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 Named 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 Compensation Committee believes promote the creation of long-term shareholder value and position the Company for long-term success. As described more fully in this 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 creating a close relationship between performance and compensation. The Compensation Committee and the Board of Directors believe that the design of the program and the compensation awarded to Named Executive Officers under the current program fulfill this objective.
We urge shareholders to read this Compensation Discussion and Analysis section of this Proxy Statement, which discusses in detail how our compensation policies and procedures complement 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 91% 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 regarding compensation of our Named Executive Officers (as set forth in this Proxy Statement).
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 2019, all of whom are collectively referred to as the “Named Executive Officers” or "NEOs". Our NEOs for 2019 were:
|Thomas L. Ryan||President, Chairman of the Board, and Chief Executive Officer|
|Eric D. Tanzberger||Senior Vice President, Chief Financial Officer|
|Sumner J. Waring, III||Senior Vice President, Chief Operating Officer|
|Gregory T. Sangalis||Senior Vice President, General Counsel and Secretary|
|Steven A. Tidwell||Senior Vice President, Sales and Marketing|
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:
- aligning executive pay and benefits with the performance of the Company and shareholder returns while fostering a culture of highly ethical standards and integrity.
- attracting, motivating, rewarding, and retaining the broad-based management talent required to achieve our corporate objectives.
Pay for Performance and Corporate Strategy
We have aligned our executive compensation programs with our long-term strategy. Actions taken to achieve the performance compensation metrics are creating long-term value for our shareholders and other stakeholders.
Our Core Strategy: Grow Revenue, Leverage Scale, and Deploy Capital
We plan to grow revenue by remaining relevant to our customers as their preferences evolve through a combination of price, product, and service differentiation strategies. Growing our preneed sales will drive future revenue growth. In 2019, we grew revenue by $41 million to $3.2 billion as a result of a 4.6% and 1.5% growth in our funeral and cemetery preneed sales production, respectively.
We leverage our scale by developing our sales organization and optimizing the use of our network through the use of technology and for the benefit of our preneed backlog. Our large scale enables us to achieve cost efficiencies through the maximization of purchasing power and utilizing economies of scale through our supply chain channel. This year, we took significant steps to improve the quality of customer feedback and elevate our online reputation.
Growing revenue and leveraging scale increases cash flow, which enables us to:
We continue maximizing capital deployment opportunities in a disciplined and balanced manner to the highest relative return opportunity. Our priorities for capital deployment are: 1) investing in acquisitions and building new funeral service locations, 2) paying dividends, 3) repurchasing shares, and 4) managing debt. In 2019, we deployed capital of $404 million, investing $143 million in acquisitions, new build opportunities, and acquiring land for cemeteries and returning $261 million to shareholders through dividends and share repurchases.
Implementing our core strategy allows us to deliver superior total shareholder return
Performance Compensation Metrics
Annual Performance-Based Incentive Plan:
- Normalized Earnings per Share: Growth is the result of growing revenue and leveraging our scale, which in turn, enhances shareholder value.
- Normalized Free Cash Flow per share: Growth in normalized free cash flow per share is tied directly to our strategy to increase our cash flow and effectively deploy capital. Growth in this metric drives current performance of the Company and enhances shareholder value.
- Comparable Preneed Production: Comparable preneed production is 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. Preneed sales production is driving current and future market share growth, adding stability to our future revenue stream and creating future value for our shareholders.
Long-Term Incentive Plan:
- Total Shareholder Return: As we grow revenue and leverage our scale, we increase our cash flow allowing the company to deploy capital and deliver superior total shareholder return.
- Normalized Return on Equity: Growth in return on equity is the long term result of effectively implementing our core strategy of growing revenue and deploying capital as described above.
Our management has a strong focus on delivering profitable growth and returning value to our shareholders utilizing our long-term growth strategy as discussed above. This long-term focus has contributed significantly to the Company’s total shareholder return over several years as illustrated below as well as our yearly growth as reflected in the Company's 2019 performance for adjusted earnings per share and adjusted operating cash flow.
