UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
Schedule 14A Information
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant x
Filed by a Party other than the Registrant ¨
Check the appropriate box:
x | Preliminary Proxy Statement | |||
¨ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |||
¨ | Definitive Proxy Statement | |||
¨ | Definitive Additional Materials | |||
¨ | Soliciting Material Pursuant to §240.14a-12 | |||
Choice Hotels International, Inc. | ||||
(Name of Registrant as Specified in Its Charter) | ||||
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant) |
Payment of Filing Fee (Check the appropriate box):
x | No fee required. |
¨ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
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PRELIMINARY COPY SUBJECT TO COMPLETION
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901
NOTICE OF ANNUAL MEETING
TO BE HELD APRIL 26, 2013
To the shareholders of
CHOICE HOTELS INTERNATIONAL, INC.
You are cordially invited to attend the 2013 Annual Meeting of Shareholders of Choice Hotels International, Inc., a Delaware corporation (the Company), to be held on April 26, 2013, at 9:00 a.m., Eastern Time, for the following purposes:
1. | To elect three Class I directors from the three nominees listed in the attached proxy statement to hold office for a three-year term ending at the 2016 Annual Meeting of Shareholders or until their successors are elected and qualified; |
2. | To approve an amendment to the Choice Hotels International, Inc. 2006 Long-Term Incentive Plan to increase the number of shares authorized for issuance; |
3. | To approve the material terms for payment of executive incentive compensation; |
4. | To adopt and approve an amendment to the Companys Restated Certificate of Incorporation to declassify the Board of Directors and provide for the annual election of directors; |
5. | To hold an advisory vote to approve executive compensation; |
6. | To ratify the appointment of PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2013; |
7. | To consider a shareholder proposal requesting a report on showerheads; and |
8. | To transact other business properly coming before the Annual Meeting. |
Shareholders who owned Common Stock as of the close of business on the record date of February 28, 2013, are entitled to notice of, and to vote at, the Annual Meeting or any adjournment(s) or postponement(s) thereof. In order to have your shares represented at the meeting, you can vote your shares of Common Stock through any one of the following methods: (i) properly execute and return the enclosed proxy card; (ii) vote online; or (iii) vote by telephone.
Please note that, on or around April 5, 2013, the Company plans to relocate its corporate headquarters from the Silver Spring address listed above to a new address in Rockville, Maryland. The Company intends to hold the Annual Meeting at its new headquarters, located at One Choice Hotels Circle, Suite 400, Rockville, Maryland 20850.
A list of the Companys shareholders will be available for inspection at the office of the Company located at One Choice Hotels Circle, Suite 400, Rockville, Maryland 20850, at least 10 days prior to the Annual Meeting.
By Order of the Board of Directors |
CHOICE HOTELS INTERNATIONAL, INC. |
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Simone Wu Senior Vice President, General Counsel, Secretary & Chief Compliance Officer |
April , 2013
Silver Spring, Maryland
PLEASE READ THIS ENTIRE PROXY STATEMENT CAREFULLY AND SUBMIT YOUR
PROXY BY COMPLETING AND MAILING THE ENCLOSED
PROXY CARD OR PROVIDE YOUR VOTING INSTRUCTIONS BY TELEPHONE OR ONLINE.
PRELIMINARY COPY SUBJECT TO COMPLETION
CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 26, 2013
GENERAL INFORMATION
The Board of Directors (the Board) is soliciting your proxy for the 2013 Annual Meeting of Shareholders (the Annual Meeting). As a shareholder of Choice Hotels International, Inc., you have a right to vote on certain matters affecting the Company. This proxy statement discusses the proposals on which you are being asked to vote this year. Please read it carefully because it contains important information for you to consider when deciding how to vote. Your vote is important.
In this proxy statement, we refer to Choice Hotels International, Inc., as Choice, Choice Hotels or the Company.
The Companys annual report on Form 10-K for the fiscal year ended December 31, 2012, is being mailed with this proxy statement. The annual report on Form 10-K is not part of the proxy solicitation material.
The Board is sending proxy material to you and all other shareholders on or about April , 2013. The Board is asking for you to vote your shares by completing and returning the proxy card, or by voting by telephone or online.
Shareholders who owned Common Stock as of the close of business on February 28, 2013 are entitled to notice of, and to vote at, the Annual Meeting or any adjournment(s) or postponement(s) thereof. At the close of business on February 28, 2013, there were 58,104,437 outstanding shares of Common Stock.
Please note that, on or around April 5, 2013, the Company plans to relocate its corporate headquarters from the Silver Spring address listed above to a new address in Rockville, Maryland. The Annual Meeting will be held at its new headquarters, located at One Choice Hotels Circle, Suite 400, Rockville, Maryland 20850.
Driving Directions to Choices New Corporate Headquarters in Rockville, Maryland
GPS
For GPS driving directions, please use 200 East Middle Lane, Rockville, Maryland until our One Choice Hotels Circle, Suite 400, Rockville, MD 20850 is updated in many navigation systems. Choice is located on the corner of East Middle Lane and Hungerford Drive in Rockville, MD.
From Washington, DC, and points south
Take the George Washington Memorial Parkway north to I-495 ramp towards Maryland. Continue on the I-270-Spur north toward Rockville/Frederick. Take the MD-189 exit 5 to Falls Road North/Rockville/Town Center. Keep right at the fork. This becomes Maryland Avenue. Turn right onto East Middle Lane. Choice is located on the corner of East Middle Lane and Hungerford Drive.
From Frederick, MD, and points north
Take I-270 South towards Rockville. Bear right at I-270 Local south and head towards Shady Grove Road/Local Lanes. Take the MD-28 west exit 6-A toward Rockville Town Center. Turn left on West Montgomery Ave. Continue onto West Jefferson St. Turn Left on Maryland Avenue. Turn Right onto East Middle Lane. Choice is located on the corner of East Middle Lane and Hungerford Drive.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
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Roles of the Committee and Others in Compensation-Related Decisions |
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Board Compensation and Management Development Committee Report on Executive Compensation |
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Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table |
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PROPOSAL 6RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
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PROPOSAL 7SHAREHOLDER PROPOSAL REQUESTING A REPORT ON SHOWERHEADS |
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Appendix D: Amendment to the Restated Certificate of Incorporation |
D-1 |
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Q. | Who can vote at the Annual Meeting? |
A. | Shareholders who owned Common Stock as of the close of business on February 28, 2013, may attend and vote at the Annual Meeting. Each share of Common Stock is entitled to one vote. There were 58,104,437 shares of Common Stock outstanding on February 28, 2013. |
Q. | Why am I receiving this proxy statement? |
A. | This proxy statement describes proposals on which we would like you, as a shareholder, to vote. It also gives you information on these proposals, as well as other information, so that you can make an informed decision. |
Q. | What is the proxy card? |
A. | The proxy card enables you to vote whether or not you attend the meeting. Even if you plan to attend the meeting, we encourage you to complete and return your proxy card before the meeting date in case your plans change. By completing and returning the proxy card, you are authorizing the designated proxies, Stephen P. Joyce (the Companys Chief Executive Officer) and Ervin R. Shames (the Companys lead independent director), to vote your shares of Common Stock at the meeting, as you have instructed them on the proxy card, or in the absence of such instructions, in accordance with the recommendations of the Board of Directors. |
If a proposal is properly presented for a vote at the meeting that is not on the proxy card, Messrs. Joyce and Shames will vote your shares, under your proxy, at their discretion.
Q. | On what issues am I voting? |
A. | We are asking you to vote on: |
· | Proposal 1the election of three Class I directors from the three nominees named in this proxy statement. |
· | Proposal 2approval of an amendment to the Choice Hotels International, Inc. 2006 Long-Term Incentive Plan to increase the number of shares authorized for issuance. |
· | Proposal 3approval of the material terms for payment of executive incentive compensation. |
· | Proposal 4adoption and approval of an amendment to the Companys Restated Certificate of Incorporation to declassify the Board of Directors and provide for the annual election of directors. |
· | Proposal 5an advisory vote to approve executive compensation. |
· | Proposal 6the ratification of the appointment of PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2013. |
· | Proposal 7shareholder proposal requesting a report on showerheads. |
Q. | What is the difference between a record holder and a street name holder? |
A. | If your shares of Common Stock are registered directly in your name, you are considered the holder of record with respect to those shares. If your shares of Common Stock are held in a brokerage account or by a bank, trust or other nominee, then the broker, bank, trust or other nominee is considered to be the holder of record with respect to those shares, while you are considered the beneficial owner of those shares. In that case, your shares are said to be held in street name. Street name holders generally cannot vote their shares directly and must instead instruct the broker, bank, trust or other nominee how to vote their shares using one of the methods described below. |
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Q. | How do I vote? |
A. | If you are a record holder: |
You may vote by mail: You may do this by completing and signing your proxy card and mailing it in the enclosed, prepaid and addressed envelope.
If you mark your voting instructions on the proxy card, your shares will be voted as you instruct.
If you sign, but do not mark your voting instructions on the proxy card, your shares will be voted:
· | for the election of the three named nominees for director, |
· | for the proposal to amend the Choice Hotels International, Inc. 2006 Long-Term Incentive Plan to increase the number of shares authorized for issuance, |
· | for the approval of the material terms for payment of executive incentive compensation, |
· | for the approval of an amendment to the Companys Restated Certificate of Incorporation to declassify the Board and provide for the annual election of directors, |
· | for the advisory vote to approve executive compensation, |
· | for the ratification of PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2013, and |
· | abstain for the shareholder proposal requesting a report on showerheads. |
You may vote by telephone: You may do this by calling toll-free 1-800-652-8683 on a touch-tone phone and following the instructions. You will need your proxy card available if you vote by telephone.
You may vote online: You may do this by accessing www.envisionreports.com/chh and following the instructions. You will need your proxy card available if you vote online.
You may vote in person at the meeting: We will pass out written ballots to anyone who wants to vote at the meeting. However, if you hold your shares in street name, you must request a proxy from your broker in order to vote at the meeting.
If you are a street name holder:
If you hold your shares of Common Stock in street name, you must vote your shares through the procedures prescribed by your broker, bank, trust or other nominee. Your broker, bank, trust or other nominee has enclosed or otherwise provided a voting instruction card for you to use in directing the broker, bank, trust or other nominee how to vote your shares. In many cases, you may be permitted to submit your voting instructions online or by telephone.
Q. | What does it mean if I receive more than one proxy card? |
A. | It means that you have multiple accounts at the transfer agent or with brokerage firms. Please complete and return all proxy cards you may receive, or otherwise vote your shares online or by telephone as described herein, to ensure that all of your shares are voted. |
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Q. | What if I change my mind after I vote? |
A. | If you are a holder of record, you may revoke your proxy by any of the following means: |
· | signing or submitting another proxy as provided herein with a later date, |
· | sending us a written notice of revocation, which must be received prior to the Annual Meeting at the following address: Corporate Secretary, Choice Hotels International, Inc., One Choice Hotels Circle, Suite 400, Rockville, Maryland 20850, or |
· | voting in person at the meeting. |
If you are a street name holder, you may change your vote by complying with the procedures contained in the voting instructions provided to you by your broker, bank, trust or other nominee.
Q. | Will my shares be voted if I do not return my proxy card? |
A. | If you are a record holder, your shares will not be voted. If you are a street name holder, your brokerage firm, under certain circumstances, may vote your shares. |
Brokerage firms have authority under the New York Stock Exchange (NYSE) rules to vote customers shares on certain routine matters if the customer has not provided the brokerage firm with voting instructions within a certain period of time before the meeting. A brokerage firm cannot vote customers unvoted shares on non-routine matters. Only Proposal Six is considered a routine matter under the NYSE rules.
Accordingly, if you do not instruct your brokerage firm how to vote your shares, your brokerage firm may not vote your shares on Proposals One, Two, Three, Four, Five or Seven. Likewise, your brokerage firm may either:
· | vote your shares on Proposal Six and other routine matters that are properly presented at the meeting, or |
· | leave your shares unvoted as to Proposal Six and other routine matters that are properly presented at the meeting. |
When a brokerage firm votes its customers unvoted shares on routine matters, these shares are counted to determine if a quorum exists to conduct business at the meeting. When a brokerage firm does not vote a customers unvoted shares, these shares are counted to determine if a quorum exists; however, they are not treated as voting on a matter.
We encourage you to provide instructions to your brokerage firm. This ensures your shares will be voted at the meeting.
A purchasing agent under a retirement plan may be able to vote a participants unvoted shares. If you are a participant in the Choice Hotels Retirement Savings and Investment Plan or the Non-Qualified Retirement Savings and Investment Plan, the plans purchasing agent may vote the shares you hold under the plan if the purchasing agent does not receive voting instructions from you. The purchasing agent will vote your unvoted shares in the same proportion as all other plan participants who vote their shares.
Q. | How many shares must be present to hold the meeting? |
A. | To hold the meeting and conduct business, a majority of the Companys outstanding shares of Common Stock as of the close of business on February 28, 2013, must be present in person or represented by proxy at the meeting. This is called a quorum. |
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Shares are counted as present at the meeting if the shareholder either:
· | is present and votes in person at the meeting, or |
· | has properly submitted a proxy card, or voted their shares by telephone or online. |
Q. | What are my voting choices when voting on the election of directors? |
A. | You may vote either for or withhold your vote for each nominee. |
If you give your proxy without voting instructions, your shares will be counted as a vote for each nominee.
Q. | How many votes must the nominees have to be elected as directors? |
A. | Directors are elected by a plurality of votes cast in person or by proxy at the meeting. This means that the three nominees receiving the highest number of votes for will be elected as directors. |
Q. | What happens if a nominee is unable to stand for election? |
A. | The Board expects that each of the nominees will be available for election and willing to serve. If any nominee is unable to serve at the time the election occurs, the Board may reduce the number of directors or select a substitute nominee. In the latter case, if you have completed and returned your proxy card or voted by telephone or online, Stephen P. Joyce and Ervin R. Shames can vote your shares for a substitute nominee. They cannot vote for more than three nominees. |
Q. | What are my voting choices when voting on the approval of the amendment to the Companys 2006 Long-Term Incentive Plan? |
A. | You may vote either for or against the approval of the amendment, or you may abstain from voting. |
If you give your proxy without voting instructions, your shares will be voted for the approval of the amendment.
Q. | How many votes are needed to approve the amendment to the Companys 2006 Long-Term Incentive Plan? |
A. | The vote of a majority of the shares present in person or represented by proxy and voting on the matter is required to approve the amendment to the Companys 2006 Long-Term Incentive Plan. In addition, under NYSE rules, the total votes cast on this proposal (which includes for and against votes and abstentions, but excludes broker non-votes) must represent over 50% of the issued and outstanding shares of Common Stock. |
Q. | What are my voting choices when voting on the approval of the materials terms for payment of executive incentive compensation? |
A. | You may vote either for or against the approval of the material terms, or you may abstain from voting. |
If you give your proxy without voting instructions, your shares will be voted for the approval of the material terms.
Q. | How many votes are needed to approve the material terms for payment of executive incentive compensation? |
A. | The vote of a majority of the shares present in person or by proxy and voting on the matter is required to approve the material terms for payment of executive compensation. |
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Q. | What are my voting choices when voting on the adoption and approval of the amendment to the Companys Restated Certificate of Incorporation? |
A. | You may vote either for or against the approval of the proposal, or you may abstain from voting. |
If you give your proxy without voting instructions, your shares will be voted for approval of the amendment.
Q. | How many votes are needed to approve the amendment to the Restated Certificate of Incorporation? |
A. | The vote of a majority of the outstanding shares of Common Stock is required to approve the amendment. |
Q. | What are my voting choices when voting on the advisory vote to approve executive compensation? |
A. | You may vote either for or against the approval of the proposal, or you may abstain from voting. |
If you give your proxy without voting instructions, your shares will be voted for approval of executive compensation.
Q. | How many votes are needed to approve the advisory vote to approve executive compensation? |
A. | The vote of a majority of the shares present in person or represented by proxy and voting on the matter is required to approve the proposal on executive compensation. The proposal is an advisory vote, which means that it is nonbinding on the Company. However, the Compensation and Management Development Committee of the Board will take into account the outcome of the vote when considering future executive compensation decisions. Abstentions are not treated as voting on the matter. |
Q. | What are my voting choices when voting on the ratification of the appointment of PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2013? |
A. | You may vote either for or against the ratification, or you may abstain from voting. |
If you give your proxy without voting instructions, your shares will be voted for the ratification.
Q. | How many votes are needed to ratify the appointment of PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2013? |
A. | The vote of a majority of the shares present in person or by proxy and voting on the matter is required to ratify the appointment of PricewaterhouseCoopers LLP. Abstentions are not treated as voting on the matter. |
Q. | What are my voting choices when voting on the shareholder proposal requesting a report on showerheads? |
A. | You may vote either for or against the approval of the proposal, or you may abstain from voting. |
If you give your proxy without voting instructions, your shares will be voted abstain for the shareholder proposal requesting a report on showerheads.
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Q. | How many votes are needed to approve the shareholder proposal requesting a report on showerheads? |
A. | The vote of a majority of the shares present in person or represented by proxy and voting on the matter is required to approve the shareholder proposal requesting a report on showerheads. Abstentions are not treated as voting on the matter. |
Q. | Is my vote kept confidential? |
A. | Proxy cards, telephone and online voting reports, ballots and voting tabulations identifying shareholders are kept confidential and will not be disclosed by Choice Hotels except as required by law. |
Q. | Where do I find voting results of the meeting? |
A. | We will announce preliminary voting results at the Annual Meeting. We will publish the final results in a Form 8-K to be filed with the Securities and Exchange Commission (SEC) after the Annual Meeting. |
Q. | How can I review the Companys annual report on Form 10-K? |
A. | The annual report of Choice Hotels on Form 10-K, including the financial statements and the schedules thereto, is being mailed to you together with this proxy statement. You may also view the Form 10-K, as well as the Companys other proxy materials, on the website listed below. Click on the Investor Information link on the website. You may also view the Form 10-K through the SECs website at www.sec.gov. You may also obtain a copy of the Form 10-K free of charge by contacting the Company at (301) 592 5026. |
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDERS MEETING TO BE HELD ON APRIL 26, 2013.
The proxy statement and the Companys annual report on Form 10-K are available at www.edocumentview.com/chh.
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PROPOSAL 1ELECTION OF CLASS I DIRECTORS
The Companys Restated Certificate of Incorporation provides that the number of directors must be at least three but not more than 12, and is divided into three classes as nearly equal in number as possible. The exact number of directors within that range is determined from time to time by the Board and currently consists of nine members. The term of each class of directors is three years, and the term of one class expires each year in rotation.
Three Class I directors are to be elected at the 2013 Annual Meeting, to hold office until the 2016 Annual Meeting of Shareholders, or until their successors are elected and qualified. The remaining directors will continue to serve the terms consistent with their class, as noted below.
The Board has nominated William L. Jews, John T. Schwieters and John P. Tague to serve as Class I directors for terms of three years, expiring at the 2016 Annual Meeting of Shareholders, or until their successors are elected and qualified. Each of the nominees is currently a member of our Board of Directors. Mr. Tague was appointed to the Board in February 2012 as a Class I director and is standing for election for the first time. Mr. Tague was initially referred by a consultant engaged to propose potential new Board Members.
Please note that Proposal 4, which shareholders are being asked to approve at the 2013 Annual Meeting, will not directly impact the election of directors pursuant to this Proposal 1. If Proposal 4 is approved by the Companys shareholders, the annual election or declassification of the Board will be phased in such that directors elected by the shareholders at the 2013 Annual Meeting as Class I directors will serve for a three-year term ending at the 2016 Annual Meeting, and thereafter be subject to re-election on an annual basis. See Proposal 4 below for additional information.
The Chairman of the Board, Stewart Bainum, Jr., is the uncle of one of our directors, Scott A. Renschler. Other than the family relationship between Mr. Bainum and Dr. Renschler, there are no other familial relationships among our directors or executive officers.
The Board requires that its members possess the highest personal and professional integrity and be positioned to contribute to the Boards effectiveness through their experience. The Boards Corporate Governance and Nominating Committee regularly reviews the experience, qualifications, attributes and skills of each of the Boards director nominees and continuing directors. The following is the Boards assessment of the qualifications of each Board member that led the Committee to conclude that each Board nominee and continuing director is qualified to serve as a member of the Companys Board:
Director Nominees
William L. Jews. Mr. Jews brings to the Board experience as the chief executive officer of large, service-oriented companies. The Board benefits from Mr. Jews unique ability to relate to and comprehend many of the operational issues before the Board. In addition, Mr. Jews executive experience was characterized by management of rapid company growth, which provides the Board with insight related to various strategic growth and development plans.
John T. Schwieters. Mr. Schwieters possesses an extensive background in tax, accounting and financial matters. This experience positions Mr. Schwieters well to serve as the chair of the Boards Audit Committee as well as to generally provide the Board with opinions and advice related to the financial and risk-related
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components of various matters considered by the Board. The Board also values Mr. Schwieters continuing service on the audit committees of other publicly-traded companies as a means to provide comparative assessments of the Companys overall reporting, internal control and risk management functions.
John P. Tague. Mr. Tagues extensive experience in the airline industry enables him to provide the Board with input and suggestion relevant to the travel industry. Because Mr. Tagues industry experience is not hotel-based, he provides the Board with unique opinions and assessments about the sector of the travel/hospitality industry in which the Company operates. In addition to his overall industry experience, Mr. Tagues specific experience managing revenue matters in the airline industry provides the Board with a subject matter expert in distribution, eCommerce and marketing strategies, which is an area in which the Company (and the hospitality industry) is becoming increasingly involved.
Continuing Directors
Barbara T. Alexander. Ms. Alexanders experience and expertise in corporate finance provides the full Board generally, and the Audit Committee specifically, with valuable opinion and advice on financial and accounting matters. In addition, her experience as a director of other public companies provides the Board with a source for comparative and alternative Board decision-making and operational strategies which the Board expects to rely on increasingly as the Company expands its presence both domestically and around the world.
Stewart Bainum, Jr. Mr. Bainums long-standing relationship serving the Company provides the Board with a valuable historical perspective on the Companys culture and direction that is important in the Boards decisions concerning the Companys future direction. In addition, his experience as the board chairman for a hospitality-based real estate development and management company allows Mr. Bainum to provide the Board with unique opinions and perspectives regarding development and operational issues that affect the Companys hotel brands. Mr. Bainums previous service as Chairman of the Board of Manor Care, Inc. represents valuable, relevant experience in the duties of management and board leadership of a publicly-traded company.
Stephen P. Joyce. Because Mr. Joyce serves as the Companys president and chief executive officer, he possesses unique insight and information related to both the Companys day-to-day operations and its long- and short-term needs. Mr. Joyces immersion in all aspects of the Companys business and operations provides a perspective on operational and strategic proposals under consideration by the Board that other directors rely upon in reviewing and approving matters before the Board. In addition, the Board benefits from Mr. Joyces insight into hotel development matters gained during his previous experience as an executive at Marriott International.
Scott A. Renschler, Psy.D. Dr. Renschlers 15 years of experience as a member of the board of directors of Realty Investment Company, Inc. historically and currently one of the Companys largest shareholders provides the Board with the unique perspective on Company matters of a large shareholder of the Company. In addition, because Realtys ownership interests focus on hospitality and real estate investments other than in the Company, Dr. Renschler has previously encountered, discussed and made decisions as a board member regarding many of the industry-related issues that the Board regularly considers.
