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 (Amendment No. ) | ||
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LENNOX INTERNATIONAL INC.
(Name of Registrant as Specified In Its Charter)
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2140 Lake Park Blvd.
Richardson, Texas 75080
April 12, 2019
Dear Stockholders:
It is my pleasure to invite you to the 2019 Annual Meeting of Stockholders of Lennox International Inc. The meeting will be held at 10:30 a.m., local time, on Thursday, May 23, 2019, at the Lennox International Inc. Corporate Headquarters, 2140 Lake Park Blvd., Richardson, Texas 75080.
Lennox has elected to deliver our proxy materials to the majority of our stockholders over the Internet. This delivery process allows us to provide stockholders with the information they need while conserving natural resources and lowering the cost of delivery. On or about April 12, 2019, we mailed to our stockholders a Notice of Internet Availability of Proxy Materials (the “Notice”) containing instructions on how to access our Proxy Statement for our 2019 Annual Meeting of Stockholders and fiscal 2018 Annual Report to stockholders. The Notice also provides instructions on how to vote online or by telephone and includes instructions on how to receive a paper copy of the proxy materials by mail.
The accompanying Notice of Annual Meeting of Stockholders and Proxy Statement describe the items of business that will be discussed and voted upon during the meeting.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the 2019 Annual Meeting of Stockholders, we urge you to vote and submit your proxy by Internet, telephone or mail, pursuant to the instructions on your Notice or your proxy card. We encourage you to vote by Internet or telephone. It is convenient and saves the Company postage and other costs. Please use the website or telephone number shown on your Notice or your proxy card to vote by Internet or telephone. If you attend the meeting you will have the right to revoke the proxy and vote your shares in person.
On behalf of management and our Board of Directors, I want to thank you for your continued support and confidence in 2019.
Sincerely, | |
 | |
Todd M. Bluedorn | |
Chairman of the Board and Chief Executive Officer | |
2140 Lake Park Blvd.
Richardson, Texas 75080
April 12, 2019
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS | ||
TO BE HELD ON MAY 23, 2019 | ||
The 2019 Annual Meeting of Stockholders of Lennox International Inc. will be held on Thursday, May 23, 2019 at 10:30 a.m., local time, at the Lennox International Inc. Corporate Headquarters, 2140 Lake Park Blvd., Richardson, Texas 75080, to:
• | elect three Class III directors to hold office for a three-year term expiring at the 2022 Annual Meeting of Stockholders; |
• | conduct an advisory vote to approve the compensation of our named executive officers (“NEOs”) as disclosed in this Proxy Statement; |
• | approve the Lennox International Inc. 2019 Equity and Incentive Compensation Plan; |
• | ratify the appointment of KPMG LLP as our independent registered public accounting firm for the 2019 fiscal year; and |
• | transact any other business that may properly come before the Annual Meeting of Stockholders in accordance with the terms of our Bylaws. |
The Board of Directors has determined that our stockholders of record at the close of business on March 26, 2019 are entitled to notice of, and to vote at, the Annual Meeting of Stockholders.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 23, 2019. This Proxy Statement and the Annual Report to Stockholders are available on our website at www.lennoxinternational.com/financialrep.html and also at the website appearing on your Notice or your proxy card. A Proxy Statement, Proxy Card, and Annual Report to Stockholders, which includes our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, accompany this Notice.
Most stockholders have a choice of voting on the Internet, by telephone or by mail. Please refer to your Notice, proxy card or other voting instructions included with these proxy materials for information on the voting method(s) available to you. If you vote by Internet or telephone, you do not need to return your proxy card. If your shares are held in the name of a brokerage firm, bank or other nominee of record, follow the voting instructions you receive from such holder of record to vote your shares.
By Order of the Board of Directors, | |
 | |
John D. Torres | |
Corporate Secretary | |
TABLE OF CONTENTS
Page | |
Appendix A-1 | |
Appendix B-1 | |
-i-
GENERAL INFORMATION REGARDING THE 2019
ANNUAL MEETING OF STOCKHOLDERS
Meeting Date and Location
The 2019 Annual Meeting of Stockholders (the “Annual Meeting”) of Lennox International Inc. (also referred to in this Proxy Statement as the “Company,” “us,” “we,” or “our”) will be held on Thursday, May 23, 2019 at 10:30 a.m., local time, at the Company’s Corporate Headquarters, 2140 Lake Park Blvd., Richardson, Texas 75080. We began mailing or making available this Proxy Statement and the accompanying Notice of Annual Meeting of Stockholders, Proxy Card and Annual Report to Stockholders, which includes our Annual Report on Form 10-K, to our stockholders on or about April 12, 2019 for the purpose of soliciting proxies on behalf of our Board of Directors (the “Board”).
Matters to be Voted On
At the meeting, you will be asked to vote on three proposals. Our Board recommends you vote “for” each of the director nominees in Proposal 1 and “for” Proposals 2, 3 and 4. The proposals to be voted on at the Annual Meeting are:
• | Proposal 1: To elect three Class III directors to hold office for a three-year term expiring at the 2022 Annual Meeting of Stockholders; |
• | Proposal 2: To conduct an advisory vote to approve the compensation of our named executive officers (“NEOs”) as disclosed in this Proxy Statement; |
• | Proposal 3: To approve the Lennox International Inc. 2019 Equity and Incentive Compensation Plan; and |
• | Proposal 4: To ratify the appointment of KPMG LLP as our independent registered public accounting firm for the 2019 fiscal year. |
Record Versus Beneficial Ownership of Shares
If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are the "stockholder of record" with respect to those shares. If you are a stockholder of record, we sent our proxy materials directly to you.
If your shares are held in a stock brokerage account or by a bank, you are considered the “beneficial owner” of shares held in street name. In that case, our proxy materials have been forwarded to you by your broker or bank, which is considered the stockholder of record with respect to those shares. Your broker or bank will also send you instructions on how to vote. If you have not heard from your broker or bank, please contact them as soon as possible.
Record Date and Number of Votes
You are entitled to vote at the Annual Meeting if you were a stockholder of record at the close of business on March 26, 2019, our Annual Meeting record date. At the close of business on the record date, there were 39,560,837 shares of our common stock outstanding and entitled to vote. Each share of common stock is entitled to one vote.
Quorum Requirement
A quorum is required to transact business at the Annual Meeting. To achieve a quorum at the Annual Meeting, stockholders holding a majority of our outstanding shares of common stock entitled to vote must be present either in person or represented by proxy. Shares held by us in treasury will not count towards the calculation of a quorum.
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If a quorum is not present at the Annual Meeting, we expect the Annual Meeting will be adjourned or postponed to solicit additional proxies. In such event, the Chairman or stockholders representing a majority of the outstanding shares entitled to vote at the Annual Meeting and present in person or by proxy at the meeting may adjourn the Annual Meeting.
Abstentions and Broker Non-Votes
If a broker or bank holds shares in “street name” (that is, in the name of a bank, broker, nominee or other holder of record) and the beneficial owner does not provide the broker or bank with specific voting instructions, the broker or bank only has discretion to vote on routine matters (referred to as “broker non-votes”) but does not have discretion to vote on non-routine matters.
Pursuant to New York Stock Exchange (“NYSE”) rules, Proposal 1 (election of directors), Proposal 2 (advisory vote on the compensation of our NEOs), and Proposal 3 (approval of the 2019 Equity and Incentive Compensation Plan) are non-routine matters for which your broker or bank may not exercise voting discretion if it does not receive voting instructions from you. Proposal 4 (ratification of the appointment of KPMG LLP as our independent registered public accounting firm for the 2019 fiscal year) is a routine matter for which your broker or bank may exercise voting discretion even if it does not receive voting instructions from you. As a result, if you are a beneficial owner of shares held in street name, it is critical that you cast your vote in order for it to be counted on Proposals 1, 2 and 3.
Broker non-votes will not be counted as votes “for” or “withheld” for Proposal 1 or “for” or “against” Proposal 2 and Proposal 3. Abstentions will be counted as votes “against” Proposals 2, 3, and 4 but will not be counted as votes “for” or “withheld” for Proposal 1.
Vote Requirement for each Proposal
If a quorum is present, our Bylaws require, for purposes of Proposal 1, that a director nominee receive a majority of the votes cast with respect to his or her election in an uncontested election (that is, the number of shares voted “for” a director nominee must exceed the number of “withheld” votes cast for that nominee) to be elected. Each of our director nominees is currently serving on the Board. If a nominee who is currently serving as a director is not re-elected, Delaware law provides that the director would continue to serve on the Board as a “holdover director.” Under our Bylaws and Corporate Governance Guidelines, each director submits an advance, contingent resignation that the Board may accept if stockholders do not re-elect the director. In that situation, our Board Governance Committee would make a recommendation to the Board about whether to accept or reject the resignation, or whether to take other action. The Board would act on the Board Governance Committee’s recommendation, and publicly disclose its decision and the rationale behind it within 90 days from the date that the election results were certified.
If a quorum is present Proposal 3 (approval of the Lennox 2019 Equity and Incentive Compensation Plan) and Proposal 4 (ratification of the appointment of KPMG LLP as our independent registered public accounting firm for the 2019 fiscal year), will require the affirmative vote of a majority of the shares of common stock present in person or represented by proxy at the meeting and entitled to vote thereon.
Voting Procedures
Registered holders may vote in person at the Annual Meeting, by the Internet, by telephone, or, if they received a printed copy of these proxy materials, by mail. If your shares are held in street name, you will receive instructions from a bank, broker, nominee or other holder of record that you must follow in order for your shares to be voted. If you have not received voting instructions from your bank, broker, or other holder of record, please contact them as soon as possible.
A representative of Mediant Communication will tabulate the votes and act as inspector of election at the Annual Meeting.
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Changing Your Vote
You can revoke or change your vote on a proposal at any time before the Annual Meeting for any reason by revoking your proxy. For stockholders of record, proxies may be revoked by delivering a written notice of revocation, bearing a later date than your proxy, to our Corporate Secretary at or before the Annual Meeting. Proxies may also be revoked by:
• | submitting a new written proxy bearing a later date than a proxy you previously submitted prior to or at the Annual Meeting; |
• | voting again by Internet or telephone before 11:59 p.m., Eastern Time, on May 22, 2019; or |
• | attending the Annual Meeting and voting in person. |
In each case, the later submitted vote will be recorded and the earlier vote revoked. Any written notice of a revocation of a proxy should be sent to Lennox International Inc., 2140 Lake Park Blvd., Richardson, Texas 75080, Attention: Corporate Secretary. To be effective, the revocation must be received by our Corporate Secretary before the taking of the vote at the Annual Meeting.
If your shares are held in street name, you must follow the specific voting directions provided to you by your bank, broker, nominee or other holder of record to change or revoke any instructions you have already provided. Alternatively, you may obtain a proxy from your bank, broker or other holder of record and provide it with your vote at the Annual Meeting.
Other Business; Adjournments
We are not aware of any other business to be acted upon at the Annual Meeting. However, if you have voted by proxy and other matters are properly presented at the Annual Meeting for consideration in accordance with our Bylaws, the persons named in the accompanying Proxy Card will have discretion to act on those matters according to their best judgment or the Board’s recommendation. In the absence of a quorum, the Chairman or stockholders representing a majority of the votes present in person or by proxy at the meeting may adjourn the meeting.
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PROPOSAL 1
ELECTION OF DIRECTORS
Our Bylaws provide that our Board may be composed of no less than three and no more than 15 members. The size of our Board is currently fixed at 10 members, divided into three classes, with each class serving a three-year term.
Upon the recommendation of the Board Governance Committee, the Board has nominated three Class III directors for re-election to our Board to hold office for a three-year term expiring at the 2022 Annual Meeting of Stockholders. All Class I and II directors will continue in office until the expiration of their terms at the 2020 and 2021 Annual Meeting of Stockholders, respectively. The process followed by the Board in nominating directors and the criteria considered for director nominees is described in the “Corporate Governance” section of this Proxy Statement.
We provide biographical information for each Class III director nominee and for each other director below. For each director and director nominee, the information presented includes the positions held, principal occupation, and business experience as of April 1, 2019. The biographical description below for each director and director nominee also includes the specific experience, qualifications, attributes and skills that led to the Board’s conclusion that such person should serve as a director of the Company at this time, in light of our business and structure.