As of December 31, 2019 and includes the reinvestment of dividends | Source: S&P Capital IQ
(1) GAAP - Generally Accepted Accounting Principles
(2) 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.
2019 Company Performance
The Company delivered solid financial results in 2019 that include the following:
- Maintaining our position as the largest provider in the Company’s industry, with 15% to16% revenue market share.
- Growing consolidated revenue by $41 million to $3.2 billion in 2019.
- Increasing funeral and cemetery preneed sales by 4.6% and 1.5%, respectively, to $1.9 billion, bringing our preneed backlog to $12.0 billion in 2019.
- Increasing adjusted earnings per share by approximately 6% compared to 2018.
- Increasing adjusted operating cash flow 4% over the prior year to approximately $635 million, exceeding our November guidance range of $575-$615 million. This increase was primarily due to increased cash earnings as a result of improved preneed installment collections. It was somewhat offset by expected increases in cash interest and cash tax payments of $19 million, collectively.
- Enhancing shareholder value by deploying capital of $404 million, investing $143 million in acquisitions, new build opportunities, and acquiring land for cemeteries, and returning $261 million to shareholders through dividends and share repurchases.
- Achieving a total shareholder return (TSR) of 572% over the last ten fiscal years, outpacing the return of the S&P 500 of 257%.
Key Features of Our Compensation Programs
Over the course of the past several years, the Compensation Committee, in conjunction with management, improved the alignment of our compensation programs with the interests of our shareholders. In addition, the Committee modified or eliminated certain components of our compensation programs better aligning the programs 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. Our stock ownership guidelines require each of the Company Officers to hold Company stock with a value linked to a multiple of their respective salaries and to retain all SCI stock acquired from grants of restricted stock and stock options (net of acquisition and tax costs and expenses) until stock ownership guidelines are met.
✓ We have claw-backs. Our claw-back provisions may be triggered in certain circumstances. If triggered, the provisions allow the Company to recoup annual performance-based incentives, 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 governance topics regularly as 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. Our policies prohibit Officers and Directors from hedging or pledging their SCI stock ownership.
✗ We do not allow the repricing of stock options. Our policies prohibit subsequent alterations of stock option pricing without shareholder approval.
Consideration of 2019 "Say-on-Pay" Vote
At our Annual Meeting of shareholders held on May 8, 2019, 91.3% of the shares voted were in favor of the proposal to approve Named Executive Officer compensation (“say-on-pay” vote), versus 89.4% in 2018. 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 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 Group” - see Annex B). Incentive programs provide opportunities to exceed Peer Comparator Group target compensation levels through annual and long-term 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.
The Compensation Committee reviews comparative market information, including benchmarking data presented by the Committee's independent compensation consultant, Meridian Compensation Partners, LLC ("Meridian") - see page 52 of this Proxy Statement for further information on the Compensation Committee's retention of Meridian. 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. On the basis of its review of market data, input from the CEO and Meridian and other relevant factors, the Compensation Committee sets each Named Executive Officer's annual base salary, annual performance-based incentives, and long-term incentives for that year. In 2019, the Compensation Committee reviewed total compensation design components and recommended to the Nominating and Corporate Governance Committee that it make a determination that the risks arising from the Company's compensation policies and practices for its employees are not reasonably likely to have a material adverse effect on the Company.
CEO Pay and Performance Alignment
Below is a graph that displays the relationship between our CEO's total annual compensation and the five year total shareholder return of the Company and S&P 500.
(1) A change in the denomination of the performance unit plan created a temporary distortion in the disclosure of years 2018 and 2019 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 48.
Total Direct Compensation Pay Mix
The below graphs display the CEO's and other NEOs' mix of total direct compensation, with each component expressed as a percentage of total direct compensation.
