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. )

 

Filed by the Registrant  ☑

Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

 

 

 

 

 

 

 

March 27, 2019

You are invited to Arrow’s Annual Meeting on Thursday, May 9, 2019. The formal notice of the Annual Meeting and the Proxy Statement soliciting your vote at the Annual Meeting appear on the following pages.

Under the rules adopted by the United States Securities and Exchange Commission, we are furnishing proxy materials to our shareholders online rather than mailing printed copies to each shareholder. Accordingly, you will not receive a printed copy of the proxy materials unless you request one. The Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting (the “Notice”) includes instructions on how to access and review the materials, and how to access your proxy card and vote online. If you would like to receive a printed copy of our proxy materials, please follow the instructions included in the Notice.

Please make sure you vote whether or not you plan to attend the Annual Meeting. You can cast your vote in person at the Annual Meeting, online by following the instructions on either the proxy card or the Notice, by telephone, or, if you received paper copies of our proxy materials, by mailing your proxy card in the postage-paid return envelope.

 

 

 

 

 

 

 

 

ARROW ELECTRONICS, INC.
Annual Meeting of Shareholders
TO BE HELD MAY 9, 2019

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

PROXY STATEMENT

In Connection with the 2019 Annual Meeting

THE PURPOSE OF THIS STATEMENT

The Board of Directors of Arrow Electronics, Inc., a New York corporation (“Arrow” or the “Company”), is furnishing this Proxy Statement to shareholders of record to solicit proxies to be voted at the 2019 Annual Meeting. By returning a completed proxy card, or voting by telephone or internet, you are giving instructions on how your shares are to be voted at the Annual Meeting. The Proxy Statement is available through www.proxyvote.com.

SHAREHOLDERS ENTITLED TO VOTE

Only shareholders of record of Arrow’s common stock at the close of business on March 12, 2019 (the “Record Date”) are entitled to notice of and to vote at the Annual Meeting. As of the Record Date, there were 85,185,490 shares of Arrow common stock outstanding. Each share of common stock is entitled to one vote on each matter properly brought before the Annual Meeting. The presence in person or by proxy of a majority of the shares entitled to vote at the Annual Meeting shall constitute a quorum.

For those who hold shares as a participant in Arrow’s 401(k) Plan, the shareholder has the right to direct Vanguard Fiduciary Trust Company (the “Trustee”), who is the holder of record, how to vote the shares of common stock credited to the participant’s account at the Annual Meeting. If voting instructions for the shares of common stock in the 401(k) Plan are not received, those shares will be voted by the Trustee in the same proportions as the shares for which voting instructions were received from other participants in the 401(k) Plan. Voting (including any revocations) by 401(k) Plan participants will close at 11:59 p.m. Eastern time on May 6, 2019. The Trustee will then vote all shares of common stock held in the 401(k) Plan by the established deadline. For all other shareholders, voting (including any revocations) will close at 11:59 p.m. Eastern time on May 8, 2019.

REVOCATION OF PROXIES

The person giving a proxy may revoke it at any time prior to the time it is voted at the Annual Meeting by giving written notice to Arrow’s Secretary, Gregory Tarpinian, at Arrow Electronics, Inc., 9201 East Dry Creek Road, Centennial, Colorado 80112. If the proxy was given by telephone or internet, it may be revoked in the same manner. You may also revoke your proxy by attending the Annual Meeting and voting in person. If your shares are held in “street name,” you must contact the record holder of the shares regarding how to revoke your proxy.

COST OF PROXY SOLICITATION

Arrow pays the cost of soliciting proxies. Arrow has retained D.F. King & Co., Inc. to assist in soliciting proxies at an anticipated cost of approximately $20,000, plus expenses. Arrow will supply soliciting materials to the brokers and other nominees holding Arrow common stock in a timely manner so that the brokers and other nominees may send the material to each beneficial owner. Arrow will reimburse the brokers and other nominees for their expenses in so doing. In addition to this solicitation by mail, employees or agents of the Company may solicit proxies in person or by telephone.

PROPOSALS REQUIRING YOUR VOTE

VOTING YOUR SHARES

 

CERTAIN SHAREHOLDERS

HOLDERS OF MORE THAN 5% OF COMMON STOCK

The following table sets forth certain information with respect to the only shareholders known to the Company to own beneficially more than 5% of the outstanding common stock of Arrow as of March 12, 2019.

SHAREHOLDINGS OF EXECUTIVE OFFICERS AND DIRECTORS

The following table shows, as of March 12, 2019, the beneficial ownership of the Company’s common stock for each director, each of the “Named Executive Officers” (the Chief Executive Officer, the Chief Financial Officer, and each of the other three most highly compensated executive officers of the Company, referred to as the “NEOs”), and other executive officers who file Section 16(a) reports.

*Represents holdings of less than 1%.

 

PROPOSAL 1: ELECTION OF DIRECTORS

THE BOARD RECOMMENDS A VOTE “FOR” ALL OF THE NOMINEES NAMED BELOW.

Each nominee for election as a member of the Board of Directors of Arrow (the “Board”) is to be elected to hold office until the next Annual Meeting.

All nominees identified below are current members of the Board. All have been recommended for re-election to the Board by the Corporate Governance Committee and approved and nominated for re-election by the Board. The Board does not anticipate that any of the nominees named below will be unable or unwilling to serve as a director. If any nominee should refuse or be unable to serve, the proxy will be voted for a person designated by the Board, or in lieu thereof, the Board may reduce the number of directors. In accordance with the Company’s bylaws, the ten nominees receiving a plurality of votes cast at the Annual Meeting will be elected directors, subject to the Director Resignation Policy described below.

An uncontested election of directors is not considered “routine” under the New York Stock Exchange rules. As a result, if a shareholder holds shares in “street name” through a broker or other nominee, the broker or nominee is not permitted to exercise voting discretion with respect to this proposal. For this reason, if a shareholder does not give his or her broker or nominee specific instructions, the shareholder’s shares will not be voted on this proposal. If you vote to “abstain,” your shares will be counted as present at the meeting, and your abstention will have the effect of a vote against the proposal.

BOARD MEMBERSHIP REQUIREMENTS

In accordance with the Company’s corporate governance guidelines, members of the Board should have the education, business experience, and insight necessary to understand the Company’s business. Members of the Board must be able to evaluate and oversee its direction and performance for the Company’s continued success. The directors should also possess such functional skills, corporate leadership, and international experience required to contribute to the development and expansion of the Board’s knowledge and capabilities. Moreover, the directors should have the willingness and ability to objectively and constructively appraise the performance of executive management and, when necessary, recommend appropriate changes.

The Corporate Governance Committee has a thoughtful policy regarding diversity. Whenever the Corporate Governance Committee evaluates a potential candidate, it considers that individual in the context of the composition of the Board as a whole. The Board believes that its membership should reflect diversity in its broadest sense and, consistent with that philosophy, the Board does consider a candidate’s experience, education, gender, race, ethnicity, geographic location, and difference of viewpoint when evaluating his or her qualifications for election to the Board. Based on the nominee’s experience, attributes, and skills, which exemplify the sought-after characteristics described above, the Board has concluded that each nominee possesses the appropriate qualifications to serve as a director of the Company.

 

 

 

 

 

 

 

 

 

 

DIRECTOR RESIGNATION POLICY

The Board has adopted a Director Resignation Policy, which provides that in an uncontested election any director nominee that receives a greater number of votes “withheld” from his or her election than votes “for” his or her election must tender a letter of resignation to the Board within five days of the certification of the shareholder vote. The Corporate Governance Committee must then consider whether to accept or reject the director’s resignation and make a recommendation to the Board. The Board will then consider the resignation within 90 days following the date of the shareholders’ meeting at which the election occurred and then shall publicly disclose its decision. A director whose resignation is under consideration may not participate in any deliberation regarding his or her resignation. The Director Resignation Policy can be found under “Governance Documents” at the “Leadership & Governance” sub-link of the Investor Relations drop-down menu on investor.arrow.com.

