|AMERICAN CAPITAL, LTD filed this Form 10-K/A on 04/29/2016|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Amendment No. 1)
For the fiscal year ended December 31, 2015
Commission file number 814-00149
AMERICAN CAPITAL, LTD.
(Exact name of registrant as specified in its charter)
2 Bethesda Metro Center
Bethesda, Maryland 20814
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No. x
As of June 30, 2015, the aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant was approximately $3.6 billion based upon a closing price of the Registrant’s common stock of $13.55 per share as reported on The NASDAQ Global Select Market on that date. (For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant and certain other shareholders; such an exclusion shall not be deemed to constitute an admission that any such person is an “affiliate” of the registrant.)
As of February 1, 2016, there were 239,350,681 shares of the Registrant’s common stock legally outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. Certain exhibits previously filed with the Securities and Exchange Commission are incorporated by reference into Part IV of this report.
On February 17, 2016, we filed our Annual Report on Form 10-K for the year ended December 31, 2015 (the “Original Filing”), with the Securities and Exchange Commission (the “SEC”). The Original Filing intended to incorporate Part III of Form 10-K by reference to the Company’s definitive proxy statement (to be subsequently filed). This Amendment No. 1 (this “Amendment”) on Form 10-K/A, which amends and restates items identified below with respect to the Original Filing, is being filed to provide the disclosure required by Part III of Form 10-K.
This Form 10-K/A only amends information in Part III, Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence) and Item 14 (Principal Accounting Fees and Services). In addition, as required by Rule 12b-15 of the Securities Exchange Act of 1934, this Form 10-K/A contains new certifications by our chief executive officer and our chief financial officer, filed as exhibits hereto. Because this Form 10-K/A includes no financial statements, we are not including certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
This Amendment on Form 10-K/A is not intended to revise any other information presented in the Original Filing, which remains unchanged, and has not been updated to reflect events occurring subsequent to the original filing date. This Amendment speaks as of the date of the Original Filing, except for certain certifications, which speak as of their respective dates and the filing date of this Amendment. This Amendment should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Filing, including any amendments to those filings.
INDEX TO FORM 10-K/A
Item 10. Directors, Executive Officers and Corporate Governance
We believe that all of our directors possess the personal and professional qualifications necessary to serve as a member of our Board of Directors. Our directors have been evaluated by the Compensation, Corporate Governance and Nominating Committee pursuant to the guidelines described above under “Board and Governance Matters—Board Membership Criteria” and the determination was made that each of them fulfills and exceeds the qualities that we look for in members of our Board of Directors. Other than Mr. Wilkus, each of the directors is independent as defined in the NASDAQ listing standards and is not an “Interested Person” as defined in Section 2(a)(19) of the 1940 Act.
The information set forth below is as of April 25, 2016, with respect to each of our directors. The business address of each director is American Capital, Ltd., 2 Bethesda Metro Center, 14th Floor, Bethesda, Maryland 20814. We have highlighted specific attributes for each Board member below.
Director Nominee Biographies and Qualifications
The Board of Directors elects executive officers annually following our Annual Meeting of Stockholders ("Annual Meeting") to serve until the meeting of the Board following the next Annual Meeting. Set forth below is certain information about each executive officer as of April 25, 2016. The business address of each executive officer is American Capital, Ltd., 2 Bethesda Metro Center, 14th Floor, Bethesda, Maryland 20814.
Board Leadership Structure
Mr. Wilkus has served as our Chairman and Chief Executive Officer since he founded the Company in 1986, except for the period from 1997 to 1998, during which he served as Chief Executive Officer and Vice Chairman of the Board of Directors. We believe that combining the positions of Chairman and Chief Executive Officer is the best corporate governance leadership structure for the Company because it permits clear accountability, effective decision-making and alignment on corporate strategy. We also believe that this structure is particularly appropriate and beneficial to us because it most effectively utilizes Mr. Wilkus’ broad experience and knowledge regarding the Company, including by allowing him to set the agendas and priorities of the Board and lead discussions on our business and strategy.
Although we believe that it is more effective for us to combine the positions of Chairman and Chief Executive Officer, we recognize the importance of strong independent leadership on the Board. We believe that our Board’s independent oversight continues to be substantial. Our Board of Directors has determined that all of the current directors, except Mr. Wilkus, are “independent” as defined in the NASDAQ listing standards. Similarly, only Mr. Wilkus is an “Interested Person” of American Capital under the 1940 Act.
It is our Board’s policy as a matter of good corporate governance to have a majority of our directors who are not “Interested Persons” meet regularly without persons who are members of management or employee directors present to facilitate the Board’s effective independent oversight of management. These directors also designate a director who is “independent,” as defined in the NASDAQ listing standards, to serve as the “lead independent director” and preside at these meetings. Presently, our disinterested directors meet quarterly and may hold additional meetings at the request of the lead independent director or another disinterested director. The designation of a lead independent director is for a one-year term and a lead independent director may be re-appointed at the end of a term. If the lead independent director is unavailable for a meeting, his or her immediate predecessor will serve as lead independent director for such meeting. At a meeting on July 23, 2015, Mr. Harper was designated as the lead independent director for the current term.
Each of our Board’s Audit, Compliance and Valuation Committee and Compensation, Corporate Governance and Nominating Committee is composed entirely of independent directors. These independent committees of our Board also have the authority under their respective charters to hire independent advisors and consultants, at our expense, to assist them in performing their duties. Two independent directors also serve on our Executive Committee.
Committees of the Board
Our Board of Directors’ principal standing committees and their primary functions are described below.
Audit, Compliance and Valuation Committee
This committee makes recommendations to the Board of Directors with respect to the engagement of independent auditors and questions our management and independent auditors on the application of accounting and reporting standards in our financial statements. This committee also reviews the adequacy of our internal controls over financial reporting, including information technology security and controls relating to the preparation of our financial statements. This committee’s meetings include, whenever appropriate, executive sessions with each of our independent auditors, internal auditors and senior valuation officers, without the presence of management. The Audit, Compliance and Valuation Committee reviews and provides a recommendation to the Board of Directors with regard to its approval of the valuations of portfolio companies presented by management. In such review, the committee discusses the proposed valuations with our independent auditors and any other relevant consultants. It also has the responsibility for reviewing matters regarding accounting, ethics, legal and regulatory compliance and for engaging, evaluating and terminating any internal audit service providers and approving fees to be paid to such internal audit service providers. The Audit, Compliance and Valuation Committee annually reviews the experience and qualifications of the senior members of the independent external auditors and the internal auditors and the quality control procedures of the independent external auditors and the internal auditors. In addition, the Audit, Compliance and Valuation Committee discusses with the independent auditors, internal auditors and any internal audit service providers (as may be engaged from time to time) the overall scope, plans and budget for their respective audits, including the adequacy of staffing and other factors that may affect the effectiveness and timeliness of such audits.