In 2019, over 80% of our CEO's and over 70% of our other NEOs’ compensation was performance-based.
We have aligned our executive compensation programs with the interests of our shareholders and our corporate strategy through various metrics that drive our business. See the following pages for more details on the elements of our compensation program and how it is linked to our corporate strategy and shareholders’ interests.
% of 2019 compensation for CEO and NEOs
Description: Fixed cash element of compensation established within a competitive range of benchmark pay levels.
Link to shareholder value: Serves to attract and retain executive talent capable of driving superior performance.
How we determine amount: We consider individual performance, oversight responsibility, and competitive benchmarking.
Description: Performance–based element of compensation tied to the attainment of performance measures, which is paid in cash. The 2020 Plan includes a modifier based on the non-financial metric related to Google online customer satisfaction ratings.
Link to shareholder value: Rewards achievement of shorter-term financial and operational objectives we believe are primary drivers of long-term shareholder value.
How we determine amount: The Compensation Committee establishes performance metrics that will drive the current performance of the company and enhance shareholder value. The 2019 metrics included:
- Normalized Earnings Per Share
- Normalized Free Cash Flow
- Comparable Preneed Sales Production.
How we determine amount: The Compensation Committee considers several factors in determining the total long-term incentive compensation including Peer Comparator Group benchmark pay levels, the individual performance of each NEO, the job responsibilities of each NEO, and the overall Company performance in light of the current economic environment. Once the total target value is established for each NEO, we calculate and grant to the NEO (i) the number of stock options with a value equal to one-third of the total target value, (ii) the number of shares of restricted stock with a value equal to one-third of the total target value, and (iii) the number of performance units with a value equal to one-third of the total target value.
Description: 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.
Link to shareholder value: Aligns the long-term interest of the NEOs with the shareholders and fosters a culture of ownership.
Description: 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.
Link to shareholder value: Aligns the long-term interest of the NEOs with the shareholders and fosters a culture of ownership.
Description: The performance unit plan, which is now denominated in shares, measures the three-year total shareholder return (“TSR”) relative to a peer group of public companies (see Annex C).
Link to shareholder value: Rewards effective management of the Company's performance over a multi-year period and delivering positive TSR.
Description: Executive Deferred Compensation Plan and 401(k) Plan.
Link to shareholder value: Provides financial security for retirement.
Perquisites and Personal Benefits
Description: reasonable benefits as described on page 50.
Link to shareholder value: Enhances 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 52. 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. Based on consideration of benchmark pay levels for each executive, the Compensation Committee maintained the base salary for each executive at the 2018 amount.
2019 Salary: $1,200,000
2018 Salary: $1,200,000
Eric D. Tanzberger
2019 Salary: $600,000
2018 Salary: $600,000
Sumner J. Waring, III
2019 Salary: $570,000
2018 Salary: $570,000
Gregory T. Sangalis
2019 Salary: $500,000
2018 Salary: $500,000
Steven A. Tidwell
2019 Salary: $520,000
2018 Salary: $520,000
We use annual performance-based incentives paid in cash to focus our NEOs 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 2019, the Compensation Committee established the performance measures as the basis for annual performance-based incentive awards for our NEOs. The target award opportunities for the NEOs for 2019 were as follows:
Target Award Opportunity (% of Base Salary)
Thomas L. Ryan - 125%
Eric D. Tanzberger - 90%
Sumner J. Waring, III - 90%
Gregory T. Sangalis - 80%
Steven A. Tidwell - 80%
We believe normalized earnings per share and free cash flow per share drive the 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 and the receivable from the customer is deemed collectible. While recognition of all other comparable preneed funeral and cemetery production is generally deferred and does not have an immediate impact on earnings, 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 2019 performance measures are similar to the performance measures utilized in 2018 and are outlined below:
- Normalized Earnings per Share, which we calculated by applying a targeted 25.15% 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 held constant for calculating our incentive compensation and therefore does not change throughout the year.
