In accordance with Section 14A of the Exchange Act and the related SEC rules, we are asking shareholders to approve, on an advisory and 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 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 programs and practices achieve the Compensation Committee’s objective of linking pay and performance.
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 88% 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. Please see page 32 in this Proxy Statement for more information.
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 2020, all of whom are collectively referred to as the “Named Executive Officers” or "NEOs". Our NEOs for 2020 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|
|Steven A. Tidwell||Senior Vice President, Sales and Marketing|
|Gregory T. Sangalis||Senior Vice President, General Counsel and Secretary|
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.
Strategy, Performance, and COVID-19 Pandemic Reponse
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 measures are creating long-term value for our shareholders and other stakeholders.
Our Strategy: Grow Revenue, Leverage Scale, and Deploy Capital
Like most businesses world-wide, COVID-19 has impacted various aspects of our business operations. However, we believe our fundamental strategy has not changed and we were able to continue to operate without any major disruptions to our business, highlighting the power of our scale. Throughout the pandemic, a shift to an increased use of technology has influenced how we serve our customers and how we invest our capital. Please see section titled "Strategies for Growth" in Part I, Item 1. Business in our 2020 Form 10-K filing for more information on COVID-19 and its impact to our strategy.
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 2020, we grew revenue by $281 million to $3.5 billion which was bolstered by the effects of COVID-19. In 2020, we sold over $1.0 billion in preneed cemetery sales production.
We leverage our scale by optimizing the use of our network through the use of technology and for the benefit of our preneed backlog. Our scale enables us to achieve cost efficiencies through the maximization of purchasing power and utilizing economies of scale through our supply chain channel. In 2020, throughout the pandemic, we were able to continue to operate without any major disruptions to our business, which highlights the power of our scale due to our many shared resources.
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. 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 2020, we deployed capital of $807 million, investing $153 million in acquisitions and new build opportunities and returning $654 million to shareholders through dividends and share repurchases.
Implementing our core strategy allows us to deliver superior total shareholder return
Performance Compensation Measures
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 US and Canadian 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 (TSR) over several years as illustrated below as well as our yearly growth as reflected in the Company's 2020 performance for adjusted earnings per share and adjusted operating cash flow.
As of December 31, 2020 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 in this Proxy Statement for disclosures and reconciliations to the appropriate GAAP measure.
2020 Company Performance
The Company delivered solid financial results in 2020 that include the following:
- Grew consolidated revenue by $281 million, or 9%, to $3.5 billion in 2020 primarily as a result of increases in both funeral services performed and burials in our cemeteries as well as higher preneed cemetery sales due in part to the COVID-19 pandemic.
- Sold over $1.0 billion in preneed cemetery sales production which mitigated the declines in our preneed funeral sales production. In total, preneed funeral and cemetery sales production increased by 2.5% to $1.9 billion, bringing our preneed backlog to $12.7 billion in 2020.
- Increased adjusted earnings per share by approximately 53% compared to 2019 primarily due to the revenue increase described above, lower interest expense as a result of recent debt transactions throughout 2019 and 2020, and fewer shares outstanding.
- Increased adjusted operating cash flow 27% over the prior year to approximately $804 million. This increase was primarily due to increased growth in gross profit combined with lower cash interest payments and deferred payroll taxes (as allowed under the CARES Act). These increases in adjusted operating cash were partially offset by higher cash tax payments associated with higher earnings for 2020 as well as a higher use of working capital related to the significant increase in preneed cemetery property sales which are generally sold on an installment basis.
- Enhanced total company value by deploying capital of $807 million, investing $153 million in acquisitions and new build opportunities and returning $654 million to shareholders through dividends and share repurchases.
- Completed a strategic refinancing transaction during 2020 to manage our debt maturity profile, which resulted in lower interest expense. We issued $850.0 million of unsecured 3.375% Senior Notes due August 2030 to refinance our 5.375% Senior Notes due 2024 as well as for other corporate purposes.
- Achieved a total shareholder return (TSR) of 611% over the last ten fiscal years, outpacing the return of the S&P 500 of 267%.
COVID-19 Pandemic Response
During 2020, the Company responded to the pandemic crisis in relation to our associates, client-families, and communities, which has been summarized below. Please see section titled "COVID-19 Pandemic Response" in the Proxy Summary Statement beginning on page 9 for more information.
