Compensation Highlights

Compensation Discussion and Analysis

Pursuant to SEC rules, we are asking shareholders to approve, on an annual basis, the compensation of our Named Executive Officers as disclosed in the Compensation Discussion and Analysis, the compensation tables, and any related material contained in this Proxy Statement. This proposal, commonly known as a “say-on-pay” proposal, gives shareholders the opportunity to endorse or not endorse our executive pay program and policies through the following resolution:

“Resolved, that the shareholders approve the compensation of our Named Executive Officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, the compensation tables, and any related material contained in our Proxy Statement.”

The compensation of our executive officers is based on a program that ties a substantial percentage of an executive’s compensation to the attainment of financial and other performance measures that, the Board believes, promote the creation of long-term shareholder value and position the Company for long-term success. As described more fully in the Compensation Discussion and Analysis, the mix of fixed and performance-based compensation and the terms of annual and long-term incentive awards are all designed to enable the Company to attract and maintain top talent while, at the same time, creating a close relationship between performance and compensation. The Compensation Committee and the Board of Directors believe that the design of the program, and therefore the compensation awarded to Named Executive Officers under the current program, fulfills this objective.

Shareholders are urged to read this Compensation Discussion and Analysis section of this Proxy Statement, which discusses in detail how our compensation policies and procedures implement our compensation philosophy.

Although the vote is non-binding, the Compensation Committee will review the voting results in connection with their ongoing evaluation of the Company’s compensation program. The Committee in recent years has considered the feedback from shareholders in making specific compensation plan changes. Our compensation plan was well received by our shareholders as reflected in our annual say-on-pay vote last year when over 89% of the shares voted were in favor of the Named Executive Officer compensation. Approval of this proposal is subject to the approval of a majority of the holders of shares of the Company’s common stock present in person or represented by proxy and entitled to vote at the Annual Meeting. Each holder of our common stock is entitled to one vote for each share held. Abstentions will have the same effect as a vote AGAINST this proposal. Broker non-votes are not counted.

The Board of Directors recommends a vote “FOR” advisory approval of the resolution set forth above.

This Compensation Discussion and Analysis has been prepared by our management and reviewed by the Compensation Committee of our Board of Directors. This discussion provides information and context regarding the compensation paid to our Chief Executive Officer, Chief Financial Officer, and the other three most highly-compensated executive officers in 2018, all of whom are collectively referred to as the “Named Executive Officers”. Our Named Executive Officers (NEOs) for 2018 were:

Chairman of the Board and Chief Executive Officer - Thomas L. Ryan(1)

President and Chief Operating Officer - Micheal R. Webb(1)

Senior Vice President, Chief Financial Officer - Eric D. Tanzberger

Senior Vice President, Operations - Sumner J. Waring, III(1)

Senior Vice President, General Counsel and Secretary - Gregory T. Sangalis

The Company’s executive compensation policies are designed to provide aggregate compensation opportunities for our executives that are competitive in the business marketplace and that are based upon Company and individual performance. Our foremost objectives are to:

  • align executive pay and benefits with the performance of the Company and shareholder returns while fostering a culture of highly ethical standards and integrity and
  • attract, motivate, reward, and retain the broad-based management talent required to achieve our corporate objectives.

(1)As announced on January 22, 2019, Michael R. Webb informed the Company of his intent to retire effective March 31, 2019. Thomas L. Ryan will assume the role of President in addition to his existing roles of Chairman of the Board and Chief Executive Officer, and Sumner J. Waring, III will assume the role of Chief Operating Officer, both effective April 1, 2019.

Our management has a strong focus on delivering long-term profitable growth and returning value to our shareholders. This long-term focus has contributed significantly to the Company’s total shareholder return as seen below. Also, below we reflect the Company's 2018 performance for adjusted earnings per share and adjusted operating cash flow.

 10-year Total Shareholder Return chart

As of December 31, 2018 and includes the reinvestment of dividends.
Source: S&P Capital IQ

 Adjusted earnings per share and Adjusted operating cash flow in millions chart

Adjusted Earnings Per Share and Adjusted Operating Cash Flow are non-GAAP financial measures. Please see Annex A for disclosures and reconciliations to the appropriate GAAP measure.

2018 Company Performance

As detailed in the Q&A with our Chairman and CEO earlier in this Proxy Statement, the Company delivered outstanding financial results in 2018, including the following:

  • Maintained our position as the largest provider in the Company’s industry, with 15%-16% market share and $3.2 billion in revenue.
  • During 2018, we grew our funeral and cemetery preneed sales 6.5% and 4.3%, respectively, to $1.8 billion which allowed our preneed backlog to grow to $11.1 billion.
  • Increased adjusted earnings per share by approximately 15% compared to 2017.
  • Adjusted operating cash flow was approximately $610 million, which is a 10% increase over the prior year.
  • We enhanced shareholder value by deploying capital of $628 million, investing $227 million to acquisitions and new build opportunities, and returning $401 million through dividends and share repurchases.
  • Achieved a total shareholder return (TSR) of 142% over the last five fiscal years, outpacing the return of the S&P 500 of 50%.

