At the Annual Meeting, action will be taken on the matters set forth in the accompanying Notice and described in this Proxy Statement. The Board knows of no other matters to be presented for action at the Annual Meeting.

If any other matters do properly come before the Annual Meeting, the persons named in the Proxy Card will have discretionary authority to vote on those matters in accordance with their best judgment.

11.        WHO WILL PAY THE COST OF THIS PROXY SOLICITATION?

12.        HOW CAN I PARTICIPATE IN THE ANNUAL MEETING?

13.        WHAT IF I HAVE TECHNICAL DIFFICULTIES OR TROUBLE VIEWING THE VIRTUAL MEETING

14.        ARE VOTES CONFIDENTIAL?

15.        WHO COUNTS THE VOTES?

16.        MAY STOCKHOLDERS ASK QUESTIONS AT THE ANNUAL MEETING?

 

 

 

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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

               The following table sets forth information, as of March 28, 2019, regarding the beneficial ownership of the Company’s Common Stock by (a) each person who is known by us to be the beneficial owner of more than five percent of the Common Stock outstanding; (b) each Director and nominee for election as Director; (c) each of our executive officers named in the Summary Compensation Table in this Proxy Statement (except for Messrs. Michels and Spair who have retired from the Company); and (d) all of our Directors and executive officers as a group. Unless otherwise indicated, the address of each person identified below is c/o OraSure Technologies, Inc., 220 East First Street, Bethlehem, Pennsylvania 18015.

               Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), shares of Common Stock which a person has a right to acquire pursuant to the exercise of stock options held by that person that are exercisable within 60 days of March 28, 2019 are deemed to be outstanding for the purpose of computing the ownership percentage of that person, but are not deemed outstanding for computing the ownership percentage of any other person.

 

 

⁵ Based on information contained in a schedule 13G/A filed February 11, 2019.  The filing person has sole voting power with respect to 120,352 shares, shared voting power with respect to 4,900 shares, sole dispositive power with respect to 3,715,825 shares and shared dispositive power with respect to 120,552 shares.

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CORPORATE GOVERNANCE

 

 

               The primary responsibility of the Board of Directors is to promote the long-term success of the Company. In fulfilling this role, each Director must exhibit good faith business judgment as to what is in the best interests of the Company. The Board is responsible for establishing broad corporate policies, setting strategic direction and overseeing management. The Company’s management is responsible for the day-to-day operations of the Company.

               The Board is divided into three classes with each class consisting of one-third of the total number of Directors on the Board. At each Annual Meeting of Stockholders, the nominees for the class of Directors whose term is expiring at that annual meeting are elected for a three-year term. A Director holds office until the Annual Meeting of Stockholders for the year in which his or her term expires or until his or her successor is elected and duly qualified, subject to prior death, resignation, retirement, disqualification or removal. Each nominee for election at the Annual Meeting currently serves as a Director.

 

 

               The Board has adopted Corporate Governance Principles which, along with the Charters for each of its Committees and the Company’s Code of Business Conduct and Ethics, provide a framework for the governance of the Company. The Company’s Corporate Governance Principles address matters such as the responsibilities and composition of the Board, Director independence and the conduct of Board and Committee meetings. The Company’s Code of Business Conduct and Ethics sets forth guiding principles of business ethics and certain legal requirements applicable to all Company employees and non-employee Directors. Copies of the current Corporate Governance Principles and Code of Business Conduct and Ethics are available on the Company’s website, www.orasure.com.

 

 

 

 

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               The Board has carefully considered its leadership structure and believes at this time that the Company and its stockholders are best served by having the positions of Chairman and Chief Executive Officer filled by different individuals. This allows the Chief Executive Officer to, among other things, focus on the Company’s day-to-day business, while allowing the Chairman to lead the Board in its fundamental role of providing strategic advice and oversight of management. In the future, however, the Board may reconsider whether its Chief Executive Officer should also serve as Board Chairman or may elect to rotate the position of Board Chairman to other independent Directors.

 

 

and the Company. As a result of this review, the Board determined that Mara Aspinall, Michael Celano, Eamonn P. Hobbs, Ronny B. Lancaster, Charles W. Patrick and Aradhana Sarin, M.D., are “independent,” as that term is defined in the applicable rules of NASDAQ and the SEC. Stephen S. Tang, Ph.D., was determined by the Board not to be independent because he is currently an executive officer employed by the Company. Based on the foregoing, the Board of Directors is comprised of a majority of independent Directors. All standing Committees of the Board are also comprised solely of independent Directors.

 

 

its risk monitoring activities. In addition, senior management provides periodic reports to the full Board on the major risks facing the Company and the processes and procedures in place to manage such risks. Management also conducts a risk assessment of the Company’s compensation policies and practices, including its executive compensation program, as described in greater detail in the Section of this Proxy Statement entitled, “Compensation Committee Matters.”

 

               The Board has approved a policy concerning Board members’ attendance at our Annual Meeting of Stockholders and a process for security holders to send communications to members of the Board. A description of the Board’s policy on annual meeting attendance is provided on our website, at www.orasure.com. As a general matter, each Board member is required to attend each Annual Meeting of Stockholders. Our 2018 Annual Meeting was attended by all members of the Board.

 

               Security holders may communicate with the Board by sending their communications to OraSure Technologies, Inc., 220 East First Street, Bethlehem, Pennsylvania 18015, Attention: Corporate Secretary, fax: (610) 882-2275, email: corporatesecretary@orasure.com.

 

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               The Board currently has three standing committees - the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. Members of these committees are each “independent,” as defined in the Exchange Act and NASDAQ rules applicable to such Committees. In addition, the Board has determined that Michael Celano is an “audit committee financial expert,” as that term is defined by applicable rules of the SEC. Each committee operates pursuant to a written charter, copies of which are available on our website, at www.orasure.com. Additional information on each standing committee is provided below:

 

 

C – Committee Chair

– Determined by the Board to be an audit committee financial expert as defined under applicable SEC Rules.

I – Determined by the Board to be independent under applicable SEC and NASDAQ rules.

*- Eamonn P. Hobbs served on the Audit Committee during 2018.  In February 2019, Mr. Hobbs left the Audit Committee and joined the Nominating and Corporate Governance Committee, where he currently serves as Chairman.

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C – Committee Chair

– Determined by the Board to be an audit committee financial expert as defined under applicable SEC Rules.

I – Determined by the Board to be independent under applicable SEC and NASDAQ rules.

* – Mr. Hobbs joined the Nominating and Corporate Governance Committee and was appointed as Chairman of the Committee in February 2019.

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               The Nominating and Corporate Governance Committee may also consult with outside advisors or retain search firms to assist in the search for qualified candidates. Candidates recommended by stockholders will be considered by the Nominating and Corporate Governance Committee in the same manner as candidates recommended by other sources, but only if the stockholder makes a recommendation in accordance with the advance notification provisions set forth in the Company’s Bylaws.

 

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               Although there is no formal policy governing Board diversity, the Nominating and Corporate Governance Committee considers diversity as one of many factors in identifying new candidates for the Board. Such diversity includes personal characteristics such as race and gender as well as diversity in background and skills and experience that relate to our Board’s performance of its responsibilities.  The Nominating and Corporate Governance Committee does not assign specific weight to any particular criteria when reviewing candidates and may not apply the same criteria to all prospective nominees.

 

 

 

 

 

 

 

 

 

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               Any individual who was covered by the guidelines at the time of adoption or who becomes subject to the guidelines following adoption is required to meet the guidelines within five years. Any individual already subject to the guidelines who becomes subject to a higher ownership requirement, due to a promotion, a further amendment to the guidelines or an increase in compensation, is required to meet the new ownership requirement within five years following the effective date of promotion, change in compensation or guideline amendment. In determining whether an individual meets the required ownership requirement, shares owned directly or indirectly, restricted stock (including both time and performance vested) and shares deferred under our deferred compensation plan will be counted. Compliance will be determined as of December 31 of each fiscal year. The guidelines also require each covered individual to retain at least 50% of the net shares acquired upon the exercise of stock options and the vesting of restricted stock until the individual’s holdings of Common Stock equal or exceed the applicable ownership requirement. As of December 31, 2018, all covered officers and non-employee Directors were in compliance with the stock ownership guidelines.

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AUDIT COMMITTEE MATTERS    

 

 

The information contained in this report shall not be deemed to be “soliciting material” or “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to liability under that Section. This report shall not be deemed “incorporated by reference” into any document filed under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, whether such filing occurs before or after the date hereof, regardless of any general incorporation language in such filing.

The role of the Audit Committee is to assist the Board of Directors in fulfilling its responsibilities to oversee management’s conduct of the Company’s financial reporting process, including monitoring (1) the participation of management and the outside independent registered public accounting firm in the financial reporting process, (2) the Company’s systems of internal accounting and financial controls, (3) the annual independent audit of the Company’s financial statements and (4) the qualifications, independence and performance of the outside independent registered public accounting firm. The Audit Committee selects the Company’s outside independent registered public accounting firm, and once selected, the outside independent registered public accounting firm reports directly to the Audit Committee. The Audit Committee is responsible for approving both audit and non-audit services to be provided by the outside independent registered public accounting firm. The Audit Committee is composed of five (5) non-employee directors and operates pursuant to a Charter that was last amended and restated by the Board on February 20, 2018 (which can be found on the Company’s website at www.orasure.com).

Management of the Company is responsible for the preparation, presentation and integrity of the Company’s financial statements, the Company’s accounting and financial reporting principles and internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. The independent registered public accounting firm is responsible for auditing the Company’s financial statements and expressing an opinion as to their conformity with U.S. generally accepted accounting principles. The Audit Committee’s responsibility is to monitor and review these processes. It is not the Audit Committee’s duty or responsibility to conduct auditing or accounting reviews.

In the performance of its oversight function, the Audit Committee has considered and discussed the audited financial statements with management, which included a discussion of not only the quality, but also the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements. The Audit Committee met with the independent registered public accounting firm, with and without management, to discuss the results of their audit and their judgments regarding the Company’s accounting policies. The Audit Committee has also discussed with the independent registered public accounting firm the matters required to be discussed under applicable standards, including those in Public Company Accounting Oversight Board Auditing Standard No. 16, as currently in effect. Finally, the Audit Committee has received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board as currently in effect, has considered whether the provision of non-audit services by the independent registered public accounting firm to the Company is compatible with maintaining the firm’s independence and has discussed with the independent registered public accounting firm the firm’s independence.

Based upon the reports and discussions described in this report, and subject to the limitations on the role and responsibilities of the Audit Committee referred to above and in the Audit Committee’s Charter, the Audit Committee recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for filing with the SEC and selected KPMG LLP as the independent registered public accounting firm for fiscal year 2019. The Board is recommending that stockholders ratify that selection at the Annual Meeting.

