UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.          )

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BOOZ ALLEN HAMILTON HOLDING CORPORATION

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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Notice of
Annual Meeting
of Stockholders
and Proxy

Statement

August 10, 2011

 

 

Booz Allen Hamilton Holding Corporation
8283 Greensboro Drive
McLean, Virginia 22102

 

 

July 1, 2011

 

Dear Stockholder:

 

You are cordially invited to attend our annual meeting of stockholders to be held at 8:00 a.m. (EDT) on August 10, 2011, at The John C. Newman Auditorium, located in our offices at 8283 Greensboro Drive, McLean, VA 22102. Enclosed with this proxy statement are your proxy card, the 2011 annual report to stockholders and the 2011 annual report on Form 10-K.

 

Your vote is important. Whether you plan to attend the annual meeting or not, you may access electronic voting via the Internet or the automated telephone voting feature, both of which are described on your enclosed proxy card, or you may sign, date and return the proxy card in the envelope provided. If you plan to attend the annual meeting you may vote in person.

 

Registration and seating will begin at 7:30 a.m. Each stockholder will be asked to sign an admittance card and may be asked to present a valid picture identification. Stockholders holding stock in brokerage accounts will need to bring a copy of a brokerage statement reflecting stock ownership as of the June 21, 2011 record date. Cameras and recording devices will not be permitted at the meeting.

 

On behalf of the Board of Directors, I want to thank you for your support of Booz Allen Hamilton.

 

Sincerely,

 

 

Ralph W. Shrader, Ph.D.
Chairman, Chief Executive Officer and President

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
OF BOOZ ALLEN HAMILTON HOLDING CORPORATION

 

 

CG Appleby

Executive Vice President, General Counsel

and Secretary

 

July 1, 2011

 

TABLE OF CONTENTS TO PROXY STATEMENT

 

 

The Board of Directors is soliciting proxies to be used at the annual meeting of stockholders to be held on August 10, 2011, beginning at 8:00 a.m. (EDT) at The John C. Newman Auditorium, located in our offices at 8283 Greensboro Drive, McLean, VA 22102. This proxy statement and the accompanying materials are being mailed to stockholders beginning July 1, 2011.

 

We will bear all costs of soliciting proxies. Pursuant to rules adopted by the Securities and Exchange Commission, or SEC, we have elected to deliver a notice of Internet availability of proxy materials to stockholders and provide Internet access to those proxy materials. Stockholders may obtain paper copies of the proxy materials free of charge by following the instructions provided in the notice of Internet availability of proxy materials.

 

Unless the context otherwise indicates or requires, as used in this proxy statement, references to: (i) the “Company,” “we,” “us,” “our” or our “company” refer to Booz Allen Hamilton Holding Corporation, its consolidated subsidiaries and predecessors; (ii) “Booz Allen Holding” refers to Booz Allen Hamilton Holding Corporation exclusive of its subsidiaries; (iii) “Booz Allen Hamilton” refers to Booz Allen Hamilton Inc., our primary operating company and a wholly-owned subsidiary of Booz Allen Holding; (iv) “our Board” or “the Board” means the Board of Directors of the Company; (v) “stockholder” means holders of our common stock; (vi) “fiscal,” refers to our fiscal years ended March 31 and (vii) “you,” “your,” “yours” or other words of similar import in this proxy statement refers to stockholders entitled to vote on the matters to be presented at the annual meeting.

 

At the annual meeting, stockholders will act upon the matters set forth in the notice of meeting, including the election of directors and the ratification of the selection of the Company’s independent registered public accounting firm. The Company’s senior management will also present information about the Company’s performance during fiscal 2011 and will answer questions from stockholders.

 

Holders of the following classes of the Company’s common stock are entitled to vote at the annual meeting: Class A common stock, Class C restricted common stock and Class E special voting common stock. On June 21, 2011, 123,442,195, 1,900,630 and 12,348,860 shares of our Class A common stock, Class C restricted common stock and Class E special voting common stock, respectively, were outstanding.

 

The Board of Directors has established the record date for the annual meeting as June 21, 2011. Only holders of record of the Company’s Class A common stock, Class C restricted common stock and Class E special voting common stock at the close of business on the record date are entitled to receive notice of the meeting and to vote at the meeting.

 

If you are a stockholder of record of Class A common stock, Class C restricted common stock or Class E special voting common stock, you can vote your shares at the annual meeting by attending the meeting and completing a ballot or you can give a proxy to be voted at the annual meeting in one of three ways: (1) over the telephone by calling a toll-free number provided on the enclosed proxy card, (2) electronically via the Internet as described in the enclosed proxy card or (3) date, sign and

complete the proxy card and return it without delay in the enclosed envelope, which requires no postage stamp if mailed in the United States.

 

The holders of stock representing a majority of the voting power of all shares issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, will constitute a quorum for the transaction of business. Abstentions will be treated as present for purposes of determining a quorum. Each share of Class A common stock, Class C restricted common stock and Class E special voting common stock is entitled to one vote, and stockholders do not have the right to cumulate their votes for the election of directors.

 

If your shares are held by a broker in “street name,” your brokerage firm may vote your shares on certain “routine” matters if you do not provide voting instructions. The ratification of an independent registered public accounting firm is an example of a routine matter. If you do not provide voting instructions, your brokerage firm may either vote your shares on routine matters or leave your shares unvoted. When a brokerage firm votes its customers’ shares on a routine matter without receiving voting instructions, these shares are counted both for establishing a quorum to conduct business at the meeting and in determining the number of shares voted for or against the routine matter. A brokerage firm cannot vote your shares on non-routine matters, such as the election of directors, the advisory vote on “say-on-pay” and the advisory vote on the frequency of “say-on-pay.” If your brokerage firm has not received voting instructions on a non-routine matter, these shares will be considered “broker non-votes” to the extent that the brokerage firm submits a proxy. Broker non-votes are counted for purposes of establishing a quorum to conduct business at the meeting but will have no effect on the outcome of the non-routine proposals.

 

For each of the proposals being considered at the annual meeting, approval of the proposal requires the affirmative vote of a majority of the shares entitled to vote at the annual meeting represented either in person or by proxy at the annual meeting, except that directors shall be elected by a plurality of the votes validly cast at the annual meeting.

 

As of the record date, an entity controlled by The Carlyle Group, or Carlyle, owned shares of our Class A common stock representing greater than 50% of the combined voting power of our Class A common stock, Class C restricted common stock and Class E special voting common stock. As a result, Carlyle owns sufficient shares of our voting common stock to assure the presence of a quorum for the conduct of the annual meeting and to assure the approval and adoption of the proposals in connection with which this proxy and the related materials are being delivered.

 

You may revoke your proxy before it is voted at the annual meeting by delivering a signed revocation letter to the Secretary at 8283 Greensboro Drive, McLean, VA 22102 or by submitting a new proxy, dated later than your first proxy, in one of the ways described above under “Voting Procedures.” If you are attending in person and have previously mailed your proxy card, you may revoke your proxy and vote in person at the meeting.

 

The Company currently has eight directors divided into three classes: three in Class I, three in Class II and two in Class III. The terms of office of the three Class I directors expire at the 2011 annual meeting of stockholders.

 

The three nominees for election as Class I directors are listed below. If elected, the nominees for election as Class I directors will serve for a term of three years and until their successors are elected and qualify. Unless you instruct us on the proxy card to vote differently, we will vote signed, returned proxies FOR the election of such nominees. If for any reason any nominee cannot or will not serve as a director, we may vote such proxies for the election of a substitute nominee designated by the Board of Directors.

 

A nominee must receive the vote of a plurality of the votes validly cast at the annual meeting represented either in person or by proxy at the annual meeting to be elected. The Class I nominees are as follows:

 

 

 

The Board of Directors recommends a vote FOR
all of the Class I nominees.

 

The five directors whose terms will continue after the annual meeting and will expire at the 2012 annual meeting (Class II) or the 2013 annual meeting (Class III) are listed below.