Key Features of Our Compensation Programs

Over the course of the past several years, acting in the interests of the stockholders, the Compensation Committee in conjunction with management has adjusted compensation programs toward greater performance-based compensation. In addition, we have collectively modified or eliminated certain components of our programs to better align with prevailing standards. The following are highlights of our compensation programs, including our emphasis on pay commensurate with performance and actions taken to align aspects of our programs with evolving standards.

What we do:

  • We pay for performance. A significant portion of the compensation of our Named Executive Officers is directly linked to the Company’s performance, as demonstrated by the historical payouts related to our annual and long-term incentive plans.
  • We require stock ownership. We maintain stock ownership guidelines for officers and Directors. Under the guidelines, an officer should retain all SCI stock acquired from grants of restricted stock and stock options (net of acquisition and tax costs and expenses) until that officer has met the stock ownership guidelines.
  • We have claw-backs. The Company maintains claw-back provisions that are triggered in certain circumstances. If triggered, the provisions provide for a claw-back of annual performance-based incentives paid in cash, stock options, restricted stock, and performance units.
  • We seek independent advice. We engage independent consultants to review executive compensation and provide advice to the Compensation Committee.
  • We have an ongoing shareholder outreach program. As part of our commitment to effective corporate governance practices, we regularly engage with shareholders. We specifically discuss executive compensation along with other important topics regularly as an ongoing part of our outreach program.

What we don't do:

  • We do not allow tax gross-ups. We do not provide tax gross-ups in our compensation programs, and we do not have provisions in our executive employment agreements that provide for tax gross-ups in the event of a change of control of the Company.
  • We do not allow hedging or pledging. We have policies that prohibit officers and Directors from hedging or pledging their SCI stock ownership.
  • We do not allow the repricing of stock options. We have policies that prohibit subsequent alterations of stock option pricing.

Consideration of 2018 "Say-on-Pay" Vote

At our Annual Meeting of shareholders held on May 23, 2018, 89.4% of the shares voted were in favor of the proposal for an advisory vote to approve Named Executive Officer compensation (“say-on-pay” vote), which was approximately the same in 2017. These votes represented a majority of our outstanding shares. The Compensation Committee believes this result is an indication that a substantial majority of our shareholders are satisfied with our executive compensation policies and decisions, and that our executive compensation program effectively aligns the interests of our Named Executive Officers with the interests of our shareholders.

The Company’s compensation philosophy as implemented through the Compensation Committee is to align executive compensation with the performance of the Company and the individual by using several compensation components for our executives.

Our overall compensation philosophy provides target direct compensation opportunities within a competitive range of target pay levels among general industry companies of comparable size and scope (the “Peer Comparator Group” - see Annex B). Incentive programs provide opportunities to exceed Peer Group target compensation levels through annual and long-term performance-based incentives paid in cash and stock. However, if performance targets are not met, then the resulting performance-based award payouts will be below target levels. We believe these target levels of direct compensation are appropriate to motivate, reward, and retain our executives, each of whom has leadership talents and expertise that make them attractive to other companies. In making annual compensation decisions, the Compensation Committee reviews each Named Executive Officer’s total compensation, as well as the compensation components, for reasonableness and comparability to market levels and the prior year’s compensation.

The compensation components are designed to motivate our senior leadership to operate as a team to achieve Company-wide goals. This approach serves to align the compensation of our most senior leadership team with the performance of the Company.

In the first quarter of each year, our independent consultant presents to the Compensation Committee comparative market information, including benchmarking data discussed below. For the Chairman and CEO, the Compensation Committee is exclusively responsible for the final determination of all components of compensation, but requests input and recommendations from Meridian. For other Named Executive Officers, the Compensation Committee receives additional recommendations from our CEO for all components of compensation. In the first quarter of each year, the Compensation Committee reviews the market data and recommendations and sets the compensation components of annual base salary, annual performance-based incentives, and long-term incentives for that year. Below is a graph aligning CEO pay and performance, using the five year total shareholder return.

CEO Pay and Performance Alignment chart

(1)A change in the denomination of the performance unit plan created a temporary distortion in the disclosure of 2018 total compensation by "doubling up" previous performance plan grants, which were disclosed when paid, with the initial inclusion of 2018 performance plan grant value. For more information, please see page 42.

Below is an overview of SCI’s elements of compensation and a graph showing the percentage of the total for each element.

Direct Compensation chart

(1)A change in the denomination of the performance unit plan created a temporary distortion in the disclosure of 2018 total compensation by "doubling up" previous performance plan grants, which were disclosed when paid, with the initial inclusion of 2018 performance plan grant value. For more information, please see page 42.

 

Approximately three-fourths of our NEOs' compensation is performance-based.

Annual Base Salary page 39

  • Description: Fixed cash element of compensation established within a competitive range of benchmark pay levels.
  • Objective: Serves to attract and retain executive talent and may vary by individual or due to marketplace competition or economic conditions.
  • Recent Changes: Reduced peer group for benchmark studies.

