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 (Amendment No. )
Filed by the Registrant þ
Filed by a Party other than the Registrant ¨
Check the appropriate box:
| þ | Preliminary Proxy Statement |
| ¨ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
| ¨ | Definitive Proxy Statement |
| ¨ | Definitive Additional Materials |
| ¨ | Soliciting Material Pursuant to §240.14a-12 |
Pentair Ltd.
(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):
| þ | 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: |
PRELIMINARY PROXY MATERIALS - SUBJECT TO COMPLETION
PENTAIR LTD.
NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS
To Be Held April 29, 2013
To our Shareholders:
Our Annual General Meeting of Shareholders will be held at the Park Hyatt Zürich, Beethoven-Strasse 21, 8002 Zürich, Switzerland, on Monday, April 29, 2013, at 10:00 a.m. Central European Time, for the following purposes:
| 1. | to re-elect three directors with terms expiring at the 2016 annual general meeting of shareholders; |
| 2. | to approve the 2012 annual report of Pentair Ltd., the statutory financial statements of Pentair Ltd. for the year ended December 31, 2012 and the consolidated financial statements of Pentair Ltd. for the year ended December 31, 2012; |
| 3. | to discharge the Board of Directors and executive officers of Pentair Ltd. from liability for the year ended December 31, 2012; |
| 4. | to elect auditors as follows: (a) to re-elect Deloitte AG as statutory auditors until the next annual general meeting; (b) to ratify appointment of Deloitte & Touche LLP as independent registered public accounting firm for the year ending December 31, 2013; and (c) to elect PricewaterhouseCoopers AG as special auditors until the next annual general meeting; |
| 5. | to approve: (a) the appropriation of results for the year ended December 31, 2012; and (b) the conversion and appropriation of reserves from capital contributions to distribute an ordinary cash dividend; |
| 6. | to approve by advisory vote the compensation of our named executive officers as disclosed in this Proxy Statement; |
| 7. | to approve performance goals and related matters under the Pentair Ltd. 2012 Stock and Incentive Plan; and |
| 8. | to consider and act on such other business as may properly come before the Annual General Meeting or any adjournment of the Annual General Meeting. |
A copy of the proxy materials, including this Notice of Annual General Meeting of Shareholders and Proxy Statement and the enclosed proxy card, is first being sent on or about March 13, 2013 to each shareholder registered in our share register as of the close of business (Eastern Standard Time) on March 1, 2013. A copy of the proxy materials also will be sent to any additional shareholders who are registered in our share register as shareholders with voting rights, or who become beneficial owners through a nominee registered in our share register as a shareholder with voting rights, as of the close of business (Eastern Standard Time) on April 9, 2013. Only shareholders of record and beneficial owners of our common shares at the close of business (Eastern Standard Time) on April 9, 2013 are entitled to attend and vote on matters presented at the Annual General Meeting.
Your vote is very important. We encourage you to vote your proxy as soon as possible. You may vote by signing and submitting the enclosed proxy card by mail. You may vote in person at the Annual General Meeting even if you submit your proxy by mail.
By Order of the Board of Directors
Angela D. Lageson, Secretary
Schaffhausen, Switzerland
March 13, 2013
PROXY STATEMENT
FOR THE
ANNUAL GENERAL MEETING OF SHAREHOLDERS OF
PENTAIR LTD.
TO BE HELD ON MONDAY APRIL 29, 2013
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PROXY STATEMENT
FOR THE
ANNUAL GENERAL MEETING OF SHAREHOLDERS OF
PENTAIR LTD.
TO BE HELD ON MONDAY, APRIL 29, 2013
The Board of Directors (the “Board”) is soliciting proxies for use at our Annual General Meeting of Shareholders to be held on April 29, 2013. This Proxy Statement, the accompanying proxy card and our 2012 annual report to shareholders are being provided to give all shareholders of record at the close of business (Eastern Standard Time) on April 9, 2013 the opportunity to vote on matters that will be presented at the Annual General Meeting. These materials provide you with the information you need to know to vote your shares.
We have sent these materials on or about March 13, 2013 to each person who is registered as a holder of common shares in our register of shareholders (such owners are often referred to as “holders of record” or “registered shareholders”) as of the close of business (Eastern Standard Time) on March 1, 2013. We will also send a copy of these materials to any additional shareholders who become registered in our share register after the close of business (Eastern Standard Time) on March 1, 2013 and continue to be registered in our share register at the close of business (Eastern Standard Time) on April 9, 2013.
We have requested that banks, brokerage firms and other nominees who hold common shares on behalf of the owners of the common shares (such owners are often referred to as “beneficial shareholders” or “street name holders”) as of the close of business (Eastern Standard Time) on March 1, 2013 forward these materials, together with a proxy card or voting instruction card, to those beneficial shareholders and to do the same for any additional beneficial owners who acquire their shares after March 1, 2013 and continue to hold them at the close of business (Eastern Standard Time) on April 9, 2013. We have agreed to pay the reasonable expenses of the banks, brokerage firms and other nominees for forwarding these materials. We also have provided for these materials to be sent to persons who have interests in common shares through participation in our employee benefit plans. These individuals are not eligible to vote directly at the Annual General Meeting, but they may instruct the trustee of these plans how to vote the shares represented by their interests. The enclosed proxy card also will serve as voting instructions for the trustee of the plans.
QUESTIONS AND ANSWERS ON THE SOLICITATION AND VOTING
Who is Pentair Ltd.?
Pentair Ltd. is a company organized under the laws of Switzerland. We took our current form on September 28, 2012 as a result of the spin-off of Pentair Ltd. from its parent, Tyco International Ltd. (“Tyco”), and a reverse acquisition involving Pentair, Inc. We are the successor to Pentair, Inc. under the Securities Act of 1934, as amended. In this Proxy Statement, we may also refer to Pentair Ltd. as “the company”, “we”, “our” or “us”.
On September 28, 2012 prior to the Merger (as defined below), Tyco effected the spin-off of Pentair Ltd. through the pro-rata distribution of 100% of the outstanding common shares of Pentair Ltd. to Tyco’s shareholders (the “Distribution”). Immediately following the Distribution, a wholly-owned subsidiary of ours merged with and into Pentair, Inc., with Pentair, Inc. surviving as a wholly-owned subsidiary of ours (the “Merger”). At the effective time of the Merger, each Pentair, Inc. common share was converted into the right to receive one of our common shares, resulting in Pentair, Inc. shareholders owning approximately 47.5% of our common shares and Tyco shareholders owning approximately 52.5% of our common shares, in each case on a fully-diluted basis using the treasury method under United States generally accepted accounting principles.
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Are proxy materials available on the Internet?
Yes. However, your proxy card must be submitted by mail if you are a shareholder of record.
Important Notice Regarding the Availability of Proxy Materials for the Annual General Meeting to be Held on April 29, 2013. Our proxy statement for the Annual General Meeting to be held on April 29, 2013, other proxy material and our 2012 annual report to shareholders is available at http://www.proxyvote.com.
What is a proxy?
A proxy is your legal designation of another person (the “proxy”) to vote on your behalf. By voting your proxy, you are giving the persons named on the proxy card the authority to vote your shares in the manner you indicate on your proxy card. You vote your proxy by signing and submitting the proxy card by mail.
Why do I have more than one proxy card?
You may have multiple proxy cards if you hold your shares in different ways or accounts (for example, 401k accounts, joint tenancy, trusts, custodial accounts) or in multiple accounts. If your shares are held by a broker (in “street name”), you will receive your proxy card or other voting information from your broker, and you will return your proxy card or cards or otherwise vote your proxy as indicated in the materials you receive from your broker. You should vote your proxy for each separate account you have.
How many votes do I have?
Every holder of a common share on April 9, 2013 will be entitled to one vote per share for each director to be elected at the Annual General Meeting and to one vote per share on each other matter presented at the Annual General Meeting. However, if a person or group of persons beneficially own shares in excess of 20% less one share of our issued shares (the “Cap”), such person or group of persons will only be entitled to cast votes at the Annual General Meeting equal to the number of shares that is equal to the Cap. The Cap is set forth in Article 14 of our Articles of Association.
What is the difference between a shareholder of record and a beneficial owner?
Most of our shareholders hold their shares through a stockbroker, bank or other nominee rather than directly in their own name. As summarized below, there are some differences between shares held of record and those owned beneficially.
Shareholder of Record
If your shares are registered directly in your name with Wells Fargo Bank, N.A., our transfer agent, you are a “shareholder of record” and these proxy materials are being sent to you directly by us. As the shareholder of record, you have the right to grant your voting proxy directly to our officers named in the proxy card or to the independent proxy (see “How do I appoint and vote via an independent proxy?” below) named in the proxy card, to grant a written proxy to any person (who does not need to be a shareholder), or to vote in person at the Annual General Meeting. We have enclosed a proxy card for you to use in which you can elect to appoint our officers or the independent proxy as your proxy.
Beneficial Owner
If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in street name, and these proxy materials are being forwarded to you by your broker, bank or other nominee who is considered, with respect to those shares, the shareholder of record. As the
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beneficial owner, you have the right to direct your broker, bank or other nominee on how to vote your shares and are also invited to attend the Annual General Meeting. However, since you are not the shareholder of record, you may only vote these shares in person at the Annual General Meeting if you follow the instructions described below under the heading “How do I attend the Annual General Meeting?” and “How do I vote if I am a beneficial owner?” Your broker, bank or other nominee has enclosed a voting instruction card for you to use in directing your broker, bank or other nominee as to how to vote your shares, which may contain instructions for voting by telephone or electronically.
Who is entitled to vote?
Shareholders of Record
All shareholders registered in our share register at the close of business (Eastern Standard Time) on April 9, 2013 are entitled to vote on the matters set forth in this Proxy Statement and any other matter properly presented at the meeting for consideration, provided such shareholders become registered as shareholders with voting rights by that time. See “I am a shareholder of record. How do I become registered as a shareholder with voting rights?”
Beneficial Owners
Beneficial owners whose banks, brokers or nominees are shareholders registered in our share register with respect to the beneficial owners’ shares at the close of business (Eastern Standard Time) on April 9, 2013 are entitled to vote on the matters set forth in this Proxy Statement and any other matter properly presented at the meeting for consideration, provided such banks, brokers or nominees become registered as shareholders with voting rights. See “I am a shareholder of record. How do I become registered as a shareholder with voting rights?”
What if I am the record holder or beneficial owner of shares at the close of business (Eastern Standard Time) on March 1, 2013, but sell or otherwise transfer all or some portion of those shares before the close of business (Eastern Standard Time) on April 9, 2013?
Holders of record and beneficial owners will not be entitled to vote their shares or provide instructions to vote with respect to their shares if they hold shares at the close of business (Eastern Standard Time) on March 1, 2013, but sell or otherwise transfer all of those shares before the close of business (Eastern Standard Time) on April 9, 2013. Although holders of record and beneficial owners at the close of business (Eastern Standard Time) on March 1, 2013 are receiving these materials, holders of record and beneficial owners will only be entitled to vote their shares or provide instructions to vote with respect to those shares held at the close of business (Eastern Standard Time) on April 9, 2013. For each holder of record and beneficial owner, any instructions to vote with respect to shares held prior to the close of business (Eastern Standard Time) on April 9, 2013 will remain valid with respect to shares held at the close of business (Eastern Standard Time) on April 9, 2013 unless changed or revoked as provided in these materials.
I am a shareholder of record. How do I become registered as a shareholder with voting rights?
If you are a shareholder of record, you have been registered as a shareholder with voting rights in our share register, unless in certain circumstances (such as failure to comply with particular disclosure requirements set forth in our Articles of Association) we have specifically advised you that you are registered as a shareholder without voting rights.
How do I vote if I am a shareholder of record?
If you are a shareholder of record, you can vote in the following ways:
| • | By Mail: If you are a shareholder of record, you can vote by marking, dating and signing the appropriate proxy card and returning it by mail in the enclosed postage-paid envelope. |
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| • | At the Annual General Meeting: If you are a shareholder of record planning to attend the Annual General Meeting and wish to vote your common shares in person, we will give you a ballot at the meeting. |
Even if you plan to be present at the Annual General Meeting, we encourage you to complete and mail the enclosed proxy card to vote your common shares by proxy.
How do I vote if I am a beneficial owner?
If you are a beneficial owner of common shares, you can vote in the following ways:
| • | General: If you beneficially own your common shares, you can vote by following the instructions on the voting instruction card provided by your bank, broker or other nominee with these proxy materials. |
| • | At the Annual General Meeting: Shareholders who beneficially own their common shares in street name are not able to vote at the Annual General Meeting unless they have a proxy, executed in their favor, from the shareholder of record of their shares (i.e. their broker, bank or other nominee). |
Can I vote by telephone or via the Internet?
If you are a shareholder of record, you cannot vote by telephone or via the Internet. If you are a beneficial shareholder, see the voting instruction card provided by your broker, bank or other nominee for telephone or Internet voting instructions.
How do I vote by proxy given to a company officer?
If you properly complete your proxy card and send it to us in time to vote, your proxy, meaning one of the individuals named on your proxy card or their designated substitute, will vote your shares as you have directed. If you sign the proxy card but do not make specific choices, your proxy will vote your shares as recommended by the Board “FOR” each of the agenda items listed above. Alternatively, you can grant a proxy to the independent proxy as described below.
If a new agenda item or a new motion or proposal for an existing agenda item is presented to the Annual General Meeting, your proxy will vote in accordance with the recommendation of the Board. At the time we began printing this Proxy Statement, we knew of no matters that needed to be acted on at the Annual General Meeting other than those discussed in this Proxy Statement.
Whether or not you plan to attend the Annual General Meeting, we urge you to submit your proxy. Returning the proxy card or submitting your vote electronically will not affect your right to attend the Annual General Meeting. You must return your proxy cards to the address and by the times and dates set forth below under “Returning Your Proxy Card” in order for your vote to be counted.
How do I appoint and vote via an independent proxy?
If you are a shareholder of record with voting rights, you may authorize the independent proxy, Dr. René Schwarzenbach, Schwarzenbach Rechtsanwälte, Grossmünsterplatz 1, 8001 Zürich, Switzerland, with full rights of substitution, to vote your common shares on your behalf by checking the appropriate box on the enclosed proxy card. If you authorize the independent proxy to vote your shares without giving instructions, your shares will be voted in accordance with the recommendations of the Board with regard to the items listed in the notice of meeting.
If new agenda items (other than those in the notice of meeting) or new proposals or motions with respect to those agenda items set forth in the notice of meeting are being put forth before the Annual General Meeting, the independent proxy will, in the absence of other specific instructions, vote in accordance with the recommendation of the Board.
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Whether or not you plan to attend the Annual General Meeting, we urge you to submit your proxy. Returning the proxy card will not affect your right to attend the Annual General Meeting. You must return your proxy cards to the address and by the times and dates set forth below under “Returning Your Proxy Card” in order for your vote to be counted.
How do I attend the Annual General Meeting?
All shareholders are invited to attend and vote at the Annual General Meeting. For admission to the Annual General Meeting, shareholders of record should bring a form of photo identification to the Registered Shareholders check-in area, where their ownership will be verified. Those who beneficially own shares should come to the Beneficial Owners check-in area. To be admitted, beneficial owners must bring account statements or letters from their banks or brokers showing that they own our common shares as of April 9, 2013 along with a form of photo identification. Beneficial owners should also see “How do I vote if I am a beneficial owner?” above for additional requirements if they intend to vote at the Annual General Meeting. Registration will begin at 9:00 a.m. Central European Time and the Annual General Meeting will begin at 10:00 a.m. Central European Time.
May I change or revoke my vote after I return my proxy or voting instruction card?
You may change your vote before it is exercised by:
| • | Notifying our Corporate Secretary in writing before the Annual General Meeting that you are revoking your proxy or, if you beneficially own your common shares, follow the instructions on the voting instruction card; |
| • | Submitting another proxy card (or voting instruction card if you beneficially own your common shares) with a later date; or |
| • | If you are a shareholder of record, or a beneficial owner with a proxy from the shareholder of record, voting in person at the Annual General Meeting. |
If you have granted your proxy to the independent proxy and wish to revoke or change the proxy, you should send a revocation letter, and new proxy, if applicable, directly to the independent proxy, Dr. René Schwarzenbach, Schwarzenbach Rechtsanwälte, Grossmünsterplatz 1, 8001 Zürich, Switzerland.
What proposals are being presented at the Annual General Meeting and what vote is required to approve each proposal?
We intend to present proposals numbered one through seven for shareholder consideration and voting at the Annual General Meeting. For purposes of these proposals, an absolute majority means at least half plus one additional vote represented (in person or by proxy) at the Annual General Meeting. Shares not eligible to be voted (including broker non-votes) will be deemed not to be represented at the Annual General Meeting. These proposals are for:
| • | Re-election of three directors with terms expiring at the 2016 Annual General Meeting of Shareholders. |
The re-election of each director nominee requires the affirmative vote of an absolute majority (or in the event of a contested election, a plurality) of the votes cast (in person or by proxy) at the Annual General Meeting.
| • | Approval of the annual report and financial statements. |
The approval of the 2012 annual report of Pentair Ltd., the statutory financial statements of Pentair Ltd. for the year ended December 31, 2012 and the consolidated financial statements of Pentair Ltd. for the year ended December 31, 2012 requires the affirmative vote of an absolute majority of the votes represented (in person or by proxy) at the Annual General Meeting.
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| • | Discharge of the Board and executive officers from liability for the year ended December 31, 2012. |
The discharge of the Board and executive officers from liability for the year ended December 31, 2012 requires the affirmative vote of a majority of the votes represented (in person or by proxy) at the Annual General Meeting, not counting the votes of any member of the Board or any executive officer (except in their capacity as proxy for other, non-Board member or non-executive officer shareholders) of Pentair Ltd. or any votes represented by Pentair Ltd.
| • | Election of auditors. |
Each of (a) the re-election of Deloitte AG as statutory auditors until the next annual general meeting, (b) the ratification of the appointment of Deloitte & Touche LLP as independent registered public accounting firm for the year ending December 31, 2013 and (c) the election of PricewaterhouseCoopers AG as special auditors until the next annual general meeting requires the affirmative vote of an absolute majority of the votes represented (in person or by proxy) at the Annual General Meeting.
| • | Appropriation of results for the year ended December 31, 2012 and conversion and appropriation of reserves from capital contributions to distribute an ordinary cash dividend. |
Each of (a) the appropriation of results for the year ended December 31, 2012 and (b) the conversion and appropriation of reserves from capital contributions to distribute an ordinary cash dividend requires the affirmative vote of an absolute majority of the votes represented (in person or by proxy) at the Annual General Meeting.
| • | Advisory vote to approve the compensation of the named executive officers. |
The approval by advisory vote of the compensation of the named executive officers requires the affirmative vote of an absolute majority of the votes represented (in person or by proxy) at the Annual General Meeting.
| • | Approval of performance goals and related matters under the Pentair Ltd. 2012 Stock and Incentive Plan. |
The approval of performance goals and related matters under the Pentair Ltd. 2012 Stock and Incentive Plan requires the affirmative vote of an absolute majority of the votes represented (in person or by proxy) at the Annual General Meeting.
Other than matters incident to the conduct of the Annual General Meeting and those set forth in this Proxy Statement, we do not know of any other business or proposals to be considered at the Annual General Meeting. If any other business is proposed and properly presented at the Annual General Meeting, the proxies received from our shareholders give the proxy holders the authority to vote on the matter at their discretion, and such proxy holders will vote in accordance with the recommendation of the Board.
What are the Board’s recommendations on how I should vote my shares?
The Board recommends that you vote your shares as follows:
| Proposal 1 — | FOR the re-election of each of three directors to our Board with terms expiring at the 2016 annual general meeting of shareholders. | |
| Proposal 2 — | FOR approval of the 2012 annual report of Pentair Ltd., the statutory financial statements of Pentair Ltd. for the year ended December 31, 2012 and the consolidated financial statements of Pentair Ltd. for the year ended December 31, 2012. | |
| Proposal 3 — | FOR discharging the Board and executive officers of Pentair Ltd. from liability for the year ended December 31, 2012. | |
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| Proposal 4 — | FOR each of (a) the re-election of Deloitte AG as statutory auditors until the next annual general meeting; (b) the ratification of the appointment of Deloitte & Touche LLP as independent registered public accounting firm for the year ending December 31, 2013; and (c) the election of PricewaterhouseCoopers AG, as special auditors until the next annual general meeting. | |
| Proposal 5 — | FOR approval of each of (a) the appropriation of results for the year ended December 31, 2012; and (b) the conversion and appropriation of reserves from capital contributions to distribute an ordinary cash dividend. | |
| Proposal 6 — | FOR approval of the compensation of our named executive officers as disclosed in this Proxy Statement. | |
| Proposal 7 — | FOR approval of performance goals and related matters under the Pentair Ltd. 2012 Stock and Incentive Plan. | |
What are my choices when voting?