 

THE BOARD AND ITS COMMITTEES

The Board meets in general sessions with the Chairman of the Board presiding, in meetings limited to non-management directors (which are presided over by the Lead Director), and in various committees. Committee meetings are open to all members of the Board.

Committee memberships and chair assignments are reviewed annually by the Corporate Governance Committee, which makes appointment and chair recommendations to the Board.

The table below reflects committee memberships for calendar year 2018.

C= Chair M= Member

(1)Mr. Gunby was appointed to the Audit Committee on May 10, 2018.

(2)    Ms. Krzeminski was appointed to the Board on December 11, 2018 and to the Audit Committee on February 19, 2019.

LEAD DIRECTOR

In accordance with the Company’s corporate governance guidelines, the Board appointed Mr. Perry to serve as the Lead Director. The Lead Director chairs Board meetings when the Chairman is not present. He also chairs the sessions of the non-management directors held in connection with each regularly scheduled Board meeting. The Lead Director serves as a liaison between the Chairman and the independent, non-management directors, and reviews and approves Board agendas and meeting schedules. The Lead Director has the authority to call meetings of the non-management directors.

CHIEF EXECUTIVE OFFICER AND CHAIRMAN POSITIONS

The Company’s Chief Executive Officer currently serves as Chairman of the Board. In his position as Chief Executive Officer, Mr. Long has primary responsibility for the day-to-day operations of the Company and provides consistent leadership on the Company’s key strategic objectives. In his role as Chairman, he sets the strategic priorities for the Board, presides over its meetings, and communicates its findings and guidance to management. The Board believes that the combination of these two roles is the most appropriate structure for the Company at this time because: (i) this structure provides more consistent communication and coordination throughout the organization, which results in a more effective and efficient implementation of corporate strategy; (ii) it unifies the Company’s strategy behind a single vision; (iii) the Chief Executive Officer is the most knowledgeable member of the Board regarding risks the Company may be facing and, in his role as Chairman, is able to facilitate the Board’s oversight of such risks; (iv) the structure has a long-standing history of serving the Company’s shareholders well through many economic cycles, business challenges, and succession of multiple leaders; (v) the Company’s current corporate governance processes, including those set forth in the various Board committee charters and corporate governance guidelines, preserve and foster independent communication amongst non-management directors as well as independent evaluations of and discussions with the Company’s senior management, including the Company’s Chief Executive Officer; and (vi) the role of the Lead Director, which fosters better communication among non‑management directors, fortifies the Company’s corporate governance practices, making the separation of the positions of Chairman of the Board and Chief Executive Officer unnecessary at this time.

CEO PAY RATIO

The 2018 median annual total compensation of all employees, other than the Company’s CEO, Mr. Long, was $54,614. Mr. Long’s 2018 annual total compensation was $15,339,932. The ratio of these amounts was 1-to-281. Mr. Long’s 2018 annual total compensation includes a special equity grant intended to replace the loss of his Supplemental Executive Retirement Plan (“SERP”) benefits he forfeits by delaying retirement up to five years. The Compensation Committee determined that it was in the best interest of the Company to incent Mr. Long’s retention by restoring the value of his forfeited SERP benefits through a one-time Restricted Stock Unit (“RSU”) award with a grant date value of $6,000,000, vesting contingent upon Mr. Long’s continued employment in 20% increments beginning on the first anniversary of date of grant.  With the exclusion of this special grant, Mr. Long’s 2018 annual total compensation was $9,339,932, resulting in a ratio of 1-to-171.  We believe excluding the value of the one-time grant provides a more accurate comparison of CEO to median employee annual pay because it only includes the regular, ongoing components of our CEO’s compensation program that are expected to continue in 2019 and beyond.

The pay ratio disclosure rules permit companies to identify the median compensated employee once every three years unless there has been a material change in employee population or employee compensation arrangements which would significantly impact the pay ratio disclosure. During 2018, the Company closed the acquisition of eInfochips, a wholly-owned subsidiary. Consistent with Instruction 7 to Item 402(u) of Regulation S-K, we are omitting the approximately 1,500 eInfochips employees that were acquired in the transaction from our total employee count for fiscal year 2018. As we do not believe the Company has experienced any material changes that would significantly impact the pay ratio disclosure, we are generally employing the same methodology as undertaken in 2017, as follows:

>    Employee Measurement Date: The Company utilized the entire global population of approximately 19,000 eligible employees on December 31, 2017. 

>    Exclusions: The number of US and non-US employees prior to exemption were approximately 7,000 and 12,000, respectively. Employees from the following non-US jurisdictions that collectively constitute 5% or less of the total global workforce were excluded: India, Indonesia, Latvia, Lithuania, Malaysia, Ukraine, and Vietnam. The total number of employees excluded was approximately 900. Therefore, the total number of US and non-US employees used in the final analysis was 7,000 and 11,100, respectively.

>    Compensation Time Period: The Company measured compensation for the above employees using the 12-month period ending December 31, 2017.

>    Consistently Applied Compensation Measure: Target total cash (base + target bonus) was selected as the consistently applied compensation measure used to identify the median employee. Base pay for hourly employees was calculated based on a reasonable estimate of hours worked in 2017, and on salary levels for all remaining employees.

>    Determining the Median Employee: Using this methodology, we determined that our median employee in 2017 was a full-time, hourly employee, with wages and overtime pay for the 12-month period ending December 31, 2017 in the amount of $50,919. However, the employee identified at median in 2017 is no longer with the Company. As such, the rules permit us to use another employee whose compensation is substantially similar to the original median employee based on the compensation measure used to select the original median employee in 2017. Based on this rule, our new median employee for 2018 was a full-time, hourly employee, with wages and overtime pay for the 12-month period ending December 31, 2018 in the amount of $51,737.

>    Determining Median Employee’s Pay for CEO Ratio: With respect to our median employee, we then identified and calculated the elements of such employee’s compensation for fiscal 2018 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation in the amount of $54,614. The difference between such employee’s wages and the employee’s annual total compensation represents the estimated value of such employee’s retirement-related benefits, which is $2,877.

>    Determining CEO’s Pay for CEO Ratio: With respect to the annual total compensation of our CEO, we used the amount reported in the “Total” column of our 2018 Summary Compensation Table included in this Proxy Statement.

This pay ratio is a reasonable estimate calculated in a manner consistent with SEC rules based on our payroll and employment records and the methodology described above. Because the SEC rules for identifying the median compensated employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, apply certain exclusions, and make reasonable estimates and assumptions that reflect their compensation practices, the pay ratio reported by other companies may not be comparable to the pay ratio reported above, as other companies may have different employment and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios.

COMMITTEES

Each of the committees of the Board operates under a charter, copies of which are available under “Governance Documents” at the “Leadership & Governance” sub-link of the Investor Relations drop-down menu on investor.arrow.com. As a matter of practice, the Board determined that a director who acts as the chair for a committee will not serve as a member of any other committee.

Audit Committee

(1)Ms. Krzeminski was appointed to the Audit Committee on February 19, 2019.

The Board has determined that Mrs. Keeth, Ms. Krzeminski, and Mr. Patrick are qualified as “audit committee financial experts,” as the term is defined in Item 407(d) of Regulation S-K.

 

Compensation Committee

In 2018, the Compensation Committee directly engaged Pearl Meyer & Partners as a consultant to examine and report to the Compensation Committee on best practices in the alignment of compensation programs for the Chief Executive Officer and other members of senior management by providing competitive benchmarking data, analyses, and recommendations with regard to plan design and target compensation. In addition, Pearl Meyer & Partners provides guidance to the Corporate Governance Committee regarding non-management director compensation. Pearl Meyer & Partners does not provide any other services to the Company. These services have not raised any conflicts of interest.

