Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

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LITHIA MOTORS, INC.
(Exact Name of Registrant as Specified In Its Charter)

 
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Notice of 2019 Annual Meeting of Shareholders and Proxy Statement

Thursday, April 25, 2019 at 8:30 a.m. Pacific Daylight Time
150 N. Bartlett St., Medford, Oregon 97501
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Letter from the Chief
Executive Officer


Dear Shareholder,

We are pleased to invite you to attend our 2019 Annual Meeting of Shareholders on
April 25 at 8:30am PDT to share our growth strategies and vision on how we will
continue to create personal transportation solutions wherever, whenever and however
our consumers desire.

Our mission, Growth Powered by People, focuses on our customers and team to create
our competitive advantage. We are fortunate to lead such a talented and engaged
group of people committed to modernizing automotive retail through innovation and
personalized experiences.

We will continue to expand our value-based growth strategy that targets strong
franchised stores that have not realized their potential. By unlocking the vertical and
horizontal adjacencies created by the scale of our core business we will further activate
and grow our nationwide network.

Our entrepreneurial culture inspires leaders to test and tailor solutions to their
local markets providing a diverse range of consumer offerings. These solutions are
underpinned by world class performance management systems that assist in managing
results to drive profits upward.

We’re passionate about cars and the relationships we have built with our customers,
team members and the communities we serve. We hope you share our enthusiasm
during this exciting time in our industry. We have a winning combination of high
profitability, a strategic acquisition model, organic growth opportunity, a well-positioned
balance sheet and an amazing team. Together these strengths will enable us to
capture a significant portion of the U.S. market.

Thank you very much for being a partner and a shareholder in our company.



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Bryan DeBoer
President and Chief Executive Officer
Lithia Motors, Inc.


2019 Lithia Motors, Inc. Proxy Statement | 1



NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
To Be Held On April 25, 2019

To the Shareholders of Lithia Motors, Inc.:

I am pleased to invite you to the 2019 Annual Meeting of Shareholders of Lithia Motors, Inc., which will be held at 150 N. Bartlett St., Medford, Oregon 97501, on Thursday, April 25, 2019, at 8:30 a.m., Pacific Daylight Time for the following purposes:

To elect seven directors to serve until the next annual meeting of shareholders;
To conduct an advisory vote on the compensation of our named executive officers, as disclosed pursuant to Item 402 of Regulation S-K;
To approve an amendment to the Company's Bylaws to provide shareholders with a "proxy access" right;
To approve amendments to the Company's Restated Articles of Incorporation and Bylaws to adopt majority voting for uncontested elections of directors;
To approve an amendment and restatement of the Company's 2009 Employee Stock Purchase Plan, including an increase in the number of shares available under the plan; and
To ratify the appointment of KPMG LLP as our Independent Registered Public Accounting Firm for the year ending December 31, 2019.

We will also consider and act on other matters that properly come before the meeting.

Only holders of record of our common stock at the close of business on February 28, 2019 are entitled to notice of and to vote at the meeting and any adjournment thereof. Further information regarding voting rights and the matters to be voted upon is presented in our proxy statement.

On or about March 11, 2019, we expect to mail to our shareholders a Notice of Internet Availability of Proxy Materials containing instructions on how to access our proxy statement for our 2019 Annual Meeting of Shareholders and our 2018 Annual Report on Form 10-K. This notice provides instructions on how to vote online or by telephone and includes instructions on how to receive a paper copy of the proxy materials by mail. Our proxy statement and 2018 Annual Report on Form 10-K can be accessed directly at the following Internet address:
http://www.proxyvote.com. Just enter the control number located on your proxy card.

If you have any questions regarding this information or the proxy materials, please visit our website at www.lithia.com or contact our investor relations department at (541) 776-6591.

YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the Annual Meeting of Shareholders, we urge you to submit your vote via the Internet, telephone or mail.

We appreciate your continued support of Lithia Motors and look forward to either seeing you at the meeting or receiving your proxy.


Very truly yours,

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Christopher S. Holzshu, Executive Vice President and Secretary
March 11, 2019

2019 Lithia Motors, Inc. Proxy Statement | 2



CONTENTS
 
PROXY STATEMENT
 
DIRECTORS, NOMINEES, AND EXECUTIVE OFFICERS
 
PROPOSAL NO. 1 Election of Directors
 
PROPOSAL NO. 2
Compensation of our Named Executive Officers
 
PROPOSAL NO. 3
Amendment to the Company's Bylaws to
Provide Shareholders with a "Proxy Access" Right

 
PROPOSAL NO. 4
Amendments to the Restated Articles of Incorporation and Bylaws to Adopt Majority Voting for Uncontested Elections of Directors
 
PROPOSAL NO. 5
Adoption of the Lithia Motors, Inc. 2009 Employee Stock Purchase Plan


2019 Lithia Motors, Inc. Proxy Statement | 3



 
PROPOSAL NO. 6
Ratification of Appointment of KPMG as Independent Registered Public Accounting Firm
 
PROCEDURES
 
APPENDICES


2019 Lithia Motors, Inc. Proxy Statement | 4




LITHIA MOTORS, INC.
PROXY STATEMENT

This proxy statement, the accompanying 2018 Annual Report on Form 10-K, the Notice of Annual Meeting and the proxy card are being furnished to the shareholders of Lithia Motors, Inc., an Oregon corporation, in connection with the solicitation of proxies by the Company for use at our 2019 Annual Meeting of Shareholders (the “Annual Meeting”). The Annual Meeting will be held at our principal executive office, 150 N. Bartlett St., Medford, Oregon 97501, on Thursday, April 25, 2019, at 8:30 a.m. Pacific Daylight Time. On or about March 11, 2019, we mailed to our shareholders a Notice of Internet Availability of Proxy Materials (the "Notice") containing instructions on how to access this proxy statement and our 2018 Annual Report on Form 10-K. The Notice provides instructions on how to vote online or by telephone and includes instructions on how to receive a paper copy of the proxy materials by mail. All references in this proxy statement to “Lithia,” “Lithia Motors,” the “Company,” “we,” “us,” or “our” refer to Lithia Motors, Inc. and its subsidiaries, except where the context otherwise requires or as otherwise indicated.




Questions and Answers About the Annual Meeting

What is the purpose of the Annual Meeting?

The Annual Meeting will be held for the following purposes:

Ÿ To elect seven directors to serve until the next annual meeting of shareholders;
Ÿ To conduct an advisory vote on the compensation of our named executive officers, as disclosed pursuant to Item 402 of Regulation S-K;
Ÿ To approve an amendment to the Company’s Bylaws to provide shareholders with a “proxy access” right;
Ÿ To approve amendments to the Company’s Restated Articles of Incorporation and Bylaws to adopt majority voting for uncontested elections of Directors; and
Ÿ To approve an amendment and restatement of the Company's 2009 Employee Stock Purchase Plan, including an increase in the number of shares available under the plan; and
Ÿ To ratify the appointment of KPMG LLP as our Independent Registered Public Accounting Firm for the year ending December 31, 2019.
Will any other matters be voted on?

We are not aware of any other matters on which you will be asked to vote at the Annual Meeting. If other matters are properly brought before the Annual Meeting, the proxy holders may use their discretion to vote on these matters. Furthermore, if a nominee cannot or will not serve as director, the proxy holders will vote for a substitute nominee selected by our Board of Directors.







2019 Lithia Motors, Inc. Proxy Statement | 1



Who is entitled to vote at the Annual Meeting?
Only holders of record of our common stock at the close of business on February 28, 2019, the record date, will be entitled to notice of and to vote at the meeting and any adjournment thereof. As of the record date, there were 22,347,738 shares of Class A common stock and 800,000 shares of Class B common stock outstanding and entitled to vote. Each share of Class A common stock outstanding is entitled to one vote, and each share of Class B common stock outstanding is entitled to ten votes. Our executive officers and directors hold or control 1.8% (402,000 shares) of the Class A common stock and 100% (800,000 shares) of the Class B common stock outstanding representing approximately 27.7% of the votes available to be cast at the Annual Meeting. All shares will vote together as a single voting group on all matters submitted to a vote of the shareholders except as otherwise required by law.
How do I vote?

There are four ways to vote:

by Internet at http://www.proxyvote.com; just enter the control number found on your proxy card (we encourage you to vote this way as it is the most cost-effective method);
by toll-free telephone at 1-800-690-6903;
by completing and mailing your proxy card; or
by written ballot at the Annual Meeting.
May I change my vote?

Yes. You may change your vote or revoke your proxy any time before the Annual Meeting by:

entering a new vote by Internet or phone;
returning a later-dated proxy card;
notifying Christopher S. Holzshu, our Secretary, in writing, at 150 N. Bartlett Street, Medford, Oregon 97501; or
completing a written ballot at the Annual Meeting.



2019 Lithia Motors, Inc. Proxy Statement | 2



What vote is required to approve each proposal?

Assuming a quorum is present at the Annual Meeting, the required vote for approval varies depending on the proposal.

Proposal 1: Shareholders will elect the seven director nominees receiving the greatest number of votes. Directors are elected by a plurality of the votes cast and only votes cast in favor of a nominee will be counted. However, if a director nominee receives more “withheld” votes than votes “for,” that may result in the director resigning from our Board of Directors (See Proposal No. 1 for a further description of our Director Resignation Policy).

Proposal 2: The votes that shareholders cast “for” must exceed the votes shareholders cast “against” to approve the compensation of our named executive officers. This vote is advisory and is not binding on us. However, the Compensation Committee of our Board of Directors, which is responsible for designing and administering our executive compensation program, and our Board of Directors value your opinion and will consider the outcome of the vote in making decisions regarding executive compensation.

Proposal 3: The votes that shareholders cast “for” must exceed the votes that shareholders cast “against” to approve the amendment to the Company’s Bylaws to provide shareholders with a "proxy access" right.

Proposal 4: The affirmative vote of the majority of voting power of the shares of our Class A common stock and Class B Common stock outstanding and entitled to vote at the Annual Meeting, voting together as a single class, is required to approve the amendments to the Company’s Restated Articles of Incorporation and Bylaws to adopt majority voting for uncontested elections of Directors.

Proposal 5: The votes that shareholders cast “for” must exceed the votes that shareholders cast “against” to amend and restate the Company’s 2009 Employee Stock Purchase Plan.

Proposal 6: The votes that shareholders cast “for” must exceed the votes that shareholders cast “against” to ratify the appointment of KPMG LLP as our Independent Registered Public Accounting Firm for the year ending December 31, 2019.

How is a quorum determined?

For a quorum to exist at the Annual Meeting, there must be represented, in person or by proxy, shares representing a majority of the votes entitled to be cast at the meeting. Proxies that expressly abstain from voting on a particular proposal and broker non-votes will be counted for purposes of determining whether a quorum exists at the Annual Meeting.
How do we count votes?

The proxy holders will vote your shares as you instruct. We will not count abstentions or broker non-votes either “for” or “against” a “non-routine” matter submitted to a vote of shareholders. A broker non-vote occurs when a broker or other holder of record, such as a bank, submits a proxy representing shares that another person beneficially owns, and that person has not given voting instructions to the broker or other nominee. A broker may only vote shares on a non-routine matter if the beneficial owner gives the broker voting instructions. Only the ratification of the selection of KPMG LLP as our independent registered public accounting firm for the year ending December 31, 2019 is considered a routine matter on which a broker or nominee that holds shares in its name may vote without instruction from the person that owns the shares beneficially.

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How are proxies solicited for the Annual Meeting?

The Company is soliciting proxies for the Annual Meeting. All expenses associated with this solicitation will be borne by us. We will reimburse brokers or other nominees for reasonable expenses that they incur in sending these proxy materials to you if a broker or other nominee holds your shares.
How is my proxy voted?

The Board of Directors has designated Tina Miller, Vice President and Chief Accounting Officer, as the proxy holder for the Annual Meeting. All properly executed proxies will be voted (except to the extent that authority to vote has been withheld) as specified by the shareholder. Proxies submitted without specification will be:

Voted FOR the director nominees listed in this proxy statement;
Voted FOR the approval of our compensation of the named executive officers, as disclosed pursuant to Item 402 of Regulation S-K;
Voted FOR the approval of the amendment to the Company’s Bylaws to provide shareholders with a “proxy access” right;
Voted FOR the approval of the amendments to the Company’s Restated Articles of Incorporation and Bylaws to adopt
majority voting for uncontested elections of Directors;
Voted FOR the amendment and restatement of the Company’s Employee Stock Purchase Plan; and
Voted FOR the ratification of the appointment of KPMG as our independent registered public accounting firm.

Why did I receive a notice regarding the availability of proxy materials on the Internet instead of a full set of proxy materials?


In accordance with the Securities and Exchange Commission (“SEC”) rules, we are furnishing our proxy materials, including this proxy statement and our Annual Report on Form 10-K, to our shareholders primarily via the Internet. On or about March 11, 2019, we mailed to our shareholders a Notice that contains instructions on how to access our proxy materials on the Internet, how to vote at the meeting and how to request printed copies of the proxy materials and Annual Report on Form 10-K. Shareholders may request to receive all future proxy materials in printed form by mail or electronically by email by following the instructions contained in the Notice.



I have previously indicated I want to receive my proxy materials electronically. Will I still receive my materials via email as I have in the past?
Yes. If you have already signed up to receive the materials by email or other electronic transmission, you will continue to receive them in that manner.




2019 Lithia Motors, Inc. Proxy Statement | 4



DIRECTORS, NOMINEES,
AND EXECUTIVE OFFICERS

Current directors and nominees

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SIDNEY B. DEBOER
Sidney B. DeBoer took Lithia Motors public in 1996 and is the Chairman of the Board. Mr. DeBoer served as Chief Executive Officer and Secretary from 1968 through 2011, and then Executive Chairman through the end of 2015. Mr. DeBoer’s pioneering work in the public auto retailer sector and as an automotive dealer has earned him numerous awards and recognition. His charitable work on the Southern Oregon University Foundation Board, Oregon Community Foundation and the Oregon Shakespeare Festival has created a vibrant community for our company’s headquarters. Mr. DeBoer attended Stanford University and the University of Oregon. Mr. DeBoer’s familiarity with our business, executive leadership knowledge and industry experience make him uniquely qualified to be our Chairman.





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BRYAN B. DEBOER
Bryan B. DeBoer has been our Chief Executive Officer and President since 2012 and first became a director in 2008. Prior to becoming CEO, Mr. DeBoer was Senior Vice President of Mergers & Acquisitions/Operations and then Chief Operating Officer driving the growth of Lithia and transforming the company culture to an entrepreneurial and high performance model. Upon joining Lithia in 1989, Mr. DeBoer grew through the store positions of Finance Manager, Used Vehicle Manager, General Sales Manager, General Manager and multi-store General Manager. Mr. DeBoer has a B.S. degree from Southern Oregon University in Business Administration. He also graduated from the National Automobile Dealers Association Dealer Academy. Mr. DeBoer’s store experience, passion for mergers and acquisitions and strong manufacturer relationships drive our growth. His enthusiasm for the car business combined with a competitive spirit set the tone for our culture.

