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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the registrant x
Filed by a party other than the registrant ¨
Check the appropriate box:
| ¨ |
Preliminary Proxy Statement | ¨ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |||
| x | Definitive Proxy Statement | |||||
| ¨ | Definitive Additional Materials | |||||
| ¨ | Soliciting Material pursuant to § 240.14a-12 |
DaVita Inc.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (Check the appropriate box):
| x | No fee required |
| ¨ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11 |
| (1) | Title of each class of securities to which transaction applies: |
| (2) | Aggregate number of securities to which transaction applies: |
| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined.): |
| (4) | Proposed maximum aggregate value of transaction: |
| (5) | Total fee paid: |
| ¨ | Fee paid previously with preliminary materials: |
| ¨ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. |
| (1) | Amount previously paid: |
| (2) | Form, schedule, or registration statement no.: |
| (3) | Filing party: |
| (4) | Date filed: |
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
June 6, 2011
TO OUR STOCKHOLDERS:
We will hold our 2011 annual meeting of the stockholders of DaVita Inc., a Delaware corporation, on Monday, June 6, 2011 at 9:30 a.m., Mountain Time, at DaVita Inc., 1627 Cole Boulevard, Lakewood, Colorado 80401, for the following purposes, which are further described in the accompanying Proxy Statement:
| (1) | To vote upon the election of the ten directors identified in the attached Proxy Statement to the Board of Directors to serve for a term of one year or until their successors are duly elected and qualified; |
| (2) | To approve the DaVita Inc. 2011 Incentive Award Plan; |
| (3) | To ratify the appointment of KPMG LLP as our independent registered public accounting firm for fiscal year 2011; |
| (4) | To hold an advisory vote on executive compensation; |
| (5) | To hold an advisory vote on the frequency with which future advisory votes on executive compensation should be held; |
| (6) | To consider a stockholder proposal, if properly presented at the annual meeting; and |
| (7) | To transact such other business as may properly come before the annual meeting or any adjournment thereof. |
The Board of Directors has fixed the close of business on April 15, 2011 as the record date for the determination of stockholders entitled to vote at the annual meeting or any meetings held upon adjournment of the annual meeting. Only holders of record of our common stock at the close of business on that day will be entitled to vote.
In accordance with rules and regulations adopted by the Securities and Exchange Commission, we are providing access to our proxy materials over the Internet. Accordingly, we will mail, on or about April 27, 2011, a Notice of Internet Availability of Proxy Materials to our stockholders of record and beneficial owners at the close of business on April 15, 2011. On the date of mailing of the Notice of Internet Availability of Proxy Materials, all stockholders of record and beneficial owners will have the ability to access the proxy materials on a website referred to in the Notice of Internet Availability of Proxy Materials. These proxy materials will be available free of charge.
The Notice of Internet Availability of Proxy Materials will also identify the date, time and location of the annual meeting; the matters to be acted upon at the annual meeting and the Board of Directors’ recommendation with regard to each matter; a toll-free telephone number, an e-mail address, and a website where stockholders can request a paper or e-mail copy of the Proxy Statement, our Annual Report to Stockholders and a form of proxy relating to the annual meeting; information on how to access the form of proxy over the Internet and how to vote over the Internet; and information on how to obtain directions to attend the annual meeting and vote in person.
We invite you to attend the annual meeting and vote in person. If you cannot attend, to ensure that you are represented at the annual meeting, please vote, at your earliest convenience, by telephone or Internet, or request a proxy card to complete, sign and date and return by mail. If you attend the annual meeting, you may vote in person, even if you previously used the telephone or Internet voting systems, or mailed your completed proxy card.
Please note that all votes cast via telephone or the Internet must be cast prior to 11:59 p.m., Eastern Time, on Sunday, June 5, 2011.
| By order of the Board of Directors, |
|
| Kim M. Rivera |
| Vice President, General Counsel and |
| Secretary |
April 27, 2011
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PROXY STATEMENT
We are delivering this Proxy Statement in connection with the solicitation of proxies by the Board of Directors, for use at our 2011 annual meeting of stockholders, which we will hold on Monday, June 6, 2011 at 9:30 a.m., Mountain Time, at DaVita Inc., 1627 Cole Boulevard, Lakewood, Colorado 80401. The proxies will remain valid for use at any meetings held upon adjournment of that meeting. The record date for the annual meeting is the close of business on April 15, 2011. All holders of record of our common stock on the record date are entitled to notice of the annual meeting and to vote at the annual meeting and any meetings held upon adjournment of that meeting. Our principal executive offices are located at 1551 Wewatta Street, 6th Floor, Denver, Colorado, 80202, and our telephone number is (303) 405-2100. This Proxy Statement is being initially distributed to stockholders on or about April 27, 2011. To obtain directions to our annual meeting, visit our website, located at http://www.davita.com.
In accordance with rules and regulations adopted by the Securities and Exchange Commission (the “SEC”), instead of mailing a printed copy of our proxy materials to each stockholder of record or beneficial owner, we are furnishing the proxy materials to our stockholders over the Internet, which include this Proxy Statement and the accompanying Notice of Meeting, Proxy Card, and Annual Report to Stockholders. Because you received a Notice of Internet Availability of Proxy Materials by mail, you will not receive a printed copy of the proxy materials, unless you have previously made a permanent election to receive these materials in paper copy. Instead, the Notice of Internet Availability of Proxy Materials instructs you as to how you may access and review all of the important information contained in the proxy materials, and how you may submit your vote by proxy on the Internet. If you received a Notice of Internet Availability of Proxy Materials by mail and would like to receive a printed copy of our proxy materials, you should follow the instructions for requesting such materials included in the Notice of Internet Availability of Proxy Materials.
The Notice of Internet Availability of Proxy Materials was first mailed on or about April 27, 2011 to all stockholders of record as of April 15, 2011.
Whether or not you plan to attend the annual meeting in person, please vote by telephone, Internet, or request a Proxy Card to complete, sign, date and return by mail to ensure that your shares will be voted at the annual meeting. You may revoke your proxy at any time prior to its use by filing with our secretary an instrument revoking it or a duly executed proxy bearing a later date or by attending the annual meeting and voting in person.
If you plan to attend the annual meeting in person, please so indicate when you submit your proxy by mail, by telephone or via the Internet and bring with you the items that are required pursuant to DaVita’s admission process for the 2011 Annual Meeting. A description of the admission process can be found below in this Proxy Statement under the heading “General Information—Admission to Annual Meeting.”
Unless you instruct otherwise in the proxy, any proxy that is given and not revoked will be voted at the annual meeting:
| • | For each nominee to the Board of Directors identified in this Proxy Statement; |
| • | For the approval of the DaVita Inc. 2011 Incentive Award Plan; |
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| • | For the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal year 2011; |
| • | For the approval, on an advisory basis, of the compensation of our named executive officers; |
| • | For the approval, on an advisory basis, of holding future advisory votes on executive compensation every year; |
| • | Against the stockholder proposal regarding stockholder action by written consent; and |
| • | As determined by the proxyholders named in the Proxy Card in their discretion, with regard to all other matters as may properly come before the annual meeting or any adjournment thereof. |
Our only voting securities are the outstanding shares of our common stock. At the record date, we had approximately 95,871,454 shares of common stock outstanding. Each stockholder is entitled to one vote per share on each matter that we will consider at this meeting. Stockholders are not entitled to cumulate votes. Brokers holding shares of record for their customers generally are not entitled to vote on some matters unless their customers give them specific voting instructions. If the broker does not receive specific instructions, the broker will note this on the proxy form or otherwise advise us that it lacks voting authority. Recent regulatory changes were made to take away the ability of your bank, broker, or other nominee to vote your uninstructed shares in the election of directors on a discretionary basis. Thus, if you hold your shares in “street name,” meaning that your shares are registered in the name of your broker, bank or other nominee, and you do not instruct your bank, broker, or other nominee how to vote in the election of directors, the approval of the DaVita Inc. 2011 Incentive Award Plan, the proposals regarding the advisory vote on executive compensation and the frequency with which an advisory vote on executive compensation should be held or the stockholder proposal regarding stockholder action by written consent, no votes will be cast on your behalf. The votes that the brokers would have cast if their customers had given them specific instructions are commonly called “broker non-votes.” If the stockholders of record present in person or represented by their proxies at the annual meeting hold at least a majority of our shares of common stock outstanding as of the record date, a quorum will exist for the transaction of business at the annual meeting. Stockholders attending the annual meeting in person or represented by proxy at the annual meeting who abstain from voting and broker non-votes are counted as present for quorum purposes.
Directors are elected by a majority of votes cast, which means that the number of shares voted “for” each of the ten nominees for election to the Board of Directors must exceed 50% of the number of votes cast with respect to each nominee’s election. Abstentions and broker non-votes will not be counted as votes cast and therefore, will have no effect on the election of directors. In the event that the number of nominees exceeds the number of directors to be elected, which is a situation that we do not anticipate, directors will be elected by a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors.
The approval of the DaVita Inc. 2011 Incentive Award Plan, the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal year 2011, the approval of the proposal regarding the advisory vote on executive compensation and the approval of the stockholder proposal each requires the affirmative vote of a majority of the shares of common stock present at the annual meeting, in person or by proxy and entitled to vote thereon. Because your vote on executive compensation is advisory, it will not be binding on the company or the Board of Directors. However, the Board of Directors and the Compensation Committee will consider the voting results as appropriate when making future decisions regarding executive compensation. Abstentions are considered present and entitled to vote with respect to these proposals and will, therefore, be treated as votes against these proposals. Broker non-votes with respect to these proposals will not be considered as present and entitled to vote on these proposals, which will therefore reduce the number of affirmative votes needed to approve these proposals.
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The affirmative vote of at least a majority of the shares of common stock present at the annual meeting, in person or by proxy and entitled to vote thereon is required to approve, on an advisory basis, the frequency of the say-on-pay advisory vote every three years, two years or one year. If none of the frequency alternatives receives a majority vote, the frequency of the advisory vote on executive compensation receiving the greatest number of votes—every three years, every two years or every one year—will be considered the frequency that has been selected by the stockholders. However, the company will hold a similar vote no less frequently than once every six years. Because your vote is advisory, it will not be binding on the company or the Board of Directors. However, the Board of Directors and the Compensation Committee will consider the voting results as appropriate when adopting a policy on the frequency of future advisory votes on executive compensation. Abstentions and broker non-votes will not be counted as votes cast and therefore, will have no effect on such proposal.
We will pay for the cost of preparing, assembling, printing and mailing of the Notice of Internet Availability of Proxy Materials, this Proxy Statement and the accompanying Notice of Meeting, Proxy Card, and Annual Report to Stockholders, to our stockholders, as well as the cost of soliciting proxies relating to the annual meeting. We may request banks and brokers to solicit their customers who beneficially own our common stock listed of record in names of nominees. We will reimburse these banks and brokers for their reasonable out-of-pocket expenses regarding these solicitations. We have also retained Georgeson Inc. (“Georgeson”) to assist in the distribution and solicitation of proxies and to verify records related to the solicitation at a fee of $8,500 plus reimbursement for all reasonable out-of-pocket expenses incurred during the solicitation. Georgeson and our officers, directors and employees may supplement the original solicitation by mail of proxies, by telephone, facsimile, e-mail and personal solicitation. We will pay no additional compensation to our officers, directors and employees for these activities. We agreed to indemnify Georgeson against liabilities and expenses arising in connection with the proxy solicitation unless caused by Georgeson’s negligence or intentional misconduct.
Delivery of Proxy Statement and Annual Report
Beneficial owners, but not record holders, of our common stock who share a single address may receive only one copy of the Notice of Internet Availability of Proxy Materials and, as applicable, an Annual Report to Stockholders and Proxy Statement, unless their broker has received contrary instructions from any beneficial owner at that address. This practice, known as “householding,” is designed to reduce printing and mailing costs. If any beneficial owner at such an address wishes to discontinue householding and receive a separate copy of the Notice of Internet Availability of Proxy Materials and, if applicable, an Annual Report to Stockholders and Proxy Statement, they should notify their broker. Beneficial owners sharing an address to which a single copy of the Notice of Internet Availability of Proxy Materials and, if applicable, an Annual Report to Stockholders and Proxy Statement was delivered can also request prompt delivery of a separate copy of the Notice of Internet Availability of Proxy Materials and, if applicable, an Annual Report to Stockholders and Proxy Statement by contacting Investor Relations at the following address: Attn: Investor Relations, DaVita Inc., 1551 Wewatta Street, Denver, Colorado 80202, (888) 484-7505.
Admission to the annual meeting will be limited to stockholders of DaVita, family members accompanying stockholders of DaVita, persons holding executed proxies from stockholders who held DaVita stock as of the close of business on April 15, 2011 and such other persons as the chair of the annual meeting shall determine.
If you are a stockholder of DaVita, you must bring certain documents with you in order to be admitted to the annual meeting and in order to bring family members with you. The purpose of this requirement is to help us verify that you are actually a stockholder of DaVita. Please read the following procedures carefully, because they
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specify the documents that you must bring with you to the annual meeting in order to be admitted. The items that you must bring with you differ depending upon whether or not you were a record holder of DaVita stock as of the close of business on April 15, 2011. A “record holder” of stock is someone whose shares of stock are registered in his or her name in the records of DaVita’s transfer agent. Many stockholders are not record holders because their shares of stock are held in “street name,” meaning that the shares are registered in the name of their broker, bank or other nominee, and the broker, bank or other nominee is the record holder instead. If you are unsure as to whether you were a record holder of DaVita common stock as of the close of business on April 15, 2011, please call DaVita’s transfer agent, BNY Mellon Shareowner Services at (877) 889-2012.
If you were a record holder of DaVita common stock as of the close of business on April 15, 2011, then you must bring:
| • | valid personal photo identification (such as a driver’s license or passport). |
At the annual meeting, we will check your name for verification purposes against our list of record holders as of the close of business on April 15, 2011.
If a broker, bank or other nominee was the record holder of your shares of DaVita common stock as of the close of business on April 15, 2011, then you must bring:
| • | valid personal photo identification (such as a driver’s license or passport); and |
| • | proof that you owned shares of DaVita common stock as of the close of business on April 15, 2011. |
Examples of proof of ownership include the following: (i) an original or a copy of the voting instruction from your bank or broker with your name on it, (ii) a letter from your bank or broker stating that you owned DaVita common stock as of the close of business on April 15, 2011, or (iii) a brokerage account statement indicating that you owned DaVita common stock as of the close of business on April 15, 2011.
If you acquired your shares of DaVita common stock at any time after the close of business on April 15, 2011, you do not have the right to vote at the Annual Meeting, but you may attend it if you bring:
| • | valid personal photo identification (such as a driver’s license or passport); and |
| • | proof that you own shares of DaVita common stock. |
Examples of proof of ownership include the following:
| • | if a broker, bank or other nominee is the record holder of your shares of DaVita common stock: (i) a letter from your bank or broker stating that you acquired DaVita common stock after April 15, 2011, or (ii) a brokerage account statement as of a date after April 15, 2011 indicating that you own DaVita common stock; or |
| • | if you are the record holder of your shares of DaVita common stock, a copy of your stock certificate or a confirmation acceptable to DaVita that you bought the stock after April 15, 2011. |
If you are a proxy holder for a stockholder of DaVita who owned shares of DaVita common stock as of the close of business on April 15, 2011, then you must bring:
| • | the executed proxy naming you as the proxy holder, signed by a stockholder of DaVita who owned shares of DaVita common stock as of the close of business on April 15, 2011; |
| • | valid personal photo identification (such as a driver’s license or passport); and |
| • | if the stockholder whose proxy you hold was not a record holder of DaVita common stock as of the close of business on April 15, 2011, proof of the stockholder’s ownership of shares of DaVita common stock as of the close of business on April 15, 2011, in the form of (i) an original or a copy |
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| of the voting instruction form from the stockholder’s bank or broker with the stockholder’s name on it, or (ii) a letter or statement from a bank, broker or other nominee indicating that the stockholder owned DaVita common stock as of the close of business on April 15, 2011. |
No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted at the annual meeting. Shares may be voted in person at the annual meeting only by (a) the record holder as of the close of business on April 15, 2011 or (b) a person holding a valid proxy executed by such record holder.
Electronic Availability of Proxy Materials for 2011 Annual Meeting
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to Be Held on June 6, 2011. This Proxy Statement and the Annual Report to Stockholders and Form 10-K for fiscal year 2010 are available electronically at www.proxyvote.com.
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ELECTION OF DIRECTORS
At the annual meeting, you will elect ten directors to serve until the 2012 annual meeting of stockholders or until their respective successors are elected and qualified. Our bylaws require that each director be elected by the majority of votes cast with respect to such director in uncontested elections. In a contested election, where the number of nominees for director exceeds the number of directors to be elected, directors are elected by a plurality of shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. If a nominee for director who was in office prior to the election is not elected by a majority of votes cast, the director must promptly tender his or her resignation from the Board of Directors, and the Nominating and Governance Committee of the Board of Directors will make a recommendation to the Board of Directors about whether to accept or reject the resignation, or whether to take other action. The Board of Directors, excluding the director in question, will act on the recommendation of the Nominating and Governance Committee and publicly disclose its decision and its rationale within 90 days from the date the election results are certified. If a nominee for director who was not already serving as a director does not receive a majority of votes cast at the annual meeting, the nominee is not elected to the Board of Directors. All 2011 nominees are currently serving on the Board of Directors.
Nine of the ten nominees for director have been determined to be independent under the listing standards of the New York Stock Exchange (“NYSE”). Please see the section titled “Corporate Governance—Director Independence” below for more information. The Nominating and Governance Committee has recommended, and the Board of Directors has nominated, Pamela M. Arway, Charles G. Berg, Willard W. Brittain, Jr., Carol Anthony (“John”) Davidson, Paul J. Diaz, Peter T. Grauer, John M. Nehra, William L. Roper, Kent J. Thiry and Roger J. Valine for election as directors. Each nominee has consented to being named in this Proxy Statement as a nominee and has agreed to serve as a director if elected.
Unless the proxy indicates otherwise, the persons named as proxies in the accompanying proxy have advised us that at the meeting they intend to vote the shares covered by the proxies for the election of the nominees named above. If one or more of the nominees are unable or not willing to serve, the persons named as proxies may vote for the election of the substitute nominees that the Board of Directors may propose. The accompanying proxy contains a discretionary grant of authority with respect to this matter. The persons named as proxies may not vote for a greater number of persons than the number of nominees named above.
No arrangement or understanding exists between any nominee and any other person or persons pursuant to which any nominee was or is to be selected as a director or nominee. None of the nominees has any family relationship with any other nominee or with any of our executive officers.
The Board of Directors recommends a vote FOR the election of each of the named nominees as directors.
Information Concerning Members of the Board of Directors Standing for Reelection
| Name |
Age | Position | ||||
| Pamela M. Arway |
57 | Director | ||||
| Charles G. Berg |
53 | Director | ||||
| Willard W. Brittain, Jr. |
63 | Director | ||||
| Carol Anthony (“John”) Davidson |
55 | Director | ||||
| Paul J. Diaz |
49 | Director | ||||
| Peter T. Grauer |
65 | Lead Independent Director | ||||
| John M. Nehra |
62 | Director | ||||
| William L. Roper |
62 | Director | ||||
| Kent J. Thiry |
55 | Chairman of the Board and Chief Executive Officer | ||||
| Roger J. Valine |
62 | Director | ||||
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Pamela M. Arway has been one of our directors since May 2009. From 2005 to 2007, Ms. Arway served as the president of American Express International, Japan, Asia-Pacific, Australia region, a global payment services and travel company. Ms. Arway joined the American Express Company in 1987 after which she served in various capacities, including as chief executive officer of American Express Australia Limited from 2004 to 2005 and as executive vice president of Corporate Travel, North America from 2000 to 2004. Prior to her retirement in October 2008, she also served as advisor to the American Express Company’s chairman and chief executive officer. Ms. Arway is an experienced business leader, with extensive management experience.
Charles G. Berg has been one of our directors since March 2007. Mr. Berg served as executive chairman and as a member of the board of directors of WellCare Health Plans, Inc. (“WellCare”), a provider of managed care services for government-sponsored healthcare programs from January 2008 to December 2010. Mr. Berg became non-executive chairman of the board of directors of WellCare in January 2011. From January 2007 to April 2009, Mr. Berg was a senior advisor to Welsh, Carson, Anderson & Stowe, a private equity firm. From April 1998 to July 2004, Mr. Berg held various executive positions with Oxford Health Plans, Inc. (“Oxford”) which included chief executive officer from November 2002 to July 2004 when Oxford was acquired by UnitedHealth Group, president and chief operating officer from March 2001 to November 2002 and executive vice president, medical delivery from April 1998 to March 2001. From July 2004 to September 2006, Mr. Berg served as an executive of UnitedHealth Group and was primarily responsible for integrating the Oxford business. Mr. Berg is an experienced business leader with significant experience in the healthcare industry and brings an understanding of the operational, financial and regulatory aspects of our industry and business.
Willard W. Brittain, Jr. has been one of our directors since March 2007. Mr. Brittain has served as chairman and chief executive officer of Preod Corporation, an executive search and business advisory company, since March 2003. From September 2000 to October 2002, Mr. Brittain served as chief operating officer of PwC Consulting and from July 1995 to September 2000, Mr. Brittain served as chief operating officer of PricewaterhouseCoopers LLP. Mr. Brittain was with PricewaterhouseCoopers LLP for 28 years before his retirement. Mr. Brittain serves on the boards of Convergys Corporation, Tutor Perini Corporation and Host Hotels & Resorts, Inc. and previously served on the board of Analysts International Corporation. Mr. Brittain is an experienced business leader and brings significant financial and operations expertise as well as strategic insight.
Carol Anthony (“John”) Davidson has been one of our directors since December 2010. Mr. Davidson has been senior vice president, controller and chief accounting officer of Tyco International Ltd. (“Tyco”), a provider of diversified industrial products and services, since January 2004. Prior to joining Tyco in January 2004, he spent six years at Dell Inc., a computer and technology services company, where he held various leadership roles, including vice president, audit, risk and compliance, and vice president, corporate controller. In addition, he previously spent 16 years at Eastman Kodak Company, a provider of imaging technology products and services, in a variety of accounting and financial leadership roles. Mr. Davidson is a CPA with more than 30 years of leadership experience across multiple industries. Mr. Davidson is a member of the Board of Trustees of the Financial Accounting Foundation which oversees financial accounting and reporting standards setting processes for the United States, including oversight of the Financial Accounting Standards Board (FASB). Mr. Davidson brings a strong track record of building and leading global teams and implementing governance and controls processes.
Paul J. Diaz has been one of our directors since July 2007. Mr. Diaz has been the president and chief executive officer of Kindred Healthcare, Inc. (“Kindred”), a provider of long-term healthcare services in the United States, since January 2004. Mr. Diaz joined Kindred in January 2002 as president and chief operating officer. Prior to joining Kindred, Mr. Diaz was the managing member of Falcon Capital Partners, LLC, a private investment and consulting firm, and from 1996 to July 1998, Mr. Diaz served in various executive capacities with Mariner Health Group, Inc., including as executive vice president and chief operating officer. Mr. Diaz serves on the board of Kindred and the board of visitors of Georgetown University Law Center and previously served on the board of PharMerica Corporation. Mr. Diaz is an experienced business leader with significant experience in the healthcare industry and brings an understanding of the operational, financial and regulatory aspects of our industry and business.
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Peter T. Grauer has been one of our directors since August 1994 and our lead independent director since 2003. Mr. Grauer has been chairman of the board of Bloomberg, Inc. since April 2001, and its chief executive officer and treasurer since March 2002. From November 2000 until March 2002, Mr. Grauer was a managing director of Credit Suisse First Boston. From September 1992 until November 2000, upon the merger of Donaldson, Lufkin & Jenrette (“DLJ”) into Credit Suisse First Boston, Mr. Grauer was a managing director and founding partner of DLJ Merchant Banking Partners. Mr. Grauer has significant experience as a business leader and brings a deep understanding of our business and industry through his over 15 years of service as a member of the Board of Directors.
John M. Nehra has been one of our directors since November 2000. Mr. Nehra has been affiliated with New Enterprise Associates (NEA), a venture capital firm, since 1989, including, since 1993, as general partner of several of its affiliated venture capital limited partnerships. Mr. Nehra has also been managing general partner of Catalyst Ventures, a venture capital firm, since 1989. Mr. Nehra serves on the boards of a number of NEA’s portfolio companies. Mr. Nehra is an experienced business leader with approximately 35 years experience in investment banking, research and capital markets and he brings a deep understanding of our business and industry through his almost 10 years of service as a member of the Board of Directors as well as significant experience in the healthcare industry through his involvement with NEA’s healthcare-related portfolio companies.
William L. Roper has been one of our directors since May 2001. Dr. Roper has been chief executive officer of the University of North Carolina (“UNC”) Health Care System, dean of the UNC School of Medicine and vice chancellor for medical affairs of UNC since March 2004. Dr. Roper also continues to serve as a professor of health policy and administration in the UNC School of Public Health and a professor of pediatrics and of social medicine in the UNC School of Medicine. From 1997 until March 2004, he was dean of the UNC School of Public Health. Before joining UNC in 1997, Dr. Roper served as senior vice president of Prudential Health Care. He also served as director of the Centers for Disease Control and Prevention from 1990 to 1993, on the senior White House staff in 1989 and 1990 and as the administrator of Centers for Medicare & Medicaid Services from 1986 to 1989. Dr. Roper is also chairman of the board of the National Quality Forum. Dr. Roper serves on the board of Medco Health Solutions, Inc. Dr. Roper brings substantial expertise in the medical field, an in-depth understanding of the regulatory aspects of our business as well as clinical, financial and operational experience.
Kent J. Thiry became our chairman of the Board of Directors and chief executive officer in October 1999. From June 1997 until he joined us, Mr. Thiry was chairman of the board and chief executive officer of Vivra Holdings, Inc., which was formed to operate the non-dialysis business of Vivra Incorporated (“Vivra”) after Gambro AB acquired the dialysis services business of Vivra in June 1997. From September 1992 to June 1997, Mr. Thiry was the president and chief executive officer of Vivra, a provider of renal dialysis and other healthcare services. From April 1992 to August 1992, Mr. Thiry was president and co-chief executive officer of Vivra, and from September 1991 to March 1992, he was president and chief operating officer of Vivra. From 1983 to 1991, Mr. Thiry was associated with Bain & Company, first as a consultant, and then as vice president. Mr. Thiry previously served on the board of Varian Medical Systems, Inc. As a member of management, Mr. Thiry provides significant industry-specific experience and unique expertise regarding the company’s business and operations as well as executive leadership and management experience.
