Compensation Discussion and Analysis

 

Executive Summary

This Compensation Discussion and Analysis (“CD&A”) contains an overview and analysis of our executive compensation program and policies and the material compensation decisions we have made for the executive officers named in the “Summary Compensation Table” on page 48. We refer to this group of executive officers collectively as our “Named Executive Officers” throughout this document. During fiscal 2021, our Named Executive Officers were:

 

 

Joseph B. Armes

Chairman, Chief Executive Officer (“CEO”) and President (principal executive officer)

James E. Perry

Executive Vice President and Chief Financial Officer (“CFO”) (principal financial officer)

Donal J. Sullivan

Executive Vice President and General Manager, Industrial Products

Craig J. Foster

Former Senior Vice President and General Manager, Specialty Chemicals(1)

Luke E. Alverson

Senior Vice President, General Counsel & Secretary

Gregg W. Branning

Former Executive Vice President and CFO(2)

 

(1)

Mr. Foster’s employment with the Company ended in May 2021, after fiscal year end.

(2)

Mr. Branning’s employment with the Company ended in May 2020.

 

At last year’s annual meeting, we conducted an advisory vote to approve our Named Executive Officers’ compensation for fiscal 2020. A significant majority (95.6%) of the votes cast in the executive compensation vote were voted in favor of the compensation of our Named Executive Officers. While the Say on Pay vote is nonbinding, the Compensation Committee believes this level of approval indicates that our stockholders strongly support our executive compensation program and policies and the material compensation decisions made for executive officers. The Compensation Committee will consider the results of this year’s say-on-pay proposal, as well as continuing feedback from our stockholders, when evaluating future executive compensation decisions.

Fiscal 2021 began with the opportunity to continue building momentum on our outstanding fiscal 2020 performance. However, global events, including the COVID-19 pandemic and resulting economic crisis, challenged the executive team in multiple unprecedented ways. Despite these challenges, Mr. Armes and the CSWI executive team led the Company well, successfully adapting to rapidly changing business, economic, and social conditions, completing the Company’s largest acquisition to date, and, ultimately, delivering impressive financial results.

 

The following highlights our consolidated financial results achieved in fiscal 2021 (comparisons to fiscal 2020).

 

 

Additionally, the Company achieved or completed the following in fiscal 2021:

Completed the $360 million acquisition of TRUaire

Just after year end formed a joint venture with Shell/Pennzoil Quaker State to drive organic growth for greases and lubricants

Maintained full, performance-managed employment throughout the year, with no COVID-19-related furloughs or layoffs

Maintained our comprehensive and competitive retirement and benefit plans

Launched a Company-wide ESG program

Launched a Company-wide Diversity & Inclusion initiative

Advanced our health and safety program, including completing an inaugural Safety Awareness Month, resulting in meaningful decreases in our TRIR

 

The following charts illustrate the relationship between our Company performance and CEO pay.

 

 

As discussed in more detail under “—Elements of the Executive Compensation Program—Annual Incentive Program,” our Named Executive Officers are eligible to receive a cash incentive payment based upon the Company’s annual financial performance against pre-established goals. Based on our fiscal 2021 results, the Company achieved 126.5% of our aggregate quarterly Operating Income goals and achieved 154.4% of our annual Operating Cash Flow goal.

As discussed in more detail under “—Elements of the Executive Compensation Program—Long Term Incentives,” our Named Executive Officers, as well as other Company employees, are eligible to receive equity awards that vest based upon the Company’s financial performance against pre-established goals. For the April 1, 2018 to March 31, 2021 performance period, our Named Executive Officers at the time received performance shares that vested based on the Company’s TSR compared to the TSR of the Russell 2000 Index’s members. When measured as prescribed in our performance share awards, the Company achieved a TSR of 190.8% for this performance period, which ranked 169th among the 2,023 members of the Russell 2000 Index, or the 92nd percentile, vesting these performance shares at 200% of target as shown in the chart to the right. This result is consistent with our emphasis on long-term stockholder value creation and the achievement of benchmarked performance goals, which are described in more detail throughout this CD&A.

As shown below, for fiscal 2021, our CEO had 80.4% of his target pay “at risk,” or dependent upon the Company’s and his individual performance, and our other Named Executive Officers had on average 66.2% of their target pay “at risk.”

2018-2021 Performance Share Awards

 

The Compensation Committee has designed our executive compensation program to support CSWI’s growth strategy. Our key executive compensation objectives are:

 

 

 

In furtherance of these objectives, the Compensation Committee maintains a thoughtful approach to our executive compensation program design and governance practices. The below table summarizes these practices.

What We Do

 

What We Don’t Do

Promote a strong pay for performance plan design

 

No hedging, pledging, or short sales of stock permitted

Regularly benchmark executive compensation against peers of comparable size, complexity, and industry

 

No change in control excise tax gross-ups

Maintain meaningful stock ownership guidelines for our directors and executive officers

 

No option repricing without stockholder approval

Have double trigger requirements on cash payments following a change in control

 

No perquisites offered, other than those generally provided to all employees

Conduct an annual compensation risk review

 

No dividends paid and no voting rights on unvested performance-based equity awards

Provide reasonable and standardized benefits upon severance or change in control

 

No duplication of metrics in annual and long-term incentive plans

Engage an independent compensation consultant

 

No supplemental executive retirement plans

Maintain an incentive compensation “clawback” policy

 

Executive Compensation Program Changes for Fiscal 2021

The Compensation Committee is committed to continuously evaluating our executive compensation program, with a focus on the best interests of our stockholders and the Company and sound compensation practices, consistent with our compensation philosophy. The global outbreak of COVID-19 in March 2020 presented unique challenges to our executive compensation program evaluation for fiscal 2021. COVID-19 created a sharp recessionary environment in the U.S. and around the globe, leading to projected and actual declines in demand in many end markets we serve. The substantial decline of and volatility in oil prices that occurred at that same time magnified these effects. Finally, as our fiscal year ends on March 31, these 2020 events occurred at the same time our Board of Directors and management team would normally set our operating budget for fiscal 2021.

In May 2020, our Compensation Committee met to review and approve our executive compensation program for fiscal 2021. At the same time, and in response to existing market uncertainty and rapidly changing conditions within our end markets, our Board of Directors elected to set our operating budget for fiscal 2021 and review management’s performance against the budget on a quarterly, rather than annual, basis. At that point, we were aware that the significant uncertainty caused directly and indirectly by the COVID-19 pandemic led many companies to revise previously established annual budgets, withdraw guidance, and recast financial metric targets within incentive compensation plans.

The Compensation Committee evaluated all elements of our compensation program for fiscal 2021, in consultation with management and Longnecker & Associates, the Compensation Committee’s independent compensation consultants (“Longnecker”). As a result of this evaluation, the Compensation Committee confirmed all existing elements and design characteristics of our executive compensation program, with three temporary modifications:

1)

Compensation for executive officers, as well as other salaried employees, was frozen at fiscal 2020 levels. This was a prudent, cautionary measure taken to mitigate expenses in light of highly uncertain market conditions in early fiscal 2021. The Compensation Committee reserved the ability to evaluate Company performance and market conditions and modify salaries and other compensation elements as appropriate, but ultimately no other changes were made to base salaries during fiscal 2021.