For Proposal 1, you may cast your vote in favor of or against re-electing a nominee as a director, or you may abstain from voting for any or all of the nominees.
For all other proposals, you may cast your vote in favor of or against the applicable proposal, or you may elect to abstain from voting your shares.
How many shares can vote at the Annual General Meeting?
Our registered shares are our only class of voting stock. As of the close of business on March 1, 2013, there were [204,851,198] registered shares issued and outstanding and entitled to vote; however, shareholders who are not registered in our share register as shareholders or do not become registered as shareholders with voting rights as of the close of business (Eastern Standard Time) on April 9, 2013 will not be entitled to attend, vote at or grant proxies to vote at, the Annual General Meeting. See “—I am a shareholder of record. How do I become registered as a shareholder with voting rights?” Shares duly represented (in person or by proxy) at the Annual General Meeting will be entitled to one vote per share for each matter presented at the Annual General Meeting. Shareholders who are registered in our share register as of the close of business (Eastern Standard Time) on April 9, 2013 and who are registered with voting rights may vote in person at the Annual General Meeting as discussed under “How do I vote if I am a shareholder of record?” Shareholders who beneficially own their common shares as of the close of business (Eastern Standard Time) on April 9, 2013 may vote in person at the Annual General Meeting as discussed under “How do I vote if I am a beneficial owner?”
What constitutes a quorum?
Our Articles of Association provide that all resolutions and elections made at a shareholders’ meeting require the presence, in person or by proxy, of a majority of all shares entitled to vote, with abstentions and broker non-votes regarded as present for purposes of establishing the quorum.
What is the effect of broker non-votes and abstentions?
A broker non-vote occurs when a broker holding shares for a beneficial owner does not vote on a particular agenda item because the broker does not have discretionary voting power for that particular item and has not received instructions from the beneficial owner. Although brokers have discretionary power to vote your shares with respect to “routine” matters, they do not have discretionary power to vote your shares on “non-routine” matters pursuant to New York Stock Exchange (“NYSE”) rules. We believe the following proposals will be considered non-routine under NYSE rules and therefore your broker will not be able to vote your shares with
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respect to these proposals unless the broker receives appropriate instructions from you: Proposal No. 1 (Re-election of Three Directors), Proposal No. 5(b) (Approval of a Conversion and Appropriation of Reserves from Capital Contributions to Distribute an Ordinary Cash Dividend), Proposal No. 6 (Advisory Vote to Approve Compensation of the Named Executive Officers) and Proposal No. 7 (Approval of Performance Goals and Related Matters under the Pentair Ltd. 2012 Stock and Incentive Plan).
Common shares owned by shareholders electing to abstain from voting with respect to any agenda item will be regarded as represented at the meeting and counted towards the determination of the majority required to approve the agenda items submitted to the Annual General Meeting. Therefore, abstentions will have the effect of an “AGAINST” vote on such agenda items.
How will my shares be voted if I do not specify how they should be voted?
If you submit your signed proxy without indicating how you want your shares to be voted, your proxy will vote your shares according to the Board’s recommendations that are listed above. As to any other business that may properly come before the Annual General Meeting, your proxy will vote in accordance with the recommendation of the Board. We do not presently know of any other business.
If your shares are held in the Pentair Retirement Savings and Stock Incentive Plan and you do not submit a proxy indicating how you want your shares to be voted, Fidelity Management Trust Company (or its designated affiliate) will vote your shares along with all other uninstructed shares in proportion to the voting by Pentair Retirement Savings and Stock Incentive Plan shares for which instructed proxies were received.
How will voting on any other business be conducted?
Other than matters incidental to the conduct of the Annual General Meeting and those set forth in this Proxy Statement, we do not know of any business or proposals to be considered at the Annual General Meeting. If any other business is proposed and properly presented at the Annual General Meeting, the proxies received from our shareholders give the proxy holders the authority to vote on the matter at their discretion and such proxy holders will vote in accordance with the recommendation of the Board.
Who will count the votes?
Representatives from The Carideo Group, Inc. will count the votes and serve as our Inspectors of Election. The Inspectors of Election will be present at the Annual General Meeting.
Who pays the cost of this proxy solicitation?
We pay the costs of soliciting proxies sought by the Board. Upon request, we will reimburse brokers, dealers, banks and trustees, or their nominees, for reasonable expenses incurred by them in forwarding proxy materials to beneficial owners of our common shares. Morrow & Co., 470 West Avenue, Stamford, Connecticut, is assisting us in the solicitation of proxies at a cost to us of $10,000, plus expenses.
Returning your proxy card to the company
Our shareholders should complete and return the proxy card as soon as possible. In order to assure that your proxy is received in time to be voted at the meeting, the proxy card must be completed in accordance with the instructions on it and received at the address set forth below by the time and date specified:
By 5:00 p.m. (Eastern Standard Time) on April 26, 2013 by mail at:
Vote Processing
c/o Broadridge
51 Mercedes Way
Edgewood, NY 11717
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If your common shares are held in street name, you should return your proxy card or voting instruction card in accordance with the instructions on that card or as provided by the bank, brokerage firm or other nominee who holds our common shares on your behalf.
Returning your proxy card to the independent proxy
Shareholders wishing to instruct the independent proxy should complete the proxy card as soon as possible and check the appropriate box to appoint the independent proxy. In order to assure that your proxy is received in time to be voted at the meeting by the independent proxy, the proxy card must be completed in accordance with the instructions on it and received at the address set forth below by the time (being local time) and date specified:
By 5:00 p.m. (Eastern Standard Time) on April 26, 2013 by mail at:
Vote Processing
c/o Broadridge
51 Mercedes Way
Edgewood, NY 11717
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Board Governance
The Board has adopted and regularly reviews and, if appropriate, revises our Corporate Governance Principles and written charters for its Audit and Finance Committee, Compensation Committee and Governance Committee in accordance with rules of the Securities and Exchange Commission (“SEC”) and the NYSE. We and our Board continue to be committed to the highest standards of corporate governance and ethics. The Board has adopted Pentair’s Code of Business Conduct and Ethics and has designated it as the code of ethics for our Chief Executive Officer and senior financial officers. Copies of all of these documents are available, free of charge, on our website at http://www.pentair.com/about-us/corporate-governance-and-leadership/.
Board Leadership Structure
Our Corporate Governance Principles describe our policies concerning:
| • | Selection and Composition of the Board |
| • | Board Leadership |
| • | Board Composition and Performance |
| • | Responsibilities of the Board |
| • | Board Relationship to Senior Management |
| • | Meeting Procedures |
| • | Committee Matters |
| • | Leadership Development |
We do not have a policy requiring the positions of Chairman of the Board and Chief Executive Officer to be held by different persons. Rather, the Board has the discretion to determine whether or not the positions should be combined or split. Since 2002, our Chief Executive Officer has also been the Chairman of the Board. The Board believes that this leadership structure has worked well for several reasons, among them:
| • | We historically have had a super-majority of independent directors; only one or two officers of our company have served at any one time as directors (out of 10 or 11 members of the Board). |
| • | Our independent directors meet in executive session without the Chief Executive Officer present at every regular meeting of the Board. |
| • | Our annual Board Assessment process addresses issues of Board structure and director performance. |
| • | We have and have had since 2003 an independent member of the Board as our Lead Director. |
| • | Our Lead Directors have served as an effective communication channel between the independent Board members and the Chief Executive Officer and among the independent Board members. |
Our Lead Director is selected by the Independent Directors on our Board. His role is to provide independent leadership to the Board, act as liaison between the non-management directors and our company, and ensure that the Board operates independently of management. The principle responsibilities assigned to the Lead Director include:
| • | Chairing the Board in the absence of the Chief Executive Officer; |
| • | Presiding over all executive sessions of the Board; |
| • | In conjunction with the Chairman of the Compensation Committee, giving annually the Board’s performance review of the Chief Executive Officer; |
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| • | In conjunction with the Chairman, approving the agenda for Board meetings, including scheduling to assure sufficient time for discussion of all agenda items; |
| • | In conjunction with the Chairman and Committee Chairs, ensuring an appropriate flow of information to the Directors; |
| • | Holding one-on-one discussions with individual directors where requested by directors or the Board; and |
| • | Carrying out other duties as requested by the Board. |
Board’s Role in Risk Oversight
At the direction of our Board, we have instituted an enterprise-wide risk management system to assess, monitor and mitigate risks that arise in the course of our business. The Board has determined that the Board as a whole, and not a separate committee, will oversee our risk management process. Each of our Board Committees has historically focused on specific risks within their areas of responsibility, but the Board believes that the overall enterprise risk management process is more properly overseen by all of the members of the Board. Our chief operating officer, general counsel and head of internal audit are the primary personnel responsible to the Board in the planning, assessment and reporting of our risk profile. The Board reviews an assessment of, and a report on, our risk profile on a regular basis.
Shareholder and Other Stakeholder Communication with the Board
If you are a shareholder or other stakeholder and wish to communicate with the Board, non-management directors as a group or any individual director, including the Lead Director, you may send a letter addressed to the relevant party, c/o Corporate Secretary, Pentair Ltd., Freier Platz 10, CH-8200, Schaffhausen, Switzerland. The Board has instructed the Corporate Secretary to forward such communications directly to the addressee(s).
Committees of the Board
The Board has three standing committees: the Audit and Finance Committee, the Compensation Committee and the Governance Committee. The committees generally hold meetings when the Board meets and additionally as needed. Management representatives attend each committee meeting. Independent directors generally also meet in executive session without management present at each meeting.
Audit and Finance Committee
| Role: | The Audit and Finance Committee is responsible, among other things, for assisting the Board with oversight of our accounting and financial reporting processes, oversight of our financing strategy, investment policies and financial condition, and audits of our financial statements. These responsibilities include the integrity of the financial statements, compliance with legal and regulatory requirements, the independence and qualifications of our external auditor and the performance of our internal audit function and of the external auditor. The Audit and Finance Committee is responsible for the selection and recommendation for election by a meeting of shareholders of an independent auditor. The Audit and Finance Committee is directly responsible for the compensation, evaluation, terms of engagement (including retention and termination recommendations to shareholders) and oversight of the independent registered public accounting firm elected by shareholders to serve as the external auditor. The Audit and Finance Committee holds meetings periodically with our independent and internal auditors, the Board and management to review and monitor the adequacy and effectiveness of reporting, internal controls, risk assessment and compliance with our policies. | |
| Meetings: | The Audit and Finance Committee held nine meetings in 2012. | |
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| Members: | The members of the Audit and Finance Committee are Ronald L. Merriman (Chair), Leslie Abi-Karam, Carol Anthony (John) Davidson, Charles A. Haggerty and David H.Y. Ho. All members have been determined to be independent under SEC and NYSE rules. Mr. Merriman is a member of the audit committees of Aircastle Limited, Realty Income Corporation and Haemonetics Corporation, each of which is a publicly-traded company. The Board has determined that Mr. Merriman’s service on the audit committees of three other public companies does not impair his ability to effectively serve as Chair of our Audit and Finance Committee. | |
| Report: | You can find the Audit and Finance Committee Report under “Audit and Finance Committee Report” of this Proxy Statement. | |
| Financial Experts: |
The Board has unanimously determined that all members of the Audit and Finance Committee are financially literate under NYSE rules and at least one member has financial management expertise. In addition, the Board has determined that all members of the Audit and Finance Committee qualify as “audit committee financial experts” under SEC standards. | |
| Compensation Committee | ||
| Role: | The Compensation Committee sets and administers the policies that govern executive compensation within the framework determined by the Board. This includes establishing and reviewing executive base salaries and administering cash bonus and equity-based compensation under the 2012 Stock and Incentive Plan. The Compensation Committee also sets the Chief Executive Officer’s compensation based on the Board’s annual evaluation of the Chief Executive Officer’s performance. The Compensation Committee has engaged Aon Hewitt, a human resources consulting firm, to aid the Compensation Committee in its annual review of our executive and director compensation programs for continuing appropriateness and reasonableness and to make recommendations regarding executive officer and director compensation levels and structures. In reviewing our compensation programs, the Compensation Committee also considers other sources to evaluate external market, industry and peer company practices. Information regarding the independence of Aon Hewitt is included under “Compensation Discussion and Analysis – Services of Compensation Consultant.” A more complete description of the Compensation Committee’s practices can be found under “Compensation Discussion and Analysis” under the headings “Compensation Committee Practices,” “Services of Compensation Consultant,” “Role of Executive Officers in Compensation Decisions,” “Setting Executive Compensation” and “Comparative Framework.” | |
| Meetings: | The Compensation Committee held eight meetings in 2012. | |
| Members: | The members of the Compensation Committee are David A. Jones (Chair), Glynis A. Bryan, Jerry W. Burris, T. Michael Glenn and William T. Monahan. All members have been determined to be independent under NYSE rules. | |
| Report: | You can find the Compensation Committee Report under “Compensation Committee Report” of this Proxy Statement. | |
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| Governance Committee | ||
| Role: | The Governance Committee is responsible for, among other things, identifying individuals qualified to become directors and recommending nominees to the Board for election at annual general meetings of shareholders. In addition, the Governance Committee monitors developments in director compensation and, as appropriate, recommends changes in director compensation to the Board. The Governance Committee is also responsible for developing and recommending to the Board our corporate governance principles. Finally, the Governance Committee oversees public policy matters and compliance with our Code of Business Conduct and Ethics. | |
| Meetings: | The Governance Committee held five meetings in 2012. | |
| Members: | The members of the Governance Committee are Glynis A. Bryan (Chair), Jerry W. Burris, T. Michael Glenn, David A. Jones and William T. Monahan. All members have been determined to be independent under NYSE rules. | |
Compensation Committee Interlocks and Insider Participation
During 2012, we did not employ any member of the Compensation Committee as an officer or employee and there were no interlock relationships.
Independent Directors
The Board determines the independence of each director and nominee for election as a director. The Board makes these determinations in accordance with the NYSE rules for independence of directors and our categorical standards of independence included in our Corporate Governance Principles. Based on these standards, the Board affirmatively determined that each of the following non-employee directors and non-employee director nominees is independent and has no material relationship with us, except as a director or shareholder:
| (1) Leslie Abi-Karam | (6) Charles A. Haggerty | |
| (2) Glynis A. Bryan | (7) David H. Y. Ho | |
| (3) Jerry W. Burris | (8) David A. Jones | |
| (4) Carol Anthony (John) Davidson | (9) Ronald L. Merriman | |
| (5) T. Michael Glenn | (10) William T. Monahan | |
In addition, based on the NYSE standards and our categorical standards of independence included in the Corporate Governance Principles, the Board affirmatively determined that Randall J. Hogan is not independent because he is our Chief Executive Officer.
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In determining the independence of directors, our Governance Committee considers circumstances where one of our directors also serves as a director or executive officer of a company that is our customer or supplier. The Governance Committee has reviewed each of these relationships, which are set forth below. In each case, the relationship involves sales to or purchases from the organization indicated which (i) amount to less than the greater of $1 million or 2% of that organization’s consolidated gross revenues during each of 2012, 2011 and 2010; and (ii) during all relevant years were not of an amount or nature that impeded the director’s exercise of independent judgment.
| Director |
Relationships Considered | |
| Leslie Abi-Karam | Executive Vice President and President, Communications Solutions, Pitney Bowes Inc. | |
| Glynis A. Bryan | Chief Financial Officer, Insight Enterprises, Inc. | |
| T. Michael Glenn | Executive Vice President – Market Development and Corporate Communications, FedEx Corporation | |
| David A. Jones | Senior Advisor, Oak Hill Capital Partners | |
Our Governance Committee also considered the fact that Carol Anthony (John) Davidson was Senior Vice President, Controller and Chief Accounting Officer of Tyco until September 28, 2012. Tyco was the parent company of Pentair Ltd. until the Distribution occurred on September 28, 2012. Due to the resulting leadership structure after the Merger, and the fact that Mr. Davidson’s relationship with the former parent of Pentair Ltd. ceased concurrently with the Merger, the Governance Committee determined that Mr. Davidson’s former officer position with Tyco did not impede Mr. Davidson’s exercise of independent judgment.
Policies and Procedures Regarding Related Person Transactions
Our Board has adopted written policies and procedures regarding related person transactions. For purposes of these policies and procedures:
| • | a “related person” means any of our directors, executive officers or five-percent shareholders or any of their immediate family members; and |
| • | a “related person transaction” generally is a transaction (including any indebtedness or a guarantee of indebtedness) in which we were or are a participant and the amount involved exceeds $50,000, and in which a related person had or will have a direct or indirect material interest. |
Potential related person transactions must be brought to the attention of the Governance Committee directly or to the General Counsel for transmission to the Governance Committee. Disclosure to the Governance Committee should occur before, if possible, or as soon as practicable after the related person transaction is effected, but in any event as soon as practicable after the executive officer or director becomes aware of the related person transaction. The Governance Committee’s decision whether or not to approve or ratify a related person transaction is to be made in light of a number of factors, including the following:
| • | whether the terms of the related person transaction are fair to us and on terms at least as favorable as would apply if the other party was not or did not have an affiliation with any of our directors, executive officers or five-percent shareholders; |
| • | whether there are demonstrable business reasons for us to enter into the related person transaction; |
| • | whether the related person transaction could impair the independence of a director under our Corporate Governance Principles’ standards for director independence; and |
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| • | whether the related person transaction would present an improper conflict of interest for any of our directors or executive officers, taking into account the size of the transaction, the overall financial position of the director or executive officer, the direct or indirect nature of the interest of the director or executive officer in the transaction, the ongoing nature of any proposed relationship, and any other factors the Committee deems relevant. |
We had no related person transactions during 2012. To our knowledge, no related person transactions are currently proposed.
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Re-election of Three Directors with Terms Expiring
at the 2016 Annual General Meeting of Shareholders
Proposal of the Board
The Board, upon recommendation of the Governance Committee, proposes the following three incumbent directors as nominees for re-election as directors for three-year terms that expire at the 2016 Annual General Meeting of Shareholders: T. Michael Glenn, David H.Y. Ho and Ronald L. Merriman.
Eight directors have terms of office that do not expire at this time and we expect that they will continue to serve their full terms.
If re-elected, each of the three director nominees standing for re-election at the Annual General Meeting will serve on the Board until the Annual General Meeting in 2016. If any of the three nominees should become unable to accept re-election, the persons named on the proxy card as proxies may vote for other person(s) selected by the Board or the named proxies. Management has no reason to believe that any of the three nominees for re-election named above will be unable to serve their full term if elected.
Biographies of the director nominees and continuing directors follow. These biographies include their ages; an account of their specific business experience; the names of publicly held and certain other corporations of which they also are, or have been within the past five years, directors; and a discussion of their specific experience, qualifications, attributes or skills that led to the conclusion that they should serve as directors.
Vote Requirement
Under our Articles of Association, election of directors requires the affirmative vote of an absolute majority (or in the event of a contested election, a plurality) of the votes cast (in person or by proxy) at the Annual General Meeting. A nominee who does not receive an absolute majority of the votes in an uncontested election will not be elected to our Board. Vacancies in the Board may be filled through election by shareholders at a general meeting of shareholders.
Information About Directors
Board Composition
Our Articles of Association currently provide for a Board of eleven members. The Board is divided into three classes with directors serving three-year terms. The beginning date for each term is staggered so that, in any particular year, the term of only one class expires. Vacancies may be filled through election by shareholders at a general meeting of shareholders. Incumbent directors T. Michael Glenn, David H. Y. Ho and Ronald L. Merriman are standing for re-election at the Annual General Meeting.
Directors’ Attendance
The Board held nine meetings in 2012. In each of the regularly scheduled meetings, the independent directors in attendance also met in executive session, without the Chief Executive Officer or other management present. All directors attended at least 75% of the aggregate of all meetings of the Board and all meetings of the Committees on which they served during the year ended December 31, 2012. We expect our directors to attend our annual general meetings of shareholders. In April 2012, all of the directors then in office attended the 2012 annual meeting of shareholders. William T. Monahan has served as the Board’s Lead Director since January 1, 2008 and acts as the presiding director for all executive sessions of the independent directors.