Annual Performance-Based Incentive Compensation page 39

  • Description: Performance–based element of compensation tied to the attainment of performance measures, which is paid in cash.
  • Objective: Rewards achievement of shorter term financial and operational objectives we believe are primary drivers of our common stock price over time.
  • Recent Changes: For 2018, we have transitioned return on equity to a modifier for the performance unit plan under Long-Term Incentive Compensation rather than as a metric for our Annual Performance-Based Incentive Compensation Plan.

Long-Term Incentive Compensation page 40

  • Description: Stock Options – granted at an exercise price equal to 100% of the fair market value of SCI common stock on the grant date and vest at a rate of 1/3 per year.
  • Objective: Rewards for the Company’s stock price appreciation.
  • Description: Restricted Stock – awards are made in February each year at the same time as the stock option grants and vest at a rate of 1/3 per year.
  • Objective: Supports retention and furthers stock ownership.
  • Description: Performance Units – the performance unit plan measures the three-year total shareholder return (“TSR”) relative to a peer group of public companies (see Annex C and D).
  • Objective: Rewards for effective management of the Company's performance over a multi-year period and delivering positive TSR.
  • Recent Changes: (1) Reduced size of the peer comparator group, (2) Added a return on equity modifier for 2018 awards, (3) Units are now denominated in shares
    instead of cash.

Other Compensation page 43

  • Description: Retirement Plans – Executive Deferred Compensation Plan and 401(k) Plan.
  • Objective: Provide financial security for retirement.
  • Description: Perquisites and Personal Benefits – reasonable benefits as described on page 43.
  • Objective: To enhance executive performance by facilitating effective management of personal matters.

 

We target the base salary levels of our Named Executive Officers within a competitive range of benchmark pay levels defined in the competitive benchmarking study described on page 46. We believe these levels are appropriate to motivate and retain our Named Executive Officers, who each have leadership talents and business expertise that make them attractive to other companies. In addition, when adjusting salaries, we may also consider the individual performance of the executive. The Compensation Committee made the adjustment reflected below based on consideration of benchmark pay levels for each executive and in recognition of strong performance during 2017. In the first quarter of 2018, the Compensation Committee made the following salary adjustments:

 Thomas Ryan

2018 Salary: $1,200,000
2017 Salary: $1,200,000
Change: $ —
% Change: —%

Michael R. Webb

2018 Salary: $750,000
2017 Salary: $750,000
Change: $ —
% Change: —%

Eric D. Tanzberger

2018 Salary: $600,000
2017 Salary: $600,000
Change: $ —
% Change: —%

Sumner J. Waring, III

2018 Salary: $570,000
2017 Salary: $570,000
Change: $ —
% Change: —%

Gregory T. Sangalis

2018 Salary: $500,000
2017 Salary: $480,000
Change: $20,000
% Change: 4.2%

We use annual performance-based incentives paid in cash to focus our executive officers on financial and operational objectives that the Compensation Committee believes are primary drivers of our common stock price over time. In the first quarter of 2018, the Compensation Committee established the performance measures as the basis for annual performance-based incentive awards for our Named Executive Officers. The target award opportunities for the Named Executive Officers for 2018 were as follows:

Target Award Opportunity (% of Base Salary) 

Thomas L. Ryan - 125%

Michael R. Webb - 100%

Eric D. Tanzberger - 90%

Sumner J. Waring, III - 90%

Gregory T. Sangalis - 80%

We believe normalized earnings per share and free cash flow per share drive the current performance of the Company and enhance shareholder value. Comparable preneed cemetery property production is a key driver of current performance, as we are generally able to recognize this revenue at the time of sale when the property is ready and available for use. While all other comparable preneed funeral and cemetery production is generally deferred and does not have an immediate impact on earnings, we believe such production is driving future market share growth, adding stability to our future revenue stream, and creating future value for our shareholders over the long term. The 2018 performance measures discussed below are similar to the performance measures utilized in 2017.

  • Normalized Earnings per Share, which we calculate by applying a 24.2% effective tax rate to the Company’s calculation of its reported diluted earnings per share and further adjusting to exclude the items listed below. The effective tax rate is fixed and does not change throughout the year.
  • Normalized Free Cash Flow per Share, which we calculate by (1) adjusting reported cash flows from operating activities to exclude the cash impact of the items listed below, (2) deducting forecasted capital improvements at existing facilities and capital expenditures to develop cemetery property, (3) utilizing the forecasted amounts of cash taxes paid in 2018 relate to normal operating activities, and (4) dividing the result by the reported weighted average diluted number of shares outstanding in 2018.
  • Comparable Preneed Production, which we define as the percentage of growth over prior year in combined total preneed funeral sales production and total preneed cemetery sales production at comparable same-store locations in mixed currency dollars (USD and Canadian dollars).

For 2018, we weighted each of the performance measures at 331/3%. The Compensation Committee established ranges for performance measures and their related payouts as a percentage of the target award for the performance period from January 1 through December 31, 2018. We calculated awards for performance levels between threshold and target or target and maximum using straight-line interpolation. The 2018 performance targets, SCI’s actual performance, and resulting payout percentages are set forth below.