Compensation, Corporate Governance and Nominating Committee
This committee has the responsibility for setting the terms of employment of our Chief Executive Officer and reviewing and approving the salaries, incentive payments and other compensation and benefits of our other executive officers, reviewing
and advising management regarding benefits and other terms and conditions of compensation of our other employees, evaluating the compensation and fees payable to the members of the Board of Directors and administering our employee incentive compensation plans. Although the committee consults with senior management to establish our general compensation philosophy, they have the sole authority to set the compensation of our executive officers. It also has responsibility for recommending and considering corporate governance practices and policies, monitoring our litigation docket and reviewing and assisting with the development of our executive succession plans. In addition, this committee serves as the standing nominating committee of the Board.
This committee has the authority to exercise all powers of the Board of Directors except for actions that must be taken by the full Board of Directors under Delaware law or the 1940 Act.
Board and Committee Meetings
Under our Bylaws and Delaware law, the Board of Directors is permitted to take actions at regular or special meetings and by written consent. The Board of Directors held 19 meetings during 2015.
Each of the Audit, Compliance and Valuation Committee and the Compensation, Corporate Governance and Nominating Committee schedules regular meetings to coincide with the quarterly in-person meetings of the Board of Directors and also meets at the request of senior management or at such other times as it determines. Our Secretary, in consultation with the chairman of the committee, sets agendas for the meetings. Each committee reports regularly to the Board of Directors on its activities at the next regularly scheduled Board meeting following the committee meetings and when appropriate. The Compensation, Corporate Governance and Nominating Committee held 8 meetings during 2015, and the Audit, Compliance and Valuation Committee held 8 meetings during 2015.
Each of the directors attended at least 95% of the meetings of the Board of Directors and 100% of the meetings of the committees on which he or she served. Although we do not have a policy on director attendance at our Annual Meeting of Stockholders, directors are encouraged to attend the Annual Meetings. At the 2015 Annual Meeting, all then-current directors attended in person.
One of the roles of our Board of Directors is being responsible for the general oversight of the Company, including the performance of senior management and the Company’s risk management processes, to assure that the long-term interests of our stockholders are being served. In performing its risk oversight function, the Board, directly or through its standing committees, regularly reviews our material strategic, operational, investment, financial, compensation and compliance risks with senior management. In particular, the Board receives updates at each regular meeting on the Company’s strategic plan, which addresses, among other things, the risks and opportunities facing us, as well as our investment and asset management platforms. In addition, the Board routinely receives information regarding the technology and cyber-risks relevant to the Company's business to ensure that adequate steps are being taken to prevent, and prepare for, cyber-incidents.
The Board of Directors also recognizes the importance of effective executive leadership to our success and is actively engaged in overseeing the operational risks related to succession planning. The Board of Directors routinely discusses staffing for critical roles, and potential replacements for key personnel are given exposure to the Board of Directors during meetings and other events. In addition, the Board of Directors is regularly updated on strategies for recruiting, developing and retaining outstanding personnel firmwide.
The Board has delegated certain risk management oversight responsibility to its committees as follows:
CODE OF ETHICS AND CONDUCT
We have adopted the Code of Ethics, which requires our directors and employees (including our Chief Executive Officer, Chief Financial Officer and principal accounting officer) to abide by high standards of business conduct and ethics. The Code of Ethics is available in the Investor Relations section of our web site at www.AmericanCapital.com . We intend to post amendments to or waivers from the Code of Ethics (to the extent applicable to our Chief Executive Officer, Chief Financial Officer and principal accounting officer) at that location on its web site. The Code of Ethics was amended by the Board of Directors on July 26, 2007.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act and the disclosure requirements of Item 405 of SEC Regulation S-K require that our directors and executive officers, and any persons holding more than 10% of any class of our equity securities report their ownership of such equity securities and any subsequent changes in that ownership to the SEC, The NASDAQ Global Select Market and to us. Based on a review of the written statements and copies of such reports furnished to us by our executive officers, directors and greater than 10% beneficial owners, we believe that during fiscal year 2015 all Section 16(a) filing requirements applicable to the executive officers, directors and stockholders were timely satisfied, except a filing for David Richards that was one day late.
Item 11. Executive Compensation
DIRECTOR COMPENSATION AND STOCK OWNERSHIP GUIDELINES
The elements of compensation for our non-employee directors include retainers, stock options and, if applicable, compensation for serving on the boards of directors of our portfolio companies. Non-employee directors are paid a retainer for service on the Board of Directors at the rate of $200,000 per year, payable quarterly in advance, and each member of the Audit, Compliance and Valuation Committee and the Compensation, Corporate Governance and Nominating Committee receives an additional retainer at the rate of $40,000 per year and each member of the Executive Committee receives an additional retainer at the rate of $15,000 per year. The lead director and members chairing the Audit, Compliance and Valuation Committee and the Compensation, Corporate Governance and Nominating Committee receive an additional retainer at the rate of $40,000, $20,000 and $20,000 per year, respectively.
Non-employee directors received a fee from us for each American Capital portfolio company or fund board of directors on which they served, in lieu of any payment by the portfolio company or fund. For such companies that are not public, that fee is set at the rate of $40,000 per year. For such companies that are public, that fee is based on the fee payable by the company to its other directors. Directors are also reimbursed for travel, lodging and other out-of-pocket expenses incurred in connection with the Board of Directors and committee meetings. Directors who are our employees do not receive additional compensation for service as a member of the Board of Directors.
The following table sets forth the compensation received by each non-employee director during 2015:
As noted above, we also provide stock-based incentive compensation to our non-employee directors under option plans to help further align their interests with those of our stockholders. Under the 1940 Act, such option plans must be approved by the SEC in order to become effective (the “existing director option plans”).
Our most recent plan was the 2010 Disinterested Director Stock Option Plan, which provided for the issuance of options to purchase up to 1,250,000 shares of our Common Stock, and which became effective on August 30, 2011, when the SEC issued an order authorizing the plan. Each of the non-employee directors at such time received an automatic grant of options to purchase 156,250 shares of our Common Stock. Ms. Nestegard received a grant of options to purchase 156,250 shares in connection with her appointment to the Board of Directors on June 13, 2013. All such options have now vested and expire on September 15, 2020, except for Ms. Nestegard’s options, which vest over the first three anniversaries of June 13, 2013 and expire on June 13, 2023. Vesting of these options will be automatically accelerated upon the occurrence of death or disability of the director. There are no
options remaining under any of our existing director option plans to be granted to the non-employee directors, unless any outstanding options are cancelled following the termination of a director’s service and reissued.