- Normalized Free Cash Flow per Share, which we calculated by adjusting reported cash flows from operating activities to exclude the cash impact of the following items: (1) deducting forecasted capital improvements at existing facilities and capital expenditures to develop cemetery property, (2) utilizing the forecasted amounts of cash taxes paid in 2019 related to normal operating activities, and (3) dividing the result by the reported weighted average diluted number of shares outstanding in 2019.
- Comparable Preneed Production is the percentage of growth over prior year of 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 2019, we weighted each of the performance measures at one-third. 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, 2019. We calculated awards for performance levels between threshold and target or target and maximum using straight-line interpolation. The 2019 performance targets, SCI’s actual performance, and resulting payout percentages are set forth below.
(1)Any performance above threshold but less than target results in a payout of up to 100%.
(2)Performance at target results in a 100% payout; performance above target but less than max results in payout between 100% and 200%, respectively.
(3)Performance at max or above max results in a 200% payout.
(4)Expressed as a percentage of comparable 2019 performance compared to 2018.
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 2019, the Compensation Committee approved the exclusion of net gains or losses on dispositions, currency losses, losses associated with the early extinguishment of debt, and certain legal settlements.
As a result of the foregoing and giving effect to the weightings described above, our NEOs received annual performance-based incentives paid in cash at 74.3% of their individual incentive targets. The actual dollar amounts of the payouts are set forth in footnote (2) to the Summary Compensation Table on page 54.
The Compensation Committee established each NEO’s target opportunity for 2019 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, NEOs 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.
Looking ahead to the 2020 plan, the annual performance-based incentive will include a modifier based on the non-financial metric related to Google online customer satisfaction ratings, aligning our NEOs’ compensation with our operational performance and success in remaining relevant with our customers.
We believe that the grant of significant annual equity-based awards further aligns the interests of the NEOs with those of the Company’s shareholders. To best align these interests, we grant our NEOs a mix of equity awards, which include stock options, restricted stock, and performance units. These long-term incentive ("LTI") award vehicles are important components of annual compensation.
In February 2019, the Compensation Committee set each NEO’s 2019 total target value of long-term incentive compensation. In developing this total target value, the Compensation Committee considered several factors including Peer Comparator Group benchmark LTI pay levels, the individual performance of each NEO, the job responsibilities of each NEO, and the overall Company performance in light of the then current economic environment. Once the target value was established for each NEO, we calculated and granted to the NEO (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. The grants were made in February 2019.
This mix of equity awards is designed to focus our NEOs 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.
Stock options provide NEOs 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 with service-based vesting provisions is retaining our NEOs and encouraging stock ownership. The restricted stock awards vest at a rate of one-third per year.
Performance units reward NEOs for the delivery of shareholder returns that compare favorably to similarly available public company investments 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). 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.
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. Beginning in 2018, the performance units also apply a normalized return on equity (ROE) modifier to the total shareholder return metric. The normalized ROE modifier reduces the indicated performance unit payout by 25% if average normalized ROE over the three-year performance period is less than the current threshold of 15%. The Company set a 15% ROE threshold with reference to the S&P MidCap 400® companies (of which SCI is a participant), and where less than half of the companies have historically exceeded a 15% ROE. SCI has meaningfully exceeded this threshold since its implementation in 2018. The normalized ROE modifier threshold is comparative to the median ROE of the S&P MidCap 400®. The share denomination improves shareholder alignment, as the underlying unit value fluctuates with stock price. Our 2019 Summary Compensation Table includes performance units for two different award periods. The 2019 grant is included in the Share Awards column and the payout for the 2017-2019 performance period is included in the Non-Equity Incentive Plan Compensation column.
*Calculation of awards for performance levels between threshold and target or target and maximum are calculated using straight-line interpolation.