2018 Performance Targets and Actual Performance

Performance Measure: Normalized Earnings per Share
Threshold for 0% Payout(1): $1.73
Target for 100% Payout: $1.81
Maximum for 200% Payout: $1.89
2018 Actual Performance: $1.77
2018 Performance as % of Target: 97.76%
Payout Percentage: 49.34%

Performance Measure: Normalized Free Cash Flow per Share
Threshold for 0% Payout(1): $1.85
Target for 100% Payout: $2.04
Maximum for 200% Payout: $2.23
2018 Actual Performance: $1.99
2018 Performance as % of Target: 97.39%
Payout Percentage: 71.96%

Performance Measure: Comparable Preneed Production(2)
Threshold for 0% Payout(1): 102.50%
Target for 100% Payout: 105.00%
Maximum for 200% Payout: 107.50%
2018 Actual Performance: 105.03%
2018 Performance as % of Target: 100.02%
Payout Percentage: 101.02%

Total Payout Percentage: 74.10%

(1)Any performance above the threshold results in a payout.
(2)Expressed as a percentage of comparable 2017 performance.

The Compensation Committee believes it is appropriate to exclude certain non-routine items from performance metrics to encourage appropriate decision making regarding operations and capital deployment. For 2018, the Compensation Committee approved the exclusion of net gains or losses on dispositions, currency losses, losses associated with the early extinguishment of debt, and IRS settlements related to prior years.

As a result of the foregoing and giving effect to the weightings described above, our Named Executive Officers received annual performance-based incentives paid in cash at 74.10% of their individual incentive targets. The actual dollar amounts of the payouts are set forth in footnote (2) to the Summary Compensation table below.

The Compensation Committee established each Named Executive Officer’s target opportunity for 2018 to be consistent with our overall compensation philosophy to align compensation with our performance and to motivate and retain the executive level talent. The target award opportunities were generally positioned within the mid-range of the competitive benchmark market data. If SCI achieved the performance targets established by the Compensation Committee, executive officers would receive incentive awards at this targeted level. Actual incentive awards may be higher or lower than the target levels based on SCI’s performance relative to the performance goals. The range of performance goals established a lower threshold to achieve a minimal annual performance-based incentive but with a higher threshold to achieve a payout at or near the maximum award of 200% of the targeted incentive levels. The award is based on base salary on the last day of the measurement period.

In February of each year, the Compensation Committee approves the long-term incentive award grants for that year. Awards granted in 2018 under our long-term incentive compensation program consisted of three types of awards to provide balance and focus for the Named Executive Officers. Specifically, the awards consist of a mix of stock options, restricted stock, and performance units, which are designed to ensure focus on driving an appropriate culture and healthy operating platform for the Company, managing our on-going risk profile, and implementing strategies to generate superior total long-term shareholder returns. The Compensation Committee considered several factors in determining the total target value of long-term incentive compensation for Named Executive Officers, including Peer Group benchmark pay levels, the individual performance of each executive officer, the job responsibilities of each executive officer, and the overall Company performance in light of the then current economic environment. Once the total target value was established for each executive officer, we calculated and granted to the executive officer (i) the number of stock options that had a value equal to one-third of the total target value, (ii) the number of shares of restricted stock that had a value equal to one-third of the total target value, and (iii) the number of performance units that had a value equal to one-third of the total target value. We believe that the grant of significant annual equity awards further aligns the interests of senior management and the Company’s shareholders. Therefore, the grant of stock options and the award of restricted stock are important components of annual compensation. Although the Compensation Committee does not consider current stock ownership levels in determining equity awards, we do annually review the ownership levels and progress towards established ownership guidelines, as discussed below.

Stock Options

The purpose of using stock options is to provide executive officers a reward value that is directly attributable to their ability to increase the value of the business and our stock price.

Stock options are granted at an exercise price equal to 100% of the fair market value of SCI common stock on the grant date. Stock options vest at a rate of one-third per year and have an eight-year term.

Restricted Stock

The purpose of using restricted stock with service-based vesting provisions is to assist in retaining our executive officers and encourage stock ownership. The restricted stock awards are made in February each year at the same time as the stock option grants and vest at a rate of one-third per year.

Performance Units

The performance units are intended to reward executive officers for effective management of the business over a multi-year period. The performance unit plan measures the three-year total shareholder return (“TSR”) relative to public companies that are a subset of the Peer Group (see Annex C and D). The subset of the Peer Group is selected based on correlation in size, certain business characteristics, and stock price as well as other various factors.

TSR is defined as the percentage computed from $100 invested in SCI common stock on the first day of the performance cycle, with dividends reinvested, compared to $100 invested in each of the public companies in the Peer Group, with dividend reinvestment during the same period.