Stock Ownership Guidelines
Our Board of Directors believes that directors more effectively represent the best interests of the Company if they are stockholders themselves. Thus, non-employee directors are encouraged to own shares of our common stock equal in value to three times the annual cash Board retainer (which is currently set at $200,000). The minimum number of shares to be held by the non-employee directors will be calculated on the first trading day of each calendar year based on their fair market value. In the event a new director joins the Board of Directors or the stock price decreases, in each case causing a director to be out of compliance after having been in compliance, any such director will have seven years to return to compliance (but in any case, a person joining the Board shall own no fewer than 5,000 shares within one year of joining the Board). In the event that the cash retainer increases, causing a director to be out of compliance after having been in compliance, any such director will have five years to meet or return to compliance with these guidelines. The Compensation, Corporate Governance and Nominating Committee may waive or modify these requirements in appropriate situations. In addition, our Board of Directors has adopted a policy prohibiting our executive officers and directors from pledging or margining any shares of our common stock (regardless of whether such stock is owned directly or indirectly as such terms are used in the Securities and Exchange Commission rules promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). The Compensation, Corporate Governance and Nominating Committee may waive or modify these requirements in certain situations.
COMPENSATION DISCUSSION AND ANALYSIS
This section of the report is a discussion of aspects of our compensation program and practices for the following executive officers:
(1) Mr. Wagner separated from employment with the Company on March 31, 2015.
In this report, we refer to those individuals as our “named executive officers,” or “NEOs.” This section includes a description of the philosophy and objectives of our executive compensation policies and our most important executive compensation decisions during 2015 and provides our analysis of these policies and decisions. It also includes a discussion of our executive officer compensation programs for 2016. This section also provides a context for the data we present in the compensation tables and related footnotes below, as well as the narratives that accompany the compensation tables.
At our 2014 Annual Meeting of Stockholders, we held a stockholder advisory vote to approve the compensation paid to our named executive officers, commonly referred to as a “say-on-pay” vote. Our stockholders approved the resolution on executive compensation with 67% voting in favor, which, although far more than a majority, was materially less than the 89% vote our executive compensation program received in the preceding say-on-pay vote in 2011. We are committed to ensure our compensation policies remain aligned with stockholders’ interests and view the decrease in favorable votes as one reason to reevaluate our compensation programs, practices and communication. As a result, our Compensation Committee engaged Johnson Associates during 2014, a leading compensation consultant, to provide advice and insight with regard to reviewing and structuring our programs, practices and communication. In addition, our executive officers and other officers have discussed our executive compensation programs, practices and communications with many stockholders during the year and have reviewed this feedback with the Compensation Committee. The Compensation Committee considered this information as it reviewed our executive compensation programs, practices and communication. This feedback informed a new framework adopted by the Compensation Committee for determining short-term incentive compensation for our NEOs for 2015, as further described below, which was intended to have a more explicit connection between pay and performance. Also, we adopted a more rigorous clawback mechanism in the event of financial restatements or certain other events and identified a specific comparator group. The Compensation
Committee intends to continue to review and listen to stockholder feedback as it considers further changes to the Company’s executive compensation programs, practices and communication. Our next “say‑on-pay” vote will be at our 2017 Annual Meeting of Stockholders.
2015 Performance and Compensation Highlights
Last year was one of mixed performance for the Company, which reflected trends experienced by other business development companies (“BDCs”) and the stock market in general. Our performance in 2015 also reflected significant efforts related to our strategic plan announced in late 2014 to spin out two new BDCs to our stockholders (which was revised during 2015 to spinning out a single new BDC) and for the Company to continue primarily in the asset management business. We made considerable progress on the strategic plan during 2015, including filing applicable registration and proxy statements with the SEC and releasing three-year financial projections. However, circumstances that arose late in the year led us to announce that we were undertaking a full strategic review of alternatives for the Company and that the spin-off plan would be reconsidered as part of that review. In early 2016, we announced that we would be soliciting offers to purchase the Company or its business lines, in whole or in part.
As discussed further below, the Compensation Committee considered these results and activities in ultimately determining the 2015 short-term cash incentive compensation for our NEOs. The Compensation Committee noted that certain metrics, including revenue, pre-tax net operating earnings and share repurchases, showed marked improvement over 2014, while other metrics, including net earnings return on equity and earnings per share, showed declines. The Committee also considered the significant efforts related to strategic activities in 2015 and the importance of retaining and incentivizing certain executives with regard to the strategic review process and a possible sale of the Company. Thus, the Committee decided that all NEOs employed at the end of 2015, except Mr. Wilkus, should receive their full target cash incentive compensation for 2015, and that Mr. Wilkus would receive 50% of his target. This represented a decline from 2014 for Mr. Wilkus and the NEOs as a group, but an increase from 2014 for the NEOs other than Mr. Wilkus. (As discussed below, Mr. Wagner separated from employment with the Company on March 31, 2015, and much of his compensation recorded in 2015 constituted severance payments and is excluded from this analysis.) Moreover, the Compensation Committee made no awards of long-term equity incentive compensation in 2015 to the NEOs other than to Mr. Wilkus, and the only long-term equity incentive compensation awarded to Mr. Wilkus was to replace certain prior equity incentive grants that were determined to be void because they exceeded certain plan limits, as described more fully below. Thus, excluding this replacement equity incentive grant and compensation paid to Mr. Wagner in 2015, the total compensation for the NEOs decreased from 2014 to 2015 and remained significantly below levels paid in years 2010 to 2014. The following charts show this decline in the compensation of Mr. Wilkus and of the average of the other NEOs over the last three years.
Total Realized Compensation*
The Compensation Committee believes this slight increase in total compensation of the NEOs other than Mr. Wilkus is appropriate. A decline in compensation could place the Company at risk of losing NEOs that it desires to retain for the strategic review process and otherwise, and that these NEOs should be incentivized to remain with the Company through cash incentives as well as through the material amounts of previously granted equity incentive compensation. The Compensation Committee is mindful of the importance of long-term equity based compensation to align the interests of executives with those of stockholders and acknowledges that having all cash compensation, as occurred in 2015 for all our NEOs other than Mr. Wilkus, is atypical. However, as discussed further below, the Company is prohibited by the 1940 Act from issuing restricted stock or restricted stock units, and the Company has essentially no stock options available for grant.
What We Do; What We Don’t Do
Below are certain highlights of our compensation programs and practices, which we believe illustrate their alignment with the interests of our stockholders.
Compensation Philosophy and Objectives
We believe our continued success as a publicly traded global asset manager and private equity firm through various economic environments has been attributable to our ability to attract, motivate and retain outstanding executive officers through compensation programs and practices, including both short- and long-term incentive compensation, that are competitive in a global market. We also believe that as a public company, elements of our programs should be designed to align executive officer interests with those of our stockholders and to reward performance above various goals, which is why we implemented our stock-based long-term incentive compensation programs. We establish compensation levels for our named executive officers based on current competitive market conditions and individual and Company performance, each reflecting the economic climate and the relative values of different programs.
