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Section 1: DEF 14A (DEF 14A)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A INFORMATION

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

 

Filed by the Registrant  x

Filed by a Party other than the Registrant  o

Check the appropriate box:

o

Preliminary Proxy Statement

o

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

x

Definitive Proxy Statement

o

Definitive Additional Materials

o

Soliciting Material under Rule 14a-12

 

Hormel Foods Corporation

(Name of Registrant as Specified In Its Charter)

 

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

 

Payment of Filing Fee (Check the appropriate box):

x

No fee required

o

Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11

 

(1)

Title of each class of securities to which transaction applies:

 

 

 

 

(2)

Aggregate number of securities to which transaction applies:

 

 

 

 

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

 

 

(4)

Proposed maximum aggregate value of transaction:

 

 

 

 

(5)

Total fee paid:

 

 

 

o

Fee paid previously with preliminary materials.

o

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

(1)

Amount Previously Paid:

 

 

 

 

(2)

Form, Schedule or Registration Statement No.:

 

 

 

 

(3)

Filing Party:

 

 

 

 

(4)

Date Filed:

 

 

 

 



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HORMEL FOODS CORPORATION

 

AUSTIN, MINNESOTA

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To the Stockholders:

 

The Annual Meeting of Stockholders of Hormel Foods Corporation, a Delaware corporation, will be held in the Richard L. Knowlton Auditorium of the Austin High School, 300 NW 4th Street, Austin, Minnesota, on Tuesday, January 30, 2018, at 8:00 p.m. Central Standard Time.  The items of business are:

 

1.              Elect a board of 12 directors for the ensuing year;

 

2.              Ratify the appointment by the Audit Committee of the Board of Directors of Ernst & Young LLP as independent registered public accounting firm for the fiscal year ending October 28, 2018;

 

3.              Advisory vote to approve Named Executive Officer compensation as disclosed in the Company’s 2018 annual meeting proxy statement;

 

4.              Approve the Hormel Foods Corporation 2018 Incentive Compensation Plan; and

 

5.              Such other matters as may properly come before the meeting.

 

The Board of Directors has fixed December 1, 2017, at the close of business, as the record date for the determination of stockholders entitled to notice of, and to vote at, the meeting.

 

By Order of the Board of Directors

BRIAN D. JOHNSON

Vice President and

Corporate Secretary

 

December 20, 2017

 

 

Important Notice Regarding the Availability of Proxy Materials

for the Stockholder Meeting to be Held on January 30, 2018

 

The Proxy Statement and Annual Report to Stockholders

are available at www.proxyvote.com

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page

 

 

GENERAL INFORMATION

1

 

 

MEETING ADMISSION

2

 

 

CONDUCT OF MEETING

2

 

 

ITEM 1 – ELECTION OF DIRECTORS

2

 

 

DIRECTOR NOMINEES

4

 

 

CORPORATE GOVERNANCE

6

 

 

Corporate Governance Guidelines

6

Board Leadership Structure

7

Code of Ethical Business Conduct

8

Stock Ownership Guidelines

8

Board Independence

8

Board of Director and Committee Meetings

9

Board Role in Risk Oversight

10

Policy Regarding Attendance at Annual Meetings

10

Board Communication

10

 

 

COMPENSATION OF DIRECTORS

11

 

 

AUDIT COMMITTEE REPORT AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES

13

 

 

Audit Committee Report

13

Independent Registered Public Accounting Firm Fees

13

Audit Committee Preapproval Policies and Procedures

13

 

 

ITEM 2 – RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

13

 

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

14

 

 

SECURITY OWNERSHIP OF MANAGEMENT

14

 

 

EXECUTIVE COMPENSATION

15

 

 

COMPENSATION COMMITTEE REPORT

15

 

 

COMPENSATION DISCUSSION AND ANALYSIS

15

 

 

Compensation Overview

15

Say-on-Pay

16

Executive Compensation Programs

16

Base Salary

17

 

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Operators’ Share Incentive Compensation Plan

17

Annual Incentive Plan

17

Long-Term Incentives

19

Stock Incentives

20

Clawback Policy

20

Pension Plan

20

Supplemental Executive Retirement Plan

21

Nonqualified Deferred Compensation Plan

21

Survivor Income Protection Plan

21

Perquisites

22

How Annual Compensation Decisions are Made

22

Tax Deductibility

23

 

 

ANALYSIS OF RISK ASSOCIATED WITH OUR COMPENSATION PLANS

23

 

 

COMPENSATION OF NAMED EXECUTIVE OFFICERS (NEOs)

24

 

 

SUMMARY COMPENSATION TABLE

24

ALL OTHER COMPENSATION

25

GRANTS OF PLAN-BASED AWARDS FOR FISCAL 2017

26

OUTSTANDING EQUITY AWARDS AT FISCAL 2017 YEAR END

27

VESTING SCHEDULE FOR UNEXERCISABLE OPTIONS

28

OPTION EXERCISES FOR FISCAL 2017

28

PENSION BENEFITS

29

NONQUALIFIED DEFERRED COMPENSATION

29

POTENTIAL PAYMENTS UPON TERMINATION

30

POTENTIAL PAYMENTS UPON TERMINATION AT FISCAL 2017 YEAR END

30

 

 

ITEM 3 – ADVISORY VOTE ON EXECUTIVE COMPENSATION

31

 

 

ITEM 4 – APPROVE THE HORMEL FOODS CORPORATION 2018 INCENTIVE COMPENSATION PLAN

32

 

 

EQUITY COMPENSATION PLAN INFORMATION

41

 

 

RELATED PARTY TRANSACTIONS

42

 

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

42

 

 

VIEWING AND DELIVERY OF PROXY MATERIALS

42

 

 

STOCKHOLDER PROPOSALS FOR 2019 ANNUAL MEETING OF STOCKHOLDERS

42

 

 

OTHER MATTERS

43

 

 

Appendix A - HORMEL FOODS CORPORATION 2018 INCENTIVE COMPENSATION PLAN

 

 

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PROXY STATEMENT

 

HORMEL FOODS CORPORATION
(CUSIP No. 440452100)
1 HORMEL PLACE
AUSTIN, MINNESOTA 55912

 

The enclosed proxy is solicited by the Board of Directors of Hormel Foods Corporation (“Company”) for use at the Annual Meeting of Stockholders to be held on January 30, 2018.  This proxy statement and form of proxy, or a Notice of Internet Availability of Proxy Materials, are first being mailed to stockholders on or about December 20, 2017.

 

GENERAL INFORMATION

 

Voting Securities -   Only stockholders of record at the close of business as of December 1, 2017 are entitled to vote at the meeting.  The Company had 529,585,006 shares of common stock outstanding as of December 1, 2017.  Each share of stock is entitled to one vote.  There is no cumulative voting.  The Company has no other class of shares outstanding.

 

Quorum -   A majority of the outstanding shares will constitute a quorum at the meeting.

 

Voting Your Proxy -   Whether or not you plan to attend the meeting, we encourage you to grant a proxy to vote your shares.  Follow the instructions on your proxy card or electronic delivery notice to cast your vote via the internet or telephone.  If you received a proxy card, you may vote your shares by completing the card with your vote, signature and date, and returning it by mail in the envelope provided.

 

The table below summarizes the proposals that will be voted on, the vote required to approve each item, how votes are counted and how the Board recommends you vote:

 

 

Vote Required

Voting
Options

Board
Recommendation
(1)

Broker
Discretionary
Voting
Allowed
(2)

Impact of
Abstention
(3)

Item 1: Elect 12 directors

Majority of the votes cast(4)(5)

“FOR”

“AGAINST”

“ABSTAIN”

“FOR”

No

None

Item 2: Ratify the appointment by the Audit Committee of the Board of Directors of Ernst & Young LLP as independent registered public accounting firm for the fiscal year ending October 28, 2018

 

Majority of votes present in person or by proxy and entitled to vote on this item

“FOR”

“AGAINST”

“ABSTAIN”

“FOR”

Yes

“AGAINST”

Item 3: Advisory vote to approve Named Executive Officer compensation as disclosed in the Company’s 2018 annual meeting proxy statement

 

Majority of the votes cast(4)

“FOR”

“AGAINST”

“ABSTAIN”

“FOR”

No

None

Item 4: Approve the Hormel Foods Corporation 2018 Incentive Compensation Plan

 

Majority of votes present in person or by proxy and entitled to vote on this item

“FOR”

“AGAINST”

“ABSTAIN”

“FOR”

No

“AGAINST”

 

(1)                                 If you submit a proxy without giving specific voting instructions, your shares will be voted in accordance with the Board of Directors’ recommendations set forth above.

 

(2)                                 If a stockholder holds shares in “street name” and does not provide voting instructions to the holder of the account regarding non-discretionary matters, such shares are considered “broker nonvotes.”   “Street name” means the shares are held in a stock brokerage account or by a bank, trust or other institution.  Broker nonvotes are counted for purposes of determining the presence of a quorum for the transaction of business.  Shares represented by broker nonvotes are not considered entitled to vote and thus are not counted for purposes of determining whether a

 

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proposal has been approved.  The New York Stock Exchange (“NYSE”) rules determine whether uninstructed brokers have discretionary voting power on a particular proposal.

 

(3)                                 Shares represented by abstentions are counted for purposes of determining the presence of a quorum for the transaction of business and as shares represented at the meeting.

 

(4)                                 A majority of the votes cast means that there are more “FOR” votes than “AGAINST” votes.

 

(5)                                 An incumbent director who is not re-elected under this standard must promptly offer to resign.  The Governance Committee will make a recommendation on the offer and the Board must accept or reject the offer within 90 days and publicly disclose its decision and rationale.  In the event of a contested election, directors will be elected by a plurality of the votes cast.

 

The persons appointed as proxies will vote in their discretion on other matters as may properly come before the meeting.

 

Revoking Your Proxy and Changing Your Vote -   You may revoke your proxy or change your vote at any time before it is exercised by submitting a later-dated proxy, voting in person at the meeting or sending a written notice of revocation to the Corporate Secretary.

 

Expenses -   The expenses of soliciting proxies will be paid by the Company.  Proxies may be solicited at Company expense personally, or by mail, telephone or electronic communication, by directors, officers and other employees.  Such persons will not receive additional compensation.  The Company will reimburse banks, brokerage firms and other nominees for their reasonable out-of-pocket expenses incurred in sending proxy materials to beneficial owners.  Your cooperation in promptly granting a proxy to vote your shares will help to avoid additional expense.

 

MEETING ADMISSION

 

The following persons will be admitted to the Annual Meeting of Stockholders to be held on January 30, 2018:

 

·                  Stockholders of record at the close of business on December 1, 2017, and their immediate family members;

 

·                  Individuals holding written proxies executed by stockholders of record at the close of business on December 1, 2017;

 

·                  Stockholders who provide a letter or account statement from their broker, bank or other nominee showing that they owned stock held in the name of the broker, bank or other nominee at the close of business on December 1, 2017, and their immediate family members;

 

·                  Stockholders by virtue of stock held in the Company’s Employee Stock Purchase Plan;

 

·                  Other individuals with the approval of the Corporate Secretary; and

 

·                  One authorized representative of stockholders that are corporations or other entities.  Additional authorized representatives may be admitted with the approval of the Corporate Secretary.

 

If you are not able to attend, we will have video of the meeting available on the internet after January 31, 2018.  To view this video, follow these instructions:

 

1.                                      Go to the “Newsroom” section of http://www.hormelfoods.com/;

 

2.                                      Click on the “Annual Meeting” story under Company News; and

 

3.                                      Locate the video within the Annual Meeting story content and click play.

 

CONDUCT OF MEETING

 

The Chairman will preside over the Annual Meeting of Stockholders pursuant to the Bylaws and by action of the Board of Directors.  The Chairman has broad authority to ensure the orderly conduct of the meeting.  This includes discretion to recognize stockholders or proxies who wish to speak and to determine the extent of discussion on each item of business.  Rules governing the conduct of the meeting will be distributed at the meeting along with the agenda.  The Chairman may also rely on applicable law regarding disorderly conduct to ensure that the meeting is conducted in a manner that is fair to all stockholders.

 

ITEM 1 – ELECTION OF DIRECTORS

 

Identifying and Evaluating Nominees for Director -  The Governance Committee is responsible for establishing procedures to identify and review the qualifications of all nominees for Board membership.  The Committee considers recommendations of director candidates made by directors, senior management, and the Company’s stockholders.  The Committee applies the same criteria for consideration of stockholder nominees as it does to nominees proposed by other

 

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sources.  The Committee may engage an independent search firm to assist the Committee in identifying and evaluating potential director nominees to fill vacancies on the Board.

 

Stockholders wishing to make a recommendation may do so by contacting the Governance Committee, c/o Brian D. Johnson, Vice President and Corporate Secretary, 1 Hormel Place, Austin, Minnesota 55912.  Stockholders should send:

 

1.              Name of the candidate and the candidate’s business and residence addresses;

 

2.              A resume or biographical sketch of the candidate, which includes the candidate’s principal occupation or employment;

 

3.              A document(s) evidencing the number of shares of Company stock currently held by the candidate and the candidate’s willingness to serve as a director if elected; and

 

4.              A signed statement as to the submitting stockholder’s current status as a stockholder, which includes the stockholder’s address and the number of shares of Company stock currently held.

 

The Committee’s procedures include making a preliminary assessment of each proposed nominee.  Such assessment is based upon the resume and biographical information, an indication of the individual’s willingness to serve, and business experience and leadership skills.  This information is evaluated against the criteria set forth below and the Company’s specific needs at that time.  Based upon a preliminary assessment of the candidates, those who appear best suited to meet the Company’s needs may be invited to participate in a series of interviews, which are used to further evaluate candidates.  On the basis of information learned during this process, the Committee determines which nominees to recommend to the Board.

 

Director Qualifications – The Governance Committee determines the selection criteria of director nominees based upon the Company’s needs at the time nominees are considered.  In evaluating director candidates the Committee will consider, among other qualifications the Committee deems appropriate, a candidate’s:

 

·                  Intellect;

 

·                  Integrity;

 

·                  Broad-based experience at the policy-making level in business, government, education or the public interest;

 

·                  Analytical ability;

 

·                  Ability to qualify as an independent director;

 

·                  Ability and willingness to devote time and energy to effectively carry out all Board responsibilities; and

 

·                  Unique qualifications, skills and experience.

 

The Committee reviews past performance on the Board for directors seeking reelection.  The Board’s annual self-evaluation process assists the Committee in this review.

 

The Committee considers the diversity of director candidates and seeks to enhance the overall diversity of the Board.  Each candidate’s diversity in terms of race, gender, national origin and other personal characteristics is considered.  The Committee also assesses each candidate’s contribution to the diversity of the Board in a broader sense, including age, education, experience, skills and other qualifications.  While the Committee carefully considers diversity when evaluating director candidates, it has not adopted a formal diversity policy.

 

The Committee recommends director nominees to the Board to submit for election at the next Annual Meeting of Stockholders.  The Board selects director nominees based on its assessment and consideration of various factors.  These factors include the current Board profile, the long-term interests of stockholders, the needs of the Company, and the goal of creating an appropriate balance of knowledge, experience and diversity on the Board.

 

Our Nominees for Director –  Each of our director nominees is well qualified under the criteria described above.  As an employee of the Company, Mr. Snee does not qualify as an independent director.  Each director nominee brings a variety of qualifications, skills, attributes and experience to the Board of Directors.

 

A common trait among our director nominees is executive leadership experience with a large company or organization.  Such experience brings a variety of benefits, including an understanding of business management, various business functions and strategic planning.  Other advantages of an executive leadership background include experience with policy making, risk management and corporate governance matters.

 

Another common characteristic of our director nominees is each has prior service on our Board.  Each director nominee has a demonstrated record of regular attendance, advance preparation and active participation in Board and Board committee meetings.  Through prior service on the Board committees, our director nominees have demonstrated and further developed expertise relating to the duties assigned to the Board committees.

 

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The biographical information below identifies and highlights additional qualifications, skills, attributes and experience each director nominee brings to the Board.

 

The Board of Directors recommends a vote FOR each of the 12 director nominees listed below.  The persons named as proxies will vote FOR the election of these 12 nominees to hold office as directors until the next Annual Meeting of Stockholders and until their successors are elected and qualify, unless stockholders specify otherwise.  If any of such nominees become unavailable for any reason, it is intended that the proxies will vote for the election of such substitute persons as may be designated by the Board of Directors.  Directors are elected by a majority of the votes cast, whereby there must be more “FOR” votes than “AGAINST” votes for the nominee.  An incumbent director who is not re-elected under this standard must promptly offer to resign.

 

DIRECTOR NOMINEES

 

GARY C. BHOJWANI, age 49, director since 2014.

 

Mr. Bhojwani is President of CNO Financial Group, Inc., a provider of health and life insurance and retirement solutions, a position he has held since April 2016.  He will become Chief Executive Officer of CNO Financial Group, Inc. effective January 1, 2018.  Mr. Bhojwani was founder and Chief Executive Officer of GCB, LLC, an insurance and financial services consulting company, from April 2015 to April 2016.  He was Chairman of Allianz Life Insurance Company of North America, a provider of retirement solutions, and a member of the Board of Management of Allianz SE from 2012 to January 1, 2015 and Chief Executive Officer of Allianz Life Insurance Company of North America from 2007 to 2011.  Mr. Bhojwani was President of Commercial Business, Fireman’s Fund Insurance Company from 2004 to 2007, Chief Executive Officer of Lincoln General Insurance Company from 2002 to 2004, founder and Chief Executive Officer of Avalon Risk Management from 1998 to 2002, and President, Trade Insurance Services from 1995 to 1997.  He is a member of the Board of Directors of CNO Financial Group, Inc., Carmel, Indiana, Allina Health System, Minneapolis, Minnesota, and the Minneapolis Institute of Arts, Minneapolis, Minnesota.   Mr. Bhojwani brings extensive expertise in risk management, finance and consumer product marketing to the Board, as well as ongoing experience as the active President of a publicly held company whose stock is traded on the NYSE.

 

 

TERRELL K. CREWS, age 62, director since 2007.

 

Mr. Crews retired from Monsanto Company, an agricultural company, in 2009.  He served as Executive Vice President, Chief Financial Officer and Vegetable Business CEO for Monsanto Company from 2007 to 2009, and Executive Vice President and Chief Financial Officer from 2000 to 2007.  Mr. Crews is a member of the Board of Directors of Archer-Daniels-Midland Company, Chicago, Illinois, WestRock Company, Richmond, Virginia, Teays River Investments, LLC, Zionsville, Indiana, and Junior Achievement of Greater St. Louis, Chesterfield, Missouri, and the Board of Trustees of Freed-Hardeman University, Henderson, Tennessee.  Mr. Crews brings extensive expertise in finance and related functions to the Board, as well as significant knowledge of corporate development, agri-business and international operations.

 

 

GLENN S. FORBES, M.D., age 70, director since 2011.

