DEF 14A 1 d701196ddef14a.htm DEF 14A DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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 ¨

Check the appropriate box:

¨

  

Preliminary Proxy Statement

  ¨   

Confidential, for Use of the Commission

Only (as permitted by Rule 14a-6(e)(2))

x   

Definitive Proxy Statement

    
¨   

Definitive Additional Materials

    
¨   

Soliciting Material pursuant to § 240.14a-12

    

DAVITA HEALTHCARE PARTNERS INC.

 

(Name of Registrant as Specified in its Charter)

 

  

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of filing fee (Check the appropriate box):

 

x

No fee required

 

¨

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:

 

  

 

¨

Fee paid previously with preliminary materials:

 

¨

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

 

  (1)

Amount previously paid:

 

  

 

  (2)

Form, schedule, or registration statement no.:

 

  

 

  (3)

Filing party:

 

  

 

  (4)

Date filed:

 

  

 


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LOGO

Invitation to Participate in the

Annual Meeting of Stockholders

May 8, 2014

Dear Fellow Stockholder:

We are pleased to invite you to attend the DaVita HealthCare Partners Inc. annual meeting of stockholders. The annual meeting will be held on Tuesday, June 17, 2014, at 5:30 p.m., Mountain Time, at DaVita HealthCare Partners Inc., 2000 16th Street, Denver, Colorado 80202. The attached Notice of Annual Meeting and Proxy Statement will serve as your guide to the business to be conducted at the meeting.

Among other items, the Proxy Statement includes information about the qualifications of our director nominees and the compensation of our executive officers that is relevant to matters that will be presented at the annual meeting. During the meeting, we will also report to you on the Company and provide an opportunity for stockholders to engage in a dialogue with management.

We hope that you will participate in the annual meeting, either by attending and voting in person or voting by other available methods as promptly as possible. Voting by any of the available methods will ensure that you are represented at the annual meeting, even if you are not present. You may vote your proxy via the Internet, by telephone, or by mail. Please follow the instructions on the Notice of Internet Availability of Proxy Materials that you receive in the mail and/or your proxy card.

Your vote is very important to us and to our business. Please take the first opportunity to ensure that your shares are represented at the annual meeting.

Thank you very much for your continued interest in our business.

 

Sincerely,
LOGO
Kent J. Thiry

Co-Chairman of the Board,

Chief Executive Officer

DaVita HealthCare Partners Inc.


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LOGO

Notice of 2014 Annual Meeting of Stockholders

Tuesday, June 17, 2014

5:30 p.m., Mountain Time

DaVita HealthCare Partners Inc.

2000 16th Street

Denver, Colorado 80202

The 2014 annual meeting of the stockholders of DaVita HealthCare Partners Inc., a Delaware corporation, will be held on Tuesday, June 17, 2014 at 5:30 p.m., Mountain Time, at DaVita HealthCare Partners Inc., 2000 16th Street, Denver, Colorado 80202, for the following purposes, which are further described in the accompanying Proxy Statement:

 

 

To vote upon the election of the ten directors identified in the attached Proxy Statement to the Board of Directors to serve for a term of one year or until their successors are duly elected and qualified;

 

 

To ratify the appointment of KPMG LLP as our independent registered public accounting firm for fiscal year 2014;

 

 

To hold an advisory vote on executive compensation;

 

 

To adopt and approve an amendment and restatement of our 2011 Incentive Award Plan;

 

 

To consider and vote upon a stockholder proposal, if properly presented at the annual meeting; and

 

 

To transact such other business as may properly come before the annual meeting or any adjournment thereof.

We will mail, on or about May 8, 2014, a Notice of Internet Availability of Proxy Materials to stockholders of record and beneficial owners as of the close of business on April 24, 2014. On the date of mailing of the Notice of Internet Availability of Proxy Materials, the proxy materials will be accessible on a website referred to in the Notice of Internet Availability of Proxy Materials. These proxy materials will be available free of charge.

The Notice of Internet Availability of Proxy Materials will also identify the date, time, and location of the annual meeting; the matters to be acted upon at the annual meeting and the Board of Directors’ recommendation with regard to each matter; a toll-free telephone number, an e-mail address, and a website where stockholders can request a paper or e-mail copy of the Proxy Statement, our Annual Report to Stockholders, and a form of proxy relating to the annual meeting; information on how to access the form of proxy over the Internet and how to vote over the Internet; and information on how to obtain directions to attend the annual meeting and vote in person. If you attend the annual meeting and previously used the telephone or Internet voting systems, or mailed your completed proxy card, you may vote in person at the meeting if you wish to change your vote in any way.

Please note that all votes cast via telephone or the Internet must be cast prior to 11:59 p.m., Eastern Time, on Monday, June 16, 2014.

 

By order of the Board of Directors,

LOGO

Martha Ha

Corporate Secretary

DaVita HealthCare Partners Inc.

May 8, 2014


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PROXY STATEMENT

    1   

General Information

    1   

Voting Information

    2   

Votes Required for Proposals

    2   

Proxy Solicitation Costs

    2   

Delivery of Proxy Statement and Annual Report

    3   

Admission to Annual Meeting

    3   

Electronic Availability of Proxy Materials for the 2014 Annual Meeting

    4   

Proposal 1             Election of Directors

    5   

Information Concerning Members of the Board Standing for Reelection

    6   

CORPORATE GOVERNANCE

    11   

Selection of Directors

    11   

Director Independence

    11   

Leadership Structure and Meetings of Independent Directors

    12   

Communications with the Board

    13   

Annual Meeting of Stockholders

    13   

Information Regarding the Board and its Committees

    13   

Committees of the Board

    13   

Overview of Committee Membership Qualifications

    15   

Risk Oversight

    15   

Board Share Ownership Policy

    16   

Code of Ethics and Codes of Conduct

    16   

Insider Trading Policy

    17   

Proposal 2             Ratification of Appointment of  Independent Registered Public Accounting Firm

    18   

Independent Registered Public Accounting Firm

    18   

Pre-approval Policies and Procedures

    18   

Proposal 3             Advisory Vote on Executive  Compensation

    19   

Proposal 4              Approval of the Amendment and Restatement of our 2011 Incentive Award Plan

    21   

Introduction

    21   

Purpose

    21   

Stockholder Approval Requirement

    22   

Compensation and Governance Best Practices

    22   

Administration

    23   

Eligibility

    23   

Limitation on Awards and Shares Available

    23   

Limitation on Full Value Award Vesting

    24   

Awards

    24   

Adjustment Provisions

    30   

Amendment and Termination

    31   

Federal Income Tax Consequences

    31   

Equity Compensation Plan Information

    32   

Proposal 5              Stockholder Proposal Regarding the Board Chairmanship

    33   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    36   

Information Concerning Our Executive Officers

    38   

Section 16(a) Beneficial Ownership Reporting Compliance

    40   

COMPENSATION DISCUSSION AND ANALYSIS

    41   

Table of Contents

    41   

Compensation Discussion and Analysis Information

    42   


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Executive Summary

    42   

Elements of Compensation

    55   

Process for Determining NEO Compensation

    62   

Compensation Policies and Practices

    67   

Tax and Accounting Considerations

    68   

COMPENSATION COMMITTEE REPORT

    69   

EXECUTIVE COMPENSATION

    70   

2013 Summary Compensation Table

    70   

2013 Grants of Plan-Based Awards

    72   

2013 Outstanding Equity Awards at Fiscal Year-End

    73   

2013 Option Exercises and Stock Vested

    74   

No Pension Benefits

    74   

Non-Qualified Deferred Compensation

    74   

2013 Nonqualified Deferred Compensation

    75   

Voluntary Deferral Plan

    76   

Executive Retirement Plan

    76   

Potential Payments Upon Termination or Change of Control

    77   

COMPENSATION OF DIRECTORS

    83   

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

    88   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    89   

AUDIT COMMITTEE REPORT

    89   

STOCKHOLDER PROPOSALS FOR 2015 ANNUAL MEETING

    91   

OTHER MATTERS

    91   

APPENDIX A

    92   

 

 


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LOGO

PROXY STATEMENT

General Information

We are delivering this Proxy Statement in connection with the solicitation of proxies by our Board of Directors (the “Board”), for use at our 2014 annual meeting of stockholders, which we will hold on Tuesday, June 17, 2014 at 5:30 p.m., Mountain Time, at DaVita HealthCare Partners Inc. (the “Company”), 2000 16th Street, Denver, Colorado 80202. The proxies will remain valid for use at any meetings held upon adjournment of that meeting. The record date for the annual meeting is the close of business on April 24, 2014. All holders of record of our common stock on the record date are entitled to notice of the annual meeting and to vote at the annual meeting and any meetings held upon adjournment of that meeting. Our principal executive offices are located at 2000 16th Street, Denver, Colorado, 80202, and our telephone number is (303) 405-2100. To obtain directions to our annual meeting, visit our website, located at http://www.davita.com.

In accordance with rules and regulations adopted by the Securities and Exchange Commission (the “SEC”), instead of mailing a printed copy of our proxy materials to each stockholder of record or beneficial owner, we are furnishing the proxy materials to our stockholders over the Internet, which include this Proxy Statement and the accompanying Notice of Meeting, Proxy Card, and Annual Report to Stockholders. Because you received a Notice of Internet Availability of Proxy Materials by mail, you will not receive a printed copy of the proxy materials, unless you have previously made a permanent election to receive these materials in paper copy. Instead, the Notice of Internet Availability of Proxy Materials instructs you as to how you may access and review all of the important information contained in the proxy materials, and how you may submit your vote by proxy on the Internet. If you received a Notice of Internet Availability of Proxy Materials by mail and would like to receive a printed copy of our proxy materials, you should follow the instructions for requesting such materials included in the Notice of Internet Availability of Proxy Materials.

The Notice of Internet Availability of Proxy Materials will be first mailed on or about May 8, 2014 to all stockholders of record as of April 24, 2014.

Whether or not you plan to attend the annual meeting in person, please vote by telephone, Internet, or request a Proxy Card to complete, sign, date and return by mail to ensure that your shares will be voted at the annual meeting. You may revoke your proxy at any time prior to its use by filing with our secretary an instrument revoking it or a duly executed proxy bearing a later date or by attending the annual meeting and voting in person.

If you plan to attend the annual meeting in person, please so indicate when you submit your proxy by mail, by telephone or via the Internet and bring with you the items that are required pursuant to the Company’s admission process for the 2014 Annual Meeting. A description of the admission process can be found below in this Proxy Statement under the heading “General Information—Admission to Annual Meeting.”

Unless you instruct otherwise in the proxy, any proxy that is given and not revoked will be voted at the annual meeting:

 

 

For each nominee to the Board identified in this Proxy Statement;

 

 

For the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal year 2014;

 

 

For the approval, on an advisory basis, of the compensation of our named executive officers;

 

 

For the approval of the amendment and restatement of our 2011 Incentive Award Plan;

 

 

Against the stockholder proposal, if properly presented at the annual meeting; and

 

 

As determined by the proxy holders named in the Proxy Card in their discretion, with regard to all other matters as may properly come before the annual meeting or any adjournment thereof.

 

DAVITA HEALTHCARE PARTNERS INC. – 2014 Proxy Statement    1


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Voting Information

Our only voting securities are the outstanding shares of our common stock. At the record date, we had approximately 214,196,995 shares of common stock outstanding. Each stockholder is entitled to one vote per share on each matter that we will consider at this meeting. Stockholders are not entitled to cumulate votes. Under the rules of the New York Stock Exchange, your bank, broker, or other nominee may not vote your uninstructed shares in the election of directors and certain other matters on a discretionary basis. Accordingly, brokers holding shares of record for their customers generally are not entitled to vote on these matters unless their customers give them specific voting instructions. If the broker does not receive specific instructions, the broker will note this on the proxy form or otherwise advise us that it lacks voting authority. Thus, if you hold your shares in “street name,” meaning that your shares are registered in the name of your bank, broker, or other nominee, and you do not instruct your bank, broker, or other nominee how to vote in the election of directors, the proposal regarding the advisory vote on executive compensation, the amendment and restatement of our 2011 Incentive Award Plan, or on the stockholder proposal, if properly brought before the annual meeting, no votes will be cast on your behalf. The votes that the brokers would have cast if their customers had given them specific instructions are commonly called “broker non-votes.” If the stockholders of record present in person or represented by their proxies and entitled to vote at the annual meeting hold at least a majority of our shares of common stock outstanding as of the record date, a quorum will exist for the transaction of business at the annual meeting. Stockholders attending the annual meeting in person or represented by proxy at the annual meeting who abstain from voting and broker non-votes are counted as present for quorum purposes.

Votes Required for Proposals

Directors are elected by a majority of votes cast, which means that the number of shares voted “for” each of the ten nominees for election to the Board must exceed 50% of the number of votes cast with respect to each nominee’s election. Abstentions and broker non-votes will not be counted as votes cast and will have no effect on the election of directors. In the event that the number of nominees exceeds the number of directors to be elected, which is a situation that we do not anticipate, directors will be elected by a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors.

The ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal year 2014, the approval of the proposal regarding the advisory vote on executive compensation, the approval of the amendment and restatement of our 2011 Incentive Award Plan, and the stockholder proposal, if properly brought before the annual meeting, each require the affirmative vote of a majority of the shares of common stock present at the annual meeting in person or by proxy and entitled to vote thereon. Because your vote on executive compensation and the stockholder proposal is advisory, the results of those votes will not be binding on the Company or the Board. However, the Board and any applicable Board committee will consider the voting results as appropriate when making future decisions regarding executive compensation and the topic of the stockholder proposal. Abstentions are considered present and entitled to vote with respect to these proposals and will, therefore, have the same effect as votes against these proposals. Broker non-votes with respect to the approval of the proposal regarding the advisory vote on executive compensation, the approval of the amendment and restatement of our 2011 Incentive Award Plan, and the stockholder proposal will not be considered as present and entitled to vote on these proposals, and will therefore have no effect on the number of affirmative votes needed to approve these proposals.

Proxy Solicitation Costs

We will pay for the cost of preparing, assembling, printing and mailing of the Notice of Internet Availability of Proxy Materials, this Proxy Statement and the accompanying Notice of Meeting, Proxy Card, and Annual Report to Stockholders to our stockholders, as well as the cost of our solicitation of proxies relating to the annual meeting. We may request banks and brokers to solicit their customers who beneficially own our common stock listed of record in names of nominees. We will reimburse these banks and brokers for their reasonable out-of-pocket expenses regarding these solicitations. We have also retained MacKenzie Partners, Inc. (“MacKenzie”) to assist in

 

DAVITA HEALTHCARE PARTNERS INC. – 2014 Proxy Statement    2


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the distribution and solicitation of proxies and to verify records related to the solicitation at a fee of $15,000 plus reimbursement for all reasonable out-of-pocket expenses incurred during the solicitation. MacKenzie and our officers, directors and employees may supplement the original solicitation by mail of proxies, by telephone, facsimile, e-mail and personal solicitation. We will pay no additional compensation to our officers, directors and employees for these activities. We have agreed to indemnify MacKenzie against liabilities and expenses arising in connection with the proxy solicitation unless caused by MacKenzie’s negligence or intentional misconduct.

Delivery of Proxy Statement and Annual Report

Beneficial owners, but not record holders, of our common stock who share a single address may receive only one copy of the Notice of Internet Availability of Proxy Materials and, as applicable, an Annual Report to Stockholders and Proxy Statement, unless their broker has received contrary instructions from any beneficial owner at that address. This practice, known as “householding,” is designed to reduce printing and mailing costs. If any beneficial owner at such an address wishes to discontinue householding and receive a separate copy of the Notice of Internet Availability of Proxy Materials and, if applicable, an Annual Report to Stockholders and Proxy Statement, they should notify their broker. Beneficial owners sharing an address to which a single copy of the Notice of Internet Availability of Proxy Materials and, if applicable, an Annual Report to Stockholders and Proxy Statement was delivered can also request prompt delivery of a separate copy of the Notice of Internet Availability of Proxy Materials and, if applicable, an Annual Report to Stockholders and Proxy Statement by contacting Investor Relations at the following address: Attn: Investor Relations, DaVita HealthCare Partners Inc., 2000 16th Street, Denver, Colorado 80202, (888) 484-7505.

Admission to Annual Meeting

Admission to the annual meeting will be limited to holders of the Company’s common stock, family members accompanying holders of the Company’s common stock, persons holding executed proxies from stockholders who held the Company’s common stock as of the close of business on April 24, 2014 and such other persons as the chair of the annual meeting shall determine.

If you are a holder of the Company’s common stock, you must bring certain documents with you in order to be admitted to the annual meeting and in order to bring family members with you. The purpose of this requirement is to help us verify that you are actually a holder of the Company’s common stock. Please read the following procedures carefully, because they specify the documents that you must bring with you to the annual meeting in order to be admitted. The items that you must bring with you differ depending upon whether or not you were a record holder of the Company’s common stock as of the close of business on April 24, 2014. A “record holder” of stock is someone whose shares of stock are registered in his or her name in the records of the Company’s transfer agent. Many stockholders are not record holders because their shares of stock are held in “street name,” meaning that the shares are registered in the name of their broker, bank or other nominee, and the broker, bank or other nominee is the record holder instead. If you are unsure as to whether you were a record holder of the Company’s common stock as of the close of business on April 24, 2014, please call the Company’s transfer agent, Computershare, at (877) 899-2012.

If you were a record holder of the Company’s common stock as of the close of business on April 24, 2014, then you must bring:

 

 

valid personal photo identification (such as a driver’s license or passport).

At the annual meeting, we will check your name for verification purposes against our list of record holders as of the close of business on April 24, 2014.

If a broker, bank or other nominee was the record holder of your shares of the Company’s common stock as of the close of business on April 24, 2014, then you must bring:

 

 

valid personal photo identification (such as a driver’s license or passport); and

 

 

proof that you owned shares of the Company’s common stock as of the close of business on April 24, 2014.

 

DAVITA HEALTHCARE PARTNERS INC. – 2014 Proxy Statement    3


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Examples of proof of ownership include the following: (i) an original or a copy of the voting instruction from your bank or broker with your name on it, (ii) a letter from your bank or broker stating that you owned the Company’s common stock as of the close of business on April 24, 2014, or (iii) a brokerage account statement indicating that you owned the Company’s common stock as of the close of business on April 24, 2014.

If you acquired your shares of the Company’s common stock at any time after the close of business on April 24, 2014, you do not have the right to vote at the Annual Meeting, but you may attend the meeting if you bring with you:

 

 

valid personal photo identification (such as a driver’s license or passport); and

 

 

proof that you own shares of the Company’s common stock.

Examples of proof of ownership include the following:

 

 

if a broker, bank or other nominee is the record holder of your shares of the Company’s common stock: (i) a letter from your bank or broker stating that you acquired the Company’s common stock after April 24, 2014, or (ii) a brokerage account statement as of a date after April 24, 2014 indicating that you own the Company’s common stock; or

 

 

if you are the record holder of your shares of the Company’s common stock, a copy of your stock certificate or a confirmation acceptable to the Company that you bought the stock after April 24, 2014.

If you are a proxy holder for a stockholder of the Company who owned shares of the Company’s common stock as of the close of business on April 24, 2014, then you must bring:

 

 

the executed proxy naming you as the proxy holder, signed by a stockholder of the Company who owned shares of the Company’s common stock as of the close of business on April 24, 2014;

 

 

valid personal photo identification (such as a driver’s license or passport); and

 

 

if the stockholder whose proxy you hold was not a record holder of the Company’s common stock as of the close of business on April 24, 2014, proof of the stockholder’s ownership of shares of the Company’s common stock as of the close of business on April 24, 2014, in the form of (i) an original or a copy of the voting instruction form from the stockholder’s bank or broker with the stockholder’s name on it, or (ii) a letter or statement from a bank, broker or other nominee indicating that the stockholder owned the Company’s common stock as of the close of business on April 24, 2014.

No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted at the annual meeting. Shares may be voted in person at the annual meeting only by (a) the record holder as of the close of business on April 24, 2014 or (b) a person holding a valid proxy executed by such record holder.

Electronic Availability of Proxy Materials for the 2014 Annual Meeting

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to Be Held on June 17, 2014. This Proxy Statement and the Annual Report to Stockholders and Form 10-K for fiscal year 2013 are available electronically at www.proxyvote.com.

 

DAVITA HEALTHCARE PARTNERS INC. – 2014 Proxy Statement    4


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Proposal 1   Election of Directors

At the annual meeting, you will elect ten directors to serve until the 2015 annual meeting of stockholders or until their respective successors are elected and qualified. Our bylaws require that each director be elected by the majority of votes cast with respect to such director in uncontested elections. In a contested election, where the number of nominees for director exceeds the number of directors to be elected, directors are elected by a plurality of shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. If a nominee for director who was in office prior to the election is not elected by a majority of votes cast, the director must promptly tender his or her resignation from the Board, and the Nominating and Governance Committee of the Board will make a recommendation to the Board about whether to accept or reject the resignation, or whether to take other action. The Board, excluding the director in question, will act on the recommendation of the Nominating and Governance Committee and publicly disclose its decision and its rationale within 90 days (or, if so extended by the Board in certain circumstances, within 180 days) from the date the election results are certified. If a nominee for director who was not already serving as a director does not receive a majority of votes cast in an uncontested election at the annual meeting, the nominee is not elected to the Board. All 2014 nominees are currently serving on the Board.

Eight of the ten nominees for director have been determined to be independent under the listing standards of the New York Stock Exchange (“NYSE”). Please see the section titled “Corporate Governance—Director Independence” below for more information. The Nominating and Governance Committee has recommended, and the Board has nominated, Pamela M. Arway, Charles G. Berg, Carol Anthony (“John”) Davidson, Paul J. Diaz, Peter T. Grauer, Dr. Robert J. Margolis, John M. Nehra, William L. Roper, Kent J. Thiry and Roger J. Valine for election as directors. Each nominee has consented to being named in this Proxy Statement as a nominee and has agreed to serve as a director if elected.

Unless the proxy indicates otherwise, the persons named as proxies in the accompanying proxy have advised us that at the meeting they intend to vote the shares covered by the proxies for the election of the nominees named above. If one or more of the nominees are unable or not willing to serve, the persons named as proxies may vote for the election of the substitute nominees that the Board may propose. The accompanying proxy contains a discretionary grant of authority with respect to this matter. The persons named as proxies may not vote for a greater number of persons than the number of nominees named above.

No arrangement or understanding exists between any nominee and any other person or persons pursuant to which any nominee was or is to be selected as a director or nominee, with the exception of Dr. Margolis. Pursuant to the Agreement and Plan of Merger, as amended, by and between the Company and HealthCare Partners Holdings, LLC (“HCP LLC”) pursuant to which the Company acquired HCP LLC on November 1, 2012 (the “HCP Merger Agreement”), for a minimum period of four consecutive annual meetings of stockholders of the Company after his initial appointment to the Board in November 2012, the Company’s Nominating and Governance Committee shall assess Dr. Margolis’ re-nomination for election to the Board in the same manner as every other incumbent director on the Board and shall determine which directors it will select as nominees or recommend to the Company’s Board for nomination for election to the Company’s Board at its annual meeting of stockholders. In addition, pursuant to the HCP Merger Agreement, for a minimum period of four consecutive annual meetings of stockholders following his appointment in November 2012, Dr. Margolis will hold the office of “Co-Chairman” until the expiration of his term of office or until his successor is duly elected and qualified, subject to his earlier death, resignation, disqualification, or removal in accordance with the Company’s bylaws and/or applicable law. None of the nominees has any family relationship with any other nominee or with any of our executive officers.

 

DAVITA HEALTHCARE PARTNERS INC. – 2014 Proxy Statement    5


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Information Concerning Members of the Board

Standing for Reelection

A biography of each nominee, current as of March 31, 2014, setting forth his or her age, and describing his or her business experience during the past five years, including other prior relevant business experience is presented below.

 

LOGO

Pamela M. Arway

 

Director since 2009

Age 60

Pamela M. Arway has been one of our directors since May 2009. From 2005 to 2007, Ms. Arway served as the president of American Express International, Japan, Asia-Pacific, Australia region, a global payment services and travel company. Ms. Arway joined the American Express Company in 1987 after which she served in various capacities, including as chief executive officer of American Express Australia Limited from 2004 to 2005 and as executive vice president of Corporate Travel, North America from 2000 to 2004. Prior to her retirement in October 2008, she also served as advisor to the American Express Company’s chairman and chief executive officer. Ms. Arway has also been a member of the board of the Hershey Company, a chocolate and confectionary company, since May 2010. She currently serves as the Chair of the Governance Committee and as a member of the Audit and Executive Committees of Hershey Company’s board. She joined the board of Iron Mountain Incorporated in March 2014 and serves on its Compensation Committee. Ms. Arway is an experienced business leader, with extensive management experience.

 

LOGO

Charles G. Berg

 

Director since 2007

Age 56

Charles G. Berg has been one of our directors since March 2007. Mr. Berg served as executive chairman and as a member of the board of directors of WellCare Health Plans, Inc. (“WellCare”), a provider of managed care services for government-sponsored healthcare programs from January 2008 to December 2010. Mr. Berg served as non-executive chairman of the board of directors of WellCare from January 2011 to May 2013. From January 2007 to April 2009, Mr. Berg was a senior advisor to Welsh, Carson, Anderson & Stowe, a private equity firm. From April 1998 to July 2004, Mr. Berg held various executive positions with Oxford Health Plans, Inc. (“Oxford”), a health benefit plan provider, which included chief executive officer from November 2002 to July 2004 when Oxford was acquired by UnitedHealth Group, president and chief operating officer from March 2001 to November 2002 and executive vice president, medical delivery from April 1998 to March 2001. From July 2004 to September 2006, Mr. Berg served as an executive of UnitedHealth Group and was primarily responsible for integrating the Oxford business. Mr. Berg is an experienced business leader with significant experience in the healthcare industry and brings an understanding of the operational, financial and regulatory aspects of our industry and business.

 

DAVITA HEALTHCARE PARTNERS INC. – 2014 Proxy Statement    6


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LOGO

Carol Anthony (“John”) Davidson

 

Director since 2010

Age 58

Carol Anthony (“John”) Davidson has been one of our directors since December 2010. From January 2004 to September 2012, Mr. Davidson served as the senior vice president, controller and chief accounting officer of Tyco International Ltd. (“Tyco”), a provider of diversified industrial products and services. Prior to joining Tyco in January 2004, he spent six years at Dell Inc., a computer and technology services company, where he held various leadership roles, including vice president, audit, risk and compliance, and vice president, corporate controller. In addition, he previously spent 16 years at Eastman Kodak Company, a provider of imaging technology products and services, in a variety of accounting and financial leadership roles. Mr. Davidson is a director of Pentair Ltd., a provider of products and solutions in water, fluids, thermal management and equipment protection. Mr. Davidson is a member of the Board of Trustees of the Financial Accounting Foundation which oversees financial accounting and reporting standards setting processes for the United States. Mr. Davidson also serves on the Board of Governors of the Financial Industry Regulatory Authority (FINRA). Mr. Davidson is a CPA with more than 30 years of leadership experience across multiple industries and he brings a strong track record of building and leading global teams and implementing governance and controls processes.

 

LOGO

Paul J. Diaz

 

Director since 2007

Age 52

Paul J. Diaz has been one of our directors since July 2007. Mr. Diaz has been the chief executive officer of Kindred Healthcare, Inc. (“Kindred”), a provider of long-term healthcare services in the United States, since January 2004. Mr. Diaz joined Kindred in January 2002 as president and chief operating officer. Prior to joining Kindred, Mr. Diaz was the managing member of Falcon Capital Partners, LLC, a private investment and consulting firm, and from 1996 to July 1998, Mr. Diaz served in various executive capacities with Mariner Health Group, Inc., a health care facility operator, including as executive vice president and chief operating officer. Mr. Diaz serves on the board of Kindred and the board of visitors of Georgetown University Law Center and previously served on the board of PharMerica Corporation. Mr. Diaz is an experienced business leader with significant experience in the healthcare industry and brings an understanding of the operational, financial and regulatory aspects of our industry and business.

