UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
o | Preliminary Proxy Statement |
o | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
ý | Definitive Proxy Statement |
o | Definitive Additional Materials |
o | Soliciting Material Pursuant to Section 240.14a-12 |
LINCOLN ELECTRIC HOLDINGS, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
ý | No fee required. |
o | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
(1) | Title of each class of securities to which transaction applies: | |
(2) | Aggregate number of securities to which transaction applies: | |
(3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): | |
(4) | Proposed maximum aggregate value of transaction: | |
(5) | Total fee paid: | |
o | Fee paid previously with preliminary materials. |
o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
(1) | Amount Previously Paid: | |
(2) | Form, Schedule or Registration Statement No.: | |
(3) | Filing Party: | |
(4) | Date Filed: | |
Table of Contents | ||
BUSINESS OVERVIEW | ||
DIRECTOR NOMINEES | ||
PROPOSAL 4—ADVISORY VOTE ON THE FREQUENCY OF AN EXECUTIVE COMPENSATION VOTE | ||
PROPOSAL 5—RE-APPROVAL OF THE MATERIAL TERMS FOR QUALIFIED PERFORMANCE-BASED COMPENSATION UNDER OUR 2007 MANAGEMENT INCENTIVE COMPENSATION PLAN (MICP) | ||
PROPOSAL 6—APPROVAL OF FIRST AMENDMENT TO 2015 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS | ||
APPENDIX A—DEFINITIONS AND NON-GAAP FINANCIAL MEASURES | ||
APPENDIX B—2007 MANAGEMENT INCENTIVE COMPENSATION PLAN | B-1 | |
APPENDIX C—2015 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS | C-1 | |
DEAR SHAREHOLDER:
You are cordially invited to attend the Annual Meeting of Shareholders of Lincoln Electric Holdings, Inc., which will be held at 11:00 ET on Thursday, April 20, 2017 at the Marriott Cleveland East, 26300 Harvard Road, Warrensville Heights, Ohio. A map is printed on the outside back cover of this proxy statement.
At the meeting, you will be asked to: • Elect eleven Director nominees named in the proxy statement for a one-year term; • Ratify our independent auditors for the year ending December 31, 2017; • Approve, on an advisory basis, the compensation of our named executive officers; • Recommend, on an advisory basis, the frequency of the shareholder vote on the compensation of our named executive officers; • Re-approve the material terms for qualified performance-based compensation under our 2007 Management Incentive Compensation Plan; • Approve an amendment to our 2015 Stock Plan for Non-Employee Directors ; and • Address any other business that properly comes before the meeting. Shareholders of record on the close of business on March 1, 2017, the record date, are entitled to vote at the Annual Meeting. Your vote is very important! Please vote your shares promptly in one of the four ways noted on page 5. We appreciate your continued confidence in Lincoln Electric and we look forward to seeing you at the Annual Meeting! | Sincerely,  Christopher L. Mapes Chairman, President and Chief Executive Officer  Frederick G. Stueber Executive Vice President, General Counsel and Secretary |
WE WILL BEGIN MAILING THIS PROXY STATEMENT ON OR ABOUT MARCH 20, 2017. |
Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to Be Held on April 20, 2017: This proxy statement and the related form of proxy, along with our 2016 Annual Report and Form 10-K, are available free of charge at www.lincolnelectric.com/proxymaterials.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 1 |
 | BUSINESS OVERVIEW // Lincoln Electric is the world leader in the design, development and manufacture of arc welding products, robotic arc welding systems, plasma and oxyfuel cutting equipment and has a leading global position in the brazing and soldering alloys market. Headquartered in Cleveland, Ohio, U.S., we operate 47 manufacturing locations in 19 countries and distribute to over 160 countries. In 2016, we generated $2.3 billion in sales. As an innovation leader with the broadest portfolio of solutions and the industry’s largest team of technical sales representatives and application experts, we are known as the Welding Experts®. Our portfolio of welding and cutting solutions are designed to help customers achieve greater productivity and quality in their manufacturing and fabrication processes. We leverage our global presence and broad distribution network to serve an array of customers across various end markets including: general metal fabrication, power generation and process industries, structural steel construction (buildings and bridges), heavy equipment fabrication (agricultural, mining, construction and rail), shipbuilding, automotive, pipe mills and pipelines, and oil and gas. |
 | |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 2 |
For over 120 years, we have achieved success through a balanced approach and our focus in providing:
• Customers with a market leading product offering and superior technical application capability, | • Employees with an incentive and results driven culture, and |
• Shareholders with above market returns. | |
In 2010, we mobilized the organization around a ten year “2020 Vision and Strategy” that focuses on expanding Lincoln Electric’s position as a valued, technical solutions-provider in our industry by accelerating innovation, operational excellence, and achieving best-in-class financial results through an economic cycle. The strategy is founded on Lincoln Electric’s values and organizes commercial and operational initiatives around six core capabilities and competitive advantages to drive growth and improved margin and return performance: welding process expertise, commercial excellence, product development, global network and reach, operational excellence and financial discipline.
 | In executing our “2020 Vision and Strategy,” we have pursued an aggressive acquisition strategy, accelerated our investments in R&D to enhance the value proposition and positioning of our solutions, and have emphasized engineered solutions for mission-critical applications. Additionally, we have focused on reach to expand our brand’s footprint geographically, across our extensive distribution channels and in attractive adjacencies such as automation. Our efforts have been successful, as contributions from acquisitions, a strong vitality index of new products and an expanded market presence have contributed to improved margin performance and returns. We have also focused on making structural improvements to the business through continuous improvement initiatives focused on quality, efficiency, and safety which will have improved margins, cash flow generation and returns, but have also improved the long-term operating performance of the business through the economic cycle. |
In 2016, the organization continued to advance performance and sustained or improved results in three of the four key 2020 financial metrics:
Key Financial Metrics | 2020 Goal | 2009–2016 Achievement1 | Key Initiatives and Focus |
Sales Growth CAGR | 10% CAGR through the cycle | 4% Reported Sales CAGR 6% CAGR (Excludes FX and Venezuela results) | • Increased investment in R&D, increasing our new product vitality index • Active acquisition program |
Operating Income Margin | 15% Average through the cycle | 10.7% Average Reported 12.4% Average Adjusted (Achieved a peak 15.1% margin in 2014) | • Targeted growth opportunities • Richening the portfolio mix through differentiated technologies and applications • Operational excellence |
Return on Invested Capital (ROIC) | 15% Average through the cycle | 16.7% Average | • Disciplined acquisition program with stringent ROIC and IRR goals • Margin expansion • Cash management |
Average Operating Working Capital Ratio | 15% at 2020 | 15.6% at 2016 (760 basis point improvement) | • Effective cash cycle management • Inventory management |
(1) See Appendix A for definitions and/or reconciliations of theses metrics to results reported in accordance with generally accepted accounting principles.
As we navigate through the 2020 strategy, we continue to review our progress and remain confident in our program, our ability to execute to plan and achieve our goals.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 3 |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 4 |
NOTICE OF ANNUAL MEETING / /
ANNUAL MEETING OF SHAREHOLDERS
DATE & TIME | LOCATION | RECORD DATE |
Thursday, April 20, 2017 11:00 ET | Marriott Cleveland East 26300 Harvard Road Warrensville Heights, Ohio | March 1, 2017 |
HOW TO CAST YOUR VOTE //
Your vote is important! Please vote your shares promptly in one of the following ways:
 |  |  |  |
BY INTERNET | BY PHONE | BY MAIL | IN PERSON |
Visit www.proxyvote.com until April 19, 2017 | Please call 1-800-690-6903 by April 19, 2017 | Sign, date and return your proxy card or voting instruction form, must be received by April 19, 2017 | You can vote in person at the meeting in Warrensville Heights, Ohio on April 20, 2017 |
MEETING AGENDA VOTING MATTERS //
PROPOSAL 1 |  | FOR each nominee | PAGE 12 |
To elect eleven Director nominees named in this Proxy Statement to hold office until the 2018 Annual Meeting | |||
PROPOSAL 2 | | FOR | PAGE 74 |
To ratify the appointment of Ernst & Young LLP as independent auditor for the 2017 fiscal year | |||
PROPOSAL 3 | | FOR | PAGE 76 |
To approve, on an advisory basis, the compensation of our named executive officers (NEOs) | |||
PROPOSAL 4 | | FOR one year | PAGE 79 |
To recommend, on an advisory basis, the frequency of the shareholder vote on the compensation of our NEOs | |||
PROPOSAL 5 | | FOR | PAGE 79 |
To re-approve the material terms for qualified performance-based compensation under our 2007 Management Incentive Compensation Plan | |||
PROPOSAL 6 | | FOR | PAGE 83 |
To approve an amendment to our 2015 Stock Plan for Non-Employee Directors | |||
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 5 |
PROXY SUMMARY //
This section provides an overview of important items related to this proxy statement and the Annual Meeting. We encourage you to read the entire proxy statement for more information before voting.
2016 PERFORMANCE HIGHLIGHTS //
We achieved solid performance in 2016 despite weakness in industrial end markets. While sales declined 10% to $2.3 billion, we continued to focus on improving mix, cost management and operational excellence. Successful execution of a number of commercial and operational initiatives resulted in strong margin, cash flow and return performance, as well as record-level working capital efficiency. These results demonstrate the structural improvements achieved in the business through our "2020 Vision and Strategy" and how the organization continues to advance towards best-in-class results.
*See Appendix A for definitions and/or reconciliation of these metrics to results reported in accordance with generally accepted accounting principles. Performance measures used in the design of the executive compensation program are presented within the Compensation Discussion and Analysis section.
In addition, we continued to generate value for shareholders in 2016 by returning $429 million of cash - comprised of $342 million in share repurchases and a 10% increase in the dividend payout rate. In the last five years, we have repurchased an aggregate amount of $1.3 billion in shares and have increased the dividend payout rate by 88%.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 6 |
CORPORATE GOVERNANCE HIGHLIGHTS //
Lincoln Electric has a solid track record of integrity and corporate governance practices that promote thoughtful management by its officers and Board of Directors facilitating profitable growth while strategically balancing risk to maximize shareholder value. Below is a summary of certain Board of Director and governance information:
Board & Governance Information | |||
Size of Board | 11 | Number of fully independent Board committees | 4 |
Number of independent Directors | 10 | Independent Directors meet without management | Yes |
Average age of Directors | 65 | Director attendance at Board & committee meetings | 100% |
Percent female or ethnically diverse | 27% | Mandatory retirement age (75) | Yes |
Board meetings held in 2016 | 5 | Stock ownership requirements for Directors | Yes |
New Directors in the last 5 years | 2 | Annual Board and committee self-assessments | Yes |
Annual election of Directors | Yes | Code of Ethics for Directors, officers & employees | Yes |
Majority voting policy for Directors | Yes | Succession planning and implementation process | Yes |
Lead Independent Director | Yes | Environmental & risk management review | Yes |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 7 |
DIRECTOR NOMINEES AND BOARD SUMMARY //
You are being asked to vote on the election of these eleven Director nominees. Summary biographical information and the committee membership and leadership of each Director, including Director nominees, is listed below. Additional information can be found in the Director biographies under Proposal 1.
Director Nominees
Name | Age | Director Since | Independent | Audit | Compensation & Executive Development | Nominating & Corporate Governance | Finance | Other Public Company Boards |
Curtis E. Espeland Executive Vice President and CFO, Eastman Chemical Company | 52 | 2012 | ü | n | l | — | ||
David H. Gunning (Lead Director) Retired Vice Chairman, Cliffs Natural Resources, Inc. | 74 | 1987 | ü | l | l | 11 | ||
Stephen G. Hanks Retired President and CEO, Washington Group International | 66 | 2006 | ü | l | n | 2 | ||
Michael F. Hilton President and CEO, Nordson Corporation | 62 | 2015 | ü | l | l | 2 | ||
G. Russell Lincoln President, N.A.S.T. Inc. (personal investment firm) | 70 | 1989 | ü | l | l | — | ||
Kathryn Jo Lincoln Chair and CIO, Lincoln Institute of Land Policy | 62 | 1995 | ü | l | n | — | ||
William E. MacDonald, III Retired Vice Chairman, National City Corporation | 70 | 2007 | ü | n | l | — | ||
Christopher L. Mapes (Chairman) President and CEO, Lincoln Electric | 55 | 2010 | 1 | |||||
Phillip J. Mason Retired President, EMEA Sector of Ecolab, Inc. | 66 | 2013 | ü | l | l | 1 | ||
Hellene S. Runtagh Retired President and CEO, Berwind Group | 68 | 2001 | ü | l | l | 2 | ||
George H. Walls, Jr. Retired Chief Deputy Auditor, State of North Carolina | 74 | 2003 | ü | l | l | — | ||
n Chair l Member
(1) Mr. Gunning is a member of the Board of Directors of MFS Funds, an investment company under the Investment Company Act of 1940.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 8 |
EXECUTIVE COMPENSATION PROGRAM HIGHLIGHTS //
Our “2020 Vision and Strategy” is focused on key actions and initiatives that generate long-term profitable growth within our targeted markets through value-added solutions and operational excellence. We have established targets in our programs to achieve a long-term 10% compounded annual growth rate (CAGR) in sales, a 15% average Adjusted Operating Income margin and Return on Invested Capital (ROIC) through an economic cycle, as well as a 15% Average Operating Working Capital to Net sales ratio by 2020. We believe this framework engages our business team in creating a value proposition for shareholders that generates above-market returns through economic cycles and maintains a short-term focus on aggressive profit and working capital targets that incentivizes management to improve profitability and operating excellence. Our executive compensation designs are structured to align our incentives with the “2020 Vision and Strategy.”
We have a long history of driving an incentive management culture, emphasizing pay for performance and seeking to align compensation with the achievement of enterprise, segment and individual goals. The executive compensation program is designed to achieve the following objectives:
•Incentivize our executives to deliver above-market financial results; | •Address specific business challenges; and |
•Align management’s interests with the long-term interests of our shareholders; | •Maintain good governance practices in the design and operation of our executive compensation programs, including consideration of compensation risk in the execution of business strategies. |
•Define performance drivers that support key financial and strategic business objectives; | |
We believe our compensation program and practices provide an appropriate balance between profitability, cash flow and returns, on the one hand, and suitable levels of risk-taking, on the other. This balance, in turn, aligns compensation strategies with shareholder interests, as reflected by the consistent high level of shareholder approval of the compensation of our named executive officers (NEOs).
ACTIONS TO FURTHER ALIGN EXECUTIVE COMPENSATION WITH SHAREHOLDER INTERESTS
The Compensation and Executive Development Committee of the Board reviews the framework of our executive compensation program and has taken the following actions over the past year to better align our executive compensation with shareholder interests:
•Replaced the cash portion of long-term incentives with performance shares, beginning with 2016 grants associated with the 2016 to 2018 performance cycle. | •Created a Restoration Plan to allow NEOs (except Hallmann) to participate in a standard retirement design subject to IRS limitations. |
•Adjusted the 2016 peer group to exclude companies with sales greater than 2.5 times that of the Company, with the exception of Illinois Tool Works (ITW), as ITW is a global competitor of Lincoln Electric, with its largest presence in the U.S. | In addition, the Committee took actions to respond to challenging business conditions, including: |
•Supported a 5% temporary reduction in 2016 base salary for all officers and other key management, including the NEOs, in support of Lincoln Electric’s cost-cutting measures (reinstated December 1, 2016). | |
•Froze benefits under the Retirement Annuity Program (RAP) as of December 31, 2016. | |
•Froze and vested benefits under the Supplemental Executive Retirement Program (SERP) as of November 30, 2016. | •Held NEO base salaries flat for 2016 in light of continued cost-cutting measures. |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 9 |
2016 Executive Compensation Practices | |||
What We Do | What We Don’t Do | ||
We have long-term, compensation programs focused on profitability, net income growth, ROIC and total shareholder returns | ü | We do not allow hedging or pledging of our shares | û |
We use targeted performance metrics to align pay with performance | ü | We do not reprice stock options and do not issue discounted stock options | û |
We maintain stock ownership requirements (5x base salary for CEO; 3x base salary for other NEOs) | ü | ||
We have shareholder-approved incentive plans | ü | We do not provide excessive perquisites | û |
We have a broad clawback policy | ü | We do not have multi-year guarantees for compensation increases | û |
We have a double-trigger change of control policy | ü | ||
COMPENSATION FRAMEWORK & PHILOSOPHY
Our compensation program is designed to attract and retain exceptional employees. As indicated below, we design our compensation system to reflect current best practices, including setting base pay at or below the competitive market for each position, targeting incentive-based compensation at or above competitive market rates and promoting quality corporate governance in compensation decisions. We believe these practices result in sustained, long-term shareholder value and reflect our philosophy that the best performers should receive the greatest rewards.
