Compensation Discussion and Analysis

Compensation Discussion and Analysis

Introduction

The following Compensation Discussion and Analysis (“CD&A”) provides a detailed description of our executive compensation objectives, philosophy, practices and programs as well as how the Compensation Committee determines executive compensation under those programs. In particular, this CD&A provides information related to each of the following aspects of our executive compensation program: (1) the objectives and philosophy of our executive compensation program, (2) our executive compensation oversight, processes and criteria, (3) the components of our compensation program, and (4) how each component fits into our overall compensation objectives.

Our CD&A focuses on the compensation of our named executive officers for fiscal year 2016, who were: (1) Susan R. Salka, President and Chief Executive Officer, (2) Brian M. Scott, Chief Financial Officer, Chief Accounting Officer and Treasurer, (3) Ralph S. Henderson, President, Professional Services and Staffing, and (4) Denise L. Jackson, Senior Vice President, General Counsel & Secretary. The Compensation Committee believes that our named executive officers are collectively a strong, valuable, experienced, skilled and innovative team with a passion for the Company and its business and for delivering value to stockholders.

Executive Summary

Our CD&A focuses on the compensation of our named executive officers for fiscal year 2016, who were: (1) Susan R. Salka, President and Chief Executive Officer, (2) Brian M. Scott, Chief Financial Officer, Chief Accounting Officer and Treasurer, (3) Ralph S. Henderson, President, Professional Services and Staffing, and (4) Denise L. Jackson, Senior Vice President, General Counsel & Secretary. The Compensation Committee believes that our named executive officers are collectively a strong, valuable, experienced, skilled and innovative team with a passion for the Company and its business and for delivering value to stockholders.

  • Pay for performance, with variable pay constituting a significant portion of total compensation, 
  • Create commonality of interest between our executives and stockholders by tying realized compensation directly to changes in shareholder value,
  • Support the attainment of our short- and long-term financial and strategic objectives, and 
  • Attract, retain and motivate highly skilled and innovative executives who will lead us to be the thought leader and driver of innovation within our industry.

In support of our executive compensation objectives, we provide an executive compensation program that includes (1) base salary, (2) annual bonuses, and (3) long-term incentive awards.

We highlight below some of our “do’s” and “don’ts” as it relates to our executive compensation program for our named executive officers.

 What We Do
Executive Compensation Philosophy. We maintain an Executive Compensation Philosophy for the Company, which we reviewed and revised in April 2016, to capture our evolving thoughts on executive compensation.
Align Pay with Our Performance. Our named executive officer pay is aligned with actual total shareholder returns and our financial performance, with variable pay constituting between 65% to 80% of named executive officer compensation in 2016.
Reward Increases in Shareholder Value. We grant performance restricted stock units (“PRSUs”) based on absolute and relative total shareholder return (“TSR PRSUs”) over a three-year performance period, which is intended to reward named executive officers for above market stock performance (relative to companies in the Russell 2000 Index) or hold them accountable for relatively poor stock performance (relative to companies in the Russell 2000 Index).
Grant PRSUs that Focus on Our Long-Term Goals. We grant PRSUs based on our long-term AEBITDA margin goals (“AEBITDA PRSUs”).
Require Stock Ownership. We maintain meaningful stock ownership guidelines under which our CEO is required to hold shares of Common Stock equal in value to three times her base salary and other named executive officers are required to hold shares of Common Stock equal in value to two times their annual base salary.
Cap Incentive Awards. We maintain a cap on annual bonus awards for our named executive officers under our Senior Management Incentive Bonus Plan, as amended and restated (the “Bonus Plan”).
Bonus Awards Based on Objective and Key Financial Metrics. 70% of our Bonus Plan target for each named executive officer is based on achieving our annual revenue and AEBITDA targets, two key financial metrics for the Company. The remaining 30% is based on objective non-financial criteria such as execution on key initiatives.
Utilize Independent Compensation Consultant. Our Compensation Committee utilizes the services of an independent and reputable compensation consultant who provides recommendations on CEO pay and other named executive officers directly to the Compensation Committee.
Responsible Use of Shares. We are judicious in the granting of shares under our Equity Plan, as amended and restated (the “Equity Plan”), and we believe our share utilization rate under our Equity Plan falls below industry norms.
Regularly Review Our Peer Group.We regularly review our designated peer group to ensure that our compensation program is properly aligned with the actual peers with which we compete for talent and business.
 What We Don't Do
No Risky Programs. We do not engage in compensation programs that create undue risk.
No Pledges or Hedges of, or Liens on, Our Common Stock. We prohibit the pledging of, or hypothecating, or otherwise placing a lien on, any Common Stock or other equity interests of the Company. We also prohibit hedging.
No Employment Contracts Other than with CEO. We do not provide employment contracts other than for our CEO.
No Perquisites. We generally provide no perquisites to named executive officers.
No Tax Gross-ups. We have committed to cease entering into new employment or other agreements with tax gross-ups for named executive officers.
No Options or SARs. We have not granted equity awards in the form of options or SARs since 2010.

2016 Financial, Operational and Stock Performance Highlights

A long-standing principle of our executive compensation program is to link pay to performance. Accordingly, when making compensation decisions, we analyze our financial, operational and stock performance and execution on our strategic initiatives. As set forth below, the Company delivered strong financial and stock performance in 2016 and continued to make significant progress on our long-term strategic goals.(1)

Highlights for 2016 included:

  • The price of our Common Stock increased 24% in 2016, from $31.05, the closing price on December 31, 2015, to$38.45, the closing price on December 30, 2016 (the last trading day of the year), which brought our cumulative total shareholder return for the last three years (i.e., since December 31, 2013) to 162%. Utilizing the metrics for our TSR PRSU award, we ranked in the 97th percentile in total shareholder return for the three-year period ended December 31, 2016 among companies comprising the Russell 2000 Index as of December 31, 2013. 
  • Our consolidated AEBITDA(2) increased year over year 43%, from $165.2 million to $236.9 million, which exceeded our 2016 operating plan (“2016 Ops Plan”) target of $199.3 million by 19%. 
  • Our annual consolidated AEBITDA margin(3) increased 120 basis points year over year, from 11.3% to 12.5%.
  • Our consolidated revenue increased 30% year over year, from $1.46 billion to $1.90 billion, which exceeded our 2016 Ops Plan target by 10%. 
  • We expanded our workforce solutions offerings to include remote medical coding and related health information management with our acquisition of Peak Health Solutions. We also acquired and integrated HealthSource Global Staffing, a crisis staffing response company. 
  • We successfully integrated our acquisitions of B.E. Smith, MillicanSolutions and The First String Healthcare, and became a leading provider of executive and clinical leadership interim staffing and healthcare executive search services. 
  • We provided for more flexibility in our capital structure by selling $325 million of senior notes at what we believe to be a very attractive interest rate, which allows us the ability and flexibility to opportunistically pursue potential acquisitions. 
  • We implemented a share repurchase program of up to$150 million and repurchased 443,353 shares of our Common Stock at an aggregate cost of $13.3 million. 
  • We continued to make progress on our long-term initiative of significantly upgrading our front and back office technology platforms in order to deliver best-in-class client and healthcare professional experiences and optimize the efficiency of our business operations converting our local staffing division to these new platforms.