Role of the Compensation Committee
The Compensation Committee performs an extensive review of each element of compensation of our named executive officers throughout the year and makes a determination regarding any adjustments to current compensation programs, practices and levels after considering a number of factors. The Compensation Committee generally takes into account the scope of an officer’s responsibilities and experience and balances these factors with competitive compensation levels, the Company’s performance and current market conditions. During the annual review process, the Compensation Committee reviews our full-year financial performance, along with a variety of measures, with executive officers and other employees and, as described in the following sections, receives input from its compensation consultant. However, only the Compensation Committee makes all compensation decisions regarding our executive officers. Under its charter, the Compensation Committee also has the authority to select, retain and terminate compensation consultants. In 2015, the Compensation Committee did not retain any compensation consultants.
Role of Management
Management provides material support to the Compensation Committee, but all compensation decisions related to executive officers remain at the discretion of the Compensation Committee. Our Chief Human Resources Officer and her staff provide the Compensation Committee with information and market data on the compensation programs and levels at similar firms and our GC and his staff provide support to the Compensation Committee on legal aspects of compensation decisions, including disclosure requirements. Also, the Compensation Committee considers recommendations made by the CEO on compensation for each of the other NEOs, based on industry data, individual performance and our performance over the past year. Our CEO is not present in the portions of meetings of the Compensation Committee at which his performance is evaluated and his compensation is discussed and determined.
Review of Compensation Programs and Practices of Comparable Companies
We believe that we compete primarily with companies managing private equity funds, mezzanine debt funds, hedge funds and other types of specialized investment funds to attract and retain our executive talent. Many of our competitors are private companies and are not required to disclose their executive compensation programs and practices. In addition, several of our primary competitors that are publicly traded have unusual compensation structures as a result of being led by individuals who own extraordinarily large equity positions associated with being founders of their companies. These founders with large equity positions often receive little cash compensation and instead receive significant equity distributions, which makes comparisons to certain of the Company’s compensation practices of limited value. Nevertheless, the Compensation Committee, with the assistance of its compensation consultant and management, collects information that is available regarding the compensation practices of these comparable private companies. As part of its engagement in 2014, Johnson Associates reviewed and assessed the potential for a comparator group of public companies for the Company. Johnson Associates evaluated a wide range of public company comparators based on external stakeholder and internal feedback, along with its own market comparisons. The consultants interacted with management where necessary and appropriate to carry out its assignment. Potential public company comparators were excluded where the comparator’s primary business was (a) narrower in business scope, (b) meaningfully smaller in size/scale, and/or (c) operating in different businesses from us.
The resulting public company comparator group has the following companies:
We emphasize that the firms listed above are not exact peers. The Compensation Committee utilizes information regarding the compensation programs and practices of this comparator group together with other comparative and market data in a holistic manner to assist it in gaining a general awareness of industry programs, policies and trends. Although we seek to offer to our named executive officers a competitive level of total compensation so as to attract, motivate and retain them, the Compensation Committee does not target a particular percentile of the public company comparator group for total pay packages or individual
components. The Compensation Committee considers market data as only one of many factors and such market data is not a replacement for the Compensation Committee’s independent judgment in making compensation decisions.
Components of NEO Compensation and their Purposes
Base salary is one component of each named executive officer’s cash compensation. We establish base salaries after considering a variety of factors, including current economic conditions and the competitive market for executive officers, the scope of each executive officer’s responsibilities, individual performance and our performance and, if requested by the Compensation Committee, recommendations from the Compensation Committee’s compensation consultant. Base salaries for our named executive officers are reviewed annually by the Compensation Committee and by its compensation consultant and at the time of a promotion or other change in responsibility and may be adjusted after considering the above factors.
Each named executive officer’s employment agreement sets a minimum base salary. Except for Mr. Graff, who received a promotion and an increase in his base salary effective January 1, 2015, the base salaries of our NEOs have not been increased since 2008. The current base salaries for the NEOs are $1,495,000 for Mr. Wilkus, $1,085,000 for Mr. Erickson, and $1,020,000 for each of Messrs. Flax, Graff and O’Brien. The same base salaries apply in 2016. The current base salaries are the minimum base salaries required in each NEO’s employment agreement, except the minimum base salary provided for in Mr. Wilkus’ employment agreement is $530,000.
Short-Term Cash Incentive Payment
Short-term cash incentive payments are another component of each NEO’s cash compensation. The considerations in setting each NEO’s target short-term incentive compensation amount are generally the same as we use to establish each NEO’s base salary, although their weighting may be different in each case. The determination of actual awards is described further below. Prior to 2015, these cash incentive payments took the form of “Annual Awards” under the Company’s Performance Incentive Plan. However, in early 2015, the Board of Directors adopted the American Capital, Ltd. Employee Cash Incentive Plan (“Cash Incentive Plan”), which was subsequently approved by our stockholders at our 2015 Annual Meeting. Commencing in 2015, awards were paid under the Cash Incentive Plan.
Each NEO's employment agreement entitles him to participate in a short-term cash incentive program and sets a minimum target incentive amount for which he is eligible to be considered. The minimum contracted amounts are Mr. Wilkus at 230% of his base salary, Mr. Erickson at $3,000,000, and $2,500,000 for each of Messrs. Flax, Graff and O’Brien. In 2015 and 2016, the targeted amount set by the Compensation Committee for each of the named executive officers is this minimum targeted amount except that the Compensation Committee set Mr. Wilkus’ target amount at $6,000,000.
It has been the general practice of the Compensation Committee to make short-term cash incentive payments following the end of each of the first three calendar quarters after the Compensation Committee has reviewed our performance and the NEO’s performance for each quarter and then, if earned, to make a larger payment after the year has concluded and the Compensation Committee has reviewed our performance and the NEO’s performance for the entire year. The quarterly payout, if any, is intended to motivate our NEOs throughout the year and to match rewards with actual performance, with a larger amount typically paid at the end of the year, each based on satisfaction of pre-established performance criteria. After the conclusion of each year, the Compensation Committee meets to review individual performance, our overall performance for the year and current economic and market factors. All payments are at the discretion of the Compensation Committee and the Compensation Committee uses a variety of objective and subjective factors in determining awards.
One set of objective factors has been a set of “Performance Goals” generally established on a quarterly and annual basis. The Performance Goals have generally served as only a threshold for determination of any short-term cash incentive, and the Compensation Committee still retained negative discretion to determine not to pay all or a portion of the target amount for the quarterly or annual period. In 2015, the Performance Goals also provided a non-exclusive framework to satisfy Section 162(m) of the Code, which is discussed below under “—Tax and Regulatory Issues.” Under this aspect of the Performance Incentive Plan, the Compensation Committee designates Performance Goals, which they select from the following metrics, among others:
Performance Goals may also include any other objective goals established by the Compensation Committee, and may be absolute in their terms or measured against or in relationship to other comparable companies. Performance Goals may be particular to an employee or the department, branch, affiliate or other division in which they work, or may be based on the performance of the Company, one or more affiliates, or the Company and one or more affiliates, and may cover such period as specified by the Compensation Committee.