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Director Qualifications
The Governance Committee searches for qualified candidates to be a director, reviews the qualifications of each candidate and recommends to the Board the names of qualified candidates to be nominated for election or re-election as directors. The Board reviews the candidates recommended by the Governance Committee and nominates candidates for election or re-election by the shareholders. The Governance Committee recognizes that the contribution of the Board will depend both on the character and capacities of the directors taken individually and on their collective strengths. With this in mind, the Governance Committee evaluates candidates in light of a number of criteria. Directors are chosen with a view to bringing to the Board a variety of experience and backgrounds and establishing a core of business advisers with financial and management expertise. The Governance Committee also considers candidates who have substantial experience outside the business community, such as in the public, academic or scientific communities.
When they consider possible candidates for appointment or election as directors, the Governance Committee and the Board are also guided by the following principles, found in our Corporate Governance Principles:
| • | the Corporate Governance Principles and the rules adopted by the SEC and the NYSE require that at least a majority of the Board consist of independent directors; |
| • | each director should be chosen without regard to sex, sexual orientation, race, religion or national origin; |
| • | each director should be an individual of the highest character and integrity and have an inquiring mind, vision and the ability to work well with others; |
| • | each director should be free of any conflict of interest which would violate any applicable law or regulation or interfere with the proper performance of the responsibilities of a director; |
| • | each director should possess substantial and significant experience which would be of particular importance to us in the performance of the duties of a director; |
| • | each director should have sufficient time available to devote to our affairs in order to carry out the responsibilities of a director; and |
| • | each director should have the capacity and desire to represent the balanced, best interests of the shareholders as a whole and not primarily the interests of a special interest group or constituency and be committed to enhancing long-term shareholder value. |
Our Board’s policies on director qualifications emphasize our commitment to diversity at the Board level – diversity not only of sex, sexual orientation, race, religion or national origin but also diversity of experience, expertise and training. The Governance Committee in the first instance is charged with observance of these director selection guidelines, and strives in reviewing potential candidates to assess the fit of his or her qualifications with the needs of the Board and our company at that time, given the then current mix of directors’ attributes. Board composition, director effectiveness and Board processes, including director recruitment and selection, are all subject areas of our annual Board assessment.
Shareholder Nominees
Shareholders submitted to the Governance Committee no candidates for nomination for election as a director at the 2013 Annual General Meeting. According to our Articles of Association, a shareholder must give advance notice and furnish certain information in order to submit a nomination for election as a director. Any shareholder who wishes to present a candidate for consideration for election at the 2014 Annual General Meeting should send a letter identifying the name of the candidate and summary of the candidate’s qualifications, along with the other supporting documentation described in Article 11, Section 3 of our Articles of Association, to our Governance Committee. This letter should be addressed c/o Corporate Secretary, Freier Platz 10, CH-8200, Schaffhausen, Switzerland no earlier than January 2, 2014 and no later than January 27, 2014 for consideration at the 2014 Annual General Meeting. You may find a copy of our Articles of Association on file with the SEC by
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searching the EDGAR archives at http://www.sec.gov/edgar/searchedgar/webusers.htm. You may also obtain a copy from us free of charge by submitting a written request to our principal executive offices at Freier Platz 10, CH-8200, Schaffhausen, Switzerland, Attention: Corporate Secretary.
Directors Standing For Re-election
For a Three-Year Term Expiring at the 2016 Annual General Meeting of Shareholders
T. Michael Glenn, director of Pentair since 2007, age 57.
Since 1998, Mr. Glenn has been the Executive Vice President—Market Development and Corporate Communications of FedEx Corporation, a global provider of supply chain, transportation, business and related information services. Since 2000, Mr. Glenn has also served as President and Chief Executive Officer of FedEx Corporate Services, responsible for all marketing, sales, customer service and retail operations functions for all FedEx Corporation operating companies including FedEx Office. From 1994 to 1998, Mr. Glenn was Senior Vice President—Marketing and Corporate Communications of FedEx Express. Mr. Glenn is also a director of Level 3 Communications, Inc. and was formerly a director of Deluxe Corporation from 2004 to 2006 and Renasant Corporation from 2008 to 2012.
Mr. Glenn brings extensive strategic, marketing and communications experience to our Board from his service as one of the top leaders at FedEx Corporation. He has been an active participant in the development of our strategic plans, and a strong proponent for strengthening our branding and marketing initiatives.
David H. Y. Ho, director of Pentair since 2007, age 53.
Mr. Ho is Chairman and founder of Kiina Investment Limited, a venture capital firm that invests in start-up companies in the technology, media and telecommunications industries, and has significant executive experience with global technology companies. From 2007 until his retirement in 2008, he served as the Chairman of the Greater China Region for Nokia Siemens Networks, a telecommunications infrastructure company that is a joint venture between Finland-based Nokia Corporation and Germany-based Siemens AG. Between 2002 and 2007, Mr. Ho served in various capacities for Nokia China Investment Limited, the Chinese operating subsidiary of Nokia Corporation, a multinational telecommunications company. Between 1983 and 2001, Mr. Ho held various senior positions with Nortel Networks and Motorola Inc. in Canada and China. Mr. Ho is also a director of Air Products and Chemicals, Inc. (since 2013), Triquint Semiconductor (since 2010) and Dong Fang Electric Corporation, a Chinese State Owned Enterprise (since 2009), and was a director of 3Com Corporation from 2008 through 2010, Owens-Illinois Inc. from 2008 to 2012 and Sinosteel Corporation from 2008 until 2012.
Mr. Ho brings extensive experience and business knowledge of global markets in diversified industries, with a strong track record in establishing and building businesses in China, and management expertise in operations, mergers, acquisitions and joint ventures in the area.
Ronald L. Merriman, director of Pentair since 2004, age 68.
Mr. Merriman serves as the Chair of the Audit and Finance Committee. He is the retired Vice Chair of KPMG, a global accounting and consulting firm, where he served from 1967 to 1997 in various positions, including as a member of the Executive Management Committee. He also served as Executive Vice President of Ambassador International, Inc., a publicly-traded travel services business, from 1997 to 1999; Executive Vice President of Carlson Wagonlit Travel, a global travel management firm, from 1999 to 2000; Managing Director of O’Melveny & Myers LLP, a global law firm, from 2000 to 2003; and Managing Director of Merriman Partners, a management advisory firm, from 2004 to 2010. He is also a director of Aircastle Limited, Realty Income Corporation and Haemonetics Corporation.
Mr. Merriman’s extensive accounting and financial background has strengthened our Audit and Finance Committee and its processes. In addition, his global experience has assisted us in our expansion into overseas markets.
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Directors Not Standing For Re-election
With a Three-Year Term Expiring at the 2015 Annual General Meeting of Shareholders
Jerry W. Burris, director since 2007, age 49.
Mr. Burris has been President and Chief Executive Officer of Associated Materials, LLC, a manufacturer of professionally installed exterior building products, since 2011. Between 2008 and 2011, he was President, Precision Components of Barnes Group Inc. From 2006 until 2008, Mr. Burris was the President of Barnes Industrial, a global precision components business within Barnes Group. Prior to joining Barnes Group, Mr. Burris worked at General Electric Company, a multinational technology and services conglomerate, where he served as president and chief executive officer of Advanced Materials Quartz and Ceramics in 2006. From 2003 to 2006, Mr. Burris was the general manager of global services for GE Healthcare. From 2001 to 2003, he led the integration of global supply chain sourcing for the Honeywell integration and served as the general manager of global sourcing for GE Industrial Systems. Mr. Burris first joined General Electric Company in 1986 in the GE Corporate Technical Sales and Marketing Program.
Mr. Burris brings to our Board significant experience in management of global manufacturing operations and related processes, such as supply chain management, quality control and product development. Mr. Burris provides the Board with insight into operating best practices and current developments in a variety of management contexts.
Carol Anthony (John) Davidson, director since 2012, age 57.
From 2004 until 2012, Mr. Davidson was Senior Vice President, Controller and Chief Accounting Officer of Tyco International Ltd., a provider of diversified industrial products and services. Between 1997 and 2004, Mr. Davidson held a variety of leadership roles at Dell Inc., a computer and technology services company, including the positions of Vice President, Audit, Risk and Compliance, and Vice President, Corporate Controller. From 1981 to 1997, Mr. Davidson held a variety of accounting and financial leadership roles at Eastman Kodak Company, a provider of imaging technology products and services. Since 2010, Mr. Davidson has also been a director of DaVita HealthCare Partners Inc., a provider of kidney dialysis services. 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 also serves on the Board of Governors of the Financial Industry Regulatory Authority.
Mr. Davidson is a CPA with more than 30 years of leadership experience across multiple industries and brings a strong track record of building and leading global teams and implementing governance and controls processes.
Randall J. Hogan, director since 1999, age 57.
Since January 1, 2001, Mr. Hogan has been our Chief Executive Officer. Mr. Hogan became Chairman of the Board on May 1, 2002. From December 1999 through December 2000, Mr. Hogan was our President and Chief Operating Officer. From March 1998 to December 1999, he was Executive Vice President and President of our Electrical and Electronic Enclosures Group. From 1995 to 1997, he was President of the Carrier Transicold Division of United Technologies Corporation, a leader in the transport refrigeration and air conditioning business. From 1994 until 1995, he was Vice President and General Manager of Pratt & Whitney Industrial Turbines. From 1988 until 1994, he held various executive positions at General Electric Company in a variety of functions such as marketing, product management and business development and planning. From 1981 until 1987, he was a consultant at McKinsey & Company where he led major global engagements on strategy, operations and organization for clients in the manufacturing, energy, chemical, electronics and engineering services industries. Mr. Hogan also served as a director of Unisys Corporation from 2004 to 2006. Mr. Hogan is also a director of Covidien plc.
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Mr. Hogan has significant leadership experience both with us and predecessor employers demonstrating a wealth of operational management, strategic, organizational and business transformation acumen. His deep knowledge of business in general and our businesses, strengths and opportunities in particular, as well as his experience as a director in two other complex global public companies allow him to make significant contributions to the Board.
David A. Jones, director since 2003, age 63.
Mr. Jones serves as the Chair of our Compensation Committee. Since 2008, Mr. Jones has been Senior Advisor to Oak Hill Capital Partners, a private equity firm. In 2010, Mr. Jones was appointed to the board of directors of Dave & Buster’s Holdings, Inc., an owner and operator of high-volume restaurant/entertainment venues, and to the board of directors as the lead director of The Hillman Group, Inc., a distributor of fasteners, key duplication systems, engraved tags and related hardware items and in 2012, Mr. Jones was appointed to the board of directors of Earth Fare, Inc., one of the largest natural food retailers in the U.S., all of which are privately owned by Oak Hill Capital Partners. Between 1996 and 2007, Mr. Jones was Chairman and Chief Executive Officer of Spectrum Brands, Inc. (formerly Rayovac Corporation), a global consumer products company with major businesses in batteries, lighting, shaving/grooming, personal care, lawn and garden, household insecticide and pet supply product categories. From 1996 to 1998, he also served Rayovac as President. After Mr. Jones was no longer an executive officer of Spectrum Brands, it filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in March 2009 and exited from bankruptcy proceedings in August 2009. From 1995 to 1996, Mr. Jones was Chief Operating Officer, Chief Executive Officer, and Chairman of the board of directors of Thermoscan, Inc. From 1989 to 1994, he served as President and Chief Executive Officer of The Regina Company. Mr. Jones also served as a director of Simmons Bedding Company from 2000 to 2010, as a director of Spectrum Brands from 1996 to 2007, and as a director of Tyson Foods, Inc. from 1999 to 2005.
Mr. Jones’ extensive management experience with both public and private companies and private equity funds, coupled with his global operational, financial and mergers and acquisitions expertise, have given the Board invaluable insight into a wide range of business situations. Mr. Jones has served on each of our Board Committees, which has given him an understanding of the impact on us of a wide range of business situations.
With a Three-Year Term Expiring at the 2014 Annual General Meeting of Shareholders
Leslie Abi-Karam, director since 2008, age 54.
Since 2008, Ms. Abi-Karam has been the Executive Vice President and President, Communications Solutions at Pitney Bowes Inc., a global mailstream technology company. She is responsible for global revenue from Pitney Bowes’ core mailing, digital management solutions, production print and mail businesses. Her responsibilities also include Pitney Bowers’ Global Supply Chain and Customer Operations, providing service and support to over 2 million customers worldwide. Between 2002 and 2008, Ms. Abi-Karam was the Executive Vice President and President, Document Messaging Technologies (DMT) of Pitney Bowes Inc. She has been with Pitney Bowes since 1984 and has held various roles of increasing responsibility.
Ms. Abi-Karam brings to our Board significant experience in the management of global technology businesses. As a current operating leader, Ms. Abi-Karam faces many of the same challenges as our company and provides perspective on alternative solutions to common problems.
Glynis A. Bryan, director since 2003, age 54.
Ms. Bryan serves as the Chair of our Governance Committee. Since 2007, Ms. Bryan has been the Chief Financial Officer of Insight Enterprises, Inc., a leading provider of information technology products and solutions to clients in North America, Europe, the Middle East and the Asia-Pacific region. Between 2005 and 2007, Ms. Bryan was the Executive Vice President and Chief Financial Officer of Swift Transportation Co., a
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holding company which operates the largest fleet of truckload carrier equipment in the United States. Between 2001 and 2005, Ms. Bryan was the Chief Financial Officer of APL Logistics, the supply-chain management arm of Singapore-based NOL Group, a logistics and global transportation business. Prior to joining APL, Ms. Bryan spent 16 years with Ryder System, Inc., a truck leasing company, where she held a series of progressively responsible positions in finance. In her last assignment, Ms. Bryan was Senior Vice President of Ryder Capital Services, where she led the development of the firm’s capital services business. In 1999 and 2000, Ms. Bryan served as Senior Vice President and Chief Financial Officer of Ryder Transportation Services.
Ms. Bryan has extensive global financial and accounting experience in a variety of business operations, especially in logistics services. Ms. Bryan originally served on the Audit Committee of the Board for five years, and was selected in 2009 by the Board to serve as the Chair of the Governance Committee. Her familiarity with all aspects of Board responsibilities at Pentair will be critical in the future as governance and risk management processes continue to develop.
Charles A. Haggerty, director since 1994, age 71.
Mr. Haggerty served as Chief Executive Officer of LeConte Associates, LLC, a consulting and investment firm from 2000 until 2012. Mr. Haggerty joined Western Digital Corporation, a maker of hard disc drives, in 1992, where he served as Chief Operating Officer until 1993, and as Chief Executive Officer and Chairman of the board from 1993 until he retired in 2000. From 1964 to 1992, Mr. Haggerty served in various positions at International Business Machines Corporation. Mr. Haggerty is also a director of Imation Corp., Deluxe Corporation and LSI Corporation, and formerly served as a director at Beckman Coulter, Inc. until 2011.
Mr. Haggerty’s long record of service with Pentair as director and Lead Director, his familiarity with our company and our various businesses, his executive management experience, extensive service as a director at other public companies, as well as his interest and expertise in corporate governance issues give him a deep understanding of the role of the Board of Directors that is instrumental in maintaining the functionality of the Board. Mr. Haggerty has served as a member of each of our Board committees, which has given him a firm understanding of the impact on us of a wide range of business situations.
William T. Monahan, director since 2001, age 65.
Mr. Monahan serves as our Lead Director. In 2006, Mr. Monahan served as a director and the Interim Chief Executive Officer of Novelis, Inc., a global leader in aluminum rolled products and aluminum can recycling. From 1995 to 2004, Mr. Monahan was Chairman of the board of directors and Chief Executive Officer of Imation Corp., a manufacturer of magnetic and optical data storage media. He was involved in worldwide marketing with Imation and prior to that 3M Company. Mr. Monahan is also a director of The Mosaic Company and was formerly a director of Hutchinson Technology, Inc. from 2000 to 2013, Solutia Inc. from 2008 to 2012 and Novelis, Inc. from 2005 to 2007.
Mr. Monahan brings to our Board a wealth of global operational and management experience, as well as a deep understanding of our businesses gained as a long serving member of our Board. Mr. Monahan has extensive service as a board member and chief executive officer at companies in a number of different industries. His broad international perspective on business operations has been instrumental as we become more global.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” RE-ELECTION OF EACH DIRECTOR NOMINEE.
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Approval of the Annual Report and Financial Statements
Proposal of the Board
The Board proposes that the 2012 annual report of Pentair Ltd., the statutory financial statements of Pentair Ltd. for the year ended December 31, 2012 and the consolidated financial statements of Pentair Ltd. for the year ended December 31, 2012 be approved.
Our annual report to shareholders for the year ended December 31, 2012, which accompanies this Proxy Statement, includes the statutory financial statements of Pentair Ltd. (which do not consolidate the results of operations for our subsidiaries) and the consolidated financial statements of Pentair Ltd. for the year ended December 31, 2012, and contains the reports of our statutory auditor and our independent registered public accounting firm, as well as information on our business, organization and strategy. Copies of our 2012 annual report and this Proxy Statement are available on the Internet at http://www.proxyvote.com.
Deloitte AG, as our statutory auditor, has issued an unqualified recommendation to the Annual General Meeting that the statutory financial statements of Pentair Ltd. for the year ended December 31, 2012 be approved. As our statutory auditor, Deloitte AG has expressed its opinion that the financial statements for the year ended December 31, 2012 comply with Swiss law and our Articles of Association.
Deloitte AG has also issued a recommendation to the Annual General Meeting that the consolidated financial statements of Pentair Ltd. for the year ended December 31, 2012 be approved. As our statutory auditor, Deloitte AG has expressed its opinion that the consolidated financial statements for the year ended December 31, 2012 present fairly, in all material respects, the financial position, the results of operations and the cash flows of Pentair Ltd. in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and comply with Swiss law.
Representatives of Deloitte AG will attend the Annual General Meeting and will have an opportunity to make a statement if they wish. They will also be available to answer questions at the meeting.
Vote Requirement
Under Swiss law, our annual report, parent company financial statements of Pentair Ltd. and consolidated financial statements for the year ended December 31, 2012 must be submitted to shareholders for approval at each annual general meeting. Approval of the annual report and financial statements requires the affirmative vote of an absolute majority of the votes represented (in person or by proxy) at the Annual General Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2012.
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Discharge of the Board of Directors and Executive Officers of Pentair Ltd. from Liability
for the Year Ended December 31, 2012
Proposal of the Board
The Board proposes that the members of the Board and our executive officers be discharged from liability for their activities during the year ended December 31, 2012.
As is customary for Swiss corporations and in accordance with Article 698, subsection 2, item 5 of the Swiss Code of Obligations, shareholders are requested to discharge the members of the Board and our executive officers from liability for their activities during the year ended December 31, 2012. This discharge excludes liability claims brought by us or our shareholders against the members of the Board and our executive officers for activities carried out during the year ended December 31, 2012 relating to facts that have not been disclosed to shareholders. Registered shareholders that do not vote in favor of this agenda item are not bound by the result for a period ending six months after the vote.
Vote Requirement
The discharge of the Board and our executive officers requires the affirmative vote of a majority of the votes cast (in person or by proxy) at the Annual General Meeting, not counting the votes of any member of our Board or any of our executive officers or any votes represented by us.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE DISCHARGE OF THE DIRECTORS AND EXECUTIVE OFFICERS FOR THE YEAR ENDED DECEMBER 31, 2012.
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Election of Auditors
Proposal 4(a)—Re-election of Statutory Auditors
Proposal of the Board
The Board proposes that Deloitte AG be re-elected as statutory auditors until the next annual general meeting.
Our shareholders must elect a firm as statutory auditor. The statutory auditor’s main task is to audit our consolidated financial statements and the statutory financial statements of Pentair Ltd. that are required under Swiss law. The Board has recommended that Deloitte AG, Zürich, Switzerland, be elected as our statutory auditor for our consolidated financial statements and the statutory financial statements of Pentair Ltd. until our next annual general meeting.
Representatives of Deloitte AG will be present at the Annual General Meeting and be available to make a statement or respond to appropriate questions.
For independent auditor fee information and information on our pre-approval policy of audit and non-audit services, see Proposal 4(b) below. Please also see the Audit and Finance Committee Report included in this Proxy Statement for additional information about our statutory auditors.
Vote Requirement
The re-election of the statutory auditors requires the affirmative vote of an absolute majority of the votes represented (in person or by proxy) at the Annual General Meeting.
EACH OF THE BOARD AND THE AUDIT AND FINANCE COMMITTEE UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF DELOITTE AG AS OUR STATUTORY AUDITOR UNTIL OUR NEXT ANNUAL GENERAL MEETING.
Proposal 4(b)—Ratification of Appointment of Independent Registered Public Accounting Firm
Proposal of the Board
The Board proposes that Deloitte & Touche LLP be ratified as independent registered public accounting firm for the year ending December 31, 2013.