 

 

The Board of Directors has adopted a set of Corporate Governance Guidelines. The Board and the Nominating and Corporate Governance Committee are responsible for reviewing and amending these guidelines as they deem necessary and appropriate. The Nominating and Corporate Governance Committee is responsible for overseeing the system of corporate governance of the Company. The Corporate Governance Guidelines are available without charge on the Investor Relations portion of our website, www.boozallen.com. This website also includes the Company’s Code of Business Ethics and Conduct and Code of Ethics for Senior Financial Officers, each of which was adopted by the Board and each of which may be accessed without charge. The Code of Business Ethics and Conduct is the Company’s code-of-ethics document applicable to our directors, Chief Executive Officer, Chief Financial Officer, Controller and all other executives and employees. The Code of Ethics for Senior Financial Officers applies to the Company’s Chief Executive Officer, Chief Financial Officer, Controller and any other persons performing similar functions.

 

As noted in our Corporate Governance Guidelines, the Board has no policy with respect to the separation of the offices of Chairman and Chief Executive Officer. The Board believes that it is important to retain its flexibility to allocate the responsibilities of the offices of the Chairman and Chief Executive Officer in any way that is in the best interests of the Company at a given point in time. Dr. Shrader currently serves as both our Chairman and Chief Executive Officer.

 

The Board of Directors oversees the risk management of the Company. Management identifies the enterprise risks that the Company must mitigate and/or manage. The risks and the effectiveness of the mitigation processes are periodically discussed with the Board. Moreover, the Board has implemented processes to monitor and assess the effectiveness of the Company’s enterprise risk mitigation and management processes. In addition, management regularly reports to the Audit Committee about compliance with the Company’s Code of Business Ethics and Conduct and policies and procedures. The Audit Committee is responsible for reviewing and discussing with management the Company’s guidelines and policies with respect to maintaining effective internal controls over its financial reporting systems. The Nominating and Corporate Governance Committee is responsible for evaluating risks associated with governance issues, and the Compensation Committee is responsible for evaluating risks related to the Company’s compensation policies and succession plans and policies.

 

As a controlled company, as that term is defined under the rules of the New York Stock Exchange, we are not required to have a majority of independent directors. The Board of Directors has determined that Messrs. Odeen and Gaumond are independent under the independence criteria for directors established by the New York Stock Exchange, Rule 10A-3 under the Securities Exchange Act of 1934, or the Exchange Act, and the independence criteria adopted by the Board of Directors. The independence criteria adopted by the Board are set forth in the Company’s Corporate Governance Guidelines.

 

The Nominating and Corporate Governance Committee recommends to the Board appropriate criteria for the selection of new directors based on the strategic needs of the Company and the Board, and

periodically reviews the criteria adopted by the Board and, if deemed desirable, recommends to the Board changes to such criteria. The Board seeks members from diverse professional backgrounds who combine a broad spectrum of experience and expertise with a reputation for integrity. The Board does not have a formal policy with respect to diversity and inclusion; however, it affirms the value placed on diversity within the Company. Diversity is one of many factors the Nominating and Corporate Governance Committee considers when recommending director nominees to the Board. The Committee defines diversity in an expansive way to be reflective of the diversity of the Company and representative of the clients it serves. Exceptional candidates who do not meet all of these criteria may still be considered. The Board seeks members that have experience in positions with a high degree of responsibility, are, or have been, leaders in the companies or institutions with which they are, or were, affiliated, and are selected based upon the contributions they can make to the Company.

 

During fiscal 2011, the Board of Directors met three times. Each of our directors attended 75% or more of the aggregate total number of meetings of the Board held during the period in which he was a director and the total number of meetings held by all Board committees on which he served during the period that he served.

 

Stockholders who wish to contact our Board may send written correspondence, in care of the Secretary, to 8283 Greensboro Drive, McLean, Virginia 22102. Communications may be addressed to an individual director, to the non-management directors as a group, or to the Board as a whole, marked as confidential or otherwise. Communications not submitted confidentially, which are addressed to directors that discuss business or other matters relevant to the activities of our Board, will be preliminarily reviewed by the office of the Secretary and then distributed either in summary form or by delivering a copy of the communication. Communications marked as confidential will be distributed, without review by the office of the Secretary, to the director, or group of directors, to whom they are addressed. With respect to other correspondence received by the Company that is addressed to one or more directors, the Board has requested that the following items not be distributed to directors, because they generally fall into the purview of management, rather than the Board: junk mail and mass mailings, product and services complaints, product and services inquiries, resumés and other forms of job inquiries, solicitations for charitable donations, surveys, business solicitations and advertisements.

 

Our Board has four standing committees: an Executive Committee, an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The charter of each committee is available without charge on the Investor Relations portion of our website, www.boozallen.com. The following is a brief description of our committees.

 

The Executive Committee

 

Our Executive Committee is responsible, among its other duties and responsibilities, for assisting our Board in fulfilling its responsibilities. Our Executive Committee is responsible for approving certain corporate actions and transactions, including acquisitions of assets other than in the ordinary course of business and outside hires of Executive Vice Presidents and certain Senior Vice Presidents or the termination of such employees. The members of our Executive Committee are Dr. Shrader (Chairman) and Messrs. Clare and Fujiyama. The Executive Committee did not meet during fiscal 2011.

The Audit Committee

 

Our Audit Committee is responsible, among its other duties and responsibilities, for overseeing our accounting and financial reporting processes, the audits of our financial statements, the qualifications and independence of our independent registered public accounting firm, the effectiveness of our internal control over financial reporting and the performance of our internal audit function and independent registered public accounting firm. Our Audit Committee reviews and assesses the qualitative aspects of our financial reporting, our processes to manage business and financial risks, and our compliance with significant applicable legal, ethical and regulatory requirements. Our Audit Committee is directly responsible for the appointment, compensation, retention and oversight of our independent registered public accounting firm.

 

The members of our Audit Committee are Messrs. Rossotti (Chairman), Odeen and Gaumond. Our Audit Committee currently consists of two independent directors, Messrs. Odeen and Gaumond. Mr. Rossotti is not an independent director. Rule 10A-3 of the Exchange Act requires us to have all independent audit committee members (within the meaning of Rule 10A-3) within one year of November 16, 2010, the date of the effectiveness of our Form S-1 registration statement relating to our initial public offering of our Class A common stock. We intend to comply with these independence requirements within the appropriate time period.

 

The Board has determined that each member of our Audit Committee is financially literate and has determined that Mr. Odeen is an “audit committee financial expert” as such term is defined under Item 407(d)(5) of Regulation S-K promulgated under the Securities Act. Messrs. Rossotti and Gaumond currently serve on the audit committee of three and two public companies (including us), respectively. In accordance with our Audit Committee Charter, these obligations have been disclosed to the Board. The Board has determined that serving on such additional audit committees does not impair the ability of Messrs. Rossotti and Gaumond to effectively serve on our Audit Committee.

 

The Audit Committee met six times during fiscal 2011.

 

The Compensation Committee

 

Our Compensation Committee is responsible, among its other duties and responsibilities, for reviewing and approving all forms of compensation to be provided to, and employment agreements with, the executives and directors of our company and its subsidiaries (including the Chief Executive Officer), establishing the general compensation policies of our company and its subsidiaries and reviewing, approving and overseeing the administration of the employee benefits plans of our company and its subsidiaries. Our Compensation Committee also periodically reviews management development and succession plans.

 

The members of our Compensation Committee are Messrs. Odeen (Chairman), Clare and Fujiyama. Mr. Odeen is an independent director. Messrs. Clare and Fujiyama are not independent directors. As a controlled company, as that term is defined under the rules of the New York Stock Exchange, we are not required to have an independent Compensation Committee. The Compensation Committee charter requires that, at least two members of the Compensation Committee must satisfy the requirements of “non-employee director” for purposes of Rule 16b-3 under the Exchange Act. All of the members of our Compensation Committee currently satisfy these requirements.

