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Franklin Electric Co., Inc.
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FRANKLIN ELECTRIC CO., INC.
9255 Coverdale Road
Fort Wayne, Indiana 46809
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held
May 7, 2021 at 8:00 a.m., Eastern Time
To the Shareholders of
Franklin Electric Co., Inc.
The Annual Meeting of Shareholders of Franklin Electric Co., Inc. (the "Company"), an Indiana corporation, will be held at Franklin Electric Global Headquarters and Engineering Design Center, 9255 Coverdale Road, Fort Wayne, Indiana 46809 on Friday, May 7, 2021, at 8:00 a.m., Eastern Time. The purposes of the meeting are to:
1.Elect Gregg C. Sengstack and David M. Wathen as directors for the terms expiring at the 2024 Annual Meeting of Shareholders;
2.Ratify the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the 2021 fiscal year;
3.Approve, on an advisory basis, the executive compensation of the named executive officers as disclosed in the Proxy Statement; and
4.Transact any other business that may properly come before the Annual Meeting of Shareholders or any adjournment or postponement thereof.
Only shareholders of record at the close of business on March 1, 2021 will be entitled to notice of and to vote at the Annual Meeting.
You are urged to vote your proxy whether or not you plan to attend the Annual Meeting of Shareholders. If you do attend, you may choose to vote in person which will revoke any previously executed proxy.
By order of the Board of Directors.
Jonathan M. Grandon
Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary
Annual Meeting of Shareholders to be Held on May 7, 2021
GENERAL INFORMATION
This Proxy Statement and the enclosed proxy are furnished to shareholders in connection with the solicitation of proxies by the Board of Directors of Franklin Electric Co., Inc. (the "Company"), 9255 Coverdale Road, Fort Wayne, Indiana 46809 for use at the Annual Meeting of Shareholders to be held on May 7, 2021, or any adjournment or postponement thereof. Shareholders were sent a Notice of the Annual Meeting of Shareholders (the "Annual Meeting"), as well as information regarding how to access this Proxy Statement and the Company's 2020 Annual Report, including the financial statements contained therein, beginning on or about March 19, 2021.
The expenses of solicitation, including the cost of printing and mailing, will be paid by the Company. Officers and employees of the Company, without additional compensation, may solicit proxies personally, by telephone, email, or by facsimile. Arrangements will also be made with brokerage firms and other custodians, nominees, and fiduciaries to forward proxy solicitation materials to the beneficial owners of shares held of record by such persons, and the Company will reimburse such entities for reasonable out-of-pocket expenses incurred by them in connection therewith.
3
NOTICE AND VOTING INSTRUCTIONS
Shareholders will receive a Notice Card with information regarding the availability of proxy materials over the internet. Shareholders who wish to receive a paper or email copy of the proxy materials must request one by submitting the request to the Secretary of the Company at the Company's address listed on the first page of this Proxy Statement. There is no charge for receiving a copy. Requests can also be made at the voting website, via telephone, or via email, as described in the Notice Card.
Voting by Internet: Use the internet link and control number provided to you on your Proxy Card. You may vote until 11:59 p.m., Eastern Time, on May 6, 2021. You will need the control number provided on your Proxy Card to access the website.
Voting by Telephone: Call the toll-free telephone number provided to you on your Proxy Card. Telephone voting will be available until 11:59 p.m., Eastern Time, on May 6, 2021. Detailed instructions will be provided during the call. The procedures are designed to authenticate votes cast by using the last 4 digits of a shareholder’s social security/taxpayer I.D. number.
Voting by Mail: Request a hard copy of the proxy materials by submitting your request to the Secretary of the Company at the Company's address listed on the first page of this Proxy Statement. Then complete the Proxy Card, date and sign it, and return it in the envelope provided. Shareholders may also vote their shares in person at the Annual Meeting.
Employees who are participants in the Company’s Retirement Program (401(k) plan) will receive a notice and instructions by email or other method that explains how to vote shares credited to their Retirement Program accounts.
If a shareholder does not specify the manner in which the proxy shall be voted, the shares represented thereby will be voted:
•FOR the election of the nominees for director as set forth in this Proxy Statement;
•FOR the ratification of the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the 2021 fiscal year;
•FOR approval of the compensation of the Company’s named executive officers;
•In accordance with the recommendations of management with respect to other matters that may properly come before the Annual Meeting.
A shareholder who has executed a proxy has the power to revoke it at any time before it is voted by (i) delivering written notice of such revocation to Mr. Jonathan M. Grandon, Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary, 9255 Coverdale Road, Fort Wayne, Indiana, 46809, (ii) executing and delivering a subsequently dated proxy by mail, or voting by telephone or through the internet at a later date, or (iii) attending the Annual Meeting and voting in person.
SHAREHOLDERS ENTITLED TO VOTE AND SHARES OUTSTANDING
The Board of Directors of the Company fixed the close of business on March 1, 2021, as the record date (the "Record Date") for determining shareholders entitled to notice of and to vote at the Annual Meeting. As of the Record Date, there were 65,000,000 shares of Common Stock, $.10 par value (the "Common Stock"), authorized, of which 46,336,364 shares of Common Stock were outstanding. Each share of Common Stock is entitled to one vote on each matter submitted to a vote of the shareholders of the Company. Votes cast by proxy or in person at the Annual Meeting will be tabulated by the inspectors of election appointed for the Annual Meeting and will be counted as present for purposes of determining whether a quorum is present. A majority of the outstanding shares of Common Stock, present in person or represented by proxy, will constitute a quorum for the transaction of business at the Annual Meeting. Abstentions and broker non-votes (which occur when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that proposal and has not received instructions from the beneficial owner) will be counted for purposes of determining the presence or absence of a quorum but will not be counted as votes cast on any matter submitted to shareholders. As a result, abstentions and broker non-votes will not have any effect on the voting results with respect to any of the matters scheduled to be submitted to shareholders at the Annual Meeting.
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LETTER TO SHAREHOLDERS
Fellow Shareholders,
We ended 2020 in a strong position, thanks to the tremendous dedication of our global team. Together, we prioritized health, safety, and operational excellence through the year’s many twists and turns. 2020 challenged businesses like no other year in recent memory. Global markets experienced significant economic volatility, important social movements were at the forefront of the public consciousness, and individuals were faced with varying challenges from the COVID-19 pandemic. Through these turbulent times, we continue to be guided by a persistent focus on our Key Factors for Success: quality, availability, service, innovation, and cost, and the contributions of each of our employees has allowed us to emerge from the year stronger and more motivated than ever before.
We leveraged impressive momentum in the back half of the year, which was capped off by record sales and earnings in our fourth quarter. We saw favorable weather conditions in North America, with some catch-up demand from the second quarter’s COVID-related slowdown. Outside of the U.S., Latin America, Africa, and the Middle East outpaced other regions in organic growth for our business. Overall, our Water Systems segment showed tremendous resilience in the face of the pandemic slowdowns. Our Distribution business exhibited impressive organic growth and was able to double operating margins. This strength was driven by favorable weather in most of the U.S., some green shoots in agricultural commodities and pent-up demand for installations. The uncertainty around the pandemic impacted global capital investment in fueling stations, impacting our Fueling Systems business; however, we are confident that this business will recover in 2021 thanks to an anticipated rebound in capital investment, strong global market share, and new product innovations that protect the environment while reducing total cost of installation, operation, and maintenance.