Our executive compensation program is structured as follows: | • Long-term incentive compensation is based on our financial performance over a three-year cycle |
• Base salary is targeted to be the smallest component of total direct compensation | • Variable, "at risk," pay is a significant percentage of total compensation |
• Short-term incentive compensation is based on annual consolidated and, if applicable, segment performance | |
AVERAGE MIX OF KEY COMPENSATION COMPONENTS AND KEY COMPENSATION METRICS
The following charts present the mix of 2016 target direct compensation for our Chief Executive Officer and all NEOs, as well as the key financial and performance metrics used to make compensation decisions. As shown below, 83% of our CEO’s compensation value and, on average, 76% of our NEOs’ compensation value was “at risk,” with the actual amounts realized based on annual and long-term performance as well as our stock price.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 10 |
We use the following six key financial performance measures to evaluate results across short- and long-term periods. These metrics are also closely tied to our “2020 Vision and Strategy” program.
Key Performance Metrics Tied to Executive Compensation
Metric | Annual Compensation | Long-Term Incentive Programs (3-yr Performance Cycle) |
EBITB1,2 (Earnings before interest, taxes and bonus) | ü | |
Average Operating Working Capital to Sales2 ratio | ü | |
Consolidated, segment and individual performance | ü | |
Adjusted Net Income2 growth | ü | |
Return on Invested Capital (ROIC)2 | ü | |
Total Shareholder Return (TSR)2 | ü | |
(1) EBITB is an internal measure which tracks our adjusted operating income.
(2) Performance measures used in the design of the executive compensation program and are defined in Appendix A.
2016 Executive Compensation Summary
The table below presents a summary of the information included in the Summary Compensation Table for 2016. The full table and additional related information can be found in the “Executive Compensation” section. As noted above, beginning with the 2016 to 2018 performance cycle, the Performance Share LTIP replaced the Cash LTIP. Compensation associated with the Cash LTIP is disclosed in the Summary Compensation Table when realized (at the end of the cycle under the "Non-Equity Incentive Plan Compensation" column) and compensation associated with the Performance Share LTIP is disclosed when granted (at the beginning of the cycle under the "Stock Awards" column). Compensation associated with the 2014 to 2016 Cash LTIP and the 2016 to 2018 Performance Share LTIP are disclosed in the 2016 Summary Compensation Table.
Name | Salary ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Change in Pension and Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Combined Total ($) |
Christopher L. Mapes | $865,429 | $2,315,716 | $1,117,327 | $2,320,266 | $32,704 | $45,167 | $6,696,609 |
Vincent K. Petrella | $453,229 | $569,772 | $274,971 | $1,053,730 | $848,537 | $30,664 | $3,230,903 |
George D. Blankenship | $477,083 | $459,306 | $221,696 | $749,942 | $1,359,141 | $27,735 | $3,294,903 |
Frederick G. Stueber | $391,208 | $373,259 | $180,030 | $560,251 | $331,371 | $15,821 | $1,851,940 |
Mathias Hallmann | $289,556 | $283,142 | $136,670 | $395,583 | — | $29,009 | $1,133,960 |
AUDITOR //
We ask our shareholders to approve the selection of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2017. Below is summary information about fees paid to Ernst & Young LLP for services provided during fiscal 2016 and 2015.
2016 | 2015 | |||||
Audit Fees | $ | 3,079,000 | $ | 3,143,000 | ||
Audit-Related Fees | 10,000 | 85,000 | ||||
Tax Fees | 178,000 | 117,000 | ||||
All Other Fees | 0 | 0 | ||||
Total Fees | $ | 3,267,000 | $ | 3,345,000 | ||
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 11 |
PROPOSAL 1—ELECTION OF DIRECTORS //
ELECTION OF ELEVEN DIRECTORS TO SERVE UNTIL 2018
Our shareholders are being asked to elect eleven Directors to serve for a one-year term until the 2018 Annual Meeting and until their successors are duly elected and qualified. Unless otherwise directed, shares represented by proxy will be voted FOR the following nominees:
Curtis E. Espeland | G. Russell Lincoln | Phillip J. Mason |
David H. Gunning | Kathryn Jo Lincoln | Hellene S. Runtagh |
Stephen G. Hanks | William E. MacDonald, III | General George H. Walls, Jr. |
Michael F. Hilton | Christopher L. Mapes | |
All of the nominees have been previously elected by our shareholders.
Each of the nominees has agreed to stand for election. The biographies of all of our Director nominees can be found later in this section.
If any of the nominees is unable to stand for election, the Board may provide for a lesser number of nominees or designate a substitute. In the latter event, shares represented by proxies solicited by the Directors may be voted for the substitute. We have no reason to believe that any of the nominees will be unable to stand for election.
MAJORITY VOTING POLICY
The Director nominees receiving the greatest number of votes will be elected (plurality standard). However, our majority voting policy that states that any Director who fails to receive a majority of the votes cast in his/her favor is required to submit his/her resignation to the Board. The Nominating and Corporate Governance Committee of the Board would then consider each resignation and determine whether to accept or reject it. Abstentions and broker non-votes will have no effect on the election of a Director and are not counted under our majority voting policy. Holders of common stock do not have cumulative voting rights with respect to the election of a Director.
OUR BOARD RECOMMENDS A VOTE FOR EACH DIRECTOR NOMINEE LISTED ABOVE |
ANNUAL MEETING ATTENDANCE; NO SPECIAL ARRANGEMENTS
Directors are expected to attend each annual meeting. The Director nominees, as well as the continuing Directors, plan to attend this year’s Annual Meeting. At the 2016 Annual Meeting, all of our Directors were in attendance.
Neither the Director nominees nor any continuing Director has any special arrangement or understanding with any other person pursuant to which the Director nominees or continuing Director was or is to be selected as a Director or nominee. There are no family relationships, as defined by SEC rules, among any of our Directors or executive officers. SEC rules define the term “family relationship” to mean any relationship by blood, marriage or adoption, not more remote than first cousin.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 12 |
DIRECTOR NOMINEES
 | Recent Business Experience: Mr. Espeland has been Executive Vice President and Chief Financial Officer of Eastman Chemical Company (a chemical, fiber and plastic manufacturer) since January 2014. Prior to his service as Executive Vice President and Chief Financial Officer, Mr. Espeland was Senior Vice President and Chief Financial Officer from 2008 to January 2014 and Vice President, Finance and Chief Accounting Officer of Eastman Chemical from 2005 to 2008. Qualifications: Mr. Espeland has extensive experience in corporate finance and accounting, having served in various finance and accounting roles, and ultimately as the Chief Financial Officer, at a large publicly traded company (Eastman Chemical) for the past several years. Mr. Espeland also has significant experience in the areas of mergers and acquisitions, taxation and enterprise risk management. Mr. Espeland also served as an independent auditor at Arthur Andersen LLP having worked in both the United States and abroad (Europe and Australia). Mr. Espeland’s extensive accounting and finance experience, the Board has determined, qualifies him as an “audit committee financial expert.” This expertise makes Mr. Espeland an important member of the Audit Committee (where he is Chair) and the Finance Committee. In addition, Mr. Espeland’s international business experience is a valued asset for our global operations. |
 | Recent Business Experience: Mr. Gunning is the former Vice Chairman of Cliffs Natural Resources, Inc. (an iron ore and coal mining company formerly known as Cleveland-Cliffs Inc), a position he held from 2001 until his retirement in 2007. Prior to that, Mr. Gunning served as Chairman, President and Chief Executive Officer of Capital American Financial Corp. Mr. Gunning is also a lawyer and practiced law for many years as a corporate partner with Jones Day. Directorships: Mr. Gunning is a member of the Board of MFS Funds (since 2004), and is the Chair of the Board of the Funds. Mr. Gunning served on the Board of Cliffs Natural Resources, Inc. (2001 to 2007), Portman Mining Ltd. (2005 to 2008), Southwest Gas Corporation (2000 to 2004) and Development Alternatives, Inc. (pre-1993 to May 2013). Qualifications: Mr. Gunning brings to the Board chief executive officer and senior management experience (with public companies), public company board experience and corporate legal skills. Additionally, Mr. Gunning’s relatively long tenure as a Director provides the Board with a valuable perspective on Lincoln Electric’s challenges within its industry. |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 13 |
DIRECTOR NOMINEES
 | Recent Business Experience: Mr. Hanks spent 30 years with global engineering and construction company Morrison Knudsen Corporation and its successor Washington Group International, Inc., serving the last eight years as President, CEO and a member of its Board of Directors and retiring in January 2008. Directorships: Mr. Hanks is a member of the Board of McDermott International, Inc. (NYSE: MDR), a position he has held since 2009, and Babcock & Wilcox Enterprises, Inc. (NYSE: BWC), a position he has held since July 2010. Mr. Hanks is also a member of the Board of The Washington Companies, which is privately-owned. Qualifications: Mr. Hanks’ executive leadership of a U.S. publicly-held company with international reach has provided him with extensive experience dealing with the issues that these companies confront. His diverse professional skill set, including finance (having served as CFO of Morrison Knudsen) and legal competencies (such as enterprise risk management, corporate compliance and legal strategy), make him a valuable member of the Board, the Finance Committee (where he is Chair) and the Compensation and Executive Development Committee. Mr. Hanks’ experience as a Chief Executive Officer and Chief Financial Officer of a publicly-held company qualifies him as an “audit committee financial expert.” |
 | Recent Business Experience: Mr. Hilton is President and Chief Executive Officer of Nordson Corporation (a company that engineers, manufactures and markets differentiated products and systems used for the precision dispensing of adhesives, coatings, sealants, biomaterials, polymers, plastics and other materials, fluid management, test and inspection, UV curing and plasma surface treatment), a position he has held since 2010. Prior to joining Nordson, Mr. Hilton was the Senior Vice President and General Manager for Air Products and Chemicals, Inc. (a company that provides a unique portfolio of atmospheric gases, process and specialty gases, performance materials, and equipment and services) with specific responsibility for leading its $2B global Electronics and Performance Materials segment. Air Products serves customers in industrial, energy, technology and healthcare markets globally. Directorships: Mr. Hilton has served on the Board of Ryder System, Inc. (NYSE: R) since 2012 and Nordson Corporation (Nasdaq: NDSN) since 2010. Qualifications: With over 30 years of global manufacturing experience, Mr. Hilton brings to the Lincoln Electric Board an intimate understanding of management leadership, strategy development and day-to-day operations of a multi-national company, including product line management, new product technology, talent development, manufacturing, distribution and other sales channels, business processes, international operations and global markets expertise. |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 14 |
DIRECTOR NOMINEES
 | Recent Business Experience: Mr. Lincoln is President of N.A.S.T. Inc. (a personal investment firm), a position he has held since 1996. Prior to joining N.A.S.T. Inc., Mr. Lincoln served as the Chairman and Chief Executive Officer of Algan, Inc. Qualifications: As an entrepreneurial businessman with experience, including 25 years running a $50 million business, Mr. Lincoln understands business risk and the importance of hands-on management. As the grandson of James F. Lincoln and as a long-term trustee, Mr. Lincoln provides the Board with his historic perspective on the Company’s unique culture and especially its incentive management system. His leadership role and his investment experience serve Lincoln Electric well as a member of the Audit and Finance Committees of the Board. |
 | Recent Business Experience: Ms. Lincoln is Chair and Chief Investment Officer of the Lincoln Institute of Land Policy—a leading educational institution teaching land economics and taxation. She has held this position since 1996, and in her role as CIO currently manages and directs all aspects of the Institute’s $550 million endowment. In her role as Chair, she is responsible for all Board development and governance and takes a leadership position in strategic planning. From 1999 through 2006, Ms. Lincoln previously served as President of the Lincoln Foundation, the non-profit foundation that supported the Lincoln Institute until the two entities merged in 2006. Directorships: Ms. Lincoln is an Advisory Board Member of the Johnson Bank, Arizona Region, a position she has held since 2006, before which she was a Board member of the Johnson Bank, Arizona, N.A., beginning in 2001. Qualifications: Ms. Lincoln’s leadership experience with the Lincoln Institute, where she plays a crucial role in strategic planning and asset allocation, as well as her extensive experience with the Chautauqua Institution in New York, a major Arizona health care provider, and an international non-profit organization related to land use and policy, make Ms. Lincoln a valuable contributor to a well-rounded Board. Ms. Lincoln serves as a member of the Compensation and Executive Development Committee and Chairs the Nominating and Corporate Governance Committee. In addition, as a Lincoln family member and long-standing Director of Lincoln Electric, Ms. Lincoln has a keen sense of knowledge about Lincoln Electric, its culture and the founding principles. |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 15 |
DIRECTOR NOMINEES
 | Recent Business Experience: Mr. MacDonald is the former Vice Chairman of National City Corporation (a diversified financial holding company), a position he held from 2001 until his retirement in 2006, where he was responsible for its seven-state regional and national corporate banking businesses, the Risk Management and Credit Administration unit, Capital Markets and the Private Client Group. Mr. MacDonald joined National City in 1968 and, during his tenure, held a number of key management positions, including Senior Executive Vice President of National City Corporation and President and Chief Executive Officer of National City’s Ohio bank. Directorships: Mr. MacDonald was a member of the Board of American Greetings Corporation from 2007 until September 2013 when the company was privatized. In addition, Mr. MacDonald served on the Board of MTC Technologies, Inc. from 2002 to 2008 and The Lamson & Sessions Co. from 2006 to 2007 when, in each case, the boards were dismantled as a result of divestitures. Qualifications: Mr. MacDonald brings experience in leading a large corporate organization with over 35,000 employees and structuring complex financing solutions for large and middle-market businesses to the Board and its Compensation and Executive Development Committee (where he is Chair) and Finance Committee. In addition to his expertise in economic issues, Mr. MacDonald appreciates the human resources and development challenges facing a global, publicly-traded company. |
 | Recent Business Experience: Mr. Mapes is Chairman, President and Chief Executive Officer of Lincoln Electric. Mr. Mapes has served as President and Chief Executive since December 31, 2012. On December 21, 2013, Mr. Mapes was appointed as Chairman of the Board in addition to his other responsibilities. From September 2011 to December 31, 2012, Mr. Mapes served as the Chief Operating Officer of Lincoln Electric. From 2004 to August 2011, Mr. Mapes served as an Executive Vice President of A.O. Smith Corporation (a global manufacturer with a water heating and water treatment technologies business, which has residential, commercial, industrial and consumer applications) and the President of its former Electrical Products unit. Prior to joining A.O. Smith, he was the President, Motor Sales and Marketing of Regal Beloit Corporation (a manufacturer of electrical and mechanical motion control products). Directorships: Mr. Mapes is a member of the Board of The Timken Company (NYSE: TKR), a position held since 2014. Qualifications: As an experienced executive officer of Lincoln Electric as well as other large, global public companies engaged in manufacturing operations for over thirty years, Mr. Mapes understands the manufacturing industry and the challenges of global growth. He is also familiar with the welding industry generally, given his service to Lincoln Electric as Chief Executive Officer and Chief Operating Officer. In addition to his business management experience, Mr. Mapes has an MBA and a law degree. |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 16 |
DIRECTOR NOMINEES
 | Recent Business Experience: Mr. Mason is the former President of the Europe, Middle East & Africa Sector (EMEA Sector) of Ecolab, Inc. (a leading provider of food safety, public health and infection prevention products and services), a position he held from 2010 until his retirement in 2012. Mr. Mason brings 35 years of international business experience to the Board and its Audit and Finance Committees, including starting, developing and growing businesses abroad in both mature and emerging markets. Prior to leading Ecolab’s EMEA Sector, Mr. Mason had responsibility for Ecolab’s Asia Pacific and Latin America businesses as President of Ecolab’s International Sector from 2005 to 2010 and as Senior Vice President, Strategic Planning in 2004. Directorships: Mr. Mason is a member of the Board of GCP Applied Technologies (NYSE: GCP). GCP Applied Technologies was spun off from W.R. Grace & Co. as of February 3, 2016. Qualifications: Mr. Mason has over 35 years of international business experience with experience in establishing businesses in China, South Korea, Southeast Asia, Brazil, India, Russia, Africa and the Middle East. Mr. Mason’s executive leadership of an international business sector for a U.S. publicly-held company provides him with extensive international business expertise in a business-to-business environment, including industrial sectors. Additionally, he brings a strong finance and strategic planning background, including merger and acquisition experience, along with significant experience working with and advising boards on diverse issues confronting companies with international operations. |
 | Recent Business Experience: Ms. Runtagh is the former President and Chief Executive Officer of the Berwind Group (a diversified pharmaceutical services, industrial manufacturing and real estate company), a position she held in 2001. From 1997 through 2001, Ms. Runtagh was Executive Vice President of Universal Studios (a media and entertainment company). Prior to joining Universal Studios, Ms. Runtagh spent 27 years at General Electric Company (a diversified industrial company) in a variety of leadership positions. Directorships: Ms. Runtagh has served on the Board of Harman International Industries, Inc. (NYSE: HAR) since 2008 and NeuStar, Inc. (NYSE: NSR) since 2006. In addition, Ms. Runtagh is a former member of the Board of IKON Office Solutions Inc., Avaya Inc. and Covad Communications Group. Qualifications: Ms. Runtagh has over 30 years of experience in management positions with global companies. Ms. Runtagh’s responsibilities in management have ranged from marketing and sales to finance, as well as engineering and manufacturing. Ms. Runtagh’s diverse management experience, including growing those businesses while maintaining high corporate governance standards, and her extensive experience as a director of public companies, make her well-positioned for her role as a Director, member of the Compensation and Executive Development Committee and member of the Nominating and Corporate Governance Committee. |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 17 |
DIRECTOR NOMINEES
 | Recent Business Experience: General Walls is the former Chief Deputy Auditor of the State of North Carolina, a position he held from 2001 through 2004. General Walls retired from the U.S. Marine Corps in 1993 with the rank of Brigadier General, after nearly 29 years of distinguished service. Directorships: General Walls served on the Board of The PNC Financial Services Group, Inc. from 2006 to 2015 and Thomas Industries, Inc. from 2003 to 2005 when the board was dismantled as a result of a divestiture. Qualifications: General Walls brings to the Board substantial financial acumen and experience supervising the audits of various government entities, including the Office of the Governor of North Carolina, all state agencies of North Carolina, all Clerks of Superior Court for North Carolina and all not-for-profit agencies that received state or federal funds during his tenure as Chief Deputy Auditor of the State of North Carolina, which serves him well as a member of the Audit Committee of the Board. General Walls also has significant experience in the leadership, management and ethics of large, complex organizations, aiding him in his services on the Nominating and Corporate Governance Committee of the Board. General Walls is also a National Association of Corporate Directors (NACD) Board Leadership Fellow. In addition, General Walls understands the welding industry and at one point in time had oversight responsibility for the Marine Corps welding school and development program. |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 18 |
CORPORATE GOVERNANCE
Governance Framework
At Lincoln Electric, we are committed to effective corporate governance and high ethical standards. We adhere to our ethical commitments in every aspect of our business, including our commitments to each other, in the marketplace and in the global, governmental and political arenas. These commitments are spelled out in our Code of Corporate Conduct and Ethics, which applies to all of our employees (including our principal executive and senior financial officers) and Board of Directors.