 

The Compensation Committee has the authority to delegate any of its responsibilities to subcommittees as the Compensation Committee may deem appropriate, provided that the subcommittees are composed entirely of directors satisfying the independence standards then applicable to the Compensation Committee generally.

The Compensation Committee has not engaged a compensation consultant; however, the Compensation Committee is briefed by management who consults with William M. Mercer, Inc., which provides executive compensation design, best practice data and assists us in determining market competitive positioning. During fiscal 2011, Mercer provided data analyses, market assessments regarding director compensation and named executive officer compensation, analysis of benefit/perquisite prevalency, counsel regarding new proxy disclosure and say-on-pay regulations and preparation of related reports.

 

Each of our executive officers, who collectively comprise our Leadership Team, participates in the discussion and consideration of compensation to be awarded to all executives. See “Executive Compensation.” The Board of Directors, rather than the Compensation Committee, approves equity grants for purposes of Rule 16b-3 of the Exchange Act.

 

The Compensation Committee met two times during fiscal 2011.

 

Nominating and Corporate Governance Committee

 

Our Nominating and Corporate Governance Committee is responsible, among its other duties and responsibilities, for identifying and recommending candidates to the Board for election to our Board (including candidates proposed by stockholders), reviewing the composition of the Board and its committees, developing and recommending to the Board corporate governance guidelines that are applicable to us, and overseeing Board and Board committee evaluations.

 

The members of our Nominating and Corporate Governance Committee are Dr. Shrader (Chairman) and Messrs. Clare and Fujiyama. Dr. Shrader and Messrs. Clare and Fujiyama are not independent directors. As a controlled company, as that term is defined under the rules of the New York Stock Exchange, we are not required to have an independent Nominating and Corporate Governance Committee.

 

Under the terms of an amended and restated stockholders agreement to which Booz Allen Holding, Explorer Coinvest LLC (an entity controlled by Carlyle), certain members of the management of Booz Allen Holding and certain other stockholders of Booz Allen Holding are party, subject to certain conditions and restrictions, at least a majority of the nominees for election to our Board are to be designated by Carlyle and at least two members of the Board must be full-time employees of Booz Allen Hamilton and are to be designated by Booz Allen Holding’s Chief Executive Officer. Under the terms of the amended and restated stockholders agreement, Carlyle and our executive officers will be required to vote the voting shares over which they have voting control in favor of Carlyle’s and the Chief Executive Officer’s designees. See “Certain Relationships and Related Party Transactions — Related Person Transactions — Stockholders Agreement.” Messrs. Clare and Odeen have been designated for election by Carlyle. Dr. Shrader is our Chief Executive Officer.

 

Except as described above, there is no difference in the manner in which the Nominating and Corporate Governance Committee evaluates a nominee for director designated by Carlyle or our Chief Executive Officer or recommended by a stockholder.

 

During fiscal 2011, management engaged Korn/Ferry International, an executive search firm, to assist it in identifying and evaluating nominees for director. Mr. Gaumond became a director of the Company as a result of this identification and evaluation process. We anticipate using Korn/Kerry International in the future to assist in identifying and evaluating nominees for director.

 

The Nominating and Corporate Governance Committee did not meet during fiscal 2011.

 

Directors who are employed by us or by Carlyle do not receive any additional compensation for their services as a director. For fiscal 2011, our non-employee directors were each entitled to receive $100,000 (pro-rated for partial-year service). Accordingly, for their services on our Board in fiscal 2011, Philip A. Odeen and Charles O. Rossotti were paid $100,000 per annum, and Mark Gaumond received a pro-rated payment of $14,520 for service from February 1 through March 31, 2011. The directors may elect to receive payment in cash or restricted shares of our Class A common stock. Messrs. Odeen and Rossotti were also afforded the opportunity to purchase shares of our Class A common stock at fair market value in May 2010. Mr. Rossotti purchased 39,050 shares of our Class A common stock in May 2010.

 

Our Board has adopted a new compensation policy for directors who are not also employees of our Company or Carlyle, that will be effective for fiscal 2012, in order to more closely align their compensation with the compensation of directors of similarly situated public companies and to attract highly qualified candidates to serve on our Board. Non-employee directors will receive an annual cash retainer of $100,000 and an annual equity award with a fair market value equal to $50,000. In addition, the chair of our Audit Committee will receive an additional annual payment of $20,000 in cash, and the chair of our Compensation Committee will receive an additional annual payment of $10,000 in cash. Directors may elect to receive all or a portion of their cash compensation in the form of restricted stock, which will be granted under our Equity Incentive Plan. Our directors will not receive additional fees for attending Board or committee meetings.

 

The amount paid to Messrs. Odeen, Rossotti and Gaumond for their service on our Board in fiscal 2011 is reflected in the table below.

 

Director Compensation Table

 

 

 

 

 

 

 

The current members of our Compensation Committee are Messrs. Odeen (Chairman), Clare and Fujiyama. Dr. Shrader, our Chief Executive Officer and a stockholder, stepped down from our Compensation Committee prior to the completion of our initial public offering of our Class A common stock. As a stockholder, Dr. Shrader is a party to the amended and restated stockholders agreement with Booz Allen Holding and other stockholders. Our company also employs two of Dr. Shrader’s children and pays a company controlled by Dr. Shrader for use of an aircraft. See “Certain Relationships and Related Party Transactions — Related Person Transactions — Other Relationships.” Messrs. Clare and Fujiyama are employed by The Carlyle Group, an affiliate of Explorer Coinvest LLC, or Coinvest. Coinvest is a party to a stockholders agreement with Booz Allen Holding and other stockholders. Coinvest and The Carlyle Group are affiliates of TC Group V US, L.L.C., which is party to a management agreement with Booz Allen Holding and Booz Allen Hamilton pursuant to which TC Group V US, L.L.C. provides Booz Allen Holding and its subsidiaries, including Booz Allen Hamilton, with advisory, consulting and other services for a fee. See “Certain Relationships and Related Party Transactions — Related Person Transactions — Stockholders Agreement,” and “— The Management Agreement.” No member of our Compensation Committee serves as a member of the board or compensation committee of any other entity that has one or more executive officers serving as a member of our Board or Compensation Committee.

 

The following table indicates information as of June 21, 2011 regarding the beneficial ownership of our common stock by:

 

 

 

The percentages shown are based on 123,442,195, 3,017,791, 1,900,630 and 12,348,860 shares of Class A, Class B, Class C and Class E common stock outstanding as of June 21, 2011. The rights of the holders of Class A common stock, Class C restricted common stock and Class E special voting common stock are identical, except with respect to dividend and other distributions, vesting and conversion. Class A common stock, Class C restricted common stock and Class E special voting common stock are entitled to one vote per share on all matters voted on by our stockholders. The Class B common stock is non-voting common stock. Upon a transfer of Class B non-voting common stock and Class C restricted common stock that occurs at least 180 days following the completion of our initial public offering, we will issue shares of Class A common stock to the transferee on a one-for-one basis. Class E common stock underlies certain outstanding options. When each option is exercised, we will repurchase the underlying share of Class E common stock and issue a share of Class A common stock to the option holder.

 

The amounts and percentages owned are reported on the basis of the SEC’s rules governing the determination of beneficial ownership of securities. The SEC’s rules generally attribute beneficial ownership of securities to each person who possesses, either solely or shared with others, the voting power or investment power, which includes the power to dispose of those securities. The rules also treat as outstanding all shares of capital stock that a person would receive upon exercise of stock options or warrants held by that person that are immediately exercisable or exercisable within 60 days. These shares are deemed to be outstanding and to be beneficially owned by the person holding those options for the purpose of computing the number of shares beneficially owned and the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Under these rules, one or more persons may be a deemed beneficial owner of the same securities and a person may be deemed a beneficial owner of securities to which such person has no economic interest. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

 

Information with respect to beneficial ownership has been furnished by each director, executive officer, or beneficial owner of more than 5% of the shares of our common stock. Except as otherwise noted below, the address for each person listed on the table is c/o Booz Allen Hamilton Inc., 8283 Greensboro Drive, McLean, Virginia 22102.