Our strategy to grow as a global provider of water and fuel systems, through geographic expansion and product line extensions, leveraging our global platform and competency in system design, is working, and is supported by strong tactical performance. Through a steadfast commitment to increasing operational efficiencies and diligent cost management, we generated record free cash flow, improved working capital, and reduced indebtedness to further strengthen our already strong balance sheet. As a result, we have further reinforced our financial flexibility, which has allowed us to return capital to our shareholders through an increased quarterly dividend, while simultaneously facilitating our purposeful acquisition strategy. We completed two strategic acquisitions in 2020, one in the Water Treatment space in Canada and the other a key groundwater distribution business in central Texas. We are confident that each offers a robust platform for growth in 2021 and beyond.
2020 saw the release of our inaugural Sustainability Report the first public disclosure of its kind for Franklin Electric. This report included many key environmental and social commitments and measurements, which are underpinned by the principles of sustainability that have been among the foundational tenets of our company’s culture and history of success. These principles: a commitment to safety, ethical compliance with established policies, care for the well-being of our employees, a history of innovation, environmental protection, continuous improvement, and lean manufacturing practices, have never been more relevant to our business, customers, employees, shareholders, leadership, and other stakeholders. We will continue to provide updates to this report, as we maintain a dynamic stance in adapting to a continually evolving sustainability landscape.
Looking towards 2021 and beyond, personally, and on behalf of our Board of Directors, I want to thank all of our employees around the world for their continued focus on serving our customers, coworkers, and communities. We are supported by our Board of Directors, that is actively engaged in the review and approval of the long-term strategic objectives and direction of the Company, including with respect to environment, social and governance initiatives. Our Board is also a great resource for me and my management team. Together, we are excited about the opportunities that lie ahead and look forward to providing updates on our progress.
Sincerely,
Gregg Sengstack
Chairperson of the Board and Chief Executive Officer
Franklin Electric Co., Inc.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows the persons known by the Company to be the beneficial owners of more than five percent of the Company’s Common Stock as of March 1, 2021, unless otherwise noted. The nature of beneficial ownership is sole voting and dispositive power, unless otherwise noted.
Name and address of beneficial owner
Amount and nature of beneficial ownership
Percent of class
BlackRock, Inc.
55 East 52nd Street
New York, NY 10055
6,949,755
(1)
15.00
%
The Vanguard Group, Inc. 100 Vanguard Blvd. Malvern, PA 19355
4,566,610
(2)
9.86
%
Patricia Schaefer 5400 Deer Run Court Muncie, IN 47304
4,000,168
(3)
8.63
%
Diane D. Humphrey 2279 East 250 North Road Bluffton, IN 46714
3,037,454
(4)
6.56
%
Wells Fargo & Company 420 Montgomery Street San Francisco, CA 94163
2,489,671
(5)
5.37
%
Impax Asset Management Group PLC 7th Floor, 30 Panton Street London, United Kingdom
2,364,021
(6)
5.10
%
Earnest Partners, LLC 1180 Peachtree Street NE, Suite 2300 Atlanta, GA 30309
2,360,713
(7)
5.09
%
(1)According to a Schedule 13G filed with the SEC, as of December 31, 2020, BlackRock. Inc. has sole voting power with respect to 6,820,517 shares and sole dispositive power with respect to 6,949,755 shares.
(2)According to a Schedule 13G filed with the SEC, as of December 31, 2020, The Vanguard Group, Inc. has shared voting power with respect to 98,287 shares, sole dispositive power with respect to 4,437,225 shares and shared dispositive power with respect to 129,385 shares.
(3)Pursuant to agreements with Ms. Schaefer, the Company has a right of first refusal with respect to 3,416,080 shares owned by Ms. Schaefer.
(4)Pursuant to agreements with Ms. Humphrey, the Company has a right of first refusal with respect to 2,733,750 shares owned by Ms. Humphrey.
(5)According to a Schedule 13G filed with the SEC, as of December 31, 2020, Wells Fargo & Company has sole voting power with respect to 364,357 shares, shared voting power with respect to 390,760 shares, sole dispositive power with respect to 364,357 shares and shared dispositive power with respect to 2,114,818 shares.
(6)According to a Schedule 13G filed with the SEC as of December 31, 2020, Impax Asset Management Group PLC has sole voting power with respect to 2,364,021 shares.
(7)According to a Schedule 13G filed with the SEC, as of December 31, 2020, Earnest Partners, LLC has sole voting power with respect to 1,500,318 shares and sole dispositive power with respect to 2,360,713 shares.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table shows the number of shares of Common Stock beneficially owned by directors, nominees, each of the executive officers named in the "Summary Compensation Table" on page 32 of this Proxy Statement and all executive officers and directors as a group, as of March 1, 2021. The nature of beneficial ownership is sole voting and investment power, unless otherwise noted, except for restricted shares, with respect to which the holder has investment power only after the shares vest.
Name of beneficial owner
Amount and nature of beneficial ownership
Percent of class
David T. Brown
0(2)
*
Victor D. Grizzle
0(2)
*
Renee J. Peterson
0(2)
*
Jennifer L. Sherman
0(2)
*
Thomas R. VerHage
0(2)
*
David M. Wathen
2,522(2)
*
Gregg C. Sengstack
899,522(1)(5)(6)(7)
1.94
John J. Haines
211,495(1)(3)(5)(7)
*
Donald P. Kenney
112,693(1)(3)(5)(7)
*
DeLancey W. Davis
6,464(3)(5)(7)
*
Jonathan M. Grandon
53,268(1)(4)
*
All directors and executive officers as a group
1,346,650(1)(2)(3)(4)(5)(6)(7)
2.9
* Less than 1 percent of class
(1)Includes shares issuable pursuant to stock options exercisable within 60 days after March 1, 2021 as follows: Mr. Sengstack, 479,474; Mr. Haines, 167,431; Mr. Kenney, 67,269; and Mr. Grandon, 34,901. All directors and executive officers as a group, 782,042.
(2)Does not include stock units credited pursuant to the terms of the Non-Employee Directors’ Deferred Compensation Plan described under “Director Compensation” to: Mr. Brown, 77,772; Mr. Grizzle, 3,366; Ms. Peterson, 28,651; Ms. Sherman, 31,247; Mr. VerHage, 48,264; and Mr. Wathen, 90,418.
(3)Includes shares held by the 401(k) Plan Trustee as of March 1, 2021: Mr. Haines, 6,170; Mr. Kenney, 31,666; and Mr. Davis, 123. All executive officers as a group, 37,980.
(4)Includes unvested restricted shares as follows: Mr. Grandon, 9,712. All executive officers as a group, 27,074.
(5)Does not include unvested restricted stock units as follows: Mr. Sengstack, 67,339; Mr. Haines, 19,257; Mr. Kenney, 14,734; and Mr. Davis, 9,511. All executive officers as a group, 110,841.
(6)Includes 275,000 shares owned by a trust.
(7)Includes shares based on estimated release of performance share units earned in 2020 as follows: Mr. Sengstack, 20,374; Mr. Haines, 5,556; Mr. Kenney, 3,705; Mr. Davis, 3,067, and Mr. Grandon, 3,053. All executive officers as a group, 40,813. See the "Compensation Discussion and Analysis" section for further information.