Roger J. Valine has been one of our directors since June 2006. From 1993 to his retirement in July 2006, Mr. Valine served as the chief executive officer of Vision Service Plan (“VSP”), the nation’s largest provider of eyecare wellness benefits. From January 1993 to February 2006, Mr. Valine served as both the president and chief executive officer of VSP. Upon his retirement, Mr. Valine had worked for VSP for 33 years and provided consulting services to VSP through January 2008. Mr. Valine serves on the board of SureWest Communications and previously served on the board of American Specialty Health Incorporated. Mr. Valine is an experienced business leader with significant experience in the healthcare industry and brings an understanding of the operational, financial and regulatory aspects of our business as well as extensive management experience.
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Under the listing standards of the NYSE, a majority of the members of the Board of Directors must satisfy the NYSE criteria for “independence.” No director qualifies as independent under the NYSE listing standards unless the Board of Directors affirmatively determines that the director has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us). In addition, the Board of Directors has adopted a formal set of standards used to determine director independence. The full text of our director independence standards is available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance.
The Board of Directors evaluates the independence of our directors annually and will review the independence of individual directors on an interim basis to consider changes in employment, relationships and other factors. The Board of Directors has determined that all of the individuals currently serving, or who served at any time during 2010, as members of the Board of Directors, other than Mr. Thiry, are independent under the NYSE listing standards.
In making determinations of independence, the Board of Directors considered the following relationships and determined that none of such relationships was a material relationship that would impair the independence of any such individual:
(1) Mr. Thiry holds an ownership interest of less than 2% in NEA Partnerships, a venture capital firm. Mr. Nehra is a general partner of NEA Partnerships and Richard K. Whitney, our former chief financial officer and current special advisor to the chief executive officer, is a venture partner of New Enterprise Associates, an affiliate of NEA Partnerships.
(2) Mr. Berg is a director, the non-executive chairman and a stockholder of WellCare, which has made payments to us for services rendered in the ordinary course of business in the last three years which did not exceed the greater of $1 million or 2% of WellCare’s consolidated gross revenue in any such year. For additional information, see “Certain Relationships and Related Transactions.”
(3) Mr. Diaz is a director, the president and chief executive officer and a stockholder of Kindred, which has made payments to us for services rendered in the ordinary course of business in the last three years which did not exceed the greater of $1 million or 2% of Kindred’s consolidated gross revenue in any such year.
The Board of Directors also maintains a policy whereby the Board of Directors will evaluate the appropriateness of the director’s continued service on the Board of Directors in the event that the director retires from their principal job, changes their principal job responsibility or experiences a significant event that could negatively affect their service to the Board of Directors. In such event, the affected director shall promptly submit his or her resignation to the chairman of the Board of Directors and the lead independent director. The members of the Board of Directors, excluding the affected director, will determine whether the affected director’s continued service on the Board of Directors is in the best interests of our stockholders and will decide whether or not to accept the resignation of the director. In addition, prior to accepting an invitation to serve on the board of directors of another public company, a director must advise the chairman of the Board of Directors and the lead independent director so that the remaining members of the Board of Directors may evaluate any potential conflicts of interest.
Leadership Structure and Meetings of Non-management Directors
Mr. Thiry is our chief executive officer and chairman of the Board of Directors. Mr. Thiry brings over ten years of experience with our company and deep institutional knowledge and experience to the combined role. Our lead independent director, Mr. Grauer, plays a significant role in Board leadership and meetings of the
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independent directors. Mr. Grauer chairs our Nominating and Governance Committee, which is a committee composed of all directors other than Mr. Thiry. As lead independent director, Mr. Grauer reviews and provides input to the chairman on meeting agendas and information to be sent to the Board of Directors, consults with the chairman on meeting schedules to assure that there is sufficient time for discussion of agenda items, serves as the principal liaison between the chairman and the non-executive directors and presides over executive sessions of the Board of Directors, providing consolidated feedback, as appropriate, from those meetings to Mr. Thiry. Additionally, Mr. Grauer facilitates discussions outside of scheduled board meetings among the independent directors on key issues as required. We believe that Mr. Thiry’s experience and knowledge, and the significant role of the lead independent director, make combination of the chairman and chief executive officer roles appropriate.
Non-management directors meet regularly in executive sessions without management. Executive sessions are held in conjunction with each regularly scheduled meeting of the Board of Directors.
Communications with the Board of Directors
Any interested party who desires to contact the lead independent director, Mr. Grauer, may do so by sending an email to leaddirector@davita.com. In addition, any interested party who desires to contact the Board of Directors or any member of the Board of Directors may do so by writing to: Board of Directors, c/o Corporate Secretary, DaVita Inc., 1551 Wewatta Street, Denver, Colorado 80202. Copies of any such written communications received by the Secretary will be provided to the full Board of Directors or the appropriate member depending on the facts and circumstances described in the communication unless they are considered, in the reasonable judgment of the Secretary, to be improper for submission to the intended recipient(s).
Annual Meeting of Stockholders
We do not have a policy requiring that directors attend the annual meeting of stockholders. Stockholders may contact our lead independent director and the Board of Directors as described above. At the last annual meeting of stockholders, our chairman, Mr. Thiry, attended the meeting.
Information Regarding the Board of Directors and its Committees
The Board of Directors met seven times during 2010. Each of our directors attended at least 75% of the total number of meetings of the Board of Directors and of the committees of the Board of Directors on which he or she served during 2010. The Board of Directors has established the following committees: the Audit Committee, the Compensation Committee, the Nominating and Governance Committee, the Compliance Committee, the Public Policy Committee and the Clinical Performance Committee.
Audit Committee
The current members of our Audit Committee are Mr. Berg, Mr. Davidson and Mr. Valine, with Mr. Valine serving as the chair. Mr. Davidson and Mr. Grauer joined the Audit Committee on December 2, 2010 and June 7, 2010, respectively. Mr. Grauer joined the Audit Committee on an interim basis upon the retirement of Mr. Vaughan from the Board of Directors and the Audit Committee and until a successor member of the Audit Committee could be appointed. After Mr. Davidson’s appointment to the Audit Committee, Mr. Grauer ended his interim service on the Audit Committee on March 10, 2011. The Board of Directors has determined that Mr. Berg, Mr. Davidson and Mr. Valine each qualifies as an “audit committee financial expert” within the meaning of the rules of the SEC and that each of the members of our Audit Committee is “independent” and “financially literate” under the listing standards of the NYSE and the company’s independence standards.
The Board of Directors has adopted a written charter for our Audit Committee. The charter is available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-
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governance. The Audit Committee’s primary responsibilities are to assist the Board of Directors with oversight of: (1) the integrity of our financial statements including the financial reporting and disclosure processes and the integrity and effectiveness of our system of internal controls over financial reporting; and (2) the independence, qualifications and performance of our independent registered public accounting firm, including a review of the scope and results of their audit, as well as our internal audit function. The Audit Committee, together with the Compliance Committee, assists the Board of Directors with oversight of compliance with legal and regulatory requirements. The Compliance Committee has primary responsibility for oversight of health care regulatory compliance requirements. The Audit Committee assists the Board of Directors with oversight of all other legal and regulatory requirements, including those that may have a material impact on the company’s financial statements. The Audit Committee also appoints and engages our independent registered public accounting firm and is required to pre-approve the independent registered public accounting firm’s annual audit services (including related fees), audit-related services, and all other services in accordance with our pre-approval policy. Our pre-approval policy is available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance. The Audit Committee met nine times during 2010, including meetings held with the independent registered public accounting firm and management each quarter prior to the release of the company’s financial results. The Audit Committee met with the independent registered public accounting firm without management present on five occasions in 2010.
Compensation Committee
The current members of our Compensation Committee are Mr. Grauer, Mr. Nehra and Mr. Valine, with Mr. Nehra serving as the chair. Each of the members of our Compensation Committee is independent in accordance with the listing standards of the NYSE and the company’s independence standards. Each of the members of this committee is also a “nonemployee director” as that term is defined under Rule 16b-3 of the Securities Exchange Act of 1934 (the “Exchange Act”) and an “outside director” as that term is defined in Internal Revenue Service regulations.
Our Compensation Committee reviews the performance of our chief executive officer and other executives and makes decisions regarding their compensation, with the goal of ensuring that our compensation system for our chief executive officer and our other executives, as well as our philosophy for compensation for all employees and the Board of Directors, is aligned with the long-term interests of our stockholders. The Compensation Committee establishes policies relating to the compensation of our executive officers and other key employees that further this goal.
The Compensation Committee is responsible for determining the compensation of our chief executive officer. The Compensation Committee conducts an evaluation of our chief executive officer’s performance and the company’s performance and considers a self-assessment prepared by our chief executive officer. Periodically, the Compensation Committee engages an outside consultant to conduct an in-depth analysis of our chief executive officer’s performance as a manager during the year. Neither the chief executive officer nor other members of management provide a recommendation to the Compensation Committee with regard to the chief executive officer’s compensation. The compensation package for our chief executive officer is approved by the Compensation Committee, subject to ratification by the independent members of the Board of Directors. The Compensation Committee works closely with our chief executive officer to determine the compensation of our other executive officers. Our chief executive officer conducts a performance and compensation review of each other executive officer and reviews his detailed assessments of the performance of each of the other executive officers with the Compensation Committee. The Compensation Committee considers the recommendations of the chief executive officer when determining the compensation of the other executive officers.
In 2011, Compensia, a national compensation consulting firm engaged by the Compensation Committee, provided the Compensation Committee with an analysis of comparative market data on the cash and stock-based compensation for senior executives at a group of comparable companies within our industry. The Compensation Committee considered Compensia’s analysis of the compensation of executives serving in similar positions at
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comparable companies to obtain a general understanding of current compensation practices in our industry and to provide context for compensation decisions. Compensation decisions are not directly related to or otherwise based upon the comparative data. The Compensation Committee uses this comparative data as one of many factors considered to set the compensation for our executive officers. The Compensation Committee has the sole authority to retain or replace Compensia in its discretion. Compensia does not provide consulting services to the company and may not provide such services without the approval of the chair of the Compensation Committee.
Our Non-Management Director Compensation Philosophy and Plan sets forth the terms of our director compensation. There is no discretionary decision-making involved in director compensation. The Compensation Committee and the Board of Directors periodically review director compensation. In 2010, Compensia provided the Compensation Committee with an analysis of comparative market data on the cash and stock-based compensation for directors at a group of comparable companies within our industry. The Compensation Committee considered Compensia’s analysis of the compensation of directors at comparable companies to obtain a general understanding of current compensation practices in our industry. The Compensation Committee did not modify director compensation following this review. Please see “Compensation of Directors” beginning on page 72 of this Proxy Statement for more information regarding our director compensation program pursuant to the Non-Management Director Compensation Philosophy and Plan.
The Compensation Committee met five times during 2010. The charter of the Compensation Committee is available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance.
Nominating and Governance Committee
The current members of our Nominating and Governance Committee are Ms. Arway, Mr. Berg, Mr. Brittain, Mr. Davidson, Mr. Diaz, Mr. Grauer, Mr. Nehra, Dr. Roper and Mr. Valine, representing all of our independent directors. Mr. Davidson joined the Nominating and Governance Committee on December 2, 2010. Our lead independent director, Mr. Grauer, is the chair of the Nominating and Governance Committee. The Board of Directors has adopted a set of corporate governance guidelines established to assist the Board of Directors and its committees in performing their duties and serving the best interests of the company and our stockholders. On March 10, 2011, the Board of Directors amended the corporate governance guidelines to, among other things, (a) provide for a mandatory retirement age, such that any director who has reached the age of 75 will not be nominated for reelection to the Board of Directors; (b) limit the number of public company boards that a director or director nominee may serve on, such that no director or director nominee may serve on more than four other public company boards; (c) require the completion of a written questionnaire with respect to the background and qualification of such director or director nominee in order to be eligible for election or reelection to the Board of Directors and a written representation and agreement from each director nominee that such nominee (i) is not and will not become a party to any voting agreement with respect to how such director will vote; (ii) is not and will not become a party to any agreement that provides the director with compensation, reimbursement or indemnification in connection with such director’s service on the Board of Directors; (iii) owns the required amount of shares of common stock in accordance with our share ownership policy; (iv) will comply with all applicable corporate governance, conflict of interest, confidentiality, trading policies and corporate governance guidelines; and (v) if elected and renominated, will abide by the resignation provisions set forth in the bylaws to the extent such nominee does not receive a majority of votes cast. The charter of the Nominating and Governance Committee and our corporate governance guidelines are available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance.
Our Nominating and Governance Committee reviews and makes recommendations to the Board of Directors about our governance processes, assists in identifying and recruiting candidates for the Board of Directors, reviews the performance of the individual members of the Board of Directors, proposes a slate of nominees for election at the annual meeting of stockholders and makes recommendations to the Board of Directors regarding the membership and chairs of the committees of the Board of Directors. The Nominating and
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Governance Committee does not have a specific set of minimum criteria for membership on the Board of Directors. In making its recommendations, however, it considers the mix of characteristics, experience, diverse perspectives and skills that is most beneficial to our company. The committee also considers continuing director tenure and takes steps as may be appropriate to ensure that the Board of Directors maintains an openness to new ideas and a willingness to re-examine the status quo. The company does not have a specific diversity policy. However, as noted in our corporate governance guidelines, when selecting nominees the committee considers diversity of skills, experience, perspective and background. The Nominating and Governance Committee will consider nominees for director recommended by stockholders upon submission in writing to our Secretary of the names and qualifications of such nominees at the following address: Corporate Secretary, DaVita Inc., 1551 Wewatta Street, Denver, Colorado 80202. The committee does not intend to alter the manner in which it evaluates candidates based on whether the candidate was recommended by a stockholder.
The Nominating and Governance Committee held five formal meetings during 2010. In March 2011, the Nominating and Governance Committee recommended the candidates standing for election at the 2011 annual meeting of stockholders. One of these candidates, Mr. Davidson, was appointed as a director by the Board of Directors outside of last year’s annual meeting of stockholders to fill a vacancy. Mr. Davidson was identified as a potential member of the Board of Directors by a non-management member of the Board of Directors. The Nominating and Governance Committee then considered Mr. Davidson and recommended him for membership on the Board of Directors. Mr. Davidson was appointed unanimously to the Board of Directors by a vote at a regular meeting of the Board of Directors on December 2, 2010.
Compliance Committee
The current members of our Compliance Committee are Ms. Arway, Mr. Berg, Mr. Grauer and Dr. Roper, with Dr. Roper serving as the chair. Each of the members of our Compliance Committee is independent in accordance with the listing standards of the NYSE and the company’s independence standards. Our Compliance Committee oversees and monitors the effectiveness of our health care regulatory compliance program, reviews significant health care regulatory compliance risk areas, and reviews the steps management is taking to monitor, control and report these risk exposures. The Compliance Committee, together with the Audit Committee, assists the Board of Directors with oversight of compliance with legal and regulatory requirements. The Compliance Committee has primary responsibility for oversight of health care regulatory requirements. The Compliance Committee meets regularly with our chief compliance officer. The Compliance Committee met four times during 2010. The charter of the Compliance Committee is available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance.
Public Policy Committee
The current members of our Public Policy Committee are Mr. Brittain, Mr. Diaz and Dr. Roper, with Mr. Diaz serving as the chair. Each of the members of our Public Policy Committee is independent in accordance with the listing standards of the NYSE and the company’s independence standards. Our Public Policy Committee advises the Board of Directors on public policy and makes recommendations to the Board of Directors as to policies and procedures relating to issues of public policy and government relations. The Public Policy Committee met three times during 2010. The charter of the Public Policy Committee is available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance.
Clinical Performance Committee
The current members of our Clinical Performance Committee are Ms. Arway, Mr. Brittain, Mr. Nehra and Dr. Roper, with Dr. Roper serving as the chair. Each of the members of our Clinical Performance Committee is independent in accordance with the listing standards of the NYSE and the company’s independence standards. Our Clinical Performance Committee advises the Board of Directors on clinical performance issues facing the company and makes recommendations to management and to the Board of Directors as to policies and
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procedures relating to issues of clinical performance. The Clinical Performance Committee met one time during 2010. The charter of the Clinical Performance Committee is available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance.
The Board of Directors’ involvement in risk oversight involves the Audit Committee, the Compliance Committee and the full Board of Directors. The Audit Committee is responsible for legal and regulatory risk oversight and the Compliance Committee has primary responsibility for oversight of healthcare regulatory compliance requirements. The Audit Committee and the Compliance Committee meet regularly with our chief compliance officer. The Compliance Committee reviews significant healthcare regulatory compliance risk areas and the steps management has taken to monitor, control and report such compliance risk exposures. The Compliance Committee meets on a regular basis and reports directly to the Board of Directors on its findings. The Audit Committee receives materials on enterprise risk management on an annual basis. These materials include identification of top enterprise risks for the company, the alignment of management’s accountability and reporting for these risks, and mapping of Board of Directors’ and Audit Committee’s oversight responsibilities for key risks. In addition, the Audit Committee and the full Board of Directors periodically receive materials to address the identification and status of major risks to the company. The Audit Committee discusses significant risk areas and the actions management has taken to monitor, control, and report such exposures. The Audit Committee also reviews with the company’s general counsel any legal matters that may have a material impact on the company’s financial statements, the company’s compliance with applicable laws and regulations, and material reports or inquiries received from governmental agencies, including such matters identified by the Compliance Committee or the chief compliance officer. At each meeting of the full Board of Directors, the chairman of the Audit Committee reports on the activities of the Audit Committee, including risks identified and risk oversight.
Risk Considerations in Our Compensation Program
The Compensation Committee, with the assistance of an independent compensation consultant, conducted a review of the company’s material compensation policies and practices applicable to its employees, including its executive officers. Based on this review, the Compensation Committee concluded that these policies and practices do not create risks that are reasonably likely to have a material adverse effect on the company. The key features of the executive compensation program that support this conclusion include:
| • | a balance between cash and equity compensation; |
| • | a balance between short-term and long-term performance focus; |
| • | short-term incentive opportunities are capped and are not linked to any one specific goal; |
| • | equity awards have meaningful vesting requirements and relatively short terms; |
| • | a clawback policy that permits the Board of Directors to recover bonuses, incentive and equity-based compensation from executive officers and members of the Board of Directors whose fraud or intentional misconduct was a significant contributing factor to the company having to restate all or a portion of its financial statements; and |
| • | significant independent Compensation Committee oversight. |
Board of Directors Share Ownership Policy
We have a share ownership policy that applies to all non-management members of the Board of Directors. The purpose of the policy is to encourage the Board of Directors to have an ownership stake in the company by retaining a specified financial interest in our common stock.
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Both shares owned directly and shares underlying vested but unexercised stock options, stock appreciation rights (“SARs”), including stock-settled stock appreciation rights (“SSARs”), and restricted stock units (“RSUs”) are included in the determination of whether the share ownership guidelines have been met. The total net realizable share value retained must have a current market value of not less than the lower of:
| • | 25% of the total equity award value realized by the Board of Directors member to date in excess of $100,000; or |
| • | five times the annual Board of Directors retainer of $24,000, or $120,000. |
Management Share Ownership Policy
In addition, we have a share ownership policy which applies to all members of our management team at the vice president level and above. See “Executive Compensation Process & Governance—Management Share Ownership Policy” beginning on page 55 of this Proxy Statement for more information regarding our management share ownership policy.
Code of Ethics and Code of Conduct
We have a code of ethics that applies to our chief executive officer, chief financial officer, controller and chief accounting officer, general counsel, all vice presidents and all professionals involved in the accounting and financial reporting functions. We also have a code of conduct that applies to all of our teammates. The code of ethics and the code of conduct are available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance.
We have a clawback policy that permits the Board of Directors to recover bonuses, incentive and equity-based compensation from executive officers and members of the Board of Directors whose fraud or intentional misconduct was a significant contributing factor to the company having to restate all or a portion of its financial statements. See “Compensation Discussion and Analysis” beginning on page 40 of this Proxy Statement for more information regarding our clawback policy.
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APPROVAL OF THE DAVITA INC. 2011 INCENTIVE AWARD PLAN
We are asking you to vote for approval of the proposed DaVita Inc. 2011 Incentive Award Plan (the “2011 Plan”). The 2011 Plan constitutes an amendment and restatement of the DaVita Inc. 2002 Equity Compensation Plan, as amended (the “2002 Plan” or the “Equity Compensation Plan”).
The Board of Directors believes that an equity-based compensation award program is an important incentive tool for the employees and consultants of DaVita, its subsidiaries and affiliates and directors. As a result, the Board of Directors has adopted, subject to stockholder approval, the 2011 Plan to continue to provide a means by which the employees and consultants of DaVita, its subsidiaries and affiliates and members of the Board of Directors may be given an opportunity to benefit from the increases in the value of our common stock, and to attract and retain the services of such persons.
The 2011 Plan will become effective upon approval of the 2011 Plan by our stockholders at the Annual Meeting. If the stockholders do not approve the 2011 Plan, the 2002 Plan will continue in full force and effect only until February 8, 2012, when it will expire. After February 8, 2012, the company would no longer be able to grant equity-based compensation to its employees, consultants and directors, and would lose an important incentive tool for its employees, consultants and directors.
Equity-based compensation has been a major component of our compensation programs. The Board of Directors believes that our capacity to grant equity-based compensation has been a significant factor in our ability to achieve our growth objectives and enhance stockholder value. The principal features of the 2011 Plan are summarized below, but the summary is qualified in its entirety by reference to the 2011 Plan itself. The 2011 Plan is attached to this Proxy Statement as Appendix A.
The purpose of the 2011 Plan is to promote our success and enhance our value by linking the individual interests of the members of the Board of Directors and our employees to those of our stockholders and by providing such individuals with an incentive for outstanding performance to generate superior returns to our stockholders. The 2011 Plan is further intended to provide us flexibility in our ability to motivate, attract, and retain the services of members of the Board of Directors, our employees and our consultants upon whose judgment, interest, and special effort the successful conduct of our operation is largely dependent. The 2011 Plan is designed to enable us to grant performance-based equity and cash awards that qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code (the “Code”).
The 2011 Plan does not increase the number of shares authorized under the 2002 Plan. As of December 31, 2010, there were 11,012,487 stock-settled stock appreciation rights and 501,564 restricted stock units outstanding, and 10,908,787 shares available for future grants, under the 2002 Plan. Since its inception in 2002, a cumulative aggregate of 34,178,338 shares have been reserved under the 2002 Plan, as hereby amended and restated by the 2011 Plan, including shares directly authorized under the plan, shares inherited from predecessor plans, and shares reserved under the plan from repurchases under a prior replenishment provision that was terminated in 2007. For more information regarding the shares available for issuance under the 2011 Plan, see “Limitations on Awards and Shares Available” below.
The Board of Directors committed and continues to commit to our stockholders that over the three-year period that commenced on April 1, 2010, it will not grant a number of shares subject to stock awards under the
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2002 Plan or 2011 Plan, including stock options, SARs, restricted stock units or other stock awards, at an average annual rate greater than 4.02% of the number of shares of our common stock that we believe will be outstanding over such three-year period. This 4.02% rate is the average of the 2009 and 2010 three-year average median grant rate plus one standard deviation for the Russell 3000 companies in the company’s industry segment. Awards that are settled in cash, awards that are granted pursuant to stockholder approved exchange programs, awards sold under our Employee Stock Purchase Plan and awards assumed or substituted in business combination transactions will be excluded from our grant rate calculation. For purposes of calculating the number of shares granted, any Full Value Awards (i.e., restricted stock, restricted stock unit, performance share or any other award that does not have an exercise price per share at least equal to the per share fair market value of our common stock on the grant date) will count as equivalent to 3.0 shares. The company will publicly report its compliance with this three-year average annual grant rate commitment, and the data necessary to independently confirm it, in a public filing shortly after March 31, 2013.
Under the terms of the 2011 Plan, the pool of shares may be used for all types of awards under a fungible pool formula. Pursuant to this fungible pool formula, the authorized share limit will be reduced by one share of our common stock for every one share subject to an option or stock appreciation right and three shares of our common stock for every one share subject to a Full Value Award.
Stockholder Approval Requirement
In general, stockholder approval of the 2011 Plan is necessary in order for us to (1) continue to meet the stockholder approval requirements of the principal securities market on which shares of our common stock are traded and (2) continue to take tax deductions for certain compensation resulting from awards granted thereunder qualifying as performance-based compensation under Section 162(m) of the Code.
Compensation and Governance Best Practices
The 2011 Plan authorizes the Compensation and Management Development Committee (or Compensation Committee) of the Board of Directors (or, if the Board of Directors determines, another committee of the Board of Directors) to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock units, restricted stock, performance-based awards, dividend equivalents, stock payments, deferred stock unit awards and deferred stock awards structured by the Compensation Committee within parameters set forth in the 2011 Plan, for the purpose of providing the members of the Board of Directors, our employees and our consultants and equity compensation, incentives and rewards for performance. The 2011 Plan reflects a broad range of compensation and governance best practices, with some of the key features of the 2011 Plan as follows:
| • | Limitations on Grants. The maximum aggregate number of shares with respect to one or more awards that may be granted to any one person during any consecutive 12 month period is 2,250,000. However, this number may be adjusted to take into account equity restructurings and certain other corporate transactions as described below, the issuance of rights and certain other events described in the 2011 Plan, in addition to the share limitations described above under “Size of the Share Pool.” |
| • | No Repricing or Replacement of Options or Stock Appreciation Rights. The 2011 Plan prohibits, without stockholder approval: (i) the amendment of options or stock appreciation rights to reduce the exercise price, and (ii) the replacement of an option or stock appreciation right with cash or any other award when the price per share of the option or stock appreciation right exceeds the fair market value of the underlying shares, except with respect to any Substitute Award (as defined in “Limitations on Awards and Shares Available” below). |
| • | No In-the-Money Option or Stock Appreciation Right Grants. The 2011 Plan prohibits the grant of options or stock appreciation rights with an exercise or base price less than the fair market value, generally the closing price, of our common stock on the date of grant. |
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| • | Section 162(m) Qualification. The 2011 Plan is designed to allow awards made under the 2011 Plan, including equity awards and incentive cash bonuses, to qualify as performance-based compensation under Section 162(m) of the Code. |
| • | Independent Administration. The Compensation Committee of the Board of Directors, which consists of only non-employee directors generally will administer the 2011 Plan if it is approved by stockholders, and only the Compensation Committee may make grants of awards to persons who are subject to Section 16 of the Exchange Act and persons who are “covered employees” within the meaning of Section 162(m) of the Code. The Compensation Committee may delegate certain of its duties and authorities to a subcommittee for awards to certain non-executive employees. |
The 2011 Plan will be administered by the Compensation Committee. Unless otherwise determined by the Board of Directors, the Compensation Committee shall consist solely of two or more directors appointed by the Board of Directors, each of whom is an “outside director” within the meaning of Section 162(m) of the Code, a “non-employee director” within the meaning of the rules under Section 16 of the Securities Exchange Act of 1934, as amended, and an “independent director” under the rules of the principal securities market on which shares of our common stock are traded. The Compensation Committee may delegate to a committee of one or more members of the Board of Directors or one or more of our officers the authority to grant or amend awards to participants other than our senior executives who are subject to Section 16 of the Exchange Act, employees who are “covered employees” within the meaning of Section 162(m) of the Code, and the regulations thereunder, or a member of the Board of Directors or an officer to whom authority has been delegated under the 2011 Plan to grant or amend awards.