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SUSAN O. CAIN
Susan O. Cain joined our Board of Directors in 2009. Ms. Cain has been a Senior Instructor in Accounting at Southern Oregon University, located in Ashland, Oregon since 2004 and retired in 2018. Ms. Cain joined KPMG LLP in 1978, retiring as a partner in the San Francisco office in 1999. While with KPMG, she specialized in banking institutions and trust tax services. Ms. Cain is involved with various non-profit and charitable organizations including the Ashland Independent Film Festival and the Oregon Shakespeare Festival. She maintains her CPA license in California and brings to our Board of Directors a high level of accounting expertise. Ms. Cain holds a B.A. degree in General Science from Oregon State University and a Master of Science in Taxation from Washington School of Law, Washington Institute of Graduate Studies. She serves as the Audit Committee Chair and is an audit committee financial expert as defined under SEC rules.

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SHAUNA F. MCINTYRE
Shauna F. McIntyre is a nominee for director. Ms. McIntyre serves as the Lead of Google Automotive Services, Geo, at Alphabet, Inc., and brings deep automotive industry experience, including perspective on new and emerging forms of mobility from both a technology and user viewpoint. Prior to joining Google, Ms. McIntyre was Head of U.S. Automotive and New Mobility Practice Group at Egon Zehnder, where she worked with marquee clients and created thought leadership on new mobility models. Ms. McIntyre also served as a Corporate Officer and Vice President of Strategy, Finance and Operations at Achates Power, a Sequoia Capital-backed startup developing the fuel efficient internal combustion engine for trucking applications, as well as Vice President of Global Commercial Vehicle Turbocharger Platforms at Honeywell. Prior to joining Honeywell, Ms. McIntyre held positions at both McKinsey and at Ford Motor Company. Ms. McIntyre holds a B.S. degree from the University of California, Los Angeles, an M.S. degree from University of California, Berkeley, and an M.B.A from Harvard University.
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LOUIS P. MIRAMONTES
Louis P. Miramontes joined our Board of Directors in 2018. Mr. Miramontes currently serves as Audit Committee Chair for Rite Aid Corporation and a private company in California. He provides advisory services to a real estate development company. Mr. Miramontes worked at KPMG from 1976 to 2014, where he served as managing partner for the San Francisco office and provided audit services to public and private companies. He has extensive experience in accounting, financial reporting and corporate governance. Mr. Miramontes hold a B.S. degree in Business Administration from California State University, East Bay. He is also an audit committee financial expert as defined under SEC rules.

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KENNETH E. ROBERTS
Kenneth E. Roberts joined our board in 2012 after retiring from Lane Powell PC, a Pacific Northwest law firm. Mr. Roberts was a partner with the law firm of Roberts Kaplan LLP (formerly Foster Pepper LLP) from 1987 until the firm joined with Lane Powell in 2011. His private law practice focused on corporate finance, mergers and acquisitions, corporate governance, executive compensation and securities, having represented many public companies including Lithia Motors since its initial public offering in 1996. Mr. Roberts is a graduate of Harvard Law School and Oregon State University with a B.S. in Business and Technology. Mr. Roberts chairs our Nominating and Governance Committee and lends insightful analysis to our mergers and acquisitions strategies.



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DAVID J. ROBINO
David J. Robino joined our board in 2016. He began his management career at The Maytag Corporation and Pepsi-Cola. He joined AC Nielsen in 1989, culminating as Senior Vice President of Nielsen International, based in Brussels, Belgium. After a successful Vice Presidency at AT&T's Business Markets Division, Mr. Robino left to lead Gateway, Inc. as Executive Vice President and Chief Administrative Officer and later Vice Chairman. Upon retiring from Gateway, Mr. Robino served as a member of the board of directors of Memec, Inc., then the world's leading distributor of specialty semiconductors, and Insight Enterprises, Inc., a global provider of information technology capabilities to enterprises. He has served as an adjunct instructor at Southern Oregon University since 2012. Mr. Robino has a M.S. in Industrial Relations from Iowa State University and B.A. in Social Studies from Graceland College. Mr. Robino’s executive management and board experience over the course of his career at many large firms, provides us with expertise across a broad range of subjects.

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Non-Director Executive Officers

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CHRISTOPHER S. HOLZSHU
Christopher S. Holzshu is our Executive Vice President. Previously, he had been our CFO from 2010 to 2016. As CFO, Mr. Holzshu combined his accounting and financial acumen with his drive to help our stores’ operations including the development of our performance management system. He is helping our stores develop stronger teams and stronger performance. Mr. Holzshu joined Lithia in 2003 as Director of Accounting after working on our external audit team at KPMG LLP, where he specialized in automotive manufacturing and retail sectors. Throughout his career with Lithia he has gained a deep understanding of the operations of our stores and a special talent for relating to individuals at all levels of the organization. Mr. Holzshu earned a B.S. in Finance and Accounting from the University of Alaska.

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SCOTT A. HILLIER
Scott A. Hillier has been Senior Vice President of Operations since 2008, for which he oversees store leadership. Mr. Hillier joined Lithia in 1986, working in our stores in roles including Finance Manager, General Sales Manager, General Manager and multi-store General Manager. He was an initial leader of our store acquisition efforts. Mr. Hillier quickly developed a reputation for identifying talent and building teams which led to his promotion to Vice President of Human Resources in 2003. In his current role, Mr. Hillier helps foster our value of taking personal ownership for performance while mentoring store leadership including the Lithia Partners Group. Mr. Hillier graduated from Southern Oregon University with a B.S. in Inter-Disciplinary Studies.
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GEORGE C. LIANG
George C. Liang has been our Senior Vice President of Operations since DCH combined with Lithia in 2014. He oversees store leadership. Mr. Liang joined DCH in 1988 after working as Vice President of BNP Paribas for 11 years in commercial finance. After working in Toyota and Nissan stores, he assumed responsibility for DCH’s West Coast operations in 2001. Mr. Liang successfully added the East Coast to his duties and he became President of DCH Auto Group in 2010. During the combination with Lithia, he right-sized operations and led a cultural change to elevate performance through entrepreneurship. Mr. Liang is very active in various automotive dealer associations, including minority dealer organizations, and has extensive relationships with our manufacturer and finance partners. He is a graduate of University of California at Berkeley (B.A.) and University of British Columbia, Canada (M.B.A.), majoring in finance.





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BRYAN OSTERHOUT
Bryan Osterhout is a Senior Vice President leading a substantial group of stores throughout the Northwest U.S. and Alaska. He joined Lithia over 20 years ago as the General Manager of Eugene Chrysler Dodge Jeep Ram. Mr. Osterhout exhibited his entrepreneurial spirit early, borrowing money from his family to start a used car dealership when he was only 21 years old. Now, he inspires that same passion for operational performance and leadership throughout many of our stores.  Mr. Osterhout studied economics and marketing for four years at the University of Oregon. 

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THOMAS M. DOBRY
Tom Dobry is our Senior Vice President and Chief Marketing Officer.  He leads our internal marketing team and partners with external agencies that serve our stores.  Mr. Dobry first joined Lithia in 2007 and then again in 2013.  He took a brief hiatus from Lithia to build a team in Detroit, Michigan guiding Chevrolet’s advertising.  Before joining Lithia, Mr. Dobry led regional marketing efforts for the Saturn and Dodge brands at Goodby Silverstein & Partners and BBDO advertising agencies, respectively.  Mr. Dobry has a B.A. in Advertising from Michigan State University and a M.B.A. from the University of Oregon.

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ERIK LEWIS
Erik Lewis is our Senior Vice President and Chief Human Resources Officer. Previously, Erik held HR leadership roles in Apple Leisure Group and Walmart. As CHRO, Mr. Lewis is focused on driving cultural alignment across our stores and instilling Lithia's values in a "Growth, Powered by People" approach to our business. In this effort, he will assist our management teams in taking a proactive approach to talent development and employee rewards. Earlier in Erik's career, he worked as a consultant with Andersen and PwC, where he advised clients in the automotive industry. In his career, Erik has gained a deep understanding of how effective people leadership can drive top line growth and profitability. He has a particular passion for creating a fun, exciting atmosphere in which our top talent can be engaged and retained. Erik has an M.B.A. and a B.A. in Spanish from Brigham Young University.
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TINA MILLER
Tina Miller is our Vice President and Chief Accounting Officer, and has recently been appointed our interim Principal Financial Officer. She joined Lithia in 2005 working in Internal Audit and Corporate Accounting before being promoted to Director in 2010. Before Lithia, Tina worked as an auditor at Ernst & Young, one of the Big Four accounting firms. She graduated from Santa Clara University with a B.S. in Accounting and is a licensed CPA in Oregon. Tina's leadership and passion for accounting plays an important role in advancing our company.


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CORPORATE GOVERNANCE
Board Leadership and Structure


2018 Board and Committee Composition

The following table reflects our Board members and their committee positions in 2018.

Director
Key
Compensation
Audit
Nominating & Governance
Sidney B. DeBoer
CB
 
 
 
Thomas R. Becker
LI
P
 
P
Susan O. Cain
I
P
C
P
Bryan B. DeBoer
 
 
 
 
Louis P Miramontes
I
P
P
 
Kenneth E. Roberts
I
 
P
C
David J. Robino
I
C
P
P

CB = Chairman of the Board I = Independent Director LI = Lead Independent Director C = Committee Chairman

Board of Directors

Our Bylaws provide for not fewer than five and not more than nine directors. Our Board of Directors has the discretion to set the size of our board from time to time. Our Board of Directors has set the number of directors at seven.

There is no requirement that directors attend our Annual Meeting of Shareholders, but directors are encouraged to do so. Our Board of Directors held 20 meetings in 2018. Each incumbent director attended at least 80% of all meetings of the Board and of the Board committees on which he or she served. All of our incumbent directors attended our 2018 Annual Meeting of Shareholders.

Board Committees

Our Board has three standing committees: the Compensation Committee, the Audit Committee, and the Nominating and Governance Committee. Each committee member is an independent director under NYSE listing standards, including, with respect to members of the Audit Committee and Compensation Committee, under the enhanced independence standards that apply to members of those committees. Each of our Board committees has a charter. Commencing with our 2018 Annual Meeting, at least one member of each of our Audit Committee and Compensation Committee may not belong to both committees. A written copy of our committee charters, Corporate Governance Guidelines, Code of Business Conduct and Ethics and Shareholder Communications Policy may be obtained by contacting our Investor Relations Department, Lithia Motors, Inc., 150 N. Bartlett Street, Medford, Oregon 97501. These documents are also available on our website at www.lithia.com under Investor Relations.

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THE COMPENSATION COMMITTEE

The Compensation Committee is responsible for our executive compensation philosophy. Among other responsibilities, it annually reviews the performance of, and determines the base salary and variable and long-term compensation for, our Chief Executive Officer. The Compensation Committee also reviews the compensation for other executive officers and reviews and recommends the compensation for independent Board members.

The Compensation Committee may delegate any of its responsibilities to a subcommittee, which subcommittee shall consist of at least two members of the Compensation Committee but otherwise may consist of any person(s) selected by the Compensation Committee. In December 2018, the Compensation Committee delegated limited authority to our CEO and Executive Vice President to award restricted stock units (“RSUs”) to employees of the Company during the course of 2019 based upon employee performance; the maximum aggregate number of shares underlying RSUs that the CEO may award in a calendar year is equal to an aggregate of $1,500,000 divided by the average closing price of one share of the Company’s Class A common stock in the 40 trading days before the award date of the RSU. In addition, the Compensation Committee has delegated authority to our CEO and CFO to make discretionary contributions to employees’ accounts of up to $200,000 in the aggregate per calendar year under the Lithia Motors, Inc. Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan.

The Compensation Committee also has the authority, in its sole discretion, to select, retain and obtain the advice of a compensation consultant and outside legal counsel as necessary to assist with the execution of its duties and responsibilities. In 2018, the Compensation Committee retained Pay Governance LLC to provide advice and counsel. Pay Governance provided compensation advice to the Committee on our Chief Executive Officer, Chief Financial Officer and next three highest-paid executives. The Compensation Committee monitors our employee benefits plans, including our 2013 Amended and Restated Stock Incentive Plan, our 2009 Employee Stock Purchase Plan, our Performance Bonus Plan and our Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan, and the Compensation Committee certifies and approves payments based on performance measures. The Compensation Committee
 
held 8 meetings in 2018. See “Compensation Discussion and Analysis” below for a discussion of our compensation philosophy and how the Compensation Committee determines the compensation of our executive officers.

THE AUDIT COMMITTEE

The Audit Committee is responsible for selecting and hiring our independent registered public accounting firm and for overseeing our accounting functions, systems of internal control established by management and processes to assure compliance with applicable laws, regulations and internal policies. The Audit Committee routinely meets in executive session with each of representatives from KPMG, our Chief Financial Officer and our Director of Internal Audit. Our Director of Internal Audit reports directly to the chair of the Audit Committee. The Audit Committee held 5 meetings during 2018. In addition to meeting the independence requirement for audit committee members, each current member of the Audit Committee also meets the financial literacy and experience requirements contained in the corporate governance listing standards of the NYSE. Our Board has reviewed the qualifications and experience of the nominees standing for election and has determined that both Ms. Cain and Mr. Miramontes satisfy the requirements of an “audit committee financial expert” as defined by SEC rules.


THE NOMINATING AND GOVERNANCE COMMITTEE

The Nominating and Governance Committee is responsible for assisting our Board of Directors in identifying qualified individuals to become Board members and recommending to our Board of Directors nominees for each annual meeting of the shareholders; determining the composition of our Board of Directors and its committees; developing and implementing a set of effective corporate governance policies and procedures; developing and enforcing a Code of Business Conduct and Ethics; monitoring a process to assess the effectiveness of our Board of Directors, its members and its committees; and ensuring our compliance with NYSE listing standards. The Nominating and Governance Committee held 5 meetings in 2018.








2019 Lithia Motors, Inc. Proxy Statement | 10




Director Independence

Our Corporate Governance Guidelines require our board to be composed of a majority of independent directors. Generally, under NYSE listing standards, a director is not independent if he or she has a direct or indirect material relationship with Lithia or its management. In accordance with its charter, the Nominating and Governance Committee annually reviews the independence of all non-employee director nominees and reports its findings to the full Board of Directors, which makes a determination about the independence of each nominee. The Board of Directors and the Nominating and Governance Committee review and discuss all transactions and relationships between each director nominee or any member of his or her immediate family and Lithia, its consolidated subsidiaries and affiliates, and management, both in the context of the specific independence standards enumerated in the NYSE listing standards, as well as other business and personal relationships that could compromise the independent judgment of a director. Other than the NYSE listing standards, we do not adhere to categorical standards for determining independence; rather, we review and evaluate the specific facts and circumstances of each transaction and relationship to determine whether the director is independent. As a result of this review, our Board of Directors affirmatively determined that each of Ms. Cain and Ms. McIntyre and Messrs. Becker, Miramontes, Roberts and Robino is independent under NYSE listing standards.

Lead Independent Director and Leadership Structure

Lithia’s governance documents provide our Board with flexibility to select the leadership structure that is best for the Company. If the Chairman of our Board of Directors is not an independent director, our Board of Directors annually selects an independent director to serve as the “Lead Independent Director” responsible for coordinating the activities of the independent directors. If the Chairman of our Board of Directors is an independent director, our Board of Directors may nonetheless select a Lead Independent Director from one of the other independent directors.