 

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LOGO

Peter T. Grauer

 

Director since 1994

Age 68

Peter T. Grauer has been one of our directors since August 1994 and our lead independent director since 2003. Mr. Grauer has been chairman of the board of Bloomberg, Inc., a business and financial information company, since April 2001, treasurer since March 2001 and was its chief executive officer from March 2002 until July 2011. Mr. Grauer has also served as a non-executive director of Glencore Xstrata plc, a global mining and commodities firm listed on the London Stock Exchange, since June 2013. From November 2000 until March 2002, Mr. Grauer was a managing director of Credit Suisse First Boston, a financial services firm. From September 1992 until November 2000, upon the merger of Donaldson, Lufkin & Jenrette (“DLJ”), a financial services firm, into Credit Suisse First Boston, Mr. Grauer was a managing director and founding partner of DLJ Merchant Banking Partners. Mr. Grauer has significant experience as a business leader and brings a deep understanding of our business and industry through his nearly 20 years of service as a member of the Board.

 

LOGO

Dr. Robert J. Margolis

 

Director since 2012

Age 68

Dr. Robert J. Margolis became our co-chairman of the Board in November 2012 in connection with our acquisition of HCP LLC. He served as the chief executive officer of HCP LLC, from May 1982 to November 2012, and as the chief executive officer of our integrated care business, HealthCare Partners (“HCP”), from November 2012 to March 2014. Dr. Margolis is board certified in internal medicine and medical oncology having trained at Duke University Medical School and the National Cancer Institute. Dr. Margolis serves on the boards of the Martin Luther King Hospital, the National Committee for Quality Assurance, the California Association of Physician Groups, and the California Hospital Medical Center Foundation, Los Angeles. Dr. Margolis also serves as a member of HealthCare Policy Advisory Council for Harvard Medical School and as a member of the advisory board of the USC Schaeffer Center for Health Policy and Economics. Dr. Margolis previously served as the chairman of the boards of the American Medical Group Association, the National Committee for Quality Assurance, and the Unified Medical Group Association. Dr. Margolis has a national reputation in the managed care industry with over 40 years of industry experience. He works extensively on issues of quality improvement, pay for performance, coordinated care and access to care issues and speaks frequently on these and related subjects at national and regional meetings.

 

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LOGO

John M. Nehra

 

Director since 2000

Age 65

John M. Nehra has been one of our directors since November 2000. Mr. Nehra has been affiliated with New Enterprise Associates (“NEA”), a venture capital firm, since 1989, including, since 1993, as general partner of several of its affiliated venture capital limited partnerships. Mr. Nehra also served as managing general partner of Catalyst Ventures, a venture capital firm, from 1989 to 2013. Mr. Nehra serves on the boards of a number of NEA’s portfolio companies. Mr. Nehra is an experienced business leader with approximately 43 years experience in investment banking, research and capital markets and he brings a deep understanding of our business and industry through his more than 10 years of service as a member of the Board as well as significant experience in the healthcare industry through his involvement with NEA’s healthcare-related portfolio companies.

 

LOGO

Dr. William L. Roper

 

Director since 2001

Age 65

Dr. William L. Roper has been one of our directors since May 2001. Dr. Roper has been chief executive officer of the University of North Carolina (“UNC”) Health Care System, dean of the UNC School of Medicine and vice chancellor for medical affairs of UNC since March 2004. Dr. Roper also continues to serve as a professor of health policy and administration in the UNC School of Public Health and a professor of pediatrics and of social medicine in the UNC School of Medicine. From 1997 until March 2004, he was dean of the UNC School of Public Health. Before joining UNC in 1997, Dr. Roper served as senior vice president of Prudential Health Care. He also served as director of the Centers for Disease Control and Prevention from 1990 to 1993, on the senior White House staff in 1989 and 1990 and as the administrator of Centers for Medicare & Medicaid Services from 1986 to 1989. Dr. Roper is a member of and the immediate past chairman of the board of the National Quality Forum. From December 2007 to November 2011, Dr. Roper served on the board of Medco Health Solutions, Inc., a pharmacy benefits management company, and since November 2011 has served on the board of its successor company, Express Scripts Holding Company. Dr. Roper brings substantial expertise in the medical field, an in-depth understanding of the regulatory aspects of our business as well as clinical, financial and operational experience.

 

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LOGO

Kent J. Thiry

 

Director since 1999

Age 58

Kent J. Thiry became our co-chairman of the Board in November 2012 in connection with our acquisition of HCP LLC and continues to serve as our chief executive officer, a role he has held since October 1999. From October 1999 until November 2012, Mr. Thiry served as our chairman of the Board. From June 1997 until he joined us, Mr. Thiry was chairman of the board and chief executive officer of Vivra Holdings, Inc., which was formed to operate the non-dialysis business of Vivra Incorporated (“Vivra”) after Gambro AB acquired the dialysis services business of Vivra in June 1997. From September 1992 to June 1997, Mr. Thiry was the president and chief executive officer of Vivra, a provider of renal dialysis and other healthcare services. From April 1992 to August 1992, Mr. Thiry was president and co-chief executive officer of Vivra, and from September 1991 to March 1992, he was president and chief operating officer of Vivra. From 1983 to 1991, Mr. Thiry was associated with Bain & Company, first as a consultant, and then as vice president. Mr. Thiry previously served on the board of Varian Medical Systems, Inc. from August 2005 to February 2009 and served as the non-executive chairman of Oxford Health Plans, Inc. until it was sold to UnitedHealth Group in July 2004. As a member of management, Mr. Thiry provides significant healthcare industry experience and unique expertise regarding the Company’s business and operations as well as executive leadership and management experience.

 

LOGO

Roger J. Valine

 

Director since 2006

Age 65

Roger J. Valine has been one of our directors since June 2006. From 1993 to his retirement in July 2006, Mr. Valine served as the chief executive officer of Vision Service Plan (“VSP”), the nation’s largest provider of eyecare wellness benefits. From January 1991 to February 2006, Mr. Valine served as both the president and chief executive officer of VSP. Upon his retirement, Mr. Valine had worked for VSP for 33 years and provided consulting services to VSP through January 2008. Mr. Valine previously served on the boards of American Specialty Health Incorporated and SureWest Communications. Mr. Valine is an experienced business leader with significant experience in the healthcare industry and brings an understanding of the operational, financial and regulatory aspects of our business as well as extensive management experience.

The Board recommends a vote FOR the election of each of the named nominees as directors.

 

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CORPORATE GOVERNANCE

The general governance framework for the Company is provided by its bylaws, corporate governance guidelines, the charters for each of the Board’s committees, the corporate governance code of ethics and corporate code of conduct. These governance documents are available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance. The Board adopted the corporate governance guidelines to assist the Board and its committees in performing their duties and serving the best interests of the Company and our stockholders.

Selection of Directors

The Nominating and Governance Committee does not have a specifically defined set of criteria for membership on the Board. In making its recommendations, it considers the mix of characteristics, experience, diverse perspectives and skills that is most beneficial to our Company. The committee also considers the mix of different tenures of the directors, taking into account the benefits of directors with longer tenures, including greater board stability and continuity of organizational knowledge, and directors with shorter tenures, which helps ensure that the Board maintains an openness to new ideas and a willingness to re-examine the status quo. The Company does not have a specific diversity policy. However, as noted in our corporate governance guidelines, when selecting nominees the committee considers diversity of skills, experience, perspective and background. The Nominating and Governance Committee will consider nominees for director recommended by stockholders upon submission in writing to our Secretary of the names and qualifications of such nominees at the following address: Corporate Secretary, DaVita HealthCare Partners Inc., 2000 16th Street, Denver, Colorado 80202. The committee does not intend to alter the manner in which it evaluates candidates based on whether the candidate was recommended by a stockholder.

In March 2014, the Nominating and Governance Committee recommended the candidates standing for election at the 2014 annual meeting of stockholders.

Director Independence

Under the listing standards of the NYSE, a majority of the members of the Board must satisfy the NYSE criteria for “independence.” No director qualifies as independent under the NYSE listing standards unless the Board affirmatively determines that the director has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us). In addition, the Board has adopted a formal set of standards used to determine director independence. The full text of our director independence standards is available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance.

The Board evaluates the independence of our directors annually and will review the independence of individual directors on an interim basis to consider changes in employment, relationships and other factors. The Board has determined that all of the individuals currently serving, or who served at any time during 2013, as members of the Board, other than Mr. Thiry and Dr. Margolis, are independent under the NYSE listing standards and the Company’s independence standards. In evaluating each director’s independence, the Board considered the nature of any executive officer’s personal investment interest in director affiliated entities (active or passive), the level of involvement by the director or executive officer as a partner in any such director affiliated entities, any special arrangements between the parties which would lead to a personal benefit, any personal benefits derived as a result of business relationships with the Company, any other personal benefit derived by any director or executive officer as a result of the disclosed relationships or any other relevant factors.

In making determinations of independence, the Board considered that certain Board members have in the past invested in certain funds of a venture capital firm of which Mr. Nehra is a special partner or that are managed directly or indirectly by the firm of which Mr. Nehra is a partner. The Board also considered transactions in which

 

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WellCare has made payments to us for services rendered in the ordinary course of business in the last three years which did not exceed the greater of $1 million or 2% of WellCare’s consolidated gross revenue in each such year. Mr. Berg was a director and non-executive chairman of WellCare until May 2013 and holds less than 10% beneficial interest in WellCare. The Board also considered the $465,000 of additional fees in the aggregate paid to Mr. Berg in his role as a member of the Board’s Compliance Committee, in overseeing the 2010 U.S. Attorney physician relationship investigation and the 2011 U.S. Attorney physician relationship investigation, at the request of the Board. In addition, the Board considered the transactions in which Kindred has made payments to us for services rendered in the ordinary course of business in the last three years which did not exceed the greater of $1 million or 2% of Kindred’s consolidated gross revenue in each such year. Mr. Diaz is the chief executive officer of and has less than 10% beneficial interest in Kindred.

The Board also maintains a policy whereby the Board will evaluate the appropriateness of the director’s continued service on the Board in the event that the director retires from their principal job, changes their principal job responsibility or experiences a significant event that could negatively affect their service to the Board. In such event, the policy provides that the affected director shall promptly submit his or her resignation to the chairman of the Board and the lead independent director. The members of the Board, excluding the affected director, will determine whether the affected director’s continued service on the Board is in the best interests of our stockholders and will decide whether or not to accept the resignation of the director. In addition, the policy provides that prior to accepting an invitation to serve on the board of directors of another public company, a director must advise the chairman of the Board and the lead independent director so that the remaining members of the Board may evaluate any potential conflicts of interest.

Leadership Structure and Meetings

of Independent Directors

Since the completion of our acquisition of HCP LLC, Mr. Thiry and Dr. Margolis have served as co-chairmen of our Board. Mr. Thiry is the chief executive officer of the Company and brings nearly 15 years of experience with our Company and deep institutional knowledge and experience to the combined role. Dr. Margolis served as the chief executive officer of HCP LLC from May 1982 to November 2012, and the chief executive officer of HCP from November 2012 to March 2014, and brings experience and extensive knowledge of our integrated care business.

We believe that Mr. Thiry’s experience and knowledge, and the significant role of the lead independent director, provide a counterbalance to the combined co-chairman and CEO role. Our lead independent director, Mr. Grauer, who was elected by and from the independent board members, plays a significant role in Board leadership and meetings of the independent directors. Mr. Grauer chairs our Nominating and Governance Committee. As chairman of the Nominating and Governance Committee, Mr. Grauer has the authority to call meetings of the committee, whose primary purpose, as outlined in its charter, includes overseeing the evaluation of the Company’s management, including the CEO.

As lead independent director, Mr. Grauer serves as liaison between the co-chairmen and the independent directors, approves information sent to the Board, confers with the CEO/Co-Chairman in setting and thereafter approving meeting agendas for the Board, approves meeting schedules to assure that there is sufficient time for discussion of all agenda items, and presides at all meetings of the Board at which the co-chairmen are not present, including executive sessions of independent directors. Additionally, Mr. Grauer facilitates discussions outside of scheduled Board meetings among the independent directors on key issues as required, and decides when to engage independent advisors for the Board or a Board Committee. Mr. Grauer, in his capacity as lead independent director, also has the authority to call meetings of the Board and the independent directors and, if requested by major stockholders, makes himself available for consultation and direct communication with them.

Independent directors meet regularly in executive sessions without management. Executive sessions are held in conjunction with each regularly scheduled meeting of the Board.

 

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Communications with the Board

Any interested party who desires to contact the lead independent director, Mr. Grauer, may do so by sending an email to leaddirector@davita.com. In addition, any interested party who desires to contact the Board or any member of the Board may do so by writing to: Board of Directors, c/o Corporate Secretary, DaVita HealthCare Partners Inc., 2000 16th Street, Denver, Colorado 80202. Copies of any such written communications received by the Secretary will be provided to the full Board or the appropriate member depending on the facts and circumstances described in the communication unless they are considered, in the reasonable judgment of the Secretary, to be improper for submission to the intended recipient(s).

Annual Meeting of Stockholders

We do not have a policy requiring that directors attend the annual meeting of stockholders. At the last annual meeting of stockholders, our co-chairman and chief executive officer, Mr. Thiry, attended the meeting.

Information Regarding the Board and its Committees

The Board met 16 times during 2013. Each of our directors attended at least 75% of the aggregate of the total number of meetings of the Board and the total number of meetings held by all committees of the Board on which he or she served during 2013. The Board has established the following committees: the Audit Committee, the Compensation Committee, the Nominating and Governance Committee, the Compliance Committee, the Public Policy Committee, and the Clinical Performance Committee.

Committees of the Board

The following chart sets out the current members of our Board Committees and describes the principal functions of each committee of our Board. The charter for each committee is available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance. In early 2014, we rotated a number of our committee members to different committees as a result of feedback we received from stockholders regarding the tenure of the committee members on certain committees.

 

Name of Committee
and Members
  

Principal Functions

of the Committee

  Meetings
in 2013
 

Audit(1)

Carol Anthony (“John”) Davidson, Chair

Charles G. Berg

Roger J. Valine

  

•  Assists the Board with oversight of the integrity of our financial statements including the financial reporting and disclosure processes and the integrity and effectiveness of our system of internal control over financial reporting.

•  Assists the Board with oversight of the independence, qualifications and performance of our independent registered public accounting firm, including a review of the scope and results of their audit, as well as our internal audit function.

•  Together with the Compliance Committee, assists the Board with oversight of compliance with legal and regulatory requirements, including those that may have a material impact on the Company’s financial statements.

     12   
    

•  Appoints and engages our independent registered public accounting firm, and pre-approves the firm’s annual audit services (including related fees), audit-related services, and all other services in accordance with our pre-approval policy.

•  Monitors our disclosure controls and procedures and compliance with ethical standards.

 

       

 

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Compensation(2)

Pamela M. Arway, Chair

Paul J. Diaz

Peter T. Grauer

Roger J. Valine

  

•  Reviews the performance of our chief executive officer and other executives and makes decisions regarding their compensation.

•  Establishes policies relating to the compensation of our executive officers and other key employees that further the goal of ensuring that our compensation system for our chief executive officer and our other executives, as well as our philosophy for compensation for all employees and the Board, is aligned with the long-term interests of our stockholders.

•  Conducts an evaluation of our chief executive officer’s performance and the Company’s performance and considers a self-assessment prepared by our chief executive officer. Periodically, the Compensation Committee engages an outside consultant to conduct an in-depth analysis of our chief executive officer’s performance as a manager during the year.

•  Has sole authority and discretion to retain or replace its independent compensation consultant.

•  Annually determines and approves the compensation package for our chief executive officer subject to ratification by the independent members of the Board.

•  Works closely with and considers the recommendations of our chief executive officer to determine the compensation of our other executive officers.

•  When determining the compensation of the other executive officers, considers the recommendations of the chief executive officer who conducts a performance and compensation review of each other executive officer and reviews his detailed assessments of the performance of each of the other executive officers with the Compensation Committee.

•  Reviews the results of advisory stockholder votes and other stockholder feedback on the compensation of our executive officers and considers whether to make adjustments to our compensation policies and practices as a result of such votes.

 

    4   

Nominating and Governance(3)

Peter T. Grauer, Chair

Pamela M. Arway

Carol Anthony (“John”) Davidson

Roger J. Valine

  

•  Reviews and makes recommendations to the Board about our governance processes.

•  Assists in identifying and recruiting candidates for the Board.

•  Annually reviews the performance of the individual members of the Board.

•  Proposes a slate of nominees for election at the annual meeting of stockholders.

•  Makes recommendations to the Board regarding the membership and chairs of the committees of the Board.

 

    2   

Compliance Committee(4)

Dr. William L. Roper, Chair

Charles G. Berg

Paul J. Diaz

John M. Nehra

  

•  Oversees and monitors the effectiveness of our healthcare regulatory compliance program, reviews significant healthcare regulatory compliance risk areas, and reviews the steps management is taking to monitor, control and report these risk exposures.

•  Together with the Audit Committee, assists the Board with oversight of compliance with healthcare regulatory requirements.

•  Has primary responsibility for oversight of healthcare regulatory requirements and for directing the Company’s response to certain pending governmental investigations.

•  Meets regularly with our chief compliance officer.

    33   

 

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Public Policy(5)

John M. Nehra, Chair

Pamela M. Arway

Paul J. Diaz

Dr. Robert J. Margolis

  

•     Advises the Board on public policy and makes recommendations to the Board as to policies and procedures relating to issues of public policy and government relations.

•     Oversees the Company’s government affairs activity and political spending.

 

    1   

Clinical Performance(6)

Dr. William L. Roper, Chair

Carol Anthony (“John”) Davidson

Dr. Robert J. Margolis

 

  

•     Advises the Board on clinical performance issues facing the Company.

•     Makes recommendations to management and to the Board as to policies and procedures relating to issues of clinical performance.

    2   
(1) 

Ms. Arway served on the Audit Committee until March 6, 2014.

(2) 

Mr. Nehra served as the Chair of the Compensation Committee until January 14, 2014. Ms. Arway was appointed to the Compensation Committee on January 14, 2014, and was appointed Chair of the Compensation Committee on January 14, 2014. Mr. Diaz was appointed to the Compensation Committee on March 6, 2014.

(3) 

Messrs. Berg, Diaz and Nehra and Dr. Roper served on the Nominating and Governance Committee until March 6, 2014.

(4) 

Ms. Arway and Mr. Grauer served on the Compliance Committee until March 6, 2014. Messrs. Diaz and Nehra were appointed to the Compliance Committee on March 6, 2014.

(5) 

Mr. Diaz served as the Chair of the Public Policy Committee until March 6, 2014. Dr. Roper served on the Public Policy Committee until March 6, 2014. Ms. Arway, Mr. Nehra, and Dr. Margolis were appointed to the Public Policy Committee on March 6, 2014, and Mr. Nehra was appointed Chair of the Public Policy Committee on March 6, 2014.

(6) 

Ms. Arway and Mr. Nehra served on the Clinical Performance Committee until March 6, 2014. Mr. Davidson was appointed to the Clinical Performance Committee on March 6, 2014.

 

Overview of Committee Membership Qualifications

 

Director    Independent        Other Public
Company Boards*
 

Pamela M. Arway(1)

     Yes           2   

Charles G. Berg(2)

     Yes           0   

Carol Anthony (“John”) Davidson(2)

     Yes           1   

Paul J. Diaz(1)

     Yes           1   

Peter T. Grauer(1), (3)

     Yes           1   

Dr. Robert J. Margolis

     No           0   

John M. Nehra

     Yes           0   

Dr. William L. Roper

     Yes           1   

Kent J. Thiry

     No           0   

Roger J. Valine(1), (2)

     Yes           0   
(1)

Member of the Compensation Committee and is (a) independent under the listing standards of the NYSE and the Company’s independence standards, (b) a “nonemployee director” under Rule 16b-3 of the Securities Exchange Act of 1934 (the “Exchange Act”), and (c) an “outside director” as defined in Internal Revenue Service regulations.

(2)

Member of the Audit Committee and qualifies as an “audit committee financial expert” within the meaning of the rules of the SEC and each is “independent” and “financially literate” under the listing standards of the NYSE and the Company’s independence standards.

(3)

Mr. Grauer is our Lead Independent Director.

*

Current as of March 31, 2014.

 

Risk Oversight

The Board’s involvement in risk oversight involves the Audit Committee, the Compliance Committee and the full Board. The Audit Committee is responsible for legal and regulatory risk oversight and the Compliance Committee has primary responsibility for oversight of healthcare regulatory compliance requirements. The Audit Committee and the Compliance Committee meet regularly with our chief compliance officer and chief legal officer. The Compliance Committee reviews significant healthcare regulatory compliance risk areas and the steps management has taken to monitor, control and report such compliance risk exposures. The Compliance

 

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Committee meets on a regular basis and reports directly to the Board on its findings. The Audit Committee receives materials on enterprise risk management on an annual basis. These materials include identification of top enterprise risks for the Company, the alignment of management’s accountability and reporting for these risks, and mapping of the Board’s and Audit Committee’s oversight responsibilities for key risks. In addition, the Audit Committee and the full Board periodically receive materials to address the identification and status of major risks to the Company. The Audit Committee discusses significant risk areas and the actions management has taken to monitor, control, and report such exposures. The Audit Committee also reviews with the Company’s chief legal officer legal matters that may have a material impact on the Company’s financial statements, the Company’s compliance with applicable laws and regulations, and material reports or inquiries received from governmental agencies, including such matters identified by the Compliance Committee or the chief compliance officer. At each meeting of the full Board, the chairman of the Audit Committee reports on the activities of the Audit Committee, including risks identified and risk oversight.

Board Share Ownership Policy

We have a share ownership policy that applies to all non-employee members of the Board. The purpose of the policy is to encourage the Board to have an ownership stake in the Company by retaining a specified financial interest in our common stock.

Both shares owned directly and shares underlying vested but unexercised stock appreciation rights (“SARs”), including stock-settled stock appreciation rights (“SSARs”), restricted stock units (“RSUs”) and stock options are included in the determination of whether the share ownership guidelines have been met. The total net realizable share value retained must have a current market value of not less than the lower of:

 

 

25% of the total equity award value realized by the Board member to date in excess of $100,000; or

 

 

five times the annual Board retainer of $24,000, or $120,000.

As of December 31, 2013, each of our non-employee members of the Board had met the requirements of our share ownership guidelines. See “Compensation Policies & Practices—Management Share Ownership Policy” on page 67 of this Proxy Statement for more information regarding our management share ownership policy.

Code of Ethics and Codes of Conduct

We have a code of ethics that applies to our chief executive officer, chief financial officer, controller and chief accounting officer, chief legal officer, all vice presidents and all professionals involved in the accounting and financial reporting functions. We also have a code of conduct that applies to all of our employees and the Board. The code of ethics and the code of conduct are available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance. If the Company amends or waives the code of ethics or the code of conduct with respect to our chief executive officer, chief financial officer, controller or chief accounting officer, or persons performing similar functions, we will post the amendment or waiver at the same location on our website.

HCP also has a code of conduct that applies to its board of directors, employees, affiliated physicians, other contracted providers, vendors and all third parties conducting business on behalf of HCP. The HCP code of conduct is available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance.

 

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Insider Trading Policy

We have adopted an Insider Trading Policy applicable to our directors, executive officers and employees that is intended to ensure that those individuals do not benefit financially from buying or selling shares of our common stock while in the possession of material non-public information. Under our Insider Trading Policy, pre-clearance by our Chief Legal Officer is required for equity and 401(k) plan transactions entered into by our executives and Board members, such as an option or stock appreciation right exercise, or electing to invest in or divest shares of our common stock, as well as certain other transactions involving our common stock. In addition, quarterly trading blackouts are imposed under the Insider Trading Policy upon our directors, executive officers and certain other employees who are deemed to have access to the Company’s financial results prior to their becoming final and being publicly disclosed.

 

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Proposal 2    Ratification of Appointment of Independent Registered Public Accounting Firm

Independent Registered Public Accounting Firm

The Audit Committee has appointed KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2014. Representatives of KPMG LLP are expected to attend the annual meeting in person and will be available to respond to appropriate questions and to make a statement if they so desire. If KPMG LLP should decline to act or otherwise become incapable of acting, or if KPMG LLP’s engagement is discontinued for any reason, the Audit Committee will appoint another independent registered public accounting firm to serve as our independent registered public accounting firm for 2014. Although we are not required to seek stockholder ratification of this appointment, the Board believes that doing so is consistent with corporate governance best practices. If the appointment is not ratified, the Audit Committee will explore the reasons for stockholder rejection and will reconsider the appointment.

The following table sets forth the aggregate professional fees billed to us for the years ended December 31, 2013 and 2012 by KPMG LLP, our independent registered public accounting firm:

 

      2013      2012  

Audit fees(1)

   $   4,253,918       $   3,894,086   

Audit-related fees(2)

     1,158,435         2,456,843   

Tax fees(3)

     300,482         820,368   

All other fees

               
     $ 5,712,835       $ 7,171,297   
(1)

Includes aggregate fees for the audit of our consolidated financial statements and the effectiveness of our internal control over financial reporting and the three quarterly reviews of our consolidated financial statements included in our Form 10-Q and other SEC filings. In addition, audit fees include statutory audits in several international countries.

(2)

Includes fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported as “Audit Fees.” The audit-related fees in 2013 and 2012 include fees for audits of our employee benefit plans, audits of two of our majority-owned entities and fees of $627,253 and $1,834,343, respectively, for due diligence services relating to potential acquisitions. In addition, the 2013 audit-related fees include fees for an audit of HCP’s risk bearing organizations and the 2012 audit-related fees include audit services related to our acquisition of HCP.

(3)

Includes fees for professional services rendered for tax advice and tax planning as well as $260,583 and $794,704 in 2013 and 2012, respectively, for tax due diligence services. None of these fees were for tax compliance or tax preparation services.

 

Pre-approval Policies and Procedures

The Audit Committee of the Board is required to pre-approve the audit, audit-related, tax and all other services provided by our independent registered public accounting firm in order to assure that the provision of such services does not impair the auditor’s independence. The Audit Committee’s pre-approval policy provides for pre-approval of all audit, audit-related, tax and all other services provided by the independent registered public accounting firm, KPMG LLP. The Audit Committee pre-approved all such services in 2013 and concluded that such services performed by KPMG LLP were compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.

The Board recommends a vote FOR the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal year 2014.

 

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Proposal 3   Advisory Vote on Executive Compensation

Pursuant to Section 14A of the Exchange Act, we are providing stockholders with a vote to approve, on an advisory basis, the compensation of our named executive officers as disclosed in this Proxy Statement in accordance with SEC rules. The advisory vote on executive compensation described in this proposal is commonly referred to as a “say-on-pay vote.”

The Company intends to include in its proxy statement on an annual basis an advisory vote regarding named executive officer compensation.

As disclosed in the Compensation Discussion and Analysis, the Company believes that its executive compensation program is reasonable, competitive and strongly focused on pay-for-performance principles. We design our executive officer compensation programs to attract and retain outstanding leaders who possess the skills and talent necessary to achieve our business goals and objectives. Our ultimate objective is to continue to create long-term stockholder value by generating strong overall revenue growth, market share increases, improvements in cost per treatment, operating income growth, operating margin growth, increases in earnings per share and improvement in our debt to equity ratio. In order to achieve this objective, we have designed our compensation programs so they:

 

 

reward strong Company performance;

 

 

align our executives’ interests with our stockholders’ interests; and

 

 

are competitive within the relevant markets, including the health care services, diagnostics, managed care and solutions markets, so that we can attract and retain outstanding executives.

In 2013, in response to disappointing say-on-pay votes and to further align executives’ pay with individual and Company performance, the Compensation Committee took the actions listed on pages 43 to 50 of this Proxy Statement.

The compensation of our named executive officers during fiscal 2013 is consistent with the following achievements and financial performance for 2013:

 

 

improved clinical outcomes in our U.S. dialysis operations, including lowest catheter rates ever at 13.0%, highest fistula in use rates ever at 65.3%, and lowest gross mortality rate ever at 13.7;

 

 

three-year compound annual TSR of 22.2%, compared to the median three-year compound annual TSR of 1.3% for our Global Industry Classification Standard (“GICS”) group and 17.6% for our comparator peer group; and a five-year compound annual TSR of 20.7%, compared to the median five-year compound annual TSR of 9.3% for our GICS group and 24.2% for our comparator peer group;

 

 

strong operating cash flow of $1,773 million compared to original guidance range of $1,350 million to $1,500 million;

 

 

Kidney Care adjusted operating income of $1,513 million compared to original guidance range of $1,350 million to $1,450 million;

 

 

consolidated net revenue growth of 43.7% driven primarily by inclusion of a full year of HCP operations;

 

 

normalized non-acquired U.S. dialysis treatment growth of 5.1%;

 

 

an increase of 7.2% in the overall number of U.S. dialysis treatments; and

 

 

consolidated operating income growth of 19.5%, which includes the impact of a loss contingency reserve and adjustments to a contingent earn-out obligation and a tax asset associated with the HCP acquisition escrow provisions. Without these items adjusted consolidated operating income would have increased by 34.2%*.