We are seeking the shareholders’ ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm to audit our consolidated financial statements for U.S. federal securities law reporting for the year ending December 31, 2013. If the shareholders do not ratify the appointment of Deloitte & Touche LLP, the Audit and Finance Committee will make another appointment effective for the subsequent fiscal year. Even if the shareholders ratify the appointment, the Audit and Finance Committee, in its discretion, may select a new independent auditor at any time that it believes such change would be in our best interests and in the best interests of our shareholders.
Representatives of Deloitte & Touche LLP will be present at the Annual General Meeting and be available to make a statement or respond to appropriate questions.
Please see the Audit and Finance Committee Report included in this Proxy Statement for additional information about our independent registered public accounting firm.
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Vote Requirement
The ratification of the appointment of the independent registered accounting firm requires the affirmative vote of an absolute majority of the votes represented (in person or by proxy) at the Annual General Meeting.
EACH OF THE BOARD AND THE AUDIT AND FINANCE COMMITTEE UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF DELOITTE & TOUCHE LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2013.
Audit and Finance Committee Pre-approval Policy
The Audit and Finance Committee reviews and approves the external auditor’s engagement and audit plan, including fees, scope, staffing and timing of work. In addition, the Audit and Finance Committee Charter limits the types of non-audit services that may be provided by the independent auditors. Any permitted non-audit services to be performed by the independent auditors must be pre-approved by the Audit and Finance Committee after the Committee is advised of the nature of the engagement and particular services to be provided. The Audit and Finance Committee pre-approved audit fees and all permitted non-audit services of the independent auditor in 2012. Responsibility for this pre-approval may be delegated to one or more members of the Audit and Finance Committee; all such approvals, however, must be disclosed to the Audit and Finance Committee at its next regularly scheduled meeting. The Audit and Finance Committee may not delegate authority for pre-approvals to management.
Service Fees Paid to the Independent Registered Public Accounting Firm
We engaged Deloitte & Touche LLP, Deloitte AG and the member firms of Deloitte Touche Tohmatsu and their respective affiliates (collectively, the “Deloitte Entities”) to provide various audit, audit-related, tax and other permitted non-audit services to us during fiscal years 2012 and 2011. Their fees for these services were as follows (in thousands):
| 2012 | 2011 | |||||||
| Audit fees (1) |
$ | 11,989 | $ | 4,880 | ||||
| Audit-related fees (2) |
1,504 | 555 | ||||||
| Tax fees (3) |
||||||||
| Tax compliance and return preparation |
639 | 459 | ||||||
| Tax planning and advice |
1,587 | 1,309 | ||||||
|
|
|
|
|
|||||
| Total tax fees |
2,226 | 1,768 | ||||||
| All other fees (4) |
4,879 | - | ||||||
|
|
|
|
|
|||||
| Total |
$ | 20,598 | $ | 7,203 | ||||
|
|
|
|
|
|||||
| (1) | Consists of fees for audits of our consolidated annual financial statements and the effectiveness of internal controls over financial reporting, reviews of our quarterly financial statements, statutory audits, reviews of SEC filings, consents for registration statements and comfort letters in connection with securities offerings. Audit fees in 2012 include $2.6 million for statutory audits for periods prior to the Merger but paid subsequent to the Merger. |
| (2) | Consists of fees for due diligence, employee benefit plan audits and certain other attest services. |
| (3) | Consists of fees for tax compliance and return preparation and tax planning and advice. |
| (4) | For 2012, consists of integration related consulting services in connection with the spin-off of Pentair Ltd. from Tyco and the merger of our predecessor, Pentair, Inc., with a wholly-owned subsidiary of Pentair Ltd. |
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Proposal 4(c)—Election of Special Auditors
Proposal of the Board
The Board proposes that PricewaterhouseCoopers AG be elected as special auditors until the next annual general meeting.
Under Swiss law, special reports by an auditor are required in connection with certain corporate transactions, including certain types of increases or decreases in share capital. Because of the auditor independence requirements under U.S. Federal securities laws, we do not believe Deloitte AG can act as our special auditing firm with respect to certain types of corporate transactions. The Board has recommended that PricewaterhouseCoopers AG, Zürich, Switzerland, be elected as special auditing firm until our next annual general meeting.
Vote Requirement
The election of the special auditors requires the affirmative vote of an absolute majority of the votes represented (in person or by proxy) at the Annual General Meeting.
EACH OF THE BOARD AND THE AUDIT AND FINANCE COMMITTEE UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF PRICEWATERHOUSECOOPERS AG AS OUR SPECIAL AUDITOR UNTIL THE NEXT ANNUAL GENERAL MEETING.
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Appropriation of Results for the Year Ended December 31, 2012 and
Conversion and Appropriation of Reserves from Capital Contributions to Distribute an
Ordinary Cash Dividend
Proposal 5(a)—Appropriation of Results for the Year Ended December 31, 2012
Proposal of the Board
The Board proposes that our net loss be appropriated to the accumulated deficit in our statutory accounts as shown below.
Our net loss for the year ended December 31, 2012 decreases total shareholders’ equity in our statutory accounts. The corresponding appropriation to accumulated deficit does not have an impact on net equity. Our net loss in our standalone statutory accounts for the year ended December 31, 2012 is derived primarily from intercompany transactions in the year ended December 31, 2012, and is separate from our net loss reported in our consolidated financial statements presented in accordance with U.S. generally accepted accounting principles. The following table shows the appropriation of net loss in Swiss francs and U.S. dollars (converted from Swiss francs as of December 31, 2012) as proposed by the Board:
| Swiss Francs | U.S. Dollars | |||||||
| Net loss |
7,238,641 | 7,722,284 | ||||||
| Accumulated deficit, beginning of period |
9,389,095 | 10,297,318 | ||||||
| Accumulated deficit, carried forward |
16,627,736 | 18,019,602 | ||||||
Under Swiss law, the appropriation of our balance sheet results is customarily submitted to shareholders for approval at each annual general meeting.
Vote Requirement
The appropriation of results for the year ended December 31, 2012 requires the affirmative vote of an absolute majority of the votes represented (in person or by proxy) at the Annual General Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROPRIATION OF NET LOSS TO INCREASE THE ACCUMULATED DEFICIT.
Proposal 5(b)—Conversion and Appropriation of Reserves from Capital Contributions to Distribute an Ordinary Cash Dividend
Proposal of the Board
The Board proposes to convert reserves from capital contributions into free reserves in a total amount of $213 million and to appropriate them to distribute an ordinary cash dividend in the amount of $1.00 per share. Payment of the dividend will be made in four equal quarterly installments of $0.25 in each of the third and fourth quarters of 2013 and the first and second quarters of 2014 at such times and with such record dates as shall be determined by our Board. Dividend payments shall be made with respect to our outstanding share capital on the record date for the applicable dividend payment, which amount excludes any shares held by us or any of our subsidiaries. The deduction to our contributed surplus in our statutory accounts, which is required to be made in Swiss francs, will be determined based on the aggregate amount of the dividend and shall be calculated based on the USD / CHF exchange rate in effect on the date of the Annual General Meeting. The U.S. dollar amount of the dividend will be capped at an amount such that the aggregate reduction to our contributed surplus will not exceed
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CHF 396 million (or $2.00 per share based on the USD / CHF exchange rate of approximately CHF 0.93 per $1.00 in effect on February 22, 2013). To the extent that a dividend payment would exceed the cap, the U.S. dollar per share amount of the current or future dividends will be reduced on a pro rata basis so that the aggregate amount of all dividends paid does not exceed the cap. In addition, the aggregate reduction in contributed surplus will be increased for any shares issued, and decreased for any shares acquired, after the Annual General Meeting and before the record date for the applicable dividend installment payment. Our Board’s proposal is accompanied by a report by the auditor, Deloitte AG, as state supervised auditing enterprise, who will be present at the meeting. The auditor’s report states that the proposed dividend complies with Swiss law.
Vote Requirement
The approval of the conversion and appropriation of reserves from capital contributions to distribute an ordinary cash dividend requires the affirmative vote of an absolute majority of the votes represented (in person or by proxy) at the Annual General Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE CONVERSION AND APPROPRIATION OF RESERVES FROM CAPITAL CONTRIBUTIONS TO DISTRIBUTE AN ORDINARY CASH DIVIDEND.
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COMPENSATION DISCUSSION AND ANALYSIS
Explanatory Note Concerning the Merger
As described above under “Questions and Answers on the Solicitation and Voting,” we took our current form on September 28, 2012 as a result of the spin-off of Pentair Ltd. from its parent, Tyco, and a reverse acquisition involving Pentair, Inc. We are the successor to Pentair, Inc. under the Securities Exchange Act of 1934, as amended. The actions taken prior to the Merger described in this Compensation Discussion and Analysis were taken by the Compensation Committee of the Board of Directors of Pentair, Inc. Actions taken after the Merger were, except as otherwise indicated, taken by the Compensation Committee of the Board of Directors of Pentair Ltd. Throughout this Compensation Discussion and Analysis, we use the term the “Committee” to refer to either the Compensation Committee of Pentair, Inc. or the Compensation Committee of Pentair Ltd., as applicable. Because the officers of Pentair, Inc. became officers of Pentair Ltd. after the Merger, the compensation arrangements described in this Compensation Discussion and Analysis are those of the Chief Executive Officer and other officers of Pentair, Inc. named in the Summary Compensation Table (the “Named Executive Officers”) prior to the Merger and of the same officers of Pentair Ltd. after the Merger. The identity of our Named Executive Officers did not change as a result of the Merger.
Overview of Compensation Program
The Committee sets and administers the policies that govern our executive compensation, including:
| • | establishing and reviewing executive base salaries; |
| • | overseeing our annual incentive compensation plans; |
| • | overseeing our long-term equity-based compensation plan; |
| • | approving all awards under those plans; |
| • | periodically evaluating risk considerations in connection with our executive compensation programs; and |
| • | annually approving and recommending to the Board all compensation decisions for executive officers, including those for the Named Executive Officers. |
The Committee seeks to assure that compensation paid to the Named Executive Officers is fair, reasonable and competitive, and is linked to increasing long-term shareholder value. Only independent directors serve on the Committee.
2012 Say on Pay Vote
In April 2012 (prior to the Merger but after many of the 2012 executive compensation actions described in this Compensation Discussion and Analysis had taken place), we held our annual advisory shareholder vote on the compensation of our named executive officers at our annual shareholders’ meeting, and, consistent with the recommendation of the Board, our shareholders approved the compensation of our named executive officers with more than 81% of votes cast in favor. Consistent with this strong vote of shareholder approval, we have not undertaken any material changes to our executive compensation programs in response to the outcome of the vote.
Compensation Philosophy and Objectives
The Committee believes that the most effective executive compensation program aligns executive initiatives with shareholders’ economic interests. The Committee seeks to accomplish this by rewarding the achievement of specific annual, longer-term and strategic goals that create lasting shareholder value. The Committee evaluates both executive performance and executive compensation to attract and retain superior executives in key positions at compensation levels competitive in the marketplace. To achieve the objectives
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stated below, the Committee provides executive compensation packages containing both cash and equity-based compensation components that reward performance as measured against established goals. The Committee’s specific objectives include:
| • | to motivate and reward executives for achieving financial and strategic objectives; |
| • | to align management and shareholder interests by encouraging employee stock ownership; |
| • | to provide rewards commensurate with individual and Company performance; |
| • | to encourage innovation and growth; and |
| • | to attract and retain top-quality executives and key employees. |
To balance these objectives, our executive compensation program uses the following elements:
| • | base salary, to provide fixed compensation competitive in the marketplace; |
| • | annual incentive compensation, to reward short-term performance against specific financial targets and individual goals; |
| • | long-term incentive compensation, to link management incentives to long-term value creation and shareholder return; and |
| • | retirement, perquisites and other benefits, to attract and retain executives over the longer term. |
We discuss each of these components below under “2012 Compensation Program Elements” and “Changes in Compensation Program Mix for 2013.”
Compensation Committee Practices
The Committee meets regularly to review, discuss and approve executive compensation and employee benefit plan matters. To ensure it is able to address all of its responsibilities, the Committee establishes an annual agenda at the beginning of each year. In 2012, the Committee held five regular meetings. In addition to the regularly scheduled meetings, the Committee holds special meetings when necessary. In 2012, the Committee held three special meetings relating to compensation arrangements in connection with the Merger.
Committee members generally receive written materials several days prior to each regularly scheduled meeting. At the close of each regularly scheduled Committee meeting, the Committee conducts an executive session without management present. When appropriate, the Committee also meets in executive session at the close of special meetings. At the Committee’s request, the Committee’s external compensation consultant reviews committee meeting materials and attends meetings.
In making changes to our compensation programs, the Committee considers our compensation philosophy and objectives, as well as external market, industry and peer company practices. The Committee reviews each element of the executive compensation program annually for continuing appropriateness and reasonableness.
In December 2011 and February 2012, the Committee reviewed and approved executive salaries, equity plan incentive grants and performance measures and related targets for our annual incentive program for 2012. When reviewing proposed awards, the Committee considered our corporate performance for the year and the prior three-year period against the peer group of companies identified as the “Comparator Group” below under “Comparative Framework.” The Committee also considered our corporate performance compared to our strategic objectives.
In March 2012, the Committee held three special meetings to consider retention and other compensation arrangements in anticipation of the prospective transaction that became the Merger. These actions are discussed further below under “Effect of the Merger.”
The Committee reviewed and approved equity grants for newly hired and promoted employees as required throughout the year. Committee actions relating to executive salaries, incentive awards and long-term compensation, as well as changes to our compensation programs, were submitted to the full Board for ratification and approval.
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Services of Compensation Consultant
During 2012, the Committee continued to retain Aon Hewitt, an external compensation consultant, to advise the Committee on executive compensation issues. See “Corporate Governance Matters – Committees of the Board – Compensation Committee” for disclosure relating to services provided to us by affiliates of Aon Hewitt. Subsequent to Aon Hewitt’s initial appointment, and following the publication of SEC rules and NYSE listing standards regarding the independence of compensation committee advisors, the Committee reviewed the independence of Aon Hewitt and the individual representatives of Aon Hewitt who served as the Committee’s consultants in light of the new requirements, considering the following specific factors: (i) other services provided to us by Aon Hewitt; (ii) fees paid by us to Aon Hewitt as a percentage of Aon Hewitt’s total revenue; (iii) policies and procedures maintained by Aon Hewitt that are designed to prevent a conflict of interest; (iv) any business or personal relationships between the individual representatives of Aon Hewitt who advised the Committee and any member of the Committee; (v) any company common shares owned by the individual representatives; and (vi) any business or personal relationships between our executive officers and Aon Hewitt or the individual representatives. Aon Corporation, which merged with Hewitt Associates on October 1, 2010, creating Aon Hewitt as a wholly owned subsidiary of Aon Corporation, has historically provided insurance brokerage and benefit administrative outsourcing services to us. For the year ended December 31, 2012, we paid Aon Corporation approximately $754,411 for these services and Aon Hewitt approximately $405,408 for executive compensation consulting for the Committee. The decision to engage Aon Corporation for insurance brokerage and benefit administrative outsourcing services was made by management prior to the merger with Hewitt Associates and was not approved by the Board or the Committee. The Committee concluded, based on the evaluation described above, that the services performed by Aon Hewitt with respect to insurance and benefits administration did not raise a conflict of interest or impair Aon Hewitt’s ability to provide independent advice to the Committee regarding executive compensation matters. The Committee’s conclusion was based on the limited scope of the insurance and benefits administrative services provided to us by Aon Hewitt, the small percentage of Aon Hewitt’s revenues represented by the fees paid by us, the separation within Aon Hewitt between its compensation consulting business and its other businesses and the absence of any conflicting relationships between the individual representatives of Aon Hewitt who provided advice to the Committee or Aon Hewitt, on the one hand, and members of the Committee or our executive officers, on the other.
At the direction of the Committee, Aon Hewitt advises the Committee in implementing and overseeing appropriate compensation programs and policies. As part of this process, Aon Hewitt provides the Committee with comparative market data based on analyses of the practices of the Comparator Group defined below under “Comparative Framework” and relevant survey data. The comparative market data that Aon Hewitt provides address the structure of the compensation programs maintained by the Comparator Group companies as well as the amount of compensation they provide. Aon Hewitt provides guidance on industry best practices and advises the Committee in determining appropriate ranges for base salaries, annual incentives and equity compensation for each senior executive position.
Role of Executive Officers in Compensation Decisions
At the request of the Committee, the Chief Executive Officer and the Senior Vice President, Human Resources, generally attend meetings of the Committee, but are not present in executive sessions and do not participate in deliberations of their own compensation. Our human resources group assists the Committee as requested on specific topics regarding compensation, as well as on specific recommendations for compensation for management throughout our company.
The Chief Executive Officer annually reviews with the Committee the performance of each executive officer (other than himself) and presents compensation recommendations based on these reviews to the Committee. The Committee reviews these recommendations with Aon Hewitt and exercises its discretion in adopting, rejecting or changing them.
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The Board and the Committee employ a formal rating process to evaluate the Chief Executive Officer’s performance. As part of this process, the Board reviews financial and other relevant data related to the performance of the Chief Executive Officer at each meeting of the Board throughout the year. At the end of the year, each independent director provides an evaluation and rating of the Chief Executive Officer’s performance in various categories. The Committee Chair submits a consolidated rating report and the Committee’s recommendations regarding the Chief Executive Officer’s compensation to the independent directors for review and ratification. The Lead Director chairs a discussion with the independent directors in executive session without the Chief Executive Officer present. From that discussion, the Committee finalizes the Chief Executive Officer’s performance rating. The Committee Chair and the Lead Director review the final performance rating results and commentary with the Chief Executive Officer. The Committee takes the performance rating and financial data into account in determining the Chief Executive Officer’s compensation and the Board’s adoption of goals and objectives for the Chief Executive Officer for the following year.
Setting Executive Compensation
The Committee recognizes the importance of maintaining sound principles for developing and administering compensation and benefits programs. The Committee seeks to carry out its responsibilities by:
| • | holding executive sessions (without management present) at every regular Committee meeting; |
| • | requiring clear communication of compensation policy and actions to executives and shareholders; |
| • | annually reviewing total annual compensation for all executive officers; and |
| • | establishing appropriate guidelines for executive change-in-control agreements. |
Comparative Framework
In making its recommendations to the Board concerning executive officer compensation, the Committee annually reviews and evaluates our corporate performance and our executive officers’ compensation and equity ownership. The Committee also obtains and reviews comparative data from Aon Hewitt and a number of third-party sources, including proxy statements, publicly available information and surveys by consulting firms.
The Committee uses external competitive benchmarks that it believes support the guiding principles outlined above for each element of compensation. For 2012 prior to the Merger, the market for assessing compensation was defined as comparable publicly traded companies headquartered in the U.S. and engaged in one or more manufacturing sectors (the “Pre-Merger Comparator Group”). The Committee identified 16 companies as our Pre-Merger Comparator Group based upon the analysis and recommendations of Aon Hewitt. The Pre-Merger Comparator Group companies had annual revenues ranging from $1.7 billion to $16.1 billion, with median revenues of $5.0 billion, and represented five Global Industry Classification Standard (“GICS”) sub-industry classifications: industrial machinery (nine companies and us), electrical components and equipment (four companies), building products (one company), electronic components (one company) and industrial conglomerates (one company). The Pre-Merger Comparator Group consisted of business competitors, similarly structured broadly diversified organizations and competitors for executive talent:
| A. O. Smith Corporation | Amphenol Corporation | Cooper Industries plc | ||
| Crane Co. | Danaher Corporation | Donaldson Company, Inc. | ||
| Dover Corporation | Eaton Corporation | Flowserve Corporation | ||
| Hubbell Incorporated | ITT Corporation | Pall Corporation | ||
| Parker-Hannifin Corporation | Rockwell Automation, Inc. | SPX Corporation | ||
| Thomas & Betts Corporation |
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In anticipation of the conclusion of the Merger, the Committee commissioned Aon Hewitt to reevaluate the continued competitiveness of the Pre-Merger Comparator Group as a benchmark following the Merger and concluded that, due to our larger scope, certain changes were required. The Committee recognized that, after the Merger, we would be competing against larger and more international companies for executive talent. Therefore, based on the analysis and recommendations of Aon Hewitt, the Committee identified a new peer group of companies (the “Post-Merger Comparator Group”) for use in setting and assessing our post-Merger compensation arrangements. Throughout this Compensation Discussion and Analysis, we use the term the “Comparator Group” to refer to either the Pre-Merger Comparator Group or the Post-Merger Comparator Group, as applicable. The Post-Merger Comparator Group companies were selected using four selection criteria:
| • | Publicly-traded on a major exchange |
| • | Same or similar industry to ours, based upon GICS code: industrial machinery, electrical components and equipment, building products, electronic components and industrial conglomerates |
| • | Within a reasonable revenue range (0.5x to 3x) compared to our projected revenue following the Merger |
| • | Similar in business scope and/or operations to our business units |
In addition, Aon Hewitt performed a peer-of-peers analysis to identify companies common in other peer groups which may not be identified by the criteria above. This included reviewing peers of the companies in the Pre-Merger Comparator Group as well as companies that use us in their respective peer groups. As a result of this analysis, the following 17 companies were selected as the Post-Merger Comparator Group:
| Cooper Industries plc | Danaher Corporation | Dover Corporation | ||
| Eaton Corporation | Emerson Electric Co. | Flowserve Corporation | ||
| Illinois Tool Works Inc. | Ingersoll-Rand Co. | Masco Corp. | ||
| Medtronic Inc. | Parker-Hannifin Corporation | Rockwell Automation, Inc. | ||
| Stanley Black & Decker, Inc. | SPX Corporation | Timken Co. | ||
| Tyco International Ltd. | Xylem Inc. (1) |
| (1) | Xylem Inc. formerly made up the water equipment and services business of ITT Corporation and was spun off from ITT Corporation in October 2011. |
The Post-Merger Comparator Group companies have revenues ranging from $3.8 billion to $24.2 billion, with median revenues of $10.4 billion.