The Board of Directors, acting by a majority of its members in office, will have authority to administer the 2011 Plan with respect to awards granted to non-employee members of the Board of Directors, and the Compensation Committee will have authority to administer the 2011 Plan to all other eligible individuals. References to Administrator in this Proposal No. 2 shall mean, as applicable, the full Board of Directors or the Compensation Committee as the entity to which the administration of the 2011 Plan has been delegated within the limits described in the 2011 Plan. Unless otherwise limited by the Board of Directors, the Administrator will have the authority to administer the 2011 Plan with respect to grants of equity awards, including the power to determine eligibility, the types and sizes of awards, the price and timing of awards and the acceleration or waiver of any vesting restriction, as well as the authority to delegate such administrative responsibilities.
Persons currently eligible to participate in the 2011 Plan are nine non-employee directors, approximately 34,000 employees and a non-significant number of consultants (e.g., less than 10) of DaVita and its subsidiaries and affiliates, as determined by the Administrator.
LIMITATION ON AWARDS AND SHARES AVAILABLE
As of December 31, 2010, there were 11,012,487 stock-settled stock appreciation rights and 501,564 restricted stock units outstanding, and 10,908,787 shares available for future grants, under the 2002 Plan. Since its inception in 2002, a cumulative aggregate of 34,178,338 shares have been reserved under the 2002 Plan, as hereby amended and restated by the 2011 Plan, including shares directly authorized under the plan, shares inherited from predecessor plans, and shares reserved under the plan from repurchases under a prior replenishment provision that was terminated in 2007. The shares of our common stock covered by the 2011 Plan may be shares in treasury, authorized but unissued shares, or shares purchased in the open market.
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If any shares subject to an award under the 2011 Plan that is not a Full Value Award are forfeited or expire or such award is settled for cash, then any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, be used again for new grants under the 2011 Plan. To the extent that a Full Value Award is forfeited or expires or such award is settled for cash, the shares available under the 2011 Plan will be increased by 3.0 shares subject to such Full Value Award. However, any shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligation pursuant to any award and any shares subject to a stock appreciation right that are not issued in connection with the stock settlement of the stock appreciation right on its exercise may not be used again for new grants.
The payment of dividend equivalents in cash in conjunction with any outstanding awards will not be counted against the shares available for issuance under the 2011 Plan.
Awards granted under the 2011 Plan upon the assumption of, or in substitution for, outstanding equity awards previously granted by an entity in connection with a corporate transaction, such as a merger, combination, consolidation or acquisition of property or stock (but not awards made in connection with the cancellation and repricing of an option or stock appreciation right) will not reduce the shares authorized for grant under the 2011 Plan. Additionally, in the event that a company acquired by us or any of our subsidiaries or affiliates or with which we or any of our subsidiaries or affiliates combines has shares available under a pre-existing plan approved by stockholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan may be used for awards under the 2011 Plan and will not reduce the shares authorized for grant under the 2011 Plan, absent the acquisition or combination, and will only be made to individuals who were not employed by or providing services to us or any of our subsidiaries or affiliates immediately prior to such acquisition or combination.
The maximum number of shares of our common stock that may be subject to one or more awards granted to any one participant pursuant to the 2011 Plan during any 12 month period is 2,250,000 and the maximum amount that may be paid in cash to any one participant during any calendar year is $10,000,000.
LIMITATION ON FULL VALUE AWARD VESTING
Except as may be determined by the Administrator in the event of a consummation of a change of control, or the holder’s death, disability, or retirement, a Full Value Award will not become fully vested earlier than three years from the grant date (two years in the case of an employee who is not an executive of the company or in the case of performance-based Full Value Awards, over a period of not less than one year); provided, however, that notwithstanding the foregoing, Full Value Awards (a) that do not exceed in the aggregate of 5% of the total number of shares available under the 2011 Plan will not be subject to the minimum vesting provisions and (b) the company may grant a Full Value Award to employees newly hired by the company or any of its subsidiaries without respect to such minimum vesting provisions.
The 2011 Plan provides for the grant of ISOs, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock, performance-based awards, dividend equivalents, stock payments, deferred stock unit awards and deferred stock awards. No determination has been made as to the types or amounts of awards that will be granted to specific individuals pursuant to the 2011 Plan.
Stock options, including ISOs, as defined under Section 422 of the Code, and nonqualified stock options may be granted pursuant to the 2011 Plan. The option exercise price of all stock options granted pursuant to the 2011 Plan will not be less than 100% of the fair market value of our common stock on the date of grant. In general, the fair market value shall be the closing sales price for a share of our common stock as quoted on the
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principal securities market on which shares of our common stock are traded on the date of grant, which as of April 13, 2011 was $86.70. Stock options may vest and become exercisable as determined by the Administrator, but in no event may a stock option have a term extending beyond the fifth anniversary of the date of grant. ISOs granted to any person who owns, as of the date of grant, stock possessing more than ten percent of the total combined voting power of all classes of our stock, however, shall have an exercise price that is not less than 110% of the fair market value of our common stock on the date of grant and may not have a term extending beyond the fifth anniversary of the date of grant. The aggregate fair market value of the shares with respect to which options intended to be ISOs are exercisable for the first time by an employee in any calendar year may not exceed $100,000, or such other amount as Section 422 of the Code provides.
Stock appreciation rights may be granted pursuant to the 2011 Plan. A stock appreciation right entitles its holder, upon exercise of all or a portion of the stock appreciation right (the number of shares of which are the “base shares”), to receive from us an amount determined by multiplying the difference obtained by subtracting the exercise or base price per share of the stock appreciation right from the fair market value at the time of exercise of the stock appreciation right by the number of shares with respect to which the stock appreciation right has been exercised (in the event the stock appreciation right is settled in shares, the shares obtained are the “gain shares”), subject to any limitations imposed by the Administrator. The exercise or base price per share subject to a stock appreciation right will be set by the Administrator, but may not be less than 100% of the fair market value on the date the stock appreciation right is granted. The Administrator determines the period during which the right to exercise the stock appreciation right vests in the holder, but in no event may a stock appreciation right have a term extending beyond the fifth anniversary of the date of grant. No portion of a stock appreciation right which is unexercisable at the time the holder’s employment with us terminates will thereafter become exercisable, except as may be otherwise provided by the Administrator. Payment pursuant to the stock appreciation right awards may be in cash, shares, or a combination of both, as determined by the Administrator.
Restricted stock units may be granted pursuant to the 2011 Plan. A restricted stock unit award provides for the issuance of our common stock at a future date upon the satisfaction of specific conditions set forth in the applicable award agreement. The Administrator will specify the dates on which the restricted stock units will become fully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate, including conditions based on achieving one or more of the performance criteria listed below, or other specific criteria, including service to us or any of our subsidiaries or affiliates. Restricted stock units may not be sold, or otherwise hypothecated or transferred, and a holder of restricted stock units will not have voting rights or dividend rights prior to the time when the vesting conditions are satisfied and the shares of common stock are issued. Restricted stock units generally will be forfeited and the underlying shares of our common stock will not be issued, if the applicable vesting conditions are not met. The Administrator will specify, or permit the restricted stock unit holder to elect, the conditions and dates upon which the shares underlying the vested restricted stock units will be issued (subject to compliance with the deferred compensation requirements of Section 409A of the Code). Restricted stock units may be paid in cash, shares, or both, as determined by the Administrator. On the distribution dates, we will transfer to the participant one unrestricted, fully transferable share of our common stock (or the fair market value of one such share in cash) for each restricted stock unit scheduled to be paid out on such date and not previously forfeited. Restricted stock units may constitute, or provide for a deferral of compensation, subject to Section 409A of the Code and there may be certain tax consequences if the requirements of Section 409A of the Code are not met.
Restricted stock may be granted pursuant to the 2011 Plan. A restricted stock award is the grant of shares of our common stock at a price determined by the Administrator, if any, to be paid by the holder to us with respect to any restricted stock award, with cash, services or any other consideration that the Administrator deems acceptable, subject to the requirements of law, and which is nontransferable and may be subject to substantial risk of forfeiture until specific conditions are met. Conditions may be based on continuing service to us or any of our subsidiaries or affiliates or achieving one or more of the performance criteria listed below, or other specific criteria. During the period of restriction, participants holding shares of restricted stock have full voting and dividend rights with respect to such shares unless otherwise provided by the Administrator. In addition, with
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respect to a share of restricted stock with performance-based vesting, dividends which are paid prior to vesting shall only be paid out to the holder to the extent that the performance-based vesting conditions are subsequently satisfied and the share of restricted stock vests. Restricted stock generally may be repurchased by us at the original purchase price, if any, or forfeited, if the vesting conditions and other restrictions are not met. The restrictions will lapse in accordance with a schedule or other conditions determined by the Administrator.
Dividend equivalents may be granted pursuant to the 2011 Plan, except that no dividend equivalents may be payable with respect to options or stock appreciation rights pursuant to the 2011 Plan. A dividend equivalent is the right to receive the equivalent value of dividends paid on shares. Dividend equivalents that are granted by the Administrator are credited as of dividend payments dates during the period between the date an award is granted and the date such award vests, is exercised, is distributed or expires, as determined by the Administrator. Such dividend equivalents will be converted to cash or additional shares of our common stock by such formula, at such time and subject to such limitations as may be determined by the Administrator. In addition, dividend equivalents with respect to an award with performance-based vesting that are based on dividends paid prior to vesting shall only be paid out to the holder to the extent that the performance-based vesting conditions are subsequently satisfied and the award vests.
Stock payments may be granted pursuant to the 2011 Plan. A stock payment is a payment in the form of shares of our common stock or an option or other right to purchase shares, as part of a bonus, deferred compensation or other arrangement. The number or value of shares of any stock payment will be determined by the Administrator and may be based on continuing service with us or any of our subsidiaries or affiliates or achieving one or more of the performance criteria listed below, or other specific criteria determined by the Administrator. Except as otherwise determined by the Administrator, shares underlying a stock payment which is subject to a vesting schedule or other conditions set by the Administrator will not be issued until those conditions have been satisfied. Stock payments may, but are not required to, be made in lieu of base salary, bonus, fees or other cash compensation otherwise payable to any individual who is eligible to receive awards.
Deferred stock units may be granted pursuant to the 2011 Plan. The number of deferred stock units will be determined by the Administrator and may be based on continuing service with us or any of our subsidiaries or affiliates or achieving one or more of the performance criteria listed below, or other specific criteria determined by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Each deferred stock unit entitles its holder to receive one share of common stock on the date the deferred stock unit becomes vested or upon a specified settlement date thereafter. Except as otherwise determined by the Administrator, shares underlying a deferred stock unit award which is subject to a vesting schedule or other conditions set by the Administrator will not be issued until those conditions have been satisfied. Unless otherwise provided by the Administrator, a holder of deferred stock units shall have no rights as a stockholder with respect to such deferred stock units until the award of deferred stock units has vested and any other applicable conditions and/or criteria have been satisfied and the shares of common stock underlying the award have been issued to the holder.
Deferred stock may be granted pursuant to the 2011 Plan. Deferred stock provides for the deferred issuance to the holder of shares of our common stock. The number of shares of deferred stock will be determined by the Administrator and may be based on continuing service with us or any of our subsidiaries or affiliates or achieving one or more of the performance criteria listed below, or other specific criteria determined by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Except as otherwise determined by the Administrator, shares underlying a deferred stock award which is subject to a vesting schedule or other conditions set by the Administrator will not be issued until those conditions have been satisfied. Deferred stock may constitute, or provide for a deferral of compensation, subject to Section 409A of the Code and there may be certain tax consequences if the requirements of Section 409A of the Code are not met.
Performance awards may also be granted pursuant to the 2011 Plan. Performance awards may be granted in the form of cash bonus awards, stock bonus awards, performance awards or incentive awards that are paid in
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cash, shares, equity awards or a combination of cash, shares or equity awards. The value of performance awards may be linked to any one or more of the performance criteria listed below, or other specific criteria determined by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Performance awards may be payable upon the attainment of pre-established performance goals based on one or more of the performance criteria listed below, or other specific criteria determined by the Administrator. The goals are established and evaluated by the Administrator and may relate to performance over any periods as determined by the Administrator. The Administrator will also determine whether performance awards are intended to be performance-based compensation within the meaning of Section 162(m) of the Code. Following is a brief discussion of the requirements for awards to be treated as performance-based compensation within the meaning of Section 162(m) of the Code.
Performance-based compensation under Section 162(m). The Compensation Committee may grant awards to employees who are or may be “covered employees,” as defined in Section 162(m) of the Code, that are intended to be performance-based compensation within the meaning of Section 162(m) of the Code in order to preserve the deductibility of these awards for federal income tax purposes. Under the 2011 Plan, these performance-based awards may be stock, equity, or cash awards or a combination. Participants are only entitled to receive payment for a Section 162(m) performance-based award for any given performance period to the extent that pre-established performance goals set by our Compensation Committee for the period are satisfied. These pre-established performance goals must be based on one or more of the following performance criteria:
| • | net earnings (either before or after interest, taxes, depreciation and amortization); |
| • | gross or net sales or revenue; |
| • | net income (either before or after taxes); |
| • | adjusted net income; |
| • | operating earnings or profit; |
| • | cash flow (including, but not limited to, operating cash flow and free cash flow); |
| • | return on assets; |
| • | return on capital; |
| • | return on stockholders’ equity; |
| • | total stockholder return; |
| • | return on sales; |
| • | gross or net profit or operating margin; |
| • | costs; |
| • | funds from operations; |
| • | expenses; |
| • | working capital; |
| • | earnings per share; |
| • | adjusted earnings per share; |
| • | price per share of our common stock; |
| • | regulatory body approval for commercialization of a product; |
| • | implementation or completion of critical projects; |
| • | market share; and |
| • | economic value, |
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any of which may be measured with respect to us, or any subsidiary, affiliate or other internal unit of ours, either in absolute terms, terms of growth or as compared to any incremental increase, or as compared to results of a peer group. The Compensation Committee will define in an objective fashion the manner of calculating the performance criteria it selects to use for such awards. With regard to a particular performance period, the Compensation Committee will have the discretion to select the length of the performance period, the type of performance-based awards to be granted, and the performance goals that will be used to measure the performance for the period. In determining the actual size of an individual performance-based award for a performance period, the Compensation Committee may reduce or eliminate (but not increase) the initial award. Generally, a participant will have to be employed by or providing services to us on the date the performance-based award is paid to be eligible for a performance-based award for any period.
Except as provided by the Compensation Committee, the achievement of each performance goal will be determined in accordance with U.S. generally accepted accounting principles, international financial reporting standards, or such other accounting principles or standards as may apply to our financial statements under the U.S. federal securities laws from time to time, to the extent applicable. At the time of grant, the Compensation Committee may provide that objectively determinable adjustments will be made for purposes of determining the achievement of one or more of the performance goals established for an award. Any such adjustments will be based on one or more of the following:
| • | items related to a change in accounting principle; |
| • | items relating to financing activities; |
| • | expenses for restructuring or productivity initiatives; |
| • | other non-operating items; |
| • | items related to acquisitions; |
| • | items attributable to the business operations of any entity acquired by us during the performance period; |
| • | items related to the disposal of a business or segment of a business; |
| • | items related to discontinued operations that do not qualify as a segment of a business under applicable accounting standards; |
| • | items attributable to any stock dividend, stock split, combination or exchange of shares occurring during the performance period; |
| • | any other items of significant income or expense which are determined to be appropriate adjustments; |
| • | items relating to unusual or extraordinary corporate transactions, events or developments; |
| • | items related to amortization of acquired intangible assets; |
| • | items that are outside the scope of our core, on-going business activities; |
| • | items related to acquired in-process research and development; |
| • | items relating to changes in tax laws; |
| • | items relating to major licensing or partnership arrangements; |
| • | items relating to asset impairment charges; |
| • | items relating to gains or losses for litigation, arbitration and contractual settlements; or |
| • | items relating to any other unusual or nonrecurring events or changes in applicable laws, accounting principles or business conditions. |
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Payment Methods. The Administrator will determine the methods by which payments by any award holder with respect to any awards granted under the 2011 Plan may be paid, the form of payment, including, without limitation: (1) cash or check; (2) shares of our common stock issuable pursuant to the award or held for such period of time as may be required by the Administrator in order to avoid adverse accounting consequences and having a fair market value at the time of delivery equal to the aggregate payments required; (3) other property acceptable to the Administrator (including through the delivery of a notice that the award holder has placed a market sell order with a broker with respect to shares of our common stock then issuable upon exercise or vesting of an award, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to us in satisfaction of the aggregate payments required; provided that payment of such proceeds is then made to us upon settlement of such sale); or (4) other form of legal consideration acceptable to the Administrator. However, no participant who is a member of the Board of Directors or an “executive officer” of DaVita within the meaning of Section 13(k) of the Exchange Act will be permitted to make payment with respect to any awards granted under the 2011 Plan, or continue any extension of credit with respect to such payment in any method which would violate the prohibitions on loans made or arranged by us as set forth in Section 13(k) of the Exchange Act. Only whole shares of common stock may be purchased or issued pursuant to an award. No fractional shares shall be issued and the Administrator shall determine, in its sole discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding down.
Vesting and Exercise of an Award. The applicable award agreement governing an award will contain the period during which the right to exercise the award in whole or in part vests, including the events or conditions upon which the vesting of an award will occur or may accelerate. No portion of an award which is not vested at the holder’s termination of service with us will subsequently become vested, except as may be otherwise provided by the Administrator in the agreement relating to the award or by action following the grant of the award.
Generally, an option or stock appreciation right may only be exercised while such person remains an employee or non-employee director of us or one of our subsidiaries or affiliates or for a specified period of time (up to the remainder of the award term) following the holder’s termination of service with us or one of our subsidiaries or affiliates. An award may be exercised for any vested portion of the shares subject to such award until the award expires. Upon the grant of an award or following the grant of an award, the Administrator may provide that the period during which the award will vest or become exercisable will accelerate, in whole or in part, upon the occurrence of one or more specified events, including, a change in control or a holder’s termination of employment or service with us or otherwise.
Transferability. No award under the 2011 Plan may be transferred other than by will or the then applicable laws of descent and distribution or, subject to the consent of the Administrator, pursuant to a domestic relations order, unless and until such award has been exercised or the shares underlying such award have been issued and all restrictions applicable to such shares have lapsed. No award shall be liable for the debts or contracts of the holder or his successors in interest or shall be subject to disposition by any legal or equitable proceedings. During the lifetime of the holder of an award granted under the 2011 Plan, only such holder may exercise such award unless it has been disposed of pursuant to a domestic relations order. After the holder’s death, any exercisable portion of an award may be exercised by his personal representative or any person empowered to do so under such holder’s will or the then applicable laws of descent and distribution until such portion becomes unexercisable under the 2011 Plan or the applicable award agreement. Notwithstanding the foregoing, the Administrator may permit an award holder to transfer an award other than an ISO to any “family member” of the holder, as defined under the instructions to use of the Form S-8 Registration Statement under the Securities Act of 1933, subject to certain terms and conditions. Further, an award holder may, in a manner determined by the Administrator, designate a beneficiary to exercise the holder’s right and to receive any distribution with respect to any award upon the holder’s death, subject to certain terms and conditions.
Forfeiture, Recoupment and Clawback Provisions. Pursuant to its general authority to determine the terms and conditions applicable to awards under the 2011 Plan, the Administrator shall have the right to provide, in an award agreement or otherwise, or to require a holder to agree by separate written instrument, that (a) (i) any
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economic benefit received by the holder upon any receipt or exercise of the award, or upon the receipt or resale of any shares of common stock underlying the award, must be paid to the company, and (ii) the award shall terminate and any unexercised portion of the award shall be forfeited, if (x) a termination of service occurs within a specific time period following receipt or exercise, (y) the holder at any time, or during a specified time period, engages in any activity in competition with the company, or which is contrary to the interests of the company, or (z) the holder incurs a termination of service for “cause” (as determined in the Administrator’s discretion or as set forth in a written agreement between the company and the holder); and (b) all awards (including any economic benefit received by the holder upon any receipt or exercise of any award or upon the receipt or resale of any shares of common stock underlying the award) shall be subject to the provisions of any recoupment or clawback policies implemented by the company, including, without limitation, any recoupment or clawback policies adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder, to the extent set forth in such recoupment or clawback policies and/or in the applicable award agreement.
Certain transactions with our stockholders not involving our receipt of consideration, such as stock splits, spin-offs, stock dividends or certain recapitalizations may affect the shares or the share price of our common stock (which transactions are referred to collectively as equity restructurings). In the event that an equity restructuring occurs, the Administrator will equitably adjust the class of shares issuable and the maximum number and kind of shares of our common stock subject to the 2011 Plan, and will equitably adjust outstanding awards as to the class, number of shares and price per share of our common stock. The Administrator will also adjust the number and kind of shares for which automatic grants are subsequently to be made to new and continuing non-employee directors pursuant to the 2011 Plan. Other types of transactions may also affect our common stock, such as a dividend or other distribution, reorganization, merger or other changes in corporate structure. In the event that there is such a transaction, which is not an equity restructuring, and the Administrator determines that an adjustment to the 2011 Plan and any outstanding awards would be appropriate to prevent any dilution or enlargement of benefits under the 2011 Plan, the Administrator will equitably adjust the 2011 Plan as to the class of shares issuable and the maximum number of shares of our common stock subject to the 2011 Plan, as well as the maximum number of shares that may be issued to an employee during any calendar year, and will adjust any outstanding awards as to the class, number of shares, and price per share of our common stock in such manner as it may deem equitable.
The Board of Directors may terminate, amend or modify the 2011 Plan at any time; however, except to the extent permitted by the 2011 Plan in connection with certain changes in capital structure, stockholder approval must be obtained for any amendment to (i) increase the number of shares available under the 2011 Plan, (ii) reduce the per share exercise price of the shares subject to any option or stock appreciation right below the per share exercise price as of the date the option or stock appreciation right was granted, and (iii) cancel any option or stock appreciation right in exchange for cash or another award when the option or stock appreciation right price per share exceeds the fair market value of the underlying shares, except with respect to any Substitute Award.
FEDERAL INCOME TAX CONSEQUENCES
If an optionee is granted a non-qualified stock option under the 2011 Plan, the optionee should not have taxable income on the grant of the option. Generally, the optionee should recognize ordinary income at the time of exercise in an amount equal to the fair market value of a share of our common stock at such time, less the exercise price paid. The optionee’s basis in the common stock for purposes of determining gain or loss on a
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subsequent sale or disposition of such shares generally will be the fair market value of our common stock at the time the optionee exercises such option. Any subsequent gain or loss will be taxable as a capital gain or loss. We or our subsidiaries or affiliates generally should be entitled to a federal income tax deduction at the time and for the same amount as the optionee recognizes ordinary income.
A participant receiving ISOs will not recognize taxable income upon grant. Additionally, if applicable holding period requirements are met, the participant will not recognize taxable income at the time of exercise. However, the excess of the fair market value of our common stock received over the exercise or base price is an item of tax preference income potentially subject to the alternative minimum tax. If stock acquired upon exercise of an ISO is held for a minimum of two years from the date of grant and one year from the date of exercise, the gain or loss (in an amount equal to the difference between the fair market value at the time of sale and the exercise or base price) upon disposition of the stock will be treated as a long-term capital gain or loss, and we will not be entitled to any deduction. If the holding period requirements are not met, the ISO will be treated as one that does not meet the requirements of the Code for ISOs and the tax consequences described for nonqualified stock options will apply.
The current federal income tax consequences of other awards authorized under the 2011 Plan generally follow certain basic patterns: stock appreciation rights are taxed and deductible in substantially the same manner as nonqualified stock options; nontransferable restricted stock subject to a substantial risk of forfeiture results in income recognition equal to the excess of the fair market value over the price paid, if any, only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant); restricted stock units, stock-based performance awards, dividend equivalents and other types of awards are generally subject to tax at the time of payment based on the fair market value of the award at such time. Compensation otherwise effectively deferred is taxed when paid. In each of the foregoing cases, we will generally have a corresponding deduction at the time the participant recognizes income, subject to Section 162(m) of the Code with respect to covered employees.
Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to certain “covered employees” in a taxable year to the extent that compensation to such covered employee exceeds $1,000,000. It is possible that compensation attributable to awards under the 2011 Plan, when combined with all other types of compensation received by a covered employee from us, may cause this limitation to be exceeded in any particular year.
Qualified “performance-based compensation” is disregarded for purposes of the deduction limitation. In accordance with Treasury Regulations issued under Section 162(m), compensation attributable to stock awards will generally qualify as performance-based compensation if (1) the award is granted by a compensation committee composed solely of two or more “outside directors,” (2) the plan contains a per-employee limitation on the number of awards which may be granted during a specified period, (3) the plan is approved by the stockholders, and (4) under the terms of the award, the amount of compensation an employee could receive is based solely on an increase in the value of the stock after the date of the grant (which requires that the exercise or base price of the option is not less than the fair market value of the stock on the date of grant), and for awards other than options, established performance criteria that must be met before the award actually will vest or be paid.
The 2011 Plan is designed to meet the requirements of Section 162(m); however, awards other than options and stock appreciation rights granted under the 2011 Plan will only be treated as qualified performance-based compensation under Section 162(m) if the awards and the procedures associated with them comply with all other requirements of Section 162(m). There can be no assurance that compensation attributable to awards granted under the 2011 Plan will be treated as qualified performance-based compensation under Section 162(m) and thus be deductible to us.
Awards are subject to the discretion of the Administrator. Therefore, it is not possible to determine the benefits that will be received in the future by participants in the 2011 Plan or the benefits that would have been received by such participants if the 2011 Plan had been in effect in the year ended December 31, 2010.