We encourage you to visit our website where you can find detailed information about our corporate governance programs/policies including:
• Code of Corporate Conduct and Ethics | • Charters for our Board Committees |
• Guidelines on Significant Corporate Governance Issues | • Director Independence Standards |
Corporate Governance Highlights Board of Directors • Our Board held five meetings in 2016. • During 2016, each of our Directors attended at least 75% of the total full Board meetings and meetings of committees on which he or she served during the time he or she served as a Director. • Size of Board—11 • Plurality vote with director resignation policy for failures to receive a majority vote in uncontested director elections • Combined Chairman and CEO • Lead Independent Director • All directors are expected to attend the Annual Meeting | Board Alignment with Shareholders • Annual equity grants align interests of directors and officers with shareholders • Annual advisory approval of executive compensation • No poison pill • Stock ownership requirements for officers and directors Compensation • No employment agreements • Executive compensation is tied to performance— 83% of CEO target pay and 76% of all NEO target pay is performance-based (at risk) • Anti-hedging and anti-pledging policies for directors and officers |
Board Composition • Number of independent directors—10 • Diverse Board including different backgrounds, experiences and expertise, as well as balanced mix of ages and tenure of service • Several current and former CEOs • Audit Committee has multiple financial experts Board Processes • Independent directors meet without management present • Annual Board and Committee self-assessments • Board orientation/evaluation program • Governance Guidelines approved by Board • Board plays active role in risk oversight • Full Board review of succession planning | • Recoupment/claw-back policy Integrity and Compliance • Code of Conduct for employees, officers and directors • Environmental, health and safety guidelines & goals, including long-term sustainability goals • Annual training on ethical behavior |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 19 |
Our Board of Directors
Our Board oversees management in the long-term interest of Lincoln Electric and our shareholders. The Board’s major responsibilities include:
• Overseeing the conduct of our business | • Planning for CEO succession and monitoring management’s succession planning for other key executives |
• Reviewing and approving key financial objectives, strategic and operating plans and other significant actions | |
• Establishing an appropriate governance structure, including appropriate board composition and succession planning | |
• Evaluating CEO and senior management performance and determining executive compensation | |
How We Select Director Nominees
In evaluating Director candidates, including persons nominated by shareholders, the Nominating and Corporate Governance Committee expects that any candidate must have these minimum qualifications:
• Demonstrated character, integrity and judgment | • Specialized experience and background that will add to the depth and breadth of the Board |
• High-level managerial experience or experience dealing with complex problems | |
• Independence as defined by the Nasdaq listing standards | |
• Ability to work effectively with others | |
• Sufficient time to devote to the affairs of Lincoln Electric and these specific qualifications | • Financial literacy |
In evaluating candidates to recommend to the Board, including continuing director candidates, the Committee also considers whether the candidate enhances the diversity of the Board. Such diversity includes professional background and capabilities, knowledge of specific industries and geographic experience, as well as race, gender and national origin.
Lincoln Electric is also committed to having director candidates that can provide perspective on the industry challenges that Lincoln Electric faces and Lincoln Electric’s long-term commitment to a pay for performance culture.
The Committee’s process for identifying and evaluating nominees for Director includes annually preparing and discussing prospective Director specifications, which serve as the baseline to evaluate candidates. From time to time, we have retained an outside firm to help identify candidates.
Shareholders may nominate one or more persons for election as Director of Lincoln Electric. The process for doing so is set forth in the FAQ section of this proxy statement.
Director Independence
Each of our non-employee Directors meets the independence standards set forth in the Nasdaq listing standards, which are reflected in our Director Independence Standards. To be considered independent, the Board must affirmatively determine that the director has no material relationship with Lincoln Electric.
During 2016, the independent Directors met in regularly scheduled Executive Sessions in conjunction with each of the Board meetings. The Lead Director presided over these sessions.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 20 |
Board Leadership
Our Chairman, President and Chief Executive Officer is responsible for planning, formulating and coordinating the development and execution of our corporate strategy, policies, goals and objectives. He is accountable for Lincoln Electric’s performance and:
• reports directly to our Board; | • establishes procedures to govern our Board’s work; |
• works closely with our management to develop our strategic plan; | • oversees the execution of the financial and other decisions of our Board; |
• works with our management on transactional matters by networking with strategic relationships; | • makes available to all members of our Board opportunities to acquire sufficient knowledge and understanding of our business to enable them to make informed judgments; |
• promotes and monitors the Board’s fulfillment of its oversight and governance responsibilities; | |
• encourages the Board to set and implement our goals and strategies; | • presides over meetings of our shareholders; and |
• sets the agenda for, and presides over, Board meetings | |
Mr. Mapes, our President and Chief Executive Officer, serves as Chairman in addition to his other responsibilities. Our Board believes having one individual serve as Chairman and Chief Executive Officer is beneficial to us because the dual role enhances Mr. Mapes’ ability to provide direction and insight on strategic initiatives impacting us and our shareholders. The Board also believes the dual role is consistent with good corporate governance practices because it is complemented by a Lead Director.
Lead Director
Our Lead Director is appointed each year by the independent Directors. The Lead Director serves as a liaison between the Chairman of the Board and the independent Directors, presides as Chairman of the Board for all meetings at which the Chairman is not present and presides over executive sessions attended only by independent Directors. The Lead Director consults with the Chairman on the format and adequacy of information the Directors receive and the effectiveness of the Board meeting process and has independent authority to review and approve Board meeting agendas and schedules, as well as the authority to request from our officers any company information deemed desirable by the independent Directors. The Lead Director may call meetings of the independent Directors should he or she see fit—during 2016, the independent Directors met in conjunction with each of the board meetings. The Lead Director may also speak on behalf of Lincoln Electric, from time to time, as the Board may decide.
David H. Gunning currently serves as our Lead Director, a position he has held since 2013.
Board Role in Risk Oversight & Assessment
In the ordinary course of business, we face various strategic, operating, compliance and financial risks. Our risk management processes seek to identify and address significant risks. Our Board oversees this enterprise-wide approach, and the Lead Director promotes our Board’s engagement in enterprise risk management. Additionally, the Audit Committee reviews major financial risk exposure and the steps management has taken to monitor and control risk. Our Board has integrated its enterprise risk management process with its strategic planning process, refining the distinction between strategic risks and operational risks. Our Board reviews both regularly.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 21 |
Compensation-Related Risk
We regularly assess risks related to our compensation and benefit programs, including our executive programs, and our Compensation and Executive Development Committee is actively involved in those assessments. In addition, Willis Towers Watson, a compensation consultant engaged by management, has provided a risk assessment of our executive programs in the past. Although we have a long history of pay for performance and incentive-based compensation, we believe our compensation programs contain many mitigating factors to ensure that our employees are not encouraged to take unnecessary risks.
As a result of all these efforts, we do not believe the risks arising from our executive compensation policies and practices are reasonably likely to have a material adverse effect on Lincoln Electric.
RELATED PARTY TRANSACTIONS
Any related party transactions concerning Lincoln Electric and any of its directors, officers or other employees (or any of their immediate family members) are to be disclosed to and approved by the Chief Compliance Officer and the Audit Committee of the Board. We define “related party transactions” generally as transactions in which the self-interest of the employee, officer or Director may be at odds or conflict with the interests of Lincoln Electric, such as doing business with entities that are or may be controlled or significantly influenced by such persons or their immediate family members. Our related party transaction policies can be found in our Code of Corporate Conduct and Ethics, as well as the Audit Committee Charter, both of which are available on our website at www.lincolnelectric.com.
In February 2017, the Audit Committee considered and approved a related party transaction involving P&R Specialty, Inc., a supplier to Lincoln Electric. Greg D. Blankenship, the brother of George D. Blankenship, is the sole stockholder and President of P&R Specialty, Inc. During 2016, we purchased approximately $2.0 million worth of products from P&R Specialty in ordinary course of business transactions. George D. Blankenship has no ownership interest in or any involvement with P&R Specialty. We believe that the transactions with P&R Specialty were, and are, on terms no less favorable to us than those that could have been obtained from unaffiliated parties.
OUR BOARD COMMITTEES
We have separately designated standing Audit, Compensation and Executive Development and Nominating and Corporate Governance Committees established in accordance with applicable provisions of the Securities Exchange Act of 1934 and Securities and Exchange Commission and Nasdaq rules. The Board also has designated a standing Finance Committee. The number of meetings held by each committee during 2016 is set forth below.
Audit | Compensation & Executive Development | Nominating & Corporate Governance | Finance | |
Number of Committee Meetings | 6 | 6 | 4 | 5 |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 22 |
The following summaries set forth the principal responsibilities of each of the Board’s separately designated standing committees, as well as other information regarding their makeup and operations. A copy of each committee’s charter may be found on our website at www.lincolnelectric.com.
Audit Committee Members Messrs. Espeland (Chair), Hilton, Lincoln, Mason and Walls | |
• Appoints and determines whether to retain or terminate the independent auditors • Approves all audit engagement fees, terms and services • Approves any non-audit engagements • Reviews and discusses the independent auditors’ quality control • Reviews and discusses the independence of the auditors, the audit plan, the conduct of the audit and the results of the audit • Reviews and discusses with management Lincoln Electric’s financial statements and disclosures, its interim financial reports and its earnings press releases | • Reviews with Lincoln Electric’s General Counsel legal matters that might have a significant impact on our financial statements • Oversees compliance with our Code of Corporate Conduct and Ethics, including annual reports from compliance officers • Reviews with management the appointment, replacement, reassignment or dismissal of the Senior Vice President, Internal Audit, the internal audit charter, internal audit plans and reports • Reviews with management the adequacy of internal control over financial reporting |
Each of the members of our Audit Committee meets the independence standards set forth in the Nasdaq listing standards and have likewise been determined by the Board to have the financial competency required by the listing standards. In addition, because of the professional training and past employment experience of Messrs. Espeland and Hilton, the Board has determined that they are financially sophisticated Audit Committee Members under the Nasdaq listing standards and qualify as “audit committee financial experts” in accordance with Securities and Exchange Commission rules. Shareholders should understand that the designation of Messrs. Espeland and Hilton as “audit committee financial experts” is a disclosure requirement and that it does not impose upon them any duties, obligations or liabilities that are greater than those generally imposed on them as members of the Audit Committee and the Board. | |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 23 |
Compensation and Executive Development Committee Members Messrs. MacDonald, III (Chair), Gunning, Hanks, Ms. Lincoln and Ms. Runtagh | |
• Reviews and establishes total compensation of our Chief Executive Officer and other executive officers • Annually assesses the performance of our Chief Executive Officer and other executive officers • Monitors our key management resources, structure, succession planning, development and selection processes and the performance of key executives • Reviews and recommends to the Board, in conjunction with the Nominating and Corporate Governance Committee, the appointment and removal of our elected officers | • Has oversight for our employee stock and incentive plans and reviews and makes recommendations to the Board concerning all employee benefit plans • Reviews and recommends to the Board new or amended executive compensation plans |
Each of the members of our Compensation and Executive Development Committee meets the independence standards set forth in the Nasdaq listing standards and each of whom is deemed to be (1) an outside Director within the meaning of Section 162(m) of the U.S. Internal Revenue Code ("Section 162(m)"), and (2) a “non-employee director” within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934. As part of the independence evaluation, the Board must consider all factors relevant to whether the Director has a relationship to the Company that is material to his or her ability to be independent, including the Director’s source of compensation and whether the Director is affiliated with the Company. None of the members of the Committee were determined to have an affiliation or source of income that was material to his or her ability to be independent. The Committee does not generally delegate any of its authority to other persons, although it has the power to delegate authority. Two exceptions to the foregoing are that the authority to delegate is not permitted with respect to awards under our equity compensation plans to any executive officers or any person subject to Section 162(m) and the authority to delegate is limited by Section 162(m) under our 2007 Management Incentive Compensation Plan, a plan that relates to awards subject to Section 162(m). | |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 24 |
Nominating and Corporate Governance Committee Members Ms. Lincoln (Chair), Messrs. Hilton, Walls, Gunning and Ms. Runtagh | |
• Reviews external developments in corporate governance matters, and develops and recommends to the Board corporate governance principles for Lincoln Electric • Identifies and evaluates Board member candidates and is responsible for director succession planning • Reviews director compensation, benefits and expense reimbursement programs | • Reviews periodically the quality, sufficiency and currency of governance information furnished to the Board by management • Reviews and advises on shareholder proposals and engagement • Leads our Board and Committees in annual reviews of their performance |
Each of the members of our Nominating and Corporate Governance Committee meet the independence standards set forth in the Nasdaq listing standards. | |
Finance Committee Members Messrs. Hanks (Chair), Espeland, Lincoln, MacDonald, III and Mason | |
• Reviews financial performance, including comparing our financial performance to budgets and goals • Reviews capital structure issues, including dividend and share repurchasing policies • Reviews our financial operations | • Reviews our capital expenditures • Oversees strategic planning and financial policy matters, including merger and acquisition activity • Reviews pension plan funding and plan investment management performance |
Each of the members of our Finance Committee meet the independence standards set forth in the Nasdaq listing standards. All of our Directors typically attend the Finance Committee meetings, a practice that has been in place for the past several years. | |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 25 |
DIRECTOR COMPENSATION //
OUR BOARD COMPENSATION PROGRAM
Based upon the recommendations of the Nominating and Corporate Governance Committee, the Board determines our non-employee Director compensation. The Committee periodically reviews the status of Board compensation in relation to other comparable companies, trends in Board compensation and other factors it deems appropriate. The objectives of our non-employee Director compensation programs are to attract highly qualified and diverse individuals to serve on our Board and to align their interests with those of our shareholders. An employee of Lincoln Electric who also serves as a Director does not receive any additional compensation for serving as a Director, or as a member or chair of a Board committee.