Ervin R. Shames. Mr. Shames has expertise in management strategy that is valuable to the Board both as a resource for use in evaluating the management performance of the Companys executive team, as well as for developing and fostering management initiatives and incentives within the Company. Mr. Shames experience as an executive of consumer products-based companies aligns well with the Boards constant evaluation of the Companys hotel brand performance and plans for brand development and enhancement. Mr. Shames background as a lecturer at the Darden School of Business exposed him to a variety of ideas and strategies in the area of business management which is valuable to the Board as a basis for enhancing or refining the Companys management practices and corporate governance procedures.
Gordon A. Smith. Mr. Smiths specific experience as an executive in the consumer services industry provides the Board with insight into trends, operations, practices and ideas in industries and markets that have a
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significant indirect impact on the Companys core business of hotel franchising. The knowledge Mr. Smith gained during his tenure at American Express, where he played a vital role in managing a global brand and in developing partnerships and customer rewards programs, is valuable in helping the Board review advertising, branding and growth strategies.
Class I Terms Expiring 2013
William L. Jews, age 61, director from 2000 to 2005 and since March 2006. President and Chief Executive Officer of CareFirst, Inc. from January 1998 to December 2006. Previously, he served as President and Chief Executive Officer of CareFirst of Maryland, Inc. and Group Hospitalization and Medical Services, Inc. and served as Chief Executive Officer of Blue Cross Blue Shield of Delaware. He was formerly President and Chief Executive Officer of Blue Cross Blue Shield of Maryland, Inc., from April 1993 until January 1998. Mr. Jews is Chairman of The Ryland Group, Inc. and a director of Camden Learning Corporation. In the past five years, Mr. Jews has also served as a director of MBNA Corporation, Ecolab, Inc., and Fortress International Group, Inc.
John T. Schwieters, age 73, director since 2005. Senior Executive of Perseus LLC since May 2012, Senior Advisor of Perseus LLC from 2009 to May 2012, and Vice Chairman of Perseus LLC from 2000 to 2009; Managing Partner of Arthur Andersens Mid-Atlantic region 1989 to 2000; head of Arthur Andersens tax practice from 1974 to 1989. Mr. Schwieters is a director of the Danaher Corporation and Smithfield Foods, Inc. In the past five years, Mr. Schwieters has also served as a director of Manor Care, Inc. and Union Street Acquisition Corp.
John P. Tague, age 50, director since February 2012. Chairman and Chief Executive Officer of Greatwide Logistics Services, Inc. since July 2011. President of United Air Lines, Inc. and Executive Vice President of UAL Corporation from July 2009 until October 2010; and Executive Vice President and Chief Operating Officer of United Air Lines, Inc. and UAL Corporation from May 2008 until July 2009. He served as Executive Vice President and Chief Revenue Officer of United Air Lines, Inc. and UAL Corporation from April 2006 until May 2008. He joined United as Executive Vice President in 2003. Mr. Tague also serves on the board of directors of Reddy Ice Inc., a private equity-backed company.
Class II Terms Expiring in 2014
Stewart Bainum, Jr., age 66, director from 1977 to 1996 and since 1997. Chairman of the Board of Choice Hotels International, Inc., from March 1987 to November 1996 and since October 1997; Director of the Board of Realty Investment Company, Inc., a real estate management and investment company, since December 2005 and Chairman from December 2005 through June 2009; Director of the Board of Sunburst Hospitality Corporation, a real estate developer, owner and operator, since November 1996 and Chairman from November 1996 through June 2009. He was a director of Manor Care, Inc., from September 1998 to September 2002, serving as Chairman from September 1998 until September 2001. From March 1987 to September 1998, he was Chairman and Chief Executive Officer of Manor Care, Inc. He served as President of Manor Care of America, Inc., and Chief Executive Officer of ManorCare Health Services, Inc., from March 1987 to September 1998, and as Vice Chairman of Manor Care of America, Inc., from June 1982 to March 1987.
Ervin R. Shames, age 72, director since 2002. An independent management consultant to consumer goods and services companies, advising on management and marketing strategy, since January 1995 and lecturer at the University of Virginias Darden Graduate School of Business from 1996 until 2008. From December 1993 to January 1995, Mr. Shames served as the Chief Executive Officer of Borden, Inc., and was President and Chief Operating Officer of Borden, Inc., from July 1993 until December 1993. He served as President and Chief Executive Officer of Stride Rite Corporation from 1990 to 1992, and then served as its Chairman, President and
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Chief Executive Officer until 1993. From 1967 to 1989, he served in various management positions with General Foods and Kraft Foods. Mr. Shames serves as a director of Online Resources Corporation and Select Comfort Corporation.
Gordon A. Smith, age 54, director since 2004. Chief Executive Officer, Chase Consumer and Community Banking, JP Morgan Chase since 2007. President, Global Commercial Card Group for American Express Travel Related Services, Inc., from 2005 to 2007. President of Consumer Card Services Group for American Express Travel Related Services, Inc., from September 2001 to 2005 and Executive Vice President of U. S. Service Delivery from March 2000 to September 2001. Mr. Smith joined American Express in 1978 and held positions of increasing responsibility within the company. His prior positions include serving as Senior Vice President in charge of the American Express Service Center in Phoenix and Senior Vice President of Operations and Reengineering for the Latin America and Caribbean region, as well as senior positions in the U.S. Credit and Fraud operations, at Amex Life Insurance Company and in the international card and Travelers Cheque businesses.
Class III Terms Expiring 2015
Barbara T. Alexander, age 64, director since February 2012. Independent consultant since February 2004. From October 1999 to January 2004, she was a senior advisor for UBS, and from January 1992 to September 1999, she was a managing director of Dillon Read & Co., Inc. and successor firms. Prior to joining Dillon Read, Ms. Alexander was a managing director in the corporate finance department of Salomon Brothers. Ms. Alexander is a director of QUALCOMM Incorporated, Allied World Assurance Company Holdings, Ltd., and KB Home. In the past five years, Ms. Alexander has also served as a director of Centex Corporation and Federal Home Loan Mortgage Corporation (Freddie Mac).
Stephen P. Joyce, age 53, director since April 2008. President and Chief Executive Officer of Choice Hotels International, Inc. since June 2008 and President and Chief Operating Officer of Choice Hotels International, Inc., from May 2008 to June 2008. Prior to joining the Company, he was employed by Marriott International, Inc. as Executive Vice President, Global Development/Owner and Franchise Services, from 2005 until April 2008 and held several other senior executive positions during his 26-year tenure with Marriott International, Inc. Mr. Joyce is a director of DineEquity, Inc.
Scott A. Renschler, Psy.D. age 43, director since February 2008; clinical psychologist in private practice since July 2007. Since 1993, he has served as a member of the board of directors of the Commonweal Foundation, Inc. He is also a director, since 2000, of the Mental Wellness Foundation, and a Trustee, since 2007, of the Crisis Clinic where he also served as President of the Board of Trustees from January 2009 to January 2011. He served as a director of Realty Investment Company, Inc. from 1993 until 2008.
The Board recommends a vote FOR each of the Class I nominees.
The Board is responsible for overseeing the overall performance of the Company. Members of the Board are kept informed of the Companys business primarily through discussions with the Chairman, the Chief Executive Officer and other members of the Companys management, by reviewing materials provided to them and by participating in Board and committee meetings.
In 2012, the Board held six meetings and each director attended at least 75% of all meetings of the Board and the standing committees of the Board on which he or she served. In 2012, all of the then current Board members attended the Annual Meeting. The independent, non-management members of the Board are required to
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meet at least once a year in executive session without management. Mr. Shames, the lead independent director, chairs these meetings. Four such meetings were held in 2012.
The Board has adopted Corporate Governance Guidelines, a Corporate Ethics Policy, and charters for each of its standing committees, including the Audit Committee, Compensation and Management Development Committee, Corporate Governance and Nominating Committee, and Diversity Committee, each of which is discussed further below. Each of these documents is included in the investor relations section of the Companys website at www.choicehotels.com.
The Board is led by the Chairman, Mr. Bainum, who has served in this role for more than 23 years. The benefits of Mr. Bainums leadership of the Board stem both from Mr. Bainums long-standing relationship and involvement with the Company, which provides a unique understanding of the Companys culture and business, as well as his on-going role as the Boards primary day-to-day contact with the Companys senior management team, which ensures that a constant flow of Company-related information is available to the Board as a whole. This flow of communication enables Mr. Bainum to identify issues, proposals, strategies and other considerations for future Board discussions and to assume the lead in many of the resulting discussions during Board meetings.
The Company has elected to separate the positions of Chairman (held by Mr. Bainum) and Chief Executive Officer (held by Mr. Joyce). Although Mr. Joyce serves as a member of the Board, we believe that Mr. Bainums status as Chairman provides for a meaningful division of leadership between management and the Board.
In addition to this division of leadership between Chairman and Chief Executive Officer, leadership is further enhanced on the Board based on the Boards annual election of a lead independent director. In light of the Company and Board leadership roles held by Mr. Bainum and Mr. Joyce, the Board believes that it is important to maintain a Board leadership position that is held by an independent director. Currently, Mr. Shames serves as the Boards lead independent director. In his role as lead independent director, Mr. Shames serves as chairman of executive session meetings in which Mr. Bainum and Mr. Joyce (as well as Dr. Renschler) do not participate. The goal and purpose of these meetings chaired by Mr. Shames is to permit the non-management and independent members of the Board to freely discuss issues or concerns related to Company and Board performance, including issues or concerns related to Company or Board leadership. The Board meets regularly in executive session. Four such meetings were held in 2012. In addition to chairing the executive sessions, the lead independent director manages the Boards review of the CEOs performance, coordinates activities of the independent directors and performs any other duties assigned by the Board.
Boards Role in Risk Oversight
The Board administers its risk oversight function through two primary mechanisms: (1) through the adoption and enforcement of Board policies and procedures intended to require the full Board to discuss, address and approve or disapprove certain items determined by their nature to involve various risks requiring Board consideration, and (2) through the efforts of the Boards Audit Committee, which focuses on the particular risks to the Company that arise out of financial reporting.
The Boards primary role in risk oversight is to establish and maintain effective policies and procedures that serve to highlight or expose critical risks. The Board has adopted a set of Board policies applicable to various transactions involving the Company and its directors, officers and employees that the Board has determined are likely to involve a potentially higher degree of risk than ordinary course transactions, and therefore are appropriately reviewable by the full Board. For these transactions, the Company is required to obtain Board approval, which provides the Board with an opportunity to discuss the transaction and attendant risk, prior to becoming binding on the Company. These transactions requiring prior Board approval include transactions above
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certain limits, certain lending arrangements, certain litigation settlements, and related party transactions. In addition to the full Boards role in risk oversight, different committees of the Board play a role in overseeing risks attendant to the committees particular area of focus. For instance, the Compensation and Management Development Committee assumes primary responsibility for risk oversight as it relates specifically to the Companys compensation policies and practices, and the Corporate Governance and Nominating Committee and Diversity Committee are empowered to raise risks or potential risks brought to such Committees attention to the full Board for discussion. In addition, as discussed below, the Boards Audit Committee has specific functions and responsibilities that generally relate to the risk oversight function.
The general functions of the Audit Committee are as set forth under the heading Committees of the Board Audit Committee. As a result of the Audit Committees performance of these functions, it is often provided with access to reports and analysis (either internally generated or created by the Companys independent auditors) relating to issues or concerns that, because of the potential for exposure to risk, the Committee determines to be proper for additional review and discussion. Often, these discussions may remain within the Audit Committee, if, after discussions with the Companys Chief Executive Officer, Chief Financial Officer, Controller, and other relevant Company employees, the result of the review is a determination by the Audit Committee that the identified potential for risk is being adequately addressed by the Company. In certain circumstances, the Audit Committee may determine (either initially after identification of the potential risk or after a preliminary review conducted by the Audit Committee) that certain risks or potential risks be referred to the full Board for discussion.
The Board currently has nine directors, a majority (six) of whom the Board has determined to be independent under the listing standards of the NYSE. The independent directors are Barbara T. Alexander, William L. Jews, John T. Schwieters, Ervin R. Shames, Gordon A. Smith, and John P. Tague.
In determining director independence, the Board applies the standards as set forth in the listing standards of the NYSE and additional independence standards adopted by our Board as follows:
· | No director can be independent until five years following the termination or expiration of a directors employment with the Company, rather than three years as currently required under the NYSE rules; |
· | No director can be independent who is, or in the past five years has been, affiliated with or employed by a present or former outside auditor of the Company until five years after the end of either the affiliation or the auditing relationship, rather than three years as currently required under the NYSE rules; and |
· | No director can be independent if he or she in the past five years has been part of an interlocking directorate, rather than three years as currently required under the NYSE rules. |
Corporate Governance Guidelines
The Corporate Governance Guidelines, adopted by the Board of Directors, are a set of principles that provide a framework for the Companys corporate governance. The main tenets of the Guidelines are:
· | Create value for shareholders by promoting their interests; |
· | Focus on the future, formulate and evaluate corporate strategies; |
· | Duty of loyalty to the Company by directors; |
· | Annual Chief Executive Officer evaluation by independent directors; |
· | Annual approval of three-year strategic plan and one-year operating plan or as the Board deems necessary in the event there are no material changes to the strategic and operating plans then in effect; |
· | Annual assessment of Board and committee effectiveness by the Corporate Governance and Nominating Committee; |
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· | Directors are required to reach and maintain ownership of $175,000 of Company stock; |
· | Directors attendance expectations; and |
· | Annual report of succession planning and management development by Chief Executive Officer. |
The Board has established a Corporate Ethics Policy to aid each director, officer and employee of the Company (including the Chief Executive Officer, Chief Financial Officer and Controller) and its subsidiaries in making ethical and legal decisions in his or her daily work. To the extent granted, the Company will post amendments to or waivers from the Corporate Ethics Policy (to the extent applicable to the Chief Executive Officer, Chief Financial Officer and Controller) on the Companys website.
The standing committees of the Board are the Audit Committee, the Compensation and Management Development Committee, the Corporate Governance and Nominating Committee and the Diversity Committee. The charters for each of these committees are included in the investor relations section of the Companys website at www.choicehotels.com. All of the current members of each of the Audit Committee, Compensation and Management Development Committee, and Corporate Governance and Nominating Committee are independent, as required by the committee charters and the current listing standards of the NYSE and the rules of the SEC, as applicable.
The following provides a description of certain functions, current membership and meeting information for each of the Board committees for 2012.
Compensation and Management Development Committee
In September 2012, the Board amended the Compensation Committees name and updated its charter. These changes were made to reflect the Committees increasing role in the Companys executive management, talent development and succession planning, in addition to its core focus on compensation matters.
Under the terms of its revised charter, the Compensation and Management Development Committee (Compensation Committee) discharges the Boards responsibilities relating to compensation of the Companys executives through the following functions, among others:
· | Overseeing the administration of the Companys equity compensation plans and authorizing equity awards thereunder; |
· | Establishing and updating the peer group used to compare the Companys compensation practices; |
· | Reviewing and approving the compensation of executive officers, in light of shareholder Say on Pay results and other relevant factors; |
· | Setting the compensation for the non-employee members of the Board of Directors; |
· | Reviewing bonus and incentive plans, pensions and retirement; |
· | Reviewing other employee benefit plans and programs; |
· | Reviewing the Companys succession plan and management development; |
· | Self-evaluating annually; |
· | Setting criteria and guidelines for performance of the Chief Executive Officer; |
· | Assessing performance of the Chief Executive Officer against performance objectives; and |
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· | Reviewing and discussing the Companys Compensation Discussion and Analysis and producing the annual Compensation Committee report for the Companys proxy statement. |
The Compensation Committee discharges its responsibilities relating to executive management, talent development and succession planning of the Companys executives by reviewing and discussing the Companys management succession plan for the CEO and other key senior executives and by reviewing and discussing management development for key executives as part of the Companys annual talent review process.
During 2012, at the direction of the Chairman of the Compensation Committee, Mr. Joyce our President and Chief Executive Officer assisted by Patrick Cimerola our Senior Vice President, Human Resources & Administration prepared and distributed to Committee members meeting agendas, consultant-provided compensation related information, and Company reports and data in preparation for Committee meetings. In addition, in conjunction with the Compensation Committee Chairman, Messrs. Joyce and Cimerola prepared and presented specific compensation proposals to the Compensation Committee, including Mr. Joyces respective assessment of individual executive officer performance and recommended compensation amounts for each officer other than himself. See the Compensation Discussion and Analysis section below for more information on Mr. Joyces role in recommending the compensation paid to our Named Executive Officers (as defined below in Compensation Discussion and Analysis) in 2012. None of our executive officers determined or recommended the amount or form of non-employee director compensation.
In accordance with its charter, the Compensation Committee has the authority to retain, terminate and approve professional arrangements for outside compensation consultants to assist the Committee. During 2012, the Compensation Committee retained Mercer USA (Mercer) to provide various compensation-related services and assistance, including preparing a report on executive compensation trends, assisting the Compensation Committee in reviewing the Companys Board and executive compensation practices, updating the Companys peer group for use beginning in 2013 for future compensation decisions, and providing regulatory updates. The Company paid Mercer $169,894 for compensation consulting services provided in 2012 related to their engagement by the Compensation Committee. In addition to the Compensation Committee engagement, the Company paid Mercer $35,835 for actuarial services related to the Companys supplemental executive retirement plan and $7,282 for non-executive salary survey data provided in 2012. The Company utilized Mercer for these actuarial and salary survey-related services with the Compensation Committees approval. See Compensation Discussion and Analysis below for additional information related to the role of Mercer in the Companys 2012 executive compensation decisions.
Three affiliates of Mercer, Marsh USA (Marsh), Seabury & Smith, Inc. (Seabury) and Kroll Associates, Inc. (Kroll) were engaged during 2012 by the Company. Marsh was the Companys insurance broker and risk advisor from September 2008 through September 2012; Seabury provided the Company with administrative services relating to the Companys franchisees from August 2009 through November 2012, and Kroll has, from time to time, since 2005 provided the Company with various investigative and background reports. In 2012, the Company paid Marsh aggregate fees equal to $135,441 and paid Seabury aggregate fees equal to $88,112. The Company did not make any payments to Kroll during 2012. When each of Marsh, Seabury and Kroll was initially retained by the Company to provide services, the Companys then current General Counsel approved the engagement. Neither the Board nor any committee thereof was involved in the decision to engage Marsh, Seabury or Kroll, and prior to the decision to engage Mercer, the Compensation Committee was not advised of Marshs, Seaburys or Krolls relationship with Mercer, or asked to approve the Companys maintenance of its existing business relationship with Marsh, Seabury or Kroll. As indicated above, during 2012, the Companys on-going business relationship with both Marsh and Seabury terminated.
In 2012, the Compensation Committee met six times. The Chair of the Compensation Committee was Ervin R. Shames and the other members were Fiona Dias, William L. Jews, Gordon A. Smith, David C. Sullivan, and John P. Tague. Ms. Dias and Mr. Sullivan served on the Committee through the April Committee meeting. Mr. Tague joined the Committee beginning with the February Committee meeting, and Mr. Jews joined the Compensation Committee beginning with the June Committee meeting.
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While the charter authorizes the Compensation Committee to delegate its responsibilities to subcommittees, to date, the Committee has not delegated any of its responsibilities in this manner.
Audit Committee
Under the terms of its charter, the Audit Committee assists the Board to fulfill its oversight responsibilities with respect to the Companys auditing, accounting and financial reporting processes generally. The Committee discharges these duties through the following functions, among others:
· | Conferring separately with the Companys independent accountants and internal auditors regarding their responsibilities; |
· | Reviewing reports of the Companys independent accountants and internal auditors and annual and quarterly reports for filing with the SEC; |
· | Reviewing reports of the Companys independent accountants concerning financial reporting processes and internal controls; |
· | Establishing and monitoring a complaints procedure regarding accounting and auditing matters; |
· | Pre-approving all audit and non-audit services provided by the Companys independent accountants; |
· | Self-evaluating annually; |
· | Determining the selection, compensation and appointment of the Companys independent accountants and overseeing their work; |
· | Reviewing the Companys policies with respect to risk management; and |
· | Reviewing with the Chief Executive Officer and Chief Financial Officer, the Companys disclosure controls and procedures. |
In 2012, the Audit Committee met eight times. The Chair of the Committee was John T. Schwieters and the other members of the Committee were Ervin R. Shames, David Sullivan, William Jews, Barbara T. Alexander and John P. Tague. Mr. Jews and Mr. Sullivan served on the Committee through the April Committee meeting. Mr. Tague joined the Committee beginning with the February Committee meeting and Ms. Alexander joined the Committee beginning with the April Committee meeting. Ms. Alexander currently serves on the audit committees of three other public companies. The Board has determined that such service does not impair the ability of Ms. Alexander to serve on our Audit Committee. The Board has determined that Mr. Schwieters and Ms. Alexander are qualified as audit committee financials expert within the meaning of the SECs regulations. Furthermore, each member of the Committee has accounting and related financial management expertise within the meaning of the listing standards of the NYSE.
Corporate Governance and Nominating Committee
Under the terms of its charter, the Corporate Governance and Nominating Committee assists the Board to determine the composition of the Board and its committees and oversee the Companys corporate governance through the following functions, among others:
· | Recommending to the Board a set of Corporate Governance Guidelines; |
· | Determining the size and composition of the Board; |
· | Self-evaluating annually; |
· | Engaging search firms and recommending candidates to fill new positions or vacancies on the Board; |
· | Determining actions to be taken with respect to directors who are unable to perform their duties; |
· | Setting the Companys policies regarding the conduct of business between the Company and any other entity affiliated with a director; and |
· | Monitoring and making recommendations to the Board concerning matters of corporate governance. |
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In 2012, the Committee met two times. John T. Schwieters was the Chair of the Committee through the April meeting and the other members of the Committee were Ervin R. Shames and William L. Jews. Mr. Jews was appointed as Chair of the Committee at the April Committee meeting and began serving as Chair at the December meeting.
Diversity Committee
Under the terms of its charter, the Diversity Committee seeks to assist and oversee management in its development of a culture that values diversity of people which leads to diversity of thought and benefits the business and to further efforts to develop a workforce, franchise and vendor base that is reflective of the community in which the Company does business. The Committee seeks to achieve these goals through the following functions, among others:
· | Overseeing management in programs and initiatives oriented toward assuring equality of opportunities in all facets of the Companys business; and |
· | Reviewing efforts by management to increase the diversity of the Companys workforce. |
In 2012, the Committee met two times. Fiona P. Dias was the Chair of the Committee through the April Committee meeting and the other members of the Committee were William L. Jews, Gordon A. Smith, Barbara T. Alexander and Scott Renschler. Ms. Alexander was appointed to the Committee in February 2012, and was appointed as Chair of the Committee at the September Committee meeting.
Contacting the Board of Directors
Shareholders or other interested parties may contact an individual director, the lead independent director of the Board, or the independent directors as a group by mail at the following address:
Mail: | Choice Hotels International, Inc. |
One Choice Hotels Circle, Suite 400
Rockville, Maryland 20850
Attn: Board of Directors
Each communication should specify the applicable addressee or addressees to be contacted, as well as the general topic of the communication. The Company will initially receive and process communications before forwarding them to the addressee. The Company generally will not forward to the directors a shareholder communication that it determines to be primarily commercial in nature or relates to an improper or irrelevant topic, or that requests general information about the Company.
