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TABLE OF CONTENTS
APPENDIX A | ||||||||
THE ULTIMATE SOFTWARE GROUP, INC.
2000 ULTIMATE WAY
WESTON, FLORIDA 33326
April 2, 2018
Dear Shareholder:
You are cordially invited to attend the 2018 Annual Meeting of Shareholders of The Ultimate Software Group, Inc. (“Ultimate,” “we,” “us” or “our”), which will be held on Monday, May 14, 2018, at 10:00 a.m. (EDT), at Ultimate’s principal corporate office at 2000 Ultimate Way, Weston, Florida 33326 (the “Annual Meeting”).
The principal business of the meeting will be (i) to elect three directors to serve until the 2021 Annual Meeting of Shareholders or until their successors are duly elected and qualified; (ii) to ratify the appointment of KPMG LLP as Ultimate’s independent registered public accounting firm for the fiscal year ending December 31, 2018; (iii) to approve by non-binding advisory vote the compensation paid to Ultimate’s named executive officers; (iv) to approve the Amended and Restated 2005 Equity and Incentive Plan, as proposed to be amended; and (v) to transact such other business as may properly come before the meeting or any postponement or adjournment thereof. We also will review the results of the past fiscal year and report on significant aspects of our operations during the first quarter of fiscal 2018.
In accordance with the Securities and Exchange Commission (“SEC”) rule (“Notice and Access Rule”) that allows companies to furnish their proxy materials (including the form of proxy, this proxy statement and our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on February 26, 2018) over the Internet, we sent a Notice of Internet Availability of Proxy Materials (“Notice”) on or about April 2, 2018 to our shareholders of record as of March 20, 2018. We also provided access to our proxy materials over the Internet beginning on that date. As a result of the Notice and Access Rule, all shareholders receiving the Notice have the ability to access the proxy materials over the Internet and request to receive a paper copy of the proxy materials by mail. Instructions on how to access the proxy materials over the Internet or to request a paper copy may be found on the Notice. In addition, the Notice contains instructions on how shareholders may request to receive proxy materials electronically by e-mail.
Whether you plan to attend the Annual Meeting or not, to have your vote recorded, you should vote over the Internet or by telephone, or, if you requested paper copies of the proxy materials by mail, you can also vote by mail by following the instructions on the proxy card. Voting by any of these methods will ensure your representation at the Annual Meeting regardless of whether you attend in person. If you decide to attend the meeting, you may, of course, revoke your proxy and personally cast your votes.
We thank you for your continued interest in Ultimate.
Sincerely yours,
Scott Scherr
Chairman, President and Chief Executive Officer
THE ULTIMATE SOFTWARE GROUP, INC.
2000 ULTIMATE WAY
WESTON, FLORIDA 33326
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 14, 2018
TO THE SHAREHOLDERS OF THE ULTIMATE SOFTWARE GROUP, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of The Ultimate Software Group, Inc. (“Ultimate,” “we,” “us” or “our”) will be held on Monday, May 14, 2018, at 10:00 a.m. (EDT), at Ultimate’s principal corporate office at 2000 Ultimate Way, Weston, Florida 33326 for the following purposes:
1) | To elect three directors to serve until the 2021 Annual Meeting of Shareholders or until their successors are duly elected and qualified; |
2) | To ratify the appointment of KPMG LLP as Ultimate’s independent registered public accounting firm for the fiscal year ending December 31, 2018; |
3) | To approve by non-binding advisory vote the compensation paid to Ultimate’s named executive officers; |
4) | To approve the Amended and Restated 2005 Equity and Incentive Plan, as proposed to be amended; and |
5) | To transact such other business as may properly come before the meeting or any postponement or adjournment thereof. |
Shareholders of record of the voting stock of Ultimate at the close of business on March 20, 2018 are entitled to notice of and to vote at the Annual Meeting or any postponement or adjournment thereof.
By Order of the Board of Directors:
Vivian Maza
Secretary
Weston, Florida
April 2, 2018
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IMPORTANT NOTICE REGARDING AVAILABILITY OF PROXY MATERIALS FOR THE
SHAREHOLDERS MEETING TO BE HELD ON MAY 14, 2018:
This proxy statement, the form of proxy and Ultimate’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (“2017 Annual Report”) are being mailed to shareholders who have requested hard copies on or after April 2, 2018.
Registered and beneficial shareholders may view and print Ultimate’s proxy statement and the 2017 Annual Report at www.proxyvote.com.
All shareholders may view and print Ultimate’s proxy statement and the 2017 Annual Report, which are located on the “Investors” link of Ultimate’s website at http://ultimatesoftware.com/investors.asp.
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THE ULTIMATE SOFTWARE GROUP, INC.
2000 ULTIMATE WAY
WESTON, FLORIDA 33326
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
MAY 14, 2018
This proxy statement (this “Proxy Statement”) is being furnished to holders of The Ultimate Software Group, Inc. (“Ultimate,” “we,” “us,” or “our”) common stock, par value $0.01 per share (the “Common Stock”). Proxies are being solicited on behalf of the Board of Directors of Ultimate (the “Board”) to be used at the Annual Meeting of Shareholders (the “Annual Meeting”) to be held on Monday, May 14, 2018, at 10:00 a.m. (EDT), at Ultimate’s principal corporate office at 2000 Ultimate Way, Weston, Florida 33326 and at any postponement or adjournment thereof, for the purposes set forth in the Notice of Annual Meeting of Shareholders.
Ultimate is using the Securities and Exchange Commission (the “SEC”) rule that allows companies to furnish their proxy materials over the Internet. As a result, we mailed to our shareholders a Notice of Internet Availability of Proxy Materials (the “Notice”) instead of a paper copy of the proxy materials (including the form of proxy, this Proxy Statement and our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on February 26, 2018 (the “2017 Annual Report”), collectively, the “Proxy Materials”) on or about April 2, 2018. We also provided access to our Proxy Materials over the Internet beginning on that date. The Notice contained instructions on how to access this Proxy Statement and the 2017 Annual Report and how to vote online or by toll-free number. Subsequent to receiving the Notice, all shareholders have the ability to access the Proxy Materials over the Internet and request to receive a paper copy of the Proxy Materials by mail. Instructions on how to access the Proxy Materials over the Internet or to request a paper copy may be found on the Notice. In addition, the Notice contains instructions on how shareholders may request to receive Proxy Materials electronically by e-mail.
Registered and beneficial shareholders may view and print this Proxy Statement and the 2017 Annual Report at www.proxyvote.com.
All shareholders may view and print this Proxy Statement and the 2017 Annual Report, which are located on the “Investors” link of Ultimate’s website at http://ultimatesoftware.com/investors.asp.
Proxies are being solicited from holders of Ultimate’s Common Stock. If a proxy is properly executed and returned, the shares represented by it will be voted and, where specification is made by the shareholder as provided in such proxy, will be voted in accordance with such specification. Unless a shareholder specifies otherwise, all shares represented by valid proxies will be voted (i) FOR the election of the persons named in this Proxy Statement as nominees of Ultimate under the heading “Election of Directors;” (ii) FOR the ratification of the appointment of KPMG LLP as Ultimate’s independent registered public accounting firm for the fiscal year ending December 31, 2018; (iii) FOR approval, by non-binding advisory vote, of the compensation paid to Ultimate’s named executive officers ("NEOs"); (iv) FOR approval of the Amended and Restated 2005 Equity and Incentive Plan, as proposed to be amended; and (v) at the discretion of the proxy holders on any other matter that may properly come before the Annual Meeting or any adjournment thereof.
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SOLICITATION OF PROXIES
Ultimate is paying all of the costs of soliciting proxies, including preparation costs, assembly, posting on the Internet, printing and mailing of the Proxy Materials, the Notice and any additional information furnished to shareholders. Proxies are being solicited by Ultimate primarily by mail and the Internet, but in addition, the solicitation by these means may be followed by solicitation in person, or by telephone, e-mail or facsimile, by directors, officers and other employees of Ultimate without additional compensation. Brokers, dealers, banks, voting trusts, custodians and other institutions, and their nominees, who are holders of shares of Ultimate’s Common Stock on the Record Date, referred to below, will be requested to forward the soliciting material to the beneficial owners of such shares of Common Stock and to obtain authorization for the execution of proxies. Ultimate will, upon request, reimburse such institutions for their reasonable expenses in forwarding the Proxy Materials to their beneficial owners.
VOTING RIGHTS AND PROCEDURES
Only shareholders of record of the Common Stock of Ultimate at the close of business on March 20, 2018 (the “Record Date”) will be entitled to vote at the Annual Meeting. As of that date, a total of 31,282,207 shares of Common Stock were outstanding, each share being entitled to one vote. There is no cumulative voting.
A majority of the issued and outstanding shares of Common Stock entitled to vote at the Annual Meeting, represented in person or by proxy, constitutes a quorum for the transaction of business at the Annual Meeting. If a shareholder abstains from voting as to any matter, then the shares held by such shareholder shall be deemed present at the Annual Meeting for purposes of determining a quorum. If a broker returns a “non-vote” proxy, indicating a lack of authority to vote on such matter, then the shares covered by such non-vote shall be deemed present at the Annual Meeting for purposes of determining a quorum but shall not be deemed to have been voted in favor of or against such matter.
Our By-laws require that a director nominee will be elected only if he or she receives a majority of the votes cast with respect to his or her election in an uncontested election (that is, the number of shares voted “for” a director nominee must exceed the number of votes cast “against” that director nominee). Abstentions from voting, as well as any broker non-votes, are not treated as votes cast and are not counted for purposes of determining the election of directors. In a contested election (a situation in which the number of nominees exceeds the number of directors to be elected), which is not the case for our Annual Meeting this year, the standard for election of directors is a plurality of the votes cast.
The affirmative vote of the holders of a majority of the shares represented in person or by proxy and entitled to vote at the Annual Meeting is required for ratification of the appointment of KPMG LLP as Ultimate’s independent registered public accounting firm for the fiscal year ending December 31, 2018, and the proposal for advisory approval of executive compensation. Abstentions will not be counted either for or against the proposal for the ratification of the appointment of KPMG LLP as Ultimate’s independent registered public accounting firm for 2018 or the proposal for advisory approval of executive compensation.
The affirmative vote of the holders of a majority of the shares represented in person or by proxy and entitled to vote at the Annual Meeting is required for the approval of the Amended and Restated 2005 Equity and Incentive Plan, as proposed to be amended. Abstentions will have the effect of votes “against” the approval of the Company’s Amended and Restated 2005 Equity and Incentive Plan, as proposed to be amended. If a broker returns a “non-vote” proxy, indicating a lack of authority to vote on such matter, then the shares covered by such non-vote shall be deemed present at the Annual Meeting for purposes of determining a quorum but shall not be deemed to have been voted in favor of or against such matter.
A shareholder may revoke a proxy at any time prior to its exercise by giving to the Secretary of Ultimate a written notice of revocation of the proxy’s authority prior to the voting thereof or by submitting a later dated proxy by telephone, on the Internet or by mail, or by voting in person at the Annual Meeting.
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PROPOSAL I—ELECTION OF DIRECTORS
The Board of Ultimate is currently composed of seven members, divided into three classes. The members of each class are elected to serve three-year terms with the term of office of each class ending in successive years. Messrs. Marc D. Scherr, Rick A. Wilber and James A. FitzPatrick, Jr. serve in the class whose term expires at the Annual Meeting.
The Board has nominated Messrs. Marc D. Scherr, Rick A. Wilber and James A. FitzPatrick, Jr. for election to the Board at the Annual Meeting for a term of three years, expiring at the 2021 Annual Meeting, and each has indicated a willingness to serve. Messrs. Scott Scherr and Alois T. Leiter serve in the class whose term expires at the Annual Meeting of Shareholders in 2019. Messrs. Jonathan D. Mariner and Jason Dorsey serve in the class whose term expires at the Annual Meeting of Shareholders in 2020.
Our By-laws require that a director nominee will be elected only if he or she receives a majority of the votes cast with respect to his or her election in an uncontested election (that is, the number of shares voted “for” a director nominee must exceed the number of votes cast “against” that director nominee). Abstentions from voting, as well as any broker non-votes, are not treated as votes cast and are not counted for purposes of determining the election of directors. In a contested election (a situation in which the number of nominees exceeds the number of directors to be elected), which is not the case for our Annual Meeting this year, the standard for election of directors is a plurality of the votes cast.
Messrs. Marc D. Scherr, Rick A. Wilber and James A. FitzPatrick, Jr. are directors currently serving on the Board. If any one of them is not re-elected, Delaware law provides that such director would continue to serve on the Board as a “holdover director.” Under our By-laws, each of Messrs. Marc D. Scherr, Rick A. Wilber and James A. FitzPatrick, Jr., as a director who is being re-nominated for election to the Board, submitted an advance, contingent, irrevocable resignation that the Board may accept if shareholders do not re-elect him. In that situation, the Nominating Committee of the Board would make a recommendation to the Board about whether to accept or reject the resignation, or whether to take other action. The Board would act on the Nominating Committee's recommendation and would publicly disclose its decision within 90 days from the date that the election results were certified and, if such resignation were to be rejected, the rationale behind the Board's decision also would be publicly disclosed.
In the event that any of Messrs. Marc D. Scherr, Rick A. Wilber and James A. FitzPatrick, Jr. is unable or unwilling to serve as a nominee at the time of the Annual Meeting, the persons named as proxies in this Proxy Statement may vote for a substitute nominee chosen by the present Board to fill the vacancy. In the alternative, the proxies named in this Proxy Statement may vote just for the remaining nominees, if any, leaving a vacancy or vacancies that may be filled at a later date.
The following table sets forth certain information concerning the nominees, based on data furnished by them. Information regarding incumbent directors whose terms are not expiring is included in the section labeled “Directors and Executive Officers” below.
Name of Nominee | Age | Principal Occupation | Director Since | |||
Marc D. Scherr | 60 | Vice Chairman and Chief Operating Officer, The Ultimate Software Group, Inc. | April 1996 | |||
Rick A. Wilber | 71 | Retired | October 2002 | |||
James A. FitzPatrick, Jr. | 68 | Senior Counsel, Hogan Lovells US LLP | July 2000 | |||
Marc D. Scherr has been a director of Ultimate since its inception in April 1996 and has served as Vice Chairman since July 1998 and as Chief Operating Officer since October 2003. Mr. Scherr is also a member of the Executive Committee of the Board. Mr. Scherr became an executive officer of Ultimate effective March 1, 2000. Mr. Scherr served as a director of Gerschel & Co., Inc., a private investment firm from January 1992 until March 2000. In December 1995, Mr. Scherr co-founded Residential Company of America, Ltd. (“RCA”), a real estate firm, and served as President of its general partner until March 2000. Mr. Scherr also served as Vice President of RCA’s general partner from its inception in August 1993 until December 1995. From 1990 to 1992, Mr. Scherr was a real estate pension fund advisor at Aldrich, Eastman & Waltch. Previously, he was a partner in the Boston law firm of Fine & Ambrogne. Mr. Scherr is the brother of Scott Scherr, Chairman of the Board, President and Chief Executive Officer of Ultimate. Mr. Scherr’s long tenure in our executive and Board leadership
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supports institutional continuity and industry knowledge accumulated through all phases of economic cycles and through Ultimate’s expansion over that period. With his experience as a practicing lawyer and businessman, as well as his longstanding position as a senior executive of Ultimate, Mr. Scherr brings to Ultimate’s Board invaluable insight in developing corporate strategy, strategic relationships, ethical practices, quality staff and product differentiation.
Rick A. Wilber has served as a director of Ultimate since October 2002 and is Chairman of the Nominating Committee since May 2017. Mr. Wilber is a member of the Audit Committee and a member of the Compensation Committee of the Board. Mr. Wilber formerly served on Ultimate’s Board of Directors from October 1997 through May 2000. Mr. Wilber served as the President of Lynn’s Hallmark Cards, which owned and operated a number of Hallmark Card stores, from 1995 until 2013, at which time Mr. Wilber retired. Mr. Wilber has served as a director of Synergy Resource Corporation, an oil and gas exploration company, since October 2008. Mr. Wilber was a co-founder of Champs Sports Shops and served as its President from 1974 to 1984. He served on the Board of Royce Laboratories, a pharmaceutical concern, from 1990 until April 1997, when Royce Laboratories was sold to Watson Pharmaceuticals, Inc., a pharmaceutical concern. Mr. Wilber brings to the Board his considerable business and entrepreneurial acumen and business management experience, his understanding of business opportunities and strategies and his experience with the motivation of employees.
James A. FitzPatrick, Jr. has served as a director of Ultimate since July 2000 and as Chairman of the Compensation Committee of the Board since May 2017. Mr. FitzPatrick is a member of the Audit Committee of the Board since May 2017 and a member of the Nominating Committee. Mr. FitzPatrick was the Chairman of the Nominating Committee of the Board from 2013 until May 2017. Mr. FitzPatrick is, and since January 2018, has been, senior counsel in the law firm Hogan Lovells US LLP. From June 2012 until January 2018, Mr. FitzPatrick was a partner in Hogan Lovells US LLP. Mr. FitzPatrick was a partner in the law firm Dewey & LeBoeuf LLP and its predecessor firms from January 1983 until May 2012 and was an associate from September 1974 until January 1983. Mr. FitzPatrick brings to the Board his longstanding experience as a practicing attorney, including experience with corporate governance, contractual matters, private and public capital raising, purchase and sale of assets and mergers and acquisitions. Mr. FitzPatrick’s knowledge of corporate and securities laws and corporate governance facilitates the Board’s oversight responsibilities concerning such areas.
THE BOARD RECOMMENDS A VOTE FOR THE ELECTION OF MESSRS. MARC D. SCHERR, JAMES A. FITZPATRICK, JR. AND RICK A. WILBER AS DIRECTORS OF ULTIMATE TO HOLD OFFICE UNTIL THE 2021 ANNUAL MEETING AND UNTIL THEIR RESPECTIVE SUCCESSORS ARE ELECTED AND QUALIFIED.
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PROPOSAL II— RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The audit committee of the Board (the “Audit Committee”) has appointed KPMG LLP as the independent registered public accounting firm for Ultimate for the fiscal year ending December 31, 2018. KPMG LLP has served as the independent registered public accounting firm for Ultimate since 2002. A representative of KPMG LLP will be present at the Annual Meeting and will be given an opportunity to make a statement. The representative also will be available to respond to appropriate questions from shareholders.
Shareholder ratification of the appointment of KPMG LLP as Ultimate’s independent registered public accounting firm is not required by Ultimate’s By-Laws or otherwise. However, the Board is submitting the selection of KPMG LLP to the shareholders for ratification as a matter of corporate practice. The affirmative vote of the holders of a majority of the shares represented in person or by proxy and entitled to vote is required for the ratification of the appointment of KPMG LLP as Ultimate’s independent registered public accounting firm for the fiscal year ending December 31, 2018. Abstentions will not be counted either for or against the proposal for the ratification of the appointment of KPMG LLP as Ultimate’s independent registered public accounting firm for 2018. If the shareholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain KPMG LLP. Even if the selection is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if the Audit Committee determines that such a change would be in the best interests of Ultimate and its shareholders.
THE BOARD RECOMMENDS A VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS ULTIMATE’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING DECEMBER 31, 2018.