Corporate Governance Committee

The Corporate Governance Committee considers shareholder recommendations of nominees for membership on the Board as well as those recommended by current directors, officers, employees, and others. Such recommendations may be submitted to Arrow’s Secretary, Gregory Tarpinian, at Arrow Electronics, Inc., 9201 East Dry Creek Road, Centennial, Colorado 80112, who will forward them to the Corporate Governance Committee. Possible candidates suggested by shareholders are evaluated by the Corporate Governance Committee in the same manner as other possible candidates.

The Corporate Governance Committee retains the services of a third-party executive recruitment firm to assist its members in the identification and evaluation of potential nominees for the Board. The Corporate Governance Committee’s initial review of a potential candidate is typically based on any written materials provided to it. The committee then determines whether to interview the nominee. If warranted, the Corporate Governance Committee, the Chairman of the Board and Chief Executive Officer, the Lead Director, and others, as appropriate, interview the potential nominees.

The Corporate Governance Committee’s expectations as to the specific qualities and skills required for directors, including those nominated by shareholders, are set forth in Section 4 of Arrow’s corporate governance guidelines (available under “Governance Documents” at the “Leadership & Governance” sub-link of the Investor Relations drop-down menu on investor.arrow.com).

ENTERPRISE RISK MANAGEMENT

The role of the Board is to promote the best interests of the Company and its shareholders by overseeing the management of Arrow’s business, assets, and affairs. Management is responsible for the day-to-day analysis and review of the risks facing the Company, including timely identification of risk and risk controls related to significant business activities, and developing programs and recommendations to determine the sufficiency of risk identification, the balance of potential risk to potential reward, and the appropriate manner in which to control risk. The Board implements its risk oversight responsibilities by having management provide regular briefing and information sessions on the significant risks that the Company faces and how the Company seeks to control those risks when appropriate. In some cases, risk oversight in specific areas is the responsibility of a Board committee, such as: the Audit Committee’s oversight of issues related to internal controls over financial reporting and regulatory compliance; the Corporate Governance Committee’s oversight of the Board’s succession planning and governance; and the Compensation Committee’s oversight of risks related to compensation programs. Arrow’s Chief Executive Officer has the ultimate management authority for enterprise risk management, including responsibility for capability development, risk identification and assessment, and policies and governance, as well as strategies and actions to address enterprise risk.

COMPENSATION RISK ANALYSIS

The Company believes that its executive compensation program reflects an appropriate mix of compensation elements and balances current and long-term performance objectives, cash and equity compensation, and risks and rewards associated with executive roles. The following features of the Company’s executive incentive compensation program illustrate this point:

>    performance goals and objectives reflect a balanced mix of performance measures to avoid excessive weight on a certain goal or performance measure;

>    annual and long-term incentives provide a defined range of payout opportunities (ranging from 0% to 200% of target for annual cash incentives for the NEOs and 0% to 185% for long-term incentives);

>    total direct compensation levels are heavily weighted on long-term, equity-based incentive awards that vest over a number of years;

>    equity incentive awards that vest over a number of years are granted annually so executives always have unvested awards that could decrease significantly in value if the business is not managed for the long-term;

>    the Company has executive stock ownership guidelines so that the component of an executive’s personal wealth that is derived from compensation from the Company is significantly tied to the long-term success of the Company; and

>    the Compensation Committee retains discretion to adjust compensation based on the quality of Company and individual performance and adherence to the Company’s ethics and compliance programs, among other things.

Based on the above combination of program features, the Company believes that: (i) its executives are encouraged to manage the Company in a prudent manner; and (ii) its incentive programs are not designed in a manner that encourages executives to take risks that are inconsistent with the Company’s best interests.

Further, at the Compensation Committee’s request, in 2018, Pearl Meyer & Partners conducted an assessment of risks associated with the Company’s short-term and long-term incentive programs, the results of which were discussed by the Compensation Committee in its meeting in May 2018. The Compensation Committee concluded that the overall design of the Company’s compensation programs maintained an appropriate level of risk. Pearl Meyer & Partners did not recommend any plan design changes to further mitigate risk exposure.

It is the Company’s opinion that its compensation policies and practices for all employees are not likely to create risks that could have a material adverse effect on the Company. The Company delivers, to its entire employee base in the aggregate, most of its compensation in the form of base salary, with smaller portions delivered in the form of cash incentives and long-term incentives. The Company’s cash incentive compensation plans, which represent the primary variable component of compensation, have been designed to drive performance of employees working in management, sales, and sales-related roles. These plans are typically tied to achievement of sales/financial goals that include maximums designed to prevent “windfall” payouts.

INDEPENDENCE

The Company’s corporate governance guidelines provide that the Board should consist primarily of independent, non-management directors. For a director to be considered independent under the guidelines, the Board must determine that the director does not have any direct or indirect material relationships with the Company and that he or she is not involved in any activity or interest that conflicts with or might appear to conflict with his or her fiduciary duties. A director must also meet the independence standards in the New York Stock Exchange listing rules, which the Board has adopted as its standard.

The Board has determined that all of its directors and nominees, other than Mr. Long, satisfy both the New York Stock Exchange’s independence requirements and the Company’s guidelines.

As required by the Company’s corporate governance guidelines and the New York Stock Exchange’s listing rules, all members of the Audit, Compensation, and Corporate Governance Committees are independent. Non-management directors and all members of the Audit Committee and Compensation Committee also satisfy the independence requirements.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Compensation Committee is a present or former employee of the Company. Additionally, no member of the Compensation Committee has a relationship that requires disclosure of a Compensation Committee interlock.

Meetings and Attendance

Consistent with the Company’s corporate governance guidelines, it is the practice of the Board for all of its non-management directors to meet separately (without Company management present) either prior to or after each regularly scheduled Board meeting, with the Lead Director presiding. In 2018, these non-management director meetings totaled four in number.

During 2018, there were four meetings of the Board, eight meetings of the Audit Committee, four meetings of the Compensation Committee, and four meetings of the Corporate Governance Committee. All of the directors attended 75% or more of all of the meetings of the Board and the committees on which they served. It is the policy of the Board that all of its members attend the Annual Meeting absent exceptional cause, and all members of the Board did so in 2018.

DIRECTOR COMPENSATION

The independent, non-management members of the Board (that is, all members except Mr. Long) receive the following fees in cash:

In addition to the cash fees, each non-management director receives an annual grant of RSUs valued at $150,000, based on the fair market value of Arrow common stock on the date of grant. Commencing in 2019, the annual grant of RSUs will increase to $175,000. Further, the Lead Director receives another annual award of RSUs valued at $30,000 in recognition of the additional responsibilities associated with such position.

The following table shows the total dollar value of compensation received by all non-management directors in or in respect of 2018.

Under the terms of the Non-Employee Director Deferred Compensation Plan, non-management directors may defer the payment of all or a portion of their annual retainers until the end of their service on the Board. Unless a different amount is chosen by the director, 50% of the director’s annual retainer fee is automatically deferred and converted to units of Arrow common stock. The units held by each director are included under the heading “Common Stock Units” in the Shares of Common Stock Beneficially Owned Table. The amounts deferred by each director for 2018, to the extent there are any, are included under the heading “Fees Earned” on the Non-Management Director Compensation Table. All deferrals under the plan will be paid upon separation of service from the Board.

For stock awards outlined in the Non-Management Director Compensation Table, each director is given the option to have his or her RSUs converted to shares one year after grant. Ms. Hamilton and Messrs. Hill and Kerin have selected that option for their 2018 grants.