We discuss further below the decisions made with regard to short-term cash incentive awards made for 2015 and the criteria we have used for awards to be made in 2016. On a weighted average basis, the short-term cash incentive award for our NEOs has been the indicated percentage of their applicable target amount for the indicated years: 50% (2009); 50% (2010); 65% (2011); 70.7% (2012); 90% (2013); 87.5% (2014); and 81.8% (2015).
Each NEO participates in long-term equity incentive compensation plans as do virtually all of our officers. The Compensation Committee and our Board of Directors believe that stock-based incentives are necessary to attract, motivate and retain outstanding executives and to align their interests with those of our stockholders. Stock-based compensation advances the interests of our Company, but, as a BDC, we are restricted under the 1940 Act in the forms of incentive compensation we can provide to our employees. For instance, we generally cannot compensate employees with restricted stock or stock appreciation rights and our ability to issue stock options is restricted in ways not applicable to most other public companies. Moreover, we compete with numerous private equity, mezzanine and hedge funds for our NEOs and investment professionals. These funds typically pay to their partners and employees 20% of the gains (including capital gains) of each fund under management. This payment is commonly referred to as a carried interest, but the 1940 Act generally prohibits us from compensating our officers and employees in this manner. We have established two types of long-term equity based incentive plans based on these considerations.
Options. Stock options are a key element of our named executive officers’ compensation and we currently maintain several stock option plans (“Option Plans”), which provide for the grant of nonqualified stock options. However, we have not adopted any new employee stock option plan since 2009, and, since mid-2012, nearly all of our shares of Common Stock available for grant under options have been allocated. The Compensation Committee administers the Option Plans for employee participants. Under the 1940 Act, a majority of our disinterested directors must approve option awards and their terms. The considerations in
awarding options to NEOs are generally the same as we use to establish each NEO’s base salary, although their weighting may be different in each case.
Options may be exercised during a period of no more than ten years following grant and the terms of each option grant set forth the vesting period. Vesting may be accelerated under certain circumstances, and it is automatically accelerated upon specified change of control transactions. The exercise price and other corresponding terms of outstanding options may be adjusted to reflect the effect of stock splits, stock dividends and recapitalizations, but not cash dividends. Section 61(a) of the 1940 Act imposes certain requirements on our Option Plans including that the options must expire no later than ten years from grant, the options must not be separately transferable other than by gift, will or intestacy, the exercise price at the date of issuance must not be less than the current market price for the underlying stock, the plan must be approved by a majority of our disinterested directors and by our stockholders and we must not have a profit-sharing plan as described in the 1940 Act.
Moreover, under the 1940 Act, we can only issue new options if the number of shares of common stock covered by outstanding options is no more than 20% of the outstanding shares. In addition to there being few shares available under the terms of our Option Plans as noted above, the number of shares covered by outstanding options is close to the 20% limit. It should be noted that, as we repurchased shares of Common Stock in recent years, the 1940 Act limit on the number of shares covered by our outstanding options also declined.
Given these limitations, we did not award any options to our named executive officers in 2015, and it is unlikely that we will award any options to them in 2016. Nevertheless, we believe that the interests of our named executive officers will remain aligned with stockholders given the number of previously granted stock options that remain outstanding.
Performance Incentive Plan Incentive Awards. As discussed above, we believe that our employee compensation plans must provide an economic interest in the Company that is similar to that generally provided to partners and employees of management companies of private equity, mezzanine and hedge funds. We believe that our Option Plans only partially fulfill this objective. First, they do not allow option holders to share in any cash dividends paid on our Common Stock. While we have not paid cash dividends on Common Stock in recent years, historically, dividends represented a significant portion of the value received by stockholders. In addition, we have materially increased our management of assets in externally managed funds. This involves the raising of capital by entities other than us and does not involve the sale of shares of our Common Stock. As noted above, we are limited in our ability to issue additional options by the number of outstanding shares of Common Stock. Therefore, by using options alone, we may not be able to compensate employees at competitive levels commensurate with the amount of assets we have under management.
Thus, in order to further align employees and stockholders, to address the fact that option holders do not receive the benefit of cash dividends on our Common Stock and to reflect the additional assets under management through externally managed funds, we established the Performance Incentive Plan (formerly known as the Incentive Bonus Plan) in 2006. It is an unfunded bonus program intended to be exempt from the Employment Retirement Income Security Act, or ERISA.
Long-term equity incentive awards (“Incentive Awards”), in which all of our employees have been eligible to participate, are made under the Performance Incentive Plan. (Prior to 2015, short-term cash incentives were also made under this Plan.) We established a trust fund to provide a vehicle for funding the payment of the Incentive Awards under the Performance Incentive Plan (the “Trust”). The trustee of the Trust is First State Trust Company. In the past we made contributions of cash to the Trust based on the Incentive Awards approved by the Compensation Committee. Pursuant to the trust agreement, we instruct the trustee, subject to its fiduciary duty, to invest this cash and any other cash generated by trust assets in money market securities for short-term investment purposes and in shares of our Common Stock for long-term investment purposes, which are purchased on the open market. Shares of our Common Stock held in the Trust are enrolled in our dividend reinvestment plan and any dividends paid on these shares have been reinvested in our Common Stock.
Each participant has a bookkeeping account, which is allocated a hypothetical, or notional, number of shares of our Common Stock, generally based on the amount of each participant’s cash awards divided by the average open-market purchase price for the Common Stock purchased by the Trust in connection with the respective awards. Once these notional shares are allocated to a participant’s account, the Incentive Awards are tied directly to the interests of stockholders as the value is directly related to the market price of Common Stock. Moreover, if cash dividends are paid on our Common Stock, the notional value of the dividends attributable to the participant’s account is credited to the account, in the form of additional notional shares. Thus, the participant could receive a benefit from any cash dividends, something not possible under the Option Plans, further aligning the interests of plan participants with those of stockholders since participants share similarly in any appreciation or decline in our stock price.
The considerations in awarding Incentive Awards to NEOs are generally the same as we use to establish each NEO’s base salary, although their weighting may be different in each case. Each participant vests in Incentive Awards in accordance with a vesting schedule specified by the Compensation Committee. Vesting is generally based on continued employment, with a vesting
schedule generally of two to six years. Vesting is accelerated upon a participant’s employment termination as a result of death or disability, or upon a change of control.