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PROPOSAL 1: ELECTION OF DIRECTORS
The Company's Amended and Restated By-laws provide that the Board of Directors shall consist of at least seven directors and not more than eleven members, divided into three classes. Each year, the directors of one of the three classes are elected to serve terms of three years or until their successors have been elected and qualified. Two directors will be elected at the Annual Meeting this year. Directors are elected by the affirmative vote of a majority of the shares voted, unless the number of nominees for director exceeds the number of directors to be elected, in which case directors shall be elected by a plurality of the shares voted (i.e., the two nominees who receive the most votes will be elected).
Gregg C. Sengstack and David M. Wathen have been nominated to serve as directors of the Company for terms expiring in 2024. The nominees are current directors of the Company and have indicated their willingness to continue to serve as directors if elected. If, however, any nominee is unwilling or unable to serve as a director, shares represented by the proxies will be voted for the election of another nominee proposed by the Board of Directors or the Board may reduce the number of directors to be elected at the Annual Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR THE ELECTION OF EACH NOMINEE.
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INFORMATION CONCERNING NOMINEES AND CONTINUING DIRECTORS
Set forth below for the director nominees and continuing directors are their ages, year they first became a director, principal occupations and directorships for at least the past five years, and legal proceedings, if any, for the past ten years. With respect to each nominee or continuing director, we describe under the heading “Relevant Experience” the particular experience and other attributes that have led to the conclusion that the individual should serve on the Board of Directors of the Company.
Directors with terms expiring in 2021
Gregg C. Sengstack David M. Wathen
Gregg C. Sengstack
Age: 62
Director and Chief Executive Officer of the Company
Director Since: 2014
Principal Occupation: Chief Executive Officer of the Company since 2014.
Formerly: President and Chief Operating Officer of the Company from 2011-2014; prior thereto, Senior Vice President and President, Franklin Fueling Systems and International Water Group from 2005-2011; prior thereto, Chief Financial Officer of the Company from 1999-2005.
Directorships - Public Companies: Woodward, Inc.
Relevant Experience: Mr. Sengstack received his bachelor's degree in math and economics from Bucknell University and his MBA from the University of Chicago. Mr. Sengstack joined the Company in 1988 and has significant experience holding various positions in the Company, which provides the Board with a unique depth of understanding of the Company's markets and businesses that is beneficial to the Board in its deliberations. Mr. Sengstack's long tenure with the Company also helps give the Board a historical perspective of the Company.
David M. Wathen
Age: 68
Director of the Company
Director Since: 2005
Principal Occupation: Retired in 2016.
Formerly: President and Chief Executive Officer of TriMas Corporation, a manufacturer of engineered products, that serve a variety of industrial, commercial and consumer end markets worldwide, from 2009-2016; prior thereto, President and Chief Executive Officer, Balfour Beatty, Inc. (U.S. Operations), an engineering, construction and building management services company, from 2002-2006; prior thereto, Group Executive/Corporate Officer, Eaton Corporation, a global technology leader in diversified power management solutions, from 1997-2000.
Relevant Experience: Mr. Wathen received his bachelor's degree in mechanical engineering from Purdue University and his MBA from Saint Francis College, Fort Wayne, Indiana. Mr. Wathen brings to the Board his experience as CEO of two companies and leadership positions in others, including over twenty years direct technical and general management experience in the same industry as the Company and direct experience managing electrical businesses serving pump OEMs and distributor channels similar to those served by the Company. His background enables him to serve as an "audit committee financial expert". His experience on the Board of the Company also helps give the Board a historical perspective in its deliberations.
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Directors with terms expiring in 2022
Renee J. Peterson Jennifer L. Sherman
Renee J. Peterson
Age: 59
Director of the Company
Director Since: 2015
Principal Occupation: Vice President, Treasurer and Chief Financial Officer of The Toro Company, a leading provider of solutions for the outdoor environment, including turf maintenance, snow and ice management, landscape, retail and specialty construction equipment, and irrigation and outdoor lighting solutions, since 2011.
Formerly: Vice President, Finance and Planning of Eaton Corporation from 2008 to 2011; prior thereto, Vice President and Division Chief Financial Officer of the Aerospace and Defense Segment of Honeywell International Inc. Ms. Peterson held a variety of positions of increasing responsibility throughout her Honeywell career from 1983 to 2008.
Relevant Experience: Ms. Peterson received her bachelor's degree in accounting from Saint Cloud State University and her MBA from the University of Minnesota. Ms. Peterson brings financial and operational experience at three large manufacturers that provides the Board with specific expertise and assists in its deliberations. At Toro, Ms. Peterson also provides leadership oversight of the Information Systems function. Her background enables her to serve as an "audit committee financial expert."
Jennifer L. Sherman
Age: 56
Director of the Company
Director Since: 2015
Principal Occupation: President and Chief Executive Officer of Federal Signal Corporation, a diversified manufacturer of specialized vehicles and systems in maintenance and infrastructure as well as safety and security products, including audible and visual warning devices, since 2016.
Formerly: Chief Operating Officer of Federal Signal from 2014 to 2015; prior thereto, Chief Administrative Officer of Federal Signal from 2010 to 2014; prior thereto, General Counsel of Federal Signal from 2004 to 2010.
Relevant Experience: Ms. Sherman received her bachelor's degree in business administration and her Juris Doctor from the University of Michigan. She is also a fellow of the Kellogg School of Management at Northwestern University. Ms. Sherman's background has provided her with a broad range of experiences that will complement the Board. Specifically, Ms. Sherman’s experience includes, but is not limited to, compliance, human resources, legal issues, governance and business operations. Consequently, Ms. Sherman has the background and capability to serve as an important member of the Board.
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Directors with terms expiring in 2023
Victor D. Grizzle Thomas R. VerHage
Victor D. Grizzle
Age: 59
Director of the Company
Director Since: 2020
Principal Occupation: President and Chief Executive Officer of Armstrong World Industries, Inc., a leading designer and manufacturer of commercial and residential ceiling, wall and suspension system solutions, since 2016.
Formerly: Executive Vice President and Chief Executive Officer of Armstrong Building Products from 2011 to 2016; prior thereto, Group President of Global Structures, Coatings and Tubing for Valmont Industries, a global leader of infrastructure and manufacturer of mechanized irrigation equipment for large scale farming. And prior to Valmont Industries, held several General Management positions over 16 years with the General Electric Company.
Relevant Experience: Mr. Grizzle received his Bachelor of Science in Mechanical Engineering from California Polytechnic University. He brings to the Board his experience as CEO of Armstrong, in addition to extensive senior leadership experience in the areas of international business, acquisitions, process improvement, sales and marketing for large, publicly traded manufacturing companies.
Thomas R. VerHage
Age: 68
Director of the Company
Director Since: 2010
Principal Occupation: Retired in 2011.
Formerly: Vice President and Chief Financial Officer, Donaldson Company, Inc., a worldwide provider of filtration systems and replacement parts, from 2004 until 2011; prior thereto, Partner, Deloitte & Touche, LLP, an international accounting and consulting firm, from 2002 to 2004; prior thereto, Partner, Arthur Andersen, LLP, a consulting and accounting firm, from 1976 to 2002.
Relevant Experience: Mr. VerHage received his bachelor’s degree in business administration and his MBA from the University of Wisconsin. Mr. VerHage adds to the Board his financial and accounting expertise from his experience as CFO of Donaldson Company, Inc. and his prior experience with two major public accounting firms. His background enables him to serve as an “audit committee financial expert.”
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INFORMATION ABOUT THE BOARD AND ITS COMMITTEES
Director Independence
The Board of Directors of the Company has determined that each of the current directors, except for Gregg C. Sengstack, Chief Executive Officer, is an “independent director” in compliance with the independence standards set forth in the Company’s Corporate Governance Guidelines and under the applicable rules adopted by The NASDAQ Stock Market, Inc. (“NASDAQ”). In making its independence determinations, the Board concluded that no director, other than Mr. Sengstack, has any material relationship in the Company, except as a director and shareholder.
Board Leadership Structure and Risk Oversight
The Board is led by Mr. Sengstack, who has served as Chairperson of the Board and Chief Executive Officer since 2015. The Board consists of Mr. Sengstack and six other directors. The Board has three standing committees - Audit, Management Organization and Compensation, and Corporate Governance. The Audit Committee is primarily responsible for risk oversight and the full Board receives regular reports from the Audit Committee and from the Company's officers and other management personnel regarding risk management. Each of the other two committees also considers risk as it falls within its area of responsibility.
The Company’s Corporate Governance Guidelines provide for an independent non-executive director to act as Lead Independent Director. The Lead Independent Director is appointed by a majority of the independent directors and serves for a two-year term; however, he or she may be removed or replaced by a majority of the independent directors at any time. David T. Brown currently serves as the Company’s Lead Independent Director. The Lead Independent Director receives additional compensation for his or her services, as the Board determines from time to time.
The specific responsibilities of the Lead Independent Director when acting as such include the following:
•Acting as a liaison between the Chairperson and the Independent Directors;
•Assisting the Chairperson and Secretary in setting the Board agenda and determining what materials will be provided to the directors in advance of Board meetings and ensuring that the agenda items receive adequate time for discussion and deliberation;
•Providing leadership to the Board to ensure that the Board works cohesively and independently;
•Determining when the Board should meet in executive session without management present, coordinating and developing the agenda for, and chairing, such executive sessions; and
•In the event of the incapacitation of the Chairperson, serving as non-executive chairperson until a permanent chairperson is appointed.
The Lead Independent Director also performs any additional responsibilities delegated to the Lead Independent Director by the Board.
The Board believes that the Chairperson and Chief Executive Officer should consist of a single individual who is seen by the Company’s customers, business partners, investors, and shareholders as someone who provides strong leadership for the Company and is viewed as such in the industries in which the Company competes. The Company believes that the Lead Independent Director, the Board committees, all of which are chaired by and consist of independent directors, and the full Board of Directors, provide effective oversight of the Company’s businesses and the risks involved in them.
Meetings
The Board held five meetings during 2020. Each director attended at least 75 percent of the aggregate meetings of the Board and Board committees of which he or she was a member during the period that each served as a director. All directors attended the 2020 Annual Meeting of Shareholders telephonically.
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Committees
Audit Committee
The members of the Audit Committee during 2020 were Renee J. Peterson (Chairperson), Victor D. Grizzle, and Thomas R. VerHage. The Board of Directors has determined that each member of the Audit Committee is an “independent director” in compliance with the independence standards set forth in the Company’s Corporate Governance Guidelines and under the applicable NASDAQ rules. The Board of Directors has adopted an Audit Committee charter, a copy of which is available on the Company’s website at www.franklin-electric.com under “Governance,” that sets forth the duties and responsibilities of the Audit Committee. Under its charter, the Audit Committee appoints the Company’s independent registered public accounting firm and assists the Board of Directors in fulfilling its oversight responsibilities by reviewing the Company’s financial information, the Company’s system of internal control, the Company’s processes for monitoring compliance with laws and regulations and the Company’s audit and risk management processes. It is the general responsibility of the Audit Committee to advise and make recommendations to the Board of Directors in all matters regarding the Company’s accounting methods and internal control procedures. The Audit Committee held four meetings in 2020.
The Audit Committee is also responsible for the review, approval, or ratification of transactions between the Company and “related persons.” The Audit Committee reviews information compiled in response to the Directors' and Officers' Questionnaires or otherwise developed by the Company with respect to any transactions with the Company in which any director, executive officer, 5% beneficial holders, or any member of his or her immediate family, has a direct or indirect material interest that would require disclosure under applicable SEC regulations. In 2020, there were no such transactions.
The Board of Directors has determined that all members of the Audit Committee are “audit committee financial experts” as defined by Item 407(d)(5)(ii) of Regulation S-K of the Exchange Act and are “independent” under the applicable NASDAQ rules.
Management Organization and Compensation Committee
The members of the Management Organization and Compensation Committee (the "Compensation Committee") during 2020 were Jennifer L. Sherman (Chairperson), David T. Brown, and David M. Wathen. The Board of Directors has determined that each member of the Compensation Committee is an “independent director” in compliance with the independence standards set forth in the Company’s Corporate Governance Guidelines and under applicable NASDAQ rules. The Board of Directors has adopted a Compensation Committee charter, a copy of which is available on the Company’s website at www.franklin-electric.com under “Governance,” that sets forth the duties and responsibilities of the Compensation Committee. Under its charter, the Compensation Committee recommends to the Board of Directors the annual salary and bonus for the Chief Executive Officer, determines and approves the equity awards for the Chief Executive Officer and the annual salary, bonus and equity awards of the other executive officers of the Company; reviews and submits to the Board of Directors recommendations concerning bonus and stock plans; periodically reviews the Company's policies in the area of management benefits; and oversees the Company's management development and organization structure. As part of its oversight responsibilities, the Compensation Committee evaluated the risks arising from the Company’s compensation policies and practices, with the assistance of Meridian Compensation Partners, LLC, an independent executive consulting firm. The Committee considered, among other factors, the design of the incentive compensation programs, which are closely linked to corporate performance and capped the mix of long- and short-term compensation, the distribution of compensation as between equity and cash, and other factors that mitigate risk. The Committee concluded that the Company’s compensation policies and practices do not involve undue risk. The Compensation Committee held six meetings in 2020.
Corporate Governance Committee
The members of the Corporate Governance Committee (the “Governance Committee”) during 2020 were David M. Wathen (Chairperson), David T. Brown, and Jennifer L. Sherman. The Board of Directors has determined that each member of the Governance Committee is an “independent director” in compliance with the independence standards set forth in the Company’s Corporate Governance Guidelines and under applicable NASDAQ rules. The Board of Directors has adopted a Governance Committee charter, a copy of which is available on the Company’s website at www.franklin-electric.com under “Governance,” that sets forth the duties and responsibilities of the Governance Committee. Under its charter, the Governance Committee reviews the size of the Company’s Board of Directors and committee structure and recommends appointments to the Board and the Board Committees; reviews and recommends to the Board of Directors the compensation of non-employee directors, including awards to non-employee directors under the Company’s equity-based compensation plans; and develops and recommends to the Board corporate governance guidelines deemed necessary for the Company. The Governance Committee held three meetings in 2020.
