The following Compensation Discussion and Analysis (“CD&A”) provides a detailed description of the objectives, philosophy, practices and programs that comprise our named executive officer’s total rewards program. It also explains how the Compensation Committee determines executive compensation under this program, as it takes great care in the development and refinement of a total rewards program that reflects its stewardship responsibility to AMN’s shareholders while simultaneously ensuring the availability of talent to lead our organization to achieve our strategic goals.
More specifically, this CD&A provides clear details related to each of the following aspects of the total rewards program that has been designed for our named executive officers: (1) the objectives and philosophy, (2) the processes and criteria in place for proper oversight, (3) the components of our named executive officer’s total rewards program, and (4) how each component fits into our Compensation Committee’s overall objective to support the Company’s business strategy.
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, its core values and delivering sustainable, long-term returns for our shareholders. Our named executive officers for the 2017 fiscal year are listed below.
|Susan R. Salka||President and Chief Executive Officer|
|Brian M. Scott||Chief Financial Officer, Chief Accounting Officer and Treasurer|
|Ralph S. Henderson||President, Professional Services and Staffing|
|Denise L. Jackson||Chief Legal Officer and Corporate Secretary|
Our pay-for-performance focused executive compensation program is designed to motivate our leaders to build sustainable long-term shareholder value. Among other things, the Compensation Committee premises our executive compensation objectives on the following guiding principles:
- to align pay with performance, with variable pay constituting a significant portion of total compensation;
- to create commonality of interest between our executives and shareholders by tying realized compensation directly to changes in shareholder value;
- to support the attainment of our short- and long-term financial and strategic objectives;
- to 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; and
- to foster a culture of integrity and ethics where team members are treated with respect and appreciation for their contributions.
To support our objectives, we have designed an executive compensation total rewards program that includes (1) base salary, (2) annual bonuses, and (3) longterm incentive awards, which constitutes a significant portion of our named executive officers total pay.
Below is a summary relating to the total rewards compensation package we provide our named executive officers.
|What We Do|
|✔||Executive Compensation Philosophy. We maintain an Executive Compensation Philosophy, which was reviewed and revised in February 2018, to expressly capture our commitment to equal pay and fostering a culture of ethics.|
|✔||Align Pay with Our Performance. We align our named executive officer pay with actual total shareholder return and financial performance, with variable pay constituting 73% of our CEO’s total compensation and at least half of the total compensation for each of our other named executive officers in 2017.|
|✔||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 that vest based on our long-term AEBITDA margin goals (“AEBITDA PRSUs”).|
|✔||Ownership Guidelines. We have meaningful stock ownership requirements for our named executive officers.|
|✔||Cap Incentive Awards. We maintain a cap on annual bonus awards for our named executive officers under our 2017 Senior Executive Management Incentive Bonus Plan (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, Frederic W. Cook, to provide recommendations on our named executive officers pay.|
|✔||Responsible Use of Shares. We judiciously grant shares under our The AMN Healthcare 2017 Equity Plan (the “Equity Plan”), and our share utilization rate under our Equity Plan falls below industry norms.|
|✔||Appropriate Peer Group Selection.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 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.|
2017 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 strategic initiatives.
As set forth below, the Company delivered strong financial and stock performance in 2017 and continued to make significant progress on our long-term strategic goals.(1)
Some of our highlights for 2017 included:
- The price of our Common Stock increased 28% in 2017, from $38.45, the closing price on December 31, 2016, to $49.25, the closing price on December 31, 2017. We ranked in the 95th percentile in total shareholder return for the three-year period ended December 31, 2017 among companies comprising the Russell 2000 Index as of December 31, 2014 with a cumulative total shareholder return for the last three years (i.e., since December 31, 2014) of 165%.
- Our consolidated AEBITDA(2) increased year-over-year by approximately 8%, from $236.9 million to $256.4 million.
- Our annual consolidated AEBITDA margin(3) increased 40 basis points year-over-year, from 12.5% to 12.9%.
- We renewed our share repurchase program of up to $150 million and repurchased 486,543 shares of our Common Stock in 2017 at an average price of $41.41 per share, resulting in an aggregate purchase price of $20.2 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.
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 2017.
(1) For more detail regarding our financial results, please see our 2017 annual report on Form 10-K filed by us with the SEC on February 16, 2018 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 2017 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 2017 net income, 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 TSR as well as financial and operational performance over the past 12 months in determining our CEO’s 2017 cash bonus as well as her 2017 equity awards. 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, 2017.
(1) The closing price of our Common Stock on December 29, 2017 (the last trading day of the year) was $49.25. Cumulative total shareholder return is the percentage increase in the 90 day average closing price of our Common Stock on the trading day at the end of the relevant investment period from the 90 day average 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.
2017 Compensation for Our Named Executive Officers
Numerous factors influenced our compensation decisions for 2017 with the customary overarching goal of closely linking pay to performance. In 2017, performance-based cash incentives and equity compensation (which is inherently linked to performance) comprised 73% of our CEO’s compensation, and 56%—63% of the total compensation for each of our other named executive officers.
To illustrate this, the chart set forth below reflects the percentage breakdown of our CEO’s 2017 compensation as set forth in the Summary Compensation Table.
As the Compensation Committee has consistently done throughout the past several years, it based its 2017 compensation decisions around financial goal setting for 2017 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. Due to our solid operational performance and financial results, each named executive officer earned 85% of his or her target bonus that was tied to the Company’s 2017 financial performance.
We set forth below the breakdown of each named executive officer’s compensation for 2017 as taken from the Summary Compensation Table.
Response to 2017 Say-on-Pay Vote
At our 2017 Annual Meeting of Shareholders held on April 19, 2017, we received approximately 96% support on our “say-on-pay” proposal regarding the executive compensation of our named executive officers identified in our 2017 proxy statement. Our compensation program has remained consistent with that set forth in our 2017 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 motivate, reward and retain executives.
The Compensation Committee believes that our executive compensation program in 2017 satisfied each of the four themes identified above. In 2017, the Compensation Committee took the following actions:
- Continued to use PRSUs tied to total shareholder return and financial goals (i.e., AEBITDA) over a three-year period,
- Established goals of 7.8% and 8.2% year-over-year consolidated revenue and AEBITDA growth, respectively, that we needed to satisfy in order for the named executive officers to receive their target bonuses,
- Modestly adjusted base salaries upward in 2017 to more closely align with industry and peer group pay practices and reward strong performance, and
- 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.
In 2018, based on discussions with our shareholders and input from the Compensation Committee’s independent consultant, the Compensation Committee made adjustments to the vesting schedule and maximum payouts of new equity awards to reduce complexity and reflect more common market practices (e.g., a three-year ratable vesting schedule for its time-vested RSUs).
Our Compensation Program Philosophy and Objectives
A guiding principle of our Executive Compensation Philosophy is that compensation realized by executives should generally reflect the individual skills and contributions of the executive in achieving the strategic, financial and operational goals of the Company and the leadership they demonstrate in promoting our valuesbased culture. Additionally, corporate governance best practices and the annual shareholder advisory vote on executive compensation are also considered in the design of our executive’s total rewards package. Our philosophy embraces the following principles, which the Compensation Committee sets forth in its Executive Compensation Philosophy, and is available in the “Corporate Governance” section under the “Investor Relations” tab of our Company’s website at www.amnhealthcare.com.
- Be performanced-based, with variable pay constituting a significant portion of total compensation,
- Create commonality of interest between our executives and shareholders by tying realized compensation directly to changes in shareholder value,
- Focus on propelling growth in the attainment of our short- and long-term financial and strategic objectives,
- Reward our executives for long-term improvement in shareholder value,
- Provide pay based on performance without regard to legal classification,
- Attract, retain and motivate highly skilled and innovative executives that embrace and promote AMN’s values-based culture that fosters innovation,
- Build a strong talent base to reinforce our succession planning objectives,
- Be competitive with companies in our peer group,
- Maximize the financial efficiency of the overall program from, including but not limited to 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 abovemarket growth in revenue and profitability by (1) being the 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 equity incentive awards— 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, 75th and 90th 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.
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.
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, achievement of a significant strategic and operational goals 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 EQUITY INCENTIVES
We believe our long-term incentives should consist primarily of equity. We provide such incentives through our Equity Plan, which our shareholders last approved in April 2017. The principles guiding the design of our longterm incentive plans include utilizing long-term incentives to (1) align executive and shareholder 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 motivate 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 incentivize our named executive officers to achieve certain AEBITDA margin goals to support our strategic objectives.
✓ Time-Vested RSUs. A common equity vehicle we utilize as part of our long-term incentive program to motivate our named executive officers are time-vested RSUs, full-value awards with the ultimate value based on the price of our Common Stock. In addition to the interests of our named executive officers with shareholders, we also believe these type of awards operate as a necessary and effective retention tool, which is consistent with our compensation principles and a common practice among our peers.
Our Compensation Program Oversight
RESPONSIBILITIES OF THE COMPENSATION COMMITTEE
The primary responsibilities of the Compensation Committee include oversight of our executive compensation programs. Specifically, this includes:
- 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 19 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 shareholders last approved in April 2017, 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 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 2017 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 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 from the healthcare, commercial and professional services industries, and target those companies operating in the recruitment, staffing and management services sectors. Like us, many of our peers are in both the S&P SmallCap 600 Index and the S&P Composite 1500 Index. Our 2017 peer group as determined by our Compensation Committee was as follows:
|Our 2017 Peer Group|
|Amedisys, Inc.||Korn/Ferry International|
|Cross Country Healthcare, Inc.||LHC Group, Inc.|
|Healthcare Services Group, Inc.||MEDNAX, Inc.|
|Tivity Health, Inc.||On Assignment, Inc.|
|Huron Consulting Group Inc.||Premier, Inc.|
|Insperity, Inc.||Team Health Holdings, Inc.|
|Kforce, Inc.||TrueBlue, Inc.|
Our 2017 peer group ranged from approximately $540 million to $3.38 billion in revenues based on each peer’s most recently reported four fiscal quarters and from approximately $470 million to $4.95 billion in market capitalization. For purposes of comparison, our consolidated revenue for our most recently reported last four fiscal quarters equaled $1.97 billion and our market capitalization as of December 31, 2017 equaled approximately $2.38 billion, placing us fifth in our 2017 peer group for both metrics.
As it does annually, in July 2017, the Compensation Committee evaluated our peer group for 2018 using, among other metrics, annual revenue and market capitalization.
During its evaluation, the Compensation Committee removed two companies from our 2017 peer group, noting that Team Health Holdings, Inc. was no longer a publicly traded company and that Tivity Health, Inc.‘s revenues and market capitalization was no longer competitive as it had fallen below the 25th percentile of our 2017 peer group.
In determining appropriate replacements for the two companies, the Compensation Committee reviewed (1) our 2017 peer group, (2) peers utilized by Institutional Shareholder Services (“ISS”) that were not in our 2017 peer group, (3) companies that were not in our 2017 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 2018:
|Included for 2018||Removed in 2017|
|Allscripts Healthcare Solutions, Inc.||Team Health Holdings, Inc.|
|Robert Half International Inc.||Tivity Health, Inc.|
Components of Our Compensation Program
In line with our core value of continuous improvement, we (1) listen to our shareholders, (2) review the latest trends in executive compensation practices, (3) evaluate whether certain pay practices are viewed with disfavor by shareholders 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 shareholders with a balance of short- and long-term incentives. The principal components of our executive compensation program include:
- base salary,
- short-term or annual performance awards in the form of cash bonuses,
- long-term incentive awards,
- a non-qualified deferred compensation plan as well as benefits generally available to all of our employees, and
- for our CEO, an employment agreement with severance provisions and, for our other named executive officers, severance arrangements.
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:
- the market salary for similarly situated executives within our peer group and other companies of similar revenue size and market capitalization,
- our operational and financial performance,
- our stock performance,
- individual performance, skills, knowledge, tenure, experience and responsibilities, and
- 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.
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 120% of the target amount for each metric. We have typically used 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, achievement of strategic objectives and TSR.
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:
- the metrics must be tied to key indicators of our success and our annual objectives,
- the performance goal must be reasonably achievable and viewed as fair, while at the same time encouraging stretch performance,
- the metrics must be simple to understand and can be influenced by the subject executive,
- the portion of an individual’s target annual cash compensation attributable to target annual bonus should increase with successively higher levels of responsibility, and
- 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 shareholders if the amendment would affect the tax deduction of payments made under it.
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. We utilize PRSUs as part of our long-term incentive structure to strengthen the performance-based component of the long-term incentive program. In 2017, 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:
- performance periods should cover multiple years to create balance between short- and long-term objectives,
- long-term incentives should function to (a) align executive and shareholder 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,
- awards should support long-term retention of key contributors through vesting,
- 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
- 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 also 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.
Consistent with our executive compensation philosophy and our commitment to align pay with performance, we have generally refrained from providing perquisites to our named executive officers. However, in September 2017 our CEO relocated to Dallas, Texas to provide increased executive leadership to our more than 600 employees located in our Dallas office. In connection with her relocation and to better support our Dallas office’s strategic objectives, the Company agreed to pay Ms. Salka a monthly housing allowance, which the Compensation Committee will review and evaluate on an annual basis. In 2017, the Company paid $32,000 in housing allowances to our CEO.
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 2017 Compensation Program and Results
Our named executive officers’ 2017 direct compensation consisted of: (1) a base salary; (2) cash incentive bonus based on performance; (3) long-term equity incentives and (4) all other compensation, typically ranges from 1%—5% of our CEO’s total compensation. We discuss each component of our 2017 compensation program for our named executive officers in more detail below.
In late 2016, the Compensation Committee reviewed annual base salary levels for the named executive officers, and after careful consideration, approved increases effective January 1, 2017 ranging from three to six percent from the previous year, as set forth in the table immediately to the right. In December 2017, the Compensation Committee considered base salaries of our named executive officers for 2018. In making determinations, the Compensation Committee considers, among other things, peer group benchmarking, individual and company performance.
When benchmarking Ms. Salka’s 2017 base salary, it was below the median among other CEOs among our peers.
Target Bonus. In January 2017, the Compensation Committee reviewed the target bonus level for each named executive officer, which we express as a percentage of annual base salary. After careful consideration of peer group data and other benchmarking information, the Compensation Committee decided to maintain the existing bonus percentage target for Mr. Scott and Ms. Jackson while increasing the target percentage for Ms. Salka and Mr. Henderson.
The table below shows 2017 target bonus information for each named executive officer both in dollar amount and a percentage of salary together with, for comparative purposes, the same figures for 2016.
We believe that Ms. Salka’s 2017 dollar bonus target fell around the median among CEOs within our 2017 executive compensation peer group, which the Compensation Committee believed was appropriate as an incentive since Ms. Salka’s base salary fell below the median.
Structure of our Bonus Plan. In 2017, and consistent with previous years, the Financial Component comprised 70% of our named executive officers’ total target bonuses, and the RP/Leadership Component comprised the remaining 30%. Beginning in 2017, Mr. Henderson’s Financial Component bonus is tied to the Company’s consolidated annual revenue and AEBITDA goals due to his oversight of businesses within each of our reporting segments.
We tied the Financial Component of the bonus to the achievement of financial targets set forth in the Company’s 2017 Annual Operating Plan (the “2017 Ops Plan”) that we understood had represented above market growth for our three business segments on a consolidated basis.
In 2017, the weighting of the performance metrics was consistent for each of our named executive officers:
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 remains to be one of the most reliable measurements to evaluate the success of our strategy, which is to grow as a workforce solutions company. It also selected revenue because investors focus on revenue growth as a metric when evaluating our performance. The Compensation Committee also chose AEBITDA, and understands its widespread acceptance among management, the Board, shareholders and analysts to assess our profitability and performance. Both revenue and AEBITDA (along with net income) are routinely areas of focus 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 and operational initiatives.
The actual consolidated revenue and consolidated AEBITDA targets on which the bonuses are based represented growth that the Compensation Committee believed exceeded general organic growth rates in the markets we serve. The threshold for a named executive officer to receive a bonus on the consolidated financial metrics required achievement of 90% of our 2017 Ops Plan target for each of Pre-Bonus AEBITDA (“Pre-Bonus AEBITDA”)(4) and consolidated revenue. For information on the calculation of Pre-Bonus AEBITDA, and a reconciliation of it to our 2017 net income, please see Exhibit B to this proxy statement (page B-1). Additionally, receipt of the target bonus amount for each financial metric required the Company to meet 100% of our 2017 Ops Plan for that metric, which represented roughly 8% year-over-year growth for both consolidated revenue and AEBITDA (all of which constituted organic growth).
2017 Bonus Plan Payouts. We have set forth a table below ($ in thousands) that summarizes how we performed against the 2017 Ops Plan financial performance metrics that were utilized, in whole or in part, in determining the Financial Component portion of our named executive officers’ bonuses.
With respect to the second component, the Compensation Committee believes our named executive officers provided strong leadership in 2017 that resulted in good financial and operational results for the Company on both an absolute and relative basis (i.e., compared to our executive compensation peers, the Russell 2000). We continued to deliver annual organic revenue, which grew by 4% year-over-year, and AEBITDA growth of 8%, as well as a cumulative total shareholder return of 33%. However, our Compensation Committee also recognizes that the future poses additional challenges that are distinct from the past. For that reason, among others, the Compensation Committee decided to tie the RP/Leadership Component for each named executive officer in 2017 to the implementation of new front and back office enterprise information technology systems across the Company’s portfolio. Given the importance of this initiative, the Compensation Committee decided to base the achievement of the RP/Leadership Component for each named executive officer in 2017 primarily on the achievement of a successful implementation to the upgraded platform. We now anticipate that the new platform will launch in the first half of 2018 in our locum tenens segment.
As a result, we will not determine the amount that any named executive officer earns under this component of the 2017 bonus until June 2018, and we will report the amount that we pay under this component, if any, as compensation for 2018.
4) We use Pre-Bonus Adjusted EBITDA solely to determine bonuses. Pre-Bonus Adjusted EBITDA excludes from Adjusted EBITDA the payment of bonuses and, other extraordinary items not contemplated in the 2017 Ops Plan. We identify this measurement as “Pre-Bonus AEBITDA” in this proxy statement. Under no circumstances should Pre-Bonus AEBITDA be used to substitute for any other financial metric and is used by us solely to determine bonus amounts.
The tables below set forth metrics and summary calculations for each named executive officer’s bonus amounts under the RP/Leadership Component together with the final amounts under the Financial Component, which makes up 70% of the total bonus amount.
(5) As discussed in the narrative above, the Compensation Committee decided to tie the RP/Leadership Component for each named executive officer in 2017 to the implementation of new front and back office enterprise information technology systems across the Company’s portfolio. We now anticipate that the new platform will launch in the first half of 2018 in our locum tenens segment. As a result, we will not determine the amount that any named executive officer earns under this component of the 2017 bonus until June 2018, and we will report the amount that we pay under this component, if any, as compensation for 2018.
LONG-TERM INCENTIVE COMPENSATION
In 2017, the Compensation Committee granted equity awards to each named executive officer and believes it serves as a key component of our named executive officer’s compensation package. We set forth in the chart below the AGD Fair Value of each equity component granted to each named executive officer.
The TSR PRSU grant represented approximately 30% of the total 2017 equity grant value, based on the grant date fair value, that was awarded to each named executive officer, and it will be earned at the end of an approximately three-year performance period (i.e., shortly after December 31, 2019, with the number of shares that are ultimately earned contingent on our total shareholder return for the period relative to the companies in the Russell 2000 Index on December 31, 2016, with 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 included in the Russell 2000 Index as of December 31, 2016, and absolute TSR is positive, then 25% of the PRSUs will be earned. If we perform at the 50th percentile of Relative TSR, 100% of the PRSUs will be earned. If we perform at the 75th percentile, the maximum amount, 175%, of the target number of 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 to the target amount if we exceed the 50th percentile threshold of Relative TSR but do not have a positive absolute TSR.
If we conducted the TSR Measurement on December 31, 2017: (1) Relative TSR would have measured at the 73rd percentile, and (2) Absolute TSR would have been positive. Based on those results, 169% of the named executive officers’ target number of TSR PRSUs granted in 2017 would have been earned. The table set forth below discloses the percentage of the 2017 target PRSUs that may be potentially earned depending on the actual results of the Company’s TSR Measurement:(6)
(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 up to the 50th percentile with the maximum payout of 100%.
In 2017, the Compensation Committee once again determined it best to dedicate a significant portion of the PRSUs to focusing our named executive officers on achieving a 13.5% AEBITDA margin for 2019.(7) Similar to the TSR PRSUs, the number of shares that may ultimately be earned ranges from 0% to 175% of the target number of AEBITDA PRSUs depending on our actual AEBITDA margin for 2019.