 

* See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Form 10-K for the year ended December 31, 2013 for reconciliation of this metric to the most closely comparable GAAP metric.

 

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Prior to the significant changes to our executive compensation program described on pages 43 to 50 that are being implemented in 2014, the Compensation Committee had developed and approved an executive compensation philosophy to provide a framework for the Company’s executive compensation program featuring the following policies and practices:

 

 

strong pay-for-performance alignment, with equity awards ranging from 23% to 88% of our named executive officers’ compensation in 2013;

 

 

addition of cash-based performance awards in 2013 under the long-term incentive program;

 

 

a stock ownership policy that requires our executives to accumulate a meaningful ownership stake in the Company over time to strengthen the alignment of our named executive officers’ and stockholders’ interests;

 

 

a clawback policy that permits the Board to recover bonuses, incentive and equity-based compensation from executive officers and members of the Board whose fraud or intentional misconduct was a significant contributing factor to the Company having to restate all or a portion of its financial statements; and

 

 

equity incentive plans that prohibit repricing or replacing underwater stock options or stock appreciation rights without prior stockholder approval.

This proposal gives our stockholders the opportunity to express their views on the overall compensation of our named executive officers and the philosophy, policies and practices described in this Proxy Statement. For the reasons discussed above, we are asking our stockholders to indicate their support for our named executive officer compensation by voting FOR the following resolution at the Annual Meeting:

“RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed in this Proxy Statement pursuant to the compensation disclosure rules of the Securities and Exchange Commission (which disclosure includes the Compensation Discussion and Analysis, the 2013 Summary Compensation Table and the other related tables and disclosure).”

The say-on-pay vote is an advisory vote only, and therefore it will not bind the Company or the Board. However, the Board and the Compensation Committee will consider the voting results as appropriate when making future decisions regarding executive compensation, as they did following the 2013 annual meeting of stockholders.

The Board recommends a vote FOR the approval of the advisory resolution relating to the compensation of our named executive officers as disclosed in this Proxy Statement.

 

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Proposal 4    Approval of the Amendment and Restatement of our 2011 Incentive Award Plan

The DaVita Inc. 2011 Incentive Award Plan (the “2011 Plan”) was approved by the Board on April 13, 2011 as an amendment and restatement of the DaVita Inc. 2002 Equity Compensation Plan, as amended (the “2002 Plan”), and was approved by our stockholders and became effective on June 6, 2011. On March 21, 2013, the Board approved an amendment of the 2011 Plan that was approved by our stockholders and became effective on June 17, 2013. On March 28, 2014, the Board approved an amendment and restatement to the 2011 Plan (the “Amended and Restated 2011 Plan”), subject to stockholder approval at the Annual Meeting.

The Amended and Restated 2011 Plan amends the performance criteria under the 2011 Plan to permit the grant of performance-based awards tied to the achievement of additional performance criteria added by the amendment. Specifically, the Amended and Restated 2011 Plan includes the following additional performance criteria: non-acquired growth; new market entries; acquisition targets; treatment growth; patient growth; center growth; clinical outcomes (including mortality rates) and processes; physician recruitment; physician retention; physician relations; employee turnover; employee relations; patient retention and satisfaction; improvements in reimbursement economics; commercial payor relationships and contract related targets; public policy efforts and investigation; and legal proceedings and litigation outcomes. We believe these additional criteria will provide us with the ability to motivate our key talent to achieve tailored and specific non-financial goals that are critical to our continued growth and success.

If the stockholders do not approve the Amended and Restated 2011 Plan, the 2011 Plan will continue in full force and effect without the changes described above.

Introduction

Equity-based compensation has been a major component of our compensation programs. The Board believes that our capacity to grant equity-based compensation has been a significant factor in our ability to achieve our growth objectives and enhance stockholder value. The principal features of the Amended and Restated 2011 Plan are summarized below, but the summary is qualified in its entirety by reference to the Amended and Restated 2011 Plan itself, which is attached to this Proxy Statement as Appendix A.

Purpose

The purpose of the Amended and Restated 2011 Plan is to promote our success and enhance our value by linking the individual interests of the members of the Board and our employees to those of our stockholders and by providing such individuals with an incentive for outstanding performance in order to generate superior returns for our stockholders. The Amended and Restated 2011 Plan is further intended to provide us flexibility in our ability to motivate, attract, and retain the services of members of the Board, our employees and our consultants upon whose judgment, interest, and special effort the successful conduct of our operation is largely dependent. The Amended and Restated 2011 Plan is designed with the intent of granting performance-based equity and cash awards that may qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code (the “Code”).

 

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Stockholder Approval Requirement

In general, Section 162(m) of the Code (“Section 162(m)”) places a limit on the deductibility for federal income tax purposes of the compensation paid to our chief executive officer or any of our three other most highly compensated executive officers (other than our chief financial officer). Under Section 162(m), compensation paid to such persons in excess of $1 million in a taxable year generally is not deductible. However, compensation that qualifies as “performance-based” under Section 162(m) does not count against the $1 million deduction limitation. One of the requirements of “performance-based” compensation for purposes of Section 162(m) is that the material terms of the plan under which compensation may be paid be disclosed to and approved by our public stockholders. For purposes of Section 162(m), the material terms include (a) the employees eligible to receive compensation, (b) a description of the business criteria on which the performance goals may be based and (c) the maximum amount of compensation that can be paid to an employee under the performance goals. We believe that each of these aspects of the Amended and Restated 2011 Plan is discussed below, and stockholder approval of this Proposal 4 is intended to constitute approval of the material terms of the Amended and Restated 2011 Plan, for purposes of the stockholder approval requirements of Section 162(m). However, stockholder approval of the Amended and Restated 2011 Plan is only one of several requirements under Section 162(m) that must be satisfied for amounts realized under the Amended and Restated 2011 Plan to qualify for the “performance-based” compensation exemption under Section 162(m), and submission of the material terms of the Amended and Restated 2011 Plan and the performance goals included therein for stockholder approval should not be viewed as a guarantee that we will be able to deduct all compensation under the Amended and Restated 2011 Plan. Nothing in this proposal precludes us or the Compensation Committee of the Board of Directors (the “Compensation Committee”) from making any payment or granting awards that do not qualify for tax deductibility under Section 162(m).

Accordingly, if our stockholders do not approve this Proposal 4, we will not be able to grant performance-based awards tied to the achievement of the additional performance criteria for which we are seeking approval. If this Proposal 4 is not approved by our stockholders, we may continue to grant performance-based compensation under the current terms of the 2011 Plan within the meaning of Section 162(m), subject to the current terms and limitations of the 2011 Plan.

Compensation and Governance Best Practices

The Amended and Restated 2011 Plan authorizes the Compensation Committee of the Board (or, if the Board determines, another committee of the Board) to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock units, restricted stock, performance-based awards, dividend equivalents, stock payments, deferred stock unit awards and deferred stock awards structured by the Compensation Committee within parameters set forth in the Amended and Restated 2011 Plan, for the purpose of providing the members of the Board, our employees and our consultants and equity compensation, incentives and rewards for performance. The Amended and Restated 2011 Plan reflects a broad range of compensation and governance best practices, with some of the key features of the Amended and Restated 2011 Plan as follows:

 

  ·   

Limitations on Grants. The maximum aggregate number of shares with respect to one or more awards that may be granted to any one person during any consecutive 12 month period is 2,250,000. However, this number may be adjusted to take into account equity restructurings and certain other corporate transactions as described below, the issuance of rights and certain other events described in the Amended and Restated 2011 Plan, in addition to the share limitations under the Amended and Restated 2011 Plan.

 

  ·   

No Repricing or Replacement of Options or Stock Appreciation Rights. The Amended and Restated 2011 Plan prohibits, without stockholder approval: (i) the amendment of options or stock appreciation rights to reduce the exercise price, and (ii) the replacement of an option or stock appreciation right with cash or any other award when the price per share of the option or stock appreciation right exceeds the fair market value of the underlying shares.

 

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  ·   

No In-the-Money Option or Stock Appreciation Right Grants. The Amended and Restated 2011 Plan prohibits the grant of options or stock appreciation rights with an exercise or base price less than the fair market value, generally the closing price, of our common stock on the date of grant.

 

  ·   

Section 162(m). The Amended and Restated 2011 Plan is designed to allow awards made under the Amended and Restated 2011 Plan, including equity awards and incentive cash bonuses, to qualify as performance-based compensation under Section 162(m) of the Code.

 

  ·   

Independent Administration. The Compensation Committee, which consists of only non-employee directors, generally administers the Amended and Restated 2011 Plan, and only the Compensation Committee may make grants of awards to persons who are subject to Section 16 of the Exchange Act and persons who are “covered employees” within the meaning of Section 162(m) of the Code. The Compensation Committee may delegate certain of its duties and authorities to a subcommittee for awards to certain non-executive employees.

Administration

The Amended and Restated 2011 Plan will be administered by the Compensation Committee. Unless otherwise determined by the Board of Directors, the Compensation Committee shall consist solely of two or more directors appointed by the Board of Directors, each of whom is an “outside director” within the meaning of Section 162(m) of the Code, a “non-employee director” within the meaning of the rules under Section 16 of the Securities Exchange Act of 1934, as amended, and an “independent director” under the rules of any securities market on which shares of our common stock are traded. The Compensation Committee may delegate to a committee of one or more members of the Board of Directors or one or more of our officers the authority to grant or amend awards to participants other than our senior executives who are subject to Section 16 of the Exchange Act, employees who are “covered employees” within the meaning of Section 162(m) of the Code, and the regulations thereunder, or a member of the Board of Directors or an officer to whom authority has been delegated under the Amended and Restated 2011 Plan to grant or amend awards.

The Board of Directors, acting by a majority of its members in office, will have authority to administer the Amended and Restated 2011 Plan with respect to awards granted to non-employee members of the Board of Directors, and the Compensation Committee will have authority to administer the Amended and Restated 2011 Plan to all other eligible individuals. References to Administrator in this Proposal 4 shall mean, as applicable, the full Board of Directors or the Compensation Committee as the entity to which the administration of the Amended and Restated 2011 Plan has been delegated within the limits described in the Amended and Restated 2011 Plan. Unless otherwise limited by the Board of Directors, the Administrator will have the authority to administer the Amended and Restated 2011 Plan with respect to grants of equity awards, including the power to determine eligibility, the types and sizes of awards, the price and timing of awards and the acceleration or waiver of any vesting restriction, as well as the authority to delegate such administrative responsibilities.

Eligibility

Employees and consultants of the Company and its affiliates and non-employee directors of the Company are eligible to participate in the Amended and Restated 2011 Plan. Currently, 9 non-employee directors, approximately 57,400 employees and a non-significant number of consultants (e.g., fewer than 10 consultants) are eligible to participate in the Amended and Restated 2011 Plan.

Limitation on Awards and Shares Available

The number of shares authorized for issuance under the Amended and Restated 2011 Plan is 94,356,676. Shares available for issuance under the Amended and Restated 2011 Plan are reduced, (i) by 3.5 shares for each share delivered in settlement of an award, other than a stock option or a stock appreciation right (“Full Value Award”),

 

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and (ii) by 1 share for each stock option or stock appreciation right, for which the holder receives the benefit only of the appreciation from the grant date fair market value of the underlying stock. The shares of our common stock covered by the Amended and Restated 2011 Plan may be shares in treasury, authorized but unissued shares, or shares purchased in the open market.

If any shares subject to an award under the Amended and Restated 2011 Plan that is not a Full Value Award are forfeited or expire or such award is settled for cash, then any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, be used again for new grants under the Amended and Restated 2011 Plan. To the extent that a Full Value Award is forfeited or expires or such award is settled for cash, the shares available under the Amended and Restated 2011 Plan will be increased by 3.5 shares subject to such Full Value Award. However, any shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligation pursuant to any award and any shares subject to a stock appreciation right that are not issued in connection with the stock settlement of the stock appreciation right on its exercise may not be used again for new grants.

The payment of dividend equivalents in cash in conjunction with any outstanding awards will not be counted against the shares available for issuance under the Amended and Restated 2011 Plan.

Awards granted under the Amended and Restated 2011 Plan upon the assumption of, or in substitution for, outstanding equity awards previously granted by an entity in connection with a corporate transaction, such as a merger, combination, consolidation or acquisition of property or stock (but not awards made in connection with the cancellation and repricing of an option or stock appreciation right) will not reduce the shares authorized for grant under the Amended and Restated 2011 Plan. Additionally, in the event that a company acquired by us or any of our subsidiaries or affiliates or with which we or any of our subsidiaries or affiliates combines has shares available under a pre-existing plan approved by stockholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan may be used for awards under the Amended and Restated 2011 Plan and will not reduce the shares authorized for grant under the Amended and Restated 2011 Plan, absent the acquisition or combination, and will only be made to individuals who were not employed by or providing services to us or any of our subsidiaries or affiliates immediately prior to such acquisition or combination.

The maximum number of shares of our common stock that may be subject to one or more awards granted to any one participant pursuant to the Amended and Restated 2011 Plan during any 12 month period is 2,250,000 and the maximum amount that may be paid in cash to any one participant during any calendar year is $10,000,000.

Limitation on Full Value Award Vesting

Except as may be determined by the Administrator in the event of a consummation of a change of control, or the holder’s death, disability, or retirement, a Full Value Award will not become fully vested earlier than three years from the grant date (two years in the case of an employee who is not an executive of the Company or in the case of performance-based Full Value Awards, over a period of not less than one year); provided, however, that notwithstanding the foregoing, Full Value Awards (a) that do not exceed in the aggregate of 5% of the total number of shares available under the Amended and Restated 2011 Plan will not be subject to the minimum vesting provisions and (b) the Company may grant a Full Value Award to employees newly hired by the Company or any of its subsidiaries without respect to such minimum vesting provisions.

Awards

The Amended and Restated 2011 Plan provides for the grant of incentive stock options (“ISOs”), nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock, performance-based awards, dividend equivalents, stock payments, deferred stock unit awards and deferred stock awards.

 

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Stock options, including ISOs, as defined under Section 422 of the Code, and nonqualified stock options may be granted pursuant to the Amended and Restated 2011 Plan. The option exercise price of all stock options granted pursuant to the Amended and Restated 2011 Plan will not be less than 100% of the fair market value of our common stock on the date of grant. In general, the fair market value shall be the closing sales price for a share of our common stock as quoted on the principal securities market on which shares of our common stock are traded on the date of grant, which as of April 24, 2014 was $69.38. Stock options may vest and become exercisable as determined by the Administrator, but in no event may a stock option have a term extending beyond the fifth anniversary of the date of grant. ISOs granted to any person who owns, as of the date of grant, stock possessing more than ten percent of the total combined voting power of all classes of our stock, however, shall have an exercise price that is not less than 110% of the fair market value of our common stock on the date of grant and may not have a term extending beyond the fifth anniversary of the date of grant. The aggregate fair market value of the shares with respect to which options intended to be ISOs are exercisable for the first time by an employee in any calendar year may not exceed $100,000, or such other amount as Section 422 of the Code provides.

Stock appreciation rights may be granted pursuant to the Amended and Restated 2011 Plan. A stock appreciation right entitles its holder, upon exercise of all or a portion of the stock appreciation right (the number of shares of which are the “base shares”), to receive from us an amount determined by multiplying the difference obtained by subtracting the exercise or base price per share of the stock appreciation right from the fair market value at the time of exercise of the stock appreciation right by the number of shares with respect to which the stock appreciation right has been exercised (in the event the stock appreciation right is settled in shares, the shares obtained are the “gain shares”), subject to any limitations imposed by the Administrator. The exercise or base price per share subject to a stock appreciation right will be set by the Administrator, but may not be less than 100% of the fair market value on the date the stock appreciation right is granted. The Administrator determines the period during which the right to exercise the stock appreciation right vests in the holder, but in no event may a stock appreciation right have a term extending beyond the fifth anniversary of the date of grant. No portion of a stock appreciation right which is unexercisable at the time the holder’s service with us terminates will thereafter become exercisable, except as may be otherwise provided by the Administrator. Payment pursuant to the stock appreciation right awards may be in cash, shares, or a combination of both, as determined by the Administrator.

Restricted stock units may be granted pursuant to the Amended and Restated 2011 Plan. A restricted stock unit award provides for the issuance of our common stock at a future date upon the satisfaction of specific conditions set forth in the applicable award agreement. The Administrator will specify the dates on which the restricted stock units will become fully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate, including conditions based on achieving one or more of the performance criteria listed below, or other specific criteria, including service to us or any of our subsidiaries or affiliates. Restricted stock units may not be sold, or otherwise hypothecated or transferred, and a holder of restricted stock units will not have voting rights or dividend rights prior to the time when the vesting conditions are satisfied and the shares of common stock are issued. Restricted stock units generally will be forfeited and the underlying shares of our common stock will not be issued, if the applicable vesting conditions are not met. The Administrator will specify, or permit the restricted stock unit holder to elect, the conditions and dates upon which the shares underlying the vested restricted stock units will be issued (subject to compliance with the deferred compensation requirements of Section 409A of the Code). Restricted stock units may be paid in cash, shares, or both, as determined by the Administrator. On the distribution dates, we will transfer to the participant one unrestricted, fully transferable share of our common stock (or the fair market value of one such share in cash) for each restricted stock unit scheduled to be paid out on such date and not previously forfeited. Restricted stock units may constitute, or provide for a deferral of compensation, subject to Section 409A of the Code and there may be certain tax consequences if the requirements of Section 409A of the Code are not met.

Restricted stock may be granted pursuant to the Amended and Restated 2011 Plan. A restricted stock award is the grant of shares of our common stock at a price determined by the Administrator, if any, to be paid by the holder to us with respect to any restricted stock award, with cash, services or any other consideration that the Administrator deems acceptable, subject to the requirements of law, and which is nontransferable and may be subject to substantial risk of forfeiture until specific conditions are met. Conditions may be based on continuing service to us or any of our subsidiaries or affiliates or achieving one or more of the performance criteria listed below, or other specific criteria. During the period of restriction, participants holding shares of restricted stock have full voting and dividend rights with respect to such shares unless otherwise provided by the Administrator. In addition, with respect to a share of restricted stock with performance-based vesting, dividends which are paid prior to vesting shall only be paid out to the holder to the extent that the performance-based vesting conditions are

 

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subsequently satisfied and the share of restricted stock vests. Restricted stock generally may be repurchased by us at the original purchase price, if any, or forfeited, if the vesting conditions and other restrictions are not met. The restrictions will lapse in accordance with a schedule or other conditions determined by the Administrator.

Dividend equivalents may be granted pursuant to the Amended and Restated 2011 Plan, except that no dividend equivalents may be payable with respect to options or stock appreciation rights pursuant to the Amended and Restated 2011 Plan. A dividend equivalent is the right to receive the equivalent value of dividends paid on shares. Dividend equivalents that are granted by the Administrator are credited as of dividend payments dates during the period between the date an award is granted and the date such award vests, is exercised, is distributed or expires, as determined by the Administrator. Such dividend equivalents will be converted to cash or additional shares of our common stock by such formula, at such time and subject to such limitations as may be determined by the Administrator. In addition, dividend equivalents with respect to an award with performance-based vesting that are based on dividends paid prior to vesting shall only be paid out to the holder to the extent that the performance-based vesting conditions are subsequently satisfied and the award vests.

Stock payments may be granted pursuant to the Amended and Restated 2011 Plan. A stock payment is a payment in the form of shares of our common stock or an option or other right to purchase shares, as part of a bonus, deferred compensation or other arrangement. The number or value of shares of any stock payment will be determined by the Administrator and may be based on continuing service with us or any of our subsidiaries or affiliates or achieving one or more of the performance criteria listed below, or other specific criteria determined by the Administrator. Except as otherwise determined by the Administrator, shares underlying a stock payment which is subject to a vesting schedule or other conditions set by the Administrator will not be issued until those conditions have been satisfied. Stock payments may, but are not required to, be made in lieu of base salary, bonus, fees or other cash compensation otherwise payable to any individual who is eligible to receive awards.

Deferred stock units may be granted pursuant to the Amended and Restated 2011 Plan. The number of deferred stock units will be determined by the Administrator and may be based on continuing service with us or any of our subsidiaries or affiliates or achieving one or more of the performance criteria listed below, or other specific criteria determined by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Each deferred stock unit entitles its holder to receive one share of common stock on the date the deferred stock unit becomes vested or upon a specified settlement date thereafter. Except as otherwise determined by the Administrator, shares underlying a deferred stock unit award which is subject to a vesting schedule or other conditions set by the Administrator will not be issued until those conditions have been satisfied. Unless otherwise provided by the Administrator, a holder of deferred stock units shall have no rights as a stockholder with respect to such deferred stock units until the award of deferred stock units has vested and any other applicable conditions and/or criteria have been satisfied and the shares of common stock underlying the award have been issued to the holder.

Deferred stock may be granted pursuant to the Amended and Restated 2011 Plan. Deferred stock provides for the deferred issuance to the holder of shares of our common stock. The number of shares of deferred stock will be determined by the Administrator and may be based on continuing service with us or any of our subsidiaries or affiliates or achieving one or more of the performance criteria listed below, or other specific criteria determined by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Except as otherwise determined by the Administrator, shares underlying a deferred stock award which is subject to a vesting schedule or other conditions set by the Administrator will not be issued until those conditions have been satisfied. Deferred stock may constitute, or provide for a deferral of compensation, subject to Section 409A of the Code and there may be certain tax consequences if the requirements of Section 409A of the Code are not met.

Performance awards may also be granted pursuant to the Amended and Restated 2011 Plan. Performance awards may be granted in the form of cash bonus awards, stock bonus awards, performance awards or incentive awards that are paid in cash, shares, equity awards or a combination of cash, shares or equity awards. The value of performance awards may be linked to any one or more of the performance criteria listed below, or other specific criteria determined by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Performance awards may be payable upon the attainment of pre-established performance goals based on one or more of the performance criteria listed below, or other specific criteria determined by the Administrator. The goals are established and evaluated by the Administrator and may relate to performance over any periods as determined by the Administrator. The Administrator will also determine whether performance awards are intended to be performance-based compensation within the meaning of Section 162(m)

 

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of the Code. Following is a brief discussion of the requirements for awards to be treated as performance-based compensation within the meaning of Section 162(m) of the Code.

Performance-based compensation under Section 162(m). The Compensation Committee may grant awards to employees who are or may be “covered employees,” as defined in Section 162(m) of the Code, that are intended to be performance-based compensation within the meaning of Section 162(m) of the Code in order to preserve the deductibility of these awards for federal income tax purposes. Under the Amended and Restated 2011 Plan, these performance-based awards may be stock, equity, or cash awards or a combination. Participants are only entitled to receive payment for a Section 162(m) performance-based award for any given performance period to the extent that pre-established performance goals set by our Compensation Committee for the period are satisfied. These pre-established performance goals must be based on one or more of the following performance criteria:

 

  ·   

net earnings (either before or after one or more of the following: (A) interest, (B) taxes, (C) depreciation and (D) amortization);

 

  ·   

gross or net sales or revenue;

 

  ·   

net income (either before or after taxes);

 

  ·   

adjusted net income;

 

  ·   

operating earnings or profit;

 

  ·   

cash flow (including, but not limited to, operating cash flow and free cash flow);

 

  ·   

return on assets;

 

  ·   

return on capital;

 

  ·   

return on stockholders’ equity;

 

  ·   

total stockholder return;

 

  ·   

return on sales;

 

  ·   

gross or net profit or operating margin;

 

  ·   

costs;

 

  ·   

funds from operations;

 

  ·   

expenses;

 

  ·   

working capital;

 

  ·   

earnings per share;

 

  ·   

adjusted earnings per share;

 

  ·   

price per share;

 

  ·   

regulatory body approval for commercialization of a product;

 

  ·   

implementation or completion of critical projects;

 

  ·   

market share;

 

  ·   

economic value;

 

  ·   

non-acquired growth;

 

  ·   

new market entries;

 

  ·   

acquisition targets;

 

  ·   

treatment growth;

 

  ·   

patient growth;

 

  ·   

center growth;

 

DAVITA HEALTHCARE PARTNERS INC. – 2014 Proxy Statement    27


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  ·   

clinical outcomes (including mortality rates) and processes;

 

  ·   

physician recruitment;

 

  ·   

physician retention;

 

  ·   

physician relations;

 

  ·   

employee turnover;

 

  ·   

employee relations;

 

  ·   

patient retention and satisfaction;

 

  ·   

improvements in reimbursement economics;

 

  ·   

commercial payor relationships and contract related targets;

 

  ·   

public policy efforts and investigation; and

 

  ·   

legal proceedings and litigation outcomes

any of which may be measured with respect to us, or any subsidiary, affiliate or other internal unit of ours, either (i) on an absolute or per share basis or (ii) in absolute terms, terms of growth or as compared to any incremental increase, or as compared to results of a peer group. The Compensation Committee will define in an objective fashion the manner of calculating the performance criteria it selects to use for such awards. With regard to a particular performance period, the Compensation Committee will have the discretion to select the length of the performance period, the type of performance-based awards to be granted, and the performance goals that will be used to measure the performance for the period. In determining the actual size of an individual performance-based award for a performance period, the Compensation Committee may reduce or eliminate (but not increase) the initial award. Generally, a participant will have to be employed by or providing services to us on the date the performance-based award is paid to be eligible for a performance-based award for any period.

Except as provided by the Compensation Committee, the achievement of each performance goal will be determined in accordance with U.S. generally accepted accounting principles, international financial reporting standards, or such other accounting principles or standards as may apply to our financial statements under the U.S. federal securities laws from time to time, to the extent applicable. At the time of grant, the Compensation Committee may provide that objectively determinable adjustments will be made for purposes of determining the achievement of one or more of the performance goals established for an award. Any such adjustments will be based on one or more of the following:

 

  ·   

items related to a change in accounting principles;

 

  ·   

items relating to financing activities;

 

  ·   

expenses for restructuring or productivity initiatives;

 

  ·   

other non-operating items;

 

  ·   

items related to acquisitions;

 

  ·   

items attributable to the business operations of any entity acquired by us during the performance period;

 

  ·   

items related to the disposal of a business or segment of a business;

 

  ·   

items related to discontinued operations that do not qualify as a segment of a business under applicable accounting standards;

 

  ·   

items attributable to any stock dividend, stock split, combination or exchange of shares occurring during the performance period;

 

  ·   

any other items of significant income or expense which are determined to be appropriate adjustments;

 

  ·   

items relating to unusual or extraordinary corporate transactions, events or developments;

 

  ·   

items related to amortization of acquired intangible assets;

 

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  ·   

items that are outside the scope of our core, on-going business activities;

 

  ·   

items related to acquired in-process research and development;

 

  ·   

items relating to changes in tax laws;

 

  ·   

items relating to major licensing or partnership arrangements;

 

  ·   

items relating to asset impairment charges;

 

  ·   

items relating to gains or losses for litigation, arbitration and contractual settlements; or

 

  ·   

items relating to any other unusual or nonrecurring events or changes in applicable laws, accounting principles or business conditions.

Payment Methods. The Administrator will determine the methods by which payments by any award holder with respect to any awards granted under the Amended and Restated 2011 Plan may be paid, the form of payment, including, without limitation: (1) cash or check; (2) shares of our common stock issuable pursuant to the award or held for such period of time as may be required by the Administrator in order to avoid adverse accounting consequences and having a fair market value at the time of delivery equal to the aggregate payments required; (3) delivery of a notice that the award holder has placed a market sell order with a broker with respect to shares of our common stock then issuable upon exercise or vesting of an award, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to us in satisfaction of the aggregate payments required; provided that payment of such proceeds is then made to us upon settlement of such sale; or (4) other form of legal consideration acceptable to the Administrator. However, no participant who is a member of the Board of Directors or an “executive officer” of the Company within the meaning of Section 13(k) of the Exchange Act will be permitted to make payment with respect to any awards granted under the Amended and Restated 2011 Plan, or continue any extension of credit with respect to such payment in any method which would violate the prohibitions on loans made or arranged by us as set forth in Section 13(k) of the Exchange Act. Only whole shares of common stock may be purchased or issued pursuant to an award. No fractional shares shall be issued and the Administrator shall determine, in its sole discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding down.