The following charts compare our year-over-year performance on certain financial metrics that we utilized in making compensation decisions for our named executive officers in 2016.

Screen Shot 2017-03-08 at 4.17.33 PM

(1) For more detail regarding our financial results, please see our 2016 annual report on Form 10-K filed by us with the SEC on February 17, 2017 and provided to you concurrently with this proxy statement. We provide the summary financial information in this proxy statement solely to help you in your evaluation and review of our CD&A. It should not be used as a substitute for a review of the detailed financial information in our 2016 annual report on Form 10-K.
(2) For information on AEBITDA, which stands for adjusted earnings before interest, taxes, depreciation and amortization, and a reconciliation of it to our net income for 2016, please see Exhibit B to this proxy statement (page B-1).
(3) AEBITDA margin represents, as a percentage, AEBITDA divided by consolidated revenue.

The Compensation Committee placed considerable emphasis on our total shareholder return and financial and operational performance over the past 12 months in determining our CEO’s 2016 cash bonus as well as her 2016 equity award. Because certain compensation information included in this proxy statement spans the last three fiscal years, we have set forth below our cumulative total shareholder return and compound annual growth rate for the one-, two- and three-year periods ended December 31, 2016.

cumulativeshareholderreturn

(1) The price of our Common Stock on December 30, 2016 (the last trading day of the year) was $38.45. Cumulative total shareholder return is the percentage increase in the closing price of our Common Stock on the trading day at the end of the relevant investment period from the closing price of our Common Stock on the last trading day of the year preceding the beginning of the applicable period. We did not pay any dividends during the periods set forth in this table.

2016 Compensation for Our Named Executive Officers

Numerous factors influenced our compensation decisions for 2016 with the customary overarching goal of closely linking pay to performance. In 2016, performance-based cash incentives and equity compensation (which is inherently linked to performance) comprised 80% of our CEO’s compensation, and over two-thirds of the total compensation for each of our other named executive officers. The chart set forth below illustrates the percentage breakdown of our 2016 CEO compensation as set forth in the Summary Compensation Table.

Screen Shot 2017-03-08 at 4.20.08 PM

As the Compensation Committee has consistently done throughout the past several years, it based its 2016 compensation decisions around financial goal setting for 2016 and other actions influencing executive compensation on the expectation that (1) we would achieve market-leading revenue and AEBITDA growth on a consolidated basis and within each of our business segments, and (2) our named executive officers would lead their teams to successfully execute our business strategy in a manner that reflected our core values. Because of, among other things, our excellent operational and financial performance and total shareholder return as well as the continued significant progress made on our strategic initiatives, each named executive officer received 181% to 194% of his or her 2016 target bonus.

We set forth below the breakdown of each named executive officer’s compensation for 2016 as taken from the Summary Compensation Table.

Screen Shot 2017-03-08 at 4.21.31 PM

Response to 2016 Say-on-Pay Vote

At our 2016 Annual Meeting of Stockholders held on April 20, 2016, we received approximately 95% support on our “say-on-pay” proposal regarding the executive compensation of our named executive officers identified in our 2016 proxy statement. Our compensation program has remained consistent with that set forth in our 2016 proxy statement. We believe the following four themes remain important among our investors: (1) compensation should correlate to company performance, (2) performance awards should constitute an important component of long-term incentive awards,(3) performance measures beyond total shareholder return should be considered and (4) variable compensation should be designed to incent, reward and retain executives.

The Compensation Committee believes that our executive compensation program in 2016 satisfied each of the four themes identified above. In 2016, the Compensation Committee took the following actions:

  1. Continued to use a long-term performance vehicle tied to our total shareholder return,
  2. Utilized an additional performance measure for long-term performance compensation beyond total shareholder return, AEBITDA PRSUs,
  3. Established significantly increased, yet achievable, goals of 18.3% and 20.7% year-over-year consolidated revenue and AEBITDA growth, respectively, that we needed to satisfy for the named executive officers to receive their target bonuses,
  4. Modestly adjusted base salaries upward in 2016 to reflect cost of living increases and to reward good performance, and
  5. Continued to reward named executive officers for strong financial, operational and Common Stock performance through the use of reasonable, competitive amounts of incentive based compensation.

The Compensation Committee took actions similar to those outlined above for its 2017 executive compensation program.

Compensation Program Philosophy and Objectives

Our executive compensation philosophy embraces the following principles, which the Compensation Committee sets forth in its Executive Compensation Philosophy document:(4)

  • Pay for performance, with variable pay constituting a significant portion of total compensation, 
  • Create commonality of interest between our executives and stockholders by tying realized compensation directly to changes in shareholder value, 
  • Drive the attainment of our short- and long-term financial and strategic objectives, 
  • Reward our executives for long-term improvement in shareholder value, 
  • Provide differentiated pay based on an executive’s contributions to our performance, 
  • Attract, retain and motivate highly skilled and innovative executives that will lead us as the thought leader and driver of innovation within our industry, 
  • Build a strong talent base to reinforce our succession plan objectives, 
  • Be competitive with companies in our peer group, 
  • Maximize the financial efficiency of the overall program from tax, accounting, and cash flow perspectives, and 
  • Ensure that corporate governance practices and the impact of our say-on-pay proposals are upheld.

With these principles as our foundation, we have designed and continually evaluate and modify, as necessary, our executive compensation program to support our strategic objectives of achieving above-market growth in revenue and profitability by (1) being a market leader and innovator in healthcare workforce solutions and staffing services,(2) growing our overall revenue mix from workforce solutions and technology and (3) delivering a superior customer experience through operational excellence and agility.