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Equity Grants as of April 13, 2011
The following table sets forth summary information concerning the number of shares of our common stock subject to equity grants made under the 2002 Plan to our named executive officers, directors, director nominees and employees as of April 13, 2011.
| Individual or Group |
Number of Shares Underlying SSAR/Option Grants |
Number of Shares Underlying Stock Unit Awards |
||||||
| Kent J. Thiry, Chairman of the Board of Directors and Chief Executive Officer |
5,050,000 | 112,500 | ||||||
| Dennis L. Kogod, Chief Operating Officer |
1,180,000 | 42,500 | ||||||
| Luis A. Borgen, Chief Financial Officer |
60,000 | 15,000 | ||||||
| Javier J. Rodriguez, Senior Vice President |
969,000 | 30,000 | ||||||
| David T. Shapiro, Chief Compliance Officer and Senior Vice President |
110,000 | 4,750 | ||||||
| Richard K. Whitney, Former Chief Financial Officer |
593,000 | 16,750 | ||||||
| All current executive officers as a group |
8,747,500 | 240,750 | ||||||
| All current non-employee directors as a group |
681,578 | 68,579 | ||||||
| Pamela M. Arway |
27,000 | 1,981 | ||||||
| Charles G. Berg |
53,786 | 4,218 | ||||||
| Willard W. Brittain, Jr. |
53,153 | 3,204 | ||||||
| Carol Anthony (“John”) Davidson |
15,000 | 472 | ||||||
| Paul J. Diaz |
39,000 | 3,157 | ||||||
| Peter T. Grauer |
153,000 | 18,439 | ||||||
| John M. Nehra |
126,000 | 13,860 | ||||||
| William L. Roper |
153,000 | 18,413 | ||||||
| Roger J. Valine |
61,639 | 4,835 | ||||||
| Each associate of any such directors, executive officers or nominees |
— | — | ||||||
| Each other person who received or is to receive 5% of such options, warrants or rights |
— | — | ||||||
| All employees, including current officers who are not executive officers, as a group |
16,933,134 | 916,646 | ||||||
The Board of Directors recommends a vote FOR approval of our proposed 2011 Incentive Award Plan.
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RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Independent Registered Public Accounting Firm
The Audit Committee has appointed KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2011. Representatives of KPMG LLP are expected to attend the annual meeting in person or telephonically, and will be available to respond to appropriate questions and to make a statement if they so desire. If KPMG LLP should decline to act or otherwise become incapable of acting, or if KPMG LLP’s engagement is discontinued for any reason, the Audit Committee will appoint another independent registered public accounting firm to serve as our independent registered public accounting firm for 2011. Although we are not required to seek stockholder ratification of this appointment, the Board of Directors believes that doing so is consistent with corporate governance best practices. If the appointment is not ratified, the Audit Committee will explore the reasons for stockholder rejection and will reconsider the appointment.
The following table sets forth the aggregate professional fees billed to us for the years ended December 31, 2010 and 2009 by KPMG LLP, our independent registered public accounting firm:
| 2010 | 2009 | |||||||
| Audit fees(1) |
$ | 1,748,129 | $ | 1,674,237 | ||||
| Audit-related fees(2) |
427,742 | 728,821 | ||||||
| Tax fees(3) |
55,000 | 25,073 | ||||||
| All other fees |
— | — | ||||||
| $ | 2,230,871 | $ | 2,428,131 | |||||
| (1) | Includes aggregate fees for the audit of our consolidated financial statements and the effectiveness of our internal control over financial reporting and the three quarterly reviews of our reports on Form 10-Q and other SEC filings. |
| (2) | Includes fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported as “Audit Fees,” including fees of $55,038 in 2010 and $482,898 in 2009, for KPMG LLP’s services as an independent review organization for our subsidiary Gambro Healthcare, Inc., now known as DVA Renal Healthcare, Inc. The audit-related fees also include fees for audits of our employee benefit plans, an audit of one of our majority-owned joint ventures and audits of certain wholly-owned subsidiaries. In addition, the 2010 audit-related fees also include fees of $218,354 for due diligence services relating to potential acquisitions. The 2009 audit-related fees also include fees for agreed-upon procedures to review our initial XBRL tags. |
| (3) | Includes fees for professional services rendered for tax advice and tax planning. None of these fees were for tax compliance or tax preparation services. |
Pre-approval Policies and Procedures
The Audit Committee of the Board of Directors is required to pre-approve the audit, audit-related, tax and all other services provided by our independent registered public accounting firm in order to assure that the provision of such services does not impair the auditor’s independence. The Audit Committee’s pre-approval policy provides for pre-approval of all audit, audit-related, tax and all other services provided by the independent registered public accounting firm, KPMG LLP, and is available under the Corporate Governance section of our website, located at http://www.davita.com/about/corporate-governance. The Audit Committee pre-approved all such services in 2010 and concluded that such services performed by KPMG LLP were compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.
The affirmative vote of a majority of the shares of common stock present at the annual meeting, in person or by proxy and entitled to vote thereon, is required for the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal year 2011.
The Board of Directors recommends a vote FOR the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal year 2011.
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ADVISORY VOTE ON EXECUTIVE COMPENSATION
Pursuant to recently enacted Section 14A of the Exchange Act, we are providing stockholders with a vote to approve, on an advisory basis, the compensation of our named executive officers as disclosed in this Proxy Statement in accordance with SEC rules. The advisory vote on executive compensation described in this proposal is commonly referred to as a “say-on-pay vote.”
As disclosed in the Compensation Discussion and Analysis, the company believes that its executive compensation program is reasonable, competitive and strongly focused on pay-for-performance principles. We design our compensation programs for executive officers to attract and retain outstanding leaders who possess the skills and talent necessary to achieve our business goals and objectives. Ultimately, our objective is to continue to create long-term stockholder value by generating strong overall revenue growth, market share increases, improvements in cost per treatment, operating income growth, operating margin growth, increases in earnings per share and improvement in our debt to equity ratio. In order to achieve this objective, we have established our compensation programs so they:
| • | reward strong company performance |
| • | align our executives’ interests with our stockholders’ interests; and |
| • | are competitive within the health care services, diagnostics and solutions market so that we can attract and retain outstanding executives. |
The compensation of our named executive officers during fiscal 2010 is consistent with the following achievements and financial performance. As compared to 2009:
| • | we experienced a one-year total stockholder return (“TSR”) of 18.30%, compared to the median one-year TSR of 12.64% in our Global Industry Classification Standard group and the median one-year TSR of 11.94% in our comparator peer group; |
| • | we returned approximately $618 million to our stockholders through our stock buy-back program; |
| • | we experienced strong operating cash flow of $840 million, or an increase of approximately 26%; |
| • | our consolidated revenue growth was approximately 6.0%; |
| • | we experienced an increase of approximately 6.0% in the overall number of treatments that we provided; and |
| • | our consolidated operating income growth was approximately 6.0%. |
The Compensation Committee has developed and approved an executive compensation philosophy to provide a framework for the company’s executive compensation program featuring the following policies and practices:
| • | strong pay-for-performance alignment, with equity awards ranging from 23% to 73% of our named executive officers’ compensation in 2010; |
| • | equity incentive plans that prohibit repricing or replacing underwater stock options or stock appreciation rights without prior stockholder approval; |
| • | a stock ownership policy that requires our named executive officers to accumulate a meaningful ownership stake in the company over time to strengthen the alignment of our named executive officers’ and stockholders’ interests; and |
| • | a clawback policy that permits the Board of Directors to recover bonuses, incentive and equity-based compensation from executive officers and members of the Board of Directors whose fraud or intentional misconduct was a significant contributing factor to the company having to restate all or a portion of its financial statements. |
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This proposal gives our stockholders the opportunity to express their views on the overall compensation of our named executive officers and the philosophy, policies and practices described in this Proxy Statement. For the reasons discussed above, we are asking our stockholders to indicate their support for our named executive officer compensation by voting FOR the following resolution at the Annual Meeting:
“RESOLVED, that the company’s stockholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed in this Proxy Statement pursuant to the compensation disclosure rules of the Securities and Exchange Commission (which disclosure includes the Compensation Discussion and Analysis, the Summary Compensation Table and the other related tables and disclosure).”
The say-on-pay vote is an advisory vote only, and therefore it will not bind the company or the Board of Directors. However, the Board of Directors and the Compensation Committee will consider the voting results as appropriate when making future decisions regarding executive compensation.
The Board of Directors recommends a vote FOR the approval of the advisory resolution relating to the compensation of our named executive officers as disclosed in this Proxy Statement.
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ADVISORY VOTE ON THE FREQUENCY OF SAY-ON-PAY VOTES
Pursuant to recently enacted Section 14A of the Exchange Act, we are asking stockholders whether future say-on-pay votes should be held every three years, every two years or every year.
After careful consideration of this proposal, the Board of Directors has determined that the company should hold future say-on-pay votes every year for a number of reasons, including the following:
| • | An annual say-on-pay vote will allow us to obtain stockholder input on our executive compensation program on a more consistent basis which aligns more closely with our objective to engage in regular dialogue with our stockholders on corporate governance matters, including our executive compensation philosophy, policies and practices; |
| • | The one-year frequency provides the highest level of accountability and communication by enabling the say-on-pay vote to correspond with the most recent executive compensation information presented in our proxy statement for the annual meeting; |
| • | A longer approach may make it more difficult for the Compensation Committee to understand and respond to the voting results because it may be unclear whether the stockholder vote pertains to the most recent executive compensation information presented in our proxy statement or to pay practices from the previous two years or both; and |
| • | Holding say-on-pay votes annually reflects sound corporate governance principles and is consistent with a majority of institutional investor policies. |
Stockholders are not voting to approve or disapprove of the Board of Directors’ recommendation. Instead, the proxy card provides stockholders with four choices with respect to this proposal: one year, two years, three years or stockholders may abstain from voting on the proposal. For the reasons discussed above, we are asking our stockholders to vote for a ONE YEAR frequency when voting on the frequency of future say-on-pay votes.
This vote is an advisory vote only, and therefore it will not bind the company or the Board of Directors. However, the Board of Directors and the Compensation Committee will consider the voting results as appropriate when adopting a policy on the frequency of future say-on-pay votes. The affirmative vote of at least a majority of the shares of common stock present at the annual meeting, in person or by proxy and entitled to vote thereon is required to approve, on an advisory basis, the frequency of the say-on-pay advisory vote every three years, every two years or every year. If none of the frequency alternatives receives a majority vote, the frequency of the advisory vote on executive compensation receiving the greatest number of votes—every three years, every two years or every year—will be considered the frequency that has been selected by the stockholders. Nevertheless, the Board of Directors may decide that it is in the best interests of our stockholders and the company to hold say-on-pay votes more or less frequently than the option approved by our stockholders. Our stockholders, however, will be given the opportunity to vote on the frequency of say-on-pay votes at least once every six years.
The Board of Directors recommends a vote for holding future say-on-pay votes EVERY YEAR.
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STOCKHOLDER PROPOSAL REGARDING STOCKHOLDER ACTION BY WRITTEN CONSENT
We expect the following proposal to be presented by a stockholder at the annual meeting. The Board of Directors has recommended a vote AGAINST this proposal for the reasons set forth following the proposal. The name, address and share holdings of the stockholder proponent and co-filer will be supplied promptly to a stockholder upon the company’s receipt of an oral or written request. The Board of Directors disclaims any responsibility for the content of the proposal and the statement in support of the proposal, which are presented in the form received by the stockholder.
SHAREHOLDER ACTION BY WRITTEN CONSENT
RESOLVED, Shareholders hereby request that our board of directors undertake such steps as may be necessary to permit written consent by shareholders entitled to cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all shareholders entitled to vote thereon were present and voting (to the fullest extent permitted by law).
Stockholder’s Statement Supporting Proposal No. 6
We gave greater than 56%-support to a 2010 shareholder proposal on this same topic. Our 56%-support was all the more remarkable because our management used an argument twice as long as the complete shareholder proposal. The Council of Institutional Investors www.cii.org recommends that management adopt a shareholder proposal upon receiving its first 50%-plus vote. This 56%-plus support even translated into greater than 48% support from all shares outstanding.
This proposal topic also won majority shareholder support at 13 major companies in 2010. This included 67%-support at both Allstate and Sprint. Hundreds of major companies enable shareholder action by written consent.
Taking action by written consent in lieu of a meeting is a means shareholders can use to raise important matters outside the normal annual meeting cycle. A study by Harvard professor Paul Gompers supports the concept that shareholder dis-empowering governance features, including restrictions on shareholder ability to act by written consent, are significantly related to reduced shareholder value.
The merit of this Shareholder Action by Written Consent proposal should also be considered in the context of the need for additional improvement in our company’s 2010 reported corporate governance status:
The Corporate Library www.thecorporatelibrary.com, an independent investment research firm downgraded DaVita to “D” with “High Governance Risk” and “Very High Concern” in Executive Pay—$25 million for Kent Thiry. Mr. Thiry gained $25 million on the exercise of stock options in 2009 and $19 million on the exercise of options in 2007.
Mr. Thiry also continued to receive annual mega-grants of more and more market-priced stock options—650,000 in 2009 with a grant date value of nearly $8 million. Market priced options pose the risk for shareholders of providing rewards to our executives due only to a rising market, regardless of individual performance.
In fact, this was the only type of equity Mr. Thiry received over the past few years. Performance-based equity tied to actual company performance would better align our CEO’s interests with shareholders.
Peter Grauer, with 16-years tenure (independence concerns), was our so-called Lead Director and was still allowed in his position after attracting our highest negative votes. This was compounded by Mr. Grauer also sitting on our Executive Pay Committee and chairing our Nomination Committee. Plus our Nomination Committee appears to be most of the board members rather than a committee of the board.
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It is important to have well-qualified new directors with continuing business experience. However, Pamela Arway, new to our board in 2009, was an early retiree. Please encourage our board to respond positively to this proposal to enable shareholder action by written consent—Yes on 6.
The Company’s Statement in Opposition to Proposal No. 6
The Board of Directors recommends that you vote AGAINST this proposal for the following reasons:
The proposal is unnecessary given that our stockholders have the right to call special meetings. Our stockholders have the ability “to raise important matters outside the normal annual meeting cycle.” We recently amended our bylaws to allow stockholders holding 10% or more of our outstanding common stock to call a special meeting to propose, debate and vote on matters outside the normal annual meeting cycle. Notably, our 10% threshold for calling a special meeting is lower than the threshold at many S&P 500 companies and is substantially lower than the majority that would be required to take action by written consent under this proposal.
Acting on matters at a meeting of stockholders is more democratic and transparent than doing so by written consent. The special meeting process provides a more meaningful opportunity for all stockholders to participate in our corporate governance and in actions taken on behalf of the company’s stockholders. Addressing matters that are significant to the company at a meeting of the stockholders, rather than through the consent solicitation process, ensures that information about proposed stockholder actions will be disseminated to all stockholders and allows the transparent, public, orderly and deliberate consideration of issues facing the company. Requiring action to be taken at a stockholder meeting also allows all stockholders to express their views on a given matter with the opportunity to persuade other stockholders of the merits of a contrary position, rather than allowing a subset of the stockholder constituency to take action without the knowledge or participation by the rest of the company’s stockholders. Action by written consent could lead to hasty decision-making and could be costly and disruptive for the company. The company has over 96 million outstanding shares. Different stockholders could act on different matters by written consent for any purpose, at any time, and as often as they wish, causing significant disruption and confusion. This could lead to a chaotic state of corporate affairs rather than the orderly stockholder meeting process currently in place.
We have a strong track record of sound corporate governance. We have had a long-standing commitment to sound corporate governance practices. We continually evaluate our business, stockholder sentiment, the competitive landscape and developments in corporate governance and implement changes to our corporate governance practices when they appear to be in the best interests of our business and stockholders. We have a number of corporate governance policies and practices that enhance the accountability of the Board of Directors to our stockholders, including:
| • | annual election of all directors (no “staggered board” or “classified board”); |
| • | election of directors by majority vote; |
| • | right of 10% of the voting power to call a special meeting of stockholders; |
| • | limited anti-takeover defenses, including the early termination of our rights plan (poison pill) in March 2011; |
| • | all members of the Board of Directors are removable with or without cause by stockholders; |
| • | no supermajority approval requirements in our organization documents, except where required by Delaware law; |
| • | all members of the Board of Directors, other than our CEO, are independent; |
| • | restriction on the number of other public company boards a member of the Board of Directors may serve on (currently no member of the Board of Directors serves on more than three outside boards); |
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| • | share ownership policy for members of the Board of Directors; and |
| • | a clawback policy for the recoupment under certain circumstances by the company of incentive compensation of Board members or executive officers if the company has to restate its financial statements. |
The Board has undertaken a thorough evaluation of the company’s corporate governance structure in light of shareholder sentiment and corporate governance trends. As a result, several of the enhancements listed above were added to already strong corporate governance policies and practices. We are committed to good corporate citizenship and accountability to our stockholders. Our continual process of evaluating and making appropriate changes as needed to our corporate governance structure underscores this commitment and, we believe, enhances stockholder value.
The affirmative vote of a majority of the shares of common stock present at the annual meeting, in person or by proxy and entitled to vote thereon, is required for the approval of this proposal.
For these reasons, the Board of Directors recommends that you vote AGAINST this proposal.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the ownership of our common stock as of March 31, 2011 by (a) all persons known by us to own beneficially more than 5% of our common stock, (b) each of our directors and named executive officers, and (c) all of our directors, named executive officers and other executive officers as a group. We know of no agreements among our stockholders which relate to voting or investment power over our common stock or any arrangement the operation of which may at a subsequent date result in a change of control of the company.
| Name and address of beneficial owner(1) |
Number of shares beneficially owned |
Percentage of shares beneficially owned |
||||||
| TimesSquare Capital Management, LLC(2) |
7,010,669 | 7.3 | % | |||||
| 1177 Avenue of the Americas, 39th Floor |
||||||||
| New York, NY 10036 |
||||||||
| BlackRock, Inc.(3) |
6,782,480 | 7.0 | % | |||||
| 40 East 52nd Street |
||||||||
| New York, NY 10022 |
||||||||
| The Vanguard Group, Inc.(4) |
5,033,331 | 5.2 | % | |||||
| 100 Vanguard Blvd. |
||||||||
| Malvern, PA 19355 |
||||||||
| Kent J. Thiry(5) |
1,531,710 | 1.6 | % | |||||
| Dennis L. Kogod(6) |
226,042 | * | ||||||
| Luis A. Borgen(7) |
2,500 | * | ||||||
| Javier J. Rodriguez(8) |
377,914 | * | ||||||
| David T. Shapiro(9) |
14,906 | * | ||||||
| Richard K. Whitney(10) |
266,603 | * | ||||||
| Pamela M. Arway(11) |
5,731 | * | ||||||
| Charles G. Berg(12) |
31,968 | * | ||||||
| Willard W. Brittain, Jr.(13) |
6,454 | * | ||||||
| Carol Anthony (“John”) Davidson(14) |
472 | * | ||||||
| Paul J. Diaz(15) |
26,407 | * | ||||||
| Peter T. Grauer(16) |
2,676 | * | ||||||
| John M. Nehra(17) |
108,756 | * | ||||||
| William L. Roper(18) |
45,892 | * | ||||||
| Roger J. Valine(19) |
47,859 | * | ||||||
| All directors, named executive officers and other executive officers as a group (21 persons)(20) |
2,860,245 | 2.9 | % | |||||
| * | Amount represents less than 1% of our common stock. |
| (1) | Unless otherwise set forth in the following table, the address of each beneficial owner is 1551 Wewatta Street, 6th Floor, Denver, Colorado, 80202. |
| (2) | Based on information contained in a Schedule 13G/A filed with the SEC on February 9, 2011, these securities are owned by investment advisory clients of TimesSquare Capital Management, LLC (“Times Square”). In its role as investment advisor, Times Square has sole voting power with respect to 5,007,969 shares and sole dispositive power with respect to 7,010,669 shares. |
| (3) | Based upon information contained in a Schedule 13G/A filed with the SEC on February 4, 2011, BlackRock, Inc. may be deemed to be the beneficial owner of 6,782,480 shares with sole power to vote and sole power to dispose of all 6,782,480 shares as a result of being a parent holding company or control person. |
| (4) | Based upon information contained in a Schedule 13G filed with the SEC on February 10, 2011, The Vanguard Group, Inc., an investment adviser, has sole voting power with respect to 126,243 shares, sole dispositive power with respect to 4,907,088 shares and shared dispositive power with respect to 126,243 shares. |
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| (5) | Includes 117,127 shares held in a family trust and 1,395,833 shares issuable upon the exercise of SSARs and 18,750 RSUs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011. |
| (6) | Includes 216,667 shares issuable upon the exercise of SSARs and 9,375 RSUs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011. |
| (7) | Includes 2,500 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011. |
| (8) | Includes 346,249 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011. |
| (9) | Includes 14,416 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011. |
| (10) | Mr. Whitney stepped down from his position as chief financial officer in May 2010 and was no longer an executive officer of the company on March 31, 2011. Includes 262,416 shares issuable upon the exercise of SSARs and 4,187 RSUs which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011. |
| (11) | Includes 3,750 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011, and 169 vested but unissued restricted stock units. |
| (12) | Includes 3,750 and 24,000 shares issuable upon the exercise of options and SSARs, respectively, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011, and 169 vested but unissued restricted stock units. |
| (13) | Includes 3,750 shares issuable upon the exercise of options, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011, and 169 vested but unissued restricted stock units. |
| (14) | Includes 49 vested but unissued restricted stock units. |
| (15) | Includes 11,250 and 12,000 shares issuable upon the exercise of options and SSARs, respectively, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011, and 169 vested but unissued restricted stock units. |
| (16) | Includes 1,811 vested but unissued restricted stock units. |
| (17) | Includes 34,945 shares held in a family trust and 36,000 and 36,000 shares issuable upon the exercise of options and SSARs, respectively, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011, and 1,811 vested but unissued restricted stock units. |
| (18) | Includes 36,000 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011, and 1,811 vested but unissued restricted stock units. |
| (19) | Includes 18,739 and 24,000 shares issuable upon the exercise of options and SSARs, respectively, which are exercisable as of, or will become exercisable within 60 days after March 31, 2011, and 293 vested but unissued restricted stock units. |
| (20) | Includes 73,489 and 2,520,979 shares issuable upon the exercise of options and SSARs, respectively, which are exercisable as of, or will become exercisable within 60 days after, March 31, 2011, and 6,451 vested but unissued restricted stock units. |
Information Concerning Our Executive Officers
| Name |
Age | Position | ||||
| Kent J. Thiry |
55 | Chairman of the Board of Directors and Chief Executive Officer | ||||
| Luis A. Borgen |
41 | Chief Financial Officer | ||||
| James K. Hilger |
49 | Chief Accounting Officer | ||||
| Dennis L. Kogod |
51 | Chief Operating Officer | ||||
| Laura A. Mildenberger |
52 | Chief People Officer | ||||
| Allen R. Nissenson, MD, FACP |
64 | Chief Medical Officer | ||||
| Kim M. Rivera |
42 | Vice President, General Counsel and Secretary | ||||
| Javier J. Rodriguez |
40 | Senior Vice President | ||||
| David T. Shapiro |
41 | Chief Compliance Officer and Senior Vice President | ||||
| Thomas O. Usilton, Jr. |
59 | Senior Vice President and Chief Development Officer | ||||
| LeAnne M. Zumwalt |
52 | Vice President | ||||
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Our executive officers are elected by, and serve at the discretion of, the Board of Directors. Set forth below is a brief description of the business experience of all executive officers other than Mr. Thiry, who is also a director and whose business experience is set forth above in the section of this Proxy Statement entitled “Information Concerning Members of the Board of Directors Standing for Reelection.”
Luis A. Borgen became our chief financial officer in May 2010 and prior to that, he served as our senior vice president beginning in March 2010. From February 2009 until joining us, Mr. Borgen served as senior vice president, finance for the U.S. retail division of Staples, an office products company, where he played a role in strategy development and business planning efforts. From June 2005 until January 2009, Mr. Borgen served as the vice president, finance for the U.S. retail division of Staples. From July 2002 to June 2005, Mr. Borgen served as vice president, corporate financial planning and analysis of Staples where he led the global business planning efforts. From February 1999 to June 2002, Mr. Borgen served in the corporate treasury department of Staples, including as vice president and assistant treasurer.
James K. Hilger became our chief accounting officer in April 2010, and has served as our vice president and controller since May 2006. Prior to that, he served as our vice president, finance beginning in September 2005. Mr. Hilger was our acting chief financial officer from November 2007 through February 2008. From September 2003 until joining us, Mr. Hilger served as vice president, finance and administration and chief financial officer of Pyramid Breweries, a brewer of specialty beverages. From December 1998 to July 2003, Mr. Hilger served in positions as chief executive officer and chief financial officer of WorldCatch, Inc., a seafood industry company. From 1987 until joining WorldCatch, Inc., Mr. Hilger held a variety of senior financial positions in the food industry. Mr. Hilger began his career in public accounting with Ernst & Whinney.
Dennis L. Kogod became our chief operating officer in January 2009 and prior to that, he served as our president-west beginning in October 2005. From January 2004 until joining us, Mr. Kogod served as president and chief operating officer-west of Gambro Healthcare, Inc., which we acquired in October 2005. From July 2000 to January 2004, Mr. Kogod served as president, west division of Gambro Healthcare, Inc. From June 1999 to July 2000, Mr. Kogod was president of Teleflex Medical Group, a medical original equipment manufacturer of medical delivery systems. From January 1996 to June 1999, Mr. Kogod was corporate vice president of Teleflex Surgical Group, a surgical device and service organization. Mr. Kogod served on the board of directors of Arbios Systems, Inc., a medical device and cell-based therapy company.
Laura A. Mildenberger became our chief people officer in July 2008, having joined us in October 2001 as vice president of operations. Prior to joining us, Ms. Mildenberger served as vice president of operations for the western U.S. for Matrix Rehabilitation, a physical therapy outpatient company, from March 2000 to October 2001. From 1993 to 2000, Ms. Mildenberger served as a general manager for NovaCare Outpatient Rehabilitation, a provider of physical and occupation therapy services. From 1988 to 1993, Ms. Mildenberger was the executive vice president/principal of Worker Rehabilitation Services, a multi-site physical rehabilitation company. Ms. Mildenberger began her career as an occupational therapist at the Mayo Clinic.
Allen R. Nissenson, MD, FACP, became our chief medical officer in August 2008. He is an emeritus professor of medicine at the David Geffen School of Medicine at UCLA, where he served as director of the dialysis program from 1977 to 2008 and associate dean from 2005 to 2008. Dr. Nissenson was the president of the Southern California End-Stage Renal Disease Network from 2005 to 2007. Dr. Nissenson was the president of the National Anemia Action Council from 2001 to 2007. Dr. Nissenson was the president of the Renal Physicians Association from 1999 to 2001.
Kim M. Rivera became our vice president, general counsel and secretary in January 2010. From February 2006 to November 2009, Ms. Rivera served as vice president and associate general counsel of The Clorox Company, a consumer products company. From August 2004 to February 2006, Ms. Rivera served as vice president law and chief litigation counsel to Rockwell Automation, Inc., a provider of industrial automation control and information solutions. From November 1999 to August 2004, she served as general counsel to Rockwell’s Automation Control and Information Group. Prior to joining Rockwell, Ms. Rivera was an attorney at the law firm of Jones Day.
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Javier J. Rodriguez became our senior vice president in 2006. From 2004 to 2006, Mr. Rodriguez served as our vice president of operations. From 2000 to 2003, Mr. Rodriguez served as our vice president of payor contracting. From 1998 to 2000, Mr. Rodriguez served with us in various other director positions. Prior to joining DaVita, Mr. Rodriguez worked for Baxter Healthcare Corporation in Finance from 1995 to 1996. He also served as Director of Operations for CBS Marketing Inc. in Mexico City.
David T. Shapiro became our chief compliance officer and senior vice president in October 2008, having joined us in March 2008 as the deputy chief compliance officer. Prior to joining us, Mr. Shapiro was counsel at the Pepper Hamilton law firm from March 2007 through February 2008, during which time he represented health care clients in government investigations and compliance issues. From October 2003 through March 2007, Mr. Shapiro served as a trial attorney with the Civil Frauds Section of the United States Department of Justice. From June 1999 through October 2003, Mr. Shapiro was an attorney with the law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in Washington, DC.
Thomas O. Usilton, Jr. became our chief development officer in July 2010, and has served as our senior vice president since April 2006. Prior to that, he served as our group vice president beginning in August 2004. From February 2000 until joining us, Mr. Usilton served as president and chief executive officer of Digital Insurance Inc., a health and welfare brokerage and services company. From 1995 until founding Digital Insurance Inc. in 2000, Mr. Usilton was senior vice president of Vivra Specialty Partners, a national physicians practice management company. Prior to joining Vivra Specialty Partners, Mr. Usilton served as president and chief executive officer of Premier Asthma and Allergy, a disease management company specializing in asthma management. From 1986 to 1987, Mr. Usilton was general manager and executive vice president of CIGNA Corporation. Prior to his employment with CIGNA Corporation, from 1978 to 1985, he served as executive vice president for Health America Inc., a national leader in the Health Maintenance Organization medical insurance field.
LeAnne M. Zumwalt became our vice president in January 2000 and currently oversees our public policy—regulatory efforts and our purchasing department. Ms. Zumwalt has served in various capacities with us and served as our vice president investor relations from January 2000 through October 2009. From 1997 to 1999, Ms. Zumwalt served as chief financial officer of Vivra Specialty Partners, a privately held health care service and technology firm. From 1991 to 1997, Ms. Zumwalt held various executive positions at Vivra Incorporated, a publicly held provider of dialysis services. Prior to joining Vivra Incorporated, Ms. Zumwalt was a senior manager at Ernst & Young, LLP. Ms. Zumwalt serves on the board of directors of The Advisory Board Company.
None of the executive officers has any family relationship with any other executive officer or with any of our directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires “insiders,” including our executive officers, directors and beneficial owners of more than 10% of our common stock, to file reports of ownership and changes in ownership of our common stock with the SEC and the NYSE, and to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received by us, or written representations from reporting persons, we believe that our insiders complied with all applicable Section 16(a) filing requirements during 2010, except that a Statement of Changes in Beneficial Ownership of Securities on Form 4 for each of Mr. Thiry, Mr. Grauer, Mr. Hilger, Mr. Kogod, Ms. Mildenberger, Mr. Rodriguez, Mr. Shapiro, Mr. Usilton, Mr. Whitney and Ms. Zumwalt was filed late.
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EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about our common stock that may be issued upon the exercise of SSARs, stock options, restricted stock units and other rights under all of our existing equity compensation plans as of December 31, 2010, including our omnibus 2002 Equity Compensation Plan and our Employee Stock Purchase Plan, and the terminated 1999 Non-Executive Officer and Non-Director Equity Compensation Plan. The material terms of these plans are described in Note 17 to the consolidated financial statements, which are part of our Annual Report on Form 10-K for the year ended December 31, 2010. The 1999 Non-Executive Officer and Non-Director Equity Compensation Plan was not required to be approved by our stockholders.
| Plan category |
Number of shares to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of shares remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
Total of shares reflected in columns (a) and (c) |
||||||||||||
| (a) | (b) | (c) | (d) | |||||||||||||
| Equity compensation plans approved by stockholders |
11,597,916 | $ | 49.74 | 11,787,674 | 23,385,590 | |||||||||||
| Equity compensation plans not requiring stockholder approval |
1,000 | $ | 54.58 | — | 1,000 | |||||||||||
| Total |
11,598,916 | $ | 49.74 | 11,787,674 | 23,386,590 | |||||||||||
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Compensation Discussion and Analysis
This Compensation Discussion and Analysis (the “CD&A”) describes our executive compensation program for our named executive officers. As of December 31, 2010, our named executive officers consisted of Kent J. Thiry, our chairman of the Board of Directors and chief executive officer, Dennis L. Kogod, our chief operating officer, Luis A. Borgen, our chief financial officer, Javier J. Rodriguez, our senior vice president, David T. Shapiro, our chief compliance officer and senior vice president, and Richard K. Whitney, our former chief financial officer. Mr. Whitney stepped down from the position of chief financial officer effective May 4, 2010.
DaVita is a leading provider of kidney dialysis services in the United States through a network of approximately 1,612 outpatient dialysis centers and approximately 750 hospitals, serving approximately 125,000 patients in 42 states. In 2010, our overall network of dialysis centers increased by 82 centers primarily as a result of opening new centers and acquisitions and the overall number of patients that we serve increased by approximately 6.0%. We believe our attention to these three stakeholders—our patients, our business partners, and our employees—represents the major driver of our long-term performance, although we are subject to the impact of external factors such as government reimbursement policies and physician practice patterns.
We design our compensation programs for executive officers to attract and retain outstanding leaders who possess the skills and talent necessary to achieve our business goals and objectives. Ultimately, our objective is to continue to create long-term stockholder value by generating strong overall revenue growth, market share increases, improvements in cost per treatment, operating income growth, operating margin growth, increases in earnings per share and improvement in our debt to equity ratio. In order to achieve this objective, we have established our compensation programs so they: (i) reward strong company performance; (ii) align our executives’ interests with our stockholders’ interests and (iii) are competitive within the health care services, diagnostics and solutions market so that we can attract and retain outstanding executives.
When establishing the compensation for our named executive officers for 2010, the Compensation Committee gave significant weight to our sustained record of strong operating performance, our improvement in strategic positioning and our continued strong clinical performance, particularly in light of general economic volatility and significant industry regulatory challenges and uncertainty.
Our overall financial, operating and TSR performance was strong for 2010 and we believe that the named executive officers were instrumental in achieving these results. As compared to 2009:
| • | we experienced a one-year TSR of 18.30%, compared to the median one-year TSR of 12.64% in our Global Industry Classification Standard group and the median one-year TSR of 11.94% in our comparator peer group; |
| • | we returned approximately $618 million to our stockholders through our stock buy-back program; |
| • | we experienced strong operating cash flow of $840 million, or an increase of approximately 26%; |
| • | our consolidated revenue growth was approximately 6.0%; |
| • | we experienced an increase of approximately 6.0% in the overall number of treatments that we provided; and |
| • | our consolidated operating income growth was approximately 6.0%. |
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In addition, we believe our clinical outcomes compare favorably with other dialysis providers in the United States and generally exceed the dialysis outcome quality indicators of the National Kidney Foundation. The Compensation Committee balanced its evaluation of our performance in 2010 by also considering the potential impact on DaVita and our industry of healthcare reform and other significant healthcare regulatory changes, including changes to government reimbursement policies. When establishing 2010 compensation for our named executive officers, the Compensation Committee considered these and other factors in the context of individual named executive officer performance.
Our compensation programs for our named executive officers emphasize compensation based on performance and are designed to align our named executive officers’ interests with those of our stockholders and to permit individuals who have performed well in creating significant long-term value for the company and its stockholders to share in the value generated. To this end, our compensation programs emphasize variable compensation in the form of cash and stock-based awards over fixed compensation. In light of this emphasis, the Compensation Committee determined to limit increases to fixed compensation amounts in 2010 such that the base salaries of our named executive officers, other than Mr. Kogod, were retained at 2009 levels (or, in the case of Mr. Whitney, reduced from 2009 levels). The following pie charts illustrate the allocation of the total direct compensation that the named executive officers earned for 2010 (not including Mr. Whitney, as he is not currently an executive officer of the company):
The Compensation Committee believes that the above compensation structure struck an appropriate balance by promoting long-term stockholder value without motivating or rewarding excessive risk-taking.
The following graph illustrates how cash performance bonuses over the past three years varied with changes in our operating income (not including Mr. Whitney, as he is not currently an executive officer of the company):
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To further illustrate our emphasis on compensation based on performance and our commitment to align the interests of our named executive officers with those of our stockholders, the following graph illustrates how our chief executive officer’s compensation over the past three years varied with changes in our TSR for the same period (indexed to the commencement year of the graph, i.e., 2008):
Stockholder Interest Alignment
We believe that our equity awards further serve to align the interests of our executives with the long-term interests of our stockholders by providing our executives with an opportunity to benefit from the appreciation of our stock price, by providing for vesting over a period of time and by requiring executives to accumulate meaningful ownership through our stock ownership policy. Therefore, a primary objective of our executive compensation programs is to provide a significant portion of compensation in the form of stock-based awards. For 2010, equity awards ranged from 23% to 73% of our named executive officers’ compensation. Further, the equity awards that are granted for 2010 performance vest commencing on the third anniversary of the date of grant, such that the awards vest 50% on the third anniversary of the date of grant and the remaining 50% on the fourth anniversary of the date of grant. The vesting schedule was determined in order to assist in the long-term retention of such named executive officers and further align the interests of our executives with the long-term interests of our stockholders. Stock-based compensation creates an incentive for the named executive officer to contribute to the overall success of the company and to take actions that result in the creation of long-term stockholder value.
We evaluate the overall competitiveness of our executives’ total direct compensation each year in order to assist in executive retention. The Compensation Committee commissions Compensia, an independent national compensation consulting firm, to perform a comprehensive market analysis of our executive compensation programs and pay levels. See “Role of Independent Compensation Consultant” beginning on page 55 of this Proxy Statement and “Corporate Governance—Information Regarding the Board of Directors and its Committees—Compensation Committee” beginning on page 11 of this Proxy Statement for detailed discussion of the Compensia services provided in 2010. In 2011, Compensia provided the Compensation Committee with an analysis of comparative market data on the cash, stock-based compensation and total compensation for senior executives at a group of comparable companies within our industry. In addition to published executive compensation survey data, the Compensation Committee reviewed the compensation practices of our comparator
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peer group, consisting of the following companies, which are all in the health care services, diagnostics and solutions markets:
| Company |
1-Year TSR | Market Capitalization (in millions)(1) |
Net Income for Last 4 Quarters (in millions)(2) |
Revenue for Last 4 Quarters (in millions)(2) |
||||||||||||
| Community Health Systems, Inc. |
4.97 | % | $ | 3,790.8 | $ | 280.0 | $ | 12,986.5 | ||||||||
| Express Scripts, Inc. |
25.09 | % | $ | 29,700.1 | $ | 1,181.2 | $ | 45,057.2 | ||||||||
| HCA Holdings, Inc. |
N/A | $ | N/A | $ | 1,375.0 | $ | 30,052.0 | |||||||||
| Health Management Associates, Inc. |
31.22 | % | $ | 2,517.7 | $ | 150.1 | $ | 5,115.0 | ||||||||
| HealthSouth Corporation |
10.34 | % | $ | 2,259.8 | $ | 899.0 | $ | 1,999.3 | ||||||||
| Kindred Healthcare, Inc. |
-0.49 | % | $ | 984.2 | $ | 56.5 | $ | 4,359.7 | ||||||||
| Laboratory Corporation of America Holdings |
17.48 | % | $ | 9,166.2 | $ | 558.2 | $ | 5,003.9 | ||||||||
| Lincare Holdings Inc. |
10.00 | % | $ | 2,824.4 | $ | 181.6 | $ | 1,669.2 | ||||||||
| Magellan Health Services, Inc. |
16.08 | % | $ | 1,586.1 | $ | 138.7 | $ | 2,969.2 | ||||||||
| Medco Health Solutions, Inc. |
-4.13 | % | $ | 24,930.7 | $ | 1,427.3 | $ | 65,968.3 | ||||||||
| MEDNAX Services, Inc. |
11.94 | % | $ | 3,115.6 | $ | 202.7 | $ | 1,401.6 | ||||||||
| Omnicare, Inc. |
9.64 | % | $ | 3,346.4 | $ | (106.1 | ) | $ | 6,146.2 | |||||||
| Quest Diagnostics Incorporated |
-9.95 | % | $ | 9,713.6 | $ | 720.9 | $ | 7,368.9 | ||||||||
| Tenet Healthcare, Inc. |
24.12 | % | $ | 3,489.1 | $ | 1,119.0 | $ | 9,205.0 | ||||||||
| Universal Health Services, Inc. |
43.02 | % | $ | 4,447.8 | $ | 230.2 | $ | 5,568.2 | ||||||||
| WebMD Health Corp. |
32.66 | % | $ | 3,387.6 | $ | 54.1 | $ | 534.5 | ||||||||
| Summary Statistics: |
||||||||||||||||
|
75th Percentile |
25.09 | % | $ | 6,807.0 | $ | 954.0 | $ | 10,150.4 | ||||||||
|
50th Percentile |
11.94 | % | $ | 3,387.6 | $ | 255.1 | $ | 5,341.6 | ||||||||
| DaVita |
18.30 | % | $ | 7,619.5 | $ | 405.7 | $ | 6,447.4 | ||||||||
| DaVita Percentage Rank |
65 | % | 76% | 56% | 62% | |||||||||||
| (1) | Data as of February 28, 2011. |
| (2) | Data generally through December 31, 2010. |
Our comparator peer group includes a diverse representation in various health care services, diagnostics and solutions markets because we compete in this broad industry group for executive talent. Our comparator peer companies are comparable to us in their size, as measured by market capitalization, net income and revenues. Compensation paid by this comparator peer group is representative of the compensation we believe is required to attract, retain and motivate our executive talent. The Compensation Committee, in conjunction with Compensia, reviews the makeup of this group annually and makes adjustments to the composition of the group as it deems appropriate. The majority of the companies in our comparator peer group have remained the same over the years. The group therefore provides a fairly consistent measure for comparing executive compensation. In addition to the 14 comparator peer group companies that were used in Compensia’s 2010 analysis, HCA Holdings and Tenet Healthcare were added to provide further balance to DaVita’s relative positioning among the peer group companies.
The Compensation Committee considered Compensia’s analysis of the compensation of executives serving in similar positions at our comparable companies to obtain a general understanding of current compensation practices in our industry. The analysis provided by Compensia was used to provide context for the compensation decisions made in 2011 for 2010 performance, but the Compensation Committee’s decisions were not directly related to or otherwise based upon the comparative data. Instead, the Compensation Committee used this comparative data as one of many factors considered to set the compensation for our named executive officers. The Compensation Committee also used the analysis as a tool to assess how well the company is implementing its core compensation objective of awarding compensation weighted heavily in favor of variable compensation tied to performance. The emphasis on stock-based awards as compared to cash compensation was reflected in the results of Compensia’s analysis which showed that the percentage of overall average equity awards as compared to overall average cash awards for our named executive officers in 2010 was higher than the average for comparable companies.
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In its 2011 report, Compensia found that the total direct compensation for our named executive officers clusters above 75% of our 16-company comparator peer group. In approving executive compensation, the Compensation Committee considered that DaVita’s market capitalization is at the 76th percentile of our comparator peer group and DaVita’s size, in terms of net income and revenue, is greater than the median of our comparator peer group. Further, the Compensation Committee considered that DaVita’s TSR was well above the median TSR against its industry peers (i.e., companies in the same Global Industry Classification Standards group as DaVita) and above the 60th percentile for one-year TSR and three-year compound average annual TSR against the comparator peer group companies. In addition, the Compensation Committee considered that DaVita’s ten-year compound average annual TSR is above the 90th percentile against the comparator peer group companies. DaVita also has a record of sustained performance against the comparator peer group companies, posting above the 60th percentile for three-year operating margin, net margin and revenue growth against the comparator peer group companies and above the 60th percentile for five-year and above the 75th percentile for ten-year operating margin, net margin and revenue growth against the comparator peer group companies, notwithstanding the challenging environment in which the company operates. The Compensation Committee also considers each named executive officer’s roles and responsibilities within the company, individual performance, company performance and internal pay equity in addition to the results of the competitive pay analysis.
Good Governance and Best Practices
Pursuant to our desire to maintain fair and responsible compensation programs while serving our retention objectives, we have entered into employment agreements with each of our named executive officers. Each agreement is individually negotiated and the terms vary; however, the employment agreements reflect current compensation practices and trends by, among other things: (i) not providing for any single trigger payments upon a change in control event of the company and (ii) limiting severance payments to not more than three times base salary and bonus. Further, in 2011, the Compensation Committee determined that the company will no longer enter into any new or materially amended agreements with its executives that include any excise tax gross-up provisions with respect to payments contingent upon a change in control.
In addition, our equity incentive plans prohibit repricing or replacing underwater stock options or stock appreciation rights without prior stockholder approval and our stock-based awards are designed so that in order to vest and earn the full benefit of the award the named executive officers must remain employed for a multi-year period. This reinforces a culture in which the company’s long-term success takes precedence over volatile and unsustainable short-term results.
Further, approximately every other year, the Compensation Committee engages an outside independent consultant to conduct an in-depth analysis of our chief executive officer’s performance as a manager during the year. The most recent assessment took place in 2010. The results of this assessment are reviewed by the Board of Directors and the Compensation Committee and is one of the many factors considered when making compensation decisions.
In 2010, the Board of Directors adopted a clawback policy that permits the Board of Directors to recover bonuses, incentive and equity-based compensation from executive officers and members of the Board of Directors whose fraud or intentional misconduct was a significant contributing factor to the company having to restate all or a portion of its financial statements. See “Executive Compensation Process & Governance—Policy Regarding Clawback of Bonuses and Incentive Compensation” for additional details.
We have a stock ownership policy that applies to all of our named executive officers to strengthen the alignment of our named executive officers’ and stockholders’ interests. The purpose of the policy is to ensure that our executive officers and other members of our senior management team accumulate a meaningful ownership stake in the company over time by retaining a specified financial interest in our common stock. As of
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December 31, 2010, all of the named executive officers are meeting our stock ownership policy and guidelines. See “Management Share Ownership Policy” beginning on page 55 of this Proxy Statement for more information regarding our stock ownership guidelines.
We believe it is in the best interests of our stockholders to attract and retain talented leaders. In order to attract and retain executives who are not only outstanding leaders but who also embody our mission and values, we strive to provide compensation that is reasonable and provides the best value for our stockholders but that is also sufficient to achieve our recruitment and retention objectives. When recruiting new executives, the Compensation Committee and our chief executive officer evaluate the comparative compensation of executives within the company with similar levels of responsibility, the prior experience of the executive and expected contributions to company performance. Thereafter, each executive’s compensation is reviewed annually by the Compensation Committee and chief executive officer, and considered for adjustment based on individual performance and other factors.
When evaluating performance, we base compensation decisions on an assessment of company and individual performance over the year, taking individual accomplishments into consideration in light of the totality of circumstances together with individual potential to contribute to the company’s future growth. We believe that all of our named executive officers have the ability to influence overall company policies and performance and, accordingly, should be accountable for company-wide performance as well as the areas over which they have direct influence. The differences in total annual compensation levels among the named executive officers are based on their individual roles and responsibilities within the company and their relative individual performance. The Compensation Committee uses its judgment in awarding compensation to our named executive officers in accordance with the overall objectives of the company’s compensation programs.
The Compensation Committee takes into consideration a number of factors when determining the elements and amounts of compensation awarded to our named executive officers, including individual performance, overall financial and non-financial performance of the company for the year, individual skill sets and experience relative to industry peers, readiness for promotion to a higher level, past and expected future performance, the importance and difficulty of achieving future company and individual objectives, the value of each executive’s outstanding equity awards, aggregate historical compensation, levels of responsibility and performance relative to other executives within the company, importance to the company and difficulty of replacement. The Compensation Committee also gives significant weight to our clinical performance and quality of patient care. Accordingly, company-wide patient clinical outcomes and improvements in quality of patient care, and each named executive officer’s contributions in those areas, can have a significant impact on named executive officer compensation.
The company-wide factors taken into consideration by the Compensation Committee include, but are not limited to, the following:
| • | overall revenue growth, which includes increases in our dialysis revenue per treatment and in our treatment volume, market share increases, improvements in cost per treatment, operating income growth, operating margin growth, increases in earnings per share and improvement in the company’s debt to equity ratio, |
| • | healthcare regulatory compliance initiatives, |
| • | improved strategic positioning, |
| • | improved positioning of the company for continued growth and diversification, |
| • | improved organizational capabilities, |
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| • | patient growth, |
| • | relationships with private payors, |
| • | improved clinical outcomes, vaccination rates and fistula utilization, |
| • | relationships with medical directors, |
| • | selection and implementation of improved financial, operating and clinical information systems, |
| • | management performance in attracting and retaining high-performing employees throughout our organization and succession planning, |
| • | implementation of successful public policy efforts, |
| • | good corporate citizenship, and |
| • | advancement of strategic business initiatives supporting our mission to be the provider, partner and employer of choice. |
The Compensation Committee considers the foregoing items subjectively. There is no formal weighting of the individual elements considered and no particular elements are required to be considered with respect to a given individual or in any particular year.
When determining annual compensation for our named executive officers, other than for our chief executive officer, the Compensation Committee works closely with our chief executive officer to review each individual’s performance for the year and determine such named executive officer’s compensation. Shortly following the end of each year, our chief executive officer provides his assessment of each named executive officer’s performance during the year based on his personal experience with the individual, the named executive officer’s achievement of success in areas determined to be significant to the company, and any changes in responsibility levels. The Compensation Committee also considers performance discussions that have taken place at the Board of Directors and Compensation Committee level regarding the named executive officers, retention objectives and the future growth potential of the individual executive. Our chief executive officer recommends to the Compensation Committee the amounts of cash and stock-based compensation for each of the named executive officers. The Compensation Committee considers the recommendations made by the chief executive officer regarding the other named executive officers but retains the discretion to deviate from those recommendations. Neither the chief executive officer nor other members of management provide a recommendation to the Compensation Committee with regard to the chief executive officer’s compensation.
The Compensation Committee evaluates our chief executive officer’s performance at the same time as it sets the compensation of the other named executive officers. When evaluating the performance of our chief executive officer and making decisions about his compensation, the Compensation Committee considers overall company performance as part of the assessment of our chief executive officer’s performance but does not rely on the achievement of specific objectives to determine his compensation. The Compensation Committee also considers a self-assessment prepared by our chief executive officer. As part of this self-assessment, our chief executive officer reviews with the Compensation Committee the overall annual management objectives of the company and his participation in the attainment or level of responsibility for the shortfall of such objectives. Approximately every other year, the Compensation Committee engages an outside independent consultant to conduct an in-depth analysis of our chief executive officer’s performance as a manager during the year. The most recent assessment took place in 2010. This evaluation involves a rigorous assessment of our chief executive officer’s performance by members of the senior management team. The results of this assessment are reviewed by the Board of Directors and the Compensation Committee and is one of the many factors considered when making compensation decisions. The compensation package for our chief executive officer is approved by the Compensation Committee, subject to ratification by the independent members of the Board of Directors.
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Base salary is included in the compensation of our named executive officers because we believe it is appropriate that some portion of compensation be provided in a form that is liquid and assured. Base salaries are initially established at levels necessary to enable us to attract and retain highly qualified executives with reference to comparative pay within the company for executives with similar levels of responsibility, prior experience of the executive and expected contributions to company performance.
We do not guarantee salary adjustments on a yearly basis. During March of each year, the Compensation Committee considers adjustments to salary as part of the overall compensation assessment for our named executive officers. Our chief executive officer typically provides the Compensation Committee with his recommendation regarding merit-based increases for each named executive officer other than himself. The chief executive officer’s base salary is determined by the Compensation Committee with input from Compensia and Compensia’s analysis of CEO compensation of our comparator peer group.
In accordance with our emphasis on performance-based compensation and the Compensation Committee’s decision to limit increases to fixed compensation amounts in 2010, the Compensation Committee retained the base salary of Messrs. Thiry, Rodriguez and Shapiro at 2009 levels. The Compensation Committee increased Mr. Kogod’s base salary for 2010 pursuant to the Compensation Committee’s review of his performance in the previous year and consideration of the salary level of Mr. Kogod’s predecessor and the comparative market data provided by Compensia. Mr. Borgen commenced employment with us on March 22, 2010. Mr. Whitney stepped down from his position as our chief financial officer, effective May 4, 2010. The base salaries for 2009 and 2010 are shown in the table below.
| Name |
2009 Base Salary |
2010 Base Salary |
||||||
| Kent J. Thiry |
$ | 1,050,000 | $ | 1,050,000 | ||||
| Dennis L. Kogod |
$ | 650,000 | $ | 800,000 | ||||
| Luis A. Borgen |
N/A | $ | 450,000 | |||||
| Javier J. Rodriguez |
$ | 550,000 | $ | 550,000 | ||||
| David T. Shapiro |
$ | 350,000 | $ | 350,000 | ||||
| Richard K. Whitney |
$ | 500,000 | $ | 400,000 | ||||
For 2011, the Compensation Committee retained the base salary for Messrs. Thiry, Kogod, Borgen, Rodriguez and Whitney at 2010 levels. The Compensation Committee increased Mr. Shapiro’s base salary for 2011 to $360,000, pursuant to the Compensation Committee’s review and consideration of his performance in 2010 and the comparative market data provided by Compensia.
Annual Performance-Based Cash Compensation
Our 2010 annual performance-based cash compensation was paid to our named executive officers under our performance-based Executive Incentive Plan, other than Mr. Shapiro and Mr. Whitney, who stepped down from his position as our chief financial officer effective May 4, 2010. We believe that cash bonuses based on performance provide an incentive to consistently excel on an individual level as well as to contribute to the overall success of the company.
Executive Incentive Plan
We maintain an Executive Incentive Plan (“EIP”), in which our chief executive officer and other executives selected by the Compensation Committee may participate. For 2010, the Compensation Committee identified all of the named executive officers as eligible participants in the EIP, other than Mr. Shapiro (whose subject compensation was expected to be below $1 million for 2010) and Mr. Whitney (who stepped down from his position as our chief financial officer). The EIP is structured to satisfy the requirements of Section 162(m) of
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the Internal Revenue Code as described below, and individuals expected to receive compensation in excess of certain levels specified by Section 162(m) are selected to participate. When identifying potential participants for the plan, the Compensation Committee considers the projected total compensation for the eligible executive and the likelihood that such compensation will exceed $1 million for any one calendar year. The Compensation Committee has historically established an operating income target as the performance measure for participants in the EIP. The Compensation Committee uses operating income as the relevant performance measure because it believes that operating income provides the best measurement of our operating results, is a key measure of the financial strength and stability of our company, and can also be consistently measured by us and our stockholders against the operating results of other companies in our industry. From time to time, the Compensation Committee may establish different performance measures for individual participants in the EIP.
For 2010, the Compensation Committee established a fiscal year operating income target of not less than $826 million as the performance goal. When the Compensation Committee was determining the operating income target for 2010, it considered the uncertainties of the time period, including, among others, those relating to the healthcare reform and other significant healthcare regulatory changes, changes to government reimbursement policies, reduction in government payment rates and changes to the structure of payments under the Medicare ESRD program or other government-based programs, including, for example, the implementation of a bundled payment rate system, which will lower reimbursement for services we provide to Medicare patients. The Compensation Committee considered the company’s estimates of 2010 budgeted operating income, as approved by the Board of Directors, when this target was established and attempted to establish a performance target at a level that can be characterized as “stretch but attainable,” meaning that based on historical performance and then-current economic and regulatory uncertainty, attainment of the performance target is uncertain but may be reasonably anticipated to be achieved. For 2010, the Compensation Committee established a maximum award amount of up to $10,000,000 for each of Messrs. Thiry and Kogod and a maximum award amount of up to $5,000,000 for each of Messrs. Rodriguez and Borgen. The Compensation Committee has the ability to apply only negative discretion in determining incentive compensation; and, historically, the Compensation Committee has applied such negative discretion in determining incentive compensation, resulting in cash-based incentive awards under the EIP over the last five years never greater than 25% of the maximum award amount. The Compensation Committee did not establish a target award amount for the eligible named executive officers under the EIP.
The company achieved operating income of $997 million for 2010, which exceeded the 2010 target performance goal. When determining the award amounts, the Compensation Committee considered the achievement of the target performance goal, as well as overall company and individual performance. With regard to the overall company performance, the Compensation Committee considered that, as compared to 2009, (i) we experienced a one-year TSR of 18.30%, compared to the median one-year TSR of 12.64% in our Global Industry Classification Standard group and the median one-year TSR of 11.94% in our comparator peer group; (ii) we experienced strong operating cash flow of $840 million, or an increase of approximately 26%; (iii) our consolidated revenue grew by approximately 6.0%; (iv) we experienced an increase of approximately 6.0% in the overall number of treatments that we provided and (v) our consolidated operating income grew by approximately 6.0%.
The Compensation Committee also considered that our three-year compound average annual TSR was 7.24%, compared to the median three-year compound average annual TSR of 5.19% and above the 60th percentile of our comparator peer group; our five-year compound average annual TSR was 6.53%, compared to the median five-year compound average annual TSR of 1.68% and at the 55th percentile of our comparator peer group; and our ten-year compound average annual TSR was 19.79%, compared to the median ten-year compound average annual TSR of 4.78% and above the 90th percentile of our comparator peer group.
In addition, the Compensation Committee considered that the company returned approximately $618 million to our stockholders through our stock buy-back program in 2010 (or 9.4% of our market capitalization) and approximately $1 billion to our stockholders in the three-year period from 2008 through 2010 (or 16.5% of our market capitalization), as compared to the median of our comparator peer group, at approximately
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$100 million to stockholders in 2010 (or 3.1% of market capitalization) and approximately $201 million to stockholders in the three-year period from 2008 through 2010 (or 7.9% of market capitalization). The Compensation Committee considered DaVita’s record of sustained performance against the comparator peer group companies, posting above the 60th percentile for three-year operating margin, net margin and revenue growth against the comparator peer group companies and above the 60th percentile for five-year and above the 75th percentile for ten-year operating margin, net margin and revenue growth against the comparator peer group companies, notwithstanding general economic volatility and significant industry regulatory challenges and uncertainty.
The Compensation Committee also considered that our clinical outcomes compare very favorably with other dialysis providers in the United States and generally exceed the dialysis outcome quality indicators of the National Kidney Foundation. In addition to significant contributions to overall company performance, the Compensation Committee also considered individual performance, as listed for each named executive officer below.
| Name |
Individual Performance Factors Considered in Determining EIP Award | |
| Kent J. Thiry, Chairman of the Board of Directors and Chief Executive Officer |
• succession planning efforts and his successful development of key members of senior management, assisting in the company being better prepared for managing future growth | |
| • successful development of exceptionally high-caliber management team | ||
| • significant improvement in organizational capabilities over past years | ||
| • successful progress with respect to significant clinical initiatives | ||
| • leadership in public policy efforts that promote the interests of the company and the dialysis industry as a whole | ||
| • advancement of strategic business initiatives | ||
| • success with initiatives that position the company for successful continued growth and diversification | ||
| • successful working relationship with the Board of Directors, Board recruiting efforts and focus on Board diversity | ||
| Dennis L. Kogod, |
• substantial contributions to the company’s strong operational and clinical performance | |
| Chief Operating Officer |
||
| • higher percentage of acquisitions closed | ||
| • improved vaccination rates, fistula utilization and first 90-day dialysis care | ||
| • lower rate of attrition for teammates in the field | ||
| • improved retention rate for high performance leaders | ||
| • maintained strong teammate organizational productivity and efficiency that contribute to operational cost management | ||
| • substantial contribution to developing international opportunities | ||
| Luis A. Borgen, |
• successful integration into organization | |
| Chief Financial Officer |
• demonstrated expertise in evaluating international opportunities | |
| • completed debt refinancing with favorable terms | ||
| Javier J. Rodriguez, |
• succession planning for his position | |
| Senior Vice President |
• significant development as manager | |
| • successfully secured major payor contracts | ||
| • demonstrated leadership in the areas of disease management and integrated care operations | ||
| • significant contributions to enterprise development and growth | ||
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Our chief executive officer recommends to the Compensation Committee the performance bonus amount for our named executive officers, other than for himself, and the final performance bonus amounts are reviewed by the Compensation Committee and sometimes adjusted in consultation with our chief executive officer, prior to approval by the Compensation Committee. The Compensation Committee determines the performance bonus amount for our chief executive officer without recommendations from management. The award of amounts below the maximum amount was not a negative reflection on the performance of the eligible participants. In consideration of the company and individual performance listed above and in consultation with our chief executive officer with regard to performance bonuses for the named executive officers other than himself, the Compensation Committee awarded 2010 performance bonuses under the EIP to the eligible named executive officers, as follows:
| Name |
2010 EIP Award Amount | |||
| Kent J. Thiry |
$ | 3,125,000 | ||
| Dennis L. Kogod |
$ | 1,500,000 | ||
| Luis A. Borgen |
$ | 96,000 | ||
| Javier J. Rodriguez |
$ | 1,000,000 | ||
For 2011, the Compensation Committee reduced the maximum cash award amount for Mr. Thiry from $10,000,000 to $5,000,000 (with a maximum aggregate cash and restricted stock units, or RSUs, award limit of $10,000,000) and maximum cash award amounts for the remaining named executive officers from $5,000,000 to $2,500,000 (with a maximum aggregate cash and RSUs award limit of $10,000,000 for Mr. Kogod and $5,000,000 for the remaining named executive officers). The Compensation Committee believes that the lowered maximum cash award amounts are more generally aligned with the market maximum cash incentive opportunities and past actual cash-based incentive awards given to our named executive officers under the EIP.
Other Performance-Based Bonuses
For the named executive officers who did not participate in the EIP, the Compensation Committee performs a similar review of overall company and individual performance throughout the year. The following table shows the individual performance factors considered in determining performance bonuses for Messrs. Shapiro and Whitney.
| Name |
Individual Performance Factors Considered in Determining Incentive Award | |
| David T. Shapiro Chief Compliance Officer and Senior Vice President |
• substantially strengthened compliance team and process | |
| • successfully integrated compliance policies and processes enterprise-wide | ||
| • developed exceptional compliance training programs for teammates and physicians | ||
| • managed the former Gambro corporate integrity agreement with regulators to a successful conclusion | ||
| • successful handling of complex litigation and compliance matters | ||
| • provided senior leadership during transition to new corporate headquarters | ||
| Richard K. Whitney, Former Chief Financial Officer |
• successfully completed transition of new chief financial officer | |
| • oversaw capital markets decisions and strategy | ||
| • positioned the company for operating under new bundled reimbursement | ||
| • successfully renegotiated pharmaceutical supply contract | ||
In consideration of the company and individual performance listed above and in consultation with our chief executive officer with regard to performance bonuses for Messrs. Shapiro and Whitney, the Compensation Committee awarded 2010 performance bonuses of $1,000,000 to Mr. Shapiro and $450,000 to Mr. Whitney.
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We moved our headquarters to Denver, Colorado and in order to support each of Messrs. Thiry’s, Kogod’s, Borgen’s and Shapiro’s relocation and transition to Denver, Colorado, the Company agreed to pay each executive relocation bonuses and/or reimburse certain relocation expenses. See the “2010 Summary Compensation Table” in this Proxy Statement for more information relating to the relocation bonuses.
While we emphasize stock-based compensation, we do not designate a target percentage of total compensation as stock-based. We instead maintain flexibility to use judgment to respond to changes in named executive officer and company performance and related objectives. The emphasis on stock-based compensation creates a commonality of interest between our named executive officers and our stockholders. Grants of stock-based awards also serve as an important tool for attracting and retaining our named executive officers. The majority of our grants of stock-based awards vest solely based on the passage of time, and vesting is contingent upon continued employment with us. To vest in stock-based awards and earn the full benefit of the award the named executive officers must remain employed for a multi-year period, typically over four years, which reinforces a culture in which the company’s long-term success takes precedence over volatile and unsustainable short-term results.
Stock-based awards to our named executive officers are made pursuant to our Equity Compensation Plan. The Equity Compensation Plan permits the issuance of stock options, stock appreciation rights, restricted stock units, and other forms of stock-based awards. The majority of our stock-based awards to named executive officers are in the form of SSARs, which only derive value if the market value of our common stock increases. Each year, the Compensation Committee recommends to the full Board of Directors an aggregate equity award pool that will be available for grants to all eligible recipients of stock-based awards, based on (i) the historical amounts granted, (ii) the amount of equity that is currently in-the-money, (iii) the number of shares we expect to be forfeited due to anticipated departures, and (iv) the number of shares that will likely be required both to retain our highest-potential and highest-performing employees and to attract new executives we expect to hire during the coming year. The Compensation Committee may also recommend the establishment of special purpose share budgets for proposed interim grants. After considering such recommendations, the Board of Directors approves a budget and delegates authority to the Compensation Committee to make awards to our executive officers and other employees, and to the chair of the Compensation Committee to make grants to non-executive officer employees within the authorized budget.
The stock-based awards that are granted to our named executive officers are generally made annually (typically in the first half of the year). Discretionary interim awards to our named executive officers may be made during the year to address special circumstances, such as retention concerns, promotions and special performance recognition awards, and new hire awards. The timing of the annual grants is generally dictated by the timing of the completion of performance reviews and the timing of decisions regarding other forms of direct compensation. The timing of the interim grants depends upon individual circumstances. We do not have any program, plan or practice to time interim awards in coordination with the release of material non-public information; however, it is possible that awards may be granted at times when the company is in possession of material non-public information. Under the terms of the Equity Compensation Plan, awards are granted with an exercise or base price not less than the closing price of our common stock on the date of grant.
Stock Appreciation Rights
Since July 2006, we have primarily issued SSARs in lieu of stock options. The economic value and tax and accounting treatment of SSARs are comparable to those of stock options, but SSARs are less dilutive to our stockholders because only shares with a total value equal to the grantee’s gain (the difference between the fair market value of the base shares and their base price) are ultimately issued. SSARs are granted with an exercise or base price not less than the closing price of our common stock on the date of grant and vest based on the passage of time. Prior to 2010, awards of SSARs and stock options generally vested at a rate of 25% after 12 months from
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the date of grant, 8.33% at the 20th month and 8.33% every four months thereafter until fully vested. In 2010, our standard vesting schedule for SSARs was changed to 25% after 12 months from the date of grant, then 6.25% every three months thereafter (a total of 25% per year) until fully vested, although alternative vesting schedules may be applied based on retention concerns, the future timing of value expected to vest from prior awards and other factors. The standard vesting for SSARs was changed to simplify the vesting schedule and to provide for a twelve-month period to exercise the fully vested award before expiration.
The SSAR awards that were granted to all named executive officers in 2011 for 2010 performance were granted with extended vesting schedules, such that the awards vest 50% on the third anniversary of the date of grant and the remaining 50% on the fourth anniversary of the date of grant. These SSAR awards were granted with extended vesting schedules to assist in the long-term retention of the named executive officers.
Restricted Stock Units
We also award restricted stock units, or RSUs, to our named executive officers from time to time as part of our compensation program. We award RSUs because full value share awards can more closely align the interests of executives with stockholder interests by providing better parity between total stockholder returns and the executive’s gains or losses on the awards than is achievable with stock options or SSARs. In 2010, the Compensation Committee decided to increase the use of RSUs and permitted the named executive officers to elect to receive between one-third and two-thirds of the value of their allocated equity awards in the form of RSUs. One RSU was considered equivalent to four SSARs, based on the natural economic exchange ratio between the two award types implied by their respective fair values. The Compensation Committee increased the use of RSUs in 2010 to ensure that our named executive officers retain some durable equity value in light of the potential impact on the company and our industry of healthcare reform and other significant healthcare regulatory changes, including changes to government reimbursement policies. RSUs granted under the Equity Compensation Plan vest with the passage of time over a period of three years or more. Prior to 2010, RSUs vested generally at a rate of 33.33% after 36 months from the date of grant and 11.11% every four months thereafter until fully vested. In 2010, our standard vesting schedule for RSUs was changed to vest over a period of four years generally at a rate of 25% per year, although the Compensation Committee may approve alternative vesting schedules based on performance, timing of vesting of individual outstanding grants and other retention related factors. The standard vesting for RSUs was changed to simplify the vesting schedule and to create fewer forced taxation events for recipients. We currently do not award other forms of stock-based awards to employees.
Determining Award Amounts
The Compensation Committee reviews the annual grant recommendations for our named executive officers and other executives in advance of the grant date with the input of our chief executive officer. Based upon a review of equity award shares available, their dilutive effect on stockholders, long-term share budgeting restrictions and recommendations from management, the Compensation Committee recommends an aggregate equity award pool for the year for approval by the Board of Directors. In considering how to distribute the shares in the aggregate equity award pool, our chief executive officer, together with a team that includes our chief financial officer and our chief people officer, gives differential attention to high-potential individuals whom the company believes will be the future leaders of the company, and to other high-performing individuals whose performance in their current positions exceeded expectations.
Each such high-potential and/or high-performing employee is then individually reviewed, from a holistic perspective, starting with a review of such employee’s historical compensation, including his or her initial base salary, any base salary increases during his or her tenure with the company and performance cash bonuses and equity award grants over his or her career at the company. A determination is then made as to the number of equity award shares that should be granted in order to retain and continue to motivate these high-quality, high-performing individuals. Our goal is to achieve fairness in compensation over the course of multiple years, which is the reason we take into account all compensation that has been awarded to such individuals over their respective careers at the company.
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For our named executive officers that participate in the EIP, RSU awards are also made pursuant to the EIP and after the Compensation Committee determines that the company has achieved the EIP performance target for such year. Since all equity awards granted on April 13, 2011 for 2010 performance to our named executive officers were made in the form of SSARs, such SSARs were granted outside of the EIP but pursuant to our Equity Compensation Plan. Similar to the analysis that the Compensation Committee makes in determining the annual performance-based cash compensation, the Compensation Committee considers overall company and individual performance. For the equity awards granted in 2011 for fiscal 2010 performance, the Compensation Committee reviews the findings and recommendations of the chief executive officer for named executive officers other than himself and considers each named executive officers’ individual performance throughout the year (which analysis is similar to the consideration of individual performance in determining the annual performance-based cash compensation). See “Elements of Compensation—Annual Performance-Based Cash Compensation—Executive Incentive Plan” of this Proxy Statement for detailed discussion of the overall company and individual performance factors considered.
The Compensation Committee also evaluates market competitiveness by analyzing the comparator peer group’s executive equity award grants, as provided in the February 2011 Compensia report. After taking into account the elements as set forth above, the Compensation Committee approved equity award grants to our named executive officers on April 13, 2011.
The table below shows the SSAR awards granted to each named executive officer in 2011 for 2010 performance.
| Name |
Shares Subject to SSARs | |||
| Kent J. Thiry |
500,000 | |||
| Dennis L. Kogod |
250,000 | |||
| Luis A. Borgen |
— | |||
| Javier J. Rodriguez |
130,000 | |||
| David T. Shapiro |
10,000 | |||
| Richard K. Whitney |
60,000 | |||
The Compensation Committee determined that these SSAR awards shall vest 50% on the third anniversary of the date of grant and the remaining 50% on the fourth anniversary of the date of grant, for all of the above named executive officers.
Interim discretionary grants are recommended by our chief executive officer and management and reviewed by the Compensation Committee as a part of mid-year performance evaluations, special projects participation, new hires and other factors. Mr. Borgen received grants of SSARs for 60,000 shares and RSUs for 15,000 shares, due to his commencing employment with us in 2010. Such grants were made pursuant to extensive negotiation between the company and Mr. Borgen and in order to induce him to join the company. The Board of Directors has delegated the authority to our chief executive officer, chief operating officer and chief financial officer to grant a limited number of stock-based awards to employees, other than our executive officers, between meetings of the Board of Directors in accordance with guidelines established by the Compensation Committee.
Personal Benefits and Perquisites
As described above, our compensation programs for named executive officers emphasize compensation based on performance and compensation which serves to align our named executive officers’ interests with those of our stockholders. As a result, the Compensation Committee has determined that the company should provide few perquisites to named executive officers. The perquisites and personal benefits that we do provide support important attraction and retention objectives. We also consider the extent to which the perquisite or personal benefit provided serves to enhance the performance of our named executive officers in light of the demands on these individuals’ time. The perquisites and personal benefits available to our named executive officers are reviewed annually by the Compensation Committee.
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The Compensation Committee has authorized the personal use of a fractionally-owned or chartered corporate aircraft by some of our named executive officers. The Compensation Committee believes that access to an aircraft for personal travel enables our named executive officers to maximize their work hours, particularly in light of their demanding business travel schedules. One of the Compensation Committee’s objectives is to ensure that our named executive officers are afforded adequate flexibility to allow for sufficient personal time in light of the significant demands of the company. The Compensation Committee and our chief executive officer allocate a fixed number of hours for use by identified named executive officers and consider the allocated amount as part of the named executive officer’s total compensation. The Compensation Committee and our chief executive officer use their discretion when determining the number of allocated hours and displace other forms of compensation that otherwise would have been awarded to the named executive officer.
Our chief executive officer is authorized by the Compensation Committee to use a fractionally-owned or chartered corporate aircraft for business purposes, including long-distance commuting, for a fixed number of hours per year for personal use instead of additional cash compensation that would have otherwise been paid. As part of our chief executive officer’s aggregate compensation package, the Compensation Committee approves a fixed number of hours for personal use each year and unused hours from the prior year are available for use the following year. When determining the number of hours of personal use of aircraft to award, the Compensation Committee takes into consideration Mr. Thiry’s overall compensation package. If Mr. Thiry were to exceed the fixed number of hours for personal use that is unrelated to business or long-distance commuting in a given year, the excess hours of personal use would offset the number of hours approved by the Compensation Committee the following year for personal use or Mr. Thiry would be required to compensate us directly, although historically he has not exceeded the hours authorized for personal use. The Compensation Committee reviews all business and personal use of the aircraft annually, including detailed passenger logs with special attention to mixed business and personal use and required reimbursements to the company. The company does not provide any gross-ups or reimbursements for income taxes for any perquisites or personal benefits of its executive officers.
Deferred Compensation Programs
Our deferred compensation programs permit certain employees, including our named executive officers, to defer compensation at the election of the participant or at the election of the company. We maintain a Voluntary Deferral Plan which allows certain employees, including our named executive officers, to defer a percentage of their base salary, cash bonus and other compensation as identified by the company. We do not utilize deferred compensation as a significant component of compensation.
Severance and Change of Control Arrangements
We have entered into employment agreements with each of our named executive officers. These agreements, among other things, provide for severance benefits in the event of a termination of employment in certain circumstances, including, with respect to certain named executive officers, the departure of the named executive officer following a change of control of our company. Each agreement is individually negotiated and the terms vary. When entering into employment agreements with our named executive officers, we attempt to provide severance and change of control benefits which strike a balance between providing sufficient protections for the named executive officer while still providing post-termination compensation that is reasonable and in the best interests of the company and our stockholders. We have also adopted the DaVita Inc. Severance Plan (the “DaVita Severance Plan”), which provides for severance benefits for our vice presidents and director-level employees in the event of termination in certain circumstances. See “Potential Payments Upon Termination or Change of Control” beginning on page 65 of this Proxy Statement for a description of the severance and change of control arrangements set forth in our employment agreements with the named executive officers and the DaVita Severance Plan.
In addition, our stock-based award agreements provide for accelerated vesting of stock-based awards in certain circumstances following a change of control of the company or in the case of a resignation for “good reason.” The terms of individual agreements vary but under our current stock-based award agreements
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accelerated vesting of stock-based awards is generally triggered when a change of control event occurs and either the acquiring entity fails to assume, convert or replace the stock-based award or the grantee’s employment is terminated within the twenty-four-month period following a change of control or if the executive resigns for “good reason” as provided in his or her applicable employment agreement. For stock-based award agreements entered into prior to October 2006, accelerated vesting of stock-based awards is triggered when a change of control event occurs, even if there is no subsequent termination or resignation. Our stock-based award agreements further provide that a change of control shall not be deemed to have occurred if the person acting as chief executive officer for the six months prior to such transaction becomes the chief executive officer or executive chairman of the board of directors of the acquiring entity and remains in such position for at least one year following the transaction and a majority of the acquiror’s board of directors immediately after such transaction consists of persons who were directors of the company immediately prior to such transaction. The additional acceleration provisions in our stock-based award agreements further serve to secure the continued employment and commitment of our named executive officers prior to or following a change of control. See “Potential Payments Upon Termination or Change of Control” beginning on page 65 of this Proxy Statement for more information regarding accelerated vesting under our stock-based award agreements.
EXECUTIVE COMPENSATION PROCESS & GOVERNANCE
We are committed to strong governance standards with respect to our compensation programs, procedures and practices. We believe that the following aspects of our compensation programs are indicative of this commitment.
Management Share Ownership Policy
We have a share ownership policy that applies to all full-time members of our management team at the vice president level and above and any part-time vice presidents who continue to receive stock-based awards under our equity compensation programs. The management share ownership policy is similar to our share ownership policy that applies to all non-management members of the Board of Directors beginning on page 14 of this Proxy Statement. The purpose of the policy is to ensure that our executive officers and other members of our senior management team accumulate a meaningful ownership stake in the company over time by retaining a specified financial interest in our common stock. Both shares owned directly and shares underlying vested but unexercised SSARs, stock options and restricted stock units are included in the determination of whether the share ownership guidelines are met. The total net realizable share value retained must have a current market value of not less than the lower of 25% of the total equity award value in excess of $100,000 realized to date by the executive (since promotion to VP); or a specific multiple of the executive’s base salary. The salary multiple requirement is 5.0 for Mr. Thiry, 3.0 for Messrs. Kogod, Borgen and Rodriguez, 2.0 for Mr. Whitney and 1.0 for Mr. Shapiro.
Role of Independent Compensation Committee
Our executive compensation and benefits programs are designed and administered under the direction and control of the Compensation Committee. Our Compensation Committee is composed solely of independent directors, who review and approve our overall executive compensation programs, strategy and policies and sets the compensation of our executive officers.
Role of Independent Compensation Consultant
The Compensation Committee has selected and directly retains the services of Compensia, an independent compensation consulting firm. Compensia only provides compensation consulting services to the Compensation Committee, and works with the company’s management only on matters for which the Compensation Committee is responsible. The Compensation Committee periodically seeks input from
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Compensia on a range of external market factors, including evolving compensation trends, appropriate peer companies and market survey data. Compensia also provides general observations on the company’s compensation programs, but it does not determine or recommend the amount or form of compensation for the named executive officers. See “Corporate Governance—Information Regarding the Board of Directors and its Committees—Compensation Committee” beginning on page 11 of this Proxy Statement for detailed discussion of the Compensia services provided in 2010.
Policy Regarding Clawback of Bonuses and Incentive Compensation
In 2010, the Board of Directors adopted a clawback policy that permits the Board of Directors to recover bonuses, incentive and equity-based compensation from executive officers and members of the Board of Directors whose fraud or intentional misconduct was a significant contributing factor to the company having to restate all or a portion of its financial statements. The policy allows for the recovery of any bonus or incentive compensation paid to those executive officers or directors, the cancellation of restricted or deferred stock awards and outstanding stock awards granted to those executive officers or directors, and the reimbursement of any gains realized that are attributable to such awards to the fullest extent permitted by law. The policy allows for the foregoing actions to the extent that the amount of incentive compensation was calculated based upon the achievement of certain financial results that were subsequently reduced due to a restatement; the executive officer or director engaged in any fraud or intentional misconduct that was a significant contributing factor to the company having to restate its financial statements; and where the amount of the bonus or incentive compensation that would have been awarded to the officer had the financial results been properly reported would have been lower than the amount actually awarded. The company will not seek to recover bonuses or incentive or equity-based compensation paid or that vests more than three years prior to the date the applicable restatement is disclosed.
TAX AND ACCOUNTING CONSIDERATIONS
When reviewing compensation matters, the Compensation Committee considers the anticipated tax and accounting treatment of various payments and benefits to the company and, when relevant, to its executives. Section 162(m) of the Internal Revenue Code generally disallows a tax deduction for compensation in excess of $1 million paid to the chief executive officer and the three other most highly compensated named executive officers employed at the end of the year (other than the chief financial officer), such executives hereinafter referenced as “covered employees.”
Certain compensation is specifically exempt from the deduction limit to the extent that it does not exceed $1 million during any fiscal year or is “performance-based” as defined in Section 162(m). Although we have plans that permit the award of deductible compensation under Section 162(m) of the Internal Revenue Code, the Compensation Committee does not necessarily limit executive compensation to the amount deductible under that provision. Rather, it considers the available alternatives and acts to preserve the deductibility of compensation to the extent reasonably practicable and consistent with its other compensation objectives. As a result, most of our compensation programs are intended to qualify for deductibility under Section 162(m), including our EIP.
Section 409A of the Internal Revenue Code requires programs that allow executives to defer a portion of their current income to meet certain requirements regarding risk of forfeiture and election and distribution timing (among other considerations).
Section 409A of the Internal Revenue Code requires that “nonqualified deferred compensation” be deferred and paid under plans or arrangements that satisfy the requirements of the statute with respect to the timing of deferral elections, timing of payments and certain other matters. Failure to satisfy these requirements can expose employees and other service providers to accelerated income tax liabilities and penalty taxes and
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interest on their vested compensation under such plans. Accordingly, as a general matter, it is our intention to design and administer our compensation and benefits plans and arrangements for all of our employees and other service providers, including our named executive officers, so that they are either exempt from, or satisfy the requirements of, Section 409A of the Internal Revenue Code.
DaVita accounts for stock-based compensation in accordance with FASB ASC Topic 718, which requires DaVita to recognize compensation expense for share-based payments (including SSARs, RSUs and other forms of equity compensation). FASB ASC Topic 718 is taken into account by the Compensation Committee in determining to use a portfolio approach to equity grants, awarding SSARs and RSUs on a value-equivalent basis considering the natural economic exchange ratios implied by their respective fair values.
2010 Summary Compensation Table
| Name and Principal Position |
Year | Salary ($) |
Bonus(1) ($) |
Stock Awards(2) ($) |
Option Awards(3) ($) |
Non-Equity Incentive Plan Compensa- tion(4) ($) |
All Other Compensa- tion(5) ($) |
Total ($) |
||||||||||||||||||||||||
| Kent J. Thiry |
2010 | $ | 1,020,000 | $ | 200,000 | (6) | $ | 4,755,000 | $ | 4,729,560 | $ | 3,125,000 | $ | 291,483 | $ | 14,121,043 | ||||||||||||||||
| Chairman of the Board of Directors and Chief Executive Officer |
2009 | $ | 1,090,385 | — | — | $ | 7,856,160 | $ | 2,500,000 | $ | 225,597 | $ | 11,672,142 | |||||||||||||||||||
| 2008 | $ | 1,023,076 | — | — | $ | 7,657,200 | $ | 2,000,000 | $ | 354,111 | $ | 11,034,387 | ||||||||||||||||||||
| Dennis L. Kogod |
2010 | $ | 727,075 | $ | 118,000 | (7) | $ | 2,377,500 | $ | 2,364,780 | $ | 1,500,000 | $ | 17,095 | $ | 7,104,450 | ||||||||||||||||
| Chief Operating Officer |
2009 | $ | 628,855 | $ | 250,000 | — | $ | 4,230,240 | $ | 950,000 | $ | 772 | $ | 6,059,867 | ||||||||||||||||||
| 2008 | $ | 472,414 | $ | 150,000 | — | $ | 2,353,580 | $ | 750,000 | $ | 11,109 | $ | 3,737,103 | |||||||||||||||||||
| Luis A. Borgen* |
2010 | $ | 346,154 | $ | 262,976 | (8) | $ | 962,850 | $ | 957,702 | $ | 96,000 | $ | 2,500 | $ | 2,628,182 | ||||||||||||||||
| Chief Financial Officer |
||||||||||||||||||||||||||||||||
| Javier J. Rodriguez |
2010 | $ | 544,990 | — | $ | 665,700 | $ | 457,814 | $ | 1,000,000 | $ | 50,375 | $ | 2,718,879 | ||||||||||||||||||
| Senior Vice President |
2009 | $ | 571,143 | $ | 200,000 | — | $ | 776,445 | $ | 520,000 | $ | 28,632 | $ | 2,096,220 | ||||||||||||||||||
| 2008 | $ | 492,300 | $ | 150,000 | — | $ | 1,176,790 | $ | 250,000 | $ | 26,738 | $ | 2,095,828 | |||||||||||||||||||
| David T. Shapiro |
2010 | $ | 348,571 | $ | 1,276,154 | (9) | $ | 237,750 | $ | 245,258 | — | $ | 1,660 | $ | 2,109,393 | |||||||||||||||||
| Chief Compliance Officer and Senior Vice President |
||||||||||||||||||||||||||||||||
| Richard K. Whitney** |
2010 | $ | 429,769 | $ | 450,000 | (10) | $ | 1,061,950 | $ | 1,300,167 | — | $ | 330 | $ | 3,242,216 | |||||||||||||||||
| Former Chief Financial |
2009 | $ | 519,231 | $ | 300,000 | — | $ | 1,208,640 | — | $ | 330 | $ | 2,028,201 | |||||||||||||||||||
| Officer |
2008 | $ | 423,077 | $ | 233,750 | — | $ | 1,843,222 | — | $ | 314 | $ | 2,500,363 | |||||||||||||||||||
| * | Mr. Borgen joined the company as our senior vice president as of March 22, 2010 and became our chief financial officer in May 2010. The amounts reported in the columns titled “Salary” and “Non-Equity Incentive Plan Compensation” reflect compensation earned by Mr. Borgen during the portion of 2010 that he was employed with the company. |
| ** | Mr. Whitney served as our chief financial officer on a part-time basis from February 2008 until May 2010. |
| (1) | The amounts reported in this column represent discretionary bonuses, including relocation bonuses and signing bonuses, for the year with respect to which they were earned, regardless of when such bonuses are paid. Bonuses may be paid in cash, SSARs, restricted stock units or a combination of cash, SSARs, and restricted stock units. The cash component of a bonus is included in this column; however, the cash component of any bonus awarded under our EIP is included in the “Non-Equity Incentive Plan Compensation” column. |
| (2) | The amounts shown in this column reflect restricted stock unit awards and represent the aggregate grant date fair value of all such awards granted to the executive during 2010 as estimated by the company for financial reporting purposes. See Note 17 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010 for a discussion of the relevant assumptions used in calculating these amounts pursuant to FASB ASC Topic 718. |
| (3) | The amounts shown in this column reflect SSAR awards and represent the aggregate grant date fair value of all such awards granted to the executive during 2010 as estimated by the company for financial reporting purposes. See Note 17 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010 for a discussion of the relevant assumptions used in calculating these amounts pursuant to FASB ASC Topic 718. |
| (4) | The amounts shown in this column constitute payments made under our EIP. Under our EIP, awards are reported for the year with respect to which they were earned, regardless of when the award is paid. Please see the “Elements of Compensation—Annual Performance-Based Cash Compensation—Executive Incentive Plan” in this Proxy Statement for a discussion of the performance criteria under the EIP. |
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| (5) | Amounts included in this column are set forth by category below. The amounts disclosed, other than use of a fractionally-owned or chartered corporate aircraft, are the actual or share of actual costs to the company of providing these benefits. Because a fractionally-owned or chartered corporate aircraft is used primarily for business purposes, we do not include in incremental cost the fixed costs that do not change based on usage. The incremental cost to us of personal use of a fractionally-owned or chartered corporate aircraft, including use for commuting, is calculated based on the variable operating costs related to the operation of the aircraft, including fuel costs and landing fees, trip-related repairs and maintenance, catering and other miscellaneous variable costs. Fixed costs that do not change based on usage, such as pilot salaries, training, utilities, depreciation, management fees, taxes and general repairs and maintenance are excluded. The value of the personal use of a fractionally-owned or chartered corporate aircraft and the corporate residential property by our named executive officers is included in their personal income in accordance with applicable tax regulations. |
| Name and Principal Position |
Year | Aircraft Usage(a) ($) |
Corporate Residential Property Usage ($) |
Life Insurance Premiums ($) |
Total All Other Compensation ($) |
|||||||||||||||
| Kent J. Thiry |
2010 | $ | 287,398 | $ | 2,500 | $ | 1,585 | $ | 291,483 | |||||||||||
| Dennis L. Kogod |
2010 | $ | 16,323 | — | * | $ | 17,095 | |||||||||||||
| Luis A. Borgen |
2010 | — | $ | 2,500 | — | $ | 2,500 | |||||||||||||
| Javier J. Rodriguez |
2010 | $ | 49,715 | — | * | $ | 50,375 | |||||||||||||
| David T. Shapiro |
2010 | — | $ | 1,000 | * | $ | 1,660 | |||||||||||||
| Richard K. Whitney |
2010 | — | — | * | $ | 330 | ||||||||||||||
| * | Amount represents less than $1,000. |
| (a) | For purposes of calculating the incremental costs to the company of each named executive officer’s personal use of company aircraft, the total cost of the flight is allocated to personal use based upon the relative ratio of personal mileage to total mileage. Costs for fuel, ground costs, catering costs, landing fees, domestic passenger fees and federal excise tax charges are also included, if applicable. |
| (6) | Amount represents a relocation bonus paid in 2010 to support Mr. Thiry’s transition to Denver, Colorado. |
| (7) | Amount represents a relocation bonus paid in 2010 to support Mr. Kogod’s transition to Denver, Colorado. |
| (8) | Amount represents a $250,000 signing bonus paid in 2010 and $12,976 in relocation expense reimbursements paid in 2010 to support Mr. Borgen’s transition to Denver, Colorado. |
| (9) | Amount represents a $1,000,000 discretionary bonus to Mr. Shapiro for his 2010 performance and contributions to the company and $276,154 in relocation bonus and related housing allowances paid in 2010 to support Mr. Shapiro’s transition to Denver, Colorado. |
| (10) | Amount represents a discretionary bonus to Mr. Whitney for his 2010 performance and contributions to the company. |
Narrative to the Summary Compensation Table
Employment Agreements
On July 25, 2008, we entered into an employment agreement with Mr. Thiry which replaced his employment agreement that was entered into on October 18, 1999 (as amended on May 20, 2000, November 28, 2000 and March 20, 2005). The employment agreement provides for an initial term through July 25, 2011 and continues thereafter with no further action by either party for successive one-year terms. Mr. Thiry is eligible to receive a bonus based upon the achievement of performance goals as determined by the Compensation Committee and the independent directors in accordance with the Compensation Committee charter. His target incentive bonus under his employment agreement is his annual base salary in effect during the beginning of the applicable fiscal year, although his actual incentive bonus may exceed that amount in a particular year, and has exceeded that amount in recent years.
We entered into an employment agreement with Mr. Kogod effective October 24, 2005. This agreement was subsequently amended effective December 12, 2008. The agreement provides for employment at will, with either party permitted to terminate the agreement at any time, with or without cause, subject to notice requirements. Mr. Kogod is eligible to receive a discretionary performance bonus with the actual amount to be decided by our chief executive officer and/or the Board of Directors or the Compensation Committee.
We entered into an employment agreement with Mr. Borgen effective February 26, 2010. This agreement was subsequently amended effective March 18, 2010. The agreement provides for employment at will, with
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either party permitted to terminate the agreement at any time, with or without cause, subject to notice requirements. Mr. Borgen is eligible to receive a discretionary performance bonus with the actual amount to be decided by our chief executive officer and/or the Board of Directors or the Compensation Committee.
We entered into an employment agreement with Mr. Rodriguez effective March 17, 2010. The agreement provides for employment at will, with either party permitted to terminate the agreement at any time, with or without cause, subject to notice requirements. Mr. Rodriguez is eligible to receive a discretionary performance bonus with the actual amount to be decided by our chief executive officer and/or the Board of Directors or the Compensation Committee.
We entered into an employment agreement with Mr. Shapiro effective March 3, 2008. This agreement was subsequently amended effective December 4, 2008. The agreement provides for employment at will, with either party permitted to terminate the agreement at any time, with or without cause, subject to notice requirements. Mr. Shapiro is eligible to receive a discretionary performance bonus with the actual amount to be decided by our chief executive officer and/or the Board of Directors or the Compensation Committee.
We entered into an employment agreement with Mr. Whitney effective February 13, 2008. The agreement provides for employment at will, with either party permitted to terminate the agreement at any time, with or without cause, subject to notice requirements. Mr. Whitney is eligible to receive a discretionary performance bonus with the actual amount to be decided by our chief executive officer and/or the Board of Directors or the Compensation Committee. Mr. Whitney stepped from his position as chief financial officer of the company effective May 4, 2010. Mr. Whitney has remained with the company in an executive role, initially to assist with the management transition and currently, as a special advisor to the chief executive officer.
For a description of certain termination and change of control provisions included in the employment agreements for certain of our named executive officers, please see “Potential Payments Upon Termination or Change of Control” beginning on page 65 of this Proxy Statement.
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The following table sets forth information concerning awards made to each of the named executive officers under the company’s EIP and equity compensation plans during 2010.
2010 Grants of Plan-Based Awards
| Name |
Grant Date | Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) |
All Other Stock Awards: Number of Shares of Stock or Units (#) |
All Other Options Awards: Number of Securities Underlying Options (#) |
Exercise or Base Price of Option Awards ($/Sh) |
Grant Date Fair Value of Stock and Option Awards ($)(2) |
||||||||||||||||||||||
| Target ($) |
Maximum ($) |
|||||||||||||||||||||||||||
| Kent J. Thiry |
N/A | $ | 1,050,000 | $ | 10,000,000 | — | — | — | — | |||||||||||||||||||
| 3/31/2010 | — | — | 75,000 | (3) | — | — | $ | 4,755,000 | ||||||||||||||||||||
| 3/31/2010 | — | — | — | 300,000 | (4) | $ | 63.40 | $ | 4,729,560 | |||||||||||||||||||
| Dennis L. Kogod |
N/A | $ | 950,000 | $ | 10,000,000 | — | — | — | — | |||||||||||||||||||
| 3/31/2010 | — | — | 37,500 | (3) | — | — | $ | 2,377,500 | ||||||||||||||||||||
| 3/31/2010 | — | — | — | 150,000 | (4) | $ | 63.40 | $ | 2,364,780 | |||||||||||||||||||
| Luis A. Borgen |
N/A | — | $ | 5,000,000 | — | — | — | — | ||||||||||||||||||||
| 3/22/2010 | — | — | 15,000 | (5) | — | — | $ | 962,850 | ||||||||||||||||||||
| 3/22/2010 | — | — | — | 60,000 | (6) | $ | 64.19 | $ | 957,702 | |||||||||||||||||||
| Javier J. Rodriguez |
N/A | $ | 520,000 | $ | 5,000,000 | — | — | — | — | |||||||||||||||||||
| 3/31/2010 | — | — | 10,500 | (7) | — | — | $ | 665,700 | ||||||||||||||||||||
| 3/31/2010 | — | — | — | 28,000 | (8) | $ | 63.40 | $ | 457,814 | |||||||||||||||||||
| David T. Shapiro |
N/A | — | — | — | — | — | — | |||||||||||||||||||||
| 3/31/2010 | — | — | 3,750 | (7) | — | — | $ | 237,750 | ||||||||||||||||||||
| 3/31/2010 | — | — | — | 15,000 | (8) | $ | 63.40 | $ | 245,258 | |||||||||||||||||||
| Richard K. Whitney |
N/A | — | — | — | — | — | — | |||||||||||||||||||||
| 3/31/2010 | — | — | 16,750 | (3) | — | — | $ | 1,061,950 | ||||||||||||||||||||
| 3/31/2010 | — | — | — | 33,000 | (4) | $ | 63.40 | $ | 520,252 | |||||||||||||||||||
| 6/12/2010 | — | — | — | 50,000 | (9) | $ | 64.72 | $ | 779,915 | |||||||||||||||||||
| (1) | Non-equity incentive awards to Messrs. Thiry, Kogod, Rodriguez and Borgen were made under the EIP. The “maximum” amounts shown in the table above reflect the largest possible payments under the EIP for the 2010 performance period for purposes of qualifying the plan under Section 162(m) of the Code. There are no thresholds or targets under the EIP; however, pursuant to Mr. Thiry’s employment agreement, his target incentive bonus opportunity for each fiscal year shall be equal to 100% of his base salary in effect at the beginning of such fiscal year; provided, that the amount of his bonus may exceed 100% of his base salary if target performance goals for the fiscal year are exceeded. With respect to Messrs. Kogod and Rodriguez, because the Compensation Committee does not set a target amount under the EIP, the target amount reported is the cash bonus amount earned by each of them under the EIP in 2009. With respect to Mr. Borgen, no target amount is reported because he joined the company in March 2010 and therefore was not a participant of the EIP in 2009. The EIP provides that the Compensation Committee may use “negative discretion” to award any amount that does not exceed the maximum. The actual amounts awarded under the EIP are reported in the “Non-Equity Incentive Plan Compensation” column of the “2010 Summary Compensation Table.” For a description of the EIP, see “Compensation Discussion and Analysis—Elements of Compensation—Annual Performance-Based Compensation—Executive Incentive Plan” in this Proxy Statement. |
| (2) | These amounts are the aggregate grant date fair values of each award determined pursuant to FASB ASC Topic 718. See Note 17 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010 for a discussion of the relevant assumptions used in calculating grant date fair value pursuant to FASB ASC Topic 718. |
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| (3) | The awards shown are restricted stock units granted under the Equity Compensation Plan. These awards vest 25% on each of May 15, 2011, May 15, 2012, May 15, 2013 and May 15, 2014. |
| (4) | This number represents SSARs awarded under the Equity Compensation Plan. These awards vest 25% on the first anniversary and 6.25% every three months thereafter (a total of 25% per year) from the grant date. |
| (5) | The awards shown are restricted stock units granted under the Equity Compensation Plan. These awards vest 33.34% on the third anniversary and 11.11% every four months thereafter from the grant date. |
| (6) | This number represents SSARs awarded under the Equity Compensation Plan. These awards vest 25% on the first anniversary, 8.33% on the 20th month and 8.33% every four months thereafter from the grant date. |
| (7) | The awards shown are restricted stock units granted under the Equity Compensation Plan. These awards vest 33% on each of May 15, 2012, May 15, 2013 and May 15, 2014. |
| (8) | This number represents SSARs awarded under the Equity Compensation Plan. These awards vest 33% on the second anniversary and 8.33% every three months thereafter from the grant date. |
| (9) | This number represents SSARs awarded under the Equity Compensation Plan. These awards vest 25% on March 31, 2011, and 6.25% every three months thereafter (a total of 25% per year) from the grant date. |
Narrative to the Grants of Plan-Based Awards Table
Awards
See “Compensation Discussion and Analysis—Elements of Compensation—Annual Performance-Based Compensation—Executive Incentive Plan,” “Compensation Discussion and Analysis—Elements of Compensation—Long-Term Equity Incentives” in this Proxy Statement for a description of the EIP and grants of SSAR and RSU awards.
Salary and Cash Bonus in Proportion to Total Compensation
The following table sets forth the percentage of each named executive officer’s total compensation as set forth in the Summary Compensation Table that we paid in the form of base salary and cash bonus. For a description of the objectives of our compensation programs and overall compensation philosophy, please see “Compensation Discussion and Analysis” beginning on page 40 of this Proxy Statement.
| Name |
Salary and Cash Bonus as Percentage of Total 2010 Compensation |
|||
| Kent J. Thiry |
31 | % | ||
| Dennis L. Kogod |
33 | % | ||
| Luis A. Borgen |
27 | % | ||
| Javier J. Rodriguez |
57 | % | ||
| David T. Shapiro |
77 | % | ||
| Richard K. Whitney |
27 | % | ||
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The following table sets forth information concerning outstanding stock options and SSARs and unvested stock awards held by each of the named executive officers at December 31, 2010.
2010 Outstanding Equity Awards at Fiscal Year-End
| Option Awards | Stock Awards | |||||||||||||||||||||||||||
| Name |
Grant Date |
Number of Securities Underlying Unexercised Options (#) Exercisable |
Number of Securities Underlying Unexercised Options (#) Unexercisable |
Option Exercise Price ($) |
Option Expiration Date |
Number of Shares or Units of Stock That Have Not Vested (#) |
Market Value of Shares or Units of Stock That Have Not Vested(1) ($) |
|||||||||||||||||||||
| Kent J. Thiry |
7/1/2006 | 215,000 | (2) | — | $ | 49.70 | 7/1/2011 | |||||||||||||||||||||
| 3/16/2007 | 500,000 | (2) | 100,000 | (2) | $ | 52.76 | 3/16/2012 | |||||||||||||||||||||
| 3/11/2008 | 437,500 | (2) | 312,500 | (2) | $ | 43.70 | 3/11/2013 | |||||||||||||||||||||
| 3/2/2009 | 216,666 | (2) | 433,334 | (2) | $ | 46.26 | 3/2/2014 | |||||||||||||||||||||
| 3/31/2010 | — | 300,000 | (3) | $ | 63.40 | 3/31/2015 | ||||||||||||||||||||||
| 3/31/2010 | 75,000 | (4) | $ | 5,211,750 | ||||||||||||||||||||||||
| Dennis L. Kogod |
10/11/2006 | 32,083 | (2) | 2,917 | (2) | $ | 56.38 | 10/11/2011 | ||||||||||||||||||||
| 3/14/2007 | 41,666 | (2) | 8,334 | (2) | $ | 52.12 | 3/14/2012 | |||||||||||||||||||||
| 3/14/2007 | 62,500 | (5) | 37,500 | (5) | $ | 52.12 | 3/14/2012 | |||||||||||||||||||||
| 2/28/2008 | 116,666 | (2) | 83,334 | (2) | $ | 50.37 | 2/28/2013 | |||||||||||||||||||||
| 3/2/2009 | 116,666 | (2) | 233,334 | (2) | $ | 46.26 | 3/2/2014 | |||||||||||||||||||||
| 3/31/2010 | — | 150,000 | (3) | $ | 63.40 | 3/31/2015 | ||||||||||||||||||||||
| 3/31/2010 | 37,500 | (4) | $ | 2,605,875 | ||||||||||||||||||||||||
| Luis A. Borgen |
3/22/2010 | — | 60,000 | (2) | $ | 64.19 | 3/22/2015 | |||||||||||||||||||||
| 3/22/2010 | 15,000 | (6) | $ | 1,042,350 | ||||||||||||||||||||||||
| Javier J. Rodriguez |
3/14/2007 | 45,000 | (7) | 15,000 | (7) | $ | 52.12 | 3/14/2012 | ||||||||||||||||||||
| 3/14/2007 | 62,500 | (5) | 37,500 | (5) | $ | 52.12 | 3/14/2012 | |||||||||||||||||||||
| 7/30/2007 | 112,500 | (2) | 37,500 | (2) | $ | 54.13 | 7/30/2012 | |||||||||||||||||||||
| 2/28/2008 | 58,333 | (2) | 41,667 | (2) | $ | 50.37 | 2/28/2013 | |||||||||||||||||||||
| 3/6/2009 | 21,666 | (2) | 43,334 | (2) | $ | 45.72 | 3/6/2014 | |||||||||||||||||||||
| 3/31/2010 | — | 28,000 | (8) | $ | 63.40 | 3/31/2015 | ||||||||||||||||||||||
| 7/30/2007 | 8,333 | (6) | $ | 579,060 | ||||||||||||||||||||||||
| 3/31/2010 | 10,500 | (9) | $ | 729,645 | ||||||||||||||||||||||||
| David T. Shapiro |
3/17/2008 | 1,666 | (2) | 8,334 | (2) | $ | 42.48 | 3/17/2013 | — | — | ||||||||||||||||||
| 3/2/2009 | 5,666 | (2) | 43,334 | (2) | $ | 46.26 | 3/2/2014 | — | — | |||||||||||||||||||
| 3/31/2010 | — | 15,000 | (8) | $ | 63.40 | 3/31/2015 | — | — | ||||||||||||||||||||
| 3/17/2008 | 1,000 | (6) | 69,490 | |||||||||||||||||||||||||
| 3/31/2010 | 3,750 | (9) | 260,588 | |||||||||||||||||||||||||
| Richard K. Whitney |
2/14/2008 | 70,000 | (10) | — | $ | 50.50 | 8/14/2011 | |||||||||||||||||||||
| 2/15/2008 | 50,000 | (11) | — | $ | 50.99 | 8/15/2011 | ||||||||||||||||||||||
| 2/19/2008 | 30,000 | (12) | — | $ | 50.82 | 8/19/2011 | ||||||||||||||||||||||
| 2/20/2008 | 30,000 | (13) | — | $ | 50.42 | 8/20/2011 | ||||||||||||||||||||||
| 2/21/2008 | 20,000 | (14) | — | $ | 50.84 | 8/21/2011 | ||||||||||||||||||||||
| 3/2/2009 | 33,333 | (2) | 66,667 | (2) | $ | 46.26 | 3/2/2014 | |||||||||||||||||||||
| 3/31/2010 | — | 33,000 | (3) | $ | 63.40 | 3/31/2015 | ||||||||||||||||||||||
| 6/12/2010 | — | 50,000 | (15) | $ | 64.72 | 6/12/2015 | ||||||||||||||||||||||
| 3/31/2010 | 16,750 | (4) | $ | 1,163,958 | ||||||||||||||||||||||||
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| (1) | The market value of shares or units of stock that have not vested reflects the $69.49 closing price of our stock on December 31, 2010, as reported by the NYSE. |
| (2) | These SSARs vest 25% on the first anniversary, 8.33% on the 20th month and 8.33% every four months thereafter from the grant date. |
| (3) | These SSARs vest 25% on the first anniversary and 6.25% every three months thereafter (a total of 25% per year) from the grant date. |
| (4) | These restricted stock units vest 25% on each of May 15, 2011, May 15, 2012, May 15, 2013 and May 15, 2014. |
| (5) | These SSARs vest 50% on the third anniversary, 12.5% on the 45th month and 12.5% every three months thereafter from the grant date. |
| (6) | These restricted stock units vest 33.34% on the third anniversary and 11.11% every four months thereafter from the grant date. |
| (7) | These SSARs vest 25% on the second anniversary, 12.5% on the 32nd month and 12.5% every four months thereafter from the grant date. |
| (8) | These SSARs vest 33% on the second anniversary and 8.33% every three months thereafter from the grant date. |
| (9) | These restricted stock units vest 33% on each of May 15, 2012, May 15, 2013 and May 15, 2014. |
| (10) | These SSARs vest in full on the first anniversary of the grant date. |
| (11) | These SSARs vest 93% on the first anniversary and 7% on the 13th month from the grant date. |
| (12) | These SSARs vest 12% on the 13th month, 23% on the 14th, 15th and 16th month and 19% on the 17th month from the grant date. |
| (13) | These SSARs vest 5% on the 17th month, 23% on the 18th, 19th, 20th and 21st month and 3% on the 22nd month from the grant date. |
| (14) | These SSARs vest 30% on the 22nd month and 35% on the 23rd and 24th month from the grant date. |
| (15) | These SSARs vest 25% on March 31, 2011, and 6.25% every three months thereafter (a total of 25% per year) from the grant date. |
The following table sets forth information concerning the exercise of stock options and SSARs and the vesting of stock awards held by each of the named executive officers during 2010.
2010 Option Exercises and Stock Vested
| Name |
Option Awards | Stock Awards | ||||||||||||||
| Number of Shares Acquired on Exercise (#) |
Value Realized on Exercise ($)(1) |
Number of Shares Acquired on Vesting (#) |
Value Realized on Vesting ($)(2) |
|||||||||||||
| Kent J. Thiry |
385,000 | $ | 6,258,734 | — | — | |||||||||||
| Dennis L. Kogod |
36,667 | $ | 653,872 | — | — | |||||||||||
| Luis A. Borgen |
— | — | — | — | ||||||||||||
| Javier J. Rodriguez |
246,000 | $ | 5,078,355 | 6,667 | $ | 407,776 | ||||||||||
| David T. Shapiro |
26,000 | $ | 560,797 | — | — | |||||||||||
| Richard K. Whitney |
— | — | — | — | ||||||||||||
| (1) | Value realized on exercise is determined by subtracting the exercise or base price from the market price of our common stock at exercise, and multiplying the remainder by the number of shares exercised. |
| (2) | Value realized on vesting is determined by multiplying the number of shares underlying restricted stock units by the closing price for our common stock on the date of vesting, as reported by the NYSE. |
The company does not have a defined benefit pension plan in which any employee, including the named executive officers, can participate to receive payments or other benefits at, following, or in connection with retirement.
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The following table sets forth information concerning the company’s nonqualified deferred compensation plans.