The Compensation Committee believes TSR is an appropriate metric because it (i) aligns the interests of management with the interests of shareholders and (ii) provides a useful means of comparing Company performance relative to the performance of public companies in the Peer Group. Prior to 2018, each performance unit had a value of $1.00 and the actual payout may vary by a range of 0% to 200% of each executive’s target award opportunity established by the Compensation Committee. Earned performance unit awards are settled in cash at the end of each three-year performance period. The chart below sets forth the range of payouts as a percent of a target award at various levels of relative performance. See below for changes made to the plan effective for 2018 and onward.

The Board approved changes to the performance unit plan to add a return on equity modifier to the total shareholder return metric to respond to shareholder feedback and a change in the denomination to award in share units rather than cash units, which is effective for the 2018 grants. Our 2018 Summary Compensation Table includes performance units for two different award periods. The 2018 grant is included in the Share Awards column and the payout for the 2016-2018 performance period is included in the Non-Equity Incentive Plan Compensation column. Please see page 42 for further explanation of the impact.

Performance Unit Range of Payouts

Award Payout Level: Maximum
SCI Weighted Average Total Shareholder Return Ranking Relative to Comparator Group at End of Performance Cycle: 75th Percentile or greater
% of Target Award Paid as Incentive*: 200%

Award Payout Level: Target
SCI Weighted Average Total Shareholder Return Ranking Relative to Comparator Group at End of Performance Cycle: 50th Percentile
% of Target Award Paid as Incentive*: 100%

Award Payout Level: Threshold
SCI Weighted Average Total Shareholder Return Ranking Relative to Comparator Group at End of Performance Cycle: 25th Percentile
% of Target Award Paid as Incentive*: 25%

Award Payout Level: Below Threshold
SCI Weighted Average Total Shareholder Return Ranking Relative to Comparator Group at End of Performance Cycle: Less than 25th Percentile
% of Target Award Paid as Incentive*: —%

*Calculation of awards for performance levels between threshold and target or target and maximum are calculated using straight-line interpolation.

We believe positive relative performance in a down year deserves a reward, but should be limited. Therefore, payouts are capped at target if SCI experiences negative TSR for a performance cycle but performs well in relation to the Peer Group.

For the 2016 - 2018 performance cycle, the closing stock price determinations as of December 31, 2015 and December 31, 2018 were used to calculate the awards due participants. For this performance cycle, the participants earned an award of 200% of the target award opportunity based on the Company’s TSR greater than 63% (compared to S&P TSR of 30%) and at the 82nd percentile or better ranking relative to the Peer Group used in 2016.

For the 2018 - 2020 performance cycle, the Compensation Committee granted performance units with performance awards ranging from 0% to 200% as set forth below in the “Grants of Plan-Based Awards” table. A target award is earned if SCI’s TSR relative ranking is at the 50th percentile of the TSR of the public companies in the 2018 Peer Group at the end of the performance cycle at December 31, 2020.

Impact of Changing the Denomination of the Performance Unit Plan

As reported last year, in response to shareholder feedback and to continue our efforts to refine the correlation between executive pay and total shareholder return (TSR), the Board approved the change in the denomination of the performance unit plan from a cash based amount to an amount denominated in shares. The denomination in shares creates a stronger correlation of pay to performance and, more specifically, to total shareholder return which is objective, transparent, and impactful.

The change in denomination creates a temporary distortion in the disclosure of total compensation in the Summary Compensation Table. The distortion occurs because we are reporting the 2018-2020 performance-based plan grant that was made in 2018 and the cash payout from the 2016 performance period that concluded in 2018. This distortion will occur in our disclosure of both 2018 and 2019 compensation, after which time the cash based performance periods will have matured and there will be no more "doubling up" of grants and payouts in the Summary Compensation Table.

The table below uses Thomas L. Ryan's compensation to illustrate the impact on the Summary Compensation Table for 2018 (page 48). The prior year is as reported in the Summary Compensation Table and the current year is presented in two ways. The first presentation of 2018 compensation ties to the current Summary Compensation Table, including the double counting of the Performance Unit Plan, and the second presentation of 2018 compensation is a proforma as if the change in denomination did not occur.

CEO Summary Compensation chart

Annual Base Salary - Fixed cash element of compensation established within a competitive range of benchmark pay levels, which is in the Salary column on the Summary Compensation Table.

Annual Performance-Based Incentive Compensation - Performance–based element of compensation tied to the attainment of performance measures, which is paid in cash. This is included in the Non-Equity Incentive Plan Compensation column on the Summary Compensation Table.

Long-Term Incentive Compensation

  • Stock Options (SO) – granted at an exercise price equal to 100% of the fair market value of SCI common stock on the grant date and vest at a rate of 1/3 per year, which is included in the Option Awards column in the Summary Compensation Table.
  • Restricted Stock (RS) – awards are made in February each year at the same time as the stock option grants and vest at a rate of 1/3 per year, which is included in the Stock Awards column on the Summary Compensation table.
  • Performance Units (PUP) – the performance unit plan measures the three-year total shareholder return (“TSR”) relative to a comparator group of public companies (see Annex C and D). The prior year grants of performance units were included in the Non-Equity Incentive Plan Compensation column and the current year grants are included in the Stock Awards column on the Summary Compensation Table.