Consideration of Director Candidates
The Corporate Governance and Nominating Committee administers the process for nominating candidates to serve on the Companys Board. The Committee recommends candidates for consideration by the Board as a whole, which is responsible for appointing candidates to fill any vacancy that may be created between meetings of the shareholders and for nominating candidates to be considered for election by shareholders at the Companys Annual Meeting.
The Board has established selection criteria to be applied by the Corporate Governance and Nominating Committee and by the full Board in evaluating candidates for election to the Board. These criteria include: (i) independence, (ii) integrity, (iii) experience and sound judgment in areas relevant to the Companys business, (iv) a proven record of accomplishment, (v) willingness to speak ones mind, (vi) the ability to commit sufficient time to Board responsibilities, (vii) the ability to challenge and stimulate management, and (viii) belief in and passion for the Companys mission and vision. The Committee also periodically reviews with the Board the
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appropriate skills and characteristics required of Board members in the context of the current membership of the Board. This assessment includes considerations such as diversity, age and functional skills in relation to the perceived needs of the Board from time to time.
The Corporate Governance and Nominating Committee uses a variety of methods to identify potential nominees for election to the Board, including consideration of candidates recommended by directors, officers or shareholders of the Company. When reviewing and recommending candidates to join the Board, the Corporate Governance and Nominating Committee considers how each prospective new members unique background, experience and expertise will add to the Boards overall perspective and ability to govern the Company. While the Committee has not established any formal diversity policy to be used to identify director nominees, the Committee recognizes that a current strength of the Board stems from the diversity of perspective and understanding that arises from discussions involving individuals of diverse background and experience. When assessing a Board candidates background and experience, the Committee takes into consideration all relevant components, including, but not limited to, a candidates gender and cultural and ethnic status. The Committee may also use one or more professional search firms or other advisors to assist the Committee in identifying candidates for election to the Board.
The Corporate Governance and Nominating Committee will consider director candidates recommended by shareholders and evaluate them using the same criteria as applied to candidates identified through other means, as set forth above. Shareholders seeking to recommend a prospective candidate for the Committees consideration should submit the candidates name and qualifications, including the candidates consent to serve as a director of the Company if nominated by the Committee and so elected by mail to: Corporate Secretary, Choice Hotels International, Inc., One Choice Hotels Circle, Suite 400, Rockville, Maryland 20850.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table shows how much Common Stock is beneficially owned by (i) each director of the Company, (ii) the Companys Named Executive Officers (as defined below in Compensation Discussion and Analysis), (iii) all executive officers and directors of the Company as a group and (iv) all persons who are known to own beneficially more than 5% of the Companys Common Stock, as of February 28, 2013 (unless otherwise noted). Unless otherwise specified, the address for each of them as of February 28, 2013, was 10750 Columbia Pike, Silver Spring, Maryland 20901.
Name of Beneficial Owner |
Common Stock Beneficially Owned(1) |
Right
to Acquire(2) |
Unvested Restricted Stock(3) |
Percentage of Shares Outstanding(4) |
||||||||||||
Stewart Bainum, Jr. |
11,166,148 | (5)(6) | | | 19.22 | %(5)(6) | ||||||||||
Barbara T. Alexander |
8,000 | | 2,924 | * | ||||||||||||
William L. Jews |
25,888 | | 5,901 | * | ||||||||||||
Stephen P. Joyce |
69,673 | (19) | 706,440 | 46,007 | 1.41 | % | ||||||||||
Scott A. Renschler |
319,173 | (5)(7)(19) | | 5,901 | * | |||||||||||
John T. Schwieters |
30,640 | | 5,901 | * | ||||||||||||
Ervin R. Shames |
50,380 | | 5,901 | * | ||||||||||||
Gordon A. Smith |
37,923 | | 5,901 | * | ||||||||||||
John P. Tague |
5,188 | | 2,924 | * | ||||||||||||
Patrick S. Pacious |
20,236 | 133,859 | 62,095 | * | ||||||||||||
David A. Pepper |
45,135 | 170,258 | 9,385 | * | ||||||||||||
David L. White |
44,870 | 144,639 | 24,356 | * | ||||||||||||
Simone Wu |
| 5,362 | 8,963 | * | ||||||||||||
Bruce N. Haase |
30,461 | (8) | | 12,811 | * | |||||||||||
All Directors and Executive Officers as a Group (17 persons) |
11,724,403 | 1,228,447 | 233,992 | 20.18 | % | |||||||||||
Principal Stockholders |
||||||||||||||||
Barbara J. Bainum |
10,366,480 | (5)(9) | | | 17.84 | % | ||||||||||
Bruce D. Bainum |
12,084,667 | (5)(10) | | | 20.80 | % | ||||||||||
Roberta D. Bainum |
11,205,398 | (5)(11) | | | 19.28 | % | ||||||||||
Stewart W. Bainum |
8,256,852 | (5)(12) | | | 14.21 | % | ||||||||||
Todd S. Renschler |
6,968,168 | (5)(13) | | | 12.00 | % | ||||||||||
Realty Investment Company, Inc. |
6,821,574 | (5)(15)(19) | | | 11.74 | % | ||||||||||
T Rowe Price Associates, Inc. |
6,989,033 | (16) | | | 12.03 | % | ||||||||||
Baron Capital Group, Inc. |
5,652,501 | (14) | | | 9.73 | % | ||||||||||
Christine A. Shreve |
4,304,274 | (5)(17) | | | 7.40 | % | ||||||||||
Commonweal Foundation, Inc. |
2,581,000 | (5)(18) | | | 4.44 | % |
* | Less than 1%. |
1 | Includes shares: (i) for which the named person has sole voting and investment power, (ii) for which the named person has shared voting and investment power, and (iii) shares held in an account under the Choice Hotels Retirement Savings and Investment Plan (401(k) Plan) or the Choice Hotels Non-qualified Retirement Savings and Investment Plan. Does not include: (i) shares that may be acquired through stock option exercises within 60 days or (ii) unvested restricted stock holdings which the holder maintains voting rights, each of which is set out in a separate column. |
2 | Shares that can be acquired through stock option exercises within 60 days of February 28, 2013. |
3 | Shares for which the holder maintains voting rights, but are subject to a vesting schedule, forfeiture risk and other restrictions. |
4 | For each beneficial owner, ownership percentage is based on (i) the sum of the number of shares listed under each of the column headings Common Stock Beneficially Owned, Right to Acquire and Unvested Restricted Stock, and (ii) 58,104,437 shares outstanding on February 28, 2013. |
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5 | Because of SEC reporting rules, shares held by Realty Investment Company, Inc. (Realty), a real estate management and investment company, Commonweal Foundation, Inc. (Commonweal), a private foundation sponsored by the Bainum family, and certain Bainum and Renschler family entities are attributed to Realty, Commonweal, Christine A. Shreve and more than one of the Bainums and Renschlers included in this table because Realty, Commonweal, Ms. Shreve and such named Bainums and Renschlers have shared voting or dispositive control. Realty, Commonweal, Ms. Shreve, and members of the Bainum and Renschler families (including various partnerships, corporations and trusts established by members of the Bainum and Renschler families) in the aggregate have the right to vote 30,185,430 shares, approximately 51.95% of the outstanding shares of Common Stock as of February 28, 2013. |
6 | Includes 1,614,860 shares owned by the Stewart Bainum, Jr. Declaration of Trust of which Mr. Bainum, Jr. is the sole trustee and beneficiary. Also includes 6,821,574 shares owned by Realty in which Mr. Bainum, Jr.s trust owns voting stock and has shared voting authority; 978,482 shares owned by Mid Pines Associates Limited Partnership (Mid Pines), in which Mr. Bainum, Jr.s trust is managing general partner and has shared voting authority; 1,644,000 shares owned by Leeds Creek Holdings, LLC whose only member is Mr. Bainum Jr.s trust; 96,000 shares owned by the Foundation for Marylands Future, a private foundation whose principal sponsor is Mr. Bainum, Jr. and for which he has sole voting authority; and 11,232 shares, which Mr. Bainum, Jr. has the right to receive upon termination of his employment with the Company pursuant to the terms of the Companys retirement plans. |
7 | Includes 176,728 shares owned by the Scott Renschler Declaration of Trust, of which Dr. Renschler is the sole trustee and beneficiary; and 120,849 shares owned by the BBB Trust J, a trust for the benefit of Dr. Renschlers cousins for which he serves as trustee. Also includes 21,596 shares Dr. Renschler is entitled to under the Companys non-employee director plan. |
8 | Based on the Companys records as of Mr. Haases last day of employment with the Company, May 31, 2012. |
9 | Includes 1,292,840 shares owned by the Barbara Bainum Declaration of Trust of which Ms. Bainum is the sole trustee and beneficiary. Also includes 1,175,000 shares owned by Shadow Holdings, LLC for which she shares voting authority and whose sole members are Ms. Bainum and trusts for her benefit; 978,482 shares owned by Mid Pines, in which Ms. Bainums trust is a general partner and has shared voting authority; and 6,821,574 shares owned by Realty, in which Ms. Bainums trust owns voting stock and has shared voting authority. Also includes 98,584 shares owned by trusts for the benefit of Ms. Bainums nephews for which Ms. Bainum is the trustee. Ms. Bainums address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759. |
10 | Includes 2,431,721 shares owned by the Bruce Bainum Declaration of Trust of which Dr. Bainum is the sole trustee and beneficiary. Also includes 1,691,000 shares owned by Posadas Holdings, LLC for which he shares voting authority and whose sole members are Dr. Bainum, his children and trusts for the benefit of he and his children; 978,482 shares owned by Mid Pines, in which Dr. Bainums trust is a general partner and has shared voting authority; and 6,821,574 shares owned by Realty, in which Dr. Bainums trust owns voting stock and has shared voting authority. Also includes 161,890 shares owned by trusts for the benefit of Dr. Bainums adult children of which Dr. Bainum is the trustee. Dr. Bainums address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759. |
11 | Includes 1,817,724 shares owned by the Roberta Bainum Declaration of Trust of which Ms. Bainum is the sole trustee and beneficiary. Also includes 1,430,000 shares owned by Sweetwater Holdings, LLC for which she shares voting authority and whose sole members are Ms. Bainum and trusts for the benefit of she and her children; 978,482 shares owned by Mid Pines, in which Ms. Bainums trust is a general partner and has shared voting authority; and 6,821,574 shares owned by Realty, in which Ms. Bainums trust owns voting stock and has shared voting authority. Also includes 157,618 shares owned by trusts for the benefit of Ms. Bainums adult children for which Ms. Bainum is the trustee. Ms. Bainums address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759. |
12 | Includes 2,667,853 shares held directly by the Stewart Bainum Declaration of Trust, of which Mr. Bainum is the sole trustee and beneficiary; 224,399 shares owned by Cambridge Investment Co., LLC in which Mr. Bainum is the manager and sole Class A member; and 60,000 shares owned by Dinwiddie Enterprises, Inc., a private investment company in which Mr. Bainums trust owns all the stock. Also includes 2,581,000 |
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shares owned by Commonweal Foundation, Inc., a private foundation whose principal sponsors are Mr. Bainum and his wife for which Mr. Bainum shares voting authority. Also includes 2,723,600 shares owned by the Jane L. Bainum Declaration of Trust, the sole trustee and beneficiary of which is Mr. Bainums wife. Mr. Bainums address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759. |
13 | Includes 146,594 shares owned by the Todd Renschler Declaration of Trust of which Dr. Renschler is the sole trustee and beneficiary. Also includes 6,821,574 shares owned by Realty for which Dr. Renschler serves as a director and in which his trust owns stock. Dr. Renschlers address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759. |
14 | The Company is relying on the Schedule 13G, filed on February 14, 2013, by Baron Capital Group, Inc. (BCG), BAMCO, Inc., Baron Capital Management, Inc. (BCM), Ronald Baron and Baron Growth Fund (BGF). According to this filing, BCG beneficially owns 5,611,001 shares, BAMCO, Inc. beneficially owns 4,916,900 shares, BCM beneficially owns 694,101 shares, Ronald Baron beneficially owns 5,652,501 shares and BGF beneficially owns 3,007,500 shares. These reporting persons disclaim beneficial ownership to the extent these shares are held by their investment advisory clients and not directly by the reporting persons. The address for the reporting persons is 767 Fifth Avenue, 49th Floor, New York, New York 10153. |
15 | Realty is controlled and owned by members of the Bainum family, including Stewart Bainum, Jr., Barbara Bainum, Bruce Bainum, Roberta Bainum, Todd Renschler and Scott Renschler. Realtys address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759. Christine A. Shreve is an officer and director of Realty. |
16 | The Company is relying on the Schedule 13G filed on February 12, 2013, by T. Rowe Price Associates, Inc. According to this filing, T. Rowe Price beneficially owns 6,989,033 shares. These securities are owned by various individual and institutional investors which T. Rowe Price Associates, Inc. (Price Associates) serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities Exchange Act of 1934, Price Associates is deemed to be a beneficial of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities. The address for the reporting person is 100 E. Pratt Street, Baltimore, Maryland 21202. |
17 | Includes 2,800 shares owned by Ms. Shreve jointly with her husband; 1,175,000 shares owned by Shadow Holdings, LLC, an LLC whose sole members are Barbara Bainum and trusts for her benefit, for which Ms. Shreve is managing member and has shared voting authority; 1,691,000 shares owned by Posadas Holdings, LLC, an LLC whose sole members are Bruce Bainum, his children and trusts for the benefit of he and his children for which Ms. Shreve is managing member and has shared voting authority; 1,430,000 shares owned by Sweetwater Holdings, LLC, an LLC whose sole members are Roberta Bainum and trusts for the benefit of she and her children for which Ms. Shreve is managing member and has shared voting authority; and 5,474 shares owned by trusts for the benefit of Renschler family members for which Ms. Shreve is the Trustee. Ms. Shreves address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759. |
18 | Commonweal Foundation, Inc. is a private foundation whose principal sponsors are Stewart and Jane Bainum. Barbara Bainum is an officer and director of Commonweal. Scott Renschler, Bruce Bainum, and Roberta Bainum are directors of Commonweal. Stewart Bainum is the Chairman of the Investment Committee of Commonweal and Christine Shreve is the Chairman of its Audit Committee. Commonweals address is 10770 Columbia Pike, Suite 150, Silver Spring, Maryland 20901. |
19 | For Mr. Joyce, includes 32,455 shares which, in addition to other assets, are held in an account that contains a personal credit line borrowing feature. For Dr. Scott Renschler, includes 176,728 shares held in an account that had a margin feature until February 2013, when the margin feature was eliminated. Realty Investment Company, Inc. maintains a revolving credit loan agreement for up to $5 million. In connection with this loan agreement, Realty has pledged to deliver, as security under the loan, shares of the Companys stock with a value equal to 50% of the outstanding loan amount at any time. During 2012 and during 2013 as of February 28th, no amounts were borrowed or outstanding under the loan agreement and no shares were delivered as security. |
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COMPENSATION DISCUSSION AND ANALYSIS
This compensation discussion and analysis (CD&A) describes each element of compensation that we pay or award to our named executive officers (NEOs). This CD&A includes a description of the principles underlying our executive compensation philosophy and our executive compensation decisions during our 2012 fiscal year, and provides our analysis of these policies and decisions. It is also intended to provide a context for the data we present in the compensation tables and related footnotes below, as well as the narratives that accompany the compensation tables.
For purposes of this CD&A and the compensation tables and narratives that follow, the NEOs for 2012 are:
Name | Title | |
Stephen P. Joyce | President and Chief Executive Officer | |
David L. White | Senior Vice President, Chief Financial Officer and Treasurer | |
Patrick S. Pacious | Executive Vice President, Global Strategy & Operations | |
David A. Pepper | Senior Vice President, Global Development | |
Simone Wu | Senior Vice President, General Counsel, Secretary & Chief Compliance Officer | |
Bruce N. Haase | Former Executive Vice President, Global Brands, Marketing, & Operations |
As previously disclosed by the Company in its public filings, Mr. Haase ceased serving as an executive officer of the Company on January 31, 2012, and his employment with the Company terminated on May 31, 2012. However, pursuant to SEC rules, he is considered an NEO in 2012 for purposes of this proxy statement.
The core principle of Choices executive compensation program continues to be pay-for-performance, and this principle forms the foundation of and guides all of our decisions regarding executive compensation. Choice uses a combination of fixed and variable compensation programs to reward and incent strong performance, as well as to align the interests of our executives with those of the Companys shareholders. The framework of our executive compensation program includes the components described in this CD&A.
During 2012 we finalized leadership changes which drove our performance for the year as we focused on eliminating costs to improve our operating margins, growing our market share and expanding our service delivery to our franchisees, while returning value to shareholders. During 2012, our NEOs guided Choice in a manner that delivered immediate value to shareholders, as well as solid financial and operational results, including:
· | Direct Shareholder Value |
· | Total shareholder return of 20% during 2012 (and approximately 15% annualized return over the three-year period 2010 2012) |
· | Diluted earnings per share increased 12% from $1.85 for 2011 to $2.07 for 2012 |
· | Returned value to shareholders through a combination of dividends and share repurchases totaling $654.1 million and $22.6 million, respectively, during 2012. This included a special cash dividend of $10.41 per share or approximately $600.7 million |
· | Operational and Financial Performance |
· | Financial Results |
· | Total revenues of $691.5 million, an 8% increase over 2011 |
· | Implemented cost containment and reduction initiatives resulting in a 4% decline in selling, general and administrative costs compared to 2011 |
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· | Operating income of $193.1 million, an increase of 12% over 2011 |
· | Operational Performance |
· | 473 executed new domestic hotel franchise contracts (481 including direct Franchise Agreements in Canada), an increase of 42% over 2011 |
· | Domestic system-wide revenue per available room increased 6.2% and the effective royalty rate increased 1 basis point to 4.33% for full year 2012 |
· | Key Events |
· | Management Transition |
· | Patrick Pacious assumed additional responsibility for Franchise Services, Business Analytics, and International Operations in addition to his then-current responsibilities which include corporate strategy and development, global reservations delivery, information technology, and loyalty and promotions. |
· | Simone Wu joined the Company as Senior Vice President, General Counsel, Secretary and Chief Compliance Officer. |
· | Alexandra Jaritz was promoted to Senior Vice President, Brand Strategy and Marketing. |
· | Michael Murphy was promoted to Senior Vice President, Cambria and Ascend. |
We believe the compensation paid to our NEOs in 2012 reflects the Companys performance during the year as a result of our pay-for-performance philosophy and is consistent with the creation of long-term shareholder value. Specifically, we exceeded our internal 2012 EPS target (as adjusted by the Committee for certain items as described below under the Short-Term Incentives heading) by 15% and the executives achievement against 2012 shared market share and Likelihood to Recommend (LTR) goals exceeded targeted objectives for the year by 10% and 12%, respectively. As discussed in more detail below, these strong performances resulted in above target short-term incentive payouts to our executives.
For 2012, in order to directly incent sales performance, we revised the structure and formula for the short-term cash incentive plan for Mr. Pepper, our senior sales executive, which we believe played a pivotal role in our 42% year-over-year increase in executed domestic franchise sales contracts in 2012. Our executed franchise sales contracts for 2012 exceeded our goal for the year by 19% against a target which had already contemplated 20% year-over-year growth. As a result, our sales executive, Mr. Pepper, earned significant sales incentive compensation for the year.
In addition, in February 2013, performance-vested restricted stock units (PVRSUs) that were granted in 2010 subject to a three-year performance period, including years 2010, 2011, and 2012, paid out above target (130%) due to strong profitable revenue growth and expense management which drove above target three-year cumulative EPS achievement over the performance period.
Performance Period |
EPS Performance | |||
2012 |
109 | % | ||
2011 |
104 | % | ||
2010 |
107 | % | ||
Cumulative |
107 | % |
In 2012, equity grants were reflective of the potential future role and importance of each executives contribution to the achievement of the long-term strategic goals of the Company. The value of grants were delivered one-third each in the form of stock options, PVRSUs, and time-vested restricted stock. In 2012, we rebalanced the distribution of equity grants to our NEOs to increase the emphasis on time and performance
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vested restricted stock for the purpose of strengthening retention value and the linkage to performance. Challenging yet achievable three-year cumulative EPS targets were established, the achievement against which performance-vested restricted stock units will be earned.
While our compensation programs are not explicitly linked to Total Shareholder Return (TSR), the Companys intent and historical pattern based on performance is to have both executive compensation and total shareholder returns above the levels of our peer group. We believe that by focusing executive performance on the ingredients that deliver shareholder value, such as EPS, and linking pay to the performance against such goals, we will deliver shareholder value. This is exhibited in our performance in exceeding internal EPS targets over the last three years, delivering revenue growth, and cost management, which enables us not only to position the Company for future strategic and growth opportunities, but has yielded the one, three, and five year TSR performance set forth below:
Performance Period |
Choice TSR Performance |
Choices TSR Percentile Rank Among Peer Group |
||||
One-Year |
20% | 35 | % | |||
Three-Year |
15% annualized | 41 | % | |||
Five-Year |
9% annualized | 73 | % |
Based on internal reviews and analyses of our realizable pay positioning for our NEOs over two distinct three-year time periods (20092011 and 20102012), our executive compensation has been aligned between the 40th and the 60th percentile of the peer group being utilized at that time. This range is generally consistent with our one, three, and five year TSR percentile rankings set forth above.
At the Companys annual meeting in April of 2012, Choices shareholders overwhelmingly voted in favor of the advisory vote approving Choices executive compensation, or say on pay. The Compensation and Management Development Committee (the Committee) noted that approximately 99% of the shareholders voting on the say on pay proposal voted in favor of Choices executive compensation, indicating that the Companys shareholders support the Companys focus on creating a pay-for-performance executive compensation philosophy. In light of these results, the Committee determined that the Companys executive compensation program is having its intended effect of aligning the interests of the Companys executives with those of shareholders and the Committee has continued to focus on a pay-for-performance philosophy.
Overview of Executive Compensation Program
Choices executive compensation program links a significant portion of each executives total compensation opportunity to corporate and individual performance. Our compensation program reflects the belief that executive talent is attracted to a company that recognizes and rewards performance, and that high performing executives create shareholder value. In selecting and rewarding executives, the Company intends to continue its practice of providing direct accountability for individual, shared and organizational results for each executive, and ensuring that the rewards are commensurate with the contributions and results delivered for shareholders.
The compensation program has been designed to achieve the following objectives:
· | Provide a mix of salary and short- and long-term incentive compensation at competitive levels, as appropriate for public companies of our size, to enable the recruitment and retention of highly qualified executives; |
· | Link pay to corporate and individual performance to encourage and reward excellence and contributions that further Choices success; |
· | Assure that compensation relative to the appropriate market is, over time, consistent with performance relative to market competitors; |
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· | Align the interests of executives with those of our shareholders through grants of equity-based compensation that, coupled with our stock ownership guidelines, encourage significant ongoing equity ownership by our executives; and |
· | Foster long-term focus required for success in the hospitality industry through equity incentives that vest over time. |
The charts below show the elements of our executive compensation program as a percentage of the target total compensation for 2012 for our CEO and our other NEOs (excluding Mr. Haase) taken as a whole. Approximately 80% (CEO) and 70% (all other NEOs other than Mr. Haase) of total compensation is attributed to performance-based compensation.