We cap performance unit payments if our TSR over the performance period outperforms the Peer Group median, but our absolute TSR is negative.
For the 2019 - 2021 performance cycle, the Compensation Committee granted performance units with performance awards ranging from 0% to 200% of the share units 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 2019 Peer Group at the end of the performance cycle at December 31, 2021.
Impact of Changing the Denomination of the Performance Unit Plan
As reported in our 2018 Proxy and discussed above, 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 dollar-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 for years 2018 and 2019. The distortion occurs because we are reporting the performance-based plan grants that were made in 2018 and 2019 for the 2018-2020 and 2019-2021 performance cycles, respectively, and the cash payouts from the 2016 and 2017 performance period that concluded in 2018 and 2019, respectively. This distortion occurs 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 Tom Ryan's compensation to illustrate the denomination impact change on the Summary Compensation Table for years 2018 and 2019 (page 54). 2017 is "as reported" in the Summary Compensation Table and years 2018 and 2019 are presented in two ways. The "as reported" 2018 and 2019 compensation ties to the current Summary Compensation Table, including the double-counting of the performance unit plan, and the proforma presentation of 2018 and 2019 compensation is presented as if the change in denomination did not occur.
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 are 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 are included in the Stock Awards column on the Summary Compensation table.
- Performance Units (PUP) – Cash-settled grants made before 2018 are included in the Non-Equity Incentive Plan Compensation column at the value they vest and settle; share-settled grants are included in the Stock Awards column as of their grant date in the Summary Compensation Table. 2017 grants of performance units were included in the Non-Equity Incentive Plan Compensation column and 2018 and 2019 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.
To help retain and recruit executive level talent, in 2005, the Company implemented an Executive Deferred Compensation Plan. This plan allows for an annual retirement contribution by the Company 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. In addition to the Company contributions, 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 2020, the Company made the following contributions under the plan with respect to 2019 service and performance for our NEOs:
Thomas L. Ryan
7.5% Retirement Contribution: $173,565
Performance Contribution: $128,901
Eric D. Tanzberger
7.5% Retirement Contribution: $75,083
Performance Contribution: $55,762
Sumner J. Waring, III
7.5% Retirement Contribution: $71,329
Performance Contribution: $52,974
Gregory T. Sangalis
7.5% Retirement Contribution: $59,784
Performance Contribution: $44,400
Steven A Tidwell
7.5% Retirement Contribution: $62,175
Performance Contribution: $46,176
We also offer a 401(k) plan to our associates, including our NEOs. 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 $19,000, 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 associate'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 NEOs that the Compensation Committee views as an important component of competitive compensation. These benefits are designed to attract, motivate, reward, and retain the broad-based management talent required to achieve our corporate strategy:
- Financial and legal planning and tax preparation — encourages critical document preparation and financial planning advice for effective tax and retirement planning.
- Supplemental medical reimbursements — 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 — this life insurance program generally covers approximately 3.5 times the NEO's annual salary and target bonus.
- Use of Company aircraft — our NEOs 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 our Officers of cash incentive payments and stock sale proceeds in certain circumstances involving fraud. These provisions cover the following elements of compensation: annual performance-based incentives paid in cash, stock options, restricted stock, and performance units. The provisions are 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 could 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 are 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 are 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 is forfeited.