All non-employee Directors receive cash retainers and an annual stock-based award for serving on our Board. Stock-based compensation is provided under our 2015 Stock Plan for Non-Employee Directors. Below is a summary of our director compensation program:
Board Level | Lead Director | Committee Chairs | ||
 | Retainer | $80,000 | Additional $25,000 | Additional $16,000 for Audit $13,000 for Compensation and Executive Development $10,000 for Finance and Nominating and Corporate Governance |
Meeting Fees 1 | — | — | — | |
 | Annual Restricted Stock Award "approx. value" 2 | $107,000 | — | — |
Initial Restricted Stock Award "approx. value" 3 | $107,000 | — | — | |
(1) | We do not have separate meeting fees, except if there are more than 8 full Board or Committee meetings in any given year, Directors will receive $1,500 for each full Board meeting in excess of 8 meetings and Committee members will receive $1,000 for each Committee meeting in excess of 8 meetings. |
(2) | The restricted stock agreements contain pro-rata vesting of the award upon retirement. Accordingly, if a Director retires before the restricted stock award vests in full (3 years from the date of the grant), the Director will receive unrestricted shares equal to a portion of the original award calculated based on the Director’s length of service during the 3-year term. |
(3) | The initial award will be pro-rated based on the Director’s length of service during the twelve-month period preceding the next regularly scheduled annual equity grant (which normally occurs in the fourth quarter of each year). |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 26 |
Director Compensation Table | |||||||||||
Director | Fees Earned or Paid in Cash | Stock Awards 1 | All Other Compensation | Total | |||||||
Curtis E. Espeland | $ | 96,000 | 2 | $ | 106,992 | — | $ | 202,992 | |||
David H. Gunning | 105,000 | 106,992 | — | 211,992 | |||||||
Stephen G. Hanks | 90,000 | 106,992 | — | 196,992 | |||||||
Michael Hilton | 80,000 | 106,992 | — | 186,992 | |||||||
G. Russell Lincoln | 80,000 | 106,992 | — | 186,992 | |||||||
Kathryn Jo Lincoln | 90,000 | 106,992 | — | 196,992 | |||||||
William E. MacDonald, III | 93,000 | 106,992 | — | 199,992 | |||||||
Phillip J. Mason | 80,000 | 106,992 | — | 186,992 | |||||||
Hellene S. Runtagh | 80,000 | 106,992 | — | 186,992 | |||||||
George H. Walls, Jr. | 80,000 | 2 | 106,992 | — | 186,992 | ||||||
(1) | On December 12, 2016, 1,347 shares of restricted stock were granted to each non-employee Director under our 2015 Stock Plan for Non-Employee Directors. The Stock Awards column represents the grant date fair value under Accounting Standards Codification (ASC) Topic No. 718 based on a closing price of $79.43 per share on December 12, 2016. Assumptions used in the calculation of these amounts are included in footnote (9) to our audited financial statements for the fiscal year ended December 31, 2016 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2017. As of December 31, 2016, the aggregate number of shares of restricted stock held by each non-employee Director was 4,693 shares, except for Mr. Hilton, who joined our Board during 2015, who holds 3,922 shares. |
(2) | All of Messrs. Espeland’s and Walls’ board fees were deferred under our Non-Employee Director’s Deferred Compensation Plan. |
Other Arrangements
We reimburse Directors for reasonable out-of-pocket expenses incurred in connection with attendance at Board meetings, or when traveling in connection with the performance of their services for Lincoln Electric.
Continuing Education
Directors are reimbursed ($5,000 is used as a guideline) for continuing education expenses (inclusive of travel expenses) for programs each Director may elect.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 27 |
Stock Ownership Guidelines
In keeping with the philosophy that Directors’ interests should be aligned with the shareholders’ and as part of the Board’s continued focus on corporate governance, all of our non-employee Directors must adhere to our stock ownership guidelines. Restricted stock awards count toward the stock ownership guidelines; common shares underlying stock options and shares held in another person’s name (including a relative) do not. The stock ownership guidelines can be met by satisfying one of the two thresholds noted in the chart below. As of December 31, 2016, all of our non-employee Directors had satisfied the stock ownership guidelines, except for Mr. Hilton who joined the Board in July 2015. Mr. Hilton has five years from the date of his election to the board to satisfy the stock ownership guidelines. The Nominating and Corporate Governance Committee reviews the guidelines at least every two and a half years to ensure that the components and values are appropriate—a review was conducted during 2016, with the assistance of Korn Ferry as an independent advisor, and it was determined that no changes were necessary other than the share floor amount being reset to a December 2016 level. The next review is anticipated for 2019.
Retainer Multiple | Number of Shares | |
Shares valued at 4 x annual retainer ($320,000) | OR | 4,173* |
*Represents shares equal to $320,000 based on the closing price of LECO stock as of December 30, 2016 (the last trading day of the calendar year) of $76.67.
Equity Awards
The 2015 Stock Plan for Non-Employee Directors is the vehicle for the annual and initial grants of stock-based awards.
Under the terms of the awards, shares of restricted stock vest in full three years after the date of grant with accelerated vesting upon a change in control of Lincoln Electric or upon the death or disability of the Director, as well as accelerated vesting of a pro-rata portion of the award upon retirement based on the Director’s length of service during the 3-year term. During the period in which the shares remain forfeitable, dividends are paid to the Directors in cash.
Deferred Compensation Plan
Adopted in 1995, this plan allows the non-employee Directors to defer payment of all or a portion of their annual cash compensation. This plan allows each participating non-employee Director to elect to begin payment of the deferred amounts as of the earlier of termination of services as a Director, death or a date not less than one full calendar year after the year the fees are initially deferred.
The investment elections available under the plan are the same as those available to executives under our Top Hat Plan, which is discussed below in the narrative of the Nonqualified Deferred Compensation Table.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 28 |
Our “2020 Vision and Strategy” is focused on key actions and initiatives that generate long-term profitable growth within our targeted markets through value-added solutions and operational excellence. We have established targets in our programs to achieve a long-term 10% compounded annual growth rate (CAGR) in sales, a 15% average Adjusted Operating Income Margin and Return on Invested Capital (ROIC) through an economic cycle, as well as a 15% Average Operating Working Capital to Net Sales (AOWC/Sales) ratio by 2020. We believe this framework engages our business team in creating a value proposition for shareholders that generates above-market returns through an economic cycle while maintaining a short-term focus on improving profitability and driving operating excellence. Our executive compensation designs are structured to align our incentives with this “2020 Vision and Strategy.” More information on our business and “2020 Vision and Strategy” can be found in the “Business Overview” section at the beginning of this proxy statement.
The Compensation Discussion and Analysis (CD&A) describes our executive compensation programs and how they apply to our named executive officers (NEOs).
2016 Named Executive Officers (NEOs) | |
Name | Title |
Christopher L. Mapes | Chairman, President and Chief Executive Officer |
Vincent K. Petrella | Executive Vice President, Chief Financial Officer and Treasurer |
George D. Blankenship | Executive Vice President, President, Americas Welding |
Frederick G. Stueber | Executive Vice President, General Counsel and Secretary |
Mathias Hallmann | Senior Vice President, President, International Welding |
The CD&A contains statements regarding future performance targets and goals. These targets and goals are disclosed in the context of our compensation programs and should not be understood to be statements of management’s expectations or estimates of results or other guidance. We caution investors not to apply these statements in other contexts.
Executive Compensation Table of Contents | |||
Compensation Discussion & Analysis | Executive Compensation Tables | ||
Executive Summary | p. 30 | Summary of 2016 Compensation Elements | p. 53 |
Our Compensation Philosophy | p. 36 | Summary Compensation Table | p. 54 |
Elements of Executive Compensation | p. 41 | 2016 Grants of Plan-Based Awards | p. 56 |
Other Arrangements, Policies and Practices | p. 48 | Holdings of Equity-Related Interests | p. 58 |
2016 Pension Benefits | p. 60 | ||
Termination and Change in Control Arrangements | p. 65 | ||
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 29 |
EXECUTIVE COMPENSATION //
COMPENSATION DISCUSSION AND ANALYSIS
Executive Summary
Our approach to executive compensation is generally the same as our approach to employee-wide compensation, with a strong belief in pay for performance and a long-standing commitment to incentive-based compensation.
While maintaining our performance-driven culture, our executive compensation program is designed to achieve the following objectives:
• Incentivize our executives to deliver above-market financial results; • Align management interests with the long-term interests of our shareholders; • Define performance drivers which support key financial and strategic business objectives; • Address specific business challenges; and • Maintain good governance practices in the design and operation of our executive compensation programs, including consideration of the risks associated with those practices. | OVERVIEW • We maintain a performance-driven culture, with pay for performance compensation programs • 83% of CEO target pay was “at risk” and, on average, 76% of all NEO target pay was “at risk” • 93% of the shareholders who voted on “say-on-pay” at last year’s Annual Meeting approved the compensation of our NEOs • Mindful of our shareholders' strong support, we have retained our general approach and emphasis on incentive compensation |
Key Financial Performance
We have a strong track record of delivering increased value to our shareholders and we have typically delivered above-market performance across various financial metrics over many economic cycles. Our long-term “2020 Vision and Strategy” seeks to achieve profitable sales growth both organically and through acquisitions by emphasizing value-added solutions and differentiated technologies to our mix. We anticipate this strategy will yield improved profit margins and returns, and will generate best-in-class financial performance measured against our peer group.
In 2016, sales declined approximately 10% to $2.3 billion on challenged industrial end markets, notably in the oil and gas and heavy fabrication sectors. Despite these headwinds, our strategic emphasis on improved mix, cost management and operational excellence resulted in solid margin, cash flow and return performance and record-level working capital efficiency. Highlights include:
• Reported operating income margin was 12.7%, primarily reflecting the loss on the deconsolidation of our Venezuelan subsidiary (primarily a non-cash charge). Adjusted operating income margin was 14.2%, a modest 50 basis point decline versus prior year; • Cash flow from operations was $303 million, representing 113% free cash flow conversion of adjusted net income; | • Record Average operating working capital to net sales ratio at 15.6%; • ROIC of 16.6%; and • Cash returned to shareholders of $429 million - through a 10% increase in the dividend payout rate and $342 million in share repurchases. |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 30 |
2016 diluted earnings per common share (EPS) was $2.91, which included the unfavorable impact of $0.38 per diluted share related to a loss on the deconsolidation of our Venezuelan subsidiary, partially offset by a discrete income tax item. On an adjusted basis, 2016 EPS was $3.29, as compared with $3.48 in 2015, primarily due to lower volumes.
We continued to pursue our "2020 Vision and Strategy" through the development of innovative solutions and acquisitions. In 2016, we continued to invest approximately 2% of revenue in R&D and launched over 85 new products worldwide. Our investments in innovation maintained a sales vitality index from new products launched in the last five years of 34%, and we achieved a 39% vitality index in equipment systems. Additionally, acquisitions contributed 2.1% to sales performance.
Financial Measures Used For Compensation Purposes
We consider various types of widely reported financial metrics, each of which is related to our executive compensation programs in some way. Some of these financial metrics directly impact our executive compensation programs, while others are the closest approximation to the metrics that we use in our programs. We believe that all of these financial metrics are critical to the short- and long-term growth and performance of our organization.
Short-term financial metrics used to evaluate operational performance and used in our annual bonus design are:
• Adjusted earnings before interest, taxes and bonus (EBITB), and | • Average operating working capital to net sales ratio (AOWC/Sales) for compensation purposes |
The following charts illustrate our performance in these comparable metrics.
 |  | ||
[1] | Excluding special items where applicable. Definitions and a reconciliation of non-GAAP results to our most closely comparable GAAP results are included in Appendix A. | ||
[2] | See Appendix A for definitions of AOWC/Sales for Compensation Purposes. | ||
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 31 |
Financial metrics considered in long-term compensation programs include:
• Adjusted net income for compensation purposes growth (over a three-year cycle), • Three-year average ROIC for compensation purposes indexed to peer performance, and | • Share price appreciation, including dividends, (TSR) versus various indices over a three-year period. |
The following tables illustrate Lincoln Electric’s Adjusted Net Income for Compensation Purposes, ROIC for Compensation Purposes and TSR performance. ROIC for Compensation Purposes and TSR results are compared to our peer group, S&P 400 Midcap Index (in which we participate), S&P 400 Midcap Manufacturing Index and the S&P 500 Index. The ROIC for Compensation Purposes and TSR percentile rankings show the position of Lincoln Electric’s financial results compared to the particular group, with a 50th percentile ranking indicating median (or market) performance. Percentiles below 50 indicate below-market performance, while percentiles above 50 indicate above-market performance. Information is based on the most recently available public information (as accumulated by an independent third party), as of January 2017 when the analysis was performed.
 |  |
 |  |
3 Year (2014–2016) Average ROIC2 Performance Percentile Rank to Peers and Select Indices | |||
Peers | S&P Midcap 400 | S&P Midcap 400 Mfg | |
81st | 89th | 88th | |
[1] | Excludes certain items as approved by the Committee where applicable. See discussion and definitions on page 46 in the "Long-Term Incentive Plan (LTIP)" section in Performance Measures and in Appendix A. | ||
[2] | As of September 30, 2016. | ||
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 32 |
3- and 5-Year Total Shareholder Return
The following charts compare the change in the cumulative total shareholder return on our common stock against the cumulative total shareholder return of the S&P Composite 500 Stock Index (S&P 500) and the S&P 400 Midcap Index (S&P 400) for the three-year and five-year periods ending December 31, 2016. The charts assume that $100 was invested at the beginning of each period in each of Lincoln Electric common stock, the S&P 500 and the S&P 400.
 | |||
Pay for Performance, Objectives and Process
In designing our executive compensation programs, a core philosophy is that our executives should be rewarded when they deliver financial results that provide value to our shareholders. Therefore, we have established a program that ties executive compensation to superior financial performance.