The primary components of our executive compensation program — (1) base salary, (2) annual cash performance bonuses, and (3) long-term incentive awards, typically in the form of equity — reflect the implementation of our executive compensation philosophy. The Compensation Committee is provided with benchmarking information of each of these components at the 25th percentile, the median and 75th percentile utilizing companies, including all members of our peer group, that are similar to us in terms of business type, revenue and market capitalization. The Compensation Committee considers benchmarking data as a reference point rather than determinative. Compensation for specific individuals may vary, sometimes significantly, upward or downward from the median for individual named executive officers based on, among other things, individual performance, tenure, experience, scope of responsibilities, internal parity considerations, the recommendations of our CEO (for compensation other than her own) and succession considerations.(5)

(4) Our Executive Compensation Philosophy is available in the link entitled “Corporate Governance” located within the “Investor Relations” tab of our website at www.amnhealthcare.com.
(5) The Compensation Committee relies on, among other things, publicly available information of our peer companies and of other companies of similar size as aggregated by third party sources for comparative compensation information for named executive officers to determine peer group median levels of the various compensation components and the median aggregates thereof. For certain positions, i.e., the CEO and CFO positions, which job responsibilities are typically well established and substantially identical among peers and other companies of similar size to us, the comparative data is relatively straightforward. For our President, Professional Services and Staffing and our Senior Vice President, General Counsel and Secretary, who maintain positions that do not necessarily correspond with our peers’ or other companies’ named executive officers, comparative data is more difficult to analyze and requires judgment, assumptions and estimates as to what constitutes the median for such positions.

Base Salary

We utilize base salary as an essential component of our executive compensation program. We utilize base salary to attract and retain talented executives and to provide them with a fixed base of cash compensation. As set forth below, we analyze a variety of factors in addition to peer group comparative information in setting salaries for our named executive officers.

Annual Cash Incentive Performance Bonus

The principles associated with our performance-based compensation reflect a balance of objectives. Our annual cash incentive consists of (1) a financial performance component that we base solely on our annual operational results as measured against certain financial metrics (the “Financial Component”) and (2) a non-financial component based on, among other things, (A) our performance relative to our direct competitors and (B) individual leadership contributions (the “RP/Leadership Component”). We focus the Financial Component on the achievement of financial targets set out in our annual operating plan that we set with the goal of achieving what we believe constitutes above market performance in the healthcare workforce solutions industry. Because we base our annual operating plan on goals related to the execution of our operational and business strategies, the annual cash incentive plan supports the achievement of our strategic goals. The RP/Leadership Component of our annual cash incentive focuses on incentivizing both superior performance over our direct competitors as measured against certain financial metrics and effective leadership in line with our core values and executive leadership competencies. The Compensation Committee also considers relative and total shareholder return in determining our CEO’s award under the RP/Leadership Component.

Long-Term Incentives

We believe our long-term incentives should consist primarily of equity. We provide such incentives through our Equity Plan, which our stockholders last approved in April 2012. The principles guiding the design of our long-term incentive plans include utilizing long-term incentives to (1) align executive and stockholder interests, (2) enhance focus on improvements in operating performance and the creation of shareholder value, (3) drive achievement of our long-term strategic objectives, (4) support long-term retention of key contributors and (5) retain and incent potential CEO successors. We also believe that the aggregate cost of long-term incentives should be reasonable in comparison to our peer group, should avoid excessive levels of shareholder value transfer in relation to our peer group and should be reasonable in cost in light of our annual and long-term operating plans. With the foregoing principles in mind, our long-term incentive plan utilizes three primary vehicles for all named executive officers as follows:

✓ PRSUs Based on Total Shareholder Return. We utilize TSR PRSUs, the ultimate realizable value of which depends on performance against two measures: (1) a relative basis against a broader market (companies in the Russell 2000 Index at the beginning of the performance period) and (2) an absolute total shareholder return basis. Because our TSR PRSU awards measure relative total shareholder return and absolute total shareholder return over a three-year period, we believe this type of award encourages longer-term strategic focus on the creation of shareholder value beyond execution of annual financial targets.

✓ PRSUs Based on Annual AEBITDA Margin. Beginning in 2013, we created our AEBITDA PRSU to further incent our named executive officers to achieve certain AEBITDA margin goals. We established an AEBITDA margin goal of 13% for 2018, which serves as the target for our 2016 AEBITDA PRSU awards.

✓ Time-Vested RSUs. We utilize time-vested RSUs as part of our long-term incentive program the ultimate value of which depend on the price of our Common Stock and provide for performance-based accelerated vesting. In addition to stockholder alignment, we believe these awards are a necessary and effective retention tool, which is consistent with our compensation principles.

Our Compensation Program Oversight

Responsibilities of the Compensation Committee

The primary responsibilities of the Compensation Committee include oversight of our executive compensation programs. Specifically, they include:

  • determining the compensation of our CEO and, in partnership with our CEO, establishing the compensation of all other named executive officers, including salary, cash incentives and equity awards, 
  • designing our incentive compensation programs and administering our Equity Plan and Bonus Plan, 
  • establishing the financial metrics and performance targets under our incentive compensation programs, and 
  • as set forth more fully above (see page 13 above), analyzing the risk associated with our compensation practices.

The Compensation Committee reviews all components of compensation of the named executive officers and other senior officers that directly report to our CEO on an annual basis and will consider changes at other times if a change in the scope of an officer’s responsibilities justifies such consideration. In so doing, the Compensation Committee uses the services of an independent compensation consultant, Frederic W. Cook & Co., and considers the analysis and advice of its compensation consultant in discharging its responsibilities. Representatives of Frederic W. Cook & Co. attend Compensation Committee meetings and have direct access to the Compensation Committee members without management involvement. The Compensation Committee has the sole authority to hire and terminate its compensation consultant.