Bryan B. DeBoer is our President and Chief Executive Officer, and Sidney B. DeBoer is our Chairman of the Board. We believe that the separation of the CEO and Chairman positions is beneficial because it allows our CEO to focus his energy and time on operating the Company while simultaneously allowing our Chairman to exercise his leadership strengths. Because Sidney B.
 
DeBoer is not an independent director, our Board of Directors appointed Thomas R. Becker as Lead Independent Director, and he has served in that capacity since 2008.

Sidney B. DeBoer, as Manager of Lithia Holding Company, L.L.C. (“Lithia Holding”), has the authority to vote all of the Class B common stock, which has 27.7% of the voting power of our outstanding voting shares. To ensure independent oversight of management and the transparency expected from a public company:

As described below under “Certain Relationships and Transactions with Related Persons,” Sidney B. DeBoer has entered into a Class B Conversion Agreement under which he has agreed to cause all of the remaining shares of Class B common stock to be converted into Class A common stock by December 31, 2025;

2019 Lithia Motors, Inc. Proxy Statement | 11



We maintain a Board comprised of a majority of independent directors, and the Audit Committee, Compensation Committee and Nominating and Governance Committee are composed solely of independent directors;
At least once each quarter, with the Lead Independent Director presiding, the independent directors meet privately in executive session;
Annually, an independent third party conducts a 360 degree review of our Chief Executive Officer with the other Board members and the officers reporting directly to the Chief Executive Officer. The results of that review are shared with the independent directors;
An independent third party also annually conducts a review of the performance of each director, each Board committee, and the Board as a whole;
Each committee chair sets the agenda for his or her committee meeting and all directors are permitted to propose items for consideration by any committee or the full Board;
Each committee is given the right in its charter to retain outside advisors (including legal counsel) in its discretion; and
We have adopted Corporate Governance Guidelines and a Code of Business Conduct and Ethics (each of which is available on our website at www.lithia.com).

We believe our Board and committee structure, practices and policies, as described above, allow our Board of Directors to provide adequate, independent oversight of management. Shareholders may contact the Lead Independent Director or the independent directors as a group using the procedures described in “Shareholder and Other Interested Party Communications” below.

Our Board’s Risk Oversight Role

Our Board of Directors monitors the risks facing our business by evaluating our risk management processes, including the processes established to monitor how management reports material risks to our Board of Directors and how our executive team manages the various risks that our business faces. Our Board of Directors periodically reviews the potential severity of various risks faced by our Company (including geographic risks and the potential impact of new laws on the business) and the likelihood that they will occur. Our Board of Directors collaborates with management on developing the Company's annual risk management plan and as part of that process helps management ensure that those risks and uncertainties are considered in management's ongoing operations and in creating the Company’s annual risk management plan.

Our Board of Directors has delegated responsibility for certain areas of its risk oversight to its standing committees.

The Compensation Committee, together with our Board of Directors, reviews and manages our compensation policies and programs to ensure they do not encourage excessive risk-taking by our executives and employees. The Compensation Committee reviews a summary and assessment of such risks at least annually and in connection with the discussion or review of individual elements of compensation.

The Audit Committee reviews our material financial risk exposures and the process by which management assesses and manages financial risks. The Audit Committee also meets with management to discuss the steps management has taken to

2019 Lithia Motors, Inc. Proxy Statement | 12



assess, monitor and mitigate risks that the Company faces. While our Board of Directors oversees risk management, our management is charged with managing risk through effective internal controls and processes, which facilitate the identification and management of risks, and management regularly discusses risk management with our Board of Directors.
Director Qualifications and Nominations

The Nominating and Governance Committee is responsible for identifying and evaluating potential director nominees to fill any vacancies on our Board of Directors. The committee recommends director nominees with backgrounds and qualifications that complement each other and collectively allow our Board of Directors to fulfill its responsibilities.

The Nominating and Governance Committee annually reviews the composition of our Board and evaluates the qualifications and contributions of the current directors in the context of the desired composition of our Board, our operating requirements and the interests of our shareholders. The committee also routinely reviews and interviews candidates for our Board of Directors whose background and experience suggest they may be qualified to join our Board. The qualifications required of individuals for consideration as a Board nominee vary according to the particular areas of expertise sought as a complement to our existing Board of Directors composition at the time of any vacancy. Potential candidates may be suggested by various sources, including management, Board members, shareholders, legal counsel, business leaders and other industry executives and directors. In connection with its search for a replacement nominee for Mr. Becker, who is not standing for re-election at the Annual Meeting, the Nominating and Governance Committee engaged the services of Egon Zehender International, Inc. to assist with the search. Ms. McIntyre was recommended as a nominee to serve on the Board by the Nominating and Governance Committee.

The Nominating and Governance Committee evaluates the qualifications of potential director nominee candidates, including candidates proposed by shareholders, based on criteria that include the individual’s skills, experience and other factors in the context of the current composition of our Board of Directors, to maintain our Board’s overall diversity. Among other aspects, the Nominating and Governance Committee evaluates the following factors when evaluating director nominees: business experience, other directorships, business and personal relationships with management, educational background, expertise in
 
finance, knowledge of financial reporting and the business of the Company, and industry experience. In this context, diversity encompasses differences of viewpoint, personal and professional experience, education, skill, and other individual qualities and backgrounds, such as gender, race and ethnicity. At a minimum, qualified director nominees must have the ability to dedicate sufficient time to Board activities, and candidates for a position as an independent director must meet applicable NYSE independence standards and not have any conflicts of interest with the Company. The Nominating and Governance Committee reviews its effectiveness in balancing these criteria when assessing the composition of our Board.

Beginning with this Annual Meeting, directors will no longer be considered independent if they have been on the Board for 15 or more years, and no person may serve as an Independent director after attaining the age of 79. As a result of this policy, Mr. Becker, who has served on the Board since 1996 and has been on the board for 15 or more years, is not standing for re-election at the Annual Meeting.

We require all of our directors to annually sign an acknowledgment of their confidentiality obligations and obligations under our insider trading policy and other applicable policies to reinforce their commitment to protect our confidential information and our business reputation and to comply with applicable securities laws.
 
We seek to attract and retain qualified candidates for Board membership regardless of the origin of recommendation, and there are no differences in the manner in which the Nominating and Governance Committee evaluates nominees for director based on whether the nominee is recommended by a shareholder or the Committee itself. The Nominating and Governance Committee will consider potential nominees recommended by any record or beneficial shareholder. See “Shareholder and Other Interested Party Communications-Shareholder Director Recommendations” below.


2019 Lithia Motors, Inc. Proxy Statement | 13




Code of Business Conduct and Ethics

We adopted a Code of Business Conduct and Ethics that applies to all of our officers, directors and employees, including our principal executive, financial and accounting officers. A complete copy of our Code of Business Conduct and Ethics is available on our website at www.lithia.com. You may request a copy by mail from our Investor Relations Department, Lithia Motors, Inc., 150 N. Bartlett Street, Medford, Oregon 97501. We intend to publicly disclose any amendment to and any waiver of the Code of Business Conduct and Ethics on our website.









 








2019 Lithia Motors, Inc. Proxy Statement | 14



BOARD COMPENSATION


Compensation of Directors

Non-Employee Director Compensation. Our directors serve from election at each annual meeting until the following annual meeting or until the director’s successor is elected and qualified. The Compensation Committee annually reviews non-employee director compensation and recommends changes to our Board of Directors. If accepted, any recommended change is effective for the ensuing service year. Accordingly, the actual compensation paid to a non-employee director in a calendar year is generally earned under two separate compensation plans. Except for Sidney B. DeBoer, directors who are employees of the Company are not compensated separately for their service as directors. As noted in the Non-Employee Director Compensation Table, for his services as a director, Sidney B. DeBoer receives the same compensation, in the same form, as the Company pays to its non-employee directors. Separately, Sidney B. DeBoer receives payments for his prior services rendered as an employee that are described below under “Certain Relationships and Transactions with Related Persons.” on pg 57. Executive officers of the Company do not recommend or determine non-employee director compensation. Our non-employee directors are Ms. Cain and Messrs. Becker, Miramontes, Roberts and Robino.

We pay a majority of our non-employee directors’ compensation as equity awards. The Compensation Committee believes that paying a majority of the annual compensation in equity provides non-employee directors with a vested interest in our long-term financial success and aligns their interests with those of our shareholders. The compensation structure for our non-employee directors for the 2018-2019 service year was:


 


$85,000 cash plus an additional $15,000 cash to each director who serves as a committee chair, lead independent director or as chairman of the Board. In each case, cash amounts are paid in 12 monthly installments over the service period.

An award for a number of RSUs, which are settled in shares of our Class A common stock, with a value of $140,000. The number of RSUs awarded is based on the average closing share price for the 40 trading days prior to the award grant date.


We currently grant RSU awards to our non-employee directors immediately after the annual shareholder meeting. The RSU awards vest over one year, with 25% vesting on the first business day of the month after each regularly scheduled quarterly meeting of our Board of Directors if the director continues to serve on that day. All equity grants to non-employee directors are subject to our stock ownership policy. See “Non-Employee Director Stock Ownership Policy; Hedging and Pledging Restrictions” below.

Our Board of Directors believes the compensation of our non-employee directors is equitable, and that by paying most of the non-employee directors’ compensation as equity awards subject to our stock ownership policy, we tie the directors’ compensation to shareholder interests. The Compensation Committee periodically engages independent consultants to review the market competitiveness of the compensation paid to the non-employee directors compared to Company peers. The Compensation Committee engaged Pay Governance LLC in 2018 to help it assess non-employee director compensation for the 2018-2019 Board service year and Pay Governance LLC advised that non-employee director compensation is at the median compared to Company Peers.
.


2019 Lithia Motors, Inc. Proxy Statement | 15




Non-Employee Director Compensation Table

Non-Employee Director Compensation Table. The following table summarizes compensation paid to non-employee directors and to Sidney B. DeBoer during calendar year 2018, which represents the 2018 portion of both the 2017-2018 Board term and the 2018-2019 Board term:

Name
Fees Earned
or Paid in
Cash ($)
 
Stock
Awards
($)(1)
All Other
Compensation
($)
 
Total ($)
Sidney B. DeBoer
100,000

 
140,095

7,785

(2), (3) 
$
247,880

Thomas R. Becker
100,000

 
140,095

7,431

(2) 
$
247,526

Susan O. Cain
100,000

 
140,095

4,060

(2) 
$
244,155

Louis P. Miramontes
56,667

 
140,095


 
$
196,762

Kenneth E. Roberts
100,000

 
140,095

8,194

(2) 
$
248,289

David J. Robino
100,000

 
140,095


 
$
240,095


(1)
The amounts set forth in this column reflect the grant date fair value of all awards in 2018, including awards that did not vest in 2018. (See Note 10 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 for the valuation techniques and assumptions and other information related to our stock awards).
(2)
Amounts paid by us on behalf of our Board members for long-term care insurance premiums.
(3)
Does not include amounts paid to Mr. DeBoer under the Transition Agreement, which are described under “Certain Relationships and Transactions with Related Persons" on page 57.

The fees reflected in the column “Fees Earned or Paid in Cash” in the above table are the actual fees earned in calendar year 2018. The amounts in the “Stock Awards” column reflect the fair value of awards granted during 2018, even though not fully earned until the completion of the year of service in March 2019.

Equity incentive awards outstanding at December 31, 2018 for each non-employee director were as follows:
Name
Unvested
Stock Awards (#)
Sidney B. DeBoer
342
Thomas R. Becker
342
Susan O. Cain
342
Louis P. Miramontes
342
Kenneth E. Roberts
342
David J. Robino
342

Deferred Compensation Agreements with Non-Employee Directors. We offer our non-employee directors the opportunity to defer receipt of their compensation by entering into a Deferred Compensation Agreement with the Company. Under this agreement, participants, including the non-employee directors, who elect to defer compensation may defer receipt of all or a portion of their cash compensation and any stock award. In 2018, no director elected to defer cash compensation or stock compensation.














2019 Lithia Motors, Inc. Proxy Statement | 16




Non-Employee Director Stock Ownership Policy; Hedging
and Pledging Restrictions

We expect our non-employee directors to acquire and hold sufficient shares of our common stock to meaningfully share the risks and rewards of ownership with our shareholders. Accordingly, under our Stock Ownership Policy for Directors, non-employee directors are required to acquire and retain the net after-tax shares received as compensation until the director’s accumulated holdings have a market value equal to at least five times the base compensation paid to the director in the then-current service year. If a director ceases to comply with the policy, the director is expected to retain 50% of the net after-tax shares received upon the settlement of any equity incentive award until the stock ownership minimums are attained. In determining compliance with the policy, share ownership includes RSUs subject to time-vesting and indirect share ownership.

Our insider trading policy and our stock ownership policy for executive officers and directors specifies that they may not (1) engage in hedging transactions, including through the use of financial instruments such as prepaid variable forwards, equity swaps, collars and exchange funds or (2) hold Company securities in a margin account or otherwise pledge Company securities as collateral for a loan. In addition, securities pledged as of March 15, 2013 may continue to be pledged under existing or replacement arrangements. The number of securities that were pledged prior to such date have decreased over time. Sidney B. DeBoer is a member and the manager of Lithia Holding, which has the sole voting and investment power with respect to all of the Company’s Class B common stock; all of the 800,000 shares of Class B common stock held by Lithia Holding are pledged by Lithia Holding to secure a loan to Lithia Holding. Kenneth E. Roberts has a line of credit that is secured by the securities held in one of his brokerage accounts, including 59,775 shares of Class A common stock of Lithia; no amounts were drawn on this line of credit as of February 28, 2019. Thomas R. Becker has a line of credit that is secured by the securities held in one of his brokerage accounts, including 50,095 shares of Class A common stock of Lithia; no amounts were drawn on this line of credit as of February 28, 2019.































2019 Lithia Motors, Inc. Proxy Statement | 17



PROPOSAL NO. 1
Election of Directors

Our Board of Directors has nominated each of the following persons for election as a director:

Nominee Name
Age
Has Been a Director Since/(During)
Independent
Sidney B. DeBoer
75
1968
 
Susan O. Cain
64
2009
Yes
Bryan B. DeBoer
52
2008
 
Shauna F. McIntyre
47
 
Yes
Louis P. Miramontes
64
2018
Yes
Kenneth E. Roberts
74
2012
Yes
David J. Robino
59
2016
Yes

Our Board of Directors unanimously recommends a vote FOR each of the nominees named above.
Term

 
If elected, each nominee will hold office until the next annual meeting or until his or her successor is elected and qualified.

Director Replacement and Resignation Policy/Election by Majority Vote

 
We have no reason to believe that any of the nominees will be unable or unwilling to serve if elected. However, if any nominee should become unable or unwilling to serve, proxies may be voted for another person nominated by our Board of Directors.

