Modification of Equity Award Agreements
In April 2021, following the unexpected passing of Mr. Delaney, the Company reviewed its policy for the treatment of outstanding equity upon termination by reason of death or disability. In connection with this review, the Compensation Committee considered, in consultation with Exequity, data regarding prevalent market practices, including through a review of its peer group’s practices, and determined that the Company’s then current treatment of equity upon death or disability was less favorable than typical market practices. Accordingly, the Compensation Committee determined to modify Mr. Delaney’s awards, and to amend all other outstanding equity award agreements, to provide for, upon termination due to death or disability, as applicable: (i) full vesting of all time-based awards, including restricted stock awards and stock options, (ii) pro-rata vesting of all performance-based awards, including performance share units, based on actual performance as of the end of the applicable performance period, pro-rated based on the period of employment during the applicable performance period, and (iii) the extension of the post-termination exercise window for vested stock options from 90 days to three years. For Mr. Delaney’s estate, these modifications were subject to execution of a release of claims in favor of the Company. In adjusting the treatment of outstanding equity upon termination by reason of death or disability, and modifying Mr. Delaney’s awards, the Compensation Committee intended to position the Company competitively with the market in order to better attract and retain equity-eligible employees and executives as well as to provide a post-termination exercise window that is sufficient to allow for the settlement of outstanding options prior to any court proceedings that may be required with respect to the award recipient’s estate.
Compensation of Mr. Delaney
Mr. Delaney’s annual base salary during fiscal year 2021 was $1,230,000 and his target annual cash incentive award was $1,845,000, which was structured in the same manner as the target annual cash incentive awards for our NEOs. In addition, prior to his passing, Mr. Delaney received long-term incentive awards with a target value of $7,125,000, which were comprised of performance share units (with respect to 50% of the target value) and restricted stock (with respect to 50% of the target value) structured in the same manner as the awards received by our NEOs. Mr. Delaney’s base salary, target annual cash incentive award and target long-term incentive awards for fiscal year 2021 were determined based on the same considerations as those for the same type of compensation received by our NEOs for fiscal year 2021. Mr. Delaney’s salary earned through April 8, 2021 was paid to his estate. Mr. Delaney was not eligible to receive his full annual cash incentive award as his employment with the Company ceased during 2021. Mr. Delaney received a pro-rated annual cash incentive award through April 8, 2021.
In connection with Mr. Delaney’s passing, the Compensation Committee approved the modifications to his outstanding equity awards as described above under “—Compensation Discussion and Analysis—Modification of Equity Award Agreements,” which resulted in the accelerated vesting of 202,731 shares of restricted stock and 74,060 stock options with a weighted average exercise price of $20.89 that had been previously granted. As a result of these modifications, his estate also retained the right to earn up to 135,257 performance share unit awards that were originally granted in fiscal year 2020, and 4,921 performance share unit awards that were originally granted in fiscal year 2021, each of which represent a pro rata portion of the performance share unit awards originally granted prorated based on that portion of the performance period for each award during which Mr. Delaney was employed by us. No changes were made to the performance-based vesting criteria of these awards and, as a result, the percentage of the pro rata portion of these performance share units that will be earned, if any, will be determined in the same manner and using the same performance criteria as were originally established for the performance share units. These modifications resulted in an aggregate increase in the incremental fair value of those awards for accounting purposes of approximately $17,500,000.
Tax and Accounting Considerations
Section 162(m) of the Internal Revenue Code
Generally, Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), disallows a tax deduction to any publicly-held corporation for any individual remuneration in excess of $1 million paid in any taxable year to certain “covered employees.” We expect to be eligible for transition relief from the Section 162(m) deduction limitation that should generally extend until our 2022 Annual Meeting of Shareholders.
To the extent that this transition relief expires or is otherwise unavailable, we expect that the Compensation Committee will consider the potential future effects of Section 162(m) on the deductibility of executive compensation paid to our NEOs. As such, in approving the amount and form of compensation for our NEOs in the future, the Compensation Committee will consider all elements of the cost to us of providing such compensation, including the potential impact of Section 162(m). In appropriate circumstances, however, the Compensation Committee may implement programs that recognize a full range of criteria important to our success and to ensure that our executive officers are compensated in a manner consistent with our best interests and those of our shareholders, even where the compensation paid under such programs may not be deductible under Section 162(m) of the Internal Revenue Code.
Section 280G of the Internal Revenue Code
Section 280G of the Internal Revenue Code disallows a tax deduction with respect to excess parachute payments to certain executives of companies which undergo a change in control. In addition, Section 4999 of the Internal Revenue Code imposes a 20% penalty on the individual receiving the excess payment. Parachute payments are compensation that is linked to or triggered by a change in control and may include, but are not limited to, bonus payments, severance payments, certain fringe benefits, and payments and acceleration of vesting from long-term incentive plans including stock options and other equity-based compensation.