STOCK OWNERSHIP BY DIRECTORS

The Board believes that stock ownership by its directors strengthens their commitment to the long-term future of the Company and further aligns their interests with those of the shareholders generally. As a result, the corporate governance guidelines specifically state that directors are expected over time to own beneficial shares of the Company’s common stock having a value of at least three times their annual retainer fee (including shares owned outright and RSUs and common stock units in a deferred compensation account). All directors either own the required number of shares, or in the case of recently appointed directors, are accumulating shares to meet the requirement.

 

AUDIT COMMITTEE REPORT

The Audit Committee represents and assists the Board by overseeing: (i) the Company’s financial statements and internal controls; (ii) the independent registered public accounting firm’s qualifications and independence; and (iii) the performance of the Company’s corporate audit function and of its independent registered public accounting firm.

On the date of the adoption of this Report, the Audit Committee consisted of four directors, all considered independent in accordance with New York Stock Exchange listing standards and other applicable regulations. The Board has determined that committee members Mrs. Keeth and Mr. Patrick are “audit committee financial experts” as defined by the SEC.

Company management has the primary responsibility for the preparation of the financial statements and for the reporting process, including the establishment and maintenance of Arrow’s system of internal controls over financial reporting. The Company’s independent registered public accounting firm is responsible for auditing the financial statements prepared by management, expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, and auditing the Company’s internal controls over financial reporting.

In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed with both management and the independent registered public accounting firm, the Company’s quarterly earnings releases, Quarterly Reports on Form 10-Q, and the 2018 Annual Report on Form 10-K. Such reviews included a discussion of critical or significant accounting policies, the reasonableness of significant judgments, the quality (not just the acceptability) of the accounting principles, the reasonableness and clarity of the financial statement disclosures, and such other matters as the independent registered public accounting firm is required to review with the Audit Committee under the standards promulgated by the Public Company Accounting Oversight Board. The Audit Committee also discussed with both management and the Company’s independent registered public accounting firm the design and efficacy of the Company’s internal control over financial reporting.

In addition, the Audit Committee received from and discussed with representatives of the Company’s independent registered public accounting firm the written disclosure and the letter required by the applicable requirements of the Public Company Accounting Oversight Board (regarding the independent registered public accounting firm’s communications with the Audit Committee concerning independence) and considered the compatibility of non-audit services rendered to Arrow with the independence of the Company’s independent registered public accounting firm. The Audit Committee also discussed with the independent registered public accounting firm the matters required to be discussed by the Auditing Standards 1301, “Communication with Audit Committee” issued by the Public Company Accounting Oversight Board.

The Audit Committee also discussed with the independent registered public accounting firm and Arrow’s corporate audit group the overall scope and plans for their respective audits. The Audit Committee periodically met with the independent registered public accounting firm, with and without management present, to discuss the results of their work, their evaluations of Arrow’s internal controls, and the overall quality of Arrow’s financial reporting.

In reliance on these reviews and discussions, the Audit Committee recommended to the Board that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for filing with the SEC.

M.F. (Fran) Keeth, Chair

Steven H. Gunby

Gail E. Hamilton

Stephen C. Patrick

PRINCIPAL ACCOUNTING FIRM FEES

The aggregate fees billed by Arrow’s principal accounting firm, Ernst & Young LLP, for auditing the annual financial statements and the Company’s internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and related regulations included in the Annual Report on Form 10‑K, the reviews of the quarterly financial statements included in the Quarterly Reports on Form 10-Q, statutory audits, assistance with and review of documents filed with the SEC, and consultations on certain accounting and reporting matters for each of the last two fiscal years are set forth as “Audit Fees” in the table below.

Also set forth for the last two fiscal years are “Audit-Related Fees.” Such fees are for services rendered in connection with business acquisitions, employee benefit plan audits, and other accounting consultations. “Tax Fees” relate to assistance with tax return preparation, tax audits, and compliance in various tax jurisdictions around the world. “Other Fees” refer to advice, planning, and consulting other than as set forth above. Ernst & Young LLP did not provide any services to the Company related to financial information systems design or implementation, nor did it provide any personal tax work or other services for any of the Company’s executive officers or members of the Board.

The amounts in the table above do not include fees charged by Ernst & Young LLP to Marubun/Arrow, a joint venture between the Company and the Marubun Corporation. Audit fees for Marubun/Arrow totaled $496,850 in 2018, and $446,514 in 2017.

Consistent with the Audit Committee charter, audit, audit-related, tax, and other services were approved by the Audit Committee, or by a designated member thereof. The Audit Committee has determined that the provision of the non-audit services described above is compatible with maintaining Ernst & Young LLP’s independence.

 

PROPOSAL 2: RATIFICATION OF
APPOINTMENT OF AUDITORS

THE BOARD RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP.

Shareholders are asked to ratify the appointment of Ernst & Young LLP as Arrow’s independent registered public accounting firm for the fiscal year ending December 31, 2019. Arrow expects that representatives of Ernst & Young LLP will be present at the Annual Meeting with the opportunity to make a statement if they desire to do so and that they will be available to answer appropriate inquiries raised at the Annual Meeting. Abstentions and broker non-votes are counted only for purposes of determining whether a quorum is present at the Annual Meeting.

PROPOSAL 3: RE-APPROVAL AND AMENDMENT OF THE
ARROW ELECTRONICS, INC. 2004 OMNIBUS INCENTIVE PLAN

THE BOARD RECOMMENDS A VOTE “FOR” THE RE-APPROVAL AND AMENDMENT OF THE ARROW ELECTRONICS, INC. 2004 OMNIBUS INCENTIVE PLAN.

The Board believes that the future growth and profitability of Arrow depends, in large measure, on its ability to retain and motivate outstanding employees, directors, and third-party service providers. To further this goal, in 2004, the Board adopted the Arrow Electronics, Inc. 2004 Omnibus Incentive Plan, which has been amended a number of times since then (the “Plan”). The Plan provides the Compensation Committee of the Board with the ability to utilize a wide variety of compensation and incentive vehicles. Key among these are the equity-based programs: incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units, performance units and performance shares. Equity-based compensation is critical to the Company’s effort to ensure that the interests of its managers are aligned with the interests of its shareholders and to focus its managers’ efforts on the creation of long-term value.

The number of shares that remain available for issuance under the Plan after giving effect to all grants through February 19, 2019, is 2,757,405. At current and projected rates of utilization, without an increase, there may be insufficient shares available to meet the Company’s needs with respect to grants and awards expected to be made early in 2020, prior to the Company’s annual meeting of shareholders for that year. With this in mind, the proposed amendments would increase the aggregate number of shares of Arrow common stock available for issuance to Plan participants by 4,900,000 shares. The Company estimates that, based on its historical grant practices and current future projections, the authorized pool of shares under the amended Plan would last for approximately 5 years.

Our estimated 2018 dilution rate was 7.61% of common shares outstanding, which was among the lowest in our Peer Group, as defined below. “Dilution” is the sum of outstanding equity shares plus shares available for grant and new share authorizations as a percent of proxy record date common shares outstanding.

The “burn rate” is the number of equity shares granted in a fiscal year as a percent of weighted average basic common shares outstanding. Our estimated three year average burn rate was 1.17% (for 2016 through 2018), which compares to our Peer Group median of 1.55%.

PLAN HIGHLIGHTS

Independent Plan Administrator. The Compensation Committee, which is composed of independent directors, administers the Plan, and retains full discretion to determine the number and amount of awards to be granted under the Plan, subject to the terms of the Plan.

Reasonable Grant Restrictions. Subject to adjustment as described in the Plan:

>    Awards to each participant of stock options, stock appreciation rights, restricted stock/restricted stock units, performance units/performance shares, and other stock-based awards under the Plan, in each case, are limited to 500,000 shares per year, and cash-based awards awarded or credited to any participant under the Plan in a single year may not exceed $10,000,000, in all instances subject to carryover increase from prior years.

>    Awards to each non-employee director under the Plan are limited to 400,000 shares in the aggregate and 20,000 shares per year (40,000 shares per year for the Chairman or Lead Director), plus an additional 40,000 shares in the year of first appointment or election.

Double Trigger Change in Control Treatment. The Plan does not provide for “single trigger” acceleration of awards. As discussed under the heading “Non-Qualified Stock Option, Restricted Stock Unit, and Performance Stock Unit Award Agreements” in the Compensation Discussion and Analysis section below, the Company’s award agreements provide for “double trigger” acceleration of awards, which means that awards will not be accelerated solely upon a change in control of the Company, but instead only if the participant incurs an involuntary termination of employment in connection with the change in control.

Prohibition on Liberal Share Counting. If shares are withheld or tendered in order to satisfy tax withholding obligations or the exercise price of stock options, those shares will not again become available for future issuance under the Plan.

Full Value Awards Weighted More Heavily. The settlement of one share pursuant to a full value award is deemed to reduce the authorized share pool under the Plan by 1.69 shares.

Full Value Award Vesting Limitations. Time-based full value awards under the Plan may not vest more rapidly than pro rata over three years, and performance-based full value awards under the Plan must provide for a performance period of at least 12 months.

No Discounted Stock Options. The Plan requires that the exercise price for newly-issued stock options may not be less than the fair market value per share on the date of grant.

Prohibition on Repricing. The Plan prohibits the repricing of outstanding stock options without shareholder approval (outside of certain corporate transactions or adjustments specified in the Plan). Similarly, the Plan does not provide for the repricing of stock appreciation rights.

No Dividend Equivalents for Unvested Awards. The Plan permits dividend equivalents to be credited only with respect to the vested portion of an award (including performance awards).

Stockholder Approval of Certain Amendments. The Plan requires shareholder approval of any amendments to the Plan, to the extent required by law or exchange listing requirements. This includes amendments increasing the number of shares available for issuance under the Plan.

PROPOSED AMENDMENTS

The amendments to the Plan contained in this proposal were adopted, subject to shareholder approval, by the Compensation Committee and ratified by the Board on February 19, 2019. The amendments to the Plan are described below:

>    Increase in Share Limit: As explained above, in light of the continued growth of the Company and the importance of the share-based incentive vehicles facilitated by the Plan, and in order for Arrow to have a sufficient number of shares available for future grants (including projected grants expected to be made in accordance with the Company’s annual practice), the proposed amendments would increase the aggregate number of shares of Arrow common stock available for issuance to Plan participants by 4,900,000 shares.

>    Extension of Plan: The proposed amendments extend the termination date of the Plan to February 19, 2029 (unless the Plan is terminated sooner under the terms provided therein).

>    Increase in Cash-Based Awards Limit: The proposed amendments increase the maximum aggregate amount awarded or credited with respect to Cash-Based Awards to any one Participant in any one Plan Year from $5,000,000 to $10,000,000.

>    Updates for Changes in Accounting Standards: The proposed amendments make the following revisions to the Plan to comply with changes to applicable accounting principles:

>    Deletion of Section 6.11 due to the supersession of APB Opinion 25 by FASB ASC 718, which removed the ability of the Company to expense the cost of options.

>    Update of the reference in Section 11.2(e) to “extraordinary non-recurring items as described in Accounting Principles Board Opinion No. 30” to refer to the “unusual or infrequently occurring items as described in FASB Accounting Standards Codification 220‑20,” reflecting the fact that APB Opinion No. 30 was superseded by FASB ASC 225‑20, which has been superseded (via ASC 2017‑19) by FASB ASC 220‑20.

>    Removal of NQSO Limit: The proposed amendments remove the numerical limit in Section 4.1(c) on the maximum number of shares of Arrow common stock that may be issued pursuant to awards in the form of Non-Qualified Stock Options (“NQSOs”).  Specifying a maximum NQSO limit in the Plan was permitted but not required under Section 422 of the Code and the regulations thereunder.

>    Updates for Recent Changes to Section 162(m) of the Internal Revenue Code: Under the current terms of the Plan, the Compensation Committee is permitted to grant performance awards intended to constitute “performance-based compensation” to certain “covered employees” under Section 162(m) of the Internal Revenue Code (“Section 162(m)”).  Such awards were designed to be exempt from the $1 million deduction limitation under Section 162(m). The Tax Cuts and Jobs Act (“TCJA”) (passed in December 2017) and IRS Notice 2018-68 (issued in August 2018), among other things, eliminated the performance-based compensation exemption to the Section 162(m) deduction limitation for new and materially modified awards after November 2, 2017, and changed the definition of a Section 162(m) “covered employee.” The proposed amendments make the following revisions to the Plan to comply with these recent changes to Section 162(m):

>    Clarification that the Compensation Committee need only comply with the Section 162(m) performance-based compensation requirements with respect to awards granted prior to November 2, 2017 (and not materially modified thereafter), which were intended to constitute performance-based compensation under Section 162(m) (such awards, “Grandfathered Awards”).

>    Other clarifications to the Plan to comply with the recent changes to Section 162(m).

>    Deletion of “Covered Employee Annual Incentive Awards” as a type of award granted under the Plan. Such awards were annual incentive awards granted solely to executive-level Section 162(m) “covered employees” of the Company, and were specifically structured to meet the pre-TCJA performance-based compensation exemption to the Section 162(m) deduction limitation. Because such exemption has been eliminated for any new or materially modified award after November 2, 2017, there is no continuing need to offer Covered Employee Annual Incentive Awards under the Plan. Thus, beginning in 2019, no further Covered Employee Annual Incentive Awards will be granted under the Plan.

Shareholders are asked to approve the proposed amendments and the complete text of the Plan incorporating the proposed amendments, which is attached as Annex A. The principal provisions of the Plan are summarized below and qualified in their entirety by the attached Plan.

SUMMARY DESCRIPTION OF THE PLAN

Purpose of the Plan

The Plan is intended to strengthen the Company’s ability to attract, motivate and retain the employees, directors, and third-party service providers upon whose judgment, initiative and efforts the financial success and growth of the Company largely depends, and to provide additional incentive for such individuals through stock ownership and other rights that promote and recognize the successful efforts of these individuals and thereby enhance shareholder value.

Duration

The Plan became effective on May  27,  2004, when Arrow’s shareholders approved the Plan. The Plan will terminate effective on February 19, 2029 if it is re-approved. Any award granted prior to Plan termination will remain outstanding post-termination in accordance with the applicable terms and conditions of the Plan and the award.

Administration

The Compensation Committee is responsible for administering the Plan and has the discretionary power to interpret it (including any Plan-related documentation), to determine eligibility for awards and the terms and conditions of awards (including, without limitation, the amount of the awards), and to adopt rules, regulations, forms, instruments, and guidelines. Determinations of the Compensation Committee made under the Plan are final and binding. The Compensation Committee may delegate administrative duties and powers to one or more of its members or to one or more officers, agents, or advisors. The Compensation Committee may also delegate to one or more Company officers the power to designate employees (other than executive officers of the Company) and third-party service providers to be recipients of awards and the amount of such awards. Notwithstanding the foregoing, only the Board may determine the type and number of awards granted under the Plan to the Company’s non-employee directors.

Plan Share Limits

The maximum number of shares of common stock that have been authorized for issuance under the Plan for the duration of the plan has been 27,400,000, subject to adjustment upon the occurrence of various corporate events as described in the Plan. However, 8,300,000 of those shares expired in March 2014. Of the total authorized, only 2,757,405 shares remain available after giving effect to all grants through February 19, 2019. The proposed amendments to the Plan add another 4,900,000 shares with respect to which grants may be made, meaning that, as the Plan is proposed to be amended, 32,300,000 shares will have been authorized, of which 7,657,405 shares will be available for issuance to participants under the Plan.

Generally, shares are counted against the authorization only to the extent they are actually issued. Each share issued under “full value” awards (e.g., restricted stock and performance units, as described below) count against the authorization at a rate of 1.69:1; each share issued under all other awards (e.g., stock options and stock appreciation rights (“SARs”)) count against the authorization at a rate of 1:1. Shares which are the subject of awards that terminate by expiration, forfeiture, cancellation, or otherwise, or are settled in cash in lieu of shares, or exchanged for awards not involving shares, shall again be available for grant. However, if the option price or tax withholding requirements of any award are satisfied by the Company’s withholding of shares or the participant’s tendering of shares to the Company, or if a SAR is exercised, both the number of shares issued, and the number of shares withheld or tendered will be deemed issued under the Plan. The maximum number of shares shall not be reduced to reflect dividends or dividend equivalents that are reinvested into additional shares or credited as additional restricted stock, restricted stock units, performance shares, or other stock-based awards, but may be adjusted by the Compensation Committee to reflect certain corporate events or transactions.

Participant Award Limits

Under the Plan, participants may receive a) stock options, b) SARs, c) restricted stock or restricted stock units, d) performance units or performance shares, e) other stock-based awards, and f) cash-based awards. The Plan imposes annual per-participant award limits on such awards. For each of the stock-based awards (“a” to “e” above), the maximum award to any participant (other than a non-employee director) in any calendar year is 500,000 shares (or the cash value of 500,000 shares at the time of vesting or payout, if applicable) plus any unused annual limit from prior years. For each of the cash-based awards (“f” above), the maximum amount awarded or credited to any participant in any year may not exceed $10,000,000 (determined as of the date of vesting or payout) plus the amount of any unused annual limit from prior years. The maximum number of shares of common stock of the Company that may be issued to each non-employee director is 400,000 shares, and no non-employee director may receive an award covering more than 20,000 shares in any calendar year, or 40,000 shares for a non-employee director serving as Chairman or Lead Director.  However, in the year in which a new non-employee director joins the Board, he or she may receive an award covering no more than an additional 40,000 shares. The number and kind of shares that may be issued, the number and kind of shares subject to outstanding awards, the option price or grant price applicable to outstanding awards, the annual per-participant award limits, and other value determinations and terms of awards are subject to adjustment by the Compensation Committee in order to prevent dilution or enlargement of participants’ rights under the Plan in the case of a corporate event or transaction such as a merger, reorganization, stock dividend, stock split, reverse stock split, or other similar event. The Compensation Committee shall also, as it deems necessary or appropriate, make adjustments to reflect unusual or non-recurring events.

Any stock-settled time-vesting full value awards granted under the Plan cannot vest more rapidly than pro-rata over a three-year period and any stock settled performance-vesting full value awards granted under the Plan must provide for a performance period of at least 12 months. Notwithstanding the foregoing, the Board has the discretion to issue up to five percent of all shares authorized under the Plan with time vesting and/or performance requirements it deems appropriate.

Eligibility and Participation

The Compensation Committee may select from and grant awards to employees, directors, and third-party service providers of the Company, its subsidiaries and its affiliates. Awards to non-employee directors will be made by the Board. In addition to the nine non-employee directors, all employees of the Company are eligible to receive grants under the Plan. While the number of eligible third-party service providers is not determinable, to date, none have received any awards under the Plan, and the Compensation Committee has no intention of granting any such awards.

Stock Options

The Compensation Committee may grant both incentive stock options (“ISOs”) and NQSOs under the Plan, which may be subject to vesting and other conditions as determined by the Compensation Committee. ISOs may be granted only to employees of the Company or of any parent or subsidiary corporation. The exercise price for options cannot be less than the fair market value of Arrow’s common stock on the date of grant. The options may have terms of up to ten years from grant date except in the case of participants outside of the United States, which period may extend beyond ten years. To date, no options have been granted with terms exceeding ten years. The exercise price may be paid with cash, with previously acquired shares of common stock, a combination of both, or by other means approved by the Compensation Committee.

Stock Appreciation Rights

The Compensation Committee may grant SARs under the Plan either alone or in tandem with stock options on such terms and conditions as the Compensation Committee may determine. The grant price of a SAR cannot be less than the fair market value of the common stock at the time of grant. The grant price and term of a tandem SAR will be the same as the price and term of the option with which it was granted. SARs may have

terms of up to ten years from grant, except that SARs granted to participants outside of the United States may have a term greater than ten years. To date, no SARs have been granted.

Freestanding SARs may be exercised on such terms as the Compensation Committee determines. Tandem SARs may be exercised by relinquishing the related portion of the tandem option. Upon exercise of a SAR, the holder will receive cash, shares of common stock, or a combination of the two, as determined by the Compensation Committee, equal in value to the difference between the fair market value of the common stock subject to the SAR at the exercise date and the grant price.

Restricted Stock Units and Restricted Shares

The Compensation Committee may award restricted shares and restricted stock units, subject to vesting schedules and limitations on transfer and such other restrictions as the Compensation Committee may determine. A holder of restricted shares is a shareholder, entitled to dividend and voting rights, whereas the holder of a restricted stock unit is not entitled to dividends and does not have voting rights.

Performance Stock Units and Performance Shares

Performance unit and performance share awards may be granted under the Plan. Performance unit awards and performance shares will have an initial value based on the fair market value of the Company’s common stock on the date of grant. The Compensation Committee sets performance goals, the achievement of which will determine the value and/or number of performance units or performance shares that will be paid to the participant. The performance goals and periods may vary from participant to participant, group to group, and time to time. Performance shares and performance units may be paid in the form of cash and/or shares (such shares may be subject to restrictions as determined by the Compensation Committee). Performance shares may entitle the participant to dividend equivalents; however, with respect to grants made since May 4, 2010, participants are only entitled to receive dividend equivalents with respect to the vested portions of the award.

Performance Measures

Although the “performance-based compensation” exemption under Section 162(m) does not apply to any new or materially modified award after November 2, 2017, the performance goals for awards that are intended to constitute performance-based compensation under the Plan will be based upon the performance measures listed in the Plan for any business unit. The following are examples of performance measures that may be applied:

>    earnings per share

>    sales growth

>    operating margins including gross profit, operating expenses and operating income as a percentage of sales

>    operating efficiency

>    working capital targets

The Compensation Committee may base payment or vesting on performance measures in addition to, or other than, those set forth above.

The Compensation Committee will determine whether the performance targets or goals that have been chosen for a particular performance award have been met and may provide in an award that any evaluation of performance may include or exclude any of the following that occur during the performance period to which the award is subject: asset write-downs; litigation, claim judgments or settlements; the effect of changes in tax laws, accounting principles or other laws or provisions affecting reported results; any reorganization and restructuring programs; unusual or infrequently occurring items (as defined by generally accepted accounting principles,

and/or as described in management’s discussion and analysis of financial condition and results of operations appearing in the Company’s annual report to shareholders for the applicable year); acquisitions or divestitures; and foreign exchange gains and losses.

Awards that are designated as performance-based compensation may be adjusted upward or downward, as the Compensation Committee may deem appropriate. Awards may be paid in the form of cash, shares of common stock, or in any combination, as determined by the Compensation Committee.

If applicable tax and/or securities laws change to permit the Compensation Committee discretion to alter the governing performance measures without obtaining shareholder approval of such changes, the Compensation Committee shall have sole discretion to make such changes without obtaining shareholder approval.