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PROPOSAL III — ADVISORY VOTE ON NAMED
EXECUTIVE OFFICER COMPENSATION
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the SEC rules promulgated thereunder, we are providing our shareholders with the opportunity to vote to approve, on a non-binding, advisory basis, the compensation of our Named Executive Officers ("NEOs") as disclosed in this Proxy Statement. This proposal, commonly known as a “say-on-pay” proposal, gives our shareholders the opportunity to express their views on our NEO's compensation. The vote is not intended to address any specific item of compensation, but rather the overall compensation of our NEOs and the philosophy, policies and practices described in this Proxy Statement. A proposal will be presented at the Annual Meeting in the form of the following resolution:
“RESOLVED, that the shareholders of Ultimate hereby approve the compensation paid to Ultimate’s NEOs, as disclosed in the proxy statement for Ultimate’s 2018 Annual Meeting of Shareholders pursuant to Item 402 of SEC Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion.”
The Board believes that our compensation program is consistent with the goals and objectives set forth under “Compensation Discussion and Analysis” in this Proxy Statement, namely, attracting and retaining key executives who are committed to Ultimate's core values of excellence, integrity and teamwork, while motivating the NEOs to achieve Ultimate's strategic goals and aligning their interests with those of our shareholders. The Board urges you to review carefully the information under “Compensation Discussion and Analysis” in this Proxy Statement and to vote, on an advisory basis, to approve the compensation of Ultimate’s NEOs, as disclosed in this Proxy Statement.
While the vote on named executive officer compensation is advisory and non-binding, the Board and Compensation Committee value the opinions of our shareholders and will consider the outcome of the vote when making future executive compensation decisions.
Response to Say-on-Pay Votes
In May 2017, we held a shareholder advisory (non-binding) vote on the compensation of our NEOs. A majority of shareholders approved the compensation of our NEOs, with over 63% of shareholder votes cast in favor of our 2017 "say-on-pay" resolution (excluding abstentions and broker non-votes). As we evaluated our compensation practices and talent needs after May 2017, the Compensation Committee carefully considered the level of support our shareholders expressed for our compensation philosophy and determined not to make any significant changes to the design of our executive compensation program given the shareholder support of the compensation program in the 2017 advisory vote.
In recent years we have modified our executive compensation programs in significant ways to address concerns expressed by our shareholders and to better align the interests of our NEOs with the interests of our shareholders, including:
• | Adoption of stock ownership guidelines for our CEO and members of the Board; |
• | Adoption of anti-hedging and anti-pledging policies for our CEO, executive officers, and members of the Board; |
• | Adoption of an executive officer compensation recovery, or "claw-back," policy; and |
• | Engagement of an independent national compensation consulting firm to advise us on our executive compensation arrangements. |
In addition to the policies adopted above, the Board previously adopted two Amended and Restated Change in Control Bonus Plans ("CIC Plans") (first adopted in March 2004). The CIC Plan I provided for the payment of cash amounts to three of Ultimate's NEOs upon a “change in control” of Ultimate as defined in that plan. The CIC Plan II provided for the payment of cash amounts in the event of a similar “change in control” to the other two NEOs and certain other employees of Ultimate as designated by the Compensation Committee ("the CIC Consideration").
In March 2015, the Board and the Compensation Committee significantly amended the CIC Plan I and terminated the Change in Control Plan II ("CIC Plan II"). These changes reduced the aggregate potential payout under the CIC Plan I from 6% to 3.5% of the CIC Consideration. The individual participant’s interests were reduced from 3.5% to 2.25%. The additional significant potential cost associated with the Federal excise tax “gross-up” provisions under the CIC Plan I was reduced from 2.5% to 1.25% of the CIC Consideration.
In February 2016, the Board and the Compensation Committee further amended the Company’s CIC Plan I. These changes reduced the potential payout under the CIC Plan I from 3.5% to 1.85% of the CIC Consideration. The individual participant’s interests were reduced from 2.25% to 1.125%. The additional significant potential cost associated with the Federal excise tax “gross-up” provisions under the CIC Plan I was reduced from 1.25% to 0.725% of the CIC Consideration.
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In February 2017, our Board of Directors approved the termination of the CIC Plan I and all remaining awards that were outstanding under the CIC Plans (see discussion below in "Compensation Discussion and Analysis" under "Change In Control Bonus Plans").
The amendments and subsequent termination of our CIC Plans required providing participants with substantially equivalent value in exchange for the reduction of participant interests. The equity that was issued to unwind the CIC Plans was comparable to the percentage of equity that would have been issued in 2004 and 2007 if time-based equity had been issued at that time. The equity was issued in the form of restricted stock awards with three-year vesting schedules to strengthen future retention hold of our key executives and maintain their alignment with shareholder interests.
THE BOARD RECOMMENDS AN ADVISORY VOTE FOR THE APPROVAL OF THE COMPENSATION OF OUR NEOs, AS DISCLOSED IN THIS PROXY STATEMENT.
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PROPOSAL IV - APPROVAL OF THE AMENDED AND RESTATED 2005 EQUITY AND INCENTIVE PLAN AS PROPOSED TO BE AMENDED
The Company’s Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the grant of options to non-employee directors, officers and employees of the Company to purchase shares of the Company’s Common Stock. The Plan also authorizes the grant to such persons of restricted and non-restricted shares of Common Stock, stock appreciation rights, stock units and cash performance awards (collectively, and together with stock options, the “Awards”). The Plan was last amended as approved by the Company’s shareholders, at the Annual Meeting of shareholders on May 16, 2016.
Main Purposes of Proposal to Amend the Plan and Consequence of Failing to Approve
The sole purpose of the proposal to amend the Plan is to increase the number of shares of the Company’s Common Stock authorized for issuance pursuant to Awards granted under the Plan by 1,300,000 shares.
The principal changes made by the Plan are to:
• | Increase the number of shares of the Company's Common Stock authorized for issuance by an additional 1,300,000 shares. The number of shares reserved for issuance under the Plan on or after May 14, 2018 will be equal to the sum of (i) 1,300,000 shares, plus (ii) the number of shares subject to outstanding awards under the current plan as of March 20, 2018 (1,422,258 shares), plus (iii) 550,957 shares, which is the number of shares available for grant of awards under the current plan as of March 20, 2018. The increase represents an additional 1,300,000 shares over the current share authorization of the current plan that will be available for awards under the Plan. |
The aggregate number of shares of Common Stock authorized for issuance under all Awards granted under the Plan is currently 15,090,000 shares. As of the Record Date, the aggregate number of shares of Common Stock that remain available for new Awards under the Plan is 550,957 shares. As of March 6, 2018, the number of shares to be issued upon vesting, exercise or settlement of outstanding awards under all of our equity-based plans was as follows: (1) total number of options outstanding was 32, 292 with a weighted average exercise price of $27.597 and weighted average remaining term of .39 years and (2) full value awards outstanding were 1,391,836. Shares available for grant as of March 6, 2018 were 550,939. In the twelve months ended December 31, 2017, Awards with respect to 714,566 shares of Common Stock were granted under the Plan, this includes 353,857 shares of Common Stock granted in connection with the termination of CIC Plan I as comparable value to those participants who had awards terminated. See "Change in Control Bonus Plans" in the "Compensation Discussion and Analysis" of this proxy statement. The CIC Plans were adopted initially in 2004 in lieu of granting time-based equity awards to the NEOs and certain other senior officers. In 2007, the CIC Plans were amended to increase the limit on aggregate awards under the plans and to increase the NEOs’ respective interests in the CIC Plan I, again in lieu of granting equity awards. As discussed, in "Change of Control Bonus Plans" in the "Compensation Discussion and Analysis" section of this proxy statement, the grants of Awards in 2017 were made to terminate the CIC Plan I. Without an amendment to the Plan to increase the number of shares of Common Stock authorized to be issued pursuant to Awards granted under the Plan, the Compensation Committee of the Board (the “Compensation Committee”) would be severely restricted in its ability to grant Awards, other than cash awards, under the Plan. When originally adopted, the Plan had a ten year term. Without the proposed amendment, all authority of the Compensation Committee to make additional grants under the Plan would end on January 31, 2026. The Board believes it is essential that its Compensation Committee be able to continue to grant Awards of equity based compensation under the Plan in order to attract and maintain qualified employees, officers and directors and to tie their compensation, in part, to the performance of the Company’s Common Stock.
On February 5, 2018, the Board approved, subject to shareholder approval at the 2018 Annual Meeting, an amendment and restatement of the Plan, the sole purpose of which is to increase the number of shares of Common Stock authorized for issuance pursuant to Awards granted under the Plan by an additional 1,300,000 shares. The Plan, as so amended and restated in its entirety, is hereinafter referred to as the “Amended and Restated Plan”. If the Amended and Restated Plan is not approved by shareholders, the Plan will continue in its current form, which will have a minimal number of shares available for future grants and awards.
The following is a summary of the material terms of the Amended and Restated Plan. This summary is qualified by reference to the full text of the Amended and Restated Plan, which is attached hereto as Appendix A.
Summary of the Amended and Restated Plan
Purpose. The objectives of the Plan are (i) to provide a vehicle for compensating the Company’s key personnel by giving them the opportunity to acquire a proprietary interest in the Company’s Common Stock by receiving equity-based
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incentive compensation; (ii) to provide management with an equity ownership in the Company commensurate with Company financial performance, as reflected in increased shareholder value; (iii) to attract, motivate and retain key employees, non-employee directors and other service providers by maintaining competitive compensation levels; and (iv) to provide an incentive to management for continuous employment with or service to the Company.
Reservation of Shares. Subject to shareholder approval at the 2018 Annual Meeting, and subject to adjustments as described below, the maximum aggregate number of shares of the Company’s Common Stock that may be issued under all Awards granted under the Amended and Restated Plan shall be 16,390,000 shares. As of the Record Date, an aggregate of 14,539,043 shares of Common Stock have either (i) already been issued as a result of the exercise of stock options under the Amended and Restated Plan, or (ii) are subject to outstanding Awards granted under the Amended and Restated Plan. Accordingly, as of the Record Date, only 550,957 shares remain available for new Awards under the Amended and Restated Plan.
Shares of Common Stock issued and sold under the Amended and Restated Plan may be either authorized but unissued shares or shares held in the Company’s treasury. To the extent that any Award under the Amended and Restated Plan, payable in shares of Common Stock, is forfeited, canceled, returned to the Company for failure to satisfy vesting requirements or upon the occurrence of other forfeiture events, or otherwise terminates without payment being made thereunder, the shares of Common Stock covered thereby will no longer be charged against the foregoing maximum share limitation and may again be made subject to Awards under the Amended and Restated Plan. In addition, any shares of Common Stock exchanged by a participant or withheld from a participant for tax withholding upon payment or settlement of an Award other than with respect to stock options or stock appreciation rights under the Amended and Restated Plan will be returned to the number of shares of Common Stock available for issuance under the Amended and Restated Plan. Any Awards settled in cash will not be counted against the share limitations under the Amended and Restated Plan. The maximum number of shares of Common Stock that may be returned or added to the aggregate share reserve under the Amended and Restated Plan upon the termination, forfeiture, cancellation or other disposition of an Award granted under the Amended and Restated Plan is currently limited to 6,000,000 shares.
Adjustments. In the event of a recapitalization, reclassification or other specified event affecting the Company or the shares of Common Stock, appropriate and equitable adjustments shall be made to the number and kind of shares of Common Stock available for grant, as well as to other maximum limitations under the Amended and Restated Plan, and the number and kind of shares of Common Stock or other rights and prices under outstanding Awards, the performance measures or goals relating to Awards and such other terms of Awards, to prevent dilution or enlargement of a participant’s rights under an Award.
Administration. The Amended and Restated Plan is administered by the Compensation Committee. The Compensation Committee shall, to the extent deemed necessary or advisable by the Board, be constituted so each committee member will satisfy the requirements for (i) an “independent director” under rules adopted by the NASDAQ Stock Market, (ii) a “non-employee director” for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and (iii) an “outside director” under section 162(m) of the Internal Revenue Code (the “Code”). Subject to the limitations set forth in the Amended and Restated Plan, the Compensation Committee has the authority to determine the persons to whom Awards are to be granted, the types of Awards to be granted, the time at which Awards will be granted, the number of shares of Common Stock, units or other rights subject to each Award, the exercise, base or purchase price of an Award, the time or times at which the Award will become vested, exercisable or payable, the performance criteria, performance goals and other conditions of an Award, and the duration of the Award. Subject to the terms of the Amended and Restated Plan, the Compensation Committee shall have the authority to amend the terms of an Award in any manner that is permitted by the Amended and Restated Plan for the grant of an Award, provided that no such action shall adversely affect the rights of a participant with respect to an outstanding Award without the participant’s consent. The Compensation Committee has discretionary authority to interpret the Amended and Restated Plan, make all factual determinations, waive conditions under Awards, and all other determination necessary or advisable. The Compensation Committee's determinations shall be final and binding. The Compensation Committee will have the right, from time to time, to delegate to one or more of the Company’s officers the authority of the Compensation Committee to grant and determine the terms and conditions of Awards, subject to certain limitations. Any Awards under the Amended and Restated Plan made to non-employee members of the Board must be approved by the Board.
Eligibility. Awards under the Amended and Restated Plan may be granted to any current or prospective employee, officer, director, consultant or adviser of the Company or any of its subsidiaries. As of March 20, 2018, the Company had 4,312 full-time employees, (including five NEOs), and 5 non-employee directors who are eligible to participate in the Plan. There are seven executive officers of the Company.
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Stock Options. Stock options granted under the Amended and Restated Plan may be issued as either incentive stock options (within the meaning of section 422 of the Code), or as nonqualified options. The exercise price of an option will be 100% of the fair market value of a share of the Company’s Common Stock on the date of the grant of the option, or such other amount as determined by the Compensation Committee. The Compensation Committee will determine the vesting and/or exercisability requirements and the term of exercise of each option, including the effect of termination of employment or service of a participant and accelerate the vesting at any time. The maximum term of a stock option is ten years from the date of grant. To exercise an option, the participant must pay the exercise price, subject to specified conditions, (i) in cash, (ii) in shares of Common Stock that have been held for at least six months, (iii) through an open-market broker-assisted transaction, (iv) by combination of any of the above methods, or (v) by such other method approved by the Compensation Committee, and must pay any required tax withholding amounts. For purposes of section 422 of the Code, the maximum value of shares of Common Stock (determined at the time of grant) that may be subject to incentive stock options that become exercisable by an employee in any one year is limited to $100,000. Subject to adjustments as described above, the maximum number of shares of Common Stock that may be covered under options granted under the Amended and Restated Plan to any participant in any calendar year is 500,000 shares of Common Stock. All options are nontransferable except upon death by the participant’s will or the laws of descent and distribution or, in the case of nonqualified options, to family members of the participant or to trusts for the benefit of the participant or such participant’s family members, as may be approved by the Compensation Committee and set forth in the award agreement in accordance with the terms of the Amended and Restated Plan. The Amended and Restated Plan prohibits (i) the reduction of the exercise or strike price of any stock option or stock appreciation right or (ii) the cancellation of any outstanding stock option or stock appreciation right that has an exercise or strike price (per share) greater than the then-current fair market value of the shares in exchange for cash or other Awards under the Amended and Restated Plan; unless the shareholders of the Company have approved such an action within twelve (12) months prior to such an event or in the event of equitable adjustments for changes in the Company’s corporate structure.
Director Fee Options. The Amended and Restated Plan allows for the periodic grant of nonqualified stock options to its non-employee directors in lieu of cash payment of directors’ fees that are earned during the calendar quarter ending immediately prior to the date of grant.
The Board periodically reviews its grants of Awards to non-employee directors. For the years 2015, 2016 and 2017, the arrangement pursuant to which the non-employee directors and the Chairman of the Audit, Compensation and Nominating Committees of the Board, respectively, were granted restricted stock awards, provided that (i) each non-employee director was granted a restricted stock award of 400 shares of Common Stock for each regular meeting of the Board attended during 2015, 2016 and 2017 and (ii) each of the Chairmen of the Audit Committee, Compensation Committee and Nominating Committee of the Board was granted a restricted stock award of 50 shares of Common Stock for attendance at each regular meeting of such respective Committee during 2015, 2016 and 2017 that he chaired. In addition, the Board determined that in 2015, 2016 and 2017, each non-employee director shall be granted, for each fiscal quarter during which he serves, a restricted stock award of that number of shares of Common Stock equal to the quotient of $12,500 divided by the closing price of the Common Stock on NASDAQ on the date of grant, which is the effective date of the grant determined by the Committee for each such quarter, rounded down to the closest full number of shares. The arrangement provides that the date of grant shall not be a date prior to the date of the Compensation Committee’s determination of the same and currently provides that restricted stock awards shall vest on the fourth anniversary of the date of grant, subject to accelerated vesting in the event of a director’s death, disability, cessation of service at the end of his term or the occurrence of a change of control of the Company.
Stock Appreciation Rights. A stock appreciation right entitles the participant, upon settlement or exercise, to receive a payment based on the excess of the fair market value of a share of Common Stock on the date of settlement or exercise over the base price of the right, multiplied by the number of shares of Common Stock as to which the right is being settled or exercised. The base price may not be less than the fair market value of a share of Common Stock on the date of grant. The Compensation Committee will determine the vesting requirements and the term of exercise of each stock appreciation right, including the effect of termination of employment or service of a participant and may accelerate the vesting at any time. The maximum term of a stock appreciation right will be ten years from the date of grant. Subject to adjustments as described above, the maximum number of shares of Common Stock that may be subject to stock appreciation rights granted under the Amended and Restated Plan to any participant during any calendar year is 500,000 shares of Common Stock. Stock appreciation rights may be payable in cash or in shares of Common Stock or in a combination of both. The Amended and Restated Plan prohibits the “repricing” of stock appreciation rights, as described above for stock options.
Restricted Stock Awards. A restricted stock award represents shares of Common Stock that are issued subject to restrictions on transfer and vesting requirements as determined by the Compensation Committee which may accelerate the vesting at any time. The Compensation Committee may require payment of a special purchase price in connection with the grant of an award. Vesting requirements may be based on the continued employment or service of the participant for specified time periods and/or on the attainment of specified business performance goals established by the Compensation Committee. Subject to the transfer restrictions and vesting requirements of the Award, the participant will have the rights of a shareholder of
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the Company, including all voting and dividend rights, during the restriction period, unless the Compensation Committee determines otherwise at the time of the grant. Subject to adjustments as described above, the maximum number of shares of Common Stock that may be subject to restricted stock awards granted under the Amended and Restated Plan to any participant during any calendar year is 250,000 shares of Common Stock.
Stock Units. An award of stock units provides the participant the right to receive a payment based on the fair market value of a share of Common Stock. Stock units may be subject to vesting requirements, restrictions and conditions to payment as the Compensation Committee determines are appropriate and the Compensation Committee may accelerate at any time. Such vesting requirements may be based on the continued employment or service of the participant for a specified time period or on the attainment of specified business performance goals established by the Compensation Committee. A stock unit award may also be granted on a fully vested basis, with a deferred payment date. Stock unit awards are payable at such times as determined by the Compensation Committee and set forth in the Award Agreement and are payable in cash or in shares of Common Stock or in a combination of both. Stock units may also be granted together with related dividend equivalent rights. The participant will not have any rights of a shareholder unless and until shares subject to the stock unit award are delivered to the participant. Subject to adjustments as described above, the maximum number of shares of Common Stock that may be subject to stock units granted under the Amended and Restated Plan to any participant during any calendar year is 250,000 shares of Common Stock.