2012 Compensation Program Elements
For the year ended December 31, 2012, the principal components of compensation for Named Executive Officers were:
| • | Base salary; |
| • | Annual incentive compensation; |
| • | Long-term incentive compensation; |
| • | Retirement and other benefits; and |
| • | Perquisites and other personal benefits. |
The Committee reviews total compensation for executive officers and the relative levels of each of these forms of compensation, against the Committee’s goals to attract, retain and incentivize talented executives and to align the interests of these executives with those of our long-term shareholders.
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Base Salaries
We provide Named Executive Officers with a fixed base salary. Focusing on the market value of each position, the Committee’s goal is to target approximately the 50th percentile (the “Midpoint”) of the Comparator Group for executives’ base salary ranges based on available market data. Market data include published survey data and proxy statement data for our Comparator Group. The Committee establishes each Named Executive Officer’s salary within a range of 25% of the Midpoint. Differences in base salaries among the Named Executive Officers and the extent to which a Named Executive Officer’s base salary is set at a level other than the Midpoint are decided by the Committee based on various factors, including competitive conditions for the Named Executive Officer’s position within the Comparator Group and in the broader employment market, as well as the Named Executive Officer’s length of employment, level of responsibility, experience and individual performance.
In December 2011, the Committee undertook its annual review of base salaries for the Named Executive Officers and other management personnel, in accordance with its normal procedures. Following a market review by Aon Hewitt, the Committee, with the Board’s concurrence, approved annual merit increases to base salary for each executive officer effective January 1, 2012. In October 2012, following the Merger, the Committee re-evaluated and adjusted the base salaries for the Named Executive Officers, as described below under “Effect of the Merger.”
Annual Incentive Compensation Plan
To achieve the objective of providing competitive compensation to attract and retain top talent while linking pay to annual performance, we pay a portion of our executives’ cash compensation as incentive compensation tied to annual business performance as measured against annual goals established by the Committee. In 2012, we paid cash annual incentive compensation to our executive officers, including the Named Executive Officers, under the Executive Officer Performance Plan (“EOPP”). The Committee had no discretion to increase formula-derived incentive compensation under the EOPP. For 2012, the only participants in the EOPP were our executive officers.
For each EOPP participant, the Committee determined a percentage of that executive’s base salary as a targeted level of incentive compensation opportunity, based on the Committee’s review of Aon Hewitt’s recommendations, relevant survey data and, in the case of Named Executive Officers other than the Chief Executive Officer, the recommendations of the Chief Executive Officer. Differences in target levels of incentive compensation opportunity among the Named Executive Officers are decided by the Committee based on various factors, including competitive conditions for the Named Executive Officer’s position within the Comparator Group and in the broader employment market, as well as the Named Executive Officer’s length of employment, level of responsibility and experience. An executive officer’s base salary multiplied by the incentive compensation opportunity percentage establishes the target incentive compensation for which the executive officer is eligible. The Committee determined incentive compensation targets in 2012 for all Named Executive Officers. These incentive compensation targets were as follows:
| Target as a Percent of Salary |
Target in Dollars |
|||||||
| Randall J. Hogan |
150 | % | 1,650,000 | |||||
| John L. Stauch |
80 | % | 394,934 | |||||
| Michael V. Schrock |
100 | % | 581,771 | |||||
| Frederick S. Koury |
60 | % | 244,580 | |||||
| Angela D. Lageson |
60 | % | 210,000 | |||||
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Actual incentive compensation awarded to each Named Executive Officer may range from 0 to 2 times the target, depending on actual Company and individual performance, as described below. The Committee approves performance goals (described below) for each year and sets each executive’s incentive compensation opportunity so that if we attain target performance levels, annual cash incentive levels will be between the 50th and 75th percentiles of our Comparator Group. If we attain superior performance levels, cash incentive compensation could exceed the 75th percentile of the Comparator Group; if we do not attain target performance levels for any of the goals, cash incentive compensation will be below the 50th percentile of our Comparator Group.
To establish the performance goals and related targets applied to EOPP payments for the Named Executive Officers, the Committee examined goals that were recommended by the Chief Executive Officer, after consultation with the Chief Financial Officer and certain other executive officers, and that were based solely on objectively determinable financial performance measures. The Committee then assessed these recommendations in light of comparable data of the Comparator Group and relevant survey data. In February 2012, the Committee established the performance goals for 2012 for the EOPP, which the Board then ratified. The EOPP performance goals that applied to the Named Executive Officers consisted of the following quantitative measures:
| • | Operating income, which means the excess of revenues over expenses for normal operating activities. For 2012, the operating income threshold was $446.0 million, target was $461.0 million and maximum was $495.0 million, prior to adjustments specified in the EOPP. |
| • | Sales, which means sales excluding the impact of acquisitions and foreign currency exchange. For 2012, the sales threshold was $3.700 billion, target was $3.800 billion and maximum was $3.935 billion, prior to adjustments specified in the EOPP. |
| • | Free cash flow, which means cash from operating activities less capital expenditures, including both continuing and discontinued operations, plus proceeds from sale of property and equipment. For 2012, the free cash flow threshold was $240.0 million, target was $270.0 million and maximum was $300.0 million, prior to adjustments specified in the EOPP. |
| • | EBITDA, which means earnings before interest, depreciation and amortization. For 2012, EBITDA threshold was $400.0 million, prior to adjustments specified in the EOPP. |
The Committee believed that these performance goals correlate strongly with two primary corporate objectives: to improve the financial return from our businesses and to strengthen our balance sheet through cash flow improvement and debt reduction.
To provide an added performance incentive, the Committee determined that the amount of incentive compensation related to each performance goal other than EBITDA would be scaled according to the amount by which the measure exceeded or fell short of the target. The Committee also determined that the performance goals for operating income, sales and free cash flow should have a threshold level below which no incentive compensation would be earned, as detailed above. In the case of the operating income, sales and free cash flow performance goals, the amount of incentive compensation for each performance goal was scaled from 0.75 (at the threshold) to 2.0 times (at the maximum) the target according to a formula that was based solely on our corporate performance and was not subject to adjustment or discretion.
In the case of EBITDA, the Committee determined that attainment of this performance goal is a necessary, but not sufficient, condition to trigger an incentive compensation award. If the EBITDA threshold was not attained, no award would be made for this performance goal. However, if the EBITDA threshold was attained, the Named Executive Officer would be eligible for the EBITDA portion of the award. The Committee retained the discretion to reduce, but not to increase, the amount of any EBITDA-based award to a Named Executive Officer, based upon a strategy deployment factor (“SDF”). The SDF measures an individual executive’s performance against expectations in the attainment of corporate strategic goals set by the Board. The SDF is determined by the Committee for each Named Executive Officer based on its assessment of individual performance following consultation with the Chief Executive Officer.
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The Committee determined that, for 2012, the performance goals applied to EOPP payments for all Named Executive Officers were to be weighted as follows: operating income: 40%; sales: 20%; free cash flow: 20%; and EBITDA: 20%. The actual incentive compensation of each Named Executive Officer was determined by multiplying the eligible target incentive compensation amount by a multiplier determined as noted above.
As described below under “Effect of the Merger,” the closing of the Merger triggered payment of the annual incentive compensation awards under the EOPP at the target level. Because the Merger closed at the end of the third quarter of 2012, the Committee determined that, for purposes of fourth quarter incentive compensation, the performance goals as previously established under the EOPP would continue until the end of 2012 for Pentair, Inc. on a standalone basis without regard to the effect of the Merger, with any excess performance over the target levels resulting in payouts above the target levels. For 2012, operating income after adjustment for factors specified in the EOPP was $450.6 million, which met the threshold but not the target. Sales after adjustment for factors specified in the EOPP were $3,528.7 billion, which did not meet the threshold. Cash flow after adjustment for factors specified in the EOPP was $317.7 million, which exceeded the maximum. EBITDA after adjustment for factors specified in the EOPP was $530.8 million, higher than the $400.0 million threshold. These performance levels resulted in no additional compensation being paid. The actual EOPP payouts received by the Named Executive Officers as a result of the closing of the Merger triggering payment of EOPP awards at target level did not exceed what the Named Executive Officers would have otherwise received under the EOPP had it remained in place for the full year. Based on the foregoing, the Named Executive Officers received the EOPP payouts that are reflected in the “Non-Equity Incentive Plan Compensation” column under “Executive Compensation—Summary Compensation Table.”
The EOPP terminated in connection with the Merger and, beginning with 2013, the Committee intends to grant annual incentive awards under the 2012 Stock and Incentive Plan. Following the Merger, in October 2012 the Committee re-evaluated and adjusted the annual incentive compensation target values for the Named Executive Officers, as described below under “Effect of the Merger.”
2012 Long-Term Incentive Compensation
The Committee emphasizes executive compensation that is tied to building and sustaining our Company’s value through common share performance over time. We provide long-term compensation to our executives to further the objectives of:
| • | motivating and rewarding executives through share price appreciation; |
| • | encouraging innovation and growth; |
| • | aligning management and shareholder interests; and |
| • | attracting and retaining key executive talent. |
In keeping with this philosophy, the Committee establishes long-term incentive compensation targets falling between the 50th and 75th percentiles of competitive compensation programs, based on the Committee’s assessment of both published survey data and data from our Comparator Group. If we build and sustain long-term shareholder value through superior performance, ongoing long-term incentive values may exceed the 75th percentile of our Comparator Group.
In 2012 prior to the Merger, the Committee awarded long-term incentive compensation under the 2008 Pentair, Inc. Omnibus Stock Incentive Plan (the “2008 Omnibus Plan”). As it does each year, the Committee used benchmark data (including compensation surveys, Comparator Group information and other data provided by Aon Hewitt) to set competitive target dollar award levels for each Named Executive Officer and for each position or grade level. Differences in target dollar award levels among the Named Executive Officers were decided by the Committee based on various factors, including competitive conditions for the Named Executive Officer’s position within the Comparator Group and in the broader employment market, as well as the Named Executive Officer’s length of employment, level of responsibility, experience and individual performance.
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Individual awards generally range between 80 and 120 percent of the target award level, with actual award amounts determined by the Committee based on its assessment of both the executive’s individual performance against his or her individual performance goals in the previous year and Company performance in the previous year against our strategic plan.
The Committee approved in December 2011 the elements and mix of long-term incentive compensation for 2012 under the 2008 Omnibus Plan. The Committee granted all Named Executive Officers a mix of the following components: stock options, restricted stock units and cash settled performance units.
| • | Stock options: The Committee determined that it would grant ten-year stock options, with one third of the options vesting on each of the first, second and third anniversaries of the grant date, as in prior years. For the 2012 grant, stock options constituted one-third of the long-term incentive award’s total value. |
| • | Restricted stock units: The Committee determined that it would grant restricted stock units. Unlike past grants, the Committee imposed a performance condition on the restricted stock units, which required the Company to meet a specified threshold goal for free cash flow in 2012. If such goal was achieved, then, consistent with past practice, one-half of the restricted stock units would vest on each of the third and fourth anniversaries of the grant date. Each restricted stock unit represents the right to receive one of our common shares upon vesting and includes one dividend equivalent unit, which entitles the holder to a cash payment equal to all cash dividends declared on our common shares from and after the date of grant. An executive officer could elect to defer receipt of restricted stock units upon vesting under our Non-Qualified Deferred Compensation Plan. For the 2012 grant, restricted stock units constituted one third of the long-term incentive award’s total value. |
| • | Cash settled performance units: The Committee determined that it would also grant cash settled performance units in 2012 from a bonus pool that would be established only if the Company met a specified threshold goal for free cash flow in 2012. From this bonus pool, each participant, including the Named Executive Officers, would be granted cash settled performance units. Each performance unit entitled the holder to a cash payment following the end of a three-year performance period, if we achieved specified Company performance goals on metrics set forth in the 2008 Omnibus Plan. The performance goals selected by the Committee for the 2012 to 2014 performance period were revenue growth and return on invested capital, each weighted 50%. |
Subject to establishment of the bonus pool and depending on cumulative Company performance over the three-year performance period, we would pay nothing if a threshold were not met, 50% of the target value if the threshold were met, 100% of the target value if the target were met and 200% of the target value if the maximum were met. An executive officer could elect to defer receipt of the cash payment under our Non-Qualified Deferred Compensation Plan. For the 2012 grant, the value of cash settled performance units awarded constituted one-third of the long-term incentive award’s total value.
The value of stock options and restricted stock units and a range of values for the cash settled performance units granted to the Named Executive Officers in 2012 are reflected in the table under “Executive Compensation—Grants of Plan-Based Awards Table.” As described below under “Effect of the Merger,” in connection with the completion of the Merger, our executive officers, including our Named Executive Officers, became entitled to accelerated vesting and payment of their outstanding long-term incentive awards. However, each of our executive officers, including our Named Executive Officers waived such accelerated vesting (other than Mr. Schrock to the extent such waiver would result in adverse tax consequences under Section 409A of the Code) and payment and received grants of restricted stock units in exchange. We also adopted a new incentive compensation plan, the 2012 Stock and Incentive Plan, in connection with the Merger to serve as the plan document under which future equity and cash incentive awards would be granted. See “Effect of the Merger” for a detailed discussion.
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The value of restricted shares that vested for each Named Executive Officer in 2012 and the value of options exercised by each Named Executive Officer in 2012 are shown in the table under “Executive Compensation—Option Exercises and Stock Vested.”
The Committee reviewed and approved the 2012 grants of long-term incentive compensation for executive officers in December 2011 effective on January 3, 2012. For all other recipients, in February 2012, the Committee reviewed and approved grants that were effective on March 1, 2012. The Committee reviews and approves all equity awards to newly hired or promoted executives at regular meetings throughout the year. As a rule, the Committee grants awards to newly hired or promoted executives that are effective the earlier of the 15th day of the month following the date of hire or promotion or the 15th day of the month following the date of the Committee meeting at which the grant is approved. If the 15th day of such month is a day on which the NYSE is not open for trading, then the grant date will be the first day following the 15th day of such month on which the NYSE is open for trading. The Committee has also given the Committee Chair and the Chief Executive Officer discretion to grant equity awards to newly hired or promoted executives as required throughout the year, within the guidelines of the 2012 Stock and Incentive Plan. The Committee then ratifies these grants at its next meeting. All options are granted at fair market value based on the closing share price on the effective day of grant.
In October 2012, following the Merger, the Committee re-evaluated and adjusted the long-term incentive compensation target values for the Named Executive Officers, as described below under “Effect of the Merger.”
Stock Ownership Guidelines
The Committee and the Board have established stock ownership guidelines for the Named Executive Officers and other executives to motivate them to become significant shareholders and to further encourage long-term performance and growth. The Committee monitors our executives’ compliance with these stock ownership guidelines and periodically reviews the definition of “stock ownership” to reflect the practices of companies in the Comparator Group. For 2012, “stock ownership” included common shares owned by the officer both directly and indirectly, the pro-rated portion of unvested restricted stock, restricted stock units, and shares held in our employee stock ownership plan or our employee stock purchase plan. The Committee determined that, over a period of five years from appointment, certain executives should accumulate and hold common shares equal to a multiple of base salary as follows:
| Executive Level |
Stock Ownership Guidelines (as a multiple of salary) | |
| Chief Executive Officer |
5x base salary | |
| President, Chief Operating Officer; Executive Vice President and Chief Financial Officer |
3x base salary | |
| Senior Vice President, Human Resources; Senior Vice President and General Counsel |
2.5x base salary | |
| Other key executives |
2x base salary |
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Stock Ownership for the Currently-Serving Named Executive Officers as of December 31, 2012
| Share Ownership |
12/31/12 Market Value ($) (1) |
Ownership Guideline ($) |
Meets Guideline | |||||||||||
| Randall J. Hogan |
453,688 | 22,298,765 | 5,590,000 | Yes | ||||||||||
| John L. Stauch |
124,937 | 6,140,654 | 1,575,000 | Yes | ||||||||||
| Michael V. Schrock |
224,203 | 11,019,577 | 1,745,313 | Yes | ||||||||||
| Frederick S. Koury |
68,116 | 3,347,901 | 1,019,083 | Yes | ||||||||||
| Angela D. Lageson |
18,670 | 917,631 | 1,062,500 | No(2) | ||||||||||
| (1) | The amounts in this column were calculated by multiplying the closing market price of our common shares on December 31, 2012 (the last trading day of our most recently completed fiscal year) of $ 49.15 by the number of shares owned. |
| (2) | Ms. Lageson was appointed to her position with the Company in February 2010, and will have five years from her appointment to meet the stock ownership requirement. |
Retirement and Other Benefits
The Named Executive Officers and other executives and employees participate in the Pentair, Inc. Pension Plan, the Pentair, Inc. Retirement Savings and Stock Incentive Plan, the Pentair, Inc. Supplemental Executive Retirement Plan and the Pentair, Inc. Restoration Plan. We also provide other benefits such as medical, dental and life insurance and disability coverage to employees, including the Named Executive Officers. We aim to provide employee and executive benefits at levels that reflect competitive market levels at the 50th percentile of similar benefits given by our Comparator Group.
The Pentair, Inc. Pension Plan, the Pentair, Inc. Retirement Savings and Stock Incentive Plan, the Pentair, Inc. Supplemental Executive Retirement Plan and the Pentair, Inc. Restoration Plan were all amended in 2008 to comply with final regulations under Section 409A of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). As a result of these amendments, benefits vested prior to January 1, 2005 are separated from benefits earned after January 1, 2005, and may offer different distribution or other options to participants as described below.
The Pentair, Inc. Pension Plan
The Pentair, Inc. Pension Plan (the “Pension Plan”) is a funded, tax-qualified, noncontributory defined-benefit pension plan that covers certain employees, including the Named Executive Officers. Participation in the Pension Plan is restricted to those Named Executive Officers and other employees who were hired on or before December 31, 2007. Benefits under the Pension Plan are based upon an employee’s years of service and highest average earnings in any five-year period during the ten-year period preceding the employee’s retirement (or, in the case of an employee with more than five years but less than ten years of service, during any five-year period preceding the employee’s retirement). No additional benefits may be earned under the Pension Plan after December 31, 2017. Benefits under the Pension Plan are payable after retirement in the form of an annuity.
Compensation covered by the Pension Plan for the Named Executive Officers equals the amounts set forth in the “Salary” column under “Executive Compensation—Summary Compensation Table” and 2011 incentive compensation paid in March 2012 set forth in the “Non-Equity Incentive Plan Compensation” column under “Executive Compensation—Summary Compensation Table.” The amount of annual earnings that may be considered in calculating benefits under the Pension Plan is limited by law. For 2012, the annual limitation was $250,000.
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Benefits under the Pension Plan are calculated as an annuity equal to the sum of:
| • | 1.0 percent of the participant’s highest final average earnings multiplied by years of service; and |
| • | 0.5 percent of such earnings in excess of Primary Social Security compensation. |
Years of service under these formulas cannot exceed 35. Contributions to the Pension Plan are made entirely by us and are paid into a trust fund from which the benefits for all participants will be paid.
The Pentair Supplemental Executive Retirement and Restoration Plan
The Pentair, Inc. Supplemental Executive Retirement Plan (“SERP”) and the Pentair, Inc. Restoration Plan (“Restoration Plan”) are unfunded, nonqualified defined benefit pension plans. Employees eligible for participation in the SERP include all executive officers and other key executives selected for participation by the Committee. Participation in the Restoration Plan is limited to eligible employees under the SERP who were eligible employees on or before December 31, 2007. Benefits under these two Plans vest upon the completion of five years of benefit service (all service following initial participation). These Plans are combined for all administrative, accounting and other purposes. Each of the Named Executive Officers participates in the SERP and each of the Named Executive Officers other than Ms. Lageson participates in the Restoration Plan. All Named Executive Officers other than Ms. Lageson are fully vested in these Plans.