If you do not wish to vote your shares for any particular nominee, you may withhold your vote for that particular nominee. If any Class III director nominee becomes unavailable to serve, the persons named in the accompanying Proxy Card may vote for any alternate designated by the incumbent Board, or the number of directors constituting the Board may be reduced.
The Board has nominated the following directors for re-election as Class III directors for three-year terms expiring at the 2022 Annual Meeting of Stockholders:
 | Todd M. Bluedorn, 55, became Chief Executive Officer and was elected as a director of our Company in April 2007. He was appointed as Chairman of the Board in May, 2012. Prior to joining the Company, Mr. Bluedorn served in numerous senior management positions for United Technologies Corporation since 1995, including President, Americas — Otis Elevator Company; President, North America — Commercial Heating, Ventilation and Air Conditioning for Carrier Corporation; and President, Hamilton Sundstrand Industrial. He began his professional career with McKinsey & Company in 1992. A graduate of West Point with a B.S. in electrical engineering, Mr. Bluedorn served in the United States Army as a combat engineer officer and United States Army Ranger from 1985 to 1990. He received his M.B.A. from Harvard University School of Business in 1992. Mr. Bluedorn also serves on the Board of Directors of Eaton Corporation, a diversified industrial manufacturer, Texas Instruments Incorporated, a global designer and manufacturer of semiconductors and the Washington University in St. Louis Board of Trustees. Mr. Bluedorn possesses considerable industry knowledge and executive leadership experience. Mr. Bluedorn’s extensive knowledge of our Company and its business, combined with his drive for excellence and innovation, position him well to serve as CEO and a director of our Company. | |
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 | Max H. Mitchell, 55, has served as a director of our company since 2016. He is a member of the Audit Committee and the Board Governance Committee. Mr. Mitchell is the President, Chief Executive Officer and a Director of Crane Co., a diversified manufacturer of highly engineered industrial products. Before being elected President and Chief Executive Officer of Crane Co. in 2014, he served as the President and Chief Operating Officer of Crane Co. from 2013 to 2014, Executive Vice President and Chief Operating Officer of Crane Co. from 2011 to 2013, and Group President, Fluid Handling segment of Crane Co. from 2005 to 2012. Mr. Mitchell also served as an executive of Pentair Corporation and Danaher Corporation and served in finance and operational roles at Ford Motor Company. Mr. Mitchell has a M.B.A. in finance and strategic planning from the University of Pittsburgh and a B.A. from Tulane University. Mr. Mitchell brings broad global experiences across a diverse set of complex end industries and processes including strategy development as well as significant M&A experience and capital allocation decision making. | |
 | Kim K.W. Rucker, 52, has served as a director of our Company since 2015. She is a member of the Board Governance Committee and the Compensation and Human Resources Committee. Ms. Rucker has served as Executive Vice President, General Counsel and Secretary at Andeavor (formerly Tesoro Corporation) and Executive Vice President and General Counsel for Andeavor Logistics LP (formerly Tesoro Logistics GP, LLC) from 2016 to 2018. Previously, she was Executive Vice President, Corporate & Legal Affairs, General Counsel and Corporate Secretary at Kraft Foods Group, Inc., a global manufacturer and distributor of food products and beverages until July 2015. Prior to joining Kraft in 2012, Ms. Rucker served as the Senior Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer at Avon Products, Inc., a global manufacturer of beauty and related products, since 2008. Before joining Avon, Ms. Rucker was Senior Vice President, Corporate Secretary and Chief Governance Officer for Energy Future Holdings, Corp., an energy company, since 2004. She began her legal career at Sidley Austin LLP in its Chicago, Illinois office. Ms. Rucker currently serves on the Boards of Directors of Marathon Petroleum Corporation, U.S. refining, marketing and midstream oil and gas company, and Celanese Corporation, a global technology leader in the production of differentiated chemistry solutions and specialty materials. Ms. Rucker has a B.B.A. in Economics from the University of Iowa, a J.D. from Harvard Law School and a Master in Public Policy from the John F. Kennedy School of Government at Harvard University. Ms. Rucker contributes a broad knowledge of law, corporate governance, internal and external communications, M&A transactions, community involvement activities and government affairs in her service as a director. | |
THE BOARD RECOMMENDS A VOTE “FOR”
THE ELECTION OF EACH OF THE ABOVE NOMINEES
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The following Class I directors’ terms will continue until the 2020 Annual Meeting of Stockholders:
 | Janet K. Cooper, 65, has served as a director of our Company since 1999. She is a member of the Audit Committee and the Public Policy Committee. From 2002 to 2008, Ms. Cooper served as Senior Vice President and Treasurer of Qwest Communications International Inc. From 2001 to 2002, she served as Chief Financial Officer and Senior Vice President of McDATA Corporation, a global leader in open storage networking solutions. From 2000 to 2001, she served as Senior Vice President, Finance of Qwest. From 1998 to 2000, she served in various senior level finance positions at US West Inc., a regional Bell operating company, including Vice President, Finance and Controller and Vice President and Treasurer. From 1978 to 1998, Ms. Cooper served in various capacities with the Quaker Oats Company, including Vice President, Treasurer and Tax from 1997 to 1998 and Vice President, Treasurer from 1992 to 1997. Ms. Cooper serves on the Board of Directors of The Toro Company, a manufacturer of equipment for lawn and turf care maintenance and Resonant Inc., a technology company creating RF filters for mobile devices. Ms. Cooper contributes a substantial financial background and extensive experience in capital markets, tax, accounting matters, and pension plan investments in her service as a director. | |
 | John W. Norris, III, 61, has served as a director of our Company since 2001. He is the Chairman of the Public Policy Committee and a member of the Compensation and Human Resources Committee. Mr. Norris is a partner and co-founder of Maine Network Partners and is the founding Chairman of the Environmental Funders Network. From 2000 to 2005, he served as the Associate Director of Philanthropy for the Maine Chapter of The Nature Conservancy and from 2006 to 2007 as Program Officer for the Northern Forest Center. Mr. Norris was Co-Founder and President of Borealis, Inc., an outdoor products manufacturer, from 1988 to 2000 and served as an economic development Peace Corps Volunteer in Jamaica from 1985 to 1987. Before joining the Peace Corps, Mr. Norris completed a graduate school internship at Lennox Industries Inc., a subsidiary of the Company, in 1983. Mr. Norris contributes substantial experience and knowledge on environmental issues, non-governmental organizations, and organizational development in his service as a director. | |
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 | Karen H. Quintos, 55, has served as a director of our company since 2014. She is a member of the Compensation and Human Resources Committee and the Public Policy Committee. Ms. Quintos is the Executive Vice President and Chief Customer Officer (CCO) of Dell Technologies Inc., leading a global organization devoted to customer advocacy. Under Ms. Quintos’ leadership, the CCO organization defines and develops Dell’s customer experience strategy and programs, with the goals of maximizing customer satisfaction, acquisition, retention and profitability. Ms. Quintos is also responsible for Dell’s strategy and programs for Diversity & Inclusion and Corporate Social Responsibility — business imperatives she is passionate about and that matter to Dell’s customers and team members around the world. Previously at Dell, Ms. Quintos served as Senior Vice President and Chief Marketing Officer since September 2010 and Vice President of Public Sector Marketing and North America Commercial from 2008 to 2010. She previously also held executive roles in services, support and supply chain management. Ms. Quintos joined Dell from Citigroup, where she was Vice President of Global Operations and Technology. She also held a variety of marketing, operations, planning and supply chain management roles at Merck & Co. Ms. Quintos earned a master’s degree in marketing and international business from New York University, and a Bachelor of Science in supply chain management from Pennsylvania State University. Ms. Quintos is also on the board of Susan G. Komen for the Cure and Penn State’s Smeal College of Business, and was a 2014 recipient of the Smeal College of Business’ highest honor, the Distinguished Alumni Award. She also is founder and executive sponsor of Dell’s employee resource group dedicated to women. Ms. Quintos contributes a broad knowledge of marketing, communications, brand strategy, operations and supply chain management in her service as a director. | |
 | Paul W. Schmidt, 74, has served as a director of our Company since 2005. He is a member of the Audit Committee and the Public Policy Committee. In 2007, Mr. Schmidt retired from his position as Corporate Controller of General Motors Corporation, a position he held since 2002. He began his career in 1969 as an analyst with the Chevrolet Motor Division of General Motors and subsequently served in a wide variety of senior leadership roles for General Motors, including financial, product and factory management, business planning, investor relations and international operations. Schmidt was a plant manager in Pittsburgh, Pennsylvania from 1982 to 1984 before managing the largest automotive product program in GM’s history from 1985 to 1991. He subsequently led the automotive finance organizations in Europe from 1991 to 1994 and then in North America from 1994 to 2001 before becoming Corporate Controller. Mr. Schmidt contributes a thorough knowledge of U.S. GAAP and extensive experience in financial statement preparation, accounting matters, and risk management, as well as manufacturing expertise, in his service as a director. | |
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The following Class II directors’ terms will continue until the 2021 Annual Meeting of Stockholders:
 | John E. Major, 73, has served as a director of our Company since 1993. He is the Chairman of the Compensation and Human Resources Committee and a member of the Board Governance Committee. Mr. Major is President of MTSG, a company that provides consulting, investment and governance services, which he formed in 2003. From 2003 to 2006, he served as CEO of Apacheta Corporation, a mobile wireless software company whose products are used to manage inventory and deliveries. From 2000 to 2003, he served as Chairman and CEO of Novatel Wireless, Inc., a leading provider of wireless Internet solutions. From 1997 to 1998, he served as Executive Vice President of QUALCOMM. Prior to joining QUALCOMM, Mr. Major served as Senior Vice President and Chief Technology Officer at Motorola, Inc., a manufacturer of telecommunications equipment. Prior to that he served as Senior Vice President and General Manager for Motorola’s Worldwide Systems Group of the Land Mobile Products Sector. Mr. Major currently serves as the Chairman of the Board of Resonant Inc., a technology company creating RF filters for mobile devices, and on the Boards of Directors of Lattice Semiconductor, a manufacturer of programmable logic devices, Littelfuse, Inc., a manufacturer of circuit protection devices, and ORBCOMM Inc., a satellite communications service provider. Mr. Major contributes substantial experience in product innovation, compensation programs, and mergers and acquisitions in his service as a director. | |
 | Gregory T. Swienton, 69, has served as a director of our Company since 2010. He is the Chair of the Audit Committee and a member of the Board Governance Committee. Mr. Swienton was an adviser to Ryder System, Inc., a supplier of transportation, logistics and supply chain management solutions from May 2013 until May 2015. He previously was Executive Chairman of Ryder System, Inc., from January 2013 to May 2013, after having been Chairman of Ryder System, Inc. since May 2002 and Chief Executive Officer since November 2000. Mr. Swienton joined Ryder as President and Chief Operating Officer in June 1999. Before joining Ryder, Mr. Swienton was Senior Vice President-Growth Initiatives of Burlington Northern Santa Fe Corporation (BNSF). Prior to that he was BNSF’s Senior Vice President-Coal and Agricultural Commodities Business Unit, and previously had been Senior Vice President of its Industrial and Consumer Units. He joined BNSF in June 1994 as Executive Vice President-Intermodal Business Unit. Prior to joining BNSF, Mr. Swienton was Executive Director-Europe and Africa of DHL Worldwide Express in Brussels, Belgium from 1991 to 1994, and prior to that, he was DHL’s Managing Director-Western and Eastern Europe from 1988 to 1990, also located in Brussels. For the five years prior to these assignments, Mr. Swienton was Regional Vice President of DHL Airways, Inc. in the United States. From 1971 to 1982, Mr. Swienton held various national account, sales and marketing positions with AT&T and Illinois Bell Telephone Company. Mr. Swienton serves on the Board of Directors of Harris Corporation, a supplier of communications and information technology products. Mr. Swienton contributes extensive international business experience, deep expertise in global distribution and supply chain innovations, as well as experience in growth initiatives, in his service as a director. | |
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 | Todd J. Teske, 54, has served as a director of our company since 2011 and as Lead Director since May, 2015. He is the Chair of the Board Governance Committee and a member of the Compensation and Human Resources Committee. Since 2010, Mr. Teske has served as the Chairman, President and Chief Executive Officer of Briggs & Stratton Corporation, a world leader in gasoline engines for outdoor power equipment, portable generators, and lawn and garden powered equipment and related accessories. Before becoming CEO of Briggs & Stratton in January 2010, he served as its President and Chief Operating Officer, President of its power products business, head of corporate development and Controller. Mr. Teske serves as the Chairman of the Board of Briggs & Stratton. He also serves on the Board of Directors of Badger Meter, Inc., a leading innovator, manufacturer and marketer of flow measurement and control products. As an active CEO and former corporate controller, Mr. Teske contributes extensive expertise in the areas of management, finance, accounting, manufacturing and corporate governance in his service as a director. | |
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CORPORATE GOVERNANCE
Director Independence
Our Corporate Governance Guidelines require that a majority of our directors be “independent,” and that the Compensation & Human Resources, Board Governance and Audit Committees consist exclusively of independent directors as defined under the NYSE listing standards, the Securities Exchange Act of 1934 (the "Exchange Act") and any other applicable laws or regulations regarding independence. No director qualifies as “independent” unless the Board affirmatively determines that the director has no material relationship with the Company.