To assess pay for performance, we evaluate the relationship between “total direct realizable pay” for the NEOs and our financial performance. “Total direct realizable pay” is calculated based on the actual value of targeted compensation realized by the executive, as further described below. This allows us to understand the degree of alignment between total compensation delivered for the prior three fiscal years and our financial performance, both relative to peers. Because we believe that trend information is an important component of our analysis, we have relied both on current and historical comparisons to assess pay for performance for 2016. This analysis is performed by management’s compensation consultant, Willis Towers Watson, which is reviewed by the Compensation and Executive Development Committee (the “Committee”) and by its independent consultant, Korn Ferry.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 33 |
“Financial performance” is a composite of reported adjusted EBIT growth, net income growth, ROIC and TSR (the “composite”), where each metric is equally weighted. “Total direct realizable pay” is the sum of the following components (using comparable components from the peer group):
• Base pay for the applicable three-year period; | • The value of restricted stock units (“RSUs”) granted over the three-year period (for Lincoln Electric, this is based on the closing price of Lincoln Electric common stock as of the prior fiscal year-end); and | |
• Actual annual bonus paid during the three-year period; | ||
• The value of any in-the-money stock options granted over the relevant three-year period (for Lincoln Electric, this is based on the closing price of Lincoln Electric common stock as of the prior fiscal year-end); | • The value of long-term performance units/shares over the relevant three-year period (for Lincoln Electric, for the cycles shown below, this includes payments under our cash long-term incentive program ("Cash LTIP") during the three-year cycle and pro-rata amounts, at target, for awards that are mid-cycle). | |
As the charts below demonstrate, our financial performance results were slightly below peer group results between the 2013 to 2015 compensation cycle, the most recent period available, with our overall composite financial performance at the 41st percentile and our TSR at the 40th percentile. For the same period, total direct realizable compensation was at the 47th percentile for the NEOs. Pay and performance were below the market median of the peer group but in alignment. In the prior two compensation cycles, pay and performance were misaligned as relative pay was lower than composite financial and TSR performance. Information for the charts below is based on the most recent available data as of July 2016 when the analysis was performed.
 |  | ||
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 34 |
2016 Executive Compensation Actions
During 2016, the Committee reviewed the design of executive compensation programs, and, in consultation with its independent adviser, instituted certain actions to better align executive compensation to value drivers in line with our financial performance and shareholder interests. Key actions approved by the Committee include:
•Replaced the cash portion of long-term incentives with performance shares, beginning with 2016 grants associated with the 2016 to 2018 performance cycle. | •Created a Restoration Plan effective January 1, 2017 to allow all NEOs, except for Mr. Hallmann, who are subject to IRS limitations on covered compensation in the 401(k) plan to participate in a standard retirement plan design. | |
•Froze benefits under the Retirement Annuity Program (RAP) as of December 31, 2016. | ||
•Froze and vested benefits under the Supplemental Executive Retirement Program (SERP) as of November 30, 2016. | •Adjusted the 2016 peer group to exclude companies with sales greater than 2.5 times that of the Company, with the exception of Illinois Tool Works (ITW), as ITW is a global competitor of Lincoln Electric, with its largest presence in the U.S. | |
In addition, the Committee took actions to respond to challenging business conditions, including: | ||
•Supported a 5% temporary reduction in 2016 base salary for all officers and other key management, including the NEOs, in support of Lincoln Electric’s cost-cutting measures (reinstated December 1, 2016). | • Held NEO base salaries flat for 2016 in light of continued cost-cutting measures. | |
Good Governance Practices
In addition to our emphasis on above-market financial performance and pay for performance, we design our executive compensation programs to be current with best practices and good corporate governance. We also consider the risks associated with any particular program, design or compensation decision. We believe these assessments result in sustained, long-term shareholder value. Some of those governance practices are described in the Compensation-Related Risk portion of the Corporate Governance section above. Other such practices include:
What We Do | What We Don’t Do | ||
Pay for Performance Focus We heavily weight our compensation programs toward variable, “at risk”, compensation in addition to performing annual reviews of market competitiveness and the relationship of compensation to financial performance. | ü | No Guaranteed Pay We do not provide multi-year guarantees for compensation increases, including base pay, and no guaranteed bonuses. | û |
Balanced Compensation We structure compensation opportunities that are linked to both short- and long-term periods of time, while aligning compensation with several financial performance metrics that are critical to achievement of sustained growth and shareholder value creation. | ü | No Repricing or Replacement of Underwater Stock Options We do not reprice or replace underwater stock options without prior shareholder approval. | û |
Double Trigger Provisions for Change in Control We have change in control arrangements that do not provide for tax gross-ups, do not provide for additional retirement service in the SERP, are limited to three times base pay and bonus (for the Chairman, President and CEO, but only two or one times base pay and bonus for other executives) and mainly provide for payments only upon a double (not single) trigger. | ü | No Payment of Dividends on Unvested Equity We do not pay dividend or dividend equivalents while executive RSUs are unvested. | û |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 35 |
What We Do | What We Don’t Do | ||
Stock Ownership Policy We maintain stock ownership requirements for our officers and directors, with a mid-cycle review to ensure they remain appropriate. | ü | No Excessive Perks We do not pay excessive perks; our perks are modest, consisting of financial planning (for which imputed income is charged), an annual physical examination and reimbursement of club dues (for which, if not used exclusively for business purposes, imputed income is charged). | û |
Clawback Policy We maintain a broad clawback policy that applies to all recent incentive awards for officers. | ü | No Excise Tax Gross-Ups or Tax Reimbursements We do not provide tax gross-up payments or tax reimbursements on compensation and benefits, other than tax equalization benefits that are available to all employees who are on international assignment and modest gross-up payments on employee relocation benefits (and which are a standard component of a U.S. company’s relocation benefits). | û |
Independent Compensation Committee and Consultants We utilize independent directors with significant experience and knowledge of the drivers of our long-term performance, coupled with independent compensation consultants and legal advisors, retained directly by the Committee, to provide input and recommendations on our executive compensation programs. | ü | No Hedging or Pledging We do not permit hedging activities, such as cashless collars, forward sales, equity swaps and other similar arrangements. In addition, our insider trading policy prohibits the pledging of Lincoln Electric stock on a going-forward basis. | û |
Our Compensation Philosophy
Core Principles
Our executive compensation programs consist of four main components: (1) base pay, (2) annual bonus (EMIP), (3) long-term incentives and (4) benefits/perquisites, all of which are discussed in more detail below. Base pay is targeted at the 45th percentile of the competitive market (below market), while target total cash compensation (which includes an annual bonus that incorporates financial targets) is set at the 65th percentile of the market (above market). Long-term incentive compensation is set at the 50th percentile (at market), and is divided equally among three programs: (1) stock options, (2) restricted stock units (RSUs), and (3) a Performance Share LTIP. Although not targeted to a specific competitive level, we believe our benefits, taken as a whole, are at the market median and our executive perquisites are below the market median.
We place the greatest emphasis on programs that reward financial and individual performance while striking a balance between different programs that reward both short-term and long-term financial performance. We believe that this structure is the most effective way to attract, motivate and retain exceptional employees. We use a variety of financial metrics in the operation of our programs (namely Earnings before Interest, Taxes and Bonus (EBITB), Adjusted Net Income for Compensation Purposes growth, Average Operating Working Capital to Sales (AOWC/Sales) for Compensation Purposes, Return on Invested Capital (ROIC) for Compensation Purposes and share price appreciation) and we use a mixture of consolidated and business-specific financial goals, with no one factor receiving an excessive weighting.*
*Please refer to Appendix A for definitions of certain financial metrics.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 36 |
We use base pay and benefits to deliver a level of fixed compensation since our compensation programs are heavily weighted toward variable compensation. Therefore, fixed components, such as base pay, are generally set at or below the competitive market for each position, while incentive-based compensation, such as annual bonuses, are set at or above the competitive market and require above market financial performance. However, because annual bonuses (EMIP) reward short-term operating performance and are paid in cash, our long-term incentive compensation programs are weighted more heavily toward rewards for share price appreciation and long-term profitability. To further align our realizable compensation with share price appreciation or depreciation, beginning in 2016, the cash portion of the long-term incentive plan has been replaced with performance shares (PSUs). Individual performance also plays a key role in determining the amount of compensation delivered to an individual in many of our programs, with our philosophy being that the best performers should receive the greatest rewards. In addition, for 2016, as the charts below demonstrate, 83% of the CEO’s compensation mix was “at risk” and 76% of the NEOs compensation mix was “at risk.”
The following is a summary of our 2016 executive compensation and how each component fits within our core principles:
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 37 |
The Roles of the Committee, External Advisors and Management
The Committee, which consists solely of non-employee Directors, has primary responsibility for reviewing, establishing and monitoring all elements of our executive compensation programs. The Committee is advised by independent executive compensation consultants, Korn Ferry, and independent legal counsel. Management provides recommendations and analysis to the Committee, and is supported in those efforts by its own executive compensation consultant.
Role of the Committee | |
Compensation-Related Tasks | Organizational Tasks |
Reviews, approves and administers all of our executive compensation plans, including our equity plans | Evaluates the performance of the CEO, with input from all non-employee directors |
Establishes performance objectives under our short- and long-term incentive compensation plans | Reviews the performance capabilities of the other executive officers based on input from the CEO |
Determines the attainment of those performance objectives and the awards to be made to our executive officers under our short- and long-term incentive compensation plans | Reviews succession planning for officer positions, including the position of the CEO |
Determines the compensation for our executive officers, including salary and short- and long-term incentive opportunities | Reviews proposed organization or responsibility changes at the officer level |
Reviews compensation practices relating to key employees to confirm that these practices remain equitable and competitive | Reviews our practices for the recruitment and development of a diverse talent pool |
Reviews new employee benefit plans or significant changes in such plans or changes with a disproportionate effect on our officers or primarily benefiting key employees | |
Role of External Advisors
The Committee receives assistance and advice from its independent executive compensation consultants at Korn Ferry, which has been retained by the Committee for several years. Korn Ferry advises on matters including competitive compensation analysis, executive compensation trends and plan design, peer group company configuration, competitive financial performance and financial target setting. The Committee, however, is not bound by the input, advice or recommendations of its consultant. While some of the analysis and data collection may be prepared initially by management (or its consultant), all work is reviewed by Korn Ferry, who discusses their findings directly with the Committee.
Korn Ferry reports directly to the Chairperson of the Committee and meets with the Committee in executive session without the participation of management. Considering all relevant factors, as required by the compensation consultant independence standards set forth in applicable SEC rules and Nasdaq listing standards, we are not aware of any conflict of interest that has been raised by the work performed by Korn Ferry. In addition, from time to time the Committee has retained the services of independent legal counsel to provide input on various matters. We are not aware of any conflict of interest related to the work performed by independent legal counsel, considering all factors required by Nasdaq listing standards.
Willis Towers Watson provides executive compensation and other services directly to management. For executive compensation, Willis Towers Watson performs the data analysis on competitive compensation, competitive financial performance and financial target setting. That analysis is provided to the Committee’s consultant in advance to allow them to comment upon the findings and any recommendations being made by management.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 38 |
Role of CEO and Management
Our management (particularly the Chief Executive Officer, the Chief Financial Officer and the Chief Human Resources Officer) provides recommendations to the Committee relative to the philosophies underlying our compensation programs, components of these programs and levels of compensation. Specifically, the Chief Executive Officer recommends the compensation for the other executive management positions and provides the Committee with assessments of their individual performance, both of which are subject to Committee review. Relative to compensation setting, the Committee reviews the Chief Executive Officer’s recommendations and discusses them with their independent, executive compensation consultant to ensure the compensation recommendations are in line with our program’s stated philosophies and are reasonable when compared to our competitive market. Relative to individual performance assessments, which are based on achievement of various financial and leadership objectives set by the Chief Executive Officer, the Committee reviews specific performance components and makes suggestions for modifications where warranted.
Our Methodologies
Selection of Compensation Elements
As part of its annual review, the Committee evaluates whether changes in the philosophy or structure are warranted in light of emerging trends, business needs and/or financial performance. The Committee then uses competitive market data, performance assessments and management recommendations to set the pay components along the targets described above (for example, 45th percentile for base pay). Actual pay for executive management will generally fall within a range of these targets (plus or minus 20%). Absent significant increases due to promotion, increases for break-through individual performance or significant changes in the competitive market data, pay increases are generally in line with national trends.
Market Comparison Data
We collect competitive market compensation data from multiple nationally published surveys, from proxy data for a peer group of companies and from proxy data for companies in the S&P Midcap 400 Index. Nationally published survey market compensation data is statistically determined (through regression analysis) to approximate our revenue size and aged to approximate more current data. Even though still used for survey data, regression analysis is no longer used to approximate our revenue size for peer group compensation data, as the peer group was modified in 2016 to remove all companies with sales greater than 2.5 times that of Lincoln Electric, with the exception of Illinois Tool Works (ITW), as detailed below.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 39 |
Peer Group
We use a peer group of publicly traded industrial companies that are headquartered in the U.S., as well as non-U.S. headquartered companies that are listed on a U.S. exchange, that serve a number of different market segments and that have significant foreign operations. These are companies for which Lincoln Electric competes for talent and shareholder investment. In addition, we only select companies with solid historical financial results (removing companies from the peer group when their financial performance has consistently fallen below an acceptable level) and companies with sales that are within 2.5 times that of Lincoln Electric, with the exception of ITW, as ITW is a global competitor with its largest presence in the U.S. The Committee conducts an annual review of our peer group.
For 2016, our peer group consisted of the following 19 publicly traded industrial corporations:
Ametek Inc | Donaldson Co | ITT Corp | Roper Industries |
Carlisle Companies Inc | Flowserve Corporation | Kennametal Inc | SPX Corp |
CLARCOR Inc | Graco Inc | Nordson Corporation | The Toro Company |
Colfax Corporation | IDEX Corp | Regal Beloit Corporation | The Timken Company |
Crane Company | ITW | Rockwell Automation | |
Executive Compensation Structure
Business Needs. The Committee’s independent compensation consultant (Korn Ferry) assists in presenting information about emerging trends in executive compensation, along with Committee members’ own reading and study. These trends are considered in light of our compensation philosophies and various business needs. Business needs that are evaluated can include: talent attraction or retention strategies, growth expectations, strategic programs, cost-containment initiatives, management development needs and our company culture. No single factor guides whether changes will be made. Instead, the Committee uses a holistic approach, considering a variety of factors.
Individual Performance. Individual performance is a significant factor in determining annual changes (up or down) to pay components. In addition, the annual bonus includes an individual performance component in determining the percentage of target to be paid (described below and as noted in the annual bonus (EMIP) matrix). Individual performance is measured against how well an executive achieves objectives established for him or her at the beginning of the year. For the past three years, individual performance ratings for the annual bonus for officers have ranged from 110 to 130.
Pay for Performance Review. In determining whether changes will be made to the existing philosophy or structure and before setting compensation levels for the upcoming year, the Committee conducts its annual assessment of Lincoln Electric’s financial performance and pay for performance (both of which are described above). These reviews are used to evaluate whether executive compensation is properly aligned with our financial performance.
In setting 2016 compensation (which was done in the first quarter of 2016), the Committee reviewed the composite financial performance for Lincoln Electric (which included Adjusted EBIT growth, net income growth, ROIC and 3-year TSR) versus those same metrics for the peer group companies, and it compared the level of total direct realizable pay for our NEOs versus similar individuals in the peer group companies. As the pay for performance review was done in July 2015, the most recent period used for the analysis was the 2012 to 2014 compensation cycle.
For the 2012 to 2014 compensation cycle and the two cycles prior, financial performance results were above peer group results; however, total direct realizable compensation was below. Therefore, we had generally paid below our compensation targets for above market financial performance, indicating ongoing misalignment between our executive compensation programs and Lincoln Electric's financial performance. Accordingly, the Committee had taken actions to improve the alignment of executive compensation with shareholder interests, including modifying the annual bonus (EMIP) matrix in 2015, modifying the vesting period on RSUs to three years from five years beginning with grants awarded after October 2015, and replacing the cash portion of long-term incentives with performance shares beginning with 2016 grants associated with the 2016 to 2018 performance cycle.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 40 |
Timing of Compensation Determination and Payouts
Base pay, annual bonus targets and long-term incentive awards are set at a regularly scheduled Committee meeting held in the first quarter of the year. This change was made during 2014, as compensation used to be determined at the regularly scheduled Committee meeting held in the last quarter of the year (normally in December). Due to this change in timing, there were no stock option and RSU awards for 2014, as shown in the Summary Compensation Table. Payout amounts for the annual EMIP (bonus) and the Cash LTIP are determined after year-end, at the first available Committee meeting of the following year (normally in February) or a subsequent special meeting (normally in March), once final financial results are available. As mentioned above, beginning with the 2016 to 2018 performance cycle, the Performance Share LTIP replaced the Cash LTIP. Compensation associated with the Cash LTIP is disclosed in the Summary Compensation Table when realized (at the end of the cycle) and compensation associated with the Performance Share LTIP is disclosed when granted (at the beginning of the cycle). Therefore, compensation associated with the 2014 to 2016 Cash LTIP and the 2016 to 2018 Performance Share LTIP are both disclosed in the 2016 Summary Compensation Table.
Elements of Executive Compensation
Each compensation component for our NEOs is described below, with specific actions that were taken during 2016 noted. For 2016 compensation amounts, please refer to the Summary Compensation Table and other accompanying tables below.