The Committee considers many factors that influence the determination of NEO compensation. These factors include the Company culture and philosophy, historical performance of the individual and the executive team as a whole, strategic importance of the executives role in the execution of the Companys short and long-term strategic objectives, and executive compensation market trends of peer and similarly sized companies in the hospitality and franchise industries. For 2012, the Committee, with Mercers assistance, utilized a peer group consisting of: Ameristar Casinos, Carrolls Restaurant Group, CEC Entertainment, DineEquity, Morgans Hotel Group, Panera Bread, Pinnacle Entertainment, Red Robin Gourmet Burgers, Sonic Corp., Vail Resorts and The Wendys Company.
The Committee may review data which is reflective of the competitive market with which we compete in business and for talent. Specifically, the Committee may review nationally published third-party survey data reflective of companies similar in size to Choice in the hospitality and franchise industries. This market data is used to provide insight into the range of compensation levels in the competitive market, as well as a general understanding of compensation practices and policies used to deliver that compensation to executives.
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In addition, as further discussed below under the heading Role of the Compensation Consultant, the Committee regularly engages a compensation consultant to provide updates regarding executive compensation trends, both regulatory and practical.
However, consistent with prior practice, comparative market information is not used by the Committee to benchmark the amount of total compensation or any specific element of compensation. Comparative market information has been and is expected to continue to be reviewed by the Committee as a general reference and guide to assist the Committee with its decisions related to executive compensation.
Roles of the Committee and Others in Compensation-Related Decisions
Role of the Compensation and Management Development Committee
The Committee sets the Companys compensation principles that guide the design of compensation plans and programs for our executive officers. The Committee is charged with establishing, implementing and monitoring the Companys executive compensation and succession planning programs. In carrying out its responsibilities, the Committee endeavors to achieve and to maintain an executive compensation package that is both fair and competitive in furtherance of the Companys goals, including increasing shareholder value.
As part of its responsibility and oversight, the Committee reviews corporate goals and objectives relevant to CEO compensation, evaluates performance in light of those goals and objectives, and recommends CEO compensation based on this evaluation to the Board for approval. With regard to other executive officers, the Committee reviews and approves changes to base salary and incentive compensation targets, annual and long-term incentive plan goals and objectives and the achievement against those goals, and equity-based compensation design, delivery and value. In addition, the Committee reviews and approves all compensation-related agreements, including employment agreements, severance and change of control arrangements, and any other special supplemental compensation and/or benefits for all executive officers, except for the CEO for which the Committee makes a recommendation to the Board for approval.
As discussed in more detail above in the Corporate Governance section under the heading Compensation and Management Development Committee, in 2012, the Committee updated its charter to reflect the Committees increasing role in the Companys executive management, talent development and succession planning, in addition to its core focus on compensation matters.
Role of Management
At the direction of the Chairman of the Committee, management may prepare and distribute to Committee members agendas, meeting materials and Company data in preparation for Committee meetings. In addition, in conjunction with the Committee Chairman, management may prepare and present specific compensation proposals to the Committee. For consideration by the Committee, the CEO may make recommendations with regard to the assessment of individual executive officer performance (other than his own) and corresponding compensation actions. In addition, the CEO and Senior Vice President, Human Resources and Administration may make recommendations with regard to incentive and other benefits plan design and delivery. Finally, the CEO, Senior Vice President, Human Resources and Administration, and CFO may make recommendations with regard to financial and non-financial targets under our annual incentive plan and our performance vested restricted stock unit awards. The other named executive officers do not play a role in their own individual compensation determinations, other than discussing individual performance objectives with the CEO.
Role of Compensation Consultant
In accordance with its charter, the Committee has the authority to retain outside compensation consultants and advisors to assist the Committee. The Committee currently retains Mercer (US) Inc. (Mercer, or the Compensation Consultant) to review market trends and advise the Committee regarding executive
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compensation. In 2012, in addition to providing the Committee with general advice related to executive compensation decisions, Mercer provided regular reports on executive compensation trends and regulatory updates, including a review of the executive compensation competitive market, and conducted a review of the Companys non-employee director compensation program. Mercer also reviewed the amended Committee Charter, and assisted in updating the Companys peer group for use in future compensation decisions.
The Committee is directly responsible for the appointment, compensation and oversight of the Compensation Consultant. The Compensation Consultant reported directly to the Committee, although the Committee instructed Mercer to work with management to compile information and gain an understanding of the Company and any issues for consideration by the Committee.
Elements of Named Executive Officer Compensation
The Companys executive compensation program consists of four primary elements: base salary; short-term cash incentives; long-term equity incentives; and perquisites and other personal benefits. The largest component of total compensation for our NEOs, as well as our executive officers in general, is in the form of long-term equity incentive compensation. The Committee believes that linking the greatest portion of total compensation to long-term equity incentives furthers the objectives of aligning executives interests with those of shareholders and focusing executive attention on the Companys long-term prospects. Additionally, the Committee believes this strategy focuses our executives on addressing the potential risks facing the business. In order to strengthen the tie between executive compensation and the Companys pay-for-performance focus, each executives targeted and actual pay mix may vary by position, and the variance generally is based on each executives impact on operational performance, with those having a greater impact on performance generally having more pay at risk in the form of long-term incentives.
Base Salary
We believe the primary purpose of base salaries is to provide a level of fixed compensation that is competitive so as to attract and retain highly qualified executives. The table below reflects increases in each NEOs base salary during 2012, and the resulting base salary in effect for each NEO at the end of the year (or in the case of Mr. Haase, as of May 31, 2012, the last date of his employment with the Company):
Named Executive Officer |
2012 Merit Increase |
2012 Other Adjustments |
Base Salary as of 12/31/12 |
|||||
Joyce |
3% | 6% | $ | 900,000 | ||||
White |
3% | n/a | $ | 345,000 | ||||
Pacious |
3% | 19.3% | $ | 430,000 | ||||
Pepper |
4% | n/a | $ | 330,000 | ||||
Wu |
n/a | n/a | $ | 325,000 | ||||
Haase |
n/a | n/a | $ | 412,000 |
In February 2012, Mr. Joyce recommended, and the Committee approved, the merit increases listed above for Messrs. White, Pacious, and Pepper. The Committee also recommended approval to the Board of a 3% merit increase for Mr. Joyce, increasing his base salary to $850,000. The Committee believed that each of these merit increases was consistent with executive compensation market trends prevailing at the time. In addition, in February 2012, as part of an ongoing corporate reorganization in anticipation of Mr. Haases departure from the Company, Mr. Pacious assumed responsibility for Franchise Services and Business Analytics in addition to his then-current responsibilities. In recognition of his assumption of these responsibilities, Mr. Pacious received an additional 19.3% adjustment to his base salary. Each of the base salary increases described above were approved by the Committee during its February 2012 meeting with a retroactive effective date of January 5, 2012.
On May 25, 2012, in connection with the effective date of his amended and restated employment agreement, Mr. Joyces base salary was increased an additional 6% to $900,000. This increase resulted from the negotiations between the Company and Mr. Joyce related to the agreed upon 5-year extension of Mr. Joyces employment term.
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Ms. Wu was hired effective February 13, 2012 and her salary was established based on the Committees assessment of the market conditions for similarly situated senior legal executives and the negotiations between the Company and Ms. Wu.
In accordance with his agreement entered into in connection with his planned departure from the Company, Mr. Haase was not eligible for a merit increase in 2012.
Short-Term Incentives
Short-Term Incentive Target Opportunity
The Company has established a short-term incentive program called the Management Incentive Plan (MIP), pursuant to which each NEO has a target incentive opportunity equal to the NEOs eligible earnings, which is a percentage of salary actually paid in the calendar year. For Ms. Wu, who joined the Company in February 2012, pursuant to negotiations at the time of her employment, the Company agreed to calculate her target MIP payment based on her full year salary of $325,000, rather than her actual earnings during 2012. For Mr. Joyce, the percentage is set forth in his employment agreement. For the remaining NEOs, the percentage is established by the Committee. The targets for the continuing NEOs remained the same from 2011 to 2012. The threshold, target and maximum bonus levels for each of the NEOs for 2012 were:
Named Executive Officer |
Threshold | Target | Maximum | |||||||||
Joyce |
50 | % | 100 | % | 200 | % | ||||||
White |
27.5 | % | 55 | % | 110 | % | ||||||
Pacious |
27.5 | % | 55 | % | 110 | % | ||||||
Pepper |
25 | % | 50 | % | 100 | % | ||||||
Wu |
25 | % | 50 | % | 100 | % |
Pursuant to the terms of his severance agreement with the Company, Mr. Haase is entitled to receive a payment equal to his target of 55%.
Short-Term Incentive Performance Goals
Due to the belief that the MIP design has been successful in incenting and rewarding the NEOs from year-to-year, the Committee approved the same general MIP design for calendar year 2012 as was in place in previous years. The 2012 MIP was structured to pay the target bonus for each NEO upon achievement of an established earnings per share (EPS) target as a primary goal, and to pay a varying percentage of the target for EPS performance above or below the annual goal as follows:
· | no payment unless the Company achieves the minimum performance level, or 90% of the EPS goal ($1.81 per share); |
· | payment equal to 50% of the target award for achievement of 90% of the EPS goal ($1.81 per share); |
· | payment equal to 100% of the target award for achievement of the target performance level ($2.01 per share); and |
· | payment equal to 200% of the target award for achievement of the maximum performance level, or 120% of the EPS goal ($2.41 per share). |
Consistent with prior years, the Committee chose EPS as the objective performance measure for the Companys 2012 MIP in order to provide a direct link between Company performance and shareholder value. The Committee believes that EPS is easily understood by shareholders and executives and allows for comparisons to both internal targets and other public companies. The EPS target for the 2012 MIP payout at 100% of target was $2.01, which was recommended to the Committee by Mr. Joyce and approved in December 2011 based on the Companys Board-approved 2012 business plan.
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In July 2012, in connection with its review of the payment of a one-time, special cash dividend and associated financing transactions, the Committee approved an adjustment to the EPS target for the 2012 MIP to take into consideration the additional expense generated by the interest and transaction costs related to the debt issued to finance the dividend payment and the non-recurring professional fees incurred in connection with the special dividend transaction, which would have a dilutive impact on EPS. The Committee believed that since EPS is the performance measure for the MIP, the dilutive impact of the special dividend transaction would have the effect of reducing (or eliminating) the potential for the MIP to be earned for reasons not reflective of the actual performance of the Company and its associates, including the NEOs. As a result of this adjustment, the annual goals used to determine 2012 MIP payout were as follows:
· | no payment unless the Company achieves the minimum performance level, or 90% of the adjusted EPS goal ($1.66 per share); |
· | payment equal to 50% of the target award for achievement of 90% of the EPS goal ($1.66 per share); |
· | payment equal to 100% of the target award for achievement of the target performance level ($1.84 per share); and |
· | payment equal to 200% of the target award for achievement of the maximum performance level, or 120% of the EPS goal ($2.21 per share). |
Because the EPS objective is the most heavily weighted factor of the MIP for determining the target payment for all of the NEOs, the level of achievement of the EPS target, combined with each NEOs established target incentive percentage, is the primary driver of each NEOs annual incentive payment for the year. However, for each NEO, the ultimate payout may be further adjusted based on the assessment of each NEOs degree of achievement of certain pre-determined performance objectives for the year. As with the EPS objective, the other performance objectives are assigned various weighting percentages, and can each be adjusted up or down based on the relationship between the targeted goal and the result achieved. For Mr. Joyce, this assessment is conducted by the Committee. For the other NEOs, the assessment is made by the Committee based on the recommendations of Mr. Joyce. These performance objectives, where applicable, are based in part upon a qualitative evaluation of performance, but can also include quantifiable measures such as franchisee/customer satisfaction and Revenue Per Available Room (RevPAR) improvement, in addition to other relevant measures.
For 2012, following a practice initiated by the Committee in 2010 based on its belief that establishing shared objectives will create stronger alignment throughout the Company, the NEOs (as discussed below, other than Mr. Pepper) and other senior executives received two shared performance objectives as part of each of their objectives associated with performance goals related to the Companys market share and LTR (likelihood to recommend) ratings of the Companys hotel portfolio. Mr. Joyces performance objectives for 2012 consisted exclusively of the executive teams shared objectives. For the other NEOs (other than Mr. Pepper), the shared objectives were accompanied by additional specific individual or department objectives.
For the 2012 MIP, the Committee revised the plan for the Companys senior sales executive, Mr. Pepper. Rather than including Mr. Pepper within the group of NEOs and other senior executives that have shared objective performance goals, Mr. Pepper became subject to an Executive Sales MIP intended to drive franchise sales. The plan was designed to deliver his target MIP (50% of base salary) upon achievement of 400 executed franchise agreements during 2012 (with increased performance payouts for results above the sales target, and decreased payout amounts for results below the sales target), with the opportunity for the target payout to be adjusted up or down by Company EPS similar to the other executive officers.
Because cash incentive compensation is tied to a final determination of the Companys EPS, the payments are typically finalized and paid in February following the year in which the cash incentive was earned.
In February 2013, the Company implemented a Bonus Recoupment Policy (the Clawback Policy). Pursuant to the Clawback Policy, the Committee has the right to require the Companys senior executives,
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including each of the NEOs, to pay back previous MIP distributions in the event that the Company materially restates its financial results as a result of significant noncompliance with financial reporting requirements.
Short-Term Incentive Results
The Company announced EPS of $2.07 per share in 2012. However, pursuant to the MIP, EPS may be adjusted at the discretion of the Committee for certain non-recurring items. During December 2008, the Committee approved standard plan adjustments related to costs required to be accounted for in accordance with (i) Accounting Standards Codification (ASC) No. 712Compensation Nonretirement Postemployment Benefits and (ii) ASC No. 420Exit or Disposal Cost Obligations (the Standing Adjustment Items). As part of the Committees 2008 approval, it determined that any future adjustments to EPS related to Standing Adjustment Items made by the Company would not need additional Committee approval. For 2012, the adjustment to EPS attributable to the Standing Adjustment Items was $0.01. In addition to the Standing Adjustment Items, the Committee approved in February 2013 additional adjustments to the 2012 EPS in the amount of $0.03 related to unplanned charges resulting from the settlement of the Companys Supplemental Executive Retirement Plan (SERP) and a loss on the extinguishment of debt related to the unplanned refinancing of the Companys revolving credit facility. Based on the Standing Adjustment Items, as well as the exclusion of the charges related to the settlement of the SERP and the loss on extinguishment of debt, EPS for 2012 incentive plan determination purposes was $2.11, which resulted in an incentive payout at 170% of the target.
As discussed above, the amount of each NEOs short-term incentive is subject to potential further adjustment based on the assessment of the NEOs achievement of the pre-determined performance objectives. For 2012 annual incentive payments, the shared objectives were related to targeted market share and likelihood to recommend (LTR) ratings for certain of our brands that we refer to as our equity brands. Market share achievement was determined based on the projected total lodging industry supply growth so as to maintain our market share. LTR for equity brands was measured as the average ratings provided on the 10-point scale via the Guest Insight Systems survey administered by a third-party vendor. Performance in 2012 against both of these measures exceeded the targeted performance levels and resulted in an additional payout opportunity under the MIP. Specifically, the target versus actual achievement of both EPS and the shared objectives is set forth in the table below:
Criteria |
EPS | Market Share |
Likelihood to Recommend | |||
Target |
$1.84 | Domestic new unit additions of -4 or -0.1% net unit growth | 8.34 for equity brands (Cambria Suites, Comfort Inn, Comfort Suites, and Sleep Inn) | |||
Actual |
$2.11 | 1.64% net unit growth for Choice vs. .74% net unit growth for the U.S. | 8.40 or 6 basis points above plan | |||
Achievement |
115% | 164% | 100.7% | |||
Payout Percentage |
170% | 110% | 112% |
The following table details the weighting of each of the performance measures and actual amount earned in 2012 attributed to the measure for each NEO.
NEO |
EPS | Market Share | Likelihood to Recommend (LTR) |
Individual /Divisional Objectives |
||||||||||||||||||||||||||||
Joyce |
70 | % | $ | 1,041,021 | 20 | % | $ | 327,178 | 10 | % | $ | 166,563 | 0 | % | N/A | |||||||||||||||||
White |
50 | % | $ | 161,108 | 10 | % | $ | 35,444 | 10 | % | $ | 36,088 | 30 | % | $ | 103,431 | ||||||||||||||||
Pacious |
50 | % | $ | 199,587 | 10 | % | $ | 43,909 | 10 | % | $ | 44,707 | 30 | % | $ | 125,740 | ||||||||||||||||
Wu |
50 | % | $ | 138,125 | 10 | % | $ | 30,388 | 10 | % | $ | 30,940 | 30 | % | $ | 87,019 | ||||||||||||||||
Pepper |
|
Based on achievement of executed franchise sales contracts in 2012; up to the target incentive portion was subject to EPS leverage; see further description below. $815,100 |
|
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During 2012 the development team under the leadership of Mr. Pepper delivered 481 executed franchise agreements in his region (including the U.S., certain brands in Canada, and the Caribbean). Mr. Peppers incentive plan delivered the target incentive award opportunity (i.e., 50% of salary) at 400 executed contracts. This target was increased based on the Companys EPS performance at the achievement level described above (170%), increasing Mr. Peppers target payout to $280,500. In addition, Mr. Peppers MIP provided that for executed agreements in excess of 400, he would receive additional incentive payments. Based on actual achievement, Mr. Pepper earned a total cash bonus of $815,100. However, as of February 28, 2013, $72,600 of this amount had not been distributed and remained contingent on the satisfaction of certain outstanding items associated with 11 of the franchise agreements executed in 2012.
Pursuant to the terms of his severance agreement with the Company, Mr. Haase received a payment equal to his target of 55%, or $226,600.
In addition to the amounts paid to NEOs pursuant to the MIP, Ms. Wu received a one-time cash sign on bonus of $239,418 in connection with her agreement to join the Company.
Long-Term Incentives
Equity Grant Target Opportunities
The Committee believes that annual awards of long-term equity are imperative to foster the long-term focus of the Companys executives required for success in the hospitality industry.
Consistent with prior years, as a reference for determining the 2012 grant value, a target equity value based upon a multiple of the NEOs base salary was assigned to each executive. Each NEOs multiple was established based on guidelines that take into account the executives role within the organization and its criticality in achieving the long-term strategic plan of the organization, as well as the competitive market. The Companys Senior Vice President, Human Resources & Administration provided a range of potential values to Mr. Joyce to assist him in making recommendations to the Committee for stock option and restricted stock awards (both service and performance based), with minimum, target, and maximum values set forth for each officer. A minimum, target, and maximum value for equity, as determined by the Committee, were used to assist in its decision making for Mr. Joyce.
Award targets as a percentage of salary for the continuing NEOs remained the same from 2011 to 2012. The following table sets forth the equity award value targets for each applicable NEO and their base salary as of January 1, 2012:
Named Executive Officer |
Base Salary |
Target Award Value as a Percentage of Salary |
Aggregate Annual Equity Award Value at Target |
|||||||||
Joyce |
$ | 825,000 | 200 | % | $ | 1,650,000 | ||||||
White |
$ | 335,000 | 125 | % | $ | 418,750 | ||||||
Pacious |
$ | 350,000 | 125 | % | $ | 437,500 | ||||||
Pepper |
$ | 317,240 | 100 | % | $ | 317,240 |
For the actual equity award values for each NEO in 2012, see the Grants of Plan-Based Awards Table.
Because Ms. Wu joined the Company during 2012, she is not included in the table above. For a description of equity grants to Ms. Wu in connection with her agreement to join the Company, see below under the heading Grants Made in Connection with Employment of Ms. Wu. In addition, pursuant to the terms of his severance agreement with the Company, Mr. Haase was not eligible for, and did not receive, any equity grants as part of the annual grant process or otherwise during 2012; as a result, he is not included in the table above.
For 2012, the Committee approved awards of stock options, performance-vested restricted stock units (PVRSUs) and service-based restricted stock (RS), with each targeted at 33.3% each of the total value of the
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grant. This targeted distribution reflects a rebalancing from prior years, in which the Company targeted equity grants at 50% stock options, 25% RS, and 25% PVRSUs. The Committee determined to rebalance the target distribution percentages to provide a stronger mix of retention and linkage to performance against long-term financial targets. In addition, the new mix provides a balance of retention, and two-thirds performance-based through a combination of options and PVRSUs. The PVRSUs are earned based on achievement of three-year cumulative EPS targets, while the options provide the appropriate focus on share price.
Annual equity awards to the NEOs are typically granted by the Committee at its February meeting, except for Mr. Joyce, whose awards are granted at the February full Board meeting. The exercise price of each stock option awarded to the Companys executives is the closing price of the Companys stock on the date of grant.
As discussed in the preamble to the Grants of Plan-Based Awards Table, the number of shares subject to the stock option portion of the equity award granted to each officer is based on the Black Scholes option-pricing model. See the preamble to the Grants of Plan-Based Awards Table for more information on how the Company determines the actual number of shares subject to each type of equity award.
The Company grants PVRSUs to executives with the goal of further aligning compensation with the long-term results generated by the actions and decisions of these executives. Under the long-term incentive program, performance achievement levels relative to threshold, target, and maximum are established at the beginning of the performance period, as well as the corresponding percentage of the target grant that will be earned at each achievement level. As a result, the number of PVRSUs that actually vest during any performance period may range from 0% to 200% of the initial grant, based on three-year cumulative EPS performance as compared to the target EPS for the period. The chart below provides the achievement percentages and their corresponding vesting result.
Criteria |
Below Threshold |
Threshold | Target | Maximum | ||||||||||||
Performance Achievement |
<90 | % | 90 | % | 100 | % | 120 | % | ||||||||
Corresponding Vesting Result |
0 | % | 50 | % | 100 | % | 200 | % |
Because disclosure of the cumulative EPS target for the ongoing performance periods could easily be used in a competitively harmful way by third parties, we are not disclosing our actual PVRSU EPS targets until the end of the respective performance periods. However, in determining the cumulative EPS target for the 20122014 performance period, the Committee approved managements recommendation based on the Companys projected target growth under our strategic plan over the relevant time period. The Committee believes that the approved EPS targets are consistent with the Committees goal of making PVRSU EPS targets challenging, but achievable. The Committee believes that the recent history of PVRSU vesting supports this belief: in 2012, no PVRSUs vested because there were no PVRSUs awarded in 2009, in 2011 no PVRSUs vested as the minimum threshold performance was not achieved, and in 2010 PVRSUs vested at 70% of the target share award.
Equity Performance Results
After reviewing the equity range recommendation worksheet prepared by the Companys Senior Vice President, Human Resources & Administration, Mr. Joyce recommended that except for Mr. Pacious, each of the NEOs should receive 2012 equity awards valued at or near the target/midpoint level of the range of potential grant values for each type of award. For Mr. Pacious, Mr. Joyce recommended an overall value of approximately 13% above the target/midpoint level based on Mr. Pacious increased role and responsibility as of February 2012.
The Committee approved a grant to Mr. Joyce above the target/midpoint level in recognition of the Mr. Joyces continuing leadership and management of the Company during 2011.
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The chart below shows the actual stock options, PVRSUs, and RS granted to each NEO as part of the Companys annual equity grant process (which excludes special equity grants).