Submitted by the Audit Committee of the Company’s Board of Directors:

Aradhana Sarin, M.D., Chairman

Mara G. Aspinall

Michael Celano

Charles W. Patrick

February 25, 2019

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The following table presents fees for professional audit services rendered by KPMG LLP (i) for the audits of our annual consolidated financial statements and review of the financial statements in our Quarterly Reports on Form 10-Q for the fiscal years ended December 31, 2018 and 2017, and (ii) for the audits of our internal control over financial reporting as of December 31, 2018 and 2017. The following table also includes fees billed for other services rendered by KPMG:

 

 

 

The Audit Committee has adopted a general practice of pre-approving all audit and non-audit services provided to the Company by our independent registered public accounting firm. The Chairman of the Audit Committee has been delegated the authority to pre-approve audit and non-audit services having an aggregate value of up to $25,000 between meetings of the Audit Committee, provided that such pre-approval is communicated to the Audit Committee at its next scheduled meeting. All services by KPMG in 2018 and 2017 were approved in accordance with these practices.

COMPENSATION COMMITTEE MATTERS    

 

The Compensation Committee assists the Board in developing and managing the compensation provided to executive officers of the Company and non-employee members of the Board. The Compensation Committee is responsible for developing and overseeing the implementation of the Company’s compensation philosophy and for setting executive compensation at levels that are sufficiently competitive so that the Company can attract, retain, motivate and reward high quality executives who can contribute to the Company’s success.

 

Compensation for executives is established by the Compensation Committee in accordance with the compensation philosophy established under its charter as set forth in the CD&A Section of this Proxy Statement. In setting executive compensation, the Compensation Committee considers the Company’s and each executive’s performance against previously established objectives, internal pay equity, the compensation practices of the Company’s peer group (set forth in the CD&A) (“Peer Group”), the Company’s industry position and general industry compensation data. The Compensation Committee periodically retains independent compensation consultants to review our executive compensation practices and to assist in establishing competitive compensation levels for our executives.

 

On an annual basis, the Compensation Committee and other non-employee Directors evaluate the performance of the CEO and, while Mr. Spair was with the Company, the CFO/Chief Operating Officer (“COO”) (prior to Mr. Spair’s retirement), based on the overall performance of the Company. The CEO also evaluates the performance of the other NEOs (including the CFO following Mr. Spair’s retirement) against their respective predetermined performance objectives. Annual performance objectives for the NEOs are established at the beginning of the applicable year and generally include two parts: (1) the Company’s overall target financial objectives, and (2) individual objectives in the functional areas for which the executive is responsible. For each NEO, these objectives are then weighted to reflect their relative importance to the Company and the executive’s functional responsibilities.

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Depending on the Company’s overall performance and the extent to which an executive achieves his or her individual objectives for a particular year, the executive will be rated as “Does Not Meet,” “Does Not Consistently Meet,” “Meets Expectations,” “Exceeds Expectations” or “Outstanding.” On occasion, a blended rating such as “Meets/Exceeds” or “High Meets” will be used to indicate performance in between the foregoing performance rating levels. The Compensation Committee uses the performance ratings and other factors to determine base salary adjustments, incentive cash bonuses and long-term incentive equity awards.

The Board and Compensation Committee did not apply specific performance rating levels to Mr. Michels or Mr. Spair when they were employed by the Company, because their performance was based on the overall performance of the Company.  In evaluating Dr. Tang’s and Mr. Cuca’s performance for 2018, the Board and Compensation Committee have returned to the practice of using performance ratings in setting compensation for our CEO and CFO, even though Dr. Tang’s performance continues to be based primarily on the Company’s overall performance.

 

The Compensation Committee is comprised of independent non-employee Directors who oversee our executive compensation program. Each year, the Compensation Committee determines or recommends the appropriate level of compensation for all NEOs. As an initial guideline, the Compensation Committee sets the total direct compensation opportunity (base salary, annual incentive bonus target, and long-term incentive equity target) for each of our executive officers within a range around the 50th percentile of comparable medical diagnostics and healthcare companies. The variation of actual pay relative to the market data is dependent on the executive officer’s performance, experience, knowledge, skills, level of responsibility, potential to impact our performance and future success, and the need to retain and motivate strategic talent.

The Compensation Committee generally determines an executive officer’s compensation based upon the objectives of our executive compensation program. The Compensation Committee makes compensation recommendations to the Board for the CEO and approves decisions for the other NEOs after careful review and analysis of appropriate performance information and market compensation data. Compensation for the CEO is approved by the independent members of the Board of Directors.

Beyond determining and recommending specific compensation for the NEOs, the Compensation Committee works with executive management to review and adjust compensation policies and practices to remain consistent with the Company’s values and philosophy, support the recruitment and retention of executive talent, and help the Company achieve its business objectives.  The Compensation Committee also determines a market-based level of compensation for non-employee Directors.

 

The CEO provides performance assessments and recommendations to the Compensation Committee on the total direct compensation for each executive. The CEO’s recommendations are based on his review of each executive’s performance, job responsibilities, importance to our overall business strategy, and our compensation philosophy. Although the CEO’s recommendations are given significant weight, the Compensation Committee retains full discretion when determining compensation.

 

To assist in the review of executive compensation and to obtain information regarding market trends and governance best practices, the Compensation Committee engages independent executive compensation consultants to analyze our executive compensation structure and plan designs, and to assess whether the compensation program is competitive and supports our goal of aligning the interests of our executive officers with those of our stockholders. Such consultants also provide the Compensation Committee with the Peer Group and other market data that is discussed in the CD&A, which the Compensation Committee evaluates when determining compensation for executive officers. In connection with its 2018 year-end compensation decisions, the Compensation Committee engaged Pay Governance LLC (“Pay Governance”) to provide market assessments of the target compensation for our executives, to assist in updating the Peer Group of companies we use for compensation benchmarking purposes and to consult on the preparation of this Proxy Statement. During 2018, Pay Governance also assisted the Compensation Committee in determining market-based compensation terms for the employment agreements entered into with Dr. Tang and Mr. Cuca and the retirement agreements entered into with Mr. Michels and Mr. Spair and has been engaged to provide a market-based assessment of non-employee Director compensation.

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The Compensation Committee has the sole authority to approve any independent compensation consultant’s fees and terms of engagement. The Compensation Committee annually reviews its relationship with each consultant to ensure executive compensation consulting independence. The process in 2018 included a review of the services Pay Governance provides, the quality of those services, and the fees associated with the services during the fiscal year as well as consideration of the factors impacting independence that NASDAQ rules require and a review of Pay Governance’s independence policy. The Compensation Committee concluded that there were no conflicts of interest that prevented Pay Governance from serving as an independent consultant to the Compensation Committee on executive compensation matters.

 

In determining annual compensation, the Compensation Committee reviews tally sheets for each executive. Tally sheets set forth the dollar amounts of all components of each NEO’s current compensation, including salary, incentive cash bonus, incentive equity awards, potential termination payments and other benefits deemed relevant by the Compensation Committee. These tally sheets allow the Compensation Committee to review how a change in the amount of each compensation component affects each executive’s total compensation and to consider each executive’s compensation in the aggregate. Included in each tally sheet is the estimated amount of severance and other benefits payable to the executive under various termination scenarios. Tally sheets are utilized by the Compensation Committee to establish aggregate compensation for our executives which the Compensation Committee believes to be reasonable.

 

Mara G. Aspinall, Michael Celano, Eamonn P. Hobbs and Ronny B. Lancaster each served as members of the Compensation Committee during 2018, with Mr. Lancaster serving as Chairman. None of these Directors has served or is currently serving as an officer or employee of the Company, nor have they engaged in any transactions involving the Company which would require disclosure as a transaction with a related person. There are no Compensation Committee interlocks between the Company and any other entity involving the Company’s or such entity’s executive officers or board members.

 

The information contained in this report shall not be deemed to be “soliciting material” or “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that Section. This report shall not be deemed to be “incorporated by reference” into any document filed under the Securities Act or the Exchange Act, whether such filing occurs before or after the date hereof, regardless of any general incorporation language in such filing.

The Compensation Committee of OraSure Technologies, Inc. has reviewed and discussed with the Company’s management the Section entitled, “Compensation Discussion and Analysis,” contained in this Proxy Statement. Based on that review and discussion, the Compensation Committee recommended to the Company’s Board of Directors that the foregoing Compensation Discussion and Analysis be included in the Company’s 2018 Annual Report on Form 10-K Report and Proxy Statement for the 2019 Annual Meeting of Stockholders.

COMPENSATION COMMITTEE:

Ronny B. Lancaster, Chairman

Mara G. Aspinall

Michael Celano

Eamonn P. Hobbs

April 4, 2019

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EXECUTIVE OFFICERS    

 

The table below provides information about the executive officers of the Company as of March 28, 2019. Officers of the Company hold office at the discretion of the Board.

 

_________________

¹ Mr. Smith served as Executive Vice President, Business Unit Leader, Molecular Solutions until January 1, 2019, when he was replaced by Ms. Weber. 

 

 

 

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TRANSACTIONS WITH RELATED PERSONS    

 

Since January 1, 2018, there have been no transactions with related persons that would require disclosure in this Proxy Statement. The Audit Committee is required to review and approve in advance all transactions with related persons involving the Company. The Audit Committee may approve a related party transaction if the transaction is on terms comparable to those that could be obtained in arms’ length dealings with an unrelated third party. The Audit Committee also reviews any public disclosures of a related party transaction contained in our SEC filings. These responsibilities are described in the Audit Committee’s charter, a copy of which is available on our website at www.orasure.com.

Information regarding employment, severance and retirement agreements between our executive officers and the Company is set forth in the Section entitled, “Employment Agreements and Potential Payments Upon Termination or Change of Control,” in this Proxy Statement.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE    

 

Section 16(a) of the Exchange Act requires that our executive officers, Directors and persons who own more than ten percent of our Common Stock (collectively, “Reporting Persons”) file reports of ownership and changes in ownership with the SEC. Reporting Persons are required by the SEC’s regulations to furnish us with copies of all Section 16(a) forms they file.

As a matter of practice, our administrative staff assists each of the Reporting Persons who are employees and Directors of the Company in preparing initial reports of ownership and reports of changes in beneficial ownership and filing such reports with the SEC and the NASDAQ. Based solely on a review of the copies of forms filed by or on behalf of the Reporting Persons and on written representations (if any) from each of the Reporting Persons, we believe that all Reporting Persons complied on a timely basis with all applicable filing requirements with respect to the 2018 fiscal year.

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COMPENSATION DISCUSSION AND ANALYSIS

 

 

Overview

This Compensation Discussion and Analysis, or CD&A, describes the material elements of the compensation of our NEOs and describes the objectives and principles underlying the Company’s executive compensation program, the compensation decisions we have recently made under this program and the factors we considered in making these decisions.

Our NEOs for 2018 who are covered in this CD&A include:

 

_________________

¹ Mr. Smith served as Executive Vice President, Business Unit Leader, Molecular Solutions during 2018 and assumed his current position on January 1, 2019.

Our Performance in 2018

We reported another strong year of financial performance in 2018, with record revenues and a fourth consecutive year of profitability. The following charts describe our consolidated financial performance during the last three fiscal years, expressed in dollars (thousands).

 

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__________

¹ 2017 operating income includes a $12.5 million gain related to

  a litigation settlement. 2018 operating income includes $9.6 million

  in executive transition costs and $1.2 million in transaction costs

  associated with two recent acquisitions.