Participants are generally eligible to receive distributions of the vested portions of Incentive Awards immediately upon vesting. All distributions are made by the Trust in Common Stock. Participants have generally been able to elect to defer the payment of the vested portions of Incentive Awards to a later distribution date (or dates) allowed by the Compensation Committee and as permitted under Section 409A of the Code (but generally no later than ten years after the date of grant). Notwithstanding any deferral election, the vested portion of a participant’s Performance Incentive Plan account will generally be paid on the participant’s termination or upon a change of control. A participant is required to satisfy withholding taxes upon vesting and distribution dates. Incentive Awards under the Performance Incentive Plan are included in the “Stock Awards” column of the Summary Compensation Table below, although the NEOs do not receive stock directly from us, as discussed above.
In recent years, we have made few Incentive Awards, although as a result of deferrals in past years, the current NEOs generally have significant balances in their Performance Incentive Plan accounts. In 2011 and 2012, no Incentive Awards were made, and in 2013, only nominal awards were made. Other than as discussed below with regard to Mr. Wilkus, we made no Incentive Awards to NEOs in 2014 or 2015 and do not anticipate making any in 2016.
In 2015, our Board approved a new equity incentive plan, which was to be submitted to stockholders for approval in connection with the spin-off transaction. However, there are now no plans to seek stockholder approval for or otherwise implement such a plan in 2016 under current expectations for the Company’s strategic review process.
2015 Compensation Decisions
As described above, the compensation for most of the NEOs in 2015 included base salary and cash short-term incentives. Except in the case of Mr. Wilkus, described below, the Company did not award equity incentive compensation, primarily because of the unavailability of stock options under our Option Plans.
As noted above, the Compensation Committee took stockholder feedback into account as it considered its process for analyzing and determining executive compensation for 2015. With the help of its compensation consultant, the Compensation Committee determined there should be significant revisions to the Compensation Committee’s short-term cash incentive program under the Cash Incentive Plan so as to focus more on specific measures of Company performance as well as personal performance.
There were two principal steps in determining awards under the Cash Incentive Plan for 2015. First, a cash incentive pool was established and, second, the pool was allocated among the NEOs. In early 2016, the Compensation Committee set the final size of the cash incentive pool by determining the aggregate maximum target bonus that each executive officer was eligible to earn in 2015 under his employment agreement or as otherwise set by the Compensation Committee (each executive officer’s “Target Amount”), and multiplying that aggregate amount by a factor determined by the Compensation Committee considering the measures and weightings below.
The Committee reached the following conclusions with regard to the factors listed in the table above:
The sum of these factors was 81.6% so the pool was 81.6% of the sum of the aggregate Target Amounts. Next, the Compensation Committee allocated the pool to the NEOs, with awards that could have ranged from 0% up to a maximum of 150% of each NEO’s Target Amount. In determining the actual cash short-term incentive award for each NEO, the Compensation Committee used the following framework to assess individual and relative performance the NEOs:
The Committee applied this framework to each of the NEOs as follows:
The Compensation Committee was allowed to make short-term cash incentive awards during the course of the year equal to an aggregate of 37.5% of NEOs officer’s Target Amount. In making such interim awards, the Compensation Committee considered the measures and weightings above as it deemed appropriate and any such awards were deducted from the award otherwise determined by the above formulation.
The Compensation Committee determined that the NEOs qualified to be considered for all or a portion of their target amount under the Performance Incentive Plan for the February and March period, and the second, third and fourth quarters of 2015 and for the full year 2015.
As discussed above, the Compensation Committee made no long-term equity incentive compensation awards in 2015 other than to Mr. Wilkus. This was primarily because available stock options have largely been exhausted, and while it would have been possible to make additional incentive awards under the Performance Incentive Plan, to do so in a meaningful way would have required cash to purchase additional shares of Common Stock for contribution to the plan.
Effective March 31, 2015, we entered into an agreement with Mr. Wagner regarding his separation from employment on March 31, 2015 (the “Separation Agreement”). Under the Separation Agreement, Mr. Wagner was scheduled to receive base severance payments of $1,275,000, enhanced severance payments totaling $4,375,000, a benefits payment amount of $21,552, and accrued but unused vacation. In addition to these amounts, all of Mr. Wagner’s unvested options and unvested awards under the Performance Incentive Plan were accelerated effective as of his separation date. Payments under the Separation Agreement satisfy the Company’s obligations upon separation under Mr. Wagner’s employment agreement, which was superseded by the Separation Agreement, except for the provisions of his employment agreement related to confidential information, non-competition and non-solicitation. We also entered into a Consulting Agreement with Mr. Wagner effective as of April 1, 2015, that required Mr. Wagner to render to American Capital such consulting services consistent with his level of experience and knowledge as American Capital may have requested, in exchange for a monthly fee of $75,000 and reimbursement of reasonable expenses. The Consulting Agreement was terminated as of July 1, 2015.
Special Long-Term Equity Incentive Compensation Award
The Compensation Committee made one long-term equity incentive compensation award in 2015 to Mr. Wilkus as a replacement equity incentive award. In the second quarter of 2014, we determined that certain stock options granted to Mr. Wilkus in the years 2011-2013 exceeded the limit on the number of stock options that could be granted to any individual participant with respect to particular option plans. Accordingly, the attempted grant of those excess stock options was ineffective, and the Board of Directors determined that the grants were void. The total number of such void options was 2,345,647. In addition, the Company determined that an Incentive Award granted to Mr. Wilkus under the Performance Incentive Plan in 2007 exceeded the annual cash limit under the Performance Incentive Plan by $2,586,692. This excess award had resulted in the credit of 100,750 too many notional shares of our Common Stock to Mr. Wilkus’ plan account (including the effect of dividends paid on the granted shares). Accordingly, the attempted award of that amount and the crediting of those notional shares were ineffective, and the Board of Directors determined that the award was void.