Vesting and Exercise of an Award. The applicable award agreement governing an award will contain the period during which the right to exercise the award in whole or in part vests, including the events or conditions upon which the vesting of an award will occur or may accelerate. No portion of an award which is not vested at the holder’s termination of service with us will subsequently become vested, except as may be otherwise provided by the Administrator in the agreement relating to the award or by action following the grant of the award.

Generally, an option or stock appreciation right may only be exercised while such person remains an employee or non-employee director of us or one of our subsidiaries or affiliates or for a specified period of time (up to the remainder of the award term) following the holder’s termination of service with us or one of our subsidiaries or affiliates. An award may be exercised for any vested portion of the shares subject to such award until the award expires. Upon the grant of an award or following the grant of an award, the Administrator may provide that the period during which the award will vest or become exercisable will accelerate, in whole or in part, upon the occurrence of one or more specified events, including, a change in control or a holder’s termination of employment or service with us or otherwise.

Transferability. No award under the Amended and Restated 2011 Plan may be transferred other than by will or the then applicable laws of descent and distribution or, subject to the consent of the Administrator, pursuant to a domestic relations order, unless and until such award has been exercised or the shares underlying such award have been issued and all restrictions applicable to such shares have lapsed. No award will be subject to the debts or contracts of the holder or his successors in interest or shall be subject to disposition by any legal or equitable proceedings. During the lifetime of the holder of an award granted under the Amended and Restated 2011 Plan, only such holder may exercise such award unless it has been disposed of pursuant to a domestic relations order. After the holder’s death, any exercisable portion of an award may be exercised by his personal representative or any person empowered to do so under such holder’s will or the then applicable laws of descent and distribution until such portion becomes unexercisable under the Amended and Restated 2011 Plan or the applicable award agreement. Notwithstanding the foregoing, the Administrator may permit an award holder to transfer an award other than an ISO to any “family member” of the holder, as defined under the instructions for use of the Form S-8 Registration Statement under the Securities Act of 1933, subject to certain terms and conditions. Further, an

 

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award holder may, in a manner determined by the Administrator, designate a beneficiary to exercise the holder’s right and to receive any distribution with respect to any award upon the holder’s death, subject to certain terms and conditions.

Forfeiture, Recoupment and Clawback Provisions. Pursuant to its general authority to determine the terms and conditions applicable to awards under the Amended and Restated 2011 Plan, the Administrator shall have the right to provide, in an award agreement or otherwise, or to require a holder to agree by separate written instrument, that (a) (i) any economic benefit received by the holder upon any receipt or exercise of the award, or upon the receipt or resale of any shares of common stock underlying the award, must be paid to the Company, and (ii) the award shall terminate and any unexercised portion of the award shall be forfeited, if (x) a termination of service occurs within a specific time period following receipt or exercise, (y) the holder at any time, or during a specified time period, engages in any activity in competition with the Company, or which is contrary to the interests of the Company, or (z) the holder incurs a termination of service for “cause” (as determined in the Administrator’s discretion or as set forth in a written agreement between the Company and the holder); and (b) all awards (including any economic benefit received by the holder upon any receipt or exercise of any award or upon the receipt or resale of any shares of common stock underlying the award) shall be subject to the provisions of any recoupment or clawback policies implemented by the Company, including, without limitation, any recoupment or clawback policies adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder, to the extent set forth in such recoupment or clawback policies and/or in the applicable award agreement.

Adjustment Provisions

Certain transactions with our stockholders not involving our receipt of consideration, such as stock splits, spin-offs, stock dividends or certain recapitalizations may affect the shares or the share price of our common stock (which transactions are referred to collectively as equity restructurings). In the event that an equity restructuring occurs, the Administrator will equitably adjust the class of shares issuable and the maximum number and kind of shares of our common stock subject to the Amended and Restated 2011 Plan, and will equitably adjust outstanding awards as to the class, number of shares and price per share of our common stock. The Administrator will also adjust the number and kind of shares for which automatic grants are subsequently to be made to new and continuing non-employee directors pursuant to the Amended and Restated 2011 Plan. Other types of transactions may also affect our common stock, such as a dividend or other distribution, reorganization, merger or other changes in corporate structure. In the event that there is such a transaction, which is not an equity restructuring, and the Administrator determines that an adjustment to the Amended and Restated 2011 Plan and any outstanding awards would be appropriate to prevent any dilution or enlargement of benefits under the Amended and Restated 2011 Plan, the Administrator will equitably adjust the Amended and Restated 2011 Plan as to the class of shares issuable and the maximum number of shares of our common stock subject to the Amended and Restated 2011 Plan, as well as the maximum number of shares that may be issued to an employee during any calendar year, and will adjust any outstanding awards as to the class, number of shares, and price per share of our common stock in such manner as it may deem equitable.

In addition, if there is any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other distribution (other than normal cash dividends) of Company assets to stockholders, or other unusual or nonrecurring transactions or events, the Administrator may, in its discretion:

 

  ·   

provide for the termination of any award in exchange for an amount of cash (if any) and/or other property equal to the amount that would have been attained upon the exercise of such award or realization of the participant’s rights;

 

  ·   

provide for the replacement of any award with other rights or property selected by the Administrator in its sole discretion having an aggregate value not exceeding the amount that could have been attained upon exercise of such award or realization or the participant’s rights;

 

  ·   

provide that any surviving corporation (or its parent or subsidiary) will assume awards outstanding under the Amended and Restated 2011 Plan or will substitute similar awards for those outstanding under the Amended and Restated 2011 Plan, with appropriate adjustment of the number and kind of shares and the prices of such awards;

 

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  ·   

make adjustments (i) in the number and type of shares of common stock (or other securities or property) subject to outstanding awards or in the number and type of shares of restricted stock or deferred stock or (ii) to the terms and conditions of (including the grant or exercise price) and the criteria included in, outstanding awards or future awards;

 

  ·   

provide that awards may be exercisable, payable or fully vested as to shares of common stock covered thereby; or

 

  ·   

provide that any outstanding award cannot vest, be exercised or become payable after such event.

Amendment and Termination

The Board of Directors may terminate, amend or modify the Amended and Restated 2011 Plan at any time; however, except to the extent permitted by the Amended and Restated 2011 Plan in connection with certain changes in capital structure, stockholder approval must be obtained for any amendment to (i) increase the number of shares available under the Amended and Restated 2011 Plan, (ii) reduce the per share exercise price of the shares subject to any option or stock appreciation right below the per share exercise price as of the date the option or stock appreciation right was granted, and (iii) cancel any option or stock appreciation right in exchange for cash or another award when the option or stock appreciation right price per share exceeds the fair market value of the underlying shares.

Federal Income Tax Consequences

If an optionee is granted a non-qualified stock option under the Amended and Restated 2011 Plan, the optionee should not have taxable income on the grant of the option. Generally, the optionee should recognize ordinary income at the time of exercise in an amount equal to the fair market value of a share of our common stock at such time, less the exercise price paid. The optionee’s basis in the common stock for purposes of determining gain or loss on a subsequent sale or disposition of such shares generally will be the fair market value of our common stock at the time the optionee exercises such option. Any subsequent gain or loss will generally be taxable as a capital gain or loss. We or our subsidiaries or affiliates generally should be entitled to a federal income tax deduction at the time and for the same amount and at the same time as the optionee recognizes ordinary income.

A participant receiving ISOs will not recognize taxable income upon grant. Additionally, if applicable holding period requirements are met, the participant will not recognize taxable income at the time of exercise. However, the excess of the fair market value of our common stock received over the exercise or base price is an item of tax preference potentially subject to the alternative minimum tax. If stock acquired upon exercise of an ISO is held for a minimum of two years from the date of grant and one year from the date of exercise, the gain or loss (in an amount equal to the difference between the fair market value at the time of sale and the exercise or base price) upon disposition of the stock will be treated as a long-term capital gain or loss, and we will not be entitled to any deduction. If the holding period requirements are not met, the ISO will be treated as one that does not meet the requirements of the Code for ISOs and the tax consequences described for nonqualified stock options will apply.

The current federal income tax consequences of other awards authorized under the Amended and Restated 2011 Plan generally follow certain basic patterns: stock appreciation rights are taxed and deductible in substantially the same manner as nonqualified stock options; nontransferable restricted stock subject to a substantial risk of forfeiture results in income recognition equal to the excess of the fair market value over the price paid, if any, only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant); restricted stock units, stock-based performance awards, dividend equivalents and other types of awards are generally subject to tax at the time of payment based on the fair market value of the award at such time. Compensation otherwise effectively deferred is taxed when paid. In each of the foregoing cases, we will generally have a corresponding deduction at the time the participant recognizes income, subject to Section 162(m) of the Code with respect to covered employees.

 

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Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to certain “covered employees” in a taxable year to the extent that compensation to such covered employee exceeds $1,000,000. It is possible that compensation attributable to awards under the Amended and Restated 2011 Plan, when combined with all other types of compensation received by a covered employee from us, may cause this limitation to be exceeded in any particular year.

Qualified “performance-based compensation” is disregarded for purposes of the deduction limitation. In accordance with Treasury Regulations issued under Section 162(m), compensation attributable to stock awards will generally qualify as performance-based compensation if (1) the award is granted by a compensation committee composed solely of two or more “outside directors,” (2) the plan contains a per-employee limitation on the number of awards which may be granted during a specified period, (3) the plan is approved by the stockholders, and (4) under the terms of the award, the amount of compensation an employee could receive is based solely on an increase in the value of the stock after the date of the grant (which requires that the exercise or base price of the option is not less than the fair market value of the stock on the date of grant), and for awards other than options, established performance criteria that must be met before the award actually will vest or be paid.

The Amended and Restated 2011 Plan is designed to meet the requirements of Section 162(m); however, awards other than options and stock appreciation rights granted under the Amended and Restated 2011 Plan will only be treated as qualified performance-based compensation under Section 162(m) if the awards and the procedures associated with them comply with all other requirements of Section 162(m). There can be no assurance that compensation attributable to awards granted under the Amended and Restated 2011 Plan will be treated as qualified performance-based compensation under Section 162(m) and thus be deductible to us.

Equity Compensation Plan Information

The following table provides information about our common stock that may be issued upon the exercise of stock-settled stock appreciation rights, restricted stock units and other rights under all of our existing equity compensation plans as of December 31, 2013, which consisted of our 2011 Plan and our Employee Stock Purchase Plan. The material terms of these plans are described in Note 19 to the consolidated financial statements, which are part of our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Plan category    Number of
shares to be
issued upon
exercise of
outstanding
options,
warrants and
rights
    Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
     Number of shares
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
    

Total of
shares
reflected

in

columns

(a) and (c)

 
   (a)     (b)      (c)      (d)  

Equity compensation plans approved by

stockholders

     13,922,690   $ 42.29         37,221,758         51,144,448   

Equity compensation plans not approved by

stockholders

                              

TOTAL

     13,922,690   $ 42.29         37,221,758         51,144,448   
  *

Includes 12,956,094 stock-settled stock appreciation rights outstanding, with a weighted average base price of $45.44 per share and remaining contractual life of 2.8 years, as well as 966,596 restricted stock units outstanding.

The Board recommends a vote FOR the approval of the Amended and Restated 2011 Incentive Award Plan.

 

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Proposal 5    Stockholder Proposal Regarding the Board Chairmanship

We expect the following proposal to be presented by a stockholder at the annual meeting. The Board has recommended a vote AGAINST this proposal for the reasons set forth following the proposal. The name, address and share holdings of the stockholder proponent will be supplied promptly to a stockholder upon the Company’s receipt of an oral or written request. The Board disclaims any responsibility for the content of the proposal and the supporting statement, which are presented in the form received by the stockholder.

Stockholder Proposal and Supporting Statement

 

Independent Board Chairman

RESOLVED: Shareholders request that our Board of Directors to adopt a policy, and amend other governing documents as necessary to reflect this policy, to require the Chair of our Board of Directors to be an independent member of our Board. This independence requirement shall apply prospectively so as not to violate any contractual obligation at the time this resolution is adopted. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. The policy should also specify how to select a new independent chairman if a current chairman ceases to be independent between annual shareholder meetings.

When our CEO is our board chairman, this arrangement can hinder our board’s ability to monitor our CEO’s performance. Many companies already have an independent Chairman. An independent Chairman is the prevailing practice in the United Kingdom and many international markets. This proposal topic won 50%-plus support at 5 major U.S. companies in 2013 including 73%-support at Netflix.

This topic is particularly important for DaVita because our board of directors needed greater independence to serve in a checks and balances role in regard to our Chairman/CEO Kent Thiry. Directors with long-tenure included John Nehra (13-years) and Peter Grauer (19-years). 10 to 15-years long-tenure detracts from a director’s independence. Plus Mr. Nehra chaired our executive pay committee ($65 million for Kent Thiry) and was on our nomination committee. And Mr. Grauer was on our executive pay committee and chaired our nomination committee.

This proposal should also be more favorably evaluated due to our Company’s clearly improvable corporate governance performance as reported in 2013:

GMI Ratings, an independent investment research firm, gave DaVita a D for executive pay – $65 million for Kent Thiry. GMI said DaVita could give long-term incentive pay to Mr. Thiry for below-median performance. Unvested equity pay would not lapse upon CEO termination.

Other limits on shareholder rights included:

 

  ·   

Our board’s unilateral ability to amend DaVita’s bylaws without shareholder approval

 

  ·   

Lack of fair price provisions to help insure that all shareholders are treated fairly

 

  ·   

Limits on the right of shareholders to take action by written consent

 

  ·   

The absence of confidential voting policies

GMI said the DaVita board had not formally acknowledged its responsibility in overseeing our company’s social impacts. It did not report on its sustainability policies and practices via the Global Reporting Initiative, a commonly used and highly effective standard for such reporting, nor had it become a voluntary signatory of the UN Global Compact, yet another commonly employed global standard for achieving and maintaining more effective sustainability practices. DaVita had not implemented OSHAS 18001 as its occupational health and safety management system, nor did it disclose its workplace safety record in its annual report.

Returning to the core topic of this proposal from the context of our clearly improvable corporate governance, please vote to protect shareholder value:

Independent Board Chairman - Proposal 5

 

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The Company’s Statement in Opposition to Proposal No. 5

 

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

We have a designated lead independent director, elected by and from the independent board members, whose broad duties and authority provide a counterbalance to the combined CEO/Co-Chairman role. Peter Grauer is our designated lead independent director, and his clearly delineated and comprehensive duties, include:

 

  ·   

presiding at all meetings of the Board at which the chairman is not present, including executive sessions of independent directors;

 

  ·   

serving as liaison between the co-chairmen and the independent directors;

 

  ·   

approving information sent to the Board, conferring with the CEO/Co-Chairman in setting and thereafter approving meeting agendas for the Board;

 

  ·   

facilitating discussions outside of scheduled Board meetings among the independent directors on key issues as required;

 

  ·   

deciding when to engage independent advisors for the Board or a Board Committee; and

 

  ·   

approving meeting schedules to assure that there is sufficient time for discussion of all agenda items.

As lead independent director, Mr. Grauer also has the authority to call meetings of the Board and the independent directors and, if requested by major stockholders, makes himself available for consultation and direct communication with them. Moreover, as chairman of the Nominating and Governance Committee, he has the authority to call meetings of the committee, whose primary purpose, as outlined in its charter, includes overseeing the evaluation of the Company’s management, including the CEO.

Our majority-independent Board and fully independent key committees are governed by established governance guidelines that prevent or address potentially problematic governance or management issues. We have a Board that is four-fifths independent and our key committees are entirely independent, including our Audit Committee, Compensation Committee and Nominating and Governance Committee. The Board’s independent members have unrestricted access and visibility into the Company’s operations, provide independent oversight of the CEO and management performance, consistently and constructively challenge our CEO and management, and meet regularly without management present. The Board also engages independent consultants to assist them when needed.

The Board is committed to sound corporate governance and accountability to our stockholders. The Corporate Governance Guidelines, available on the Company’s website, which were established by and govern our Board, are reviewed and updated regularly to ensure the promotion of stockholder interests and best governance practices. Additionally, the Company has taken further measures to promote stockholder interests, including eliminating our non-stockholder-approved stockholder rights plan or “poison pill,” providing the right for 10% of our stockholders to call a special meeting of stockholders, electing our directors by majority vote, and adopting an executive compensation recoupment or “clawback” policy. All of our directors are elected annually and are removable with or without cause, we have no stockholder supermajority approval requirements other than as required by law, and we have a share ownership policy that extends to the members of our Board in addition to Company management at the level of vice president and above.

We have an experienced CEO who strikes the appropriate balance between active leadership and independent oversight of the business. Mr. Thiry currently serves as both our chief executive officer and, along with Dr. Margolis, co-chairman of the Board. The Board currently believes that Mr. Thiry’s combined role is appropriate and is in the best interests of the Company and our stockholders, based on Mr. Thiry’s nearly 15 years of experience with the Company, his deep institutional knowledge and experience, and the strong performance of the Company. We believe having an executive in the boardroom who possesses deep experience and understanding about the Company’s operations and the industry, with authority and access to management, contributes to the highest level of informed judgment, effective feedback and oversight. The combined role strikes the appropriate balance between active leadership and independent oversight of business, has facilitated the efficient and effective functioning of the Board, and allows for the pursuit of a unified vision for the Company, without compromising management accountability. This structure has also contributed to the Company’s outstanding financial performance, producing a three-year total stockholder return of 82.4%, which is 25.6% above

 

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the S&P 500 total returns, and a total stockholder return during Mr. Thiry’s tenure in the combined role of CEO and chairman that places the Company near the very top of all companies in the S&P 500 during that timeframe.

The Board can best protect its stockholders’ interests when it is able to retain flexibility in determining the best Board leadership depending upon the facts and circumstances existing from time to time. The stockholder proposal would mandate a fixed, inflexible, one-size-fits-all leadership structure for the Company and would prevent the Board, including future boards, from determining the most appropriate leadership structure for the Company. In our view, the Board is best positioned to determine the appropriate leadership structure for our Company, and it can most effectively perform its leadership responsibilities and best protect its stockholders’ interests if it can exercise its judgment with regard to leadership structure in light of the challenges facing the Company from time to time and the composition of management and the Board at any given time.

The Board believes strongly that Company management should be accountable to the Board and does not believe that the current leadership structure compromises accountability or Board independence. The Board and our Nominating and Governance Committee have taken affirmative steps to facilitate accountability to stockholders and independent oversight of management.

*********************************

For all of the foregoing reasons, the Board believes that the Company’s current leadership structure is consistent with good governance as well as with a significant portion of major U.S. companies. In his Statement of Support, the proponent notes that “this proposal topic won 50%-plus support at 5 major U.S. companies in 2013” but failed to mention that it failed to pass at 53 other companies in that year. In addition, the proponent makes several specific comments attributable to a report by GMI Ratings, some of which are incorrect or arguably misleading, but failed to note that the GMI report stated that “the DaVita board appears to be generally well aligned with sustainable shareholder interest” and that “this rating falls in the average range for all the companies we rate, and generally reflects a low level of concern in most areas”.

For these reasons, the Board recommends that you vote AGAINST this proposal.

 

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SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the ownership of our common stock as of March 31, 2014 by (a) all persons known by us to own beneficially more than 5% of our common stock, (b) each of our directors and named executive officers, and (c) all of our directors and executive officers as a group. We know of no agreements among our stockholders which relate to voting or investment power over our common stock or any arrangement the operation of which may at a subsequent date result in a change of control of the Company. Where applicable, the figures presented in this Proxy Statement have been adjusted to reflect the two-for-one split of our common stock in the form of a stock dividend payable on September 6, 2013.

 

Name and address of beneficial owner(1)    Number of
shares
beneficially
owned
     Percentage of
shares
beneficially
owned
 

Warren E. Buffett(2)

Berkshire Hathaway Inc.(2)

1440 Kiewit Plaza

Omaha, Nebraska 68131

     36,461,294         17.0%   

The Vanguard Group, Inc.(3)

100 Vanguard Blvd.

Malvern, PA 19355

     12,888,702         6.0%   

Kent J. Thiry(4)

     1,365,550         *   

Dr. Robert J. Margolis(5)

     3,067,494         1.4%   

Javier J. Rodriguez(6)

     232,597         *   

Dennis L. Kogod(7)

     328,374         *   

Dr. Garry E. Menzel

             *   

James K. Hilger(8)

     31,476         *   

Kim M. Rivera(9)

     92,921         *   

Pamela M. Arway(10)

     57,898         *   

Charles G. Berg(11)

     69,406         *   

Carol Anthony (“John”) Davidson(12)

     5,701         *   

Paul J. Diaz(13)

     3,327         *   

Peter T. Grauer(14)

     127,166         *   

John M. Nehra(15)

     189,968         *   

Dr. William L. Roper(16)

     41,351         *   

Roger J. Valine(17)

     81,867         *   

All directors and executive officers as a group (20 persons)(18)

     5,946,323         2.7%   
*

Amount represents less than 1% of our common stock.

(1)

Unless otherwise set forth in the following table, the address of each beneficial owner is 2000 16th Street, Denver, Colorado, 80202.

(2)

Based solely on information contained in a Schedule 13G/A No. 3 filed on February 14, 2014 with the SEC by Berkshire Hathaway Inc., a diversified holding company which Mr. Buffett may be deemed to control. Mr. Buffett and Berkshire Hathaway Inc. share voting and dispositive power over 36,461,294 shares of the Company’s common stock, which include shares beneficially owned by certain subsidiaries of Berkshire Hathaway Inc. as a result of being a parent holding company or control person.

(3)

Based solely upon information contained in Amendment No. 3 to Schedule 13G filed with the SEC on February 12, 2014, The Vanguard Group, Inc., an investment adviser, has sole voting power with respect to 290,260 shares, sole dispositive power with respect to 12,619,942 shares and shared dispositive power with respect to 268,760 shares.

(4)

Includes 228,050 shares held in a family trust and 1,100,000 shares issuable upon the exercise of SSARs and 37,500 restricted stock units, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2014.

(5)

Represents 3,067,494 shares held in family trusts.

(6)

Includes 161,333 shares issuable upon the exercise of SSARs and 7,000 restricted stock units, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2014.

 

 

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(7)

Includes 268,750 shares issuable upon the exercise of SSARs and 18,750 restricted stock units, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2014.

(8)

Includes 18,334 shares issuable upon the exercise of SSARs and 1,666 restricted stock units, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2014.

(9)

Includes 90,000 shares issuable upon the exercise of SSARs and 1,111 restricted stock units, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2014.

(10)

Includes 48,000 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2014, and 225 vested and outstanding restricted stock units.

(11)

Includes 48,000 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2014, and 194 vested and outstanding restricted stock units.

(12)

Includes 356 vested and outstanding restricted stock units.

(13)

Includes 194 vested and outstanding restricted stock units.

(14)

Includes 108,000 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2014, and 3,356 vested and outstanding restricted stock units.

(15)

Includes 81,643 shares held in a family trust and 108,000 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2014, and 325 vested and outstanding restricted stock units.

(16)

Includes 36,000 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2014, and 356 vested and outstanding restricted stock units.

(17)

Includes 66,000 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2014, and 194 vested and outstanding restricted stock units.

(18)

Includes 2,289,829 shares issuable upon the exercise of SSARs and 71,753 restricted stock units, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2014, of which 5,200 restricted stock units are vested and outstanding as of March 31, 2014.

 

 

 

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Information Concerning Our Executive Officers

 

Name    Age    Position

Kent J. Thiry

   58    Co-Chairman of the Board and Chief Executive Officer

Dr. Robert J. Margolis

   68    Co-Chairman of the Board

Javier J. Rodriguez

   43    Chief Executive Officer, Kidney Care

Michael D. Staffieri

   40    Chief Operating Officer, Kidney Care

Dr. Craig E. Samitt

   49    Chief Executive Officer, HealthCare Partners

Dennis L. Kogod

   54    Chief Operating Officer, HealthCare Partners

Dr. Garry E. Menzel

   49    Chief Financial Officer

James K. Hilger

   52    Chief Accounting Officer

Kim M. Rivera

   45    Chief Legal Officer

Jeanine M. Jiganti

   54    Chief Compliance Officer

LeAnne M. Zumwalt

   55    Group Vice President, Purchasing and Public Affairs

Laura A. Mildenberger

   55    Chief People Officer, Kidney Care

Our executive officers are appointed by, and serve at the discretion of, the Board. Set forth below is a brief description as of March 31, 2014 of the business experience of all executive officers other than Mr. Thiry and Dr. Margolis, who are also directors and whose business experience is set forth above in the section of this Proxy Statement entitled “Information Concerning Members of the Board Standing for Reelection.”

Javier J. Rodriguez became our chief executive officer, Kidney Care in March 2014. Since joining the Company in 1998, Mr. Rodriguez has served in a number of other different capacities. From February 2012 to March 2014, he served as our president. From April 1, 2006 thru February 2012, he served as our senior vice president. Before that, from 2000 to 2006 he served as a vice president of operations and payor contracting. Mr. Rodriguez joined the Company in 1998 as a director of value management. Prior to joining the Company, Mr. Rodriguez worked for Baxter Healthcare Corporation in Finance from 1995 to 1996. He also previously served as director of operations for CBS Marketing Inc. in Mexico City.

Michael D. Staffieri became our chief operating officer, Kidney Care, in February 2014. From July 2011 to February 2014, he served as a senior vice president, Kidney Care. From March 2008 to July 2011, he served as our vice president of operations and new center development. Mr. Staffieri joined the Company in July 2000 and has served in several other different roles. Prior to joining us, Mr. Staffieri worked for Arthur Andersen LLP in Finance from 1999 to 2000.

Dr. Craig E. Samitt became our chief executive officer of our integrated care business, HealthCare Partners (“HCP”), in March 2014. He joined us in September 2013 as executive vice president of HCP. In November 2013, he became HCP’s president in which role he continues to serve, in addition to being its chief executive officer. Dr. Samitt is also serving as a commissioner for the Medicare Payment Advisory Commission, commonly known as MedPAC, which advises Congress on Medicare policies. Dr. Samitt has served as a commissioner since May 2012. Prior to joining us, he served as the president and chief executive officer of Dean Health Systems, Inc. from September 2006 to August 2013. From May 2002 to September 2006, he served as chief operating officer of Fallon Clinic, Inc. (now Reliant Medical Group). From November 2001 to May 2002, he served as a consultant and interim executive to Southwind Health Partners. From December 1999 to May 2001, he served as senior vice president for marketing, sales and customer service of Harvard Pilgrim Health Care. From May 1995 to December 1999, he served in a number of capacities for Harvard Vanguard Medical Associates including executive director of their largest ambulatory care center, corporate director of the internal medicine department, and chief of internal medicine. He is a fellow of the American College of Physicians.

Dennis L. Kogod became chief operating officer, HealthCare Partners, in March 2014. From January 2009 to March 2014, he served as our chief operating officer, and prior to that, he served as our president-west beginning in October 2005. From January 2004 until joining us, Mr. Kogod served as president and chief operating officer-west of Gambro Healthcare, Inc., which we acquired in October 2005. From July 2000 to January 2004, Mr. Kogod served as president, west division of Gambro Healthcare, Inc. From June 1999 to July 2000, Mr. Kogod was president of Teleflex Medical Group, a medical original equipment manufacturer of medical delivery systems. From

 

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January 1996 to June 1999, Mr. Kogod was corporate vice president of Teleflex Surgical Group, a surgical device and service organization. Mr. Kogod previously served on the board of Arbios Systems, Inc., a medical device and cell-based therapy company.

Dr. Garry E. Menzel became our chief financial officer in November 2013 and served as our senior vice president, finance from September 2013 to November 2013. From December 2010 to June 2013, Dr. Menzel served as chief operating officer of Regulus Therapeutics Inc., a biopharmaceutical company. From August 2008 to November 2010, Dr. Menzel served as their executive vice president for both finance and corporate development. From November 2004 to April 2008, Dr. Menzel served as managing director and global head of life sciences with Credit Suisse Group AG, an investment banking firm. From August 1994 to August 2004, Dr. Menzel served as managing director and global head of biotechnology with The Goldman Sachs Group, Inc., an investment banking firm.

James K. Hilger served as our interim chief financial officer from April 2012 until November 2013. Mr. Hilger continues to serve as our chief accounting officer, a position he has held since April 2010. Prior to April 2010, Mr. Hilger served as our vice president and controller since May 2006, after having served as our vice president, finance beginning in September 2005. Mr. Hilger was our acting chief financial officer from November 2007 through February 2008. From September 2003 to September 2005, Mr. Hilger served as vice president, finance and administration and chief financial officer of Pyramid Breweries, a brewer of specialty beverages. From December 1998 to July 2003, Mr. Hilger served as chief executive officer and chief financial officer of WorldCatch, Inc., a seafood industry company. From 1987 until joining WorldCatch, Inc., Mr. Hilger held a variety of senior financial positions in the food industry. Mr. Hilger began his career in public accounting with Ernst & Whinney.