Stock Awards. A stock award represents shares of Common Stock that are issued free of restrictions on transfer and free of forfeiture conditions and to which the participant is entitled all incidents of ownership. A stock award may be granted for past services, in lieu of bonus or other cash compensation, directors’ fees or for any other valid purpose as determined by the Compensation Committee. Subject to adjustments as described above, the maximum number of shares of Common Stock that may be subject to stock awards granted under the Amended and Restated Plan to any participant during any calendar year is 250,000 shares of Common Stock.
Performance Awards. The Compensation Committee may grant performance awards under the Amended and Restated Plan, which shall represent the right to receive a payment in cash if performance goals established by the Compensation Committee for a performance period are satisfied. The Compensation Committee may grant performance awards that are intended to qualify as performance-based compensation under section 162(m) of the Code, as well as performance awards that are not intended to so qualify. At the time a performance award is granted, the Compensation Committee will determine, in its sole discretion, the applicable performance period and performance goals to be achieved during the performance period, as well as such other conditions as the Compensation Committee deems appropriate. The Compensation Committee may also determine a target payment amount or a range of payment amounts for each Award. The maximum amount of compensation that may be payable to a participant during any one calendar year with respect to performance awards is $2 million. In the case of performance awards that are intended to qualify as performance-based compensation under section 162(m) of the Code, the Compensation Committee will designate performance criteria from among the criteria set forth below.
Section 162(m) Awards. Awards of options and stock appreciation rights granted under the Amended and Restated Plan are intended by their terms to qualify for the performance-based compensation exception under section 162(m) of the Code. In addition, the Compensation Committee may grant awards of restricted stock, stock units, stock awards or performance awards that are intended to qualify for the performance-based compensation exception under section 162(m) of the Code. Under section 162(m), the terms of such award must state, in terms of an objective formula or standard, the method of computing the amount of compensation payable under the award, and must preclude discretion to increase the amount of compensation payable under the terms of the award (but may give the Compensation Committee discretion to decrease the amount of compensation payable). For each such award, the performance criteria upon which the payment or vesting may be based shall be limited to one or more of the following performance measures, which may be applied with respect to the Company, any subsidiary or any business unit: annual recurring revenues; recurring revenues; services revenues; license revenues; net or gross revenue; operating expenses; cash flow; total earnings; earnings per share, diluted or basic; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; gross or operating margin; return on equity; return on capital; return on investment; market share; economic value added; stock price; and total shareholder return. The foregoing performance criteria shall have any reasonable definitions that the Compensation Committee may specify, which may include or exclude any items specified by the Compensation Committee, including but not limited to any or all of the following items: discontinued operations, extraordinary, unusual or non-recurring items, effects of accounting changes, effects of currency or interest rate fluctuations, effects of financing activities (e.g., effect on earnings per share of issuing convertible debt securities), changes in tax rates, expenses for restructuring or productivity initiatives, litigation losses, non-operating items, effects of acquisitions or divestitures and changes of law or regulation affecting the Company’s business. The foregoing performance measures may be determined on an absolute basis or relative to internal goals or relative to levels attained in prior years, or related to other companies or indices, or as ratios expressing relationships between two or more performance measures.
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Effect of Change in Control. The Compensation Committee may, in an award agreement, provide for the effect of a “change in control” (as defined in the Plan) on an Award. These provisions may include the acceleration of vesting of an Award, the elimination or modification of performance or other conditions, the extension of the time for exercise or realizing gain from an Award, the acceleration of payment, cash settlement of an Award or other adjustments that the Compensation Committee considers appropriate. Unless otherwise provided by the Compensation Committee and set forth in the applicable award agreement, upon a change in control, (i) each outstanding option and stock appreciation right, to the extent that it has not otherwise become vested and exercisable, will automatically become fully and immediately vested and exercisable, without regard to any otherwise applicable vesting requirement, (ii) each restricted stock award will become fully and immediately vested and all forfeiture and transfer restrictions thereon will lapse, and (iii) each outstanding stock unit award, stock award and performance award will become immediately and fully vested and payable.
Term; Amendment and Termination. If shareholder approval is obtained, the Amended and Restated Plan will terminate on February 4, 2028, unless earlier terminated by the Board. The Board may terminate or amend the Amended and Restated Plan at any time, subject to shareholder approval under certain circumstances provided in the Amended and Restated Plan (i.e., as required for the listing requirements of NASDAQ or other exchange or securities market purposes or under the Code), however, no termination or amendment of the Amended and Restated Plan will adversely affect the right of a participant under any previously granted Award.
New Plan Benefits
The terms and number of Awards to be granted in the future under the Amended and Restated Plan are to be determined at the discretion of the Compensation Committee. Since no such determinations have yet been made, the benefits or amounts that will be received by or allocated to the Company’s executive officers or other eligible employees cannot be determined at this time.
Grants under the Plan in 2017
In 2017, no stock options were granted under the Plan to the Company’s executive officers, non-employee directors or other employees.
In 2017, three of the five NEOs received grants of restricted stock as disclosed in the “Grants of Plan Based Awards in 2017” table in "Compensation Discussion and Analysis" section of this proxy statement and above in "Amendments to the Change in Control Bonus Plan for Executive Officers" and "Termination of the Change in Control Bonus Plan for Officers and Employees". The NEOs as a group received Awards under the Plan for an aggregate of 353,857 restricted shares of Common Stock. In 2017, Awards were also granted under the Plan to other employees of the Company for an aggregate of 348,979 restricted shares of Common Stock. In 2017, Awards were also granted under the Plan to non-employee directors for an aggregate of 11,730 shares of Common Stock.
As of the Record Date, the closing price on the NASDAQ National Market of the Company’s Common Stock was $249.39 per share.
U.S. Federal Income Tax Consequences
The following discussion of certain relevant federal income tax consequences applicable to Awards granted under the Amended and Restated Plan is a summary only, and reference is made to the Code for a complete statement of all relevant federal tax provisions. Different rules may apply in the case of a participant who is subject to Section 16 of the Exchange Act with respect to the Company. The tax consequences of the Amended and Restated Plan to the Company and participants in other jurisdictions outside the U.S. are not summarized below.
Stock Options. An optionee will not generally recognize taxable income upon the grant of a nonqualified stock option to purchase shares of Common Stock. Upon exercise of the option, the optionee will generally recognize ordinary income for federal income tax purposes equal to the excess of the fair market value of the shares of Common Stock over the exercise price. The tax basis of the shares of Common Stock in the hands of the optionee will equal the exercise price paid for the shares of Common Stock plus the amount of ordinary compensation income the optionee recognizes upon exercise of the option, and the holding period for the shares of Common Stock for capital gains purposes will commence on the day the option is exercised. An optionee who sells any of the shares of Common Stock will recognize short-term or long-term capital gain or loss measured by the difference between the tax basis of the shares of Common Stock and the amount realized on the sale. The Company will be entitled to a federal income tax deduction equal to the amount of ordinary compensation income recognized by the optionee. The deduction will be allowed at the same time the optionee recognizes the income.
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An optionee will not generally recognize income upon the grant of an incentive stock option to purchase shares of Common Stock and will not generally recognize income upon exercise of the option, provided that the optionee is an employee of the Company or a subsidiary at all times from the date of grant until three months prior to exercise. If an optionee who has exercised an incentive stock option sells the shares of Common Stock acquired upon exercise more than two years after the grant date and more than one year after exercise, capital gain or loss will be recognized equal to the difference between the sales price and the exercise price. An optionee who sells the shares of Common Stock before the expiration of the foregoing holding periods will generally recognize ordinary income upon the sale, and the Company will be entitled to a corresponding federal income tax deduction at the same time the participant recognizes ordinary income.
Restricted Stock. An individual will not realize any income when the right to acquire shares subject to restricted stock awards (“Restricted Shares”) is granted to him or her, or when the certificates for the Restricted Shares themselves are registered in his or her name. The individual will realize ordinary income as and when the Restricted Shares are no longer subject to a substantial risk of forfeiture, in an amount equal to the difference between the fair market value of the Restricted Shares as of such date and the price, if any, he or she paid for the shares. Alternatively, the individual can file a written election with the Internal Revenue Service, no more than 30 days after the certificates for the Restricted Shares are granted, to be taxed as of the date of issuance on the difference between the then fair market value of the Restricted Shares and the price, if any, he or she paid for the shares. Once the individual has realized ordinary income with respect to the Restricted Shares, any subsequent increase in the value of the Restricted Shares generally will be taxed when the shares are sold as long-term or short-term capital gain, depending on how long the Restricted Shares are held. The individual’s holding period with respect to the Restricted Shares will begin on the date he or she realizes ordinary income with respect to the Restricted Shares and the basis in the shares will be equal to their then fair market value. The Company will be entitled to a tax deduction when, and to the extent, ordinary income is realized by the individual with respect to the Restricted Shares. Any dividends or other distributions paid on the Restricted Shares generally will be taxable when distributed to the individual.
Stock Appreciation Rights. Upon exercise of a stock appreciation right, the holder will recognize ordinary income in an amount equal to the cash or fair market value of the shares received upon exercise. The Company will generally be entitled to a tax deduction (as compensation) for the amount taxable to an individual in the same year as those amounts are taxable to the individual.
Stock Units. An individual will not be subject to tax upon the grant of a Stock Unit award. Upon distribution of the cash and/or shares underlying the Stock Unit, the individual will recognize as ordinary income an amount equal to the cash and/or fair market value (measured on the distribution date) of the shares received, and such amount will generally be deductible by the Company. The individual’s basis in any shares received will be equal to the fair market value of the shares on the date of distribution and the holding period in such shares will begin on the day following the date of distribution.
Section 280G of the Code. In addition to the Federal income tax consequences discussed above, Section 280G of the Code provides that if an officer, stockholder or highly compensated individual receives a payment which is in the nature of compensation and which is contingent upon a change in control of the employer, and such payment equals or exceeds three times his or her “base amount” (as defined in Section 280G), then any amount received in excess of the base amount shall be considered an “excess parachute payment.” Under certain circumstances, Awards may give rise to excess parachute payments. If so, then in addition to any income tax which would otherwise be owed in connection with such payment, the individual will be subject to an excise tax equal to 20% of such excess payment, and the Company will not be entitled to any tax deduction to which it would have been entitled with respect to such excess parachute payment.
Disposition of Shares. Unless stated otherwise above, upon the subsequent disposition of shares acquired under any of the preceding Awards, the individual will recognize capital gain or loss based upon the difference between the amount realized on such disposition and the individual’s basis in the shares, and such amount will be long-term capital gain or loss if such shares were held for more than 12 months.
Section 162(m). Section 162(m) of the Code generally disallows the corporate tax deduction for certain compensation paid in excess of $1,000,000 annually to certain executive officers of publicly held companies. Prior to the enactment of tax legislation in December 2017 (the "Tax Act"), awards that qualify as “performance-based compensation” were exempt from section 162(m), thus allowing the Company the full federal tax deduction otherwise permitted for such compensation. Under the Tax Act, this special exclusion for performance based compensation will not be available with respect to taxable years beginning after December 31, 2017 unless the compensation is pursuant to a written binding contract which was in effect on November 2, 2017 and is not modified in any material respect on or after such date. Pursuant to the Tax Act, for the taxable year beginning after December 31, 2017, Section 162(m) of the Code was expanded to cover additional executive officers including the chief financial officer so that the compensation of the chief executive officer and chief financial officer (at any time during the fiscal year), and the three other most highly compensated executive officers (as of the end of any
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fiscal year) will be subject to Section 162(m) of the Code. Any executive officer whose compensation is subject to Section 162(m) of the Code in taxable years beginning after December 31, 2016 will have compensation subject to Section 162(m) of the Code for all future years, including years after the executive terminates employment or dies. The Company reserves the right to pay its employees amounts which may or may not be tax-deductible under Section 162(m) or other provisions of the Code.
Equity Compensation Plan Information
The following table summarizes the securities authorized for issuance under the Company’s equity compensation plans as of December 31, 2017:
Equity Compensation Plan Information | |||||||||||||
Plan Category | ( a ) Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | ( b ) Weighted - Average Exercise Price of Outstanding Options, Warrants and Rights | ( c ) Number of Securities Remaining Available for Future Issuance of Equity Compensation Plans (Excluding Securities Reflected in Column ( a )) | ||||||||||
Equity compensation plans approved by security holders | 113,634 | $ | 29.22 | 819,893 | |||||||||
Equity compensation plans not approved by security holders | 0 | 0 | 0 | ||||||||||
Total | 113,634 | $ | 29.22 | 819,893 | |||||||||
As of March 6, 2018, the number of shares to be issued upon vesting, exercise or settlement of outstanding awards under all of our equity-based plans was as follows: (1) total number of options outstanding was 32, 292 with a weighted average exercise price of $27.597 and weighted average remaining term of .39 years and (2) full value awards outstanding were 1,391,836. Shares available for grant as of March 6, 2018 were 550,939.
THE BOARD RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDED AND RESTATED 2005 EQUITY AND INCENTIVE PLAN AS PROPOSED TO BE AMENDED.
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CORPORATE GOVERNANCE, BOARD MEETINGS AND COMMITTEES OF THE BOARD
Corporate Governance Principles and Practice Highlights
We are committed to excellence in corporate governance and maintain policies and practices that promote good corporate governance. Many of these policies and practices are designed to ensure compliance with the listing requirements of The NASDAQ Stock Market LLC ("NASDAQ"); others are designed to implement corporate governance preferences of the Board.
Board Independence
The majority of our directors are independent of Ultimate and management. We are committed to maintaining a majority of independent directors.
Following consultation with counsel and based upon the facts described below, the Board has determined that the following individuals are independent directors within the meaning of NASDAQ rules: James A. FitzPatrick, Jr., Alois T. Leiter, , Rick A. Wilber and Jonathan D. Mariner. In the course of the Board’s determination regarding the independence of each non-employee director, it considered any transactions, relationships and arrangements as required by NASDAQ rules governing independence standards for directors. With respect to each of the three most recently completed fiscal years, the Board determined that there were no related party transactions with any independent directors.
The independent directors met regularly in executive session and outside the presence of Ultimate’s management throughout the 2017 fiscal year and will do so throughout fiscal 2018 in compliance with NASDAQ rules.
Board Leadership
The Chairman of the Board, Scott Scherr, also serves as Ultimate’s President and Chief Executive Officer. A combined Chairman and Chief Executive Officer role provides an efficient and effective leadership model because it fosters clear accountability, effective decision-making and alignment on corporate strategy. The Chief Executive Officer’s direct involvement in Ultimate’s operations and his familiarity with Ultimate’s business and industry make him best positioned to lead productive Board meetings and strategic planning sessions. While Ultimate’s independent directors bring experience, oversight and expertise from outside the Company and industry, as the founder of Ultimate, Scott Scherr brings company and industry-specific experience and expertise to the Board. The Board has not designated a lead independent director from among its members. The Board retains the authority to modify the foregoing leadership structures.
Board Role in Risk Oversight
Management is responsible for the day-to-day management of risks that Ultimate encounters, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management. Management regularly presents reports to the Board from members of senior management on areas that may pose material risk to Ultimate, including operational, strategic, financial, compliance, legal, product, competitive and reputational risks. While oversight of risk management efforts is the responsibility of the entire Board, the Audit Committee assists the Board in fulfilling its oversight responsibilities with respect to risk management in the areas of accounting, auditing, financial reporting and maintaining effective internal controls over financial reporting. The Compensation Committee assists the Board in fulfilling its oversight responsibilities with respect to the management of any risks arising from Ultimate’s compensation policies and arrangements.
Hedging and Pledging Policies
Our directors and executive officers are prohibited from hedging their ownership of Ultimate Common Stock, including trading in options, puts, calls, or other derivative instruments related to Ultimate's Common Stock. Our directors and executive officers are generally prohibited from pledging their shares of Ultimate's Common Stock. A person covered by the pledging policy may request permission to pledge shares of Ultimate's Common Stock as collateral for a loan (not including a margin loan) if he or she demonstrates that (i) the value of all his or her pledged shares of Ultimate's Common Stock will not exceed 20% of his or her holdings and (ii) he or she has the financial capacity to repay the loan without resorting to the pledged securities. Currently, none of our executive officers or directors have any pledging arrangements. Nevertheless, the decision to grant or deny such a request remains with Ultimate.
Stock Ownership Guidelines
The Board has adopted stock ownership guidelines for our Chief Executive Officer and members of the Board. The guidelines were established to promote a long-term perspective in managing the company and align the interests of our shareholders, executives, and directors.
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Claw-back Policy
The Board has adopted a claw-back policy under which in the event of a material restatement of our reported financial statements, the Board shall review any performance-based cash compensation paid to executive officers during the three years preceding such restatement. In the event the performance-based cash compensation would have been lower had it been calculated based on such restated financial statements, the Board shall have the authority to seek the recovery of such excess performance-based cash compensation.
Other Policies and Procedures
Key information regarding our corporate governance initiatives, Code of Business Conduct and Ethics and the charter for each standing committee of the Board, is posted on our website at www.ultimatesoftware.com.
Meetings and Meeting Attendance
During fiscal 2017, the Board held four Board meetings. During fiscal 2017, each director attended all of the meetings of the Board and of all of the meetings of the committees of the Board on which he served. The Board has an Executive Committee, an Audit Committee, a Compensation Committee and a Nominating Committee, which are described below.
Interested parties may communicate with the Board, anonymously if they wish, by sending a written note or memo to the Secretary, The Ultimate Software Group, Inc., 2000 Ultimate Way, Weston, Florida 33326. Communications that are intended specifically for non-management or independent directors should be sent to the above address to the attention of the Chairman of the Audit Committee. All such communications will be delivered unopened by the Secretary to the Chairman of the Board or the Chairman of the Audit Committee, as applicable.
Ultimate does not have a policy with respect to attendance by the directors at the Annual Meeting of Shareholders. Three of the seven members of the Board attended the 2017 Annual Meeting of Shareholders.
Executive Committee. The Executive Committee of the Board is composed of Messrs. Scott Scherr (Chairman) and Marc D. Scherr and Rick A. Wilber. The Executive Committee has the authority to exercise (except as provided by law or as may have been specifically reserved by or for the Board) all the powers and authority of the Board in the management of the business and affairs of Ultimate between regular meetings of the Board and while the Board is not in session. The Executive Committee held no meetings during fiscal 2017.
Audit Committee. Messrs. Jonathan D. Mariner (Chairman), Rick A. Wilber, James A. FitzPatrick, Jr., and Alois T. Leiter are members of the Audit Committee of the Board. The Audit Committee oversees Ultimate’s financial reporting process on behalf of the Board and reviews the independence of Ultimate’s independent registered public accounting firm. The Audit Committee held five meetings during fiscal 2017.
The Board has determined that the Audit Committee’s current member composition satisfies the NASDAQ rules that govern audit committee composition, including the requirement that audit committee members all be “independent directors” as that term is defined by NASDAQ Rule 5605(a)(2). The Board has determined that Mr. Jonathan D. Mariner is an “audit committee financial expert” as defined in the rules of the SEC. Ultimate has established an Audit Committee Charter that sets forth the Audit Committee's principal duties and responsibilities. This charter is available on our website at www.ultimatesoftware.com.
Compensation Committee. Messrs. James A. FitzPatrick, Jr. (Chairman), Rick A. Wilber, Jonathan D. Mariner and Alois T. Leiter are members of the Compensation Committee of the Board. The Compensation Committee is responsible for determining the compensation and benefits for the executive officers of Ultimate and administers Ultimate’s stock-based plan and oversees such other benefit plans as Ultimate may from time to time maintain. The Compensation Committee held four meetings during fiscal 2017. Ultimate has established a Compensation Committee Charter, that sets forth the Compensation Committee's principal duties and responsibilities. This charter is available on our website at www.ultimatesoftware.com.