2)

The Annual Incentive Plan was temporarily modified to set quarterly (rather than annual) targets for our Operating Income financial metrics. This approach aligned with the Board’s decision to set the Company’s fiscal 2021 operating budget on a quarterly basis. Quarterly target setting and measurement both moderated AIP payout results and provided a nimble framework to address highly dynamic market conditions while maintaining objectivity over target setting and performance evaluations. Setting quarterly targets also reduced the risk that we would need to recast targets or adjust operating income results, either during or at the end of the fiscal year.

 

3)

Calculated payout percentages for annually-determined Annual Incentive Plan metrics were reduced by 25%. Recognizing the limited visibility management and the Compensation Committee had regarding market conditions, as well as the acute challenge of setting appropriately challenging, yet achievable, financial metric targets in fiscal 2021, the Compensation Committee applied a 75% limit on the calculated AIP payout percentages for the consolidated operating cash flow and business unit working capital turns financial metrics. This served to reduce calculated AIP payouts for these financial metrics by 25%, providing an effective cap of 150% on the customary 0% to 200% payout range. This limitation addressed the risk that the annual targets would be set too conservatively in the face of limited market visibility, and therefore helped mitigate potential expenses and the risk of oversized AIP payments on an actual and relative basis.

As fiscal 2021 progressed, management presented to our Board proposed quarterly budgets for the Company near the beginning of each fiscal quarter that informed the quarterly operating income targets set for the Annual Incentive Plan. In turn, the Board reviewed management’s performance against the quarterly budgets, and the Compensation Committee measured such performance against the Annual Incentive Plan’s targets. This information was then used in the context of current and forecasted market conditions to establish operating income targets for subsequent quarters.

Throughout the year, the Compensation Committee continued to adhere to the stated elements of our compensation philosophy, including ensuring that performance targets for all financial metrics used in our Annual Incentive Plan were set at definitive, challenging and objective levels that require significant effort and achievement by our Named Executive Officers for a payout to occur. The results of the fiscal 2021 Annual Incentive Plan are discussed in additional detail throughout this CD&A.

Executive Compensation Program Principles

Our key compensation objectives are to align the long-term interests of our executives with those of our stockholders, reward current performance, drive future performance and attract and retain key leaders. While the individual compensation elements may differ, the design of the executive compensation program is based on the same objectives as the compensation programs provided to all Company employees. The Compensation Committee has established the following principles, which are meant to accomplish these compensation objectives and guide the design and administration of specific programs for our Named Executive Officers.

The Compensation Committee believes that a significant portion of our executives’ total compensation should be “at risk” to ensure a strong correlation between executive pay and Company and individual performance. The Compensation Committee also believes the proportion of an executive’s total compensation that is “at risk” should increase in line with the scope and level of the executive’s business responsibilities. To accomplish this, we use a variety of targeted, performance-based compensation programs that promote our annual operating budget and long-term business strategy, build long-term stockholder value, and discourage excessive risk-taking.

For fiscal 2021, 72.2% (on average) of total target compensation for the Named Executive Officers was dependent upon our stock price, our financial performance, and individual performance. The Compensation Committee believes that the CEO’s “at risk” compensation should be a higher percentage compared to the other Named Executive Officers considering the CEO position’s strategic focus and leadership responsibilities. The following table shows the percentage of each Named Executive Officer’s total target compensation for fiscal 2021 that was “at risk” under the program.

Percent of Fiscal 2021 Target Pay “At Risk”(1)

 

(1)

Calculated by dividing (i) the sum of the annual incentive opportunity and target long-term incentive opportunity by (ii) the sum of the annual incentive opportunity, target long-term incentive opportunity and base salary.

 

The Compensation Committee believes that the use of internal performance metrics alone does not create a full picture of Company performance. Accordingly, the performance-based element of our executive compensation program emphasizes and evaluates the Company’s performance relative to an external benchmark.

Since April 2017, our performance share awards have used the Russell 2000 Index, which includes CSWI, as the external benchmark. Using an external benchmark shows, on a comparative basis, how well we deliver results that build long-term stockholder value, which in turn allows us to better establish performance expectations. The Compensation Committee believes the use of the Russell 2000 Index for performance share award TSR benchmarking is objective and transparent to investors. The Compensation Committee also believes the use of a broad index is appropriate because of the diversified nature of the Company’s businesses.

The Compensation Committee reviews relevant market compensation survey data to evaluate the market competitiveness of our executive compensation program. This furthers the goals of attracting and retaining top executive talent. The Compensation Committee uses survey data provided by Longnecker, which consists of compensation data for comparable executive positions within a group of comparable industrial products and specialty chemicals companies, as well as compensation data from the broader market. The Compensation Committee recognizes that potential qualified candidates for executive roles, as well as market opportunities for our current executives, are not limited to companies in our industry sectors.

The group of companies used by Longnecker for purposes of evaluating executive compensation data in fiscal 2021 is shown below.

 

 

CIRCOR International, Inc.

Columbus McKinnon Corp.

CTS Corporation

ESCO Technologies Inc.

FutureFuel Corp.

GCP Applied Tech. Inc.*

Hawkins, Inc.

Innospec Inc.*

Lydall, Inc

NN, Inc.

Quaker Chemical Corp.*

Standex International Corp.

Tredegar Corporation

TriMas Corporation

 

*

New for fiscal 2021

This comparator group was selected using a two-step process that applies objective criteria and financial parameters. For the objective criteria, a list of potential comparator companies was compiled by referring to industrial classifications that include industrial machinery, manufacturing and/or specialty chemicals; public operating companies traded on a U.S. exchange; and geographic locations in the U.S. with international operations. After this list of potential comparator companies was identified, a financial metric filter was applied using revenues, assets, market capitalization, enterprise value, net income and EBITDA, along with gross and operating margin profiles. Companies that did not have at least a majority of these financial metrics falling within 0.5x and 3.0x of the Company’s metrics were excluded. This process produced the list of companies identified above.

The Compensation Committee uses the survey data from Longnecker and the broader market to benchmark our executives’ base salary, annual bonus opportunities, total target cash compensation, long-term incentive compensation and total target compensation, ensuring alignment with the Company’s compensation philosophy, practices and policies.

Base salaries, target annual incentive opportunities and target long-term incentive opportunities for our executives are generally set using the 50th percentile of benchmarked compensation data as a reference point. This approach helps the Compensation Committee balance a performance-focused structure with the Company’s interests in maintaining market-competitive target and realized compensation. Actual realized compensation varies and is determined by performance against these pre-established measures and objectives.