 

Dr. Forbes is retired Executive Board Chair, past CEO Mayo Clinic-Rochester, and Emeritus Physician, Mayo Clinic, having retired in 2012. He was Medical Director for Diversified Business Activities for Medical Imaging Services at Mayo Clinic from 2010 to 2012, Medical Director for State Government Affairs and Public Relations at Mayo Clinic from 2009 to 2010, and Chief Executive Officer, Mayo Clinic-Rochester from 2006 to 2009.  Dr. Forbes was Professor of Radiology, Mayo Clinic College of Medicine from 1990 to 2012, and Consultant in the Department of Diagnostic Radiology at Mayo Clinic from 1977 to 2012.  He was a member of the Board of Trustees, Mayo Clinic from 2006 to 2009, and the Board of Governors, Mayo Clinic from 2003 to 2009, and Chair of the Executive Board, Mayo Clinic-Rochester from 2006 to 2009.  He is past Chair of the Board of Directors of the American Board of Radiology Foundation, Tucson, Arizona.  Dr. Forbes brings executive leadership experience with a large Minnesota-based health care institution and extensive public policy and corporate governance expertise to the Board.

 

 

STEPHEN M. LACY, age 63, director since 2011.

 

Mr. Lacy is Chairman of the Board and Chief Executive Officer of Meredith Corporation, a media and marketing company, a position he has held since August 2016. He served Meredith Corporation as Chairman of the Board, President and Chief Executive Officer starting in 2010, President and Chief Executive Officer starting in 2006, President and Chief Operating Officer starting in 2004, President, Publishing Group, and President, Interactive and Integrated Marketing Group, starting in 2000, and Chief Financial Officer starting in 1998.  Mr. Lacy is a member of the Board of Directors of Meredith Corporation, Des Moines, Iowa, and Great Western Bancorp, Inc., Sioux Falls, South Dakota.  Mr. Lacy brings extensive

 

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expertise in finance and consumer product marketing to the Board, as well as ongoing experience as the active Chief Executive Officer of a publicly held company whose stock is traded on the NYSE.

 

 

ELSA A. MURANO, Ph.D., age 58, director since 2006.

 

Dr. Murano has served Texas A&M University as Director of the Norman Borlaug Institute for International Agriculture since 2014, Professor, Department of Animal Science, since 2001, and President Emerita since 2009.  She was Interim Director of the Norman Borlaug Institute for International Agriculture from 2012 to 2014, President of Texas A&M University from 2008 to 2009, and Vice Chancellor and Dean of Agriculture, Director of the Texas Agricultural Experiment Station, from 2005 to 2007.  Dr. Murano was Undersecretary for Food Safety, U.S. Department of Agriculture from 2001 to 2004. She is a member of the Board of Directors of Food Safety Net Services, San Antonio, Texas.  Dr. Murano brings preeminent food safety expertise and significant experience in agri-business and regulatory affairs to the Board.

 

 

ROBERT C. NAKASONE, age 69, director since 2006.

 

Mr. Nakasone is Chief Executive Officer of NAK Enterprises, a family-owned investment and consulting business he has led since 2000.  Mr. Nakasone was Chief Executive Officer, Toys “R” Us, Inc. from 1998 to 1999, President and Chief Operating Officer from 1994 to 1997, Vice Chairman from 1989 to 1993, and President U.S. Toy Stores from 1985 to 1988.  Prior to 1985, he served in multiple senior executive capacities with the Jewel Companies, Inc., including Group Vice President and General Manager of the Jewel Food Stores Midwest Region.  Mr. Nakasone is a member of the Board of Trustees of Claremont McKenna College, Claremont, California, the “V” Foundation For Cancer Research, Cary, North Carolina, and the Santa Barbara Foundation, Santa Barbara, California.  He was a founding member of the Board of Directors of Staples, Inc., Framingham, Massachusetts and retired from that Board in 2015.  Mr. Nakasone brings extensive expertise in retail food product marketing and international business development to the Board, as well as experience as the Chief Executive Officer of a large publicly held company.

 

 

SUSAN K. NESTEGARD, age 57, director since 2009.

 

Ms. Nestegard is Advisor for True Wealth Ventures, a venture capital fund, a position she has held since July 2017.  She was President, Global Healthcare Sector, of Ecolab Inc., a provider of cleaning and sanitizing products and services, from 2010 to 2012, Executive Vice President, Global Healthcare Sector, from 2008 to 2010, and Senior Vice President, Research, Development and Engineering, and Chief Technical Officer, from 2003 to 2008.  Ms. Nestegard served as interim Chief Executive Officer of Cambridge Major Laboratories, Inc., a pharmaceutical company, from March 2014 to August 2014.  She also has over 20 years of experience with 3M Company in product development, research and development, and business unit management.  Ms. Nestegard was a member of the Board of Directors of American Capital, Ltd., Bethesda, Maryland, from June 2013 to January 2017.  Ms. Nestegard brings significant expertise in food safety, research and development, foodservice, and international business to the Board.

 

 

DAKOTA A. PIPPINS, age 69, director since 2001.

 

Mr. Pippins has been President and Chief Executive Officer, Pippins Strategies, LLC, a marketing consulting company, since 2003.  He served as Director of Urban Think Tank and Director of Planning for the Vigilante Division of Leo Burnett, USA, an advertising agency, from 1998 to 2003, Director of Management Institute at New York University from 1990 to 1995, and has been an Adjunct Associate Professor at New York University since 1990.  Prior experience includes various management positions at Citicorp, a banking company, General Foods Corporation, a food company, and Burrell Communications Group, a marketing company.  Mr. Pippins brings to the Board in-depth expertise in consumer product marketing and corporate sustainability, developed both through professional work experience and academia.

 

 

CHRISTOPHER J. POLICINSKI, age 59, director since 2012.

 

Mr. Policinski is President and Chief Executive Officer of Land O’Lakes, Inc., a member-owned cooperative which produces and markets dairy-based food products and agricultural supplies, a position he has held since 2005.  He served Land O’Lakes, Inc. as Chief Operating Officer of the Dairy Foods business unit starting in 1999, and Vice President of Strategy and Business Development starting in 1997.  Prior experience includes various management positions at Kraft General Foods Corporation, a food company, Bristol Myers Squibb, a biopharmaceutical and consumer goods company, and Pillsbury Company, a food company.  Mr. Policinski is a member of the Board of Directors of Xcel Energy, Inc., Minneapolis, Minnesota, Grocery Manufacturers of America, Washington, D.C., National Council of Farmer Cooperatives,

 

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Washington, D.C., U. S. Global Leadership Campaign, Washington, D.C., and Catholic Relief Services, Baltimore, Maryland, and the Board of Trustees of the University of Minnesota Foundation, Minneapolis, Minnesota.  Mr. Policinski brings extensive expertise in agri-business, consumer product marketing and corporate development to the Board, as well as ongoing experience as the active Chief Executive Officer of a large Minnesota-based company operating globally in the food industry.

 

 

SALLY J. SMITH, age 59, director since 2014.

 

Ms. Smith is President and Chief Executive Officer of Buffalo Wild Wings, Inc., a restaurant company, a position she has held since 1996. She has announced her retirement from these positions on or before December 31, 2017.  Ms. Smith served Buffalo Wild Wings, Inc. as Chief Financial Officer from 1994 to 1996.  She was Controller, from 1984 to 1987, and Chief Financial Officer, from 1987 to 1994, of Dahlberg, Inc., a manufacturer of hearing aids.  Ms. Smith began her career with KPMG LLP, an international accounting and consulting firm. She is a member of the Board of Directors of Alerus Financial Corporation, Grand Forks, North Dakota, Allina Health System, Minneapolis, Minnesota, and the National Restaurant Association, Washington, D.C.  Ms. Smith was a member of the Board of Directors of Buffalo Wild Wings Inc., Minneapolis, Minnesota, from 1996 to June 2017.  Ms. Smith brings extensive expertise in finance, corporate development and the foodservice industry to the Board, as well as experience as the Chief Executive Officer of a Minnesota-based publicly held company.

 

 

JAMES P. SNEE, age 50, director since 2015.

 

Mr. Snee is Chairman of the Board, President and Chief Executive Officer of the Company, serving in that capacity since November 20, 2017.  He was President and Chief Executive Officer from October 31, 2016 to November 19, 2017, and President and Chief Operating Officer from October 26, 2015 to October 30, 2016.  Mr. Snee was Group Vice President and President, Hormel Foods International Corporation from October 2012 to October 2015, Vice President and Senior Vice President, Hormel Foods International Corporation from October 2011 to October 2012, and Vice President, Affiliated Business Units from October 2008 to October 2011.  In addition to his executive leadership experience, Mr. Snee brings broad sales, marketing, supply chain and international business expertise to the Board, as well as in-depth knowledge of the Company and food industry developed during his 28-year career with the Company.

 

 

STEVEN A. WHITE, age 57, director since 2014.

 

Mr. White is President, Comcast West Division, of Comcast Corporation, an entertainment and communications company, a position he has held since 2009.   He served Comcast as Regional Senior Vice President, Comcast California from 2007 to 2009 and as Regional Senior Vice President, Comcast Mid-South Region from 2002 to 2007.  Mr. White was Regional Vice President of AT&T Broadband, LLC from 2000 to 2002 and Regional Vice President of Telecommunications, Inc. from 1997 to 2000.  Prior experience includes various marketing positions with Colgate-Palmolive Company from 1991 to 1997.  He is a member of the Board of Directors of Comcast Foundation, Philadelphia, Pennsylvania.  Mr. White brings significant expertise in digital commerce and consumer product marketing to the Board, as well as ongoing experience as the active President of a large business.

 

No family relationship exists between any of the director nominees or executive officers of the Company.

 

CORPORATE GOVERNANCE

 

Corporate Governance Guidelines

 

The Board of Directors has adopted Corporate Governance Guidelines which include the following:

 

·                                          At all times a substantial majority of the Board will be independent, as that term is defined in relevant law and the NYSE listing standards;

 

·                                          Directors who (1) retire from or change their principal employment, (2) reach retirement age of 72, (3) resign or are removed from, or fail to be re-elected to, the board of directors of any other public company, or (4) take action that creates a conflict of interest with the Company, must submit a letter of resignation from the Board.  The Board may accept or reject a letter of resignation.  It is the Board’s general policy that directors will not stand for reelection after reaching age 72;

 

·                                          The Board and Board committees will conduct annual self-evaluations.  This self-evaluation process currently includes the completion and anonymous submission of Board and Board committee assessment

 

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surveys by all Board members and personal interviews conducted by the Lead Director with all Board members;

 

·                                          Directors participate in an annual strategic planning retreat, which provides directors a detailed overview of the Company’s strategic business plans and an opportunity to access senior management of the Company;

 

·                                          All independent directors will typically meet in executive session at the end of every regular Board meeting but in all circumstances at least quarterly;

 

·                                          The Compensation Committee will evaluate the Chief Executive Officer’s performance annually.  This evaluation is based in part on a self-evaluation by the Chief Executive Officer (“CEO”) which is reviewed by all the nonemployee directors.  The annual evaluation will take into account the CEO’s performance measured against established goals.  After the process has been completed, the Compensation Committee will set the CEO’s compensation and obtain the Board’s ratification of such compensation;

 

·                                          Directors will have full access to officers and employees of the Company; and

 

·                                          The Board and each committee have the power to hire independent legal, financial or other advisers, without consulting or obtaining the approval of any officer of the Company.

 

The Company’s Corporate Governance Guidelines may be found on the Company’s Web site at www.hormelfoods.com under “Investors - Governance - Governance Documents.”

 

Board Leadership Structure

 

The Board takes a flexible approach to the issue of whether the offices of Chairman and CEO should be separate or combined.  This approach allows the Board to regularly evaluate whether it is in the best interests of the Company for the CEO or another director to hold the position of Chairman.

 

Mr. Snee became Chairman effective November 20, 2017 and currently serves as both Chairman and CEO of the Company.  The Board believes there are important advantages to Mr. Snee serving in both roles at this time.  Mr. Snee is the director most familiar with our Company’s business and industry and best situated to propose the Board’s agendas and lead Board discussions on important matters.  Mr. Snee provides a strong link between management and the Board, which promotes clear communication and enhances strategic planning and implementation of corporate strategies.  Another advantage is the clarity of leadership provided by one person representing the Company to employees, stockholders and other stakeholders.

 

Jeffrey M. Ettinger was Chairman of the Company from November 2006 through November 20, 2017, when he retired from the Board.  He also served as CEO of the Company from January 2006 through October 30, 2016.  Mr. Snee became CEO of the Company on October 31, 2016.  The Board determined a leadership structure that separated the Chairman and CEO roles was optimal for the period from October 31, 2016 through November 20, 2017 because it allowed Mr. Snee to focus on operating and managing the Company while assuming the role of a public company CEO, while Mr. Ettinger could provide leadership of the Board.

 

When the Chairman is not an independent director, the Board will appoint a “Lead Director.”  The Lead Director position is held by an independent director elected by the Board of Directors.  The Board’s policy is that a director’s term as Lead Director should generally be limited to five consecutive years.

 

Christopher J. Policinski has been the Lead Director since September 26, 2016.  The duties of the Lead Director include the following:

 

·                                          Serve as a liaison between the Chairman and the nonemployee directors;

 

·                                          Serve as a liaison among the nonemployee directors;

 

·                                          Provide input to the Chairman on the preparation of Board meeting agendas, including content, sequence, and time allocations;

 

·                                          Have the authority to call meetings of the nonemployee directors, with advance notice of such meetings to be given to the Chairman;

 

·                                          Preside at meetings of the Board in the absence of the Chairman;

 

·                                          Preside at executive sessions of the nonemployee or independent directors;

 

·                                          In conjunction with the Governance Committee, take an active role in the Board’s annual self-evaluation; and

 

·                                          In conjunction with the Compensation Committee, take an active role in the annual evaluation of the CEO.

 

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The independent directors who chair the Company’s Audit, Compensation and Governance Committees also provide leadership to the Board in their assigned areas of responsibility.   The Board believes the substantial majority of independent directors on the Board, use of a Lead Director, independent Committee chairs and executive sessions of the independent directors safeguard the independent governance of the Board.

 

Code of Ethical Business Conduct

 

The Company has adopted a Code of Ethical Business Conduct that covers its directors, officers and employees.  This Code of Ethical Business Conduct may be found on the Company’s Web site at www.hormelfoods.com under “Investors - Governance - Governance Documents.”

 

Stock Ownership Guidelines

 

The Company’s officers and directors are subject to stock ownership guidelines.   Officers are required to hold shares of Company stock with a value equal to their five-year average base salary times a multiple of 1.5 to 5, depending on position.  Directors need to hold shares of Company stock with a value equal to their five-year average annual retainer times a multiple of 5.  For both officers and directors, the required stock ownership value is divided by the five-year average Company stock price, based on fiscal year end prices, to calculate the number of shares to be held.  The Company’s officers and directors must hold all shares of Company stock acquired (net of shares sold to fund an option exercise or satisfy withholding taxes) until their stock ownership guidelines have been met.

 

The value of shares individually owned, held in Company benefit plans, and deferred in the Company’s deferred compensation plans are counted toward the guidelines.   Individual ownership of shares is determined under Section 16 of the Securities Exchange Act of 1934, as amended (“Exchange Act”).   Stock options and restricted shares are not counted toward the guidelines.

 

Officers and directors have approximately five years from their initial election to comply with the guidelines.  Officers promoted to a level requiring higher stock ownership under the guidelines have five years to achieve compliance.  All officers and directors who are subject to the guidelines are in compliance with the guidelines.

 

The Company has a pledging policy which prohibits officers and directors from holding Company stock in a margin account or pledging Company stock as collateral for a loan.

 

The Company also has a hedging policy which prohibits employees, officers and directors from purchasing any financial instruments (including without limitation prepaid variable forward contracts, equity swaps, collars, and exchange funds) that are designed to hedge or offset any decrease in the market value of Company securities held directly or indirectly by the employee, officer or director.

 

Board Independence

 

The Company’s Corporate Governance Guidelines require that a substantial majority of the Company’s directors be independent.  The NYSE listing standards require that a majority of the Company’s directors be independent and that the Audit, Compensation and Governance Committees be comprised entirely of independent directors.  The Board of Directors has adopted standards to assist it in making the annual determination of each director’s independence status. These Director Independence Standards are consistent with the NYSE listing standards. The Director Independence Standards are posted on the Company’s Web site at www.hormelfoods.com under “Investors - Governance - Governance Documents.”  A director will be considered “independent” if he or she meets the requirements of the Director Independence Standards and the independence criteria in the NYSE listing standards.

 

The Board of Directors has affirmatively determined that the following directors have no direct or indirect material relationship with the Company and satisfy the requirements to be considered independent:

 

Gary C. Bhojwani

Elsa A. Murano

Christopher J. Policinski

Terrell K. Crews

Robert C. Nakasone

Sally J. Smith

Glenn S. Forbes

Susan K. Nestegard

Steven A. White

Stephen M. Lacy

Dakota A. Pippins

 

John L. Morrison (retiring when term expires January 30, 2018)

 

The Board of Directors also has determined that each of the Company’s Audit, Compensation and Governance Committees is composed solely of independent directors.  In making the independence determinations, the Board reviewed all of the directors’ relationships with the Company.  This review is based primarily on a review of the responses of the directors to questions regarding employment, business, family, compensation and other relationships with the Company and its management.  In making the independence determination for Mr. Lacy, Chairman of the Board and CEO of Meredith Corporation, the Board considered the relationship arising out of the transactions in the ordinary course of business between the Company, including transactions through its advertising agencies, and Meredith Corporation, a supplier of the

 

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Company.  The Board determined that this relationship was not material and did not impair Mr. Lacy’s independence.  In making the independence determination for Mr. Policinski, President and CEO of Land O’Lakes, Inc., the Board considered the relationship arising out of the transactions in the ordinary course of business between the Company and Land O’Lakes, Inc., a supplier of the Company.  The Board determined that this relationship was not material and did not impair Mr. Policinski’s independence.  In making the independence determination for Mr. White, President, West Division of Comcast Corporation, the Board considered the relationship arising out of the transactions in the ordinary course of business between the Company and Comcast Corporation, a service provider to the Company.  The Board determined that this relationship was not material and did not impair Mr. White’s independence.  The dollar amount of the Company’s transactions with Meredith Corporation, Land O’Lakes, Inc. and Comcast Corporation are below the thresholds for commercial transactions under the independence criteria in the NYSE listing standards.

 

Board of Director and Committee Meetings

 

Board of Directors and Committees -   The Board of Directors conducts its business through meetings of the Board and its committees.  The Lead Director presides at executive sessions of the nonemployee or independent directors.  The Board held ten meetings during fiscal 2017.  Each director attended at least 75% of the total meetings during the fiscal year of the Board and Board committees on which he or she served.

 

The Board of Directors has established the following Board committees: Audit, Compensation and Governance.  The following table shows membership and meeting information for each committee for fiscal 2017.