Kim M. Rivera became our chief legal officer in July 2011. From January 2010 to December 2013, she served as our corporate secretary. From January 2010 to July 2011, she also served as our vice president and general counsel. Prior to joining us, Ms. Rivera served as vice president and associate general counsel of The Clorox Company, a consumer products company, from February 2006 to November 2009. From August 2004 to February 2006, Ms. Rivera served as vice president law and chief litigation counsel to Rockwell Automation, Inc., a provider of industrial automation control and information solutions. From November 1999 to August 2004, she served as general counsel to Rockwell’s Automation Control and Information Group. Prior to joining Rockwell, Ms. Rivera was an attorney at the law firm of Jones Day.

Jeanine M. Jiganti became our chief compliance officer in March 2013. From July 2012 to March 2013, she served as our vice president, international chief compliance officer and deputy chief compliance officer. Prior to joining us, she served as chief compliance officer for Takeda Pharmaceuticals North America, a subsidiary of a Japanese pharmaceutical company, from October 2005 to March 2012. Additionally, she served as chief compliance officer for several of Takeda Pharmaceutical Company Limited’s affiliates including Takeda Global Research and Development and Takeda Pharmaceuticals International Operations. During Ms. Jiganti’s career, she has served as general counsel for the Illinois Department of Commerce and Economic Opportunity from September 2003 to September 2005, general counsel of Near North Insurance Company from September 2002 to September 2003 and vice president of litigation at Caremark Inc., a pharmaceutical services company, from 1996 to 2002.

LeAnne M. Zumwalt became our group vice president-purchasing and government affairs in July 2011. From January 2000 to July 2011, Ms. Zumwalt served as our vice president in many capacities. From January 2000 to October 2009, she served as our vice president, investor relations while having other responsibilities. From 1997 to 1999, Ms. Zumwalt served as chief financial officer of Vivra Specialty Partners, a privately held health care service and technology firm. From 1991 to 1997, Ms. Zumwalt held various executive positions, including chief financial officer, at Vivra Incorporated, a publicly held provider of dialysis services. Prior to joining Vivra Incorporated, Ms. Zumwalt was a senior manager at Ernst & Young, LLP. Ms. Zumwalt serves on the board of The Advisory Board Company.

Laura A. Mildenberger became our chief people officer, Kidney Care, in March 2014. From July 2008 to March 2014, she served as our chief people officer. Ms. Mildenberger joined us in October 2001 as vice president of operations. Prior to joining us, Ms. Mildenberger served as vice president of operations for the western U.S. for Matrix Rehabilitation, a physical therapy outpatient company, from March 2000 to October 2001. From 1993 to 2000, Ms. Mildenberger served as a general manager for NovaCare Outpatient Rehabilitation, a provider of physical and occupation therapy services. From 1988 to 1993, Ms. Mildenberger was the executive vice president/principal of Worker Rehabilitation Services, a multi-site physical rehabilitation company. Ms. Mildenberger began her career as an occupational therapist at the Mayo Clinic.

None of the executive officers has any family relationship with any other executive officer or with any of our directors.

 

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires “insiders,” including our executive officers, directors and beneficial owners of more than 10% of our common stock, to file reports of ownership and changes in ownership of our common stock with the SEC and the NYSE, and to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received by us, or written representations from reporting persons, we believe that our insiders complied with all applicable Section 16(a) filing requirements during 2013, except that one Form 4 was inadvertently filed late for Ms. Mildenberger relating to a single transaction to acquire shares of the Company’s common stock, and two Forms 4 were inadvertently filed late for Messrs. Berg, Grauer and Roper and Ms. Arway, relating to two separate transactions to acquire shares of the Company’s common stock.

 

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COMPENSATION DISCUSSION AND ANALYSIS

Table of Contents

 

COMPENSATION DISCUSSION AND ANALYSIS

     41   

Executive Summary

     42   

Our Business

     42   

Response to 2013 Say-on-Pay Vote

     43   

Our Compensation Design & Philosophy

     51   

2013 Financial and Performance Highlights

     51   

Linking 2013 NEO Compensation to Performance

     52   

Stockholder Interest Alignment

     54   

Key Features of Our Executive Compensation Program

     54   

Elements of Compensation

     55   

Base Salary

     55   

Annual Performance-Based Cash Compensation

     56   

Long-Term Incentive Program

     58   

Personal Benefits and Perquisites

     61   

Deferred Compensation Programs

     62   

Severance and Change of Control Arrangements

     62   

Process For Determining NEO Compensation

     62   

Role of Independent Compensation Committee

     62   

Role of Independent Compensation Consultant

     64   

Market Competitiveness

     64   

Risk Considerations in Our Compensation Program

     67   

Compensation Policies and Practices

     67   

Management Share Ownership Policy

     67   

Policy Regarding Clawback of Bonuses and Incentive Compensation

     67   

Tax and Accounting Considerations

     68   

 

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Compensation Discussion and Analysis Information

This Compensation Discussion and Analysis (the “CD&A”) describes our executive compensation program for the following named executive officers (“NEOs”):

 

NEO    TITLE

Kent J. Thiry

   Co-Chairman of the Board and Chief Executive Officer (“CEO”)

Javier J. Rodriguez

   Chief Executive Officer, Kidney Care

Dennis L. Kogod

   Chief Operating Officer, HealthCare Partners

Dr. Garry E. Menzel*

   Chief Financial Officer

James K. Hilger**

   Chief Accounting Officer

Kim M. Rivera

   Chief Legal Officer
*

Dr. Menzel served as the Company’s senior vice president finance, from September 9, 2013 through November 6, 2013 and became the Company’s chief financial officer effective November 7, 2013.

**

Mr. Hilger served as the Company’s interim chief financial officer from April 16, 2012 through November 6, 2013.

Executive Summary

Our Business

 

The Company consists of two major divisions, Kidney Care and HealthCare Partners (“HCP”). Our Kidney Care division is comprised of our U.S. dialysis and related lab services business, various other ancillary services and strategic initiatives, including our international dialysis operations, and our corporate level expenses.

Our largest line of business is our U.S. dialysis and related lab services business, which is a leading provider of kidney dialysis services in the U.S. As of December 31, 2013, we operated or provided administrative services through a network of 2,074 outpatient dialysis centers in the U.S., serving approximately 163,000 patients in 45 states, the District of Columbia and Puerto Rico. We also provide acute inpatient dialysis services in approximately 1,000 hospitals. In 2013, our overall network of U.S. outpatient dialysis centers increased by 120 centers primarily as a result of opening new centers and acquisitions. In addition, the overall number of patients that we serve in the U.S. increased by approximately 6.3% compared to 2012.

Our other major line of business is HCP, a patient- and physician-focused integrated health care delivery and management company. HCP has nearly three decades of providing cost-effective coordinated, outcomes-based medical care. Through capitation contracts with some of the nation’s leading health plans, as of December 31, 2013 HCP had approximately 764,000 members under its care in southern California, central and south Florida, southern Nevada, central New Mexico and central Arizona. In addition to its managed care business, HCP provides care in all of its markets, except Arizona, to over 472,000 patients whose health coverage is structured on a fee-for-service basis, including patients enrolled through traditional Medicare and Medicaid programs, preferred provider organizations and other third party payors.

The patients of HCP’s associated physicians, physician groups and independent practice associations benefit from an integrated approach to medical care that places the physician at the center of patient care. As of December 31, 2013, HCP delivered services to its members via a network of over 3,000 associated group and other network primary care physicians, 204 network hospitals, and several thousand associated group and network specialists. Together with hundreds of case managers, registered nurses and other care coordinators, these medical professionals utilize a comprehensive information technology system, sophisticated risk management techniques and clinical protocols to provide high-quality, cost-effective care to HCP’s members.

The design of our 2013 executive compensation program is best understood by evaluating it in the context of the business environment in which we currently operate. This includes increasing regulation by numerous federal, state and local government entities, reductions in reimbursements under federal and state healthcare programs, including Medicare and Medicaid, continued downward pressure on our commercial payment rates, and the incorporation of HCP.

 

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Response to 2013 Say-on-Pay Vote

 

We value our stockholders’ feedback regarding our executive compensation policies and practices, and we are committed to providing our stockholders the opportunity for a “Say-on-Pay” vote annually.

In June 2013, approximately 60% of the votes cast by stockholders at the annual meeting were voted in favor of our named executive officers’ compensation. Although a majority of our stockholders approved our named executive officers’ compensation for 2012, we engaged in substantial outreach efforts to better understand stockholders’ votes on our executive compensation program. We reached out to our largest 30 institutional investors, and were able to hold discussions with 17 of our largest stockholders representing approximately 50% of the Company’s outstanding voting shares.

We also spoke with two influential stockholder advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis & Co. We reviewed with each of ISS and Glass Lewis the feedback we received from our stockholders, and discussed with them specific areas of concern regarding our executive compensation program, which they raised in their reports analyzing our 2013 annual meeting proxy statement.

In December 2013, the Board and the Compensation Committee reviewed the results of our say-on-pay vote, including feedback from our large institutional stockholders that were willing to share the reasons for their say-on-pay vote. In January 2014, the Board and the Compensation Committee approved the rotation off of the Compensation Committee of the chair and appointed Ms. Arway as the new chair of the Compensation Committee. The Compensation Committee discussed and developed various proposed modifications to our executive compensation program for 2014 and beyond. The Compensation Committee then requested that management again reach out to our largest institutional investors to obtain further feedback regarding the proposed modifications to our executive compensation program to ensure that the proposed changes then contemplated by the Compensation Committee were in step with stockholders’ feedback. We reached out to our largest 30 institutional investors and were able to hold discussions with 17 of our stockholders representing approximately 50% of the Company’s voting shares.

During these discussions, our stockholders expressed general satisfaction with the Company’s performance and our executive compensation program. Our stockholders expressed appreciation for our continued level of stockholder outreach, and were supportive of the changes we were then contemplating to our executive compensation program for 2014. Based on the positive feedback we received from our stockholders, we continued working on revisions, performance metrics and goals for our executive compensation program. Taking the vote results and stockholder feedback into account, and considering trends in executive compensation and the interests of our stockholders, the Compensation Committee adopted substantial changes to our executive compensation structure in March of this year. While stockholder feedback varied, the most frequently cited stockholder concerns as well as the changes we have adopted are summarized below. It is important to note that the impact of most of these changes will not be reflected in the compensation of our named executives reported in the 2013 Summary Compensation Table until our 2014 executive compensation is reported in our 2015 proxy statement, since the decisions relating to fiscal 2013 compensation reported in this Proxy Statement were made before our 2013 advisory vote on executive compensation.

 

Investor Feedback    Response by the Board of Directors and the
Compensation Committee effective 2014
A compensation committee chair must be and appear to be independent, and should not have additional transactions outside of his or her role in overseeing the CEO that may give rise to independence questions.    The Compensation Committee and the Board engage in rigorous discussion and evaluation of CEO and executive compensation, including consulting with an outside independent consultant. Likewise, the Audit Committee reviews and considers all transactions in its evaluation of director independence. In addition to the foregoing practices, the Board of Directors rotated Board Committee assignments in 2014.
     In January 2014, the Board of Directors appointed Pamela M. Arway to the Compensation Committee and appointed her as its chair, and John M. Nehra rotated off the Compensation Committee. This change was made prior to the Compensation Committee making any decisions with respect to our 2013 executive bonuses or our revised 2014 executive compensation structure and equity grants.

 

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While stockholders were generally satisfied with the CEO’s and Company’s performance, some expressed concern that the level of CEO compensation seemed excessive.   

In 2012, the CEO’s aggregate equity grant value of approximately $20.1 million included equity grants related directly to the HCP acquisition. In 2013, our CEO’s total compensation decreased 36.2% from $26.8 million to approximately $17.1 million, primarily due to reduced equity compensation.

 

We also evaluated our CEO’s maximum bonus opportunity after reviewing the maximum payout range of our self-selected peer group and ISS’s projected peer group and accordingly reduced our CEO’s 2014 maximum payout from 4.2 times to 3.0 times his base salary. This reduction in our CEO’s maximum bonus opportunity aligns more closely with our peer group, and this maximum bonus remains subject to the Compensation Committee’s and Board’s negative discretion.

 

The equity grant value for the CEO decreased from an annual average of $14.8 million (based on the awards made to our CEO in 2013, 2012 and 2011, respectively), to a target of $9.8 million for 2014.

The Company should incorporate a combination of short-term and long-term incentives tied to value creation for stockholders.   

The Compensation Committee has implemented a combination of short-term and long-term metrics that align pay with creation of long-term stockholder value. We shifted our short-term and long-term incentive criteria to more performance-based metrics, including substantially reducing the percentage of equity awards that are subject to time-vesting only or a single performance metric. We conducted a comprehensive review of our incentive programs. Upon completion of that review, the Compensation Committee approved a new structure for short-term and long-term incentive awards granted beginning in fiscal year 2014. The new structure reflects the operating results of Kidney Care and HCP, and increases the emphasis on performance-based compensation that aligns with our strategic and financial objectives in creating stockholder value.

 

The annual bonuses granted to each executive upon achievement of the performance metrics remain further subject to the Board’s negative discretion.

 

The Compensation Committee adjusted long term equity compensation to a combination of stock-settled stock appreciation rights and performance stock units. At least 50% of the CEO’s equity awards are in the form of performance stock units, and at least 25% of the other executive officers’ awards are in the form performance stock units. Performance stock units are restricted stock grants that are performance-based and primarily tied to long-term value creation. Relative total stockholder return makes up 50% of these performance stock units for close alignment with stockholder value creation.

 

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Stockholders would like to see more challenging performance goals.   

Our historical approach used metrics to establish eligibility for maximum bonus amounts and provided absolute negative discretion in setting the amount actually paid, including the discretion to pay nothing at all. In light of stockholder and general preference for greater prospective predictability and transparency, however, we revised our approach as follows:

 

To be eligible for the full annual bonus amount, the performance goals now explicitly require:

 

·        Performance substantially better than the industry and/or the Company’s historical performance, and

·         Operating income performance that exceeds the high end of the public guidance range.

 

Likewise, considerable improvements to historical results and/or better than industry average performance must be achieved in order to realize the full number of performance-based restricted stock units. If there is no historical or industry comparison, the Compensation Committee selects goals it believes reflect successful long-term value creation.

Long-term incentive awards should be based on relative, not absolute, metrics, and should be based on a variety of performance metrics.   

The Compensation Committee established several criteria that determine the value of long-term incentive awards, including growth, clinical performance, new market entry and relative total stockholder return. Each executive officer who participates in the program has a minimum of three different goals, and in the case of the CEO, chief financial officer, and chief legal officer, five different goals.

 

To more closely align our long-term incentive program to stockholder value creation and make it more relative and less absolute, the Compensation Committee has set relative total stockholder return as our primary performance metric, representing 50% of the goals for performance stock units. Given the nature of some of the performance goals, described in further detail below, an appropriate basis for developing metrics relative to the industry or peers may not be available for each goal.

There appears to be an overlap in performance metrics for both short-term and long-term incentives.   

To address this feedback we received from our stockholders, we increased the percentage of non-overlapping metrics, mainly operating income, which will represent 50% to 70% for short-term performance, and relative total stockholder return, which will represent 50% for long-term performance.

 

We are first and foremost a caregiving company, and believe strong clinical care ultimately drives the success of the Company. Mortality is both a short-term and long-term performance metric because we believe it is the single best measure of the care we provide. Non-acquired growth is the other metric we use for both short-term and long-term incentives because it reflects one of our most important business objectives that also drives shareholder value – absolute and relative growth.

 

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NEW 2014 EXECUTIVE COMPENSATION STRUCTURE

2014 Short-Term Incentive Criteria. The Compensation Committee identified short-term criteria that emphasize our objectives as a Company, align with our public guidance to our investors and create a foundation for long-term value creation. Annual bonus payments will be made based on the short-term incentive criteria set forth in the chart below. Each criterion is assigned relative weights to determine the maximum percentage of the bonus potential for which each executive is eligible. After the amount of the bonus potential achieved is determined, the Board and the Compensation Committee may exercise negative discretion to reduce the annual bonus payment applicable to any of the performance criteria in the sections below based on changed or special circumstances, or factors that may not have been anticipated when the goals were set:

 

2014 Short-Term

Incentive Criteria

   Company-wide
Executives
  

Kidney Care

Division

Executives

  

HCP

Division
Executives

Adjusted Enterprise Operating Income

   70%    --    --

Adjusted Core Kidney Care Operating Income

   --    70%    --

Adjusted HCP Operating Income

   --    --    50%

Kidney Care Mortality

   10%    15%    --

Kidney Care Non Acquired Growth

   10%    15%    --

HCP Medicare Advantage Enrollment Growth

   10%    --    50%

Adjusted Operating Income. Adjusted operating income is operating income, adjusted for unusual or non-recurring items that are not considered indicative of normalized or consistent operating performance. These adjustments are designed to be the same as the adjustments we make in reporting our Adjusted Operating Income in our quarterly earnings releases (e.g., gains or losses on sale of assets other than in the ordinary course of business; large charges related to legal settlements, fines or judgments; large write-offs of assets).*

The Compensation Committee selected an operating income metric as the only short-term financial metric because it believes operating income is the best measure of overall financial success. The Compensation Committee also considered and reviewed total revenue and earnings per share (“EPS”) as possible financial metrics, but ultimately decided not to use them because they are not the best measures of Company operating performance. For example, growth in total revenue can be achieved without contributing to profitable incremental growth, and EPS can be financially engineered in a manner that does not result in high quality earnings and positioning for long-term value creation.

The percentage of maximum bonus (based on the weightings detailed in the table above) for which the participating executive officers are eligible is determined based on our public guidance to investors related to operating income at the time these criteria are approved by the Compensation Committee, according to the following grid:

 

2014 Adjusted Operating Income Relative
to Performance Range
  

% of Maximum Performance Based

Eligibility Amount

Bottom quartile or below range

   0%

Second quartile

   25%

Third quartile

   50%

Fourth quartile

   75%

Above high end of range

   100%

 

* See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the company’s Form 10-K for the year ended December 31, 2013 for reconciliation of this metric to the most closely comparable GAAP metric.

 

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The guidance ranges for fiscal year 2014 described below represent the actual adjusted operating income guidance ranges we provided with our fourth quarter 2013 earnings release on February 11, 2014 (“year-end guidance ranges”), the latest guidance ranges which were in effect at the time the Compensation Committee approved this performance condition. The actual performance ranges for this performance condition are based on and rationally relate to these year-end guidance ranges, and differ from these year-end guidance ranges only with respect to inclusion or exclusion of business unit subdivisions thereof, as described below.

Our year-end guidance range for adjusted consolidated operating income guidance was $1,725 million to $1,860 million. For our Kidney Care division, our year-end guidance range was $1,475 million to $1,550 million, excluding business lines for which such executives do not have direct oversight. For our HCP division, our year-end guidance range was $250 million to $310 million. The Compensation Committee established this performance condition based on these year-end guidance ranges, though the Company’s actual expectations and public guidance may change in the future.

Kidney Care Non-Acquired Growth. Non-Acquired Growth (“NAG”) is our measurement of relative competitive growth, which is one of the most important business objectives in our Kidney Care division that drives the success of the Company. NAG includes the effect of same-facility growth as well as growth from new or “de novo” facilities, which are built in response to capacity constraints at existing facilities to capture additional patient share in a proximate geography or otherwise position ourselves to serve additional nephrology groups. De novos also represent a higher return on capital than acquisition driven growth.

 

2014 Non-Acquired Growth(1),(2)    % of Maximum Performance Based Eligibility
Amount

4.30%

   50%

4.60%

   75%

4.90%

   100%
  (1)

Represents the performance criteria for NAG, which takes into account potential center closures and slowdown in near-term de novo activity that may result due to expected near-term reimbursement cuts under the Medicare program.

  (2)

For relative context, overall industry growth in 2011 (the latest information available as of 3/31/14) was 3.2% and the compound annual growth rate from 2007 to 2011 was 3.8%. The foregoing data are based on the 2013 Annual Data Report, United States Renal Data System, Table D.1 “Percentages and counts of reported ESRD patients: by treatment modality.” This includes the results of our Company, without which the industry growth rates would be lower.

For historical context, the following table presents our Kidney Care NAG for the last several years:

 

Year   2008   2009   2010   2011   2012   2013

NAG

  4.49%   4.74%   4.27%   4.65%   4.79%   5.06%

Kidney Care Mortality. We are first and foremost a caregiving company, and believe that mortality is the single best outcome measure of the care we provide in Kidney Care. Mortality is measured based on the number of dialysis patient deaths during the year divided by the quotient of total patient years divided by 100 (which has the effect of expressing the result as a number rather than a percentage). The criterion for mortality is 13.51 or less, and is an absolute criterion, not subject to partial eligibility for partial performance. That is, unlike the other performance measures listed for our short-term incentive criteria, if 2014 mortality is higher than 13.51, there will be no eligibility for any bonus attributable to this criterion.

The following table presents historical mortality for Kidney Care along with the criterion for 2014:

 

Year   2008   2009   2010   2011   2012   2013   2014

Mortality

  15.74   15.48   15.08   14.58   13.87   13.69   13.51(1)
  (1)

The performance goal identified for this criterion represents the same level of improvement from 2013 to 2014 as we experienced from 2012 to 2013. As mortality improves, it becomes increasingly difficult to achieve the same result as that in the prior year. However, the Compensation Committee chose to set the threshold at 13.51, thereby requiring the same level of improvement from 2013 to 2014 as we experienced from 2012 to 2013.

 

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At this point, we do not have a single clinical performance measure under the short-term incentive program for the HCP division that is comparable to mortality for the Kidney Care division. However, we continue to evaluate our HCP division and may develop one or more such clinical metrics for the HCP division’s short-term incentive criteria in future years.

Medicare Advantage Enrollment Growth. Growth in Medicare Advantage enrollment for the HCP division represents a relative competitive growth concept similar to what Kidney Care NAG represents. The Compensation Committee believes that this aligns closely with stockholder value creation because most of HCP’s profits come from Medicare Advantage members. The performance goal in this category is growth relative to the rest of the industry in the primary counties in which HCP operates in California, Florida and Nevada (legacy markets in which growth would be more difficult to achieve than the relatively new markets, Arizona and New Mexico), as detailed in the following grid:

 

HCP Medicare Advantage Enrollment Relative to
Rest of Industry
   % of Maximum Performance Based Eligibility
Amount

< 10% better

   0%

10% better

   25%

20% better

   50%

30% better

   75%

40% or more better

   100%

2014 Long-Term Incentive Criteria. The long-term incentive awards consist of SSARs (see page 59) and performance-based restricted stock units. These performance stock units vest subject to performance conditions and time. At least 50% of the CEO’s equity and 25% of each executive officer participant’s equity will be in the form of performance stock units, which fully vest in four years (50% at three years, and 50% at four years) so long as performance goals have been met. Based on the level of achievement, more or less than 100% of the targeted performance stock units can vest for that particular performance goal. The following grid details the percentage of the target performance stock units that are subject to the various long-term performance conditions:

 

2014 Long-Term Incentive Criteria   Company-wide
Executives
  Kidney Care
Executives
  HCP
Executives

Kidney Care Mortality

  12.5%   25.0%   --

Kidney Care Non Acquired Growth

  12.5%   25.0%   --

HCP New Market Success

  12.5%   --   25.0%

HCP New Market Adjusted Operating Income

  12.5%   --   25.0%

Relative Total Stockholder Return

  50.0%   50.0%   50.0%

Kidney Care Mortality. Kidney Care mortality is both a short-term and long-term performance goal because of its singular importance as a measure and driver of our success as a caregiving company. In order to make this a truly long-term performance goal, achievement against the goal will be measured based on mortality in 2016, and the number of performance stock units, as a percent of the target number of performance stock units, will be determined based on the following:

 

2016 Kidney Care Mortality

   Percent of Target Performance Stock Units(1)

13.35

   50%

13.15

   100%

12.65

   150%

12.15

   200%
  (1)

The performance goal for 100% vesting of the target performance stock units with respect to this metric requires the same annual improvement in mortality from 2013 to 2016 as the improvement realized from 2012 to 2013. As mentioned above, as mortality improves, further incremental improvements become more challenging to achieve. Nonetheless, the Compensation Committee believes that this is the best measure of our success in Kidney Care from a clinical point of view, and has accordingly set an aggressive performance goal for continued improvement.

 

 

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For historical context, the following table presents historical mortality for Kidney Care:

 

Year   2008   2009   2010   2011   2012   2013

Mortality

  15.74   15.48   15.08   14.58   13.87   13.69

Kidney Care Non-Acquired Growth. Kidney Care NAG is both a short and long-term performance goal because we feel it is the best measure of our success from a primary strategic objective – relative competitive growth. Additionally, Kidney Care NAG has a compounding effect over time, and is a primary driver of long-term financial growth and stockholder value creation.

Achievement against the long-term performance goal for Kidney Care NAG will be measured based on the average of Kidney Care NAG for 2015 and 2016, and the number of performance stock units, as a percent of the target number of performance stock units, will be determined based on the following:

 

Kidney Care NAG (Average for 2015
and 2016)(1)(2)
   Percent of Target Performance Stock Units

3.95%

   50%

4.20%

   75%

4.45%

   100%

4.70%

   150%
  (1)

Represents the performance criteria for NAG, which takes into account potential center closures and slowdown in near-term de novo activity that may result due to expected near-term reimbursement cuts under the Medicare Program.

  (2)

For relative context, industry growth in 2011 (the latest available information as of March 31, 2014) was 3.2% and the compound annual growth rate from 2007 to 2011 was 3.8%. The foregoing data are based on the 2013 Annual Data Report, United States Renal Data System, Table D.1 “Percentages and counts of reported ESRD patients: by treatment modality”. This includes the results of our Company, without which the industry growth rates would be lower.

For historical context, the following table presents our Kidney Care NAG for the last several years:

 

Year   2008   2009   2010   2011   2012   2013

NAG

  4.49%   4.74%   4.27%   4.65%   4.79%   5.06%

HCP-related Metrics. The primary long-term strategic focus and stockholder value driver of HCP is new market growth. Consequently, the Compensation Committee selected two metrics for HCP related to new market growth: the number of new markets in which HCP establishes a meaningful presence by 2016, and the aggregate adjusted operating income in new markets in 2016. These two metrics will provide a balanced focus on absolute growth with meaningful growth in multiple markets.

HCP New Market Success. Achievement against the long-term performance goal for HCP new market success will be measured based on the number of new markets which meet one of the following criteria: (1) More than a pre-determined specified internal target of globally capitated Medicare Advantage lives in operations in which our Company owns at least a 50% interest; or (2) adjusted operating income multiplied by our ownership interest in these operations equal to or more than a pre-determined specified internal target. Arizona and New Mexico, which are relatively new markets, will each be considered a new market if they have adjusted operating income multiplied by our ownership interest equal to or more than a pre-determined specified internal target which is higher than the target specified in clause (2).

The number of performance stock units, as a percent of the target number of performance stock units, will be determined based on the following:

 

Number of HCP New Markets Meeting Criteria    Percent of Target Performance Stock Units

2

   50%

3

   75%

4

   100%

5

   150%

6

   200%

 

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HCP New Market Adjusted Operating Income. Performance under this metric will be measured based on the aggregate adjusted operating income of operations in HCP new markets in 2016 (other than in California, Florida and Nevada), multiplied by our percentage ownership in these operations as follows:

 

HCP New Market Adjusted Operating Income    Percent of Target Performance Stock Units

50% of Internal Goal

   50%

75% of Internal Goal

   75%

100% of Internal Goal

   100%

150% of Internal Goal

   150%

200% of Internal Goal

   200%

Relative Total Stockholder Return. Relative total stockholder return incorporates the impact of dividend reinvestment, if any, and is based on a 3-year return for restricted stock units that vest in three years and a 4-year return for restricted stock units that vest in four years. The 3-year return is based on the average stock price for the twelve months ended March 31, 2017 compared to the average stock price for the twelve months ended March 31, 2014 (including dividend reinvestment during this period, if any), and the 4-year return is based on average stock price for the twelve months ended March 31, 2018 compared to average stock price for the twelve months ended March 31, 2014 (including dividend reinvestment during this period).