 

 

2018 Business Highlights in Detail

Business highlights from 2018 and the principal factors driving our financial performance are summarized below:

 

 

 

 

 

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2018 NEO Compensation At a Glance

NEO compensation for 2018 was as follows:

Dr. Tang and Mr. Cuca joined the Company during 2018 and their initial base salaries were determined based on marketplace compensation data provided to the Compensation Committee by its compensation consultant and an assessment of Dr. Tang’s and Mr. Cuca’s respective experience levels and ability to contribute to the Company’s future performance and success.  Additional detail on these salaries is provided in the “2018 Base Salaries” Section, below.

 

^{------------------------------------}

¹ Dr. Tang became the Company’s President and CEO on April 1, 2018, replacing Mr. Michels who retired on March 31, 2018.  Mr. Cuca joined the Company in May 2018 and became CFO on June 8, 2018, replacing Mr. Spair who retired on the same date.  The indicated amounts represent the amount of salary paid to Dr. Tang and Mr. Cuca for their service in 2018.  The full-year 2018 annualized salaries for Dr. Tang and Mr. Cuca were $565,000 and $415,000, respectively.

² Mr. Smith’s 2017 Canadian-based salary has been converted into U.S. dollars using the Canadian to U.S Dollar exchange rate at December 31, 2017. Mr. Smith received a 6% base salary increase in 2018 and, as a result, his initial salary for 2018 was $300,622.  In August 2018, Mr. Smith’s salary was increased to $334,000 to bring his compensation in line with market levels.  Mr. Smith’s Canadian-based salary amounts for 2018 have been converted into U.S. dollars using the Canadian to U.S. dollar exchange rate at the time of the increases.

³ The Board and Compensation Committee evaluated the performance of Mr. Michels and Mr. Spair in 2017 based on the Company’s overall performance and, as a result, did not apply performance ratings for these executives.

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¹ Mr. Smith’s 2018 actual bonus payment was calculated using the Canadian to U.S. Dollar exchange rate in effect near the time of his bonus award.

² Mr. Michels’ and Mr. Spair’s bonuses were prorated for the period during which they provided services prior to their retirement dates of March 31, 2018 and June 8, 2018, respectively.

³ The Board and Compensation Committee evaluated the performance of Mr. Michels and Mr. Spair in 2018 based on the Company’s overall performance and, as a result, did not apply performance ratings for these executives.

 

 

 

 

¹ Pursuant to his employment agreement, Dr. Tang received an onboarding equity award consisting of 37,116 shares of time-vested RS that will cliff vest on the fifth anniversary of the April 1, 2018 award date.  The indicated amount reflects the aggregate grant date fair value of the award on April 1, 2018.

² Pursuant to his employment agreement, Mr. Cuca received an onboarding equity award consisting of (i) 50% time-vested RS (14,320 shares) and (ii) 50% PRUs (14,320 units).  The indicated amount reflects the aggregate grant date fair value of the award on Mr. Cuca’s May 7, 2108 start date.  Mr. Cuca’s award contains terms substantially similar to the annual equity awards provided to the other NEO’s in February 2018.

⁴ The Board and Compensation Committee evaluated the performance of Mr. Michels and Mr. Spair in 2017 based on the Company’s overall performance and, as a result, did not apply performance ratings for these executives.

Additional information regarding NEO compensation for 2018 is provided below in this CD&A and in the accompanying tables, including the Summary Compensation Table (“SCT”) set forth below.

 

Pay for Performance

We follow a pay-for-performance approach in compensating executives. Our program pays executives for performance by rewarding the achievement of predetermined financial and/or strategic objectives.

A significant portion of each NEO’s compensation is paid out in variable and long-term compensation that is intended to align such compensation with the long-term interests of our stockholders. Both our annual and long-term compensation are tied to the Company’s overall performance in a variety of ways, including our financial results and share price performance. A further discussion of our pay mix for the NEOs is set forth in the “Pay Mix” Section, below.

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One aspect of our compensation program is the use of performance targets to incentivize management to achieve improved financial results on a year-to-year basis. For the past several years, annual financial objectives have been used to determine the amount of pool funding available to pay individual awards under our annual bonus plan.  These objectives are generally set at levels intended to incentivize annual financial growth.  A combination of financial and strategic objectives may also be considered, and in the past have been used, where the Compensation Committee and the Board desire to incentivize management to meet certain near-term strategic objectives which could help drive improved financial performance in a year with increased financial uncertainty.  Each year the Compensation Committee and the Board evaluate whether financial objectives, strategic objectives, or some combination thereof, would provide the most appropriate near-term incentive for our NEOs to achieve improved financial performance.

In addition, for the past several years we have followed a policy of granting annual equity awards to executives that consist of 50% PRUs and 50% time-vested RS. The PRUs will only vest if (i) the NEO remains employed by the Company for three years following the date of grant and (ii) the performance criteria determined by the Committee and the Board are met. For the PRUs granted in 2018, a compound annual growth rate (“CAGR”) target for consolidated product revenues for the three-year period 2018-2020 and a one-year income before income taxes (“IBIT”) target for the fiscal year 2018 were established as the performance criteria. The time-vested RS portion of the award vests in equal annual installments over the three-year period following the grant date, subject to the NEO’s continued employment by the Company.

We believe the performance targets and three-year service period applicable to PRUs complement the short-term incentives in our annual bonus plan. We also believe the combination of the structure of our annual bonus plan and the structure of our equity award policy will incentivize management to deliver substantially improved financial performance both on an annual basis and over a longer term period and help drive long-term growth in stockholder value.

Compensation Governance Practices

We are committed to maintaining good corporate governance and practices. As a result, and in response to input from stockholders, the Compensation Committee and Board have adopted a number of changes over the past years to specifically respond to stockholder concerns and better align our compensation program with performance. The most significant of these changes was the adoption of PRUs for 50% of the value of annual long-term equity awards for our executives. These changes and other aspects of our compensation practices are summarized below:

 

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Realizable Pay vs. TSR

To ensure that our executive compensation program and compensation levels are consistent with our pay-for-performance philosophy, we evaluated the degree of alignment between our CEO’s total realizable pay versus our TSR over the prior three fiscal years (2016 to 2018) relative to our Peer Group. The graph below shows the comparison of three-year TSR and “realizable pay” relative to our Peer Group.

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Realizable pay for our CEO consists of Dr. Tang’s compensation for 2018 and Mr. Michels’ compensation for 2017 and 2016.  Realizable pay includes base salary, incentive cash bonus and all other compensation reported in the SCT, and in the case of Dr. Tang includes his onboarding compensation. Equity awards are valued using each company’s closing stock price on December 31, 2018. Restricted stock and restricted unit awards are valued by multiplying the number of shares or units by the closing stock price on December 31, 2018.  The number of restricted units included in the calculations for Mr. Michels reflect a payout based on the Company’s currently expected performance against the applicable performance measures for those awards.  Option awards are valued as the difference between the closing stock price on December 31, 2018 and the exercise price multiplied by the number of option shares granted during the period. An option award with an exercise price greater than the closing stock price on December 31, 2018 is valued at $0.

As the graph indicates, there is a close relationship between our TSR performance and the realizable pay for our CEO relative to the relationship seen in our Peer Group. This analysis confirms the strong link between pay and performance embedded in our compensation program.

Realizable Pay vs. SCT Compensation

As described further below, we believe long-term equity awards are a key incentive for our executives to drive the Company’s long-term growth and align the interests of our executives with those of our stockholders. The SCT includes the estimated value of long-term incentive equity awards at the time of grant based on the accounting valuation determined under ASC 718. The actual value of these awards that may be realizable by our executives may vary from the estimates depending on the Company’s financial and stock performance and often differs significantly from what is reported in the SCT.

A comparison of the realizable value of long-term equity incentive awards as of December 31, 2018 against the values reported in the SCT indicates how compensation outcomes may be impacted by our performance. Such a comparison also shows the degree of alignment between our stock performance and the level of compensation provided to executives.

 

The table below compares the compensation values reported in the SCT and the value of realizable pay (“RP”) for the compensation awarded during the three-year period 2016 to 2018 for our CEO, which  reflects a blend of Dr. Tang’s compensation for 2018 and Mr. Michels’ compensation for 2017 and 2016 as described above.

 

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Pay vs. Other Company Measures of Performance

While TSR is a common measure of performance that is often used to evaluate a company’s compensation practices, we consider other performance measures to be, at times, more reflective of the success of our business. It is important to recognize that our TSR can be extremely volatile, as evidenced by the substantial movements in our stock price during the past several years. Our TSR can be, and often is, influenced by a variety of macro-economic factors that are outside the control of our executives. Specifically, in 2013 our stock price declined 12%, but rose 61% in 2014. Our stock price declined again by 37% in 2015 and rose 36% in 2016. More recently, our stock price rose 115% in 2017 and then declined 38% in 2018. These price changes are not solely tied to our underlying financial performance. For example, our stock price declined in 2015 and 2018 even though we achieved record financial performance with substantial growth and strong profitability in those years.

As a result, while our executive compensation opportunities do not follow a linear relationship with TSR, the pay realizable to our executives (as noted above for our CEO) should and does demonstrate a clear relationship with both TSR and financial results. We have tried to align our executive compensation with performance results that are part of our overall business strategy that we believe will drive stock price improvement and increased value for our stockholders over the longer term.

When establishing and evaluating our executive compensation program generally, and performance-based incentive plans in particular, we believe that TSR alone will not always immediately account for the value of our accomplishments and, in many cases, it may take time for the impact of our strategic and other accomplishments to be fully reflected in the value of our stock. Thus, while obviously important, TSR is only one of several factors we consider in making compensation decisions for our executives.

Pay Comparison $20,000,000 $15,503,935 $15,000,000 $4,648,636 $10,000,000 $8,426,767 $4,849,264 $1,333,088 $1,890,774 $1,641,826 $5,000,000 $838,697 $4,364,208 $4,364,208 Total Cash + All Other Stock Options Restricted Stock PSUs

Say-on-Pay Results in 2018 and the Company’s Response

At our 2018 Annual Meeting, stockholders were asked to vote on an advisory (non-binding) basis on the compensation paid to our NEOs for 2017. We obtained strong stockholder support for our NEO compensation for 2017 with approximately 96% of stockholder votes cast in favor of our “say-on-pay” or SOP resolution. Even with this overwhelmingly positive response, we continued our outreach effort that had been initiated in response to prior SOP votes to contact certain of our major stockholders in order to continue to understand their concerns regarding our compensation practices. Overall, we attempted to contact stockholders who, in the aggregate, beneficially held approximately 33% of our outstanding Common Stock. As a general matter, our stockholders either did not respond or indicated that they saw no need to meet with us although they had done so in the past. We believe these stockholders responded in this manner because they are generally supportive of our executive compensation practices. As a result, we made no further changes to our executive compensation program following the SOP vote at the 2018 Annual Meeting.