Associates, Customers, and Communities Ensuring Oversight and Strategic Response by:
- Forming a multi-disciplinary COVID-19 Task Force, holding OTC meetings daily and officer meetings weekly to facilitate an agile response to the pandemic and its impacts on our associates, customers, communities, and our business as a whole.
Protecting the Health and Well-being of ASSOCIATES by:
- Engaging suppliers from around the globe to ensure that our frontline associates had adequate stock of personal protective equipment (PPE).
- Providing paid time off to associates who tested positive for COVID-19 or needed to care for a loved one or family member with COVID-19.
- Avoiding Company layoffs, mandatory furloughs, or reductions in workforce as a result of the impact of COVID-19.
- Awarding over $10 million in “hero bonuses” and other bonuses to associates that do not participate in our annual incentive plan in recognition of their courageous efforts and dedication to continue serving families.
- Communicating the Company’s Employee Assistance Program (EAP), which provides associates with 24/7 access to a licensed counselor at no cost.
Serving CUSTOMERS by:
- Implementing creative solutions and continuing to serving families safely with care and compassion.
- Investing in technology to provide complimentary livestreaming of services, which has allowed family and friends to attend virtually and express their condolences.
- Offering families the option of a Celebration of Remembrance at a later date, which allows family and friends to gather in celebrating the life of their loved one on a special date - such as a birthday or anniversary.
- Instituting payment options to help customers weather the financial impacts of COVID-19.
- Providing virtual arrangements and cemetery property tours for clients who prefer to avoid an in-person meeting.
- Developing on-demand seminar presentations for customers to view from their homes at their convenience.
Responding to the Needs of Our COMMUNITIES by:
- Funding a $6.0 million contribution to the SCI Foundation for future community giving efforts.
- Hosting collection drives at funeral home locations across the Company to support local food banks, food pantry programs, and homeless shelters.
- Supporting small businesses, such as local catering partners and restaurants.
Key Features of Our Compensation Programs
Over the course of the past several years, the Compensation Committee, in conjunction with senior 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 to better align the programs with prevailing market practice. 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 market 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 2020 "Say-on-Pay" Vote
At our Annual Meeting of shareholders held on May 13, 2020, 88.4% of the shares voted were in favor of the proposal to approve Named Executive Officer compensation (“say-on-pay” vote), versus 91.3% in 2019. 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. In early 2020, we engaged with shareholders representing approximately 55% of the Company’s common stock prior to our Annual Shareholder Meeting. Through our ongoing shareholder outreach efforts, we better understand the viewpoints of our shareholders and are able to communicate transparently how our decisions align with our strategic goals.
In May 2017, we disclosed that at our 2017 annual meeting, shareholders voted in favor of holding annual say-on-pay votes. In accordance with this vote, the Company will hold future say-on-pay votes annually until the next required vote on the frequency of shareholder votes on the compensation.
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 45 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.
The Compensation Committee followed a thorough framework to evaluate the impact of the COVID-19 pandemic on executive compensation. The Committee considered the impacts of COVID-19 to the Company’s performance against targets. The Committee also reviewed the actions of senior management as it related to all stakeholders during the COVID-19 crisis, which are summarized on page 35 in the Compensation Discussion and Analysis (the Company's full COVID-19 pandemic response can be found in the Proxy Summary Statement beginning on page 9). Upon the completion of the evaluation, the Committee approved the annual incentive payment finding that the value provided to all stakeholders through the timeliness, effectiveness, and communication of decision making by senior management displayed during the pandemic supported the 138.4% annual incentive payout. The annual incentive payout was earned based on unmodified incentive compensation targets originally approved by the Committee in February 2020.
In 2020, the Compensation Committee reviewed total compensation design components and advised the Nominating and Corporate Governance Committee 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 in 2018 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 inclusion of 2018 and 2019 performance plan grant value when granted. For more information, please see page 42 in this Proxy Statement.
Total Direct Compensation Pay Components
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 2020, over 80% of our CEO's compensation and almost 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 measures 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 2020 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 online customer satisfaction ratings.
Link to shareholder value: Rewards achievement of short-term financial and operational objectives we believe are primary drivers of long-term shareholder value.
How we determine amount: The Compensation Committee establishes performance measures that will drive the current performance of the company and enhance shareholder value. The 2020 measures 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.
How we determine amount: The Compensation Committee periodically reviews executive benefits and perquisites as compared to prevalent practices of other organizations.
Perquisites and Personal Benefits
Description: reasonable benefits as described on page 43 in this.
Link to shareholder value: Enhances executive performance by facilitating effective management of personal matters.