The Compensation Committee and the Board of Directors evaluated this situation and determined that it was necessary and appropriate to provide replacement equity incentive awards to Mr. Wilkus of a value generally equivalent to the void awards. Because the terms of the Option Plans precluded the award of any additional options to Mr. Wilkus, the Board of Directors determined to make the replacement awards through Incentive Awards under the Performance Incentive Plan, subject to the award limits in that plan. To determine a reasonably equivalent award to the void option awards, the value of each void option was determined as of its date of grant and converted into a number of shares of common stock based on the price of a share of our Common Stock on the date each void option was granted. This resulted in a determination that Mr. Wilkus would have been awarded the equivalent of 1,027,012 notional shares of Common Stock in his Performance Incentive Plan account if he had received an Incentive Award rather than options on the original grant date. With regard to the void Incentive Award, we adjusted the number
of void notional shares originally credited to Mr. Wilkus’ PIP account for the effect of subsequent cash and stock dividends on our common stock and determined that it equaled 100,750 shares of Common Stock. Thus, we determined that a total of 1,127,760 notional shares of our Common Stock would generally provide for an adequate replacement for the void awards. However, because of the Performance Incentive Plan’s annual limit of awards to any participant of $10,000,000 and given the current market price of our Common Stock, we were limited to making a make-whole Incentive Award to Mr. Wilkus in the second quarter of 2014 equivalent to 668,896 notional shares of Common Stock. In 2015 the Compensation Committee made an additional make-whole Incentive Award to Mr. Wilkus equivalent to 458,866 notional shares of our Common Stock, which at an estimated stock price of $15 per share, would be worth $6,882,990. These make-whole awards have been structured so that they will be deductible as a compensation expense under Section 162(m) of the Code. They are vesting on a schedule that mirrors the vesting schedule of the void awards. Thus, on the date of the 2015 make-whole award, Mr. Wilkus vested in 227,919 of the notional shares added to his Performance Incentive Plan account. Unlike other awards under the Performance Incentive Plan, Mr. Wilkus’ replacement award will only be paid on the earlier of his death or separation from service (subject to a rule under Section 409A of the Code that may require a six-month delay on amounts payable based on a separation from service). Payment of his award would not be accelerated on a change of control of the Company.
The replacement is now complete and no more replacement awards will be made to Mr. Wilkus. The Compensation Committee and the Board of Directors believe that these awards, while significant, represent a fair resolution of these issues and are in the interests of the stockholders.
2016 Compensation Considerations
The Company’s ongoing strategic review process, including the possibility that the Company or major portions of its business lines will be sold during 2016, is a significant consideration for the Compensation Committee with regard to 2016 NEO compensation The Committee has made no adjustments in the base compensation of any NEO for 2016. With regard to the cash incentive programs, the Compensation Committee has decided that it will generally remain flexible with regard to making awards and that while it will consider factors used in the framework for the 2015 cash incentive programs, such a structured program is likely not appropriate for determining 2016 cash incentive compensation.
Other Compensation Policies and Practices
Stock Ownership Guidelines
We require our named executive officers to own significant amounts of our Common Stock. Our stock ownership guidelines are designed to increase the executives’ equity ownership and to align further their interests with those of our stockholders. The guidelines require each named executive officer to own a minimum number of shares of our Common Stock based on a multiple of base salary, which is 5x for our Chairman and CEO, 3x for Presidents and Executive Vice Presidents, and 2x for other executive officers. Shares are valued at the higher of their purchase price or current trading price. Until the foregoing ownership requirements are met, each named executive officer is expected to retain one-half of all shares distributed from the Performance Incentive Plan and one-half of all shares realized upon the exercise of stock options, net of any shares sold to pay taxes and associated costs due as a result of such distribution or exercise. If a named executive officer fails to meet or show sustained progress toward meeting our stock ownership requirements, we may reduce the amount of the officer’s future equity awards. The Compensation Committee may modify these requirements in certain situations. We also believe it is highly inappropriate for any of our employees, including our named executive officers, to short our stock or engage in transactions where the person will earn a profit based on a decline of our stock price. In addition, our Board of Directors has adopted a policy prohibiting our executive officers and directors from pledging or margining any shares of our Common Stock (regardless of whether such stock is owned directly or indirectly as such terms are used in the Securities and Exchange Commission rules promulgated under the Exchange Act). The Compensation Committee may waive or modify these requirements in certain situations. The NEOs’ ownership of our Common Stock is shown in the table on page 37.
Tax and Regulatory Issues
We generally endeavor to minimize the amount of our taxes and our employees’ taxes to maximize the return to our stockholders and employees, although, in order to preserve flexibility on the design of our compensation programs, we do not have a formal policy in place. For example, Section 162(m) of the Code generally disallows a tax deduction to a public company for compensation in excess of $1 million paid to the company’s chief executive officer and any other executive officer (other than the chief financial officer) required to be reported to its stockholders under the Exchange Act by reason of such executive officer being one of the four most highly compensated executive officers. However, qualifying performance-based compensation is not subject to the deduction limitation if certain requirements are met. Thus, awards under the Option Plans have been intended to qualify as performance-based compensation under Section 162(m), in part by including limitations under each Stock Option Plan (other than the 1997 Stock Option Plan) on the number of shares that may be granted under the respective Stock Option Plan to an individual. As described above in “—Special Long-Term Equity Incentive Compensation Award,” certain prior awards to
Mr. Wilkus under the Option Plans were discovered to have been in excess of those limits have been determined to be void. In addition, through 2011, portions of the Incentive Awards and Annual Awards under the Performance Incentive Plan for the eligible NEOs were intended to qualify as performance-based compensation under Section 162(m). However, beginning in 2012, the Performance Incentive Plan did not meet certain requirements of Section 162(m) and, thus, the compensation of certain of the NEOs has been in excess of the deduction limitation for 2012-2014.
The Cash Incentive Plan includes a series of performance criteria that the Compensation Committee may use in establishing specific targets to be attained as a condition to the payment of cash awards under the Cash Incentive Plan in accordance with the performance based compensation exception under Section 162(m). In addition, Mr. Wilkus’ equity incentive awards intended to replace void equity incentive awards have been designed to be deductible under Section 162(m).
Awards that are not intended to qualify as “performance-based compensation” under Section 162(m) may be based on the performance criteria set forth in the Cash Incentive Plan or such other performance measures as the Compensation Committee may determine.
Additionally, we consider the tax implications of Section 409A of the Code. Section 409A of the Code sets forth certain requirements that a plan that provides for the deferral of compensation must meet, including requirements relating to when payments under such a plan may be made, acceleration of benefits, and the timing of elections under such a plan. Failure to satisfy these requirements will generally lead to an acceleration of timing of inclusion in income of deferred compensation, as well as certain additional income taxes.
Risk Assessment and Compensation
The Compensation Committee regularly monitors the risks and rewards associated with our compensation programs. The Compensation Committee also establishes our compensation programs with the intent to align our interests with stockholders and to prevent unnecessary or excessive risk taking. We believe that our compensation policies and practices are well balanced and designed to avoid creating compensation incentives that encourage unnecessary or excessive risks that could potentially have a material adverse effect on our Company. As described in this Compensation Analysis and Discussion section, we use variable compensation for all of our named executive officers, with a focus on performance. While we have not made long-term equity incentive awards to most NEOs this year, we have typically provided a balance between short-term and long-term, cash and equity incentive compensation to ensure management focuses on the long-term impact of short-term decisions and that management’s interests are aligned with stockholders. As an additional safeguard against unnecessary or excessive risk taking, even if pre-established performance metrics are satisfied, the Compensation Committee retains the right to make downward adjustments in awards. The Compensation Committee continually assesses our executive compensation programs and has implemented additional policies and practices that we believe have further mitigated compensation driven risk. Some of these policies and practices include limits on executive bonuses, the adoption this year of a clawback policy and the adoption of executive officer stock ownership guidelines, as described above.