Benefits under the SERP are based upon the number of an employee’s years of service following initial participation and the highest average earnings for a five calendar-year period (ending with retirement). Benefits vested as of December 31, 2004, are payable after retirement in the form of either a 15-year certain annuity or, at the participant’s option, a 100% joint and survivor annuity. Benefits earned after December 31, 2004, are payable after retirement in the form of a 15-year certain annuity. Compensation covered by the SERP and the Restoration Plan for the Named Executive Officers equals the amounts set forth in the 2012 “Salary” and “Non-Equity Incentive Plan Compensation” columns under “Executive Compensation—Summary Compensation Table.”
Benefits under the SERP are calculated as:
| • | final average compensation as defined above; multiplied by |
| • | benefit service percentage, which equals 15% multiplied by years of benefit service. |
As discussed above, the Pension Plan limits retirement benefits for compensation earned in excess of the annual limitation imposed by Code Section 401(a)(17), which was $250,000 in 2012. The Restoration Plan is designed to provide retirement benefits based on compensation earned by participants in excess of this annual limitation. The only participants in the Restoration Plan are those executive officers and other selected key leaders who participate in the SERP and who otherwise qualify for participation in the Restoration Plan. Restoration Plan benefits are combined and administered with those payable under the SERP and are paid in the same manner and at the same time.
Benefits under the Restoration Plan are calculated as:
| • | final average compensation as defined above, less compensation below the annual limitation amount in each year; multiplied by |
| • | earned benefit service percentage (which is weighted based on age at the time of service), in accordance with the following table: |
| Service Age |
Percentage | |
| Under 25 |
4% | |
| 25-34 |
5.5% | |
| 35-44 |
7% | |
| 45-54 |
9% | |
| 55 or over |
12% |
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The benefit percentages calculated above are added and the resulting percentage is multiplied by the covered compensation amount. Benefits vested as of December 31, 2004 are payable after retirement in the form of a 15-year certain annuity or, at the participant’s option, a 100% joint and survivor annuity. Benefits earned after December 31, 2004 are payable after retirement in the form of a 15-year certain annuity. No additional benefits may be earned under the Restoration Plan after December 31, 2017.
The present value of the combined accumulated benefits for the Named Executive Officers under both the SERP and the Restoration Plan is set forth in the table under “Executive Compensation—Pension Benefits.”
The Pentair Retirement Savings and Stock Incentive Plan
The Pentair Retirement Savings and Stock Incentive Plan (“RSIP/ESOP Plan”) is a tax-qualified 401(k) retirement savings plan, with a companion Employee Stock Ownership Plan (“ESOP”) component. Participating employees may contribute up to 50 percent of base salary and incentive compensation on a before-tax basis and 15 percent of compensation on an after-tax basis, into their 401(k) plan (“RSIP”). We normally match an amount equal to one dollar for each dollar contributed to the RSIP by participating employees on the first one percent, and 50 cents for each dollar contributed to the RSIP by participating employees on the next five percent, of their regular earnings. In addition, after the first year of employment, we contribute to the ESOP an amount equal to 1 1/2% of cash compensation (salary and incentive compensation) for each participant in the RSIP, to incent employees to make contributions to our retirement plan. The RSIP/ESOP Plan limits the amount of cash compensation considered for contribution purposes to the maximum imposed by Code Section 401(a)(17), which was $250,000 in 2012.
Participants in the RSIP/ESOP Plan are allowed to invest their account balances in a number of possible mutual fund investments. Our common shares are not a permitted investment choice under the RSIP. We make ESOP contributions in our common shares. Participants may sell and immediately reinvest common share contributions within the ESOP into any other investment vehicles offered under the RSIP/ESOP Plan. In addition, ESOP balances, but not RSIP balances, may be reinvested into our common shares.
Fidelity Investments Institutional Services Co. provides these investment vehicles for participants and handles all allocation and accounting services for the Plan. We do not guarantee or subsidize any investment earnings under the Plan.
Amounts deferred, if any, under the RSIP/ESOP Plan by the Named Executive Officers are included in the “Salary” and “Non-Equity Incentive Plan Compensation” columns under “Executive Compensation—Summary Compensation Table.” Pentair matching contributions allocated to the Named Executive Officers under the RSIP/ESOP Plan are included in the “All Other Compensation” column under “Executive Compensation—Summary Compensation Table.” Matching contributions are generally made a year in arrears.
Medical, Dental, Life Insurance and Disability Coverage
Employee benefits such as medical, dental, life insurance and disability coverage are available to all U.S.-based participants through our active employee plans. In addition to these benefits to active employees, we provide post-retirement medical, dental and life insurance coverage to certain retirees in accordance with the legacy Company plans which applied at the time the employees were hired. We provide up to one and a half times annual salary (up to $1,000,000) in life insurance, and up to $10,000 per month in long-term disability coverage. The cost of the active employee benefits in 2012 for the Named Executive Officers was as follows:
| Officer |
Cost of Benefits |
|||
| Randall J. Hogan |
16,035 | |||
| John L. Stauch |
16,408 | |||
| Michael V. Schrock |
15,778 | |||
| Frederick S. Koury |
10,113 | |||
| Angela D. Lageson |
15,129 | |||
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The value of these benefits is not required to be included in the Summary Compensation Table since they are made available to all of our U.S. salaried employees.
Other Paid Time-Off Benefits
We also provide vacation and other paid holidays to all employees, including the Named Executive Officers, which we have determined to be comparable to those provided at other large companies.
Deferred Compensation
We sponsor a non-qualified deferred compensation program, called the Sidekick Plan, for our U.S. executives within or above the pay grade that has a midpoint annual salary of $168,700 in 2012. This plan permits executives to defer up to 25% of their base salary and 75% of their annual cash incentive compensation. Executives also may defer receipt of restricted stock units or cash settled performance units. We normally make contributions in two tranches to the Sidekick Plan on behalf of participants similar to our contributions under the RSIP/ESOP Plan with respect to each participant’s contributions from that portion of his or her income above the maximum imposed by Code Section 401(a)(17), which was $250,000 in 2012, but below the Sidekick Plan’s compensation limit of $700,000.
Participants in the Sidekick Plan are allowed to invest their account balances in a number of possible mutual fund investments. Fidelity Investments Institutional Services Co. provides these investment vehicles for participants and handles all allocation and accounting services for the Plan. We do not guarantee or subsidize any investment earnings under the Plan, and our common shares are not a permitted investment choice under the Plan.
Amounts deferred, if any, under the Sidekick Plan by the Named Executive Officers are included in the “Salary” and “Non-Equity Incentive Plan Compensation” columns under “Executive Compensation—Summary Compensation Table.” Our contributions allocated to the Named Executive Officers under the Sidekick Plan are included in the “All Other Compensation” column under “Executive Compensation—Summary Compensation Table.”
Perquisites and Other Personal Benefits
We provide Named Executive Officers with a perquisite program (the “Flex Perq Program”) under which the Named Executive Officers receive a cash perquisite allowance in an amount that the Committee believes is customary, reasonable and consistent with our overall compensation program to better enable us to attract and retain superior employees for key positions. The Committee periodically reviews market data provided by Aon Hewitt to assess the levels of perquisites provided to Named Executive Officers.
For 2012, the total aggregate annual allowance under the Flex Perq Program was $35,000 for the Chief Executive Officer and the President and Chief Operating Officer, and $30,000 for all other participants. In addition to the allowance provided under the Flex Perq Program, we provided reimbursement for an annual executive physical and related expenses for the Chief Executive Officer, a closing recognition in connection with the Merger for our Named Executive Officers other than the Chief Executive Officer and reimbursement for travel and related expenses for the spouse or companion of certain of our Named Executive Officers in conjunction with a Board meeting. As described under “Effect of the Merger” below, in December 2012, the Committee approved increasing the aggregate annual allowance to $50,000 for the Chief Executive Officer and 40,000 for all of the other executive officers effective January 1, 2013.
The amounts of the annual allowance under the Flex Perq Program are included in the “All Other Compensation” column under “Executive Compensation – Summary Compensation Table” and are set forth in more detail in footnote 5 to that table.
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Severance and Change-in-Control Benefits
We provide severance and change-in-control benefits to selected executives to provide for continuity of management upon a threatened or completed change in control. These benefits are designed to provide economic protection to key executives following a change in control of our company so that our executives can remain focused on our business without undue personal concern. We believe that the security that these benefits provide helps our key executives to remain focused on our on-going business and reduces the key executive’s concerns about future employment. We also believe that these benefits allow our executives to consider the best interests of our company and its shareholders due to the economic security afforded by these benefits. As described below under “Effect of the Merger,” the change-in-control benefits were triggered by the consummation of the Merger. Some of the benefits were waived by the Named Executive Officers, while others remain in effect. Following the Merger, we provide the following severance and change-in-control benefits to our executive officers:
| • | We have agreements with our key corporate executives and other key leaders, including all Named Executive Officers, that provide for contingent benefits upon a change in control. |
| • | The 2012 Stock and Incentive Plan adopted in connection with the Merger provides that, upon a change in control, all options, restricted stock and restricted stock units that are unvested become fully vested; all cash performance awards (other than annual incentive awards) are paid in full based on performance at the better of target or trend; and all annual incentive awards are paid based on full satisfaction of the performance goals. |
| • | The 2008 Omnibus Plan and its predecessors provide that, upon a change in control, all outstanding options granted under such plans that are unvested become fully vested; all restrictions applicable to outstanding shares of restricted stock or restricted stock units granted under such plans automatically lapse and any dividends declared but unpaid with respect to such restricted stock or dividend equivalents on such restricted stock units shall be paid to the executive within 10 days of the date of the change in control; and all cash settled performance units for which the performance period has not expired will be cancelled in exchange for a cash payment equal to the amount that would have been due under such awards if the performance goals measured at the time of the change in control were to continue to be achieved at the same rate through the end of the performance period, or if higher, assuming the target performance goals had been met at the time of the change in control. |
| • | Upon certain types of terminations of employment (other than a termination following a change in control), severance benefits may be paid to the Named Executive Officers at the discretion of the Committee. |
We explain these benefits more fully below under “Executive Compensation—Potential Payments Upon Termination Or Change In Control.”
Retention Agreements
We entered into a Confidentiality and Non-Competition Agreement dated as of January 6, 2005, with Michael Schrock, our President and Chief Operating Officer. The Confidentiality and Non-Competition Agreement requires Mr. Schrock to devote his full-time and energy to furthering our business and prohibits Mr. Schrock, during or after his term of employment, from disclosing or using, for his own benefit or the benefit of another party, confidential information that he may learn or acquire during his employment. The Confidentiality and Non-Competition Agreement also contains a covenant against competition by Mr. Schrock for two years following his last day of employment with us. It does not contain severance provisions.
Impact of Tax Considerations
Section 162(m) of the Code places a limit of $1,000,000 on the amount of compensation that we may deduct in any one year with respect to each of our five most highly paid executive officers. There is an exception
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to the $1,000,000 limitation for performance-based compensation meeting certain requirements, including periodic shareholder approval of the benefit plans under which we pay such performance-based compensation. Annual cash incentive compensation generally is performance-based compensation meeting those requirements and, as such, is fully deductible. Beginning with awards for 2012, the Committee added a performance condition on its grants of restricted stock units that requires the Company to meet a specified threshold goal for free cash flow for any vesting to take place. This performance condition is intended to make the restricted stock units eligible to be treated as performance-based compensation. Due to the Merger, this performance condition did not apply, meaning that the restricted stock units granted in 2012 were not eligible to be treated as performance-based compensation under Section 162(m), but the Committee has included a similar performance condition on its grants of restricted stock units for 2013. We are also seeking shareholder approval of the performance goals under the new omnibus incentive plan, the 2012 Stock and Incentive Plan, at the Annual General Meeting to make awards granted under the Plan eligible to be treated as performance-based compensation under Section 162(m) if the Committee elects to make the awards otherwise compliant with the applicable requirements of Section 162(m).
The Committee also considers the impact of other tax provisions, such as the restrictions on deferred compensation set forth in Section 409A of the Code, and attempts to structure compensation in a tax-efficient manner, both for the Named Executive Officers and for our company. To maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals, the Committee has not adopted a policy requiring all compensation to be deductible.
Effect of the Merger
Effect of the Merger on Outstanding Equity Awards
Upon the consummation of the Merger, the outstanding stock options and restricted stock units held by the Named Executive Officers under Pentair Inc.’s equity incentive plans converted into equity-based awards with respect to our common shares, after giving effect to appropriate adjustments to reflect the consummation of the Merger. The awards, to the extent unvested at the time of the consummation of the Merger, would, under the terms of the Omnibus Plans, have become vested upon the consummation of the Merger, except that such accelerated vesting was waived by the Named Executive Officers with respect to certain awards pursuant to agreements they entered into with Pentair, Inc. (the “Waiver Letters”) waiving certain of their rights to accelerated vesting of their equity awards in connection with the consummation of the Merger.
The only equity-based awards as to which one of the Named Executive Officers did not waive accelerated vesting pursuant to the Waiver Letters were the unvested restricted stock units held by Mr. Schrock with an originally scheduled vesting date of 2015 or later. These restricted stock units vested and were settled by delivery of shares upon consummation of the Merger. Fifty percent of the shares delivered are not transferable until the date on which the restricted stock units would otherwise have vested and been settled in the absence of the Merger. Mr. Schrock waived the accelerated vesting of his other equity awards, but did not waive vesting of these restricted stock units because such waiver would potentially violate Section 409A of the Code.
Change in Control Agreements
As we describe above under “Severance and Change-in-Control Benefits,” we are party to agreements with the Named Executive Officers that provide for benefits in connection with a change in control that were triggered by the Merger. The agreements entitle the Named Executive Officers to (i) certain accelerated vesting and other benefits in the event of a change in control and (ii) certain severance payments and benefits in the event that the officer’s employment would be involuntarily terminated for any reason, other than for death, disability or for cause, or if the officer were to terminate his or her employment for good reason, in each case, within three years (for Messrs. Hogan, Schrock or Koury) or two years (for Mr. Stauch and Ms. Lageson) following a change in control (a “Covered Termination”). As described below under “—Waiver of Change in Control Protections,” in connection with the Merger, the Named Executive Officers waived certain protections under these agreements pursuant to the Waiver Letters.
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The Named Executive Officers would have, absent any applicable waiver, been entitled to the following payments and benefits under their respective change in control agreements upon the Merger:
| • | Incentive compensation awards for 2012 to be paid at target under the EOPP. |
| • | The actual EOPP payouts received by the Named Executive Officers as a result of the closing of the Merger triggering payment of EOPP awards at target level did not exceed what the Named Executive Officers would have otherwise received under the EOPP had it remained in place for the full year. |
| • | Immediate vesting of all unvested stock options and restricted stock units issued under the Omnibus Plans, without regard to either plan’s forfeiture provisions. |
| • | Each of the Named Executive Officers waived this immediate vesting in connection with the Merger (other than Mr. Schrock to the extent such waiver would result in adverse tax consequences under Section 409A of the Code) as described below in “—Waiver of Change in Control Protections.” |
| • | Immediate payment of cash–settled performance awards at one-third of target for award cycles that have been in effect less than 12 months, two-thirds of the then-current value for award cycles that have been in effect for between 12 and 24 months, and the then-current value for award cycles that have been in effect for 24 or more months, in each case as if all performance or incentive requirements and periods had been satisfied. |
| • | Each of the Named Executive Officers waived this immediate payment in connection with the Merger as described below in “—Waiver of Change in Control Protections.” |
| • | In certain circumstances, reimbursement of excise taxes triggered by payments to the executive and any additional taxes on this reimbursement as described below. |
| • | The payments to our Named Executive Officers in connection with the Merger did not trigger any excise taxes, so no reimbursement was triggered under this provision. |
The Named Executive Officers are entitled to the following payments and benefits under their respective change in control agreements upon a Covered Termination following a change in control, including the Merger:
| • | Severance payable upon termination in an amount equal to 300% (for Mr. Hogan) or 250% (for the other Named Executive Officers) of annual base salary plus the greater of the executive’s target bonus for the year in question or bonus received in the prior year. |
| • | Replacement coverage for company-provided group medical, dental and life insurance policies for up to three years (for Messrs. Hogan, Schrock and Koury) or up to two years (for Messrs. Stauch and Ms. Lageson). |
| • | Outplacement services from an executive search agency not to exceed 10% of the executive’s annual base salary. |
| • | The accelerated accrual and vesting of benefits under the SERP (for those executives who have been made participants in such plan); and for executives having fewer than seven years of participation in the SERP, up to three additional years of service credit, with a maximum of seven years of service. |
| • | Up to $15,000 in fees and expenses of consultants and legal or accounting advisors. |
In addition, the change in control agreements entitle each of the Named Executive Officers to reimbursement for any “golden parachute” excise taxes imposed by Section 4999 of the Code to the extent that any “parachute payments” within the meaning of Section 280G of the Code exceed 110% of the safe harbor amount under Section 280G of the Code. In the event that “parachute payments” payable to the Named Executive Officer do not exceed this threshold, such payments will be reduced to the extent necessary to avoid the imposition of the excise tax.
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In the case of each Named Executive Officer, the change in control agreement also requires the executive to devote his or her best efforts to us while employed during the three-year (for Messrs. Hogan, Schrock and Koury) or two-year (for the other Executive Officers) period following the Merger, to maintain the confidentiality of our information during and following employment and to refrain from competitive activities for a period of one year following termination of employment with us.
Under these change in control agreements, the term “cause” generally means engaging in intentional conduct that causes us demonstrable and serious financial injury, conviction of a felony or continuing willful and unreasonable refusal by an officer to perform his or her duties or responsibilities, and the term “good reason” generally means: (i) a breach of the agreement by us; (ii) any reduction in an officer’s base salary, percentage of base salary available as incentive compensation or bonus opportunity or benefits; (iii) an officer’s removal from, or any failure to reelect or reappoint him or her to serve in, any of the positions held with us on the date of the change in control or any other positions to which he or she is thereafter elected, appointed or assigned, except in the event that such removal or failure to reelect or reappoint relates to our termination of an officer’s employment for cause or by reason of disability; (iv) a good faith determination by an officer that there has been a material adverse change in his or her working conditions or status relative to the most favorable working conditions or status in effect during the 180-day period prior to the change in control, or, to the extent more favorable to him or her, those in effect at any time while employed after the change in control, including but not limited to a significant change in the nature or scope of his or her authority, powers, functions, duties or responsibilities or a significant reduction in the level of support services, staff, secretarial and other assistance, office space and accoutrements, but in each case excluding for this purpose an isolated, insubstantial and inadvertent event not occurring in bad faith that we remedy within 10 days after receipt of notice thereof; (v) relocation of an officer’s principal place of employment to a location more than 50 miles from his or her principal place of employment on the date 180 days prior to the change in control; (vi) imposition of a requirement that an officer travel on business 20% in excess of the average number of days per month he or she was required to travel during the 180-day period prior to the change in control; or (vii) our failure to cause a successor to assume an officer’s agreement. In addition, solely in the case of Mr. Hogan, the term “good reason” also includes a voluntary termination for any reason within 30 days following the first anniversary of any change in control; however, Mr. Hogan waived this “good reason” trigger in connection with the Merger, as described below.
Waiver of Change in Control Protections
In connection with the Merger, the Compensation Committee and our management team implemented several one-time actions designed to promote retention of our Named Executive Officers and to continue to provide incentives for strong financial performance. As described above, the Merger constituted a legal change in control of Pentair, Inc. under the existing change in control agreements with our Named Executive Officers. This change in control primarily meant that the vesting of all outstanding equity would be accelerated. This also meant that the “retention value” of the existing equity arrangements would have been lost when the Merger closed, potentially leaving us vulnerable to executive losses during a critical time in our history. As a result, the Compensation Committee offered a long-term incentive award to the Named Executive Officers in the form of restricted stock units subject to vesting in equal 50% installments on each of the third and fourth anniversaries of the consummation of the Merger for forgoing the accelerated equity due to the change in control. Specifically, in connection with the Merger, the Named Executive Officers entered into Waiver Letters waiving (i) accelerated vesting of their stock options and restricted stock units (except to the extent that such waiver would result in adverse tax consequences under Section 409A of the Code) and (ii) accelerated vesting and pro rata payout of their cash performance units, in each case, upon consummation of the Merger. Awards whose acceleration was waived continue to vest in accordance with their normal terms, provided that unvested awards will vest in full in the event of a Covered Termination. In addition, the performance conditions with respect to our cash performance units were deemed satisfied, and the value of such cash performance units was fixed at target, on the consummation of the Merger, and such awards are now only subject to service-based vesting conditions. Under his Waiver Letter, Mr. Hogan also waived his right to have any voluntary termination of his employment during the 30-day period following the first anniversary of the consummation of the Merger treated as a Covered Termination.