The Compensation Committee generally conducts its salary and bonus structure review for a particular year in the last quarter of the previous year or early in the subject year. At that time, the Compensation Committee evaluates compensation by, among other things, reviewing (1) peer benchmarking information relating to financial performance and compensation levels, (2) the individual’s performance, duties and experience, (3) analysis and advice from its compensation consultant, (4) our financial and operational performance, and (5) the recommendations of our CEO (who does not provide a recommendation for herself). With respect to our Bonus Plan, which our stockholders last re-approved in April 2012, the Compensation Committee, as the administrator, designates which participants are eligible for an award, the performance criteria for the award and the maximum award each year. Prior to or at the beginning of each fiscal year, the Board sets financial targets for our performance. Thereafter, the Compensation Committee sets the range of financial performance and corresponding targets for the named executive officers’ cash incentive compensation under the Bonus Plan.

The Compensation Committee may also grant annual equity awards under our Equity Plan. In addition to annual grants, the Compensation Committee has granted equity awards to key employees upon their initial employment, promotion or as special retention awards. To further serve this purpose, the Board adopted our 2014 Employment Inducement Plan (the “Inducement Plan”) under which we may issue up to 200,000 shares of our Common Stock to certain prospective employees. In the Compensation Committee’s discretion, it may authorize our CEO to grant equity awards to non-officer employees within certain individual and aggregate thresholds with the effective date of each such grant generally being the effective date of the grantee’s promotion or commencement of employment. The Compensation Committee reviews any awards granted by our CEO. The Compensation Committee does not have any policy or practice to time the grant of equity awards in conjunction with the release of material non-public information.

Our Peer Group

The duties of the Compensation Committee require specific knowledge regarding the executive compensation market. Accordingly, to understand our position within the marketplace for management talent and to assist the Compensation Committee in making compensation decisions that will help attract and retain a strong management team, the Compensation Committee reviews (1) compensation information for companies comparable in size and industry, (2) our financial performance against our internal financial targets, our designated peer group and the Russell 2000, and (3) internal compensation comparability among senior executives.

Because the Compensation Committee compares our performance against that of our peer group as part of its oversight responsibilities, it must determine our peer group. Indeed, the Compensation Committee believes that one of the most important factors that it must consider in ensuring that our compensation program remains competitive is the proper identification and selection of our peers, as we often compete for executive talent with such peers. Accordingly, the Compensation Committee evaluates and modifies, as appropriate, the members of our peer group annually. We select peers primarily from the healthcare staffing and management services sector and the commercial recruitment and staffing sector, and to a lesser extent, from the broader healthcare service industry. Like us, many of our peers are in both the S&P SmallCap 600 Index and the S&P Composite 1500 Index. Our 2016 peer group as determined by our Compensation Committee was as follows:

2016 Peer Group
Amedisys, Inc.Kforce Inc.
Cross Country Healthcare, Inc.Korn/Ferry International
Healthcare Services Group, Inc.LHC Group, Inc.
Tivity Health, Inc. (fka Healthways, Inc.)MedAssets, Inc.
Huron Consulting Group Inc.On Assignment, Inc.
Insperity, Inc.Premier, Inc.
IPC Healthcare, Inc.TrueBlue, Inc.

Our 2016 peer group (excluding MedAssets, Inc. and IPC Healthcare, Inc. because they were acquired and ceased to be publicly traded healthcare companies in late 2015 and early 2016) ranged from approximately $560 million to$2.9 billion in revenues based on each peer’s most recently reported four fiscal quarters and from approximately$515 million to $4.2 billion in market capitalization (as of December 31, 2016). For purposes of comparison, our consolidated revenue for our most recently reported last four fiscal quarters equaled $1.9 billion and our market capitalization as of December 31, 2016 equaled approximately $1.85 billion, placing us fourth in our 2016 peer group for both metrics.

As it does annually, in July 2016, the Compensation Committee evaluated our peer group for 2017 using, among other metrics, annual revenue and market capitalization.

During its evaluation, the Compensation Committee noted that two members of our 2016 peer group, MedAssets, Inc. and IPC Healthcare, Inc., were no longer publicly traded companies, and removed them from our peer group. In determining appropriate replacements for those two entities, the Compensation Committee reviewed (1) our 2016 peer group, (2) peers utilized by Institutional Shareholder Services (“ISS”) that were not in our 2016 peer group, (3) companies that were not in our 2016 peer group that disclosed us in their proxy statement as part of their peer group and (4) companies within our GICS code that met ISS’s revenue band criteria. Based on its evaluation, the Compensation Committee made the following changes to our peer group effective for 2017:

AdditionsSubtractions
Team Health Holdings, Inc.MedAssets, Inc.
MEDNAX, Inc.IPC Healthcare, Inc.

Components of Our Compensation Program

In line with our core value of continuous improvement, we (1) listen to our stockholders, (2) review the latest trends in executive compensation practices, (3) evaluate whether certain pay practices are viewed with disfavor by stockholders or proxy advisory services and (4) review our pay practices to ensure that we have designed and implemented compensation programs that we believe will create value for our stockholders with a balance of short- and long-term incentives. The principal components of our executive compensation program include:

  1. base salary,
  2. short-term or annual performance awards in the form of cash bonuses,
  3. long-term incentive awards,
  4. a non-qualified deferred compensation plan as well as benefits generally available to all of our employees, and
  5. for our CEO, an employment agreement with severance provisions and, for our other named executive officers, severance arrangements.

Base Salary

Base salary serves as the first component of our executive compensation program. In setting base salaries, the Compensation Committee considers a number of factors, including:

  1. the market salary for similarly situated executives within our peer group and other companies of similar revenue size and market capitalization,
  2. our operational and financial performance,
  3. our stock performance,
  4. individual performance, skills, knowledge, tenure, experience and responsibilities, and
  5. for those who report to her, the recommendations of our CEO.

We manage salary changes to fall within our annual budget. We evaluate our operational and financial performance in light of our annual internal objectives and our annual operating plan, the healthcare staffing industry performance and peer benchmarking data. We evaluate our stock performance against our peer group and the Russell 2000 Index. Our CEO bases her recommendations on the same factors the Compensation Committee considers, and her recommendations are particularly helpful for the Compensation Committee to evaluate the other executive officers’ performance, knowledge, skills, experience and responsibilities.