We believe our stockholder engagement has been and continues to be beneficial for the Company and our stockholders. The feedback we received reaffirms that the compensation changes made in recent years were responsive to stockholder concerns and our executive compensation is strongly aligned with performance. The Board intends to continue ongoing dialogue with our stockholders to ensure our executive compensation programs are well understood by all stakeholders and that we continue to be responsive to stockholder concerns.

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Compensation Risk Assessment

Management periodically conducts a risk assessment of the Company’s compensation policies and practices, including its executive compensation program. In its review, management considers the attributes of the Company’s policies and practices and other factors, including:

Based on its consideration of the foregoing, management believes that the Company’s policies and practices are designed with the appropriate balance of risk and reward in relation to the Company’s overall business strategy and do not incentivize employees to take unnecessary or excessive risks. The Company has also concluded that any risks arising from the Company’s compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.

 

 

The primary objectives of our compensation program for executive officers are to:

 

The total direct compensation provided to each executive consists of an annual base salary, an annual incentive cash bonus and long-term incentive equity awards. The amount of the incentive cash bonus and the size of annual incentive equity awards are variable and depend on an executive’s and the Company’s achievement of predetermined financial and other objectives. As a result, a substantial portion of each executive’s annual compensation is based on performance.

 

We believe it is useful to regularly compare our compensation program against compensation paid to executives at other comparable medical diagnostic and healthcare companies. With the assistance of Pay Governance, an independent compensation consultant engaged by the Compensation Committee, an updated Peer Group of companies was selected using criteria based on industry, revenues and market capitalization and a competitive assessment of our executive compensation was prepared.

The Compensation Committee seeks to set total direct compensation opportunity levels for each executive near the fiftieth (50^th) percentile of amounts paid by the Peer Group of companies for performance consistent with the Company’s target financial and other business plans for the applicable year. Use of the fiftieth (50^th) percentile is intended as a market-based reference and not as an absolute target. As a result, the total direct compensation opportunity and the value of specific compensation components for individual executives may fall below or exceed the fiftieth (50^th) percentile depending on the experience and individual performance of the executive, the criticality of his or her role, the executive’s contribution to our business, and other factors.

 

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Based on advice from Pay Governance, the Compensation Committee updated the Peer Group in January 2019.  The following provides information about the Peer Group used by the Compensation Committee for benchmarking purposes in setting executive compensation and how we compare to these companies (all dollars in millions):

 

 

 

 

 

Source: Standard & Poors Capital I.Q.

¹ This Peer Group represents the same group of companies used by the Compensation Committee in benchmarking our 2017 executive compensation, except that Abaxis, Inc. was eliminated in the current Peer Group because of its acquisition by another company.

 

In preparing its 2018 competitive assessment of executive compensation, Pay Governance compared the compensation of our NEOs with a 50/50 blend of proxy data from the Peer Group and data for each NEO position from the 2018 Radford Global Life Sciences Survey. Since compensation market data can be volatile from year to year, the Compensation Committee believes a blend of specific Peer Group proxy data and broader survey data better reflect market trends.

 

 

Based on its review of the Pay Governance assessment, the Compensation Committee decided not to make any changes to our executive compensation program, except as provided below.

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Overview

Our compensation program consists of the following components:

 

 

 

Pay Mix

We follow a pay-for-performance approach to executive compensation, with a significant portion of our executives’ compensation consisting of annual incentive cash bonuses and long-term equity awards that are based on the executives’ and the Company’s achievement of predetermined performance objectives.

The following charts illustrate the relative proportion of 2018 base salaries compared to the performance-based elements of our executive compensation for Dr. Tang and the other NEOs (except for Messrs. Michels and Spair), respectively.   In preparing the charts, the base salaries for Dr. Tang and Mr. Cuca were annualized since they joined the Company during 2018.  In addition, in order to better represent Dr. Tang’s normal annual mix of compensation, the onboarding RS award he received was excluded and his compensation was calculated as if he received an annual long-term equity incentive award at his target amount (i.e. 200% of base salary).  The onboarding equity award provided to Mr. Cuca was included in his compensation since it is representative of his normal annual incentive equity award.

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Compensation Components in Detail

2018 Base Salaries

Annual base salaries paid in 2018 to our NEOs (except for Dr. Tang and Mr. Cuca, whose base salaries were determined as described below) were established by the Compensation Committee at the beginning of 2018 based on a review of the Company’s performance and the individual contributions of each officer (other than Messrs. Michels and Spair, who were evaluated based on the Company’s overall performance) compared to pre-established performance objectives for 2017.  The Compensation Committee also considered the Company’s budget for expected salary adjustments, salary levels paid at the Peer Group companies and recommendations provided by the compensation consultant engaged to assist the Compensation Committee.  The initial salaries paid to Dr. Tang and Mr. Cuca were established based on market data provided by the Compensation Committee’s compensation consultant at the time these executives were hired during 2018.  

Based on these factors, the Compensation Committee approved an annual base salary increase for our senior management (including the NEOs other than Dr. Tang and Mr. Cuca) averaging approximately 3.0%. This was in line with our Company-wide budgeted average salary increase of 3.0%. Individual salary increases for 2018 were determined by using the following guidelines:

 

 

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In evaluating the Company’s overall performance, the Compensation Committee recognized that our $167.1 million in consolidated net revenues for 2017 represented a 30% increase over 2016 and that our consolidated net income of $30.9 million, or $0.51 per share, represented an $11.2 million or $0.16 per share improvement over 2016. The Compensation Committee further recognized the substantial growth of our molecular collection systems business in 2017 and the strong performance of our infectious disease business as a result of substantial growth in HCV and HIV Self-Test revenues. A final factor considered by the Compensation Committee was the 115% increase in our TSR for 2017.

 

 

In view of the foregoing, the Compensation Committee determined that Messrs. Michels and Spair should receive above-target salary increases for 2018 as a result of the Company’s overall performance during 2017, with the remaining NEOs receiving increases based on their 2017 performance against their individual objectives. As noted above, the 2018 salaries for Dr. Tang and Mr. Cuca were based on market data, an assessment of their qualifications and likely contributions to our business, and what we negotiated in order to attract and retain these executives at the time they were hired. As a result, the Compensation Committee approved the following 2018 salary levels for the NEOs:

 

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¹ Represents annualized salary amounts for Dr. Tang and Mr. Cuca because they were employed for only a portion of 2018.

³ Assessment based on overall Company performance during 2017.

2018 Annual Incentive Cash Bonuses

Annual cash bonuses are included as part of executive compensation because the Compensation Committee believes that a significant portion of each executive’s compensation should be structured as a variable incentive focused on short-term priorities related to both the overall performance of the Company and the individual contributions of the executive. On an annual basis, the Compensation Committee has adopted, with approval of the Board, an incentive plan (the “Incentive Plan”), which is intended to be the principal vehicle for incentive cash bonus awards.

When establishing the terms of each Incentive Plan, the Compensation Committee and the Board evaluate which funding objectives will provide the most appropriate incentive for our NEOs to improve our annual financial performance.  In recent years, bonus pool funding has been based solely on the achievement of annual financial objectives.  Strategic objectives may also be (and in the past have been) used in combination with annual financial objectives where there is greater financial uncertainty facing the Company and the Compensation Committee and the Board desire to incentivize our NEOs to take near- term strategic steps required to drive annual financial growth and stability.  In general, the Compensation Committee and the Board will choose those funding objectives, whether they be financial, strategic, or a combination thereof, which in their judgement provide the most appropriate incentive for management to drive improved financial performance on a year-over-year basis.

Where funding is solely based on achievement of financial objectives (as has been the case in recent years), if the Company meets the Target levels for all funding objectives, the pool is initially funded at 100% of the aggregate projected bonuses for all participants in the Incentive Plan adjusted to reflect a normal range or mix of performance assessments (i.e., Outstanding, Exceeds, Meets, Does Not Meet), which increases or decreases the total amount of individual bonuses to be paid to participants. Unless circumstances require otherwise, the pool generally is initially funded at 50% of the aggregate projected bonuses if all of the Threshold levels are met and at 150% of the aggregate projected bonuses if all of the High levels are met. If the Company achieves a Maximum performance level for all objectives, the pool can be initially funded up to 200% of the aggregate projected bonuses. A linear interpolation of the amount of funding for each target objective is

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made where a particular performance is in between the pre-established performance levels. To the extent the performance level for a funding objective is below the Threshold level, generally there is no funding for that particular objective.  The Compensation Committee and the Board have some limited discretion to increase funding to recognize unique market conditions and extraordinary circumstances.

The amount of the cash bonus pool is determined by the Compensation Committee and recommended for Board approval. The Compensation Committee and Board also retain discretion to increase or decrease the size of the pool in order to reflect differences in the mix of actual performance assessments of the participants or market conditions affecting the Company or other factors. However, the Compensation Committee and Board have limited their ability to make discretionary bonus pool adjustments to +/- 10% of the pool size otherwise determined pursuant to the funding formula under the Incentive Plan. The cash bonus pool is used to pay bonuses not only to the Company’s NEOs, but also to all other officers and certain higher-level employees of the Company and all employees of its subsidiary, DNA Genotek.

Individual payments from the bonus pool to executives are generally calculated using a formula that considers the size of the bonus pool, the executive’s achievement of individual performance objectives, the number of individuals participating in the plan at the time bonuses are awarded and the executive’s target bonus percentage. Bonuses are paid, based on an assessment of each executive’s performance for the applicable year, using targets expressed as a percentage of the executive officer’s annual base salary.

If an executive officer has met or exceeded his or her individual performance objectives and/or the Company’s expectations for the applicable year, he or she may be eligible to receive up to 150% of his or her target bonus, depending on the size of the bonus pool. The Compensation Committee and Board retain the discretion to adjust an individual executive’s performance evaluation and to increase or decrease the bonus paid to such individual to reflect the specific contributions of that executive, the Company’s overall performance, market conditions or other circumstances.

The Compensation Committee recommends for Board approval any bonus award for the CEO based on an assessment of the Company’s overall performance. The CEO recommends individual awards for the other executive officers for approval by the Compensation Committee based on an assessment of each executive’s performance against his or her applicable individual performance objectives. The Compensation Committee and Board have the right, in their sole discretion, to reject any or all of the recommended bonus awards, even if the bonus pool has been funded and any or all applicable performance criteria have been satisfied, based on the business conditions of the Company or other factors deemed relevant by the Compensation Committee or the Board.

Under the 2018 Incentive Plan, the Compensation Committee established performance levels for two equally weighted financial objectives for revenues and operating income to be used to fund the bonus pool. The Threshold financial objectives reflected our actual performance for 2017. The Target levels reflected our annual budget or operating plan for 2018 and represented strong revenue growth and improved profitability compared to 2017 after eliminating certain one-time items from our 2017 results. The High and Maximum levels reflected 105% and 110% of our Target consolidated net product sales for 2018, respectively, and 100% of our Target for all other revenues for 2018.  The funding objectives did not include any estimates for transition costs associated with the changes in our CEO and CFO, transaction costs associated with acquisitions or differences between actual foreign exchange rates and those assumed in our 2018 operating plan.