 

 

 

 

 

Based on a review of reports filed by the Company’s directors, executive officers and beneficial holders of 10% or more of our outstanding shares, and upon representations from those persons, all reports required to be filed by the Company’s reporting persons during fiscal 2011 were filed on time with the exception of one instance: Lloyd Howell did not timely file a Form 4 with respect to reporting option exercises that occurred on November 17, 2010.

 

On June 21, 2011, we adopted a related person transactions policy pursuant to which related persons, namely our executives, directors and principal stockholders, and their immediate family members, are not permitted to enter into a transaction, or materially modify or amend an ongoing transaction, with us, in which the amount involved exceeds $120,000, without the consent of our Audit Committee or any designated member of the Audit Committee. Any request for us to enter into or materially modify or amend such a transaction is required to be presented to our Audit Committee for review, consideration and approval. All of our directors, executives and employees are required to report to our Audit Committee any such related person transaction. In approving or rejecting the proposed transaction, our Audit Committee will take into account, among other factors it deems appropriate, whether the proposed related person transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances, the extent of the related person’s interest in the transaction and, if applicable, the impact on a director’s independence. Under the policy, if we should discover related person transactions that have not been approved, our Audit Committee will be notified and will determine the appropriate action, including ratification, rescission or amendment of the transaction.

 

Stockholders Agreement

 

In connection with the acquisition of Booz Allen Hamilton by Carlyle on July 31, 2008, Booz Allen Holding, Explorer Coinvest LLC, an entity controlled by Carlyle, certain members of the management of Booz Allen Holding and certain other stockholders of Booz Allen Holding entered into the stockholders agreement. Effective November 16, 2010, the stockholders agreement was amended and restated. While our second amended and restated bylaws do not limit the Board from increasing the number of directors, under the amended and restated stockholders agreement, the number of directors on the Board of Booz Allen Holding was set at a minimum of six directors and may be increased, by action of the Board, to not more than nine directors. The number of directors on the Board is currently set at eight. Subject to certain conditions and restrictions, at least a majority of the nominees for election to our Board are to be designated by Carlyle, through Coinvest, and at least two members of the Board must be full-time employees of Booz Allen Hamilton and are to be designated by Booz Allen Holding’s Chief Executive Officer. Under the terms of the amended and restated stockholders agreement, Carlyle and our executive officers will be required to vote the voting shares over which they have voting control in favor of Carlyle’s and the Chief Executive Officers’ designees. At such time as Carlyle, through Coinvest, ceases to own at least 40% of the economic interests in Booz Allen Holding represented by its issued and outstanding common stock, Carlyle and our executive officers will use commercially reasonable efforts to amend the Board representation provisions of the amended and restated stockholders agreement consistent with the reduced ownership position of Carlyle at that time.

 

Under the terms of the amended and restated stockholders agreement, Carlyle may compel each executive officer who is a party to the amended and restated stockholders agreement to sell a certain

number of securities issued by Booz Allen Holding in the event that Carlyle proposes to transfer securities issued by Booz Allen Holding to a third party purchaser.

 

Under the amended and restated stockholders agreement, in the event of any sale of shares of Class B non-voting common stock or Class C restricted common stock pursuant to the exercise of bring-along rights by Carlyle, certain transfers following an initial public offering or pursuant to the exercise of registration rights (discussed below), such shares will be converted into shares of Class A common stock.

 

Carlyle has registration rights under the amended and restated stockholders agreement, with respect to 95,660,000 shares of Class A common stock that it owned as of March 31, 2011 and, in certain circumstances, other stockholders of Booz Allen Holding who are a party to the amended and restated stockholders agreement may have the right, subject to certain exceptions, to request that certain securities (including shares of Class A common stock held by such stockholders and shares of Class A common stock issuable upon exercise of options or upon conversion from Class B or Class C common stock) be registered. To the extent that Carlyle acquires shares of Class B or Class C common stock or options exercisable for shares of Class A common stock, it would have registration rights with respect to the shares of Class A common stock issuable upon conversion or exercise thereof. Booz Allen Holding has agreed to indemnify the stockholders that are a party to the amended and restated stockholders agreement and their affiliates from liabilities resulting from the registration of securities of Booz Allen Holding pursuant to the amended and restated stockholders agreement.

 

Booz Allen Holding has certain repurchase rights under the amended and restated stockholders agreement with respect to Class A, Class B, Class C and Class E common stock and options issued to a management stockholder under the Equity Incentive Plan for up to nine months after the occurrence of certain events specified in the amended and restated stockholders agreement. Similar repurchase rights exist for Class A, Class B, Class C and Class E common stock and options held by other stockholders of Booz Allen Holding that become an employee, consultant or independent contractor for certain competitors of Booz Allen Hamilton. As of March 31, 2011, management and other stockholders (not including Carlyle) held 11,024,835 shares of Class A common stock and all of the outstanding shares of our Class B, Class C and Class E common stock.

 

The amended and restated stockholders agreement includes a waiver by management stockholders of certain rights to receive payments or other benefits that would constitute a “parachute payment” made in connection with a “change in ownership or control” of a corporation, within the meaning of Section 280G of the Internal Revenue Code of 1986, or the Code, as amended, which could reasonably be expected to result in the imposition of an excise tax on the management stockholder under Section 4999 of the Code or in the loss of any income tax deductions by Booz Allen Holding or the person making such payment under Section 280G of the Code. This waiver does not apply in certain circumstances, including at such time as Booz Allen Holding has publicly traded securities and where Booz Allen Holding obtains the requisite stockholder approval of such payments or the unaffiliated directors determine the waiver should not apply.

 

The amended and restated stockholders agreement will terminate upon a sale or change of control of Booz Allen Holding or such time as more than 60% of its equity securities have been sold to the public.

 

Irrevocable Proxy and Tag-Along Agreements

 

In connection with the amendment and restatement of the stockholders agreement, Carlyle made a unilateral offer to each individual stockholder that was a party to the original stockholders agreement to grant such stockholder a new pro rata tag-along right on certain transfers by Carlyle to third-party purchasers. In exchange for this tag-along right, Carlyle has received an irrevocable proxy from each stockholder who entered into such agreement to vote such stockholders’ securities with respect to the election and removal of directors and to approve any company sale that has already been approved by the Board of Booz Allen Holding and the holders of a majority of our voting shares. This new tag-along right and

proxy have been granted pursuant to separate irrevocable proxy and tag-along agreements entered into between Carlyle and each such individual stockholder and became effective on November 16, 2010. These arrangements will terminate at such time as Carlyle ceases to own at least 25% of the economic interests in Booz Allen Holding represented by its issued and outstanding common stock or such time as more than 60% of its equity securities have been sold to the public.

 

The Management Agreement

 

On July 31, 2008, Booz Allen Holding and Booz Allen Hamilton entered into a management agreement with TC Group V US, L.L.C., a company affiliated with Carlyle, or TC Group, pursuant to which TC Group provides Booz Allen Holding and its subsidiaries, including Booz Allen Hamilton, with advisory, consulting and other services. Booz Allen Holding pays TC Group an aggregate annual fee of $1.0 million for such services, plus expenses. Furthermore, in consideration for any additional investment banking services provided by TC Group and other services other than advisory and consulting services described above, TC Group is entitled to receive additional reasonable compensation as agreed by the parties.