Performance under this metric, measured based on the percentile rank of our relative total stockholder return compared to that of our self-selected peer group presented on pages 64 to 66, will determine the percent of the target number of performance stock units as follows:

 

DaVita TSR Percent Rank Relative to
Peer Companies
   Percent of Target Performance Stock Units

<40th

   0%

40th

   50%

60th

   100%

75th

   150%

90th

   200%

We will continue our ongoing engagement with our stockholders on corporate governance items that are of interest to them, and our Compensation Committee will always consider the feedback we receive from our stockholders in making future compensation decisions for our named executive officers. We also believe it is important to maintain consistency with our compensation philosophy and approach, described in further detail on page 51 of this Proxy Statement, to continue to incentivize management toward the proper short- and long-term financial and operating goals, which are intended to create long-term stockholder value.

 

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Our Compensation Design and Philosophy

 

Our ability to recruit and retain highly qualified executives is essential to our long-term success. An important goal in the design of our executive compensation programs, besides providing incentives that create stockholder value, is to attract and retain outstanding leaders who possess the skills and talent necessary to achieve our business goals and objectives, and who embody our mission and values. We believe it is in the best interests of our stockholders to attract and retain talented leaders, and we strive to do so by providing compensation that is reasonable, provides the best value for our stockholders, aligns incentives, and is sufficient to achieve our recruitment and retention objectives.

Our ultimate objective is to continue to create long-term stockholder value by generating strong overall revenue growth, market share increases, improvements in clinical outcomes, operating margin growth, increases in Medicare Advantage enrollment and consistently strong total stockholder return.

In order to achieve this objective, we have established an executive compensation program that:

 

(i)

rewards strong Company performance;

 

(ii)

aligns our executives’ interests with our stockholders’ interests; and

 

(iii)

is competitive within the health care services, diagnostics, managed care and solutions markets so that we can attract and retain outstanding executives.

2013 Financial and Performance Highlights

 

Our overall financial and operating performance was strong for 2013 and we believe that the NEOs were instrumental in achieving these results. Our major achievements and financial operating performance indicators in 2013 were:

 

 

improved clinical outcomes in our U.S. dialysis operations, including lowest catheter rates ever at 13.0%, highest fistula in use rates ever at 65.3%, and lowest gross mortality rate ever at 13.7;

 

 

three-year compound annual TSR of 22.2%, compared to the median three-year compound annual TSR of 1.3% for our Global Industry Classification Standard (“GICS”) group and 17.6% for our comparator peer group; and a five-year compound annual TSR of 20.7%, compared to the median five-year compound annual TSR of 9.3% for our GICS group and 24.2% for our comparator peer group;

 

 

strong operating cash flow of $1,773 million compared to original guidance range of $1,350 million to $1,500 million;

 

 

Kidney Care adjusted operating income of $1,513 million compared to original guidance range of $1,350 million to $1,450 million;

 

 

consolidated net revenue growth of 43.7% driven primarily by inclusion of a full year of HCP operations;

 

 

normalized non-acquired U.S. dialysis treatment growth of 5.1%;

 

 

an increase of 7.2% in the overall number of U.S. dialysis related treatments; and

 

 

consolidated operating income growth of 19.5%, which includes the impact of a loss contingency reserve and adjustments to a contingent earn-out obligation and a tax asset associated with the HCP acquisition escrow provisions. Without these items adjusted consolidated operating income would have increased by 34.2%*.

The Company’s TSR from the first quarter of 2000 (our CEO’s first full quarter with the Company) through the fourth quarter of 2013 was approximately 2,750%, putting the Company in the top 15 of all current S&P 500 companies over that period. The Company’s TSR over this period also exceeded that of all companies that have been in the S&P 500 during that entire period.

We believe our Kidney Care division clinical outcomes compare favorably with other dialysis providers in the United States and generally exceed the dialysis outcome quality indicators of the National Kidney Foundation. Our clinical outcomes mean better quality of life for the over 160,000 Kidney Care division patients we serve.

 

* See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Form 10-K for the year ended December 31, 2013 for reconciliation of this metric to the most closely comparable GAAP metric.

 

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Linking 2013 NEO Compensation to Performance

 

Our compensation programs for our NEOs emphasize compensation based on performance and are designed to align our NEOs’ interests with those of our stockholders and to permit individuals who have performed well in creating and protecting significant long-term value for the Company and its stockholders to share in the value generated. To this end, our compensation programs emphasize variable compensation in the form of cash and equity awards over fixed compensation.

When establishing the compensation for our NEOs for 2013, the Compensation Committee gave significant weight to our sustained record of strong operating performance as highlighted above, our improvement in strategic positioning and our continued strong clinical performance, particularly in light of ongoing general economic volatility and significant industry regulatory challenges and uncertainty. In 2013, we continued to lead industry public policy efforts, achieving favorable outcomes for the industry and the Company. The Compensation Committee balanced its evaluation of the Company’s financial and clinical performance by also considering the challenges to the Company presented by healthcare reform, changes to government reimbursement policies, other significant healthcare regulatory changes, as well as the government investigations affecting the Company. When establishing 2013 compensation for our NEOs, the Compensation Committee considered these and other factors in the context of individual NEO performance achieving this performance and responding to these challenges. The following table shows the direct compensation for 2013 (base salary, annual performance-based cash award and long-term incentive award) determined by the Compensation Committee for each NEO who remained an executive officer on December 31, 2013. This table is not a substitute for the information disclosed in the 2013 Summary Compensation Table and related footnotes, which begin on page 70.

 

NEO    Base
Salary(1)
     Annual Cash
Award
     Annual LTI
Award(2)
 

Kent J. Thiry

   $   1,148,077       $   3,000,000       $   12,272,760   

Javier J. Rodriguez

   $ 765,385       $ 1,600,000       $ 7,080,980   

Dennis L. Kogod

   $ 800,000       $ 1,100,000       $ 6,270,770   

Dr. Garry E. Menzel

   $ 147,115               $ 1,624,716   

James K. Hilger

   $ 350,000       $ 300,000       $ 395,299   

Kim M. Rivera

   $ 500,000       $ 150,000       $ 1,057,732   
(1)

The amounts reported here reflect the base salary actually paid during the 2013 fiscal year.

(2)

The amounts reported under the Annual LTI Award column consist of the grant date fair value of the 2013 equity awards and the target value of the 2013 performance-based cash awards

 

In light of the emphasis on variable compensation, the Compensation Committee determined to limit increases to fixed compensation amounts in 2013 such that the base salaries of our NEOs were retained at 2012 levels, other than Mr. Thiry’s and Mr. Rodriguez’s base salaries. Mr. Thiry’s base salary, which had not increased since 2011, was increased pursuant to the Compensation Committee’s consideration of comparative market data provided by Compensia, placing Mr. Thiry’s base salary at the 69th percentile in our self selected peer group. The Compensation Committee increased Mr. Rodriguez’s base salary for 2013 pursuant to the Compensation Committee’s review of his performance in the previous year and consideration of comparative market data provided by Compensia (see “Elements of Compensation—Base Salary” for more information on their respective base salary increases). The following pie charts illustrate the allocation of the total direct compensation that the NEOs above earned for 2013:

 

LOGO

 

 

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The Compensation Committee believes that the above compensation structure struck an appropriate balance by promoting long-term stockholder value without motivating or rewarding excessive risk-taking.

The following graph illustrates how cash performance bonuses over the past three years varied with changes in our adjusted operating income:

 

LOGO

To further illustrate our emphasis on compensation based on performance and our commitment to align the interests of our NEOs with those of our stockholders, the following graph illustrates how our CEO’s compensation over the past five years varied with changes in our TSR for the same period (indexed to the commencement year of the graph, i.e., 2009). For purposes of this table, CEO total compensation includes all elements of compensation reflected in the “Total” column of the 2013 Summary Compensation Table on page 70 of this Proxy Statement.

 

LOGO

 

 

* See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Form 10-K for the year ended December 31, 2013 for reconciliation of this measure to the Company’s GAAP consolidated operating income.

 

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Stockholder Interest Alignment

 

Prior to making the substantial changes to our executive compensation program described on pages 43 through 50, we believed that our equity awards, as they were then structured, served to align the interests of our executives with the long-term interests of our stockholders. Our equity awards provided our executives with an opportunity to benefit from the appreciation of our stock price by vesting over a period of time and by requiring executives to accumulate meaningful ownership through our stock ownership policy. Therefore, a key objective of our executive compensation program then, as it is now, is to provide a significant portion of compensation in the form of equity awards. For 2013, equity awards ranged from 23% to 88% of our NEOs’ compensation, with 72% of our CEO’s compensation provided in equity. The equity awards granted in 2013 vest 50% each after three and four years from the date of grant. These extended vesting schedules are intended to assist in the long-term retention of such NEOs and further align the interests of our executives with the long-term interests of our stockholders. A key component of our executive compensation philosophy and design is that stock-based compensation creates an incentive for the NEO to contribute to the overall success of the Company and to take actions that result in the creation of long-term stockholder value.

Key Features of Our Executive Compensation Program

 

 

We Do   We Do Not

Have double trigger change in control provisions

for acceleration of equity award vesting

  Provide excise tax gross-ups on change in control payments for new or materially amended agreements entered into since 20081

Limit severance payments to not more than three

times base salary and bonus

  Re-price or replace underwater stock options or stock appreciation rights

Provide for multi-year vesting periods for equity

award grants to reinforce a culture in which

the Company’s long-term success takes precedence

over volatile short-term results

  Have our Compensation Committee’s independent compensation consultant provide any other services to the Company

Use an independent compensation consultant

   

Have a clawback policy that permits recovery

of bonuses, incentive and equity-based

compensation from executives

   

Seek stockholder feedback on our

executive compensation

   

Apply meaningful stock ownership guidelines

to strengthen alignment of executives’ and

stockholders’ interests

   

1 We have not provided for tax gross-ups in any employment agreements or amended employment agreements entered into after July 2008. Our CEO has the only remaining legacy agreement that contains a tax gross-up; however, no gross-up would have been payable under his agreement in any of the prior five years if a change of control had occurred. See “Potential Payments Upon Termination or Change of Control” on pages 77 to 82.

 

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Elements of Compensation

The elements of direct compensation offered under our executive compensation program include both fixed (base salaries) and variable (annual and long-term incentives) compensation. It is important to note that the impact of most of the substantial changes we have made to our executive compensation program will not be reflected in the compensation of our named executives until our 2014 executive compensation is reported in our 2015 proxy statement.

Base Salary

 

We compensate our NEOs with a base salary because we believe it is appropriate that some portion of compensation be provided in a form that is liquid and assured. Base salaries are initially established at levels necessary to enable us to attract and retain highly qualified executives with reference to comparative pay within the Company for executives with similar levels of responsibility, the prior experience of the executive, and expected contributions to Company performance.

We do not guarantee salary adjustments on an annual basis. During March of each year, the Compensation Committee considers adjustments to base salary as part of the overall annual compensation assessment for our NEOs. Our CEO typically provides the Compensation Committee with his recommendation regarding merit-based increases for each NEO other than himself. The CEO’s base salary is determined by the Compensation Committee with input from Compensia, the Compensation Committee’s independent compensation consultant, and Compensia’s analysis of CEO compensation of our comparator peer group.

Consistent with our emphasis on performance-based compensation and the Compensation Committee’s decision to limit increases to fixed compensation amounts in 2013, the Compensation Committee maintained the base salaries of Mr. Kogod, Mr. Hilger and Ms. Rivera at 2012 levels. Mr. Thiry’s base salary, which had not increased since 2011, was increased based on the Compensation Committee’s consideration of comparative market data provided by Compensia which placed Mr. Thiry’s base salary at the 69th percentile in our self selected peer group. The Compensation Committee increased Mr. Rodriguez’s base salary for 2013 pursuant to the Compensation Committee’s review of his performance in the previous year and consideration of comparative market data. Dr. Menzel did not join the Company until September 2013 and accordingly had no 2012 base salary. The base salaries for 2012 and 2013 for our NEOs who remained executive officers as of December 31, 2013 are shown in the table below.

 

Name    2012 Base
Salary(1)
     2013 Base
Salary(2)
 

Kent J. Thiry

   $   1,050,000       $   1,200,000   

Javier J. Rodriguez

   $ 700,000       $ 800,000   

Dennis L. Kogod

   $ 800,000       $ 800,000   

Dr. Garry E. Menzel

           $ 510,000   

James K. Hilger

   $ 350,000       $ 350,000   

Kim M. Rivera

   $ 500,000       $ 500,000   
(1)

The amounts reported here reflect the annual base salaries approved in March 2012.

(2)

With the exception of Dr. Menzel’s base salary, which was approved in June 2013, the amounts reported here reflect the annual base salaries approved in March 2013.

 

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Annual Performance-Based Cash Compensation

 

Our 2013 annual performance-based cash compensation was paid to our NEOs, other than Dr. Menzel who joined us in September 2013. Messrs. Thiry, Rodriguez and Kogod were designated by the Compensation Committee as eligible participants under our Executive Incentive Plan (“EIP”) for 2013. While Mr. Hilger and Ms. Rivera did not participate in the EIP, they received an annual cash bonus for 2013 based on performance as described on page 58. We believe that annual cash bonuses based on performance provide an incentive to consistently excel on an individual level as well as to contribute to the overall success of the Company.

Executive Incentive Plan

Our CEO and other executives selected by the Compensation Committee participated in our EIP. The EIP was structured to satisfy the requirements of Section 162(m) of the Internal Revenue Code as described below. The Compensation Committee has historically established an operating income target as the performance measure for participants in the EIP. The Compensation Committee used operating income as the relevant performance measure because it believes that operating income provides the best measurement of our operating results, is a key measure of the financial strength and stability of our Company, and can also be consistently measured by us and our stockholders against the operating results of other companies in our industry.

For 2013, the Compensation Committee established a fiscal year adjusted operating income target of not less than $1,567 million as the performance goal. When the Compensation Committee was determining the operating income target for 2013, it considered the uncertainties of the time period, including, among others, those relating to healthcare reform and other significant healthcare regulatory changes, changes to government reimbursement policies, reduction in government payment rates generally and changes to the structure of payments under the Medicare ESRD program or other government-based programs, including, for example, across-the-board spending cuts due to federal sequestration. The Compensation Committee considered the Company’s estimates of 2013 budgeted operating income, as approved by the Board, when this target was established as a performance target. This target was structured to meet the requirements for performance-based compensation under Section 162(m) of the Internal Revenue Code. For 2013, the Compensation Committee established a maximum aggregate cash and equity award amount under the EIP of up to $10,000,000 for each of Messrs. Thiry and Kogod; further establishing that of the $10,000,000, the maximum cash awards for Messrs. Thiry and Kogod was limited to $5,000,000 and $2,500,000, respectively, for 2013. Similarly, the Compensation Committee established a maximum aggregate cash and equity award amount under the EIP of up to $5,000,000 for Mr. Rodriguez, further establishing that of the $5,000,000, the maximum cash award for Mr. Rodriguez was limited to $2,500,000 for 2013. The Compensation Committee has the ability to apply only negative discretion in determining incentive compensation. The annual target award opportunity for Mr. Thiry is set forth in his employment agreement.

The Company achieved adjusted operating income of $1,898 million for 2013, which exceeded the 2013 target performance goal. When determining the award amounts, the Compensation Committee considered the achievement of the target performance goal, as well as overall Company and individual performance. With regard to overall Company performance, the Compensation Committee considered that, as compared to 2012, (i) we experienced strong operating cash flow of $1,773 million compared to original guidance range of $1,350 million to $1,500 million; (ii) our consolidated net revenue grew by 43.7%, driven primarily by inclusion of a full year of HCP operations; (iii) normalized non-acquired dialysis treatment growth was 5.1%, (iv) we experienced an increase of 7.2% in the overall number of U.S. dialysis related treatments and (v) our consolidated operating income grew by 19.5%, which includes the impact of a loss contingency reserve, a contingent earn-out obligation, and a tax asset associated with the HCP acquisition escrow provisions. Without the items in (v) above, adjusted consolidated operating income would have increased by 34.2%*.

 

* See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the company’s Form 10-K for the year ended December 31, 2013 for reconciliation of this metric to the most closely comparable GAAP metric.

 

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The Compensation Committee also considered that our clinical outcomes compare very favorably with other dialysis providers in the United States and generally exceed the dialysis outcome quality indicators of the National Kidney Foundation. As described above, the Compensation Committee balanced its evaluation of these financial and clinical performance outcomes by also considering performance in responding to challenges the Company faces. In addition to significant contributions to overall Company performance, the Compensation Committee also considered individual performance, as listed below for each of our NEOs participating in the EIP.

 

Name    Individual Performance Factors Considered in Determining EIP Award

Kent J. Thiry,

Co-Chairman of the Board and Chief Executive Officer

  

•  advanced the Company’s international footprint

•  managed senior executive transitions in the Company’s HCP business

•  grew DaVita Rx and its clinical impact

•  led public policy efforts that promote the interests of the Company and the dialysis industry as a whole

•  succeeded with initiatives that position the Company for successful continued growth and diversification, including meeting or exceeding operating plan and financial metrics

•  continued to provide strong leadership to the Company and to the industry as a whole

Javier J. Rodriguez,

Chief Executive Officer, Kidney Care

  

•  developed internal talent to fill key roles on the Company’s Kidney Care executive and senior management teams

•  substantially contributed to the Company’s strong Kidney Care growth performance

•  secured major payor contracts and maintained key payor relationships

•  demonstrated leadership in advancing the Company’s integrated Kidney Care agenda with public and private entities, and in driving performance improvements in the ESRD-patient disease management product suite

•  supported the development of and delivery against the Company’s multi-year IT plan

•  successfully helped lead the Company’s business development activities

•  made substantial contributions to enterprise strategy development

Dennis L. Kogod,

Chief Operating Officer, HealthCare Partners

  

•  achieved lowest catheter rates in the Company’s history

•  attained largest enrollment of patients to Davita Rx

•  oversaw best overall clinical outcomes in the Company’s history

•  over achieved budgeted financials, revenue, operating income, and EBITDA in Kidney Care

•  continued growth in the Company’s international markets

•  demonstrated a path to profitability in the Company’s international markets

•  led Company’s efforts in a successful bid tender and subsequent major contract with the Kingdom of Saudi Arabia’s Ministry of Health that will substantially contribute to the Company’s international growth

•  groomed a chief operating officer successor for the Company’s Kidney Care business

•  became the chief operating officer for the Company’s HCP business

 

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Our CEO recommends to the Compensation Committee the performance bonus amount for our NEOs, other than for himself, and the final performance bonus amounts are reviewed by the Compensation Committee, and sometimes further adjusted in consultation with our CEO, prior to approval by the Compensation Committee. The Compensation Committee determines the performance bonus amount for our CEO without recommendations from management. The award of amounts below the maximum amount is not intended to reflect negatively on the performance of the eligible participants. In consideration of the Company and individual performance listed above, market data and in consultation with our CEO with regard to performance bonuses for the NEOs other than himself, the Compensation Committee awarded 2013 performance cash bonuses under the EIP to our NEOs participating in the EIP, as follows:

 

Name    2013 EIP Award Amount  

Kent J. Thiry

   $                   3,000,000   

Javier J. Rodriguez

   $ 1,600,000   

Dennis L. Kogod

   $ 1,100,000   

Other Performance Based Bonuses

For Mr. Hilger and Ms. Rivera, who did not participate in the EIP, the Compensation Committee performed a similar review of overall Company and individual performance throughout the year. The following table shows the individual performance factors considered in determining the annual performance-based cash bonus for Mr. Hilger and Ms. Rivera.

 

Name    Individual Performance Factors Considered in Determining Performance-Based Cash Award

James K. Hilger,

Chief Accounting Officer and (through November 6, 2013) Interim Chief Financial Officer

  

•  successfully onboarded the Company’s new chief financial officer

•  expanded leadership role in the finance organization

•  significantly supported the Company’s international opportunities and their integration into the Company

•  enhanced and strengthened the finance, accounting, and tax organizations

Kim M. Rivera,

Chief Legal Officer

  

•  enhanced corporate governance

•  strengthened the legal organization capability and capacity

•  attained favorable outcomes in legal matters

•  successfully supported HCP incorporation

•  supported international opportunities

In consideration of the Company and individual performance listed above and in consultation with our CEO with regard to the performance bonus for Mr. Hilger and Ms. Rivera, the Compensation Committee awarded 2013 performance-based cash bonuses to Mr. Hilger and Ms. Rivera as follows:

 

Name   

Performance

Cash Bonus

 

James K. Hilger

   $               300,000   

Kim M. Rivera

   $ 150,000   

Dr. Menzel, who joined us in September 2013, did not receive a performance-based bonus for the 2013 period because of the short period he served as an employee during the 2013 fiscal year.

Long-Term Incentive Program

 

Long-Term Incentive Program (“LTIP”) awards are granted pursuant to the 2011 Plan. The 2011 Plan permits the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, equity and cash-based performance awards, as well as other forms of equity awards. Our 2013 LTIP was designed to continue providing a link to long-term stockholder value through equity awards, while also providing a more direct tie to the dialysis and related lab services line of business through cash-based performance awards targeting internal operating performance metrics consistent with our existing compensation philosophy. We believe these LTIP changes help to align long-term executive performance with our U.S. dialysis and related lab services for those executives who oversee this segment of our business.

 

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Equity Awards

While we emphasize stock-based compensation, we do not designate a target percentage of total compensation as stock-based. We instead maintain flexibility to use judgment to respond to changes in NEO and Company performance and related objectives. The emphasis on stock-based compensation creates a commonality of interest between our NEOs and our stockholders. Grants of equity awards also serve as an important tool for attracting and retaining executives. To vest in equity awards and earn the full benefit of the award, the NEOs must remain employed for a multi-year period, typically over four years, which reinforces a culture in which the Company’s long-term success takes precedence over volatile and unsustainable short-term results.

Each year, the Compensation Committee recommends to the full Board an aggregate equity award pool that will be available for grants to all eligible recipients of equity awards, based on (i) the historical amounts granted, (ii) the amount of equity held by participants that is currently in-the-money, (iii) the number of shares we expect to be forfeited due to anticipated departures, and (iv) the number of shares that will likely be required both to retain and incent our highest-potential and highest-performing employees and to attract new employees we expect to hire during the coming year. The Compensation Committee may also recommend the establishment of special purpose share budgets for proposed interim grants. After considering such recommendations, the Board approves a budget and delegates authority to the Compensation Committee to make awards to our executive officers and other employees.

The equity awards that are granted to our NEOs are generally made annually (typically in the first half of the year). Discretionary interim awards to our NEOs may be made during the year to address special circumstances, such as retention concerns, promotions and special performance recognition awards, and new hire awards. Our annual equity awards are generally awarded upon the completion of performance reviews and in connection with the Compensation Committee’s decision and review process regarding other forms of direct compensation. The timing of the interim grants depends upon individual circumstances. Under the terms of the 2011 Plan, awards are granted with an exercise or base price not less than the closing price of our common stock on the date of grant.

Stock Appreciation Rights

The majority of our equity awards to NEOs are in the form of stock-settled stock appreciation rights (“SSARs”), which only derive value if the market value of our common stock increases. The economic value and tax and accounting treatment of SSARs are comparable to those of stock options, but SSARs are less dilutive to our stockholders because only shares with a total value equal to the grantee’s gain (the difference between the fair market value of the base shares and their base price) are ultimately issued. SSARs are granted with an exercise or base price not less than the closing price of our common stock on the date of grant and vest based on the passage of time. SSARs granted in 2013 vest 50% each in March 2016 and 2017.

Restricted Stock Units

We also award RSUs to our NEOs from time to time as part of our compensation program. RSUs are granted under the 2011 Plan and typically vest with the passage of time over a period of three or more years, but the Compensation Committee may approve alternative vesting schedules based on performance, timing of vesting of individual outstanding grants and other retention related factors. We award RSUs because full value share awards can more closely align the interests of executives with stockholder interests by providing better parity between TSRs and the executive’s gains or losses on the awards than is achievable with stock options or SSARs.

Cash-Based Performance Awards

In 2013, the Compensation Committee granted cash-based performance awards to all of our NEOs with the exception of Mr. Thiry, whose LTIP award was granted solely in the form of SSARs and Dr. Menzel who was hired late in the year. The Compensation Committee determines the target award value for NEOs’ cash-based performance awards in a manner similar to how it determines the amount of equity awards to grant, that is, based on individual and Company historical and expected performance, including an executive’s ability to influence the targeted performance measure. The aggregate target value of cash-based performance awards available for allocation to our executives is approved by the full Board for administration by the Compensation Committee along with the aggregate equity award pool.

 

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The 2013 cash-based performance awards for NEOs have a two-year performance period commencing January 1, 2014 and ending December 31, 2015. Where applicable, these cash-based performance awards are structured to satisfy the requirements of Section 162(m) of the Internal Revenue Code. Cash-based performance-based awards granted in 2013 vest 50% each on April 1, 2016 and April 1, 2017, subject to performance conditions relating to each of 2014 and 2015 being met. Under the terms of the 2011 Plan, the maximum amount of any cash-based performance award payable to any executive is $10,000,000. However, the Compensation Committee established target award values for each NEO at the time of grant, at amounts substantially lower than the maximum under the 2011 Plan.

Determining LTIP Award Amounts

The Compensation Committee reviews the annual LTIP award recommendations for our NEOs and other executives in advance of the grant date with the input of our CEO. Based upon a review of equity award shares available, their dilutive effect on stockholders, long-term share budgeting restrictions, cash-based performance award dollars available and recommendations from management, the Compensation Committee recommends aggregate equity and cash LTIP award pools for the year for approval by the Board. In considering how to distribute the equity and cash-based performance award units in the respective LTIP award pools, our CEO, together with a team that includes our chief executive officer, Kidney Care, our chief executive officer, HealthCare Partners and our chief people officer, Kidney Care, gives differential attention to high-potential individuals whom the Company believes will be the future leaders of the Company, and to other high-performing individuals whose performance in their current positions exceeded expectations.

Each such high-potential and/or high-performing employee is then individually reviewed, from a holistic perspective, starting with a review of such employee’s historical compensation, including his or her initial base salary, any base salary increases during his or her tenure with the Company and performance cash bonuses and equity award grants over his or her career at the Company. A determination is then made as to the amount and number of cash and equity LTIP award units that should be granted and the appropriate vesting schedules and performance conditions that should be implemented for such awards in order to retain and continue to motivate these high-quality, high-performing individuals. Our goal is to achieve fairness in compensation and motivate performance over the course of multiple years, which is the reason we take into account all compensation that has been awarded to such individuals over their respective careers at the Company when making prospective award decisions.

In 2013, the annual equity awards granted to our NEOs were made in the form of SSARs with such SSARs being granted pursuant to our 2011 Plan. Similar to the analysis that the Compensation Committee makes in determining the annual performance-based cash compensation, the Compensation Committee considers overall Company and individual performance. For the LTIP awards granted in 2013, the Compensation Committee reviewed the findings and recommendations of the CEO for NEOs other than himself and considered each NEO’s individual performance since the last grant.

 

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The Compensation Committee also evaluates the market competitiveness of the Company’s compensation for its NEOs and other executive officers by analyzing its historical and proposed compensation changes in light of compensation practices among its comparator peer group as provided in an annual assessment by Compensia, the Compensation Committee’s independent compensation consultant. After taking into account the elements set forth above, the Compensation Committee approved LTIP award grants to our NEOs in 2013. All of the SSARs and cash-based performance awards granted to our NEOs were granted on March 19, 2013 after the completion of the review by the Compensation Committee with the exception of Mr. Thiry whose SSARs were granted on March 20, 2013 after further approval by the independent members of the full Board and Dr. Menzel, whose SSARs were granted on his September 9, 2013 hire date. The table below shows the aggregate number of shares subject to SSARs, and the base target value of the cash-based performance awards granted to each of our NEOs in 2013.

 

NEO   

Shares
Subject to
SSARs

(#)

    

Target Cash-
Based
Performance
Award Value

($)

 

Kent J. Thiry

     900,000           

Javier J. Rodriguez

     280,000         3,300,000   

Dennis L. Kogod

     220,000         3,300,000   

Dr. Garry E. Menzel

     120,000           

James K. Hilger

     14,000         206,250   

Kim M. Rivera

     37,600         550,000   

The SSAR awards above vest 50% each in the third and fourth years from the date of grant for all of the above NEOs. The cash-based performance awards vest 50% each on April 1, 2016 and April 1, 2017, subject to their performance conditions.