The following table summarizes the 2018 Incentive Plan performance objectives (dollar amounts in millions):

 

The following sets forth the potential and actual bonus pool funding for both objectives at each performance level (after application of the performance distribution factor mentioned above) established under the 2018 Incentive Plan, based on the participants covered by the Plan at year-end:

 

During 2018, we reported consolidated net revenues totaling $181.8 million, which exceeded the Threshold performance level but was less than the Target level, resulting in funding of $1.394 million for that objective. The Company’s

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2018 consolidated net operating income was $41.0 million after eliminating (i) costs associated with our transition to a new CEO and CFO, (ii) transaction costs associated with two recent acquisitions and (iii) differences in foreign exchange rates from those that we had assumed in our 2018 operating plan. This amount exceeded the High performance target but was less than the Maximum target for this objective, resulting in funding of $2.912 million for that objective. As a result, the aggregate pool funding under the 2018 Incentive Plan was calculated to be $4.306 million.

The final bonus pool amount was approved by the full Board and used to pay bonuses to the Company’s NEOs and other members of our management team. In connection with Dr. Tang’s appointment as our new CEO, the Compensation Committee obtained market data from Pay Governance in order to ensure Dr. Tang’s compensation was set at market levels.  Based on this data, the Compensation Committee and the Board decided to increase the bonus target for the CEO position from 70% to 85% of salary at the time Dr. Tang was hired in order to better reflect market levels.  The Compensation Committee and Board also decided to apply this revised bonus target to Mr. Michels.  Pursuant to their retirement agreements, Messrs. Michels and Spair received incentive cash bonuses for 2018 pro-rated to reflect the period of time they were employed prior to their respective retirement dates.

The specific target payouts for NEO bonuses for 2018 (expressed as a percentage of annual base salary) are shown below:

 

 

 

In January 2019, the Compensation Committee authorized the payout of individual bonus awards to executive officers from the bonus pool for 2018 based on the target bonus amounts described above and an assessment of each officer’s performance during 2018 against pre-established performance objectives (except for (i) Dr. Tang where the assessment was based on the Company’s overall performance and (ii) Messrs. Michels and Spair where their target bonus amounts were pro-rated pursuant to the terms of their retirement agreements). The calculation of individual bonus awards was based on a formula that adjusted the foregoing target payments for both the executives’ individual performance during 2018 and the degree to which the final approved bonus pool funding exceeded the Target under the plan funding formula.

In evaluating Dr. Tang’s and the Company’s performance, the Compensation Committee recognized the successful leadership transition to a new CEO and CFO and the completion of an updated long-term strategy focused on innovation and growth.  The Compensation Committee also noted the record 2018 net consolidated revenues of $181.7 million, our continued strong profitability, the generation of $39.1 million in cash for the year and our strong cash position at year end.  Finally, the Compensation Committee recognized the completion of two strategic acquisitions of CoreBiome, Inc. and Novosanis, N.V., which both closed during the first week of January 2019, as evidence of initial progress in executing against our new growth strategy.

In view of the foregoing, the Compensation Committee determined that Dr. Tang should receive a High Meets performance rating for 2018 with the remaining NEOs being evaluated based on individual objectives established for their positions.  Using these performance ratings, the Compensation Committee next considered individual performance factors to adjust the bonuses for Dr. Tang, the other NEOs and the other participants in the 2018 Incentive Plan to reflect their performance assessments for 2018. As a final step, the Compensation Committee adjusted the bonuses further by a pool funding factor reflecting the amount by which pool funding exceeded Target under the plan formula.

Using the approach described above, a final 2018 incentive cash bonus of $818,346 was calculated for Dr. Tang, as follows:

 

 

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This same formula was used to calculate the 2018 bonus awards for all other NEOs, as follows:

 

2018 Bonus Payments

 

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³ Mr. Michels’ bonus was pro-rated to reflect his service prior to his March 31, 2018 retirement date.

⁴ Mr. Spair’s bonus was pro-rated to reflect his service prior to his June 8, 2018 retirement date.

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2018 Long-Term Incentive Equity Awards

An additional way that we promote the long-term growth of the Company and align the interests of executives with those of our stockholders is by compensating executives with equity in the Company that vests over a multi-year period. To accomplish this, the Compensation Committee administers the Company’s LTIP (Long-Term Incentive Policy), pursuant to which grants of time-vested restricted shares and performance-vested restricted units are made to executive officers.

Incentive equity awards under the LTIP are made on an annual basis, and are discretionary and subject to approval by the Compensation Committee and/or the Board. Awards to individual participants under the LTIP are based on an evaluation of a number of factors, including:

Each participant’s individual performance for the applicable year is evaluated against his or her individual performance objectives for that year, except for Dr. Tang who is evaluated based on total Company performance.  As previously discussed, the performance of Messrs. Michels and Spair was also based on an assessment of total Company performance.  A “Meets Expectations” performance is typically the threshold requirement to receive an equity award under the LTIP. Awards below this performance level may be considered on an exception basis at the discretion of the Compensation Committee and/or the Board.

The value of potential incentive equity awards that could have been granted in 2018 under the LTIP (expressed as a percentage of annual base salary) based on performance during 2017, are summarized below:

 

 

 The percentages set forth above were established at levels that the Compensation Committee believed represented an appropriate long-term incentive compensation value for each executive, based on the results of a competitive assessment of long-term incentive awards at the Peer Group companies. Once the aggregate dollar value of an award has been established by applying the Compensation Committee approved award percentage to a participant’s base salary, the value is converted into shares or units based on a valuation of the restricted stock and restricted unit portions of the award using the average of the high and low stock price on the grant date as reported on the NASDAQ Stock Market.

In August 2018, the range of percentages set forth above for annual incentive equity awards was increased by the Compensation Committee for Mr. Jerrett, the Company’s Senior Vice President and General Counsel (i.e. from 70%/90%/115% to 70%/100%/130%), based on advice to the Compensation Committee from Pay Governance, in order to bring the range more closely in line with market levels. The new percentage range was effective beginning with the incentive equity awards made in 2018 for performance during 2017.

 

 

 

Under the LTIP, 50% of an executive’s total equity award consists of PRUs that will not vest until three years after the grant date and only if certain performance measures are met during that three-year period. In the past, the awards

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incorporated two performance metrics: (i) a CAGR for consolidated product revenues during the three-year period beginning with the year in which the award was made and (ii) a one-year “EPS” target for the year of award followed by a further two-year time-vesting requirement. However, in February 2018 when the Compensation Committee approved LTIP equity awards to executives for performance during 2017, the EPS performance measure used for past awards was changed to a one-year “IBIT”, or income before income tax, performance measure because of uncertainty related to the impact of recently enacted Federal tax legislation on our financial performance for 2018.  The remaining 50% of each executive’s incentive equity award consists of grants of time-vested RS that vest in equal annual installments over a three-year period. These vesting restrictions serve to promote the Company’s long-term growth by restricting executives’ ability to realize short-term gains from their awards. The Compensation Committee believes the terms of its incentive equity awards to executives are competitive with the terms of equity awards offered at comparable medical diagnostics and healthcare companies.

The structure of the equity awards reflects market-based good governance practices as well as input from our stockholders, several of whom advocated that a meaningful portion of the equity awards should have performance-based vesting. We believe 50% is a meaningful portion and is consistent with or exceeds the performance orientation of our Peer Group. In addition, although some stockholders have mentioned TSR as a possible performance target, most of the stockholders we have contacted in recent years indicated that other measures such as financial or operational objectives would also be appropriate. The Board decided to use consolidated net product revenue and IBIT targets because they are important for our business, especially as we continue improving our profitability, and because of the Board’s belief that these measures will directly influence the performance of our stock price over time. Under the terms of the awards, the impact of stock repurchase programs is excluded in determining whether an IBIT target is met. As discussed above, the Board does not believe that the use of TSR as a performance metric in the long-term incentive plan is appropriate at this time, although the choice of performance metrics will be reviewed each year.

The adoption of performance-based vesting conditions with a three-year service requirement for 50% of an executive’s annual equity award substantially strengthens the link between pay and performance and creates an appropriate long-term incentive for our executives. At the same time, the use of time-based vesting conditions for the remaining 50% of each award achieves the equally important goal of share ownership/accumulation through a share-price sensitive vehicle that directly promotes alignment with stockholders and further supports executive retention. Overall, the Compensation Committee and Board believe that this approach represents a balanced performance-based approach to our executive compensation program that is appropriate for our Company, directly responds to feedback from our stockholders, and is consistent with executive pay governance best practices.

Equity awards are generally made by the Compensation Committee each year as part of the normal annual compensation cycle. The awards for a particular year generally occur in late January or early February of the following year after the Company’s full year financial results are known and performance evaluations for the executive officers have been prepared. Equity awards approved by the Compensation Committee for the CEO are then reviewed and approved by the Board. In addition to the annual equity awards, the Compensation Committee may approve equity awards for newly hired officers or in recognition of an executive’s promotion or expansion of responsibilities. These latter grants may have vesting or other terms that differ from the terms generally approved for annual equity awards. Notwithstanding the terms of the LTIP, equity awards are made at the discretion of the Compensation Committee or Board.

 

 

 

Effective February 1, 2018, the Compensation Committee approved equity awards for the NEOs under the LTIP based on the performance evaluations of such officers for 2017, as summarized below. A description of the basis for each NEO’s 2017 performance evaluation is set forth above under the Section entitled, “2018 Base Salaries,” in this CD&A.  Since Dr. Tang and Mr. Cuca joined the Company later in the year, they did not participate in the annual equity awards provided to the other NEOs in 2018.  Instead, they both received onboarding equity awards pursuant to the terms of their respective employment agreements.  Dr. Tang received an award of 37,116 shares of time-vesting RS, having a value of $623,363, which will become fully vested on the fifth anniversary of the grant date.  Mr. Cuca received an equity award having an aggregate value of $435,758, consisting of 14,320 time-vested RS and 14,320 PRUs.  The terms of Mr. Cuca’s award are substantially the same as the terms of the annual incentive awards made to the Company’s other NEOs in February 2018 for performance during 2017.

 

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The following summarizes the equity awards provided to the NEOs during 2018:

 

 

¹ Onboarding equity awards pursuant to Dr. Tang’s and Mr. Cuca’s respective employment agreements.

² Assessment based on overall Company performance during 2017.