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In order to promote the retention of key executives during the period prior to and following the consummation of the Merger, and as consideration for the waivers of acceleration of equity and cash performance awards described above, we granted additional equity awards to certain key executives, including the Named Executive Officers in connection with the consummation of the Merger. Messrs. Hogan’s, Stauch’s, Schrock’s, and Koury’s and Ms. Lageson’s Waiver Letters provided for grants of restricted stock units. The Committee intended these restricted stock units to provide for management continuity and further solidify the focus on our post-Merger success. For the Named Executive Officers, these restricted stock units were granted with a grant date value equal to one times the Officers’ respective Long-Term Incentive Compensation level, plus 15% additional consideration for the waiver of rights to accelerated vesting and payouts. Messrs. Hogan’s, Stauch’s, Schrock’s, and Koury’s and Ms. Lageson’s restricted stock units had grant date values of $6,325,000, $1,987,010, $2,676,147, $1,171,945, and $1,006,250, respectively. These restricted stock units are subject to vesting in equal 50% installments on each of the third and fourth anniversaries of the consummation of the Merger, subject to earlier pro rata vesting in the event of a Covered Termination.
Deferred Compensation
For some participants, including the Named Executive Officers, the selected distribution events under the Sidekick Plan included a change in control, which included the Merger. As a result, some previously earned and vested, but unpaid, amounts were distributed under Pentair’s deferred compensation programs to the Named Executive Officers upon the consummation of the Merger.
Other Actions Taken in Connection with the Merger
Adoption of 2012 Stock and Incentive Plan. Prior to the closing of the Merger, we adopted a new incentive compensation plan, the 2012 Stock and Incentive Plan (the “2012 Plan”), to serve as the plan document under which future equity and cash incentive awards would be granted. See “Effect of the Merger” for a detailed discussion. The 2012 Plan initially became effective in connection with the Distribution, subject to the consummation of the Merger. The 2012 Plan was approved by Tyco, as our sole shareholder, prior to the Distribution. The 2012 Plan authorizes the grant of stock options, stock appreciation rights, performance shares, performance units, restricted stock, restricted stock units, deferred stock rights, annual incentive awards, dividend equivalent units, and other equity-based awards to our and our affiliates’ eligible employees, consultants and directors.
As described in Proposal 7 below, at this Annual General Meeting, we are requesting that our shareholders approve the material terms of the performance goals under the 2012 Plan for purposes of qualifying compensation awarded under the 2012 Plan as performance-based compensation under Code Section 162(m). A full summary of the terms of the 2012 Plan is set forth under Proposal 7.
In October 2012, the Committee amended all outstanding equity-based awards under the 2008 Omnibus Incentive Plan and its predecessor plans to conform their terms regarding the treatment of awards on death, disability or retirement to the terms of awards under the 2012 Plan.
Fourth Quarter 2012 Cash Incentive. As described above under “Annual Incentive Compensation Plan,” the closing of the Merger triggered payment of the annual incentive compensation awards under the EOPP at the target level and, because the Merger closed at the end of the third quarter of 2012, the Committee determined that the performance goals as previously established under the EOPP would continue until the end of 2012.
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Market Adjustments. In October 2012 and February 2013, the Committee approved market adjustments to the base salaries, annual incentive targets and long-term incentive targets of the Named Executive Officers based on competitive data from the Post-Merger Comparator Group. The base salary adjustments became effective as of October 1, 2012, and the adjustments to the annual incentive and long-term incentive targets became effective in 2013. Following the adjustments, the base salaries, annual incentive targets and long-term incentive targets of the Named Executive Officers were as follows:
| Officer |
Base Salary ($) | Annual Incentive Target Value (% of Base Salary) |
Long-Term Incentive Target Value (% of Base Salary) |
|||||||||
| Randall J. Hogan |
1,118,000 | 160 | 750 | |||||||||
| John L. Stauch |
525,000 | 90 | 350 | |||||||||
| Michael V. Schrock |
581,771 | 110 | 400 | |||||||||
| Frederick S. Koury |
407,633 | 70 | 250 | |||||||||
| Angela D. Lageson |
425,000 | 70 | 250 | |||||||||
In December 2012, the Committee approved increasing the aggregate annual allowance under the Flex Perq Program to $50,000 for the Chief Executive Officer and $40,000 for all of the other executive officers effective January 1, 2013.
Changes in Compensation Program for 2013
The Committee believes that one of the strengths of our compensation program is its consistency; therefore, the Committee did not change in 2012 its compensation philosophy or objectives as described above under “Compensation Philosophy and Objectives.”
Base Salaries
As described above, the Committee undertook a review of base salaries for the Named Executive Officers in connection with the Merger and, in October 2012, the Committee approved market adjustments to the base salaries based on competitive data from the Post-Merger Comparator Group.
Annual Incentive Compensation
The Committee also reviewed the Company’s cash incentive plans and approved performance measures and goals for 2013. The Committee determined that operating income, sales and free cash flow generation would be the three primary operating measures used to determine cash incentive compensation amounts for 2013. These measures correlate strongly with two primary corporate objectives: to improve the financial return from our businesses, and to strengthen our balance sheet through cash flow improvement and debt reduction. In addition, the Committee also approved an EBITDA target to be used with SDFs in assessing individual performance for the year. The performance measures (and related target amounts) applicable to all Named Executive Officers for 2013 will be weighted as follows: operating income 40%, sales 20%, free cash flow 20% and EBITDA 20%.
As described above, the Committee undertook a review of annual incentive targets for the Named Executive Officers in connection with the Merger and, in October 2012, the Committee approved market adjustments to the annual incentive targets based on competitive data from the Post-Merger Comparator Group, effective in 2013.
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Long-Term Incentive Compensation
The Committee approved in December 2012 the elements and mix of long-term incentive compensation for 2013 under the 2012 Stock and Incentive Plan. The Committee granted all Named Executive Officers a mix of the following components: stock options, restricted stock units and cash settled performance units.
| • | Stock options: The Committee determined that it would grant ten-year stock options, with one third of the options vesting on each of the first, second and third anniversaries of the grant date, as in prior years. The stock options for the 2013 grant constitute one-third of the long-term incentive award’s total value. |
| • | Restricted stock units: The Committee determined that it would grant restricted stock units. As in 2012, the Committee imposed a performance condition on the restricted stock units which requires the Company to meet a specified threshold goal for free cash flow in 2013. If such goal is achieved, then consistent with past practice, one-half of the restricted stock units vest on each of the third and fourth anniversaries of the grant date. Each restricted stock unit represents the right to receive one of our common shares upon vesting and includes one dividend equivalent unit, which entitles the holder to a cash payment equal to all cash dividends declared on a share of our common shares from and after the date of grant. An executive officer may elect to defer receipt of restricted stock units upon vesting under our Non-Qualified Deferred Compensation Plan. For the 2013 grant, restricted stock units constituted one third of the long-term incentive award’s total value. |
| • | Cash settled performance units: The Committee determined that it would also grant cash settled performance units in 2013 from a bonus pool that is established only if the Company meets a specified threshold goal for free cash flow in 2013. From this bonus pool, each participant, including the Named Executive Officers, is granted cash settled performance units. Each performance unit entitles the holder to a cash payment following the end of a three-year performance period, if we achieve specified Company performance goals on metrics set forth in the 2012 Stock and Incentive Plan. The performance goals selected by the Committee for the 2013 to 2015 performance period were revenue growth and return on invested capital, each weighted 50%. |
Subject to establishment of the bonus pool and depending on cumulative Company performance over the three-year performance period, we will pay nothing if a threshold is not met, 50% of the target value if the threshold is met, 100% of the target value if the target is met and 200% of the target value if the maximum is met. An executive officer may elect to defer receipt of the cash payment under our Non-Qualified Deferred Compensation Plan. For the 2013 grant, the value of cash settled performance units awarded constituted one-third of the long-term incentive award’s total value.
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis set forth above with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference into our Annual Report on Form 10-K for the year ended December 31, 2012.
THE COMPENSATION COMMITTEE:
David A. Jones, Chair
Glynis A. Bryan
Jerry W. Burris
T. Michael Glenn
William T. Monahan
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The table below summarizes the total compensation paid to or earned by each of the Named Executive Officers for the years ended December 31, 2010, 2011 and 2012.
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||||||
| Name and Principal Position |
Year | Salary ($) |
Bonus ($) |
Stock Awards ($) (1) |
Option ($) (2) |
Non-Equity ($) (3) |
Change in ($) (4) |
All Other Compensation ($) (5) |
Total ($) |
|||||||||||||||||||||||
| Randall J. Hogan Chairman and Chief Executive Officer |
2012 | 1,104,500 | - | 8,100,007 | 1,773,060 | 3,425,000 | 4,022,354 | 347,133 | 18,772,054 | |||||||||||||||||||||||
| 2011 | 1,065,000 | - | 1,738,763 | 1,716,495 | 3,943,764 | 3,113,217 | 209,934 | 11,787,173 | ||||||||||||||||||||||||
| 2010 | 991,055 | - | 2,717,399 | 3,420,504 | 2,209,062 | 777,775 | 202,415 | 10,318,210 | ||||||||||||||||||||||||
| John L. Stauch Executive Vice President and Chief Financial Officer |
2012 | 501,500 | - | 2,545,344 | 557,720 | 953,268 | 1,175,342 | 157,045 | 5,890,219 | |||||||||||||||||||||||
| 2011 | 479,288 | - | 557,067 | 549,943 | 1,117,448 | 532,629 | 118,847 | 3,358,222 | ||||||||||||||||||||||||
| 2010 | 461,945 | - | 893,516 | 1,124,721 | 541,769 | 313,823 | 89,274 | 3,425,048 | ||||||||||||||||||||||||
| Michael V. Schrock President and Chief Operating Officer |
2012 | 581,771 | - | 3,434,442 | 757,501 | 1,340,105 | 1,425,416 | 186,728 | 7,725,963 | |||||||||||||||||||||||
| 2011 | 564,826 | - | 759,643 | 749,922 | 1,653,256 | 1,129,507 | 140,288 | 4,997,442 | ||||||||||||||||||||||||
| 2010 | 541,688 | - | 1,191,366 | 1,499,629 | 804,948 | 677,442 | 114,232 | 4,829,305 | ||||||||||||||||||||||||
| Frederick S. Koury Senior Vice President, Human Resources |
2012 | 407,633 | - | 1,501,940 | 329,638 | 574,580 | 948,344 | 127,635 | 3,889,770 | |||||||||||||||||||||||
| 2011 | 401,696 | - | 320,728 | 316,630 | 711,260 | 547,585 | 88,051 | 2,385,950 | ||||||||||||||||||||||||
| 2010 | 391,880 | - | 514,453 | 647,569 | 354,103 | 236,871 | 61,915 | 2,206,791 | ||||||||||||||||||||||||
| Angela D. Lageson (6) Senior Vice President, General Counsel and Secretary |
2012 | 368,750 | - | 1,256,257 | 249,731 | 460,000 | 508,605 | 88,179 | 2,931,522 | |||||||||||||||||||||||
| 2011 | 325,000 | - | 236,339 | 233,312 | 328,464 | 218,795 | 63,656 | 1,405,566 | ||||||||||||||||||||||||
| - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| (1) | The amounts in column (e) represent the aggregate grant date fair value, computed in accordance with Accounting Standards Codification 718 (“ASC 718”) (formerly referred to as SFAS No. 123(R)), of restricted stock and restricted stock units granted during each year. The amounts for 2012 include the additional restricted stock units granted in connection with the consummation of the Merger as consideration for the Waiver Letters and to promote the retention of the named executive officers, as described above under “—Waiver of Change in Control Protections.” Messrs. Hogan’s, Stauch’s, Schrock’s, and Koury’s and Ms. Lageson’s restricted stock units had grant date values of $6,325,000, $1,987,010, $2,676,147, $1,171,945, and $1,006,250, respectively. These restricted stock units are subject to vesting in equal 50% installments on each of the third and fourth anniversaries of the consummation of the Merger, subject to earlier pro rata vesting in the event of a Covered Termination. Assumptions used in the calculation of the amounts in column (e) are included in footnote 16 to our audited financial statements for the year ended December 31, 2012 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2013. |
| (2) | The amounts in column (f) represent the aggregate grant date fair value, computed in accordance with ASC 718, of stock options granted during each year. Assumptions used in the calculation of these amounts are included in footnote 16 to our audited financial statements for the year December 31, 2012 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2013. |
| (3) | The amounts in column (g) with respect to 2012 reflect cash awards to the named individuals pursuant to awards under the EOPP in 2012 in connection with the Merger. |
| (4) | The amounts in column (h) reflect the increase in the actuarial present value of the Named Executive Officer’s accumulated benefits under all of our pension plans determined using interest rate and mortality rate assumptions consistent with those used in our financial statements. |
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| (5) | The table below shows the components of column (i), which include perquisites and other personal benefits; the Company match under the Sidekick Plan, RSIP/ESOP Plan and the Employee Stock Purchase Plan; Company-paid life insurance premiums; and dividends on restricted stock unit awards: |
| (A) | (B) | (C) | (D) | (E) | (F) | |||||||||||||||||||
| Name | Perquisites ($)(a) |
Other ($)(b) |
Matches ($)(c) |
Matches ($) |
Life Insurance ($) |
Dividends on ($) |
||||||||||||||||||
| Mr. Hogan |
35,000 | 7,722 | 35,175 | - | 4,902 | 264,334 | ||||||||||||||||||
| Mr. Stauch |
30,000 | 4,561 | 35,175 | 1,800 | 1,265 | 84,244 | ||||||||||||||||||
| Mr. Schrock |
35,000 | 5,052 | 35,175 | 2,250 | 4,247 | 105,004 | ||||||||||||||||||
| Mr. Koury |
30,000 | 2,900 | 43,750 | - | 1,551 | 49,434 | ||||||||||||||||||
| Ms. Lageson |
30,000 | 2,900 | 30,078 | - | 598 | 24,603 | ||||||||||||||||||
| (a) | The amount shown in column (A) for each individual reflects amounts paid to or for the benefit of each Named Executive Officer under the Flex Perq Program, which is designed to provide corporate officers and other key executives with an expense allowance for certain personal and business-related benefits. |
| (b) | The amounts shown in column (B) consist of travel and related expenses for such individual’s spouse or companion in conjunction with a Board meeting for Messrs. Hogan, Stauch and Schrock, a closing recognition in connection with the Merger for each of the Named Executive Officers other than Mr. Hogan and reimbursement for costs associated with an annual executive physical and related travel expenses for Mr. Hogan. |
| (c) | The amount shown in column (C) for each individual reflects amounts contributed by us to the RSIP/ESOP Plan or the Sidekick Plan with respect to salary deferrals in 2011 that were paid in 2012. |
| (6) | Ms. Lageson became a named executive officer in 2011. She was not a named executive officer in 2010. |
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| Estimated Future Payouts Under Non- Equity Incentive Plan Awards (2) (3) |
Estimated Future Payouts Under Equity Incentive Plan Awards |
|||||||||||||||||||||||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | (k) | (l) | (m) | ||||||||||||||||||||||||||||||
| Name | Grant Date |
Compensation Committee Approval Date (1) |
Threshold ($) |
Target ($) |
Maximum ($) |
Threshold (#) |
Target (#) |
Maximum (#) |
All
Other (#)(4) |
All Other (#)(5) |
Exercise ($/sh) |
Grant Date Fair Value of Stock and Option Awards ($)(6) |
||||||||||||||||||||||||||||||
| Randall J. Hogan | 1/3/12 | 12/12/11 | 52,022 | 1,774,991 | ||||||||||||||||||||||||||||||||||||||
| 10/16/12 | 10/1/12 | 144,275 | 6,325,016 | |||||||||||||||||||||||||||||||||||||||
| 1/3/12 | 12/12/11 | 193,777 | 34.12 | 1,773,060 | ||||||||||||||||||||||||||||||||||||||
| 1/3/12 | 12/12/11 | 887,500 | 1,775,000 | 3,550,000 | ||||||||||||||||||||||||||||||||||||||
| 1,237,500 | 1,650,000 | 3,300,000 | ||||||||||||||||||||||||||||||||||||||||
| John L. Stauch | 1/3/12 | 12/12/11 | 16,364 | 558,340 | ||||||||||||||||||||||||||||||||||||||
| 10/16/12 | 10/1/12 | 45,324 | 1,987,004 | |||||||||||||||||||||||||||||||||||||||
| 1/3/12 | 12/12/11 | 60,953 | 34.12 | 557,720 | ||||||||||||||||||||||||||||||||||||||
| 1/3/12 | 12/12/11 | 279,167 | 558,334 | 1,116,668 | ||||||||||||||||||||||||||||||||||||||
| 296,201 | 394,934 | 789,868 | ||||||||||||||||||||||||||||||||||||||||
| Michael V. Schrock | 1/3/12 | 12/12/11 | 22,225 | 758,317 | ||||||||||||||||||||||||||||||||||||||
| 10/16/12 | 10/1/12 | 61,043 | 2,676,125 | |||||||||||||||||||||||||||||||||||||||
| 1/3/12 | 12/12/11 | 82,787 | 34.12 | 757,501 | ||||||||||||||||||||||||||||||||||||||
| 1/3/12 | 12/12/11 | 379,167 | 758,334 | 1,516,668 | ||||||||||||||||||||||||||||||||||||||
| 436,328 | 581,771 | 1,163,542 | ||||||||||||||||||||||||||||||||||||||||
| Frederick S. Koury | 1/3/12 | 12/12/11 | 9,672 | 330,009 | ||||||||||||||||||||||||||||||||||||||
| 10/16/12 | 10/1/12 | 26,732 | 1,171,931 | |||||||||||||||||||||||||||||||||||||||
| 1/3/12 | 12/12/11 | 36,026 | 34.12 | 329,638 | ||||||||||||||||||||||||||||||||||||||
| 1/3/12 | 12/12/11 | 165,000 | 330,000 | 660,000 | ||||||||||||||||||||||||||||||||||||||
| 183,435 | 244,580 | 489,160 | ||||||||||||||||||||||||||||||||||||||||
| Angela D. Lageson | 1/3/12 | 12/12/11 | 7,327 | 249,997 | ||||||||||||||||||||||||||||||||||||||
| 10/16/12 | 10/1/12 | 22,953 | 1,006,260 | |||||||||||||||||||||||||||||||||||||||
| 1/3/12 | 12/12/11 | 27,293 | 34.12 | 249,731 | ||||||||||||||||||||||||||||||||||||||
| 1/3/12 | 12/12/11 | 125,000 | 250,000 | 500,000 | ||||||||||||||||||||||||||||||||||||||
| 157,500 | 210,000 | 420,000 | ||||||||||||||||||||||||||||||||||||||||
| (1) | The Compensation Committee’s practices for granting options and restricted stock units, including the timing of all grants and approvals therefor, are described under “Compensation Discussion and Analysis – 2012 Long-Term Incentive Compensation.” |
| (2) | The amounts shown in column (d) to which no grant date applies reflect the total of the threshold payment levels for each element under our EOPP. This amount is 75% of the target amounts shown in column (e). The amounts shown in column (f) are 200% of such target amounts. These amounts are based on the individual’s current salary and position. The EOPP awards were paid out at target in 2012 as a result of the completion of the Merger in 2012. |
| (3) | The amounts shown in column (d) as having been granted on January 3, 2012, reflect the total of the threshold payment levels for awards of cash settled performance units granted in 2012 under the 2008 Omnibus Plan which are 50% for 2012 of the target amounts shown in column (e). The amounts shown in column (f) are 200% of such target amounts. These amounts are based on the individual’s current salary and position. Any amounts payable with respect to performance units would be paid in March 2015, based on cumulative Company performance for the period 2012 to 2014. |
| (4) | The amounts shown in column (j) reflect the number of restricted stock units granted to each Named Executive Officer in 2012. |
| (5) | The amounts shown in column (k) reflect the number of options to purchase common shares granted to each Named Executive Officer in 2012. |
| (6) | The amounts shown in column (m) reflect the grant date fair value of the awards of restricted stock units and stock options computed in accordance with ASC 718. |
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OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2012
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||
| Name | Number of securities underlying (#) Exercisable |
Number of securities underlying (#) Unexercisable |
Equity Number of (#) |
Option ($)(1) |
Option date |
Number shares of stock (#)(2) |
Market ($)(3) |
Equity Number of (#) |
Equity Market ($) | |||||||||||||||||||||
| Randall J. Hogan | 352,876 | 17,343,855 | ||||||||||||||||||||||||||||
| 272,558 | - | 40.9500 | 1/6/2015 | |||||||||||||||||||||||||||
| 197,083 | - | 34.2800 | 1/3/2016 | |||||||||||||||||||||||||||
| 316,448 | - | 30.0500 | 1/3/2017 | |||||||||||||||||||||||||||