 

 

Name

 

Audit
Committee

Compensation
Committee

Governance
Committee

 

Gary C. Bhojwani

 

X

X

 

 

Terrell K. Crews

 

X*

X

 

 

Glenn S. Forbes

 

 

 

X

 

Stephen M. Lacy

 

X

X*

 

 

John L. Morrison

 

 

X

X

 

Elsa A. Murano

 

 

 

X

 

Robert C. Nakasone

 

 

X

X*

 

Susan K. Nestegard

 

X

 

 

 

Dakota A. Pippins

 

X

 

 

 

Christopher J. Policinski

 

 

X

X

 

Sally J. Smith

 

X

 

 

 

Steven A. White

 

 

 

X

Total Meetings in Fiscal 2017

 

10

6

5


* Committee Chair

 

Each of the Audit, Compensation and Governance Committees has adopted and operates under a written charter.  These charters may be found on the Company’s Web site at www.hormelfoods.com under “Investors - Governance - Governance Documents.”

 

Audit Committee -  Each member of the Audit Committee is financially literate as determined by the Board of Directors.  The Board also determined that Terrell K. Crews, Stephen M. Lacy and Sally J. Smith each is an audit committee financial expert, as defined by the rules of the Securities and Exchange Commission (“SEC”).   The duties of the Audit Committee include the following:

 

·                  Select and evaluate the performance of the independent registered public accounting firm;

 

·                  Discuss with the internal auditors and independent registered public accounting firm the overall scope and plans for their respective audits;

 

·                  Ensure that the independent registered public accounting firm is accountable to the Committee and that the firm has no relationship with management or the Company that would impair its independence;

 

·                  Review and discuss with management and the external auditors the quarterly and annual financial statements of the Company;

 

·                  Establish procedures for the handling of complaints received by the Company regarding accounting, internal controls or auditing matters, including the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters;

 

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·                  Provide an open avenue of communication between the internal auditors, the external auditors, Company management and the Board;

 

·                  Understand the Company’s key areas of risk and assess the steps management takes to manage such risk; and

 

·                  Oversee the Company’s Code of Ethical Business Conduct, including assessment of the steps management takes to assure the Company’s compliance with all applicable laws and regulations and corporate policies.

 

Compensation Committee -   The duties of the Compensation Committee include the following:

 

·                  Establish compensation arrangements for all officers of the Company;

 

·                  Engage a compensation consultant to review the Company’s compensation programs;

 

·                  Make recommendations to the Board regarding incentive compensation and equity-based compensation plans, and administer such plans;

 

·                  Make recommendations to the Board regarding compensation to be paid to the Company’s directors; and

 

·                  Establish investment policies for the Company’s defined benefit pension plans, and periodically review investments for consistency with those policies.

 

Governance Committee -   The duties of the Governance Committee include the following:

 

·                  Establish criteria for new directors and evaluate potential candidates;

 

·                  Make recommendations to the Board regarding the composition of Board committees;

 

·                  Make recommendations to the Board of a member of the Board for election as Lead Director;

 

·                  Review the Company’s executive succession plans;

 

·                  Periodically assess the Company’s Corporate Governance Guidelines, as well as the Company’s adherence to them;

 

·                  Monitor the Company’s sustainability, environmental, and corporate social responsibility activities;

 

·                  Evaluate objectives and policies regarding the Company’s management of its human resources; and

 

·                  Oversee the annual evaluation of the Board.

 

Board Role in Risk Oversight

 

The Board of Directors takes an active role in risk oversight.  The Board administers its risk oversight function through the full Board and each of its committees.  Management of the Company, which is responsible for day-to-day risk management, maintains an enterprise risk management (“ERM”) process.  The ERM process is designed to identify and assess the Company’s risks globally, and develop steps to mitigate and manage risks.  The Board receives regular reports on the ERM process.

 

The Board’s oversight of risk includes engaging in an annual strategic planning retreat with senior management, approving annual operating plans and strategic plans, and approving significant transactions.  In addition, the Board receives regular reports on the Company’s overall business, specific segments and financial results, as well as specific presentations on topics relating to risks and risk management.

 

The Audit Committee assists the Board with its risk oversight in a variety of areas, including financial reporting, internal controls and legal and regulatory compliance.   The Audit Committee has oversight of the Company’s internal audit function and the Company’s Code of Ethical Business Conduct.  The Audit Committee also appoints the independent registered public accounting firm and approves the services it provides to the Company. The Compensation Committee oversees risk in connection with compensation programs, including incentive compensation plans and equity-based plans.  The Governance Committee oversees risk in connection with corporate governance practices.  All of these committees make regular reports of their activities to the full Board.

 

Policy Regarding Attendance at Annual Meetings

 

The Company encourages, but does not require, its Board members to attend the Annual Meeting of Stockholders.  Last year all then-serving directors of the Company attended the Annual Meeting of Stockholders.

 

Board Communication

 

Interested parties may communicate with the Board of Directors by sending a letter directed to the Board of Directors, nonemployee directors or specified individual directors, addressed to:  Brian D. Johnson, Vice President and Corporate

 

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Secretary, 1 Hormel Place, Austin, Minnesota 55912.  All communications, whether signed or anonymous, will be directed to the Lead Director or the Chair of one of the committees based on the subject matter of the communication, or to the nonemployee directors or the specified directors, if so directed.

 

COMPENSATION OF DIRECTORS

 

In fiscal 2017, the Company provided the following elements of compensation to nonemployee directors:

 

·                  Annual retainer of $70,000;

 

·                  Additional retainer of $25,000 per year for Lead Director;

 

·                  Additional retainer of $15,000 per year for chair of the Audit and Compensation Committees;

 

·                  Additional retainer of $10,000 per year for chair of the Governance Committee;

 

·                  Meeting fee for each committee meeting of $1,000 for attendance in person or $500 for attendance by telephone (no meeting fees are paid for attendance at Board meetings); and

 

·                  An award of restricted shares of Company common stock having a fixed value of $160,000 on February 1 based on the NYSE closing price for the stock at the end of that day (rounded to the nearest whole share number), subject to a restricted period which expires upon the earlier of the day before the date of the Company’s next annual stockholders meeting or the first anniversary of the award.

 

The retainers are paid half on February 1 and half on August 1.  These payments and the equity award are made on the first business day after February 1 and August 1 if those dates fall on a non-business day.

 

Newly elected nonemployee directors receive a prorated annual retainer and award of restricted shares based on the number of regular Board meetings scheduled from the time the director joins the Board to the next annual stockholders meeting out of the total number of regular Board meetings between annual stockholders meetings.  The restricted period for restricted shares awarded to newly elected nonemployee directors will expire upon the earlier of the day before the date of the Company’s next annual stockholders meeting or the following February 1.

 

The NYSE closing price of the Company’s stock was $35.62 on February 1, 2017.  This price resulted in an award of 4,492 restricted shares of Company common stock to each nonemployee director on that date.

 

The awards of restricted shares on February 1, 2017 were made pursuant to the terms of the stockholder-approved 2009 Long-Term Incentive Plan.  Each nonemployee director and the Company entered into a Restricted Stock Award Agreement consistent with the 2009 Long-Term Incentive Plan.  Directors receive declared dividends on, and are entitled to vote, the restricted shares prior to vesting.

 

Nonemployee directors may defer all or a portion of retainer and meeting fees under the Company’s Nonemployee Director Deferred Stock Plan.  Deferred fees times 105% are credited as stock units under the plan.  The stock units have the same value as Company common stock and receive dividend equivalents.  Stock units become payable in shares of Company common stock following termination of service as a director.

 

Directors who are employees of the Company receive no additional compensation for service on the Board pursuant to Compensation Committee policy.

 

The Compensation Committee reviews the compensation to be paid to the Company’s nonemployee directors.  The Committee uses a compensation consultant, Pearl Meyer, to provide advice regarding nonemployee director compensation.  The consultant analyzes each element of director compensation and total director compensation for the same peer group of companies which is used to evaluate executive compensation.  See “How Annual Compensation Decisions are Made” on page 22 for a list of these peer companies.  The Committee reviews the consultant’s report of competitive director compensation and determines whether to recommend to the Board a change in the Company’s nonemployee director compensation.  If such a change is recommended by the Committee, the full Board would then determine whether to ratify the change.

 

The Compensation Committee’s current policy is to review nonemployee director compensation every other year.  After this process was completed in early 2017, no changes were made to the Company’s nonemployee director compensation policy.  The next regular review of nonemployee director compensation is scheduled to take place in late 2018.

 

At its meeting on November 19, 2017, the Compensation Committee approved changes to the nonemployee director compensation policy, effective upon stockholder approval of the 2018 Hormel Foods Corporation Incentive Compensation Plan, to make awards of restricted shares subject to that plan and to change the vesting of restricted shares.  Restricted shares awarded on February 1 would be subject to a restricted period which expires the date of the Company’s next annual stockholders meeting and prorated awards of restricted shares to newly elected nonemployee directors would be subject to a restricted period which expires the date of the second succeeding annual meeting of the Company’s stockholders.

 

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The fiscal 2017 compensation of our nonemployee directors is shown in the following table.

 

DIRECTOR COMPENSATION FOR FISCAL 2017

Name

Fees Earned
or Paid in
Cash ($)
(1)

Stock
Awards
($)
(2) (3)

Option
Awards
($)
(3)

All Other
Compensation
($)
(4)

Total
($)

Gary C. Bhojwani

81,500

160,005

-

-

241,505

Terrell K. Crews

97,000

160,005

-

1,772

258,777

Jeffrey M. Ettinger

82,000

160,005

-

-

242,005

Glenn S. Forbes

74,500

160,005

-

1,623

236,128

Stephen M. Lacy

96,500

160,005

-

10,000

266,505

John L. Morrison

79,000

160,005

-

32,172

271,177

Elsa A. Murano

74,500

160,005

-

-

234,505

Robert C. Nakasone

90,000

160,005

-

31,202

281,207

Susan K. Nestegard

76,500

160,005

-

8,225

244,730

Dakota A. Pippins

76,500

160,005

-

14,706

251,211

Christopher J. Policinski

105,000

160,005

-

8,025

273,030

Sally J. Smith

75,500

160,005

-

2,604

238,109

Steven A. White

74,500

160,005

-

3,433

237,938

 

(1)                                 Consists of annual retainer, additional retainer for Lead Director and committee chairs, and meeting fees.  Includes amounts voluntarily deferred under the Company’s Nonemployee Director Deferred Stock Plan.

 

(2)                                 Consists of the aggregate grant date fair value of restricted stock awarded to each nonemployee director in fiscal 2017, calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (Compensation – Stock Compensation) (“FASB ASC Topic 718”).  Each nonemployee director on February 1, 2017 received a grant of 4,492 shares of restricted stock.  The grant date fair value is based on the NYSE closing price of our common stock on the grant date, which was $35.62 on February 1, 2017.

 

(3)                                 As of October 29, 2017, nonemployee directors held the following number of unexercised stock options and unvested shares of restricted stock (rounded to the nearest full share):

 

Name

Unexercised
Options
(#)

Unvested Shares
of Restricted
Stock (#)

Gary C. Bhojwani

-

4,492

Terrell K. Crews

74,400

4,492

Jeffrey M. Ettinger(a)

9,689,500

4,492

Glenn S. Forbes

13,200

4,492

Stephen M. Lacy

19,800

4,492

John L. Morrison

-

4,492

Elsa A. Murano

74,400

4,492

Robert C. Nakasone

74,400

4,492

Susan K. Nestegard

47,632

4,492

Dakota A. Pippins

-

4,492

Christopher J. Policinski

6,600

4,492

Sally J. Smith

-

4,492

Steven A. White

-

4,492

 

(a)                                 All of Mr. Ettinger’s options were awarded over the years he served as CEO of the Company.  He served as Chairman of the Board in fiscal 2017 for the same compensation as was provided to other nonemployee directors, as described above, without any additional compensation for serving in the role of Chairman.  On November 19, 2017, the Compensation Committee determined that Mr. Ettinger had earned five-sixths of his February 1, 2017 restricted stock award by serving on the Board for five of the six regular Board meetings during his current term of office on the Board and by facilitating the orderly transition of the Chairman of the Board position, and took action to vest five-sixths of such award, 3,743 shares, as of November 20, 2017, the date he retired from the Board.  The remaining one-sixth of such award, 749 shares, was forfeited by Mr. Ettinger as of such date.

 

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(4)                                 Consists primarily of dividend equivalents paid on stock units under the Company’s Nonemployee Director Deferred Stock Plan.  Also includes matching gifts to educational institutions made by the Company on behalf of directors as follows:  Mr. Lacy - $10,000; and Mr. Nakasone - $9,900.  This matching gift program is available to all full-time and retired employees and directors of the Company.

 

AUDIT COMMITTEE REPORT AND
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES

 

Audit Committee Report

 

The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors.  Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls.  The Committee has the sole authority to appoint or replace the Company’s independent registered public accounting firm.  The independent registered public accounting firm reports directly to the Audit Committee.

 

The Audit Committee has reviewed and discussed the Company’s fiscal year 2017 audited financial statements with management and with Ernst & Young LLP (“Ernst & Young”), the Company’s independent registered public accounting firm. The Audit Committee also has discussed with Ernst & Young the matters required to be discussed under applicable Public Company Accounting Oversight Board (“PCAOB”) auditing standards.

 

The Audit Committee has received from Ernst & Young the written disclosures and the letter required by the PCAOB in Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence, regarding Ernst & Young’s communications with the Audit Committee concerning independence, and has discussed with Ernst & Young its independence from the Company.

 

Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the fiscal year 2017 audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended October 29, 2017, for filing with the SEC.

 

THE AUDIT COMMITTEE

 

Terrell K. Crews, Chair

Susan K. Nestegard

Gary C. Bhojwani

Dakota A. Pippins

Stephen M. Lacy

Sally J. Smith

 

Independent Registered Public Accounting Firm Fees

 

The following table shows aggregate fees billed to the Company for fiscal years ended October 29, 2017 and October 30, 2016 by Ernst & Young, our independent registered public accounting firm.

 

 

Fiscal 2017

Fiscal 2016

Audit fees

$1,485,844

$1,926,500

Audit-related fees

$171,200

$167,900

Tax fees

$0

$0

All other fees

$0

$0

 

Audit Fees -   Audit fees are for audit of the Company’s financial statements and the audit of internal control over financial reporting for fiscal years 2017 and 2016.  Audit fees also include reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q and statutory audits required internationally.

 

Audit-Related Fees -   Audit-related fees are for services related to the performance of the audit.  These services consist of benefit plan audits.

 

Audit Committee Preapproval Policies and Procedures

 

The Audit Committee has adopted policies and procedures requiring preapproval by the Committee of audit and nonaudit services provided to the Company by the independent registered public accounting firm.  The Audit Committee preapproved all of the services performed by Ernst & Young during fiscal years 2017 and 2016.  The Audit Committee approves all audit and nonaudit fees in advance at each quarterly meeting.

 

ITEM 2 – RATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee of the Board of Directors appointed Ernst & Young as the independent registered public accounting firm to audit the consolidated financial statements of the Company and its subsidiaries for the fiscal year ending October 28, 2018.  Ernst & Young has served as the Company’s public auditors since 1931.

 

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At the annual meeting, stockholders will be asked to ratify the appointment of Ernst & Young as the Company’s independent registered public accounting firm for the fiscal year ending October 28, 2018.  Stockholder approval of this appointment is not required.  The Board is requesting ratification in order to obtain the views of the Company’s stockholders.  If the appointment is not ratified, the Audit Committee will reconsider its selection.  Representatives of Ernst & Young are expected to be present at the meeting, will be afforded an opportunity to make a statement, and will be available to respond to appropriate questions.

 

Ratification of this appointment will require the affirmative vote of the majority of the shares of common stock represented in person or by proxy at the meeting.  The Board of Directors recommends a vote FOR ratification of the appointment of Ernst & Young LLP.  Properly dated and signed proxies will be so voted unless stockholders specify otherwise.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

 

Information as to the persons or groups known by the Company to be beneficial owners of more than five percent of the Company’s common stock, as of December 1, 2017, is shown below:

 

 

Name and Address of Beneficial Owner

 

Amount and Nature of
Beneficial Ownership

 

Percent
of Class

 

The Hormel Foundation

329 North Main Street, Suite 102L, Austin, Minnesota 55912

 

256,433,116(1)

 

48.42%

 

 

 

 

 

 

 

The Vanguard Group, Inc.

100 Vanguard Blvd., Malvern, Pennsylvania 19355

 

28,660,228(2)

 

5.41%

 

 

(1)                                 The Hormel Foundation (“Foundation”) holds 27,544,172 of such shares as individual owner and 228,888,944 of such shares as trustee of various trusts.  The Foundation, as trustee, votes the shares held in trust.  The Foundation has a remainder interest in all of the shares held in trust.  The remainder interest consists of principal and accumulated income in various trusts.  These interests are to be distributed when the trusts terminate upon the death of designated beneficiaries, or upon the expiration of twenty-one years after the death of such designated beneficiaries.

 

The Foundation was converted from a private foundation to a public foundation on December 1, 1980.  The Certificate of Incorporation and Bylaws of the Foundation provide for a Board of Directors, a majority of whom represent nonprofit agencies to be given support by the Foundation.  Each member of the Board of Directors of the Foundation has equal voting rights. Members of the Board of Directors of the Foundation are: Chair, Gary J. Ray, former President Protein Business Units of Hormel Foods; Vice Chair, Bonnie B. Rietz, former Mayor of the City of Austin; Secretary, Steven T. Rizzi, Jr., Attorney, Austin; Treasurer, Roland G. Gentzler, former Vice President, Finance and Treasurer of Hormel Foods; Captain David D. Amick, Commanding Officer, The Salvation Army of Austin; Dr. Adenuga Atewologun, President, Riverland Community College; Diane B. Baker, Executive Director, United Way of Mower County, Inc.; Jeffrey A. Baldus, Executive Director, Austin Area Foundation; Dr. Mark R. Ciota, President and Chief Executive Officer of Mayo Clinic Health System-Albert Lea and Austin; Thomas J. Dankert, Director of Administrative Services for the City of Austin, representing the City of Austin; Dr. Zigang Dong, Executive Director, The Hormel Institute, Austin, representing the University of Minnesota, Hormel Institute; Jeffrey M. Ettinger, former Chairman of the Board, President and CEO of Hormel Foods; Craig W. Johnson, Attorney, Austin; Joel W. Johnson, former Chairman of the Board, President and CEO of Hormel Foods; Randall J. Kramer, Certified Financial Planner, Austin; David M. Krenz, Superintendent of Austin Public Schools; Tedd M. Maxfield, Executive Director, YMCA of Austin; Richard R. Pavek, Executive Director, Cedar Valley Services, Inc., Austin; and Larry J. Pfeil, former Vice President, Engineering of Hormel Foods.

 

(2)                                 Based on information provided in a Schedule 13G filed with the Securities and Exchange Commission on February 13, 2017, the Vanguard Group, Inc. reported that it has sole power to vote 426,317 shares, shared power to vote 82,636 shares, sole power to dispose of 28,146,425 shares, and shared power to dispose of 513,803 shares; Vanguard Fiduciary Trust Company, an investment manager, is the beneficial owner of 346,867 shares; and Vanguard Investments Australia, Ltd., an investment manager, is the beneficial owner of 246,386 shares.  The shares reported are held by the company in trust accounts for the economic benefit of the beneficiaries of those accounts.