 

The management agreement also provides that Booz Allen Hamilton will indemnify the TC Group and its officers, employees, agents, representatives, members and affiliates against certain liabilities relating to or arising out of the performance of the management agreement and certain other claims and liabilities. In connection with our initial public offering of our Class A common stock, we entered into indemnification agreements with each person who at that time was a member of our Board and our executive officers and have since entered into an indemnification agreement with Mr. Gaumond and three new executive officers. The indemnification agreements provide the directors and our executive officers with contractual rights to the indemnification and expense advancement rights provided under our second amended and restated bylaws, as well as contractual rights to additional indemnification as provided in the indemnification agreements.

 

We believe that the management and indemnification agreements are, in form and substance, substantially similar to those commonly entered into in transactions of like size and complexity sponsored by private equity firms. We further believe that the fees incurred by us under the management agreement are customary and within the range charged by similarly situated sponsors. In addition, from time to time and in the ordinary course of business and at arms-length, we engage other Carlyle portfolio companies as subcontractors or service providers and they engage us as subcontractors or service providers. The cost and revenue associated with these related party transactions were $5.3 million and $6.3 million, respectively, for fiscal 2011.

 

The Acquisition

 

In connection with the acquisition of Booz Allen Hamilton by Carlyle, our current and former executive officers (or their related family trusts) received a combination of current and deferred cash consideration as well as stock and options in Booz Allen Holding. Of the overall cash consideration, $158.0 million was structured as an interest in the deferred payment obligation and $90.0 million was deposited into escrow to fund certain purchase price adjustments, future indemnification claims under the merger agreement and for certain other adjustments. The remainder of the cash consideration was paid on the closing date as part of the acquisition. The current and former executive officers (or their related family trusts) receive their pro rata share of any payments of the deferred payment obligation and any releases of funds held in escrow to selling stockholders.

 

As of March 31, 2011, there was approximately $90.9 million of the deferred payment obligation outstanding, which includes accrued interest of $10.9 million, with approximately $52.7 million of indemnified pre-acquisition claims outstanding against the deferred payment obligation that may offset the future amount paid back to selling stockholders should such claims settle unfavorably. The ultimate

value of our current and former executive officers’ (or their related family trusts’) interests in the deferred payment obligation will not be known until all such claims are resolved.

 

Other Relationships

 

Jeffrey M. Shrader and Bryan E. Shrader, senior associates at the Company, are sons of Dr. Ralph Shrader, our Chairman of the Board, President and Chief Executive Officer. Jeffrey Shrader earned a base salary and bonus of $193,700 and retirement contributions of $13,663 in fiscal 2011. Bryan Shrader earned a base salary and bonus of $224,205 and retirement contributions of $25,227 in fiscal 2011. They also participate in the Company’s other benefit programs on the same basis as other employees at the same level. They continue to be employed by us during fiscal 2012 under similar terms.

 

Cameron A. Mayer, a senior associate at the Company, is the son of Mr. John Mayer, an Executive Vice President of the Company. He earned a base salary and bonus of $210,420 and retirement contributions of $26,085 in fiscal 2011. Mr. Mayer also participates in the Company’s other benefit programs on the same basis as other employees at the same level. Mr. Mayer continues to be employed by us during fiscal 2012 under similar terms.

 

Alberto L. Iannitto, an associate at the Company, is the brother-in-law of Mr. Joseph Logue, an Executive Vice President of the Company. He earned a base salary and bonus of $128,985 and retirement contributions of $12,089 in fiscal 2011. Mr. Iannitto also participates in the Company’s other benefit programs on the same basis as other employees at the same level. Mr. Iannitto continues to be employed by us during fiscal 2012 under similar terms.

 

Gail S. Harman, an executive assistant at the Company, is the sister of Mr. Samuel Strickland, our Chief Financial and Administrative Officer and an Executive Vice President of the Company. She earned a base salary of $109,798 and retirement contributions of $13,010 in fiscal 2011. Ms. Harman also participates in the Company’s other benefit programs on the same basis as other employees at the same level. Ms. Harman continues to be employed by us during fiscal 2012 under similar terms.

 

During fiscal 2011, we recorded expenses of $589,616 for the hiring and use of an aircraft solely for business purposes by a company of which our Chairman of the Board, President and Chief Executive Officer, Dr. Shrader, is the sole owner. The payments we made to the affiliate of Dr. Shrader for such use were based on the market rate charged to third parties for use of the aircraft. In addition, we recorded expenses of $27,328 in fiscal 2011 for technical consulting services incurred by such affiliate in connection with the operation of the aircraft and paid by the Company.

 

The following discussion and analysis of compensation arrangements of our named executive officers for fiscal 2011 (as set forth in the Summary Compensation Table below) should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt may differ materially from the programs summarized in this discussion.

 

Named Executive Officers

 

Our named executive officers for fiscal 2011 are: Ralph W. Shrader, our President and Chief Executive Officer, Samuel R. Strickland, our Chief Financial and Administrative Officer, and three of our Executive Vice Presidents, CG Appleby, Joseph E. Garner, and John D. Mayer. Mr. Garner retired from the Company as of March 31, 2011. In addition, Mr. Appleby is planning to retire from the Company as of July 31, 2011.

 

Executive Compensation Philosophy and Objectives

 

Our executive compensation program is based on the core belief that transparency and collaboration increase overall performance, and that executive impact must be measured over both a short- and long-term horizon in order to maximize stockholder value creation. Although we are a corporation, we operate with a partnership-style culture and compensation system that fosters internal collaboration. Our executive compensation structure, which is applicable to our named executive officers, is centered around a transparent compensation system, a single profit center and firm-wide bonus pool. As further described below, each of our executives, which we define to include our Chief Executive Officer, Executive Vice Presidents and Senior Vice Presidents, is assigned to one of six cohort levels (plus a separate and distinct level for our Chief Executive Officer), and all executives within each level receive the same compensation. This distinctive system fosters internal collaboration, which allows us to better compete externally and motivate our executives to act in the best interest of the firm through an emphasis on client service and by encouraging the rapid and efficient allocation of our people across markets, clients and opportunities.

 

Utilizing this philosophy, our executive compensation program has been designed to:

 

 

Setting Executive Compensation

 

Our Compensation Committee is responsible for evaluating the compensation levels of our executives, including our named executive officers. The committee takes into consideration, based upon their collective experience and reasoned business judgment, labor market data and recommendations from management. Management’s recommendations are based on an extensive, 360-degree assessment process of our executives. All executives within one of our six executive compensation levels (more fully

described below) receive the same compensation, which is based on overall firm performance. Sustained individual performance is rewarded through accelerated progression through the levels. Our Chief Executive Officer is in a separate level from other executives and receives 10% more than the executives in the next highest level, recognizing his unique role.

 

Our Compensation Committee has the goal of structuring a compensation program that allows us to attract and retain top tier talent and provides significant incentives for exceeding our performance targets, while also providing significant penalties for underperformance. Prior to our initial public offering, our compensation program focused on cash compensation and was based on annual financial performance. During fiscal 2011, our compensation program was redesigned to provide a greater proportion of equity-based incentives that vest over a longer term to better align our executives with the interests of our stockholders.

 

We use relevant quantitative and qualitative measures to set compensation for the fiscal year based on overall performance objectives and broad market parameters. Currently, our management obtains market analysis and executive compensation survey data from nationally recognized survey providers, including Towers Perrin Executive Survey, Mercer Executive Survey, CHiPS Executive and Senior Management Total Compensation Survey, and Watson Wyatt Top Management Survey. We segment these surveys based on company revenue and government contracting and professional services industries. We do not use survey data to set compensation; instead, we use it to confirm that our compensation is within a competitive range. In addition, our management consults with William M. Mercer, Inc., which provides executive compensation design and best practice data and assists us in determining market competitive positioning.

 

Our Chief Executive Officer participates in Compensation Committee meetings and makes recommendations to our Compensation Committee with respect to the setting of performance targets for our executives.