Annual Cash Incentive Performance Bonus

Annual cash performance bonus opportunities serve as the second component of our executive compensation program. The Bonus Plan is the mechanism by which the Compensation Committee provides such opportunities. We intend our Bonus Plan to provide a strong incentive for our officers to achieve annual financial objectives that support our strategic objectives. Although certain details of the annual bonus incentive may change from year to year based upon the Compensation Committee’s focus, a few key components comprise its general structure, including specific financial goals based on our annual operating plan. The metrics typically include such financial measures as consolidated revenue and consolidated AEBITDA. The Compensation Committee sets threshold, “target” (i.e., 100%) and maximum amounts for bonuses and a weight for each metric that corresponds to the level of achievement we require to trigger a threshold, target or maximum bonus for the named executive officer under such metric. The threshold level for each metric typically starts at a minimum performance level, e.g., 90% of the targeted consolidated AEBITDA. The maximum bonus typically requires a performance level of 110% to 130% of the target amount for each metric. We typically use incremental hurdles (usually 1%increments for AEBITDA and one-half percent increments for revenue) of performance between the threshold level and the maximum level that increase the amount of bonus that can be earned on a straight-line basis depending on the hurdle ultimately achieved. A portion of the bonuses has been based on non-financial factors, such as performance relative to direct competition, leadership and strategic metrics and total shareholder return.

In setting each named executive officer’s target bonus, the Compensation Committee evaluates benchmarking data for comparable positions generally and within our peer group, the recommendations of our CEO (except with respect to her target bonus), individual performance, knowledge, experience and responsibilities, and the amount of the potential bonus under various performance scenarios. As with base salary, the Compensation Committee considers these factors in the context of each individual’s total cash compensation as well as the total compensation package (i.e., equity and cash) generally.

As set forth in our Executive Compensation Philosophy, the principles governing the annual design include the following:

  1. the metrics must be tied to key indicators of our success and our annual objectives,
  2. the performance goal must be reasonably achievable and viewed as fair, while at the same time encouraging stretch performance,
  3. the metrics must be simple to understand and can be influenced by the subject executive,
  4. the portion of an individual’s target annual cash compensation attributable to target annual bonus should increase with successively higher levels of responsibility, and
  5. payouts should reflect our performance as well as the performance of the subject executive.

The Compensation Committee may amend the Bonus Plan at any time and may also amend any outstanding award granted under the Bonus Plan, provided it may not amend the Bonus Plan without the approval of our stockholders if the amendment would affect the tax deduction of payments made under it.

Long-Term Incentives

Long-term incentives in the form of equity awards serve as the third component of our executive compensation program. Under our Equity Plan, we grant equity awards, with various vesting parameters, typically three years in length, to named executive officers and key employees as an incentive to have a long-term perspective in supporting and developing our strategic objectives. We also use them as an employee retention tool. Since 2011, we have utilized PRSUs as part of our long-term incentive structure to strengthen the performance-based component of the long-term incentive program. In 2016, we utilized TSR PRSUs and AEBITDA PRSUs for performance-based equity for all of our named executive officers.

In general, we believe long-term equity incentive opportunities should be targeted to approximately the market median so that when combined with base salary and target annual bonus, total compensation falls around the median of market levels.

The following principles govern the design of our long-term incentives:

  1. performance periods should cover multiple years to create balance between short- and long-term objectives,
  2. long-term incentives should function to (a) align executive and stockholder interests, (b) enhance focus on improvements in operating performance and the creation of shareholder value and (c) drive achievement of our long-term strategic objectives,
  3. awards should support long-term retention of key contributors through vesting,
  4. aggregate annual share usage should be carefully managed to avoid excessive levels of shareholder value transfer in relation to those of our peer group, and
  5. the aggregate cost of long-term incentives should be reasonable compared to members of our peer group, and the cost implications should be supported by our annual and longer-term operating plans.

Retirement and Health Plans

Retirement plans and other customary employee benefits serve as the fourth component of our executive compensation program. We adopted our 2005 Amended and Restated Executive Nonqualified Excess Plan (the “Deferred Compensation Plan”) primarily as a result of a market review that indicated that a deferred compensation plan was a significant component of executive compensation. We exclude our named executive officers from participating in our 401(k) plan, primarily to assist us in satisfying discrimination testing performed on our 401(k) plan. The Deferred Compensation Plan serves as the only retirement plan for our management, including our named executive officers. The Deferred Compensation Plan is not intended to be tax qualified. We describe the Deferred Compensation Plan more fully in the section entitled “Nonqualified Deferred Compensation” below.

We offer healthcare insurance and other employee benefit programs to our named executive officers, which are generally the same as those programs provided to all eligible employees. We offer these plans to support our objective of attracting and retaining strong talent.

Employment and Severance Agreements

Severance arrangements serve as the fifth component of our executive compensation program. We are party to an employment agreement with our CEO, which contains severance provisions, and have entered into severance agreements with each of our other named executive officers. We entered into these agreements in support of our objectives regarding attraction and retention of strong management. In determining the appropriate severance levels, we considered survey data, advice from our compensation consultant and the Compensation Committee’s experience. We describe the terms of these agreements more fully in the section entitled “Termination of Employment and Change in Control Arrangements” below.

Our named executive officers’ 2016 direct compensation consisted of the first four components identified above. We discuss in detail below the base salary, cash bonus and long-term incentive components of our 2016 compensation program.

Base Salary

In late 2015 and early 2016, the Compensation Committee reviewed annual base salary levels for the named executive officers and approved increases ranging from three to seven percent for our named executive officers as set forth in the table immediately below based on, among other things, peer group benchmarking, Company and individual performance.

salaryincreasepercentage

We believe that Ms. Salka’s 2016 base salary fell slightly below the median among CEOs within our 2016 peer group.

Bonus Plan

Target Bonus. In January 2016, the Compensation Committee reviewed the target bonus level for each named executive officer, which we express as a percentage of annual base salary. After its review, and based on peer group and other benchmarking, the Compensation Committee decided to maintain the existing bonus percentage target for Ms. Salka while increasing the bonus target percentage for our three other named executive officers. The table below shows 2016 target bonus information for each named executive officer both in dollar amount and as a percentage of salary together with, for comparative purposes, the same figures for 2015.

bonustargets

We believe that Ms. Salka’s 2016 dollar bonus target fell around the median among CEOs within our 2016 peer group.

Structure. Consistent with the last several years, in 2016, the Financial Component comprised 70% of the total target bonuses, and the RP/Leadership Component comprised the remaining 30%. We tied the Financial Component of the bonus to the achievement of financial targets set forth in the 2016 Ops Plan that we believed represented above market growth for each of our three business segments. As a threshold, the Company had to achieve reported AEBITDA that exceeded its 2015 reported AEBITDA amount of$165.2 million before any bonuses under any metric could be earned.