Base Pay
Base compensation is provided to our executives to compensate them for their time and proficiency in their positions, as well as the value of their job relative to other positions at Lincoln Electric. Base salaries are set based on the executive’s experience, expertise, level of responsibility, leadership qualities, individual accomplishments and other factors. That being said, we aim to set base salaries at approximately the 45th percentile of the market (slightly below market) in keeping with our philosophy that greater emphasis should be placed on variable compensation.
2016 and 2017 Base Pay
During 2016, officers, including all NEOs, were on a temporary 5% base salary reduction in connection with Lincoln Electric’s cost-cutting measures that was not reinstated until December 1, 2016. As the temporary base salary reduction was in effect at the time of increase evaluations, the Committee did not approve any increases to the NEOs’ 2016 base salaries.
NEO | Increase % | 2016 Base Salary1 | ||
C. L. Mapes | 0% | $907,000 | ||
V. K. Petrella | 0% | $475,000 | ||
G. D. Blankenship | 0% | $500,000 | ||
F. G. Stueber | 0% | $410,000 | ||
M. Hallmann2 | 0% | €275,000 | ||
1 Does not reflect the temporary 5% base salary reduction that was in effect through December 1, 2016.
2 Mr. Hallmann's base salary is approved and paid in Euros. This amount is converted for reporting purposes within the Summary Compensation Table using the annual average FX Rate.
For 2017, the average base salary increase for the NEOs was 3.2%.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 41 |
Annual Bonus (EMIP) and Total Cash Compensation
The Executive Management Incentive Plan (EMIP) provides executive officers, including the NEOs, with an opportunity to receive an annual cash bonus. We believe that, given base pay is below market, annual cash bonus opportunities should be above average to balance some of the risk associated with greater variable compensation. However, we also believe that above-market pay should only be available for superior individual and financial performance. Therefore, we target total cash compensation (base and bonus target) at the 65th percentile of the market, but use a structure that provides payments of above-average bonuses only where the individual’s performance, that of the consolidated company and that of his or her particular segment or business unit warrant it.
ANNUAL BONUS (EMIP) MATRIX
The percentage of target bonus actually paid is based upon a matrix that takes into account financial performance and an executive’s individual performance. If either of these factors is not met, the percentage of target bonus paid is reduced, with the potential that no bonus will be paid. If either of these factors exceeds expectations, the percentage paid can be above the target amount.
As mentioned above, the EMIP matrix was modified in 2015, such that performance hurdles were adjusted on the high and low end of the matrix to increase or reduce payouts for higher or lower levels of performance, including increasing the potential maximum payout from 160% to 180%. The 2016 EMIP matrix used is consistent with the prior year matrix.
2016 EMIP Matrix | ||||||||
Financial Performance | ||||||||
Individual Performance Rating | 50% | 60% | 70% | 80% | 90% | 100% | 110% | 120% |
Percentage Payout | ||||||||
130 | 0 | 50% | 80% | 100% | 130% | 150% | 160% | 180% |
120 | 0 | 40% | 70% | 90% | 120% | 135% | 150% | 160% |
110 | 0 | 30% | 60% | 80% | 110% | 120% | 140% | 150% |
100 | 0 | 20% | 50% | 60% | 90% | 100% | 135% | 145% |
95 | 0 | 0 | 20% | 50% | 80% | 90% | 115% | 125% |
90 | 0 | 0 | 0 | 20% | 50% | 80% | 100% | 110% |
85 | 0 | 0 | 0 | 0 | 20% | 50% | 60% | 70% |
80 | 0 | 0 | 0 | 0 | 0 | 20% | 30% | 50% |
75 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
The Committee has discretion to approve EMIP payments outside of the strict application of this matrix. For the 2016 EMIP payments, the Committee made an adjustment to Mr. Petrella's payout in recognition of his leadership in executing the Company's capital allocation strategy. EMIP payout determinations for the 2016 performance period were made in the first quarter of 2017.
Annual Bonus (EMIP) Financial Metric
A portion of the EMIP financial component is based upon achievement of company consolidated financial performance against budget and another portion may be attributable to segment financial performance against budget, depending upon the individual’s span of responsibility. By varying the financial metrics used based upon areas of responsibility, it is possible that certain participants will receive a higher percentage of target bonus while others will receive a lower percentage of target where the segment performance for one participant is better than the segment performance for the other. This is a key component of our pay for performance and incentive-based philosophies. For 2016, consolidated and most segment results were nearly at or below budgets.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 42 |
2016 EMIP payouts for all officers ranged from 2% below target to 90% above target, with an average payout of 29% above the target amounts.
The following is a summary of the financial components used for 2016 for the NEOs:
2016 Annual Bonus (EMIP)–Financial Metrics Used | ||
NEOs | Consolidated Results | Segment Results |
Christopher L. Mapes–Chairman, President & CEO | 100% | — |
Vincent K. Petrella–EVP, CFO & Treasurer | 100% | — |
George D. Blankenship–EVP; President, Americas Welding | 50% | 50% Americas Welding |
Frederick G. Stueber–EVP, General Counsel & Secretary | 100% | — |
Mathias Hallmann–SVP; President, International Welding | 25% | 75% International Welding |
EBITB. One of the EMIP financial metrics is the achievement of earnings before interest, taxes and the bonus referred to above (EBITB) as compared to budget. Since 2011, this metric accounts for 75% of the EMIP financial component. EBITB to budget has been used as the financial metric for the annual bonus since its inception in 1997 because it is an important indicator of profitability. Budgets are set aggressively (based on the local and global economic climate), at the beginning of the year, are reviewed by the Finance Committee of the Board and are approved by the full Board. The following is a summary of historical consolidated results:
Historical EBITB to Budget (Consolidated Results since 1997) | |
Consolidated Results | |
Average | 101% |
Highest Level | 141%1 |
Lowest Level | 67% |
(1) Capped, at the time (2004), at 120%.
When performance goals are set, we believe that there is an equal probability of achieving EBITB to budget in any year, although the cyclical nature of our business may increase the probability in some years and decrease it in others. For 2016, the consolidated EBITB budget was set at $444.1 million and actual performance for 2016, as adjusted, measured at budgeted exchange rates, was $410.7 million. The Americas Welding Segment EBITB budget was set at $371.4 million and actual performance for 2016, as adjusted, measured at budgeted exchange rates, was $342.0 million, or an achievement of 92.1% of budget. The International Welding Segment EBITB budget was set at $95.0 million and actual performance for 2016, as adjusted, measured at budgeted exchange rates, was $65.3 million, or an achievement of 68.7% of budget .
AOWC/Sales for Compensation Purposes. Since 2007, a second EMIP financial metric, namely the achievement of budget for average operating working capital (AOWC) as compared to sales (AOWC/Sales), has been used as a reflection of our commitment to improving cash flow. Since 2011, AOWC/Sales for Compensation Purposes has accounted for 25% of the EMIP financial component. The following is a summary of historical consolidated results:
Historical AOWC/Sales to Budget (Consolidated Results since 2007) | |
Consolidated Results | |
Average | 101% |
Highest Level | 111% |
Lowest Level | 88% |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 43 |
Like EBITB, we believe that there is an equal probability of achieving AOWC/Sales for Compensation Purposes to budget in any given year, although the cyclical nature of our business may increase the probability in some years and decrease it in others. For 2016, the consolidated AOWC/Sales for Compensation Purposes budget was set at 20.4% (2015 performance was 21.9%) and actual performance for 2016, excluding businesses acquired during the year, was 21.2% demonstrating improvement over 2015. The Americas Welding Segment AOWC/Sales for Compensation Purposes budget was set at 17.9% and actual performance for 2016, excluding businesses acquired during the year, was 17.5%, or an achievement of 102.3% of budget; and the International Welding Segment AOWC/Sales for Compensation Purposes budget was set at 29.5% and actual performance for 2016 was 31.1%, or an achievement of 94.5% of budget.
2016 Annual Bonus (EMIP) and Total Cash Compensation
The 2016 EMIP annual bonus targets for the NEOs were established according to the principles discussed above. For 2016, target bonuses remained the same for all NEOs except Mr. Hallmann which was increased by 9.1% reflecting his additional responsibilities for our International Welding Segment as well as to align his total targeted cash compensation closer to the 65th percentile. The 2016 EMIP targets for the NEOs placed their total targeted cash compensation (base and bonus targets), on average, at the 65th percentile of market.
In approving the 2016 EMIP payments, the Committee assessed our EBITB performance and AOWC/Sales for Compensation Purposes performance against budget for consolidated and segments, as applicable. On average, 2016 EMIP payments for the NEOs were 11% higher than the 2015 payments and 36% above their 2016 target amounts, as shown below. In addition, the Committee has discretion to approve EMIP payments outside of the strict application of this matrix. The Committee made an adjustment to Mr. Petrella's payout in recognition of his leadership in executing the Company's capital allocation strategy. These bonus payments resulted in total cash compensation (base and actual EMIP (annual bonus)) for the group that was, on average, above the 65th percentile of the market.
NEO | Target Award Opportunity $ | Target Award Opportunity as a % of Base Salary | Maximum Award Opportunity Based on Matrix | Actual Award | Actual Award as a % of Target |
C. L. Mapes | $1,252,000 | 138% | $2,253,600 | $1,667,038 | 133% |
V. K. Petrella | $450,000 | 95% | $810,000 | $854,440 1 | 190% |
G. D. Blankenship | $450,000 | 90% | $810,000 | $593,235 | 132% |
F. G. Stueber | $330,000 | 80% | $594,000 | $423,984 | 128% |
M. Hallmann | €300,000 | 109% | €540,000 | €294,420 | 98% |
[1] The Committee made an adjustment to Mr. Petrella's payout in recognition of his leadership in executing the Company's capital allocation strategy.
2017 Annual Bonus (EMIP) and Total Cash Compensation
The 2017 EMIP targets for the NEOs, approved in the first quarter of 2017, were established by the Committee in consultation with Korn Ferry, based on our compensation philosophies as well as competitive market data as discussed above. The 2017 bonus targets for the NEOs are consistent with the 2016 target amounts.
Long-Term Incentives
We believe that long-term incentive opportunities should be provided to focus rewards on factors that deliver long-term sustainability and should be established at the median (or 50th percentile) of the market. We have targeted the median of the market, in keeping with our pay for performance philosophy, because we believe that superior long-term financial growth itself should be the main driver of above-market long-term incentive compensation. We also believe that different financial metrics help drive long-term performance. Therefore, we have established a structure for long-term incentives that combines several different long-term metrics, with the greatest emphasis placed on share appreciation and non-cash awards.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 44 |
For 2016, our long-term incentive program is made up of three components: (1) stock options, (2) RSUs and (3) a Performance Share LTIP. The value of each is weighted equally. This provides an even balance with respect to the different attributes and timing associated with each type of award. Annual awards of all three components are made to EMIP participants, including the NEOs. As noted above, the 2016 long-term incentive program was modified slightly from prior years, as beginning with the 2016 to 2018 performance cycle, the cash portion of the LTIP was replaced with performance shares.
Long-term incentive awards are set at regularly-scheduled Committee meetings held in the first quarter of the year. This change was made during 2014, as compensation used to be determined at the regularly scheduled Committee meeting held in the last quarter of the year (normally in December). Due to this change in timing, there were no stock option or RSU awards for 2014, as shown in the Summary Compensation Table. Payout amounts for the Cash or Performance Share LTIP are determined after year-end at the first available Committee meeting of the following year (normally in February) or a subsequent special meeting (normally in March), once final financial results are available. Compensation associated with the Cash LTIP is disclosed in the Summary Compensation Table when realized (at the end of the cycle) and compensation associated with the Performance Share LTIP is disclosed when granted (at the beginning of the cycle). Compensation associated with the 2014 to 2016 Cash LTIP and the 2016 to 2018 Performance Share LTIP are both disclosed in the 2016 Summary Compensation Table and discussed in more detail below.
Stock Options
All EMIP participants (including the NEOs) and other senior leaders receive an annual stock option award. A total of 24 employees received stock options in February 2016. Stock options vest ratably over a three-year period.
Restricted Stock Units
All EMIP participants (including the NEOs) receive an annual RSU award. Recognizing that equity awards are a valuable compensation tool, we also extend RSUs to senior leaders, managers and significant contributors, regardless of their position within Lincoln Electric. A total of 290 employees (including our NEOs) received RSUs in February 2016. Beginning with grants awarded after October 2015, RSUs vest in full after three years of continuous service.
Long-Term Incentive Plan (LTIP)
A cash long-term incentive plan, or Cash LTIP, has been in place for officers (EMIP participants) since 1997. As previously discussed, during 2015, the Committee modified the executive compensation program to replace the cash incentive with performance shares, or the Performance Share LTIP, to be effective with the 2016 annual equity grants and the 2016 to 2018 performance cycle. The terms of the awards mirror the performance objectives tied to the Cash LTIP but payouts will be in shares of Lincoln Electric common stock.
The Performance Share LTIP is designed to offer reward opportunities aligned with the long-term performance of Lincoln Electric. Target share amounts for the plan are set each year at the beginning of a three-year performance cycle based on a 7-day historical average of the stock price, up to and including the grant date, as mentioned above. Because awards are made each year and because each award relates to a three-year performance cycle, three different cycles will be running at any point in time. The percentage of the target shares actually paid at the end of the applicable three-year cycle will be based upon achievement of three-year company performance against pre-established performance thresholds. Each plan has six to seven performance thresholds with percentage payouts attributable to those thresholds ranging from 0% to 200% of target. The Committee retains discretion to modify payments to any participant, to modify targets and/or to modify the performance thresholds (up or down).
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 45 |
Performance Measures. Since its inception, the LTIP has used a performance measure of growth in adjusted net income for Compensation Purposes over the three-year cycle. Beginning in 2009, the Committee added a second metric of ROIC for Compensation Purposes and gave these two financial metrics a 50/50 weighting. The adjusted net income metric is an absolute metric. For the 2014 to 2016 performance cycle, the growth in adjusted net income over the three-year cycle is based on growth above $282,481,000 (which was the adjusted net income for 2013 when the 2014 to 2016 performance cycle was set). As the 2014 to 2016 Cash LTIP table below demonstrates, to pay 100% of target, adjusted net income growth over the three-year cycle must be at or above 40% of $282,481,000 (or $395,473,000).
From time to time, the Committee has considered and approved certain limited adjustments to reported net income (both positive and negative) in determining Adjusted Net Income for Compensation Purposes to evaluate achievement of performance against the thresholds. Each adjustment is reviewed in detail before it is made. The types of adjustments the Committee has considered include: rationalization charges, certain asset impairment charges, the gains and losses on certain transactions including the disposal of certain assets and other special items. To the extent an adjustment relates to restructuring or rationalization charges that are intended to improve organizational efficiency, a corresponding charge (equal to the adjustment) is amortized against future years’ adjusted net income until that adjustment is fully offset against the intended savings (generally this amortization occurs over a three-year period).
The ROIC for Compensation Purposes metric for the 2014 to 2016 performance cycle is a relative value that is derived based on our performance as compared to our proxy peer group (as opposed to an absolute value). In this 2014 to 2016 performance cycle, certain adjustments have been approved by the Committee in comparably measuring performance. In 2015, pension settlement charges primarily related to the purchase of a group annuity contract were excluded. In 2016, the ROIC for Compensation Purposes calculation was adjusted to exclude the incremental balance in cash and marketable securities as of December 31, 2016 compared with the December 31, 2013 balance, as well as interest expense, associated with the long-term notes drawn as a result of the execution of our capital allocation strategy.
Performance Thresholds. In setting the performance thresholds for a new three-year period, the Committee considers various factors, including historical performance against established thresholds. We believe there is a 50% probability of achieving the adjusted net income for Compensation Purposes growth thresholds for a 100% payout when initially determining the target growth for any cycle. For the 2014 to 2016 Plan, the Committee did not make any modifications to the three-year adjusted net income growth performance thresholds or the three-year average ROIC relative to peer thresholds.