 

Adoption of Annual Incentive Plan

 

In connection with our initial public offering in fiscal 2011, our Board adopted a new annual incentive compensation plan because it believes that the new plan more appropriately aligns our compensation programs with those of similarly situated public companies. In addition, in fiscal 2011, the Compensation Committee determined that, beginning on October 1, 2010, a portion of annual incentive compensation will be delivered in the form of restricted stock. The amount of the annual incentive payment will be calculated in the same fashion as it previously was under the annual performance bonus program (described below) with the only change being that a portion of the bonus is to be paid in the form of restricted stock with a value equal to 120% of the cash portion that it replaces. The restricted stock, to be issued under our Equity Incentive Plan, vests ratably over the three years following grant.

 

Executive Ownership Guidelines

 

Upon completion of our initial public offering, we established equity ownership guidelines for our executives to further align their interests to those of our stockholders. Each of our named executive officers has five years from the date he or she becomes an executive (or October 1, 2010, if later) to achieve equity ownership with a value equivalent to the amount set forth in the following table:

 

 

In calculating an executive’s ownership, vested stock options issued under the Equity Incentive Plan, all stock options under the Officers’ Rollover Stock Plan and vested and unvested restricted stock will be

considered owned by the executive. We determined these ownership levels based on market and good governance practices.

 

Elements of Compensation

 

Our executive compensation consists of the following components, which are designed to provide a mix of fixed and at-risk compensation that is heavily tied to the achievement of our short and long term financial goals and designed to promote a long-term career with our company:

 

 

A detailed description of these components is provided below.

 

A substantial amount of each executive’s total annual compensation opportunity is at-risk and is directly tied to our annual financial performance. Our Chief Executive Officer and each of the other named executive officers’ target annual compensation mix is approximately 51% salary and approximately 49% tied to our performance. The 49%, which is at risk, is delivered in a mix of cash and restricted stock as described above. Our named executive officers also hold options that vest based on achievement of company performance goals, as well as significant other long-term equity-incentive awards.

 

Cash Compensation.  As discussed above, our compensation program is structured to drive company-wide performance by encouraging internal collaboration and client service through the fluid application of resources to where they can add the most value. Key to this program is a cohort structure under which all executives are assigned to one of six levels plus a separate and distinct level for our Chief Executive Officer.

 

Cash compensation is structured in a point system. Each level is assigned a standard number of points per executive with all executives within the level assigned the same number of points. The number of points assigned to each executive in each level remains constant from year to year; however, the planned monetary value of each point is evaluated annually based on a number of factors discussed below. The dollar value of each point is the same across all cohort levels. Executives progress upward through the levels based on their competencies and performance over time.

 

The Chief Executive Officer, Chief Personnel Officer, Chief Financial Officer and Chief Operating Officer together determine what they believe is an appropriate level of cash compensation within each level by reviewing historical compensation levels and adjusting those levels to reflect factors such as projected profitability for the coming fiscal year compared to the current fiscal year. The result is then compared to market survey data as a check to confirm that the compensation within each level is within a

competitive range and to ensure that cash compensation opportunities for each level allow us to attract and retain key talent. Their recommendation is then reviewed and approved by our Leadership Team, whose membership is comprised of all of our executive officers. The result is the recommendation of a per point value that is multiplied by the number of points assigned to each executive to determine a planned annual cash compensation. Although the monetary point value is reviewed annually, changes do not ordinarily occur every year. A portion of the cash compensation is designated as base salary and is paid monthly. The remaining portion of the cash compensation is designated as an incentive bonus, which is paid annually based on achievement of company performance targets with upward or downward adjustments for exceeding or falling below the targets. Our Compensation Committee reviews the recommendation from management as well as the market information provided and approves a monetary value for each point and, therefore, the base salary and total cash compensation for each executive assuming firm targets are achieved. For fiscal 2011, the target monetary value per point, which includes a target bonus amount, was increased across all levels by approximately 3% over the prior fiscal year to recognize the greater difficulty in reaching our growth targets in light of the economic environment. The increase was allocated to the incentive bonus opportunity rather than base salary to further support our performance-driven compensation focus. Because of this focus, base salary levels within each level have not increased in several years and did not increase for fiscal 2011.

 

As discussed above, our Chief Executive Officer, Dr. Shrader, is in a distinct level and receives 10% higher cash compensation than the executives in the next highest level due to his unique responsibilities. Messrs. Appleby, Garner, and Strickland are in our highest level (excluding the level for our Chief Executive Officer) because of their level of experience, performance over time, and their ability to impact financial performance and our business operations. Mr. Strickland was promoted to the highest level (excluding our Chief Executive Officer) effective April 1, 2010 because of his level of experience, performance over time and impact on our financial operations. As a result, Messrs. Appleby, Garner and Strickland received the same level of cash compensation and restricted stock for fiscal 2011. Mr. Mayer was promoted to the second highest level (excluding the level for our Chief Executive Officer) effective April 1, 2010 because of his level of experience, performance over time and impact on our institution and, accordingly, received the same level of cash compensation and restricted stock for fiscal 2011 as the other executives in his level.

 

For fiscal 2011, each of our named executive officers earned the base salary set forth in the “Salary” column of the Summary Compensation Table. Base salary levels within each level will remain the same for fiscal 2012. Mr. Strickland’s salary for fiscal 2011 increased over his fiscal 2010 salary as a result of his promotion to align his salary with that of his new cohort level. Mr. Mayer’s salary for fiscal 2011 also increased over his salary for the prior fiscal year as a result of his promotion.

 

The annual incentive portion of our executives’ cash compensation is provided through our annual bonus program. The bonus portion of the total cash compensation as discussed above creates an aggregate bonus pool for the year. The bonus pool is established by multiplying the bonus portion of the point value times the aggregate number of points (reduced for fringe and other charges). Annual incentive bonuses are paid as a result of meeting the target “Bonus EBITDA,” which is defined as our consolidated earnings before subtracting interest, taxes, depreciation, amortization, stock-option based and other equity-based compensation expenses, management, transaction and similar fees paid to the principal stockholders or their affiliates, as reflected on our audited consolidated financial statements for such fiscal year, and adjusting for certain extraordinary and non-recurring items as determined by the Compensation Committee. Bonus EBITDA is calculated to eliminate the impact of the stock-option based and other equity-based compensation for our executives, above target annual incentive payments as well as management fees paid to an affiliate of Carlyle and accounting adjustments and other transaction expenses associated with the Carlyle acquisition of Booz Allen Hamilton. We base annual bonuses on Bonus EBITDA because it is a direct reflection of the cash flow and operating profitability of our business and it represents the element of our performance that executives can most directly impact.

 

Upon availability of our year end operating results, our Compensation Committee reviews the Bonus EBITDA and, in its sole discretion, approves any adjustments to the plan bonus pool. Adjustments are based on performance against target Bonus EBITDA.

The target bonus value was set at the beginning of the year and is based on achievement of target Bonus EBITDA results. To incentivize our executives to exceed target Bonus EBITDA levels and thereby increase long-term company value, if Bonus EBITDA results exceed target, a portion of the dollars above target will be added to the pool available for executive compensation. For fiscal 2011, for the period from April 1, 2010 through September 30, 2010, half of the dollars above target were added to the pool available for executive compensation. For the period beginning on October 1, 2010 through March 31, 2011, one-third of the dollars above target were added to the pool available for executive compensation. In future years, one-third of the dollars above target will be added to the pool and one-third of the dollars below target will be subtracted from the pool available for executive compensation. In each case, the additions or subtractions are subject to the positive or negative adjustment of our Compensation Committee to take into consideration the impact of any extraordinary and non-recurring items and other factors. The additional and discretionary adjustments allow the Compensation Committee to limit increases in the bonus pool to factors over which the executives have control and that result in long-term value for our company including increasing the bonus pool by a smaller percentage for increases in Bonus EBITDA due to indirect cost savings above budget. Following any adjustment for extraordinary and nonrecurring items and other factors, the bonus pool is further reduced to account for the additional fringe benefit costs incurred as a result of the additional bonus payment to our executives. The final bonus pool as approved by our Compensation Committee is distributed to our executives on a consistent per point basis. Our Compensation Committee has the discretion to determine the actual payments to our executives, subject to achievement of the performance measures.