 

SECURITY OWNERSHIP OF MANAGEMENT

 

Information as to beneficial ownership of the Company’s common stock by directors, nominees, executive officers of the Company named in the Summary Compensation Table on page 24, and all directors and executive officers of the Company as a group as of December 1, 2017, is shown below:

 

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Amount and Nature of
Beneficial Ownership

 

Name of Beneficial Owner

Shares(1)

Exercisable
Options
(2)

Percent
of Class

Gary C. Bhojwani

19,399

-

*

Steven G. Binder(3)(4)

348,823

1,346,625

*

Terrell K. Crews

92,582

58,400

*

Thomas R. Day(4)

147,818

546,800

*

Glenn S. Forbes

50,110

13,200

*

Stephen M. Lacy

44,476

19,800

*

Glenn R. Leitch(4)

60,636

474,075

*

John L. Morrison(3)

286,701

-

*

Elsa A. Murano

74,991

74,400

*

Robert C. Nakasone

124,065

58,400

*

Susan K. Nestegard

74,709

47,632

*

Dakota A. Pippins

92,490

-

*

Christopher J. Policinski

47,885

6,600

*

James N. Sheehan(3)(4)

152,519

280,400

*

Sally J. Smith

25,328

-

*

James P. Snee(4)

58,541

462,800

*

Steven A. White

26,605

-

*

All Directors and Executive Officers as a Group (28 persons)(4)

2,214,292

5,724,082

1.48%

 


* One percent or less.

 

(1)                                 Except as otherwise indicated and subject to applicable community property and similar statutes, the persons listed as beneficial owners of the shares of the Company’s common stock have sole voting and investment powers with respect to the shares.  None of the shares are pledged as security.  Holdings are rounded to the nearest full share.

 

(2)                                 Consists of shares subject to options exercisable on or within 60 days of December 1, 2017.

 

(3)                                 Includes the following number of shares of the Company’s common stock beneficially owned by members of their respective households:  Mr. Binder – 336,924; Mr. Sheehan – 56,786; and Mr. Morrison – 60,480.

 

(4)                                 Shares listed as beneficially owned include, where applicable, shares allocated to participants’ accounts under the Hormel Tax Deferred Investment Plan A – 401(k), and a pro-rata share of unallocated shares held in the Company’s Joint Earnings Profit Sharing Trust for the benefit of participants.

 

EXECUTIVE COMPENSATION

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis that follows this report. Based on this review and discussion, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into the Company’s Annual Report on Form 10-K for the fiscal year ended October 29, 2017.

 

THE COMPENSATION COMMITTEE

 

Stephen M. Lacy, Chair

John L. Morrison

Gary C. Bhojwani

Robert C. Nakasone

Terrell K. Crews

Christopher J. Policinski

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Compensation Overview

 

The Compensation Committee of the Board of Directors establishes and administers the compensation and benefit programs for executive officers.  The Compensation Committee consists exclusively of nonemployee, independent directors.  The Committee uses a compensation consultant, Pearl Meyer, to provide compensation advice independent of Company executives.  The Committee determined the consultant’s work did not raise any conflict of interest. Pearl Meyer

 

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does not provide any additional consulting services to the Company.  The Committee and its consultant work with senior management to implement and monitor the programs the Committee approves.

 

The Company’s executive compensation programs are designed to achieve two primary goals:

 

·                  Attract and retain highly qualified executive officers; and

·                  Incent the behavior of executive officers to create stockholder value.

 

These two goals are achieved by providing a competitive total compensation program that offers competitive “fixed pay” (i.e., base salary and benefits) along with “variable, performance-based pay” designed to pay for performance.

 

Total compensation for executive officers is leveraged toward performance-based compensation rather than base salary.  Performance-based compensation is comprised of both short-term and long-term incentives.  An appropriate balance of short-term and long-term incentives assures executive officers are properly balancing the need for consistent annual performance with the need for improved long-term performance.  This compensation balance provides both downside risk and upside opportunity for Company performance.

 

The Company’s target pay positioning reflects the strong pay-for-performance philosophy.  The Compensation Committee considers several factors in its review and approval of overall target compensation, including market competitive pay, individual performance and internal equity.  In addition to reviewing target pay levels, the Committee also considers the range of potential payouts under the plans as well as balancing long-term and short-term performance.  As indicated in the table below, target pay levels and incentive plans are designed to create alignment between actual relative pay and relative performance.  The Committee believes this strategy has allowed the Company to attract and retain a talented, experienced management team, including the named executive officers (“NEOs”) listed in the Summary Compensation Table on page 24, that has delivered strong financial performance and returns to stockholders.

 

Pay Component

 

Performance Factors

 

Performance Time Horizon

 

Performance
Leverage

 

% of Target Total
Direct Compensation
for NEOs

Base Salary

 

Individual performance

 

Annual

 

Low

 

10 – 25%

Operators’ Shares

 

Company EPS

 

Annual

 

Low/Moderate

 

 5 – 15%

Annual Incentive Plan

 

Company EBIT, segment profit and asset management

 

Annual

 

Moderate/High

 

15 – 25%

Long-Term Incentive

 

Relative total shareholder return performance

 

3-year performance period

 

Moderate/High

 

15 – 35%

Stock Options

 

Stock price growth

 

4-year vesting; 10-year term

 

High

 

25 – 40%

 

Say-on-Pay

 

At the 2017 Annual Meeting of Stockholders, the Company provided stockholders an advisory vote on executive compensation.  The stockholders approved, on an advisory basis, the compensation of the Company’s NEOs, as disclosed pursuant to the compensation disclosure rules of the SEC, including the Compensation Discussion and Analysis, compensation tables and narrative discussion set forth in the Company’s 2017 annual meeting proxy statement.  Of the shares voted, 97.85% voted in favor of the Company’s executive compensation.

 

The Committee took into account the result of the stockholder vote in determining executive compensation policies and decisions since that vote.  The Committee viewed the vote as an expression of the stockholders’ general satisfaction with the Company’s current executive compensation programs.  While the Committee considered this stockholder satisfaction in determining to continue the Company’s executive compensation programs for fiscal 2018, decisions regarding incremental changes in individual compensation were made in consideration of the factors described below.

 

Consistent with the stockholders’ preference expressed in voting at the 2017 Annual Meeting of Stockholders, the Company’s Board of Directors determined that an advisory vote on the compensation of the Company’s NEOs will be conducted every year.

 

Executive Compensation Programs

 

Executive officer compensation consists of six parts:

 

·                  Base Salary;

 

·                  Operators’ Share Incentive Compensation Plan;

 

·                  Annual Incentive Plan;

 

·                  Long-Term Incentives;

 

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·                  Stock Incentives; and

 

·                  Benefits and Perquisites.

 

Base Salary

 

Base salary levels are the fixed portion of the executive compensation package. Base salary levels typically represent less than 25% of an executive officer’s total direct compensation.  Salary levels are based on competitive pay levels and the executive’s experience, responsibilities and performance.  In keeping with the Company’s focus on paying for performance, base salaries are generally below competitive median levels.

 

Operators’ Share Incentive Compensation Plan

 

Why Operators’ Shares?

 

The Hormel Foods Corporation Operators’ Share Incentive Compensation Plan (“Operators’ Share Plan”) is a short-term incentive.  The basic concept of the Operators’ Share Plan structure has been in place since 1932.

 

This annual cash incentive plan rewards employee participants for Company financial performance, as measured by earnings per share (“EPS”).  The Operators’ Share Plan rewards employees as the EPS of the Company rises over time.  Improved EPS, over time, results in an increase in the stock price, which improves stockholder value.

 

How the Plan Works

 

Upon initial eligibility for plan participation, an employee receives a grant of Operators’ Shares.  Operators’ Shares are phantom units, not actual shares of stock or the right to receive the value of stock.  Operators’ Shares represent the right to receive performance-based cash compensation under the Operators’ Share Plan.

 

Grants of Operators’ Shares to executive officers are determined by the Compensation Committee.  Operators’ Shares are awarded at a level that results in competitive total annual cash compensation relative to market pay levels, taking into consideration length of service and performance.  The total of the Executive’s base pay plus the projected value of the Operators’ Shares is generally at the 50th percentile of the market for base pay.

 

During the year, participants receive “dividend equivalents.”  These are cash payments equal to declared dividends multiplied by the number of Operators’ Shares held.

 

Following the end of each fiscal year, the Company calculates each participant’s Operators’ Share Plan award.  This is done by multiplying the Company’s annual EPS by the number of Operators’ Shares identified for that participant.  This award is decreased by the total amount of dividend equivalents paid during the year to determine the final Operators’ Shares payment.

 

Annual Incentive Plan

 

Why AIP?

 

The Hormel Foods Corporation Annual Incentive Plan (“AIP”) is a short-term incentive.  The AIP is an annual cash incentive program that rewards participants for the Company’s financial performance.  The AIP rewards achievement of profit objectives and asset management.  The Committee believes the AIP further aligns performance pay to key drivers of the Company’s financial success.

 

How the Program Works

 

Payout under the AIP is based on the achievement of financial goals in relation to the Company’s annual operating plan approved by the Board of Directors.  The Chief Executive Officer’s goal is based on earnings before interest and taxes (“EBIT”) for the consolidated Company.  Participants who are heads of one of the Company’s segments (Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and International & Other) will have their goal weighted, with one-half based on segment profit for their particular segment and one-half based on EBIT for the consolidated Company.  All other NEOs have their goal based on EBIT for the consolidated Company.

 

Performance goals for EBIT and segment profit are based on the annual operating plan approved by the Board of Directors.  The Committee has authority to modify the performance goal at the beginning of the year to provide for adjustments for certain non-recurring items, and to exercise negative discretion when measuring performance after year-end.   For fiscal 2017, the Committee defined the EBIT goal at the beginning of the year to exclude unusual events that negatively affected the Company’s EBIT and retained its negative discretion to adjust the payout downward.  As a result, the calculation of fiscal 2017 Total Company EBIT and segment profit for Refrigerated Foods and International excluded certain non-recurring items in order to ensure the equitable comparability of the performance to the goal.  Such items included charges

 

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related to the sale of the Farmer John business and results attributed to the acquisition of the Fontanini and Ceratti businesses.

 

Target award amounts under the AIP are determined by the Compensation Committee and will vary based on the participant’s position within the Company and the competitive market rate.  Performance levels at threshold, target, and maximum, and their payout levels are established at the beginning of the fiscal year.   Payouts are a percentage of target as follows:

 

 

 

 

EBIT/Segment Profit as a
% of Plan

 

 

Payout as a %
of Target

 

 

 

> 120%

 

 

200%

Maximum

 

 

120%

 

 

200%

Target

 

 

100%

 

 

100%

Threshold

 

 

80%

 

 

50%

 

 

 

< 80%

 

 

0%

 

Awards are interpolated for EBIT and segment profit between the discrete percentages.

 

The AIP modifier is a secondary measure applied to the AIP award.

 

·                  For most participants, including all of the NEOs, the modifier is based on asset management.  Asset management is calculated as the average measured assets (including accounts receivable, inventories, prepaid expenses, intangible assets, property, plant & equipment, investments, and other assets) as a percentage of the annual operating plan.  The asset management modifier may increase or decrease the payout based on EBIT/segment profit.  Asset management within 95% to 105% of the plan will have no impact on the payout.  Asset management below 95% of the plan will increase the payout by 20%.  Asset management above 105% of the plan will decrease the payout by 20%.

 

·                  The Committee has authority to modify the performance goal at the beginning of the year to provide for adjustments for certain non-recurring items, and to exercise negative discretion when measuring performance after year-end.  As a result, the measurement of asset management for Total Company, International, and Refrigerated Foods excluded the assets attributed to the Fontanini and Ceratti businesses acquired during the year, the Farmer John business sold during the year, and capital not spent on the China plant construction.

 

The maximum payout under the AIP is 200% of the target incentive.  The Compensation Committee retains discretion to reduce the amount of any award payout.

 

The fiscal 2017 AIP payout percentage varied for the NEOs, based upon the Total Company results or their segment results, as follows:

 

 

 

 

Target
Incentive

 

Basis for AIP Incentive
Payment

AIP Payout % Including
Asset Management Modifier

 

 James P. Snee

 

$1,000,000

 

Total Company

80%

Steven G. Binder

 

$585,000

 

  1/4 Refrigerated Foods

100%

 

 

 

 

  1/4 Grocery Products

95%

 

 

 

 

  1/2 Total Company

80%

 

 

 

 

Weighted Total

88.8%

Thomas R. Day

 

$365,000

 

1/2 Refrigerated Foods

100% 

 

 

 

 

1/2 Total Company

80%

 

 

 

 

Weighted Total

90%

James N. Sheehan

 

$400,000

 

Total Company

80%

Glenn R. Leitch

 

$385,000

 

  1/2 Jennie-O Turkey Store

0%

 

 

 

 

  1/2 Total Company

80%

 

 

 

 

Weighted Total

40%

 

The Refrigerated Foods segment met their segment profit goal for fiscal 2017.  Total Company, Grocery Products, International, Jennie O Turkey Store, and Specialty Foods did not achieve their segment profit goal for fiscal 2017. The Refrigerated Foods, Grocery Products, and Jennie O turkey Store segments met their asset management goals.  The resulting payout percentages represent this performance.  The Total Company EBIT goal for fiscal 2017 was $1,397,153,000.  The Total Company’s actual EBIT performance was $1,280,101,000, which was adjusted to $1,279,633,000 for the non-recurring items described above, resulting in 92% achievement of the EBIT goal.  The Total Company asset goal for fiscal year 2017 was $5,481,313,000.  The Total Company’s actual average measured assets employed, excluding measured assets attributed to the acquired Fontanini and Ceratti, sale of Farmer John, and capital not

 

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spent on China plant construction were $5,343,442,000, resulting in 97% achievement of the goal.  Since the actual achievement fell within the 95% to 105% range, no payout modifier was applied.

 

SEC rules provide that the Company does not have to disclose confidential financial information if doing so would result in competitive harm to the Company.  The quantitative factors identified below are all maintained by the Company as confidential and proprietary information.  The Compensation Committee believes disclosure of such information would result in competitive harm to the Company.  Such harm would be caused by factors including the following:

 

·                  Segment profit targets and results are competitively sensitive information that the Company does not publicly disclose; and

 

·                  Segment asset management targets and results are competitively sensitive information that the Company does not publicly disclose.

 

The target-level goals can be characterized as “strong performance,” meaning that based on historical performance, although attainment of this performance level is uncertain, it can be reasonably anticipated that target performance may be achieved, while the threshold goals are more likely to be achieved and the maximum goals represent more aggressive levels of performance.

 

Long-Term Incentives

 

Why Long-Term Incentives?

 

The Hormel Foods Corporation 2009 Long-Term Incentive Plan (“LTIP”) is administered by the Compensation Committee and is utilized for the Company’s long-term compensation programs.  The LTIP allows the Compensation Committee to grant Company executive officers different types of performance awards conditioned on achievement of objective performance goals.  LTIP performance awards are designed to provide a small group of key employees selected by the Committee with an incentive to maximize stockholder value.  LTIP performance awards granted in fiscal 2017 provide an additional incentive opportunity based on the Company’s long-term “Total Shareholder Return” performance compared to its peers.  The Committee feels that the relative performance nature of these LTIP awards balances the absolute performance of the stock options, and recognizes the cyclicality of the business.  In other words, if the Company underperforms versus peers in a very strong market, the options may be valuable, but the LTIP awards will be worthless.  Conversely, if the Company outperforms its peers in a very weak market, the options may be worthless, but the LTIP awards would generate a reward.

 

How the LTIP Awards Work

 

“Total Shareholder Return” measures the increase in stock price and any reinvested dividends.  Each participant, including the NEOs, is given a target dollar award opportunity for the three-year performance period.  In selecting the cash incentive target for each participant, the Compensation Committee considers the responsibilities of the employee, his or her contributions to the Company’s success, and competitive market data.

 

In July 2017, the annual LTIP performance awards were granted.  The performance cycle for each award is three years and participants can have up to three overlapping LTIP grants at any time. If, during any three year performance cycle, a subsequent target award is increased or decreased due to a promotion or job change, that change will be applied to any existing target awards as of the subsequent award’s effective date.

 

If the Company’s actual Total Shareholder Return for the three-year period is at the 50th percentile of the peer group, then the target award is earned.  If the Company’s actual Total Shareholder Return ranks highest among the peers, then the award payout equals three times the target opportunity.  No award is paid unless actual Total Shareholder Return is above the 25th percentile of the peers.  Awards will be interpolated for Company performance between the discrete points.  The Compensation Committee retains discretion to reduce the amount of any award payout.  The peer group for LTIP awards granted in fiscal 2017 consists of 23 publicly traded companies in the food industry, listed below.

 

LTIP Peer Companies

 

Campbell Soup Company
Clorox Company
ConAgra Foods, Inc.

 

Hershey Company
J.M. Smucker Company
Kellogg Company

 

Pinnacle Foods Inc.
Post Holdings, Inc.
Sanderson Farms, Inc.

Dean Foods Company
Flowers Foods, Inc.
Fresh Del Monte Produce Inc.

 

Kraft Heinz Company
McCormick & Company, Inc.
Mondelez International Inc.

 

Seaboard Corporation
Snyders-Lance Inc.
Treehouse Foods Inc.

General Mills, Inc.
Hain Celestial Group, Inc.

 

PepsiCo Inc.
Pilgrim’s Pride Corp.

 

Tyson Foods Inc.

 

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See footnote 5 to the Summary Compensation Table on page 24 for LTIP performance and the payout made in fiscal 2017.

 

Stock Incentives

 

Why Stock?

 

The LTIP also allows the Committee to grant several types of equity awards, including stock options, restricted stock and other stock-based awards.  In general, the Committee uses stock options as the primary form of annual equity award.  The Committee favors stock options because the option structure focuses executives on continued stock price improvement.  Stock option grants typically vest equally over a four year period and have a term of ten years. This extended vesting period and term encourage executives to balance how business decisions made in the near-term affect the Company’s long-term stock price performance.

 

The Compensation Committee grants stock options annually, effective on the first Tuesday of December, except for stock option grants to the CEO.  This practice ensures that option grant dates cannot be manipulated for a more favorable strike price.  The Committee determined to make the CEO’s stock option grants effective the same date as the nonemployee directors’ restricted share grants, February 1.  This date was chosen because it falls shortly after conclusion of the annual CEO evaluation process.  Options are always granted at the market price of the Company’s stock at the date of grant.  Options only provide value to the participant when the market price of the stock exceeds the grant price.  Options are intended to provide long-term performance-based compensation tied specifically to increases in the price of the Company’s stock, aligning the financial interests of executives and stockholders.

 

The Company’s officers are required to hold Company stock with a value equivalent to 1.5 to 5 times their five-year average annual base salary.   Once options are exercised, the Company’s officers are required to hold the acquired shares until their stock ownership guidelines are met.  See “Stock Ownership Guidelines” on page 8 for more information on the Company’s stock ownership guidelines, as well as the Company’s pledging and hedging policies.