Compensation Consultant. The Compensation Committee engaged Compensia, Inc. ("Compensia") to advise the Compensation Committee on marketplace trends in executive compensation, management proposals for compensation programs, and executive officer compensation decisions. Compensia also evaluates equity compensation programs generally. Compensia also consults with the Compensation Committee about its recommendations to the Board on CEO and director compensation.
Consultant Independence. Compensia is directly accountable to the Compensation Committee. To maintain the independence of the firm's advice, Compensia does not provide any services for Ultimate other than those described above. In addition, the Compensation Committee conducted a conflict of interest assessment by using the factors applicable to compensation consultants under SEC rules and NASDAQ rules and no conflict of interest was identified.
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Nominating Committee. Messrs. Rick A. Wilber (Chairman), James A. FitzPatrick, Jr., Jonathan D. Mariner, and Alois T. Leiter are members of the Nominating Committee of the Board. The primary function of the Nominating Committee is to recommend director-nominees to be considered for election or appointment by the Board. The Nominating Committee held two meetings during fiscal 2017. Ultimate has established a Nominating Committee Charter that sets forth the Nominating Committee's principal duties and responsibilities. This charter is available on our website at www.ultimatesoftware.com. The Nominating Committee's and the Board's goal is to nominate candidates who represent diverse viewpoints. When identifying nominees to serve as directors, the Nominating Committee will consider candidates with a diversity of experiences and backgrounds who will enhance the quality of the Board's deliberations and decisions. To further these aspirations, the Board recently adopted a board diversity policy which is available on our website at www.ultimatesoftware.com.
When considering potential director candidates, the Nominating Committee considers the candidate's independence (as mandated by the NASDAQ rules), character, judgment, age, skills, financial literacy, and experience in the context of the needs of Ultimate and the Board.
In fiscal 2017, Ultimate did not pay any fees to a third party to assist in identifying or evaluating potential nominees.
The Nominating Committee and the Board will consider director candidates recommended by Ultimate's shareholders in a similar manner as those recommended by members of management or other directors. The name and qualifications of, and other information specified in Ultimate's By-laws with respect to any recommended candidate for director, should be sent to the attention of the Secretary of Ultimate in accordance with the procedures set forth under the caption “Shareholder Proposals for the 2018 Annual Meeting of Shareholders.” In addition, in 2017 we adopted “proxy access,” which, under certain circumstances, allows a shareholder or group of up to twenty shareholders who have owned at least 3% of Ultimate’s Common Stock for at least three years to submit director nominees (up to the greater of two Directors or 20% of the Board) for inclusion in our proxy materials if the shareholder(s) and the nominee(s) satisfy the requirements specified in our By-laws. Shareholders who wish to nominate directors for inclusion in the Company’s proxy materials or directly at an annual meeting of shareholders in accordance with the procedures in our By-laws should follow the instructions under the “Shareholder Proposals for the 2019 Annual Meeting of Shareholders.”
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DIRECTOR COMPENSATION
Each non-employee director of Ultimate receives compensation for serving on the Board, payable exclusively in the form of Restricted Stock Awards granted under Ultimate’s Amended and Restated 2005 Equity and Incentive Plan (the “Plan”).
During 2017, non-employee directors and the Chairmen of the Audit, Compensation and Nominating Committees of the Board, respectively, were granted Restricted Stock Awards for each regular Board and Committee meeting attended. Under the compensation arrangement, (i) each non-employee director was granted a restricted stock award of 400 shares of Common Stock for each regular meeting of the Board attended during 2017 and (ii) each of the Chairmen of the Audit Committee, Compensation and Nominating Committee was granted a restricted stock award of 50 shares of Common Stock for attendance at each regular meeting of the committee during 2017 that he chaired.
In addition, each non-employee director was granted, for each fiscal quarter during which he served, a restricted stock award of that number of shares of Common Stock equal to the quotient of $12,500 divided by the closing price of the Common Stock on NASDAQ on the date of grant, which is the effective date of the grant determined by the Board for each such quarter, rounded down to the closest full number of shares. The date of grant shall not be a date prior to the date of the Board’s determination of the same.
During 2017, Restricted Stock Awards were awarded to Jonathan D. Mariner and Jason Dorsey upon election to the Board. Mr. Mariner and Mr. Dorsey each received a Restricted Stock Award for 1,000 shares. The grant date fair value to each Mr. Mariner and Mr. Dorsey was $214,780.
All Restricted Stock Awards to non-employee directors shall vest on the fourth anniversary of the date of grant, subject to accelerated vesting in the event of a director’s death, disability, cessation of service at the end of his term or the occurrence of a change of control of Ultimate.
All directors are reimbursed (in cash) for expenses incurred in connection with their attendance at Board and Committee meetings.
2017 DIRECTOR COMPENSATION
Name (1) | ($) Fees Earned or Paid in Cash | ($) Stock Awards (2) | ($) Option Awards | ($) Non-Equity Incentive Plan Compensation | Change in Pension Value and Nonqualified Deferred Compensation Earnings | ($) All Other Compensation | ($) Total | |||||||||||||||||||||
James A. FitzPatrick, Jr. | $ | — | $ | 400,473 | $ | — | $ | — | $ | — | $ | — | $ | 400,473 | ||||||||||||||
Jonathan D. Mariner | $ | — | $ | 418,612 | $ | — | $ | — | $ | — | $ | — | $ | 418,612 | ||||||||||||||
Rick A. Wilber | $ | — | $ | 380,881 | $ | — | $ | — | $ | — | $ | — | $ | 380,881 | ||||||||||||||
Alois T. Leiter | $ | — | $ | 370,787 | $ | — | $ | — | $ | — | $ | — | $ | 370,787 | ||||||||||||||
Jason Dorsey | $ | — | $ | 398,706 | $ | — | $ | — | $ | — | $ | — | $ | 398,706 | ||||||||||||||
____________________
(1) | Messrs. Scott Scherr and Marc D. Scherr are not included in this table as they are employees of Ultimate and receive no compensation for their services as directors. The compensation for Messrs. Scott Scherr and Marc D. Scherr as employees is shown in the Summary Compensation Table. |
(2) | The amounts reported in the Director Compensation table above represent the aggregate grant date fair value of Restricted Stock Awards granted to each director as compensation costs for Board services in accordance with Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation,” (“ASC 718”) for fiscal 2017. Under ASC 718, the fair value of each Restricted Stock Award is measured based on the closing market price of Ultimate’s Common Stock at the date of grant and is recognized on a straight-line basis over the four-year cliff vesting period. Holders of restricted stock awards have all rights of a shareholder including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto. Each award becomes fully vested on the fourth anniversary of the respective date of grant, subject to the grantee’s continued Board service with Ultimate on each such vesting date and subject further to accelerated vesting in the event of a change in control of Ultimate, death or disability, or at cessation of his Board service at the end of his term. |
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The number of outstanding stock option awards and outstanding Restricted Stock Awards for each non-employee director as of December 31, 2017 was as follows:
Name | Outstanding Option Awards | Outstanding Restricted Stock Awards | ||||
James A. FitzPatrick, Jr. | 7,500 | 8,096 | ||||
Jonathan D. Mariner | — | 2,024 | ||||
Rick A. Wilber | 15,000 | 7,596 | ||||
Alois T. Leiter | 11,250 | 7,546 | ||||
Jason Dorsey | — | 1,924 | ||||
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial ownership of Ultimate's Common Stock as of March 8, 2018 (unless otherwise noted) by (i) each person who is known by Ultimate to own beneficially more than 5% of the Common Stock; (ii) each director; (iii) each executive officer named in the Summary Compensation Table under the heading "Compensation Discussion and Analysis" in this Proxy Statement; and (iv) all directors and executive officers as a group:
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership (1) | Percent of Class (2) | ||||
T. Rowe Price Associates, Inc. (3) | 4,146,592 | 13.3 | % | |||
100 E. Pratt Street | ||||||
Baltimore, MD 21202 | ||||||
FMR LLC (4) | 3,373,495 | 10.8 | % | |||
245 Summer Street | ||||||
Boston, MA 02210 | ||||||
Janus Henderson Group (5) | 3,084,189 | 9.9 | % | |||
201 Bishopgate EC2M 3AE | ||||||
United Kingdom | ||||||
BlackRock, Inc. (6) | 2,379,320 | 7.6 | % | |||
55 East 52nd Street | ||||||
New York, NY 10055 | ||||||
The Vanguard Group (7) | 2,368,879 | 7.6 | % | |||
100 Vanguard Boulevard | ||||||
Malvern, PA 19355 | ||||||
Scott Scherr (8) | 216,777 | * | ||||
Marc D. Scherr (9) | 203,371 | * | ||||
Mitchell K. Dauerman (10) | 86,514 | * | ||||
John C. Phenicie (11) | 48,070 | * | ||||
Adam Rogers (12) | 43,334 | * | ||||
James A. FitzPatrick, Jr. (13) | 14,350 | * | ||||
Jonathan D. Mariner (14) | 2,528 | * | ||||
Rick A. Wilber (15) | 143,625 | * | ||||
Jason Dorsey (16) | 2,378 | * | ||||
Alois T. Leiter (17) | 175,960 | * | ||||
All directors and executive officers as a group (10 persons) (18) | 936,907 | 3.0 | % | |||
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* | Indicates beneficial ownership of less than 1.0% of the outstanding Common Stock. |
(1) | Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to securities. Shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days from March 8, 2018, are deemed outstanding and to be beneficially owned by the person holding such option for purposes of computing such person's percentage ownership, but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Ultimate has made restricted stock awards to NEOs and non-employee directors under the Plan (“Restricted Stock Awards”). All shares of Common Stock issued under the |
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Restricted Stock Awards are considered to be beneficially owned for purposes of computing the holders' respective percentages of ownership in this table. Ultimate has also made awards of stock units under the Plan (“Stock Unit Awards”). Stock Unit Awards are not included in this table since the grantee does not have any rights as a shareholder with respect to the shares subject to a Stock Unit Award until such time as shares of Common Stock are delivered to the grantee pursuant to the terms of the related stock unit award agreement. Except for shares held jointly with a person's spouse or subject to applicable community property laws, or as indicated in the footnotes to this table, each shareholder identified in this table possesses the sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by such shareholder.
(2) | Applicable percentage of ownership is based on 31,266,213 shares of Common Stock outstanding. |
(3) | Represents shares held as of December 31, 2017 as reported on Schedule 13G/A filed by T. Rowe Price Associates, Inc. ("Price Associates"). As reported on Schedule 13G/A, Price Associates has sole voting power of 1,158,533 shares of Common Stock and sole dispositive power of 4,146,592 shares of Common Stock. Price Associates does not serve as custodian of the assets of any of its clients; accordingly, in each instance only the client or the client's custodian or trustee bank has the right to receive dividends paid with respect to, and proceeds from the sale of such securities. |
(4) | Represents shares held as of December 31, 2017 as reported on Schedule 13G filed by FMR LLC. As reported on Schedule 13G, FMR LLC has sole voting power of 192,074 shares of Common Stock and sole dispositive power of 3,373,495 shares of Common Stock. Various persons have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the shares of Common Stock reflected as beneficially owned by FMR LLC. |
(5) | Represents shares held as of December 31, 2017 as reported on Schedule 13G filed by Janus Henderson Group. As reported on Schedule 13G, Janus Henderson Group has shared voting power of 3,084,189 shares of Common Stock and shared dispositive power of 3,084,189 shares of Common Stock. The managed portfolios have the right to receive all dividends from, and the proceeds from the sale of, the securities held in their respective accounts. |
(6) | Represents shares held as of December 31, 2017 as reported on Schedule 13G/A filed by BlackRock, Inc. As reported on Schedule 13G/A, BlackRock, Inc. has sole voting power of 2,281,554 shares of Common Stock and sole dispositive power of 2,379,320 shares of Common Stock. As reported on Schedule 13G/A, BlackRock, Inc. is a parent holding company or control person in accordance with Rule 13d-1(b)(1)(ii)(G) under the Exchange Act. The aggregate amount beneficially owned by each reporting person of 2,379,320 shares of Common Stock of Ultimate is on a consolidated basis and includes any beneficial ownership separately reported by a subsidiary. |
(7) | Represents shares held as of December 31, 2017 as reported on Schedule 13G filed by The Vanguard Group ("Vanguard"). As reported on Schedule 13G, Vanguard has sole voting power of 15,908, sole dispositive power of 2,350,643, shared voting power of 4,651 and shared dispositive power of 18,236, shares of Common Stock of Ultimate. As reported on Schedule 13G, Vanguard is an investment adviser in accordance with 240.13d-1(b)(1)(ii)(E) under the Exchange Act. The aggregate amount beneficially owned by each reporting person of 2,350,643 shares of Common Stock of Ultimate is on a consolidated basis and includes any beneficial ownership separately reported by a subsidiary. |
(8) | Represents 25,000 shares of Common Stock held by Mr. Scott Scherr and 191,777 shares of Common Stock subject to Restricted Stock Awards held by Mr. Scott Scherr. |
(9) | Represents 31,594 shares of Common Stock held by Mr. Marc D. Scherr and 171,777 shares of Common Stock subject to Restricted Stock Awards. |
(10) | Represents 22,319 shares of Common Stock held by Mr. Mitchell K. Dauerman and 64,195 shares of Common Stock subject to Restricted Stock Awards. |
(11) | Represents 17,402 shares of Common Stock held by Mr. John C. Phenicie, 26,668 shares of Common Stock subject to Restricted Stock Awards and exercisable options to purchase 4,000 shares of Common Stock. |
(12) | Represents 43,334 shares of Common Stock subject to Restricted Stock Awards held by Mr. Adam Rogers. |
(13) | Represents 2,625 shares of Common Stock held by Mr. FitzPatrick, exercisable options to purchase 3,750 shares of Common Stock and 7,975 shares of Common Stock subject to Restricted Stock Awards. |
(14) | Represents 2,528 shares of Common Stock subject to Restricted Stock Awards held by Mr. Jonathan D. Mariner. |
(15) | Represents 124,750 shares of Common Stock held by Mr. Wilber, exercisable options to purchase 11,250 shares of Common Stock and 7,625 shares of Common Stock subject to Restricted Stock Awards. |
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(16) | Represents 2,378 shares of Common Stock subject to Restricted Stock Awards held by Mr. Jason Dorsey. |
(17) | Represents 159,275 shares of Common Stock held by Mr. Leiter, exercisable options to purchase 7,500 shares of Common Stock, 1,315 shares of Common Stock held by certain trusts for the benefit of Mr. Leiter's children, 345 shares of Common Stock held by certain trusts established for the benefit of Mr. Leiter's minor children and 7,525 shares of Common Stock subject to Restricted Stock Awards. Mr. Leiter disclaims beneficial ownership of the shares owned by the trusts established for the benefit of his children. |
(18) | Represents an aggregate of 384,625 shares of Common Stock (both directly and indirectly owned), 525,782 shares of Common Stock subject to Restricted Stock Awards and exercisable options to purchase an aggregate of 26,500 shares of Common Stock. |
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DIRECTORS AND EXECUTIVE OFFICERS
The directors, director nominees and NEOs (Messrs. Scott Scherr, Marc D. Scherr, Mitchell K. Dauerman, John C. Phenicie and Adam Rogers), and their ages as of February 28, 2018, are as follows:
Name | Age | Position(s) | ||
Scott Scherr | 65 | Chairman of the Board, President and Chief Executive Officer | ||
Marc D. Scherr | 60 | Vice Chairman of the Board and Chief Operating Officer | ||
Mitchell K. Dauerman | 61 | Executive Vice President, Chief Financial Officer and Treasurer | ||
John C. Phenicie | 46 | Senior Vice President, Chief Mid-Market Sales Officer | ||
Adam Rogers | 43 | Senior Vice President, Chief Technology Officer | ||
James A. FitzPatrick, Jr. | 68 | Director | ||
Alois T. Leiter | 52 | Director | ||
Rick A. Wilber | 71 | Director | ||
Jonathan D. Mariner | 62 | Director | ||
Jason Dorsey | 39 | Director | ||
Scott Scherr has served as President and a director of Ultimate since its inception in April 1996 and has been Chairman of the Board and Chief Executive Officer of Ultimate since September 1996. Mr. Scherr is also a member of the Executive Committee of the Board. In 1990, Mr. Scherr founded The Ultimate Software Group, Ltd. (the “Partnership”), the business and operations of which were assumed by Ultimate in 1998. Mr. Scherr served as President of the Partnership's general partner from the inception of the Partnership until its dissolution in March 1998. From 1979 until 1990, he held various positions at Automatic Data Processing, Inc. (“ADP”), a payroll services company, where his titles included Vice President of Operations and Sales Executive. Prior to joining ADP, Mr. Scherr operated Management Statistics, Inc., a data processing service bureau founded by his late father, Reuben Scherr, in 1959. He is the brother of Marc Scherr, the Vice Chairman of the Board and Chief Operating Officer of Ultimate, and the father-in-law of Adam Rogers, Senior Vice President and Chief Technology Officer. Mr. Scherr shares a household with Vivian Maza, our Chief People Officer and Secretary.
As Ultimate's founder and Chief Executive Officer, Mr. Scherr brings to the Board a unique and deeply rooted understanding of our Company, its business, its employees and its customers. During his long tenure as Chairman of our Board and our Chief Executive Officer, Mr. Scherr's leadership skills have been essential to Ultimate's attraction and retention of high quality personnel, product development, attraction and retention of customers, and establishment of a culture of teamwork that has allowed Ultimate to grow from a start-up operation in 1990 to a leading provider of human capital management solutions.
Mitchell K. Dauerman has served as Executive Vice President of Ultimate since April 1998 and as Chief Financial Officer and Treasurer of Ultimate since September 1996. From 1979 to 1996, Mr. Dauerman held various positions with KPMG LLP, serving as a Partner in the firm from 1988 to 1996. Mr. Dauerman is a Certified Public Accountant. Mr. Dauerman’s longstanding experience with accounting principles, financial reporting rules and regulations, income and sales tax rules and regulations, financial planning and general oversight of the financial reporting process, both as a former partner of KPMG LLP and as our Chief Financial Officer since 1996, as well as his role interfacing with the analyst and investor communities, are invaluable to the Board.
John C. Phenicie has served as Senior Vice President and Chief Mid-Market Sales Officer since January 2009 and served as Vice President of Workplace Sales from April 2007 until January 2009. From January 2000 to April 2007, Mr. Phenicie served as Strategic Account Manager for Ultimate. From July 1997 to January 2000, Mr. Phenicie held various sales positions with ADP, the most recent of which position was Sales Manager.
Adam Rogers has served as Senior Vice President, Chief Technology Officer since February 6, 2007. Mr. Rogers served as Senior Vice President, Development from December 2002 to February 6, 2007. From July 2001 to December 2002, Mr. Rogers served as Vice President of Engineering. From May 1997 to July 2001, Mr. Rogers held various positions in Ultimate’s research and development organization, including Director of Technical Support from October 1998 to November 1999 and Director of Web Development from November 1999 to July 2001. Mr. Rogers is the son-in-law of Scott Scherr, Chairman of the Board, President and Chief Executive Officer of Ultimate.