 

The Compensation Committee believes that executive compensation should be linked to building long-term stockholder value while remaining consistent with our business objectives. Our executive compensation program addresses this by including long-term, equity-based incentives that help tie realized compensation to the performance of the Company’s common stock. We also maintain stock ownership guidelines for our executives. In fiscal 2021, our long-term incentive awards for the Named Executive Officers were equally weighted between:

performance shares, which generally vest, if at all, at the expiration of a three-year performance period based on the Company’s TSR performance compared to an objective, external benchmark; and

restricted stock, which vests ratably over time.

The Compensation Committee believes this incentive mix appropriately encourages long-term equity ownership, promotes a balance between stock-based and financial-based achievements, and aligns the interests of the Named Executive Officers with the Company’s risk profile and the interests of our stockholders. The Company does not currently grant stock options as part of its executive compensation program.

The Compensation Committee also recognizes that, while stock prices generally correlate to corporate performance over the long term, other factors may significantly affect stock prices at any point in time. These factors include general economic conditions, industry business cycles, and varying attitudes among investors toward the stock market in general and toward specific industries and/or companies. The influence of these factors makes performance of the Company’s common stock alone an incomplete measure of the Company’s performance. Accordingly, the base salary and Annual Incentive Plan (“AIP”) components of our executive compensation program emphasize short-term corporate performance, as well as the realization of defined business and financial objectives.

The Compensation Committee also believes that the way in which executive officers accomplish objectives is important to the Company’s culture and relevant to long-term performance. Purely formulaic incentive plans do not account for qualitative assessments and can work against the Company’s and stockholders’ best interests. Accordingly, the Compensation Committee has retained an element of discretion to adjust executive compensation to reflect individual, qualitative performance.

At the first regular Compensation Committee meeting following our fiscal year-end, the Compensation Committee conducts a comprehensive review of all components of our executive compensation program. This review is done with the assistance of Longnecker and influenced by feedback from our stockholders, and it considers evolving market practices in the general industry, external regulatory requirements, the competitive market for executives, our business objectives and our executive compensation philosophy. In conducting its review, the Compensation Committee reviews information related to each executive officer’s income and benefits, including base salary, target incentives and retirement, and health and welfare benefits.

 

Elements of the Executive Compensation Program

The primary elements of the Company’s executive compensation program in fiscal 2021 are shown in the following table and are discussed in detail below.

Element

Form

Compensation Objective

Addressed

Description & Rationale

Base Salary

Cash

Reward Current Performance

Fixed cash compensation based on responsibilities of the position and market benchmarks

Provides a base level of market-competitive fixed compensation

 

 

Attract and Retain

Annual Incentive

Performance
Cash Award

Stockholder Alignment

Annual cash incentive tied to achievement of short-term, predetermined performance metrics that align with the Company’s strategy

 

Payment ranges from 0% to 200% of target award

 

Reward Current Performance

 

Attract and Retain

Long-Term Equity Incentive

Performance Shares

Stockholder Alignment

Cliff vest at end of a three-year period at 0% to 200% of award value based on TSR performance against the Russell 2000 Index

 

No voting rights and not eligible to receive dividends (if any) until vesting

Drive Future Performance

Attract and Retain

 

 

 

 

Restricted Stock

Stockholder Alignment

Vests ratably over a three-year period

 

Has voting rights and is eligible to receive dividends (if any) from date of grant

 

Drive Future Performance

 

Attract and Retain

 

 

 

 

Other

Health, Welfare and Retirement Programs

Attract and Retain

Executives participate in the same benefit programs offered to other salaried U.S. employees, including:

Employee Stock Ownership Plan, through which over 4% of our Company is owned by our employees, aligning our collective interests

Qualified 401(k) Plan

Severance Benefits

Stockholder Alignment

Standardized benefits for executive officers in the event of termination without cause by the Company or for good reason by the executive

 

Provides stockholders with predictability if an executive departs and provides protection for executives to pursue stockholder value-enhancing opportunities

 

Attract and Retain




Change-in-Control Benefits

Stockholder Alignment

Standardized “double trigger” severance benefits for executive officers in the event of termination following a change in control

Attract and Retain

Other Benefits

 

 

No perquisites offered, other than those generally provided to all employees

 

The Compensation Committee’s process of reviewing the executive compensation program and setting compensation levels for our Named Executive Officers involves several steps. During the first quarter of each fiscal year, the Compensation Committee reviews each Named Executive Officer’s total compensation. The Compensation Committee members also meet regularly with the Named Executive Officers at various times during the year, both formally within Board meetings and informally outside of Board meetings, allowing the Compensation Committee to assess directly each Named Executive Officer’s performance.

In setting the CEO’s compensation, the Compensation Committee considers the results of the Board’s review of the CEO’s performance with all independent Board members. This process includes the independent Board members individually and collectively presenting their assessment, and the CEO providing his assessment, of his performance.

In addition, the CEO annually presents an evaluation of each other Named Executive Officer to the Compensation Committee, which includes a review of each officer’s contributions and performance over the past year, strengths, weaknesses, development plans, and succession potential, as well as compensation recommendations for the Compensation Committee’s consideration. Following this presentation and a benchmarking review for pay, the Compensation Committee makes its own assessments and determines compensation amounts for each other Named Executive Officer as described below.

During the first quarter of each fiscal year, the Compensation Committee reviews and establishes the base salaries of the Named Executive Officers. The Compensation Committee generally uses the 50th percentile of base salary market data provided by Longnecker as a reference point for the Company’s various executive positions. For each Named Executive Officer, the Compensation Committee considers the scope of responsibilities, experience, and individual performance and then balances these factors against competitive salary practices, including internal pay equity. The Compensation Committee does not assign any relative or specific weights to these factors.

In fiscal 2021, the Named Executive Officers’ base salaries were frozen at fiscal 2020 levels as a prudent, cautionary measure in light of the COVID-19 pandemic and the resulting economic crisis and disruption of market conditions. Any future base salary adjustments will be evaluated relative to incentive compensation targets to ensure total target compensation and “at risk” pay remains consistent with our philosophy. The Named Executive Officers’ annual base salaries for fiscal 2021 were established as shown in the following table:

Named Executive Officer

Fiscal 2021

Annual

Base Salary

Fiscal 2021

Base Salary

Increase %

Joseph B. Armes

$580,672

0.0%

James E. Perry

$360,000

Donal J. Sullivan

$366,593

0.0%

Craig J. Foster

$331,660

0.0%

Luke E. Alverson

$299,601

0.0%

Mr. Armes’ base salary and other compensation components in fiscal 2021 are discussed below in further detail under “—Additional Executive Compensation Information—Chief Executive Officer Compensation in 2021.”

During the first quarter of each year, the Compensation Committee has traditionally established an annual cash incentive opportunity for each Named Executive Officer under the Company’s AIP. At that time, the Compensation Committee also approves the overall Company performance measures for the fiscal year.