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Director Nomination Process
The Governance Committee is responsible for identifying and recommending to the Board candidates for director. The Governance Committee considers diversity when identifying candidates for directorships. Although the Company does not have a written policy regarding diversity, the Governance Committee seeks to identify persons from various backgrounds and with a variety of life experiences who have a reputation for, and a record of, integrity and good business judgment and the willingness to make an appropriate time commitment. The Governance Committee also considers whether a person has experience in a highly responsible position in a profession or industry relevant to the conduct of the Company’s business. The Governance Committee takes into account the current composition of the Board and the extent to which a person’s particular expertise, experience and ability will complement the expertise and experience of other directors. Candidates for director should also be free of conflicts of interest or relationships that may interfere with the performance of their duties. Based on its evaluation and consideration, the Governance Committee submits its recommendation for director candidates to the full Board of Directors, which is then responsible for selecting the candidates to be elected by the shareholders. The Governance Committee evaluates its success in achieving these goals for Board composition from time to time, particularly when considering Board succession and candidates to fill vacancies.
The Governance Committee will consider as candidates for director persons recommended or nominated by shareholders. Shareholders may recommend candidates for director by writing to the Secretary of the Company at the address listed below under “Other Corporate Governance Matters.” Nominations of directors may be made by any shareholder entitled to vote in the election of directors, provided that written notice of intent to make a nomination is given to the Secretary of the Company not later than 90 days prior to the anniversary date of the immediately preceding Annual Meeting of shareholders. The notice must set forth (i) information regarding the proposed nominee as would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC, and (ii) the consent of such nominee to serve as a director of the Company if so elected.
Environmental, Social and Governance Items
In October 2020, the Company published its first Sustainability Report, highlighting the Company’s commitment to environmental protection, safety of our employees and customers, and social and governance concerns. The Sustainability Report also provides information on the Company’s corporate governance and compliance practices and details the Board’s oversight of sustainability initiatives and enterprise risk management. The Sustainability Report can be found on the Company’s website at www.franklin-electric.com.
Other Corporate Governance Matters
The Board of Directors has adopted Corporate Governance Guidelines, a copy of which is available on the Company’s website at www.franklin-electric.com under “Governance,” that provide, among other things, that the Company’s independent directors will meet in executive session, outside the presence of the non-independent directors and management, at least twice each year. In 2020, the independent directors met in executive session five times.
Each Board committee, on an annual basis, conducts and reviews with the Board a performance evaluation of the committee, which evaluation compares the committee's performance against the requirements of the committee's charter and sets the committee's goals for the coming year.
Anyone may contact the Board of Directors, any Board Committee, the Lead Independent Director, any independent director or any other director by writing to the Secretary of the Company as follows:
Franklin Electric Co., Inc.
Attention: [Board of Directors], [Board Committee], [Board Member]
c/o Corporate Secretary
Franklin Electric Co., Inc.
9255 Coverdale Road
Fort Wayne, IN 46809
The independent directors of the Board have approved a process for collecting, organizing and responding to written shareholder communications addressed to the Board, Board Committees or individual directors.
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Copies of the Company’s corporate governance documents, including the Board Committee charters and the Corporate Governance Guidelines are available upon written request to the Secretary of the Company at the address listed above or on the Company's website at www.franklin-electric.com under "Governance."
In compliance with Section 406 of the Sarbanes-Oxley Act of 2002, the Company has adopted a code of business conduct and ethics for its directors, principal financial officer, controller, principal executive officer, and other employees (the "Code"). The Company has posted the Code on the Company’s website at www.franklin-electric.com under "Governance." The Company will disclose any amendments to the Code and any waivers from the Code for directors and executive officers by posting such information on its website.
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MANAGEMENT ORGANIZATION AND
COMPENSATION COMMITTEE REPORT
The Management Organization and Compensation Committee of the Board of Directors hereby furnishes the following report to the shareholders of the Company in accordance with rules adopted by the Securities and Exchange Commission.
The Management Organization and Compensation Committee has reviewed and discussed with management the Company’s Compensation Discussion and Analysis contained in this Proxy Statement.
Based upon this review and discussion, the Management Organization and Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.
This report is submitted on behalf of the 2020 members of the Management Organization and Compensation Committee.
Jennifer L. Sherman (Chairperson)
David T. Brown
David M. Wathen
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COMPENSATION DISCUSSION AND ANALYSIS
This section of the proxy statement is intended to provide shareholders with information about the compensation awarded in fiscal 2020 to the Company’s executives, including the “named executive officers.” This information includes a discussion of the key elements of the Company’s compensation program and the philosophy and rationale behind the Management Organization and Compensation Committee’s executive compensation decisions. The named executive officers are those listed below and in the Summary Compensation Table of this proxy statement:
Gregg C. Sengstack:
Chairperson of the Board and Chief Executive Officer (CEO)
John J. Haines:
VP, Chief Financial Officer (CFO)
Donald P. Kenney:
VP and President, Global Water
DeLancey W. Davis:
VP and President, Headwater Companies
Jonathan M. Grandon:
VP and Chief Administrative Officer (CAO), General Counsel and Corporate Secretary
You should review this Compensation, Discussion and Analysis section together with the tabular disclosures beginning on page 32.
Executive Summary
The Management Organization and Compensation Committee of the Board (the “Committee”) believes that a significant portion of the total compensation opportunity for each executive should be tied to performance, both of the Company and of the individual executive. This summary contains a discussion of the 2020 executive compensation highlights, 2020 performance and the prior year Advisory Vote on Executive compensation ("say on pay") results.
2020 Executive Compensation Overview
•Performance-based compensation represented between 53% and 64% of the named executive officers’ total targeted compensation for fiscal 2020.
•The annual cash incentive awards are directly aligned with critical one-year operating results. No cash awards are earned unless a threshold level of performance is attained. Earned payouts cannot exceed 200% of the target opportunity.
•Long-term incentive awards are equity-based and are designed to align management’s interests with those of the Company’s shareholders and to foster retention of key executives. The 2020 long-term incentive grants are predominantly performance-based, with 40% of the targeted value awarded as stock options and 30% of the targeted value awarded as performance-based share units (earned units cannot exceed 200% of the target number of units). The remaining 30% of the targeted value is awarded as time-based restricted stock or restricted stock units. These awards focus executives on delivering results that drive shareholder value.
•The Company generally does not provide perquisites to the named executive officers, but will, in certain circumstances, such as relocation, provide perquisites.
•The Company has stock ownership requirements in place to further align the interests of the Company’s executives with those of the Company’s shareholders.
•The Company has a recoupment policy that permits the recovery of incentive compensation paid to executives in instances where misconduct results in a restatement of financial statements or material harm to the Company.
•The Company has anti-hedging and anti-pledging provisions that prohibit executives and directors from hedging the value of Company securities or pledging Company securities held by them.
2020 Company Performance
The financial results achieved by the Company included sales of $1,247.3 million compared to $1,314.6 million in the prior year. The sales decrease was primarily from lower volumes, in part created by uncertainty and general disruptions around the COVID-19 pandemic. The impact of foreign currency translation decreased sales by about 3 percent. Water Segment sales were $734.7 million in 2020, a decrease of $46.8 million compared to 2019. Fueling Segment sales were $245.1 million in 2020, a decrease of $48.5 million from 2019. Distribution sales were $328.4 million versus 2019 sales of $291.8 million.