Other Compensation - Retirement plans and perquisites. This grouping includes the Change in Pension Value Column and the All Other Compensation column from the Summary Compensation Table.

Retirement Plans

We believe financial security during retirement is as important as financial security before retirement. We previously maintained a Supplemental Executive Retirement Plan for Senior Officers, which ceased accruing benefits in 2000. In 2005, we implemented an Executive Deferred Compensation Plan, which includes a Company contribution for retirement.

Our Supplemental Executive Retirement Plan for Senior Officers is a non-qualified plan under which our Named Executive Officers accrued benefits until December 31, 2000. No additional benefits have been accrued after 2000. Each participant is vested in the full benefit at age 60.

To help retain and recruit executive level talent, the Company maintains the Executive Deferred Compensation Plan. This plan allows for an annual retirement contribution of up to 7.5% of eligible compensation and a performance-based contribution targeted at 7.5%, with a range of 0% to 15% based on achievement of Company performance measures established in the first quarter of each year. These are the same performance measures described in the annual performance-based incentives paid in cash above. The percentages are applied to the combined eligible compensation of base salary and annual performance-based incentives paid in cash. The plan allows for individual deferral of base salary, annual performance-based incentives paid in cash, restricted stock awards, and performance unit awards. The plan also allows for the restoration of Company matching contributions that are prohibited in the Company’s 401(k) plan due to tax limits on contributions to qualified plans. In February 2019, the Company made the following contributions under the plan with respect to 2018 service and performance:

 

Thomas L. Ryan

7.5% Retirement Contribution: $173,374
Performance Contribution: $128,528
Total: $301,902

Michael R. Webb

7.5% Retirement Contribution: $97,937
Performance Contribution: $72,604
Total: $170,541

Eric D. Tanzberger

7.5% Retirement Contribution: $75,015
Performance Contribution: $55,611
Total: $130,626

Sumner J. Waring, III

7.5% Retirement Contribution: $71,264
Performance Contribution: $52,830
Total: $124,094

Gregory T. Sangalis

7.5% Retirement Contribution: $59,733
Performance Contribution: $44,282
Total: $104,015

We also offer a 401(k) plan to our associates, including our executive officers. In 2000, the Company initiated the 401(k) Retirement Savings Plan for elective contributions by participants and matching contributions by the Company up to prescribed limits established by the Board of Directors and specific IRS limitations. Participants may elect to defer up to 50% of salary and bonus into the Plan subject to the annual IRS contribution limit of $18,500, excluding the $6,000 catch-up contributions for eligible participants age 50 and older. The Company’s match ranges from 75% to 125% of employee deferrals based on their years of Company service. The match is applied to a maximum of 6% of an officer’s salary and annual performance-based incentive, subject to the IRS compensation limits.

Perquisites and Personal Benefits

We provide various perquisites and personal benefits to our executive officers that the Compensation Committee views as an important component of competitive compensation. These benefits are designed to enhance executive performance by facilitating effective management of personal matters and include, among others:

  • Financial and legal planning and tax preparation — provided to officers to encourage critical document preparation and financial planning advice for effective tax and retirement planning.
  • Supplemental medical reimbursements — provided to officers, assistance vice presidents, and managing directors. The insured benefit product covers out of pocket medical expenses, exclusive of required premium contributions by participants in the Company’s medical and dental plans, and is a valued benefit provided at a modest annual cost per participant.
  • Enhanced life insurance — executive life insurance program for officers generally covering approximately 3.5 times the executive’s annual salary and bonus.
  • Funeral and cemetery benefits — provides funeral/cemetery discounts for Directors and officers and their immediate families, on an atneed or prearranged basis. Under the policy, which was amended in February 2015, the Company provides funeral and cemetery merchandise, services, and interment rights at discounts ranging from 25% to 75% of retail prices.
  • Use of Company aircraft — six senior officers are allowed limited and specified use of leased aircraft for personal reasons in accordance with the Company’s usage policy approved by the Board of Directors. Personal benefit amounts are not considered annual salary for bonus purposes, deferred compensation purposes, or 401(k) contribution purposes.

Provisions Regarding Claw-Backs

We have provisions for seeking the return (claw-back) from executive officers of cash incentive payments and stock sale proceeds in certain circumstances involving fraud. These provisions are for the following elements of compensation: annual performance-based incentives paid in cash, stock options, restricted stock, and performance units. The provisions would be triggered if the Board of Directors determines that an officer has engaged in fraud that caused, in whole or in part, a material adverse restatement of the Company’s financial statements. In such an event, the Company would seek to recover from the offending officer the following:

  • The actual annual performance-based incentive paid in cash to the officer, but only if the original payment would have been lower if it had been based on the restated financial results.
  • The gains from sales of stock acquired under stock options realized at any time after the filing of the incorrect financial statements. Any remaining vested and unvested stock options would be canceled.
  • The gains from sales of restricted stock realized at any time after the filing of the incorrect financial statements. Any remaining unvested restricted stock would be forfeited.
  • The amount of a performance unit award paid after the ending date of the period covered by the incorrect financial statements. Any unpaid performance unit award would be forfeited.

Securities Trading and Investment Policy

The Board of Directors maintains a policy governing Directors and officers with regard to transactions involving the Company’s securities, including purchases and sales of common stock. Among other things, the policy provides guidelines on trading during “trading windows,” confidentiality responsibilities, and reporting obligations.

Stock Ownership Guidelines and Retention Requirements - Officers

We have stock ownership guidelines for officers. Stock ownership is generally achieved through open market purchases of SCI stock, shares acquired in the Company-sponsored 401(k) plan, vesting of restricted stock, and shares retained after exercise of stock options. The policy requires an officer to retain all SCI stock acquired from grants of restricted stock and stock options (net of acquisition and tax costs and expenses) until that officer has met the ownership guidelines.

For each Named Executive Officer, the stock ownership guideline shall be the amount of SCI shares having a fair market value equal to a multiple of base salary as set forth in the following table. Measurement of stock ownership against the guidelines will be calculated once a year based on valuation of the shares held at year end utilizing the closing price of SCI common stock on the last trading day of the previous year. A new officer has an initial period of five years to achieve the target ownership level.

The table below sets forth our current ownership guidelines for our Named Executive Officers and their holdings, excluding stock options, as of March 11, 2019 (further details are provided in the footnotes to the tables of Director and officer shareholdings listed under the “Voting Securities and Principal Holders”).

 

Thomas L. Ryan, Chairman of the Board and Chief Executive Officer

Required Salary Multiple: 6
Minimum Shares Required: 178, 838
Actual Salary Multiple: 53
Actual Shares Owned: 1,568,309

Michael R. Webb, President and Chief Operating Officer

Required Salary Multiple: 4
Minimum Shares Required: 74,516
Actual Salary Multiple: 23
Actual Shares Owned: 424,399

Eric D. Tanzberger, Senior Vice President and Chief Financial Officer

Required Salary Multiple: 3
Minimum Shares Required: 44,709
Actual Salary Multiple: 15
Actual Shares Owned: 225,181

Sumner J. Waring, III, Senior Vice President, Operations

Required Salary Multiple: 3
Minimum Shares Required: 42,474
Actual Salary Multiple: 24
Actual Shares Owned: 334,827

Gregory T. Sangalis, Senior Vice President, General Counsel and Secretary

Required Salary Multiple: 3
Minimum Shares Required: 37,258
Actual Salary Multiple: 17
Actual Shares Owned: 207,663

At March 11, 2019, the Named Executive Officers have exceeded their ownership guideline levels for 2019.

Policies on Hedging and Pledging

In 2013, we established policies to prohibit officers and Directors from hedging or pledging their SCI stock ownership.

Employment Agreements and Termination Payment Arrangements

The Company has employment agreements with Messrs. Thomas L. Ryan, Michael R. Webb, Eric D. Tanzberger, Sumner J. Waring, III, and Gregory T. Sangalis. These agreements have current terms expiring December 31, 2019. Annually, the Company may extend each agreement for an additional year unless notice of nonrenewal is given by either party.

The employment agreements articulate the terms and conditions of the officers’ employment with the Company including termination provisions and noncompetition obligations. Each November, we review the list of, and the terms and conditions of employment for, the Named Executive Officers and other officers with employment agreements in effect and determine whether to extend, modify, or allow the agreements to expire.

Consistent with this review, we amended our executive employment agreements in 2010 to eliminate any obligation to pay tax gross-up in the event of a change in control of the Company. In 2016, we replaced our executive employment agreements with updated terms (see pages 55-56 for more information).

For further discussion of these employment agreements, refer to “Executive Compensation Tables - Executive Employment Agreements” below.

Our employment agreements and compensation plans have historically incorporated arrangements for certain payments upon change of control of the Company and for other terminations. We believe that these arrangements have been and are necessary to attract, motivate, reward, and retain the broad-based management talent required to achieve our corporate strategy. In the context of a possible acquisition or merger of the Company, we believe that change of control provisions (i) help focus our executives on strategic alternatives that would maximize shareholder value, and (ii) provide for personal financial security, thereby reducing a concern that could be a distraction for the executive. Our change of control and other termination payment arrangements do not affect decisions regarding other compensation elements. We structured the terms and payout of our arrangements based upon our historical practice and competitive considerations, including advice from an independent consultant and features that are commonly used by publicly other traded companies.

For further discussion of termination arrangements, refer to “Executive Compensation Tables - Potential Payments Upon Termination” below.

CEO Pay Ratio

As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the median of the annual total compensation of our employees (excluding the CEO) and the annual total compensation of our CEO. The pay ratio included in this information is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K.

We used December 31, 2018 as our determination date and identified the median employee by examining total gross wages for all full-time, part-time, or seasonal employees who were employed at that date. After identifying the median employee, we calculated annual 2018 compensation for the median employee using the same methodology used to calculate the CEO’s total compensation as reflected in the Summary Compensation Table on page 48 of this Proxy Statement. The median employee’s 2018 total compensation was $33,280, which was calculated in the same manner in which we calculated the CEO’s total compensation under the Item 402(c)(2)(x) of Regulation S-K. Based on this information, the CEO’s 2018 annual total compensation was 400 times the annual total compensation of the median employee (excluding the CEO). Adjusting for the 2018 change in the denomination of the Performance Unit Plan, which was in response to shareholder feedback, the CEO pay ratio would have been 327 times the annual total compensation of the median employee (excluding the CEO).

Role of the Compensation Committee

The Compensation Committee reviews the executive compensation program of the Company for its adequacy to attract, motivate, reward, and retain well-qualified executive officers who will maximize shareholder returns. The Compensation Committee also reviews the program for its direct and material relation to the short-term and long-term objectives of the Company and its shareholders as well as the operating performance of the Company. To carry out its role, among other things, the Compensation Committee:

  • reviews appropriate criteria for establishing annual performance targets for executive compensation that are complementary to the Company’s long-term strategies for growth;
  • determines appropriate levels of executive compensation by annually conducting a thorough competitive evaluation, reviewing proprietary and proxy information, and consulting with and receiving advice from an independent executive compensation consulting firm;
  • ensures the Company’s executive stock plan, long-term incentive plan, annual incentive compensation plan, and other executive compensation plans are administered in accordance with compensation objectives; and
  • approves all new equity-based compensation programs.

Compensation Committee Interlocks and Insider Participation

Board members who served on the Compensation Committee during 2018 were Alan R. Buckwalter, III, Anthony L. Coelho, John W. Mecom, Jr., Ellen Ochoa, and Marcus A. Watts. No member of the Compensation Committee in 2018 or at present was or is an officer or employee of the Company or any of its subsidiaries, or was formerly an officer of the Company or any of its subsidiaries or had any relationships requiring disclosure by the Company, except that Mr. Buckwalter has a family relationship as disclosed under the section entitled “Certain Transactions” on page 58.

Role of Compensation Consultants

Compensation decisions are made by our Compensation Committee, based in part on input from independent consultants. Meridian Compensation Partners, LLC ("Meridian") has served as our independent advisor on executive compensation since 2010. Meridian is retained by and reports directly to the Compensation Committee, which has the authority to approve Meridian’s fees and other terms of engagement. Services performed by Meridian for the Compensation Committee during 2018 included preparation of competitive benchmarking reviews regarding the executive and director compensation, evaluation of proposed compensation programs or changes to existing programs, provision of information on current trends in executive compensation, and updates regarding applicable legislative and governance activity. Annually, the Compensation Committee reviews the fee structure, services, and performance of their independent consultants.

Compensation Benchmarking Tools

In November 2017, in its consideration of 2018 compensation for the Named Executive Officers, the Compensation Committee reviewed a competitive benchmarking study prepared by Meridian. The benchmarking study provided market data for each of the Named Executive Officers, reflecting pay rates for similar positions among a group of general industry companies (the “Peer Group”). The Compensation Committee used the competitive benchmark study as a reference point for assessing the overall competitiveness of our executive compensation program.

At the request of the Compensation Committee, Meridian developed the Peer Group for 2018 by reviewing a diversified group of companies that participated in the Equilar Executive Compensation Survey. Meridian developed the Peer Group based on size and industry parameters excluding certain industries with unique or uncomparable pay practices using metrics based on data from 2016. The Compensation Committee believes this approach reflects an objective and credible methodology and results in an effective working range of competitive compensation benchmarks that appropriately considers the overall complexity of SCI’s business model. For example, the Company sells preneed contracts (approximately $1.8 billion in 2018) that are substantially deferred to our growing backlog that will be recognized as future revenue at the time of need or when we provide the services and merchandise. These preneed contracts are administered by the Company over long periods of time, and the Company oversees the management and administration of approximately $5.8 billion in trust assets and related receivables, the earnings of which are typically deferred under GAAP. In addition, executive management oversees a people-centric business of over 24,000 employees, including approximately 4,300 preneed sales personnel whose production may not initially impact revenue under GAAP. The Compensation Committee reviews the methodology and composition of the Peer Group annually and may consider modification to the methodology or source of data, as warranted.

The Peer Group used to inform 2018 pay decisions, which is based on data from 2016, comprised the 91 companies set forth in Annex B, against which SCI is positioned near the median in terms of revenue, market capitalization, and enterprise value.

SCI Compared to 2018 Peer Group (91 companies* set forth on Annex B)

Based on results as of December 31, 2016

SCI Compared to 2018 Peer Group chart

*Note StoneMor Partners, LLP and Carriage Services, Inc. two direct industry peers, were not included in our Peer Group as neither company met the financial criteria. 

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

Compensation Committee

Alan R. Buckwalter signature

Alan R. Buckwalter (Chairman)

Anthony L. Coelho signature

Anthony L. Coelho

John W. Mecom, Jr. signature

John W. Mecom, Jr.

Ellen Ochoa signature

Ellen Ochoa

Marcus A. Watts signature

Marcus A. Watts