In May 2020, the Compensation Committee established annual cash incentive opportunities under the AIP for the Named Executive Officers, which were expressed as a percentage of base salary. The Compensation Committee sets these targets consistent with our stated executive compensation objectives and principles and in consultation with Longnecker. The Compensation Committee uses the 50th percentile of comparative market data as a reference point in setting AIP targets and total target cash compensation. Target annual incentive opportunities for the Named Executive Officers in fiscal 2021, which were unchanged from the target opportunities in fiscal 2020, are set forth below.

Named Executive

Officer

Fiscal 2021

AIP Target

$

Fiscal 2021

AIP Target

% of Base

Salary

Fiscal 2020

AIP Target

% of Base

Salary

Joseph B. Armes

$754,874

130%

130%

James E. Perry

$270,000

75%

Donal J. Sullivan

$219,956

60%

60%

Craig J. Foster

$198,996

60%

60%

Luke E. Alverson

$164,781

55%

55%

 

The Compensation Committee, working with management and Longnecker, evaluates and approves the Company’s AIP performance measures for each fiscal year. The Compensation Committee weights performance measures for each Named Executive Officer—even those who are responsible for business units—in proportions that ensure the majority of measured financial performance is based on the performance of the Company as a whole. We believe it is important for all Named Executive Officers’ to be primarily focused on setting the overall strategic direction of the Company and achieving overall Company results that are aligned with increased stockholder value.

The Compensation Committee also believes that AIP payouts should reflect individual, non-financial performance metrics. This serves to restrain the influence of objective factors on incentive pay, which can have detrimental effects on the Company and stockholders when overused. Importantly, non-formulaic metrics provide the Compensation Committee with discretion to adjust compensation upward or downward depending not only on what objectives and goals an executive accomplished in a given year, but also on how those objectives and goals were met. The Compensation Committee’s intent is to promote and reward only those behaviors that are consistent with our business objectives and core values.

 

The Company’s AIP performance measures established for fiscal 2021 were as follows:

 

Consolidated

Operating Income

 

Consolidated

Operating Cash Flow

 

Business Unit

Operating Income

 

Business Unit Working

Capital Turns

 

Individual

Performance

Why we use it: Measures and supports both our revenue growth and operating efficiency performance, aligning our interests with the interests of our stockholders

 

Why we use it: Measures and supports our strategic objective of delivering strong cash flow from operations to fund growth and returns to stockholders, aligning our interests with the interests of our stockholders

 

Why we use it: Measures and supports both our revenue growth and operating efficiency objectives at the business unit/operating company level, which are in direct control of the executive

 

 

Why we use it: Measures our working capital efficiency in support of sales growth at the business unit/operating company level, which are in direct control of the executive, indirectly supporting operating cash flow

 

Why we use it: Emphasizes individual performance and qualitative achievement of goals to promote and reward behaviors consistent with our business objectives and core values

How we measure it: U.S. GAAP

 

How we measure it: U.S. GAAP (net cash provided by operating activity), net of deferred taxes

 

How we measure it:

U.S. GAAP

 

How we measure it: Annual Revenues / Average Working Capital (i.e., current assets minus current liabilities)

 

How we measure it: Board and CEO assessment of individual performance against predetermined goals and objectives

Payout range:

0% — 200%

 

Payout range:

0% — 200%

 

Payout range:

0% — 200%

 

Payout range:

0% — 200%

 

Payout range:

0% — 200%

The Compensation Committee selected these performance metrics, with input from management, because they support the key strategies that we believe drive sustainable and profitable Company growth. For all financial metrics, the Compensation Committee may exercise its judgment, within parameters it establishes at the beginning of the year, about whether to exclude the effect of certain developments in measuring performance. These developments may include unanticipated changes in accounting principles or extraordinary, unusual or unplanned events, such as the effects of restructurings, impairments, reorganizations, acquisitions, or dispositions.

When the Compensation Committee sets AIP performance metrics for a given year, it also establishes a payout range for all AIP awards, which determines the percentage of the target incentive to be paid for achieved results. The Company’s achievement of financial-based performance metrics is objective and calculated as appropriate. The payout percentages for each Named Executive Officer’s qualitative individual performance metrics are determined by the Compensation Committee based on its performance assessment, as discussed previously.

 

The fiscal 2021 payout range established for all AIP metrics was 0% to 200% of the target award opportunity, which was unchanged from fiscal 2020. The actual payout percentage is determined using a matrix that compares performance against the established performance targets for the year. Payouts for each of the financial metrics are calculated on a straight-line basis for performance between the applicable performance levels (“threshold,” “target,” and “maximum”).

In fiscal 2021, the Compensation Committee temporarily modified the AIP by setting quarterly, rather than annual, targets for our operating income financial metric. As previously discussed, this approach aligned with the Board’s decision to set the Company’s fiscal 2021 operating budget on a quarterly basis. It also provided a nimble framework to address highly dynamic market conditions while maintaining objective targets and performance evaluation, thereby reducing the potential for discretionary adjustments to targets and/or results either during or at the end of the fiscal year. Performance against the quarterly AIP targets was measured, and a payout percentage was calculated, for each quarter. The four quarterly payout percentages were simple averaged to arrive at the final AIP payout percentage for the full year, which resulted in a lower payout percentage than if performance had been measured annually.

Recognizing the limited visibility the Company had regarding market conditions and the acute difficulty of setting appropriately challenging financial targets, the Compensation Committee reduced the calculated AIP payout percentages for the consolidated operating cash flow and working capital turns financial metrics by 25%. This imposed an effective cap of 150% on the payout range for these annually-determined metrics in fiscal 2021. This limitation addressed the risk of annual targets being set too conservatively in the face of limited market visibility, and therefore mitigated expenses and the risk of oversized payouts on an actual and relative basis.

 

The following tables show, for each of the financial performance metrics, the percentage of the target award that is paid at different levels of Company performance, as well as the measured performance and percentage payout for fiscal 2021.

 

Threshold

(50% Payout)

Target

(100% Payout)

Maximum

(200% Payout)

 

FY2021 Measured

Performance

FY2021 Percentage

Payout

Consolidated Operating Income(1)

$38.9 million
(75% of Target)

$51.9 million
(100% of Target)

$64.9 million
(125% of Target)

 

$65.6 million

152.8%(2)

 

(1)

Threshold, Target and Maximum amounts shown represent the aggregate of the four quarterly targets set throughout the year.

(2)

Calculated average performance against the four quarterly operating income targets (i.e., (150.0% + 200.0% + 175.0% + 86.8%) / 4)

 

In fiscal 2021, the Company delivered a total of $65.6 million of measured Operating Income. Consistent with our philosophy and historical approach with strategic transactions, this measured performance excludes $4.1 million of operating income generated by TRUaire from its December 15, 2020 acquisition date, as well as $7.8 million of one-time expenses associated with the acquisition. The measured performance also excludes $2.6 million of one-time expenses associated with the formation of the Shell and Whitmore Reliability Solutions joint venture. In total, this adjusted operating income result was 126.5% of the aggregated quarterly Operating Income targets of $51.9 million. If this metric had been measured annually, rather than quarterly, as in a customary year, the payout results would have been 200%.

 

Threshold

(50% Payout)

Target

(100% Payout)

Maximum

(200% Payout)

 

FY2021 Measured

Performance

FY2021 Percentage

Payout

Consolidated Operating Cash Flow

$36.0 million
(80% of Target)

$45.0 million
(100% of Target)

$51.8 million
(115% of Target)

 

$69.5 million

150.0%(1)

 

(1)

Calculated performance against the annual target (200.0%), reduced by 25%.

 

In fiscal 2021, the Company delivered a total of $69.5 million of Operating Cash Flow (net of deferred taxes), or 154.4% of the Operating Cash Flow plan of $45.0 million (net of deferred taxes). This result excludes $6.3 million of operating cash generated by TRUaire as well as a total of $7.8 million of cash used (net of tax benefit) to fund one-time expenses associated with the TRUaire acquisition and the formation of the Shell and Whitmore Reliability Solutions joint venture. The calculated performance against the Operating Cash Flow plan was 200%, which was then reduced by 25%, resulting in an approved AIP percentage payout of 150% for the Operating Cash Flow metric.

 

 

Threshold

(50% Payout)

Target

(100% Payout)

Maximum

(200% Payout)

 

FY2021 Measured

Performance

FY2021 Percentage

Payout

Business Unit Operating Income

*

*

*

 

*

122.6%(1)

64.5%(2)

Business Unit Working Capital Turns

*

*

*

 

*

 

150.0%(1)

78.0%(2)

 

*

Not disclosed for competitive reasons as discussed below.

(1)

Represents Fiscal 2021 payout percentage for Mr. Sullivan, based on the blended results of the Company’s Industrial Products-focused operating companies.

(2)

Represents Fiscal 2021 payout percentage for Mr. Foster, based on the blended results of the Company’s Specialty Chemicals-focused operating companies.

 

The Company has chosen not to disclose the Threshold, Target, Maximum and Measured Performance data for the Business Unit Operating Income and Working Capital Turns metrics used for Mr. Sullivan and Mr. Foster. These metrics correspond to financial data that is not otherwise publicly disclosed and is used primarily to assess compensation for these two executive officers. The Company believes that disclosing such information would cause competitive harm to the Company without adding meaningfully to the understanding of its business. For the annually-determined Business Unit Working Capital Turns metric, we applied the same 25% reduction to the calculated payout percentages.

The Compensation Committee believes that all performance targets for all financial metrics used in our AIP are set at definitive, challenging, and objective levels that require significant effort and achievement by our Named Executive Officers for payout to occur. Despite the inherent challenges of establishing performance targets in fiscal 2021 due to the impact of COVID-19 and other factors, the Compensation Committee believes the AIP approach used in fiscal 2021 ensured these intentions were met.

While AIP results for any given year will vary, the Compensation Committee believes that appropriate performance target setting, when combined with strong Company and individual Named Executive Officer performance, should result in AIP financial metric payouts that average close to target levels over a five-year period. For additional context, the following table summarizes the Company’s actual financial metric payout percentages under the AIP over the last five years.

Based on its review of our Named Executive Officers’ individual and collective performance, the Compensation Committee approved varied discretionary individual performance payouts. In determining individual performance, the Compensation Committee considered pre-established individual performance goals and objectives for each Named Executive Officer, which addressed the following topics:

Achievement of the Company’s and business units’ performance against key financial metrics, as applicable;

Achievement of milestones to improve operational excellence and sustainability initiatives;

Execution of identified key growth initiatives and development of strategic growth capabilities;

Successful management of enterprise risks;

Improvement in performance against key health and safety metrics; and

Improvement in talent development, employee retention, and diversity and inclusion.

Additionally, the Compensation Committee considered the leadership acumen demonstrated by each Named Executive Officer in addressing the unique challenges of fiscal 2021, including the COVID-19 pandemic and resulting economic crisis, and the value ultimately created for the Company’s stockholders in fiscal 2021. The Compensation Committee also considered how each Named Executive Officer performed and delivered results in a manner consistent with our core values of Integrity, Respect, Excellence, Stewardship, Citizenship, Accountability and Teamwork.

 

The payout percentages for the 25%-weighted individual performance metric for each Named Executive Officer is set forth in the final AIP payments table below.

 

Target AIP

Award

Consolidated

Operating

Income

Consolidated

Operating

Cash Flow

Business Unit

Operating

Income

Business Unit

Working

Capital Turns

Individual

Performance

FY2021

AIP Award

Joseph B. Armes

$754,874

$692,068

(152.8% Payout)

$169,847

(150.0% Payout)

$338,085

(179.1% Payout)

$1,200,000

(159.0% Payout)

James E. Perry

$270,000

$247,536

(152.8% Payout)

$60,750

(150.0% Payout)

$91,714

(135.9% Payout)

$400,000

(148.1% Payout)

Donal J. Sullivan

$219,956

$117,632

(152.8% Payout)

$32,993

(150.0% Payout)

$53,933

(122.6% Payout)

$32,993

(150.0% Payout)

$109,978

(200.0% Payout)

$347,530

(158.0% Payout)

Craig J. Foster

$198,996

$106,423

(152.8% Payout)

$29,849

(150.0% Payout)

$25,670

(64.5% Payout)

$15,522

(78.0% Payout)

$0

(0% Payout)

$177,465

(89.2% Payout)

Luke E. Alverson

$164,781

$151,071

(152.8% Payout)

$37,076

(150.0% Payout)

$61,853

(150.1% Payout)

$250,000

(151.7% Payout)

 

The total AIP award earned by each Named Executive Officer for fiscal 2021 is reported in the “Summary Compensation Table” under the “Non-Equity Incentive Plan Compensation” column.

Our long-term incentive plan (“LTIP”) rewards our Named Executive Officers for the Company’s performance over a period of more than one fiscal year. Our LTIP consists of two components: performance shares and restricted stock. In fiscal 2021, all Named Executive Officers received their long-term incentive awards in these forms. The Compensation Committee may also award one-time equity grants in its discretion from time to time based on performance or other factors.

As discussed above, the Compensation Committee believes that long-term incentive compensation is essential to retaining and motivating executives. The Compensation Committee further believes that providing our executives with long-term incentives will encourage them to operate the Company’s business with a view toward building long-term stockholder value. Based on these considerations and consistent with prior years, the Compensation Committee determined that for fiscal 2021, an equity award combination consisting of 50% in granted value of restricted stock, which vests ratably over a three-year period, and 50% in granted value of performance shares, which cliff vest at the end of a three-year period, would best serve the goals that the Compensation Committee sought to achieve.

The Compensation Committee has established a practice of annually approving and granting equity awards to LTIP participants at two points during the year. Restricted stock is granted on or about October 1 (the middle of our fiscal year), and performance shares are granted on or about April 1 (the beginning of our fiscal year). This difference in grant dates, and the possible difference in base salary levels at the time grant amounts are calculated (given the timing of annual salary adjustments), causes the actual award values of the restricted stock and performance shares to be slightly different. The material terms and conditions of these equity awards are determined under the provisions of our existing equity compensation plan, which is available on the Company’s website at www.cswindustrials.com under the caption “Investors — Financial Reports and Filings.”

Each year, the Compensation Committee establishes a target LTIP opportunity for each Named Executive Officer, which is expressed as a percentage of the executive’s base salary. The LTIP opportunities are set after the Compensation Committee has evaluated the Company’s operating results for the prior year and at the same time the Company is making its major compensation decisions for the current fiscal year. In determining the aggregate amount of total awards available for our executives, the Compensation Committee considers two things: the target dollar value of the long-term incentive awards, and the awards’ potential dilutive effect on the Company’s outstanding shares of common stock.

In setting the target dollar values, the Compensation Committee considers comparator group and broader market data provided by Longnecker, as previously described. We generally provide long-term incentive awards at target levels using the 50th percentile of benchmarked compensation data as a reference point to help achieve market-competitive levels of total target compensation.

Once the target dollar values are initially set, the Compensation Committee evaluates stockholder dilution based on equity compensation “burn rates,” which refers to the annual rate at which shares are awarded under our equity compensation plan compared to the Company’s outstanding shares of common stock. Generally, the Compensation Committee targets a Company-wide “burn rate” of 1.0% or less for each annual grant of long-term incentive awards for all Company employees. Our equity granting practices have stayed well within this target since program inception.

Based on the criteria described above, the Compensation Committee approved the target LTIP opportunities for the Named Executive Officers as set forth in the following table.

Named Executive

Officer

2021 LTIP

Target In $

2021 LTIP

Target

as % of Base

Salary

2020 LTIP

Target

as % of Base

Salary

Joseph B. Armes

$1,625,882

280%

280%

James E. Perry

$630,000

175%

Donal J. Sullivan

$549,890

150%

100%

Craig J. Foster

$331,660

100%

100%

Luke E. Alverson

$299,983

100%

100%

In general, executive LTIP targets were unchanged from fiscal 2020. Mr. Sullivan’s LTIP target was increased from 100% to 150% in connection with his August 2020 promotion to Executive Vice President and based on competitive pay analysis, consistent with individual performance and our compensation philosophy.

The grant date fair value of the performance share and restricted stock awards granted to the Named Executive Officers during fiscal 2021, calculated in accordance with U.S. GAAP pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Compensation — Stock Compensation,” are shown in the “Summary Compensation Table” under the “Stock Awards” column and the accompanying footnotes. The actual award values of the equity awards at grant differ from the “grant date fair value” disclosed in the Summary Compensation Table due to the required accounting methodology, as discussed in footnote 2. Additional information on the awards granted in fiscal 2021 is shown in the “2021 Grants of Plan-Based Awards” table.

Performance shares are restricted shares that vest, if at all, based on the Company’s achievement of predetermined performance metrics, measured over a three-year performance period. Performance share awards in fiscal 2021 were based on TSR performance compared to the members of the FTSE Russell 2000 Index. This performance measure is consistent with prior years and supports the Company’s strategic objective of emphasizing growth in excess of market levels and aligning the interest of our executives with the Company’s stockholders. The Compensation Committee believes that these performance-based awards provide a strong incentive for our executives to achieve performance goals that advance our business strategies and build long-term stockholder value, and that they encourage executive retention.

These performance-based awards are subject to forfeiture if the executive’s employment is terminated by the Company for cause or by the executive without good reason before the end of the three-year performance period. Until vesting, holders of performance shares do not have voting rights. They also do not receive dividends but are entitled to receive dividend accrual units that vest, if at all, at the same percentage as the underlying award.

Before performance share awards are granted, the Compensation Committee establishes a vesting percentage range around each executive’s target long-term incentive opportunity allocated to the performance shares. This vesting percentage range has an established upper limit and a minimum below which no shares will vest, and it determines the number of performance shares that vest relative to the number of shares originally granted.

For fiscal 2021, the vesting percentage range established for performance shares was 0% to 200% of the award value, which was unchanged from fiscal 2020. The vesting of these awards will be calculated by determining the Company’s TSR percentile ranking among the Russell 2000 Index members, and then multiplying the number of performance shares granted by the applicable interpolated percentage of shares earned, as set forth in the following vesting matrix:

As noted in the above schedule, the Compensation Committee has imposed a limit on the number of shares that will vest if the Company’s TSR is negative for the applicable performance period. If the Company’s TSR is negative during the performance period, the maximum amount of performance shares that can vest is 100%, even if the Company’s TSR performs above the 50th percentile of the Russell 2000 Index.

For the fiscal 2021 performance share awards, the reported value shown in the “Summary Compensation Table” was computed based on the probable outcome of the performance conditions based on a Monte Carlo simulation and the grant date estimate of compensation cost to be recognized over the performance period, which was 126% of target, or $74.26 per share. This “grant date fair value” (i.e., 126% of the target amount) is reported in the “Summary Compensation Table” below for the Named Executive Officers’ performance shares. This reported amount is higher than the actual granted award value (i.e., 100% of the target amount) due to the accounting methodology for determining this amount, as discussed in footnote 2 to the table.

 

Our restricted stock awards vest ratably over a three-year period to deliver a meaningful long-term incentive that balances risk and potential reward. These awards help executives build ownership in the Company, aligning their interests with stockholders. These awards also serve as an effective incentive for our executive officers to remain with the Company and continue high levels of performance. The Compensation Committee considers restricted stock awards to be “at risk” compensation because no compensation is realized at grant, the awards are subject to forfeiture based on employment status, and their future value to the executive is directly determined by the Company’s stock price.

Restricted stock awards are only earned if the individual continues to be employed by the Company through the vesting date. Unvested restricted stock has voting rights and earns dividends, if any, on the same basis as the Company’s outstanding unrestricted common stock.

In fiscal 2021, we provided special compensation awards to certain executives in the following amounts:

Executive Officer

Special Award Details

Rationale

James E. Perry

2,500 Performance Shares

Sign-on award to help induce the executive to join our organization and provide a meaningful retention incentive

Donal J. Sullivan

$52,470

Additional cash bonus paid in recognition of exemplary performance in fiscal 2021 and leadership in consummating the TRUaire acquisition

Additional Executive Compensation Information

Under the Company’s Insider Trading Policy, which is available on our website at www.cswindustrials.com under the caption “Investors — Corporate Governance,” executives and other employees are prohibited from pledging stock, holding Company securities in a margin account, and engaging in transactions (such as trading in options, short sales, and sales “against the box”) designed to hedge against the value of the Company’s common stock.

Our executive compensation program provides guidelines for executive ownership of Company common stock, expressed as a multiple of annual base salary. The Compensation Committee believes these guidelines encourage the alignment of executive and stockholder interests and promote the Company’s objective of building long-term stockholder value by requiring executives to build and maintain a meaningful stake in the Company.