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Water Systems Segment
Water Systems is a global leader in the production and marketing of water pumping systems and is a technical leader in submersible motors, pumps, drives, electronic controls, and monitoring devices. The Water Systems segment designs, manufactures and sells motors, pumps, drives, electronic controls, monitoring devices, and related parts and equipment primarily for use in groundwater, water transfer and wastewater.
Water Systems motors, pumps and controls are used principally for pumping clean water and wastewater in a variety of residential, agricultural, municipal and industrial applications. Water Systems also manufactures electronic drives and controls for the motors which control functionality and provide protection from various hazards, such as electrical surges, over-heating and dry wells or dry tanks. In the last two years, the Company acquired First Sales, LLC and Waterite, Inc., expanding its portfolio to include water treatment systems.
Water Systems products are sold in highly competitive markets. Water Systems contributes about 60 percent of the Company’s total revenue. Significant portions of segment revenue come from selling groundwater and surface pumps, motors, and controls for residential and commercial buildings, as well as agricultural sales which are more seasonal and subject to commodity price changes. The Water Systems segment generates approximately 35 to 40 percent of its revenue in developing markets, which often lack municipal water systems. As those countries install water systems, the Company views those markets as an opportunity. The Company has had 6 to 9 percent compounded annual sales growth in developing regions in recent years. Water Systems competes in each of its targeted markets based on product design, quality of products and services, performance, availability, and price. The Company’s principal competitors in the specialty water products industry are Grundfos Management A/S, Pentair, Inc., and Xylem, Inc.
2020 Water Systems research and development expenditures were primarily related to the following activities:
•Electronic variable frequency drives and controls for Pump and HVAC applications, including SubDrive Connect Plus, SubDrive Utility 3 Phase, and Cerus X-Drive including HES (High Efficiency Systems) motor support
•Greywater pumping equipment, including the new High Temperature Condensate Pump Series and expanded FPS Non-Clog products up to 20 horsepower
•Submersible and surface pumps for residential, commercial, municipal, and agricultural applications including the development of a standard global 4” pump family and the integration our new recently acquired lineshaft turbine product offerings
•Submersible motor technology and motor protection, including expanded scope of the MagForce™ HES (High Efficiency Systems) from 1-335 horsepower
•Water Treatment products focused on a new commercial valve and IOT enabled sensing systems
Fueling Systems Segment
Fueling Systems is a global leader in the production and marketing of fuel pumping systems, fuel containment systems, and monitoring and control systems. The Fueling Systems segment designs, manufactures and sells pumps, pipe, sumps, fittings, vapor recovery components, electronic controls, monitoring devices and related parts and equipment primarily for use in fueling system applications.
Fueling Systems offers a complete array of components between the tank and the dispenser, including submersible pumps, station hardware, piping, sumps, vapor recovery and electronic controls. The Fueling Systems segment growth has been sustained by a commitment to protecting human health and the environment while delivering the lowest total cost of ownership.Fueling Systems takes steps to ensure its products are installed and maintained properly through robust global certification tools for their third-party contractors.The segment serves other energy markets such as power reliability systems and includes intelligent electronic devices that are designed for online monitoring for the power utility, hydroelectric, and telecommunication and data center infrastructure.
Fueling Systems products are sold in highly competitive markets. Rising vehicle use is leading to more investment in fueling stations which, in turn, leads to increased demand for the Company’s Fueling Systems products.The Company believes there is growth opportunity in developing markets. Fueling Systems competes in each of its targeted markets based on product design, quality of products and services, performance, availability, and value. The Company’s principal competitors in the petroleum equipment industry are Vontier Corporation, formerly a part of Fortive Corporation, and Dover Corporation.
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2020 Fueling Systems research and development expenditures were primarily related to the following activities:
•Developed and launched a Corrosion Control System to reduce corrosion in diesel tanks
•Developed products to monitor retail fueling sites, tank corrosion, and vapor recovery systems
•Developed and launched a Battery Monitoring System to for Telecommunication, Data Centers, and Power Utilities back up battery systems
•Developed a Distribution Transformer Monitor to analyze distribution transformer health
Distribution Segment
The Distribution Segment is operated as a collection of wholly owned leading groundwater distributors known as the Headwater Companies. Headwater Companies deliver quality products and leading brands to the industry, providing contractors with the availability and service they demand to meet their application challenges. The Distribution segment operates within the U.S. professional groundwater market. Highlights of the Distribution Segment are as follows:
•2017 - Acquired controlling interests in three distributors in the U.S. professional groundwater market, creating the new Distribution Segment
•2018 - Acquired Valley Farms Supply, Inc., a professional groundwater distributor operating in the mid-west
•2019 - Acquired Milan Supply Company, a professional groundwater distributor operating in the mid-west
•2020 - Acquired Gicon Pumps & Equipment, Inc., a professional groundwater distributor operating in the south
Prior Year Say on Pay Results
At the May 8, 2020 shareholders meeting, the “Advisory Vote on Executive Compensation” proposal (the “say on pay” vote) received support from 98.3% of votes cast. The Committee considered these results and determined that the results of the vote did not call for any significant changes to the executive compensation plans and programs already in place for 2020 or for 2021.
Management Organization and Compensation Committee
The Committee, consisting entirely of independent directors, has the responsibility for establishing, implementing and monitoring adherence with the Company’s compensation program and providing input to the Board with respect to management development and succession planning. The role of the Committee is to oversee, on behalf of the Board, the Company’s compensation and benefit plans and policies, administer its stock plans (including reviewing and approving equity grants to the CEO and all other executive officers), review and approve all other compensation decisions relating to the executive officers of the Company other than the CEO, and recommend CEO compensation to the Board for its approval.
In addition, the Committee (i) reviews the Company’s organization structure, (ii) reviews the recruitment of key employees and management’s development plans for key employees, (iii) makes recommendations to the Board with respect to the CEO succession plan and (iv) reviews compensation risk to determine whether the compensation policies and practices are reasonably likely to have a material adverse effect on the Company. The Committee meets a minimum of three times annually to discharge its duties and held six meetings in 2020.
Compensation Philosophy and Pay Objectives
The Company and the Committee believe that compensation paid to executive officers, including the named executive officers, should be aligned with the strategy and performance of the Company on both a short-term and long-term basis, and that such compensation should assist the Company in attracting and retaining key executives critical to the Company’s success. Compensation is structured to ensure that a significant portion of the executive’s compensation opportunities will be directly related to Company performance and other factors that directly and indirectly influence shareholder value, including any performance evaluated against the achievement of objectives relative to applicable Environmental, Social and Governance risks and metrics.
The Committee encourages superior short-term performance through the use of annual cash incentive awards and superior long-term performance through equity incentive awards. For the Company’s CEO, CFO and CAO the cash incentive compensation is designed to reward Company-wide performance by tying 100% of their target cash incentive opportunity to
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corporate financial goals, including earnings per share and consolidated working capital ratio. For other named executive officers, the cash incentive compensation is weighted to reward the achievement of specific financial metrics within areas under their control or influence, although Company-wide performance is still an important factor. Stock-based compensation consists of a combination of stock options, restricted stock (or restricted stock units for retirement-eligible executives) and performance share units. The Committee believes that all three equity-based components create a strong link to shareholder value creation, with the majority of the awards in the form of stock options and performance share units.
Historically, the Committee has set executive pay opportunities based on a number of factors deemed appropriate by the Committee, including market competitive pay data, individual performance and the experience level of the executive. Subject to the factors set forth above, the Committee used the following pay objectives as a guide in assessing competitiveness of pay opportunities at a peer group of companies for 2020 pay decisions (the same levels were used in 2019). The higher targeted pay objectives for annual bonus and long-term incentive components reflect the Committee’s objective to attract and retain high quality executive talent in order to meet the aggressive performance goals of the Company and its belief that a significant portion of total compensation should be at risk and variable.
Pay Component
Targeted Pay Objectives
Base Salary
50th percentile
Annual Bonus Opportunity
65th percentile
Long-Term Incentives
65th percentile
Role of Management in Compensation Decisions
The Committee makes CEO compensation recommendations to the Board, for its review and approval, and makes all compensation decisions with respect to all other executive officers of the Company.
The CEO reviews the performance of other executive officers, including the other named executive officers, and makes recommendations to the Committee with respect to their annual salary adjustments, annual cash incentive opportunities and payments, and grants of long-term incentive awards. The Committee approves the compensation of these executives after considering the CEO’s input and recommendations and its own judgment of each executive’s performance during the period.
The Committee and the CEO also review the financial metrics to be used to measure the performance of the Company and its business units, taking into account the strategic goals of the Company. For this purpose, the CEO provides information and commentary relevant to the Committee’s review and ultimate determination
Although the CEO regularly attends Committee meetings, he is present only by invitation of the Committee and has no independent right to attend such meetings. In fiscal 2020, Mr. Sengstack attended all of the Committee meetings but did not participate in any of the executive sessions.
Role of Compensation Consultant and Advisers in Compensation Decisions
The Committee utilizes the Company’s Human Resources department and has the authority under its charter to engage the services of outside consultants to assist the Committee. In accordance with this authority, the Committee has engaged the services of Meridian Compensation Partners, LLC (“Meridian”), an independent executive compensation consulting firm, to conduct reviews of its total compensation program for executive officers and to provide advice to the Committee in the design and implementation of its executive compensation program. Pursuant to its charter and NASDAQ listing standards, the Committee regularly reviews Meridian’s independence relative to key factors, including: (i) whether Meridian provides any other services to the Company; (ii) the amount of fees paid to Meridian relative to the total revenue of the firm; (iii) policies in place to prevent conflicts of interest; (iv) any personal or business relationships with members of the Committee; (v) ownership of Company stock; and (vi) any personal or business relationships with executive officers.
One or more representatives from Meridian are invited by the Committee to attend the relevant portions of its meetings. During 2020, Meridian participated in all six of the Committee meetings in person or virtually. In the course of fulfilling its consulting responsibilities, representatives of Meridian frequently communicate with the Chairperson of the Committee outside of regular Committee meetings. A representative of Meridian meets with the Committee in executive session at most meetings. Meridian also interacts with management from time to time to exchange information and to review proposals that management may present to the Committee. In 2020, Meridian performed a detailed review of all Company executive compensation related plans and programs to assess ongoing appropriateness and alignment with current market
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practice. Based on this analysis, Meridian did not identify the need for material changes to existing programs. However, a new executive non-CIC severance plan was approved by the Committee in December 2020 (with exception of the CEO and CFO whose existing employment agreements include non-CIC severance benefits) to align with most common market practice. See page 31 for further details.
Peer Group Benchmarking
In late 2019, the Committee, with the assistance of Meridian, conducted an analysis of the current peer group used for compensation benchmarking purposes to ensure that all included companies continued to be relevant comparators. As part of this process, the Committee considered revenue size and industry, as well as companies that compete with the Company for executive talent. Based on this review and input from Meridian, no changes were made to the current peer group. As a result, the Committee approved the 25-company peer group listed below (the “2020 Peer Group”) for purposes of updating the executive pay study to assist in 2020 pay decisions. The companies in the 2020 Peer Group are primarily engaged in manufacturing, are publicly traded, and had trailing twelve-month revenue (as of 9/30/2019) between $411 million and $3.77 billion. Due to the differences in size among the companies in the 2020 Peer Group, Meridian used a form of regression analysis to adjust the pay study results based on Company revenue as compared to revenue of other companies in the 2020 Peer Group and each executive’s level of responsibility as compared to executives in comparable positions in the 2020 Peer Group.
Actuant Corporation (n.k.a. Enerpac)
Hillenbrand, Inc.
Standex International Corp.
Chart Industries, Inc.
IDEX Corporation
The Gorman-Rupp Co.
CIRCOR International, Inc.
ITT, Inc.
The Timken Co.
Crane Co.
Lindsay Corporation
Toro Co.
Curtiss-Wright Corporation
Lydall, Inc.
TriMas Corporation
Donaldson Company, Inc.
Mueller Water Products, Inc.
Watts Water Technologies, Inc.
ESCO Technologies, Inc.
Nordson Corporation
Woodward, Inc.
Esterline Technologies, Corp.
RBC Bearings, Inc.
Graco, Inc.
SPX FLOW, Inc.
Setting Executive Compensation
In General
The Company compensates its executives through programs that emphasize performance-based compensation. For the executive officers, including the named executive officers, the compensation package for 2020 included base salary, an annual cash incentive opportunity and an annual long-term incentive opportunity in the form of stock options, performance share units, and restricted stock/units. Base salary is intended to provide a certain level of fixed compensation commensurate with an executive’s position, responsibilities and contributions to the Company. The Company has structured annual and long-term incentive compensation to motivate executives to achieve the strategic objectives set by the CEO and the Board, to tie executives’ long- term interests to those of the Company’s shareholders, to reward the executives for achieving such goals, and to provide a retention incentive.
The mix of compensation among base salary, annual bonus opportunity and long-term incentives is a result of the targeted pay objective for each component of pay. This approach results in a significant portion of the compensation of those executive officers having the greatest ability to influence the Company’s performance being performance-based, which the Committee believes is appropriate. Additionally, after setting each separate component of pay, the Committee reviews the total compensation package of each named executive officer to assess the level of total target compensation provided in relation to the competitive range of market practice and may make adjustments to one or more components of pay based on this assessment.
Each year Meridian provides a study of market competitive compensation data. The updated study included 2019 compensation data for the companies in the 2020 Peer Group, with cash data “aged” at an annualized rate of 3.0% to reflect expected 2020 compensation levels for the 2020 Peer Group. In February 2020, the Committee set the specific components of the compensation of the named executive officers, with the overall goal of providing compensation opportunities at levels generally competitive with the 2020 pay study.
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The following table shows the 2020 total targeted compensation (the sum of base salary, target annual bonus opportunity and long-term incentives) for the named executive officers, using targets of the 50th percentile of the 2020 Peer Group for base salary and the 65th percentile of the 2020 Peer Group for annual bonus opportunity and long-term incentives:
Named Executive Officer
2020 Targeted
Total Compensation(1) ($)
Gregg C. Sengstack
5,011,500
John J. Haines
1,787,500
Donald P. Kenney
1,552,500
DeLancey W. Davis
1,108,750
Jonathan M. Grandon
1,062,188
(1)Based on annualized base salary rates plus target annual bonus opportunity (based on salary targeted to be paid for 2020) and economic value of long-term incentives.
The following sections discuss the individual elements of the Company’s compensation program, including any changes made for fiscal 2020.