 

For fiscal 2011 the target Bonus EBITDA was $415.4 million and actual results were $457.7 million. The calculation of Bonus EBITDA for fiscal 2011 is as follows:

 

 

 

 

As shown above, for fiscal 2011, actual Bonus EBITDA exceeded target Bonus EBITDA by $42.3 million. Accordingly, our Compensation Committee approved the payment of an initial bonus at the target level and an increase to the bonus pool of approximately $16.3 million representing 50% of the excess of actual Bonus EBITDA over target Bonus EBITDA for periods through September 30, 2010 and 33% of the excess of actual Bonus EBITDA over target Bonus EBITDA for period beginning on October 1, 2010 reduced, in each case, as provided in the preceding paragraph including the adjustment for indirect cost savings above budget. The $16.3 million increase to the bonus pool was further reduced by $0.4 million to account for the additional fringe benefit costs. Beginning with fiscal 2011, the bonus pool is delivered in a combination of cash and equity (as more fully described below). As with base salary, each executive within the same level received the same bonus amount. Accordingly, consistent with the other executives in their compensation level, Messrs. Appleby, Garner and Strickland received the same bonus amount for fiscal 2011; Dr. Shrader received 10% above that amount; and Mr. Mayer received the same bonus amount as other executives in his cohort level.

 

Our current annual performance program is based on meeting corporate annual performance goals. Starting with the annual bonus earned in respect of performance on and after October 1, 2010, our payment structure for annual performance bonus delivers a mix of cash and equity. The equity is granted in restricted stock that vests ratably over three years, subject to certain exceptions. Executives who retire or otherwise terminate employment before the issuance of the equity portion of the annual bonus and under

circumstances that entitle them to a full or pro-rated bonus will be paid their annual bonus entirely in cash. The equity portion is intended to more closely align our compensation program with market practices and enable executives to own personally-significant amounts of our company stock.

 

The percentage delivered in equity varies by compensation level with higher percentages of equity applied to executives in the highest levels. Executives in our top levels (including our Chief Executive Officer) receive 45% of their annual bonus in the form of equity. However, because the equity program was implemented in the middle of our fiscal year, only half of the annual bonus for fiscal 2011 is subject to payment in the form of equity. Accordingly, Messrs. Shrader, Strickland, Appleby and Mayer will receive 22.5% of their annual incentive for fiscal 2011 in equity. The Company will determine the number of shares of restricted stock to be granted to each executive by taking the dollar amount determined by applying the percentage noted above to the annual bonus amount, dividing that amount by the fair market value of our stock on the date of grant and multiplying that amount by 120% to reflect the impact to liquidity and risk of holding the stock. Mr. Garner received his entire fiscal 2011 annual bonus in cash because of his retirement at the end of the fiscal year.

 

The cash payments received by each of our named executive officers for fiscal 2011 is reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table. Because the equity grants will be made in fiscal 2012, they are not reflected in this year’s Summary Compensation Table. Total payments for fiscal 2011 for each of our named executive officers under the annual performance program are reflected below:

 

 

(1) Includes 20% premium.

 

Long-term Equity Incentive Plans.  We believe that our executives should hold personally significant amounts of equity to align their interests to those of our stockholders, and, accordingly, long-term equity compensation is an important component of our compensation program. Our long-term incentive program historically consisted of awards of stock options to our executives under the Equity Incentive Plan. We believe stock options further our objective of aligning the interests of our executives with those of our stockholders by providing our executives with a continuing stake in our long-term success and by rewarding only the future growth in our equity value. We have not historically granted stock options to our executives on an annual basis. Instead, an option grant is made only upon hire of an executive and/or upon promotion, so that each executive within the same level would receive the same number of options and total compensation.

 

At the beginning of fiscal 2011, each of Messrs. Strickland and Mayer received a grant of 45,000 performance-vesting stock options to reflect his promotion to the next senior level. Although our Compensation Committee approves the grant of stock options under the Equity Incentive Plan, the grants are made based on the level of the executive at the time of promotion and/or hire.

 

The terms of the options under the Equity Incentive Plan were negotiated between members of management and Carlyle at the time they invested in our company. A portion of the options vest based on continued service and the remainder vest based on achievement of EBITDA and cumulative cash flow performance goals. The terms of the options are more fully described in footnote 2 to the Grants of Plan-Based Awards Table.

 

The EBITDA target for option vesting for fiscal 2011 was $329.9 million, with the annual target level increasing by 12% each year thereafter. The cumulative cash-flow target for fiscal 2011 was $217.2 million,

with the annual amount used to calculate the cumulative target increasing by approximately 12% per year (and subject to upward or downward adjustment for changes in net revenue growth).

 

For purposes of the options, “EBITDA” is calculated in the same manner as Bonus EBITDA under the annual performance bonus program; and “cash flow” means (i) EBITDA for a fiscal year less (ii) the increase in adjusted working capital (accounts receivable (net) less accounts payable, less other accrued expenses) in the fiscal year (which may be a positive or a negative number) less (iii) any overruns in the annual budget for capital expenditures in the financial plan approved by the Board for that fiscal year.

 

In connection with the payment of special dividends in fiscal 2010, our Compensation Committee determined to adjust options by reducing the exercise price to reflect the reduction in the value of our stock as a result of the extraordinary dividends, rather than to adjust both the exercise price and the number of shares issuable upon exercise of the options, to avoid the increase in the number of shares issuable upon exercise. Because the reduction in share value exceeded the exercise price for certain of our Rollover options, the exercise price for those options was reduced to the par value of the share issuable on exercise, and the holders, including our named executive officers, became entitled to receive, on the option’s fixed exercise date, a cash payment equal to the excess of the reduction in share value as a result of the dividend over the reduction in exercise price, subject to vesting of the related options. The amount of the cash payment that vested in fiscal 2011 is reflected in the “All Other Compensation” column of the Summary Compensation Table.

 

As described above, our named executive officers will also receive a portion of our fiscal 2011 annual incentive in the form of equity. The equity will be granted in fiscal 2012 in the form of restricted stock that vests ratably over three years.

 

Defined Contribution Retirement Plan.  We provide retirement benefits to our executives in order to provide them with additional security in retirement, while allowing them to direct the investment of their retirement savings as they choose. All employees, including our executives, are automatically eligible to participate in the tax-qualified Employees’ Capital Accumulation Plan, or ECAP, our 401(k) plan. We make contributions to ECAP annually. In addition to contributions made to the tax-qualified ECAP, executives receive a cash payment equal to a percentage of eligible compensation in excess of the eligible compensation limit of the Internal Revenue Code, plus an additional 23% investment incentive, which is intended as a supplement to the retirement plan contribution. Each executive also receives a cash payment that is equivalent to the annual tax-deferred contribution he or she is permitted to make to ECAP under the Internal Revenue Code.

 

Other Retirement Benefits.  We provide additional retirement benefits to our executives in order to provide them with additional security in retirement and promote a long-term career with our company. Our executives participate in the Officers’ Retirement Plan, under which the executive may retire with full benefits after a minimum of either (x) age 60 with five years of service as an executive or (y) age 50 with ten years of service as an executive. An eligible executive who retires and does not receive severance benefits is entitled to receive a single lump sum retirement payment equal to $10,000 for each year of service as an executive, pro-rated as appropriate, and an annual allowance of $4,000 for financial counseling and tax preparation assistance. Our retirees are also eligible to receive comprehensive coverage for medical, pharmacy and dental health care. The premiums for this benefit are paid by us.