Name |
Base Salary |
LTI Guideline % of Salary |
# of Options | # of PVRSU | # of Restricted Stock | TOTAL GRANT | ||||||||||||||||||||||||||||||||||||||||||||||
Grant Based on Black Scholes of $9.979 |
Grant Based on FMV of $35.60 |
Grant Based on FMV of $35.60 |
||||||||||||||||||||||||||||||||||||||||||||||||||
Midpoint | (33.3% of Total Award Value) |
(33.3% of Total Award Value) |
(33.3% of Total Award Value) |
Value | % of Base |
|||||||||||||||||||||||||||||||||||||||||||||||
Midpoint | Shares | Value | Midpoint | Shares | Value | Midpoint | Shares | Value | ||||||||||||||||||||||||||||||||||||||||||||
Joyce, Stephen P |
$ | 825,000 | 200 | % | $ | 550,000 | 66,807 | $ | 666,667 | $ | 550,000 | 18,727 | $ | 666,667 | $ | 550,000 | 18,727 | $ | 666,667 | $ | 2,000,000 | 242 | % | |||||||||||||||||||||||||||||
White, David L |
$ | 335,000 | 125 | % | $ | 139,583 | 14,030 | $ | 140,000 | $ | 139,583 | 3,933 | $ | 140,000 | $ | 139,583 | 3,933 | $ | 140,000 | $ | 420,000 | 125 | % | |||||||||||||||||||||||||||||
Pacious, Patrick S |
$ | 350,000 | 125 | % | $ | 145,833 | 16,535 | $ | 165,000 | $ | 145,833 | 4,635 | $ | 165,000 | $ | 145,833 | 4,635 | $ | 165,000 | $ | 495,000 | 141 | % | |||||||||||||||||||||||||||||
Pepper, David A |
$ | 317,240 | 100 | % | $ | 105,747 | 10,623 | $ | 106,000 | $ | 105,747 | 2,978 | $ | 106,000 | $ | 105,747 | 2,978 | $ | 106,000 | $ | 318,000 | 100 | % |
The number of options listed above represents the number actually granted in February 2012; however, in connection with the Companys declaration and payment of the special cash dividend, these options, along with other outstanding options held by all employees of the Company, were adjusted by the Committee. For more details regarding the nature of the adjustments and to see the as-adjusted figures for the 2012 grants, see the Outstanding Equity Awards at Year-End 2012 table.
Because Ms. Wu joined the Company during 2012, equity grants made to her in 2012 were made outside of the standard annual grant structure, and she is not included in the table above. For a description of equity grants to Ms. Wu in connection with her agreement to join the Company, see below under the heading Grants Made in Connection with Employment of Ms. Wu. Pursuant to the terms of his severance agreement with the Company, Mr. Haase was not eligible for, and did not receive, any equity grants as part of the annual grant process or otherwise during 2012; as a result, he is not included in the table above.
To encourage individual executive performance and further support the Companys pay-for-performance philosophy, the Committee enables Mr. Joyce on an annual basis to recommend grants of stock awards to members of the executive team to reward extraordinary performance. The recommendation of these awards by Mr. Joyce is based on his assessment of individual performance, in addition to a number of factors that impact and foster extraordinary performance, including leadership and commitment to the Companys cultural values. For 2012, Mr. Joyce recommended that Mr. White receive an extraordinary performance grant of 2,809 shares of RS (with a grant date fair market value of $100,000), and the Board awarded a grant to Mr. White in accordance with Mr. Joyces recommendation. Mr. Whites grant was in recognition of the critical role he has played in the Company achieving its long-term strategic goals. The RS granted to Mr. White for extraordinary performance cliff vests three years from the grant date.
In connection with Mr. Pacious assuming additional responsibilities after the departure from the Company of Mr. Haase, Mr. Pacious received a special retention grant of 35,113 shares of RS (with a grant date fair market value of $1,250,000), with 40% of such shares subject to three-year cliff vesting period, and the remaining shares vesting on November 1, 2017.
In addition, in connection with Mr. Pacious entering into an amended non-competition, non-solicitation and severance benefit agreement with the Company in March of 2012, Mr. Pacious received a special retention grant of 10,750 shares of restricted stock (with a grant date fair market value of $406,458), with a three-year cliff vesting period.
Grants Made in Connection with Contract Extension for Mr. Joyce
Pursuant to Mr. Joyces second amended and restated employment agreement entered into in connection the extension of his term as President and CEO of the Company, Mr. Joyce received an award of performance-based restricted stock detailed in the Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table below. These awards were based upon a combination of market data provided by Mercer, value corresponding to a portion of equity awards granted pursuant to Mr. Joyces initial employment agreement and negotiations during employment extension discussions.
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Grants Made in Connection with Employment of Ms. Wu
In connection with the Companys recruitment and employment of Ms. Wu, the Committee approved an equity grant equal to 100% of her base salary of $325,000, in the form of $162,500 of stock options with a four-year vesting schedule, and $162,500 of RS with a four-year cliff vesting period. The Committee also approved an additional grant of $50,000 of RS with a three-year cliff vesting period.
Previously Granted PVRSUs Vesting in 2012
Because no PVRSUs were granted in 2009, there were no PVRSUs previously granted to any NEO that were eligible to vest during 2012.
Share Ownership Guidelines
Our Executive Stock Ownership Guidelines are intended to align the interests and actions of executives with the interests of shareholders and further promote our longstanding commitment to sound corporate governance.
Under the guidelines, each NEO must attain ownership of qualifying shares worth a multiple of the executives then-current base salary. The guidelines provide that executives must achieve ownership of shares having the required market value within five years after first becoming a covered executive. The chart below details the required market value for each category of executive officer:
Category |
Named Executive Officer |
Required Ownership Levels | ||
Chief Executive Officer |
Joyce | 5x current base salary | ||
Category 1 Executive Officers |
White, Pacious | 3x current base salary | ||
Category 2 Executive Officers |
Wu, Pepper | 2x current base salary | ||
Category 3 Executive Officers |
Other | 1.5x current base salary |
Stock ownership counting towards satisfaction of the guidelines includes:
· | Stock purchased on the open market by the executive; |
· | Stock obtained through stock option exercises; |
· | Stock obtained through Choices 401(k) Retirement Savings and Investment Plan or Non-Qualified Retirement Savings and Investment Plan; |
· | Restricted stock issued by Choice (whether or not vested), including time-based restricted stock, performance vested restricted stock and performance-based restricted stock; and |
· | Stock beneficially owned in trust or by immediate family members residing in the same household. |
If an executive does not attain the ownership levels within the five year period, and thereafter maintain the ownership levels, the Committee may:
· | Require the transfer of up to fifty percent (50%) of the executives payment under the MIP into the form of Choice stock and/or adjust the amount or composition of any future cash or equity compensation to assist the executive in attaining the level of ownership required by the guidelines; |
· | Restrict the executive from selling or otherwise disposing of Choice stock until he or she has attained the required ownership levels; |
· | Forego the future grant of any equity awards to the executive; or |
· | Take any other actions reasonably designed to assist or enable the executive to satisfy the guidelines. |
In addition, the NEOs must meet specified exemption criteria or obtain permission before selling stock that would result in their holding dropping below the guideline requirements.
35
The Committee formally reviews the stock ownership of the executives at least annually.
As of December 31, 2012, each of the NEOs had attained the required ownership levels for their positions except for Ms. Wu who is still within her prescribed grace period. Mr. Haase is no longer employed by the Company and, therefore, is not subject to the executive share ownership guidelines.
Perquisites and Other Personal Benefits
Flexible Perquisites Plan. Executive officers, including each of the NEOs, are eligible to receive certain benefits not available to other full-time employees. In 2000, the Company established a Flexible Perquisites Plan in connection with our efforts to recruit and retain certain key executives at that time. The plan design and covered benefits were based on our review at that time of competitive market information and how the Committee believed other companies structured their flexible perquisites program. In 2012, the Committee reviewed the prevalence of these benefits against our peer group and found them to be consistent with market practice in the hospitality and franchise market sectors.
Pursuant to the Companys Flexible Perquisites Plan, each NEO and certain other executives are eligible to receive an aggregate amount of reimbursement that may be used by the executive officer for any of the following personal benefits: financial and estate planning, legal services, supplemental life insurance premiums, club membership dues, certain health care expenses and child care expenses. The reimbursement amount for each NEO is based on the executives title, role within the organization, and scope of responsibilities. The amounts applicable to each category of executive have not increased under the Flexible Perquisites Plan since 2003. These reimbursements represent taxable income to the executive; however, pursuant to the plan, the Company pays any associated tax. In the event that an executive incurs reimbursable costs that are less than the aggregate reimbursable amount, the difference is not paid to the executive or carried forward to the next year. We believe the cost to the Company to provide this plan, and any associated tax gross up expense, is minimal compared to the goodwill and retention benefits the program offers.
In 2012, the aggregate amount of reimbursement which was available to each NEO under the Flexible Perquisites Plan is as set forth below.
Officer |
2012 Eligible Reimbursement |
|||
Joyce |
$ | 31,800 | ||
White |
$ | 15,000 | ||
Pacious |
$ | 15,000 | ||
Pepper |
$ | 15,000 | ||
Wu |
$ | 15,000 | ||
Haase |
$ | 15,000 |
For actual amounts reimbursed to each officer under the Flexible Perquisites Plan for qualified expenditures during 2012, see the All Other Compensation column of the Summary Compensation Table below.
Other Personal Benefits. In addition to the Flexible Perquisites Plan, the Company offers our officers and members of the Board the Companys Stay at Choice program which provides reimbursements for nightly room charges when staying at the Companys franchised properties for non-business related travel. The Company grosses up any associated taxes incurred from utilizing this program. Through the Stay at Choice program, the Company seeks to encourage our senior executives to use our hotels when traveling on personal matters as they are the best source of input and feedback with regard to the value and consistency of our product. For the reasons set forth above, there is no limit on an executives use of this plan during the year.
In addition to participation in the Flexible Perquisites Plan, Mr. Joyces previous employment agreement provided for an annual car allowance, as well as initial and annual fees at a dining and/or recreational club of his
36
choosing. Effective with the execution of his five year employment agreement in May 2012, these allowances are no longer available to Mr. Joyce. Mr. Joyce does continue eligibility for the personal use of the aircraft leased by the Company for up to 40 flight hours per year.
During 2012, each of the NEOs (other than Mr. Joyce, after May of 2012) received a car allowance. For the aggregate cost to the Company of each of the perquisites or other personal benefits described above, see the All Other Compensation column of the Summary Compensation Table below.
The Company offers our executives, including each of the NEOs, a retirement package comprised of various nonqualified retirement plans. We believe the combination of these retirement plans is reasonable and competitive and that these plans encourage retention of our executives and reward them for long, continued service to the Company. We provide the non-qualified plans due to the regulatory limits on the amount of compensation that can be contributed to qualified retirement plans in any given year. We believe these limits leave higher-paid executives without competitive retirement income replacement. Accordingly, we believe the nonqualified plans are a vital part of an executives financial planning to bridge the divide between Social Security and retirement income.
For more information on these plans, see the Change in Pension Value and All Other Compensation columns of the Summary Compensation Table below, as well as the Pension Benefits and Non-Qualified Deferred Compensation Tables and accompanying narratives below.
Severance and Change in Control Arrangements
Each of the NEOs, other than Mr. Haase, is entitled to receive various payments and continued benefits upon various triggering events. For Mr. Joyce, these arrangements are set forth in an employment agreement, and for each of Ms. Wu and Messrs. White and Pacious, a non-competition, non-solicitation and severance benefit agreement. For Mr. Pepper, these arrangements are prescribed by the Choice Hotels International Severance Benefit Plan which is applicable to all of the Companys employees who do not otherwise have an employment agreement or severance agreement with the Company.
The terms of the severance provisions and benefits in each of these agreements and the Choice Severance Benefit Plan were based on what the Committee believed was competitive with market at the time of adoption. In addition, Mr. Joyces employment agreement was based on contract renewal negotiations, with the Committee giving due consideration to market terms.
In connection with the contract renewal negotiations between the Company and Mr. Joyce that were completed in May 2012, the Company entered into an amended and restated employment agreement with Mr. Joyce, the terms of which were based upon arms-length negotiations. Mr. Joyces employment agreement contains severance benefits following constructive termination and termination following a change in control.
The Company and each of Ms. Wu and Messrs. White and Pacious are parties to an executive non-competition, non-solicitation and severance benefit agreement. The Committee believes that the severance, non-competition and non-solicitation provisions are typical within our industry, and are reasonable and enforceable. Each of these agreements provide for 70 weeks of severance and termination benefits in the event of termination without cause or constructive termination, and for severance payments upon termination of the executive following a change in control (i.e., a double trigger) equal to a lump sum payment of 200% of his or her base salary plus 200% of his or her annual bonus. These agreements do not provide for gross-up payments for excise tax.
For Mr. Pepper, who does not have a severance agreement or a written employment agreement that contains a severance provision, severance is determined in accordance with the Choice Severance Benefit Plan that is
37
generally applicable to all employees of the Company. This plan provides for severance compensation in certain events, but does not include accelerated vesting of equity or non-competition or non-solicitation restrictions. The Severance Benefit Plans severance benefit level for executives at or above Mr. Peppers level is 5 weeks of severance pay for each year of service, with a minimum of 26 weeks and capped at 70 weeks (or 14 years of service) where the termination is not in connection with a change in control. For a termination following a change in control, the plan provides for severance payments equal to 200% of the executives base salary plus 200% of his annual bonus.
Mr. Joyces employment agreement, the severance benefit agreements with Ms. Wu and Messrs. White and Pacious, and the Severance Benefit Plan for Mr. Pepper contain provisions granting severance payments upon termination following a change in control. These provisions were adopted to ensure that these executives will not be tempted to act in their own interests rather than the interests of the Companys shareholders in the event the Company is considering a change in control transaction. These executives may lose their ability to influence the Companys performance after a change in control and may not be in a position to earn incentive awards or vest in equity awards, and thus might be biased against such a transaction. These provisions are designed to make any transaction neutral to the executives economic interests. With respect to the severance payments and continuation of benefits upon a constructive termination or termination without cause, outside of a change in control, the Committee believed these provisions ensure executives who are unexpectedly terminated for reasons outside of their control are appropriately compensated and provided for during a limited period of time following termination.
Pursuant to an amendment to Mr. Haases 2008 severance, non-competition and non-solicitation agreement, and a transition services agreement, each of which was entered into in 2012 between the Company and Mr. Haase in connection with his planned departure from the Company, the Company agreed to the continued payment of his salary, benefits, and his participation in the Companys annual incentive compensation plan, with a target bonus equal to 55% of his base salary during the severance period. Mr. Haases severance period is 18 months, from June 1, 2012 to November 30, 2013.
For a more detailed discussion of the arrangements applicable to each NEO, including an estimated quantification of the benefits payable to each officer assuming a termination event as of December 31, 2012 (or, in the case of Mr. Haase, based on his actual termination date), see the Potential Payments Upon Termination or Change of Control section below.
Restrictions on Hedging Transactions
In September 2012, the Company adopted new restrictions on hedging transactions by Company employees, including the NEOs. These restrictions are set forth in the Companys Insider Trading Policy. The new restriction prohibits Company employees, including NEOs, from engaging in hedging transactions involving this Companys stock, such as prepaid variable forwards, equity swaps, collars and exchange funds unless the transaction has been reviewed and approved in advance by the Companys Legal Department.
Tax Deductibility of Compensation
Section 162(m) of the Internal Revenue Code imposes a corporate deduction limit of $1 million annually on certain compensation paid to the Chief Executive Officer and the next three most highly compensated executive officers (other than the CFO) who are employed with the Company as of the end of the tax year. Compensation is deductible to the extent it constitutes performance-based compensation (compensation paid based on satisfying pre-established performance goals) that has been approved by the shareholders. The Company believes that while it is generally in the best interest of shareholders to structure compensation plans so that compensation is deductible under Section 162(m), and the Company generally seeks to do so, there may be times when the benefit of the deduction would be outweighed by other corporate objectives, such as the need for flexibility.
Service-based restricted stock awards are generally subject to the $1 million deduction limitation imposed by Section 162(m); however, all other equity awards to our NEOs in 2010 through 2012 are fully deductible under Section 162(m).
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BOARD COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
Recommendation
The Compensation and Management Development Committee of the Company has reviewed and discussed the foregoing Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based upon such review and discussions, the Compensation and Management Development Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Companys Proxy Statement.
THE COMPENSATION COMMITTEE
Ervin R. Shames, Chairman
William L. Jews
Gordon A. Smith
John P. Tague
39
The following table summarizes total compensation paid or earned by each of the Named Executive Officers for the year ended December 31, 2012:
Name and Principal Position |
Year | Salary(1) ($) |
Bonus(4) ($) |
Stock Awards(2) ($) |
Option Awards(2) ($) |
Non-Equity Incentive Plan Compensation(3) ($) |
Change in Pension Value and Preferred Non-Qualified Deferred Compensation Earnings(5) ($) |
All
Other Compensation(6) ($) |
Total ($) |
|||||||||||||||||||||||||||
Stephen P. Joyce |
2012 | 874,808 | | 3,333,385 | 666,667 | 1,534,762 | 26,851 | 251,142 | 6,687,615 | |||||||||||||||||||||||||||
President & |
2011 | 825,000 | | 900,075 | 900,007 | 1,399,200 | 425,714 | 227,236 | 4,677,232 | |||||||||||||||||||||||||||
Chief Executive Officer |
2010 | 799,231 | | 1,500,057 | 1,000,004 | 997,440 | 248,740 | 231,300 | 4,776,772 | |||||||||||||||||||||||||||
David L. White |
2012 | 344,616 | | 380,030 | 140,005 | 336,071 | 29,286 | 84,551 | 1,314,559 | |||||||||||||||||||||||||||
Senior Vice President, |
2011 | 334,616 | | 579,323 | 203,134 | 309,185 | 89,775 | 71,745 | 1,587,778 | |||||||||||||||||||||||||||
Chief Financial Officer & Treasurer |
2010 | 323,846 | | 352,015 | 278,011 | 233,866 | 46,672 | 66,385 | 1,300,795 | |||||||||||||||||||||||||||
Patrick S. Pacious |
2012 | 426,923 | | 1,986,492 | 165,003 | 413,942 | 5,665 | 97,418 | 3,095,443 | |||||||||||||||||||||||||||
Executive Vice President, |
2011 | 348,077 | 50,000 | 562,568 | 150,009 | 323,708 | 39,680 | 79,510 | 1,553,552 | |||||||||||||||||||||||||||
Global Strategy & Operations |
2010 | 298,846 | | 336,465 | 248,751 | 196,192 | 29,631 | 68,040 | 1,177,925 | |||||||||||||||||||||||||||
David A. Pepper |
2012 | 329,509 | | 212,034 | 106,007 | 742,500 | 101,424 | 63,983 | 1,555,457 | |||||||||||||||||||||||||||
Senior Vice President, |
2011 | 316,883 | | 360,278 | 154,008 | 266,182 | 191,957 | 73,474 | 1,362,782 | |||||||||||||||||||||||||||
Global Development |
2010 | 307,817 | | 436,481 | 248,751 | 204,083 | 103,016 | 61,229 | 1,361,377 | |||||||||||||||||||||||||||
Simone Wu |
2012 | 278,750 | 239,418 | 212,532 | 162,508 | 286,471 | | 51,595 | 1,231,274 | |||||||||||||||||||||||||||
Senior Vice President, General Counsel, Secretary & Chief Compliance Officer |
||||||||||||||||||||||||||||||||||||
Bruce N. Haase |
2012 | 215,508 | | | | | 87,798 | 513,313 | 816,619 | |||||||||||||||||||||||||||
Executive Vice President, |
2011 | 411,539 | | 275,055 | 275,009 | 376,640 | 334,326 | 88,849 | 1,761,418 | |||||||||||||||||||||||||||
Global Brands, Marketing & |
2010 | 399,077 | | 647,501 | 249,999 | 276,780 | 188,148 | 55,332 | 1,816,837 | |||||||||||||||||||||||||||
Operations(7) |
(1) | Except as noted in the following sentence, values reflect base salary actually received by each Named Executive Officer in the years presented, which depending on the position of pay periods within a calendar year, may not equal a Named Executive Officers stated annual salary. Due to an administrative oversight, a portion of Mr. Joyces salary earned during 2011 was not paid to him until January of 2012. |
(2) | For each of the Named Executive Officers, amounts shown in the Stock Awards column for 2010, 2011 and 2012 include the grant date fair values for RS, PBRSUs and PVRSUs. The values included for PBRSUs and PVRSUs are based on the probable outcome of the performance goals on the grant date (100% of the performance target), computed in accordance with FASB ASC Topic 718. Assumptions used to calculate fair value for 2012 are discussed in Note 19 to the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012. The actual value realized by each individual with respect to PBRSU and PVRSU awards will depend on the Companys actual performance relative to the performance goals, with vesting options for actual shares ranging from 0% to 207.46% for PBRSUs and 0% to 200% for PVRSUs based on actual performance against the performance target established at the time of grant. |
The grant date fair value based on the probable outcome for the 2012 PVRSU awards was $666,681 for Mr. Joyce, $140,015 for Mr. White, $165,006 for Mr. Pacious and $106,017 for Mr. Pepper. The grant date fair value based on the maximum outcome for the 2012 PVRSU awards was $1,333,362 for Mr. Joyce, $280,030 for Mr. White, $330,012 for Mr. Pacious and $212,034 for Mr. Pepper. Pursuant to his termination agreement with the Company, Mr. Haase was not eligible to receive equity grants, including PVRSUs, during 2012. Because Ms. Wu joined the Company in 2012, she did not receive any PVRSUs.
The grant date fair value based on the probable outcome for the 2011 PVRSU awards was $450,038 for Mr. Joyce, $101,599 for Mr. White, $137,528 for Mr. Haase, $75,034 for Mr. Pacious and $77,014 for Mr. Pepper. The grant date fair value based on the maximum outcome for the 2011 PVRSU awards was $900,076 for Mr. Joyce, $203,198 for Mr. White, $275,056 for Mr. Haase, $150,068 for Mr. Pacious and $154,028 for Mr. Pepper.
The grant date fair value based on the probable outcome for the 2010 PVRSU awards was $500,019 for Mr. Joyce, $99,984 for Mr. White, $122,511 for Mr. Haase, $92,291 for Mr. Pacious and $92,291 for Mr. Pepper. The grant date fair value based on the maximum outcome for the 2010 PVRSU awards was $1,000,038 for Mr. Joyce, $199,968 for Mr. White, $245,022 for Mr. Haase, $184,582 for Mr. Pacious and $184,582 for Mr. Pepper. The 2010 PVRSUs awards vested in February 2013 with an actual outcome at 130% of the performance target.
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The amount shown in Mr. Joyces Stock Award column for 2012 includes the grant date fair value of PBRSUs based on the probable outcome of the performance goal (100% of the performance target), which amounts to a grant date fair value of $2,000,023. The grant date fair value based on the maximum outcome for the PBRSU awards was $4,149,200. The PBRSU award was granted to Mr. Joyce in connection with the negotiation and execution of his 5-year contract extension signed in May 2012.