Personal Benefits and Perquisites

 

As described above, our compensation programs for NEOs emphasize compensation based on performance and compensation which serves to align our NEOs’ interests with those of our stockholders. As a result, the Compensation Committee has determined that the Company should provide few perquisites to NEOs. We believe that the perquisites and personal benefits that we provide support important attraction and retention objectives. We also consider the extent to which the perquisite or personal benefit provided serves to enhance the performance of our NEOs in light of the demands on these individuals’ time. The perquisites and personal benefits available to our NEOs are reviewed annually by the Compensation Committee.

The Compensation Committee has authorized the personal use of fractionally-owned or chartered corporate aircraft by some of our NEOs. The Compensation Committee believes that access to an aircraft for personal travel enables our NEOs to maximize their work hours, particularly in light of their demanding business travel schedules. One of the Compensation Committee’s objectives is to ensure that our NEOs are afforded adequate flexibility to allow for sufficient personal time in light of the significant demands of the Company. The Compensation Committee and our CEO allocate a fixed number of hours for personal use by identified NEOs and consider the allocated amount as part of the NEO’s total compensation. The Compensation Committee and our CEO use their discretion when determining the number of allocated hours and displace other forms of compensation that otherwise would have been awarded to the NEO.

Our CEO is authorized by the Compensation Committee to use a fractionally-owned or chartered corporate aircraft for business purposes, and for a fixed number of hours per year for personal use instead of additional cash compensation that would have otherwise been paid. As part of our CEO’s aggregate compensation package, the Compensation Committee approves a fixed number of hours for personal use each year and unused hours from the prior year are available for use the following year. When determining the number of hours of personal use of aircraft to award, the Compensation Committee takes into consideration Mr. Thiry’s overall compensation package. If Mr. Thiry were to exceed the fixed number of hours for personal use that is unrelated to business or long-distance commuting in a given year, the excess hours of personal use would offset the number of hours approved by the

 

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Compensation Committee the following year for personal use or Mr. Thiry would be required to compensate us directly, although historically he has not exceeded the hours authorized for personal use. The Compensation Committee reviews all business and personal use of the aircraft annually, including detailed passenger logs with special attention to mixed business and personal use and required reimbursements to the Company.

Deferred Compensation Programs

 

Our deferred compensation programs permit certain employees, including our NEOs, to defer compensation at the election of the participant or at the election of the Company. We maintain a Voluntary Deferral Plan which allows certain employees, including our NEOs, to defer a percentage of their base salary, cash bonus and other compensation as identified by the Company. We do not utilize deferred compensation as a significant component of compensation and there are no Company contributions thereto or above-market returns available thereunder.

Severance and Change of Control Arrangements

 

We have entered into employment agreements with each of our NEOs. These agreements, among other things, provide for severance benefits in the event of a termination of employment in certain circumstances, including, with respect to certain NEOs, the departure of the NEO following a change of control of our Company. Each agreement is individually negotiated and the terms vary. When entering into employment agreements with our NEOs, we attempt to provide severance and change of control benefits which strike a balance between providing sufficient protections for the NEO while still providing post-termination compensation that is reasonable and in the best interests of the Company and our stockholders. We have also adopted the DaVita HealthCare Partners Inc. Severance Plan (the “DaVita Severance Plan”), which provides for severance benefits for our vice presidents and director-level employees in the event of termination in certain circumstances. The employment agreements of our NEOs provide for severance benefits and therefore none of the NEOs is eligible to participate in the DaVita Severance Plan, unless their individual employment agreement defers such provisions to that plan. See “Potential Payments Upon Termination or Change of Control” beginning on page 77 of this Proxy Statement for a description of the severance and change of control arrangements set forth in our employment agreements with the NEOs.

The terms of individual agreements vary but under our current stock-based award agreements, accelerated vesting of stock-based awards is generally triggered when a change of control event occurs and either the acquiring entity fails to assume, convert or replace the stock-based award or the grantee’s employment is terminated within the twenty-four-month period following a change of control or if the executive resigns for “good reason” or is terminated by the Company without “cause” as provided in his or her applicable employment agreement. Our stock-based award agreements further provide that a change of control shall not be deemed to have occurred if the person acting as chief executive officer for the six months prior to such transaction becomes the chief executive officer or executive chairman of the board of directors of the acquiring entity and remains in such position for at least one year following the transaction and a majority of the acquiror’s board of directors immediately after such transaction consists of persons who were directors of the Company immediately prior to such transaction. The additional acceleration provisions in our stock-based award agreements further serve to secure the continued employment and commitment of our NEOs prior to or following a change of control. See “Potential Payments Upon Termination or Change of Control” beginning on page 77 of this Proxy Statement for more information regarding accelerated vesting under our stock-based award agreements.

Process for Determining NEO Compensation

Role of Independent Compensation Committee

 

Our executive compensation and benefits programs are designed and administered under the direction and control of the Compensation Committee. Our Compensation Committee, composed solely of independent directors, reviews and approves our overall executive compensation programs, strategy and policies and sets the compensation of our executive officers.

 

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When recruiting new executives, the Compensation Committee and our CEO evaluate the comparative compensation of executives within the Company with similar levels of responsibility, the prior experience of the executive and expected contributions to Company performance. Thereafter, each executive’s compensation is reviewed annually by the Compensation Committee and CEO, and considered for adjustment based on individual performance and other factors.

When evaluating performance, we base compensation decisions on an assessment of Company and individual performance over the year, taking individual accomplishments into consideration in light of the totality of circumstances together with individual potential to contribute to the Company’s future growth. We believe that all of our NEOs have the ability to influence overall Company policies and performance and, accordingly, should be accountable for Company-wide performance as well as the areas over which they have direct influence. The differences in total annual compensation levels among the NEOs are based on their individual roles and responsibilities within the Company and their relative individual performance. The Compensation Committee uses its judgment in awarding compensation to our NEOs in accordance with the overall objectives of the Company’s compensation programs.

The Compensation Committee takes into consideration a number of factors when determining the elements and amounts of compensation awarded to our NEOs, including individual performance, overall financial and non-financial performance of the Company for the year, individual skill sets and experience relative to industry peers, readiness for promotion, past and expected future performance, the importance and difficulty of achieving future Company and individual objectives, the value of each executive’s outstanding equity awards, aggregate historical compensation, levels of responsibility and performance relative to other executives within the Company, importance to the Company and difficulty of replacement. The Compensation Committee also gives significant weight to our clinical performance and quality of patient care. Accordingly, Company-wide patient clinical outcomes and improvements in quality of patient care, and each NEO’s contributions in those areas, can have a significant impact on NEO compensation.

The Company-wide factors taken into consideration by the Compensation Committee include, but are not limited to, the following:

 

 

overall revenue growth, increases in our treatment volume, market share increases, improvements in cost per treatment, operating income growth, operating margin growth, increases in earnings per share and improvement in the Company’s debt to equity ratio;

 

 

healthcare regulatory compliance initiatives;

 

 

improved strategic positioning;

 

 

improved positioning of the Company for continued growth and diversification;

 

 

improved organizational capabilities;

 

 

patient growth;

 

 

relationships with private payors;

 

 

improved clinical outcomes, vaccination rates and fistula utilization;

 

 

relationships with medical directors;

 

 

selection and implementation of improved financial, operating and clinical information systems;

 

 

management performance in attracting and retaining high-performing employees throughout our organization and succession planning;

 

 

implementation of successful public policy efforts;

 

 

good corporate citizenship; and

 

 

advancement of strategic business initiatives supporting our mission to be the provider, partner and employer of choice.

The Compensation Committee retains discretion as to how to weight these factors. There is no formal weighting of the individual elements considered and no particular elements are required to be considered with respect to a given individual or in any particular year.

 

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When determining annual compensation for our NEOs, other than for our CEO, the Compensation Committee works closely with our CEO to review each individual’s performance for the year and determine such NEO’s compensation. Shortly following the end of each year, our CEO provides his assessment of each NEO’s performance during the year based on his personal experience with the individual, the NEO’s achievement of success in areas determined to be significant to the Company, and any changes in responsibility levels. The Compensation Committee also considers performance discussions that have taken place at the Board and Compensation Committee level regarding the NEOs, retention objectives and the future growth potential of the individual executive. Our CEO recommends to the Compensation Committee the amounts of cash and stock-based compensation for each of the NEOs. The Compensation Committee considers the recommendations made by the CEO regarding the other NEOs but retains the discretion to deviate from those recommendations. Neither the CEO nor other members of management provide a recommendation to the Compensation Committee with regard to the CEO’s compensation.

The Compensation Committee evaluates our CEO’s performance at the same time it sets the compensation of the other NEOs. When evaluating the performance of our CEO and making decisions about his compensation, the Compensation Committee considers overall Company performance as part of the assessment of our CEO’s performance but does not rely on the achievement of specific objectives to determine his compensation. The Compensation Committee also considers a self-assessment prepared by our CEO. As part of this self-assessment, our CEO reviews with the Compensation Committee the overall annual management objectives of the Company and his participation in the attainment, or level of responsibility for the shortfall, of such objectives. Approximately every other year, the Compensation Committee engages an outside independent consultant to conduct an in-depth analysis of our CEO’s performance as a manager during the year. The most recent assessment took place in 2011. This evaluation involves a rigorous assessment of our CEO’s performance by members of the senior management team. The results of this assessment are reviewed by the Board and the Compensation Committee and is one of the many factors considered when making compensation decisions. As further described below, the Compensation Committee’s independent compensation consultant provides the Compensation Committee with an analysis of comparative market data on the cash, stock-based compensation and total compensation for senior executives, including the CEO, at a group of comparable companies within our industry. The compensation package for our CEO is approved by the Compensation Committee, subject to ratification by the independent members of the Board.

Role of Independent Compensation Consultant

 

The Compensation Committee has selected and directly retains the services of Compensia, an independent national compensation consulting firm. The Compensation Committee has the sole authority to retain or replace Compensia in its discretion. Compensia does not provide consulting services to the Company and may not provide such services without prior approval of the chair of the Compensation Committee. Compensia only provides compensation consulting services to the Compensation Committee, and works with the Company’s management only on matters for which the Compensation Committee is responsible. The Compensation Committee has assessed the independence of Compensia pursuant to the rules of the SEC and NYSE and concluded that Compensia’s work for the Compensation Committee does not raise any conflicts of interest. The Compensation Committee periodically seeks input from Compensia on a range of external market factors, including evolving compensation trends, appropriate peer companies and market survey data. Compensia also provides general observations on the Company’s compensation programs, but it does not determine or recommend the amount or form of compensation for the NEOs.

Market Competitiveness

 

We evaluate the overall competitiveness of our executives’ total direct compensation each year in order to assist in executive retention. In 2013, the Compensation Committee retained Compensia to perform a comprehensive market analysis of our executive compensation programs and pay levels and based upon the recommendation of Compensia adopted a revised comparator peer group in late 2013.

Compensia provided the Compensation Committee with an analysis of comparative market data on the cash, stock-based compensation and total compensation for senior executives at the companies within our revised

 

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comparator peer group. In addition to public executive compensation data, the Compensation Committee reviewed the compensation practices of our comparator peer group for purposes of benchmarking and to understand general compensation practices of our peers. The revised comparator peer group consists of the following companies, which are all in the health care services, diagnostics, managed care and solutions markets:

 

Company(1)    1-Year
TSR(2)
    3-Year
Compound
Annual
TSR(2)
   

Market
Capitalization

(in millions)(3)

   

Net Income
for Last 4
Quarters (in

millions)(4)

    Revenue for
Last 4
Quarters
(in millions)(4)
 

Catamaran Corporation

     (16.1  %)      22.2    $       10,031      $ 262      $ 14,780   

Centene Corp.

     41.4      27.9    $ 3,414      $ 165      $ 10,863   

Community Health Systems, Inc.

     (1.8  %)      0.8    $ 3,879      $ 141      $ 12,998   

HCA Holdings, Inc.

     38.0      N/A    $ 22,245      $ 1,556      $ 34,182   

Health Net, Inc.

     32.3      5.0    $ 2,619      $ 170      $ 11,054   

HealthSouth Corporation

     36.9      10.9    $ 2,824      $ 324      $ 2,247   

Humana Inc.

     66.8      21.5    $ 15,976      $       1,231      $       41,313   
Laboratory Corporation of America Holdings      5.6      1.2    $ 7,877      $ 574      $ 5,808   

MEDNAX Services, Inc.

     42.1      23.3    $ 5,943      $ 281      $ 2,154   

Molina Healthcare, Inc.

     18.1      17.3    $ 1,671      $ 53      $ 6,589   

Omnicare, Inc.

     60.0      28.4    $ 6,100      $ (43   $ 6,079   

Quest Diagnostics Incorporated

     (3.7  %)      (0.9  %)    $ 7,552      $ 849      $ 7,146   

Tenet Healthcare, Inc.

     12.2      15.4    $ 4,344      $ (134   $ 11,102   

Universal Health Services, Inc.

     39.1      21.5    $ 7,922      $ 522      $ 7,247   

Summary Statistics:

                                        

75th Percentile

     40.8      22.2    $ 7,911      $ 561      $ 12,524   

50th Percentile

     34.6      17.3    $ 6,021      $ 271      $ 9,055   

DaVita

     14.9      20.1    $ 14,120      $ 633      $ 11,764   

DaVita Percentage Rank

     34      56      90  %      79  %      72  % 
(1)

The Company’s peer group was compiled by Compensia and approved by the Compensation Committee.

(2)

Data as of February 28, 2014.

(3)

Data as of March 11, 2014.

(4)

Financial data generally publicly available as of March 11, 2014.

 

Our revised comparator peer group includes a diverse representation of various health care services, diagnostics, managed care, and solutions markets because we compete in these broad industry groups for executive talent. The Compensation Committee, in conjunction with Compensia, reviews the composition of this group annually and makes adjustments to the composition of the group as it deems appropriate in order to provide a fairly consistent measure for comparing executive compensation. While the majority of the companies in our comparator peer group remained the same over the years, in 2013 the Compensation Committee, in conjunction with Compensia, took a broader review of our peer group to revise the group to reflect the changing composition of our business, including entry into a new industry sector as a result of our merger with HealthCare Partners Holdings, LLC, the increasing size of our enterprise, and the changes in the health care sector. Our revised comparator peer companies are comparable to us in their size, as measured by market capitalization, net income and revenues. Compensation paid by this comparator peer group is representative of the compensation we believe is required to attract, retain and motivate our executive talent.

The Compensation Committee removed from our peer group companies that are no longer free-standing, publicly traded entities including Coventry Health Care, Inc., Health Management Associates, Inc., and Lincare Holdings Inc.

The Compensation Committee removed from our peer group companies that were not comparable in size as measured by market capitalization, net income, and/or revenues. Using this criterion, the Compensation Committee dropped from our peer group Express Scripts, Inc., Kindred Healthcare, Inc., and Magellan Health Services, Inc.

 

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The Compensation Committee also sought to add comparable sized companies representing our broad industry groups, including companies that are closer comparables for our HCP business, adding Catamaran Corporation, Centene Corp., Humana Inc., and Molina Healthcare, Inc.

The following table lists our peer group companies used in our prior peer group and our revised peer group:

 

Prior Peer Group Companies    Revised Peer Group Companies

Community Health Systems, Inc.

   Catamaran Corporation

Coventry Health Care, Inc.

   Centene Corp.

Express Scripts, Inc.

   Community Health Systems, Inc.

HCA Holdings, Inc.

   HCA Holdings, Inc.

Health Management Associates, Inc.

   Health Net, Inc.

Health Net, Inc.

   HealthSouth Corporation

Health South Corporation

   Humana Inc.

Kindred Healthcare, Inc.

   Laboratory Corporation of America Holdings

Laboratory Corporation of America Holdings

   MEDNAX Services, Inc.

Lincare Holdings Inc.

   Molina Healthcare, Inc.

Magellan Health Services, Inc.

   Omnicare, Inc.

MEDNAX Services, Inc.

   Quest Diagnostics Incorporated

Omnicare, Inc.

   Tenet Healthcare, Inc.

Quest Diagnostics Incorporated

   Universal Health Services, Inc.

Tenet Healthcare, Inc.

    

Universal Health Services, Inc.

    

The Compensation Committee considered the prior comparator peer group together with market data information analysis from Compensia and other factors, in determining 2013 base salary amounts and LTIP awards granted in March 2013. The revised comparator peer group together with market data and analysis from Compensia and other factors were considered by the Compensation Committee in determining 2014 base salary amounts and LTIP awards granted in April 2014 as well as determining 2014 bonus amounts for 2013 performance.

The Compensation Committee considered Compensia’s analysis (based on publicly disclosed compensation practices) of the compensation of executives serving in similar positions at comparable companies to obtain a general understanding of current compensation practices in our industry. The analysis provided by Compensia was used to provide context for the compensation decisions made by the Compensation Committee, but the Compensation Committee’s decisions were not directly related to or otherwise based upon the comparative data. Instead, the Compensation Committee used this comparative data as one of many factors considered to set the compensation for our NEOs. The Compensation Committee also used the analysis as a tool to assess how well the Company is implementing its core compensation objective of awarding compensation weighted heavily in favor of variable compensation tied to performance. The emphasis on equity awards as compared to cash compensation was reflected in the results of Compensia’s analysis which showed that the percentage of overall average equity awards as compared to overall average cash awards for our NEOs in 2013 was higher than the median for comparable companies.

In approving executive compensation, the Compensation Committee considered the Company’s market capitalization, which is at the 90th percentile of our revised comparator peer group, and the Company’s size, in terms of net income and revenue, which is greater than the median of our revised comparator peer group. Further, the Compensation Committee noted that the Company’s TSR was above the 56th percentile for three-year compound average annual TSR of its revised comparator peer group and exceeded all peers for ten-year compound average annual TSRs of the revised comparator peer group companies. The Company also has a record of sustained performance against the revised comparator peer group companies, posting above the 70th percentile for three-year operating margin and net margin and at the 87th percentile for three-year revenue growth against the revised comparator peer group companies. The Compensation Committee also considered each NEO’s roles and responsibilities within the Company, individual performance, Company performance and internal pay equity in addition to the results of the competitive pay analysis.

 

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Risk Considerations in Our Compensation Program

 

The Compensation Committee, with the assistance of Compensia, conducted a review of the Company’s material compensation policies and practices applicable to its employees, including its executive officers. Based on this review, the Compensation Committee concluded that these policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company. The key features of the executive compensation program that support this conclusion include:

 

 

a balance between cash and equity compensation;

 

 

a balance between short-term and long-term performance focus;

 

 

short-term incentive opportunities are capped and are not linked to any one specific goal;

 

 

equity awards have meaningful vesting requirements and relatively short terms;

 

 

a clawback policy that permits the Board to recover bonuses, incentive and equity-based compensation from executive officers and members of the Board;

 

 

stock ownership guidelines; and

 

 

significant independent Compensation Committee oversight.

Compensation Policies and Practices

We are committed to strong governance standards with respect to our compensation programs, procedures and practices. We believe that the following aspects of our compensation programs are indicative of this commitment.

Management Share Ownership Policy

 

We have a share ownership policy that applies to all full-time members of our management team at the vice president level and above and any part-time vice presidents who continue to receive equity awards under our equity compensation programs. The management share ownership policy is similar to our share ownership policy that applies to all non-employee members of the Board described on page 16 of this Proxy Statement. The purpose of the policy is to ensure that our executive officers and other members of our senior management team accumulate a meaningful ownership stake in the Company over time by retaining a specified financial interest in our common stock. Both shares owned directly and shares underlying vested but unexercised stock appreciation rights (including SSARs), restricted stock units, and stock options are included in the determination of whether the share ownership guidelines are met. The total net realizable share value retained must have a current market value of not less than the lower of 25% of the total equity award value in excess of $100,000 realized to date by the executive (since promotion to VP); or a specific multiple of the executive’s base salary. The salary multiple requirement for our current NEOs is 5.0 for Mr. Thiry, 3.0 for Messrs. Rodriguez and Kogod, and Dr. Menzel, 2.0 for Ms. Rivera, and 1.0 for Mr. Hilger. As of December 31, 2013, all of the NEOs meet or exceed our share ownership policy and guidelines.

Policy Regarding Clawback of Bonuses and Incentive Compensation

 

In 2010, the Board adopted a clawback policy that permits the Board to recover bonuses, incentive and equity-based compensation from executive officers and non-employee members of the Board whose fraud or intentional misconduct was a significant contributing factor to the Company having to restate all or a portion of its financial statements. The policy allows for the recovery of any bonus or incentive compensation paid to those executive officers or directors, the cancellation of restricted or deferred stock awards and outstanding stock awards granted to those executive officers or directors, and the reimbursement of any gains realized that are attributable to such awards to the fullest extent permitted by law. The policy allows for the foregoing actions to the extent that the amount of incentive compensation was calculated based upon the achievement of certain financial results that

 

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were subsequently reduced due to a restatement; the executive officer or director engaged in any fraud or intentional misconduct that was a significant contributing factor to the Company having to restate its financial statements; and where the amount of the bonus or incentive compensation that would have been awarded to the officer had the financial results been properly reported would have been lower than the amount actually awarded. The Company will not seek to recover bonuses or incentive or equity-based compensation paid or vested more than three years prior to the date the applicable restatement is disclosed.

Tax and Accounting Considerations

Deduction Limit

When reviewing compensation matters, the Compensation Committee considers the anticipated tax and accounting treatment of various payments and benefits to the Company and, when relevant, to its executives. Section 162(m) of the Internal Revenue Code generally disallows a tax deduction for compensation in excess of $1 million paid to the chief executive officer and the three other most highly compensated NEOs employed at the end of the year (other than the chief financial officer), such executives hereinafter referenced as “covered employees.”

Certain compensation is specifically exempt from the deduction limit to the extent that it does not exceed $1 million during any fiscal year or is “performance-based” as defined in Section 162(m). While the Compensation Committee recognizes the desirability of preserving the deductibility of payments made to the NEOs, the Compensation Committee believes that it must maintain flexibility in its approach in order to structure a program that is the most effective in attracting, motivating and retaining the Company’s key executives.

Non-Qualified Deferred Compensation

Section 409A of the Internal Revenue Code requires programs that allow executives to defer a portion of their current income to meet certain requirements regarding risk of forfeiture and election and distribution timing (among other considerations).

Section 409A of the Internal Revenue Code requires that “nonqualified deferred compensation” be deferred and paid under plans or arrangements that satisfy the requirements of the statute with respect to the timing of deferral elections, timing of payments and certain other matters. Failure to satisfy these requirements can expose employees and other service providers to accelerated income tax liabilities and additional taxes and interest on their vested compensation under such plans. Accordingly, as a general matter, it is our intention to design and administer our compensation and benefits plans and arrangements for all of our employees and other service providers, including our NEOs, so that they are either exempt from, or satisfy the requirements of, Section 409A of the Internal Revenue Code.

Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718, which requires the Company to recognize compensation expense for share-based payments (including SSARs, RSUs and other forms of equity compensation). FASB ASC Topic 718 is taken into account by the Compensation Committee in determining to issue various types of equity awards, considering the natural economic exchange ratios implied by their approximate respective fair values.

 

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COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Board is currently composed of four independent directors. The Compensation Committee oversees the Company’s compensation programs on behalf of the Board. The Compensation Committee reviewed and discussed the Compensation Discussion and Analysis set forth in this Proxy Statement with management.

Based on the Compensation Committee’s review and discussion with management, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Company’s Proxy Statement for the Company’s 2014 annual meeting of stockholders and the Company’s annual report on Form 10-K.

COMPENSATION COMMITTEE

Pamela M. Arway, Chair

Paul J. Diaz

Peter T. Grauer

Roger J. Valine

The information contained above under the caption “Compensation Committee Report” will not be considered “soliciting material” or to be “filed” with the SEC, nor will that information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into a filing.

 

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EXECUTIVE COMPENSATION

2013 Summary Compensation Table

 

Name and
Principal Position
  Year    

Salary

($)

   

Bonus(1)

($)

   

Stock

Awards(2)

($)

   

Option

Awards(3)

($)

   

Non-Equity

Incentive Plan

Compensation(4)

($)

   

All Other

Compensation(5)

($)

   

Total

($)

 

Kent J. Thiry

    2013      $     1,148,077                    $     12,272,760      $                 3,000,000      $           678,420      $     17,099,257   

Chairman of the

Board of Directors

and Chief Executive

Officer

    2012      $ 1,050,000      $     200,000      $     7,976,044      $ 12,074,350      $ 5,000,000      $ 498,727      $ 26,799,121   
    2011      $ 1,050,000      $ 200,000             $ 12,057,150      $ 3,750,000      $ 484,495      $ 17,541,645   
               
                                                               

Javier J. Rodriguez

    2013      $ 765,385                    $ 3,780,980      $ 1,600,000      $ 13,245      $ 6,159,610   

Chief Executive

Officer, Kidney Care

    2012      $ 700,001      $ 76,423      $ 4,036,057      $ 1,358,364      $ 1,400,000      $ 110,638      $ 7,681,483   
    2011      $ 549,990                    $ 3,835,663      $ 750,000      $ 35,379      $ 5,171,032   

Dennis L. Kogod

    2013      $ 800,000                    $ 2,970,770      $ 1,100,000      $ 90,042      $ 4,960,812   

Chief Operating

Officer, HealthCare

Partners

    2012      $ 800,004      $ 118,000      $ 4,036,057      $ 1,358,364      $ 1,400,000      $ 45,877      $ 7,758,302   
    2011      $ 800,010      $ 118,000             $ 6,028,575      $ 1,750,000      $ 107,383      $ 8,803,968   
                                                               

Dr. Garry E. Menzel(6)

    2013      $ 147,115      $ 66,484             $ 1,624,716             $ 45      $ 1,838,360   

Chief Financial

Officer

                                                               

James K. Hilger(7)

    2013      $ 350,000      $ 300,000             $ 189,049             $ 544      $ 839,593   

Chief Accounting

Officer

    2012      $ 326,925      $ 360,000      $ 440,838      $ 482,974             $ 561      $ 1,611,298   

Kim M. Rivera

    2013      $ 500,000      $ 150,000             $ 507,732             $ 22,450      $ 1,180,182   

Chief Legal Officer

    2012      $ 499,994      $ 216,000      $ 358,714      $ 120,744      $ 215,000      $ 561      $ 1,411,013   
      2011      $ 465,376      $ 896,000             $ 1,446,858      $ 180,000      $ 660      $ 2,988,894   

 

(1)

The amounts reported in this column represent discretionary bonuses, including relocation, signing and transaction bonuses, for the year with respect to which they were earned, regardless of when such bonuses are paid. The cash component of annual incentive bonuses are included in this column; except that the cash component of any bonus awarded under our EIP is included in the “Non-Equity Incentive Plan Compensation” column. For 2013, Dr. Menzel received a signing bonus of $15,000 and $51,484 in relocation expense reimbursement paid in 2013. The amounts reported also include annual performance-based cash bonuses for Mr. Hilger and Ms. Rivera of $300,000 and $150,000, respectively.

(2)

The amounts shown in this column reflect restricted stock unit awards and represent the aggregate grant date fair value of all such awards granted to the executive during the year as estimated by the Company in accordance with FASB ASC Topic 718. See Note 19 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of the relevant assumptions used in calculating these amounts pursuant to FASB ASC Topic 718.

(3)

The amounts shown in this column reflect SSAR awards and represent the aggregate grant date fair value of all such awards granted to the executive during the year as estimated by the Company in accordance with FASB ASC Topic 718. See Note 19 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of the relevant assumptions used in calculating these amounts pursuant to FASB ASC Topic 718.

(4)

The amounts shown in this column constitute payments made under our EIP. Under our EIP, awards are reported for the year with respect to which they were earned, regardless of when the award is paid. Please see “Elements of Compensation—Annual Performance-Based Cash Compensation—Executive Incentive Plan” in this Proxy Statement for a discussion of the performance criteria under the EIP.

(5)

Amounts included in this column are set forth by category below. The amounts disclosed, other than use of a fractionally-owned or chartered corporate aircraft, are the actual or share of actual costs to the Company of providing these benefits. Because a fractionally-owned or chartered corporate aircraft is used primarily for business purposes, we do not include in incremental cost the fixed costs that do not change based on usage. The incremental cost to us of personal use of a fractionally-owned or chartered corporate aircraft, including use for commuting, is calculated based on the variable operating costs related to the operation of the aircraft, including fuel costs and landing fees, trip-related repairs and maintenance, catering and other miscellaneous variable costs. Fixed costs that do not change based on usage, such as pilot salaries, training, utilities, depreciation, management fees, taxes and general repairs and maintenance are excluded. The value of the personal use of a fractionally-owned or chartered corporate aircraft by our NEOs is included in their personal income in accordance with applicable tax regulations.