Because our Board of Directors is elected by a plurality of votes, it is possible directors can be elected with less than a majority vote in favor of their election. Our Board of Directors has adopted a Director Resignation Policy to address the possibility that, in an uncontested election of directors, a director could be elected with more “withheld” votes than votes cast “for” the director. A director receiving more “withheld” votes than “for” votes must tender his or her resignation from our Board of Directors within five business days after certification of the election results. Within ninety days after receipt of such resignation, the Nominating and Governance Committee will consider the resignation offer and make a recommendation to our Board of Directors whether to accept or reject the offer to resign. Our Board of Directors will disclose its decision on a Form 8-K filed with the SEC. The Nominating and Governance Committee will not nominate for election any person who in the previous year’s election received more “withheld” votes than votes cast “for” the person. The full Director Resignation Policy is included in our Corporate Governance Guidelines which may be accessed on our website at www.lithia.com.

Proposal 4 in this proxy statement would amend the Company’s Restated Articles of Incorporation and Bylaws to require majority voting in uncontested elections of directors. See “Proposal 4: Approval of Amendments to the Restated Articles of Incorporation and Bylaws to Adopt Majority Voting for Uncontested Elections of Directors” for more information. If Proposal 4 is approved by the shareholders, majority voting will be in effect for the 2020 Annual Meeting.

Biographical Information on our Nominees

 
Our Board of Directors believes that the combination of the qualifications, skills and experiences of the nominees will contribute to an effective and well-functioning Board. Our Board of Directors and the Nominating and Governance Committee believe that individually, and as a group, the nominees possess the necessary qualifications to provide for future oversight of our business consistent with their fiduciary duties to shareholders. Included in each director nominee’s biography, above, is a description of the experience, skills and attributes of each nominee.

2019 Lithia Motors, Inc. Proxy Statement | 18



PROPOSAL NO. 2
Advisory vote on the compensation of our named executive officers,
as disclosed pursuant to Item 402 of Regulation S-K



We are asking shareholders to approve the following advisory resolution on the executive compensation reported in this proxy statement:

RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed in the Compensation Discussion and Analysis, the Summary Compensation Table and related tables, notes and narrative discussion in the Proxy Statement for the Company’s 2019 Annual Meeting of Shareholders, is approved.

The advisory vote, which is required by Section 14A of the Securities Exchange Act, is a vote to approve or disapprove the overall compensation package of our executive officers and not any one specific element of the compensation package or on the compensation received by any one person. The advisory vote is non-binding and does not overrule a decision by the Company, our Board of Directors or the Compensation Committee or create or imply any additional fiduciary duty for our officers or directors. However, the Compensation Committee and Board will review and consider the results of the advisory vote when making future decisions about executive compensation. Because we typically determine annual compensation before the advisory vote on the prior year’s compensation is cast, however, if we determine to make a change in our practices based on shareholder feedback, there may be a delay in implementing those changes.

At our 2018 Annual Meeting of Shareholders, over 98% of the advisory votes cast on the compensation of our named executive officers, as disclosed in the Compensation Discussion and Analysis, the Summary Compensation Table and related tables, notes and narrative discussion in the Proxy Statement for our 2018 Annual Meeting of Shareholders, were cast “for” that compensation. The Compensation Committee considered this shareholder approval when it determined 2019 compensation. Based on the approval and on our belief that our compensation philosophy, programs and practices in 2017 were effective in promoting our strong financial performance, we did not make material changes to the philosophy, programs or practices in 2018. The increases we made to the amount of compensation that we paid to our executives between 2017 and 2018 reflect our improved financial performance and increased responsibility and experience of our executives.

We urge shareholders to read the detailed information about our compensation philosophy and objectives included in Compensation Discussion and Analysis (“CD&A”), below, which provides context for the Summary Compensation Table and related information. As discussed in the CD&A, we believe our compensation programs align the interests of our executives and our shareholders, help us attract and retain experienced executive talent, and focus our executives on performance and achievement of our short-, mid- and long-term strategic goals and objectives. We believe the overall compensation paid in 2018 was appropriate, particularly considering our financial results in 2018.

Our Board of Directors unanimously recommends a vote FOR the advisory resolution to approve the compensation of our named executive officers.


2019 Lithia Motors, Inc. Proxy Statement | 19



Compensation Discussion and Analysis


Named Executive Officers

This section discusses our compensation philosophy and the compensation paid in 2018 to our Chief Executive Officer, Chief Financial Officer and next three highest-paid executives (named executive officers, or NEOs). The following table identifies our NEOs, the positions they hold and the year in which they became an employee. Our officers are appointed by our Board of Directors. (See “Directors, Nominees and Executive Officers” for more complete biographical and background information on our NEOs).


 
Name
 
Age
 
Current Position(s)
 
With Company Since
Bryan B. DeBoer
 
52
 
President and Chief Executive Officer
 
1989
John F. North III
 
41
 
Senior Vice President and Chief Financial Officer
 
2002
Christopher S. Holzshu
 
45
 
Executive Vice President
 
2003
Scott A. Hillier
 
55
 
Senior Vice President
 
1986
George C. Liang
 
63
 
Senior Vice President
 
2014
EXECUTIVE SUMMARY

Compensation Philosophy

Lithia’s compensation program is designed to support the Company’s vision, mission and values, and aligns incentives and rewards with the execution of our business strategy, as defined in our Annual Operating Plan. Lithia’s compensation program is designed to attract and retain high‐performing employees who drive the Company’s long‐term success. We strive to do this by providing a market‐competitive base salary and performance‐based short‐ and long‐term incentive compensation.

Vision, Mission and Values

Our Vision is to create personal transportation solutions wherever, whenever and however consumers desire and Our Mission, Growth Powered by People focuses us on our customers and team to create our competitive advantage.

Our Mission: Growth Powered by People. We are a growth company and the continued development of our team is critical to our long-term success. Our entrepreneurial culture is the foundation of our business strategy. We support independence and variation in operating models to unleash the potential of all our people. Trust in each other is key to making decisions that will be in the long‐term best interests of the Company. We strive for high customer retention and strong market share while controlling costs to yield exceptional profit performance.

Our Values guide us in serving our customers, developing our people, reaching our potential and growing our company. Working together, we create a welcoming and highly responsive environment with positive experiences that Earn Customers for Life. We are motivated by the freedom of Taking Personal Ownership for our actions and results. By innovating, remaining humble and challenging ourselves to perform better we Improve Constantly. Our enthusiasm for our customers, communities, cars, each other and our success is the catalysts for Having Fun.


2019 Lithia Motors, Inc. Proxy Statement | 20



Our Company Strategy

The Company’s strategy is to acquire under‐performing assets and create operational excellence by promoting a high‐performance culture that enables us to generate substantial cash to fuel acquisition growth. Areas that drive our financial success are:
innovation;
increasing revenues in all business lines;
capturing a greater percentage of overall new vehicle sales in our markets;
capitalizing on a used vehicle market that is approximately three times larger than the new vehicle market;
growing our service, body and parts revenues as units in operations increase;
leveraging our cost structure as revenues increase;
diversifying our franchise mix and geographic risk through acquisitions;
integrating acquired stores to achieve targeted returns;
increasing our return to investors through share price, dividends and strategic share buy‐ backs;
utilizing prudent cash management, including investing capital to produce accretive returns; and
managing our balance sheet to prepare for future expansion opportunities and to be prepared for market downturns.

Compensation Committee Responsibilities
The Compensation Committee is responsible for reviewing the compensation philosophy and policies that govern the Company’s executive compensation programs. Most importantly, the Compensation Committee is responsible for:

adopting and guiding processes for the performance and compensation management of the CEO;
recommending and guiding processes for the performance and compensation management of the executives in positions that could conceivably succeed the CEO, all for the recommendation and approval of the Board of Directors;
and
providing oversight to any other human resources actions impacting the CEO or the executives in positions that could conceivably succeed the CEO.

The Compensation Committee has oversight of the Company’s strategic goals and objectives relevant to compensation, the compensation components, performance evaluations, succession planning and related matters of all executive management. The Committee oversees the administration of the Company’s stock incentive plans, stock purchase plans, other equity incentive plans, profit sharing plans, and pension plans. The Committee is also responsible for reviewing, discussing and approving the Compensation Discussion and Analysis in the annual proxy statement the Company files with the Securities and Exchange Commission.
 
Compensation Program Risk Assessment
Our Board of Directors and the Compensation Committee are required to assess whether our compensation policies and practices and, in particular, our performance‐based compensation practices, encourage executives or other employees to take unnecessary or unreasonable risks that could threaten the long‐term value of the Company or that are reasonably likely to have a material adverse effect on the Company. Management believes that our practices adequately manage this risk because:

our executive compensation plan is benchmarked to an independent compensation survey;
we limit the amount of fixed compensation in the form of base salary based on data from our market survey;
the primary criteria we use for performance compensation components are “bottom line” measures such as pre‐tax profit and adjusted earnings per share, which we believe are less susceptible to manipulation for short‐term gain than are “top line” measures;
cash bonuses are capped;
the incentive plans for executive management have the flexibility to put weight on Company‐wide or divisional performance measures;
our cash bonus plan preserves discretion to permit the Committee to elect not to pay otherwise achieved bonus amounts for any reason;
a meaningful component of compensation is equity grants with extended vesting periods designed to ensure that our executives value and focus on the Company’s long‐term performance;
NEOs have equity positions in Lithia and are subject to stock ownership policies, which we believe increases their focus on long‐term shareholder value;
and
executive compensation is subject to our “claw‐back” policy.

2019 Lithia Motors, Inc. Proxy Statement | 21



YEAR IN REVIEW

Business Review
In 2018, we continued to build upon our three cornerstones of success: operational growth, acquisition opportunities and financial discipline. The table below highlights selected results that determined performance‐based compensation in 2018. Certain of the financial measures differ from measures calculated in accordance with generally accepted accounting principles in the United States (“GAAP”). We reconcile adjusted pretax profit and adjusted earnings per share to the most comparable GAAP measures below.
 
2018
 
2017
 
2016
Income before income taxes
$
337.5
M
 
$
347.1
M
 
$
283.5
M
Adjusted income before income taxes
$
328.2
M
 
$
344.2
M
 
$
308.6
M
Diluted net income per share
$
10.86

 
$
9.75

 
$
7.72

Adjusted diluted net income per share
$
9.98

 
$
8.39

 
$
7.42

Leveraged EBITDA
$
298.7
M
 
$
328.6
M
 
$
276.7
M
Liquidity
$
458.9
M
 
$
515.9
M
 
$
356.8
M
Debt to adjusted EBITDA
2.3 x

 
2.0 x

 
2.2 x

New vehicle unit sales
184,601

 
167,146

 
145,772

Rate for manufacturer sales responsibility attainment
106.2
%
 
109.3
%
 
110.0
%
Used retail vehicle same store unit sales increase
4.1
%
 
3.5
%
 
9.5
%
Service, body, parts same store revenue increase
3.6
%
 
5.1
%
 
8.4
%

The following tables reconcile certain reported non-GAAP measures to the most comparable GAAP measure from our Consolidated Statements of Operations (dollars in millions, except per share amounts):

 
 
Year Ended December 31, 2018
 
 
 
 
 
 
As reported
 
Disposal gain on sale of stores
 
Asset Impairment
 
Insurance Reserves
 
Acquisition Expenses
 
Tax Attribute and Federal Rate Reduction
 
Adjusted
Income before income taxes
 
$
337.5

 
$
(15.4
)
 
$
1.3

 
$
1.5

 
$
3.3

 
$

 
$
328.2

Income tax (provision) benefit
 
(71.8
)
 
4.0

 
(0.3
)
 
(0.4
)
 
(0.9
)
 
(14.8
)
 
(84.2
)
Net income
 
265.7

 
$
(11.4
)
 
$
1.0

 
$
1.1

 
$
2.4

 
$
(14.8
)
 
$
244.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income per share
 
$
10.86

 
$
(0.47
)
 
$
0.04

 
$
0.05

 
$
0.10

 
$
(0.60
)
 
$
9.98

Diluted share count
 
24.5

 
 
 
 
 
 
 
 
 
 
 
 

2019 Lithia Motors, Inc. Proxy Statement | 22



 
 
Year Ended December 31, 2017
 
 
As reported
 
Insurance Reserves
 
Acquisition expense
 
OEM Settlement
 
Disposal gain on sale of stores
 
Tax reform
 
Adjusted
Income before income taxes
 
$
347.1

 
$
5.6

 
$
5.7

 
$
(9.1
)
 
$
(5.1
)
 
$

 
$
344.2

Income tax (provision) benefit
 
(101.9
)
 
(2.2
)
 
(2.2
)
 
3.4

 
2.5

 
(32.9
)
 
(133.3
)
Net income
 
$
245.2

 
$
3.4

 
$
3.5

 
$
(5.7
)
 
$
(2.6
)
 
$
(32.9
)
 
$
210.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income per share
 
$
9.75

 
$
0.14

 
$
0.14

 
$
(0.23
)
 
$
(0.10
)
 
$
(1.31
)
 
$
8.39

Diluted share count
 
25.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2016
 
 
As
reported
 
Disposal gain on sale of stores
 
Equity-method investment
 
Legal Reserve
 
Tax attribute
 
Adjusted
Income before income taxes
 
$
283.5

 
$
(1.1
)
 
$
22.3

 
$
3.9

 
$

 
$
308.6

Income tax (provision) benefit
 
(86.4
)
 
0.4

 
(28.6
)
 
(3.2
)
 
(1.3
)
 
(119.1
)
Net income
 
$
197.1

 
$
(0.7
)
 
$
(6.3
)
 
$
0.7

 
$
(1.3
)
 
$
189.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income per share
 
$
7.72

 
$
(0.03
)
 
$
(0.25
)
 
$
0.03

 
$
(0.05
)
 
$
7.42

Diluted share count
 
25.5

 
 
 
 
 
 
 
 
 
 
 
 
2018
 
2017
 
2016
EBITDA and Adjusted EBITDA
 
 
 
 
 
 
Net income, as reported
 
$
265.7
M
 
$
245.2
M
 
$
197.1
M
Other interest expense
 
56.0

 
34.8

 
23.2

Income tax expense
 
71.8

 
101.9

 
86.4

Depreciation and amortization
 
75.4

 
57.7

 
49.4

EBITDA
 
$
468.9
M
 
$
439.6
M
 
$
356.1
M
 
 
 
 
 
 
 
Other adjustments:
 
 
 
 
 
 
Less: used vehicle line of credit interest expense
 
(2.9
)
 
(2.7
)
 
(3.7
)
Less: (gain) loss on divestitures
 
(15.4
)
 
(5.1
)
 
(1.1
)
Add: equity investment fair value adjustment
 

 

 
22.3

Add: asset impairment
 
1.3

 

 

Add: insurance reserve
 
1.5

 
5.6

 
3.9

Add: acquisition expenses
 
3.3

 
5.7

 

Less: OEM legal settlements
 

 
(9.1
)
 

Adjusted EBITDA
 
$
456.7
M
 
$
434.0
M
 
$
377.5
M
 
 
2018
 
2017
 
2016
Leveraged EBITDA
 
 
 
 
 
 
Adjusted EBITDA
 
$
456.7
M
 
$
434.0
M
 
$
377.5
M
Less: capital expenditures
 
(158.0
)
 
(105.4
)
 
(100.8
)
Free cash flow
 
$
298.7
M
 
$
328.6
M
 
$
276.7
M

2019 Lithia Motors, Inc. Proxy Statement | 23



Compensation Performance

The Company feels strongly that it should align performance compensation with objectives that the management team can control. These include objectives such as: pre‐tax profit, earnings per share, and OEM approvability.