Timing for Setting Performance Measure and Performance Thresholds. Performance targets are set at the beginning of the first fiscal year in the cycle. This timing allows the Committee to see our final financial results for the prior year and allows for more current macro-economic projections to be used.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 46 |
2014 to 2016 Cash LTIP. The following is a summary of the performance metric ranges of all seventeen completed plan cycles, including the most recently completed cycle (2014 to 2016):
Ranges of All Prior 3-Year LTIP Cycles | |||
Payout Amount | 3-Year Adjusted Net Income for Compensation Purposes Growth | 3-Year Average ROIC for Compensation Purposes | |
Performance | % of Target | LTIP Metric since 1997 | LTIP Metric since 2009 |
Threshold | 25% | 0% to 15% | 40th %ile to 40th %ile |
50% | 3% to 25% | 50th %ile to 50th %ile | |
Target | 100% | 6% to 40% | 60th %ile to 65th %ile |
150% | 9% to 60% | 75th %ile to 75th %ile | |
Maximum | 200% | 15% to 80% | 90th %ile to 90th %ile |
Actual Payout Range | 0.0% to 200.0% | 87.6% to 176.3% | |
For the 2014 to 2016 cycle, because the net income performance threshold was not met but the ROIC for Compensation Purposes performance threshold was exceeded, payouts were made at 85.2% of target. Payments under the plan have been made in twelve out of the seventeen completed three-year cycles. The following is the most recently completed cycle (2014 to 2016):
2014 to 2016 Cash LTIP | ||||||||||
Payout Amount | 3-Year Adjusted Net Income for Compensation Purposes Growth | 3-Year Average ROIC for Compensation Purposes | ||||||||
Performance | % of Target | Absolute LECO Net Income (’000s) | Relative to LECO Peer Group | |||||||
Threshold | 25% | 10 | % | $310,729 | 40th %ile | 9.8 | % | |||
50% | 25 | % | $353,101 | 50th %ile | 11.5 | % | ||||
Target | 100% | 40 | % | $395,473 | 65th %ile | 15.9 | % | |||
150% | 60 | % | $451,970 | 75th %ile | 16.8 | % | ||||
Maximum | 200% | 80 | % | $508,466 | 90th %ile | 18.7 | % | |||
Actual Payout | 85.2% | 0% | @ 50% Weighting | 0% | 170.3% | @ 50% Weighting | 85.2% | |||
As shown above, the current plan cycle contains two metrics, each with a 50% weighting. Lincoln Electric’s Adjusted Net Income for Compensation Purposes growth over the three-year period declined 22.8%, which did not result in a payout as the threshold of 10% net income growth was not met. Lincoln Electric’s three-year average return on invested capital (ROIC) for Compensation Purposes, as compared to its peer group, was at the 81st percentile, which generated a 170.3% of target payout for this metric. Combining the payouts for both metrics, the resulting final payout for the 2014 to 2016 Cash LTIP was 85.2% of the target amounts. Excluding the aforementioned 2016 ROIC adjustment, the 2014 to 2016 cycle would have generated a payout equal to 58.5% of target. A payout at 58.5% would have resulted in the CEO’s award being lower by $204,533 and the remaining NEOs’ aggregate awards being lower by $176,267.
NEO | Target Award Opportunity $ | Maximum Award Opportunity Based on Thresholds | Actual LTIP % | Actual Award |
C. L. Mapes | $767,000 | $1,534,000 | 85.2% | $653,228 |
V. K. Petrella | $234,000 | $468,000 | 85.2% | $199,290 |
G. D. Blankenship | $184,000 | $368,000 | 85.2% | $156,707 |
F. G. Stueber | $160,000 | $320,000 | 85.2% | $136,267 |
M. Hallmann | $83,000 | $166,000 | 85.2% | $70,688 |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 47 |
2016 Long-Term Incentives
In evaluating 2016 long-term incentive compensation (at the beginning of 2016), the Committee reviewed 2014 and 2015 compensation versus the competitive benchmarks. The Committee concluded that overall the long-term incentives for the NEOs were at our 50th percentile target when compared to both survey and proxy data. With the exception of Mr. Stueber, all of the NEOs received the same targeted value of their 2016 long-term incentive awards as their 2015 level (no increase). As Mr. Stueber was below market, he received an 8% increase in his 2016 long-term incentive award target, still placing his award slightly below the 50th percentile of market. All of these awards are subject to our Recovery of Funds Policy, which is discussed below.
2017 Long-Term Incentives
In evaluating 2017 long-term incentive compensation (at the beginning of 2017), the Committee reviewed 2015 and 2016 compensation versus the competitive benchmarks. The Committee adjusted 2017 long-term incentives for the NEOs on average 3.7%, which excludes both a special RSU award to Mr. Petrella of $500,000 and Mr. Stueber, who did not receive an award due to his pending retirement.
Valuation of Equity Awards. Beginning with the 2016 annual grant, for shares under our 2015 Equity and Incentive Compensation Plan, the Committee established set valuation methods in order to convert the approved long-term incentive compensation values to shares upon the grant date. These methods consider a 7-day historical average of the stock price, up to and including the grant date, for RSUs and performance shares and the grant date Black-Scholes for stock options.
Normal Cycle and Out-of-Cycle Equity Awards. The Committee has discretion in awarding grants to EMIP participants and does not delegate its authority to management, nor does management select or influence the award dates. Occasionally, the Committee may approve limited, out-of-cycle special awards for specific business purposes or in connection with executive promotions or the hiring of new executive employees. However, the date used for awards to all EMIP participants, including the NEOs, is the date of a regularly scheduled Committee meeting, which is fixed well in advance and generally occurs at the same time each year.
At the July 2015 meeting, the Committee approved delegated authority to the CEO to designate awards through 2016 to certain employees under the 2015 Equity and Incentive Compensation Plan, subject to specific limits established. The CEO can only grant option and RSU awards and cannot grant awards to any executive officers, Section 16 officers or greater-than-10% beneficial owners of the Company, and must be granted per the agreements and vesting terms already approved by the Committee.
Other Arrangements, Policies and Practices
Overview of Benefits
We intend to provide a competitive group of benefits for all of our employees targeted at the 50th percentile of the market. Some aspects of our benefit programs are considered non-traditional due to their relationship with our pay for performance and incentive-based philosophies. For example, the premiums for Lincoln Electric-provided medical coverage are 100% paid by employees, including the NEOs, on a pre-tax basis. Premiums for dental coverage, which is a voluntary benefit, are also 100% paid by employees. Life insurance coverage paid fully by Lincoln Electric is set at $10,000 per employee, including the NEOs, although employees may purchase additional insurance at their own cost. The NEOs participate in this same cost-
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 48 |
sharing approach. We attempt to balance our various non-traditional programs (such as those with a significant portion of the cost borne by the employee) with more traditional programs. Mr. Hallmann, a non-U.S. NEO, participates in the standard benefit programs per his work location.
We also provide accidental death and dismemberment benefits to officers, due to the significant amount of travel required in their jobs. Under this program, the premiums of which are paid by Lincoln Electric, a participant’s beneficiary would receive a payment of five times annual total cash compensation up to a maximum of $3,000,000 for executive officers and $2,000,000 for other officers upon an officer’s accidental death. The policy also provides dismemberment benefits of up to 100% of the death benefit in the event an officer is permanently and totally disabled as a result of an accident, and it provides for medical evacuation coverage as a result of an accident.
Retirement Programs
Retirement benefits are provided to our NEOs through the following programs:
• | The Lincoln Electric Company Retirement Annuity Program (RAP) had been in effect for eligible employees hired before 2006. Effective January 1, 2006, new employees are no longer eligible to participate in the RAP but became eligible for Financial Security Plan Plus (FSP Plus) benefits under The Lincoln Electric Company Employee Savings Plan described below. Effective July 1, 2012, the RAP was amended to add a lump-sum distribution option where participants can elect to receive a lump-sum distribution paid out either in full upon retirement or paid out over five years. Mr. Mapes is not a participant in the RAP but became a participant in the FSP Plus benefits in September 2012 upon meeting the eligibility requirements. Similarly, Mr. Hallmann is not a participant in the RAP or the FSP Plus, as he is on a local retirement program in Germany. Effective as of December 31, 2016, the RAP was amended to cease all future benefit accruals for all participants, so that the participants will not earn any additional benefits under the RAP after December 31, 2016. The estimated retirement benefits under the RAP for the NEOs that are shown in the Pension Benefits Table below are based on the NEOs frozen benefit under the RAP as of December 31, 2016. |
• | The Supplemental Executive Retirement Plan (SERP) has been in effect since 1994 but has been closed to new participants since 2005. The purpose of the SERP is, in part, to make up for limitations imposed by the U.S. Internal Revenue Code on payments under tax-qualified retirement plans, and, primarily, to provide an aggregate competitive retirement benefit for SERP participants in line with our overall 50th percentile objective. Participation in the SERP is limited to individuals approved by the Committee. Compensation covered by the SERP is the same as shown in the salary and bonus columns of the Summary Compensation Table below. Certain terms of the SERP may be modified as to individual participants, upon action by the Committee. Except with respect to the award of additional prior service to Mr. Stueber (in 1995), as described below, there have been no other modifications to the terms of the SERP for the NEOs. Mr. Mapes and Mr. Hallmann do not participate in the SERP as they were hired after 2005. Effective as of November 30, 2016, the SERP was amended to cease all future benefit accruals and to fully vest the accrued benefit as of November 30, 2016 of each of the active SERP participants who had a benefit under the SERP. As of November 30, 2016, there were four active participants who had a benefit under the SERP. Effective as of December 1, 2016, pursuant to the amendment to the SERP, the value of the frozen accrued vested benefit of each such SERP participant was converted to a notional account balance. The account balance was determined by projecting to December 31, 2016 the participant’s SERP benefit and calculating the present value of that projected benefit. Participants’ account balances will be credited with earnings, gains and losses in accordance with each participant’s investment elections which will be made in a manner similar to that undertaken by participants in the amended and restated 2005 Deferred Compensation Plan for Executives. |
• | A qualified 401(k) savings plan, formally known as The Lincoln Electric Company Employee Savings Plan (401(k) Plan), has been in effect since 1994. For 2016, all of the NEOs deferred amounts under the 401(k) plan. Historically, we have matched participant contributions (other than catch-up contributions) at 35% up to the first 6% of pay (base and bonus) contributed. During 2015, the 401(k) match was temporarily suspended as part of our cost-cutting measures. We also provide additional 401(k) plan contributions under a program we refer to as the Financial Security Plan (FSP) for those participants, including the NEOs, who made an election to adopt this program in 1997 (in which case they receive |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 49 |
an annual FSP contribution of 2% of base pay) or who made an election to adopt a revised program in 2006, which we refer to as the FSP Plus program, in which case they receive an annual FSP Plus contribution as follows:
After service of... | Lincoln Electric will contribute... |
1 year | 4% of base pay |
5 years | 5% of base pay |
10 years | 6% of base pay |
15 years | 7% of base pay |
20 years | 8% of base pay |
25 years | 10% of base pay |
In exchange for the FSP or FSP Plus benefits, participants who were eligible to participate in the RAP elected to forfeit certain future benefits under the RAP. The 401(k) Plan was amended to cease all FSP and FSP Plus contributions for all years after 2016.
• | The 401(k) Plan was amended and restated effective January 1, 2017 and will provide that eligible employees of The Lincoln Electric Company and certain affiliated companies will be eligible to receive up to 6% of employees’ annual compensation in company contributions through: |
(1) matching employer contributions equal to 100% of the employees’ before-tax (401(k)) contributions made to the Savings Plan, but not in excess of 3% of annual compensation; and
(2) automatic employer contributions equal to 3% of annual compensation.
These matching and automatic employer contributions will be 100% vested when made. In addition, certain employees affected by the RAP freeze will also be eligible to receive employer contributions equal to 6% of annual compensation for a minimum period of five years, up to the end of the year in which they complete 30 years of service.
• | A Restoration Plan was created effective January 1, 2017 for the purpose of providing certain employees the ability to fully participate in standard employee retirement offerings, which are limited by IRS regulations on covered compensation in the 401(k) Plan. All NEOs with the exception of Mr. Hallmann will participate in the Restoration Plan in 2017. |
• | A deferred compensation plan, or Top Hat Plan, is designed to allow participants to defer their current income on a pre-tax basis and to receive a tax-deferred return on those deferrals. There are no company contributions or match. Participation in the Top Hat Plan is limited to individuals approved by the Committee. As of December 31, 2016, there were 15 active employee participants in the Top Hat Plan. |
More information on these programs can be found below in the 2016 pension benefits section.
Perquisites
We offer limited perquisites. Occasionally, we will provide perquisites to officers or EMIP participants to meet specific business needs. For example, because we believe in the importance of maintaining the health of all of our employees, including the NEOs, we pay for an annual physical for EMIP participants who are age 45 or above and for certain participants below that age on an ad hoc basis. We grandfathered certain non-EMIP participants in the executive physical program. We also make available financial planning services to certain officers. However, the cost of these financial planning services is included in the income of the participants. The physical and financial planning programs are optional programs.
To assist us in conducting business meetings and/or entertainment, we pay the cost of certain club dues for some officers. Although these officers may derive some personal benefit from their use, club memberships are used extensively for business purposes, all personal expenses are borne entirely by the executive and the club dues are included in the income of the participants. Initiation fees for club memberships are paid by the executive. Different perquisites are provided from time to time to non-U.S. based executives; however, they are customary and reasonable in nature and amount (for example, a car lease).
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 50 |
Change in Control Arrangements
We have entered into change in control agreements with all of our NEOs. The agreements are designed generally to assure continued management in the event of a change in control of Lincoln Electric.
The change in control arrangements are operative only if a change in control occurs and payments are only made if the officer’s employment is terminated (or if the officer terminates employment due to certain adverse employment changes). The agreements provide our NEOs with the potential for continued employment following a change in control, which help retain these executives and provide for management continuity in the event of an actual or threatened change in control of Lincoln Electric. They also help ensure that our executives’ interests remain aligned with shareholders’ interests during a time when their continued employment may be in jeopardy. For a more detailed discussion of our change in control agreements, see Termination and Change in Control Arrangements below. Outside of these change in control agreements, we do not maintain written employment or other severance agreements for U.S.-based employees.
Recovery of Funds Policy
We have adopted a Recovery of Funds Policy (clawback policy) consistent with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Our policy is more extensive than what Dodd-Frank requires and is applicable to all of our officers (currently, 17 individuals), including our NEOs. The policy will apply in the event that there is an accounting restatement involving our financial statements due to material non-compliance with the financial reporting requirements under the U.S. federal securities laws. The policy applies to both current and former officers and covers incentive compensation received by the officers in the 3-year period prior to the restatement. Awards of incentive compensation would include annual bonus payments, stock option awards, restricted stock awards, RSUs, performance shares (new in 2016) and Cash LTIP awards beginning in 2011, unless Dodd-Frank regulations provide otherwise. Under the policy, in the event of an accounting restatement of our financial statements, the Committee would review all incentive compensation received during the 3-year covered period and would seek recovery of the amount of incentive compensation paid in excess of what would have been paid if the accounts had been properly stated. We believe that this policy is in the best interests of Lincoln Electric and its shareholders.
Anti-Hedging/Pledging Policy
Consistent with our philosophy to encourage long-term investment in our common stock, our directors and executive officers are prohibited from engaging in any speculative or hedging transactions involving our common stock, including buying or selling puts or calls, short sales or margin purchases. In addition, our insider trading policy prohibits future pledging of Lincoln Electric securities by our executive officers and directors. There are no pledges of Lincoln Electric common stock in place for any of our directors or executive officers.
Share Ownership
As with the Directors, in keeping with our philosophy that officers should maintain an equity interest in Lincoln Electric and based on our view that such ownership is a component of good corporate governance, we initially adopted stock ownership guidelines for officers in 2006 and increased the guidelines in 2012. The revised guidelines were proposed based on a review of our peer group and corporate governance best practices. Under the current guidelines, officers of Lincoln Electric are required to own and hold a certain number of our common shares, currently at the levels set forth in the table below:
Executive Group | Ownership Guideline |
Chief Executive Officer1 | 5 times base salary |
Management Committee Members2 | 3 times base salary |
Other Officers3 | 2 times base salary |
(1) Mr. Mapes.
(2) Includes Messrs. Petrella, Blankenship, Stueber and Hallmann, as well as six other officers at 12/31/16.
(3) Includes other EMIP participants.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 51 |
Officers have five years to satisfy the stock ownership guidelines, which can be satisfied either by holding (1) shares aggregating the dollar amount specified above (valued at the then current stock price), or (2) that number of shares needed to satisfy the ownership guidelines tied to the base salaries in effect on January 1, 2012 divided by the closing price of a common share on December 31, 2011 ($39.12). RSU awards count towards the stock ownership guidelines; common shares underlying stock options and shares held in another person’s name (including a relative) do not. As of December 31, 2016, all of our NEOs met the stock ownership guidelines, with the exception of Mr. Hallmann as he is mid-cycle after becoming a Management Committee member in 2013.
The Committee reviewed the stock ownership guidelines in December 2016 at the end of the five years and concluded that they were at appropriate levels when compared to the peer group and market. The guidelines were reset January 1, 2017 and established in the same manner as above. Officers have five years to satisfy the guidelines either by holding (1) shares aggregating the dollar amount specified above (valued at the then current stock price), or (2) that number of shares needed to satisfy the ownership guidelines tied to the base salaries in effect on January 1, 2017 divided by the closing price of a common share on December 30, 2016 ($76.67).
Deductibility of Compensation
Our general philosophy is to qualify future compensation for tax deductibility under Section 162(m), wherever appropriate, recognizing that, under certain circumstances, the limitations may be exceeded. Qualification is sought to the extent practicable and only to the extent that it is consistent with our overall compensation objectives. Moreover, even if we intend to grant compensation that qualifies as qualified performance-based compensation for purposes of 162(m), we cannot guarantee that such compensation will so qualify or ultimately will be deductible by us.
Our 2007 Management Incentive Compensation Plan, as amended, contains performance measures that were last approved by our shareholders in 2012 and provides us with flexibility to potentially grant performance-based awards under the plan that may be deductible under Section 162(m).
In addition, our current equity compensation plan for employees, the 2015 plan, contains performance measures that were approved by our shareholders in 2015, which provides us with flexibility to potentially grant performance-based equity awards under the plan that may be deductible under Section 162(m).
All of the compensation paid to the NEOs during 2016 was tax deductible by Lincoln Electric for federal income tax purposes.
COMPENSATION COMMITTEE REPORT //
The Compensation and Executive Development Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this proxy statement with Lincoln Electric’s management and, based on this review and discussion, recommends that it be included in Lincoln Electric’s Annual Report on Form 10-K for the year ended December 31, 2016 and this proxy statement.
By the Compensation & Executive Development Committee:
William E. MacDonald, III, Chair
David H. Gunning
Stephen G. Hanks
Kathryn Jo Lincoln
Hellene S. Runtagh
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 52 |
EXECUTIVE COMPENSATION TABLES
Summary of 2016 Compensation Elements | |||||||
Purpose | Competitive Target | Financial Metrics Used 4 | When the 2016 Amount Was Set | The Period to Which the Amount Relates | Where Reported in the SCT1 | ||
 | Base Pay | Rewards responsibility, experience and individual performance | Below Market | — | Beginning of 2016 | 2016 | Salary column |
Annual Bonus (EMIP) | Rewards strong annual financial results and individual performance | Above Market [base plus bonus] | EBITB and AOWC/Sales4 | Beginning of 2016 | 2016 Performance | Non-Equity Incentive Plan Compensation column | |
 | Stock Options | Rewards the creation of shareholder value | At Market | Share Price Appreciation | Beginning of 2016 | 2016 Based Award | Option Awards column |
RSUs | Rewards the creation of shareholder value and strong long-term financial results | Share Price Appreciation [RSUs granted prior to 2016 include Adjusted Net Income4 Growth and ROIC4 for accelerated vesting] | Beginning of 2016 | 2016 Based Award | Stock Awards column | ||
Cash-LTIP2 | Rewards the creation of long-term growth and the efficient use of capital | Adjusted Net Income4 Growth and ROIC4 | End of 2013 | 2014 through 2016 Performance | Non-Equity Incentive Plan Compensation column | ||
Performance Share LTIP2 (PSUs) | Beginning of 2016 | 2016 through 2018 Performance | Stock Awards column | ||||
 | Benefits other than Pension | Includes 401[k] match, FSP contributions, insurance and standard expatriate benefits | Below Market | — | Various | 2016 | All Other Compensation column |
Pension Benefits3 | Includes RAP, SERP and above-market earnings in the Top Hat | Above Market | — | Various | For RAP/SERP, shows changes from 2015 For Earnings, shows 2016 amounts | Change in Pension Value column | |
Perks | Meets specific business needs–includes financial planning, annual physical and certain club dues | Below Market | — | Various | 2016 | All Other Compensation column | |
1 Summary Compensation Table
2 In 2016, the Performance Share LTIP replaced the Cash LTIP. Compensation associated with the Cash LTIP is disclosed in the Summary Compensation Table at the end of the cycle (when realized) and compensation associated with the Performance Share LTIP is disclosed at the beginning of the cycle (upon grant). As such, compensation associated with both the 2014 to 2016 Cash LTIP and the 2016 to 2018 Performance Share LTIP are both disclosed within the 2016 Summary Compensation Table.
3 The SERP, effective November 30, 2016, and the RAP, effective December 31, 2016, were amended to cease all future benefit accruals.
4 Financial metrics used for compensation purposes are defined in Appendix A.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 53 |
2016 Summary Compensation Table
This table details total compensation paid to our NEOs for the past three years. In 2014, the Committee moved the annual grant of plan-based awards (stock and option awards) to the first quarter of 2015. Accordingly, there are no amounts of stock awards or option awards presented in the table for 2014. In 2016, beginning with the 2016 to 2018 performance cycle, the Performance Share LTIP replaced the Cash LTIP. Compensation associated with the Cash LTIP is disclosed in the Summary Compensation Table when realized (at the end of the cycle under the "Non-Equity Incentive Plan Compensation" column) and compensation associated with the Performance Share LTIP is disclosed when granted (at the beginning of the cycle under the "Stock Awards" column). Compensation associated with the 2014 to 2016 Cash LTIP and the 2016 to 2018 Performance Share LTIP are both disclosed in the 2016 Summary Compensation Table.
Name and Principal Position | Year | Salary ($)1 | Stock Awards ($)2 | Option Awards ($)2 | Non-Equity Incentive Plan Com- pensation ($)3 | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)4 | All Other Compensation ($)5 | Total ($) | |||||||||
Christopher L. Mapes Chairman, President and Chief Executive Officer | 2016 | 865,429 | 6 | 2,315,716 | 1,117,327 | 2,320,266 | 6 | 32,704 | 45,167 | 6,696,609 | |||||||
2015 | 903,221 | 1,138,408 | 1,097,410 | 2,146,573 | 10,997 | 39,364 | 5,335,973 | ||||||||||
2014 | 880,000 | – | – | 2,196,696 | 5 | 36,745 | 3,113,446 | ||||||||||
Vincent K. Petrella Executive Vice President, Chief Financial Officer and Treasurer | 2016 | 453,229 | 7 | 569,772 | 274,971 | 1,053,730 | 7 | 848,537 | 30,664 | 3,230,903 | |||||||
2015 | 473,021 | 280,073 | 270,106 | 777,746 | 288,753 | 34,593 | 2,124,292 | ||||||||||
2014 | 460,000 | – | – | 852,751 | 616,579 | 30,910 | 1,960,240 | ||||||||||
George D. Blankenship Executive Vice President, President, Americas Welding | 2016 | 477,083 | 459,306 | 221,696 | 749,942 | 1,359,141 | 27,735 | 3,294,903 | |||||||||
2015 | 497,917 | 225,731 | 217,668 | 703,999 | 512,151 | 6,800 | 2,164,266 | ||||||||||
2014 | 435,000 | – | – | 717,300 | 887,149 | 32,695 | 2,072,144 | ||||||||||
Frederick G. Stueber Executive Vice President, General Counsel and Secretary | 2016 | 391,208 | 8 | 373,259 | 180,030 | 560,251 | 331,371 | 15,821 | 1,851,940 | ||||||||
2015 | 408,292 | 169,646 | 163,663 | 534,110 | 9,448 | 20,890 | 1,306,049 | ||||||||||
2014 | 400,000 | – | – | 637,476 | 377,160 | 20,839 | 1,435,475 | ||||||||||
Mathias Hallmann Senior Vice President, President, Int'l Welding | 2016 | 289,556 | 9 | 283,142 | 136,670 | 395,583 | — | 29,009 | 1,133,960 | ||||||||
(1) | All NEOs took a temporary 5% base salary reduction starting in 2015 through December 1, 2016 as part of Lincoln Electric’s cost-cutting measures. |
(2) | During 2014, the Compensation and Executive Development Committee decided to move the annual grant of plan-based awards (including RSUs and stock options) to the first quarter of each year. Accordingly, there are no amounts showing for any of the NEOs for 2014 for annual equity awards as those awards were made in the first quarter of 2015. The amounts reported reflect the grant date fair value under FASB ASC Topic 718 for the RSU and PSU awards and reflect the grant date fair value under FASB ASC Topic 718 for the stock option grants. The award date fair value disclosed for PSU awards is based upon on target performance. |
The amounts shown for 2016 represent RSU awards as follows: Mr. Mapes ($1,157,858), Mr. Petrella ($284,886), Mr. Blankenship ($229,653), Mr. Stueber ($186,629), and Mr. Hallmann ($141,571). The amounts shown also include PSU awards as follows: Mr. Mapes ($1,157,858), Mr. Petrella ($284,886), Mr. Blankenship ($229,653), Mr. Stueber ($186,629), and Mr. Hallmann ($141,571).
(3) | The amounts shown for 2016 represent payments under our EMIP (annual bonus) as follows: Mr. Mapes ($1,667,038), Mr. Petrella ($854,440), Mr. Blankenship ($593,235), Mr. Stueber ($423,984), and Mr. Hallmann ($324,895). The amounts shown also include payments under our Cash LTIP as follows: Mr. Mapes ($653,228), Mr. Petrella ($199,290), Mr. Blankenship ($156,707), Mr. Stueber ($136,267), and Mr. Hallmann ($70,688). |
(4) | The amounts shown for 2016 represent the increase in actuarial value of our two defined benefit plans, the RAP and the SERP, as compared to 2015, and the difference in earnings under the Moody’s Corporate Bond Index fund in our Top Hat Plan and a hypothetical rate. Mr. Mapes and Mr. Hallmann do not participate in our RAP or SERP. |
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 54 |
(4) (Continued)
2016 INCREASE IN PENSION VALUE & PREFERENTIAL EARNINGS (TOP HAT PLAN) | |||||
Name | RAP | SERP | Difference in 2016 Earnings Credited in the Top Hat Plan | Moody’s Corporate Bond Index Earnings | Hypothetical Market Rate* |
Christopher L. Mapes | — | — | $32,704 | $87,927 | $55,223 |
Vincent K. Petrella | 173,116 | 654,865 | 20,556 | 56,107 | 35,551 |
George D. Blankenship | 115,632 | 1,239,137 | 4,372 | 12,909 | 8,537 |
Frederick G. Stueber | 65,546 | 248,460 | 17,365 | 48,330 | 30,965 |
Mathias Hallmann | — | — | — | — | — |
*This rate is specified by the SEC rules for proxy disclosure purposes and is based on 120% of the applicable federal long-term rate, compounded monthly for 2016.
(5) The amounts shown for 2016 are comprised of the following:
2016 ALL OTHER COMPENSATION | ||||||
Perquisites* | ||||||
Name | Company Retirement Contributions | Life , Health and AD&D Premiums | Financial Planning | Physical Examination | Club Dues | Company Car |
Christopher L. Mapes | 10,600 | 1,235 | 11,861 | — | 21,471 | |
Vincent K. Petrella | 5,300 | 1,235 | 11,542 | 2,206 | 10,381 | |
George D. Blankenship | 26,500 | 1,235 | — | — | — | |
Frederick G. Stueber | 5,300 | 1,235 | 9,286 | — | — | |
Mathias Hallmann9 | 5,138 | 5,405 | — | 1,681 | — | 16,785 |
*The methodology for computing the aggregate incremental cost for the perquisites is the amount that is imputed to the individual as taxable income.
(6) | Mr. Mapes deferred 30% of his 2016 base salary, 50% of his 2016 EMIP bonus and 30% of his 2014–2016 Cash LTIP, in each case under our Top Hat Plan. See the narrative following the Nonqualified Deferred Compensation Table below for additional information on this plan. |
(7) | Mr. Petrella deferred $100,000 of his 2016 base salary, $200,000 of his 2016 EMIP bonus and $100,000 of his 2014–2016 Cash LTIP, in each case under our Top Hat Plan. |
(8) | Mr. Stueber deferred $50,000 of his 2016 base salary under our Top Hat Plan. |
(9) | Mr. Hallmann's salary, EMIP, and most of the other compensation are established and paid in Euros, which are reported in U.S. dollars using the average foreign exchange rate for the year (1.103509066). Mr. Hallmann's equity based compensation (stock and options awards) and Cash LTIP compensation are established in U.S. dollars. |
Additional Employment Terms for the CEO
Upon joining the Company in 2011, Mr. Mapes received certain compensation, a portion of which consisted of RSUs (52,498 RSUs) that represented a special executive retention and retirement replacement award valued at $1,650,000. As previously noted, Mr. Mapes is not a participant in either our RAP or SERP.
On December 31, 2012, Mr. Mapes was appointed President and Chief Executive Officer. In connection with his appointment, Mr. Mapes received a special retirement replacement and executive retention award of 33,161 RSUs valued at $1,608,000 and we increased his Cash LTIP targets, on a pro-rata basis.
The value of Mr. Mapes’ awards discussed above was intended to provide comparable, competitive retention and retirement benefits for a senior level executive of a manufacturing company but were delivered in a form (namely RSUs) that require strong financial performance (share price appreciation) to deliver the intended value. This differs from the RAP and SERP which require only continuous service. The special retirement replacement and executive retention awards for both 2011 and 2012 vest at a rate of 20% over five years. They are not eligible for accelerated vesting upon achievement of company performance objectives. Once vested, Mr. Mapes has elected to defer these RSUs under our Top Hat Plan until his retirement from the Company.
LINCOLN ELECTRIC : 2017 PROXY STATEMENT | 55 |
The remainder of the RSU awards and the stock options provided to Mr. Mapes are subject to our ordinary terms.
For 2016, Mr. Mapes’ salary and bonus accounted for 41.1% of his compensation reported in the 2016 Summary Compensation Table, based on the value of his 2016 base salary, 2016 actual EMIP (or bonus) and one-third of his actual Cash LTIP payment for the 2014 to 2016 performance cycle.
Additional Employment Terms for the Other NEOs
Mr. Stueber entered into an agreement in February 1995 when he was originally hired by the Company, which was modified in May 1998. The agreement contains many terms no longer in effect. The agreement grants credited service for purposes of the SERP of 22 years as of his date of hire, assuming a normal retirement age of 60 and service of 45 years at age 65.
For 2016, Mr. Petrella’s salary and bonus accounted for 42.5% of his compensation reported in the 2016 Summary Compensation Table, Mr. Blankenship’s salary and bonus accounted for 34.1% of his compensation reported in the 2016 Summary Compensation Table, Mr. Stueber’s salary and bonus accounted for 46.5% of his compensation reported in the 2016 Summary Compensation Table and Mr. Hallmann's salary and bonus accounted for 56.3% of his compensation reported in the 2016 Summary Compensation Table. The above percentages were based, in each case, on the value of the executive’s 2016 base salary, 2016 actual EMIP (or bonus) and one-third of the executive’s actual Cash LTIP payment for the 2014 to 2016 performance cycle.
2016 Grants of Plan-Based Awards |
The following table provides information relating to plan-based awards granted in 2016 to our NEOs.
Name | Grant Type | Grant Date | Estimated Future Payouts Under Non-Equity Incentive Plan Awards1 | Estimated Future Payouts Under Equity Incentive Plan Awards2 | All Other Option Awards: Number of Shares of Stock or Units (#)3 | All Other Option Awards: Number of Securities Under- lying Options (#)4 | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($)5 | ||||
Threshold ($) | Target ($) | Max. ($) | Threshold (#) | Target (#) | Max. (#) | |||||||
Christopher L. Mapes | EMIP | 2/17/2016 | 0 | $1,252,000 | $2,253,600 | |||||||