(3) | Values reflect the cash awards earned by each of the Named Executive Officers under the 2012 Management Incentive Plan. For a discussion of the performance targets under the 2012 Management Incentive Plan, see the description under the heading Short-Term Incentives above. For a discussion of the potential amounts payable to each Named Executive Officer under the 2012 Management Incentive Plan, see the Grants of Plan-Based Awards for 2012 table below. For Mr. Pepper, amount excludes $72,600 which as of February 28, 2013, had not been distributed and remained contingent on the satisfaction of certain outstanding items associated with 11 of the franchise agreements executed in 2012. |
(4) | Represents cash bonus payments made outside of the Companys Non-Equity Incentive Plan Compensation. For Mr. Pacious in 2011, represents a cash bonus paid in connection with his promotion to Executive Vice President, Global Strategy, Distribution & Technology. For Ms. Wu in 2012, represents a cash bonus paid in connection with her agreement to join the Company as General Counsel, Senior Vice President, Secretary & Chief Compliance Officer. |
(5) | For 2012, the following table reflects the preferential earnings on non-qualified deferred compensation under the Executive Deferred Compensation Plan (EDCP). The values reported are based on the excess of the return on amounts credited to accounts in the EDCP at the annually designated rate of return over 120% of the applicable federal long-term rate. As further described under the heading Pension Benefits for 2012, balances under the Companys supplemental executive retirement plan (SERP) were distributed during 2012 following the SERPs termination in December 2011. As a result, SERP values did not change in 2012. |
Named Executive Officer |
Preferential Earnings (EDCP) ($) |
|||
Joyce |
26,851 | |||
White |
29,286 | |||
Pacious |
5,665 | |||
Pepper |
101,424 | |||
Wu |
| |||
Haase |
87,798 |
(6) | See the All Other Compensation table below for additional information on the amounts included for each Named Executive Officer in the 2012 All Other Compensation column. |
(7) | On January 31, 2012, Mr. Haase ceased serving as an executive office of the Company, and on May 31, 2012, Mr. Haases employment with the Company terminated. |
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ALL OTHER COMPENSATION
The following table further illustrates the components of the 2012 All Other Compensation column in the Summary Compensation Table above:
Company EDCP/Non- Qualified Match ($) |
Company 401(k) Match ($) |
Tax
Payments ($)(a) |
Other
Benefits ($)(b) |
Severance Payments ($)(c) |
Total ($) |
|||||||||||||||||||
Joyce |
57,628 | 10,000 | 24,836 | 158,678 | | 251,142 | ||||||||||||||||||
White |
15,846 | 10,000 | 16,123 | 42,582 | | 84,551 | ||||||||||||||||||
Pacious |
21,346 | 10,000 | 17,695 | 48,377 | | 97,418 | ||||||||||||||||||
Pepper |
14,713 | 10,000 | 8,919 | 30,351 | | 63,983 | ||||||||||||||||||
Wu |
11,813 | 10,000 | 6,604 | 23,178 | | 51,595 | ||||||||||||||||||
Haase |
11,853 | 7,672 | 15,139 | 23,864 | 454,785 | 513,313 |
(a) | Represents amounts reimbursed for payment of taxes with respect to certain perquisites paid during 2012 pursuant to our Flexible Perquisite Program, including certain financial and estate planning and legal services, supplemental life insurance premiums, club membership dues, and certain health care and child and elder care. This column also includes amounts reimbursed for payment of taxes with respect to amounts reimbursed under our Stay at Choice program which provides reimbursements to senior executives when staying at Choice hotels properties for purposes other than business. |
(b) | Benefits included in this column include the following amounts or types of compensation: |
· | reimbursement for stay during 2012 under our Stay at Choice program, which was $6,225 for Mr. Joyce; $13,487 for Mr. White; $25,646 for Mr. Pacious; $2,561 for Mr. Pepper; $10,385 for Ms. Wu; and $7,974 for Mr. Haase; |
· | reimbursement of club dues incurred in 2012 under the Flexible Perquisites Program, which was $8,540 for Mr. Joyce; $10,260 for Mr. White; $4,935 for Mr. Pacious; $12,500 for Mr. Pepper; $1,530 for Ms. Wu; and $545 for Mr. Haase; |
· | reimbursement of financial and tax planning services and legal expenses incurred during 2012 under the Flexible Perquisites Program, which was $23,120 for Mr. Joyce; $1,700 for Mr. White; $620 for Mr. Pacious; $2,500 for Mr. Pepper; $349 for Ms. Wu; and $14,139 for Mr. Haase; |
· | reimbursement of health care expenses incurred during 2012 under the Flexible Perquisites Program, which was $140 for Mr. Joyce; $366 for Mr. White; $1,373 for Mr. Pacious; and $316 for Mr. Haase; |
· | reimbursement of child care expenses incurred during 2012 under the Flexible Perquisites Program, which was $2,560 for Mr. Pacious; |
· | a car allowance for each officer, as follows: $7,818 for Mr. Joyce (representing payments up to May 25, 2012, the effective date of Mr. Joyces amended employment agreement, which agreement did not contain a continuing car allowance); $10,154 for Ms. Wu; $12,000 for Messrs. White, Pacious, and Pepper; |
· | group term life insurance premiums paid by Choice on behalf of each Named Executive Officer; and |
· | the aggregate incremental cost to the Company for Mr. Joyces personal use of the Companys aircraft during 2012, which was $108,335. |
Choice calculates the aggregate incremental cost of the personal use of the Companys aircraft by summing actual direct and direct variable costs associated with the use of the aircraft. These costs include fuel, crew travel expenses, landing fees, flight plans, catering, and incremental cost associated with the aircraft lease. Per Mr. Joyces employment agreement, he is entitled to use the Companys aircraft for personal use for up
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to 40 hours per year. Periodically, Mr. Joyces family members and guests may accompany him on business or personal trips on the aircraft; however, the aggregate incremental cost to the Company of their use of the aircraft is minimal, if any.
(c) | Severance payments include certain amounts shown in the Potential Payments Upon Termination or Change in Control section for Mr. Haase. |
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GRANTS OF PLAN-BASED AWARDS FOR 2012
The Compensation and Management Development Committee determines the aggregate equity value to be awarded to each Named Executive Officer annually as discussed above in Compensation Discussion and Analysis, under the heading Long-Term Incentives. In 2012, other than for Ms. Wu and Mr. Haase, each NEOs aggregate standard annual equity value (excluding extraordinary performance grants, employment and retainment related grants, and similar grants made outside of the annual process) was divided into awards of approximately one-third stock options, one-third service-based restricted stock (RS), and one-third as performance vested restricted stock units (PVRSU). For options granted to these NEOs, the value of the aggregate equity grant to be delivered as options is divided by the Black-Scholes value on the date of grant to determine the number of shares to be granted. For example, as discussed above in Compensation Discussion and Analysis, Mr. Whites long-term equity grant value in 2012 was 125% of his base salary, or $418,750. Approximately one-third of this value, or $140,000, was granted as stock options. The Black-Scholes value was $9.979. Thus, the number of shares subject to Mr. Whites option grant on February 19, 2012 was determined as follows: $140,000/$9.979 = 14,030 shares. The value of the aggregate equity grant to be delivered as RS and PVRSUs were divided by the closing price of Choices Common Stock on the most recent business day before the date of grant, or $35.60. Thus, Mr. Whites stock grant was determined as follows: $280,000 (50% RS and 50% PVRSU of the aggregate equity award value for 2012)/$35.60 = 7,866 shares, consisting of 3,933 RS and 3,933 PVRSUs.
Please note that the number of equity awards listed below represent the amounts actually granted in February 2012. In connection with the Companys declaration and payment of the special dividend, these awards, along with other outstanding awards, were adjusted by the Compensation Committee. For more details regarding the nature of the adjustments and to see the as-adjusted figures for the 2012 grants, see the Outstanding Equity Awards at Year-End 2012 table.
Name |
Grant Date |
Estimated Future Payouts Under Non-Equity(1) Incentive Plan Awards |
Estimated Future Payouts Under Equity Incentive Plan Awards(2) |
All
Other Stock Awards: Number of Shares of Stock or Units (#)(3) |
All
Other Option Awards: Number of Securities Underlying Options (#)(4) |
Exercise Price of Option Awards ($)(5) |
Grant Date Fair Value of Stock and Option Awards ($) |
|||||||||||||||||||||||||||||||||||||
Threshold ($) |
Target ($) |
Maximum ($) |
Threshold (#) |
Target (#) |
Maximum (#) |
|||||||||||||||||||||||||||||||||||||||
Joyce |
450,000 | 900,000 | 1,800,000 | |||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 66,807 | 35.60 | 666,667 | |||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 9,364 | 18,727 | 37,454 | 666,681 | ||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 18,727 | 666,681 | ||||||||||||||||||||||||||||||||||||||||||
05/25/2012 | 33,260 | 55,433 | 115,000 | 2,000,023 | ||||||||||||||||||||||||||||||||||||||||
White |
94,875 | 189,750 | 379,500 | |||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 14,030 | 35.60 | 140,005 | |||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 1,967 | 3,933 | 7,866 | 140,015 | ||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 3,933 | 140,015 | ||||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 2,809 | 100,000 | ||||||||||||||||||||||||||||||||||||||||||
Pacious |
118,250 | 236,500 | 473,000 | |||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 16,535 | 35.60 | 165,003 | |||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 2,318 | 4,635 | 9,270 | 165,006 | ||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 21,068 | 750,021 | ||||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 4,635 | 165,006 | ||||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 14,045 | 500,002 | ||||||||||||||||||||||||||||||||||||||||||
03/12/2012 | 10,750 | 406,458 | ||||||||||||||||||||||||||||||||||||||||||
Pepper |
132,000 | 165,000 | | |||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 10,623 | 35.60 | 106,007 | |||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 1,489 | 2,978 | 5,956 | 106,017 | ||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 2,978 | 106,017 | ||||||||||||||||||||||||||||||||||||||||||
Wu |
81,250 | 162,500 | 325,000 | |||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 16,285 | 35.60 | 162,508 | |||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 4,565 | 162,514 | ||||||||||||||||||||||||||||||||||||||||||
02/19/2012 | 1,405 | 50,018 | ||||||||||||||||||||||||||||||||||||||||||
Haase |
226,600 |
44
(1) | For NEOs other than Mr. Pepper, threshold amount reflects the threshold payment level under the Companys 2012 Management Incentive Plan, which is 50% of the target amount. Maximum amount reflects 200% of the target amount. The threshold amount is paid if 90% of the performance goal is attained. The maximum amount is paid upon attaining 120% of the performance goal. For Mr. Pepper, threshold amount is based on minimum sales goal required to earn any payment under his Management Incentive Plan. Based on the unique structure of Mr. Peppers Plan, there is no maximum amount that can be earned. For a discussion of the performance targets under the 2012 Management Incentive Plan, see Annual Incentive Cash Compensation above. For the actual payments made to each NEO pursuant to the 2012 Management Incentive Plan, see the 2012 Non-Equity Incentive Plan Compensation column of the Summary Compensation Table above. |
(2) | Except as further described as related to Mr. Joyces PBRSUs, represents the range of PVRSU award sizes upon vesting. These PVRSUs will vest, if at all, depending on the Companys actual three-year cumulative earnings per share compared to the performance target. During the performance periods, dividends accrue on the PVRSUs, if and at the same rate as dividends are paid out on our outstanding Common Stock; provided, however, that dividends are only paid out to the extent that the PVRSUs actually vest. |
For Mr. Joyces May 25 grant of PBRSUs, represents the range of 5-year PBRSU vesting. Approximately one-third of the target number of shares of the PBRSUs, with a grant date fair value of $680,000, is eligible to vest four years from the effective date subject to the satisfaction of a 4-year performance target. This partial vesting does not include any threshold or maximum payout; therefore, if the 4-year performance target is met or exceeded, the partial vesting will occur, and if the 4-year performance target is not met, no portion of the partial award will vest. Any portion of the 2012 PBRSUs that does not vest at the four-year measurement period will vest five years from the effective date, subject to the satisfaction of a 5-year performance target. The actual payout at the conclusion of the 5-year period is subject to leveraging based on satisfaction of the 5-year performance target, with a 60% target payout threshold and a 207.46% payout maximum.
(3) | Represents grants of RS to each NEO. Except as noted in the following sentences, these awards vest in equal installments on the anniversary of the grant date over a four-year period based on the continued employment of the officer: For Mr. Pacious, 14,405 shares of RS vest at the third year anniversary of the grant date, and 21,068 shares of RS vest on November 1, 2017. For Ms. Wu, 4,565 shares of RS vest at the four year anniversary of the grant date, and 1,405 shares of RS vest at the three year anniversary of the grant date. For Mr. White, 2,809 shares of RS vest at the third anniversary of the grant date. Dividends are paid on the RS, if and at the same rate as dividends are paid on our outstanding Common Stock. |
(4) | Represents grants of stock options to each NEO. These awards vest in equal installments on the anniversary of the grant date over a four-year period, based on the continued employment of the officer. |
(5) | The exercise price of an option is equal to the closing price of Choice Common Stock on the date of grant. Fair market value was established by the Compensation and Management Development Committee as the closing price reported on the New York Stock Exchange on the date of the grant. If no shares were traded on the grant date, the Committee determines the fair market value. The Committee directed that the closing price reported on Friday, February 17, 2012 be the fair market value for the grants awarded on Sunday, February 19, 2012 since the New York Stock Exchange was not open for trading on February 19, 2012. |
NARRATIVE TO THE SUMMARY COMPENSATION TABLE AND
GRANTS OF PLAN-BASED AWARDS TABLE
Employment Agreements
Choice has entered into an Employment Agreement with Mr. Joyce and Choice has entered into a Non-Competition, Non-Solicitation and Severance Benefit Agreement (Severance Benefit Agreement) with each of Messrs. White, Pacious and Haase, and with Ms. Wu.
Mr. Joyce
On March 21, 2008, Choice entered into an employment agreement with Mr. Joyce, effective May 1, 2008, as amended and restated on April 30, 2008 and further amended September 16, 2010 (as amended, the Initial Joyce Employment Agreement). The term of the Initial Joyce Employment Agreement was five years. The Initial Joyce Employment Agreement provided that, for the first six months of the agreement term, Mr. Joyce would be President and Chief Operating Officer and, thereafter, he would transition to President and Chief Executive Officer. As previously disclosed, this schedule was accelerated and Mr. Joyce assumed the role of President and Chief Executive Officer on June 26, 2008. The Initial Joyce Employment Agreement also provided that Mr. Joyce was to be nominated for election to the Board as a Class III director. Mr. Joyce was appointed to the Board, effective April 30, 2008.
45
On May 24, 2012, Choice and Mr. Joyce entered into the Second Amended and Restated Employment Agreement (the Joyce Employment Agreement), which superseded and replaced the Initial Joyce Employment Agreement. The term of the Joyce Employment Agreement is five years.
Pursuant to the Joyce Employment Agreement, Mr. Joyce receives an initial annual base salary of $900,000 as President and Chief Executive Officer. In addition, on the effective date of the agreement, Mr. Joyce received an award of performance-based restricted stock units (2012 PBRSU), which superseded and replaced the PBRSU granted under the Initial Joyce Employment Agreement. The target number of shares granted under the 2012 PBRSU is equal to the number with a fair market value on the effective date of $2,000,023. Approximately one-third of the target number of shares of the 2012 PBRSUs is eligible to vest four years from the effective date subject to the satisfaction of a 4-year performance target. This partial vesting does not include any threshold or maximum payout; therefore, if the 4-year performance target is met or exceeded, the partial vesting will occur, and if the 4-year performance target is not met, no portion of the partial award will vest. Any portion of the 2012 PBRSUs that does not vest at the four-year measurement period will vest five years from the effective date, subject to the satisfaction of a 5-year performance target. The actual payout at the conclusion of the 5-year period is subject to leveraging based on satisfaction of the 5-year performance target, with a 60% target payout threshold and a 207.46% payout maximum.
In addition, Mr. Joyce is eligible throughout the term of the Joyce Employment Agreement to earn a target bonus of 100% per year of his base salary. Additionally, Mr. Joyce is eligible to receive annual awards of options to purchase Choice Common Stock and/or restricted stock, with the value of such annual awards to be based on a multiple of his base salary, as determined in the discretion of the Compensation Committee. Mr. Joyce is also eligible to participate in the Executive Deferred Compensation Plan (EDCP). As applied to Mr. Joyce under the EDCP, upon attaining age 55, his years of service will be deemed to be ten years. Mr. Joyce was eligible to participate under the Initial Joyce Employment Agreement in the now-terminated Choice Supplemental Executive Retirement Plan (SERP). As applied to Mr. Joyce under the SERP, upon attaining age 55, his years of service will be deemed to be his actual years of service plus ten years. The SERP was terminated in December 2012 and Mr. Joyce received a payout of his accrued benefit.
The Joyce Employment Agreement further provides that Choice will provide Mr. Joyce with (i) use of the aircraft utilized by the Company for personal use for up to 40 flight hours per year, consistent with Company policy, (ii) reimbursement for all reasonable expenses incurred by him in the performance of services under the agreement, including all travel and living expenses while away from home on business or at the request of and in the service of Choice in accordance with Company policy, (iii) participation in the Companys Flex Perquisite Program in an amount not to exceed $31,800 per year or such higher amount as may be approved by the Committee, and (iv) participation in all other retirement, health, welfare and fringe benefit plans and policies as generally afforded to the most senior executives of the Company, as are in effect from time to time. Under the Joyce Employment Agreement effective in May 2012, Mr. Joyce no longer receives a corporate club membership or automobile allowance, both benefits that were provided under the Initial Joyce Employment Agreement.
Mr. White
Mr. White, the Companys Senior Vice President, Chief Financial Officer & Treasurer, entered into a Severance Benefit Agreement with the Company effective August 1, 2011 (the White Severance Benefit Agreement). The White Severance Benefit Agreement provides for certain benefits upon specified termination events. These benefits and the termination events that trigger them are described under Potential Payments upon Termination or Change in Control below. Pursuant to Company action and policies, as of December 31, 2012, he received a base salary of $345,000 per year, was participating in our annual incentive bonus plan with a target bonus equal to 55% of his base salary, and was eligible to receive annual awards of options to purchase Choice Common Stock and/or restricted stock, with the value of such annual awards to be determined by the
46
Compensation and Management Development Committee at its discretion. In addition, Mr. White is entitled to receive a monthly automobile allowance and to participate in all other fringe benefits afforded Choice employees of similar status.
Mr. Pacious
Mr. Pacious, the Companys Executive Vice President, Global Strategy & Operations, entered into a Severance Benefit Agreement with the Company effective May 5, 2011 (as amended pursuant to an Amendment dated March 13, 2012, the Pacious Severance Benefit Agreement). The Pacious Severance Benefit Agreement provides for certain benefits upon specified termination events. These benefits and the termination events that trigger them are described under Potential Payments upon Termination or Change in Control below. Pursuant to Company action and policies, as of December 31, 2012, he received a base salary of $430,000 per year, was participating in our annual incentive bonus plan with a target bonus equal to 55% of his base salary, and was eligible to receive annual awards of options to purchase Choice Common Stock and/or restricted stock, with the value of such annual awards to be determined by the Compensation and Management Development Committee at its discretion. In addition, Mr. Pacious is entitled to receive a monthly automobile allowance and to participate in all other fringe benefits afforded Choice employees of similar status.
Ms. Wu
Ms. Wu, the Companys Senior Vice President, General Counsel, Secretary and Chief Compliance Officer, entered into a Severance Benefit Agreement with the Company effective February 13, 2012 (the Wu Severance Benefit Agreement). The Wu Severance Benefit Agreement provides for certain benefits upon specified termination events. These benefits and the termination events that trigger them are described under Potential Payments upon Termination or Change in Control below. Pursuant to Company action and policies, as of December 31, 2012 she received a base salary of $325,000 per year, was participating in our annual incentive bonus plan with a target bonus equal to 50% of her base salary, and was eligible to receive annual awards of options to purchase Choice Common Stock and/or restricted stock, with the value of such annual awards to be determined by the Compensation and Management Development Committee at its discretion. In addition, Mr. Wu is entitled to receive a monthly automobile allowance and to participate in all other fringe benefits afforded Choice employees of similar status.
Mr. Haase
Mr. Haase, formerly the Companys Executive Vice President, Global Brands, Marketing & Operations, entered into a Severance Benefit Agreement with the Company effective January 25, 2008 (the Haase Severance Benefit Agreement). The Haase Severance Benefit Agreement provides for certain benefits upon specified termination events. Pursuant to Company action and policies, prior to the termination described below, he received a base salary of $412,000 per year, participated in our annual incentive bonus plan with a target bonus equal to 55% of his base salary, and was eligible to receive annual awards to purchase Choice Common Stock and/or restricted stock, with the value of such annual awards to be determined by the Compensation and Management Development Committee at its discretion. In addition, Mr. Haase was entitled to receive a monthly automobile allowance and to participate in all other fringe benefits afforded Choice employees of similar status.
As previously disclosed, in connection with Mr. Haases planned departure from the Company on May 31, 2012: (1) Mr. Haase relinquished his executive officer title and responsibilities effective January 31, 2012, and (2) the Company and Mr. Haase amended the Haase Severance Benefit Agreement. Principally, the amendment to the Haase Severance Benefit Agreement: (i) provides for Mr. Haases participation in the Companys flexible perquisite program through 2012; (ii) requires the Company to provide certain insurance coverages and make certain expense reimbursements during Mr. Haases severance benefit period; and (iii) provides an exception to the severance payment offset requirement to permit non-competitive consulting services of less than $5,000 per
47
month. In addition, the Company and Mr. Haase entered into a Transition Services Agreement, which principally provides that: (i) as of January 31, 2012, Mr. Haase will cease serving as an executive officer of the Company and will no longer be authorized to make policy decisions on behalf of the Company, (ii) Mr. Haase will continue to serve as an employee of the Company from February 1, 2012 through May 31, 2012, performing various duties assigned to him by the Companys CEO, (iii) from February 1, 2012 through May 31, 2012, Mr. Haase will continue to receive compensation and benefits at the same levels provided to him as of January 31, 2012, except that after January 31, 2012, Mr. Haase will no longer be eligible to receive any grants of equity, and (iv) Haases employment with the Company will terminate on May 31, 2012, and this termination will be deemed a termination without cause under the Haase Severance Benefit Agreement. Mr. Haases amended Severance Benefit Agreement provides for certain benefits applicable after May 31, 2012. These benefits are described under the Potential Payments Upon Termination or Change in Control section below.
Please see the Potential Payments Upon Termination or Change in Control section below for a more detailed discussion on the termination and severance provisions set forth in each employment agreement described above, as well as the severance and termination provisions and arrangements applicable to our other Named Executive Officers.
48
OUTSTANDING EQUITY AWARDS AT YEAR-END 2012
The following table provides information on the current holdings of stock options and stock awards by the Named Executive Officers. This table includes unexercised and unvested stock option awards, unvested RS, and unvested PVRSUs with performance conditions that have not yet been satisfied. The market value of the RS, PVRSU and PBRSU awards is based on the closing market price of Choices stock as of December 31, 2012, which was $33.62. Because the PVRSUs will be earned, if at all, based on our three-year cumulative EPS performance as compared to the target EPS goal for the respective period (except for Mr. Joyces May 2012 PBRSUs that will be earned, if at all, based upon our four and five-year cumulative average EPS growth rates (see Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table Employment Agreements Mr. Joyce)) the market value of the PVRSUs and PBRSUs shown in the table is based on achievement of the target level of performance under the awards. PVRSUs listed below that were granted in 2010 reflect the target amount but actually vested in February 2013 at 130% of target.