The table below shows the 2016 metrics and weighting applicable to them for each named executive officer:

rp-leadership-components

(1) The bonus for Mr. Henderson, our President, Professional Services and Staffing, is based in part on the revenue and Pre-Bonus AEBITDA of the divisions over which he has responsibility. For ease of reference, we characterize those metrics as “Division Revenue” and “Division Pre-Bonus AEBITDA,” respectively. For a discussion of how we use Pre-Bonus AEBITDA, see footnote (6).

Rationale of Annual Bonus Performance Goals. The Compensation Committee has continued to utilize financial, relative performance and leadership goals in its annual incentive bonus program over the last several years for a variety of reasons. It chose revenue because it believes it is the best measurement to evaluate the success of our strategy to grow as a workforce solutions company and because investors focus on revenue growth as a metric in evaluating our performance. It chose AEBITDA because management, the Board, stockholders and analysts use this measure to assess our profitability and performance. Indeed, these two metrics are routinely areas of focus (along with net income) during our earnings calls. Furthermore, the Compensation Committee believes AEBITDA is an objective measure of management’s performance, and it excludes items over which management has less control, such as amortization, interest expense and taxes. The Compensation Committee uses the RP/Leadership Component to, among other things, distinguish among individuals with respect to non-financial metrics, such as leadership, personal performance and contributions, and execution on our strategic initiatives.

The actual consolidated revenue and consolidated AEBITDA amounts on which the bonuses are based required to reach the 100% target level represented growth that the Compensation Committee believed exceeded general organic growth rates in the markets we serve and took into account the acquisitions we made during 2015 and early 2016. The threshold for a named executive officer to receive a bonus on the consolidated financial metrics required achieving 84% and 90.5% of our 2016 Ops Plan target for Pre-Bonus AEBITDA (“Pre-Bonus AEBITDA”)(6) and consolidated revenue, respectively. Additionally, receipt of the target bonus amount for each financial metric required us meeting 100% of our 2016 Ops Plan for that metric, which represented year-over-year consolidated revenue and AEBITDA growth of 18.3% and 20.7%, respectively (which includes approximately 8% and 7% organic growth, respectively).

2016 Bonus Plan Payouts. We set forth below a table ($ in thousands) summarizing how we performed against the 2016 Ops Plan financial performance metrics utilized in whole or in part in determining the Financial Component portion of our named executive officers’ bonuses.

%variance-table

With respect to the RP/Leadership Component, the Compensation Committee believes our named executive officers provided outstanding leadership that resulted in a strong financial and operational year for us on an absolute basis and as compared to our peers. Among other things, we successfully completed the acquisition of Peak Health Solutions, which furthered our strategic goal of expanding our workforce solutions offerings. We completed the integration of The First String Healthcare, MillicanSolutions, B.E. Smith and HealthSource Global Staffing into our family of companies. At the same time, we delivered strong annual organic revenue growth of 17%. Additionally, we completed a $325 million senior notes offering providing us with additional liquidity on what we believe are favorable terms to pursue strategic acquisitions. As a result, all named executive officers received an award under the RP/Leadership Component of 180% to 185% of their respective targets.

The tables below set forth summary calculations for each named executive officer’s bonus under the Bonus Plan:

salka-metrics

(6) For purposes of determining whether the consolidated AEBITDA target had been achieved in 2016 solely for purposes of determining bonus amounts, the Compensation Committee excluded

scott-metrics

henderson-metrics jackson-metrics

Long-Term Incentive Compensation

In 2016, the Compensation Committee granted equity awards to each named executive officer. We set forth in the chart below the AGD Fair Value of each equity component for each named executive officer.

AGD-fair-value

TSR PRSUs. Our TSR PRSU grant, which represented approximately 30% of all 2016 equity awards by grant date fair value for each named executive officer, will be earned at the end of an approximately three-year period, i.e., shortly after December 31, 2018, with the number of shares that are ultimately vested dependent on our total shareholder return for the period relative to the companies in the Russell 2000 Index on December 31, 2015 as well as our absolute total shareholder return (collectively, the “TSR Measurement”). If we perform at the 25th percentile of the relative total shareholder return (“Relative TSR”) of companies in the Russell 2000 Index on December 31, 2015, then 25% of the PRSUs will be earned. If we perform at the 50th percentile, 100% of the PRSUs will be earned. If we perform at the 75th percentile, the maximum number, 175%, of the PRSUs will be earned. Amounts that may be earned increase in one percentile intervals from the 25th percentile up to the 75th percentile (as set forth in footnote (1) in the following table). These percentages are also subject to a “penalty” or discount whereby the payout will be reduced by 50% if we still meet or exceed the Relative TSR 25th percentile threshold but do not have a positive total shareholder return (“Absolute TSR”) for the period.

The following table sets forth the percentage of the 2016 target PRSUs that may be awarded depending on the actual results of the TSR Measurement:(7)

relative-tsr
(1) For each one percentile above the 25th percentile, an additional 3% of the TSR PRSUs will be earned if Absolute TSR is positive, and the maximum payout cannot exceed 175%. If Absolute TSR is negative, for each one percentile above the 25th percentile, an additional 1.5% of the TSR PRSUs will be earned.

If we conducted the TSR Measurement on December 31, 2016, (1) Relative TSR would have measured at the 57th percentile, and (2) Absolute TSR would have been positive. Based on those results, 120% of named executive officers’ target number of TSR PRSUs granted in 2016 would have been awarded.

AEBITDA PRSUs. In 2016, the Compensation Committee decided to dedicate a significant portion of the PRSUs to focusing our named executive officers on achieving a 13%AEBITDA margin for 2018.(8) Similar to the TSR PRSUs, the number of shares that may ultimately be awarded ranges from 0% to 175% of the target number of AEBITDA PRSUs granted depending on our actual AEBITDA margin for 2018 as follows:

aebitda-margin

Time-Vested RSUs. The time-vested RSU grants, consistent with prior years, have a three-year cliff vesting that are eligible for annual accelerated vesting in one-third increments if we achieve our annual AEBITDA targets. As it has done for the past several years, the Compensation Committee elected to wait to consider a grant of time-vested RSUs for Ms. Salka until later in 2016 when it had better visibility of our 2016 financial, operational and stock performance. Based on our strong financial, operational and stock performance in 2016, the Compensation Committee granted Ms. Salka 29,917 RSUs with an AGD Fair Value of $999,976 in December 2016.

(7) As set forth in the Grant of Plan-Based Awards Table, the target number of TSR PRSUs granted in 2016 for each named executive officer is as follows: (1) for Ms. Salka, 14,143; (2) for Mr. Scott, 4,849; (3) for Mr. Henderson, 4,849; and (4) for Ms. Jackson, 3,233.
(8) As set forth in the Grant of Plan-Based Awards Table, the target number of AEBITDA PRSUs granted in 2016 for each named executive officer is as follows: (1) for Ms. Salka, 20,295; (2) for Mr. Scott, 6,958; (3) for Mr. Henderson, 6,958; and (4) for Ms. Jackson, 4,638.

PRSUs represented 65% of the AGD Fair Value of all 2016 equity awards for our named executive officers, other than our CEO, which, due to the timing of her RSU award, received PRSUs that represented 53% of her 2016 equity awards. The chart set forth below details the change of the AGD Fair Value of all 2016 equity awards granted to our named executive officers from the AGD Fair Value of all 2015 equity awards (other than the special equity awards given in 2015 to Messrs. Scott and Henderson).(9)

agd-2015-equity

Our CEO received an 11% increase year over year in AGD Fair Value of her equity awards driven in part by the Company’s strong financial, operational and stock performance in 2016 as well as peer group and other compensation benchmarking. We believe that the AGD Fair Value of her equity awards placed her below the median among CEOs within our 2016 peer group for long-term incentive compensation. On an aggregate basis, the combined AGD Fair Value of our named executive officers’ equity awards (excluding the Special Equity Awards) increased 12% in 2016 from 2015.

Results of 2014 TSR PRSU Awards

Results of 2014 TSR PRSU Award TSR Measurement. On January 4, 2017, the Compensation Committee performed the TSR Measurement for the 2014 TSR PRSU awards. Our Relative TSR was at the 97th percentile of the Russell 2000 Index during the measurement period from January 1, 2014 through December 31, 2016. We also experienced positive Absolute TSR during such measurement period. Accordingly, each named executive officer received 175% of his or her target amount of 2014 TSR PRSUs. Specifically, Ms. Salka, Mr. Scott, Mr. Henderson and Ms. Jackson earned 42,096, 12,247, 12,553 and 11,634 PRSUs under their 2014 TSR PRSU awards, respectively. Shortly after the TSR Measurement, we issued a corresponding amount of Common Stock to each named executive officer, other than Ms. Salka, who deferred receipt of her shares under our Deferred Compensation Plan.

Results of 2014 AEBITDA PRSU Award Measurement. On February 16, 2017, the Compensation Committee determined that our 2016 AEBITDA margin equaled 12.5%. Accordingly, each named executive officer received 175% of his or her target amount of 2014 AEBITDA PRSUs. Specifically, Ms. Salka, Mr. Scott, Mr. Henderson and Ms. Jackson earned 58,935, 17,145, 17,574 and 16,287 PRSUs under their 2014 AEBITDA PRSU awards, respectively. Shortly thereafter, we issued a corresponding amount of Common Stock to each named executive officer, other than Ms. Salka, who deferred receipt of her shares under our Deferred Compensation Plan.

Actual CEO Pay

We believe actual pay is an appropriate way to view our pay-for-performance philosophy. The difference between actual pay and grant date valuation of our long-term incentive vehicles can be significant. Given the substantial portion of our CEO’s compensation that is performance based, we believe it is important to consider actual pay together with the performance of our Common Stock price.

We recognize that companies and proxy advisory firms have used various methodologies to calculate actual and realizable compensation. We also are aware of the SEC’s proposed pay versus performance disclosure rule released in April 2015 (the “Actual Pay Proposed Rule”), which, among other things, contemplates disclosure of a CEO’s actual pay. In order to provide more easily comparable information on these calculations, we have set forth below a table that summarizes for our CEO for each of the last three years the following:(1) her target total direct pay as determined by the Compensation Committee, (2) her total pay as set forth in the Summary Compensation Table and (3) her “actual pay” based on the Actual Pay Proposed Rule.

(9) As part of succession planning, in 2015, the Compensation Committee granted to each of Mr. Scott and Mr. Henderson special equity grants (“Special Equity Awards”) consisting of time-based and performance-based components under which up to 63,948 shares of our Common Stock may be awarded. Specifically, under each Special Equity Award (i) 12,731 shares of our Common Stock will vest on December 31, 2017, and an additional 12,731 shares will vest on such date if the average closing price of our Common Stock during December 2017 equals or exceeds $26.08 per share, and (ii) 19,243 shares of our Common Stock will vest on December 31, 2018, and an additional 19,243 shares will vest on such date if the average closing price of our Common Stock during December 2018 equals or exceeds $29.20 per share subject, in each case, to continued employment on such vesting date. Because the Special Equity Awards were one-time awards we exclude them for purposes of the year-over-year comparison.

Screen Shot 2017-03-08 at 9.11.11 PM

(1) Under the SEC’s Actual Pay Proposed Rule, as applicable to our CEO’s components of compensation for the years set forth in the table, actual pay equals the total compensation set forth in the Summary Compensation Table for the covered year adjusted as follows: (A) we deduct the value of stock awards and options awards set forth in the Summary Compensation Table for the covered year and (B) we add the fair value on the vesting date of all stock awards and option awards for which all applicable vesting conditions were satisfied during the covered fiscal year. For awards that vested on a certain date, but did not actually settle until it was established whether the conditions for acceleration had been met or the applicable performance test had been certified (the “Determination Date”), the table reflects the value of such shares during the year of vesting but utilizes the fair market value on the Determination Date, which usually is in February and approximately two weeks to two months after the vesting date. Any awards deferred by Ms. Salka under our Deferred Compensation Plan are reflected in our calculations.
(2) For purposes of calculating Target Pay, this chart utilizes Ms. Salka’s target bonus and target equity values preliminarily established by the Compensation Committee for the applicable year, which typically occurs in early January of the subject year or in December prior to the subject year. With respect to the equity target, the amount ultimately granted may vary from what the Compensation Committee actually targeted due to, among other things, the timing of the grant of her RSU equity award.

As illustrated above, our annual and long-term incentive programs over the past three fiscal years are consistent with our pay-for-performance philosophy, which is that actual pay is significantly correlated to the performance of our Common Stock. For the two- and three-year periods ended December 31, 2016, (1) we were above the 95th percentile for total shareholder return (and in the 57th percentile for the one-year period ended December 31, 2016) against the companies comprising the Russell 2000 Index and (2) our Common Stock performance provided cumulative total shareholder returns of 24%, 96% and 162% for the one-, two-and three-year periods ended December 31, 2016, respectively. In turn, our CEO’s actual pay significantly exceeded her annual target total direct compensation for each of the past three years, which is consistent with our design to pay above target compensation when our Company operates at a high level and provides significant total shareholder return.

Equity Ownership Requirements and Clawback and No Pledging Policies

We maintain equity ownership requirements as well as clawback and pledging policies to which our named executive officers are subject. We describe these requirements and policies in the Guidelines.

Named Executive Officer Equity Ownership Requirements

The Board believes that all named executive officers should maintain a meaningful personal financial stake in the Company to align their long-term interests with those of our stockholders. Accordingly, our CEO is required to hold shares of Common Stock equal in value to three times her base salary and other named executive officers are required to hold shares of Common Stock equal in value to two times their annual base salary. The value of unvested RSUs and vested or unvested SARs and options are not taken into account in determining whether a named executive officer satisfies our equity ownership requirements. As of December 31, 2016, all of our named executive officers satisfy our equity ownership requirements.

Clawback Policy

Under the Guidelines, if we are required to prepare an accounting restatement due to material noncompliance with any financial reporting requirements under the securities laws caused by misconduct, we can seek recoupment from all of our current or former executive officers who participated in the misconduct of:

  1. all or any portion of the bonus and equity or cash incentive compensation received by such individuals during the 12-month period following the first public issuance or filing with the SEC (whichever first occurs) of the financial document embodying such defective financial statement; and
  2. any profits realized by such individuals from the sale of securities of the Company during that 12-month period.

No Pledging Policy

The Guidelines prohibit named executive officers (and directors) from pledging, hypothecating or otherwise placing a lien on any shares of our Common Stock (or any other equity interests) that they own.

Impact of Tax Considerations

With respect to taxes, Section 162(m) of the Code imposes a$1 million limit on the deduction that a company may claim in any tax year with respect to compensation paid to each of its chief executive officer and three other named executive officers (other than the chief financial officer), unless certain conditions are satisfied. Certain types of performance-based compensation are generally exempted from the $1 million limit. Performance-based compensation can include income from stock options, performance-based restricted stock or stock units, and certain formula driven compensation that meets the requirements of Section 162(m). One of the factors that we may consider in structuring the compensation for our named executive officers is the deductibility of such compensation under Section 162(m), to the extent applicable. However, this is not the driving or most influential factor. Our Compensation Committee may approve non-deductible compensation arrangements after taking into account other factors and reserves the right to do so.

Overview of Our 2017 Executive Compensation Program

Overall, the Compensation Committee believes the Company performed strongly during 2016. We achieved year-over-year consolidated revenue and consolidated AEBITDA growth of 30% and 43%, respectively, with 17% organic revenue growth. All of our business segments experienced significant revenue and AEBITDA growth. We experienced a 120 basis point increase in our AEBITDA margin. Moreover, the price of our Common Stock grew 24% for 2016. In light of the foregoing and with its guiding principles in mind, the Compensation Committee believes it has designed the 2017 compensation structure to provide for important short- and long-term performance components that are aligned with stockholders, consistent with the market environment and tailored specifically to us.

Base Salary. The Compensation Committee decided to adjust annual base salaries for the named executive officers for 2017, as follows:

16-17-salary-increase

The base salaries of the named executive officers reflect a 4%to 6% increase as a result of their increased experience, strong individual performance and peer group benchmarking analysis. We believe our CEO’s 2017 salary falls at or slightly below the median among CEOs within our 2017 peer group.

Bonus Plan. After careful consideration, the Compensation Committee determined that the 2017 bonus target as a percentage of salary should increase for Ms. Salka and Mr. Henderson. Such increases reflect our excellent performance over the past three years and further incent our named executive officers to continue to drive strong financial performance. We set forth below the 2017 target bonuses for each named executive officer as a percentage of salary together with, for comparative purposes, the same figures for 2016.

16-17-bonus-targets

After careful consideration of the factors set forth above in the subsection of this CD&A entitled “Components of Our Compensation Program — Annual Cash Incentive Performance Bonus,” the Compensation Committee decided to use the same bonus structure for each named executive officer as it did in 2016, other than Mr. Henderson who will now use the same bonus structure (i.e., utilization of only consolidated metrics and not any divisional metrics) as the other named executive officers. The target goals for each of the financial metrics are consistent with the targets under our 2017 operating plan and generally require growth that exceeds our estimate of anticipated industry performance. For our CEO, we believe her 2017 bonus target in dollar amount falls around the median among CEOs within our 2017 peer group.

Long-Term Incentive Awards. In light of the philosophy, goals and objectives surrounding long-term incentive awards, the Compensation Committee decided to use a combination of (1) TSR PRSUs with a similar structure to previous years,(2) AEBITDA PRSUs with the same structure it has utilized since 2013 and (3) traditional time-vested RSUs. The Compensation Committee target award of AEBITDA PRSUs requires achieving a 13.5% annual AEBITDA margin for 2019.

For 2017, the Compensation Committee targeted an allocation of 30% TSR PRSUs, 35% AEBITDA PRSUs and 35% traditional time-vested RSUs (as a percentage of the AGD Fair Value of all 2017 equity awards). For each named executive officer, other than Ms. Salka, approximately 65% of the AGD Fair Value of the January 2017 equity awards consisted of PRSUs, and the remaining 35% consisted of traditional time-vested RSUs; for Ms. Salka, all of her January 2017 equity awards were PRSUs, as the Compensation Committee makes their decision on her equity grant of traditional time-vested RSUs in the fourth quarter of 2017 when it has better visibility of our 2017 performance.

Compensation Committee Report

The Compensation and Stock Plan Committee has reviewed and discussed the Compensation Discussion and Analysis with management, and based on this review and discussion, has recommended to the Board that it be included in our annual report on Form 10-K for the fiscal year ended December 31, 2016 and in this proxy statement.

Compensation and Stock Plan Committee Members
R. Jeffrey Harris
Dr. Michael M.E. Johns
Martha H. Marsh

 

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