Grandfathered Awards

All Grandfathered Awards are subject to the provisions of this Plan as amended and restated effective February 17, 2015 (the “Prior Restatement” of the Plan) regarding Section 162(m). The Grandfathered Awards will be administered pursuant to such terms of the Prior Restatement with the intent that the characterization of the Grandfathered Awards as “Performance-Based Compensation,” as that term was defined under the Prior Restatement, is preserved following November 2, 2017.

Non-Employee Director Awards

Under the Plan, the Board may grant awards of any kind other than ISOs to non-employee directors. From time to time, the Board, on the recommendation of the Corporate Governance Committee, sets the amount and type of equity awards to be granted to non-employee directors on a periodic, non-discretionary basis, based on the number of committees the director serves on, service as the chair of a committee, service as Chairman of the Board or Lead Director, or the first selection or appointment of the director. Non-employee directors currently receive annual awards of restricted stock units. The restricted stock units will vest fully upon grant and are subject to further restrictions until up to one year after the director’s separation from the Board. All restricted stock units are settled in common stock after the restriction period.

Unless a director gives written notice setting forth a different percentage, 50% of each director’s annual retainer fee is deferred and converted into units based on the fair market value of the Company’s stock as of the date it would have been payable. Upon a director’s separation of service from the Board (and not before then, except in the case of death or unforeseeable emergency need), each unit in his or her deferral account will be converted into shares and any fractional units are converted into cash.

Other Awards

Subject to the terms of the Plan including, without limitation, Plan share limits, the Compensation Committee may develop sub-plans or grant other equity or cash-based or related awards on such terms as the Compensation Committee may determine, including, but not limited to, awards designed to comply with or take advantage of applicable local laws of jurisdictions outside of the United States.

Other Provisions of Awards and Individual Award Agreements

For each manner of award, and each individual agreement granting an award, the Compensation Committee shall determine, in its discretion, whether or not, and to what extent, the participant’s receipt of cash or stock under the Plan may or shall be deferred; the impact of the termination of the participant’s employment or service on any award (including variations, if any, based on the reason for such termination); the voting rights of any stock or stock equivalent granted or delivered thereunder; the transferability of any stock, stock equivalent or other right of any participant during his or her lifetime; and whether or not dividend equivalents will be paid with respect to any shares of common stock subject to an award (except that dividend equivalents may only be credited with respect to awards granted after May 4, 2010 to the extent the awards are vested).

Except as the Compensation Committee otherwise expressly determines, neither ISOs nor other awards may be transferred other than by will or by the laws of descent and distribution. During a recipient’s lifetime, an ISO and, except as the Compensation Committee may determine, other non-transferable awards requiring exercise, may be exercised only by the recipient.

Treatment of Awards upon a Corporate Event

If the Company is dissolved or liquidated, or if substantially all of its assets are sold (or there is a merger or consolidation) and the acquiring or surviving entity does not substitute equivalent awards for the awards then outstanding, each award granted under the Plan will become fully vested and exercisable and all restrictions on each award will lapse. All options and SARs not exercised upon the occurrence of such a corporate event will terminate, and the Company may, in its discretion cancel all other awards then outstanding and pay the award holder its then-current value as determined by the Compensation Committee.

Amendment of Awards or Plan and Adjustment of Awards

The Compensation Committee may at any time alter, amend, modify, suspend, or terminate the Plan or any form of award in whole or in part. However, no amendment may adversely affect the rights of any participant under an outstanding award without his or her consent.

No option granted under the Plan will be repriced or replaced without shareholder approval, except to prevent an unintended dilution or enlargement of participants’ rights or benefits under the Plan in the event of a corporate transaction or event such as a merger or acquisition, a stock split or recapitalization, a change in accounting rules or applicable laws or regulations or other matter having such an impact. No amendment of the Plan of any kind will be made without shareholder approval if shareholder approval is required by law, regulation or stock exchange rule.

The Compensation Committee may grant awards under terms differing from those provided for in the Plan, and without regard to the Plan’s share limits, where such awards are granted in substitution for awards held by employees of other corporations who become Company employees as the result of a merger or other transaction provided that the maximum number of shares that may be granted under ISO and NQSO awards in such circumstances is currently 24,000,000. The proposed amendments to the Plan would increase the maximum number of shares that may be granted under the Plan pursuant to ISO awards to 7,657,405.

Tax Withholding

Awards under the Plan may be subject to tax withholding. If so, the Company may require the participant to remit the necessary taxes to the Company or may allow participants to satisfy their tax withholding requirements by causing shares of common stock to be withheld.

Rights of Participants

Nothing in the Plan or any award agreement will give any participant any right to continued employment (or provision of service as a director or third-party service provider) or prevent or limit the Company from terminating the participant as permitted by law. No individual in any position has the right to an award. No participant will have rights as a shareholder until he or she becomes the record holder of any such shares.

New Plan Benefits

The Company’s directors and executive officers have received awards under the Plan, and it is anticipated that those individuals will receive awards under the Plan in the future, as the Company may determine appropriate. The future benefits or amounts that would be received under the Plan by executive officers, non-executive directors and non-executive officer employees are discretionary and are therefore not determinable at this time. For a summary of the awards granted to the NEOs under the Plan during 2018, see the Grants of Plan-Based Awards Table.

Federal Tax Effects

The following discussion summarizes certain federal income tax consequences of the issuance and exercise of options under the Plan under the law as in effect on the date of this proxy statement. The summary does not purport to cover all federal employment tax or other federal tax consequences that may be associated with the Plan, nor does it cover state, local, or non-U.S. taxes.

Incentive Stock Options

In general, an optionee realizes no taxable income upon the grant or exercise of an ISO. However, the exercise of an ISO may result in an alternative minimum tax liability to the optionee. With some exceptions, a disposition of shares purchased under an ISO within two years from the date of grant or within one year after exercise produces ordinary income to the optionee equal to the value of the shares at the time of exercise less the exercise price; the same amount is generally deductible by the Company as compensation. Dispositions of shares by optionees after such periods typically result in long-term capital gains or losses, if any, equal to the difference between the sale price and the exercise price, and Arrow will not receive a deduction.

In general, an ISO that is exercised by the optionee more than three months after termination of employment is treated as an NQSO. ISOs are also treated as NQSOs to the extent they first become exercisable by an individual in any calendar year for shares having a fair market value (determined as of the date of grant) in excess of $100,000.

Non-Qualified Stock Options

In general, in the case of an NQSO, the optionee has no taxable income at the time of grant but realizes income in connection with the exercise of the option in an amount equal to the excess of the fair market value (at the time of exercise) of shares acquired upon exercise over the exercise price. For employee optionees, the same amount is deductible by Arrow as compensation, provided that income taxes are withheld from the employee. Upon a subsequent sale or exchange of the shares, any recognized gain or loss after the date of exercise is treated as capital gain or loss for which the Company is not entitled to a deduction.

Section 162(m) of the Internal Revenue Code

Section 162(m) generally disallows the corporate tax deduction for certain compensation paid in excess of $1,000,000 annually to “covered employees,” which include: (1) the CEO, (2) the Chief Financial Officer (“CFO”), (3) any employee whose total compensation is required to be reported to shareholders under the Securities Exchange Act of 1934 by reason of such employee being among the three highest compensated officers for the taxable year (excluding the CEO and CFO); and (4) any executive who was a “covered employee” for any tax year beginning after December 31, 2016. A “covered employee” includes any individual who meets the definition of a “covered employee” at any time during the year, and also includes executives who are the top three highest paid officers (excluding the CEO or CFO) even if their compensation is not required to be disclosed under existing SEC rules.

Awards that were granted prior to November 2, 2017, which were not modified in any material respect on or after such date, and which qualify as “performance-based compensation” under Section 162(m), are exempt from the $1,000,000 deduction limitation under Section 162(m), thus allowing the Company the full federal tax deduction otherwise permitted for such compensation.