Jonathan D. Mariner began serving as a director of Ultimate in May 2017 and is Chairman of the Audit Committee and a member of the Compensation and Nominating Committees. Mr. Mariner is a private investor and entrepreneur, having recently retired from 23 years working in professional sports, including retiring in May 2016 after serving as Chief Investment Officer for 18 months, and having served over 12.5 years as Executive Vice President and Chief Financial Officer, of Major League Baseball. He previously served as Executive Vice President and Chief Financial Officer for the Florida Marlins Baseball Club;
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and as Vice President and Chief Financial Officer for the Florida Panthers Hockey Club during their initial start-up and 1993-94 inaugural seasons. He brings both knowledge and experience from serving on a number of corporate boards and audit committees of boards. His leadership skills and principles as demonstrated over his career is an asset to our Board. Mr. Mariner currently serves on several corporate boards: McGraw Hill Education; The Investor’s Exchange (IEX), the new, SEC-approved public stock exchange; and FM Global Insurance Company. He also currently serves on the University of Virginia’s Darden Graduate Business School’s Board of Trustees; Little League Baseball’s board of directors; and the Knight Commission on Intercollegiate Sports. Mr. Mariner has a B.S. degree in Accounting from the University of Virginia; an MBA degree from Harvard Business School; and is a former Certified Public Accountant (CPA). Mr. Mariner served as a director of PHH Corporation, a mortgage services solution company, from February 2005 to December 2010, BankAtlantic Corporation, a banking services provider, from April 2000 to April 2006 and Steiner Leisure Limited, an innovative spa company, from February 1997 to April 2006 where he also served on their compensation committee.
Alois T. Leiter has served as director of Ultimate since October 2006 and is a member of the Compensation Committee and the Nominating Committee of the Board. Mr. Leiter was a three-time Major League Baseball World Champion and two-time All-Star pitcher formerly with the New York Yankees, New York Mets, Toronto Blue Jays, and Florida Marlins, and has been an official spokesperson for Ultimate since 2002. Mr. Leiter has served as a television commentator for the Yankees Entertainment and Sports Network since 2006 and as an analyst with MLB Network since January 2009. He has served on the Executive Committee of New York City's official tourism marketing organization, NYC & Company, since 2000 and is a member of the Board of Directors of America's Camp, a legacy organization of the Twin Towers Fund, on which he also served as a board member. Mr. Leiter brings to our Board and to our Company a strong understanding of leadership, dedication, performance under pressure and the importance of communication and teamwork to the operations of Ultimate. Mr. Leiter's success as a professional athlete and television broadcaster reflects a commitment to excellence that he regularly imparts to our management and employees as a member of our Board. Mr. Leiter also brings to the Board 19 years of proven leadership skills and management experience as president and founder of Leiter's Landing, a charitable organization, and the knowledge and experience acquired through his service on a number of New York state and community boards.
Jason Dorsey began serving as a director of Ultimate in May 2017. Mr. Dorsey is President and Co-founder of The Center for Generational Kinetics ("TCGK") and was recently added as a Venture Partner with Next Coast Ventures. Mr. Dorsey has been the co-owner of TCGK for seven years where he oversees research, strategy, and consulting. TCGK is a leading Millennials and Generation Z research, speaking, and strategy firm in the U.S. TCGK clients span numerous industries including automotive, financial services, retail, restaurants, technology, and manufacturing. TCGK's expert team works with over 150 clients each year including numerous Fortune 500 companies. Mr. Dorsey is considered a leading expert and strategist on Millennials and Generation Z in the workforce and as customers. Mr. Dorsey brings experience working with over 50 clients each year including numerous Fortune 500 companies in various industries. As the leading expert and strategist on Millennials and Generation Z in the workforce, he brings expert knowledge to our Board to assist management with our continued growth strategy in today's workforce environment.
Information regarding director nominees Marc D. Scherr, Rick A. Wilber and James A. FitzPatrick, Jr. are included under the heading “PROPOSAL I – ELECTION OF DIRECTORS.”
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COMPENSATION DISCUSSION AND ANALYSIS
Compensation Discussion and Analysis
This Compensation Discussion and Analysis ("CD&A") provides information regarding the fiscal 2017 compensation program for our principal executive officer, our principal financial officer, and our three executive officers who were our most highly-compensated executive officers as of the end of fiscal 2017. These individuals were:
• | Scott Scherr, our Chairman of the Board, President and Chief Executive Officer; |
• | Marc D. Scherr, our Vice Chairman of the Board and Chief Operating Officer; |
• | Mitchell K. Dauerman, our Executive Vice President, Chief Financial Officer and Treasurer; |
• | John C. Phenicie, our Senior Vice President, Chief Mid-Market Sales Officer; and |
• | Adam Rogers, our Senior Vice President, Chief Technology Officer. |
These executive officers were our NEOs for fiscal 2017. In this CD&A, Ultimate Software Group, Inc. is referred to as "our," "us," "we," "Company" or "Ultimate."
In this CD&A we describe the material elements of our executive compensation program during the fiscal year ended December 31, 2017. We also provide an overview of our executive compensation philosophy, as well as our principal compensation policies and practices. Finally, we analyze how and why the Compensation Committee of the Board arrived at the specific compensation decisions for our executive officers, including the NEOs, in fiscal 2017, and discuss the key factors that the Compensation Committee considered in determining the compensation of our executive officers.
Executive Overview
Fiscal 2017 Business Summary
As a leading provider of cloud-based human capital management (“HCM”), our long-term success depends on, but is not limited to, our ability to (i) develop, enhance and market our products and services to keep pace with our competitors; (ii) adapt to technological advancements and changing industry standards; and (iii) expand the functionality of our products and services to address the increasingly sophisticated requirements of our customers. To achieve these goals, it is critical that we can attract, motivate and retain highly talented individuals at all levels of the organization who are committed to Ultimate’s core values of excellence, integrity and teamwork.
During fiscal 2017, we delivered strong financial results, including the following:
• | Grew recurring revenues 23% from $654.2 million for 2016 to $802.3 million for 2017; |
• | Achieved an annualized retention rate, on a rolling 12-month basis, of approximately 96% for our recurring revenue cloud customer base as of December 31, 2017; |
• | Grew total revenues 20% from $781.3 million for 2016 to $940.7 million for 2017; |
• | Increased our non-GAAP (as described below) operating income from $157.6 million for 2016 to $194.1 million for 2017; and |
• | Increased our non-GAAP net income from $96.2 million for 2016 to $118.1 million for 2017; |
• | Grew cash from operations by 34% from $159.5 million for 2016 to $214.0 million for 2017; |
• | Our operating income approximated the 92nd percentile relative to our 2017 Peer Group (as defined under the heading "The Compensation Committee's Processes") in 2017 and our net income approximated the 92nd percentile relative to our 2017 Peer Group in 2017; and |
• | Our one- and five-year total shareholder returns as of December 31, 2017 were 20% and 18%, respectively, on an absolute basis. |
• | In October 2017, the Compensation Committee determined that it would defer granting any equity awards to senior management, including our NEOs, until the February 2018 meeting of the Compensation Committee as a new compensation study by an independent compensation consulting firm would be received by the Compensation Committee prior to that meeting. |
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• | In February 2018, the Compensation Committee awarded shares of restricted stock under the Plan to certain members of senior management, including our NEOs in view of their performance and their respective levels of their ownership of equity in the Company consistent with the Committee's objective of increasing the equity-related component of executive compensation. |
Our non-GAAP financial information excludes non-cash stock-based compensation expense, non-cash amortization of acquired intangible assets, provision for income taxes related to the federal Tax Cuts and Jobs Act (the "Tax Act") and transaction costs related to business combinations. See “Non-GAAP Financial Information” on pages 43-44 in our 2017 Annual Report on Form 10-K filed with the SEC on February 26, 2018 and "Use of Non-GAAP Financial Information" on page 10-11 in our press release incorporated by reference to Exhibit 99.1 to Ultimate's Form 8-K filed with the SEC on February 7, 2018.
Aligning Management Incentives with Long Term Shareholder Value
As part of an on-going comprehensive review of the senior officer compensation arrangements, the Board of Directors and the Compensation Committee took actions to terminate the CIC Plans primarily to better align management's incentives with long-term value creation for our shareholders and significantly reduce the aggregate amount of cash payments that would be due to senior management upon a sale of the Company. Such cash payments included a significant amount attributable to the Federal excise tax “gross up.”
Ultimate Software became a publicly traded company in June 1998 with a license-based business model for its UltiPro product offering. During 2000-2004, we successfully transitioned our business model from a license-based model to a recurring revenue-based model or cloud model. This cloud-based business model has created consistent annual recurring revenue growth and long-term shareholder value reflected in the significant growth in the aggregate market value of shares of Common Stock outstanding based upon the closing price of such shares on The NASDAQ Stock Market LLC (the "Aggregate Market Value") of Ultimate. As of June 30, 2004, the Aggregate Market Value of the Company was approximately $200 million.
After this successful transition to the cloud business model, the Compensation Committee engaged an independent compensation consulting firm in 2004 to advise us on our executive compensation arrangements. Based upon their recommendation and the Company’s Aggregate Market Value as of June 30, 2004, the Board adopted the CIC Plan I (as defined below) at the time in lieu of granting time-based equity awards to Messrs. Scott Scherr, Marc Scherr and Mitchell Dauerman which would have been part of the normal annual compensation for such officers.
The CIC Plan I was modified in 2007 to, among other things, increase those NEOs, respective interests again in lieu of granting time-based equity awards. As of June 29, 2007, the Company’s Aggregate Market Value was approximately $700 million.
During its review of the CIC Plans (as defined below), the Compensation Committee, along with its independent compensation consultant, focused on how best to align management incentives with the creation of long-term shareholder value, given that a significant amount of potential future compensation to our senior executive officers, which would have been part of the normal annual compensation for such officers, would be realized only if there was a sale of the Company. The Compensation Committee also considered:
• | Senior management's focus on growing the business irrespective of any sale of the Company. Consideration was given to the consistency of the Company's performance and the impact of the Company’s strong culture generated by the long tenure and strong performance of its senior management team. We increased ongoing retention and shareholder alignment through unwinding the CIC Plans by providing for additional 3-year time-based vesting for the Restricted Stock Awards provided to the management team. ; |
• | The financial cost and dilutive impact associated with unwinding the CIC Plans. The CIC Plans required providing participants with substantially equivalent value in exchange for the reduction of participant interests. The CIC Plans could not be simply canceled; |
• | The significant savings of the aggregate potential cost of the CIC Plans via the reduction and eventual elimination of the Federal excise tax “gross up” provisions; and |
• | Feedback from our shareholders as outlined below. |
After reviewing these considerations, the Compensation Committee recommended to the Board of Directors and the Board of Directors approved amendments to the CIC Plans in March 2015, in February 2016 and in February 2017, that among other things began to unwind and eventually terminate the CIC Plans through the issuance of Restricted Stock Awards substantially equivalent to the percentage of equity that would have been issued in 2004 and 2007 if time-based equity had
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been issued at that time to the participants, versus a one-time payout. In order to retain shareholder alignment and strengthen executive equity retention profiles, the awards have three-year vesting periods from each grant date.
Continued Shareholder Sentiment and Outreach
In addition to holding an annual advisory vote on executive compensation, we are committed to ongoing engagement with our shareholders on executive compensation and corporate governance issues. The Compensation Committee considers the results of the advisory say-on-pay votes on the compensation of the NEOs in determining the executive compensation pay levels and structures. Our CFO and our CEO are active in attending investor meetings, including conferences, throughout the year regarding our executive compensation programs, financial results and the Company's long-term business plans. Our outreach efforts to key shareholders include in-person and telephonic meetings with our CFO and CEO, as well as our other senior executive officers.
Throughout 2017, we contacted shareholders holding over 80% of our outstanding Common Stock, and as of the date of this filing, during 2018 we have contacted shareholders holding in excess of 30% of our outstanding Common Stock. We intend to continue discussions with shareholders from the date of this filing until our Annual Meeting. We expect that many of these discussions will include our Chairman of the Compensation Committee along with our CFO. During on-going discussions with our shareholders, we typically explain, among other things, our executive compensation philosophy and practices, and the background and rationale for our previous modifications and termination of the CIC Plans. With respect to the amendments and subsequent termination of the CIC Plans, we explained to shareholders that it was the Company’s and the Board’s belief that it was better for shareholders that senior management focus on growing the business irrespective of any sale of the Company, therefore mitigating any risk this may present to Company and better aligning the interests of our shareholders and management. Management and the Board of Directors do not have any current plans to establish new change in control plans. In addition, we explained the amendments resulted in the significant reduction of the potential aggregate cost of the CIC Plans via the elimination of the Federal excise tax “gross up” provisions. Assuming an Aggregate Market Value of approximately $6.0 billion, we explained that we estimated that the termination of the CIC Plan I resulted in a permanent cost savings to shareholders of approximately $150 million relating to the Federal excise tax gross-up provisions. Of these shareholders contacted, with the exception of a minority representing less than approximately 5% of our outstanding Common Stock, we did not receive negative feedback from any investors regarding the modifications we made to, and the termination of, our CIC Plans or other executive compensation practices.
At our 2017 annual meeting of shareholders, approximately 63% of the shares that were voted were cast in favor of our advisory vote on named executive officer compensation, or our "say-on-pay vote." This vote in support of our "say-on-pay" proposal occurred after all issuances of Restricted Stock Awards beginning the unwinding and termination of the CIC Plans in March 2015, February 2016 and February 2017.
Executive Compensation Policy
The HCM market is a multi-billion dollar market, and we have only a small percentage of that as of the date of this filing. We believe we can continue to expand our penetration in this market, and we believe retaining highly talented and motivated executives is an important component of achieving this goal. Our primary financial goals are to: increase recurring revenues through new sales and through high retention rates of our customers; and deliver positive operating margins.
Our belief is that compensation should be based on factors including the combination of the level of job responsibility, individual performance and Ultimate’s financial performance. As our employees progress to higher levels in the organization, an increasing proportion of their pay should be linked to Ultimate’s performance, since they are more able to affect Ultimate’s financial results. Our overall philosophy is to provide our shareholders with long-term value and align our NEO's equity compensation with shareholders value through the use of Restricted Stock Awards with three-year annual vesting.
Additionally, we believe compensation should reflect the value of the job in the marketplace. In order to attract and retain a highly skilled work force, we must remain competitive with the pay of other employers who compete with us for employee talent. Although programs and individual pay levels may reflect differences in job responsibilities, geographies and marketplace considerations, the overall structure of compensation and benefit programs should be broadly similar across Ultimate's employee base.
We believe the key elements of our fiscal 2017 executive compensation program align the interests of our NEOs with our long-term strategic direction and the interests of shareholders, and help reduce the possibility of our NEOs making business decisions that could promote short-term results or individual compensation at the expense of long-term value to Ultimate and its shareholders.
• | CEO Base Salary: The base salary for our CEO was unchanged for the past eight fiscal years and was not increased for the 2017 fiscal year. |
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• | Incentive Awards Payable in Cash: Cash incentive awards are earned only if the Company exceeds target financial performance goals. These goals are the same as the annual financial guidance the Company provides to its shareholders. |
• | Equity Incentive Awards Linked to Long-term Value and Alignment with Shareholder Interests: The Company has always maintained a fundamental belief of making business decisions that positively impact the business and its customers for the long-term versus promoting short-term results or individual compensation incentives. Our 2017 Restricted Stock Awards vest over three years in annual installments. If the respective NEO does not perform, then the value of the restricted stock award, which comprises an overwhelming portion of the NEO's target compensation, may decline. We believe these awards create strong alignment with shareholders' interests over the long-term as the terms of such awards require continued performance by the NEO and correlate the NEO's compensation with shareholder outcomes. |
The 2017 total compensation of our CEO was approximately 98% equity-based which we believe is in alignment with the long-term interests of our shareholders.
Compensation Philosophy and Design
Our Compensation Committee is responsible for developing and approving Ultimate’s compensation program for the executive officers and other officers of Ultimate. In addition, our Compensation Committee administers Ultimate’s equity based plan and oversees such other benefit plans as Ultimate may from time to time maintain.
Our Compensation Committee is composed of four non-employee directors, Messrs. James A. FitzPatrick, Jr. (Chairman), Jonathan D. Mariner, Rick A. Wilber, and Alois T. Leiter.
The executive compensation program was designed to reward executive officers for achieving Ultimate’s strategic goals and to align the interests of the executive officers with those of Ultimate’s shareholders. In particular, the program is intended to (i) give the executive officers the opportunity to acquire a proprietary interest in Ultimate’s Common Stock by receiving equity-based incentive compensation; (ii) provide the executive officers with equity ownership in Ultimate commensurate with Ultimate’s performance, as reflected in increased shareholder value; (iii) attract, motivate and retain key employees and non-employee directors by maintaining competitive compensation levels; and (iv) provide an incentive to management for continuous employment with or service to Ultimate.
This philosophy is reflected in an executive compensation package that is generally comprised of three elements (collectively, “Total Compensation”):
• | Base salary, which is determined on the basis of the individual’s position and responsibilities with Ultimate; |
• | Annual incentive-awards payable in cash and tied to exceeding specified financial targets; and |
• | Long-term stock-based incentive compensation in the form of three-year annual vesting Restricted Stock Awards or four-year cliff vesting restricted stock awards that create a link between executive compensation and the long-term interests of Ultimate’s shareholders. We believe the structure of these awards helps reduce the possibility of our NEOs making business decisions that could promote short-term results or individual compensation at the expense of long-term value creation for Ultimate and its shareholders. |
Role of the Compensation Committee
The Compensation Committee establishes Total Compensation levels for executives that it believes are competitive with industry compensation practices of other software and technology companies of comparable size. It designs, approves and recommends to the Board, for approval by the independent members of the Board, all compensation of our executive officers, including the form and amount of salary, bonus, and equity-based compensation. It also oversees the administration of our cash-based and equity-based incentive plans, and addresses other compensation matters as the Board may direct from time to time.
The Compensation Committee's charter allows it to delegate certain of its duties to a subcommittee comprised of one or more committee members. It also permits the Compensation Committee to engage a compensation consultant.
Role of our Chief Executive Officer
The Chief Executive Officer provides general guidance and recommendations with respect to compensation for other executive officers to the Compensation Committee for its review. The other executive officers for which the CEO provides general guidance and recommendations include those executive officers who report to him and to the Chief Operating Officer. The CEO reviews their performance at least annually.
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Role of Compensation Consultant
The Compensation Committee has engaged Compensia, an independent compensation consulting firm, to review and analyze our executive compensation program. In measuring the effectiveness of our executive compensation arrangements in supporting our business strategy, their reasonableness as compared to the compensation practices of our peer group companies and the alignment they foster with our shareholders. Compensia has periodically advised the Compensation Committee on the following:
• | Peer group assessment methodology; |
• | Trends and regulatory developments for executive compensation; |
• | The cost and potential dilution to our shareholders of equity incentives relative to our peer group; |
• | The amendments to and terminations of the CIC Plans discussed herein; |
• | Risk mitigation and compensation governance matters; |
• | Disclosures about our executive compensation; and |
• | Review of independent director pay levels and structures relative to competitive market practices. |
While the Compensation Committee takes the input of Compensia into consideration, all of the Compensation Committee’s executive compensation decisions, including the specific amounts paid to our executive officers, are made through the exercise of the Compensation Committee’s own judgment and may reflect factors and considerations supplemental to the information and advice provided by Compensia. The Compensation Committee may replace Compensia or hire additional advisors at any time.
Compensia reports directly to the Compensation Committee and does not provide services to Ultimate's management team other than at the Compensation Committee's request. The Compensation Committee has assessed the independence of Compensia pursuant to SEC rules and NASDAQ listing rules and concluded that the firm’s work does not raise any conflict of interest that prevents Compensia from providing independent advisory services to the Compensation Committee.