2010 Nonqualified Deferred Compensation
| Name |
Executive Contributions in Last FY ($) |
Registrant Contributions in Last FY ($) |
Aggregate Earnings in Last FY ($)(1) |
Aggregate Withdrawals/ Distributions ($) |
Aggregate Balance at Last FYE ($) |
|||||||||||||||
| Kent J. Thiry |
||||||||||||||||||||
| Voluntary Deferral Plan |
— | — | $ | 140,401 | — | $ | 1,358,714 | (2) | ||||||||||||
| Dennis L. Kogod |
||||||||||||||||||||
| Executive Retirement Plan |
— | — | $ | 16,100 | — | $ | 193,487 | |||||||||||||
| Luis A. Borgen(3) |
— | — | — | — | — | |||||||||||||||
| Javier J. Rodriguez |
||||||||||||||||||||
| Voluntary Deferral Plan |
— | — | $ | 51,020 | — | $ | 417,470 | |||||||||||||
| David T. Shapiro(3) |
— | — | — | — | — | |||||||||||||||
| Richard K. Whitney(3) |
— | — | — | — | — | |||||||||||||||
| (1) | Unless otherwise indicated, none of the earnings in this column are included in the Summary Compensation Table because they are not preferential or above market. |
| (2) | Mr. Thiry deferred $772,596 and $255,769 into the Voluntary Deferral Plan that was reported in the “Salary” column for 2009 and 2008, respectively, in the Summary Compensation Table. |
| (3) | Messrs. Borgen, Shapiro and Whitney did not participate in any of the company’s nonqualified deferred compensation plans. |
The 2010 Nonqualified Deferred Compensation Table presents amounts deferred under our Voluntary Deferral Plan. Under the Voluntary Deferral Plan, participants may defer (i) up to 50% of their base salary, (ii) all or a portion of their annual bonus payment that is earned in the same year as their base salary but payable in the following year and (iii) all or a portion of their other compensation as determined by the company. Deferred amounts are credited with earnings or losses based on the rate of return of one or more investment alternatives selected by the participant from among the investment funds selected by the company. Participants may change their investment elections daily. We do not make contributions to participants’ accounts under the Voluntary Deferral Plan. All participant contributions are irrevocably funded into a rabbi trust for the benefit of those participants. Assets held in the trust are subject to the claims of the company’s general creditors in the event of the company’s bankruptcy or insolvency until paid to the plan participants. Distributions are generally paid out in cash at the participant’s election either in the first or second year following retirement or in a specified year at least three to four years after the deferral election was effective. Participants elect to receive distributions in the form of one, five, ten, fifteen or twenty annual installments. If the participant has not elected a specified year for payout and the participant becomes disabled, dies or has a separation from service, distributions generally will be paid in a lump sum cash distribution. In the event of an unforeseeable emergency, the plan administrator may, in its sole discretion, authorize the cessation of deferrals by a participant, provide for immediate distribution to a participant in the form of a lump sum cash payment or provide for such other payment schedule as the plan administrator deems appropriate.
The table also presents amounts deferred under our Executive Retirement Plan. The Executive Retirement Plan was assumed by the company from Gambro Healthcare, Inc. following our acquisition of Gambro Healthcare in October 2005. Amounts contributed to the plan were based on a percentage of an executive’s annual base salary and such contributions were made prior to our assumption of the plan. We did not make any contributions to the Executive Retirement Plan following our assumption of the plan and effective February 1, 2006 we amended the plan to eliminate the obligation to make further contributions under the plan. Under the plan, amounts in a participant’s deferred account vest 100% upon the earlier of: (i) two years of service following the date of contribution and (ii) the date the participant reaches the age of 60. All amounts contributed under this
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plan and currently in deferred accounts were contributed prior to February 1, 2006 and therefore are fully vested. Deferred amounts are credited with earnings or losses based on the rate of return of one or more investment alternatives selected by the participant from among the investment funds selected by the company. Participants may change their investment elections daily. All contributions are irrevocably funded into a rabbi trust for the benefit of plan participants. Assets held in the trust are subject to the claims of the company’s general creditors in the event of the company’s bankruptcy or insolvency until paid to the plan participants.
Potential Payments Upon Termination or Change of Control
General Terms and Definitions
For purposes of the employment agreements with each of our named executive officers and the table below:
“Cause” is defined in Mr. Thiry’s employment agreement as any of the following: (i) conviction of a felony; (ii) any act of fraud or dishonesty resulting or intended to result directly or indirectly in personal enrichment at the expense of the company; (iii) repeated failure or refusal by the executive to follow policies established by the Board of Directors or written directives of the Board of Directors that goes uncorrected for a period of 30 consecutive days after notice of such failure or refusal, and that is material and willful and has a material adverse effect on the company’s business; or (iv) a material breach of the executive’s employment agreement that goes uncorrected for a period of 30 consecutive days after written notice has been provided to the executive.
Involuntary termination for “Material Cause” occurs if the company terminates employment for any of the following reasons: (i) conviction of a felony or plea of no contest to a felony; (ii) any act of fraud or dishonesty in connection with the performance of the executive’s duties; (iii) repeated failure or refusal by the executive to follow lawful policies or directives reasonably established by the chief executive officer of the company or his designee that goes uncorrected for a period of 10 consecutive days after written notice has been provided to the executive; (iv) a material breach of the executive’s employment agreement; (v) any gross or willful misconduct or gross negligence by the executive in performance of his duties; (vi) egregious conduct by the executive that brings the company or any of its subsidiaries or affiliates into public disgrace or disrepute; (vii) an act of unlawful discrimination, including sexual harassment; (viii) a violation of the duty of loyalty or of any fiduciary duty; or (ix) exclusion or notice of exclusion of the executive from participating in any federal health care program. Further, Mr. Borgen’s employment agreement also includes the following reason for termination under the definition of “Material Cause”: the executive’s failure to relocate to Denver, Colorado with his immediate family by September 6, 2010. Further, the definition of “Material Cause” in Mr. Shapiro’s employment agreement includes the following additional language for (iv) above: that goes uncorrected for a period of 10 consecutive days after written notice has been provided to the executive.
“Material Cause” is defined in the employment agreement of Mr. Kogod as any of the following: (i) conviction of a felony or plea of no contest to a felony; (ii) the adjudication by a court of competent jurisdiction that the executive has committed any act of fraud or dishonesty resulting or intended to result directly or indirectly in personal enrichment at the expense of the company; (iii) repeated failure or refusal by the executive to follow policies or directives reasonably established by the chief executive officer of the company or his designee that goes uncorrected for a period of 30 consecutive days after written notice has been provided to the executive; (iv) a material breach of the executive’s employment agreement that goes uncorrected for a period of 30 consecutive days after written notice has been provided to the executive; (v) any gross or willful misconduct or gross negligence by the executive in the performance of his duties; (vi) egregious conduct by the executive that brings the company or any of its subsidiaries or affiliates into public disgrace or disrepute; (vii) an act of unlawful discrimination, including sexual harassment; (viii) a violation of the duty of loyalty or of any fiduciary duty; or (ix) exclusion or notice of exclusion of the executive from participating in any federal health care program.
Except with respect to Mr. Thiry, as noted below, a “Change of Control” means (i) any transaction or series of transactions in which any person or group (within the meaning of Rule 13d-5 under the Exchange Act
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and Sections 13(d) and 14(d) of the Exchange Act) becomes the direct or indirect “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), by way of a stock issuance, tender offer, merger, consolidation, other business combination or otherwise, of greater than 50% of the total voting power (on a fully diluted basis as if all convertible securities had been converted and all warrants and options had been exercised) entitled to vote in the election of directors of the company (including any transaction in which the company becomes a wholly-owned or majority-owned subsidiary of another corporation), (ii) any merger or consolidation or reorganization in which the company does not survive, (iii) any merger or consolidation in which the company survives, but the shares of the company’s common stock outstanding immediately prior to such merger or consolidation represent 40% or less of the voting power of the company after such merger or consolidation, and (iv) any transaction in which more than 40% of the company’s assets are sold. However, despite the occurrence of any of the above-described events, a “Change of Control” will not have occurred if Mr. Thiry remains the chief executive officer of the company for at least one year after the Change of Control or becomes the chief executive officer or executive chair of the surviving company with which the company merged or consolidated and remains in that position for at least one year after the Change of Control.
“Good Cause” means the occurrence of the following events without the executive’s express written consent: (i) the company materially diminishes the scope of the executive’s duties and responsibilities; or (ii) the company materially reduces the executive’s base compensation. Notwithstanding the above, the occurrence of any such condition shall not constitute Good Cause unless the executive provides notice to the company of the existence of such condition not later than 90 days after the initial existence of such condition, and the company shall have failed to remedy such condition within 30 days after receipt of such notice.
“Good Reason” is defined in Mr. Borgen’s employment agreement as the occurrence of the following events without the executive’s express written consent: (i) the company reduces the executive’s annual base salary in a percentage greater than concurrent base salary reductions for similarly-situated executives; (ii) the company fails to pay compensation on a timely basis or continue benefits in accordance with the terms of the executive’s employment agreement, as amended; (iii) the company assigns the executive to a new work location more than thirty-five miles from the executive’s assignment to the company’s current offices in Denver, Colorado; or (iv) any material breach by the company of the executive’s employment agreement.
With respect to Mr. Thiry’s employment agreement, “Good Reason” means during the employment period, without the written consent of the executive, any one or more of the following (provided that an isolated, insubstantial or inadvertent action not taken in bad faith or failure not occurring in bad faith which is remedied by the company promptly after receipt of notice thereof given by the executive shall not constitute Good Reason): (i) the assignment to the executive of any duties inconsistent in any material and adverse respect with the executive’s then current duties and responsibilities; (ii) the material and adverse change in the executive’s titles or positions; (iii) reduction in the executive’s base salary or target annual incentive opportunity, unless such reductions are part of an across-the-board reduction that applies to all senior executives of the company and takes effect prior to a Change in Control (as defined below for Mr. Thiry); or (iv) any material breach by the company of the employment agreement, that is not corrected within 30 days after notice of such breach.
For purposes of the definition of “Good Reason” in Mr. Thiry’s employment agreement above, a “Change of Control” means (i) any transaction or series of transactions in which any person or group (within the meaning of Rule 13d-5 under the Exchange Act and Sections 13(d) and 14(d) under the Exchange Act) becomes the direct or indirect “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), by way of a stock issuance, tender offer, merger, consolidation, other business combination or otherwise, of greater than 40% of the total voting power (on a fully diluted basis as if all convertible securities had been converted and all warrants and options had been exercised) entitled to vote in the election of directors of the company (including any transaction in which the company becomes a wholly-owned or majority-owned subsidiary of another corporation), (ii) consummation of any merger or consolidation in which the shares of the company’s common stock outstanding immediately prior to such merger or consolidation represent 50% or less of the voting power of the corporation resulting from such merger or consolidation, or, if applicable, the ultimate parent corporation of such
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corporation, (iii) during any twenty-four month period, individuals who, as of the beginning of such period, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the company subsequent to the beginning of such period whose election, or nomination for election by the company’s stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the company as a result of an actual or threatened solicitation by a person other than the Board for the purpose of opposing a solicitation by any other person with respect to the election or removal of directors, or any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall not be deemed a member of the Incumbent Board, (iv) consummation of any transaction in which all or substantially all of the company’s assets are sold, or (v) the approval by the company’s shareholders of a plan of complete liquidation or dissolution of the company; provided, however, that no transaction contemplated by clauses (i) through (iv) above shall constitute a Change of Control if the person acting as the chief executive officer of the company for the twelve months prior to such transaction continues as the chief executive officer or executive chairman of the Board of Directors of the company or becomes the chief executive officer or executive chairman of the Board of Directors of the entity that has acquired control of the company as a result of such transaction (the “Acquiror”) immediately after such transaction and remains the chief executive officer or executive chairman of the Board of Directors for not less than twelve months following the transaction, and further provided, that in the event that the person acting as the chief executive officer of the company for the twelve months prior to such transaction ceases to be chief executive officer or executive chairman of the Board of Directors of the company or of the Acquiror during the twelve months following the transaction, a Change of Control shall be deemed to have occurred on the date on which such person ceases to be chief executive officer or executive chairman of the Board of Directors.
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Severance Payments and Benefits
The following tables and summary set forth the company’s payment obligations pursuant to the terms of the employment agreements and/or the DaVita Severance Plan for each of our named executive officers, under the circumstances described below, assuming that their employment was terminated on December 31, 2010. For a description of the value of stock-based awards held by Messrs. Thiry, Kogod, Borgen, Rodriguez, Shapiro and Whitney that are subject to accelerated vesting upon a Change of Control, see “—Accelerated Vesting of Stock-Based Awards” below.
| Payment of Base Salary (or multiple thereof) in effect at termination for a specified period following termination |
Bonus(1) | Continued Health Benefits for a Specified Period Following Termination |
Office and Secretarial Assistance |
Tax Gross- Up |
Total Value | |||||||||||||||||||
| Kent J. Thiry |
||||||||||||||||||||||||
| Death |
— | $ | 3,125,000 | (2) | — | — | — | $ | 3,125,000 | |||||||||||||||
| Disability |
— | $ | 3,125,000 | (2) | — | — | — | $ | 3,125,000 | |||||||||||||||
| Involuntary Termination without Cause |
$ | 9,900,000 | (3) | $ | 3,125,000 | (4) | $ | 53,504 | (5) | $ | 371,189 | (6) | — | $ | 13,449,694 | |||||||||
| Involuntary Termination without Cause (prior to age 62)(7) |
$ | 4,950,000 | (8) | $ | 3,125,000 | (4) | $ | 53,504 | (5) | $ | 371,189 | (6) | — | $ | 8,499,694 | |||||||||
| Resignation for Good Reason |
$ | 9,900,000 | (3) | $ | 3,125,000 | (4) | $ | 53,504 | (5) | $ | 371,189 | (6) | — | $ | 13,449,694 | |||||||||
| Dennis L. Kogod |
||||||||||||||||||||||||
| Death |
— | — | — | — | — | — | ||||||||||||||||||
| Disability |
— | — | — | — | — | — | ||||||||||||||||||
| Involuntary Termination for Other than Material Cause |
$ | 800,000 | (9) | $ | 1,200,000 | (10) | — | — | — | $ | 2,000,000 | |||||||||||||
| Resignation Following a Good Cause Event Unrelated to a Change of Control |
$ | 800,000 | (9) | $ | 1,200,000 | (10) | — | — | — | $ | 2,000,000 | |||||||||||||
| Resignation Following a Good Cause Event After a Change of Control |
$ | 1,600,000 | (11) | $ | 1,200,000 | (10) | — | — | — | $ | 2,800,000 | |||||||||||||
| Luis A. Borgen |
||||||||||||||||||||||||
| Death |
— | — | — | — | — | — | ||||||||||||||||||
| Disability |
— | — | — | — | — | — | ||||||||||||||||||
| Involuntary Termination for Other than Material Cause |
$ | 450,000 | (12) | — | $ | 18,515 | (13) | — | — | $ | 468,515 | |||||||||||||
| Resignation for Good Reason |
$ | 450,000 | (12) | — | $ | 18,515 | (13) | — | — | $ | 468,515 | |||||||||||||
| Javier J. Rodriguez |
||||||||||||||||||||||||
| Death |
— | — | — | — | — | — | ||||||||||||||||||
| Disability |
— | — | — | — | — | — | ||||||||||||||||||
| Involuntary Termination for Other than Material Cause |
$ | 825,000 | (14) | $ | 520,000 | (15) | — | — | — | $ | 1,345,000 | |||||||||||||
| Resignation for Good Cause |
$ | 825,000 | (14) | $ | 520,000 | (15) | — | — | — | $ | 1,345,000 | |||||||||||||
| Resignation Following a Good Cause Event After a Change of Control |
$ | 1,100,000 | (16) | $ | 520,000 | (15) | — | — | — | $ | 1,620,000 | |||||||||||||
| David T. Shapiro |
||||||||||||||||||||||||
| Death |
— | — | — | — | — | — | ||||||||||||||||||
| Disability |
— | — | — | — | — | — | ||||||||||||||||||
| Involuntary Termination for Other than Material Cause |
$ | 350,000 | (17) | — | — | — | — | $ | 350,000 | |||||||||||||||
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| (1) | Does not include any amounts payable to Messrs. Thiry and Rodriguez pursuant to our Voluntary Deferral Plan which amounts are included in the 2010 Nonqualified Deferred Compensation Table. Such amounts are currently vested, but payment thereof may be accelerated in the event of death, disability or termination of employment. |
| (2) | Mr. Thiry (or his estate) will be entitled to receive the amount of any bonus earned and payable but not yet paid for the fiscal year prior to the year in which the termination occurs. On December 31, 2010, Mr. Thiry had fully earned his bonus for 2010, so he would have received the full amount of his annual incentive bonus as reported in the Summary Compensation Table upon termination. |
| (3) | Mr. Thiry will be entitled to receive a lump-sum payment equal to the product of (x) three, and (y) the sum of his base salary in effect as of the date of termination and the Prior Bonus. “Prior Bonus” means the average of the annual incentive bonus earned under the EIP (including any bonus earned and payable but not yet paid) for the last two fiscal years before the fiscal year in which Mr. Thiry’s employment was terminated. The amount reported in the table above reflects the product of (x) three, and (y) the sum of Mr. Thiry’s base salary as of December 31, 2010, which was $1,050,000, and the average of Mr. Thiry’s 2009 annual incentive bonus in the amount of $2,500,000 and Mr. Thiry’s 2008 annual bonus in the amount of $2,000,000. |
| (4) | Mr. Thiry will be entitled to receive the amount of any bonus earned and payable but not yet paid for the fiscal year prior to the year in which the termination occurs. Mr. Thiry will also be entitled to receive a prorated annual incentive bonus (based on the actual bonus earned under the objective standards set forth in the EIP for the fiscal year in which the termination occurs) through and including the date of termination. On December 31, 2010, Mr. Thiry had fully earned his annual incentive bonus for 2010, so he would have received the full amount of his annual incentive bonus as reported in the Summary Compensation Table upon termination. |
| (5) | Mr. Thiry will continue to receive his health benefits for the three-year period following termination. The amount reported in the table above is the estimated actual cost of COBRA insurance premiums for Mr. Thiry for the three-year period following termination. |
| (6) | Mr. Thiry will be entitled to the use of an office and services of an administrative assistant for three years or until he obtains other full-time employment. The amounts above reflect the estimated costs to us of providing the office and secretarial services for three years. |
| (7) | Mr. Thiry will be entitled to receive the payments set forth in this row in the event that, prior to the date on which Mr. Thiry attains age 62, the Board of Directors gives Mr. Thiry written notice that the term of his employment agreement shall not be extended. |
| (8) | Mr. Thiry will be entitled to receive a lump sum payment equal to the product of (x) one and one-half, and (y) the sum of his base salary in effect as of the date of termination and the Prior Bonus (as defined above). The amount reported in the table above reflects the product of (x) one and one-half, and (y) the sum of Mr. Thiry’s base salary as of December 31, 2010, which was $1,050,000, and the average of Mr. Thiry’s 2009 annual incentive bonus in the amount of $2,500,000 and Mr. Thiry’s 2008 annual incentive bonus in the amount of $2,000,000. |
| (9) | Mr. Kogod will be entitled to receive his salary for the one-year period following his termination or resignation. As of December 31, 2010, Mr. Kogod’s base salary was $800,000. |
| (10) | Mr. Kogod will be entitled to receive a lump-sum payment equivalent to the bonus that he had been paid in the year before the termination. The company interprets this severance provision to mean the severance is based on the bonus paid “for” the year prior to the year for which a bonus was most recently earned. Mr. Kogod had fully earned his bonus for 2010 on December 31, 2010. This severance amount is reported as the bonus paid to Mr. Kogod for 2009, which was $1,200,000. |
| (11) | Mr. Kogod will be entitled to receive his salary for the two-year period following his resignation. |
| (12) | Mr. Borgen will be entitled to receive his salary for the one-year period following his termination or resignation. As of December 31, 2010, Mr. Borgen’s base salary was $450,000. |
| (13) | Mr. Borgen will continue to receive his health benefits for the one-year period following termination. The amount reported in the table above is the estimated actual cost of COBRA insurance premiums for Mr. Borgen for the one-year period following termination. |
| (14) | Mr. Rodriguez will be entitled to receive his salary for the 18-month period following his termination or resignation. As of December 31, 2010, Mr. Rodriguez’s base salary was $550,000. |
| (15) | If Mr. Rodriguez is terminated after April in a given year, he will be entitled to receive a lump-sum payment equal to the bonus paid in the year prior to the termination, pro-rated for the number of months served in the year his employment is terminated. The company interprets this severance provision to mean the severance is based on the bonus paid “for” the year prior to the year for which a bonus was most recently earned. Mr. Rodriguez had fully earned his bonus for 2010 on December 31, 2010. This severance amount is reported as the bonus paid to Mr. Rodriguez for 2009, which was $520,000. |
| (16) | Mr. Rodriguez will be entitled to receive his salary for the two-year period following his resignation. |
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| (17) | Under the terms of the DaVita Severance Plan, Mr. Shapiro will only be entitled to severance payment and benefits if approved by our Senior Vice President of People Services and our Assistant General Counsel-Labor. If such approval is obtained, Mr. Shapiro will be entitled to continue to receive his base salary for a period of 12 months following his termination. As of December 31, 2010, Mr. Shapiro’s base salary was $350,000. Such payment obligation would be reduced dollar-for-dollar by the amount of any compensation received by Mr. Shapiro from another employer during the severance payment period, and Mr. Shapiro would be obligated to use reasonable efforts to find employment during such period. |
Other Severance Payments and Benefits
In addition, Mr. Whitney will not receive severance payments upon any termination. For a description of the value of stock-based awards held by Mr. Whitney that are subject to accelerated vesting upon a Change of Control, see “—Accelerated Vesting of Stock-Based Awards” below.
The company’s obligation to provide continued health benefits under the circumstances set forth in the tables above is subject to earlier termination in connection with the executive accepting employment with another employer.
In the event of termination as a result of death, the estates of the named executive officers identified in the tables above will also receive the proceeds of the respective term life insurance policy for each named executive officer. The coverage amount for each named executive officer is as follows: $1,201,000 for Mr. Thiry, $585,000 for Mr. Kogod, $500,000 for Mr. Borgen, $500,000 for Mr. Rodriguez, $500,000 for Mr. Shapiro and $250,000 for Mr. Whitney.
Pursuant to the terms of his employment agreement, Mr. Thiry will be eligible to receive a “gross-up” payment to the extent that any payment or benefit received or to be received by him is reduced by tax obligations possibly imposed by Sections 280G or 4999 of the Internal Revenue Code.
To receive the severance payments and benefits described above, each named executive officer must execute the company’s standard severance and general release agreement. In addition, the employment agreements with each of our named executive officers include confidentiality provisions that would apply until the confidential information becomes publicly available (other than through breach by the named executive officer). These employment agreements also include nonsolicitation provisions which prohibit each named executive officer from soliciting any patient or customer of the company to patronize a competing dialysis facility or from soliciting any patient, customer, supplier or physician to terminate their business relationship with the company, for a period of two years following the termination of the named executive officer’s employment. However, with respect to Mr. Borgen, Mr. Kogod and Mr. Whitney, the nonsolicitation provision would apply for a period of one year following termination.
Accelerated Vesting of Stock-Based Awards
For grants and awards of SSARs, stock options and/or restricted stock units made to our named executive officers prior to October 2006, the stock-based award agreements provide that in the event of a change of control, their options or awards shall automatically vest and become immediately exercisable in their entirety, such vesting to be effective as of the effective date of such transaction.
For grants and awards of SSARs and/or restricted stock units made to our named executive officers after October 2006, the stock-based award agreements provide that in the event that either (i) in connection with a Change of Control (as defined below), the acquiring entity fails to assume, convert or replace the named executive officer’s options or awards, or (ii) the named executive officer’s employment is terminated within the twenty-four-month period following a Change of Control by the company (or the acquiring entity) other than for Cause (as defined below) or, if applicable, by the named executive officer in accordance with the termination for Good Reason provisions of the named executive officer’s employment agreement, if any, then, in any such case,
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the options or awards shall automatically vest and become immediately exercisable in their entirety, such vesting to be effective as of immediately prior to the effective date of the Change of Control in the case of (i), and as of the date of termination of the named executive officer’s employment in the case of (ii).
The table below sets forth the value of the company’s obligations upon the automatic vesting of the stock-based awards of our named executive officers as described above and assumes that the triggering event took place on December 31, 2010, the last day of our most recent fiscal year.
| Name |
Value of
Options/ SSARs(1) |
Value
of Stock Awards(2) |
Tax Gross-Up |
|||||||||
| Kent J. Thiry(3) (4) |
$ | 21,625,724 | $ | 5,211,750 | — | |||||||
| Dennis L. Kogod |
$ | 8,761,573 | $ | 2,605,875 | — | |||||||
| Luis A. Borgen |
$ | 318,000 | $ | 1,042,350 | — | |||||||
| Javier J. Rodriguez |
$ | 3,485,167 | $ | 1,308,705 | — | |||||||
| David T. Shapiro |
$ | 1,323,100 | $ | 330,078 | — | |||||||
| Richard K. Whitney |
$ | 1,988,144 | $ | 1,163,958 | — | |||||||
| (1) | Values are based on the aggregate difference between the respective exercise or base prices and the closing sale price of our common stock on December 31, 2010, which was $69.49 per share, as reported by the NYSE. |
| (2) | Values are based on the aggregate number of shares underlying restricted stock units multiplied by the closing sale price of our common stock on December 31, 2010, which was $69.49 per share, as reported by the NYSE. |
| (3) | Pursuant to the terms of his employment agreement entered into on July 25, 2008, Mr. Thiry would be entitled to receive a “gross-up” payment to the extent any benefit received is reduced by tax obligations possibly imposed by Sections 280G or 4999 of the Internal Revenue Code. Any such tax gross-up amount would be calculated using a 20% excise tax rate and an approximately 40% individual income tax rate and assumes that the base amount for purposes of Sections 280G and 4999 of the Internal Revenue Code has been allocated between the cash severance and equity components of the change of control benefits in proportion to the amounts of each component. Assuming a triggering event took place on December 31, 2010, there would not be any tax gross-up amount payable. |
| (4) | After Mr. Thiry has been employed by the company at least ten years, 50% of any unvested SSARs, stock options and restricted stock units would vest upon any termination by Mr. Thiry without Cause or for Good Reason. Since Mr. Thiry has been employed for ten years as of December 31, 2010, the value of such accelerated vesting is equal to 50% of the amounts set forth in the table. |
Definitions under Stock-Based Award Agreements
For purposes of the stock-based award agreements and the table above:
A “Change of Control” means (i) any transaction or series of transactions in which any person or group (within the meaning of Rule 13d-5 under the Exchange Act and Sections 13(d) and 14(d) of the Exchange Act) becomes the direct or indirect “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), by