The Company periodically assesses how CEO compensation relates to Total Shareholder Return (TSR) over historical pay periods. However, because TSR reflects many things management cannot control or influence, including interest rates, unemployment, industry sales, fuel prices and political issues, the Company does not believe it is an appropriate target measure for forward‐looking compensation objectives.


CEO 2017 Pay Alignment
The following chart shows Lithia’s CEO’s 2017 actual total direct compensation (TDC) and one‐year TSR ranking for 2017 in relation to members of Lithia’s peer group. 2017 actual total direct compensation is the most recent pay information available for the peer group. The 2017 actual TDC is comprised of base salary, actual bonus, and grant date value of equity awards. TSR reflects 1-year TSR from 12/31/16 to 12/31/17. LAD pay is aligned with performance, as TSR is at the 90th percentile, and actual TDC is at the 42nd percentile.

 
ceo2017payalignmenta02.jpg

The following chart shows the Company’s 3-year TSR in relation to the peer group through December 31, 2018.

a3yeartsrtrenda02.jpg

2019 Lithia Motors, Inc. Proxy Statement | 24



Compensation Plan Features

Compensation Governance Provisions
To align management and shareholder interests, and to mitigate any potential incentive for management to take inappropriate risks, the Company has the following policies:

Stock Ownership Policy: NEOs and Non‐NEO Vice Presidents are expected to acquire and hold shares of our Class A common stock with a market value equal to a multiple of their base salary, as indicated in the table below, within (7) seven years of service in their position. Our stock ownership policy more closely aligns the interests of our NEOs with the interests of our shareholders and exposes our NEOs to downside equity performance risk. A Stock Ownership Compliance review is performed quarterly, and a policy reminder is sent to employees on an annual basis.
Position
Multiple of Salary
Chief Executive President
5
Executive Vice President
3
Senior Vice President
2
Vice President
1

Insider Trading Policy: The policy sent to all employees defines insider trading and certain employees determined to have potential access to insider trader information are blocked from selling during predetermined closed selling periods. In addition, Section 16 employees and Directors are required to notify the Company of any trades.

Claw-backs: Compensation that we pay based on performance, including annual performance bonuses and equity compensation, is subject to a “claw-back” policy.

Negative Discretion of the Compensation Committee: The Committee has discretion to reduce cash bonus amounts even if performance levels specified in the award are attained.

CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of Bryan DeBoer, our Chief Executive Officer (the “CEO”):

We identified the median of the annual total compensation of all our employees using the annualized base salary and expected bonus, as of December 31, 2018, plus any equity awards and long-term incentives granted in 2018 for all individuals, excluding the CEO, who were employed by us during 2018 (total compensation was annualized for employees not employed for the full year). After identifying the median employee, we calculated annual total compensation for such employee using the same methodology we use for our CEO compensation.

For 2018, our last completed fiscal year:
the annual total compensation of the employee identified at median of our company (other than the CEO), was $40,944;
and the annual total compensation of the CEO was $7,615,943 (this amount assumes maximum bonus and equity potential vs. the CEO pay disclosed in the Summary Compensation table, which is the actual amount earned);
for this ratio, both employee compensation (other than our CEO) and CEO compensation were calculated using 2018 paid wages, annualized for full-time and part-time employees who did not work a full year.

Based on this information, for 2018, the ratio of the annual total compensation of Bryan DeBoer, our Chief Executive Officer, to the median of the annual total compensation of all employees was estimated to be 186 to 1.







2019 Lithia Motors, Inc. Proxy Statement | 25



Peer Groups and Pay Targeting

Peer Selection Methodology, Rationale and Comparison

Lithia benchmarks overall annual compensation for executives at the median of the most current peer group because we believe this group best represents our competition for executive talent. The peer group is reviewed each year by our Independent Compensation Consultants using a defined methodology that identifies companies reasonably similar to Lithia in terms of industry, industry profile, size, and market capitalization to revenue ratio and profit margins. Below is a list of peer groups:
Peer Group Symbol
Peer Group Name
RUSHA
Rush Enterprises, Inc.
KMX
CarMax Inc.
MUSA
Murphy USA Inc
ODP
Office Depot, Inc.
AN
AutoNation, Inc.
ABG
Asbury Automotive Group Inc.
CRMT
America's Car-Mart, Inc.
MNRO
Monro Muffler Brake, Inc.
PAG
Penske Automotive Group, Inc.
GPI
Group 1 Automotive, Inc.
HOG
Harley-Davidson, Inc.
SAH
Sonic Automotive, Inc.
ORLY
O'Reilly Automotive Inc.
AZO
AutoZone, Inc.
AAP
Advance Auto Parts Inc.
DKS
Dick's Sporting Goods Inc.




Pay Targeting Level

It is important to note that in determining executive compensation, the Compensation Committee does not solely rely on comparative data from the 2018 Peer Group. Such comparative data provides helpful market information about our peer companies, but the Compensation Committee does not target any specific positioning or percentile, nor does it use a formulaic approach, in determining executive pay levels. The Compensation Committee also utilizes other resources, including reputable compensation surveys and other available proxy and compensation data. All such comparative peer data and supplemental resources are considered, along with the Company’s pay for performance and internal parity objectives. All applicable information is reviewed and considered in aggregate, and the Compensation Committee does not place any particular weighting on any one factor.






2019 Lithia Motors, Inc. Proxy Statement | 26




Pay

Pay Mix, Performance Metric, and Goal Setting
After we establish target TDC levels for each executive officer, we allocate TDC between the following components, depending on the individual:

Base Salary
A competitive market salary that sufficiently covers a fixed income component the employee can rely on. The fixed salary is set at a level that provides the ability to attract talent and promotes long-term retention.

Performance Bonus
The bonus compensation plan is tied to quantitative performance objectives set at least annually by management and the Board of Directors. Bonus compensation is intended to reward employee contribution for attaining short‐term Company level objectives and to promote continued focus on high performance while balancing the Company’s long‐term strategic plan. Bonus objectives are set to support growth in the Company’s profitability, maximize our capital deployment strategies, and increase share value. The Company will use short and mid‐term earnings forecasts, analyst estimates, and strategic planning needs to set the profit objectives each period. We believe using metrics that promote high performance and profitable growth is critical. The Compensation Committee has positive and negative discretion to modify performance‐based awards. Management provides the Compensation Committee a quarterly review of the Bonus and Equity Attainment Pacing. The Compensation Committee also may award discretionary bonuses when an executive’s or employee’s performance merits it.
Equity Awards
A compensation tool that leverages Lithia’s public company status to offer Equity Award compensation that rewards employees for achieving Company quantitative financial performance objectives set annually by management and the Board of Directors. We believe using metrics that promote high performance and profitable growth is critical. Equity Award compensation ensures retention of key executives by using longer-term vesting periods and helps maximize our return to shareholders. We believe issuing restricted stock units rather than stock options better aligns our executive team with our shareholders because restricted stock units experience the upside as well as the downside of stock price changes. Because Lithia's stock price has been somewhat volatile, the value of stock options can significantly fluctuate. We believe this unnecessarily distracts employees and reduces their incentive to continuously improve the operations of the business whenever market prices dip below the options exercise price. In addition, issuing stock options can subject the company to an accounting expense even if the options are valueless to the grantee. Therefore, using restricted stock units seem to better instill a sense of ownership and employee perceived value.
Other Perquisites and Benefits
Additional other compensation benefits that are industry‐standard or enhance the competitiveness of compensation for key employees include a vehicle allowance, long term care assistance, long-term disability insurance, and life and accidental death and dismemberment insurance.









2019 Lithia Motors, Inc. Proxy Statement | 27




Pay Mix Rationale

The Company believes that as an employee moves into higher level positions in the Company, base pay should become a smaller component of overall TDC. Using competitive information as a guide, and after considering current position performance, succession planning and retention needs, the Company allocated pay components for its CEO in 2018 as follows. Approximately 82% of our CEO target TDC mix is performance-based, similar to the peer group.

2018 Peer Group Mix


lithiaaverageceotarget.jpgpeeraverageceotargettdca01.jpg



Tax Implications

The Company considers the effects of Section 162(m) of the Internal Revenue Code, which generally disallows the tax deduction for compensation in excess of $1 million for certain covered individuals.  As part of the enactment of the Tax Cuts and Jobs Act and the revisions to Section 162(m), a transitional provision allows for deductions of certain qualifying performance-based compensation with respect to payments made pursuant to a binding written agreement in effect on November 2, 2017. Thus, certain performance-based awards that are payable in the Company’s current year that were pursuant to a binding written agreement prior to November 2, 2017 may be subject to the previous Section 162(m) law if applicable requirements are met.

The Committee believes that shareholder interests are best served if its discretion and flexibility in awarding compensation is not restricted, even though some compensation awards may result in non-deductible compensation expenses. Therefore the Committee has approved salaries and other awards for executive officers that were not fully deductible because of Section 162(m) and, in light of the repeal of the performance-based compensation exception to Section 162(m), expects in the future to approve additional compensation that is not deductible for income tax purposes.








2019 Lithia Motors, Inc. Proxy Statement | 28




2018 Executive Compensation by Element

 

The elements of our executive compensation include: (1) base salary, (2) performance bonus, (3) performance equity awards, (4) retirement contributions and (5) other perquisites and benefits. Performance bonus, performance equity compensation and retirement benefits are determined as a percentage of the executive’s base compensation. We describe each of these elements below and explain what we paid in 2018 and why.
Name
Base Salary $
Performance Bonus
Equity Awards
Retirement Contribution
Other Perquisites & Benefits



 (Max as % of Base Salary)
 (Max as % of Base Salary)
 (as % of Prior Year Base Salary)
(as % of Base Salary)

2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
Bryan B. DeBoer
$
1,000,000

$
1,020,000

300
%
300
%
250
%
441
%
30
%
n/a
4
%
4
%
John F. North III
$
360,000

$
420,000

200
%
190
%
139
%
275
%
23
%
n/a
6
%
5
%
Christopher S. Holzshu
$
510,000

$
600,000

200
%
200
%
196
%
255
%
25
%
n/a
5
%
4
%
Scott A. Hillier
$
468,000

$
468,000

149
%
160
%
124
%
204
%
25
%
n/a
5
%
5
%
George C. Liang
$
384,000

$
400,000

148
%
160
%
91
%
146
%
20
%
n/a
7
%
5
%


Base Salary
The Compensation Committee established the 2018 base salary for our CEO based on competitive market factors, the CEO’s duties and responsibilities, comparison of relative CEO pay within the auto retail and industry peer groups mentioned above, our performance and the relative pay of our senior management team. The base salaries of all other NEOs are approved by the Compensation Committee and are based on both financial and non-financial criteria, the executives’ respective responsibilities, the relative internal pay equity among the senior executives and current market conditions, including relative pay within the industry.

Performance Bonus
In 2018, our performance bonus plan compensated executives for achieving annual performance goals. Each NEO had a maximum cash bonus potential based on a percentage of base salary ranging from 160% to 300%. The Compensation Committee set this range based on its view that the pay we offer to our NEOs for exceptional performance should be at least equal to, and for some NEOs it should be greater than, the NEO’s base salary. We calculated bonus payments by multiplying the executive’s maximum bonus level by the executive’s salary and the performance criteria achievement level. For example, if an executive’s maximum bonus level were 150% and the performance goals attained were 50% of potential, the executive’s bonus would equal 75% of the executive’s base salary (i.e., base salary multiplied by 150% then multiplied by 50%).



















2019 Lithia Motors, Inc. Proxy Statement | 29



The tables below shows 2018 performance objectives, performance targets, actual results, potential percentage achievement and actual percentage achieved for each target.

2018 Performance Objective

EPS Target (1)
% of Payout
Threshold
$6.80
25%



Target
$8.95 - $9.25
100%



Maximum
$10.50
200%
 
 
 
2018 EPS Result was $9.10 and Actual Achievement was 100%
(1) Determined using GAAP consolidated pre-tax profit excluding any non-operating transactions or disposal activities (examples: tax regulation changes, real
estate or store sale gains/losses, impairments, legal settlements, other unusual gains/losses, etc.)
Performance Bonus GAAP Pretax Income Reconciliation
 
 
Pretax Income - as reported
$
337.5
M
 
 
Adjustment for non-operating losses (gains)(1)
$
11.9
M
Proforma Items(2)
$
(9.3
)M
Pretax Income - adjusted
$
340.1
M
EPS - proforma
$
9.10

Shares used for EPS (shown in millions)
24.5

See 10-K for more detailed information
(1) 
Adjustment for non-operating losses (gains) contain real estate losses, acquisition expenses, and store disposal losses.
(2) 
Proforma items contain loss on sale of stores, lease & other reserves, capital investment loss, other and unusual gains.


 
 
Year Ended December 31, 2018
 
 
 
 
As reported
 
Disposal gain on sale of stores
 
Asset Impairment
 
Insurance Reserves
 
Acquisition Expenses
 
Legal Reserve
 
Interest Rate Fluctuations
 
Tax Attribute and Federal Rate Reduction
 
Adjusted
Income before income taxes
 
$
337.5
M
 
$
(15.1
)M
 
$
1.3
M
 
$
1.5
M
 
$
3.3
M
 
$
4.0
M
 
$
7.6
M
 
$

 
$
340.1
M
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax (provision) benefit
 
$
(71.8
)
 
$
3.9

 
$
(0.3
)
 
$
(0.4
)
 
$
(0.9
)
 
$
(1.0
)
 
$
(2.0
)
 
$
(44.9
)
 
$
(117.4
)
Net income
 
$
265.7
M
 
$
(11.2
)M
 
$
1.0
M
 
$
1.1
M
 
$
2.4
M
 
$
3.0
M
 
$
5.6
M
 
$
(44.9
)M
 
$
222.7
M
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income per share
 
$
10.86

 
$
(0.46
)
 
$
0.04

 
$
0.05

 
$
0.10

 
$
0.12

 
$
0.24

 
$
(1.85
)
 
$
9.10

Diluted share count
 
24.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*Adjustment for non-operating losses (gains) contain real estate losses, store disposal losses, asset impairments and other impairments.

Each NEO's performance bonus was based on the attainment described above except for Scott Hillier and George C. Liang. Their performance bonus were based on a combination of EPS and the attainment of assigned store performance targets. These performance targets were based on adjusted net income for those specific groups and the achievement of certain manufacturer approvability requirements for open points and acquisitions.



2019 Lithia Motors, Inc. Proxy Statement | 30



Equity Awards

 

In 2018, we awarded an aggregate of 49,931 performance and time-vesting RSUs to NEOs. The performance and time-vesting RSUs vest 33% on January 1st of the 2nd, 3rd and 4th anniversary of the award year, so that awards are fully vested on the fourth anniversary of the award date. The performance-vesting RSUs vest when the compensation committee certifies that the performance condition has been attained. The Compensation Committee determined the number of RSUs awarded to NEOs and other key employees after considering peer comparisons, the percentage of total compensation and targets based on adjusted earnings per share for 2018.