 

How Awards are Determined

 

The Compensation Committee determines, with the assistance of its independent outside consultant, the amount of options to be granted to executive officers, including the CEO.  The CEO adds his input and recommendations regarding grants to executives (other than himself) and other eligible employees.  The Committee reviews such recommendations and determines all final option grants to all eligible employees.

 

Option awards generally reflect the Compensation Committee’s assessment of the influence an employee’s position has on stockholder value.  The number of options awarded may vary up or down from prior year awards based on the level of an individual executive officer’s contribution to the Company in a particular year, determined in part on the recommendation of the CEO.  The Committee’s determination of option grants in fiscal 2017 and in past years took into consideration the individual’s contributions to the Company during the last fiscal year, potential for contributions in the future, and as a component of competitive total compensation based on market data.

 

Clawback Policy

 

The Committee has adopted a “clawback” policy which provides for recoupment of incentive compensation in certain circumstances. If the Company restates its reported financial results for reasons other than a restatement required by a change in applicable accounting standards, the Board will review the bonus and other awards made to the executive officers based on financial results during the period subject to the restatement and, to the extent practicable under applicable law, the Company will seek to recover or cancel any such awards which were awarded as a result of achieving performance targets that would not have been met under the restated financial results.

 

Pension Plan

 

The Company maintains noncontributory defined benefit pension plans covering substantially all salaried employees.

 

The Salaried Employees Pension Plan (“Pension Plan”) consists of two parts, a base benefit and a supplemental benefit.  Pension benefits are based on average annual compensation and utilize covered compensation as a supplemental benefit. The base benefit will be an 8% or 10% credit for each year of service after January 1, 2017.  If the sum of the employee age and years of service as of the beginning of the plan year is 75 or less, the employee receives an 8% base pay credit.  If it is greater than 75, the employee receives a 10% base pay credit.  An annual supplemental credit of 4% for each year is included if average annual compensation is greater than covered compensation at termination of employment.

 

At termination of employment, the sum of the base pay annual credits is multiplied by the average annual compensation with the result being the base portion of the pension benefit.  The sum of supplemental credits is multiplied by the result of the average annual compensation minus covered compensation with the result being the supplemental portion of the pension benefit.  The pension benefit is payable in a lump sum or an annuity.

 

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The earliest eligible retirement age is 55 years, after completion of 15 years of service.  The base benefit is discounted 0.5% for every month retirement occurs before age 62.  However, an employee may retire with 30 years of service after attaining age 60 and avoid the discount on the base benefit.  The supplemental benefit is multiplied by an adjustment factor which increases from 0.48 at age 55 to 1.00 at age 65.

 

On December 31, 2016, the Pension Plan (Traditional Pension Plan) benefit was frozen.  The base benefit is 0.95% of the average annual compensation multiplied by the years of benefit service, limited to 40 years, at retirement.  The supplemental benefit is 0.65% of average annual compensation less covered compensation multiplied by the years of benefit service, limited to 35 years.  Average annual compensation is the average of the highest five years of compensation of the last ten completed calendar years as of December 31, 2016.  For this purpose, annual compensation consists of base salary, Operators’ Share Plan payments and Annual Incentive Plan payments.  Covered compensation is derived from a published table based on year of birth that averages the maximum social security wage bases during the participant’s working life.

 

The match in the Company’s Tax Deferred Investment Plan A - 401(k) (“401(k) Plan”) covering these employees increased effective October 31, 2016 in conjunction with this modification.

 

Supplemental Executive Retirement Plan

 

Why have a SERP?

 

The Hormel Supplemental Executive Retirement Plan (“SERP”) provides an annual pension benefit to a select group of management, including all NEOs, based on the same pension formula as the Pension Plan.  The SERP bases the benefit on compensation that is not allowable in the Pension Plan.  Such compensation includes amounts over the qualified plan compensation limit, currently $275,000, restricted stock awards, and deferrals to nonqualified deferred income plans.  Rather than adding a different measure of value, the SERP merely restores the value executives lose under the Pension Plan (described above) due to government limitations.

 

Nonqualified Deferred Compensation Plan

 

Why have a NQDCP?

 

The Company also maintains a supplemental retirement plan to replace the portion of an executive’s pension benefit that cannot be paid under the broad-based plans because of the Internal Revenue Service (“IRS”) limitation.  In the same way that the SERP restores the full value of the Pension Plan, the nonqualified deferred compensation plan, the Executive Deferred Income Plan (“NQDCP”), eliminates the IRS limitations on the 401(k) Plan.  The Company’s NQDCP permits eligible employees, including all NEOs, to annually defer certain compensation.  This compensation includes base salary, Operators’ Shares dividend equivalents and year-end payments, AIP payments, and long-term incentive payments.  The Company makes contributions on behalf of participants for 401(k) match amounts which could not be contributed to the 401(k) Plan because of IRS limitations.  The Company also may make discretionary contributions to the participant’s deferral accounts.

 

Deferrals of cash compensation are credited with deemed investment gains and losses.  Similar to a 401(k) plan, the participant may choose from a number of investments, none of which provide above-market interest rates.  Payments under the NQDCP are made on the date(s) selected by each participant in accordance with the terms of the plan or on such other date(s) as specified in the plan.  Payments relating to deferrals of cash compensation are paid in cash.

 

In connection with the NQDCP, the Company has created a grantor trust, commonly known as a “rabbi trust.”  The Company is under no obligation to further fund this trust and would do so only at its discretion.  The assets of the trust are intended to be used to pay benefits under the plan, but the assets of the trust are subject to the claims of general creditors of the Company.

 

The Compensation Committee believes that the SERP and the NQDCP together provide a competitive retirement package for executives that is consistent with the retirement benefits provided to all Company employees.

 

Survivor Income Protection Plan

 

Why have a SIPE?

 

The Hormel Survivor Income Plan for Executives (“SIPE”) is provided in addition to the life insurance plan which is available to all salaried employees.  As with the qualified pension plans, there are limits on the levels of insurance provided under the broad-based plan.  The Company offers the SIPE to provide a death benefit commensurate with the income levels of the participants.  The SIPE is available to a designated group of management employees, including all NEOs.

 

The SIPE pays a benefit to the employee’s spouse or dependent child of 60% of average salary (based on a five-year average) for up to 20 years if the eligible employee died while actively employed.  If the payment is made to a beneficiary

 

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instead of a spouse or dependent child, the maximum duration is five years (for participants joining the SIPE in 2000 or after) or 20 years (for participants joining the SIPE prior to 2000).  If the eligible employee died after retirement, payment to the spouse or dependent child is 1% per year of service up to 40% of average salary for 15 years.  If the payment is made to a beneficiary, not to a spouse or dependent child, the maximum duration is five years (for participants joining the SIPE in 2000 or after) or ten years (for participants joining the SIPE prior to 2000).  The SIPE was amended in fiscal 2009 to discontinue the post-retirement benefit for new officers effective on or after October 26, 2009.

 

Perquisites

 

The Company provides limited perquisites to its executive officers.  The Company maintains two corporate aircraft, but executive use of the aircraft is strictly limited to business purposes.

 

The Company maintains a condominium in Vail, Colorado.  The condominium is made available to members of senior management as a vacation destination.  The taxable value of the use of this property is charged as taxable income to the employee, in accordance with IRS regulations.

 

The Company provides cars to executive officers.  Due to business travel needs, the Company has chosen to provide a Company car in lieu of paying mileage for the use of a personal vehicle.  The annual taxable value of the vehicle is charged as taxable income to the employee, in accordance with IRS regulations.

 

The Company provides a designated group of managers, including executive officers, an annual medical physical.  Assuring these key managers are in good health minimizes the chance business operations will be interrupted due to an unexpected health condition.

 

How Annual Compensation Decisions are Made

 

The Compensation Committee reviews and approves recommendations for pay changes for the CEO, each of his eight direct reports and a group of 28 additional officers who hold key positions within the Company.  Each year, the Committee asks its outside consultant to update the competitive analysis for each of these positions.

 

For the NEOs, the consultant develops “market consensus” data using both a peer group of companies similar to the Company in size and industry (listed below) and a combination of several compensation surveys.  The use of peer group data (1) provides the Compensation Committee with more specific information regarding market practices than is available from surveys and (2) allows the Committee to compare the Company’s relative pay positioning in relation to the Company’s relative performance positioning to ensure a proper pay-for-performance alignment.  The use of survey data (1) provides information based on specific position responsibilities rather than pay level and (2) provides pay information for positions that fall below the NEOs.  The consultant works with the Company’s Senior Vice President of Human Resources to ensure a proper understanding of the roles, responsibilities and revenue scope of each position reviewed.

 

Hormel Foods Pay and Performance Peer Group

Campbell Soup Company
ConAgra Foods, Inc.
Dean Foods Company
Flowers Foods, Inc.
Fresh Del Monte Produce Inc.
General Mills, Inc.
Hain Celestial Group, Inc.
Hershey Company
J.M. Smucker Company
Kellogg Company

Kraft Heinz Company
McCormick & Company, Inc.
Mondelez International Inc.
Pilgrim’s Pride Corporation
Pinnacle Foods Inc.
Post Holdings, Inc.
Sanderson Farms, Inc.
Seaboard Corporation
Treehouse Foods, Inc.
Tyson Foods Inc.

 

 

 

 

 

2016/2017 Fiscal Year Data
($ in millions)

Hormel Foods
(Fiscal 2016)

25th Percentile

Median

75th Percentile

Revenues

$9,523

$4,312

$7,416

$9,202

Market Capitalization

$20,226

$4,134

$8,900

$22,929

 

The companies in this Pay and Performance Peer Group are different than the LTIP Peer Companies because the purpose of each list is different.  The Pay and Performance Peer Group consists of food companies which are more similar in size to the Company.  The LTIP Peer Companies are a broader group of food companies which are publicly traded, allowing for determination of relative total shareholder return performance.  This broader group assures there will be a sufficient number of comparison companies at the end of the three-year LTIP performance cycle if some of the companies are acquired, go bankrupt or are eliminated due to unforeseen events.  Each year the Committee reviews and approves the Pay and Performance Peer Group and the LTIP Peer Companies with input from the consultant.

 

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Upon completing the competitive analysis, the consultant provides the Compensation Committee with a report of the relative pay and performance findings.  Based on the results of this analysis, the Committee discusses strategic goals for the program and establishes broad parameters for annual pay decisions, including overall pay mix.  The consultant then works with the CEO and the Senior Vice President of Human Resources to develop an initial set of recommendations for annual pay decisions, consistent with the guidelines established by the Committee.  The consultant presents preliminary recommendations based on each executive’s market positioning and relative internal positioning.  The CEO and Senior Vice President of Human Resources then modify those recommendations based on their assessment of each individual’s performance and contribution.  The initial results are submitted to the Committee for review and discussion.  Based on the Committee discussion, modifications are made to the initial recommendations and the Committee approves the final recommendations at a subsequent meeting.  The CEO does not participate in the Committee’s process for establishing the CEO’s compensation.

 

For fiscal year 2017, the Compensation Committee approved salary increases and changes to Operators’ Shares grants, AIP award target amounts, LTIP award target amounts and stock option grants for the NEOs and other key executives.  The resulting fiscal 2017 compensation levels for the NEOs are detailed in the Summary Compensation Table on page 24 and the supporting tables that follow.  At target performance, each NEO’s total direct compensation (total cash compensation plus long term compensation) will be between the 50th and 75th percentile of market consensus data.

 

The Compensation Committee considers the positioning of NEO compensation appropriate in light of the experience, expertise, responsibilities and performance of these five individuals.

 

Tax Deductibility

 

Compensation decisions for our executive officers are made with full consideration of the tax implications, including deductibility under Section 162(m) of the Internal Revenue Code.  Section 162(m) limits the deductibility of compensation paid to certain executive officers in excess of $1 million annually, but excludes “performance-based compensation” from this limit.

 

Our stockholders have approved the Company’s Operators’ Share Plan and LTIP for the purpose of permitting awards under those plans to qualify as performance-based compensation under Section 162(m).  The Compensation Committee generally intends for compensation awarded under those plans to be deductible, except for dividend equivalents paid under the Operators’ Share Plan.  Such dividends may not be deductible in full for any NEO in a given year.  The Compensation Committee reserves the right to make other compensation payments that do not qualify as performance-based compensation under Section 162(m) when the Compensation Committee determines it advisable to do so to properly incentivize our executive officers.

 


ANALYSIS OF RISK ASSOCIATED WITH OUR COMPENSATION PLANS

 

In making decisions regarding compensation program design and pay levels, our Compensation Committee and senior management consider many factors, including any potential risks to the Company and its stockholders.  Although a significant portion of our executives’ compensation is performance-based and “at-risk,” we believe the Company’s compensation plans are appropriately structured and are not reasonably likely to have a material adverse effect on the Company.

 

Senior management, with the oversight of the Committee, implements and administers the compensation program for all employees of the Company other than the executive group.

 

The Committee, with the assistance of its independent outside consultant, oversees all aspects of the executive compensation program including:

·                  Approval of the companies included in the peer group for comparison purposes;

 

·                  Approval of threshold, target and performance goals for short- and long-term incentives;

 

·                  Approval of all equity grants; and

 

·                  Approval of all pay actions for senior executives (currently 37 incumbents).

 

Specifically, the Committee notes the following design features that mitigate potential risk:

 

1.              Our short-term variable pay consists of two programs that provide a strong balance of performance measures:

 

·                  The Operators’ Share Plan rewards absolute Company-wide EPS performance.  The plan ties all participants to the results of the total Company;

 

·                  The AIP rewards the achievement of operating income and asset management relative to Committee-approved goals;

 

§                  The inclusion of asset management discourages decisions focused purely on short-term results;

 

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§                  Including both Company-wide and division measures creates a balance between focus on overall results and a pay-for-performance relationship for division executives; and

§                  The cap on annual payouts mitigates the risk of excessive rewards for temporary, unsustainable results.

2.              Our long-term incentive structure consists of two programs that balance absolute and relative shareholder value creation over a multi-year period:

·                  The LTIP performance awards program rewards relative total shareholder return over a three-year performance period;

§                  The relative nature of the measurement mitigates the risk of overpayment for absolute performance that lags industry expectations;

·                  The Stock Option grants vest over a four-year period and provide reward for the achievement of absolute stock price performance;

§                  Multi-year vesting of options mitigates the risk that executives can reap excessive rewards from temporary stock price increases;

·                  In addition, executives (and directors) are subject to stock ownership guidelines, which require minimum stock holdings for the duration of the executives’ employment; and

·                  Further, the multi-year nature of both plans also serves as a retention tool, mitigating the risk of unwanted executive turnover.

3.              Executive officers’ incentive compensation is subject to recoupment in the event of certain financial restatements to recover amounts that would not have been earned based on the restated financial results.

 

COMPENSATION OF NAMED EXECUTIVE OFFICERS (NEOs)

 

The following tables and narrative disclosure should be read in conjunction with the Compensation Discussion and Analysis, which presents the objectives of our executive compensation and benefit programs.  The table below presents compensation for individuals who served as Chief Executive Officer and Chief Financial Officer and for the other three most highly compensated executive officers who were serving as executive officers at the end of fiscal 2017.

 

SUMMARY COMPENSATION TABLE

 

Name and
Principal Position
(1)

Year

Salary
($)
(2)

Bonus
($)
(3)

Stock
Awards
($)

Option
Awards
($)
(4)

Non-Equity
Incentive Plan
Compensation
($)
(5)

Change in Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
(6)

All Other
Compensation
($)
(7)

Total
($)

James P. Snee

2017

849,940

400

-

1,950,122

2,108,771

1,266,832

144,097

6,320,162

 Chairman of the Board, President

2016

509,595

400

-

824,970

1,674,932

469,339

35,283

3,514,519

 and Chief Executive Officer

 

 

 

 

 

 

 

 

 

Steven G. Binder

2017

501,410

400

-

824,799

1,564,688

1,920,319

115,150

4,926,766

 Executive Vice President and

2016

500,965

400

-

800,298

2,057,893

1,608,831

52,160

5,020,547

 President, Hormel Business Units

2015

481,650

300

-

775,152

1,669,463

620,420

45,886

3,592,871

Thomas R. Day

2017

376,610

400

-

500,070

855,700

1,306,132

81,283

3,120,195

 Group Vice President

2016

370,165

400

-

450,264

1,217,966

990,360

38,538

3,067,693

 

2015

337,900

300

-

410,256

1,029,588

463,997

30,395

2,272,436

James N. Sheehan

2017

410,020

400

-

574,764

684,399

841,746

66,481

2,577,810

 Senior Vice President and

 

 

 

 

 

 

 

 

 

 Chief Financial Officer

 

 

 

 

 

 

 

 

 

Glenn R. Leitch

2017

386,580

400

-

519,693

743,400

678,586

82,088

2,410,747

 Group Vice President

2016

380,500

400

-

470,310

1,191,625

480,504

34,750

2,558,089

 

2015

353,170

300

-

430,416

848,500

255,202

32,236

1,919,824

 

(1)                                 Mr. Snee was President and Chief Executive Officer for the entirety of fiscal 2017, and became Chairman of the Board, President and Chief Executive Officer effective November 20, 2017.

 

(2)                                 Includes amounts voluntarily deferred under the Company’s Tax Deferred Investment Plan A - 401(k) and the Executive Deferred Income Plan.

 

(3)                                 Consists of a discretionary bonus that was paid, in the same amount, to all other eligible employees.

 

(4)                                 Consists of the aggregate grant date fair value of stock options granted during the fiscal year, calculated in accordance with FASB ASC Topic 718.  The grant date fair value is based on the Black-Scholes valuation model.

 

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Assumptions used to calculate these amounts are included in Note A, “Summary of Significant Accounting Policies – Employee Stock Options,” and Note L, “Stock-Based Compensation,” of the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended October 29, 2017.

 

(5)                                 Consists of Operators’ Share Incentive Compensation Plan and Annual Incentive Plan payments earned during the fiscal year, the majority of which were paid subsequent to fiscal year end, and payouts under the LTIP performance awards, as shown in the table below.  For the LTIP performance period June 6, 2014 through June 23, 2017, the Company’s Total Shareholder Return was at the 76.2 percentile, resulting in a payout at 154.0% of the target awards.  Includes amounts voluntarily deferred under the Executive Deferred Income Plan.

 

Name

Year

Operators’
Share Plan
Payment
($)

Annual
Incentive Plan
Payment
($)

LTIP Payout
($)

Total Non-Equity
Incentive Plan
Compensation
($)

James P. Snee

2017

314,000

800,000

994,771

2,108,771

2016

328,000

930,000

416,932

1,674,932

Steven G. Binder

2017

314,000

519,188

731,500

1,564,688

 

2016

328,000

912,813

817,080

2,057,893

 

2015

254,000

826,563

588,900

1,669,463

Thomas R. Day

2017

188,400

328,500

338,800

855,700

 

2016

196,800

630,125

391,041

1,217,966

 

2015

152,400

528,000

349,188

1,029,588

James N. Sheehan

2017

125,600

320,000

238,799

684,399

Glenn R. Leitch

2017

219,800

154,000

369,600

743,400

 

2016

229,600

590,625

371,400

1,191,625

 

2015

177,800

376,250

294,450

848,500

 

(6)                                 Consists of the annual increase in the actuarial present value of accumulated benefits under the Pension Plan and the SERP.  In accordance with SEC rules, the present value was determined using the same assumptions applicable for valuing pension benefits for purposes of our financial statements.  See “Pension Benefits” on page 29. The NEOs had no above-market or preferential earnings on deferred compensation.