The Compensation Committee has instituted a “clawback” policy that will be effective for incentive payments and awards made in 2015 or later. In the event that any incentive payment or award to an executive officer was based upon achieving certain financial results and those results were subsequently the subject of a restatement of Company financial statements filed with the SEC and a lower payment would have been made to the executive officer based upon the restated financial results, the Board of Directors may require that each executive officer repay or forfeit to the Company the amount by which the executive officer’s incentive payments received during the period covered by the restated financial statements exceeded the lower payment that would have been made based on the restated financial statements.
In addition, should (i) any incentive payment to an executive officer be based upon achieving certain performance goals (other than financial results covered above) and subsequently it is determined that such metric was not achieved or was achieved at a level that would have resulted in a lower payment; (ii) the executive officer who provided the information that caused the incorrect determination of such metric being achieved or being achieved at a higher payment level provided it with knowledge that such information was inaccurate and has been terminated for cause; and (iii) a lower payment would have been made to the executive officer based upon the metric not being achieved or being achieved at a lower payment level, the Board of Directors may require that such individual executive officer repay or forfeit to the Company the amount by which any of such individual executive officer’s incentive payments attributable to the period covered by the financial goal exceeded the lower payment that would have been made based on the metric not being achieved or being achieved at the lower payment level. This policy is in addition to clawback policies that may otherwise be required by law or regulation, such as Section 304 of the Sarbanes-Oxley Act.
Perquisites and Benefits
We do not believe that it is appropriate for our named executive officers to receive special perquisites and benefits and, thus, our named executive officers do not receive any personal benefits or perquisites that are not available on a non-discriminatory basis to all employees. Our employee benefit plans in which our NEOs participate include medical, dental, vision, disability, life and long-term care insurance, qualified transportation benefits and a 401(k) plan.
Pension and Retirement Plans
We do not maintain any retirement, pension, defined benefits, supplemental executive retirement or similar plans in which only our named executive officers are eligible. We had previously established the American Capital, Ltd. Employee Stock Ownership Plan (the “ESOP”) as an “employee stock ownership plan” within the meaning of Section 4975(e)(7) of the Code, and the American Capital, Ltd. 401(k) Plan (the “401(k) Plan”) with a cash or deferred arrangement intended to qualify under Section 401(k) of the Code. We maintained the ESOP and 401(k) Plan for the benefit of our employees to enable them to share in our growth and supplement their personal savings and social security. The ESOP was merged into the 401(k) Plan and there will be no further ESOP contributions. Since 2010, we have matched 100% of an employee’s 401(k) contributions, up to the first 3% of his or her compensation, subject to statutory maximums, and currently expect to do so again in 2016. The statutory maximum matching contribution for 2015 was $7,950. The NEOs participate in the 401(k) Plan on the same basis as all of our other employees.
We have entered into employment agreements with each of our named executive officers. The agreements provide for a two-year term, which renews on a daily basis so that there will always be two years remaining until either party gives notice that the automatic renewals are to be discontinued. As described above, each agreement also sets forth a minimum base salary for the NEO and that he is entitled to participate in a performance-based target incentive payment program with a specified minimum target incentive payment amount. Also, the agreements set forth certain compensation and benefits in the event that the executive officer’s employment with the Company terminates or is terminated, as described below under “—Severance and Change of Control Payments—Employment Agreements.” The employment agreements also include covenants related to post-employment obligations of the executive officer in areas such as competition with us and obligations to maintain the confidentiality of certain information.
We believe that our compensation programs have been appropriately designed to continue to attract, retain and motivate our employees, including our NEOs, improve our financial performance and align the interests of our NEOs with the long-term interests of our stockholders. We believe that our overall performance since going public in 1997 is due in part to the effectiveness of our compensation programs with respect to all of our employees, including our named executive officers.
REPORT OF THE COMPENSATION, CORPORATE GOVERNANCE AND NOMINATING COMMITTEE
Our Compensation, Corporate Governance and Nominating Committee reviewed and discussed with our management the “Compensation Discussion and Analysis” contained in this report. Based on that review and discussions, the Compensation, Corporate Governance and Nominating Committee recommends to the Board of Directors that the “Compensation Discussion and Analysis” be included in this report.
SUMMARY COMPENSATION TABLE
The following table provides information concerning the compensation of the NEOs earned during the fiscal year ended December 31, 2015. In the column “Salary,” we disclose the amount of base salary paid to the NEO during the fiscal year. In the column “Bonus,” we disclose the amount of short-term cash incentive payments earned by the NEO during the fiscal year. We disclose the amount of the NEO’s Incentive Awards under the Performance Incentive Plan in the column “Stock Awards,” although the NEOs do not receive stock from us; rather, we make cash contributions to the Trust, which purchases shares of our Common Stock on the open market. A number of hypothetical, or notional, shares are allocated to each participant’s account. See “—Short-Term Cash Incentive Payment” on page 16 above.
The amount of the NEO’s performance-based Target Award earned during the fiscal year under our Performance Incentive Plan is disclosed in the column “Non-Equity Incentive Plan Compensation.” The amount in the column “All Other Compensation” is comprised of our contribution to the 401(k) plan, which was capped at $7,950 in 2015, $7,800 in 2014, and $7,650 in 2013. The NEOs did not have any perquisites or other personal benefits in excess of the reporting thresholds during the fiscal year.
GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR 2015
In this table we provide information about each grant of an award made to an NEO in the most recently completed fiscal year under the Option Plans and the Performance Incentive Plan. The target amounts are the same as the maximum amounts under each of the plans. In each case, the grant date is the same date as the Compensation, Corporate Governance and Nominating Committee approval date. Amounts disclosed under “Estimated Possible Payouts Under Non-Equity Incentive Plan Awards” include the performance-based portion of the Target Awards under the Performance Incentive Plan and the amounts disclosed under “Estimated Possible Payouts Under Equity Incentive Plan Awards” include the performance-based Incentive Awards under the Performance Incentive Plan. The column “All Other Option Awards” includes grants made under the Option Plans. The exercise price of option awards is the closing price of our Common Stock on the date of grant.
Amounts included in the “Grant Date Fair Value of Stock and Option Awards” column are valued in accordance with ASC 718 without reduction of any assumed forfeitures and are based on certain assumptions that we disclose in Note 5 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table provides information about unexercised options, both exercisable and unexercisable, under the Option Plans and Incentive Awards under the Performance Incentive Plan that have not vested for each NEO outstanding as of December 31, 2015. The market value of the Incentive Awards is the market value of the NEO’s bookkeeping account under the Performance Incentive Plan calculated with a stock price of $13.79, which was the closing price of our Common Stock as of December 31, 2015.