Applying these standards, the Board has determined that all of our Board members are independent, except Todd Bluedorn, our Chairman of the Board and Chief Executive Officer (“CEO”), and that all of the members of the Board’s standing committees consist exclusively of independent directors (see table under “Board Committees”).
In making its determination as to the independence of our directors, the Board Governance Committee and the Board considered that Ms. Quintos serves as Chief Customer Officer of Dell, Inc., which provides computer equipment and related items to the Company in the ordinary course of business.
Board Meetings and Leadership Structure
Mr. Bluedorn serves as the Chairman of the Board and Chief Executive Officer (“CEO”). The Board has determined that Mr. Bluedorn’s position as Chairman allows him to be a liaison between management and the Board of Directors, providing the Board with the benefit of management’s perspective on our business strategy and all other aspects of the business as the Board performs its oversight role.
Our Corporate Governance Guidelines provide for a Lead Director position, and the Board elected Todd J. Teske as Lead Director in 2015. The Board believes the Lead Director position provides helpful guidance to the independent directors in their oversight of management. The Lead Director, among other things, presides at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors, serves as liaison between the Chairman and the independent directors, assists the Chairman in planning agendas for Board meetings and advises on the quality of the information provided to the Board. The Lead Director also has the authority to call meetings of the independent directors, and, if requested by major stockholders, is available for consultation and direct communication.
The Board met ten times in 2018. All directors attended more than 75% of the total number of all meetings of the Board and committees of the Board on which they served. Our Corporate Governance Guidelines include a policy that Board members are expected to attend the annual meeting of stockholders. All of the individuals serving as directors at the time of our 2018 Annual Meeting of Stockholders attended our 2018 Annual Meeting of Stockholders.
Risk Oversight and Compensation Risk Analysis
The Board oversees the Company’s processes to manage risk at the Board and senior management levels. The Audit Committee oversees the guidelines and policies that govern the Company’s processes to assess and manage significant enterprise risk exposure. While the Board and Audit Committee oversee the Company’s risk management, our management is responsible for the development, implementation, and maintenance of our risk management processes. Management provides periodic reports to the Board and Board committees, as appropriate, on its assessment of strategic, operational, legal and compliance, and financial reporting risks to the Company. The Board and Board committees, as appropriate, review and consider the management reports provided on the Company’s enterprise risk and risk management strategy.
The Board has reviewed the Company’s compensation policies and practices to determine if risks arising from those policies and practices are reasonably likely to have a material adverse effect on the Company. Based on this review, the Board has not identified any risks arising from the compensation policies and practices that are reasonably likely to have a material adverse effect on the Company. The Company incorporates short-term and long-term incentive programs for cash and equity awards that are designed to reward successful execution of its business strategy and achievement of desired business results. Additionally, the Company has stock ownership
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requirements and clawback provisions to align the interests of its executive officers with the interests of its stockholders. For non-executive employees, the Company uses a variety of incentive compensation programs to motivate its employees to attain individual goals and support the financial performance of the Company. All of the Company’s material incentive compensation plans are reviewed at least annually by senior management.
Board Committees
The standing committees of the Board are as follows: Audit, Board Governance, Compensation and Human Resources, and Public Policy. The Board has adopted charters for each of these committees, copies of which are available on our website at www.lennoxinternational.com by following the links “About Us — Corporate Governance — Committee Charters.” Each of these Board committees is led by a different independent director and all members of our Board committees are independent directors.
The following table provides current membership information for each of the Board committees and indicates which directors our Board determined are independent, as defined by the NYSE.
Name | Independent | Audit | Board Governance | Compensation and Human Resources | Public Policy | |||||
Todd M. Bluedorn | — | — | — | — | — | |||||
Janet K. Cooper | X | X | — | — | X | |||||
John E. Major | X | — | X | X* | — | |||||
Max H. Mitchell | X | X | X | — | — | |||||
John W. Norris, III | X | — | — | X | X* | |||||
Karen H. Quintos | X | — | — | X | X | |||||
Kim K.W. Rucker | X | — | X | X | — | |||||
Paul W. Schmidt | X | X | — | — | X | |||||
Gregory T. Swienton | X | X* | X | — | — | |||||
Todd J. Teske | X | — | X* | X | — | |||||
* | Committee Chairperson |
Audit Committee
The Audit Committee assists the Board in fulfilling its oversight responsibilities relating to the integrity of our financial statements and related systems of internal controls, our compliance with legal and regulatory requirements, the independent registered public accounting firm’s qualifications, independence and performance and the performance of our internal audit function. The Audit Committee also has the direct responsibility for the appointment, compensation, retention and oversight of our Independent Accountants.
The Board has determined that each Audit Committee member is independent, as independence is defined for audit committee members by the SEC and the NYSE. The Board has also determined that each Audit Committee member is “financially literate” as defined by the NYSE, has accounting or related financial management expertise, and is an audit committee financial expert as defined by the SEC. The Audit Committee met eight times in 2018.
Board Governance Committee
The Board Governance Committee assists the Board by identifying individuals qualified to become Board members, developing qualification criteria for Board membership, making recommendations to the Board regarding the appropriate size of the Board and appointment of members to the Board’s committees, developing and recommending to the Board any changes to the Corporate Governance Guidelines and Code of Business Conduct applicable to our Company, developing our Company’s director education programs, and overseeing the evaluation of our Board. The Board Governance Committee also conducts an individual peer review for any directors who are scheduled to be re-nominated. The Board has determined that each member of the Board Governance Committee is independent as independence is defined by the NYSE. The Board Governance Committee met twice in 2018.
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Compensation and Human Resources Committee
The Compensation and Human Resources Committee determines the compensation philosophy and oversees the compensation programs for the Company’s executive officers and the non-employee members of the Board. This Committee’s responsibilities include oversight of the short- and long-term incentive plans and the senior management succession plans. The Committee also reviews the funding requirements and investment policies for the defined benefit and defined contribution retirement plans, and the performance of investment funds, investment advisors and investment managers under those plans. The Compensation Committee may delegate its responsibilities to a subcommittee comprised of Compensation Committee members.
Although the Committee seeks input from the CEO on various elements of executive compensation, the Committee determines and approves the final compensation elements and amounts to be provided to the Company’s NEOs. The independent members of the Board (rather than the Committee) have direct responsibility for approving CEO and Board compensation; however, the Committee reviews and recommends proposed changes to CEO and Board compensation to the independent members of the Board for approval. See “Executive Compensation — Compensation Discussion and Analysis” for information concerning the committee’s philosophy and objectives in overseeing executive compensation. The Board has affirmatively determined that each member of the Committee is independent as defined for compensation committee members by the NYSE. The Board has also determined that each member of the Committee is a “non-employee director” for purposes of Section 16b-3 of the Exchange Act and, along with each of the independent directors, is an “outside director” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). The Committee met five times in 2018.
The Committee’s charter authorizes the Committee to retain third-party compensation consultants and to obtain advice and assistance from internal or external legal, accounting or other advisors. The Committee retains Frederic W. Cook & Co., Inc. (“FW Cook”) as its executive compensation consultant to provide objective analysis, advice and recommendations regarding the compensation of our executives and non-employee directors. FW Cook does not provide any other services to the Company. See “Executive Compensation — Compensation Discussion and Analysis” for further information regarding our executive compensation programs and the scope of services provided by FW Cook. The Committee has concluded that FW Cook’s work does not raise any conflicts of interest that require disclosure under applicable SEC regulations.
Public Policy Committee
The Public Policy Committee is responsible for overseeing our Company’s environmental, health and safety issues, and our position on corporate social responsibility and significant public issues that affect our stockholders. The Board has determined that each Public Policy Committee member is independent as defined by the NYSE. The Public Policy Committee met twice in 2018.
Director Nomination Process and Nominee Criteria
The Board is responsible for nominating candidates for Board membership. The Board has delegated the director screening and recruitment process to the Board Governance Committee. In this capacity, the Board Governance Committee develops and periodically reviews the qualification criteria for Board membership, identifies new director candidates, and makes recommendations to the Board regarding the appropriate size of the Board and appointment of members to the Board’s committees. The Board Governance Committee typically retains a third-party search firm to assist in identifying and evaluating potential new director candidates. The Board Governance Committee considers nominees for election to the Board recommended by stockholders in the same manner as other candidates. Qualifications required of individuals for consideration for Board membership will vary according to the particular areas of expertise, experience and skills being sought as a complement to the existing Board composition at the time of any vacancy.
Neither the Board nor the Board Governance Committee has a formal diversity policy. However, our Corporate Governance Guidelines provide that, when nominating new members to the Board, the Board will seek the best qualified candidates with consideration for diversity. This consideration may include diversity of experience, functional expertise and industry knowledge. Our Board of Director Qualification Guidelines further provide that the Board Governance Committee consider a candidate’s diversity of viewpoints in determining the particular qualifications desired for any new Board member.
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According to our Board of Director Qualification Guidelines, the Board Governance Committee considers the following factors in evaluating candidates, in addition to other factors that the Board Governance Committee deems relevant:
• | Personal Characteristics: leadership, integrity, interpersonal skills and effectiveness, accountability, and high performance standards; |
• | Business Attributes: high levels of leadership experience in business, substantial knowledge of issues faced by publicly-traded companies, experience in positions demonstrating expertise, including on other boards of directors, financial acumen, industry and Company knowledge, diversity of viewpoints, and experience in international markets and strategic planning; |
• | Independence: independence based on the standards established by the NYSE, the SEC, and any other applicable laws or regulations; |
• | Professional Responsibilities: willingness to commit the time required to fully discharge his or her responsibilities, commitment to attend meetings, ability and willingness to represent the stockholders’ long- and short-term interests, awareness of our responsibilities to our customers, employees, suppliers, regulatory bodies and the communities in which we operate and willingness to advance his or her opinions while supporting the majority Board decision, assuming questions of ethics or propriety are not involved; |
• | Governance Responsibility: ability to understand, and distinguish between, the roles of governance and management; and |
• | Availability and Commitment: availability based on the number of commitments to other entities existing or contemplated by the candidate. |
The full text of our Board of Directors Qualification Guidelines can be found on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Board of Director Qualification Guidelines.”
When a vacancy occurs on the Board, a majority of the directors then in office may fill the vacancy, or the vacancy may remain open, or the size of the Board may be reduced. The Board Governance Committee evaluates nominees to the Board to fill any vacancy on the Board.