Consistent with prior years, the time-vested RSU grants have three-year cliff vesting that are eligible for annual accelerated vesting in one-third increments if the Company achieves its annual AEBITDA targets. As it has done historically, the Compensation Committee elected to wait to consider a grant of time-vested RSUs for Ms. Salka until the end of 2017 when it had better visibility of our year-end financial, operational and stock performance. Based on our strong financial, operational and stock performance in 2017, the Compensation Committee granted Ms. Salka 20,429 RSUs with an AGD Fair Value of $1,000,000 on December 19, 2017.
PRSUs represented 65% of the AGD Fair Value of all 2017 equity awards for our named executive officers, other than our CEO. Due to the timing of Ms. Salka’s RSU award in December 2017 (rather than January 2017), she received PRSUs that represented 57% of her total 2017 equity award value. To provide further clarity on our equity grant practice, the chart set forth below details the change of the AGD Fair Value of all 2017 equity awards granted to our named executive officers against the AGD Fair Value of all 2016 equity awards.
The 8% increase in our CEO’s AGD Fair Value in 2017 from 2016 is driven in part by the Company’s strong financial, operational and stock performance in 2017, 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 2017 peer group for long-term incentive compensation. On an aggregate basis, the combined AGD Fair Value of our named executive officers’ equity awards increased 10% in 2017 from 2016.
(6) As set forth in the Grant of Plan-Based Awards Table, the target number of TSR PRSUs granted in 2017 for each named executive officer is as follows: (1) for Ms. Salka, 11,829; (2) for Mr. Scott, 4,140; (3) for Mr. Henderson, 4,140; and (4) for Ms. Jackson, 2,424.
(7) As set forth in the Grant of Plan-Based Awards Table, the target number of AEBITDA PRSUs granted in 2017 for each named executive officer is as follows: (1) for Ms. Salka, 17,983; (2) for Mr. Scott, 6,294; (3) for Mr. Henderson, 6,294; and (4) for Ms. Jackson, 3,687.
RESULTS OF OUR 2015 PRSU AWARDS
2015 TSR PRSU Award TSR Measurement
On January 5, 2018, the Compensation Committee performed the TSR Measurement for the 2015 TSR PRSU awards. Our Relative TSR was at the 95th percentile of the Russell 2000 Index during the measurement period from January 1, 2015 through December 31, 2017. We also yielded a positive Absolute TSR during such measurement period.
Accordingly, each named executive officer received the maximum of his or her target amount of 2015 TSR PRSUs. Specifically, Ms. Salka, Mr. Scott, Mr. Henderson and Ms. Jackson earned 31,224, 11,151, 11,151 and 8,475 PRSUs under their 2015 TSR PRSU awards, respectively. Shortly after the TSR Measurement, we issued a corresponding amount of Common Stock to each named executive officer.
2015 AEBITDA PRSU Award Measurement
On February 15, 2018, the Compensation Committee determined that our 2016 AEBITDA margin equaled 12.9%. Accordingly, each named executive officer received the maximum of his or her target amount of 2015 AEBITDA PRSUs. Specifically, Ms. Salka, Mr. Scott, Mr. Henderson and Ms. Jackson earned 44,076, 15,741, 15,741 and 11,963 PRSUs under their 2015 AEBITDA PRSU awards, respectively.
ACTUAL CEO PAY
The difference between actual pay and the 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 critical to consider actual pay together with the performance of our Company’s 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.
To provide more easily comparable information on these calculations, we have set forth below a table that summarizes the following for our CEO for each of the last three years: (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.
(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 in the CEO Pay chart above, our annual and long-term incentive programs over the past three fiscal years are consistent with our pay-for-performancecentric executive compensation philosophy, which is that actual pay is significantly correlated to the performance of our Common Stock. For the one-, two- and three-year periods ended December 31, 2017 we were at the 73rd, 71st and 95th percentile for cumulative total shareholder return, respectively, against the companies comprising the Russell 2000 Index. Common Stock performance also provided cumulative total shareholder returns of 33%, 54% and 165% for the one-, two- and three-year periods ended December 31, 2017, respectively. In turn, our CEO’s actual pay 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, Clawback and No Pledging Policies
We maintain meaningful equity ownership requirements as well as clawback and pledging policies to which our named executive officers are subject. We have set forth a summary of these requirements and policies below. Additional details are contained in the Guidelines.