Each 2018 performance and time-vesting RSU awarded to our NEOs was contingent on us meeting specified adjusted earnings per share thresholds for 2018, adjusted as described above. The thresholds were determined based on a percentage of the high end of external guidance from analysts who cover Lithia’s stock as follows.
EPS Threshold
% of RSUs Earned
$10.50 (highest)
150.0%
$8.95 - $9.25
100.0
$6.80
50.0
$0.01 - $6.79
41.7
$0.00 or negative
0.0

For 2018, our bonus attainment EPS was $9.10, which resulted in 100% of the 2018 performance and time-vesting RSUs becoming earned. See above and in Year in Review for reconciliation of this measure to the most comparable GAAP measure.

In 2016, the Compensation Committee awarded certain key employees, including each NEO, performance-based RSUs that vest when the Company first attains annual adjusted earnings per share of $9.00. These awards range from 50% to 100% of 2015 base compensation (Bryan B. DeBoer - 100%; Christopher S. Holzshu - 80%; Scott A. Hillier - 50%; George C. Liang - 50%; John F. North III - 50%). RSUs awarded at the $9.00 target are forfeited if not earned within three years of the date of the award.

Other Perquisites and Benefits
We provide our NEOs with an vehicle allowance, insurance premiums for long term care assistance , long-term disability, life and accidental death and dismemberment on their behalf. Our NEOs are generally eligible to participate in benefit programs available to all full-time employees, including health and disability insurance, and our 401(k) plan. However, because of limitations contained in the Internal Revenue Code applicable to principal shareholders and their family members, Bryan B. DeBoer is not eligible to participate in our 2009 Employee Stock Purchase Plan.






















2019 Lithia Motors, Inc. Proxy Statement | 31



Summary Compensation Table for 2018

The following table provides certain summary information concerning compensation awarded to, earned by or paid to our NEOs for the fiscal years ended December 31, 2018, 2017 and 2016.
Name and
Principal Position
Year
Salary
Stock
Awards(1)
Non-Equity Incentive Plan Compensation
Change in Pension Value & Nonqualified Deferred Compensation Earnings(2)
All Other
Compensation(3)
Total
Bryan B. DeBoer
2018
$1,020,000
$2,844,474
$1,530,000
$22,350
$47,570
$5,464,394
President and Chief
2017
1,000,000
2,441,014
2,055,000
50,048
332,569
5,878,631
Executive Officer
2016
950,000
1,837,701
1,311,000
46,566
331,129
4,476,396
John F. North III
2018
420,000
730,061
400,000
3,593
22,347
1,576,001
Chief Financial Officer
2017
360,000
488,257
493,200
9,249
92,014
1,442,720

2016
302,500
335,849
208,725
5,487
57,681
910,242
Christopher S. Holzshu
2018
600,000
967,107
600,000
9,017
30,752
2,206,876
Executive Vice President
2017
510,000
976,425
698,700
20,441
148,137
2,353,703

2016
485,100
764,660
446,293
15,150
145,591
1,856,794
Scott A. Hillier
2018
468,000
603,991
332,691
9,150
26,510
1,440,342
Senior Vice President
2017
468,000
566,353
319,700
20,405
142,503
1,516,961
of Operations
2016
463,050
447,909
419,060
15,541
139,120
1,484,680
George C. Liang
2018
400,000
369,818
160,000
2,891
23,029
955,738
Senior Vice President
2017
384,000
341,771
238,140
8,372
103,171
1,075,454
of Operations
2016
378,000
290,029
347,760
8,142
115,954
1,139,885

(1) 
These amounts reflect the grant date fair value for awards granted under the 2013 Amended and Restated Stock Incentive Plan during each respective year. For each type of RSU award, the attainment levels used in the calculation of the grant date fair value was based on the probable outcomes at the time of grant. For a more detailed discussion of the assumptions used to determine the grant date fair values and other related information, see Notes 1 and 10 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. The table below outlines the details of these grants, including the attainment levels used to calculate the grant date fair value.
(2) 
These amounts are the above-market interest earned in the applicable year on contributions to our Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan.

 
 
 
 
Performance and Time Vesting RSU Awards
 
Long-Term Performance RSU Awards
 
 
 
 
Name
 
Year
 
Grant Date Fair Value Attainment Level
 
Maximum Attainment Level
 
Grant Date Fair Value
 
Grant Date Fair Value Attainment Level
 
Maximum Attainment Level
 
Grant Date Fair Value
 
Total Grant Date Fair Value
 
Total Grant Date Maximum Value
Bryan B. DeBoer

2018

100%

150%

$2,844,474

—%

—%


$2,844,474

$4,266,711


2017

90%

100%

2,441,014

—%

—%


2,441,014

2,712,238


2016

90%

100%

814,299

100%

100%

1,023,402

1,837,701

1,928,179
John F. North III

2018

100%

150%

730,061

—%

—%


730,061

1,095,092


2017

90%

100%

488,257

—%

—%


488,257

542,508


2016

90%

100%

172,907

100%

100%

162,942

335,849

355,060
Christopher S. Holzshu

2018

100%

150%

967,107

—%

—%


967,107

1,450,660


2017

90%

100%

976,425

—%

—%


976,425

1,084,916


2016

90%

100%

346,549

100%

100%

418,111

764,660

803,166
Scott A. Hillier

2018

100%

150%

603,991

—%

—%


603,991

905,987


2017

90%

100%

566,353

—%

—%


566,353

629,821


2016

90%

100%

198,458

100%

100%

249,451

447,909

469,960
George C. Liang

2018

100%

150%

369,818

—%

—%


369,818

554,727


2017

90%

100%

341,771

—%

—%


341,771

379,745


2016

90%

100%

86,420

100%

100%

203,609

290,029

299,631






2019 Lithia Motors, Inc. Proxy Statement | 32



(3) All Other Compensation in 2018 consisted of the following:
Name
 
Auto Allowance
 
401(k) Match
 
Insurance Premiums (a)
 
Contributions to Long-Term Incentive Plan
 
Other (b)
Total
Bryan B. DeBoer
 
$
36,000

 
$
950

 
$
5,676

 
$

 
$
4,943

$
47,570

John F. North III
 
15,000

 
950

 
4,816

 

 
4,581

25,347

Christopher S. Holzshu
 
18,000

 
950

 
4,723

 

 
7,079

30,752

Scott A. Hillier
 
15,000

 
950

 
6,121

 

 
4,438

26,510

George C. Liang
 
13,500

 
950

 
7,164

 

 
1,415

23,029


(a) Insurance premiums include amounts paid by us on behalf of the executive for short-term disability insurance, long-term disability insurance and life insurance policies.
(b) Amounts shown are for fair market values of a Company-sponsored trip in 2018.

Grants of Plan-Based Awards Table for 2018
 
 
 
Estimated Future Payouts Under Non-Equity Incentive Plan Awards
 
Estimated Future Payouts Under Equity Incentive Plan Awards (# of shares) (3)
Grant Date Fair Value of Stock and Option Awards ($) (4)
Name
Grant Date (1)
Compensation Committee Action Date
Threshold ($)
Target ($) (2)
Maximum ($)
 
Threshold (#)
Target (#)
Maximum (#)
Bryan B. DeBoer
1/1/2018
12/20/2017
382,500

1,530,000

3,060,000

 
10,730

25,751

38,627

2,844,474

John F. North III
1/1/2018
12/20/2017
100,000

400,000

800,000

 
2,754

6,609

9,914

730,061

Christopher S. Holzshu
1/1/2018
12/20/2017
150,000

600,000

1,200,000

 
3,648

8,755

13,133

967,107

Scott A. Hillier
1/1/2018
12/20/2017
93,750

375,000

750,000

 
2,278

5,468

8,202

603,991

George C. Liang
1/1/2018
12/20/2017
80,000

320,000

640,000


1,395

3,348

5,022

369,818


(1) 
The Compensation Committee establishes the performance criteria and applicable achievement percentages. (See the discussion under “Performance Bonus” above).
(2) 
See paragraph below for discussion related to Target amounts.
(3) 
Performance and time-vesting RSU award, which includes a performance condition and a continuing service condition.
(4) 
These amounts reflect the grant date fair value for awards granted under the 2013 Amended and Restated Stock Incentive Plan. The attainment level used to calculate the grant date fair value for the performance and time-vesting grants was 100% based on the probable outcome at the time of grant. For a more detailed discussion of the assumptions used to determine the grant date fair value and other related information, see Notes 1 and 10 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

The Non-Equity Incentive Plan Awards in the Grants of Plan-Based Awards Table for 2018 reflect awards under the Cash Bonus Performance Plan. The Cash Performance Bonus Plan is structured such that the total amount earned each period is tied directly to our performance for the period. To see the performance criteria used in 2018 and for additional discussion about the Performance Bonus Plan, see “Compensation Discussion and Analysis - 2018 Executive Compensation by Element- Performance Bonus” above. The performance bonus potential for each NEO is a percentage of base salary ranging from 160% to 300% (depending on position) with the maximum amount being earned if all criteria elements are satisfied at the highest level.

The Equity Incentive Plan Awards in the Grants of Plan-Based Awards Table for 2018 were awarded under our Stock Incentive Plan and are subject to forfeiture depending on whether we achieve specified performance criteria. (See Compensation Discussion and Analysis - 2018 Executive Compensation by Element - Equity Based Compensation” for the performance criteria used in 2018).











2019 Lithia Motors, Inc. Proxy Statement | 33




Outstanding Equity Awards at Year End 2018

The following table sets forth the outstanding equity awards held by our NEOs as of December 31, 2018:
Name
Grant Date
Number of Shares or Units of Stock That Have Not Vested (#)(1)
 
Market Value of Shares or Units of Stock That Have Not Vested ($)(2)
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(3)
 
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(2)
Bryan B. DeBoer
1/5/2015
4,184

(4) 
$
319,365





2/4/2016
6,086

(5) 
464,544





2/25/2016



11,274

(8) 
860,544


1/12/2017
27,162

(6) 
2,073,275





1/1/2018
25,751

(7) 
1,965,574




John F. North III
1/5/2015
739

(4) 
56,408





2/4/2016
1,292

(5) 
98,618





2/25/2016



1,795

(8) 
137,012


1/12/2017
5,433

(6) 
414,701





1/1/2018
6,609

(7) 
504,465




Christopher S. Holzshu
1/5/2015
1,742

(4) 
132,967





2/4/2016
2,590

(5) 
197,695





2/25/2016



4,606

(8) 
351,576


1/12/2017
10,865

(6) 
829,325





1/1/2018
8,755

(7) 
668,269




Scott A. Hillier
1/5/2015
1,046

(4) 
79,841





2/4/2016
1,483

(5) 
113,197





2/25/2016



2,748

(8) 
209,755


1/12/2017
6,302

(6) 
481,032





1/1/2018
5,468

(7) 
417,372




George C. Liang
1/5/2015
455

(4) 
34,730





2/4/2016
646

(5) 
49,309





2/25/2016



2,243

(8) 
171,208


1/12/2017
3,803

(6) 
290,283





1/1/2018
3,348

(7) 
255,553




(1) 
All shares are related to restricted stock units subject to time-vesting restrictions
(2) 
Assumes a stock price of $76.33, the closing price of our common stock on December 31, 2018.
(3) 
All shares are related to restricted stock units subject to performance conditions and time-vesting restrictions.
(4) 
Vests 100% on January 1, 2019.
(5) 
Vests 50% on January 1st of each year 2019 and 2020.
(6) 
Vests 33.3% on January 1st of each year 2019, 2020 and 2021.
(7) 
Vests 33.3% on January 1st of each year 2020, 2021 and 2022.
(8) 
Vests in February of the year following the fiscal year in which the Company's adjusted earnings per share meets or exceeds $9.00.









2019 Lithia Motors, Inc. Proxy Statement | 34



Stock Vested for 2018

The following table summarizes shares acquired on vesting of RSUs during 2018 for each NEO:
 
 
Stock Awards
Name
 
Number of Shares Acquired on Vesting (#)
 
Value Realized on Vesting ($) (1)
Bryan B. DeBoer

19,588


$
2,197,446

John F. North III

3,341


$
375,205

Christopher S. Holzshu

7,865


$
883,051

Scott A. Hillier

4,879


$
547,315

George C. Liang

2,364


$
262,900

(1) Equals the value of the shares acquired based on the closing price of our common stock on the vesting date.

Nonqualified Deferred Compensation for 2018

The table below reflects the contributions, earnings, withdrawals and distributions during 2018 and the account balances as of December 31, 2018 for each NEO under our Non-Qualified Deferred Compensation and Long-Term Incentive Plan.

Name
Executive Contributions in Last FY
Registrant Contributions in Last FY (1)
Aggregate Earnings in Last FY (2)
Aggregate Withdrawals/ Distributions
Aggregate Balance at Last FYE (3)
Bryan B. DeBoer
$
513,750

$

$
162,135

$

$
3,415,660

John F. North III


15,681


322,140

Christopher S. Holzshu


39,352


808,445

Scott A. Hillier


39,933


820,366

George C. Liang
412,518


55,041


1,275,127

(1) 
These amounts are reported in All Other Compensation in the Summary Compensation Table above for the last completed fiscal year.
(2)
A portion of these amounts are related to above-market earnings on compensation that is deferred and is reported in Change in Pension Value and Nonqualified Deferred Compensation Earnings in the Summary Compensation Table above.
(3)
The amounts related to Executive Contributions, Registrant Contributions and above-market earnings on compensation that is deferred was reported as compensation in the Summary Compensation Table in prior years.

Our Non-Qualified Deferred Compensation and Long-Term Incentive Plan permits us to contribute awards for participants that will have a deferred payout. Under this plan, senior executives may defer receipt of portions of their compensation (up to 50% of base salary, and 100% of variable compensation) in any given year, with all amounts deferred earning interest at an annual rate set by the Compensation Committee. (See “Compensation Discussion and Analysis - 2018 Executive Compensation by Element - Retirement Plan”).










2019 Lithia Motors, Inc. Proxy Statement | 35



Potential Payments Upon Termination
or Change in Control

Potential Payments Upon Termination of Employment

In certain circumstances, such as in connection with succession planning or the death or disability of our senior executive officers, it is appropriate to provide severance payments, accelerated vesting of RSUs and certain other limited payments to those executives.
 
Benefits payable to NEOs upon death, disability or retirement

For all RSUs granted to NEOs in 2015, 2016, 2017 and 2018 (other than the long-term performance RSUs), if the NEO becomes disabled while employed by us, the RSUs continue to vest as scheduled for so long as the NEO remains disabled. If the NEO dies (or, with respect to the RSUs granted to NEOs in 2015 or 2016, if the NEO dies on or after January 1, 2016 or January 1, 2017, respectively), or if the NEO retires after age 65 and having been employed by the Company for at least four years, a pro rata portion of the RSUs (other than any unearned long-term performance RSUs) becomes vested. The prorated portion of the RSUs that becomes vested on death or retirement is the total number of RSUs earned by the NEO based on the performance measures but not yet vested under the service requirement multiplied by a fraction, the numerator of which is the number of full months elapsed from the date of grant through the date of the NEO recipient’s death or retirement, and the denominator of which is 48. Under our Non-Qualified Deferred Compensation and Long-Term Incentive Plan, discretionary benefits contributed by us to a participant’s account fully vest upon the participant’s death or disability.