Compensation Developments in 2019

LTIP Amendments.  In February 2019, the Compensation Committee recommended, and the Board approved, increased ranges for incentive equity awards under the LTIP for Dr. Tang, the Company’s President and CEO, and Mr. Jerrett, the Company’s Senior Vice President and General Counsel.  These changes were approved in order to bring the ranges more in line with market levels, based on market data and advice provided to the Compensation Committee by its compensation consultant, Pay Governance.  As a result, the ranges were changed as follows and will be effective for equity awards expected to be made in early 2020 for performance during 2019:

 

Pay Out Under 2016 PRUs.  We initially adopted the current structure for annual incentive equity awards in early 2016 for awards based on performance during 2015.  As noted above, these awards consisted of 50% time-vested RS and 50% PRUs.  The PRU portion of the award would not vest until three years after the grant date and only if a three-year

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product revenue CAGR target and/or a one-year EPS target were met.  The three-year service period for these PRUs expired on February 1, 2019.  Under the terms of the PRUs, the number of shares that are paid in settlement will depend on the degree to which the performance revenue CAGR and EPS measures were met.  The following table summarizes the potential range of shares that will be delivered based upon the degree of achievement of the applicable performance measures:

 

For the 2016 PRUs, the Company exceeded both of the applicable performance measures by more than 120%, thereby resulting in the maximum payout of 150% under the foregoing table.  The following summarizes the three-year revenue CAGR and one-year EPS targets for the 2016 PRUs, our performance against these targets and the resulting number of shares delivered upon settlement of the PRUs:

 

 

 

 

We provide minimal additional benefits outside of our primary elements of compensation, as follows:

Retirement Programs

All of our U.S. employees, including executive officers, are eligible to participate in our 401(k) profit sharing plan (the “401(k) Plan”). We make matching contributions for participants on a dollar-for-dollar basis up to $4,000 per year. Payments of employer-provided benefits accrued for a 401(k) Plan participant will be made upon retirement or upon termination of employment prior to retirement, provided certain vesting conditions have been met by the participant prior to termination. Our subsidiary DNA Genotek, which is located in Canada, offers a registered retirement plan to its employees, which similarly allows employee contributions for retirement savings, with matching contributions by DNA Genotek of up to CAD $2,000 per year.

The Company also maintains the OraSure Technologies, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”) for the benefit of the Company’s highly compensated employees, including all of the NEOs, and its non-employee Directors. The Deferred Compensation Plan allows participants to defer up to 100% of their annual base salaries (or fees in the case of non-employee Directors) and up to 100% of annual incentive cash bonuses and, upon vesting, restricted shares of the Company’s Common Stock awarded to the participant. The Company may also make discretionary contributions to the participants’ accounts that vest over one or more years as determined by the Company, as well as upon death, disability or a change of control. Since the Deferred Compensation Plan was put in place, the Company has made no discretionary contributions. Participants may elect to receive distributions of deferred amounts on a specified date, separation from service, a change of control, disability and/or death.

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Perquisites and Other Compensation

As a general matter, the Compensation Committee and Board do not believe that executive officers should be treated differently than other employees by receiving special perquisites unrelated to our general compensation program. Therefore, our healthcare, disability, and other insurance programs and benefits are the same for all eligible employees, including executive officers. Executive officers do not receive any additional perquisites.

 

Potential Payments Upon Termination or Change of Control Pursuant to Employment Agreements

The Company has entered into employment agreements with each of the NEOs. In addition to the compensation elements discussed above, these agreements provide for post-employment severance payments and benefits in the event of termination of employment by the Company without “cause” or by the executive for “good reason” and (except for Mr. Smith) provide enhanced severance payments upon such terminations in connection with a “change of control” of the Company. The terms of these arrangements are discussed in more detail under the Section entitled, “Employment Agreements and Potential Payments Upon Termination or Change of Control,” in this Proxy Statement. The Compensation Committee believes that these arrangements are generally consistent with industry practice at the Peer Group companies, provide an incentive to the applicable executive to remain with the Company, and serve to align the interests of stockholders and the executives in the event of a change of control of the Company.

Accounting and Tax Treatment of Compensation.

In approving the amount and form of compensation for the NEOs, the Compensation Committee considers all elements of the cost to the Company of providing such compensation, including accounting and tax implications. In particular, it considers the potential impact of Section 162(m) of the Internal Revenue Code, which disallows a tax deduction for any publicly-held corporation for individual compensation exceeding $1 million in any taxable year for certain covered employees. Historically, there had been an exemption that permitted qualified “performance-based compensation” to be exempt from this $1 million cap on deductibility. Under the Tax Cuts and Jobs Act enacted on December 22, 2017 (the “Tax Act”), this performance-based compensation exemption was eliminated. Thus, bonuses paid under the LTIP will be subject to the cap on deductibility described above unless they qualify for transition relief for certain pre-existing compensation arrangements. Notwithstanding the Tax Act, the Compensation Committee intends to maintain flexibility to pay compensation that is not entirely deductible when the best interests of the Company would make that advisable.

Compensation Recoupment Policy

The Board has adopted a compensation recoupment or “clawback” policy, applicable to all officers subject to Section 16 of the Exchange Act. Under this policy, the Company will pursue recoupment of any excess compensation, including incentive cash bonuses, restricted awards, stock options or other compensation, which was awarded to a covered officer based on financial statements of the Company where such statements are required to be restated as a result of the gross negligence, intentional misconduct or fraud of the covered officer. In addition to recoupment, the Company shall take such other remedial actions deemed necessary against a covered employee, including recommending disciplinary actions up to and including termination and other available remedies. The recovery period for recoupment of any compensation is up to three fiscal years preceding the date on which the Company is required to prepare and file the restated financial statements. This policy has been proactively adopted in advance of final guidance under Section 954 of the Dodd-Frank Act and will be amended to conform with this Section when final guidance is available.

 

As required by applicable law and SEC regulations, we are providing the following information about the relationship of the median of the annual total compensation of our employees and the annual total compensation of Stephen S. Tang, Ph.D., our President and CEO.

For the 2018 fiscal year, the median of the annual total compensation of all employees of the Company (other than Dr. Tang) and our subsidiary, DNA Genotek, was $60,826.  To identify the median of the annual total compensation of all our employees, as well as to determine the annual total compensation of our median employee, we took the following steps:

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In calculating Dr. Tang’s 2018 annual total compensation of $2,251,709 for purposes of this pay ratio disclosure, we annualized his base salary since he did not become our CEO until April 1, 2018 and included his other compensation reported in the SCT below.    

 

Based on this information, for 2018 the ratio of the annual total compensation of Dr. Tang, our President and CEO, to the median of the annual total compensation for employees, was 37 to 1.  

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The following table summarizes the compensation of our CEO and the other NEOs, for the fiscal years ended December 31, 2018, 2017 and 2016:

^{____________________________________}

² The indicated amount represents an onboarding cash bonus paid to Dr. Tang pursuant to the terms of his employment agreement.

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The following table summarizes information concerning possible incentive cash bonuses and possible and actual RS and PRU awards for the NEOs during the fiscal year ended December 31, 2018:

 

^{_________________________________}

¹   Onboarding award consisting of time-vested RS granted to Dr. Tang on his date of hire.

²   Onboarding award consisting of time-vested RS and PRUs granted to Mr. Cuca on his date of hire.

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The following table summarizes information regarding unexercised stock options and unvested RS and PRUs held by the NEOs as of December 31, 2018:

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The following table summarizes information with respect to the exercise of stock options and vesting of RS for each of the NEOs during the fiscal year ended December 31, 2018:

 

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² The indicated amounts represent the number of shares acquired upon exercise of the options multiplied by the difference between the market value of the Company’s Common Stock on the applicable exercise date and the option exercise price.

 

 

The NEOs are eligible to participate in our 401(k) Plan or, in the case of Mr. Smith, a registered retirement plan offered by DNA Genotek, on the same terms and conditions applicable to other employees. For a further description of the terms of the 401(k) Plan, see the Section entitled, “Retirement Programs,” in the CD&A.

 

The OraSure Technologies, Inc. Deferred Compensation Plan (the “Plan”) is a non-qualified deferred compensation plan designed to provide deferred compensation benefits to a select group of the Company’s highly compensated employees, including all of the NEOs, and to non-employee members of the Board.

The Plan allows for deferrals by participants of up to 100% of their annual base salaries (or in the case of non-employee Directors, 100% of fees payable under the Company’s Non-Employee Director Compensation Policy), up to 100% of annual incentive cash bonuses and, upon vesting, restricted shares of the Company’s Common Stock and shares received in respect of performance-vested restricted units awarded under the LTIP. The Company may also make discretionary contributions to the accounts of employees participating in the Plan. Cash balances in participants’ accounts may be invested in a list of investment options that are similar to the fund choices offered in the Company’s 401(k) plan. Participants will be permitted to sell vested shares in their accounts, subject to compliance with the Company’s Insider Trading Policy and applicable securities laws, and invest the proceeds of any such sale in the investment options available under the Plan. Participants will be 100% vested in their accounts and the restricted shares they defer, except that Company contributions will vest over one or more years as determined by the Company. In the event of death, disability or change of control, a participant will become 100% vested in any then unvested Company contributions.

Participants may elect to receive a distribution from his or her account upon a specified date, separation from service, change of control, disability and/or death. Distributions will be made in a lump sum or installments, as allowed under the Plan.

Amounts contributed to a participant’s account through elective deferrals or through the Company’s discretionary contributions are generally not subject to income tax, and the Company does not receive a deduction until they are distributed pursuant to the Plan.

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However, cash deferrals are subject to the Federal Insurance Contributions Act Tax imposed at the time of deferral (the “FICA tax”). Deferrals of restricted shares and shares received in respect of performance-vested restricted units are subject to the FICA tax at the time the shares vest, but are not subject to income tax, and the Company does not receive the deduction until the shares are distributed pursuant to the Plan. The Company may amend or terminate the Plan at any time in accordance with applicable law.

 

The following table summarizes information for each NEO with respect to the Plan for the fiscal year ended December 31, 2018:

 

 

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 EMPLOYMENT AGREEMENTS AND POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL

 

Employment Agreements

We have entered into employment agreements with all of our NEOs. We believe such agreements are necessary to attract and retain critical talent, and are in-line with market practices. The following summary describes the material terms of the employment arrangements with Dr. Tang and the other NEOs.

In January 2018, we entered into an employment agreement with Dr. Tang in connection with his appointment as the Company’s new President and CEO, effective April 1, 2018. Under the agreement, Dr. Tang will receive (i) an annual base salary of at least $565,000, (ii) an annual cash bonus opportunity under the Company’s annual Incentive Plan with a bonus target of at least 85% of his base salary and (iii) annual equity awards under the Company’s LTIP ranging from at least 150%-250% of his base salary, with a target of 200%. Dr. Tang also received a sign-on cash bonus of $230,000 and an award of 37,116 shares of time-vested RS. The award of RS will vest on the fifth anniversary of Dr. Tang’s date of employment. Upon a termination of employment, Dr. Tang’s agreement provides for certain post-employment severance and other benefits, as described below.

Dr. Tang’s employment agreement will terminate upon his death or disability. In addition, Dr. Tang may unilaterally terminate his employment at any time and for any reason upon 90 days written notice to the Company or for “good reason” (as defined below). Dr. Tang’s employment agreement can also be terminated by the Company for “Cause” (as defined below) or without “Cause.”

As used in Dr. Tang’s agreement, the term “good reason” means (i) a material breach of the agreement by the Company, (ii) a material diminution in Dr. Tang’s base compensation or authority, duties or responsibilities (following a change of control, such a diminution shall occur if Dr. Tang no longer functions as the sole chief executive officer of the successor organization), (iii) a material change in Dr. Tang’s reporting relationship from the Board to another employee of the Company (following a change of control, such a diminution shall occur if Dr. Tang no longer reports to the board of directors of a public company),  or (iv) a material change in Dr. Tang’s job location.