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 shareholders. 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 the Record Date, all of our named executive officers satisfy our equity ownership requirements.
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:
- 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
- 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
Prior to the tax bill that was signed into law on December 22, 2017, 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).
Overview of Our 2018 Executive Compensation Program
Overall, the Compensation Committee believes the Company performed well during 2017. We achieved yearover- year consolidated revenue and consolidated AEBITDA growth of approximately 5% and 8%, respectively, with substantially all of the revenue growth constituting organic growth. Performance of our Common Stock continued its strong performance in 2017, delivering a 28% price appreciation. In light of the foregoing and with its guiding principles in mind, the Compensation Committee believes it has designed the 2018 compensation structure to provide for important short- and long-term performance components that are aligned with shareholders, consistent with the market environment and tailored specifically to us.
The Compensation Committee approved increases in the annual base salaries for the named executive officers for 2018 to maintain a pay for performance alignment, as reflected in the table immediately below.
The base salaries of the named executive officers reflect a 5% to 7% increase as a result of their increased experience, strong individual performance and peer group benchmarking analysis. Our CEO’s salary increase for 2018 is also intended to more directly align her salary with CEO pay among our 2018 peer group, where her base salary still falls slightly below the median.
After careful consideration, the Compensation Committee determined that the 2018 bonus target as a percentage of salary should increase for Ms. Salka, Mr. Scott and Mr. Henderson. These increases reflect our excellent performance and strong total shareholder return over the past three years and further incentivize our named executive officers to continue to drive strong financial performance. We set forth below the 2018 target bonuses for each named executive officer as a percentage of salary together with, for comparative purposes, the same figures for 2017.
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 2017, except for the modifications described in the next paragraph. The target goals for each of the financial metrics are consistent with the targets under our 2018 operating plan and generally require growth that exceeds our estimate of anticipated industry performance. For our CEO, we believe her 2018 bonus target in dollar amount falls near the median among CEOs within our 2018 peer group.
LONG-TERM EQUITY INCENTIVES
In light of the philosophy, goals and objectives surrounding long-term incentive awards, the Compensation Committee decided to use a combination of TSR PRSUs and AEBITDA PRSUs
In an effort to proactively address feedback received during our 2017 shareholder engagement discussions, incentivize greater performance, and to more accurately align our long-term incentive awards with standard market practices based on input from the Compensation Committee’s independent consultant, the Compensation Committee implemented the following changes for 2018.
- Granted time-vested RSUs that vest ratably over a three-year period,
- Slightly modified the TSR Measurement applicable to the TSR PRSUs to eliminate the 50% “penalty” or discount on the number of PRSUs earned if the Company’s Relative TSR falls below the 50th percentile threshold and the Company’s Absolute TSR is negative. The number of PRSUs earned if the Company’s Relative TSR exceeds the 50th percentile but Absolute TSR is negative remains at the target number of PRSUs granted, and
- Increased the maximum number of PRSUs eligible to be earned in connection with our AEBITDA PRSU grants from 175% to 200% of the target number of PRSUs with corresponding achievement of higher AEBITDA.
For 2018, the Compensation Committee continued to target an allocation of 30% TSR PRSUs, 35% AEBITDA PRSUs and 35% time-vested RSUs (as a percentage of the AGD Fair Value of all 2018 equity awards). For each named executive officer, other than Ms. Salka, approximately 65% of the AGD Fair Value of the January 2018 equity awards consisted of PRSUs, and the remaining 35% consisted of time-vested RSUs; for Ms. Salka, all of her January 2018 equity awards were PRSUs, as the Compensation Committee makes their decision on her equity grant of time-vested RSUs in the fourth quarter of 2018 when it has better visibility of the Company’s 2018 performance.
COMPENSATION COMMITTEE REPORT
The Compensation and Stock Plan Committee has reviewed and discussed the Compensation Discussion and Analysis with management, and has recommended to the Board that it be included in this proxy statement and our annual report on Form 10-K for the fiscal year ended December 31, 2017.
|Compensation and Stock Plan Committee Members|
|Martha H. Marsh|
|R. Jeffrey Harris|
|Michael M.E. Johns, M.D.|