The Compensation Committee’s Processes
The Compensation Committee utilizes different processes to assist it in ensuring that Ultimate’s executive compensation program is achieving its objectives. Among those processes are:
Industry Comparison. The Compensation Committee establishes Total Compensation levels for executives that it believes are competitive with industry compensation practices of other software and technology companies of comparable size. The Compensation Committee reviews available information, including information published in secondary sources, regarding prevailing salaries and compensation programs offered to executive officers by businesses that are comparable to Ultimate in terms of size and industry group. Generally, the CEO provides recommendations for other executive officer compensation to the Compensation Committee for its review.
In 2016 in advance of the compensation decisions approved in 2017, the Compensation Committee determined that it was appropriate to review and potentially revise our list of peer group companies to take into account our improved financial position, financial performance growth and market capitalization to review updated peer compensation data. In reviewing the composition of our peer group, the Compensation Committee considered, among other things, companies that were similar to us in terms of one or more of the following factors:
• | Primary industry focus on software, especially software-as-a-service ("SaaS"); |
• | Total annual revenues between approximately $334 million and $1.5 billion, which represented multiples of our revenues in the range of approximately 0.4 times to 2.0 times; |
• | Market capitalization between approximately $2.2 billion and $14.6 billion, which represented multiples of our market capitalization in a range between approximately 0.4 times to 2.6 times (a broader range than the range of revenue multiples to reflect the impact of market volatility); and |
• | Three-year compound annual growth rate of revenues greater than 15%. |
Using these criteria and with the assistance of Compensia, the Compensation Committee determined that our peer group (the "Peer Group") would be comprised of the following companies: Fortinet, Inc., FireEye, Guidewire Software, athenahealth,
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Inc., CoStar Group, Inc., Workday, Inc., Splunk, Tableau Software Inc., Cornerstone OnDemand, Inc., Proofpoint, ServiceNow, Ansys, Tyler Technologies, Veeva Systems and Zillow Group.
Assessment of Ultimate's Performance. The Compensation Committee reviews Ultimate's financial performance on key measures to assist in establishing total compensation ranges. The Compensation Committee may consider various measures of Ultimate's performance, including sales, earnings per share and growth in recurring revenue. The Compensation Committee determinations are based in part on considering such measures collectively. In addition, as described in more detail below, the Compensation Committee may grant performance awards under a formula provided for under the Plan. Such awards shall represent the right to receive a payment, in cash or equity, if corporate performance goals established by the Compensation Committee for a certain performance period are exceeded.
Assessment of Individual Performance. Individual performance has a strong impact on the compensation of all employees, including the executive officers. The members of the Compensation Committee meet with the Chief Executive Officer, and then meet in executive session to evaluate the Chief Executive Officer's performance for the year, when his compensation is being determined. For the other executive officers, the Compensation Committee reviews the compensation recommendations from the Chief Executive Officer and may also exercise its judgment based on the Compensation Committee's assessment of the individual performance of such executive officers. Elements of the individual performance of Scott Scherr taken into account by the Compensation Committee include his leadership of Ultimate as a whole, his particular leadership in and the results of the sales and marketing function, his strategic focus on maximizing Ultimate's recurring revenue streams and maintaining a strong customer retention, his communications with the Board, employees, customers, shareholders and the investment community and his responsibility for the culture of Ultimate. Elements of the individual performance of Marc Scherr taken into account by the Compensation Committee include his leadership in and results of the product strategy, development, information technology services and total company services offered to Ultimate customers, and his communications with the Board. Elements of the individual performance of Mr. Dauerman taken into account by the Compensation Committee include his leadership of the financial operations of Ultimate and his communications with the Board, the Audit Committee, Ultimate's independent auditors and the investment community. Elements of the individual performance of Mr. Phenicie taken into account by the Compensation Committee include his leadership of the Mid-Market sales team and its operations and his communications with current and prospective customers. Elements of the individual performance of Mr. Rogers taken into account by the Compensation Committee include his leadership of the development team and its operations, his continued knowledge of recent technology and his strategic approaches to future technology.
Components of Executive Compensation for 2017
We believe Ultimate’s compensation programs balance both the mix of cash and equity compensation and the mix of short-term and longer-term compensation in a way that furthers the compensation objectives discussed above. Following is a discussion of the Compensation Committee’s considerations in establishing each of the components for the executive officers.
Base Salary
Base salary is the fixed element of employees’ annual cash compensation. The Compensation Committee annually reviews and determines the base salary of the Chief Executive Officer and the base salaries of the other executive officers based on the recommendations of the Chief Executive Officer. Base salaries are generally adjusted to reflect promotions, increases in responsibilities, competitive market considerations and individual performance. In order to attract and retain qualified executives, Ultimate provides base salaries it considers to be competitive.
While determining the compensation for our NEOs for 2017, including that of our President and Chief Executive Officer, Mr. Scott Scherr, the Compensation Committee reviewed the current compensation and long term incentive compensation of executive officers of certain software and technology companies, including the Peer Group (for base salaries and long term incentive compensation). This information provided the basis of a competitive review of each of our NEO’s compensation. In order to maintain approximately the same aggregate cash compensation for the senior executive team, Mr. Scott Scherr requested that his own base salary be reduced in 2018. He also requested Mr. Marc D. Scherr's base salary be reduced as well. Mr. Scott Scherr requested these changes primarily to reward the other executive officers in recognition of their increased contributions to the success of the Company. However, the Compensation Committee did not attempt to “benchmark” the total compensation, or any element of compensation (including base salary), of any of our NEOs against the total compensation, or any element of compensation (including base salary), paid to executives in the Peer Group. Instead, the Compensation Committee exercised its own judgment based upon Mr. Scherr’s performance and, successful leadership of Ultimate, including a business strategy focused on maximizing recurring revenue streams by selling Ultimate’s UltiPro Cloud offerings on a recurring revenue basis and maintaining strong customer retention. During the Compensation Committee’s evaluation of Mr. Scherr’s performance as of October 2016, Mr. Scherr stated that he had determined that he would not request or accept an increase in his base salary for fiscal 2017. Therefore, the Compensation Committee did not increase Mr. Scherr’s base salary in 2016 or 2017. Mr. Scott Scherr's base salary decreased to $600,000 for 2018. This decrease was determined by
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the Compensation Committee in order to maintain the same aggregate cash compensation for the senior executive team at the same level as in 2017 for 2018.
The Compensation Committee reviewed with Mr. Scott Scherr the performance of Mr. Marc D. Scherr as Ultimate’s Vice Chairman and Chief Operating Officer in overseeing Ultimate’s strategic and operational activities. Taking into consideration Mr. Scott Scherr’s recommendation and the Compensation Committee's review with him, the Compensation Committee determined that Mr. Marc D. Scherr's base salary would not be increased and remain at $650,000 for fiscal 2017. Mr. Marc D. Scherr's base salary decreased to $500,000 for 2018. This decrease was determined by the Compensation Committee in order to maintain the same aggregate cash compensation for the senior executive team at the same level as in 2017 for 2018.
The Compensation Committee also reviewed with Mr. Scott Scherr the performance of Mr. Dauerman as Ultimate’s Chief Financial Officer, including his oversight of financial operations and Ultimate’s relationships with the investment community. Taking into consideration Mr. Scott Scherr’s recommendation and the Compensation Committee's review with him, the Compensation Committee determined that Mr. Dauerman’s base salary would not be increased and remain at $550,000 for fiscal 2017. Mr. Dauerman's base salary was increased to $600,000 for fiscal 2018.
The Compensation Committee also reviewed with Mr. Scott Scherr the performance of Mr. Phenicie as Ultimate’s Chief Mid-Market Sales Officer, including his oversight of the Mid-Market sales team and Ultimate’s relationships with its current and prospective customers. Taking into consideration Mr. Scott Scherr’s recommendation, and the Compensation Committee's review with him, the Compensation Committee determined that Mr. John Phenicie’s base salary would remain at $250,000 for 2017. Mr. Phenicie's base salary remained consistent at $250,000 for fiscal 2018. In addition to Mr. Phenicie's base salary, he received commissions on applicable sales results for fiscal 2017. Mr. Phenicie earned $366,708 in sales commissions for fiscal 2017.
The Compensation Committee also reviewed with Mr. Scott Scherr the performance of Mr. Rogers as Ultimate’s Chief Technology Officer, including his oversight of the development team, his continued knowledge of the most recent technology and his strategic approaches to future technology. Taking into consideration Mr. Scott Scherr’s recommendation, and the Compensation Committee's review with him, the Compensation Committee determined that Mr. Roger’s base salary would remain consistent at $600,000 for 2017. Mr. Roger's base salary increased to $650,000 for fiscal 2018.
Incentive Compensation
From time to time, the Compensation Committee approves (i) incentive awards, payable in cash and tied to exceeding annual corporate financial goals (“Cash Bonuses”); and (ii) long-term stock-based incentive compensation ("Stock-Based Compensation") to its executive officers. There is no annual incentive compensation provided to our NEOs for the year if we are at or below our financial goals for the year. Annual incentive compensation is only provided if we exceed our financial goals for the year.
Incentive Awards
The Compensation Committee may grant incentive awards under an annual bonus plan, which shall represent the right to receive a payment in cash if the performance goals established by the Compensation Committee for a performance period are exceeded. At the time an incentive award is granted, the Compensation Committee shall determine, in its sole discretion, the applicable period and goals to be achieved during the period, as well as such other conditions as the Compensation Committee deems appropriate. The Compensation Committee may also determine a target payment amount or a range of payment amounts for each award. The goals applicable to an incentive award grant may be subject to adjustments as the Compensation Committee shall deem appropriate to reflect significant unforeseen events, such as changes in law, accounting practices or unusual or nonrecurring items or occurrences. At the end of the period, the Compensation Committee shall determine the extent to which performance goals have been attained, or a degree of achievement between minimum and maximum levels, in order to establish the level of payment to be made, if any.
In February 2017, the Compensation Committee approved grants of contingent cash bonuses (as provided for in the Plan) to certain members of executive management, including all of our NEOs. Pursuant to this grant, the aggregate amount of the performance awards, subject to the maximum referred to below, was equal to the excess, if any, of (A) Ultimate’s pretax operating income, as reflected in its audited financial statements for the year ended December 31, 2017, adjusted to add back the charges for such performance awards, as well as the charges for non-cash stock-based compensation expense and non-cash amortization of acquired intangible assets, over (B) $199,300,000. The maximum aggregate amount of the performance awards eligible to be granted was $3,000,000, payable to the NEO's and other members of executive management. The respective percentages of their related base salaries for the aggregate performance awards to Mr. Scott Scherr, Mr. Marc D. Scherr, Mr. Mitchell K. Dauerman, Mr. John C. Phenicie and Mr. Adam Rogers were 10.0%, 9.0%, 9.0%, 9.0% and 9.0%, respectively. The maximum potential aggregate payout to the NEOs was $1.4 million. The remainder of the $3,000,000 was a maximum
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potential aggregate payout to other members of executive management eligible for performance awards. There was no payout to the NEOs or other members of executive management. Based upon the audited financial statements of Ultimate for the fiscal year ended 2017 and the formula described above, no cash Performance Award was earned for certain members of executive management, including our NEOs.
Long-Term Stock-Based Incentive Compensation
The Compensation Committee's philosophy for long-term stock-based incentive compensation is to align the interests of our NEOs with our long-term strategic direction and the interests of shareholders, and help reduce the possibility of our NEOs making business decisions that could promote short-term results or individual compensation at the expense of long-term value. Therefore, it has been the Compensation Committee's decision to award time-based Restricted Stock Awards to our NEOs (typically annually). During fiscal 2017, the Compensation Committee determined that it would defer granting any time-based Restricted Stock Awards to our NEOs until the February 2018 meeting of the Compensation Committee as a new compensation study by an independent compensation consulting firm would be received by the Compensation Committee prior to that meeting. Therefore, Messrs. John C. Phenicie and Adam Rogers did not receive a Restricted Stock Awards in 2017. We believe this award structure ensures continued focus on the long-term value of Ultimate, helps to retain highly talented executives and aligns their interest with those of our shareholders over the long-term. In light of the modifications made to the CIC Plans (see Change in Control Bonus Plans on pages [30 to 31], Messrs. Scott Scherr, Marc D. Scherr and Mitchell K. Dauerman were granted Restricted Stock Awards in February 2017.
The Restricted Stock Awards granted in February 2018 after being deferred by the Compensation Committee in October 2017, were approved by the Compensation Committee following a review of the NEOs long-term accomplishments, including consistent and strong recurring revenue growth, high customer retention, focus on profitability and cash flows. In addition, the Committee intended the awards to recognize the role of our long-tenured executives in increasing the Company's market capitalization from approximately $800 million at the beginning of 2009 to over $6 billion at the end of 2017. The Compensation Committee also reviewed company performance (including relative to peers), individual performance, competitive market data as provided by Compensia and current individual equity ownership and historic equity allocations.
The following table shows the number of awards granted to each NEO for fiscal 2017:
Name and Principal Position | Year | Stock Awards | |||||
Scott Scherr - Chairman of the Board, President and Chief Executive Officer | 2017 | 157,270 | (1) | ||||
Marc D. Scherr - Vice Chairman and Chief Operating Officer | 2017 | 157,270 | (1) | ||||
Mitchell K. Dauerman - Executive Vice President, Chief Financial Officer and Treasurer | 2017 | 39,317 | (1) | ||||
John C. Phenicie - Senior Vice President, Chief Mid-Market Sales Officer | 2017 | — | (2) | ||||
Adam Rogers - Senior Vice President, Chief Technology Officer | 2017 | — | (2) | ||||
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(1) | Represents shares of Common Stock subject to Restricted Stock Awards granted to the NEOs in 2017 under Restricted Stock Award agreements in connection with the amendment of CIC Plan I. These Restricted Stock Awards have three-year annual vesting. See "Change in Control Bonus Plans" on pages 30 to 31 in this proxy statement. |
(2) | Restricted Stock Awards typically granted to the executives on an annual basis were deferred in 2017 until February 2018. These typically represent time-based Restricted Stock Awards with three-year annual vesting. |
Severance Benefits
Except as described below, Ultimate is not obligated to pay severance or other enhanced benefits to executive officers upon termination of their employment, whether voluntary or involuntary.
Change in Control Bonus Plans
The Board previously adopted two Amended and Restated Change in Control Bonus Plans ("CIC Plans") (first adopted in March 2004). The Change in Control Plan I ("CIC Plan I") provided for the payment of cash amounts to three of Ultimate's NEOs upon a “change in control” of Ultimate as defined in that plan. The Change in Control Plan II ("CIC Plan II") provided for the payment of cash amounts in the event of a “change in control” to the other two NEOs and certain other employees of Ultimate as designated by the Compensation Committee. For purposes of the CIC Plans, a “change in control” would occur (i)
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if Ultimate were to complete a consolidation or merger pursuant to which the shareholders of Ultimate immediately prior to the merger or consolidation did not have beneficial ownership of 50% or more of the combined voting power of Ultimate’s securities outstanding immediately after the merger or consolidation, (ii) if Ultimate were to sell, lease or transfer all or substantially all of its assets or business or (iii) if beneficial ownership of more than 50% of Ultimate’s Common Stock were acquired by a person or entity other than Ultimate, a subsidiary or an employee benefit plan of Ultimate.
These CIC Plans were adopted initially in 2004 in lieu of granting time-based equity awards to the NEOs and certain other senior officers, which had been earned by such officers. In 2007, these change-in-control plans were amended to increase the limit on aggregate awards under the plans and to increase the NEOs’ respective interests in the CIC Plan I, again, in lieu of granting equity awards which had been previously earned by the NEOs. The amount of the payments to be made to the participants under the CIC Plans is based upon the gross consideration received by Ultimate or its shareholders in the change in control transaction (the “CIC Consideration”). The aggregate amount of payments (including the “gross up” payments described below) that may be made to all participants under the CIC Plans before they were amended could not exceed 6% of the CIC Consideration. To the extent this limit would otherwise be exceeded, the Compensation Committee would reduce payments under CIC Plan I for Ultimate’s three NEOs covered by such plan on a pro-rata basis. In the event such payments were reduced to zero and aggregate payments under the CIC Plans would still exceed 6% of the CIC Consideration, the Committee would reduce one or more other payments under CIC Plan II in its discretion in the manner that it determined to be equitable and appropriate under the circumstances. No amounts were payable under the CIC Plans to any participant whose employment with Ultimate was terminated prior to the consummation of a change in control transaction.
In 2013, the Compensation Committee, along with its independent compensation consultant, began a strategic evaluation of the existing compensation arrangements for the senior officers participating in these change-in-control plans, taking into consideration senior management incentives, the potential costs of such plans and our historical practices with respect to annual equity awards to senior officers. During its review, the Compensation Committee focused on how best to align management incentives with the creation of long-term shareholder value given that a significant amount of potential future compensation to our senior executive officers would be realized only if there was a sale of the Company. The Compensation Committee also considered the size of potential aggregate cash payments that could be due upon a change in control, including the potential significant cost associated with the Federal excise tax “gross-up” provisions under the CIC Plan I. In addition, the Compensation Committee also took into account potential financial and dilution impacts and therefore resolved that the CIC Plans would need to be unwound in a few steps using three-year vesting Restricted Stock Awards to extend retention value instead of our senior executive officers being motivated to sell the Company.
In March 2015, the Board and the Compensation Committee significantly amended the CIC Plan I and terminated the CIC Plan II. These changes reduced the aggregate potential payout under the CIC Plan I from 6% to 3.5% of the CIC Consideration. The individual participant’s interests were reduced from 3.5% to 2.25%. The additional significant potential cost associated with the Federal excise tax “gross-up” provisions under the CIC Plan I was reduced from 2.5% to 1.25% of the CIC Consideration.
In February 2016, the Board and the Compensation Committee further amended the Company’s CIC Plan I. These changes reduced the potential payout under the CIC Plan I from 3.5% to 1.85% of the CIC Consideration. The individual participant’s interests were reduced from 2.25% to 1.125%. The additional significant potential cost associated with the Federal excise tax “gross-up” provisions under the CIC Plan I was reduced from 1.25% to 0.725% of the CIC Consideration.
In February 2017, the Board and the Compensation Committee terminated the Company’s CIC Plan I. This termination removed the potential payout under the CIC Plan I of 1.85% of the CIC Consideration. The individual participant’s interests were reduced to zero from 1.125%. The additional significant potential cost associated with the Federal excise tax “gross-up” provisions under the CIC Plan I was reduced to zero from 0.725% of the CIC Consideration.
Assuming an aggregate market value of $6 billion, we believe the termination of the CIC Plan I has resulted in a permanent cost savings to shareholders of approximately $150 million relating to the Federal excise tax “gross-up” provisions.
The CIC Plans required providing participants with substantially equivalent value in exchange for the reduction of participant interests. The equity that was issued to unwind the CIC Plans was comparable to the percentage of equity that would have been issued and would have been part of the normal annual compensation in 2004 and 2007 if time-based equity had been issued at that time. The equity was issued in the form of three-year Restricted Stock Awards to retain investor alignment.
In October 2017, the Compensation Committee determined that it would defer granting any time-based Restricted Stock Awards to our NEOs until the February 2018 meeting of the Compensation Committee as a new compensation study by an independent compensation consulting firm would be received by the Compensation Committee prior to that meeting. Therefore, Messrs. John C. Phenicie and Adam Rogers did not receive any time-based Restricted Stock Awards in 2017. In
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light of the modifications made to the CIC Plans (see Change in Control Bonus Plans on pages [30 to 31], Messrs. Scott Scherr, Marc D. Scherr and Mitchell K. Dauerman were granted Restricted Stock Awards in February 2017.
Termination of the Change in Control Bonus Plans for Officers and Employees
In connection with the ongoing review of executive compensation, on February 6, 2017, our Board of Directors approved the termination of the CIC Plan I and all remaining awards that were outstanding under the CIC Plan I.
Pursuant to the terms of the CIC Plan I, in connection with the termination of these awards, the Company was required to provide each of the participants with an arrangement of comparable value as determined by our Compensation Committee in good faith. The comparable value was provided to the participants in the CIC Plan I in the form of grants of restricted stock. In connection with its determination to use restricted stock grants for this purpose, the Compensation Committee considered the management retention incentives associated with restricted stock that vests over a period of time. Mr. Scott Scherr was awarded a Restricted Stock Award of 157,270 shares of the Company’s Common Stock with a date of grant of February 10, 2017. Mr. Marc D. Scherr was awarded 157,270 shares of the Company’s Common Stock with a date of grant of February 10, 2017. Mr. Mitchell K. Dauerman was awarded 39,317 shares of the Company’s Common Stock with a date of grant of February 10, 2017. Each of these Restricted Stock Awards vests one-third on each of the following dates: February 10, 2018, February 10, 2019 and February 10, 2020, assuming continued employment with the Company as of such dates and subject to accelerated vesting in the event of a change in control or termination of employment due to death or disability. Based on an assumed stock price of $195.61, the closing price of the Company’s Common Stock on February 10, 2017, the value of the Restricted Stock Awards granted to Mr. Scott Scherr, Mr. Marc D. Scherr and Mr. Mitchell K. Dauerman would be approximately $30.8 million, $30.8 million and $7.7 million, respectively. The Restricted Stock Awards were granted under our Amended and Restated 2005 Equity and Incentive Plan.
On March 6, 2015, we terminated our CIC Plan II. Two of our NEOs, Mr. Adam Rogers and Mr. John C. Phenicie, along with six other officers of the Company, had been participants in the CIC Plan II and had received awards under that plan which would have entitled each of them to receive cash payments upon a “change in control” of the Company. Pursuant to the terms of the CIC Plan II, in connection with canceling these awards, the Company was required to provide each of the participants with an arrangement of comparable value as determined by the Compensation Committee in good faith. The comparable value was provided to the participants in the CIC Plan II in the form of grants of restricted stock. In connection with its determination to use restricted stock grants for this purpose, the Compensation Committee considered the management retention incentives and the alignment with shareholders associated with restricted stock that vests over a period of time. Mr. Adam Rogers was awarded a restricted stock award of 14,429 shares of the Company’s Common Stock, valued at approximately $2.3 million as of the date of grant. Mr. John C. Phenicie was awarded a restricted stock award of 12,280 shares of the Company’s Common Stock, valued at approximately $2.0 million as of the date of grant. Each of these Restricted Stock Awards vested or vests one-third on each of the following dates: February 11, 2016, February 11, 2017 and February 11, 2018 assuming continued employment with the Company as of such dates and subject to accelerated vesting in the event of a change in control or termination of employment due to death or disability. In addition to the awards to Messrs. Rogers and Phenicie, Restricted Stock Awards of an aggregate of 73,748 shares of the Company’s Common Stock were made to other senior officers who had been participants in CIC Plan II. The Restricted Stock Awards were granted under our Amended and Restated 2005 Equity and Incentive Plan.
The Board of Directors does not have any current plans to establish new change in control plans.
Accelerated Vesting
In addition to the severance provisions described above, Ultimate’s Stock-Based Compensation for our executive officers is subject to accelerated vesting under certain circumstances described below.
Stock Options. Ultimate’s stock options issued to the executive officers pursuant to the Plan ordinarily vest 25% on the date of grant and 25% on each of the first three anniversaries of the date of grant, subject to each executive officer’s continued employment with Ultimate. However, pursuant to the terms of the Nonqualified Stock Option Award Agreements entered into between Ultimate and the executive officers under the Plan, in the event of death, disability or a change in control of Ultimate (each, an “Accelerated Vesting Occurrence”), each executive officer’s unvested stock options under the Plan would immediately vest and become fully exercisable. There are no exercisable stock options held by Messrs. Scott Scherr, Marc D. Scherr, Mitchell K. Dauerman or Adam Rogers as of December 31, 2017. Mr. John C. Phenicie held 4,000 exercisable options as of December 31, 2017. All exercisable stock options held by Ultimate’s directors were fully vested as of December 31, 2017 as a result of the passage of time.
Restricted Stock Awards. Ultimate’s shares of restricted stock issued pursuant to the Plan are a combination of restricted stock that vest 100% on the fourth anniversary of the date of grant, subject to each executive officer’s continued employment
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with Ultimate and restricted stock that vests in three equal annual installments, subject to each executive officer's continued employment with the Company or any of its subsidiaries. However, pursuant to the terms of the Restricted Stock Award Agreements entered into between Ultimate and the executive officers under the Plan, in the event of an Accelerated Vesting Occurrence, each executive officer’s shares of unvested restricted stock would immediately vest. Assuming that there was an Accelerated Vesting Occurrence on December 31, 2017, the unvested shares of restricted stock held by Messrs. Scott Scherr, Marc D. Scherr, Mitchell K. Dauerman, John C. Phenicie and Adam Rogers would have automatically vested and they would have been entitled to receive amounts equal to the value of $73.7 million, $64.0 million, $18.4 million, $3.4 million and $5.1 million, respectively, as a result of such acceleration. These amounts are derived from the per share Year End Fair Market Value (as defined below) of the Common Stock multiplied by the number of shares being accelerated. In addition, pursuant to the terms of the Restricted Stock Award Agreements entered into between Ultimate and the executive officers under the Plan, in the event an executive officer’s employment is terminated by Ultimate without cause (a “Termination Without Cause Occurrence”), that portion of such then outstanding unvested restricted shares multiplied by the number of complete months of continued employment by the executive officer with Ultimate following the applicable dates of grant would immediately vest. Assuming that there was a Termination Without Cause Occurrence on December 31, 2017, a portion of the unvested shares of restricted stock held by Messrs. Scott Scherr, Marc D. Scherr, Mitchell K. Dauerman, John C. Phenicie and Adam Rogers would have automatically vested on a pro-rated basis as described above and they would have been entitled to receive amounts equal to the value of $22.3 million, $21.5 million, $5.6 million, $0.3 million and $0.5 million, respectively, as a result of such acceleration. These amounts are derived from the per share fair market value of the Common Stock, at the closing price of the Common Stock on NASDAQ on the last trading day of 2017 (the “Year End Fair Market Value”) multiplied by the pro-rated number of shares being accelerated.
CEO Pay Ratio Disclosure
For 2017,
▪ | the median of the annual total compensation of all employees of our company (other than our CEO) was $91,613; and |
▪ | the annual total compensation of our President and Chief Executive Officer, Mr. Scott Scherr, was $31,470,785. |
Based on this information, for 2017 the ratio of the annual total compensation of our CEO to the median of the annual total compensation of all employees was 344 to 1. This ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K under the Securities Exchange Act of 1934.
As permitted by SEC rules, to identify our median employee, we selected total direct compensation, which we calculated as annual base pay, the value of annual cash incentive awards paid in 2017 and the grant date fair value of equity awards granted in 2017 as the compensation measure to be used to compare the compensation of our employees as of November 27, 2017 for the 12-month period from January 1, 2017 through December 31, 2017.
As of November 27, 2017, our employee population consisted of approximately 4,408 individuals, with approximately 4,205 employees in the United States and approximately 203 employees outside the United States. In determining this population, we considered the employees of our subsidiaries and all of our worldwide employees other than the CEO, whether employed on a full-time, part-time, or seasonal basis, except for our employees in Singapore (12 employees) who were excluded pursuant to the de minimis exemption provided under Item 402(u), using the total number of employees inside the United States and outside the United States as described above. We did not include any contractors or other non- employee workers in our employee population. We annualized base pay for any full-time and part-time employees who commenced work during 2017.
Using this approach, we selected the individual at the median of our employee population, who was an Analyst based in the United States. We then calculated annual total compensation for this individual using the same methodology we use for our named executive officers as set forth in our Summary Compensation Table. We determined that such individual’s annual total compensation for the fiscal year ended December 31, 2017 was $91,613 (excluding any estimated retirement and health benefits).
Mr. Scherr’s annual total compensation for the fiscal year ended December 31, 2017 was $31,470,785 as reflected in the Summary Compensation Table included in this Proxy Statement. As discussed in more detail in "Compensation Discussion and Analysis - Termination of the Change in Control Bonus Plans for Officers and Employees" above, Mr. Scherr’s annual total compensation included a grant of 157,270 RSAs valued at $30,763,585. This grant was awarded to Mr. Scherr in connection with the termination of the Company’s CIC Plan I, and had the effect of substantially increasing the CEO pay ratio in 2017. Pursuant to the terms of the Company’s CIC Plan I, in connection with its termination, we were required to give Mr. Scherr substantially equivalent value in exchange for the cancellation of its interests (see pages 30-31 and 36-37 for further discussion regarding the termination of the CIC Plan I).
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Because SEC rules for identifying the median of the annual total compensation of all employees and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their employee population and compensation practices, the pay ratio reported by other companies may not be comparable to our pay ratio, as other companies have different employee populations and compensation practices and may have used different methodologies, exclusions, estimates and assumptions in calculating their pay ratios. As explained by the SEC when it adopted these rules, the rule was not designed to facilitate comparisons of pay ratios among different companies, even companies within the same industry, but rather to allow stockholders to better understand and assess each particular company’s compensation practices and pay-ratio disclosures.
Other Compensation Policies and Information
Tax Deductibility of Executive Compensation
In general, Section 162(m) of the Code disallows a deduction for any compensation paid in excess of $1 million during a calendar year to any of Ultimate’s NEOs as determined pursuant to the executive compensation disclosure rules under the Exchange Act (other than the principal financial officer). Prior to the enactment of the Tax Act, an exemption from this limitation applied to “performance-based compensation.” Under the Tax Act, this special exclusion for performance based compensation will not be available with respect to taxable years beginning after December 31, 2017 unless the compensation is pursuant to a written binding contract which was in effect on November 2, 2017 and is not modified in any material respect on or after such date. Pursuant to the Tax Act, for the taxable year beginning after December 31, 2017, Section 162(m) of the Code was expanded to cover additional executive officers including the chief financial officer so that the compensation of the chief executive officer and chief financial officer (at any time during the fiscal year), and the three other most highly compensated executive officers (as of the end of any fiscal year) will be subject to Section 162(m) of the Code. Any executive officer whose compensation is subject to Section 162(m) of the Code in taxable years beginning after December 31, 2016 will have compensation subject to Section 162(m) of the Code for all future years, including years after the executive terminates employment or dies. The Compensation Committee recognizes the need to retain flexibility to make compensation decisions, even if Ultimate may not deduct all of the compensation. For 2017, a significant portion of the compensation paid to Ultimate’s NEOs was not deductible pursuant to the limitations of Section 162(m).
Employee Benefits
Ultimate offers core employee benefits coverage in order to provide our workforce with a reasonable level of financial support in the event of illness or injury and to enhance productivity and job satisfaction through programs that focus on work/life balance.
The benefits available are the same for all U.S. employees and executive officers and include medical and dental coverage, disability insurance, and life insurance. In addition, our 401(k) Plan provides a reasonable level of retirement income reflecting employees’ careers with Ultimate. All U.S. employees, including executive officers, participate in these plans.
The cost of post-employment benefits is partially borne by the employee, including each executive officer.
Stock Ownership Guidelines
In March 2014, the Board adopted guidelines with respect to ownership levels of Ultimate's Common Stock by our CEO and members of our Board to further align their interests with those of our shareholders. These guidelines state that our CEO and each director must beneficially own Common Stock having a value equal to:
• | For our CEO, five times his annual base salary; and |
• | For each non-employee director, three times the amount of the annual cash retainer paid to directors or, if no cash retainer is paid to non-employee directors, the cash equivalent value of the annual retainer paid to non-employee members of our Board in the form of restricted shares of Common Stock or other equity. |
Anti-hedging and pledging Policy
In March 2014, the Board adopted a policy that prohibits our executive officers and directors from engaging in short sales, transactions in put or call options, hedging and pledging transactions or other inherently speculative transactions with respect to our Common Stock. We adopted this policy as a matter of good corporate governance, and because short-term or speculative transactions in our securities may lead to inadvertent violations of applicable law. Our pledging policy allows for limited pre-approved exceptions for the use of the Company's securities as collateral for a loan (not including margin debt) and where the pledgor clearly demonstrates the financial capacity to repay the loan without resort to the pledged securities. The shares pledged cannot exceed 20% of the shares owned by the applicable executive officer or director.
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Executive Compensation Recovery ("Clawback") Policy
In March 2014, the Board adopted an executive compensation recovery, or "clawback" policy requiring our Board, or a committee of the Board to seek, subject to certain exceptions, the reimbursement of excess incentive-based cash compensation provided to our executive officers in the event of certain restatements of our published financial statements. The policy allows Ultimate to clawback incentive-based cash compensation from executive officers who were actually involved in intentional or unlawful misconduct that triggered the accounting restatement to the extent the cash compensation was in excess of what would have been paid under the accounting restatement. This policy is applicable to all incentive-based cash compensation paid after implementation of the policy, and it covers the three-year period preceding the date on which Ultimate is required to prepare an accounting restatement. This policy will be amended to comply with the final regulations under the Dodd-Frank Wall Street Reform Act if they are adopted by the SEC.
Perquisites
Ultimate does not provide significant perquisites or personal benefits to executive officers.
Summary Compensation Table
The following table sets forth information, for the fiscal years ended December 31, 2017, 2016 and 2015, regarding the aggregate compensation we paid to our NEOs:
Name and Principal Position | Year | ($) Salary | ($) Bonus (1) | ($) Stock Awards (2) | ($) Option Awards (3) | ($) Non-Equity Incentive Compensation | ($) All Other Compensation (4) | ($) Total | ||||||||||||||
Scott Scherr - Chairman of the Board, President and Chief Executive Officer | 2017 | $ | 700,000 | $ | — | $ | 30,763,585 | $ | — | $ | — | $ | 7,200 | $ | 31,470,785 | |||||||
2016 | 700,000 | — | 24,321,623 | — | — | 7,200 | 25,028,823 | |||||||||||||||
2015 | 700,000 | 186,987 | 37,449,707 | — | — | 6,300 | 38,342,994 | |||||||||||||||
Marc D. Scherr - Vice Chairman and Chief Operating Officer | 2017 | $ | 650,000 | $ | — | $ | 30,763,585 | $ | — | $ | — | $ | 7,200 | $ | 31,420,785 | |||||||
2016 | 650,000 | — | 24,321,623 | — | — | 7,200 | 24,978,823 | |||||||||||||||
2015 | 650,000 | 168,288 | 15,604,072 | — | — | 6,300 | 16,428,660 | |||||||||||||||
Mitchell K. Dauerman - Executive Vice President, Chief Financial Officer and Treasurer | 2017 | $ | 550,000 | $ | — | $ | 7,690,798 | $ | — | $ | — | $ | 7,200 | $ | 8,247,998 | |||||||
2016 | 550,000 | — | 6,080,406 | — | — | 7,200 | 6,637,606 | |||||||||||||||
2015 | 550,000 | 168,288 | 9,362,345 | — | — | 6,300 | 10,086,933 | |||||||||||||||
John C. Phenicie - Senior Vice President, Chief Mid-Market Sales Officer | 2017 | $ | 616,708 | $ | — | $ | — | $ | — | $ | — | $ | 7,200 | $ | 623,908 | |||||||
2016 | $ | 786,682 | $ | — | $ | 2,632,375 | $ | — | $ | — | $ | 7,200 | $ | 3,426,257 | ||||||||
2015 | $ | 807,571 | $ | 168,288 | $ | 4,036,128 | $ | — | $ | — | $ | 6,300 | $ | 5,018,287 | ||||||||
Adam Rogers - Senior Vice President, Chief Technology Officer | 2017 | $ | 600,000 | $ | — | $ | — | $ | — | $ | — | $ | 7,200 | $ | 607,200 | |||||||
2016 | 600,000 | — | 4,211,800 | — | — | 7,200 | 4,819,000 | |||||||||||||||
2015 | 600,000 | 168,288 | 5,405,255 | — | — | 6,300 | 6,179,843 | |||||||||||||||
____________________
(1) | In February 2018, the Compensation Committee did not approve grants of contingent cash incentive Awards (as defined in the Plan and described above) to be paid out in connection with certain corporate financial goals established in February 2017. None of our NEOs received a cash incentive Award for 2017. |
(2) | Includes shares of Common Stock subject to Restricted Stock Awards granted to the executive in 2017, 2016 and 2015 under Restricted Stock Award agreements. All shares granted were granted at the grant date fair value in accordance with ASC 718. The total number of restricted shares of Common Stock issued to Messrs. Scott Scherr, Marc D. Scherr, Mitchell K. Dauerman, John C. Phenicie and Adam Rogers in 2017, 2016 and 2015 were as follows: (i) for Mr. Scott Scherr, the aggregate number of Restricted Shares of Common Stock subject to Restricted Stock Awards under Restricted Stock Award Agreements Issued (the "RSAs Issued") for 2017 was 157,270, with a grant date fair value of $30.8 million. These shares were issued in connection with the termination of the CIC Plan I. The aggregate number of RSAs Issued in 2016 was 155,788, with a grant date fair value of $24.3 million. These shares were issued in connection with the modifications made to the CIC Plan I. The aggregate number of RSAs Issued in 2015 was 230,318, with a grant date fair value of $37.4 million; (ii) for Mr. Marc D. Scherr, the aggregate number of RSAs Issued for 2017 was 157,270, with a grant date fair value of $30.8 million. These shares were issued in connection with the termination of he CIC Plan I. The aggregate number of RSAs Issued in 2016 was 155,788, with a grant date fair value of $24.3 million. |
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These shares were issued in connection with the termination of the CIC Plan I. The aggregate number of RSAs Issued in 2015 was 95,966, with a grant date fair value of $15.6 million; (iii) for Mr. Mitchell K. Dauerman, the aggregate number of RSAs Issued for 2017 was 39,317, with a grant date fair value of $7.7 million. These shares were issued in connection with the modifications made to the CIC Plan I. The aggregate number of RSAs Issued in 2016 was 38,947, with a grant date fair value of $6.1 million. These shares were issued in connection with the modifications made to the CIC Plan I. The aggregate number of RSAs Issued in 2015 was 57,579, with a grant date fair value of $9.4 million; (iv) for Mr. John C. Phenicie, there were no RSAs issued for 2017; the aggregate number of RSAs issued for 2016 was 12,500, with a grant date fair value of $2.6 million. The aggregate number of RSAs Issued in 2015 was 12,280 with a grant date fair value of $2.0 million. These shares were issued in connection with the termination of the CIC Plan II. The aggregate number of RSAs issued representing annual time-based awards was 10,000 for 2015, with a grant date fair value of $2.0 million; (v) for Mr. Adam Rogers, there were no RSAs issued for 2017; the aggregate number of RSAs Issued for 2016 was 20,000, with a grant date fair value of $4.2 million. The aggregate number of RSAs Issued for 2015 was 14,429, with a grant date fair value of $2.3 million. These shares were issued in connection with the termination of the CIC Plan II. The aggregate number of RSAs Issued representing annual time-based awards was 15,000 for 2015, with a grant date fair value of $3.1 million. . The restricted shares granted in 2015 in connection with the modifications made to the CIC Plan I and with the termination of the CIC Plan II, each vested in three equal annual installments on February 11, 2016, February 11, 2017 and February 11, 2018. The restricted shares granted in 2015, 2016 and 2017 vest or vested in three equal annual installments on each of the first three anniversaries of the date of grant thereof, subject to the participant’s continued employment with the Company or any of its subsidiaries on each such vesting date and subject further to accelerated vesting in the event of a “change in control” of Ultimate (as defined in the Plan), the executive's death or disability or the termination of the executive's employment by Ultimate without cause. A discussion of the assumptions used in calculating these values may be found in Note 15 of Ultimate's Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 26, 2018. See "Change in Control Bonus Plans" on pages [30 to 31] in this proxy statement for additional information regarding the RSAs Issued in connection with the termination of the CIC Plan I, modifications made to the CIC Plan I and the termination of the CIC Plan II.
(3) | There were no option awards granted in 2017, 2016 or 2015. |
(4) | Consists of contributions to Ultimate's 401(k) Plan on behalf of the executive officers indicated. |
Grants of Plan-Based Awards in 2017
The following table provides information concerning the Stock Based Compensation awards and cash bonus awards made to the NEOs in fiscal 2017 under the Plan.
Estimated Possible Payouts Under Non-Equity Incentive Plan Awards (1) | ||||||||||||||||
Name | Grant Date | Compensation Committee Action Date | Threshold ($) | Target ($) | Maximum ($) | All Other Stock Awards: Number of Shares of Stock or Units (#) | Grant Date Fair Value ($) | |||||||||
Scott Scherr | 2/10/2017 | 2/6/2017 | $ | — | $ | — | $ | 300,000 | 157,270 | $ | 30,763,585 | |||||
Marc D. Scherr | 2/10/2017 | 2/6/2017 | $ | — | $ | — | $ | 270,000 | 157,270 | $ | 30,763,585 | |||||
Mitchell K. Dauerman | 2/10/2017 | 2/6/2017 | $ | — | $ | — | $ | 270,000 | 39,317 | $ | 7,690,798 | |||||
John C. Phenicie | $ | — | $ | — | $ | 270,000 | — | $ | — | |||||||
Adam Rogers | $ | — | $ | — | $ | 270,000 | — | $ | — | |||||||
____________________
(1) | These columns show the threshold and maximum payouts under the Plan for cash performance awards. The Awards do not provide for any target amount. For a description of these performance awards, see “Compensation Discussion and Analysis – Incentive Compensation – Incentive performance awards.” |
Ultimate has no employment agreements with its executive officers.
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The material factors necessary to understand each of the awards listed in the Grants of Plan-Based Awards in the 2017 table are discussed in detail above under "Compensation Discussion and Analysis — Incentive Compensation".
Outstanding Equity Awards at 2017 Fiscal Year-End
The following table sets forth, for Ultimate’s NEOs, certain information concerning unexercised Stock Options; restricted stock that has not vested; and equity incentive plan awards as of the end of Ultimate’s last completed fiscal year:
Option Awards | Stock Awards | ||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options Exercisable (#) | Number of Securities Underlying Unexercised Options Unexercisable (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units That Have Not Vested (#) | Market Value of Shares That Have Not Vested ($) (7) | Vest Date of Stock and Unit Awards | ||||||||||||
Scott Scherr | — | — | — | — | 76,773 | $ | 16,754,172 | Various | (1 | ) | |||||||||
— | — | — | — | 103,859 | 22,665,150 | Various | (2 | ) | |||||||||||
— | — | — | — | 157,270 | 34,321,032 | Various | (3 | ) | |||||||||||
Marc D. Scherr | — | — | — | — | 31,989 | $ | 6,980,959 | Various | (1 | ) | |||||||||
— | — | — | — | 103,859 | 22,665,150 | Various | (2 | ) | |||||||||||
— | — | — | — | 157,270 | 34,321,032 | Various | (3 | ) | |||||||||||
Mitchell K. Dauerman | — | — | — | — | 19,193 | $ | 4,188,488 | Various | (1 | ) | |||||||||
— | — | — | — | 25,965 | 5,666,342 | Various | (2 | ) | |||||||||||
— | — | — | — | 39,317 | 8,580,149 | Various | (3 | ) | |||||||||||
John C. Phenicie | 4,000 | — | $ | 32.39 | 7/28/2018 | 4,094 | 893,434 | Various | (1 | ) | |||||||||
— | — | — | — | 3,334 | 727,579 | Various | (4 | ) | |||||||||||
— | — | — | — | 8,334 | 1,818,729 | Various | (5 | ) | |||||||||||
Adam Rogers | — | — | — | — | 4,810 | $ | 1,049,686 | Various | (1 | ) | |||||||||
— | — | — | — | 5,000 | 1,091,150 | Various | (4 | ) | |||||||||||
— | — | — | — | 13,334 | 2,909,879 | Various | (5 | ) | |||||||||||
____________________
(1) | The restricted stock grant vested on February 11, 2018. These awards were granted in connection with the amended CIC Plans (see discussion on pages 30 to 31 of this proxy statement under "Change in Control Bonus Plans"). |
(2) | The restricted stock grant vested or vests in two equal annual installments on February 8, 2018 and February 8, 2019, subject to the Participant’s continued employment with the Company or any of its Subsidiaries on each such vesting date subject to accelerated vesting in the event of a “change in control” of Ultimate (as defined in the Plan), the executive’s death or disability or termination of the executive’s employment by Ultimate without cause. These awards were granted under the amended CIC Plans (see discussion on pages 30 to 31 of this proxy statement under "Change in Control Bonus Plans"). |
(3) | The restricted stock grant vests or vested in three equal annual installments on February 10, 2018, February 10, 2019, and February 10, 2020, subject to the Participant’s continued employment with the Company or any of its Subsidiaries on each such vesting date subject to accelerated vesting in the event of a “change in control” of Ultimate (as defined in the Plan), the executive’s death or disability or termination of the executive’s employment by Ultimate without cause. These awards were granted under the amended CIC Plans (see discussion on pages 30 to 31 of this proxy statement under "Change in Control Bonus Plans"). |
(4) | The restricted stock grant vests in one annual installments on November 5, 2018, subject to the Participant’s continued employment with the Company or any of its Subsidiaries on such vesting date subject to accelerated vesting in the event of a “change in control” of Ultimate (as defined in the Plan), the executive’s death or disability or termination of the executive’s employment by Ultimate without cause. |
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(5) | The restricted stock grant vests in two equal annual installments on November 4, 2018 andNovember 4, 2019, subject to the Participant’s continued employment with the Company or any of its Subsidiaries on each such vesting date subject to accelerated vesting in the event of a “change in control” of Ultimate (as defined in the Plan), the executive’s death or disability or termination of the executive’s employment by Ultimate without cause. |
(6) | The market value of the unvested equity incentive plan awards was calculated based on the closing market price of Ultimate’s stock at the end of the last completed fiscal year. The closing price of Ultimate’s stock on NASDAQ on December 31, 2017, the last trading day of 2017, was $218.23. |
Option Exercises and Stock Vested in 2017
The following table sets forth, for Ultimate’s NEOs, certain information concerning each exercise of stock options, and each vesting of stock, including restricted stock, stock units and similar instruments, during the last completed fiscal year:
Option Awards | Stock Awards | |||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) (1) | ||||||||||
Scott Scherr | — | $ | — | 203,702 | $ | 40,186,576 | ||||||||
Marc D. Scherr | — | $ | — | 135,585 | $ | 26,715,911 | ||||||||
Mitchell K. Dauerman | — | $ | — | 58,842 | $ | 11,644,831 | ||||||||
John C. Phenicie | — | $ | — | 21,592 | 4,370,075 | |||||||||
Adam Rogers | — | $ | — | 33,143 | $ | 6,717,914 | ||||||||
____________________
(1) | Amounts reflect the fair market value on the date of vesting. Messrs. Scott Scherr, Marc D. Scherr and Mitchell K. Dauerman had awards vest on February 8, 2017, February 11, 2017 and November 6, 2017. Messrs. John C. Phenicie and Adam Rogers had Restricted Stock Awards vest on February 11, 2017, November 4, 2017, November 5, 2017 and November 6, 2017. The closing prices of Ultimate’s stock on NASDAQ on February 8, 2017, February 11, 2017, November 4, 2017, November 5, 2017 and November 6, 2017 were $193.11, $195.61, $206.78, $206.78, and $201.88, respectively. |
Relationship between Compensation Policies and Risk Management
Ultimate’s management has reviewed Ultimate’s compensation policies and practices for all employees and does not believe that there are any risks arising from such compensation policies and practices that are reasonably likely to have a material adverse effect on Ultimate.
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COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed with Ultimate’s management the disclosure set forth under the heading “Compensation Discussion and Analysis” above in this Proxy Statement. Based on such review and discussions, the Compensation Committee has recommended to the Board that such “Compensation Discussion and Analysis” be included in this Proxy Statement.
James A. FitzPatrick, Jr., Chairman | |
Jonathan D. Mariner | |
Rick A. Wilber | |
Alois T. Leiter | |
Members of the Compensation Committee | |
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AUDIT COMMITTEE REPORT
The Audit Committee is composed of four non-employee directors, Messrs. Jonathan D. Mariner (Chairman), Rick A. Wilber, James A. FitzPatrick, Jr., and Alois T. Leiter. The Audit Committee oversees Ultimate’s financial reporting process on behalf of the Board, reviews the independence of Ultimate’s auditors and fulfills the other responsibilities provided for in its charter. The Audit Committee has sole authority to appoint the independent auditors and terminate their engagement.
Management is responsible for Ultimate’s consolidated financial statements, systems of internal control and the financial reporting process. Ultimate’s independent registered public accounting firm, KPMG LLP, is responsible for performing an independent audit of Ultimate’s consolidated financial statements and expressing an opinion on the conformity of those consolidated financial statements with generally accepted accounting principles. In addition, KPMG was responsible for expressing an opinion on Ultimate’s internal control over financial reporting based on their audit as of December 31, 2017. The Audit Committee’s responsibility is to monitor and oversee these processes.
The Audit Committee has implemented procedures to ensure that during the course of each fiscal year it devotes the attention it deems necessary or appropriate to fulfill its oversight responsibilities under the Audit Committee’s charter. To carry out its responsibilities, the Audit Committee held five meetings during fiscal 2017.
The Audit Committee hereby reports as follows:
1) | The Audit Committee reviewed and discussed the audited consolidated financial statements with management and has met with the independent registered public accounting firm, KPMG LLP, with and without management present, to discuss the results of their fiscal 2017 audit and quarterly reviews, their evaluation of Ultimate’s internal controls, and the overall quality of Ultimate’s financial reporting. |
2) | The Audit Committee discussed with KPMG LLP the matters required to be discussed by Auditing Standard No. 16, Communications with Audit Committees, as adopted by the Public Company Accounting Oversight Board (PCAOB). |
3) | The Audit Committee reviewed the written disclosures and the letter received from KPMG LLP required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence and discussed with KPMG LLP that firm’s independence from Ultimate and its management, including whether the independent auditor’s provision of audit-related services to Ultimate are compatible with maintaining their independence. |
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board that Ultimate’s audited consolidated financial statements as of and for the year ended December 31, 2017 be included in Ultimate’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 for filing with the SEC, which occurred on February 26, 2018.
Jonathan D. Mariner, Chairman | |
Rick A. Wilber | |
James A. FitzPatrick, Jr. | |
Alois T. Leiter | |
Members of the Audit Committee | |
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KPMG LLP FEES
The following table presents fees for professional services rendered by Ultimate’s independent registered public accounting firm, KPMG LLP, for the audit of Ultimate’s annual consolidated financial statements and internal controls over financial reporting for the years ended December 31, 2017 and 2016, together with fees billed for other services rendered by KPMG LLP during those periods.
2017 | 2016 | |||||||
Audit Fees (1) | $ | 1,019,500 | $ | 755,000 | ||||
Audit-Related Fees (2) | 520,260 | 517,515 | ||||||
Tax Fees (3) | — | — | ||||||
All Other Fees (4) | — | — | ||||||
Total Fees | $ | 1,539,760 | $ | 1,272,515 | ||||
____________________
(1) | Consists of the aggregate fees and expenses incurred for the audits of Ultimate’s consolidated financial statements in Form 10-K for fiscal years 2017 and 2016 and the reviews of Ultimate’s 2017 and 2016 quarterly reports on Forms 10-Q. The audit fees for the years ended December 31, 2017 and 2016 also include fees for services rendered in connection with Section 404 of the Sarbanes-Oxley Act for internal controls audit work, and audit services related to acquisitions. |
(2) | Consists of fees incurred during 2017 and 2016 for assurance related services performed on management’s descriptions of its systems and the suitability of the design and operating effectiveness of controls surrounding UltiPro and UltiPro services. |
(3) | There were no fees incurred for tax compliance services during 2017 or 2016. |
(4) | Consists of the aggregate fees for products and services provided by KPMG LLP that were not reported above under “Audit Fees,” “Audit-Related Fees,” or “Tax Fees.” Ultimate did not purchase any other products or services from KPMG LLP during 2017 or 2016. |
Audit Committee Pre-approval of Audit and Permissible Non-Audit Services of Independent Auditors
Consistent with the SEC requirements regarding auditor independence, the Audit Committee has adopted a policy to pre-approve services to be performed by Ultimate’s principal independent auditor prior to commencement of the specified service. Under the policy, the Audit Committee must pre-approve the provision of services by Ultimate’s principal auditor prior to commencement of the specified service. The requests for pre-approval are submitted to the Audit Committee by the Chairman of the Board, President and Chief Executive Officer, the Chief Financial Officer, or a designee of either with a statement as to whether, in their view, the request is consistent with the SEC rules on auditor independence. All of the services performed by KPMG LLP during 2017 and 2016 were pre-approved by the Audit Committee.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Vivian Maza, our Senior Vice President, Chief People Officer and Secretary, shares a household with Scott Scherr, our Chairman of the Board, President and Chief Executive Officer. Ms. Maza received total compensation of $507,200 in 2017 for her services in those roles during our 2017 fiscal year. Since January 1, 2018 through March 16, 2018, Ms. Maza received total compensation of $4,723,262 for her services at Ultimate. The amount received in 2018 includes the grant of a time-based restricted stock award with a grant date fair value of $4,577,400 granted in February 2018 after approval by the Compensation Committee.
At the 2017 Annual Meeting, Jason Dorsey was elected as a non-employee member of Ultimate’s Board of Directors. The Board concluded that Mr. Dorsey is a non-independent director under the NASDAQ rules. Mr. Dorsey is Co-founder of TCGK. TCGK is a leading Millennials and Generation Z research, speaking, and strategy firm in the U.S. TCGK provided research and speaking services to Ultimate during our 2017 fiscal year and we paid approximately $71,500 to TCGK for those services. There have been no payments from Ultimate since January 1, 2018 through March 31, 2018, to TCGK.
On October 24, 2011, the Board adopted a written policy setting forth procedures for the review and approval or ratification of related party transactions. The policy covers all transactions between Ultimate and any related party involving or expected to involve more than $120,000 in the aggregate in any calendar year. Under the policy, a related party includes any current or former executive officer, director or director nominee, any person or group with greater than a 5% beneficial ownership of Ultimate’s voting securities or any immediate family member of the foregoing.
The policy provides that the Audit Committee review the material facts of any related party transaction in order to approve such transaction. If prior approval is not feasible, then such transaction must be ratified by the Audit Committee at its next regularly scheduled meeting or be rescinded. In making its determination, the Audit Committee considers (i) the extent of the related party’s interest in the related party transaction, (ii) if applicable, the availability of other sources of comparable products or services, (iii) whether the terms of the related party transaction are no less favorable than terms generally available in unaffiliated transactions under like circumstances, (iv) the benefit to Ultimate and (v) the aggregate value of the related party transaction. Certain transactions, such as otherwise pre-approved compensation to an executive officer or director or transactions in which charges or rates are fixed by law or determined through a competitive bidding process, are deemed not to be related party transactions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the year ended December 31, 2017 the Company did not have any compensation committee interlocks or insider participation.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Ultimate's executive officers and directors and persons who beneficially own more than 10% of Ultimate's Common Stock to file initial reports of ownership and reports of changes in ownership with the SEC. Such executive officers, directors and greater than 10% beneficial owners are required by the regulations of the SEC to furnish Ultimate with copies of all Section 16(a) reports they file. Acting pursuant to powers of attorney, our employees generally prepare these reports on the basis of information obtained from each director and officer. Based solely on a review of the copies of such reports furnished to Ultimate and written representations from the executive officers and directors, Ultimate believes that all Section 16(a) filing requirements applicable to its executive officers and directors and greater than 10% beneficial owners were met during 2017 except due to a clerical error, in connection with the exercise of a stock option to one independent director, Rick A. Wilber inadvertently filed a Form 4 late, on August 7, 2017 reporting a transaction that was executed on July 12, 2107.
SHAREHOLDER PROPOSALS FOR THE 2019 ANNUAL MEETING OF SHAREHOLDERS
Under the rules of the SEC, any proposal by a shareholder to be presented at the 2019 Annual Meeting of Shareholders and to be included in Ultimate's Proxy Statement for such meeting must be received at Ultimate's principal corporate office at 2000 Ultimate Way, Weston, Florida 33326, no later than the close of business on December 5, 2018. Proposals should be sent to the attention of the Secretary of Ultimate. Any such shareholder proposal must comply with the applicable rules of the SEC.
Under Ultimate’s By-laws, proposals of shareholders not included in the proxy materials may be presented at the 2018 Annual Meeting of Shareholders only if Ultimate’s Secretary has been notified of the nature of the proposal and is provided certain additional information at least sixty days but not more than ninety days prior to April 2, 2019, the first anniversary of the Proxy Statement in connection with the 2018 Annual Meeting of Shareholders (subject to exceptions if the 2018 Annual Meeting is advanced by more than thirty days and the proposal is a proper one for shareholder action). In addition, the Board recently adopted proxy access, which allows a shareholder or group of up to twenty shareholders who have owned at least 3% of Ultimate’s Common Stock for at least three years to submit director nominees (up to the greater of two Directors or 20% of the Board) for inclusion in our proxy materials if the shareholder(s) provide timely written notice of such nomination(s) and the shareholder(s) and the nominee(s) satisfy the requirements specified in our By-laws. To be timely for inclusion in Ultimate’s proxy materials for the 2019 Annual Meeting of Shareholders, notice must be received by the Corporate Secretary at Ultimate’s principal corporate offices at the above address no earlier than the close of business on November 5, 2018, and no later than the close of business on December 5, 2018. The notice must contain the information required by Ultimate’s By-laws, and the shareholder(s) and nominee(s) must comply with the information and other requirements in our By-laws relating to the inclusion of shareholder nominees in Ultimate’s proxy materials. Shareholders may request a copy of the By-law provisions discussed above from Corporate Secretary at the address above.
OTHER MATTERS
Financial Statements
A copy of Ultimate’s Annual Report on Form 10-K, for the year ended December 31, 2017, is available on Ultimate’s website, www.ultimatesoftware.com.
Other
Ultimate is not aware of any other matters that may come before the Annual Meeting. If other matters are properly presented at the Annual Meeting, it is the intention of the persons named as proxies in the enclosed proxy to vote in accordance with their best judgment.
By Order of the Board of Directors:
Vivian Maza
Secretary
Weston, Florida
April 2, 2018
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