 

(7)                                 All other compensation, including perquisites and other personal benefits, consists of the following:

 

ALL OTHER COMPENSATION

 

Name

Year

Joint Earnings
Profit Sharing
($)
(a)

Company 401k
Match
($)
(b)

Company
NQDCP
Contribution
($)
(c)

Use of
Company Car
($)
(d)

Use of
Company
Properties
($)
(e)

 

Air Lounge
Membership
($)
(f)

Physical
Exams
($)
(g)

Total
($)

James P. Snee

2017

32,592

10,600

74,712

12,803

4,663

-

8,727

144,097

2016

19,711

900

-

11,875

-

-

2,797

35,283

Steven G. Binder

2017

19,362

10,600

60,075

15,472

4,663

-

4,978

115,150

2016

19,506

900

-

13,975

5,097

-

12,682

52,160

 

2015

19,966

900

-

14,231

4,851

-

5,938

45,886

Thomas R. Day

2017

14,576

10,600

38,091

13,086

-

405

4,525

81,283

 

2016

14,586

900

-

12,753

5,096

-

5,203

38,538

2015

14,402

900

-

12,239

-

-

2,854

30,395

James N. Sheehan

2017

15,723

10,600

25,318

12,109

-

-

2,731

66,481

Glenn R. Leitch

2017

14,955

10,600

38,298

16,066

-

-

2,169

82,088

2016

14,986

900

-

15,580

-

-

3,284

34,750

 

2015

14,820

900

-

14,585

-

-

1,931

32,236

 

(a)                                 Consists of Joint Earnings Profit Sharing distributions for each fiscal year that were authorized and paid subsequent to fiscal year end.  Company Joint Earnings Profit Sharing distributions may be authorized by the Board of Directors in its discretion based on Company profits.  The total amount of Company distributions declared available to all participants by the Board is allocated in the same proportion as each person’s base weekly wage bears to the total base wage for all eligible persons.  Distributions to the NEOs are calculated using the same formula as is used for all eligible employees.  Distributions to the NEOs include both a contribution to the Joint Earnings Profit Sharing Trust and a Joint Earnings profit sharing cash payment.

 

(b)                                 Consists of Company matching payments under the Hormel Tax Deferred Investment Plan A - 401(k).  This matching payment, in the same amount, is available to all other eligible employees.

 

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(c)                                  Consists of Company contributions to the Executive Deferred Income Plan for each fiscal year on behalf of participants for 401(k) match amounts which could not be contributed to the 401(k) Plan because of IRS limitations.  These contributions are credited to participants’ accounts subsequent to fiscal year end.

 

(d)                                 Consists of the aggregate incremental cost to the Company of a vehicle provided to the NEO for business and personal use.   This cost includes the depreciation expense of the vehicle and insurance, license, fuel and maintenance costs.

 

(e)                                  Consists of the aggregate incremental cost to the Company of use of a Company-owned condominium in Vail, Colorado.  This cost is the total costs of the property allocated between the two units in the condominium and then divided by the number of weeks the units are available for use.  Costs of the property include property management, insurance, utilities, remodeling, repairs and property taxes.

 

(f)                                   Consists of reimbursements paid by the Company for air travel lounge membership expenditures.  Such expenditures are allocated evenly over the term of the membership.

 

(g)                                  Consists of costs of physical medical examinations paid for by the Company.

 

The following table describes each stock option and non-equity incentive plan award made to each NEO in fiscal 2017.

 

GRANTS OF PLAN-BASED AWARDS FOR FISCAL 2017

 

Estimated Future Payouts Under Non-
Equity Incentive Plan Awards

All Other
Option Awards:

Exercise
or

Grant Date

Award
Approval

Operators’
Shares
(1)

Threshold

Target

Maximum

Number of
Securities
Underlying
Options

Base
Price of
Option
Awards

Fair Value
of Stock
and Option
Awards

Name

Grant Date

Date

(#)

($)

($)

($)

(#)

($/Sh.)

($)

James P. Snee

 

11/21/2016(1)

200,000

328,000

 

 

 

 

11/21/2016(2)

 

500,000

1,000,000

2,000,000

 

 

 

  2/1/2017(3)

11/21/2016

 

 

 

 

277,400

35.62

1,950,122

7/24/2017(4)

 

975,000

1,950,000

5,850,000

 

 

 

Steven G. Binder

11/21/2016(1)

200,000

 

328,000

 

 

 

 

11/21/2016(2)

 

292,500

585,000

1,170,000

 

 

 

 

12/6/2016(3)

11/21/2016

 

 

 

 

130,300

33.31

824,799

 

7/24/2017(4)

 

262,500

525,000

1,575,000

 

 

 

Thomas R. Day

 

11/21/2016(1)

120,000

196,800

 

 

 

11/21/2016(2)

 

182,500

365,000

730,000

 

 

 

12/6/2016(3)

11/21/2016

 

 

 

79,000

33.31

500,070

7/24/2017(4)

 

162,500

325,000

975,000

 

 

 

James N. Sheehan

 

11/21/2016(1)

80,000

 

131,200

 

 

 

 

11/21/2016(2)

 

200,000

400,000

800,000

 

 

 

 

12/6/2016(3)

11/21/2016

 

 

 

 

90,800

33.31

574,764

 

7/24/2017(4)

 

187,500

375,000

1,125,000

 

 

 

Glenn R. Leitch

 

11/21/2016(1)

140,000

229,600

 

 

 

 

11/21/2016(2)

 

192,500

385,000

770,000

 

 

 

12/6/2016(3)

11/21/2016

 

 

 

 

82,100

33.31

519,693

7/24/2017(4)

 

172,500

345,000

1,035,000

 

 

 

 

(1)                                 The “Operators’ Shares” column discloses the number of Operators’ Shares granted to each NEO for fiscal 2017.  The “Target” column shows the estimated possible Operators’ Share payment for fiscal 2017 based on fiscal 2016 EPS of $1.64.  In accordance with SEC rules, this estimated possible payment is based on the previous fiscal year’s performance since the fiscal 2017 EPS results are not determinable when the award is made at the beginning of fiscal 2017.  The actual Operators’ Share payment earned in fiscal 2017 for each NEO based on fiscal 2017 EPS of $1.57 was paid subsequent to fiscal year end and is included under “Non-Equity Plan Incentive Compensation” in the Summary Compensation Table on page 24.    See “Operators’ Share Incentive Compensation Plan” on page 17 for a description of Operators’ Shares.

 

(2)                                 Consists of AIP performance awards granted in fiscal 2017. These awards include target amounts and are subject to threshold and maximum payouts under the AIP.  The actual AIP payment earned in fiscal 2017 for each NEO was paid subsequent to fiscal year end and is included under “Non-Equity Plan Incentive Compensation” in the

 

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Summary Compensation Table on page 24.    See “Annual Incentive Plan” on page 17 for a description of the AIP and AIP payouts for fiscal 2017.

 

(3)                                 Consists of stock options granted under the Company’s 2009 Long-Term Incentive Plan.  These options vest at 25% per year on the anniversary of the grant date.  The grant date fair value is included under “Option Awards” in the Summary Compensation Table on page 24.  See “Potential Payments Upon Termination” on page 30 for a discussion of how equity awards are treated under various termination scenarios.

 

(4)                                 Consists of LTIP performance awards made in fiscal 2017. The performance period is June 12, 2017 through the 20th trading day after the Company’s second fiscal quarter 2019 earnings release, ending June 30, 2020 at the latest.  The actual cash amounts payable at the end of the performance period under these LTIP performance awards, if any, cannot be determined because the amount earned will be based on the Company’s future performance and the future performance of the peer group.    See “Long-Term Incentives” on page 19 for a description of the LTIP awards and potential payouts for LTIP awards.

 

The following table summarizes the total outstanding equity awards as of October 29, 2017 for each of the NEOs.

 

OUTSTANDING EQUITY AWARDS AT FISCAL 2017 YEAR END

 

OPTION AWARDS

Name

Number of Securities Underlying
Unexercised Options
(#) Exercisable

Number of Securities Underlying
Unexercised Options
(#) Unexercisable
(1)(2)

Option Exercise
Price
($)

Option
Expiration
Date

James P. Snee

12,000

 

-

 

10.035

 

12/4/2017

 

40,000

 

-

 

6.315

 

12/2/2018

 

48,000

 

-

 

9.5625

 

12/1/2019

 

56,000

 

-

 

12.48

 

12/7/2020

 

60,000

 

-

 

14.80

 

12/6/2021

 

100,000

 

-

 

15.49

 

12/4/2022

 

 

45,450

 

15,150

 

22.99

 

12/3/2023

 

29,800

 

29,800

 

26.38

 

12/2/2024

 

26,750

 

80,250

 

37.755

 

12/1/2025

 

-

 

277,400

 

35.62

 

2/1/2027

 

Steven G. Binder

50,000

 

-

 

6.315

 

12/2/2018

 

 

220,000

 

-

 

9.5625

 

12/1/2019

 

 

220,000

 

-

 

12.48

 

12/7/2020

 

 

300,000

 

-

 

14.80

 

12/6/2021

 

 

250,000

 

-

 

15.49

 

12/4/2022

 

 

117,600

 

39,200

 

22.99

 

12/3/2023

 

 

76,900

 

76,900

 

26.38

 

12/2/2024

 

 

25,950

 

77,850

 

37.755

 

12/1/2025

 

 

-

 

130,300

 

33.31

 

12/6/2026

 

Thomas R. Day

80,000

 

-

 

6.315

 

12/2/2018

 

80,000

 

-

 

9.5625

 

12/1/2019

 

 

80,000

 

-

 

12.48

 

12/7/2020

 

 

80,000

 

-

 

14.80

 

12/6/2021

 

100,000

 

-

 

15.49

 

12/4/2022

 

57,600

 

19,200

 

22.99

 

12/3/2023

 

40,700

 

40,700

 

26.38

 

12/2/2024

 

14,600

 

43,800

 

37.755

 

12/1/2025

 

 

-

 

79,000

 

33.31

 

12/6/2026

 

James N. Sheehan

60,000

 

-

 

12.48

 

12/7/2020

 

60,000

 

-

 

14.80

 

12/6/2021

 

60,000

 

-

 

15.49

 

12/4/2022

 

24,300

 

8,100

 

22.99

 

12/3/2023

 

 

19,800

 

19,800

 

26.38

 

12/2/2024

 

 

7,800

 

23,400

 

37.755

 

12/1/2025

 

 

-

 

90,800

 

33.31

 

12/6/2026

 

 

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Glenn R. Leitch

16,000

 

-

 

6.315

 

12/2/2018

 

20,000

 

-

 

9.5625

 

12/1/2019

 

16,000

 

-

 

12.48

 

12/7/2020

 

80,000

 

-

 

14.80

 

12/6/2021

 

 

140,000

 

-

 

15.49

 

12/4/2022

 

 

65,250

 

21,750

 

22.99

 

12/3/2023

 

 

42,700

 

42,700

 

26.38

 

12/2/2024

 

 

15,250

 

45,750

 

37.755

 

12/1/2025

 

 

-

 

82,100

 

33.31

 

12/6/2026

 

 

(1)                                 Stock option grants generally vest in four equal annual installments, starting with one-fourth of the grant vesting on the first anniversary of the grant date.  The stock options have a term of ten years.  The grant date is thus ten years prior to the option expiration date shown in this table.   Specific vesting dates are listed in footnote 2 below. See “Potential Payments Upon Termination” on page 30 for a discussion of how equity awards are treated under various termination scenarios.

 

(2)                                 The table below shows the vesting schedule for all unexercisable options.  These options vest on the anniversary of the grant date in the year indicated.  For example, the December 6, 2016 option grant for Mr. Binder vested as to 32,575 shares on December 6, 2017 and will vest as to 32,575 shares on each of December 6, 2018, December 6, 2019 and December 6, 2020.

 

VESTING SCHEDULE FOR UNEXERCISABLE OPTIONS

 

Name

Option
Grant
Date

Vested in
December
2017

Will Vest
in 2018

Will Vest
in 2019

Will Vest
in 2019

Will Vest
in 2020

James P. Snee

12/3/2013

15,150

-

-

-

-

 

12/2/2014

14,900

14,900

-

-

-

 

12/1/2015

26,750

26,750

26,750

-

-

 

2/1/2017

-

69,350

69,350

69,350

69,350

Steven G. Binder

12/3/2013

39,200

-

-

-

-

 

12/2/2014

38,450

38,450

-

-

-

 

12/1/2015

25,950

25,950

25,950

-

-

 

12/6/2016

32,575

32,575

32,575

32,575

-

Thomas R. Day

12/3/2013

19,200

-

-

-

-

12/2/2014

20,350

20,350

-

-

-

12/1/2015

14,600

14,600

14,600

-

-

12/6/2016

19,750

19,750

19,750

19,750

-

James N. Sheehan

12/3/2013

8,100

-

-

-

-

 

12/2/2014

9,900

9,900

-

-

-

 

12/1/2015

7,800

7,800

7,800

-

-

 

12/6/2016

22,700

22,700

22,700

22,700

-

Glenn R. Leitch

12/3/2013

21,750

-

-

-

-

12/2/2014

21,350

21,350

-

-

-

12/1/2015

15,250

15,250

15,250

-

-

12/6/2016

20,525

20,525

20,525

20,525

-

 

The following table summarizes the option awards exercised during fiscal 2017 by each of the NEOs.

 

OPTION EXERCISES FOR FISCAL 2017

Name

Number of Shares
Acquired on Exercise
(#)

Value Realized
Upon Exercise
($)
(1)

James P. Snee

400

10,795

Steven G. Binder

30,000

647,404

Thomas R. Day

20,400

477,814

James N. Sheehan

60,000

1,249,826

Glenn R. Leitch

16,000

385,840

 

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(1)                                 Amount is the difference between the market price (NYSE prior day closing price) of the Company stock at the time of exercise and the exercise price of the options.

 

The following table shows present value of accumulated benefits that NEOs are entitled to under the Pension Plan and SERP.

 

PENSION BENEFITS

 

Name

 

Plan Name

 

Number of Years
Credited Service
(#)

 

Present Value of
Accumulated Benefit
($)

 

Payments During
Last Fiscal Year
($)

James P. Snee

 

Pension Plan

 

28-6/12

 

740,151

 

-

 

 

SERP

 

28-6/12

 

2,160,042

 

-

Steven G. Binder(1)

 

Pension Plan

 

38-4/12

 

1,442,255

 

-

 

 

SERP

 

38-4/12

 

7,615,588

 

-

Thomas R. Day(1)

 

Pension Plan

 

36-10/12

 

1,363,713

 

-

 

 

SERP

 

36-10/12

 

3,998,928

 

-

James N. Sheehan(1)

 

Pension Plan

 

39-5/12

 

1,623,716

 

-

 

 

SERP

 

39-5/12

 

2,720,173

 

-

Glenn R. Leitch(1)

 

Pension Plan

 

16-9/12

 

560,550

 

-

 

 

SERP

 

16-9/12

 

1,599,071

 

-

 

(1)                                 Each of the NEOs other than Mr. Snee is eligible for early retirement under both the Pension Plan and the SERP.     Early retirement provisions of these plans are described under “Pension Plan” on page 20 and “Supplemental Executive Retirement Plan” on page 21.

 

In accordance with SEC rules, the present value of accumulated benefits that NEOs are entitled to under these plans was determined using the same assumptions applicable for valuing pension benefits for purposes of our financial statements. See Note G, “Pension and Other Post-retirement Benefits,” of the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended October 29, 2017.  The material terms of these plans are described under “Pension Plan” on page 20 and “Supplemental Executive Retirement Plan” on page 21.

 

The following table shows information about each NEO’s participation in the Company’s Executive Deferred Income Plan.

 

NONQUALIFIED DEFERRED COMPENSATION

 

Name

 

Executive
Contributions in Last
Fiscal Year
($)
(1)

 

Company Contributions
in Last Fiscal Year
($)

 

Aggregate
Earnings in
Last Fiscal
Year
($)
(1)

 

Aggregate
Withdrawals/
Distributions
($)

 

Aggregate Balance at
October 29, 2017
($)
(1)

James P. Snee

 

219,354

 

74,712

 

8,212

 

-

 

486,673

Steven G. Binder

 

359,733

 

60,075

 

367,145

 

-

 

4,104,319

Thomas R. Day

 

-

 

38,091

 

468,187

 

-

 

2,651,888

James N. Sheehan

 

-

 

25,318

 

1,138

 

-

 

84,955

Glenn R. Leitch

 

-

 

38,298

 

20,356

 

-

 

1,105,006

 

(1)                                 The following table identifies amounts that have already been reported as compensation in our Summary Compensation Table for the current and prior years:

 

Name

 

Amount of Fiscal 2017
Contributions and Earnings
Reported as Compensation
in Fiscal 2017 Summary
Compensation Table
($)

 

Amounts in “Aggregate
Balance at October 29, 2017”
Column Reported as
Compensation in Summary
Compensation Tables for Prior Years
($)

James P. Snee

 

294,066

 

34,888

Steven G. Binder

 

419,808

 

2,178,657

Thomas R. Day

 

38,091

 

2,550

James N. Sheehan

 

25,318

 

-

Glenn R. Leitch

 

38,298

 

481,220

 

The material terms of the Company’s Executive Deferred Income Plan are described under “Nonqualified Deferred Compensation Plan” on page 21.

 

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Table of Contents

 

POTENTIAL PAYMENTS UPON TERMINATION

 

Our executive officers do not have employment or severance agreements with the Company.  Consequently, no executive officer has any right to cash severance of any kind.

 

Our stock option awards include standard provisions that result in the vesting or forfeiture of awards upon termination of employment, depending on the reason for termination.  These provisions are summarized as follows:

 

·                  All options vest immediately upon death or disability of the executive;

 

·                  Retirement results in the continued vesting of options per the original vesting schedule;

 

·                  Voluntary termination of employment results in the continued vesting of options per the original vesting schedule, but all options expire three months after such termination;

 

·                  Upon a change in capital structure of the Company, including a change in control of the Company via a merger, a sale of assets, or a tender or exchange offer, the Compensation Committee may in its discretion take action which the Committee deems appropriate, including accelerating vesting of options or permitting the exchange of options for a cash payment or substitute options; and

 

·                  Options are forfeited immediately upon termination for cause or breach of a confidentiality or noncompete agreement, both as determined by the Compensation Committee.  All NEOs have signed a confidentiality agreement.  Of the NEOs, Mr. Leitch has signed a noncompete agreement which prohibits him from working on competing products for a competitor of the Company for one year following termination of employment.