Stockholder Nominations for Director
A stockholder wishing to nominate a candidate for election to the Board at a meeting of the stockholders (“Nominating Stockholder”) is required to give written notice to our Corporate Secretary of his or her intention to make a nomination in accordance with the terms of our Bylaws. The Nominating Stockholder must be a holder of record of stock of the Company entitled to vote at the annual meeting of stockholders and must appear at the annual meeting of stockholders to nominate such person. The Nominating Stockholder must include a written consent from its proposed director nominee. The proposed director nominee must also represent and agree that he or she (1) has not and will not give any assurance or commitment not disclosed to the Company on how he or she would vote on any issue or question, (2) has not and will not become party to any agreement not disclosed to the Company regarding direct or indirect compensation (other than from the Company) for his or her service as a director, and (3) if elected, will comply with all applicable policies and guidelines of the Company. We must receive the notice of nomination at least 60 days but no more than 90 days prior to the annual meeting of stockholders. However, if we give less than 70 days’ notice of the date of the annual meeting of stockholders, the notice of nomination must be received within 10 days following the date on which notice of the date of the annual meeting of stockholders was mailed or such public disclosure was made to our stockholders.
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Pursuant to our Bylaws, the notice for the proposed director nominee must contain certain information about the nominee, the Nominating Stockholder and any person “acting in concert” with the Nominating Stockholder, including descriptions of any arrangements or understanding related to the nomination, the information that would be required if such person was making a stockholder proposal (as described under “Stockholder Proposals for the 2019 Annual Meeting of Stockholders — Proposals Not for Inclusion in the Proxy Statement to be Offered at the 2019 Annual Meeting”) and other information sufficient to allow the Board Governance Committee to determine if the candidate meets our qualification criteria for Board membership. The Board Governance Committee may require the proposed director nominee to furnish additional information in order to determine that person’s eligibility to serve as a director. A nomination that does not comply with the above procedure will be disregarded. Nominating Stockholders whose nominations comply with the foregoing procedure and who meet the criteria described above under the heading “Director Nomination Process and Nominee Criteria,” and in our Corporate Governance Guidelines, will be evaluated by the Board Governance Committee in the same manner as the Board Governance Committee’s nominees.
Stockholder Communications with Directors
Stockholders may send written communications to the Board by email to directors@lennoxintl.com, or by regular mail to 2140 Lake Park Blvd., Richardson, Texas 75080, Attention: Board of Directors, c/o Corporate Secretary.
Stockholder communications received by the Corporate Secretary will be delivered to one or more members of the Board or management, as determined by the Corporate Secretary. Any allegations of accounting, internal controls or auditing-related complaints or concerns will be directed to the Chairman of the Audit Committee.
Interested parties may communicate with non-management directors of the Board by sending written communications to the address listed above to the attention of the Lead Director.
Other Corporate Governance Policies and Practices
Code of Business Conduct
The Company has adopted a Code of Business Conduct that applies to all its directors and employees, including its senior financial and principal executive officers. The Code of Business Conduct covers a variety of matters, such as acting with integrity and compliance with laws, including anti-corruption laws. Amendments to and waivers, if any, of the Code of Business Conduct as it pertains to the executive officers will be disclosed on our website. The Code of Business Conduct is available on the Company’s website at www.lennoxinternational.com by following the links “About Us — Our Core Values — Code of Conduct.”
Corporate Governance Guidelines
The Company has adopted Corporate Governance Guidelines that are available on the Company’s website at www.lennoxinternational.com by following the links “About Us — Corporate Governance — Corporate Governance Guidelines.”
Executive Session Meetings
In accordance with our Corporate Governance Guidelines, the non-management directors of our Board, all of whom are independent, meet regularly in executive session without the presence of management. The Lead Director chairs the executive session meetings of our independent directors.
Whistleblower Procedures
The Audit Committee has established procedures for the handling of complaints regarding accounting, internal accounting controls, or auditing matters, including procedures for confidential and anonymous submission by our employees of concerns regarding such matters. The Company’s Code of Business Conduct prohibits retaliation against employees who report violations or suspected violations of the Code of Business Conduct.
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PROPOSAL 2
ADVISORY VOTE TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS
In accordance with Section 14A of the Exchange Act, we are asking our stockholders to vote to approve the compensation of our Company’s NEOs (the “Say-on-Pay vote”), as disclosed in this Proxy Statement. The Say-on-Pay vote is an advisory vote on the resolution below and is not binding on the Company or the Board. Although the vote is non-binding, the directors value the opinions of the stockholders and will consider the outcome of the vote when making future compensation decisions. Our next advisory vote on the frequency of stockholder votes on executive compensation will take place at our annual meeting of stockholders in 2023.
As described more fully in the “Compensation Discussion and Analysis” section of this Proxy Statement, the Company designed its market competitive NEO compensation program to reward successful execution of its business strategy and achievement of desired business results, with a focus on creating alignment with the interests of our stockholders. The program seeks to achieve these goals on an annual and long-term basis through an appropriate combination of base pay, annual incentives and long-term incentives.
For our NEOs, the majority of compensation is both stock-based and contingent on performance. The annual incentive payout is based on Company financial performance metrics of core net income and free cash flow, and for NEOs that are business segment leaders, a combination of Company and business segment performance. Our long-term incentives currently include: (1) performance shares units, which are designed to link compensation to the Company’s three-year financial performance as measured by return on invested capital and core net income growth; (2) stock appreciation rights, which are designed to incentivize NEOs to grow our business and deliver increased returns to our stockholders and (3) restricted stock units, which are designed to support our retention efforts.
The Company also has several governance policies in place to align executive compensation with stockholder interests and mitigate risk. These policies include: stock ownership guidelines, a prohibition on hedging and pledging of Company stock, a clawback policy and post-employment non-competition and non-solicitation restrictions. These policies are discussed in detail in the “Compensation Discussion and Analysis” section of this Proxy Statement.
The Company posted a record year for revenue, profitability, and cash generation in 2018 while working through the challenges from tornado damage at a large manufacturing facility and further streamlining our refrigeration segment by divesting certain non-core businesses. Highlights of our 2018 performance include the following:
• | Revenue* up 4% from 2017 to approximately $3.8 billion; |
• | Record total segment profit* margin of 14.2%, up 30 basis points from 2017; |
• | One-year total stockholder return of 6%, three-year total stockholder return of 81% and five-year total stockholder return of 173%; and |
• | Increased dividend 25%, which resulted in approximately $94 million cash paid to stockholders and used an additional $450 million for stock repurchase programs. |
*Revenue and profit margin exclude the non-core Refrigeration assets divested in 2018. See GAAP reconciliation on Appendix A.
Financial results, including those from prior periods, are described in more detail in our Form 10-K for the fiscal year ended December 31, 2018. For further detail and a reconciliation of Segment Profit to Operating Income, see Note 20 in the Notes to the Consolidated Financial Statements in our Form 10-K for the fiscal year ended December 31, 2018. All total stockholder return calculations assume reinvestment of dividends.
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We are asking stockholders to approve the following advisory resolution at the Annual Meeting:
RESOLVED, that the compensation of the Company’s named executive officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE
COMPENSATION OF THE NEOS AS DISCLOSED IN THIS PROXY STATEMENT.
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EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Executive Summary
The Company’s executive compensation program is designed to attract, retain and motivate leadership talent, align executive compensation with short- and long-term business goals, maintain market competitiveness and drive increased stockholder value by maintaining a strong alignment between pay and performance. Highlights of our 2018 financial performance and a description of the linkage between executive compensation and financial performance are set forth below.
Financial Highlights
The Company posted a record year for revenue, profitability, and cash generation in 2018 while working through the challenges resulting from tornado damage at a large manufacturing facility and further streamlining our refrigeration segment by divesting certain non-core businesses. Highlights of our 2018 performance include the following:
*Revenue and profit margin for all years exclude the non-core Refrigeration assets divested in 2018. See GAAP reconciliation on Appendix A.
• | One-year total stockholder return of 6%, three-year total stockholder return of 81% and five-year total stockholder return of 173%; and |
• | Increased dividend 25%, which resulted in approximately $94 million cash paid to stockholders and paid out an additional $450 million for stock repurchase programs. |
Financial results, including those from prior periods, are described in more detail in our Form 10-K for the fiscal year ended December 31, 2018. For further detail and a reconciliation of Segment Profit to Operating Income, see Note 20 in the Notes to the Consolidated Financial Statements in our Form 10-K for the fiscal year ended December 31, 2018. All total stockholder return calculations assume reinvestment of dividends.
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Pay-for-Performance Linkage
Pay-for-performance is the philosophical foundation for our annual short-term and long-term incentive programs. Highlights of our incentive compensation programs and how they are linked to our pay-for-performance philosophy include:
• | 85% of our CEO’s target compensation is variable - tied to short-term and long-term incentives; |
• | 70% of our NEOs’ long-term incentive compensation is performance-based, with the remainder provided as restricted stock units for retention purposes; |
• | CEO compensation in 2018 (as shown in the Summary Compensation Table) decreased 34%, while our one-year total stockholder return was 6%; and |
• | Payouts under our performance share unit program averaged 172% of target over the last three completed performance cycles (each spanning three years and overlapping with each other), while total stockholder return over that same five-year period was 173%. |
Overview
This Compensation Discussion and Analysis (“CD&A”) describes the philosophy and objectives of the compensation program for our NEOs. The Compensation and Human Resources Committee of the Board (the “Committee”) establishes and administers our executive compensation program, practices and policies. The Committee receives input from management and its executive compensation consultant, and considers competitive practices, our business objectives, stockholder interests, regulatory requirements and other relevant factors to develop our executive compensation program in an effort to most effectively drive the achievement of the Company’s business objectives.
Stockholder Input
The Committee considers input from stockholders, including the result of the annual Say-on-Pay vote, in determining compensation policies and decisions. At our 2018 Annual Meeting, the advisory vote on the compensation of the Company's NEOs received the approval of over 98% of the stockholders voting for or against this item. In an effort to maintain this strong support from stockholders, management has continued to review investor and proxy advisor concerns regarding executive compensation and governance and has selectively communicated with stockholders. The Say-on-Pay vote result was one of many factors the Committee considered in deciding to not implement any major changes to the executive compensation program in 2018.
Positive Governance Practices
The Committee assesses trends and developments in executive compensation practices and implements those that best fit with the Company’s business strategy and our stockholders’ long-term interests. Below are some of the practices we have incorporated into our compensation program, as described elsewhere in this Proxy Statement:
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What We Do | What We Don't Do | ||
þ | Median compensation philosophy | ý | No tax gross-ups on any CIC agreements after 2009 |
þ | Long-term balance in compensation structure | ý | No hedging of Company stock |
þ | Use of independent compensation consultant | ý | No pledging of Company stock |
þ | Annual risk assessment | ý | No dividends on equity awards in annual grant |
þ | Rigorous stock ownership guidelines | ý | No repricing of stock appreciation rights or options |
þ | Clawback provisions | ý | No cash buyouts of underwater stock appreciation rights or options |
þ | Non-Competition / Non-Solicitation restrictions | ý | No significant perquisites |
þ | Annual reviews of share utilization | ||
þ | Regular market assessment of our peer group | ||
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Executive Compensation Philosophy and Key Objectives
Pay-for-Performance
We maintain a pay-for-performance philosophy designed to reward successful execution of our business strategy and achievement of desired business results, with a focus on aligning compensation with the interests of our stockholders. When our financial results exceed performance goals, monetary rewards to our NEOs generally pay out at higher levels. When our financial results fall below performance goals, monetary awards to our NEOs generally pay out at lower levels and may not pay out at all.
Recent payouts under our short-term incentive program and our long-term incentive program demonstrate the strong link between Company performance and actual payments made to our NEOs. In 2018, overall Company performance fell slightly below the goals. As a result, our NEOs received slightly below target level payouts under our annual short-term incentive compensation program. Over the last three years, our financial performance resulted in record weighted average return on invested capital of 33.5% and a compound annual growth rate of Company core net income of 13.4%. As a result, our NEOs received an above target performance share unit payout under our long-term incentive plan, consistent with our pay-for-performance approach and results-oriented compensation.
The graph below illustrates the directional alignment of pay and performance by showing changes in CEO annual compensation (using totals from the Summary Compensation Table) versus changes in total stockholder return (“TSR”) over the last several years. The shaded bars represent the Change in Pension Value, which is impacted by interest rate changes, while the solid bars represent all other Summary Compensation Table pay.
$ amounts are in thousands. TSR represents the change in a $100 investment
from the end of year 2013 assuming reinvestment of dividends.