 

 

  

 

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     Name and Principal Position    Year     

Aircraft
Usage(a)

($)

    

Life Insurance
Premiums

($)

     Total All Other
Compensation
($)
 
  Kent J. Thiry      2013       $     677,113       $   1,307       $   678,420   
 

Javier J. Rodriguez

     2013       $ 12,701       $ 544       $ 13,245   
 

Dennis L. Kogod

     2013       $ 89,405       $ 637       $ 90,042   
 

Dr. Garry E. Menzel

     2013               $ 45       $ 45   
 

James K. Hilger

     2013               $ 544       $ 544   
   

Kim M. Rivera

     2013       $ 21,906       $ 544       $ 22,450   
  (a)

For purposes of calculating the incremental costs to the Company of each NEO’s personal use of Company aircraft, the total cost of the flight is allocated to personal use based upon the relative ratio of personal mileage to total mileage. Costs for fuel, ground costs, catering costs, landing fees, domestic passenger fees and federal excise tax charges are also included, if applicable.

 

 

(6)

Dr. Menzel has served as our chief financial officer since November 7, 2013 and served as our senior vice president, finance from September 9, 2013 through November 6, 2013.

(7)

Mr. Hilger served as our interim chief financial officer from April 16, 2012 through November 6, 2013.

 

Employment Agreements

On July 25, 2008, we entered into an employment agreement with Mr. Thiry which replaced his employment agreement that was entered into on October 18, 1999 (as amended on May 20, 2000, November 28, 2000 and March 30, 2005). The employment agreement provides for an initial term through July 25, 2011 and continues thereafter with no further action by either party for successive one-year terms. The successive one-year terms of Mr. Thiry’s employment agreement enables us to carry forward his visions and strategy and his unique skills. Mr. Thiry is eligible to receive a bonus based upon the achievement of performance goals as determined by the Compensation Committee and the independent directors in accordance with the Compensation Committee charter. His target incentive bonus under his employment agreement is his annual base salary in effect during the beginning of the applicable fiscal year, although his actual incentive bonus may exceed that amount in a particular year, and has exceeded that amount in recent years.

We entered into an employment agreement with Mr. Rodriguez effective March 17, 2010. The agreement provides for employment at will, with either party permitted to terminate the agreement at any time, with or without cause, subject to notice requirements. Mr. Rodriguez is eligible to receive a discretionary performance bonus with the actual amount to be decided by our CEO and/or the Board or the Compensation Committee.

We entered into an employment agreement with Mr. Kogod effective October 24, 2005. This agreement was subsequently amended effective December 12, 2008 and December 31, 2012. The agreement provides for employment at will, with either party permitted to terminate the agreement at any time, with or without cause, subject to notice requirements. Mr. Kogod is eligible to receive a discretionary performance bonus with the actual amount to be decided by our CEO and/or the Board or the Compensation Committee.

We entered into an employment agreement with Dr. Menzel effective July 5, 2013. The agreement provides for employment at will, with either party permitted to terminate the agreement at any time, with or without cause, subject to notice requirements. Dr. Menzel is eligible to receive a discretionary performance bonus with the actual amount to be decided by our CEO and/or the Board or the Compensation Committee.

We entered into an employment agreement with Mr. Hilger effective September 22, 2005. This agreement was subsequently amended effective December 12, 2008 and December 27, 2012. The agreement provides for employment at will, with either party permitted to terminate the agreement at any time, with or without cause, subject to notice requirements. Mr. Hilger is eligible to receive a discretionary performance bonus with the actual amount to be decided by our CEO and/or the Board or the Compensation Committee.

We entered into an employment agreement with Ms. Rivera effective October 19, 2009. The agreement provides for employment at will, with either party permitted to terminate the agreement at any time, with or without cause, subject to notice requirements. Ms. Rivera is eligible to receive a discretionary performance bonus with the actual amount to be decided by our CEO and/or the Board or the Compensation Committee.

For a description of certain termination and change of control provisions included in the employment agreements for our NEOs, please see “Potential Payments Upon Termination or Change of Control” beginning on page 77 of this Proxy Statement.

The following table sets forth information concerning awards made to each of the NEOs under the Company’s EIP and equity compensation plans during 2013.

 

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2013 Grants of Plan-Based Awards

 

           

Estimated Future Payouts Under

Non-Equity Incentive Plan

Awards(1)(2)

   

All Other
Stock
Awards:
Number
of
Shares
of Stock
or Units

(#)

   

All Other
Options
Awards:
Number of
Securities
Underlying
Options

(#)(3)

   

Exercise
or Base
Price of
Option
Awards

($/Sh)

   

Grant Date
Fair Value of
Stock and
Option
Awards

($)(4)

 
Name  

Grant

Date

   

Threshold

($)

 

 

 

   

Target

($)

 

 

 

   

Maximum

($)

 

 

 

         

Kent J. Thiry

    —(1)             $ 1,050,000      $ 5,000,000                                   
      3/20/13                                    900,000      $ 59.52      $ 12,272,760   

Javier J. Rodriguez

    —(1)             $ 1,400,000      $ 2,500,000           
    —(2)      $   1,650,000      $   3,300,000      $   10,000,000           
      3/19/13                                    280,000      $ 58.94        $3,780,980   

Dennis L. Kogod

    —(1)             $ 1,400,000      $ 2,500,000           
    —(2)      $ 1,650,000      $ 3,300,000      $ 10,000,000           
      3/19/13                                    220,000      $ 58.94        $2,970,770   

Dr. Garry E. Menzel

    9/9/13                                    120,000      $ 56.04        $1,624,716   

James K. Hilger

    —(2)      $ 103,125      $ 206,250      $ 10,000,000           
      3/19/13                                    14,000      $ 58.94        $189,049   

Kim M. Rivera

    —(2)      $ 275,000      $ 550,000      $ 10,000,000           
      3/19/13                                    37,600      $ 58.94        $507,732   
(1)

For 2013, non-equity annual incentive awards to Messrs. Thiry, Rodriguez and Kogod were made under the EIP. The “maximum” amounts shown in the table above reflect the largest possible cash payments permissible under the EIP for the 2013 performance period for purposes of qualifying the plan under Section 162(m) of the Code. There were no thresholds or targets for these awards under the EIP; however, pursuant to Mr. Thiry’s employment agreement, his target incentive bonus opportunity for each fiscal year shall be equal to 100% of his base salary in effect at the beginning of such fiscal year; provided, that the amount of his bonus may exceed 100% of his base salary if target performance goals for the fiscal year are exceeded. With respect to Mr. Rodriguez and Mr. Kogod, because the Compensation Committee did not set a target amount under the EIP, the target amount reported is the cash bonus amount earned by each of them under the EIP in 2012. The EIP provides that the Compensation Committee may use “negative discretion” to award any amount that does not exceed the maximum. In each case, the cash bonus amounts actually earned by Messrs. Thiry, Rodriguez and Kogod in 2013 are reported in the “Non-Equity Incentive Plan Compensation” column of the “2013 Summary Compensation Table.” For a description of the EIP, see “Compensation Discussion and Analysis—Elements of Compensation—Annual Performance-Based Cash Compensation—Executive Incentive Plan” in this Proxy Statement.

(2)

Non-equity long-term incentive awards were also granted under the 2011 Plan in the form of cash-based performance awards to Messrs. Rodriguez, Kogod, Hilger, and Ms. Rivera on March 19, 2013. The “maximum” amounts shown in the table above reflect the largest possible payments under the cash-based performance awards for the 2014-2015 performance period for purposes of qualifying the plan under Section 162(m) of the Code. The amounts shown in the “Threshold” column reflect the threshold cash-based performance award payment which is 50% of the amount shown in the “Target” column. The maximum amount of any cash-based performance award payable to any executive officer is $10,000,000. However, the target award values for each of the NEOs at the time of grant is substantially lower than the maximum and are set forth in the column entitled “Target” above. For a description of these long-term cash-based performance awards, see “Compensation Discussion and Analysis—Elements of Compensation—Long-Term Incentive Program—Cash-Based Performance Awards” in this Proxy Statement.

(3)

This number represents SSARs awarded under the 2011 Plan. For a description of the SSARs, see “Compensation Discussion and Analysis—Elements of Compensation—Long-Term Incentive Program—Equity Awards—Stock Appreciation Rights” in this Proxy Statement.

(4)

These amounts are the aggregate grant date fair values of each award determined pursuant to FASB ASC Topic 718. See Note 19 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of the relevant assumptions used in calculating grant date fair value pursuant to FASB ASC Topic 718.

 

Narrative to the Grants of Plan-Based Awards Table

 

Awards

See “Compensation Discussion and Analysis—Elements of Compensation—Annual Performance-Based Cash Compensation—Executive Incentive Plan,” and “Compensation Discussion and Analysis—Elements of Compensation—Long-Term Incentive Program” in this Proxy Statement for a description of the EIP, and grants of cash-based performance awards and SSARs.

The following table sets forth information concerning outstanding SSARs and unvested stock awards held by each of the NEOs at December 31, 2013.

 

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2013 Outstanding Equity Awards at Fiscal Year-End

Where applicable, the figures presented in this proxy statement have been adjusted to reflect the two-for-one split of our common stock in the form of a stock dividend payable on September 6, 2013.

 

            Option Awards     Stock Awards  
Name   Grant Date     Number
of Securities
Underlying
Unexercised
Options (#)
Exercisable
    Number
of Securities
Underlying
Unexercised
Options (#)
Unexercisable
   

Option
Exercise
Price

($)

    Option
Expiration
Date
   

Number
of Shares
or Units of
Stock That
Have
Not Vested

(#)

   

Market Value
of Shares or
Units of Stock
That Have
Not Vested(1)

($)

 

Kent J. Thiry

    3/2/2009        108,334  (2)           $    23.13        3/2/2014                 
    3/31/2010        562,500  (3)      37,500  (3)    $ 31.70        3/31/2015                 
    4/13/2011               1,000,000  (4)    $ 43.35        4/13/2016                 
    12/18/2012               1,000,000  (5)    $ 55.34        12/18/2017                 
    3/20/2013               900,000  (4)    $ 59.52        3/20/2018                 
    3/31/2010                                    37,500  (6)    $    2,376,375   
      12/18/2012                                    144,128  (7)    $ 9,133,391   

Javier J. Rodriguez

    3/6/2009        130,000  (2)           $ 22.86        3/6/2014                 
    3/31/2010        51,333  (8)      4,667  (8)    $ 31.70        3/31/2015                 
    4/13/2011               260,000  (4)    $ 43.35        4/13/2016                 
    12/8/2011        26,666  (9)      53,334  (9)    $ 36.96        12/8/2016                 
    12/18/2012               112,500  (5)    $ 55.34        12/18/2017                 
    3/19/2013               280,000  (4)    $ 58.94        3/19/2018                   
    3/31/2010                                    7,000  (10)    $ 443,590   
    12/18/2012                                    28,126  (7)    $ 1,782,345   
      12/18/2012                                    44,806  (7)    $ 2,839,356   

Dennis L. Kogod

    3/2/2009        58,334  (2)           $ 23.13        3/2/2014                 
    3/31/2010        56,250  (3)      18,750  (3)    $ 31.70        3/31/2015                 
    4/13/2011               500,000  (4)    $ 43.35        4/13/2016                 
    12/18/2012               112,500  (5)    $ 55.34        12/18/2017                 
    3/19/2013               220,000  (4)    $ 58.94        3/19/2018                 
    3/31/2010                                    18,750  (6)    $ 1,188,188   
    12/18/2012                                    28,126  (7)    $ 1,782,345   
      12/18/2012                                    44,806  (7)    $ 2,839,356   

Dr. Garry E. Menzel

    9/9/2013               120,000  (4)    $ 56.04        9/9/2018                 

James K. Hilger

    3/2/2009        3,334  (2)           $ 23.13        3/2/2014                 
    3/31/2010        2,500  (8)      834  (8)    $ 31.70        3/31/2015                 
    4/13/2011               35,000  (4)    $ 43.35        4/13/2016                 
    12/18/2012               40,000  (5)    $ 55.34        12/18/2017                 
    3/19/2013               14,000  (4)    $ 58.94        3/19/2018                   
    3/31/2010                                    1,666  (10)    $ 105,574   
    12/18/2012                                    7,966  (7)    $ 504,805   

Kim M. Rivera

    1/8/2010        45,000  (2)      20,000  (2)    $ 30.50        1/8/2015                 
    4/13/2011               120,000  (4)    $ 43.35        4/13/2016                 
    12/18/2012               10,000  (5)    $ 55.34        12/18/2017                 
    3/19/2013               37,600  (4)    $ 58.94        3/19/2018                   
    1/8/2010                                    4,444  (12)    $ 281,616   
    12/18/2012                                    2,500  (7)    $ 158,425   
    12/18/2012                                    3,982  (7)    $ 252,339   
(1)

The market value of shares or units of stock that have not vested reflects the $63.37 closing price of our stock on December 31, 2013, as reported by the NYSE.

(2)

These SSARs vest 25% on the first anniversary, 8.33% on the 20th month and 8.33% every four months thereafter from the grant date.

 

 

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(3)

These SSARs vest 25% on the first anniversary and 6.25% every three months thereafter from the grant date.

(4)

These SSARs vest 50% on the third and fourth anniversaries of the grant date.

(5)

These SSARs vest 50% each on April 1, 2015 and April 1, 2016.

(6)

These remaining RSUs will vest on May 15, 2014.

(7)

These RSUs vest 50% on May 15, 2015 and May 15, 2016, subject to the satisfaction of the 2013 RSU Performance Condition.

(8)

These SSARs vest 33% on the second anniversary and 8.33% every three months thereafter from the grant date.

(9)

These SSARs vest 33% on the second, third and fourth anniversaries of the grant date.

(10)

The remaining 33% of these RSUs vest on May 15, 2014.

(11)

These RSUs vest 33% on each of the second, third and fourth anniversaries of the date of grant.

(12)

These RSUs vest 33.34% on the third anniversary and 11.11% every four months thereafter from the date of grant.

 

The following table sets forth information concerning the exercise of stock options and SSARs and the vesting of stock awards held by each of the NEOs during 2013. Where applicable, the figures presented in this proxy statement have been adjusted to reflect the two-for-one split of our common stock in the form of a stock dividend payable on September 6, 2013.

2013 Option Exercises and Stock Vested

 

      Option Awards      Stock Awards  
Name   

Number of
Shares
Acquired on
Exercise

(#)

    

Value Realized
on Exercise

($)(1)

    

Number of
Shares
Acquired on
Vesting

(#)

    

Value Realized
on Vesting

($)(2)

 

Kent J. Thiry

     751,666       $   31,919,445         37,500       $   2,442,750   

Javier J. Rodriguez

                     7,000       $ 454,956   

Dennis L. Kogod

     103,834       $ 3,790,291         18,750       $ 1,212,204   

Dr. Garry E. Menzel

                               

James K. Hilger

     5,000       $ 181,530         1,668       $ 108,537   

Kim M. Rivera

                     5,556       $ 316,108   
(1)

Value realized on exercise is determined by subtracting the exercise or base price from the market price of our common stock at exercise, and multiplying the remainder by the number of shares exercised.

(2)

Value realized on vesting is determined by multiplying the number of shares underlying RSUs by the closing price for our common stock on the date of vesting, as reported by the NYSE.

 

No Pension Benefits

The Company does not have a defined benefit pension plan in which any employee, including the NEOs, can participate to receive payments or other benefits at, following, or in connection with retirement.

Non-Qualified Deferred Compensation

The following table sets forth information concerning the Company’s nonqualified deferred compensation plans.

 

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2013 Nonqualified Deferred Compensation

 

Name   

Executive

Contributions

in Last FY

($)

   

Registrant

Contributions

in Last FY

($)

    

Aggregate

Earnings

in Last FY

($) (1)

    

Aggregate

Withdrawals/

Distributions

($)

    

Aggregate

Balance

at Last FYE

($)

 

Kent J. Thiry

             

Voluntary Deferral Plan

   $   385,557  (2)            $   1,290,936               $   5,893,309  (3) 

Javier J. Rodriguez

             

Voluntary Deferral Plan

                  $ 143,432               $ 603,843   

Dennis L. Kogod

             

Executive Retirement Plan

                  $ 69,942               $ 289,996   

Dr. Garry E. Menzel(4)

                                      

James K. Hilger(4)

                                      

Kim M. Rivera(4)

                                      
(1)

None of the earnings in this column are included in the 2013 Summary Compensation Table because they are not preferential or above market.

(2)

This amount is reported in the “Salary” column in the 2013 Summary Compensation Table.

(3)

Mr. Thiry deferred $385,557 in 2013, $2,448,462 in 2012, and $412,500 in 2011 into the Voluntary Deferral Plan.

(4)

Dr. Menzel, Mr. Hilger and Ms. Rivera did not participate in any of the Company’s nonqualified deferred compensation plans in 2013.

 

 

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Voluntary Deferral Plan

The 2013 Nonqualified Deferred Compensation Table presents amounts deferred under our Voluntary Deferral Plan.

Contributions

 

Under the Voluntary Deferral Plan, participants may defer (i) up to 50% of their base salary, (ii) all or a portion of their annual bonus payment that is earned in the same year as their base salary but payable in the following year and (iii) all or a portion of their other compensation as determined by the Company. Deferred amounts are credited with earnings or losses based on the rate of return of one or more investment alternatives selected by the participant from among the investment funds selected by the Company.

Participants may change their investment elections daily. We do not make contributions to participants’ accounts under the Voluntary Deferral Plan. All participant contributions are irrevocably funded into a rabbi trust for the benefit of those participants. Assets held in the trust are subject to the claims of the Company’s general creditors in the event of the Company’s bankruptcy or insolvency until paid to the plan participants.

Payment of benefits

 

Distributions are generally paid out in cash at the participant’s election either in the first or second year following retirement or in a specified year at least three to four years after the deferral election was effective. Participants elect to receive distributions in the form of one, five, ten, fifteen or twenty annual installments. If the participant has not elected a specified year for payout and the participant becomes disabled, dies or has a separation from service, distributions generally will be paid in a lump sum cash distribution.

In the event of an unforeseeable emergency, the plan administrator may, in its sole discretion, authorize the cessation of deferrals by a participant, provide for immediate distribution to a participant in the form of a lump sum cash payment or provide for such other payment schedule as the plan administrator deems appropriate.

Executive Retirement Plan

The table also presents amounts deferred under our Executive Retirement Plan. The Executive Retirement Plan was assumed by the Company from Gambro Healthcare, Inc. following our acquisition of Gambro Healthcare in October 2005. Amounts contributed to the plan were based on a percentage of an executive’s annual base salary and such contributions were made prior to our assumption of the plan. We did not make any contributions to the Executive Retirement Plan following our assumption of the plan, and effective February 1, 2006, we amended the plan to eliminate the obligation to make further contributions under the plan. Under the plan, amounts in a participant’s deferred account vest 100% upon the earlier of: (i) two years of service following the date of contribution and (ii) the date the participant reaches the age of 60. All amounts contributed under this plan and currently in deferred accounts were contributed prior to February 1, 2006 and therefore are fully vested. Deferred amounts are credited with earnings or losses based on the rate of return of one or more investment alternatives selected by the participant from among the investment funds selected by the Company. Participants may change their investment elections daily. All contributions are irrevocably funded into a rabbi trust for the benefit of plan participants. Assets held in the trust are subject to the claims of the Company’s general creditors in the event of the Company’s bankruptcy or insolvency until paid to the plan participants.

 

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Potential Payments Upon Termination or Change of Control

General Terms and Definitions

 

For purposes of the employment agreements with each of our NEOs and the table below:

“Cause” is defined in Mr. Thiry’s employment agreement as any of the following: (i) conviction of a felony; (ii) any act of fraud or dishonesty resulting or intended to result directly or indirectly in personal enrichment at the expense of the Company; (iii) repeated failure or refusal by the executive to follow policies established by the Board of Directors or written directives of the Board of Directors that goes uncorrected for a period of 30 consecutive days after notice of such failure or refusal, and that is material and willful and has a material adverse effect on the Company’s business; or (iv) a material breach of the executive’s employment agreement that goes uncorrected for a period of 30 consecutive days after written notice has been provided to the executive.

Involuntary termination for “Material Cause” occurs if the Company terminates employment for any of the following reasons: (i) conviction of a felony or plea of no contest to a felony; (ii) any act of fraud or dishonesty in connection with the performance of the executive’s duties; (iii) repeated failure or refusal by the executive to follow lawful policies or directives reasonably established by the CEO of the Company or his designee that goes uncorrected for a period of 10 consecutive days after written notice has been provided to the executive; (iv) a material breach of the executive’s employment agreement; (v) any gross or willful misconduct or gross negligence by the executive in performance of the executives duties; (vi) egregious conduct by the executive that brings the Company or any of its subsidiaries or affiliates into public disgrace or disrepute; (vii) an act of unlawful discrimination, including sexual harassment; (viii) a violation of the duty of loyalty or of any fiduciary duty; or (ix) exclusion or notice of exclusion of the executive from participating in any federal health care program.

Further, the definition of “Material Cause” in Ms. Rivera’s employment agreement includes the following additional language: “Before the company may discharge Ms. Rivera for an act of fraud or dishonesty in connection with the performance of her duties, Ms. Rivera shall have a right to contest her termination to the entire Board of Directors.”

“Material Cause” is defined in the employment agreement of Mr. Kogod as any of the following: (i) conviction of a felony or plea of no contest to a felony; (ii) the adjudication by a court of competent jurisdiction that the executive has committed any act of fraud or dishonesty resulting or intended to result directly or indirectly in personal enrichment at the expense of the Company; (iii) repeated failure or refusal by the executive to follow policies or directives reasonably established by the CEO of the Company or his designee that goes uncorrected for a period of 30 consecutive days after written notice has been provided to the executive; (iv) a material breach of the executive’s employment agreement that goes uncorrected for a period of 30 consecutive days after written notice has been provided to the executive; (v) any gross or willful misconduct or gross negligence by the executive in the performance of his duties; (vi) egregious conduct by the executive that brings the Company or any of its subsidiaries or affiliates into public disgrace or disrepute; (vii) an act of unlawful discrimination, including sexual harassment; (viii) a violation of the duty of loyalty or of any fiduciary duty; or (ix) exclusion or notice of exclusion of the executive from participating in any federal health care program.

Except with respect to Mr. Thiry and Dr. Menzel, as noted below, a “Change of Control” means (i) any transaction or series of transactions in which any person or group (within the meaning of Rule 13d-5 under the Exchange Act and Sections 13(d) and 14(d) of the Exchange Act) becomes the direct or indirect “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), by way of a stock issuance, tender offer, merger, consolidation, other business combination or otherwise, of greater than 50% of the total voting power (on a fully diluted basis as if all convertible securities had been converted and all warrants and options had been exercised) entitled to vote in the election of directors of the Company (including any transaction in which the Company becomes a wholly-owned or majority-owned subsidiary of another corporation), (ii) any merger or consolidation or reorganization in which the Company does not survive, (iii) any merger or consolidation in which the Company survives, but the shares of the Company’s common stock outstanding immediately prior to such merger or consolidation represent 40% or less of the voting power of the Company after such merger or consolidation, and (iv) any transaction in which more than 40% of the Company’s assets are sold. However, despite the occurrence of any of the above-described events, a “Change of Control” will not have occurred if Mr. Thiry remains the CEO of the Company for at least one year after the Change of Control or becomes the CEO or executive chair of the

 

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surviving company with which the Company merged or consolidated and remains in that position for at least one year after the Change of Control. Further, with respect to Dr. Menzel’s employment agreement, (1) a “Change of Control” will not have occurred if (x) Mr. Thiry remains the CEO of the Company for at least one year after the Change of Control or becomes the CEO or executive chair of the surviving company with which the Company merged or consolidated and remains in that position for at least one year after the Change of Control and (y) a majority of the surviving company’s board of directors immediately after such transaction consists of persons who were directors of the Company immediately prior to such transaction. Additionally, with respect to Dr. Menzel’s employment agreement, a “Change of Control” provides for 50% thresholds in clauses “(iii)” and “(iv)” above instead of 40% thresholds.

“Good Cause” means the occurrence of the following events without the executive’s express written consent: (i) the Company materially diminishes the scope of the executive’s duties and responsibilities; or (ii) the Company materially reduces the executive’s base compensation. Notwithstanding the above, the occurrence of any such condition shall not constitute Good Cause unless the executive provides notice to the Company of the existence of such condition not later than 90 days after the initial existence of such condition, and the Company shall have failed to remedy such condition within 30 days after receipt of such notice.

With respect to Mr. Thiry’s employment agreement, “Good Reason” means during the employment period, without the written consent of the executive, any one or more of the following (provided that an isolated, insubstantial or inadvertent action not taken in bad faith or failure not occurring in bad faith which is remedied by the Company promptly after receipt of notice thereof given by the executive shall not constitute Good Reason): (i) the assignment to the executive of any duties inconsistent in any material and adverse respect with the executive’s then current duties and responsibilities; (ii) the material and adverse change in the executive’s titles or positions; (iii) reduction in the executive’s base salary or target annual incentive opportunity, unless such reductions are part of an across-the-board reduction that applies to all senior executives of the Company and takes effect prior to a Change in Control (as defined below for Mr. Thiry); or (iv) any material breach by the Company of the employment agreement, that is not corrected within 30 days after notice of such breach.

For purposes of the definition of “Good Reason” in Mr. Thiry’s employment agreement above, a “Change of Control” means (i) any transaction or series of transactions in which any person or group (within the meaning of Rule 13d-5 under the Exchange Act and Sections 13(d) and 14(d) under the Exchange Act) becomes the direct or indirect “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), by way of a stock issuance, tender offer, merger, consolidation, other business combination or otherwise, of greater than 40% of the total voting power (on a fully diluted basis as if all convertible securities had been converted and all warrants and options had been exercised) entitled to vote in the election of directors of the Company (including any transaction in which the Company becomes a wholly-owned or majority-owned subsidiary of another corporation), (ii) consummation of any merger or consolidation in which the shares of the Company’s common stock outstanding immediately prior to such merger or consolidation represent 50% or less of the voting power of the corporation resulting from such merger or consolidation, or, if applicable, the ultimate parent corporation of such corporation, (iii) during any twenty-four month period, individuals who, as of the beginning of such period, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to the beginning of such period whose election, or nomination for election by the Company’s stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened solicitation by a person other than the Board for the purpose of opposing a solicitation by any other person with respect to the election or removal of directors, or any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall not be deemed a member of the Incumbent Board, (iv) consummation of any transaction in which all or substantially all of the Company’s assets are sold, or (v) the approval by the Company’s stockholders of a plan of complete liquidation or dissolution of the Company; provided, however, that no transaction contemplated by clauses (i) through (iv) above shall constitute a Change of Control if the person acting as the CEO of the Company for the twelve months prior to such transaction continues as the CEO or executive chairman of the Board of Directors of the Company or becomes the CEO or executive chairman of the Board of Directors of the entity that has acquired control of the Company as a result of such transaction (the “Acquiror”) immediately after such transaction and remains the CEO or executive chairman of the Board of Directors for not less than twelve months following the transaction, and further provided, that in the event that the person acting as the CEO of the Company for the twelve months prior to such transaction ceases to be CEO or executive chairman of the Board of Directors of the Company or of the Acquiror during the twelve months following the transaction, a Change of Control shall be deemed to have occurred on the date on which such person ceases to be CEO or executive chairman of the Board of Directors.

 

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Severance Payments and Benefits

The following tables and summary set forth the Company’s payment obligations pursuant to the terms of the employment agreements for each of our NEOs, under the circumstances described below, assuming that their employment was terminated on December 31, 2013. For a description of the value of stock-based awards held by Messrs. Thiry, Rodriguez, Kogod, Hilger, Dr. Menzel and Ms. Rivera that are subject to accelerated vesting upon a Change of Control, see “—Accelerated Vesting of Stock-Based Awards” below.

 

      Payment of Base
Salary (or multiple
thereof) in effect at
termination for a
specified period
following termination
    Bonus(1)     Continued
Health Benefits
for a Specified
Period
Following
Termination
    Office and
Secretarial
Assistance
   

Tax

Gross-

Up

     Total Value  

Kent J. Thiry

                                                 

Death

          $     3,000,000  (2)                          $ 3,000,000   

Disability

          $ 3,000,000  (2)                          $ 3,000,000   

Involuntary Termination without Cause

   $     16,725,000