In connection with the Companys payment in 2012 of a special cash dividend of $10.41 per share, the Compensation and Management Development Committee was required to approve an equitable adjustment to the outstanding stock options to prevent the dilution of their value. The Committee elected to utilize an adjustment method known as the ratio-spread adjustment which combined a reduction of the exercise price (by amount less than the $10.41 per share dividend amount) with an increase in the number of shares subject to the option, to preserve the ratio of exercise price to fair market value that existed prior to the payment of the special cash dividend. For all option awards set forth below, the number of securities and the applicable option exercise price reflect the post-special dividend adjustment. Because dividends are payable on RS, and earned (and potentially payable) on PVRSUs and PBRSUs, no adjustments to the number of shares subject to these awards were made. However, because of the negative impact on EPS of the financing transactions related to the special dividend, the Committee approved adjustments to the EPS targets for the 2010, 2011 and 2012 PVRSU awards, and to the cumulative average EPS growth rates for the 2012 PBRSUs granted to Mr. Joyce.
Option Awards(1) | Stock Awards(2) | |||||||||||||||||||||||||||||||||||
Name |
Grant Date |
Number of Securities Underlying Unexercised Options Exercisable (#) |
Number of Securities Underlying Unexercised Options Unexercisable (#) |
Option Exercise Price ($) |
Option Expiration Date |
Number of Shares or Units of Stock That Have Not Vested (#) |
Market Value of Shares or Units of Stock That Have Not Vested ($) |
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
|||||||||||||||||||||||||||
Joyce |
5/1/2008 | 328,801 | 26.55 | 5/1/2015 | ||||||||||||||||||||||||||||||||
2/8/2009 | 156,618 | 52,252 | 20.41 | 2/8/2016 | ||||||||||||||||||||||||||||||||
2/8/2009 | 3,604 | 121,166 | ||||||||||||||||||||||||||||||||||
2/15/2010 | 66,022 | 66,024 | 24.75 | 2/15/2017 | ||||||||||||||||||||||||||||||||
2/15/2010 | 7,669 | 257,832 | 15,338 | 515,664 | ||||||||||||||||||||||||||||||||
2/15/2010 | 15,338 | 515,664 | ||||||||||||||||||||||||||||||||||
2/21/2011 | 23,868 | 71,604 | 31.31 | 2/21/2018 | ||||||||||||||||||||||||||||||||
2/21/2011 | 8,183 | 275,112 | 10,910 | 366,794 | ||||||||||||||||||||||||||||||||
2/19/2012 | 88,004 | 27.03 | 2/19/2019 | |||||||||||||||||||||||||||||||||
2/19/2012 | 18,727 | 629,602 | 18,727 | 629,602 | ||||||||||||||||||||||||||||||||
5/25/2012 | 18,847 | 633,636 | ||||||||||||||||||||||||||||||||||
5/25/2012 | 36,586 | 1,230,021 | ||||||||||||||||||||||||||||||||||
White |
2/14/2005 | 13,172 | 22.71 | 2/14/2015 | ||||||||||||||||||||||||||||||||
12/11/2007 | 26,345 | 27.65 | 12/11/2014 | |||||||||||||||||||||||||||||||||
2/10/2008 | 25,123 | 25.11 | 2/10/2015 | |||||||||||||||||||||||||||||||||
2/8/2009 | 640 | 21,517 | ||||||||||||||||||||||||||||||||||
2/8/2009 | 27,809 | 9,270 | 20.41 | 2/8/2016 | ||||||||||||||||||||||||||||||||
2/14/2010 | 18,353 | 18,355 | 24.75 | 2/14/2017 | ||||||||||||||||||||||||||||||||
2/14/2010 | 1,565 | 52,615 | 3,067 | 103,113 | ||||||||||||||||||||||||||||||||
2/14/2010 | 4,601 | 154,686 | ||||||||||||||||||||||||||||||||||
2/20/2011 | 5,386 | 16,162 | 31.31 | 2/20/2018 | ||||||||||||||||||||||||||||||||
2/20/2011 | 1,848 | 62,130 | 2,463 | 82,806 | ||||||||||||||||||||||||||||||||
8/1/2011 | 12,500 | 420,250 | ||||||||||||||||||||||||||||||||||
2/19/2012 | 18,481 | 27.03 | 2/19/2019 | |||||||||||||||||||||||||||||||||
2/19/2012 | 3,933 | 132,227 | 3,933 | 132,227 | ||||||||||||||||||||||||||||||||
2/19/2012 | 2,809 | 94,439 |
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Option Awards(1) | Stock Awards(2) | |||||||||||||||||||||||||||||||||||
Name |
Grant Date |
Number of Securities Underlying Unexercised Options Exercisable (#) |
Number of Securities Underlying Unexercised Options Unexercisable (#) |
Option Exercise Price ($) |
Option Expiration Date |
Number of Shares or Units of Stock That Have Not Vested (#) |
Market Value of Shares or Units of Stock That Have Not Vested ($) |
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
|||||||||||||||||||||||||||
Pacious |
12/11/2007 | 26,345 | 27.65 | 12/11/2014 | ||||||||||||||||||||||||||||||||
2/10/2008 | 18,917 | 25.11 | 2/10/2015 | |||||||||||||||||||||||||||||||||
2/8/2009 | 872 | 29,317 | ||||||||||||||||||||||||||||||||||
2/8/2009 | 37,921 | 12,643 | 20.41 | 2/8/2016 | ||||||||||||||||||||||||||||||||
2/14/2010 | 16,421 | 16,424 | 24.75 | 2/14/2017 | ||||||||||||||||||||||||||||||||
2/14/2010 | 1,445 | 48,581 | 2,831 | 95,178 | ||||||||||||||||||||||||||||||||
2/14/2010 | 4,601 | 154,686 | ||||||||||||||||||||||||||||||||||
2/20/2011 | 3,978 | 11,934 | 31.31 | 2/20/2018 | ||||||||||||||||||||||||||||||||
2/20/2011 | 7,500 | 252,150 | 1,819 | 61,155 | ||||||||||||||||||||||||||||||||
2/20/2011 | 1,365 | 45,891 | ||||||||||||||||||||||||||||||||||
2/19/2012 | 21,780 | 27.03 | 2/19/2019 | |||||||||||||||||||||||||||||||||
2/19/2012 | 21,068 | 708,306 | 4,635 | 155,829 | ||||||||||||||||||||||||||||||||
2/19/2012 | 4,635 | 155,829 | ||||||||||||||||||||||||||||||||||
2/19/2012 | 14,045 | 472,193 | ||||||||||||||||||||||||||||||||||
3/13/2012 | 10,750 | 361,415 | ||||||||||||||||||||||||||||||||||
Pepper |
2/14/2005 | 22,393 | 22.71 | 2/14/2015 | ||||||||||||||||||||||||||||||||
2/12/2006 | 17,834 | 37.01 | 2/12/2013 | |||||||||||||||||||||||||||||||||
2/11/2007 | 20,154 | 31.15 | 2/11/2014 | |||||||||||||||||||||||||||||||||
2/10/2008 | 30,739 | 25.11 | 2/10/2015 | |||||||||||||||||||||||||||||||||
2/8/2009 | 45,508 | 15,169 | 20.41 | 2/8/2016 | ||||||||||||||||||||||||||||||||
2/8/2009 | 1,047 | 35,200 | ||||||||||||||||||||||||||||||||||
2/14/2010 | 16,422 | 16,423 | 24.75 | 2/14/2017 | ||||||||||||||||||||||||||||||||
2/14/2010 | 1,445 | 48,581 | 2,831 | 95,178 | ||||||||||||||||||||||||||||||||
2/14/2010 | 7,669 | 257,832 | ||||||||||||||||||||||||||||||||||
2/20/2011 | 4,083 | 12,253 | 31.31 | 2/20/2018 | ||||||||||||||||||||||||||||||||
2/20/2011 | 3,750 | 126,075 | 1,867 | 62,769 | ||||||||||||||||||||||||||||||||
2/20/2011 | 1,401 | 47,102 | ||||||||||||||||||||||||||||||||||
2/19/2012 | 13,993 | 27.03 | 2/19/2019 | |||||||||||||||||||||||||||||||||
2/19/2012 | 2,978 | 100,120 | 2,978 | 100,120 | ||||||||||||||||||||||||||||||||
Wu |
2/19/2012 | 21,452 | 27.03 | 2/19/2019 | ||||||||||||||||||||||||||||||||
2/19/2012 | 4,565 | 153,475 | ||||||||||||||||||||||||||||||||||
2/19/2012 | 1,405 | 47,236 | ||||||||||||||||||||||||||||||||||
Haase |
2/10/2008 | 3,980 | 25.11 | 2/28/2014 | ||||||||||||||||||||||||||||||||
3/21/2008 | 10,184 | 342,386 | ||||||||||||||||||||||||||||||||||
2/08/2009 | 1,047 | 35,200 | ||||||||||||||||||||||||||||||||||
2/08/2009 | 1 | 15,169 | 20.41 | 2/28/2014 | ||||||||||||||||||||||||||||||||
2/14/2010 | 16,507 | 24.75 | 2/28/2014 | |||||||||||||||||||||||||||||||||
2/14/2010 | 1,917 | 64,450 | 3,758 | 126,344 | ||||||||||||||||||||||||||||||||
2/14/2010 | 12,270 | 412,517 | ||||||||||||||||||||||||||||||||||
2/20/2011 | 7,292 | 21,880 | 31.31 | 2/28/2014 | ||||||||||||||||||||||||||||||||
2/20/2011 | 2,501 | 84,084 | 3,334 | 112,089 |
(1) | The stock options listed above granted prior to December 20, 2005 vest at a rate of 20% per year, on each grant anniversary date, over the first five years of the ten-year option term. The stock options listed above granted on or after December 20, 2005 vest 25% per year, on each grant anniversary date, over the first four years of the seven-year term. The stock option expiration date for Mr. Haase is the expiration date established by the terms and conditions of his Severance Agreement, which terms supersede the expiration dates otherwise applicable under the award grants. |
(2) | Restricted stock awards generally vest at the rate of 25% each year for four years from the date of grant, except for (i) a portion of each NEOs 2010 award, each of which vests over a three-year period beginning on the third anniversary of the grant date, (ii) Ms. Wus 2/19/2012 restricted stock awards for 4,565 shares and 1,405 shares, which vest four years and three years, respectively, from the date of grant, (iii) Mr. Pacious 3/13/2012 restricted stock award for 10,750 shares which vests three years from the date of grant, and his 2/19/2012 restricted stock awards for 14,405 shares and 21,068 shares, which vest three years and five years and eight months, respectively, from the date of grant, (iv) Mr. Whites 2/19/2012 restricted stock award of 2,809 shares and his 8/1/2011 restricted stock award of 12,500 shares, each of which vests three years from the applicable grant date, and (v) Mr. Haases 3/21/2008 restricted stock awards for 10,184 shares which vest ratably over years three, four and five of the five-year vesting term. PVRSUs are earned and vest upon the conclusion of a three-year performance period based on actual three-year cumulative EPS compared to the performance target. Mr. Joyces PBRSUs are earned, if at all, and vest upon the conclusion of a four and five-year performance periods based on cumulative average EPS growth. |
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OPTION EXERCISES AND STOCK VESTED FOR 2012
The following table provides information for each of the Named Executive Officers on stock option exercises during 2012, including the number of shares acquired upon exercise and the value realized, and the number of shares acquired upon the vesting of stock awards and the value realized, each before payment of any taxes and broker commissions. Value realized is based on the closing market price of Choice Common Stock on the date of exercise or vesting, respectively.
Option Awards | Stock Awards | |||||||||||||||
Name |
Number of Shares Acquired on Exercise |
Value Realized on Exercise ($) |
Number of Shares Acquired on Vesting |
Value Realized on Vesting ($) |
||||||||||||
Joyce |
| | 26,682 | 1,002,040 | ||||||||||||
White(1) |
26,015 | 599,701 | 2,037 | 73,371 | ||||||||||||
Pacious |
| | 4,548 | 163,049 | ||||||||||||
Pepper |
| | 3,484 | 125,388 | ||||||||||||
Wu |
| | | | ||||||||||||
Haase |
147,637 | 964,036 | 13,022 | 480,336 |
(1) | Mr. White elected to defer receipt of 639 shares otherwise issuable to him, with a value of $23,547. Mr. White elected to receive this deferred amount in a lump sum following termination of employment. |
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Choices supplemental executive retirement plan (SERP) was a non-contributory defined benefit pension plan that covered our Chief Executive Officer and other key executives approved by the Board of Directors. In December of 2011, the Board adopted a resolution to terminate the SERP, initiating a process by which all interests in the SERP would be paid out to the beneficiaries. The Company completed this distribution during 2012. The table below lists the distribution amounts for each of the NEOs that participated in the SERP. Because Ms. Wu joined the Company after the Board had terminated the SERP, she did not participate in the SERP. The SERP termination process required the Compensation Committee to make certain assumptions and decisions in order to enable payouts for actively employed participants, including the NEOs listed below. The material assumptions and decisions impacting the final distribution amounts are described below.
Pursuant to the SERP, retirement benefits are determined under a formula based on each participants years of service and final average salary, defined as a monthly salary based on the sum of: (a) an average of base salary earned in the highest 60 months out of, and (b) the monthly pro-rata of the average of the five highest bonus payments earned during, the 120 months of employment immediately prior to the normal retirement date, the early retirement date or other date of separation from service. Subject to giving effect to the December 31, 2009 suspension of future accrual of benefits, the formula provides a benefit equal to 1% per year of service up to 15% and 1.5% per year of service thereafter up to 30%. Participants become vested in their benefits under the SERP upon completion of five years of service. Benefits paid under the SERP are straight life annuity amounts, although participants have the option of selecting a joint and 50% survivor annuity (for those who are married or have a domestic partner) or ten-year guaranteed payments. The benefits are not subject to offset for social security and other amounts.
Pursuant to Mr. Joyces employment agreement in effect at the time the SERP terminated, upon attaining age 55, Mr. Joyce is to be credited an additional ten years of service for purposes of the SERP. This provision was negotiated with Mr. Joyce at the time of his hire.
Unreduced benefits are available upon retirement at age 65 (the normal retirement age under the plan), or upon retirement at age 55, provided the participant has a minimum of ten years of service. The SERP does not provide for early retirement with reduced benefits; if a participant terminates prior to age 65, or prior to age 55 with ten years of service, benefit payments commence on the first day of the month following his or her 65th birthday. Upon termination for cause, participants forfeit any accumulated benefit under the SERP, even if vested. Further, upon the death of a participant before payment has begun, his or her spouse (or domestic partner) is generally entitled to receive 50% of the participants vested SERP benefit.
All of the NEOs are entitled to an unreduced benefit at age 65, except Mr. Joyce who, pursuant to his employment agreement, will be eligible to receive unreduced benefits upon attaining age 55.
As a result of the determination in 2011 to terminate the SERP, in 2012 the Compensation Committee was required to make certain decisions regarding assumptions for mortality, interest, and retirement age to enable lump sum conversion calculations for the final SERP distributions. For mortality and interest, the Committee determined to adopt the methodology required by the IRS for qualified plans under Section 417(e) of the Internal Revenue Code. This included the adoption of a one-year stability period with a two month lookback to November 2011 for interest rates, which resulted in rates of 1.99% for the first five years, 4.47% for the following 15 years, and 5.26% thereafter. For mortality, this resulted in the use of the table published by the IRS in notice 2008-85 for distributions occurring during 2012. For the applicable retirement age, the Committee selected 57.5 years to be used as the retirement age for all active participants, which represents the age that Mr. Joyce will be at the end of his current employment contract. Based on the use of this assumed retirement age,
52
pursuant to Mr. Joyces employment agreement, he was credited with an additional 10 years of service, which additional amount is reflected in the distribution total set forth below.
Name |
Plan Name | Payments During Last Fiscal Year ($) |
||||||
Joyce |
SERP | 1,942,986 | ||||||
White |
SERP | 191,103 | ||||||
Pacious |
SERP | 126,630 | ||||||
Pepper |
SERP | 285,813 | ||||||
Haase |
SERP | 295,625 |
NON-QUALIFIED DEFERRED COMPENSATION FOR 2012
Executive Deferred Compensation Plan. In 2002, Choice adopted the Choice Hotels International, Inc. Executive Deferred Compensation Plan (EDCP), which became effective January 1, 2003. Our Chief Executive Officer and other key executives approved by the Board (including each of the Named Executive Officers) are eligible to participate in the EDCP. During 2012, each of the NEOs participated in the EDCP. Participants in the EDCP are not entitled to participate in the Non-Qualified Plan described below.
Under the EDCP, participants may defer up to 90% of their base salary and up to 100% of their bonus each year. Choice matches 50% of up to 15% of eligible salary under the EDCP, reduced by the total matching contributions to which the participant is otherwise entitled under the 401(k) plan. The participants right to any Company match vests at 20% per year from the time the participant was first hired, with all past and future match amounts becoming 100% vested after the participants fifth year of service. As of December 31, 2012, each of the participating NEOs, other than Mr. Joyce and Ms. Wu, was fully vested in their Company match amounts.
A participant may elect a return based on a selection of investment options selected by the EDCPs administrators, which are generally publicly available mutual funds or other indices. Participants may elect to change their investment options under the EDCP in accordance with plan requirements.
Benefits commence under the EDCP upon the death of the participant (to the participants beneficiary), or, at the participants election, upon the participants termination of employment or, commencing in 2009 on a January designated by the participant, subject to any requirements imposed by Section 409A of the Internal Revenue Code (Section 409A). If no election is made, benefits will commence upon termination of employment, subject to any requirements imposed by Section 409A. Benefits are payable in a lump-sum payment or in annual installments over a period of up to 20 years, as elected by the participant. If no election is made, benefits will be paid in a lump sum. Benefits will also automatically be paid in a lump sum if the amount payable as of the initial payout date is $100,000 or less.
In December 2008, the Company amended and restated the EDCP to comply with treasury regulations promulgated pursuant to Section 409A. The amendment and restatement, which became effective on January 1, 2009, only applies to that portion of each participants EDCP account balances that are subject to Section 409A (generally, those contribution amounts that became vested or were credited after 2004). The pre-2005 plan documents continue to apply to the remaining participant account balances under the EDCP.
Stock Deferral Program. Each NEO is entitled to defer all or any portion of any equity award (other than stock options). The executive may elect to defer the receipt of such equity until termination of their employment or until a specified future date. Any dividends or other distributions during the deferral period are credited to the executives deferred equity account and reinvested in the purchase of additional Choice Common Stock. In December 2008, the Company amended and restated the 2006 Long-Term Incentive Plan to comply with treasury regulations promulgated pursuant to Section 409A. This amendment became effective on January 1, 2009.
53
Non-Qualified Plan. In 1997, Choice adopted the Choice Hotels International, Inc. Non-Qualified Retirement Savings and Investment Plan (Non-Qualified Plan). Generally, Choice employees with gross earnings that are greater than 125% of the highly-compensated employee limit established by the IRS, but who are not eligible to participate in the EDCP, are eligible to participate in the Non-Qualified Plan. None of the NEOs were eligible to participate in the Non-Qualified Plan in 2012. However, Mr. White retains an account balance related to his prior plan participation.
In general, participants under the Non-Qualified Plan may elect to defer up to 90% of their base salary and up to 100% of their annual bonus, reduced by the deferral limit in effect under the Choice 401(k) plan (which was $17,000 for 2012). Choice matches up to 5% of any deferred salary under the Non-Qualified Plan, offset by the amount of matching contributions to which the participant is entitled under the 401(k) plan.
Name |
Plan Name | Executive Contributions 2012 ($)(1) |
Registrant Contributions 2012 ($)(2) |
Aggregate Earnings 2012 ($)(3) |
Aggregate Withdrawals/ Distributions ($) |
Aggregate Balance 2012 ($) |
||||||||||||||||
Joyce |
EDCP | 135,257 | 57,628 | 116,803 | | 1,366,800 | ||||||||||||||||
White |
EDCP | 34,461 | 15,846 | 59,696 | | 859,692 | ||||||||||||||||
Non-Qualified Plan | | | 12,907 | | 103,790 | |||||||||||||||||
Stock Deferral Program | 23,547 | | 89,717 | | 516,683 | |||||||||||||||||
Pacious |
EDCP | 42,692 | 21,346 | 19,800 | | 301,475 | ||||||||||||||||
Pepper |
EDCP | 115,972 | 14,713 | 188,964 | | 2,678,710 | ||||||||||||||||
Stock Deferral Program | | | 51,248 | | 285,990 | |||||||||||||||||
Wu |
EDCP | 23,625 | 11,813 | 1,096 | | 36,534 | ||||||||||||||||
Haase |
EDCP | 23,706 | 11,853 | 208,452 | (4,935,347 | ) | 11,852 | |||||||||||||||
Stock Deferral Program | | | 2,274 | 63,514 | |
(1) | The following salary and bonus (non-equity incentive plan compensation) amounts are included in this column. The salary amounts represent 2012 base salary deferred by the officer during 2012. The bonus amounts represent the officers 2011 annual bonus which was paid and deferred in early 2012. The salary amounts below are included in the 2012 Salary column of the Summary Compensation Table above, while the 2011 annual bonus amounts are included in the 2011 Non-Equity Incentive Plan column of the Summary Compensation Table above. |
Name |
2012 Salary ($) | 2011 Annual Bonus ($) | ||||||
Joyce |
135,257 | | ||||||
White |
34,461 | | ||||||
Pacious |
42,692 | | ||||||
Pepper |
49,426 | |
66,546 |
| ||||
Wu |
23,625 | | ||||||
Haase |
23,706 | |
(2) | Amounts in this column are included in the 2012 All Other Compensation column of the Summary Compensation Table above. |
(3) | Certain amounts in this column represent earnings on each officers EDCP account that are also included in the 2012 Change in Pension Value and Preferential Non-Qualified Deferred Compensation Earnings column of the Summary Compensation Table above, since they represent guaranteed preferential earnings to each applicable NEO under the EDCP. Those amounts are: $26,851 for Mr. Joyce; $29,286, for Mr. White; $5,665 for Mr. Pacious; $101,424, for Mr. Pepper; and $87,798, for Mr. Haase. |
54
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The tables below reflect the amount of compensation that could have been received by each of the Named Executive Officers (other than Mr. Haase) in the event such executives employment had terminated under the various applicable triggering events described below as of December 31, 2012, the last business day of 2012. The amounts shown assume that such termination was effective as of December 31, 2012 and, for any equity-based payments or valuations, the closing stock price of Choices Common Stock on December 31, 2012, or $33.62 per share. Other than for Mr. Haase, the amounts shown are estimates only; the actual amounts to be paid will only be determinable at the time of the executives separation from Choice. In addition, certain benefits received by Mr. Haase in connection with his separation from the Company are discussed and shown below.
General Payments Made upon Termination
Regardless of the manner in which an NEOs employment terminates (or terminated, in the case of Mr. Haase), the NEO is entitled to receive amounts earned during his or her term of employment. The following amounts are not included in the tables or narratives below and include:
· | base salary earned through the date of termination; |
· | accrued but unpaid vacation pay earned through the date of termination; |
· | annual incentive compensation earned during the fiscal year of termination, which for 2012 is reflected in the 2012 Non-Equity Incentive Plan Compensation column of the Summary Compensation Table above for each NEO; |
· | amounts contributed by the executive under the Choice 401(k) plan; |
· | payments pursuant to our life insurance plan, available to all employees generally, which provides for one times base salary upon death; and |
· | each executives account balance under the EDCP, Non-Qualified Plan and Stock Deferral Program, as applicable and as set forth above under the heading Non-Qualified Deferred Compensation for 2012. |
With respect to deferred compensation plans, if the executive has previously elected to receive deferred amounts in the EDCP or Non-Qualified Plan in installments, the undistributed account balances will continue to be credited with increases or decreases reflecting changes in the investment options chosen by the executive.
Messrs. Joyce, White, Pacious and Pepper, and Ms. Wu
Payments Made upon Constructive Termination or Termination without Cause
Mr. Joyce
Pursuant to the Joyce Employment Agreement, if Mr. Joyce is constructively terminated, he will be entitled to receive for two years after the date of such constructive termination, the base salary and bonus (calculated on the actual payout of the corporate objectives) under the Joyce Employment Agreement. The base salary severance shall be paid in installments in accordance with the Companys payroll cycle. Additionally during this two year period, all unvested restricted stock and stock options granted prior to the constructive termination shall continue to vest. With respect to the 2012 PBRSU, Mr. Joyce is entitled to a pro-rata vesting of the target award based upon the percentage of actual service through the date of constructive termination. All unvested PVRSU grants will lapse upon constructive termination.
The Joyce Employment Agreement also provides for a two-year non-compete and non-solicitation period. Pursuant to the non-compete, Mr. Joyce may not engage in any competing business in the U.S. or Canada in which, at the time of termination of his employment, Choice is materially engaged. As used in the Joyce
55
Employment Agreement, a competing business means any business engaged in the (i) the same upscale, select service market as Cambria Suites, (ii) mid-market or economy hotel franchising business or (iii) any other line of business that Choice is engaged in at the time of termination. The Joyce Employment Agreement also provides for a general confidentiality provision in favor of Choice.
Generally, constructive termination is defined under Joyce Employment Agreement as:
· | Choices removal or termination other than by expiration of the agreement or for cause, death, disability or resignation; |
· | failure of Choice to place Mr. Joyces name in nomination for election to the Board; |
· | assignment of duties to Mr. Joyce inconsistent with the duties set forth in the agreement; |
· | a decrease in Mr. Joyces compensation or benefits; |
· | a change in Mr. Joyces title or line of reporting set forth in the agreement; |
· | a significant reduction in the scope of Mr. Joyces authority, position, duties or responsibilities; |
· | the relocation of Mr. Joyces office to a location more than 25 miles from his prior place of employment; |
· | a change in Choices annual bonus program which adversely affects Mr. Joyce; or |
· | any other material breach of the agreement by Choice. |
Messrs. Pacious and White and Ms. Wu
Under the Pacious Severance Benefit Agreement, the White Severance Benefit Agreement and the Wu Severance Benefit Agreement, if the executive elects to terminate for good reason or if the Company terminates the executive for any reason other than for cause, the executive is entitled to receive continued base salary for 70 weeks, payable in installments in accordance with Choices normal payroll practices and subject to standard deductions. Generally, good reason is defined under the agreement as a substantial change in the executives compensation or position and responsibilities. In addition, if the termination occurs after June 30, the executive will be entitled to the annual bonus for the year in which the termination occurred at the actual attainment level for the companys objectives and at 100% deemed attainment of the individual objectives. The executive will also be eligible to receive continued medical and dental benefits during the 70-week period, with Choice continuing to make its employer contributions for such continued benefits. Optional deductions for items such as retirement plans and life insurance will cease on the termination date. Choice is also obligated to provide the executive with its standard outplacement services for executive-level employees during the 70-week period, subject to termination in the event the executive secures new employment.
Pursuant to the Pacious Severance Benefit Agreement, the White Severance Benefit Agreement and the Wu Severance Benefit Agreement, the executive will continue to vest in any unvested stock options and other stock awards granted after the date of his or her respective severance agreement (for Mr. Pacious, May 5, 2011, for Mr. White, August 1, 2011, and for Ms. Wu, February 13, 2012) during the 70-week period.
As conditions to the executives continued receipt of the payments and benefits above, each of the executives has agreed that if he or she becomes employed prior to the end of the 70-week period, Choice is entitled to offset the payments required above by the amount of any compensation earned by him or her as a result of new employment, including unemployment insurance benefits, social security insurance or like amounts. In addition, the executive must execute a release in favor of Choice, releasing Choice and its affiliates from any claims relating to the executives employment with Choice. The agreement also provides for a 70-week non-compete and non-solicitation period, and general confidentiality provision in favor of Choice.
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Mr. Pepper
If Mr. Pepper is terminated without cause by Choice, he is entitled to severance payments under the Choice Hotels International Severance Benefit Plan, which applies to all Company employees except for those employees who are subject to an employment agreement or non-competition, non-solicitation and severance agreement. Under the Choice Hotels International Severance Benefit Plan, each participants severance benefit, and the length of time after termination for which the participant is eligible for the benefit, is determined based on his or her base salary, position and years of service as of the termination date. In addition, each participant is entitled to continuation of medical and dental coverage during the severance period, at the same level the participant was receiving at termination.
Pursuant to the Choice Hotels International Severance Benefit Plan, corporate officers without a specifically applicable written agreement, which includes Mr. Pepper, are entitled to five weeks of base salary (as in effect at termination of employment) per year of service with Choice, with a minimum of twenty-six weeks of base salary and a maximum of seventy weeks. Additionally, if the termination occurs on or after June 30th of any year, Mr. Pepper is entitled to receive a full bonus for the year in which the termination occurs. Assuming a termination as of December 31, 2012, Mr. Pepper would be entitled to 50 weeks of continued base salary. In addition, Mr. Pepper would receive payment of his 2012 incentive bonus, as well as continued medical and dental benefits during the 50-week severance benefit period. The severance benefit terminates prior to the end of the severance benefit period provided under the Choice Hotels International Severance Benefit Plan upon the earlier to occur of (i) death of the participant, or (ii) employment with a new employer. In addition, the severance benefit is subject to the participants execution of a standard release agreement in favor of Choice.
As a condition to the receipt of any benefits under the Severance Benefit Plan, Mr. Pepper is required to sign all documents required by the Company including a general release of claims.
Payments Made upon Death or Disability
The Companys disability program provides that each of the executives will receive an annual benefit equal to 70% of the previous years base salary and annual bonus, with such amount capped at $25,000 per month. In each case, the disability benefit continues until the executive reaches age 65.
Messrs. Joyce, White, Pacious, Pepper and Ms. Wu each have a supplemental executive individual life insurance policy, paid for by Choice, in the amount of $1,000,000. Premiums on this policy are added to each executives taxable income for the year.
Pursuant to the Joyce Employment Agreement, if Mr. Joyces employment is terminated because of death or disability, then all of his unvested restricted stock and stock options continue to vest in accordance with their terms. Mr. Joyce is also entitled to pro-rated vesting of his PBRSUs based upon the percentage of actual service through the date of death or disability. All unvested PVRSU grants lapse upon death or disability.
Payments Made upon Termination Following Change of Control
Mr. Joyce
If, within 12 months after a change in control, Mr. Joyce is terminated, pursuant to the Joyce Employment Agreement, he will be entitled to receive an amount equal to his base salary and bonuses (payable at 100% of target) for the period of two and a half years after the date of such change of control termination.
During the period of time he receives the foregoing change of control severance payments, all unvested shares of restricted stock and stock options, including the 2012 PBRSU assuming maximum performance but excluding the PVRS grants, are to automatically become fully vested and any and all restrictions are to lapse immediately prior to the date of such change of control termination. Unvested PVRSU grants will lapse upon such change of control termination.
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Upon a change in control termination, Mr. Joyce would be subject to the non-compete and non-solicitation provisions described above, and he would be required to execute a general release in favor of Choice in order to receive any of the above-described severance payments.
Generally, change in control is defined under the agreements described above as:
· | any person (with certain exceptions, including Mr. Bainum and his family members) becomes the beneficial owner of 33% or more of the outstanding voting securities of Choice; |
· | individuals constituting the Board of Directors of Choice, and the successors of such individuals (as nominated by the Board or committee thereof), cease to constitute a majority of the Board; |
· | a merger or other consolidation which results in Choice shareholders owning less than 65% of the surviving entity; and |
· | the acquisition of Choice, a liquidation or sale of all or substantially all of the assets of Choice, or a tender offer for all or substantially all of the stock of Choice. |
Messrs. White and Pacious and Ms. Wu
For Messrs. White and Pacious and Ms. Wu, pursuant to each of their respective Severance Benefit Agreements, if the executives employment is terminated within 12 months following a change of control, and such termination is by Choice without cause or by the executive for good reason, he is entitled to receive:
· | a lump-sum severance payment of 200% of the executives base salary then in effect plus 200% of the full amount of the annual incentive bonus (for Mr. Pacious, the bonus payment is calculated based on the previous years bonus amount paid to the executive, or if no bonus was paid in the prior year, then the target bonus amount; for Mr. White and Ms. Wu, the bonus payment is calculated based on the target bonus for the fiscal year in which the termination occurs); and |
· | immediate vesting of all unvested stock options, restricted stock and performance vested restricted stock units granted after the date of his or her respective severance agreement (for Mr. White, August 1, 2011, for Mr. Pacious, May 5, 2011, and for Ms. Wu, February 13, 2012). |
In addition, in the event of a termination following a change of control, the Companys Long-Term Incentive Plan (LTIP) would govern the equity grants issued to Messrs. White and Pacious prior to the date of each of their respective severance agreements, and the LTIP provides that stock options become fully vested and exercisable in full, all restricted stock becomes fully vested with immediate lapsing of any restrictions, and all PVRSUs are deemed to be fully vested and immediately payable to the executive at the maximum level of performance applicable to the award. Therefore, for each of Messrs. White and Pacious, the LTIP, together with each of their respective severance agreements, would result in the immediate vesting of all of the executives equity awards.
Also, upon a change in control termination, Messrs. White and Pacious and Ms. Wu would be subject to the non-competition and non-solicitation provisions described above.
In addition to the other conditions applicable to Messrs. White and Pacious and Ms. Wu in order for each executive to receive his or her severance payments, as described above, the executive is required to execute a general release in favor of Choice in order to receive any severance payments upon a qualifying termination following a change in control.
Mr. Pepper
Pursuant to the Companys Severance Benefit Policy, if Mr. Peppers employment is terminated within 12 months following a change of control, and such termination is by Choice without cause or by him for good reason, he is entitled to receive a lump-sum severance payment of 200% of his base salary then in effect plus
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200% of the full amount of the annual incentive bonus based on the target bonus for the fiscal year in which the termination occurs. In addition, he is entitled to receive medical and dental coverage for 70 weeks at the level he was receiving at the time of his termination. In addition to the other conditions applicable to Mr. Pepper in order to receive his severance payments, as described above, he is required to execute a general release in favor of Choice in order to receive any severance payments upon a qualifying termination following a change in control.
Because Mr. Pepper does not have a written agreement with the Company governing treatment of his equity awards in the event of a termination following a change of control, the terms of the Companys LTIP apply. Pursuant to the LTIP, if within two years of a change of control, Mr. Pepper is terminated by the Company other than for cause, or terminates his employment for good reason, then all of his stock options become fully vested and exercisable in full, all restricted stock becomes fully vested with immediate lapsing of any restrictions, and all PVRSUs are deemed to be fully vested and immediately payable to Mr. Pepper at the maximum level of performance applicable to the award.
Mr. Joyce
The following table shows the potential payments upon termination, with or without a change of control, for Mr. Joyce:
Executive Benefits and Payments |
Constructive Termination ($) |
Termination Following Change of Control ($) |
Disability ($) | Death ($) | ||||||||||||
Compensation: |
||||||||||||||||
Salary Continuation under Employment Agreement |
1,800,000 | (1) | 2,250,000 | (2) | | | ||||||||||
Annual Incentive Bonus(3) |
1,800,000 | 1,800,000 | | | ||||||||||||
Benefits & Perquisites: |
||||||||||||||||
Disability Income(4) |
| | 3,600,000 | | ||||||||||||
Health and Welfare Benefits(5) |
30,840 | 30,840 | | | ||||||||||||
Life Insurance Benefits(6) |
| | | 1,900,000 | ||||||||||||
Long-Term Incentives: |
||||||||||||||||
Stock Options(7) |
1,676,535 | 2,021,779 | 2,021,779 | 2,021,779 | ||||||||||||
Restricted Stock Grants(8) |
1,392,776 | 1,799,376 | 1,799,376 | 1,799,376 | ||||||||||||
PVRSUs(9) |
| | | | ||||||||||||
PBRSUs(10) |
224,537 | 3,866,300 | 224,537 | 224,537 |
(1) | Amount represents continued payment of Mr. Joyces base salary, based on his salary as of December 31, 2012, for two years. |
(2) | Amount represents continued payment of Mr. Joyces base salary, based on his salary as of December 31, 2012, for two years and six months. |
(3) | Amount represents the estimated target incentive bonus amounts for fiscal years 2013 and 2014, based on the target bonus amount for 2012. |
(4) | Amount represents the aggregate of the current monthly benefit payments at $25,000 per month that Mr. Joyce would be entitled to receive under the Choice disability program as of December 2012 through the month in which he reaches age 65. |
(5) | Amount represents estimated reimbursements to Mr. Joyce of COBRA continuation of health care coverage premiums for Mr. Joyce and his family for a period of 18 months. |
(6) | Amount represents estimated value of the proceeds payable to Mr. Joyces beneficiary upon death. |
(7) | Upon constructive termination, stock options will continue to vest for a period of two years. Upon death or disability, stock options will continue to vest through the original term of such option. In the case of termination following a change of control, all stock option awards immediately vest. Values presented represent the intrinsic value of the options based on a closing share price on December 31, 2012 of $33.62. |
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(8) | Upon constructive termination, restricted stock will continue to vest for a period of two years. Upon death or disability, restricted stock will continue to vest through the original term of the restricted stock. In the case of termination following a change of control, all restricted stock awards immediately vest. The values presented represent the value of the stock based on the closing price of our stock on December 31, 2012 of $33.62. |
(9) | Upon constructive termination, death, disability or termination following a change of control, unvested PVRSUs are immediately terminated. |
(10) | Upon constructive termination, death, or disability, Mr. Joyce is entitled to an immediate pro-rata vesting of the PBRSU awards based upon the amount of service through the date of termination or death compared to the 5-year vesting term. In the case of termination following a change of control, all unvested PBRSU awards will immediately vest with the maximum performance level under the terms of the award assumed to have been achieved. The values presented represent the value of the stock based on the closing share price on December 31, 2012 of $33.62, and solely in the case of a termination following a change of control, 207.5% vesting leverage, which is the maximum leverage permitted under the PBRSU grant. |
Mr. White
The following table shows the potential payments upon termination, with or without a change in control, for Mr. White:
Executive Benefits and Payments |
Termination without Cause or For Good Reason ($) |
Termination Following Change of Control ($) |
Disability ($) | Death ($) | ||||||||||||
Compensation: |
||||||||||||||||
Salary Continuation under Severance Benefit Agreement(1) |
464,423 | | | | ||||||||||||
Benefits & Perquisites: |
||||||||||||||||
Cash Severance(2) |
| 1,069,500 | | | ||||||||||||
Health and Welfare Benefits(3) |
18,459 | | ||||||||||||||
Outplacement Services(4) |
18,000 | | | | ||||||||||||
Disability Income(5) |
| | 6,000,000 | | ||||||||||||
Life Insurance Benefits(6) |
| | | 1,345,000 | ||||||||||||
Long-Term Incentives: |
||||||||||||||||
Stock Options(7) |
60,925 | 444,502 | | | ||||||||||||
Restricted Stock Grants(8) |
66,097 | 937,864 | | | ||||||||||||
PVRSUs(9) |
| 698,220 | | |
(1) | Amount represents continued payment of Mr. Whites base salary, based on his salary as of December 31, 2012, for 70 weeks. |
(2) | Amount represents 200% of Mr. Whites annual base salary as of December 31, 2012, plus 200% of Mr. Whites annual target bonus amount for 2012. |
(3) | Amount represents the estimated value of the future premiums and contributions that Choice would pay on behalf of Mr. White for continued coverage under our medical and dental plans for 70 weeks, based on Mr. Whites elected coverage as of December 31, 2012. |
(4) | Amount represents the estimated value of Choices standard senior executive outplacement service. |
(5) | Amount represents the aggregate of the current monthly benefit payments at $25,000 per month that Mr. White would be entitled to receive under the Choice disability program as of December 31, 2012 through the month in which he reaches age 65. |
(6) | Amount represents the estimated value of the proceeds payable to Mr. Whites beneficiary upon his death. |
(7) | For termination without cause or with good reason, unvested options granted after August 1, 2011 will continue to vest for 70 weeks following termination. In the case of termination following a change of |
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control, all stock option awards will immediately vest. Values presented represent the intrinsic value of the options based on the closing share price on December 31, 2012 of $33.62. |
(8) | For termination without cause or with good reason, restricted stock granted after August 1, 2011 will continue to vest for 70 weeks following termination. In the case of termination following a change of control, all restricted awards will immediately vest. The values presented represent the value of the stock based on the closing price of our stock on December 31, 2012 of $33.62. |
(9) | For termination without cause or with good reason, PVRSUs granted after August 1, 2011 will continue to vest for 70 weeks. In the case of termination following a change of control, all unvested PVRSU awards will immediately vest with the maximum performance level under the terms of the award being assumed to have been achieved. The values presented represent the value of the stock based on the closing share price on December 31, 2012 of $33.62, and solely in the case of a termination following a change of control, 200% vesting leverage, which is the maximum leverage permitted under the PVRSU grants. |
Mr. Pacious
The following table shows the potential payments upon termination, with or without a change in control, for Mr. Pacious:
Executive Benefits and Payments |
Termination without Cause or For Good Reason ($) |
Termination Following Change of Control ($) |
Disability ($) | Death ($) | ||||||||||||
Compensation: |
||||||||||||||||
Salary Continuation under Severance Benefit Agreement(1) |
578,846 | | | | ||||||||||||
Benefits & Perquisites: |
||||||||||||||||
Cash Severance(2) |
| 1,333,000 | | | ||||||||||||
Health and Welfare Benefits(3) |
806 | | ||||||||||||||
Outplacement Services(4) |
18,000 | | | | ||||||||||||
Disability Income(5) |
| | 5,400,000 | | ||||||||||||
Life Insurance Benefits(6) |
| | | 1,430,000 | ||||||||||||
Long-Term Incentives: |
||||||||||||||||
Stock Options(7) |
71,806 | 483,950 | | | ||||||||||||
Restricted Stock Grants(8) |
77,864 | 2,228,367 | | | ||||||||||||
PVRSUs(9) |
| 681,477 | | |
(1) | Amount represents continued payment of Mr. Pacious base salary, based on his salary in effect on December 31, 2012, for 70 weeks. |
(2) | Amount represents 200% of Mr. Pacious annual base salary as of December 31, 2012, plus 200% of Mr. Pacious annual target bonus amount for 2012. |
(3) | Amount represents the estimated value of the future premiums and contributions that Choice would pay on behalf of Mr. Pacious for continued coverage under our medical and dental plans for 70 weeks, based on Mr. Pacious elected coverage as of December 31, 2012. |
(4) | Amount represents the estimated value of Choices standard senior executive outplacement service. |
(5) | Amount represents the aggregate of the current monthly benefit payments at $25,000 per month that Mr. Pacious would be entitled to receive under the Choice disability program as of December 31, 2012 through the month in which he reaches age 65. |
(6) | Amount represents the estimated value of the proceeds payable to Mr. Pacious beneficiary upon his death. |
(7) | For termination without cause or with good reason, unvested options granted after May 5, 2011 will continue to vest for 70 weeks following termination. In the case of termination following a change of control, all stock option awards will immediately vest. Values presented represent the intrinsic value of the options based on the closing share price on December 31, 2012 of $33.62. |
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(8) | For termination without cause or with good reason, restricted stock granted after May 5, 2011 will continue to vest for 70 weeks following termination. In the case of termination following a change of control, all restricted awards will immediately vest. The values presented represent the value of the stock based on the closing price of our stock on December 31, 2012 of $33.62. |
(9) | For termination without cause or with good reason, PVRSUs granted after May 5, 2011 will continue to vest for 70 weeks. In the case of termination following a change of control, all unvested PVRSU awards will immediately vest with the maximum performance level under the terms of the award being assumed to have been achieved. The values presented represent the value of the stock based on the closing share price on December 31, 2012 of $33.62, and solely in the case of a termination following a change of control, 200% vesting leverage, which is the maximum leverage permitted under the PVRSU grants. |
Mr. Pepper
The following table shows the potential payments upon termination, with or without a change in control, for Mr. Pepper:
Executive Benefits and Payments |
Involuntary Termination without Reasonable Cause ($) |
Termination Following Change of Control ($) |
Disability ($) | Death ($) | ||||||||||||
Compensation: |
||||||||||||||||
Salary Continuation under Severance Benefit Plan(1) |
317,308 | | | | ||||||||||||
Benefits & Perquisites: |
||||||||||||||||
Cash Severance(2) |
| 990,000 | | | ||||||||||||
Health and Welfare Benefits(3) |
13,185 | 18,459 | ||||||||||||||
Disability Income(4) |
| | 5,700,000 | | ||||||||||||
Life Insurance Benefits(5) |
| | | 1,330,000 | ||||||||||||
Long-Term Incentives: |
||||||||||||||||
Stock Options(6) |
| 466,702 | | | ||||||||||||
Restricted Stock Grants(7) |
| 614,910 | | | ||||||||||||
PVRSUs(8) |
| 573,288 | | |
(1) | Amount represents continued payment of Mr. Peppers base salary, based on his salary as of December 31, 2012, for 50 weeks. |
(2) | Amount represents 200% of Mr. Peppers annual base salary as of December 31, 2012, plus 200% of his annual bonus target for 2012. |
(3) | For an involuntary termination without reasonable cause, amount represents the estimated value of the future premiums and contributions that Choice would pay on behalf of Mr. Pepper for continued coverage under our medical and dental plans for 50 weeks, based on Mr. Peppers elected coverage as of December 31, 2012. For a termination following a change of control, amount represents the estimated value of the future premiums and contributions that Choice would pay on behalf of Mr. Pepper for continued coverage under our medical and dental plans for 70 weeks, based on Mr. Peppers elected coverage as of December 31, 2012. |
(4) | Amount represents the aggregate of the current monthly benefit payments at $25,000 per month that Mr. Pepper would be entitled to receive under the Choice disability program as of December 31, 2012 through the month in which he reaches age 65. |
(5) | Amount represents the estimated value of the proceeds payable to Mr. Peppers beneficiary upon his death. |
(6) | In the case of termination following a change of control, all stock option awards immediately vest. Values presented represent the intrinsic value of the options based on the closing share price on December 31, 2012 of $33.62. |
(7) | In the case of termination following a change of control, all restricted awards immediately vest. The values presented represent the value of the stock based on the closing price of our stock on December 31, 2012 of $33.62. |
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(8) | In the case of termination following a change of control, all unvested PVRSU awards immediately vest with the maximum performance level under the terms of the award being assumed to have been achieved. The values presented represent the value of the stock based on the closing share price on December 31, 2012 of $33.62, and 200% vesting leverage, which is the maximum leverage permitted under the PVRSU grants. |
Ms. Wu
The following table shows the potential payments upon termination, with or without a change in control, for Ms. Wu:
Executive Benefits and Payments |
Termination without Cause or For Good Reason ($) |