Key Strategic Objectives
The strategic objectives of our executive compensation program are to:
• | attract, retain and motivate top executive talent; |
• | align compensation with the achievement of short-term and long-term business goals; |
• | maintain a market-competitive executive compensation program; and |
• | drive increased stockholder value by maintaining a strong alignment between pay and performance. |
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The following table lists each element of executive compensation and how the Committee believes it correlates to our compensation philosophy and key objectives.
Executive Compensation Elements | Attract Top Talent | Retain & Motivate Top Talent | Achieve Short- Term Goals | Achieve Long- Term Goals | Maintain Market Competiveness | Pay for Performance | ||||||
Base Salary | ü | ü | ü | |||||||||
Short-Term Incentive Program | ü | ü | ü | ü | ü | |||||||
Long-Term Incentive Program: | ||||||||||||
Performance Share Units | ü | ü | ü | ü | ü | |||||||
Restricted Stock Units | ü | ü | ü | |||||||||
Stock Appreciation Rights | ü | ü | ü | ü | ü | ü | ||||||
Perquisites | ü | ü | ||||||||||
Benefit Programs | ü | ü | ||||||||||
Process for Determining Named Executive Officer Compensation
Market Competitive Compensation
To maintain a market-competitive program, the Committee uses benchmarking data when establishing executive compensation. Benchmarking against a representative peer group assists the Committee in assessing the competitiveness of our executive compensation program.
Our Company’s compensation peer group, as reviewed and approved by the Committee, included the following 15 companies (the “Compensation Peer Group”):
• A. O. Smith Corporation | • Fortune Brands Home & Security, Inc. | • Regal Beloit Corporation |
• Acuity Brands, Inc. | • Hubbell Inc. | • Rockwell Automation, Inc. |
• Crane Company | • Kennametal Inc. | • Snap-On Incorporated |
• Dover Corporation | • Owens Corning | • The Timken Company |
• Flowserve Corporation | • Pentair, Inc. | • USG Corporation |
The Committee selected the Compensation Peer Group using the following criteria:
• | industry — building products, electrical components/equipment and industrial machinery; |
• | revenues of approximately 0.5 to 2.0 times our revenues; |
• | business and product mix similar to ours; and |
• | international presence and operations. |
In addition to comparing our NEO compensation to the compensation provided by our Compensation Peer Group, the Committee also referenced published compensation data and other studies of compensation trends and practices (all such data and practices, including our Compensation Peer Group, is collectively referred to as the “Market”).
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Pay Positioning and Compensation Mix
For 2018, the Committee targeted all elements of compensation for the Company’s NEOs at the 50th percentile of the Market and granted a majority of total compensation to our NEOs in the form of incentive compensation. The 2018 target compensation mix for the CEO and the average target compensation mix for the other NEOs are shown in the graphs below.
CEO - Target Compensation Mix | Other NEOs - Target Compensation Mix |
 |  |
Consistent with Market practice, the CEO’s target compensation mix has more “at-risk” performance-based incentive compensation than the other NEOs due to his broad influence on Company performance.
Compensation Analysis
Beyond traditional market analysis, the Committee utilizes various other compensation analyses to assist with its decision making process. Below are examples of information the Committee reviews and considers, as appropriate, when making compensation decisions:
• | “all in” compensation summaries and pay histories for the CEO and executive officers |
• | CEO realized pay analysis |
• | CEO pay vs. performance analysis |
• | dilution and share utilization analysis, projections and benchmarking |
• | equity compensation expense analysis |
• | short-term and long-term incentive design, metric and vehicle prevalence |
• | short-term and long-term incentive plan performance results |
Role of Management
The Committee obtains input from management and the Committee’s consultant when making NEO compensation decisions. The CEO makes recommendations to the Committee with respect to all of the elements of compensation for each NEO, excluding himself. The CEO’s recommendations on NEO pay are developed in consultation with the Chief Human Resources Officer and the Committee’s compensation consultant, and are considered with Market data. The Committee determines and approves the final compensation elements and amounts to be provided to the Company’s NEOs.
The Committee reviews and recommends proposed changes to CEO compensation to the independent members of the Board for approval. All independent members of the Board (rather than the Committee) have responsibility for approving CEO compensation.
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Role of the Executive Compensation Consultant
In 2018, the Committee engaged FW Cook to provide analysis, advice and recommendations on executive compensation to the Committee. The Committee considered disclosures provided by FW Cook related to its independence from the Company, the Company’s NEOs and the members of the Committee, and reviewed FW Cook’s independence policy. FW Cook does not provide any other services for our Company.
At the Committee’s request, FW Cook performed the following services in 2018:
• | reviewed and opined on our executive compensation philosophy; |
• | reviewed and opined on our Compensation Peer Group; |
• | provided and analyzed data for various elements of executive compensation; |
• | reviewed and opined on our executive and Board compensation programs, including NEO and Board target compensation; |
• | presented executive compensation trends and regulatory updates to the Committee; and |
• | provided input and perspective on various technical matters pertaining to executive compensation. |
The Committee analyzed and considered the information provided by management and FW Cook to determine the program design and the level and mix of each compensation element for the NEOs.
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Components and Analysis of 2018 Executive Compensation
Base Salary
In establishing each NEO’s annual base salary, the Committee considered Market data, each individual’s experience and responsibilities, our annual merit budget for all employees, achievement of performance objectives, internal equity and recommendations provided by the CEO for his direct reports.
The following table provides detail regarding base salaries for each NEO:
Name | Title | Base Salary January 1, 2018 | Increase Effective April 1, 2018 | Base Salary April 1, 2018 | |||||||||
Todd M. Bluedorn | Chairman and Chief Executive Officer | $ | 1,125,000 | 3.1 | % | $ | 1,160,000 | ||||||
Joseph W. Reitmeier | EVP, Chief Financial Officer | 500,000 | 5.0 | 525,000 | |||||||||
Douglas L. Young | EVP, President and Chief Operating Officer, Residential Heating and Cooling | 560,000 | 3.6 | 580,000 | |||||||||
Daniel M. Sessa | EVP, Chief Human Resources Officer | 495,000 | 3.0 | 510,000 | |||||||||
John D. Torres | EVP, Chief Legal Officer and Corporate Secretary | 480,000 | 3.1 | 495,000 | |||||||||
In setting NEO base salaries, the Committee used the 50th percentile of the Market as a guideline. The base salary was set within a reasonable range of this guideline for each NEO.
Short-Term Incentive Program
Our short-term incentive program (“STI Program”) as established under the Lennox International Inc. 2010 Incentive Plan, as amended and restated (the “2010 Incentive Plan”), is an annual cash-based program for our NEOs designed to reward the successful performance of our Company, our business units and each individual NEO. In early 2018, the Committee approved the financial metrics and performance goals that must be achieved for any payouts to be made under our STI Program. The 2018 STI Program was based on performance against the financial goals set forth below. The 2018 short-term incentive awards were based 75% on financial performance and 25% on each NEO’s individual performance.
Financial Performance. The following table summarizes the performance goals and payout opportunities under our 2018 STI Program, along with Company and business unit performance for each metric.
2018 Short-Term Incentive Program Summary — Financial Performance
($ in thousands)
Name(1) | Metric | Weight | Threshold | Target | Maximum | Performance | ||||||||||||||
All | Company Core Net Income(2) | 60% | $ | 326,527 | $ | 408,159 | $ | 469,383 | $ | 386,732 | ||||||||||
Company Free Cash Flow(3) | 40% | 253,610 | 362,300 | 470,990 | 364,500 | |||||||||||||||
Payout Opportunity as a % of Target | 50% | 100% | 225% | |||||||||||||||||
Mr. Young | Segment Profit(4) | 70% | $ | 346,207 | $ | 414,558 | $ | 465,822 | $ | 406,401 | ||||||||||
Segment Controllable Cash Flow(5) | 30% | 273,739 | 355,660 | 437,581 | 359,873 | |||||||||||||||
Payout Opportunity as a % of Target | 50% | 100% | 225% | |||||||||||||||||
(1) | All NEOs except Mr. Young were measured 100% on overall Company financial performance, which resulted in a calculated award of 93% of target. As the President of our Residential Heating and Cooling segment, Mr. Young’s award was measured 50% on Residential Heating and Cooling’s financial performance and 50% on overall Company financial performance. Residential Heating and Cooling’s financial performance resulted in a calculated award of 97% of target, which when blended with the Company’s calculated award of 93% of target, resulted in a calculated award for Mr. Young of 95% of target. |
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(2) | Company core net income, a non-GAAP financial measure used for incentive compensation purposes, is income from continuing operations, adjusted for 2018 restructuring charges, certain product quality adjustments, certain legal charges and contingency adjustments, unrealized gains and losses on unsettled futures contracts, pension settlement charges and certain other items. |
(3) | Company free cash flow, a non-GAAP financial measure used for incentive compensation purposes, is net cash provided by operating activities less purchases and sales of property, plant and equipment. Results were adjusted downward for timing of insurance reimbursements related to the tornado damage at a large manufacturing facility in 2018. |
(4) | Segment profit, a non-GAAP financial measure used for incentive compensation purposes, is earnings from continuing operations for the applicable segment before interest expense, other expenses, and income taxes, adjusted for 2018 restructuring charges, certain product quality adjustments, certain legal charges and contingency adjustments, unrealized gains and losses on unsettled futures contracts, and certain other items. |
(5) | Segment controllable cash flow, a non-GAAP financial measure used for incentive compensation purposes, is segment profit, defined above, less purchases and sales of property, plant and equipment, plus or minus changes in accounts receivable, inventory and accounts payable. Results were adjusted downward for timing of insurance reimbursements related to the tornado damage at a large manufacturing facility in 2018. |
Individual Performance. The Committee considered individual performance in addition to financial performance in order to further align pay with performance. The individual performance component comprised 25% of the calculated award and had the same payout range as the STI Program (0% to 225%). The individual performance component was measured against specific financial, operational, strategic, and leadership objectives established for each NEO in advance of the performance measurement period as part of our performance management process. After the end of the year, the CEO reviewed with the Committee the extent of achievement of these established objectives by each NEO (other than the CEO). The Committee then determined and approved the individual performance component for each NEO (other than the CEO). Mr. Reitmeier, Mr. Young, Mr. Sessa and Mr. Torres received small payout adjustments based on their individual performance, resulting in an actual payout of 99% of target for each executive. The independent members of the Board determined and approved the individual performance component for the CEO with a payout adjustment resulting in an actual payout of 99% of target.
Targets and Payouts. Under the STI Program, target payout opportunities are determined as a percentage of base salary. The target payout opportunities are based on Market data using the 50th percentile as a guideline. Each NEO’s target percentage fits within this guideline and was unchanged for 2018.
Based on analysis of the Market data and internal equity considerations, the Committee (or with respect to the CEO, the independent Board members) set the following short-term incentive targets for 2018. Based on actual financial and individual performance, the Committee (or with respect to the CEO, the independent Board members) approved the following 2018 payouts for each NEO:
2018 Short-Term Incentive Targets and Payouts
Name | 2018 STI Target as a % of Base Salary | 2018 STI Target | 2018 STI Payout as a % of Target | 2018 STI Payout | ||||||||||
Mr. Bluedorn | 125 | % | $ | 1,439,063 | 99 | % | $ | 1,420,343 | ||||||
Mr. Reitmeier | 70 | 363,125 | 99 | 358,215 | ||||||||||
Mr. Young | 70 | 402,500 | 99 | 397,146 | ||||||||||
Mr. Sessa | 70 | 354,375 | 99 | 350,065 | ||||||||||
Mr. Torres | 70 | 343,875 | 99 | 340,285 | ||||||||||
We include the short-term incentive payments made to the NEOs for 2018, which were approved by the Committee on February 26, 2019 and paid on March 15, 2019, in the Summary Compensation Table under “Non-Equity Incentive Plan Compensation.”
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Long-Term Incentive Program
We have a long-term incentive program ("LTI Program") designed to incentivize those employees who have principal responsibility for our long-term profitability. We believe participation in our long-term incentive program aligns the interests of our NEOs with the interests of our stockholders.