A “change of control” generally is defined to take place when disclosure of such a change would be required by the proxy rules promulgated by the SEC or when:

A “change of control period” is the period which begins 60 days prior to the occurrence of a change of control and ends 18 months thereafter.

“Cause” is defined as (i) the willful and continued failure by Dr. Tang to substantially perform his duties as provided in the agreement after a written demand for substantial performance is delivered to Dr. Tang by the Board, and Dr. Tang’s failure to comply with such demand within a reasonable time; (ii) the engaging by Dr. Tang in gross misconduct or gross negligence materially injurious to the Company; (iii) the commission of any act in direct competition with or materially detrimental to the best interests of the Company; or (iv) Dr. Tang’ conviction of having committed a felony.

 

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Upon the termination of Dr. Tang’s employment for any reason, Dr. Tang will be entitled to receive his salary through the date of termination and any bonus approved by the Board or the Compensation Committee prior to the date of termination but not yet paid. In the case of a termination upon his death or disability or by the Company without Cause, or in the case of a unilateral termination by Dr. Tang or a termination by Dr. Tang for good reason where in either case the termination occurs after June 30 of any year, Dr. Tang will also receive a cash bonus for the year of termination prorated through the date of termination. In addition, if termination is for good reason or without Cause (which includes the Company’s failure to renew the agreement) and does not occur during a change of control period, Dr. Tang would receive additional severance in the form of a lump sum amount equivalent to 18 months of his annual salary plus reimbursement of the costs of continuation coverage under the Company’s health plans (if Dr. Tang elects coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985) for a period of 18 months after the date of termination. If, however, termination is for good reason or without Cause (which includes the Company’s failure to renew the agreement) and occurs during a change of control period, Dr. Tang will receive a lump sum amount equivalent to 36 months of his annual salary and reimbursement of continuation coverage under the Company’s health plan for 36 months. If Dr. Tang is a “specified employee” within the meaning of Code Section 409A at the time of the termination of his employment and any of the foregoing payments would subject him to any tax, interest or penalty under Code Section 409A or regulation thereunder, then the payment shall not be made until the first day which is at least six months after the date of termination of his employment.

All stock awards granted to Dr. Tang are required to immediately vest (i) in the event of a change of control or (ii) if Dr. Tang’s employment is terminated for good reason by Dr. Tang or by the Company without Cause during a change of control period, and 50% of such stock awards shall vest in the event Dr. Tang’s employment is terminated for good reason by Dr. Tang or by the Company without Cause during any period other than a change of control period.

In May 2018, we entered into an employment agreement with Mr. Cuca, pursuant to which Mr. Cuca will receive (i) an annual base salary of at least $415,000, (ii) a target bonus opportunity under the Company’s annual incentive plan of 50% of his base salary, and (iii) annual equity awards under the Company’s long-term incentive policy ranging from 105% to 175% of his base salary (with a target of 140%).   Mr. Cuca also received an onboarding equity award having an aggregate value of $435,750.  This award consisted of 50% time-vested RS and 50% PRUs.  The terms of Mr. Cuca’s award are substantially the same as the terms of awards made to the Company’s other executives in February 2018.

The termination and severance provisions in the employment agreements for Mr. Cuca and the other NEOs (except for Mr. Smith) are substantially similar to Dr. Tang’s employment agreement, with the following exceptions: Mr. Jerrett is entitled to receive severance equivalent to 12 months of his annual salary, rather than 18 months, in the event of a termination for good reason or without Cause where such termination does not occur during a change of control period and he will be entitled to receive severance equivalent to 24 months of his annual salary, rather than the 36 months, if Mr. Jerrett terminates his agreement after a change of control or a termination for good reason or without Cause occurs during a change of control period. Mr. Zezzo will also be entitled to receive severance equal to 12 months of his annual salary if he is terminated for good reason or without Cause, but he will receive 24 months of his annual salary if such termination occurs during a change of control period. In the employment agreements with Messrs. Zezzo and Jerrett, the term “good reason” also includes a material diminution of the budget over which the executive exercises control and a change of control period begins upon the occurrence of a change of control. Finally, neither Mr. Zezzo nor Mr. Jerrett shall be entitled to a prorated bonus in the event of a unilateral termination by either executive after June 30 of the applicable year.

 

If Mr. Smith’s employment is terminated by the Company without “Cause” or for “good reason”, Mr. Smith will receive severance equal to 12 months of his base salary. As used in Mr. Smith’s employment agreement, “good reason” will occur if Mr. Smith terminates his employment within 30 days of the occurrence of any of the following: (i) any material reduction in his salary and bonus; (ii) a material amendment to his duties, including any transfer to any position other than his current position unless such transfer is clearly consistent with a promotion; or (iii) any required relocation beyond a 50 kilometer radius from the company’s head office. A termination of Mr. Smith’s employment for “Cause” will occur if the following events occur: (i) the act or omission involving (A) material dishonesty or (B) fraud with respect to the company, its subsidiaries or any of their customers or suppliers; (ii) a substantial and repeated failure to perform his duties; (iii) gross negligence or willful misconduct; or (iv) conduct tending to bring the company or any of its subsidiaries into substantial disgrace or disrepute.

 

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Retirement Agreements

As we previously announced, during 2018 we entered into a retirement agreement with Mr. Michels, our former President and CEO, which provided that: (i) the unvested portions of stock options and time-vested RS awards granted to Mr. Michels prior to the date of his retirement agreement would vest in full as of March 31, 2018, his retirement date; (ii) the unvested portions of PRUs granted to Mr. Michels prior to the date of his retirement agreement would vest in full three years after the grant date, subject to the satisfaction of performance measures applicable to such PRUs, in accordance with the original terms of the relevant award agreement, but without the requirement that Mr. Michels continue to be employed by the Company after his retirement date; (iii) Mr. Michels would receive a pro-rated bonus payment under the Company’s 2018 Incentive Plan equal to 85% of his base salary, subject to adjustment to reflect the actual bonus pool funding approved by the Board; (iv) Mr. Michels would receive his normal annual equity award in 2018 for his performance during 2017 pursuant to the LTIP, with a grant date value at least equal to 200% of Mr. Michels’ base salary, with the RS portion of the award vesting on Mr. Michels’ retirement date and the PRU portion vesting three years after the grant date, subject to the satisfaction of performance measures determined by the Board, but without the requirement that Mr. Michels continue to be employed by the Company after his retirement date; and (v) if after retirement Mr. Michels elects to receive continuation coverage under the Company’s group health plan pursuant to the COBRA and maintains such coverage for the full period permitted by law, he would have the right to elect to continue such coverage at his own cost and expense under the terms of the Company’s group health plan.

As we also previously announced, we also entered into a retirement agreement with Mr. Spair in 2018 that contains the same terms as Mr. Michels’ retirement agreement, except that Mr. Spair’s retirement agreement provided that his 2018 equity award (for his performance during 2017) would have a grant date value at least equal to 140% of his base salary, and his bonus payment under the Company’s 2018 Incentive Plan would be based on his target of 50% of his base salary, subject to adjustment to reflect the actual bonus pool funding approved by the Board, and would be pro-rated to his date of retirement.

Finally, as previously announced, we entered into a retirement agreement with Brian Smith, pursuant to which Mr. Smith left his position as Executive Vice President, Business Unit Leader, Molecular Solutions of DNAG and became Vice Chairman and Executive Vice President, Innovation at DNAG, beginning January 1, 2019.  Pursuant to his retirement agreement, Mr. Smith will lead the Company’s global innovation function, consult on strategy and business matters and transition his duties to Ms. Kathleen G. Weber, his successor who now serves as Executive Vice President, Business Unit Leader, Molecular Solutions at DNAG.  Mr. Smith will be eligible to receive an incentive cash bonus under our 2019 Incentive Plan based on a 40% base salary target, consistent with past practice.  The unvested portions of time-vested RS awards received by Mr. Smith prior to January 1, 2019 will vest in full on his February 5, 2020 planned retirement date.  In addition, the unvested portions of PRUs received by Mr. Smith prior to January 1, 2019 will vest in full three years after the grant date, subject to satisfaction of performance measures applicable to such awards, in accordance with the original terms of the original award agreement, but without the requirement that Mr. Smith continue to be employed after his retirement date.  Mr. Smith received his normal annual equity award in 2019 for his performance during 2018 and will receive his normal annual equity award in 2020 for his performance during 2019, consistent with past practice, with such awards consisting of 50% time-vested RS and 50% PRUs.  Finally, Mr. Smith will receive additional supplemental equity awards in both 2019 and 2020 at the same time the annual LTIP awards are granted to other senior executives, with such awards ranging from 25,000 to 37,500 PRUs for achievement of 100% to 120% of the applicable net revenue budget for DNAG for 2019 and 2020, as applicable.  These supplemental awards will vest one year after the grant date to the extent the net revenue target is met with respect to the applicable year.

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The following table provides estimates of the potential severance and other post-termination benefits the NEOs (except for Messrs. Michels and Spair, because they are no longer with the Company) would receive assuming their employment was terminated as of December 31, 2018:

 

 

¹ In the event of a unilateral termination by Dr. Tang or Mr. Cuca after June 30, they would receive a prorated bonus for the year in which termination occurs.

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EQUITY COMPENSATION PLAN INFORMATION

 

The following table provides information as of December 31, 2018 about the shares of Common Stock that may be issued upon the exercise of options under the OraSure Technologies, Inc. Stock Award Plan (“Award Plan”). The Award Plan, was adopted by the Company in connection with the merger of Epitope and STC to form the Company in September 2000. Additional grants of equity compensation may only be made under the Award Plan.

 

DIRECTOR COMPENSATION

 

 

Under our Non-Employee Director Compensation Policy (“Director Policy”), non-employee members of the Board receive fixed annual fees for service on the Board and Committees of the Board during 2018, as set forth below. The fees were paid quarterly in arrears.

 

 

 

Non-employee Directors receive an initial grant of 40,000 stock options for the Company’s Common Stock upon joining the Board (the “Initial Grant”). An additional grant of 40,000 stock options is also made to any non-employee Director who becomes Chairman of the Board (the “Chairman Grant”). The options granted to non-employee Directors are nonqualified stock options and have an exercise price equal to the mean between the high and low sales prices of the Company’s Common Stock as quoted on the NASDAQ Stock Market on the grant date. Each Initial Grant and Chairman Grant generally vest on a monthly basis over the 24 months immediately following the grant date. Payment of the exercise price may be made in cash or by delivery of previously acquired shares of Common Stock having a fair market value equal to the aggregate exercise price.

 

Under the Director Policy, each non-employee Director receives an annual grant of restricted shares (the “Annual Grant”) of the Company’s Common Stock on the date of each annual meeting of stockholders. Annual grants are made using a value transfer award method similar to that used for our executives under the LTIP. The dollar values of the Annual Awards were determined by the Compensation Committee and Board based on advice from an independent Compensation Consultant previously engaged by the Committee and an assessment of director equity awards made at comparable medical diagnostics and healthcare companies.