 

Our LTIP performance award agreements include standard provisions that result in the vesting or forfeiture of awards upon termination of employment, depending on the reason for termination.  These provisions are summarized as follows:

 

·                  Death results in calculation of an award as if the performance period ended on the date of death and payment to the employee’s beneficiary of a prorated amount based on the employee’s actual period of employment during the performance period;

 

·                  Change in control of the Company results in calculation of an award as if the performance period ended on the date change in control occurred and payment to the employee of that award without proration;

 

·                  Retirement or disability results in a payment after the end of the performance period equal to the amount that would have been earned over the entire performance period prorated based on the employee’s actual period of employment; and

 

·                  Termination of employment for any reason other than retirement, disability or death results in forfeiture of all award rights.

 

The following table shows the potential payment of LTIP performance awards and the potential value of unexercisable stock option awards for the NEOs upon death, retirement, disability, or change in control of the Company as of October 29, 2017.

 

POTENTIAL PAYMENTS UPON TERMINATION AT FISCAL 2017 YEAR END

 

Death

Retirement or Disability

Change in Control

Potential

Potential Value or Payment ($)(1)(3)

Potential

Value or Payment

Threshold

Target

Maximum

Value or Payment

Name

($)(1)(2)

($)

($)

($)

($)(1)(2)(4)

James P. Snee

   Stock Options

231,159

231,159

231,159

231,159

231,159

   LTIP award (6/15-6/18)

810,873

486,718

973,436

2,920,309

1,026,421

   LTIP award (6/16-6/19)

537,033

402,573

805,146

2,415,439

1,167,462

   LTIP award (6/17-6/20)

136,422

117,000

234,000

702,000

1,136,850

      Total

1,715,487

1,237,450

2,243,741

6,268,907

3,561,892

Steven G. Binder

   Stock Options

597,288

597,288

597,288

597,288

597,288

   LTIP award (6/15-6/18)

312,583

187,625

375,250

1,125,750

395,675

   LTIP award (6/16-6/19)

153,410

115,000

230,000

690,000

333,500

   LTIP award (6/17-6/20)

36,729

31,500

63,000

189,000

306,075

      Total

1,100,010

931,413

1,265,538

2,602,038

1,632,538

 

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Thomas R. Day

 

 

 

 

 

   Stock Options

304,688

304,688

304,688

304,688

304,688

   LTIP award (6/15-6/18)

157,937

94,800

189,600

568,800

199,920

   LTIP award (6/16-6/19)

85,910

64,400

128,800

386,400

186,760

   LTIP award (6/17-6/20)

22,737

19,500

39,000

117,000

189,475

      Total

571,272

483,388

662,088

1,376,888

880,843

James N. Sheehan

 

 

 

 

 

   Stock Options

139,059

139,059

139,059

139,059

139,059

   LTIP award (6/15-6/18)

166,341

99,845

199,689

599,067

210,558

   LTIP award (6/16-6/19)

107,534

80,610

161,220

483,660

233,769

   LTIP award (6/17-6/20)

26,235

22,500

45,000

135,000

218,625

      Total

439,169

342,014

544,968

1,356,786

802,011

Glenn R. Leitch

 

 

 

 

 

   Stock Options

331,533

331,533

331,533

331,533

331,533

   LTIP award (6/15-6/18)

171,098

102,700

205,400

616,200

216,580

   LTIP award (6/16-6/19)

92,046

69,000

138,000

414,000

200,100

   LTIP award (6/17-6/20)

24,136

20,700

41,400

124,200

201,135

      Total

618,813

523,933

716,333

1,485,933

949,348

 

(1)                                 Stock options are valued based on the difference between the $30.38 closing price of the Company’s stock on October 27, 2017, the last trading day of the fiscal year, and the applicable exercise price of the stock options.  Options with an exercise price in excess of the $30.38 closing price on October 27, 2017 have no value for this purpose.  Amounts shown for stock options represent the value of all unexercisable options.  Exercisable options would not be affected by this termination event.

 

(2)                                 Payments for LTIP performance awards upon death or change in control of the Company are based on actual Company performance through October 29, 2017.  Payments for such awards upon death are prorated based on employment from the beginning of the performance period through October 29, 2017.

 

(3)                                 Retirement or disability results in a payment for LTIP performance awards after the end of the performance period equal to the amount that would have been earned over the entire performance period prorated based on the employee’s actual period of employment.  These columns thus show the potential threshold, target and maximum payments for such awards, each prorated based on employment from the beginning of the performance period through October 29, 2017.  The actual payment would not be determined until after the performance period end date for each award.

 

(4)                                 For this table, it is assumed that the Compensation Committee exercised its discretion to accelerate vesting of all options upon a change in control of the Company.  Alternative assumptions which provide the same result are that the Committee exercised its discretion to permit the exchange of options for a cash payment or substitute options, in either case with a value equal to the difference between the closing price of the Company’s stock on October 27, 2017 (the last trading day of the fiscal year) and the applicable exercise price of the stock options.

 

Following termination of employment for any reason, our executive officers receive payment of retirement benefits and nonqualified deferred compensation benefits under the plans in which they participate. The value of those benefits are set forth in the sections above entitled “Pension Benefits” and “Nonqualified Deferred Compensation.”

 

Upon termination of employment caused by the death of an executive officer, the SIPE would provide a death benefit to the executive’s survivors.  The value of those benefits is described under “Survivor Income Protection Plan” on page 21.

 

ITEM 3 – ADVISORY VOTE ON EXECUTIVE COMPENSATION

 

The Company is providing stockholders an advisory vote on executive compensation as required by Section 14A of the Exchange Act and related SEC rules.  This advisory vote is commonly known as a “say-on-pay” vote.

 

The advisory vote on executive compensation is a non-binding vote on the compensation of the Company’s Named Executive Officers, as disclosed pursuant to the compensation disclosure rules of the SEC, including the Compensation Discussion and Analysis, compensation tables and narrative discussion set forth in this proxy statement.  The advisory vote on executive compensation is not a vote on the Company’s general compensation policies, compensation of the Company’s Board of Directors, or the Company’s compensation policies as they relate to risk management, as described under “Analysis of Risk Associated With Our Compensation Plans” on page 23.

 

The Company’s executive compensation programs are designed to attract, motivate and retain highly qualified executive officers who are able to achieve corporate objectives and create stockholder value.  The Compensation Committee believes

 

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Table of Contents

 

the Company’s executive compensation programs reflect a strong pay-for-performance philosophy and are well aligned with the stockholders’ long-term interests.    The Compensation Discussion and Analysis section starting on page 15 provides a more detailed discussion of the executive compensation programs.

 

The Compensation Committee believes the Company’s executive compensation programs have been effective at incenting the achievement of strong financial performance and long-term returns to stockholders.  Fiscal 2017 net earnings were $847 million, with $1.57 diluted EPS, the second most profitable year in the Company’s history. Net sales for fiscal 2017 were $9.2 billion, the second highest annual sales in the Company’s history.  In fiscal 2017 the Company achieved record operating margin, record operating cash flow, returned a record amount of cash back to stockholders, and increased its cash balance.  Our fourth quarter earnings release and annual report to stockholders provides more details on the Company’s financial performance.

 

The Company’s financial performance has led to superior returns to the Company’s stockholders over a longer-term horizon.  The chart below shows how the Company’s stock outperformed each of the Dow Jones Industrial Average, Standard & Poor’s 500 Index and Standard & Poor’s 500 Packaged Foods and Meat Index in total return for the five and ten-year periods ending October 27, 2017, the last trading day in fiscal 2017. The Company’s stock price has pulled back over approximately the last 18 months, resulting in total returns over the one, two and three-year periods ending October 27, 2017 which are below the peer companies included in the Standard & Poor’s 500 Packaged Foods and Meat Index, as shown in the chart below.  The Company believes this underperformance of the Company’s stock relates to the lower earnings in fiscal 2017 compared to fiscal 2016, our first down year in the last ten years.  The Company’s stock price has rebounded recently, moving from $30.38 as of October 27, 2017 to $37.10 as of December 6, 2017, an increase of 22%.

 

Ending 10/27/2017

1-Year

2-Year

3-Year

5-Year

10-Year

Hormel Foods

-18.9%

-4.0%

6.8%

17.7%

14.8%

Dow Jones Industrial Average

29.0%

15.2%

11.7%

12.3%

5.4%

S&P 500

23.9%

13.9%

11.9%

15.2%

7.6%

S&P 500 Packaged Foods and Meats

-8.0%

1.3%

7.7%

12.2%

10.3%

 

In November 2017, the Company announced a $.07 per share (10%) increase to its annual dividend rate, making the new dividend $0.75 per share. This represents the 52nd consecutive annual dividend increase and marked the ninth consecutive annual dividend increase of ten percent or more.

 

Stockholders are being asked to vote on the following resolution:

 

RESOLVED, that the stockholders of Hormel Foods Corporation approve, on an advisory basis, the compensation of the Company’s Named Executive Officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, compensation tables and narrative discussion set forth in the Company’s 2018 annual meeting proxy statement.

 

This advisory vote on executive compensation is not binding on the Company’s Board of Directors.  However, the Board of Directors will take into account the result of the vote when determining future executive compensation arrangements.

 

While the stockholder vote on this proposal is non-binding, the Board of Directors will consider stockholders to have approved the resolution if the number of shares voted for it exceeds the number of shares voted against it. The Board of Directors recommends a vote FOR adoption of the resolution approving the compensation of the Company’s NEOs as disclosed in this proxy statement.  Properly dated and signed proxies will be so voted unless stockholders specify otherwise.

 

ITEM 4 – APPROVE THE HORMEL FOODS CORPORATION 2018 INCENTIVE COMPENSATION PLAN

 

Introduction

 

On November 20, 2017, our Board of Directors, at the recommendation of our Compensation Committee (“Committee”), approved the Hormel Foods Corporation 2018 Incentive Compensation Plan (“2018 Plan”), subject to approval by our stockholders at our 2018 annual meeting.  The 2018 Plan will become effective on the date it is approved by our stockholders, and will replace the following existing incentive compensation plans of the company that equity and cash incentive awards are currently granted under: (1) the 2009 Long-Term Incentive Plan (“2009 Plan”), (2) the 2009 Nonemployee Director Deferred Stock Plan (“Director Deferred Plan”) and (3) the 2012 Operators’ Share Incentive Compensation Plan (“Operators’ Share Plan” and together with the 2009 Plan and the Director Deferred Plan, each an “Existing Plan” and collectively, the “Existing Plans”).  We do not grant any equity awards under any plan other than the Existing Plans.

 

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After the 2018 Plan becomes effective upon approval by our stockholders, no new awards will be made under any of the Existing Plans.  The number of shares of our common stock that may be the subject of awards and issued under the 2018 Plan is 20,000,000.  Awards outstanding under each Existing Plan as of the date the 2018 Plan becomes effective will continue to be subject to the terms of the applicable Existing Plan, but if those awards subsequently expire, are forfeited, canceled or terminated or are settled in cash, the shares subject to those awards will become available for awards under the 2018 Plan.

 

As of the close of business on December 6, 2017, a total of 28,443,795 shares were subject to outstanding awards under the Existing Plans, of which 28,298,182 shares were subject to outstanding stock options with a weighted average exercise price of $20.87 per share and a weighted average remaining contractual term of 5.44 years, 91,709 shares were subject to deferrals under the Director Deferred Plan, and 53,904 shares were subject to unvested restricted stock awards.  As of the same date, 45,242,717 shares in the aggregate were available for future awards under the Existing Plans.  Any shares remaining available for future awards under the Existing Plans as of the effective date of the 2018 Plan will not be carried over into the 2018 Plan.

 

Stockholder Approval and Board of Directors Recommendation

 

Stockholder approval of the 2018 Plan is being sought in order to satisfy the stockholder approval requirements of (i) the New York Stock Exchange, (ii) Section 162(m) of the Internal Revenue Code (“Code”) in order to permit compensation provided under the 2018 Plan to qualify as performance-based compensation, and (iii) Code Section 422 to enable options granted under the 2018 Plan to qualify as incentive stock options.

 

Our Board of Directors recommends that our stockholders vote FOR the 2018 Plan because it includes a number of features that we believe are consistent with the interests of our stockholders and sound corporate governance practices, and will provide us with a share reserve that will enable us to continue to provide a competitive mix of compensation to our key employees.  If the 2018 Plan is not approved by our stockholders, the Existing Plans will remain in effect, and we will remain subject to the existing share reserve of the 2009 Plan and the Director Deferred Plan.

 

Factors Considered in Setting Size of Requested Share Reserve

 

In setting the proposed number of shares reserved and issuable under the 2018 Plan, the Committee and our Board of Directors considered a number of factors, including the following:

 

Shares available and outstanding awards -  Under the heading “Equity Compensation Plan Information” on page 41, we provide information about the shares of our common stock that may be issued under the Existing Plans as of October 29, 2017, the end of our most recent fiscal year.  To facilitate approval of the 2018 Plan, we are providing updated information as of December 6, 2017.

 

As of the close of business on December 6, 2017, there were 529,681,456 shares of our common stock issued and outstanding.  The closing sale price of a share of our common stock on the New York Stock Exchange on that date was $37.10.  The following table summarizes information regarding awards outstanding and shares remaining available for grant under the Existing Plans as of the close of business on December 6, 2017:

 

 

Shares Subject to Outstanding
Option Awards

Shares Subject to Outstanding Full
Value Awards
(1)

 

 

Performance-
Based Vesting

Time-Based
Vesting

Performance-
Based Vesting

Time-Based
Vesting

Shares Remaining
Available for Future
Grant
(2)

 

_

28,298,182(3)

_

145,613(4)

45,242,717

Weighted Average Exercise Price of Options

_

$20.87

_

_

_

Weighted Average Remaining Term of Options (Years)

_

5.44

_

_

_

 

___________________________

 

(1)          “Full value” awards are equity awards other than stock options and stock appreciation rights.

 

(2)          Each Existing Plans’ share reserve is reduced by one share for each share subject to each form of award granted, both options and full value awards.

 

(3)          Of the number of shares shown, 22,231,857 are subject to the vested portions of outstanding options and 6,066,325 are subject to the unearned and unvested portions of outstanding options.

 

(4)          Of the number of shares shown, 91,709 are subject to the vested portions of outstanding full value awards (representing deferrals under the Director Deferred Plan) and 53,904 are subject to the unearned and unvested portions of outstanding full value awards (representing restricted shares held by nonemployee directors).

 

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Historical equity granting practices -  Our three-year average “burn rate” was 0.51% for fiscal years 2015 through 2017.  We define burn rate as the total number of shares subject to awards granted to participants in a single year expressed as a percent of our basic weighted average common shares outstanding for that year. This compares to the 2017 Standard & Poor’s 500 Food, Beverage and Tobacco Industry burn rate benchmark of 2.00% and proxy advisory firm Institutional Shareholder Services’ policy that the burn rate should be at 50% of the benchmark guidance for our industry classification (i.e., 1.00% in this case) or less.

 

Estimated duration of shares available for issuance under the 2018 Plan -  Based on the 20,000,000 shares to be reserved under the 2018 Plan and our three-year average burn rate as described above, we expect that the requested share reserve will cover awards for approximately five years.

 

Expected dilutionAs of December 6, 2017, our existing voting power dilution under the Existing Plans and all predecessor equity incentive plans (collectively, the “Prior Plans”) was 14%.  We define existing voting power dilution as the sum of (i) the total number of shares of our common stock subject to outstanding awards under the Prior Plans and (ii) the total number of shares available for future grants under the Existing Plans, divided by the fully diluted number of common shares outstanding. In light of the expected duration of 2018 Plan’s share reserve, we believe that the expected dilution that will result from the 2018 Plan is reasonable for a company of our size in our industry.

 

Expectations regarding future share usage under the 2018 Plan are based on a number of assumptions regarding factors such as future growth in the population of eligible participants, the rate of future compensation increases, the rate at which shares are returned to the 2018 Plan reserve through forfeitures, cancellations and the like, the level at which performance-based awards pay out, and our future stock price performance.  While the Committee believes that the assumptions utilized are reasonable, future share usage will differ to the extent that actual events differ from our assumptions.

 

Key Compensation Practices

 

The 2018 Plan includes a number of features that we believe are consistent with the interests of our stockholders and sound corporate governance practices, including the following:

 

No repricing of underwater options or stock appreciation rights without stockholder approval -  The 2018 Plan prohibits, without stockholder approval, actions to reprice, replace, or repurchase options or stock appreciation rights (“SARs”) when the exercise price per share of an option or SAR exceeds the fair market value of the underlying shares.

 

No discounted option or SAR grants -  The 2018 Plan requires that the exercise price of options or SARs be at least equal to the fair market value of our common stock on the date of grant (except in the limited case of “substitute awards” as described below).

 

Minimum vesting or performance period for all awards -  A minimum vesting or performance period of one year is prescribed for all awards, subject only to limited exceptions.

 

Conservative share recycling provisions -  We may not add back to the 2018 Plan’s share reserve shares that are delivered or withheld to pay the exercise price of an option award or to satisfy a tax withholding obligation in connection with any awards, shares that we repurchase using option exercise proceeds and shares subject to a SAR award that are not issued in connection with the stock settlement of that award upon its exercise.

 

No liberal definition of “change in control” -  No change in control would be triggered by stockholder approval of a business combination transaction, the announcement or commencement of a tender offer or any board assessment that a change in control may be imminent.

 

No automatic accelerated vesting of equity awards upon a change in control. -  The 2018 Plan does not provide for automatic accelerated vesting of equity awards upon a change in control.

 

Net best parachute payment limitation -  The 2018 Plan provides that if any benefits provided to a participant under the 2018 Plan or other Company compensation arrangements in connection with a change in control would constitute “parachute payments” within the meaning of Code Section 280G and result in the imposition of an excise tax on the participant under Code Section 4999, then the amount of such payments and benefits will either (i) be reduced to the extent necessary to avoid characterization as parachute payments and the imposition of the excise tax, or (ii) be paid in full and remain subject to the imposition of the excise tax, whichever results in the participant’s receipt on an after-tax basis of the greatest amount of payments and benefits.

 

Limit on nonemployee director awards -  Equity awards to each nonemployee director are subject to an annual grant date fair value limit.

 

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Description of the 2018 Incentive Compensation Plan

 

The major features of the 2018 Plan are summarized below. The summary is qualified in its entirety by reference to the full text of the 2018 Plan, which is attached to this proxy statement as Appendix A.

 

Eligible Participants -  Employees, consultants and advisors of the Company or any subsidiary, as well as nonemployee directors of the Company, will be eligible to receive awards under the 2018 Plan.  As of December 6, 2017, there were approximately 20,000 employees of the Company and its subsidiaries, 12 nonemployee directors of the Company and an indeterminate number of consultants and advisors who would be eligible to receive awards under the 2018 Plan.

 

Administration -  The 2018 Plan will be administered by the Committee.  To the extent consistent with applicable law, the Committee may delegate its duties, power and authority under the 2018 Plan to any one or more of its members or, with respect to awards to participants who are not themselves our directors or executive officers, to one or more of our other directors or executive officers or to a committee of the Board comprised of one or more directors.  The Committee may also delegate non-discretionary administrative duties to other persons, agents or advisors as it deems advisable.