 

 

 

 

 

Equity Compensation Plan Information

The table below provides information as of December 31, 2018, prior to the proposed amendments of the Plan.

(1)  In addition to stock options, the Plan provides for the granting of SARs, restricted stock, restricted stock units, performance shares and performance units.

The amounts in the above table do not reflect the 4,900,000 shares that are proposed for approval by the shareholders under Proposal 3 or grants and awards made between December 31, 2018 and the date of this proxy. After giving effect to all grants through February 19, 2019, a total of 2,757,405 shares remain available for future issuance under the Plan.

The Plan is intended to offer the variety of incentive and compensation tools to the Compensation Committee that it requires to achieve the strategic objectives discussed under the heading “Compensation Discussion and Analysis,” below. In order to effectively utilize those tools and programs over the years to come, the Compensation Committee must be able to issue additional shares under the Plan.

PROPOSAL 4: ADVISORY VOTE ON
EXECUTIVE COMPENSATION

THE BOARD RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE EXECUTIVE COMPENSATION AS DISCLOSED IN THIS PROXY STATEMENT.

The Board of Directors has decided that the Company will hold an advisory vote each year in connection with its Annual Meeting, until the next vote on the frequency of shareholder votes on the compensation of the NEOs, which will be 2023, or until the Board of Directors otherwise determines that a different frequency for such advisory votes is in the best interests of the shareholders.

Shareholders have an opportunity to cast an advisory vote on compensation of the NEOs. This proposal, commonly known as “say-on-pay,” gives shareholders the opportunity to approve, reject, or abstain from voting with respect to the Company’s executive compensation programs and policies and the compensation paid to the NEOs.

The Company is requesting shareholder approval of the compensation of its NEOs as disclosed in this Proxy Statement. The Company desires the affirmative vote of a majority of votes cast at the Annual Meeting. For purposes of determining the number of votes cast with respect to Proposal 4, only those votes cast “FOR” or “AGAINST” are included. Abstentions and broker non-votes are counted only for purposes of determining whether a quorum is present at the Annual Meeting. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, this is an advisory vote, which means that this proposal is not binding on the Company. The Compensation Committee, however, values the opinions expressed by the Company’s shareholders and will carefully consider the outcome of the vote when making future compensation decisions for the Company’s NEOs.

The Company asks that you review in detail the disclosure contained in this Proxy Statement regarding compensation of the Company’s NEOs (including the Company’s Compensation Discussion and Analysis, the compensation tables, and the narrative disclosures that accompany such tables) and indicate your support for the compensation of the Company’s NEOs that is described in this Proxy Statement.

Based on the foregoing, and as a matter of good corporate governance, the Board is asking shareholders to approve the following advisory resolution at the 2019 Annual Meeting:

“RESOLVED that the shareholders of the Company approve, on an advisory basis, the compensation of the Company’s Named Executive Officers disclosed in the Compensation Discussion and Analysis, the Summary Compensation Table and the related tables, notes, and narrative in the Proxy Statement for the Company’s 2019 Annual Meeting.”

REPORT OF THE COMPENSATION COMMITTEE

The substantive discussion of the material elements of all of the Company’s executive compensation programs and the determinations by the Compensation Committee with respect to compensation and executive performance for 2018 are contained in the Compensation Discussion and Analysis that follows below. The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with the management representatives responsible for its preparation and the Compensation Committee’s advisors. In reliance on these reviews and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the definitive Proxy Statement on Schedule 14A for Arrow’s 2019 Annual Meeting for filing with the SEC and be incorporated by reference in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Philip K. Asherman, Chair
Richard S. Hill
Barry W. Perry

 

COMPENSATION DISCUSSION AND ANALYSIS (“CD&A”)

EXECUTIVE COMPENSATION

This CD&A explains the executive compensation program for the Company’s NEOs listed below. The CD&A also describes the Compensation Committee’s process for making pay decisions, as well as its rationale for specific decisions related to fiscal 2018.

EXECUTIVE SUMMARY

2018 Business Strategy and Highlights

Arrow guides innovation for its customers in the areas of industrial automation, edge computing, cloud computing, connected devices, home automation, and smart cities.  Our strategy to be the foremost technology lifecycle solutions provider has been successful to date, and has us well-positioned for the future.

Through a network of more than 349 locations serving over 80 countries, the Company aggregates disparate sources of electronics components, infrastructure software, and IT hardware to increasingly provide complete solutions for customers and suppliers.  Our goal is to leave no segments of the market underserved in terms of the products we offer and services we provide.  We aim to accelerate our customers’ time to market, and to drive growth on behalf of our suppliers.

Financial Performance Achievements

We delivered a third consecutive year of record results in 2018.  Sales in 2018 increased by $3 billion for the second consecutive year, increased 12% compared to 2017, and reached an all-time record level of $29.7 billion.  Gross profit of $3.7 billion, operating income of $1.15 billion, and non-GAAP earnings per share (“EPS”) on a diluted basis of $8.83 also achieved all-time records.  Non-GAAP EPS increased by $1.32 and increased 18% compared to 2017.  The Company delivered on its financial objectives to grow sales faster than the market, increase markets served, and grow profits faster than sales.

The Company’s organic investments, acquisitions, and strong execution resulted in 44% three-year adjusted EPS growth.  This growth was second highest of the eight companies among Arrow and its Peer Group.  Three-year average return on invested capital (“ROIC”) was 2.8 percentage points above the three-year weighted average cost of capital (“WACC”).  Total shareholder return for the three-year period was 27% compared to - 8% for the Peer Group and 25% for the S&P 400 midcap stock index.

The Company believes that a non-GAAP EPS calculation is appropriate in assessing and understanding the Company’s operating performance and trends in the Company’s business because it removes financial information outside the Company’s core operating results.  For example, in 2018, reported earnings per share on a diluted basis of $8.10 increased by $3.62, or 81%, compared to reported earnings per share on a diluted basis of $4.48 in 2017.  During the fourth quarter of 2017, the Company recognized a net, non-cash charge related to U.S. tax reform that reduced reported net income by $125 million and reported EPS on a diluted basis by $1.39.  As a result, all references to EPS in this Proxy Statement are to non-GAAP EPS.

Strategic Performance Achievements

The Company’s diverse worldwide customer base consists of original equipment manufacturers, value-added resellers, managed service providers, contract manufacturers, and other commercial customers.  Our investments in key strategic growth areas have started to pay dividends for the Company.  We are helping customers create, make, and manage their products at unprecedented scale.  In 2018, the Company expanded its customer base by 50,000 to 200,000, and the largest customer contributed less than 2% of sales.

In 2018, the Company entered into several significant new distribution agreements intended to help the Company maintain its leadership position in the electronic component and information technology solutions markets.  These agreements include relationships with semiconductor, passive electromechanical component, information technology hardware and software, and cloud-based solution providers.  The Company continues to expand and diversify the products, solutions, and services it can offer.  The largest supplier’s products contributed less than 10% of sales.

Over the past three years, the Company completed eight strategic acquisitions to broaden product and service offerings, to further expand geographic reach in the Asia Pacific and Europe regions, and to increase our capabilities to meet the evolving needs of customers and suppliers.

2018 Shareholder Engagement and Say-on-Pay

In 2018, the Company’s executive compensation program for 2017 was submitted to an advisory vote of the shareholders and it received the support of approximately 86% of the total votes cast at the Annual Meeting. Based on the high level of approval received from shareholders and the Compensation Committee's determination that the Company’s existing programs were operating properly, the Company made no significant changes to its executive compensation programs in 2018. The Compensation Committee continues to carefully consider any shareholder feedback in its executive compensation decisions.

Best Compensation Practices and Policies