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Under the Director Policy, Annual Grants of restricted stock were made in 2018 pursuant to the values set forth in the following table:

 

The dollar value of each Annual Grant is converted into restricted stock by dividing the above values by the average of the high and low sales prices of the Company’s Common Stock, as reported on the NASDAQ Stock Market, on the grant date. Annual Grants of restricted stock will vest on the date that is twelve months from the date of grant. Non-employee Directors are permitted to direct the Company to withhold restricted stock in order to pay tax withholding obligations arising upon the vesting of such shares.

 

Any unvested stock options and restricted stock granted to non-employee Directors will vest in their entirety immediately upon the occurrence of a “change of control” of the Company. A “change of control” means a change of control that would be required to be reported under the Securities Exchange Act of 1934, as amended, and would be deemed to have occurred at such time as (i) any person, or more than one person acting as a group within the meaning of Section 409A of the Code, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of the Company; (ii) any person, or more than one person acting as a group within the meaning of Section 409A of the Code, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition) ownership of stock of the Company possessing 30 percent or more of the total voting power of the Company’s stock; (iii) a majority of the members of the Board is replaced during any 12-month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election; or (iv) a person, or more than one person acting as a group within the meaning of Section 409A of the Code, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition) assets from the Company that have a total gross fair market value equal to or more than 40 percent of the total gross fair market value of all the assets of the Company immediately before such acquisition or acquisitions. In addition, if a non-employee Director leaves the Board for any reason other than a change of control, prior to the end of the vesting period for the Annual Grant of restricted stock, such award shall immediately vest on a pro-rata basis based on the actual duration of such Director’s service to the Board during such vesting period.

 

Non-employee Directors are permitted to defer all or a portion of the fees and grants of restricted stock under the Company’s Non-Qualified Deferred Compensation Plan, on terms similar to those applicable to our officers.

 

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The following table summarizes information related to compensation of non-employee Directors during the fiscal year ended December 31, 2018:

 

 

 

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 PROPOSALS REQUIRING YOUR VOTE

 

 

Background

At the Annual Meeting, you will be asked to vote on the election of two Directors. A majority of the independent members of the Board have nominated Eamonn P. Hobbs and Stephen S. Tang, Ph.D. for election as Class I Directors, for terms expiring at the Annual Meeting of Stockholders in 2022.

Each of the nominees for election as Directors is presently a member of our Board and has consented to continue to serve if re-elected to the Board. Mr. Hobbs joined the Board in 2016 and serves as a member of the Compensation Committee and Chairman of the Nominating and Corporate Governance Committee. Dr. Tang joined the Board in 2011 and now serves as the Company’s President and CEO.

We do not know of anything that would preclude any nominee from serving. However, should any nominee for any reason become unable or unwilling to serve as a Director, the persons named in the enclosed Proxy Card will vote the shares represented by each Proxy for such substitute nominee as the Board may approve.

Any vacancy that occurs on the Board that results from an increase in the number of Directors may be filled by the affirmative vote of a majority of the Directors then in office, and any other vacancy on the Board may be filled by the affirmative vote of a majority of the Directors then in office, even though less than a quorum of the Board, or by a sole remaining Director.

Certain information with respect to each person nominated for election as a Director and each person whose term of office as a Director will continue after the Annual Meeting, including the particular experience, qualifications, attributes and skills they possess that led to the conclusion that they should serve as a Director, is set forth below.

 

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Vote Required; Board Recommendation

If a quorum is present, each nominee will be elected if he or she receives a majority of the votes cast by shares present in person or by Proxy and entitled to vote at the Annual Meeting. Shares voted in person or represented by proxy which are not voted for a nominee (by voting no or abstaining) will have the effect of voting against the nominee. Broker non-votes will have no effect on the required vote. In the absence of instructions to the contrary, shares of Common Stock represented by properly executed Proxies will be voted for the nominees, each of whom has consented to be named and to serve if elected.

Your Board recommends that you vote FOR the election of the Director nominees.

 

Background

The Audit Committee of the Board of Directors has approved the reappointment of KPMG LLP (“KPMG”) as our independent registered public accounting firm for the 2019 fiscal year. The Audit Committee has also recommended that the Board submit the appointment of KPMG for ratification by stockholders at the Annual Meeting. Although action by the stockholders on this matter is not legally required, the Audit Committee and the Board believe it is appropriate to seek stockholder ratification of this appointment in light of the important role played by the independent registered public accounting firm in reporting on the Company’s consolidated financial statements. If this appointment is not ratified by stockholders, the Audit Committee may reconsider its appointment of KPMG for the 2019 fiscal year or in the future.

One or more representatives of KPMG are expected to attend the Annual Meeting electronically. They will have an opportunity to make a statement and will be available to respond to appropriate questions.

Vote Required; Board Recommendation

Ratification of the appointment of KPMG requires the affirmative vote of a majority of shares present in person or by Proxy and entitled to vote at the Annual Meeting. Shares voted in person or represented by Proxy which are not voted for this ratification (by voting no or abstaining) will have the effect of voting against this proposal. In the absence of instructions to the contrary, shares of Common Stock represented by properly executed Proxies will be voted for ratification of the appointment of KPMG as our independent registered public accounting firm for the 2018 fiscal year.

Your Board recommends that the stockholders vote FOR ratification of the appointment of KPMG.

 

Background

Section 14A of the Exchange Act, enacted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), requires that stockholders be given the opportunity to vote to approve, on an advisory (non-binding) basis, no less frequently than once every three years, the compensation of our NEOs. Based on feedback received at our 2017 Annual Meeting, the Board determined that such a vote will continue to be held on an annual basis until the next advisory vote on frequency.

The vote on the resolution recommended below is not intended to address any specific element of compensation, but rather relates to the overall compensation of our NEOs. As described more fully under the CD&A Section of this Proxy Statement and the related tables and narrative, our compensation program is performance-based and is designed to pay executives for performance by offering rewards for the achievement of pre-determined objectives. In addition, our program is designed to align the interests of executives with the interests of our stockholders, provide long-term incentives and set compensation at levels sufficiently competitive to attract, retain and motivate high quality executives, and meet strong corporate governance principles. You are urged to carefully review the CD&A Section of this Proxy Statement which contains a detailed discussion of our executive compensation program, including the 2018 compensation of our NEOs.

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Compensation Program Features

As described more fully in the CD&A, there are many important features to our compensation program that illustrate our commitment to pay-for-performance and good corporate governance. A summary of some of the more significant of these features is set forth below:

 

Vote Required; Board Recommendation

If a quorum is present, the affirmative vote of a majority of shares present, in person or by Proxy and entitled to vote at the Annual Meeting, is required to approve, on an advisory (non-binding) basis, the compensation paid to NEOs. Shares voted in person or represented by Proxy which are not voted for approval of our executive compensation (by voting no or abstaining) will have the effect of voting against this proposal. Broker non-votes will not count toward the determination of whether this proposal is approved and will have no impact on the vote. In the absence of instructions to the contrary, shares of Common Stock represented by properly executed Proxies will be voted for approval of our executive compensation, as disclosed in this Proxy Statement. Because this stockholder vote is advisory, it will not be binding on the Company or the Board of Directors. However, the Compensation Committee and Board will take into account the outcome of the vote when considering future executive compensation programs and arrangements.

Based on the foregoing, the Board is requesting that stockholders vote on the following resolution:

RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed in the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.

Your Board recommends that the stockholders vote FOR the approval of our executive compensation as described in the preceding resolution.

ANNUAL REPORT

 

Our Annual Report to Stockholders for the year ended December 31, 2018 accompanies this Proxy Statement. Following receipt of a written request, we will provide, without charge, a copy of our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC (including a list briefly describing the exhibits thereto), to any record holder or beneficial owner of our Common Stock on March 28, 2019, the record date for the Annual Meeting, or to any person who subsequently becomes such a record holder or beneficial owner. Requests should be directed to the attention of the Corporate Secretary of the Company at our address set forth in the Notice of Annual Meeting of Stockholders immediately preceding this Proxy Statement.

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DEADLINE FOR STOCKHOLDER PROPOSALS

 

You may submit proposals for inclusion in the proxy materials for the Company’s 2020 Annual Meeting of Stockholders. Any such proposals must meet the stockholder eligibility and other requirements imposed by rules issued by the SEC and must be received by the Company at 220 East First Street, Bethlehem, Pennsylvania 18015, Attention: Corporate Secretary, in accordance with Rule 14a-8 promulgated under the Exchange Act, not later than December 20, 2019.

In addition, our Bylaws provide that a stockholder proposal must meet certain predetermined requirements in order to be considered at the Annual Meeting. These requirements are separate from, and in addition to, the requirements discussed above to have the stockholder proposal included in the proxy materials pursuant to the SEC’s rules and regulations. In order to be considered, a stockholder’s proposal must be made in writing to the Company’s Secretary and must be delivered to or received at our principal executive offices not less than ninety (90) days nor more than one hundred twenty (120) days prior to the meeting. However, if less than one hundred (100) days’ notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received no later than the close of business on the tenth (10^th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. The notice to the Secretary must set forth, with respect to each matter the stockholder proposes to bring before the meeting, a brief description of the matter and the reasons for considering that matter at the Annual Meeting. The notice must also include, as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf notice of the proposed business is made: (i) the name and address of the stockholder and such beneficial owner; (ii) any material interest of such stockholder and such beneficial holder in such business; (iii) the class and number of shares of capital stock of the Company which are held of record or beneficially owned by the stockholder and such beneficial owner and any other direct or indirect pecuniary or economic interest in any capital stock of the Company of such stockholder and such beneficial owner, including without limitation, any derivative instrument, swap, option, warrant, short interest, hedge, profit sharing arrangement or borrowed or loaned shares; (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to propose the business described in its notice; and (v) any other information relating to such business matter that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. To the extent the Board of Directors or the SEC, or a court of competent jurisdiction, deems these Bylaw provisions to be inconsistent with the right of stockholders to request inclusion of a proposal in the Company’s proxy materials pursuant to Rule 14a-8 promulgated under the Exchange Act, such rule shall prevail.

The SEC has promulgated rules relating to the exercise of discretionary voting authority under proxies solicited by the Board. If a stockholder intends to present a proposal at our 2020 Annual Meeting without inclusion of that proposal in the Company’s proxy materials and written notice of the proposal is not received by the Secretary of the Company by February 13, 2020 (the date that is 45 days before the one-year anniversary of the date on which the Company first sent its proxy materials for the Annual Meeting), or if the Company meets other requirements of the applicable SEC rules and regulations, the proxies solicited by the Board for use at the 2020 Annual Meeting will confer discretionary authority to vote on the proposal should it then be raised at the 2020 Annual Meeting.

BY ORDER OF THE BOARD OF DIRECTORS

Jack E. Jerrett

Secretary

April 10, 2019

 

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OraSure Technologies, Inc.

2019 Annual Meeting of Stockholders

Tuesday, May 21, 2019

Important notice regarding the Internet availability of proxy materials for the

Annual Meeting of Stockholders.

The Notice and Proxy Statement and 2018 Annual Report to Stockholders

are available at www.proxyvote.com.