 

Benefits and Perquisites.  Our employees are eligible to participate in a full complement of employer-paid benefit plans. Our executives also participate in enhanced medical and dental plans, life insurance, AD&D and personal liability coverage at the Company’s expense. Although our executives receive additional benefits and perquisites, such as executive medical, financial counseling, milestone anniversary gifts and club membership reimbursement, as well as tax gross-ups relating to life insurance coverage and milestone anniversary gifts, we do not consider these to be a principal component of their compensation. We believe that our executive benefits and perquisite programs are reasonable and commensurate with benefits and perquisites provided to executives of similarly situated companies within our industry, and are necessary to sustain a fully competitive executive compensation program.

The perquisites include initiation fees for club memberships and reasonable dues on an annual basis and up to $15,000 per year for financial counseling, up to $7,500 every three years to update an estate plan, up to $3,000 for preparation of estate plans following relocation to a new tax jurisdiction and a one-time reimbursement of up to $5,000 for retirement financial planning. For more detail on the perquisites that our named executive officers receive, see footnote 7 to the “Summary Compensation Table” below.

 

Risk Assessment

 

Management and the Compensation Committee conducted a risk assessment of our company’s executive compensation program. Based on our approach of compensating our executives for the financial success of the company as a whole and other elements of our compensation system, we concluded that our executive compensation program does not encourage undue risk-taking.

 

Government Limitations on Compensation

 

As a government contractor, we are subject to the Federal Acquisition Regulation, or the FAR, which governs the reimbursement of costs by our government clients. FAR 31.205-6(p) limits the allowability of senior executive compensation to a benchmark compensation cap established each year by the Administrator of the Office of Federal Procurement Policy under Section 39 of the Office of Federal Procurement Policy Act (41 U.S.C. 435). The benchmark cap applies to the five most highly compensated employees in management positions. When comparing senior executive compensation to the benchmark cap, all wages, salary, bonuses and deferred compensation, if any, for the year, as recorded in our books and records, must be included. The current benchmark compensation cap, effective January 1, 2010 and as published in the Federal Register, is $693,951. Any amounts over the cap are considered unallowable and are therefore not recoverable under our government contracts. The FAR also limits the allowability of reimbursement for non-senior executive compensation.

 

Policy on Recovering Bonuses in the Event of a Restatement

 

We have included provisions in our Annual Incentive Plan and our Equity Incentive Plan that provide us with the ability to impose the forfeiture of bonuses and equity compensation and the recovery of certain bonus amounts and gains from equity compensation awarded under those plans in the event of an accounting restatement due to material non-compliance with any financial reporting requirements under the securities laws with respect to individuals who engage in misconduct or gross negligence that results in a restatement of our financial statements, individuals subjected to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002, and, to the extent that, based on erroneous data, any award or payment is in excess of what would have been paid under the accounting restatement during the three-year period preceding the date on which a financial restatement is required, current or former executives, or as otherwise required under applicable laws or regulations. In addition, if an individual engages in certain other misconduct, we have the discretion to suspend vesting of all or a portion of any award and/or require the forfeiture or disgorgement to us of any equity award (including gains on the sale of the stock, if any) that vested, was paid or settled in the twelve months prior to or any time after the individual engaged in such misconduct.

 

Certain Change in Control Provisions

 

Options and restricted stock awarded under our Officers’ Rollover Stock Plan and options granted under our Equity Incentive Plan prior to our initial public offering contain provisions that accelerate vesting in connection with certain change in control events. Under the Officers’ Rollover Stock Plan and the Equity Incentive Plan, “change in control” is generally defined as the acquisition by any person (other than Carlyle) of 50% or more of the combined voting power our company’s then outstanding voting securities, the merger of our company if its stockholders immediately prior to the merger together with Carlyle do not own more than 50% of the combined voting power of the merged entity, the liquidation or dissolution of our company (other than in a bankruptcy proceeding or for the purposes of effecting a corporate restructuring or reorganization) or the sale of all or substantially all the assets of our company to non-affiliates. Options

and restricted stock granted under the Officers’ Rollover Stock Plan vest upon a change in control. Vesting of options granted under our Equity Incentive Plan is accelerated only as a result of events that result in liquidity to Carlyle. These provisions were negotiated at the time of Carlyle’s investment in our company and are designed to motivate management to assist our principal stockholders in achieving a favorable return on their investment in our company.

 

In the event of a change in control, unless the plan administrator determines otherwise, all time-vesting awards under the Equity Incentive Plan will fully vest and a pro-rated portion of outstanding performance-vesting awards will vest based on the performance achieved as of the change in control.

 

In addition, if during the five year period after a change in control our executives’ retiree medical plan is terminated or modified in a manner that is materially adverse to our executives, our executives, including our named executive officers, will be guaranteed their existing benefits under the plan through the fifth anniversary of the change in control and receive at the end of the five-year period a cash payment equal to the excess of the actuarial cost of the executive’s benefits under the plan that would be accrued on the company’s financial statements on the fifth anniversary of the change in control in the absence of the termination or modification over the amount that is accrued on our financial statements on the fifth anniversary of the change in control giving effect to the termination or modification (but excluding the accrual on the payment itself).

 

Policies on Timing of Equity Grants

 

It is our policy not to time the granting of equity awards in relation to the release of material, non-public information. Accordingly, regularly scheduled awards are permitted to be granted at times when there is material non-public information. We expect that we will generally grant awards to new hires and promotion awards effective at the time of the next scheduled Compensation Committee or Board of Directors meeting, and annual awards in June. In addition, it is our policy not to grant equity awards with effect from, or with an exercise price based on market conditions as they existed on, any date prior to the date on which the party in which granting authority is vested (typically our Compensation Committee or our Board of Directors) takes formal action to grant them.

 

Effect of Accounting and Tax Treatment on Compensation Decisions

 

Section 162(m) of the Internal Revenue Code imposes a limit on the amount of compensation that we may deduct in any one year with respect to certain “covered employees,” unless certain specific and detailed criteria are satisfied. Performance-based compensation, as defined in the Internal Revenue Code, is fully deductible if the programs are approved by stockholders and meet other requirements. As described above, all of our short-term non-equity incentive compensation is determined based upon the achievement of certain predetermined financial performance goals and follow criteria that generally permit us to deduct such amounts without being subject to limits under Section 162(m). Pursuant to applicable Treasury regulations, Section 162(m) does not apply to compensation paid or stock options or restricted stock granted under the compensation agreements and plans described in our initial public offering prospectus during the reliance transition period ending on the earlier of the date the agreement or plan is materially modified or the first stockholders meeting at which directors are elected during 2014. While we will continue to monitor our compensation programs in light of Section 162(m), our Compensation Committee considers it important to retain the flexibility to design compensation programs that are in the best long-term interests of our company and our stockholders, particularly as we continue our transition from a private to a public company. As a result, we have not adopted a policy requiring that all compensation be deductible and our Compensation Committee may conclude that paying compensation at levels that are subject to limits under Section 162(m) is nevertheless in the best interests of our company and our stockholders.

 

Other provisions of the Internal Revenue Code can also affect compensation decisions. Section 409A of the Internal Revenue Code, which governs the form and timing of payment of deferred compensation, imposes sanctions, including a 20% penalty and an interest penalty, on a recipient of deferred

compensation that does not comply with Section 409A. Our Compensation Committee takes into account the potential implications of Section 409A in determining the form and timing of compensation awarded to our executives and strives to structure its nonqualified deferred compensation plans to meet these requirements.

 

Section 280G of the Internal Revenue Code disallows a company’s tax deduction for payments received by certain individuals in connection with a change in control to the extent that the payments exceed an amount approximately three times their average annual compensation and Section 4999 of the Internal Revenue Code imposes a 20% excise tax on those payments. As described above, options and restricted stock awarded under our Officers’ Rollover Stock Plan and options granted under our Equity Incentive Plan have or will contain provisions that accelerate vesting of all or a portion of the awards in connection with a change in control. To the extent that payments upon a change in control are classified as excess parachute payments, our company’s tax deduction would be disallowed under Section 280G.

 

Summary Compensation Table

 

 

 

 

 

 

 

 

Grants of Plan-Based Awards

 

 

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End Table