The following table sets forth the estimated benefits that would have been payable to our NEOs under the RSUs

 







and Non-Qualified Deferred Compensation and Long-Term Incentive Plan if each NEOs employment had been terminated on December 31, 2018 because of death or disability:
Name
Value of Long-Term Incentive Benefits that Would Vest

Value of Stock Awards That Would Vest

Total
Bryan B. DeBoer
$
976,714


$
1,896,519


$
2,873,233

John F. North III
172,432


400,323


572,755

Christopher S. Holzshu
405,844


741,243


1,147,087

Scott A. Hillier
397,451


438,546


835,997

George C. Liang
51,833


245,712


297,545


Potential Payments Upon Change in Control

If we are facing a potential change in control transaction and the proposed transaction would likely negatively affect one or more of our senior executives, we believe it is risky to assume that those senior executives will work against their financial interest, even if the proposed transaction would be in the best interest of our shareholders. We believe that, in such case, our executives should not be motivated by financial self-interest but rather should be appropriately compensated if the completion of the transaction results in a loss of their job. Accordingly, we believe that providing "double-trigger" severance payments, accelerating the vesting of RSUs and certain other limited payments are an appropriate means of achieving alignment between the interests of our senior executives and our shareholders in the context of a potential transaction that would result in a change in control.













2019 Lithia Motors, Inc. Proxy Statement | 36



Change in Control Agreements

We are party to double-trigger Change in Control Agreements with Bryan B. DeBoer, Christopher S. Holzshu, Scott A. Hillier, George C. Liang and John F. North III. Under those agreements, if, after a change in control, the executive is terminated without cause or resigns for good reason, each as defined below, we will pay the executive:

Employee
Title
Salary
Bonus
Time Vested RSU
1-Year Performance RSUs
Long-term Performance RSUs
Bryan B. DeBoer
President/CEO
24 months
2 years
Accelerated vesting
Accelerated vesting based on previous 3 years average
Accelerated vesting at highest level
John F. North III
Sr Vice President CFO
24 months
2 years
Accelerated vesting
Accelerated vesting based on previous 3 years average
Accelerated vesting at highest level
Christopher S. Holzshu
Exec Vice President
24 months
2 years
Accelerated vesting
Accelerated vesting based on previous 3 years average
Accelerated vesting at highest level
Scott A. Hillier
Sr Vice President LAD Ops
24 months
2 years
Accelerated vesting
Accelerated vesting based on previous 3 years average
Accelerated vesting at highest level
George C. Liang
Sr Vice President DCH Ops
24 months
2 years
Accelerated vesting
Accelerated vesting based on previous 3 years average
Accelerated vesting at highest level

Continuing Change in Control Benefits

 
Continuing long-term care insurance premiums for 24 months after the separation date; and
Continuing health insurance benefits until the earlier of (a) 18 months after the separation date, (b) the full COBRA period required by law or (c) when the executive becomes eligible for employer-sponsored health insurance from a subsequent employer.

The Change in Control Agreements also contain non-solicitation, non-competition and non-disparagement provisions, but (i) those provisions are dependent on the executive electing to receive the change in control benefits identified above and (ii) the Company’s remedy if the executive violates the non-competition provisions is limited to causing the executive to forfeit profit sharing or other bonus compensation that has not yet been paid to the executive, excluding any equity awards awarded before January 1, 2016. If applicable, the non-solicitation and non-competition provisions are effective for two years following the date of the executive’s separation from service with us. If applicable, the non-disparagement provision is effective for three years from that date. The Change in Control Agreements also contain provisions regarding non-disclosure (for three years from the date of the executive’s separation from service) and assignment of interest in all creative works that are not dependent on the executive receiving any change in control benefits under the agreement.

Under the Change in Control Agreements:

A “Change in Control” occurs if: (A) the Company merges or consolidates with another entity and, as a result, less than 50% of the combined voting power of the resulting entity immediately after the merger or consolidation is held by persons who were the holders of the Company’s voting securities immediately before the merger or consolidation; (B) any person, entity, or group of persons or entities, other than through merger or consolidation, acquires 50% or more of the total fair market value or total voting power of the Company’s outstanding stock (excluding such a change through the transfer of the Company’s outstanding stock or interests in Lithia Holding to the Sidney B. DeBoer Trust or the election of Bryan DeBoer or the Sidney B. DeBoer Family Trust as the manager of Lithia Holding) or acquires substantially all of the Company’s assets; (C) any one

2019 Lithia Motors, Inc. Proxy Statement | 37




person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company possessing 50% or more of the total

voting power of the stock of the Company (excluding such a change through the transfer of the Company’s outstanding stock or interests in Lithia Holding to the Sidney B. DeBoer Trust or the election of the Sidney B. DeBoer Family Trust as the manager of Lithia Holding); or (D) a majority of the members of the Company’s Board of Directors are removed from office by a vote of the Company’s shareholders over the recommendation of our Board or replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s Board of Directors before the date of the appointment or election;

“Cause” for termination of employment means any one or more of the following: (A) willful misfeasance, gross negligence or conduct involving dishonesty in the performance of the executive’s duties, as determined by our Board of Directors; (B) conviction of a crime in connection with the executive’s duties or any felony; (C) conduct significantly harmful to the Company, as reasonably determined by our Board of Directors, including but not limited to intentional violation of law or of any significant policy or procedure of the Company; (D) refusal or failure to act in accordance with a stipulation, requirement or directive of our Board of Directors (provided such directive is lawful); or (E) failure to faithfully or diligently perform any of the duties of the executive’s employment which are specified in the Change in Control Agreement, articulated by our Board of Directors, or are usual and customary duties of the executive’s employment if the executive has not corrected the problem or formulated a plan for its correction with our Board (if such failure is not susceptible to immediate correction) within 30 days after notice to the executive; and

“Good Reason” for an executive’s resignation means (A) any one or more of the following occurs without the executive’s consent: (1) a material diminution of the executive’s base compensation (unless consistent with an across-the-board pay reduction for all senior management and not in excess of 20%); (2) a material change in the geographic location at which the executive must perform services for the Company; (3) a material diminution in the executive’s authority, duties or responsibilities, or (4) any action or inaction by the Company that constitutes a material breach of the Change in Control Agreement; (B) the executive provides notice to the Company of the existence of the condition within 90 days of the initial existence of the condition; (C) the Company has 30 days following receipt of such notice to remedy the condition and fails to do so; and (D) the executive resigns within twelve months of such event occurring. For purposes of clause (A)(3) of the previous sentence, whether a material diminution in the executive’s authority has occurred shall be determined in part by comparing the authority and positions of the persons to whom the executive directly reports immediately prior to the Change in Control or the announcement of the Change in Control with the authority and positions of the persons to whom the executive directly reports immediately after the claimed diminution in the executive’s authority. For example, if the executive was the CEO of the Company before the Company was acquired by a competing business, a material diminution in the CEO’s authority would include, but not be limited to, the CEO not serving as the CEO of the consolidated competing business after its acquisition of the Company.

Notwithstanding the provision for change in control benefits in the Change in Control Agreements, each Change in Control Agreement contains a provision stating that if any benefit payable by us to the executive, including, without limitation, the change in control benefits specified in the agreement, would constitute an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code, those benefits shall be reduced to the largest amount that will result in no portion of the benefits being subject to the excise tax imposed by Section 4999 of the Internal Revenue Code. While the executive may select which particular benefits will be reduced to comply with this provision, the determination of the amount of reduction in the benefits required is made by mutual agreement of us and the executive and, if no agreement is possible, by our independent registered public accountants.

Non-Qualified Deferred Compensation and Long-Term Incentive Plan
Under our Non-Qualified Deferred Compensation and Long-Term Incentive Plan, discretionary benefits contributed to a participant’s account by us fully vest upon a change in control, as defined under Code Section 409A or Treasury Regulations issued thereunder, even if the NEO’s employment is not terminated. Vested discretionary benefits are paid to a participant in an annual installment method over ten years.

2019 Lithia Motors, Inc. Proxy Statement | 38




Quantitative Disclosure of Payments Upon Termination or Change in Control
The following table provides quantitative disclosure of estimated payouts to NEOs assuming a change in control and associated triggering events occurred under the Change in Control Agreements and provisions that existed on December 31, 2018, and the price per share of our common stock is the closing market price on that date. The amounts listed in the table below are in addition to benefits generally available to our employees upon termination of employment, such as distributions from the 401(k) plan and accrued vacation.

Name
 
Severance Payments (1)
 
Severance Related Benefits (2)
 
Value of Stock Awards That Would Vest (3)
 
Value of Long-Term Incentive Benefits that Would Vest (4)
 
Additional Payment under Cash Incentive Plan for 2018 (5)
 
Total
Bryan B. DeBoer
 
$
2,040,000


$
21,213


$
5,683,303


$
976,714


$
1,530,000


$
10,251,230

John F. North III
 
840,000


8,976


1,211,204


172,432


400,000


2,632,612

Christopher S. Holzshu
 
1,200,000


23,280


2,179,832


405,844


600,000


4,408,956

Scott A. Hillier
 
936,000


17,494


1,301,198


397,451


417,309


3,069,452

George C. Liang
 
800,000


36,676


801,083


51,833


480,000


2,169,592


(1) 
Payable in 24 monthly installments.
(2) 
Based on current cost of providing 18 months (the full COBRA period) of COBRA benefits for our NEOs.
(3) 
Payable by delivery of shares of Lithia stock immediately following a change in control.
(4) 
Payable in equal annual installments over 10 years. The value of the long-term incentive is based on the unvested value of those benefits, calculated as of December 31, 2018 and would be payable even if the NEO’s employment was not terminated.
(5) 
Payable in a lump sum immediately following a change in control. Amounts are in addition to amounts reported in the Summary Compensation Table under “Non-equity Incentive Plan.”


Compensation Committee Report

The Committee has reviewed and discussed the Compensation Discussion and Analysis, included elsewhere in this proxy statement, with management, and, based on such review and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference in Lithia’s Annual Report on Form 10-K.

Submitted by the Compensation Committee of the Board of Directors:

David J. Robino (Chair)
Thomas R. Becker
Susan O. Cain
Louis P. Miramontes



Compensation Committee Interlocks
and Insider Participation

The following directors served on the Committee during 2018: Thomas R. Becker, Susan O. Cain, Louis P. Miramontes and David J. Robino, none of whom was a Company officer or employee during 2018, was formerly a Company officer, or had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K. During 2018, none of our executive officers served as a member of a board of directors or as a member of a compensation committee of any entity that has one or more executive officers serving as a member on our Board or any committee of our Board.


2019 Lithia Motors, Inc. Proxy Statement | 39



PROPOSAL NO. 3
Approval of Amendment to the Company's Bylaws to
Provide Shareholders with a "Proxy Access" Right
    

We are asking our shareholders to approve so-called “proxy access” amendments to our Bylaws. Proxy access allows eligible shareholders to include their director nominees in our proxy materials for our annual meetings of shareholders, along with director nominees nominated by our Board of Directors.

Background

In connection with its annual review of the Company’s corporate governance practices, our Board of Directors, with the advice and support of the Nominating and Governance Committee, has decided to implement proxy access through an amendment to our Bylaws as set forth in our proposed Amended and Restated Bylaws, which are attached to this proxy statement as Appendix 1 (the “Proxy Access Amendments”). The Proxy Access Amendments will become effective only if they are approved by a majority of the votes cast at the Annual Meeting.

Our Board of Directors believes that implementation of proxy access in the manner set forth in the Proxy Access Amendments will provide meaningful rights to our shareholders while ensuring that the rights are used in a responsible manner, and believes that the Proxy Access Amendments are in the best interests of the Company and our shareholders.

Our Board of Directors recommends a vote FOR the approval of the Proxy Access Amendments.

If the Proxy Access Amendments are approved by our shareholders at the Annual Meeting, the Proxy Access Amendments will become effective upon such approval. If the Proxy Access Amendments are approved by our shareholders, proxy access will be available for use beginning with our 2020 Annual Meeting.

Description of the Proxy Access Amendments

The following description is only a summary and is qualified in its entirety by reference to the complete text of the Proxy Access Amendments as set forth in our proposed Amended and Restated Bylaws, which are attached to this Proxy Statement as Appendix 1. We urge you to read Appendix 1 in its entirety before casting your vote.

Shareholder Eligibility to Nominate Proxy Access Nominees

Subject to certain conditions and procedures as set forth in more detail in the Proxy Access Amendments, a shareholder, or group of up to 20 shareholders, that has owned 3% or more of the outstanding shares of the Company entitled to vote in the election of directors continuously for at least three years would be permitted to include a specified number of director nominees and a supporting statement (up to 500 words in support of each nominee’s election) in our proxy materials for an annual meeting of shareholders. Two or more funds that are: (i) under common management and investment control; (ii) under common management and funded primarily by the same employer; or (iii) a group of investment companies (as defined under the Investment Company Act of 1940) will be counted as one shareholder for purposes of the 20-shareholder group limit. No person may be a member of more than one group of shareholders constituting an eligible shareholder with respect to any annual meeting of shareholders.

Calculation of Qualifying Ownership

To ensure that the interests of shareholders seeking to include proxy access nominees in our proxy materials are aligned with those of our other shareholders, a shareholder would be deemed to own only those shares of our common stock as to which the shareholder possesses both (i) the full voting and investment rights pertaining to such shares and (ii) the full economic interest in (including the opportunity for profit and risk of loss on) such shares. The following shares would not count as “owned” shares for purposes of determining whether the ownership threshold has been met:

shares sold by the shareholder or any of its affiliates in any transaction that has not been settled or closed;
shares borrowed by the shareholder or any of its affiliates for any purpose or purchased by the shareholder or any of its affiliates pursuant to an agreement to resell;

2019 Lithia Motors, Inc. Proxy Statement | 40



shares that were entered into short positions or otherwise sold short; or
shares subject to any option, warrant, forward contract, swap, contract of sale, other derivative, or similar agreement entered into by the shareholder or any of its affiliates, whether any such instrument or agreement is to be settled with shares or with cash based on the notional amount or value of our outstanding shares, in any such case which instrument or agreement has, or is intended to have, the purpose or effect of (i) reducing in any manner, to any extent or at any time in the future, such shareholder’s or any of its affiliates’ full right to vote or direct the voting of any such shares or (ii) hedging, offsetting or altering to any degree gain or loss arising from the full economic ownership of such shares by such shareholder or any of its affiliates.

A shareholder will be deemed to “own” shares held in the name of a nominee or other intermediary so long as the shareholder retains the right to instruct how such shares are voted with respect to the election of directors and possesses the full economic interest in such shares. A shareholder’s ownership of shares will also be deemed to continue during any period in which the shareholder has (i) delegated any voting power by means of a proxy, power of attorney or other instrument or arrangement that is revocable at any time by the shareholder or (ii) loaned such shares, provided that the shareholder has the power to recall such loaned shares on not more than five business days’ notice and has recalled such loan shares promptly after being notified that any of its nominees will be included in the Company’s proxy statement, and the shareholder holds the recalled shares through the annual meeting.

Maximum Permitted Number of Proxy Access Nominees

The maximum number of proxy access nominees submitted by all eligible shareholders that the Company would be required to include in our proxy materials with respect to an annual meeting of shareholders shall not exceed 20% of the number of directors in office as of the last day on which a notice of proxy access nomination may be delivered to the Company. This maximum permitted number of proxy access nominees will be reduced as follows:

if one or more vacancies for any reason occurs on the Board of Directors after the nomination deadline and before the date of the annual meeting of shareholders and the Board of Directors resolves to reduce the size of the Board of Directors in connection therewith, the maximum permitted number of proxy access nominees shall be calculated based on the reduced size of the Board of Directors; and
any director in office as of the nomination deadline who was included in the Company’s proxy statement as a shareholder nominee for any of the three preceding annual meetings and whom the Board of Directors decides to nominate for election to the Board of Directors will be counted against the maximum permitted number of proxy access nominees.
 
Further, the Company would not be required to include any proxy access nominees in its proxy materials for any annual meeting of shareholders for which the Company receives notice that a shareholder intends to nominate one or more persons for election to the Board pursuant to the Company’s advance notice provisions set forth in Section 1.3 of our Bylaws.

Procedure for Selecting Proxy Access Nominees if Maximum Permitted Number is Exceeded

Any shareholder submitting more than one nominee for inclusion in the Company’s proxy statement shall rank such nominees based on the order in which the shareholder desires such nominees to be selected for inclusion in the Corporation’s proxy statement in the event that the total number of nominees submitted by shareholders pursuant to the proxy access procedure exceeds the maximum permitted number. In the event that the number of nominees submitted by shareholders pursuant to the proxy access procedure exceeds the maximum permitted number, the highest ranking nominee who meets the applicable eligibility requirements from each nominating shareholder will be selected for inclusion in the Company’s proxy statement until the maximum permitted number is reached, going in order of the amount (largest to smallest) of shares of the Company’s capital stock each nominating shareholder disclosed as owned in its nomination notice. If the maximum permitted number is not reached after the highest ranking nominee who meets the applicable requirements from each nominating shareholder has been selected, then the next highest ranking nominee who meets the applicable requirements from each nominating shareholder will be selected for inclusion in the Company’s proxy statement, and this process will continue as many times as necessary, following the same order each time, until the maximum permitted number is reached.

Deadline for Submitting Proxy Access Nominees

In order to provide adequate time for the Board to assess proxy access nominees, requests to include such nominees in our proxy materials must be received no earlier than 150 days and no later than 120 days before the first anniversary of the mailing date of our definitive proxy statement for the prior year’s annual meeting of shareholders, subject to certain adjustments. If the Proxy Access Amendments are approved by our shareholders at the Annual Meeting, eligible shareholders may submit proxy access nominees for

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inclusion in our proxy materials for the 2020 annual meeting of shareholders no earlier than October 13, 2019 and no later than November 12, 2019.

Information Required by All Nominating Shareholders

Each shareholder seeking to include a proxy access nominee in our proxy materials would be required to provide certain information to the Company, including, but not limited to the following:

one or more written statements from the record holder of the shares (and from each intermediary through which the shares are or have been held during the requisite three-year holding period) verifying that, as of a date within seven calendar days prior to the date the nomination notice is delivered to or received by the Company, the relevant shareholder owns, and has owned continuously for the preceding three years, the required number of shares;
the written consent of each of such shareholder’s nominees to be named in the Company’s proxy statement, and form of proxy and ballot, as a nominee and, if elected, to serve as a director;
a copy of the Schedule 14N (or any successor form) relating to each shareholder nominee that has been filed with the Securities and Exchange Commission as required by Rule 14a-18 under the Securities Exchange Act;
in the case of a nomination by a group of shareholders that together is a nominating shareholder: (1) documentation satisfactory to the Company demonstrating that a group of funds qualifies pursuant to the criteria set forth in our Bylaws to be treated as one shareholder or person for purposes of the proxy access provisions, and (2) the designation by all group members of one group member that is authorized to act on behalf of all members of the nominating shareholder group with respect to the nomination and matters related thereto, including withdrawal of the nomination;
if desired, a supporting statement;
for each nominee included in the shareholder’s notice, a Shareholder Nominee Agreement as described below;
the nominating shareholder’s agreement to provide:
within five business days after the record date for the meeting, written statements from the record holder and intermediaries verifying the nominating shareholder’s continuous ownership of the required number of shares through the record date, and
immediate notice if the nominating shareholder ceases to own any of the required number of shares prior to the date of the applicable annual meeting of shareholders.

Nominating shareholders would also be required to make certain representations to and agreements with the Company, including, but not limited to, the nominating shareholder’s representation and agreement that the nominating shareholder (including each member of any group of shareholders that together is a nominating shareholder):

satisfies, and intends to continue to satisfy, the eligibility requirements described in the proxy access provisions of our Bylaws through the date of the annual meeting;
acquired the required number of shares in the ordinary course of business and not with the intent to change or influence control of the Company, and does not presently have such intent;
has not nominated and will not nominate for election to the Board of Directors at the meeting any person other than the nominee(s) being nominated pursuant to the proxy access provisions of our Bylaws;
has not engaged and will not engage in, and has not and will not be, a “participant” in another person’s “solicitation” within the meaning of Rule 14a-1(l) under the Securities Exchange Act in support of the election of any individual as a director at the meeting other than its nominee(s);
will not distribute to any shareholder any form of proxy for the meeting other than the form distributed by the Company; and
has provided and will provide facts, statements, and other information in all communications with the Company and its shareholders that are or will be true and correct in all material respects and do not and will not omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

The nominating shareholder would be required to provide a representation and agreement that each shareholder nominee:

if elected, his or her membership on the Board of Directors would not violate the Company’s Articles of Incorporation, the listing standards of the stock exchange on which shares of the Company’s capital stock are listed, or any applicable state or federal law, rule, or regulation;
does not have any direct or indirect relationship with the Company that would cause the nominee to be deemed not independent pursuant to the independence requirements, including the committee independence requirements, set forth in the listing standards of the stock exchange on which shares of the Company’s capital stock are listed, any applicable rules of the

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SEC, and any publicly disclosed standards used by the Board of Directors in determining and disclosing the independence of the directors;
is a “non-employee director” for the purposes of Rule 16b-3 under the Exchange Act (or any successor rule);
is an “outside director” for the purposes of Section 162(m) of the Internal Revenue Code (or any successor provision);
is not and has not been subject to: (1) any event specified in Item 401(f) of Regulation S-K under the Securities Act, or (2) any order of the type specified in Rule 506(d) of Regulation D under the Securities Act, without reference to whether the event is material to an evaluation of the ability or integrity of such nominee;
meets the director qualifications set forth in the Company’s corporate governance guidelines or any other policy or guidelines applicable to independent directors; and
has not been, within the past three years, an officer or director of a competitor, as defined in Section 8 of the Clayton Antitrust Act of 1914.

Each nominating shareholder would be required to provide an executed agreement, in form deemed satisfactory to the Company, pursuant to which the shareholder (including in the case of a group, each shareholder in that group that comprises the nominating shareholder) agrees:

to comply with all applicable laws, rules, regulations and listing standards of the stock exchange on which shares of the Company’s capital stock are listed in connection with the nomination, solicitation and election;
to file any written solicitation or other communication with the Company’s shareholders relating to one or more of the Company’s directors or director nominees or any shareholder nominee with the Securities and Exchange Commission, regardless of whether any such filing is required under any rule or regulation or whether any exemption from filing is available for such materials under any rule or regulation;
to assume all liability stemming from an action, suit or proceeding concerning any actual or alleged legal or regulatory violation arising out of any communication by the nominating shareholder or any of its nominees with the Company, its shareholders or any other person in connection with the nomination or election of directors, including, without limitation, the nomination notice;
to indemnify and hold harmless (jointly and severally with all other relevant shareholders, in the case of a group of shareholders that together is a nominating shareholder) the Company and each of its directors, officers, and employees individually against any liability, loss, or damages in connection with any threatened or pending action, suit, or proceeding, whether legal, administrative, or investigative, against the Company or any of its directors, officers, or employees arising out of any nomination submitted by the shareholder;
in the event that any information included in the nomination notice or any other communication by the shareholder (including with respect to any shareholder included in a group constituting a nominating shareholder) with the Company, its shareholders or any other person in connection with the nomination or election ceases to be true and accurate in any material respect (or omits a material fact necessary to make the statements made not misleading), to promptly (and in any event within 48 hours of discovering such misstatement or omission) notify the Company and any other recipient of such communication of the misstatement or omission in such previously provided information and of the information that is required to correct the misstatement or omission; and
in the event that the nominating shareholder (including with respect to any shareholder included in a group constituting a nominating shareholder) has failed to continue to satisfy the applicable eligibility requirements described in, to promptly notify the Corporation.

Shareholder Nominee Agreement

Each shareholder nominee must provide, for inclusion in the nomination notice, an executed agreement, in a form deemed satisfactory to the Company, providing that such nominee agrees:

to provide to the Company such other information and certifications, including completion of the Company’s director nominee questionnaire, as the Company may reasonably request;
at the reasonable request of the Board of Directors, any committee or any person employed by the Company, to meet with the Board of Directors, any committee or any person employed by the Company to discuss matters relating to the nomination of the nominee to the Board of Directors, including the information provided by the nominee to the Company in connection with the nomination and the nominee’s eligibility to serve as a member of the Board of Directors;
that the nominee has read and agrees, if elected, to comply with all of the Company’s corporate governance, conflict of interest, confidentiality, and stock ownership and trading policies and guidelines, and any other Company policies and guidelines applicable to directors, and understands that any material breach of these by a director may constitute cause for

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removal from the Board of Directors, without limiting any other causes for removal under the Company’s Articles of Incorporation, Bylaws or otherwise under law; and
that the nominee is not and will not become a party to certain compensatory and voting arrangements with third parties.    

Shareholder nominees will also be required to:
complete, sign, and submit all questionnaires required of directors or director nominees within five business days of receipt of each such questionnaire from the Company; and
provide within five business days of the Company’s request additional information as the Company determines may be necessary to permit the Board of Directors to determine whether the nominee meets the requirements of the proxy access provisions of our Bylaws or the Company’s requirements with regard to director qualifications and policies and guidelines applicable to directors, including whether:
the nominee is independent under the Company’s independence standards,
the nominee has any direct or indirect relationship with the Company that has not been deemed categorically immaterial pursuant to the Company’s corporate governance guidelines or any other policy or guidelines applicable to directors, and
the nominee is not and has not been subject to: (1) any event specified in Item 401(f) of Regulation S-K under the Securities Act, or (2) any order of the type specified in Rule 506(d) of Regulation D under the Securities Act.

Proxy Access Nominee Eligibility

The Company would not be required to include a proxy access nominee in our proxy materials if, among other things:

if the shareholder who has nominated the nominee has nominated for election to the Board of Directors at the meeting any person other than pursuant to the proxy access procedures, or has or is engaged in, or has been or is a “participant” in another person’s, “solicitation” within the meaning of Rule 14a-1(l) under the Securities Exchange Act in support of the election of any individual as a director at the meeting other than its nominee(s);
if the Company has received a notice (whether or not subsequently withdrawn) that a shareholder intends to nominate any candidate for election to the Board of Directors pursuant to the advance notice requirements for shareholder nominees for directors in our Bylaws;
who is not independent under the Company’s independence standards;
whose election as a member of the Board of Directors would violate or cause the Company to be in violation of its Bylaws, Articles of Incorporation, corporate governance guidelines, code of business conduct and ethics, or other document setting forth qualifications for directors, the listing standards of the stock exchange on which shares of the Company’s capital stock are listed, or any applicable state or federal law, rule, or regulation;
if the nominee is or becomes a party to certain agreements with third parties with respect to compensation or voting;
if the nominee has previously served on the Board of Directors and has been removed from the Board of Directors for cause pursuant to the Company’s Bylaws, Articles of Incorporation or otherwise under law;
who is or has been, within the past three years, an officer or director of a competitor, as defined in Section 8 of the Clayton Antitrust Act of 1914;
who is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses) or has been convicted in such a criminal proceeding within the past ten years;
who is subject to any order of the type specified in Rule 506(d) of Regulation D under the Securities Act; or
if the nominee or the applicable shareholder has provided information to the Company in respect of such nomination that was untrue in any material respect or omitted to state a material fact necessary in order to make the statement made, in light of the circumstances under which they were made, not misleading or shall have breached its or their agreements, representations, undertakings, or obligations under the proxy access provisions of our Bylaws.

Restrictions on Re-Nominations

Any proxy access nominee who is included in our proxy materials but either (i) subsequently withdraws from or becomes ineligible or unavailable for election at the applicable annual meeting, or (ii) does not receive a number of votes cast in favor of his or her election at least equal to 25% of the shares present in person or represented by proxy at the annual meeting and entitled to vote on the nominee’s election, will be ineligible to be a proxy access nominee for the following annual meeting.




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Vote Required

The affirmative vote of a majority of the outstanding shares of our common stock present in person or represented by proxy and voting on the proposal is required to approve this proposal.

Our Board of Directors recommends that you vote FOR approval of the amendment to our Bylaws to provide shareholders with a “proxy access” right.

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PROPOSAL NO. 4
Approval of Amendments to the Restated Articles of Incorporation and Bylaws
to Adopt Majority Voting for Uncontested Elections of Directors

Oregon law requires that elections of directors of Oregon corporations be determined by a plurality of the votes cast by the shareholders entitled to vote unless a corporation’s articles of incorporation impose some other standard. Under this plurality voting standard, director nominees receiving the highest number of “FOR” votes will be elected, regardless of the number of votes withheld. At the Annual Meeting, the existing plurality voting standard will continue to apply.

Shareholders are being asked at this Annual Meeting to approve and adopt an amendment to our Restated Articles of Incorporation to replace the plurality voting standard with a majority voting standard for uncontested elections of directors. If approved, this proposal would amend Article IV, Section 1 of our Restated Articles of Incorporation to establish majority voting for uncontested elections of directors beginning with the 2020 annual meeting of shareholders. As a result, all director nominees in uncontested elections would be required to receive a number of “FOR” votes representing at least a majority of votes cast in the election. If such a director nominee fails to receive “FOR” votes representing at least a majority of votes cast and is an incumbent director, the Restated Articles of Incorporation would provide that the director continue to serve until the earliest of (i) 180 days following certification of the election results, (ii) the date upon which the Board of Directors appoints a replacement director, and (iii) the date of the incumbent director’s resignation. Following the election the Nominating and Governance Committee would then be charged with making a recommendation to the Board of Directors about filling the vacancy, and the Board of Directors would act on the Nominating and Governance Committee’s recommendation within 180 days of the certification of the election results.

In contested elections where the number of nominees exceeds the number of directors to be elected, the plurality voting standard would continue to apply. The majority voting standard would not apply to vacancies on the Board (including a vacancy resulting from an increase in the number of directors) filled by a vote of the Board of Directors. This summary of the proposed amendment to our Restated Articles of Incorporation is qualified in its entirety by reference to the text of the proposed amendment attached as Appendix 2 to this proxy statement.