The stock ownership guidelines are designed to encourage stock ownership at levels high enough to indicate management’s commitment to the Company and share value appreciation, while satisfying an individual executive’s prudent needs for investment diversification. The stock ownership guidelines are set by the Compensation Committee using competitive benchmarking data, and the guidelines are reviewed each year and updated as necessary. There were no changes to the stock ownership guidelines during fiscal 2021.

 

The Company’s current stock ownership guidelines for the Named Executive Officers and the number of shares needed to satisfy the guidelines are shown below.

Named Executive Officer

Ownership Guideline

Ownership Guideline

at 3/31/2021

(# of Shares)(1)

Current Ownership

(Share Equivalent &

Multiple of Salary)(1)

Joseph B. Armes

6 x Annual Base Salary

25,558

152,897

35.6x

James E. Perry

3 x Annual Base Salary

7,923

9,382

3.5x

Donal J. Sullivan

3 x Annual Base Salary

8,068

24,854

9.2x

Craig J. Foster

3 x Annual Base Salary

7,299

18,429

7.5x

Luke E. Alverson

3 x Annual Base Salary

6,593

18,558

8.4x

 

(1)

Based on a price per share of $135.00, the closing price of the Company’s stock on March 31, 2021.

 

 

Executives are expected to meet the stock ownership guidelines within five years from the date the guidelines are first applicable. Recognizing the time required to achieve the ownership guidelines, the Compensation Committee approved an interim retention requirement. Specifically, executives who do not yet meet the applicable ownership requirement must retain at least 75% of the vested common stock they receive from equity awards granted from the time the ownership guidelines become applicable, net of any shares used or sold to pay applicable tax withholding. For fiscal 2021, all Named Executive Officers satisfied their ownership levels.

The Compensation Committee periodically reviews the stock ownership guidelines and annually monitors the executives’ progress toward meeting their target ownership levels. Shares held directly by an executive count toward satisfying the requirements, as do unvested restricted stock awards, but unvested performance-based equity awards do not. Additionally, the share equivalent of vested and unexercised stock options (net of exercise price) counts toward satisfying the stock ownership requirements.

The Company maintains a Recoupment of Incentive Compensation Policy (the “Recoupment Policy”), which reinforces our commitment to our business objectives and core values. Under the Recoupment Policy, the Compensation Committee can “claw back” from an executive certain incentive compensation paid in the past three years if the Company is required to restate its financial statements. If a restatement occurs, the Compensation Committee can require any executive to reimburse the Company when the amount of compensation received was greater than the amount the Compensation Committee believes was actually earned based on the restated financial results. The Recoupment Policy does not require any finding of fault or malfeasance on the part of an executive to support the Company’s demand for recoupment.

In connection with our spin-off from Capital Southwest Corporation in September 2015 (the “Spin-Off”), the Company assumed administrative responsibility and liability for certain legacy pension plans and the associated benefits payable to participating employees. On January 1, 2015, the legacy pension plans were closed to new participants. At the Spin-Off, the Company froze the legacy pension plans, and future benefits to plan participants ceased to accrue as of that date. Mr. Armes is the only Named Executive Officer who accrued benefits under the legacy plans as part of his prior employment with Capital Southwest Corporation. In September 2019, the Company terminated the legacy pension plans.

The legacy pension plans included a qualified defined benefit, non-contributory retirement plan, as well as a restoration plan that provided benefits to the plan participants in the qualified plan to fulfill the intent of the qualified plan without regard to limitations under the Internal Revenue Code of 1986, as amended (the “Code”). The retirement benefits payable under the legacy pension plans depended on the participant’s years of service and their final average monthly compensation determined by averaging the five consecutive years of highest compensation prior to retirement. The amount of legacy pension plan benefits attributable to Mr. Armes as of March 31, 2021, and prior to the plan termination is shown in the “Pension Benefits” table below.

As previously discussed, the Compensation Committee strives to make our executive compensation program primarily performance-based and, as such, does not provide perquisites for our executive officers other than benefits generally provided to all employees. Our executive compensation program from time to time may provide limited other benefits that the Compensation Committee determines to be competitive with the level of benefits offered by the companies with which we compete for executive talent. Any such benefits would serve to meet our stated objective of attracting and retaining executive talent. In addition, some benefits may, in the Compensation Committee’s view, be provided for the Company’s benefit, notwithstanding any personal benefit an executive may derive. No such other benefits were provided in fiscal 2021.

The compensation of the CEO was set in a manner consistent with our compensation philosophy and the general compensation objectives and principles discussed above. In the interest of providing stockholders with a better understanding of Mr. Armes’ compensation for fiscal 2021, we are providing the following discussion and analysis.

On October 1, 2015, the Company entered into an employment agreement with Mr. Armes. The employment agreement provides that Mr. Armes will serve as Chief Executive Officer of the Company and that the Board will nominate Mr. Armes for election to the Board during the term of the agreement. The employment agreement had an initial term of two years, but the term automatically extends for additional one-year periods unless Mr. Armes’ employment is terminated as provided in the employment agreement.

 

During fiscal 2021, Mr. Armes’ base salary, along with the base salaries of all the other Named Executive Officers, was maintained at fiscal 2020 levels. This was a prudent, cautionary measure undertaken at the time considering the COVID-19 pandemic and related market conditions.

During fiscal 2021, Mr. Armes’ target AIP opportunity was maintained at 130% of base salary. After performance results for the fiscal year were confirmed, the Compensation Committee approved a total AIP payout of $1,200,000, or 159.0% of target, broken down as follows:

Metric

Amount ($)

Weight

Payout

CSWI Operating Income

$692,068

60%

152.8%

CSWI Operating Cash Flow

$169,847

15%

150.0%

Individual Performance

$338,085

25%

179.1%

During fiscal 2021, Mr. Armes’ target LTIP opportunity was maintained at 280% of base salary. Accordingly, Mr. Armes received an award of 12,333 performance shares ($812,941 award value) on April 1, 2020, and an award of 11,074 shares of restricted stock ($812,941 award value) on October 1, 2020. The award value for the performance shares differs from the “grant date fair value” reported in the “Summary Compensation Table” below due to the accounting methodology for determining such amount, as discussed in footnote 2 to the table.

Under Mr. Armes’ employment agreement, if his employment is terminated due to death or disability, Mr. Armes will receive (1) his base salary and any unpaid benefits (including death benefits) through the date of termination; (2) the AIP cash payment related to the previous year, if the date of termination is after the end of a fiscal year but before the Company pays AIP cash incentives; and (3) a prorated AIP cash payment related to the then-current fiscal year, if the date of termination is before the end of a fiscal year. Additionally, all of Mr. Armes’ unvested equity-based awards will immediately vest in full, except for performance-based awards, which will vest when and to the extent that the performance conditions have been satisfied. Any options he holds will remain exercisable for one year following the date of termination.

If Mr. Armes’ employment is terminated by the Company without “cause” or by Mr. Armes for “good reason,” Mr. Armes will receive (1) his base salary and any unpaid benefits through the date of termination; (2) a lump sum payment equal to two times the sum of (a) his then-current base salary or any higher base salary that was in effect during the 12 months prior to the date of termination, and (b) the greater of his annual AIP payment for the prior fiscal year or his target AIP incentive for the current year; (3) the AIP cash payment related to the previous year, if the date of termination is after the end of a fiscal year but before the Company pays AIP cash incentives; (4) a prorated AIP cash payment related to the then-current fiscal year, if the date of termination is before the end of a fiscal year; and (5) continued medical and dental insurance for him and his dependents for 24 months following the date of termination. Additionally, all of Mr. Armes’ unvested equity-based awards will immediately vest in full, except for performance-based awards, which will vest when and only to the extent that the performance conditions have been satisfied. Any options he holds will remain exercisable for one year following the date of termination.

If Mr. Armes’ employment is terminated by the Company for “cause” or by Mr. Armes without “good reason,” Mr. Armes will receive only his base salary and any unpaid benefits through the date of termination.

Additionally, Mr. Armes participates in the Company’s Executive Change in Control and Severance Benefit Plan (the “CIC and Severance Plan”). To the extent the provisions of the CIC and Severance Plan are more beneficial to Mr. Armes than the terms set forth in his employment agreement, such provisions would apply in the applicable termination scenario.

The employment agreement also provides that Mr. Armes will not engage in activities that are competitive with the Company’s business or solicit any key employees of the Company to leave or accept employment with another company for 24 months following the date of termination.

 

The Company maintains the CIC and Severance Plan. This plan is publicly filed and its features are described more fully under “Potential Payments upon Termination or Change-In-ControlCSW Industrials, Inc. Executive Change in Control and Severance Benefit Plan” below. The Compensation Committee believes that this plan benefits stockholders in providing consistency and transparency in severance benefits if an executive officer’s employment is terminated, and also supports alignment between executive interests and stockholder interests should a transformative transaction arise that is in stockholders’ best interests.

 

The Compensation Committee regularly reviews each Named Executive Officer’s total compensation under several scenarios including a change-in-control of the Company, termination of employment by the Company, and resignation or retirement by the executive. Tally sheets setting forth all the listed scenarios are prepared by management and reviewed by the Compensation Committee with input from Longnecker. Based on its most recent review of the tally sheets, the Compensation Committee determined that the potential payments that would be provided to the Named Executive Officers were consistent with our executive compensation objectives and principles.

Executive Compensation Program Changes for Fiscal 2022

This CD&A discusses our executive compensation program for fiscal 2021. For the benefit of our stockholders, we summarize below certain changes and other matters that the Compensation Committee has approved regarding our fiscal 2022 executive compensation program. These and any other fiscal 2022 compensation program changes will be discussed in further detail in our proxy statement for the 2022 annual meeting of stockholders.

As the Company and our served end markets have adapted to COVID-19 and business conditions have stabilized relative to the beginning of fiscal 2021, the Compensation Committee intends to transition away from the quarterly financial metric target-setting process used for the fiscal 2021 AIP and return to our customary annual target-setting process in the future. For fiscal 2022, the Compensation Committee believes using a semi-annual financial target-setting process is appropriate as the AIP transitions back to a more normalized, annual target-setting structure in fiscal 2023. This belief is supported by still-present uncertainty and volatility within our served end markets and overall business environment, combined with added operational and financial complexity resulting from the December 2020 TRUaire acquisition, the formation of the Shell & Whitmore Reliability Solutions joint venture, and related integration efforts.

Within our AIP, we will transition the Business Unit Working Capital Turns metric to Business Unit Operating Cash Flow, but maintain the weight of that measure at 10% of total AIP for our operating executives. This change will better align the business units’ financial metrics to our consolidated financial metrics.

In early calendar 2021, the Board and the Compensation Committee began to engage in numerous strategic discussions, with the support of Longnecker, focused on retaining Mr. Armes’ service through retirement and promoting successful succession planning practices for the Chief Executive Officer role. These discussions were further supported by Mr. Armes’ exemplary performance during his tenure with the Company and his leadership of the Company through the challenges of fiscal 2021. As a result of these strategic discussions and in furtherance of these goals, in April 2021, the Compensation Committee approved a special equity grant for Mr. Armes, described below.

Restricted stock. Mr. Armes received 31,496 shares of restricted stock (the “RS Award”), which will cliff vest on the fifth anniversary of the date of grant, subject to Mr. Armes’ continued employment. The terms and conditions of this award were otherwise materially consistent with the Company’s restricted stock awards granted under the existing long-term incentive plan.

Performance shares. Mr. Armes received 27,559 performance shares (the “PS Award”), which will vest (or not) in equal amounts on each of March 31, 2025, 2026, and 2027, based on the Company’s total shareholder return relative to the members of the FTSE Russell 2000 Index over the applicable performance periods (i.e., four years, five years, and six years), subject to continued service. The terms and conditions of this award were otherwise materially consistent with the Company’s performance share awards granted under the existing long-term incentive plan, including the 0% to 200% performance vesting scale and the absence of both voting rights and the ability to receive dividends until vesting. Additionally, due to the retention-based intent, the PS Award does not include the Company’s customary “qualified retirement” benefit that is part of the Company’s regular performance share awards.

Succession award. Mr. Armes received 19,685 performance restricted stock units (the “Succession Award”), 40% of which will vest after we successfully recruit and hire a successor CEO (but not before April 2025), and 60% of which will vest upon the successful first employment anniversary of the successor CEO. The Succession Award restricted stock units do not have voting rights or the ability to receive dividends until vesting.

Upon termination of Mr. Armes’ employment by the Company without Cause or by him for Good Reason (as defined in his employment agreement), the RS Award, the PS Award and the Succession Award will vest in full, subject to satisfaction of all performance conditions in the case of the PS Award. Upon Mr. Armes’ termination of employment due to death or disability, the RS Award, the PS Award and the Succession Award will vest in full, except that the Succession Award will not vest unless his death or disability occurs after April 1, 2024. All awards vest automatically upon the occurrence of a Change in Control (as defined in the Company’s Amended and Restated 2015 Equity and Incentive Compensation Plan), and all awards are forfeited if Mr. Armes’ employment is terminated for Cause (as defined in his employment agreement).

 

The Compensation Committee believes these equity grants appropriately reflect the Board’s confidence in Mr. Armes’ leadership and will achieve the Board’s retention and succession-planning goals to support achievement of the Company’s long-term strategy. The equity grants also contain terms that reflect the long-term focus of the awards and are consistent with the Company’s commitment to driving long-term shareholder value. These long-term incentive awards will be disclosed in Mr. Armes’ fiscal 2022 compensation amounts in next year’s proxy statement for the 2022 annual meeting of stockholders.

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