Securities Trading and Investment Policy
The Board of Directors maintains a policy governing only 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
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 a 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 Officer, the stock ownership guideline is 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 NEOs and their holdings, excluding stock options, as of March 16, 2020 (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
President, Chairman of the Board, and Chief Executive Officer
Required Salary Multiple: 6
Minimum Shares Required: 156,420
Actual Salary Multiple: 59
Actual Shares Owned: 1,527,208
Eric D. Tanzberger
Senior Vice President and Chief Financial Officer
Required Salary Multiple: 3
Minimum Shares Required: 39,105
Actual Salary Multiple: 18
Actual Shares Owned: 234,346
Sumner J. Waring, III
Senior Vice President, Operations
Required Salary Multiple: 3
Minimum Shares Required: 37,150
Actual Salary Multiple: 27
Actual Shares Owned: 334,579
Gregory T. Sangalis
Senior Vice President, General Counsel and Secretary
Required Salary Multiple: 3
Minimum Shares Required: 32,587
Actual Salary Multiple: 20
Actual Shares Owned: 214,293
Steven A. Tidwell
Senior Vice President, Sales and Marketing
Required Salary Multiple: 3
Minimum Shares Required: 33,891
Actual Salary Multiple: 6
Actual Shares Owned: 67,283
At March 16, 2020, our Named Executive Officers have exceeded their ownership guideline levels for 2020.
Policies on Hedging and Pledging
In 2013, we established policies to prohibit Officers and Directors from hedging or pledging their SCI stock ownership. These policies apply only to Officers and Directors.
Employment Agreements and Termination Payment Arrangements
The Company has employment agreements with Tom Ryan, Eric Tanzberger, Sumner Waring, Gregory Sangalis, and Steven Tidwell. These agreements have current terms expiring December 31, 2020. 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 NEOs’ employment with the Company including termination provisions and noncompetition obligations. Each November, we review the list of the Named Executive Officers and other officers with employment agreements in effect and the terms and conditions of their employment 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-ups in the event of a change in control of the Company. In 2016, we replaced our executive employment agreements with updated terms (see pages 61-62 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 potential 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 other publicly traded companies.
For further discussion of termination arrangements, refer to “Executive Compensation Tables - Potential Payments Upon Termination” below.
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 2019 were Alan R. Buckwalter, III, Anthony L. Coelho, Jr., Ellen Ochoa, and Marcus A. Watts. No member of the Compensation Committee in 2019 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 Alan Buckwalter has a family relationship as disclosed under the section entitled “Certain Transactions” on page 65.
Role of Compensation Consultants
Compensation decisions are made by our Compensation Committee, based in part on input from independent consultants. 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 2019 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 2018, in its consideration of 2019 compensation for the NEOs, the Compensation Committee reviewed a competitive benchmarking study prepared by Meridian. The benchmarking study provided market data for each of the NEOs, reflecting pay rates for similar positions among a group of general industry companies (the “Peer Comparator 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 Comparator Group for 2019 by reviewing a diversified group of companies that participated in the Equilar Executive Compensation Survey. Meridian developed the Peer Comparator Group based on size and industry parameters excluding certain industries with unique or uncomparable pay practices. 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 $1.9 billion in 2019) that are substantially deferred into its growing backlog that will be recognized as future revenue at the time of need or when the services and merchandise are provided. These preneed contracts are administered by the Company over long periods of time, and the Company oversees the management and administration of approximately $6.5 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 approximately 25,000 employees, including approximately 4,000 preneed sales personnel whose production may not initially impact revenue under GAAP. The Compensation Committee reviews the methodology and composition of the Peer Comparator Group annually and may consider modification to the methodology or source of data, as warranted.
The Peer Comparator Group used to inform 2019 pay decisions comprised the 86 companies set forth in Annex B, against which SCI is positioned near the median in terms of revenue, market capitalization, and enterprise value.
(86 companies* set forth on Annex B)
Based on results as of December 31, 2018
*Note StoneMor Partners, LLP and Carriage Services, Inc. two direct industry peers, were not included in our Peer Comparator 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. The Committee reviewed the 2019 total compensation design components and recommended to the Nominating and Corporate Governance Committee that it make a determination that the risks arising from the Company’s compensation policies and practices for its employees are not reasonably likely to have a material adverse effect on the Company. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that this Proxy Statement include this Compensation Discussion and Analysis.
/s/ Compensation Committee
Alan R. Buckwalter (Chair), Anthony Coelho, Ellen Ochoa, and Marcus Watts