 

The Committee has the authority to determine the persons to whom awards will be granted, the timing of awards, the type and number of shares covered by each award, the terms, conditions, performance criteria and restrictions of the awards as well as the manner in which awards are paid and settled. The Committee may also establish, rescind and modify rules to administer the 2018 Plan, adopt subplans or special provisions applicable to certain awards, interpret the 2018 Plan, any subplan and any related award agreement, reconcile any inconsistency, correct any defect or supply an omission in the 2018 Plan, any subplan and any related award agreement, cancel or suspend an award, determine in what circumstances an award shall be forfeited, accelerate the vesting or extend the exercise period of an award, otherwise amend the terms of outstanding awards to the extent permitted under the 2018 Plan, grant substitute awards in accordance with the 2018 Plan, and require or permit the deferral of the settlement of an award. Unless an amendment to the terms of an award is necessary to comply with applicable laws, stock exchange rules or any compensation recovery policy as provided in the 2018 Plan, a participant whose rights under an affected award would be materially impaired by such an amendment must consent to the amendment.

 

Except in connection with equity restructurings and other situations in which share adjustments are specifically authorized, the 2018 Plan prohibits the Committee from repricing any outstanding option or SAR awards without the prior approval of our stockholders.  For these purposes, a “repricing” includes amending the terms of an option or SAR award to lower the exercise price, canceling an option or SAR award in conjunction with granting a replacement option or SAR award with a lower exercise price, canceling an option or SAR award in exchange for cash, other property or grant of a new full value award at a time when the per share exercise price of the option or SAR award is greater than the fair market value of a share of our common stock, or otherwise making an option or SAR award subject to any action that would be treated under accounting rules as a “repricing.”

 

Subject to certain limitations set forth in the 2018 Plan, the Committee may also modify the terms of awards under the 2018 Plan with respect to participants who reside outside of the United States or who are employed by a non-U.S. subsidiary of the Company in order to comply with local legal or regulatory requirements.

 

Available Shares and Limitations on Awards -  A maximum of 20,000,000 shares of our common stock may be the subject of awards and issued under the 2018 Plan.  The shares of common stock issuable under the 2018 Plan are authorized but unissued shares and treasury shares.  Under the terms of the 2018 Plan, the number of shares of common stock subject to options or SARs that may be granted to any one participant (other than a nonemployee director) during a calendar year may not exceed 750,000.  With respect to performance-based compensation, the number of shares subject to full value awards that are denominated in shares or share equivalents that may be granted to any one participant during any calendar year may not exceed 500,000 and the maximum amount payable with respect to full value awards that are not denominated in shares or share equivalents and to cash incentive awards that may be granted to any one participant during any calendar year may not exceed $20,000,000.  The aggregate grant date fair value of awards granted under the 2018 Plan during a calendar year to any one of our nonemployee directors (excluding awards granted at his or her election in lieu of any portion of retainers or fees otherwise payable in cash) may not exceed $500,000.  The share limitations under the 2018 Plan are subject to adjustment for changes in our corporate structure or shares, as described below.

 

Shares of common stock that are issued under the 2018 Plan or that are potentially issuable pursuant to outstanding awards will reduce the 2018 Plan’s share reserve by one share for each share issued or issuable pursuant to an option, SAR award or a full value award.

 

Any shares of common stock subject to an award under the 2018 Plan, or to an award under an Existing Plan that is outstanding on the date our stockholders approve the 2018 Plan, that expires, is cancelled or forfeited or is settled or paid in cash will, to the extent of such expiration, cancellation, forfeiture or cash settlement, automatically replenish the 2018 Plan share reserve and become available for future awards.  Any shares of common stock issuable during the term of the 2018

 

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Plan as a result of the reinvestment of dividends or the deemed reinvestment of dividend equivalents in connection with an award under the 2018 Plan or any prior plan that are forfeited also will automatically replenish the 2018 Plan share reserve to the extent of such forfeiture and become available for future awards. However, any shares tendered or withheld to pay the exercise price or satisfy a tax withholding obligation in connection with any award, any shares repurchased by the Company using option exercise proceeds and any shares subject to a SAR award that are not issued in connection with the stock settlement of the SAR award upon its exercise may not be used again for new grants.

 

Awards that may be settled solely in cash will not reduce the share reserve under the 2018 Plan and will not reduce the shares authorized for grant to a participant in each calendar year.  Awards granted or shares of our common stock issued under the 2018 Plan upon the assumption of, or in substitution or exchange for, outstanding equity awards previously granted by an entity acquired by us or any of our affiliates or with which we or any of our affiliates combines (referred to as “substitute awards”) will not reduce the share reserve under the 2018 Plan and will not reduce the shares authorized for grant to a participant in each calendar year.

 

Additionally, if a company acquired by us or any of our subsidiaries or with which we or any of our subsidiaries combines has shares available under a pre-existing plan approved by its stockholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of that pre-existing plan may be used for awards under the 2018 Plan and shall supplement the share reserve under the 2018 Plan, but only if the awards are made to individuals who were not employed by, or serving as a nonemployee director of, us or any of our subsidiaries immediately prior to such acquisition or combination.

 

Share Adjustment Provisions - If certain transactions with our stockholders occur that cause the per share value of our common stock to change, such as stock dividends, stock splits, spin-offs, rights offerings or certain recapitalizations (referred to as “equity restructurings”), the Committee will equitably adjust (i) the aggregate number and kind of shares or other securities issued or reserved for issuance under the 2018 Plan, (ii) the number and kind of shares or other securities subject to outstanding awards, (iii) the exercise price of outstanding options and SAR awards, and (iv) award limitations prescribed by the 2018 Plan.  Other types of transactions may also affect our common stock, such as a reorganization, merger, consolidation or partial or complete liquidation of our Company.  If there is such a transaction and the Committee determines that adjustments of the type previously described in connection with equity restructurings would be appropriate to prevent any dilution or enlargement of benefits under the 2018 Plan, the Committee may make such adjustments as it deems equitable.

 

Types of Awards -  The 2018 Plan permits us to award stock options, SARs, restricted stock awards, stock unit awards, other stock-based awards and cash incentive awards to eligible recipients. These types of awards are described in more detail below.

 

Options -  Employees of our Company or any subsidiary may be granted options to purchase common stock that qualify as “incentive stock options” within the meaning of Section 422 of the Code, and any eligible recipient may be granted options to purchase common stock that do not qualify as incentive stock options, referred to as “nonqualified stock options.” The per share exercise price to be paid by a participant at the time an option is exercised may not be less than 100% of the fair market value of one share of our common stock on the date of grant, unless the option is granted as a substitute award as described earlier. “Fair market value” under the 2018 Plan as of any date generally means the closing sale price of a share of our common stock on the New York Stock Exchange on that date. As of December 5, 2017, the closing sale price of a share of our common stock on the New York Stock Exchange was $37.10.

 

The total purchase price of the shares to be purchased upon exercise of an option will be paid by the participant in cash unless the Committee permits exercise payments to be made, in whole or in part, (i) by means of a broker-assisted sale and remittance program, (ii) by delivery to us (or attestation as to ownership) of shares of common stock already owned by the participant, or (iii) by a “net exercise” of the option in which a portion of the shares otherwise issuable upon exercise of the option are withheld by us. Any shares delivered or withheld in payment of an exercise price will be valued at their fair market value on the exercise date and have an aggregate value equal to the purchase price of the shares being purchased.

 

An option will vest and become exercisable at such time, in such installments and subject to such conditions as may be determined by the Committee, and no option may have a term greater than 10 years from its date of grant.  No dividends or dividend equivalents may be paid or credited with respect to shares subject to an option award.

 

The aggregate fair market value of shares of our common stock with respect to which incentive stock options granted to any participant may first become exercisable during any calendar year may not exceed $100,000.  Any incentive stock options that become exercisable in excess of this amount will be treated as nonqualified stock options.  The maximum number of shares that may be issued upon the exercise of incentive stock option awards under the 2018 Plan is 20,000,000.

 

Stock Appreciation Rights -  A SAR award provides the right to receive a payment from us equal to the difference between (i) the fair market value as of the date of exercise of the number of shares of our common stock as to which the SAR is

 

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being exercised, and (ii) the aggregate exercise price of that number of shares.  The Committee determines whether payment will be made in shares of our common stock, cash or a combination of both.  The exercise price per share of a SAR award will be determined by the Committee, but may not be less than 100 percent of the fair market value of one share of our common stock on the date of grant, unless the SAR is granted as a substitute award as described earlier.  No dividends or dividend equivalents may be paid or credited with respect to shares subject to a SAR award.  A SAR award may not have a term greater than 10 years from its date of grant, and will be subject to such other terms and conditions, consistent with the terms of the 2018 Plan, as may be determined by the Committee.

 

Restricted Stock Awards -  A restricted stock award is an award of our common stock that vests at such times and in such installments as may be determined by the Committee.  Until it vests, the shares subject to the award are subject to restrictions on transferability and the possibility of forfeiture.  The Committee may impose such restrictions or conditions to the vesting of restricted stock awards as it deems appropriate, including that we, or any of our subsidiaries or business units, satisfy specified performance goals.  Unless otherwise provided in an award agreement, any dividends or distributions payable with respect to shares that are subject to the unvested portion of a restricted stock award will be subject to the same restrictions and risk of forfeiture as the shares to which such dividends or distributions relate. Participants are entitled to vote restricted shares prior to the time they vest.

 

Stock Unit Awards -  A stock unit award is a right to receive the fair market value of a specified number of shares of our common stock, payable in cash, shares, or a combination of both, that vests at such times, in such installments and subject to such conditions as may be determined by the Committee.  Until it vests, a stock unit award is subject to restrictions and the possibility of forfeiture.  Stock unit awards will be subject to such terms and conditions, consistent with the other provisions of the 2018 Plan, as may be determined by the Committee. The Committee may provide for the payment of dividend equivalents on stock unit awards and other stock-based awards, but unless otherwise provided in an award agreement, any such dividend equivalents will be subject to the same restrictions and risk of forfeiture as the underlying units or other share equivalents to which such dividend equivalents relate.

 

Other Stock-Based Awards -  The Committee may grant awards of common stock and other awards that are valued by reference to and/or payable in shares of our common stock under the 2018 Plan.  The Committee has discretion in determining the terms and conditions of such awards.

 

Cash Incentive Awards -  A cash incentive award shall be considered a performance-based Award, and its payment shall be contingent upon the degree to which one or more specified performance goals have been achieved over the specified performance period.  The Committee may grant cash incentive awards in the dollar amounts, at the times and subject to such terms and conditions as it determines in its discretion. Following the completion of the applicable performance period and the vesting of a cash incentive award, payment shall be made at such time or times in the form of cash, shares or other forms of awards under the 2018 Plan (valued for these purposes at their grant date fair value) or some combination thereof as determined by the Committee and specified in the applicable subplan or Agreement.

 

Minimum Vesting Periods -  Awards that vest based solely on the satisfaction of service-based vesting conditions are subject to a minimum vesting period of one year from the date of grant, and awards whose grant or vesting is subject to performance-based vesting conditions must be subject to a performance period of not less than one year.  These required vesting and performance periods will not apply: (i) to awards granted to our nonemployee directors in payment of or in exchange for other compensation that is already earned and payable, (ii) upon a change in control, (iii) upon termination of service due to death, disability or retirement, (iv) to a substitute award that does not reduce the vesting period of the award being replaced, or (v) to awards involving an aggregate number of shares not in excess of 5 percent of the 2018 Plan’s share reserve.  For purposes of awards made to nonemployee directors, a vesting period will be deemed to be one year if it runs from the award grant date of February 1 to the date of the next annual meeting of the company’s stockholders. Generally vesting will be suspended during any unpaid leave of absence.

 

Transferability of Awards -  In general, no right or interest in any award under the 2018 Plan may be sold, assigned, transferred, exchanged or encumbered by a participant, voluntarily or involuntarily, except by will or the laws of descent and distribution. However, the Committee may provide that an award (other than an incentive stock option) may be transferable by gift to a participant’s family member or pursuant to a domestic relations order.  Any permitted transferee of such an award will remain subject to all the terms and conditions of the award applicable to the participant.

 

Performance-Based Compensation Under Section 162(m) -  The Committee may grant full value awards or cash incentive awards under the 2018 Plan to employees who are or may be “covered employees” as defined in Section 162(m) of the Code, that are intended to be “performance-based compensation” within the meaning of Section 162(m), in order to preserve the deductibility of those awards for federal income tax purposes.  Under current IRS interpretations, “covered employees” of a company for any year are its chief executive officer and any other executive officer (other than the chief financial officer) who is among the three other most highly compensated executive officers employed by the company at a year end.  Participants are entitled to receive payment for a Section 162(m) performance-based award for any given

 

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 performance period only to the extent that pre-established performance goals set by the Committee for the performance period are satisfied. Options and SAR awards granted under the 2018 Plan need not be conditioned upon the achievement of performance goals in order to constitute performance-based compensation for Section 162(m) purposes.

 

The pre-established performance goals set by the Committee must be based on one or more of the following performance measures specified in the 2018 Plan: (i) net earnings or net income; (ii) earnings before one or more of interest, taxes, depreciation, amortization and share-based compensation expense; (iii) earnings per share (basic or diluted); (iv) earnings from continuing operations; (v) revenue; (vi) gross profit or profit; (vii) operating income; (viii) profitability as measured by return ratios (including, but not limited to, return on actual or pro forma assets, net assets, return on equity, return on invested capital and return on revenue) or by the degree to which any of the foregoing earnings measures exceed a percentage of revenue or gross profit; (ix) cash generation or cash flow (including, but not limited to, operating cash flow, free cash flow and cash flow return on capital); (x) market share; (xi) margins (including, but not limited to, one or more of gross, operating, net income and net earnings margins); (xii) stock price; (xiii) total stockholder return; (xiv) asset quality; (xv) asset management; (xvi) non-performing assets; (xvii) operating assets; (xviii) tonnage; (xix) balance of cash, cash equivalents and marketable securities; (xx) cost and/or expense levels; (xxi) unit volume; (xxii) economic value added or similar value added measurements; (xxiii) improvement in or attainment of working capital levels; (xxiv) strategic plan development and implementation; (xxv) productivity ratios; (xxvi) employee retention or satisfaction measures; (xxvii) safety record; (xxviii) customer satisfaction; (xxix) debt, credit or other leverage measures or ratios; and (xxx) implementation or completion of critical projects. Any performance goal based on one or more of the foregoing performance measures may be expressed in absolute amounts, on a per share basis (basic or diluted), relative to one or more other performance measures, as a growth rate or change from preceding periods, or as a comparison to the performance of specified companies, indices or other external measures, and may relate to one or any combination of Company, subsidiary, division, segment, business unit, operational unit or individual performance in the discretion of the Committee.

 

For each performance-based award, the Committee will select the applicable performance measure(s) from the list in the preceding paragraph, specify the performance goal(s) based on those performance measures for any performance period, specify in terms of an objective formula or standard the method for calculating the amount payable to a participant if the performance goal(s) are satisfied, and certify the degree to which applicable performance goals have been satisfied and any amount that vests and is payable in connection with such award, all within the time periods prescribed by and consistent with the other requirements of Code Section 162(m).  When specifying performance goals in an award, the Committee may provide that one or more objectively determinable adjustments shall be made to the performance measures on which the performance goals are based, which may include adjustments that would cause such measures to be considered “non-GAAP” financial measures. The Committee may also adjust performance measures for a performance period in connection with an equity restructuring or other changes in corporate capitalization to prevent the dilution or enlargement of benefits under the performance-based compensation, if the adjustment will not cause the award to fail to qualify as “performance-based compensation” under Section 162(m). In determining the actual amount to be paid with respect to an individual performance-based award for a performance period, the Committee may reduce (but not increase) the amount that would otherwise be payable in connection with an award as a result of satisfying the applicable performance goals.

 

Approval of the 2018 Plan at our 2018 annual meeting of stockholders will be deemed to include approval of the material terms of awards intended to qualify as performance-based compensation under Section 162(m), including the performance measures on which performance goals may be based, the maximum awards that may be made to any individual, the eligibility of executive officers and other employees to participate in the 2018 Plan, and the qualification of option and SAR awards granted under the 2018 Plan as “performance-based compensation” for purposes of Section 162(m).

 

Change in Control -  If a change in control of the Company that involves a corporate transaction occurs, then the consequences will be as described below unless the Committee provides otherwise in an applicable award or other agreement with a participant.  If outstanding awards are continued, assumed or replaced by the surviving or successor entity in connection with a corporate transaction, and if within twenty-four months after the corporate transaction a participant’s employment or other service is involuntarily terminated without cause, (i) each of the participant’s outstanding options and SARs will become exercisable in full and remain exercisable for one year, and (ii) each of the participant’s unvested full value awards will fully vest.  For these purposes, a performance-based full value award will be considered fully vested if the performance goals are deemed to have been satisfied at the target level of performance and the vested portion of the award at that level of performance is proportionate to the portion of the performance period elapsed prior to the participant’s termination of employment or other service.

 

If any outstanding award is not continued, assumed or replaced in connection with a change in control involving a corporate transaction, then (i) all outstanding options and SARs will become fully exercisable for a period of time prior to the effective time of the corporate transaction and will then terminate at the effective time of the corporate transaction, and (ii) all full value awards will fully vest immediately prior to the effective time of the corporate transaction.  In this scenario, performance-based awards will be considered fully vested in the same manner as described above, except that the

 

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proportionate vesting amount will be determined with respect to the portion of the performance period that elapsed prior to the time of the corporate transaction.  Alternatively, if outstanding awards are not continued, assumed or replaced, the Committee may elect to cancel such awards at or immediately prior to the effective time of the corporate transaction in exchange for a payment with respect to each award in an amount equal to the excess, if any, between the fair market value of the shares subject to the award immediately prior to the effective date of such corporate transaction (which may be the fair market value of the consideration that would otherwise be received in the corporate transaction for the same number of shares) over the aggregate exercise price (if any) for the shares subject to such award (or, if there is no excess, such award may be terminated without payment).

 

In the event of a change in control of the Company that does not involve a corporate transaction, the Committee may, in its discretion, take such action as it deems appropriate with respect to outstanding awards, which may include (i) making such adjustments or modifications to the awards then outstanding as the Committee deems appropriate, which may include acceleration of vesting in full or in part, or (ii) providing for the cancellation of any outstanding award in exchange for a payment in an amount determined in the same manner as described in the preceding paragraph. The Committee is not required to treat all awards similarly in such circumstances.

 

The 2018 Plan also provides that if any payments or benefits provided to a participant under the 2018 Plan or any other Company compensation programs or arrangements in connection with a change in control would constitute “parachute payments” within the meaning of Code Section 280G, and would otherwise result in the imposition of an excise tax under Code Section 4999, then the amount of such payments and benefits will either (i) be reduced to the extent necessary to avoid characterization as parachute payments and the imposition of the excise tax, or (ii) be paid in full and remain subject to the imposition of the excise tax, whichever results in the participant’s receipt on an after-tax basis of the greatest amount of payments and benefits.

 

For purposes of the 2018 Plan, the following terms have the meanings indicated: