incentive Plan was previously adopted by the Compensation Committee of Ryland’s Board of Directors and approved by the stockholders at the Annual Meeting of Stockholders on April 23, 2003. The TRG Incentive Plan is intended to comply with Section 162(m) of the Code and the regulations promulgated thereunder, resulting in the tax deductibility of amounts payable under the plan as performance-based compensation. In order to remain in compliance with Section 162(m) and maintain tax deductibility of its performanced-based compensation, Ryland is submitting the plan to its stockholders for re-approval. Compliance with Section 162(m) of the Code results in the tax deductibility of related compensation expense.

 

Section 162(m) denies to a publicly-held corporation a deduction from taxable income for covered compensation in excess of $1,000,000 paid in any taxable year to the CEO or other executive officers whose compensation is reported in the Proxy Statement. Covered compensation does not include amounts payable upon the attainment of performance goals established by a committee of outside Directors if the material terms of the compensation are approved by Ryland’s stockholders and re-approved at least once every five years if the Compensation Committee is determined to have the authority to change the performance targets. There have been no material changes to the plan; however, it has been five years since Ryland’s stockholders initially approved the plan. For this reason, Ryland is submitting the TRG Incentive Plan for re-approval by its stockholders.

 

The TRG Incentive Plan is a long-term incentive plan that provides for awards based on the financial performance of Ryland. A copy of the TRG Incentive Plan is attached to this Proxy Statement as Exhibit C. This summary description of the TRG Incentive Plan is qualified by reference to the plan document.

 

Each year, the Compensation Committee establishes target award levels for each participating employee based on a percentage of the employee’s base salary. The Compensation Committee also determines whether the awards are paid in cash, common stock or stock units that are converted into common stock on the distribution date. No more than one-half of a performance award may be paid in the form of common stock or stock units.

 

At the beginning of each fiscal year (referred to as a “performance year”), the Compensation Committee establishes performance goals for the year based on Ryland’s return on stockholders’ equity, and the target award levels for each selected participant. After the close of the performance year, the Compensation Committee reviews Ryland’s actual performance results to assess and certify in writing the extent to which the performance goals have been met and performance awards earned. No performance award will be earned if the participant’s employment terminates during the year. Performance awards, once earned, are paid in three annual installments, one-third shortly after the close of the performance year, and one-third at the close of each of the following two years provided that the participant remains employed through each distribution date. If a “change of control” occurs, all awards are paid within 14 days after such event. The maximum performance award that may be earned by any participant for a performance year is $6,000,000.

 

The Compensation Committee selects the participants for the TRG Incentive Plan each year. Historically, there have been approximately 100 employees selected each year to participate.

 

The Compensation Committee may amend, suspend or terminate the TRG Incentive Plan or any portion of it, the terms of a participant’s performance awards, or any terms or conditions related to such awards, at any time, unless the amendment or change would limit the deductibility of performance awards paid or distributed pursuant to the TRG Incentive Plan under Section 162(m) of the Code.

 

Further details on the Compensation Committee’s implementation of the TRG Incentive Plan can be found in “Discussion Compensation Agreements and Plans” under the section entitled “TRG Incentive Plan” on page 22 of this Proxy Statement.

 

42



 

 

The actual amount of performance awards under the TRG Incentive Plan are not currently determinable for 2008 because such amounts are dependent on Ryland’s future performance. Set forth below, however, are the awards received by the following executive officers and groups under the TRG Incentive Plan in the 2007 performance year.

 

PLAN BENEFITS

PLAN NAME: TRG INCENTIVE PLAN

 

Name and Position

 

Value $

 

Named Executive Officers

 

 

 

 

 

 

 

R. Chad Dreier — Chairman of the Board of Directors, President and Chief Executive Officer of The Ryland Group, Inc.

 

$

2,130,000

 

 

 

 

 

Gordon A. Milne — Executive Vice President and Chief Financial Officer of The Ryland Group, Inc.

 

$

844,336

 

 

 

 

 

Larry T. Nicholson — Executive Vice President and Chief Operating Officer of The Ryland Group, Inc.

 

$

680,180

 

 

 

 

 

Daniel G. Schreiner — Senior Vice President of The Ryland Group, Inc.; President of Ryland Mortgage Company

 

$

383,400

 

 

 

 

 

Keith E. Bass — Senior Vice President of The Ryland Group, Inc.; President of the Southeast Region of Ryland Homes

 

$

250,739

 

 

 

 

 

Executive Group (includes named executive officers)

 

$

6,752,601

 

 

 

 

 

Non-Executive Director Group (not eligible for plan)

 

n/a

 

 

 

 

 

Non-Executive Officer Employee Group

 

$

7,324,632

 

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE RE-APPROVAL OF RYLAND’S TRG INCENTIVE PLAN. RE-APPROVAL OF RYLAND’S TRG INCENTIVE PLAN MAINTAINS TAX DEDUCTIBILITY IN COMPLIANCE WITH SECTION 162(M) OF THE CODE.

 

43



 

PROPOSAL NO. 5

RE-APPROVE RYLAND’S PERFORMANCE AWARD PROGRAM TO COMPLY

WITH THE REQUIREMENTS OF SECTION 162(M) OF THE CODE

 

The Ryland Group, Inc. Performance Award Program (the “Performance Award Program”) was adopted by the Compensation Committee of Ryland’s Board of Directors and approved by the stockholders at the Annual Meeting of Stockholders on April 23, 2003. It has been amended and approved by the Compensation Committee on February 27, 2008 to add an additional performance target related to net cash provided by operating activities. The Performance Award Program is intended to comply with Section 162(m) of the Code and the regulations promulgated thereunder, resulting in tax deductibility of amounts payable under the program as performance-based compensation. In order to remain in compliance with Section 162(m) and maintain tax deductibility of its performanced-based compensation, Ryland is re-submitting the program to its stockholders for approval. Compliance with Section 162(m) of this Code results in the tax deductibility of related compensation expense.

 

Section 162(m) denies to a publicly-held corporation a deduction from taxable income for covered compensation in excess of $1,000,000 paid in any taxable year to the CEO or other executive officers whose compensation is reported in the Proxy Statement. Covered compensation does not include amounts payable upon the attainment of performance goals established by a committee of outside Directors if the material terms of the compensation are approved by Ryland’s stockholders and re-approved at least once every five years if the Compensation Committee is determined to have the authority to change the performance targets. The Compensation Committee has adopted an additional performance target related to net cash provided by operating activities and five years have passed since the stockholders’ initial approval. For these reasons, in order to comply with the requirements of Section 162(m), Ryland is re-submitting the Performance Award Program for approval by its stockholders.

 

The stockholders of Ryland approved the Ryland 2007 Equity Incentive Plan and its predecessor plans in order to provide incentive compensation to the officers and employees of Ryland. In addition, the 2008 Equity Incentive Plan is being proposed for approval by stockholders in this Proxy Statement. The Compensation Committee is authorized to establish programs for granting awards under the Equity Incentive Plans and has established the Performance Award Program pursuant to that authority. A copy of the Performance Award Program is attached to this Proxy Statement as Exhibit D. This summary description of the performance award program is qualified by reference to the plan document.

 

The purpose of the Performance Award Program is to provide for the granting of performance awards, in the form of Common Stock of Ryland or stock units (representing shares of Common Stock of Ryland), either alone or in combination with cash, as long-term incentives for participants to strive to influence the financial growth and success of Ryland in a positive manner. Performance awards are awards that may be granted upon achievement of specified performance objectives or which may vest and/or become distributable upon such achievement.

 

The Performance Award Program is administered by the Compensation Committee. The Committee from time-to-time selects the individuals who will participate in and receive grants of performance awards under the Performance Award Program. All executive officers of Ryland and its subsidiaries may be selected to participate in the Performance Award Program. Ryland currently has twelve officers who are eligible to participate in the Performance Award Program.

 

The Committee determines the specific performance objectives and the period over which such performance objectives are measured (the “performance period”) in connection with each performance award granted under the Performance Award Program. The Committee will determine and set forth in writing, not later than 90 days after the commencement of each performance period and in no event later than the point in time when 25 percent of the performance period has elapsed or the outcome of the performance objectives is no longer substantially uncertain: (i) the officer or officers who will participate in the Performance Award Program for that performance period, (ii) the nature and the amount (or the objective formula for determining the amount) of the performance award that will be earned if specified performance objectives are met, (iii) the applicable performance objectives, and (iv) any other objective terms and conditions that must be satisfied by the officer in order to earn the performance award.

 

The performance objectives set by the Committee must be objective financial targets based upon Ryland’s return on stockholders’ equity and/or net cash provided by operating activities as reflected in Ryland’s statement of cash flows. The Committee, in its discretion, may decrease the amount of any performance award that is, or is to be, earned, but may not increase any individual award for a performance period after the performance objectives for that performance period have been established.

 

44



 

Within 120 days after the end of each performance period, the Committee will determine and certify in writing whether, and the extent to which, the performance objectives and other terms and conditions have been met. Performance awards will be granted or vested and distributed in accordance with the formula and terms and conditions established by the Committee at the beginning of the applicable performance period.

 

No single participant will be eligible to receive more than 260,000 shares of Common Stock and/or stock units, in any combination, with respect to a performance period. The maximum cash amount payable as a performance award in combination with any performance award distributable in Common Stock or stock units will be the cash amount equal to the federal and state income and Medicare taxes, assuming highest marginal tax rates, associated with the distribution of the related Common Stock or stock units.

 

The Committee may amend or change the Performance Award Program at any time, but the program may not be amended or changed in any manner that would limit the deductibility of performance awards paid or distributed under the program, unless stockholder approval is obtained. The Committee may terminate the Performance Award Program at any time without obligation to pay performance awards to participants for the performance period in which termination occurs.

 

Further details on restricted stock unit awards previously granted by the Compensation Committee under the Performance Award Program can be found in “Discussion of Compensation Agreements and Plans” under the subsection entitled “Restricted Stock Unit Grants” on page 23 of this Proxy Statement.

 

No awards have been granted under the Performance Award Program in the fiscal year 2008. However, the following table sets forth the performance awards that are anticipated to be granted on May 1, 2008, based on Compensation Committee approval on February 27, 2008, which are subject to stockholder approval of the Performance Award Program.

 

PLAN BENEFITS

PLAN NAME: PERFORMANCE AWARD PROGRAM

 

 

Name and Position

 

Value $ (1)

 

Number of Units (2)

 

Named Executive Officers

 

 

 

 

 

 

 

 

 

 

 

R. Chad Dreier — Chairman of the Board of Directors, President

 

n/a

 

80,000

 

and Chief Executive Officer of The Ryland Group, Inc.

 

 

 

 

 

 

 

 

 

 

 

Gordon A. Milne — Executive Vice President and

 

n/a

 

42,000

 

Chief Financial Officer of The Ryland Group, Inc.

 

 

 

 

 

 

 

 

 

 

 

Larry T. Nicholson — Executive Vice President and

 

n/a

 

42,000

 

Chief Operating Officer of The Ryland Group, Inc.