| 330,325 | - | 34.1800 | 1/2/2018 | |||||||||||||||||||||||||||
| 305,253 | - | 24.7800 | 1/2/2019 | |||||||||||||||||||||||||||
| 241,714 | 120,858 | (4) | 33.3800 | 1/4/2020 | ||||||||||||||||||||||||||
| 57,108 | 114,216 | (5) | 36.9800 | 1/3/2021 | ||||||||||||||||||||||||||
| - | 193,777 | (6) | 34.1200 | 1/3/2022 | ||||||||||||||||||||||||||
| John L. Stauch | 155,187 | 7,627,441 | ||||||||||||||||||||||||||||
| 121,000 | - | 33.0100 | 2/15/2017 | |||||||||||||||||||||||||||
| 12,500 | - | 31.5600 | 3/1/2017 | |||||||||||||||||||||||||||
| 112,500 | - | 34.1800 | 1/2/2018 | |||||||||||||||||||||||||||
| 79,480 | 39,740 | (4) | 33.3800 | 1/4/2020 | ||||||||||||||||||||||||||
| 18,296 | 36,594 | (5) | 36.9800 | 1/3/2021 | ||||||||||||||||||||||||||
| - | 60,953 | (6) | 34.1200 | 1/3/2022 | ||||||||||||||||||||||||||
| Michael V. Schrock | 118,531 | 5,825,799 | ||||||||||||||||||||||||||||
| 7,951 | - | 41.4300 | 1/2/2014 | |||||||||||||||||||||||||||
| 60,000 | - | 40.9500 | 1/6/2015 | |||||||||||||||||||||||||||
| 68,000 | - | 34.2800 | 1/3/2016 | |||||||||||||||||||||||||||
| 110,000 | - | 30.0500 | 1/3/2017 | |||||||||||||||||||||||||||
| 134,000 | - | 34.1800 | 1/2/2018 | |||||||||||||||||||||||||||
| 125,000 | - | 24.7800 | 1/2/2019 | |||||||||||||||||||||||||||
| 105,973 | 52,987 | (4) | 33.3800 | 1/4/2020 | ||||||||||||||||||||||||||
| 24,950 | 49,900 | (5) | 36.9800 | 1/3/2021 | ||||||||||||||||||||||||||
| - | 82,787 | (6) | 34.1200 | 1/3/2022 | ||||||||||||||||||||||||||
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| Option Awards | Stock Awards | |||||||||||||||||||||||||||||
| Name | Number of securities underlying (#) Exercisable |
Number of securities underlying (#) Unexercisable |
Equity Number of (#) |
Option ($)(1) |
Option date |
Number shares of stock (#)(2) |
Market ($)(3) |
Equity Number of (#) |
Equity Market ($) | |||||||||||||||||||||
| Frederick S. Koury | 66,489 | 3,267,934 | ||||||||||||||||||||||||||||
| 2,185 | - | 22.8800 | 1/2/2014 | |||||||||||||||||||||||||||
| 25,000 | - | 40.9500 | 1/6/2015 | |||||||||||||||||||||||||||
| 27,777 | - | 34.2800 | 1/3/2016 | |||||||||||||||||||||||||||
| 70,000 | - | 34.1800 | 1/2/2018 | |||||||||||||||||||||||||||
| 60,000 | - | 24.7800 | 1/2/2019 | |||||||||||||||||||||||||||
| 45,761 | 22,881 | (4) | 33.3800 | 1/4/2020 | ||||||||||||||||||||||||||
| 10,534 | 21,069 | (5) | 36.9800 | 1/3/2021 | ||||||||||||||||||||||||||
| - | 36,026 | (6) | 34.1200 | 1/3/2022 | ||||||||||||||||||||||||||
| Angela D. Lageson | 44,724 | 2,198,185 | ||||||||||||||||||||||||||||
| 7,863 | - | 41.1200 | 3/1/2015 | |||||||||||||||||||||||||||
| 5,793 | - | 41.1700 | 3/1/2016 | |||||||||||||||||||||||||||
| 6,431 | - | 31.5600 | 3/1/2017 | |||||||||||||||||||||||||||
| 5,597 | - | 32.4000 | 3/3/2018 | |||||||||||||||||||||||||||
| 9,629 | - | 19.1300 | 3/3/2019 | |||||||||||||||||||||||||||
| 16,666 | 8,334 | (7) | 34.2300 | 3/2/2020 | ||||||||||||||||||||||||||
| 7,762 | 15,525 | (5) | 36.9800 | 1/3/2021 | ||||||||||||||||||||||||||
| - | 27,293 | (6) | 34.1200 | 1/3/2022 | ||||||||||||||||||||||||||
| (1) | The exercise price for all stock option grants is the fair market value of our common shares on the date of grant. |
| (2) | With respect to 41,667 of the restricted stock units of Mr. Stauch, 100% of the restrictions lapsed on January 2, 2013, which was the fourth anniversary of the grant date. For all other awards of restricted stock units, the restrictions with respect to 50% of the shares will lapse on the third anniversary of the grant date and the restrictions on the remaining 50% of the shares will lapse on the fourth anniversary of the grant date. |
| (3) | The amounts in this column were calculated by multiplying the closing market price of our common shares on December 31, 2012 (the last trading day of our most recently completed fiscal year) of $49.15 by the number of unvested restricted stock or restricted stock units. |
| (4) | These options will vest on the third anniversary of the grant date, January 4, 2010. |
| (5) | One-half of these options will vest on each of the second and third anniversaries of the grant date, January 3, 2011. |
| (6) | One-third of these options will vest on each of the first, second and third anniversaries of the grant date, January 3, 2012. |
| (7) | These options will vest on the third anniversary of the grant date, March 2, 2010. |
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OPTION EXERCISES AND STOCK VESTED TABLE
The following table shows a summary of the stock options exercised by the Named Executive Officers in 2012 and the restricted stock or restricted stock units vested for the Named Executive Officers during 2012.
| Name | Option awards | Stock awards | ||||||||||||||
| Number of shares acquired on exercise (#) |
Value realized on exercise ($)(1) |
Number of shares acquired on vesting (#) |
Value ($)(2) |
|||||||||||||
| Randall J. Hogan |
426,900 | 8,329,290 | 40,538 | 1,458,198 | ||||||||||||
| John L. Stauch |
95,000 | 1,957,237 | 19,182 | 659,289 | ||||||||||||
| Michael V. Schrock |
101,725 | 1,807,521 | 57,911 | 2,340,165 | ||||||||||||
| Frederick S. Koury |
45,139 | 851,340 | 11,758 | 404,260 | ||||||||||||
| Angela D. Lageson |
- | - | 1,793 | 68,457 | ||||||||||||
| (1) | Reflects the amount calculated by multiplying the number of options exercised by the difference between the market price of our common shares on the exercise date and the exercise price of options. |
| (2) | Reflects the amount calculated by multiplying the number of shares vested by the market price of our common shares on the vesting date. |
Listed below are the number of years of credited service and present value of accumulated pension benefits as of December 31, 2012 for each of the Named Executive Officers under the Pentair, Inc. Pension Plan, the Pentair, Inc. Supplemental Executive Retirement Plan and the Pentair, Inc. Restoration Plan, which are described in detail under “Compensation Discussion and Analysis – Retirement and Other Benefits.” The disclosed amounts are actuarial estimates only and do not necessarily reflect the actual amounts that will be paid to the Named Executive Officers, which will only be known at the time that they become eligible for payment.
| Name | Plan name | Number of years credited service (#) |
Present value accumulated |
Payments during last fiscal year ($) |
||||||||||
| Randall J. Hogan |
Pentair, Inc. Pension Plan | 15 | 509,390 | - | ||||||||||
| Pentair, Inc. Supplemental Executive Retirement Plan | 15 | 14,857,393 | - | |||||||||||
| John L. Stauch |
Pentair, Inc. Pension Plan | 6 | 145,778 | - | ||||||||||
| Pentair, Inc. Supplemental Executive Retirement Plan | 6 | 2,497,394 | - | |||||||||||
| Michael V. Schrock |
Pentair, Inc. Pension Plan | 15 | 559,479 | - | ||||||||||
| Pentair, Inc. Supplemental Executive Retirement Plan | 14 | 5,464,081 | - | |||||||||||
| Frederick S. Koury |
Pentair, Inc. Pension Plan | 9 | 253,776 | - | ||||||||||
| Pentair, Inc. Supplemental Executive Retirement Plan | 9 | 2,421,973 | - | |||||||||||
| Angela D. Lageson |
Pentair, Inc. Pension Plan | 10 | 221,456 | - | ||||||||||
| Pentair, Inc. Supplemental Executive Retirement Plan | 3 | 689,161 | (2) | - | ||||||||||
| (1) | The Supplemental Executive Retirement Plan benefits, which include amounts under the Restoration Plan, are payable following retirement at age 55 or later in the form of an annuity. The actuarial present values above were calculated using the following methods and assumptions: |
| • | The Pension Plan present values were based on the accrued benefit payable at age 65 and were calculated as of December 31, 2012. |
| • | Present values for the Pension Plan are based on a life-only annuity. Present values for the Supplemental Executive Retirement Plan are based on a 180-month-certain only annuity. |
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| • | The present value of Pension Plan benefits as of December 31, 2012 was calculated assuming a 3.75% interest rate and the male and female RP2000 mortality table, projected 15 years for post-retirement decrements with no pre-retirement mortality used. |
| • | The present value of Supplemental Executive Retirement Plan benefits as of December 31, 2012 was calculated assuming a 3.30% interest rate. |
| (2) | Ms. Lageson’s benefits under the Supplemental Executive Retirement Plan are not vested, but will vest upon the completion of five years of benefit service (all service following initial participation). |
The actual amount of pension benefits ultimately paid to a Named Executive Officer may vary based on a number of factors, including differences from the assumptions used to calculate the amounts.
NONQUALIFIED DEFERRED COMPENSATION TABLE
The following table sets forth the contributions, earnings, distributions and 2012 year-end balances for each of the Named Executive Officers under our Sidekick Plan described under “Compensation Discussion and Analysis – Retirement and Other Benefits – Deferred Compensation.” Contributions we make to the Sidekick Plan are intended to make up for contributions to our RSIP/ESOP Plan (including our matching contributions) for cash compensation above the maximum imposed by Code Section 401(a)(17), which was $250,000 in 2012. Because the Code does not permit contributions on amounts in excess of that limit under a tax-qualified plan, the Sidekick Plan is designed to permit matching contributions on compensation in excess of the maximum imposed by Code Section 401(a)(17). We make these matching contributions to the Sidekick Plan on amounts in excess of the maximum imposed by Code Section 401(a)(17), but below the $700,000 compensation limit contained in our Sidekick Plan (such contributions by a Named Executive Officer, “Covered Sidekick Compensation”).
| Name |
Executive ($) |
Registrant Contributions in ($) |
Aggregate Earnings/ ($) |
Aggregate Distributions ($) |
Aggregate Balance at ($) |
|||||||||||||
| Randall J. Hogan |
579,118 | 22,750 | 456,492 | (796,469) | 2,115,971 | |||||||||||||
| John L. Stauch |
1,032,024 | 22,750 | 206,387 | (402,769) | 1,439,848 | |||||||||||||
| Michael V. Schrock |
489,904 | 22,750 | 310,262 | (722,333) | 1,724,513 | |||||||||||||
| Frederick S. Koury |
46,600 | 31,325 | 66,793 | (234,139) | 413,923 | |||||||||||||
| Angela D. Lageson |
61,471 | 17,653 | 25,423 | (16,632) | 266,099 | |||||||||||||
The amounts set forth in the column “Executive Contributions in 2012” reflect the amount of cash compensation each Named Executive Officer deferred in 2012 under the Sidekick Plan.
The amounts set forth in the column “Registrant Contributions in 2012” are the totals of contributions we made in 2012 under the Sidekick Plan for the account of each Named Executive Officer. These amounts, in addition to contributions we made under the RSIP/ESOP Plan, are included in the “Summary Compensation Table” in the column labeled “All Other Compensation” above. The contributions we made are derived from some or all of the following sources:
| • | Matching contributions equal to one dollar for each dollar contributed up to one percent of Covered Sidekick Compensation, and 50 cents for each incremental dollar contributed on the next five percent, deferred in 2011 by each Named Executive Officer; we normally make these contributions one year in arrears. |
| • | A discretionary contribution of up to 1 1/2% of Covered Sidekick Compensation earned in 2011 for each Named Executive Officer; we normally make these contributions one year in arrears. |
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The amounts set forth in the column “Aggregate Earnings/(Loss) in 2012” reflect the amount of investment earnings realized by each Named Executive Officer on the mutual fund investments chosen that are offered to participants in our RSIP/ESOP Plan and Sidekick Plan. Fidelity Investments Institutional Services Co. provides these investment vehicles for participants and handles all allocation and accounting services for these plans. We do not guarantee or subsidize any investment earnings in either Plan.
As discussed above under “Effect of the Merger,” for some participants, including the Named Executive Officers, the selected distribution events under the Sidekick Plan included a change in control, which included the Merger. As a result, some previously earned and vested, but unpaid, amounts were distributed under Pentair’s deferred compensation programs to the Named Executive Officers upon the consummation of the Merger. These amounts are set forth in the column “Aggregate Withdrawals/Distributions in 2012.”
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Except for items described below, we have no agreements, arrangements, or plans that entitle executive officers to severance, perquisites, or other enhanced benefits upon termination of their employment; such payments or benefits (other than following a change in control) would be at the discretion of the Compensation Committee.
Change in Control Agreements
We have entered into agreements with certain key corporate executives and business division leaders, including all Named Executive Officers, that provide for contingent benefits upon a change in control. These agreements are intended to provide for continuity of management upon a completed or threatened change in control. The agreements provide that covered executive officers could be entitled to certain severance benefits following a change in control. If, following such a change in control, the executive officer is involuntarily terminated for any reason, other than for disability or for cause, or if such executive officer terminates his or her employment for good reason, then the executive officer is entitled to certain severance payments.
Under these agreements, the term “cause” means:
| • | engaging in intentional conduct that causes us demonstrable and serious financial injury; |
| • | conviction of a felony; or |
| • | continuing willful and unreasonable refusal by an officer to perform his or her duties or responsibilities. |
Under these agreements, the term “good reason” means:
| • | a breach of the agreement by us; |
| • | any reduction in an officer’s base salary, percentage of base salary available as incentive compensation or bonus opportunity or benefits; |
| • | an officer’s removal from, or any failure to reelect or reappoint him or her to serve in, any of the positions held with us on the date of the change in control or any other positions to which he or she is thereafter elected, appointed or assigned, except in the event that such removal or failure to reelect or reappoint relates to our termination of an officer’s employment for cause or by reason of disability; |
| • | a good faith determination by an officer that there has been a material adverse change in his or her working conditions or status relative to the most favorable working conditions or status in effect during the 180-day period prior to the change in control, or, to the extent more favorable to him or her, those in effect at any time while employed after the change in control, including but not limited to a significant change in the nature or scope of his or her authority, powers, functions, duties or |
57
| responsibilities or a significant reduction in the level of support services, staff, secretarial and other assistance, office space and accoutrements, but in each case excluding for this purpose an isolated, insubstantial and inadvertent event not occurring in bad faith that we remedy within 10 days after receipt of notice thereof; |
| • | relocation of an officer’s principal place of employment to a location more than 50 miles from his or her principal place of employment on the date 180 days prior to the change in control; |
| • | imposition of a requirement that an officer travel on business 20% in excess of the average number of days per month he or she was required to travel during the 180-day period prior to the change in control; |
| • | our failure to cause a successor to assume an officer’s agreement; or |
| • | only in the case of the Chief Executive Officer, a voluntary termination for any reason within 30 days following the first anniversary of any change in control. |
Under these agreements, a “change in control” is deemed to have occurred if:
| • | any person is or becomes the beneficial owner of securities representing 20% (or 30% in the cases of Mr. Stauch and Ms. Lageson) or more of our outstanding common shares or combined voting power; |
| • | a majority of the Board changes in a manner that has not been approved by at least two-thirds of the incumbent directors or successor directors nominated by at least two-thirds of the incumbent directors; |
| • | we consummate a merger, consolidation or share exchange with any other entity (or the issuance of voting securities in connection with a merger, consolidation or share exchange) which our shareholders have approved and in which our shareholders control less than 50% of combined voting power after the merger, consolidation or share exchange; or |
| • | we consummate a plan of complete liquidation or dissolution or an agreement for the sale or disposition of all or substantially all of our assets which our shareholders have approved. |
Benefits Upon a Covered Termination Without a Post-Merger Change in Control
The Merger constituted a change in control under the change in control agreements and the benefits and protections provided by the agreements to the Named Executive Officers were therefore triggered by the Merger, some of which were waived by the Named Executive Officers, as described above under “Effect of the Merger – Change in Control Agreements.” As a result, if any of the Named Executive Officers terminates employment in a “Covered Termination,” under the change in control agreements that were triggered as a result of the Merger and the Waiver Agreements the Named Executive Officer would receive:
| • | severance payable upon termination in an amount equal to 300% (for the Chief Executive Officer) or 250% (for the other Named Executive Officers) of annual base salary plus the greater of the executive’s target bonus for the year in question or bonus received in the prior year; |
| • | immediate vesting of pre-Merger equity and cash performance unit awards; |
| • | pro rata vesting of restricted stock units granted in connection with the Merger based on the portion of four-year vesting period that has elapsed; |
| • | replacement coverage for company-provided group medical, dental and life insurance policies for up to three years after the Merger; |
| • | the cost of an executive search agency not to exceed 10% of the executive’s annual base salary; |
| • | accelerated accrual and vesting of benefits under the SERP (for those executives who have been made participants of such plan); and for executives having fewer than seven years of participation in the SERP, up to three additional years of service can be credited, up to a maximum of seven years of service; |
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| • | up to $15,000 in fees and expenses of consultants and legal or accounting advisors; and |
| • | in certain cases, reimbursement of any excise taxes triggered by payments to the executive and any additional taxes on this reimbursement. |
To constitute a “Covered Termination” for purposes of the benefits described above, the termination must be either by us without cause, as defined in the agreement, or by the executive with good reason, as defined in the agreement (except that Mr. Hogan has waived the portion of the definition of good reason that would be triggered by a voluntary termination of his employment by him for any reason within 30 days following the first anniversary of the Merger), in either case within three years (for Messrs. Hogan, Schrock and Koury) or two years (for Messrs. Stauch and Ms. Lageson) following the Merger.
Benefits Upon a Post-Merger Change in Control and Covered Termination
The benefits under the change in control agreements that could be triggered by a post-Merger change in control and a covered termination in connection with such a change in control include:
| • | upon any post-Merger change in control: |
| • | incentive compensation awards for the year in question to be paid at target; |
| • | immediate vesting of all unvested stock options and termination of all restrictions on restricted stock awards; |
| • | cash settled performance awards to be paid at one-third of target if the award cycle has been in effect less than 12 months, at two-thirds of the then-current value if the award cycle has been in effect for between 12 and 24 months, and at the then-current value if the award cycle has been in effect for 24 months or more months, in each case as if all performance or incentive requirements and periods had been satisfied; and |
| • | in certain cases, reimbursement of any excise taxes triggered by payments to the executive and any additional taxes on this reimbursement. |
| • | upon termination of the executive by us other than for death, disability or cause or by the executive for good reason, after a post-Merger change in control: |
| • | severance payable upon termination in an amount equal to 300% (for the Chief Executive Officer) or 250% (for the other Named Executive Officers) of annual base salary plus the greater of the executive’s target bonus for the year in question or bonus received in the prior year; |
| • | replacement coverage for Company-provided group medical, dental and life insurance policies for up to three years; |
| • | the cost of an executive search agency not to exceed 10% of the executive’s annual base salary; |
| • | the accelerated accrual and vesting of benefits under the SERP (for those executives who have been made participants of such plan); and for executives having fewer than seven years of participation in the SERP, up to three additional years of service can be credited, up to a maximum of seven years of service; and |