We use a mix of performance share units (“PSUs”), restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) in our LTI Program. PSUs and SARs reward performance, as measured by achievement of specified financial objectives for PSUs and stock price growth for SARs. RSUs help us retain key members of management through time-based vesting. The Committee allocated the mix of elements in our LTI Program in a manner designed to drive Company performance, retain key talent, and provide competitive compensation.
For 2018, the long-term incentive award allocations for our NEOs were as follows:
The Committee determines the grant date for all long-term incentive awards, and has a long-standing practice of granting all awards at its regularly scheduled December meeting. Although awards may also be granted in special circumstances or upon hire for certain executives, no out-of-cycle grants were made to any NEO in 2018. The Committee sets the exercise price of our SARs at 100% of fair market value, which is defined as the average of the high and low New York Stock Exchange (“NYSE”) trading prices of our common stock on the date of grant.
The target award values under our long-term incentive program are based on Market data for similar positions using the 50th percentile as a guideline. The number of shares available for grant under the 2010 Incentive Plan is also considered. In December 2018, the Committee established the target award values at or near the 50th percentile of the Market for all NEOs. When determining the actual award sizes for each NEO, the Committee and independent Board members considered the NEO’s time in position, individual performance and potential, the NEO’s impact on the financial performance of the Company, and internal equity.
Once the Committee determined the actual long-term incentive award values for each NEO for the 2018 grants, 50% of the value was provided as PSUs, 30% as RSUs and 20% as SARs.
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The following table summarizes the award values and number of awards granted for each NEO:
December 2018 Award Value | Number of Awards Granted | |||||||||||||||||||||||||||
Name | PSUs | RSUs | SARs | Total | PSUs(1) | RSUs(1) | SARs(2) | Total | ||||||||||||||||||||
Mr. Bluedorn | $ | 2,600,000 | $ | 1,560,000 | $ | 1,040,000 | $ | 5,200,000 | 12,129 | 7,277 | 26,763 | 46,169 | ||||||||||||||||
Mr. Reitmeier | 525,000 | 315,000 | 210,000 | 1,050,000 | 2,449 | 1,469 | 5,404 | 9,322 | ||||||||||||||||||||
Mr. Young | 625,000 | 375,000 | 250,000 | 1,250,000 | 2,916 | 1,749 | 6,433 | 11,098 | ||||||||||||||||||||
Mr. Sessa | 525,000 | 315,000 | 210,000 | 1,050,000 | 2,449 | 1,469 | 5,404 | 9,322 | ||||||||||||||||||||
Mr. Torres | 525,000 | 315,000 | 210,000 | 1,050,000 | 2,449 | 1,469 | 5,404 | 9,322 | ||||||||||||||||||||
(1) | The number of PSUs and RSUs was determined by dividing the corresponding target award value by the closing price of our common stock on the NYSE averaged over the 30 calendar days ending on November 28, 2018 ($214.36). |
(2) | The number of SARs granted was determined by dividing the corresponding target award value by the Black-Scholes value of our common stock based on the 30 calendar day average closing price of our common stock as of November 28, 2018 ($38.86). |
PSUs. To maintain our strong focus on long-term Company performance, we granted 50% of the December 2018 long-term incentive award in the form of PSUs. PSUs generally vest at the end of a three-year performance period. If at least the threshold performance level has been achieved at the end of the performance period, the PSUs are distributed in the form of Company common stock based on the actual performance achieved. Dividends are not earned or paid on PSU awards during the three-year performance period. The Committee determines the measurement criteria annually, selecting financial metrics and setting performance goals that will enhance stockholder value. The Committee certifies the financial performance levels following the end of the performance period and the Company distributes any earned shares.
The key attributes of the PSUs granted in December 2015, which vested on December 31, 2018, are summarized in the following table along with the financial performance goals and payout opportunities versus actual performance. In 2018, NEOs earned a payout of 157.2% of target for the PSUs granted in December 2015. The payout value is reflected in the 2018 Option/SAR Exercises and Stock Vested Table in the “Stock Awards - Value Realized on Vesting” column.
December 2015 PSU Grant
(for the January 1, 2016 — December 31, 2018 Performance Period)
Metric | Weight | Measurement Period | Threshold | Target | Maximum | Actual | ||||||
Return on Invested Capital ("ROIC")(1) | 50% | 3-year weighted average (20% lowest year, 40% other two years) | 15% | 20% | 30% | 33.5% | ||||||
Company Core Net Income | 50% | 3-year compound annual growth rate | 6% | 12% | 22% | 13.4% | ||||||
Payout as a % of Target Award | 50% | 100% | 200% | 157.2% | ||||||||
(1) | Net operating profit after tax (NOPAT), a component of ROIC and a non-GAAP financial measure used for incentive compensation purposes, is income from continuing operations, adjusted for 2018 restructuring charges, certain product quality adjustments, certain legal charges and contingency adjustments, unrealized gains and losses on unsettled futures contracts, pension settlement charges and certain other items. |
The key attributes of the PSUs granted in December 2018 are summarized in the following table. The Committee established the ROIC performance goals based on its assessment of desired return relative to the cost of capital as well as historical and projected ROIC outcomes. Similarly, the Committee set Company core net income growth performance goals based on historical results, projected outcomes of that measure, and expected market conditions. While specific forward-looking performance goals are not included in the table below in light of competitive sensitivities, the degrees of difficulty required to achieve a payout are included.
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December 2018 PSU Grant
(for the January 1, 2019 — December 31, 2021 Performance Period)
Metric | Weight | Rationale for Selection | Measurement Period | Threshold | Target | Maximum | ||||||
ROIC | 50% | Measures efficient use of capital; higher ROIC correlates to greater cash flow | 3-year weighted average (20% lowest year, 40% other two years) | No payout occurs unless ROIC exceeds the Company’s estimated cost of capital; Target payout occurs at roughly three times the Company’s estimated cost of capital | ||||||||
Company Core Net Income Growth | 50% | Measures profitability; higher Company core net income correlates with higher earnings per share | 3-year compound annual growth rate | Target payout requires low double digit core net income compound annual growth rate | ||||||||
Payout as a % of Target Award | 50% | 100% | 200% | |||||||||
The PSUs granted to our NEOs in 2018 are included in the 2018 Grants of Plan-Based Awards Table in the “Estimated Future Payouts Under Equity Incentive Plan Awards” column.
RSUs. To support our retention efforts, the Committee granted the NEOs 30% of the December 2018 long-term incentive award in the form of RSUs. RSUs generally vest and are distributed in shares of our common stock three years following the date of grant if the recipient remains an employee of the Company and all other conditions of the award are met. Dividends are not earned or paid on RSUs during the three-year vesting period. The number of shares underlying RSUs granted to our NEOs in 2018 is included in the 2018 Grants of Plan-Based Awards Table in the “All Other Stock Awards: Number of Shares of Stock or Units” column.
SARs. To incentivize NEOs to grow our business and deliver increased returns to our stockholders, the Committee granted the NEOs 20% of the December 2018 award in the form of SARs. SARs vest in one-third increments on each anniversary of the date of grant. Upon the exercise of vested SARs, the increase between the fair market value of our common stock on the date of grant and the fair market value on the date of the SAR exercise is paid in Company common stock. The grant date fair value and the SAR exercise price are determined on the date of grant. SARs granted in 2018 expire seven years from the date of grant. The number of SARs granted to our NEOs in 2018 is included in the 2018 Grants of Plan-Based Awards Table in the “All Other Option Awards: Number of Securities Underlying Options” column.
Perquisites
We believe providing reasonable perquisites is a market-competitive practice to attract and retain top executive talent. Rather than offering individual perquisites, however, we provide a monthly cash stipend to each of our NEOs to allow more flexibility and choice. Our NEOs have full discretion on how the cash stipend is spent and it is not tracked by the Company after the money is paid. In addition, we offer the installation of Company products and equipment at each NEO’s home to promote our brand to business and personal guests. The value of the Company products and equipment is included as taxable income to the NEO.
Benefit Programs
To attract top executive talent and as a market-competitive practice, we provide certain benefit programs to our NEOs that are in addition to those provided to our employees generally. The following table summarizes the additional benefit programs in place during 2018 and the purpose of each program.
Additional Benefit Programs Offered to NEOs in 2018
Plan | Type | Purpose | ||
Supplemental Retirement Plan | Non-Qualified Defined Benefit | Provide market-competitive retirement benefit by providing higher accruals and by permitting accruals that otherwise could not occur because of limitations on compensation under the Code. | ||
Life Insurance Plan | Company-Sponsored Life Insurance | Provide market-competitive life insurance benefits; $3 million in coverage for our CEO and minimum of $1 million for other NEOs. | ||
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In 2018, the Committee closed the defined benefit Supplemental Retirement Plan to new participants and approved a defined contribution restoration plan for individuals who become eligible executive officers on or after January 1, 2019. The Committee made these changes to better align the Company’s non-qualified retirement benefit with current market practices.
Additional Information Regarding Executive Compensation
Other agreements and policies important to a stockholder’s understanding of the Company’s overall executive compensation program structure are described below.
Employment Agreements and Change in Control Agreements
We have employment agreements and change in control (“CIC”) agreements with each NEO as reviewed and approved by the Committee. We believe employment agreements are helpful in attracting and retaining top executive talent and for financial and business planning purposes. We believe CIC agreements are necessary to (1) retain key executives during periods of uncertainty; (2) enable executives to objectively evaluate, negotiate and execute a CIC transaction; (3) encourage executives to remain focused on running the business rather than seeking other employment in the event of a possible CIC; (4) preserve stockholder value by providing continuity of management during a transition period; and (5) provide benefit to the Company in the form of restrictive covenants, such as non-compete and non-solicitation provisions. We do not provide tax gross-ups for any CIC agreements entered into after 2009.
Our employment agreements and CIC agreements, and the potential costs associated with each, are discussed in detail under “Potential Payments Upon Termination or Change in Control.”
Stock Ownership Guidelines
The Company has stock ownership guidelines for the CEO and other NEOs. We believe stock ownership by executives aligns the interests of executives with the interests of our stockholders and motivates executives to build long-term stockholder value.
The following chart sets forth, as of December 31, 2018, for each NEO, the stock ownership requirements as a multiple of base salary, the total number of shares and unvested RSUs counted toward the stock ownership requirements, and the value of the shares and unvested RSUs as a multiple of base salary. All of our NEOs met our stock ownership guidelines as of December 31, 2018. NEOs are given five years from the date of appointment as an NEO to meet the guidelines.
Name | Ownership Requirement as a Multiple of Base Salary | Total Number of Shares and Unvested RSUs | Stock Ownership as Multiple of Base Salary(1) | |||
Mr. Bluedorn | 5X | 122,422 | 22.1X | |||
Mr. Reitmeier | 3X | 14,675 | 5.9X | |||
Mr. Young | 3X | 56,296 | 20.4X | |||
Mr. Sessa | 3X | 44,912 | 18.5X | |||
Mr. Torres | 3X | 9,263 | 3.9X | |||
(1) | Based on the average daily closing price for 2018 of $209.88. |
The Committee oversees and administers the stock ownership guidelines. If an NEO fails to comply with the guidelines, the Committee will determine any appropriate corrective measures to be taken.
Clawback Policy
Our Company has an incentive compensation clawback policy for the CEO and the other NEOs. Under this policy, in the event of any fraud or misconduct that results in a restatement of our Company’s financial results within three years of the filing of the original financial results, the Committee can recoup and cancel cash and equity-based incentive compensation of each person involved in such fraud or misconduct.
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Prohibition on Hedging / Pledging Policy
The Company’s Insider Trading Policy prohibits directors, NEOs, all other employees, and each of their designees from trading in any interest, security or position relating to the future price of Company securities, such as a put, call, swap, short sale, hedge or any other type of derivative security. It also prohibits directors, NEOs and all other employees from pledging Company securities as collateral for a loan, which would include purchases of Company securities on margin.
Tax and Accounting Implications
Deductibility of Executive Compensation
Effective for taxable years beginning after December 31, 2017, The Tax Cuts and Jobs Act changed certain aspects of federal income taxation of executive compensation, including elimination of the "performance-based" compensation exemption to Section 162(m) which allowed a company to deduct “performance-based” compensation in excess of $1 million to NEOs. The Committee will continue to consider the income tax consequences to our Company when analyzing our executive compensation program. If granting awards or providing other executive compensation is consistent with Market data, our compensation philosophy or our strategic business goals, the Committee may provide executive compensation that is not fully deductible.
Non-Qualified Deferred Compensation
In addition to the non-qualified Supplemental Retirement Plan discussed previously, our Company also maintains a frozen non-qualified Profit Sharing Restoration Plan. Both of these deferred compensation plans are administered in compliance with Section 409A of the Code.
Accounting for Stock-Based Awards
When developing NEO compensation, the Committee considered the accounting consequences (in accordance with the requirements of Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation — Stock Compensation (“FASB ASC Topic 718”)) of the program design and award levels, and structured the Company’s executive compensation program accordingly.
Compensation Committee Report
The Compensation and Human Resources Committee has reviewed and discussed the foregoing CD&A with management. Based on this review and discussion, the Committee recommended to the Board that the CD&A be included in this Proxy Statement and incorporated by reference in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on February 19, 2019.
Submitted by the Compensation and Human Resources Committee of the Board:
John E. Major (Chairperson) | John W. Norris, III | |
Kim K.W. Rucker | Karen H. Quintos | |
Todd J. Teske | ||
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Summary Compensation Table
The following table provides information regarding the total compensation of each of the Company’s NEOs for the years ended December 31, 2018, 2017 and 2016.
Name and Principal Position | Year | Salary ($) | Stock Awards ($)(1) | Option Awards ($)(2) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(3) | All Other Compensation ($)(4) | Total ($) | |||||||||||||||
Todd M. Bluedorn | 2018 | 1,151,250 | 3,971,244 | 951,960 | 1,420,343 | — | 46,500 | 7,541,297 | |||||||||||||||
Chairman and Chief Executive | 2017 | 1,116,750 | 4,086,407 | 1,011,678 | 1,451,775 | 3,740,864 | 47,086 | 11,454,560 | |||||||||||||||
Officer | 2016 | 1,084,000 | 3,876,723 | 954,887 | 2,620,028 | 1,423,602 | 46,743 | 10,005,983 | |||||||||||||||
Joseph W. Reitmeier | 2018 | 518,750 | 801,780 | 192,220 | 358,215 | 235,914 | 46,500 | 2,153,379 | |||||||||||||||
Executive Vice President and | 2017 | 493,750 | 858,092 | 212,459 | 359,450 | 508,667 | 107,975 | 2,540,393 | |||||||||||||||
Chief Financial Officer | 2016 | 468,750 | 807,550 | 198,938 | 634,463 | 262,074 | 46,235 | 2,418,010 | |||||||||||||||
Douglas L. Young | 2018 | 575,000 | 954,646 | 228,822 | 397,146 | — | 47,000 | 2,202,614 | |||||||||||||||
Executive Vice President and | 2017 | 555,000 | 1,021,453 | 252,927 | 374,708 | 1,303,828 | 47,702 | 3,555,618 | |||||||||||||||
Chief Operating Officer, Residential H&C | 2016 | 535,000 | 969,031 | 238,716 | 645,900 | 314,360 | 45,900 | 2,748,907 | |||||||||||||||
Daniel M. Sessa | 2018 | 506,250 | 801,780 | 192,220 | 350,065 | — | 46,780 | 1,897,095 | |||||||||||||||
Executive Vice President and Chief | 2017 | 491,250 | 858,092 | 212,459 | 357,630 | 985,670 | 46,476 | 2,951,577 | |||||||||||||||
Human Resources Officer | 2016 | 476,250 | 807,550 | 198,938 | 644,614 | 400,106 | 46,186 | 2,573,644 | |||||||||||||||
John D. Torres | 2018 | 491,250 | 801,780 | 192,220 | 340,285 | 142,653 | 46,500 | 2,014,688 | |||||||||||||||
Executive Vice President, Chief | 2017 | 476,250 | 858,092 | 212,459 | 346,710 | 911,590 | 46,509 | 2,851,610 | |||||||||||||||
Legal Officer and Corporate Secretary | |||||||||||||||||||||||
(1) | The amounts shown represent the grant date fair value of the aggregate amount of all stock awards (prior to any assumed forfeitures related to service-based vesting conditions, where applicable) for each year, in accordance with FASB ASC Topic 718, in connection with RSUs and PSUs granted under the 2010 Incentive Plan. Assumptions used in calculating these amounts are described in Note 15 of the Consolidated Financial Statements for the fiscal year ended December 31, 2018, included in our Form 10-K filed with the SEC on February 19, 2019. Amounts for 2018 PSUs reflect the most probable outcome for the awards on December 31, 2018 valued at the date of grant in accordance with FASB ASC Topic 718. If the PSUs were valued at maximum performance levels, the total PSU value at grant date would equal: |
PSU Value at Maximum Performance Levels ($) | |||||||||
Name | 2016 | 2017 | 2018 | ||||||
Todd M. Bluedorn | 4,845,904 | 5,107,860 | 4,964,157 | ||||||
Joseph W. Reitmeier | 1,009,438 | 1,072,615 | 1,002,327 | ||||||
Douglas L. Young | 1,211,326 | 1,276,866 | 1,193,460 | ||||||
Daniel M. Sessa | 1,009,438 | 1,072,615 | 1,002,327 | ||||||
John D. Torres | 1,072,615 | 1,002,327 | |||||||
(2) | The amounts shown represent the grant date fair value of the aggregate amount of all SAR awards (prior to any assumed forfeitures related to service-based vesting conditions, where applicable) for each year, in accordance with FASB ASC Topic 718, in connection with SARs granted under the 2010 Incentive Plan. Assumptions used in calculating these amounts are included in Note 15 of the Consolidated Financial Statements for the fiscal year ended December 31, 2018, included in our Form 10-K filed with the SEC on February 19, 2019. |
(3) | The amounts shown represent the aggregate change in the actuarial present value of accumulated pension benefits that accrued during the applicable year under our Supplemental Retirement Plan and frozen Consolidated Pension Plan, each as discussed under “Retirement Plans,” as a result of changes in the valuation discount rate, changes in compensation, and an additional one year of service. No above-market interest on nonqualified deferred compensation was earned. |
(4) | The amounts shown include perquisites and other compensation. The following table identifies the amounts attributable to each category of perquisites and other compensation in 2018 for each NEO. |
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Perquisites | Other Compensation | ||||||||||||||||||||
Name | Cash Stipend | Company Equipment and Installation | Retirement Contributions | Other | Total | ||||||||||||||||
Todd M. Bluedorn | $ | 30,000 | $ | — | $ | 16,500 | $ | — | $ | 46,500 | |||||||||||
Joseph W. Reitmeier | 30,000 | — | 16,500 | — | 46,500 | ||||||||||||||||
Douglas L. Young | 30,000 | — | 16,500 | 500 | 47,000 | ||||||||||||||||
Daniel M. Sessa | 30,000 | 280 | 16,500 | — | 46,780 | ||||||||||||||||
John D. Torres | 30,000 | — | 16,500 | — | 46,500 | ||||||||||||||||
The values attributable to each item listed above are calculated as follows:
• | Cash Stipend — actual cash paid to each NEO in lieu of individual perquisites. |
• | Company Equipment and Installation — Company equipment is based on the purchase price of the equipment, adjusted in accordance with our employee rebate program. Installation of this equipment is based on the cost for installation paid by the Company in 2018. |
• | Retirement Contributions — based on Company contributions made under our qualified 401(k) Plan in 2018. |
• | Other — includes matching charitable contributions. |
2018 Grants of Plan-Based Awards
The following table provides information regarding short-term incentive awards and long-term incentive awards (PSUs, RSUs and SARs) granted under the 2010 Incentive Plan to our NEOs in 2018.
Estimated Possible Payouts Under Non-Equity Incentive Plan Awards(1) | Estimated Future Payouts Under Equity Incentive Plan Awards(2) | All Other Stock Awards: Number of Shares of Stock or Units (#)(3) | All Other Option Awards: Number of Securities Underlying Options (#)(4) | Exercise or Base Price of Option Awards ($/Sh)(5) | Closing Market Price on Date of Grant ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($)(6) | ||||||||||||||||||||||||
Name | Grant Date | Threshold ($) | Target ($) | Max. ($) | Threshold (#) | Target (#) | Max. (#) | |||||||||||||||||||||||
Todd M. Bluedorn | — | 719,531 | 1,439,063 | 3,237,891 | ||||||||||||||||||||||||||
12/7/2018 | 6,065 | 12,129 | 24,258 | 2,482,079 | ||||||||||||||||||||||||||
12/7/2018 | 7,277 | 1,489,165 | ||||||||||||||||||||||||||||
12/7/2018 | 26,763 | 214.63 | 211.05 | 951,960 | ||||||||||||||||||||||||||
Joseph W. Reitmeier | — | 181,563 | 363,125 | 817,031 | ||||||||||||||||||||||||||
12/7/2018 | 1,225 | 2,449 | 4,898 | 501,163 | ||||||||||||||||||||||||||
12/7/2018 | 1,469 | 300,616 | ||||||||||||||||||||||||||||
12/7/2018 | 5,404 | 214.63 | 211.05 | 192,220 | ||||||||||||||||||||||||||
Douglas L. Young | — | 201,250 | 402,500 | 905,625 | ||||||||||||||||||||||||||
12/7/2018 | 1,458 | 2,916 | 5,832 | 596,730 | ||||||||||||||||||||||||||
12/7/2018 | 1,749 | 357,915 | ||||||||||||||||||||||||||||
12/7/2018 | 6,433 | 214.63 | 211.05 | 228,822 | ||||||||||||||||||||||||||
Daniel M. Sessa | — | 177,188 | 354,375 | 797,344 | ||||||||||||||||||||||||||
12/7/2018 | 1,225 | 2,449 | 4,898 | 501,163 | ||||||||||||||||||||||||||
12/7/2018 | 1,469 | 300,616 | ||||||||||||||||||||||||||||
12/7/2018 | 5,404 | 214.63 | 211.05 | 192,220 | ||||||||||||||||||||||||||
John D. Torres | — | 171,938 | 343,875 | 773,719 | ||||||||||||||||||||||||||
12/7/2018 | 1,225 | 2,449 | 4,898 | 501,163 | ||||||||||||||||||||||||||
12/7/2018 | 1,469 | 300,616 | ||||||||||||||||||||||||||||
12/7/2018 | 5,404 | 214.63 | 211.05 | 192,220 | ||||||||||||||||||||||||||
(1) | The amounts shown represent award opportunities under our STI Program for 2018. The actual awards were paid March 15, 2019 in the amounts included in the Summary Compensation Table. |
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(2) | The amounts shown represent the number of PSUs granted, which to the extent earned, will vest and be distributed in shares of our common stock at the end of the three-year performance period ending December 31, 2021. |
(3) | The amounts shown represent the number of RSUs granted, which vest and will be distributed in shares of our common stock on the third anniversary of the date of grant. |
(4) | The amounts shown represent the number of SARs granted, which vest in one-third increments on each anniversary of the date of grant and expire seven years from the date of grant. |
(5) | The amounts shown reflect the exercise price of SARs granted, based on the average of the high and low NYSE trading prices of our common stock on the date of grant. |
(6) | The amounts shown represent the grant date fair values of PSUs, RSUs and SARs, calculated in accordance with FASB ASC Topic 718. The grant date fair value for SARs was determined using the Black-Scholes valuation model. The grant date fair value for the PSU and RSU awards equals the dividend-discounted value of our common stock on the date of grant. The assumptions used to calculate the grant date fair values of such awards are set forth below. |
Assumptions | ||||||||||||||||||||
Grant Date | Award | Volatility (%) | Expected Life (Years) | Dividend Yield (%) | Risk Free Interest Rate (%) | FMV Based on Average High/ Low NYSE Trading Prices on Date of Grant ($) | Grant Date Fair Value Per Share ($) | |||||||||||||
12/7/2018 | PSU | — | — | 1.76 | — | 214.63 | 204.640 | |||||||||||||
12/7/2018 | RSU | — | — | 1.76 | — | 214.63 | 204.640 | |||||||||||||
12/7/2018 | SAR | 20.60 | 3.93 | 1.76 | 2.71 | 214.63 | 35.570 | |||||||||||||
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Outstanding Equity Awards at 2018 Year-End
The following table provides information regarding all outstanding equity awards held by our NEOs as of December 31, 2018.
Options/SAR Awards(1) | Stock Awards | ||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options/ SARs (#) Exercisable(1) | Number of Securities Underlying Unexercised Options/ SARs (#) Unexercisable(1) | Option/ SAR Exercise Price ($/Sh)(2) | Option/ SAR Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#)(3) | Market Value of Shares or Units of Stock That Have Not Vested ($)(4) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(5) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(4) | |||||||||||||||
Todd M. Bluedorn | 43,053 | 0 | 92.640 | 12/12/2021 | 24,713 | 5,408,687 | 70,247 | 15,374,258 | |||||||||||||||
36,610 | 0 | 131.940 | 12/11/2022 | ||||||||||||||||||||
27,766 | 13,883 | 156.940 | 12/9/2023 | ||||||||||||||||||||
10,433 | 20,866 | 205.530 | 12/8/2024 | ||||||||||||||||||||
0 | 26,763 | 214.630 | 12/7/2025 | ||||||||||||||||||||
Joseph W. Reitmeier | 9,621 | 0 | 51.110 | 12/6/2019 | 5,114 | 1,119,250 | 14,599 | 3,195,137 | |||||||||||||||
9,549 | 0 | 81.105 | 12/12/2020 | ||||||||||||||||||||
9,785 | 0 | 92.640 | 12/12/2021 | ||||||||||||||||||||
7,959 | 0 | 131.940 | 12/11/2022 | ||||||||||||||||||||
5,784 | 2,893 | 156.940 | 12/9/2023 | ||||||||||||||||||||
2,191 | 4,382 | 205.530 | 12/8/2024 | ||||||||||||||||||||
0 | 5,404 | 214.630 | 12/7/2025 | ||||||||||||||||||||
Douglas L. Young | 15,120 | 0 | 51.110 | 12/6/2019 | 6,107 | 1,336,578 | 17,444 | 3,817,794 | |||||||||||||||
11,671 | 0 | 81.105 | 12/12/2020 | ||||||||||||||||||||
11,252 | 0 | 92.640 | 12/12/2021 | ||||||||||||||||||||
9,550 | 0 | 131.940 | 12/11/2022 | ||||||||||||||||||||
6,941 | 3,471 | 156.940 | 12/9/2023 | ||||||||||||||||||||
2,608 | 5,217 | 205.530 | 12/8/2024 | ||||||||||||||||||||
0 | 6,433 | 214.630 | 12/7/2025 | ||||||||||||||||||||
Daniel M. Sessa | 9,545 | 0 | 51.110 | 12/6/2019 | 5,114 | 1,119,250 | 14,599 | 3,195,137 | |||||||||||||||
10,610 | 0 | 81.105 | 12/12/2020 | ||||||||||||||||||||
9,785 | 0 | 92.640 | 12/12/2021 | ||||||||||||||||||||
7,959 | 0 | 131.940 | 12/11/2022 | ||||||||||||||||||||
5,784 | 2,893 | 156.940 | 12/9/2023 | ||||||||||||||||||||
2,191 | 4,382 | 205.530 | 12/8/2024 | ||||||||||||||||||||
0 | 5,404 | 214.630 | 12/7/2025 | ||||||||||||||||||||
John D. Torres | 2,653 | 0 | 131.940 | 12/11/2022 | 5,114 | 1,119,250 | 14,599 | 3,195,137 | |||||||||||||||
2,892 | 2,893 | 156.940 | 12/9/2023 | ||||||||||||||||||||
2,191 | 4,382 | 205.530 | 12/8/2024 | ||||||||||||||||||||
0 | 5,404 | 214.630 | 12/7/2025 | ||||||||||||||||||||
(1) | Outstanding SARs vest in one-third increments on each anniversary of the date of grant, with the first anniversary date occurring one year after the date of grant. |
(2) | Pursuant to the 2010 Incentive Plan, the exercise price for all outstanding SARs is based on the grant date fair market value, which is the average of the high and low NYSE trading prices of our common stock on the date of grant. |
(3) | The amounts shown represent all outstanding RSUs held by the NEOs. Refer to column (a) of Table 1 below for the vesting dates of such awards. |
(4) | The amounts shown are based on the NYSE closing price of our common stock on December 31, 2018 ($218.86). |
(5) | The amounts shown represent outstanding PSUs held by the NEOs. Refer to column (b) of Table 1 below for the vesting dates of such awards and the performance assumptions used to calculate the number of unvested PSUs. |
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Table 1
(a) Shares or Units of Stock That Have Not Vested | (b) Equity Incentive Plan Awards: Unearned Shares, Units or Other Rights That Have Not Vested | |||||||||||
Name | Number of Awards | Vesting Date | Number of Awards | Vesting Date | Performance Assumption | |||||||
Todd M. Bluedorn | 9,678 | 12/9/2019 | 32,260 | 12/31/2019 | Maximum | |||||||
7,758 | 12/8/2020 | 25,858 | 12/31/2020 | Maximum | ||||||||
7,277 | 12/7/2021 | 12,129 | 12/31/2021 | Target | ||||||||
Total | 24,713 | 70,247 | ||||||||||
Joseph W. Reitmeier | 2,016 | 12/9/2019 | 6,720 | 12/31/2019 | Maximum | |||||||
1,629 | 12/8/2020 | 5,430 | 12/31/2020 | Maximum | ||||||||
1,469 | 12/7/2021 | 2,449 | 12/31/2021 | Target | ||||||||
Total | 5,114 | 14,599 | ||||||||||
Douglas L. Young | 2,419 | 12/9/2019 | 8,064 | 12/31/2019 | Maximum | |||||||
1,939 | 12/8/2020 | 6,464 | 12/31/2020 | Maximum | ||||||||
1,749 | 12/7/2021 | 2,916 | 12/31/2021 | Target | ||||||||
Total | 6,107 | 17,444 | ||||||||||
Daniel M. Sessa | 2,016 | 12/9/2019 | 6,720 | 12/31/2019 | Maximum | |||||||
1,629 | 12/8/2020 | 5,430 | 12/31/2020 | Maximum | ||||||||
1,469 | 12/7/2021 | 2,449 | 12/31/2021 | Target | ||||||||
Total | 5,114 | 14,599 | ||||||||||
John D. Torres | 2,016 | 12/9/2019 | 6,720 | 12/31/2019 | Maximum | |||||||
1,629 | 12/8/2020 | 5,430 | 12/31/2020 | Maximum | ||||||||
1,469 | 12/7/2021 | 2,449 | 12/31/2021 | Target | ||||||||
Total | 5,114 | 14,599 | ||||||||||
2018 Option/SAR Exercises and Stock Vested
The following table provides information regarding the exercise of SARs by our NEOs and each distribution of RSUs and PSUs held by our NEOs in 2018.
Options/SAR Awards | Stock Awards | |||||||||||||
Name | Number of SARs Exercised (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($)(1) | ||||||||||
Todd M. Bluedorn | 73,100 | 10,014,848 | RSU | 10,175 | 2,131,256 | |||||||||
PSU | 26,658 | 6,655,969 | ||||||||||||
Joseph W. Reitmeier | 3,371 | 598,454 | RSU | 2,212 | 463,326 | |||||||||
PSU | 5,796 | 1,447,145 | ||||||||||||
Douglas L. Young | — | — | RSU | 2,654 | 555,907 | |||||||||
PSU | 6,955 | 1,736,524 | ||||||||||||
Daniel M. Sessa | — | — | RSU | 2,212 | 463,326 | |||||||||
PSU | 5,796 | 1,447,145 | ||||||||||||
John D. Torres | 8,807 | 633,279 | RSU | 2,212 | 463,326 | |||||||||
PSU | 5,796 | 1,447,145 | ||||||||||||
(1) | The dollar amounts shown for RSUs and PSUs are based on the average of the high and low NYSE trading prices of our common stock on the day of distribution. |
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Retirement Plans
Qualified Retirement Plans
Frozen Consolidated Pension and Profit Sharing Retirement Plans
Effective January 1, 2009, the Company’s Consolidated Pension Plan and Profit Sharing Retirement Plan were frozen. As of that date, benefits under the frozen Pension Plan stopped increasing with additional service and compensation, and additional contributions to the Profit Sharing Plan were discontinued.
The monthly target benefit under the frozen Pension Plan is based on 1.0% of final average annual pay, plus 0.6% of final average annual pay above Social Security covered compensation, multiplied by the number of years of credited service (not to exceed 30 years). The target benefit is reduced by the value of the participant’s defined contribution profit sharing account under the frozen Profit Sharing Plan, with the difference, if any, provided by the frozen Pension Plan. Participants become vested in their frozen Pension Plan accrued benefits after five years of service and may commence unreduced benefits at age 65 (normal retirement age) or actuarially reduced benefits at younger ages if age and service requirements are met (generally the attainment of age 62 and 10 years of service or if age plus years of service total 80). Benefits are generally paid in the form of an annuity. We do not grant extra years of service under the Consolidated Pension Plan. Participants in the frozen Profit Sharing Plan are fully vested in the plan after six years of service and the Company directs the investment funds. Distributions may occur at separation from service and are eligible for roll-over into another qualified retirement plan.
401(k) Salaried Retirement Plan
Salaried employees are eligible to participate in this plan, and contributions can be made on a pre-tax or Roth post-tax basis, subject to limitations for qualified plans under the Code. Participants can contribute up to
75% of their eligible earnings and receive a Company match of 50% on up to 6% of their eligible pay. In addition, all participants (after completing one year of service) receive a base contribution equal to 3% of eligible pay. The match vests after the participant completes two years of service and the base contribution is fully vested.
Non-Qualified Retirement Plans
Supplemental Retirement Plan
In 2018, the Committee closed the defined benefit Supplemental Retirement Plan to new participants and approved a defined contribution restoration plan for individuals who become eligible executive officers on or after January 1, 2019. The Committee made these changes to better align the Company’s non-qualified retirement benefit with current market practices.
The purpose of our Supplemental Retirement Plan is to provide Market-competitive executive level retirement benefit opportunities. It permits income above Code limitations to be considered in determining final average annual pay, doubles the rate of benefit accrual available under the frozen Pension Plan (2.0% of final average annual pay, plus 1.2% of final average annual pay above Social Security covered compensation), limits credited service to 15 years, generally permits early retirement on more favorable terms than the frozen Pension Plan (for example, unreduced benefits at age 62 with 10 years of service or unreduced benefits at age 60 if age plus years of service total 80), and pays benefits in the form of a lump-sum. Any benefits provided under the Supplemental Retirement Plan are reduced by the benefits payable under our Company’s frozen Pension Plan (as if such plan had not been frozen), frozen Profit Sharing Plan, and frozen Profit Sharing Restoration Plan. Participants become vested in their Supplemental Retirement Plan benefit after five years of service. Extra years of credited service are not provided to participants except for up to an additional three years of service and age (subject to the 15 year service limit) in the case of a change in control. The incremental effects of additional years of service are reflected in the tables included in “Potential Payments Upon Termination or Change in Control.”
Frozen Profit Sharing Restoration Plan
We froze the Profit Sharing Restoration Plan and discontinued contributions effective January 1, 2009. Distributions may occur at separation from service and may be paid as a lump-sum or in equal annual installments over either a five- or ten-year period. We direct the investment funds for the frozen Profit Sharing Restoration Plan,
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which mirror the investments and returns under the frozen Profit Sharing Retirement Plan. The weighted average annual rate of return for the calendar year ended December 31, 2018, was (5.9%).
2018 Pension Benefits
The following table provides information regarding the number of years of service credited to each NEO and the present value of accumulated benefits payable to each NEO under our frozen Consolidated Pension Plan and our Supplemental Retirement Plan as of December 31, 2018, as well as payments made to each NEO in 2018 under such plans.
Name | Plan Name | Number of Years Credited Service (#) | Present Value of Accumulated Benefit ($)(1) | Payments During Last Year ($) | ||||||
Todd M. Bluedorn | Consolidated Pension Plan (Frozen) | 1.9 | 45,771 | 0 | ||||||