Base Salary
The Company pays its executives annual salaries, which provide a degree of financial stability and are intended to reflect the competitive marketplace and help attract and retain quality executives. In determining the 2020 base salary for each executive, the Committee took into account the targeted annual salary objective for the position based on the results of the pay study for 2020 and assessed the responsibilities associated with the position, individual contribution and performance, skill set, prior experience and external pressures to attract and retain talent.
Applying these factors, in February 2020 the Committee approved salary increases to be effective June 1 as follows: Mr. Sengstack: $850,000; Mr. Haines: $470,000; Mr. Kenney $450,000; Mr. Davis: $395,000; and Mr. Grandon: $375,000. However, due to challenges caused by the COVID-19 pandemic, these increases were not implemented for other than Mr. Kenney, who received a lower increase than initially scheduled. This increase was due to Mr. Kenney's recent expansion in responsibilities as the President of the Global Water business unit. Accordingly, the 2020 salaries are shown in the table below:
Named Executive Officer
2020 Base Salary Rate(1)($)
2019 Base Salary Rate(2)($)
% Change
Gregg C. Sengstack
815,000
815,000
0.0%
John J. Haines
450,000
450,000
0.0%
Donald P. Kenney
430,000
415,000
3.6%
DeLancey W. Davis
385,000
385,000
0.0%
Jonathan M. Grandon
362,500
362,500
0.0%
(1)2020 base salary increases were approved by the Committee to be effective June 1, 2020, but were not implemented due to COVID-19 except for Mr. Kenney, as disclosed.
(2)2019 base salary increases were effective June 1, 2019.
Annual Cash Incentive Award
The executive officers of the Company are eligible to participate in the Executive Officer Annual Incentive Cash Bonus Program (the “Annual Bonus Plan”). The Annual Bonus Plan is designed to motivate and reward participants for achieving or exceeding financial goals that support the overall business objectives and strategic direction of the Company.
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The table below shows the target annual bonus opportunities for each of the named executive officers for 2020. Target amounts for the named executive officers are based on their respective target bonus percentage (which did not change from 2019) multiplied by the amount of base salary paid to the executive for the year (taking into account any salary increases effective as of June 1, 2020).
Named Executive Officer
2020 Target Bonus Opportunity
(as a % of Base Salary)
2020 Target Bonus Opportunity
($) (1)
Gregg C. Sengstack
110%
906,844
John J. Haines
75%
341,394
Donald P. Kenney
75%
321,548
DeLancey W. Davis
75%
292,364
Jonathan M. Grandon
67.5%
247,511
(1)Based on base salary actually paid for fiscal 2020 to the named executive officers
In the first quarter of 2020, the Committee approved financial performance targets to be used under the Annual Bonus Plan for 2020. As in prior years, the corporate-wide financial performance targets for the named executive officers were consolidated working capital ratio (WC) and earnings per share (EPS). The Committee selected WC due to its determination that management should continue to focus on managing key elements of the balance sheet, including inventory, accounts receivable and accounts payable. The Committee continues to believe that diluted EPS as adjusted is an important indicator of profitability that aligns the interests of the executive officers with those of the Company’s shareholders. Financial performance targets for Mr. Davis and Mr. Kenney also included their business unit’s operating income after non-GAAP adjustments. While the Committee continues to set individual goals for executives and assess their achievement for purposes of merit increases and promotions, individual performance will not impact the annual bonus outside of extraordinary circumstances.
With respect to each performance measure, the Committee set a threshold level of performance below which no bonus is earned for that performance measure. For each of the financial-based measures, other than the WC ratio, the performance threshold was set at 80% of the target performance level. Payout for threshold level performance was set at 33% of target. For every 1% by which performance exceeds the threshold level, the actual payout level increases 3.35% up to the target level (i.e., 100% of target payout), and for every 1% by which performance exceeds the target level, up to 120% of the target, the actual payout increases 5% up to the maximum performance level (i.e., 200% of target payout).
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The following graph illustrates the payout percentages by performance for the financial-based bonus metrics other than WC ratio:
With respect to the working capital ratio metric, the performance threshold was set at 90% of the target performance level, with a corresponding payout set at 33% of target. For every 1% by which working capital ratio performance exceeds the threshold level, the actual payout level increases 6.7% up to the target level, and for every 1% by which performance exceeds the target level, up to 110% of target, the actual payout increases 10% up to the maximum performance level.
The following graph illustrates the payout percentages by performance for the WC ratio metric:
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The performance measures, and the relative percentage of the 2020 target bonus opportunity assigned to each performance measure, were as follows:
Performance Measure
Gregg C. Sengstack
John J. Haines
Donald P. Kenney
DeLancey W. Davis
Jonathan M. Grandon
Consolidated Working Capital Ratio
50%
50%
25%
25%
50%
EPS
50%
50%
25%
25%
50%
Headwater Operating Income Growth
50%
Global Water Operating Income
50%
The chart below sets forth the threshold, target, maximum and actual performance levels for the 2020 performance goals (other than business unit operating income), and for all performance goals, the percentage at which target was attained. The performance goals were established assuming the goals would be adjusted for certain discrete items. Accordingly, with the approval of the Committee, the following was excluded in calculating EPS: restructuring income/expense and the non-operational income statement impact of the December 31, 2020 acquisition, which decreased EPS by $0.04. The “Actual” results shown in the table reflect these adjustments.
The Company does not publicly report operating income by business units below the operating segment level given the size of the business units as compared to its competitors and the potential for competitive harm. The operating income goals were set at the beginning of 2020 and the Committee believed at the time that it would require a high degree of execution of the 2020 business plan in order to attain these goals.
Performance Goal Achievement
Threshold
Target
Maximum
Actual
% of Attainment of Target
Working Capital Ratio
33.0%
30.0%
27.0%
29.5%
101.7%
EPS ($)
1.84
2.30
2.76
2.20
95.7%
Business Unit Operating Income
94.3% - 103.6% (1)
(1)The percentage of attainment of target results for the business unit metrics represents the range of results for the business units.
Mr. Sengstack evaluated the extent to which the other named executive officers attained their individual strategic goals. The annual bonus plan has a discretionary adjustment component of a positive or negative 20%. The intended application of this discretionary adjustment component is reserved, in part, for “above and beyond” accomplishments based on individual achievements, or extraordinary events outside of the executive’s control despite exceptional performance. Based on his evaluation, Mr. Sengstack did not recommend any discretionary adjustments to the calculated bonus payouts for 2020, and the Committee did not make any changes, resulting in the entire bonus payments being based on the pre-established financial goals.
Based on the results summarized above, the following table sets forth the actual bonus payouts for each named executive officer as a percentage of his target opportunity.
Executive
Payout Percentage
(% of Target)
Gregg C. Sengstack
101.1%
John J. Haines
101.1%
Donald P. Kenney
103.8%
DeLancey W. Davis
109.5%
Jonathan M. Grandon
101.1%
For additional information about the specific awards made to the named executive officers for 2020 pursuant to the above criteria, see the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table on page 32.
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Long-Term Incentive Compensation
The Committee grants equity incentives to its executive officers to more closely align the executives’ compensation with the return received by the Company’s shareholders, to offer an incentive for long-term performance, to provide a retention incentive and to encourage stock ownership. The regular cycle long-term incentive awards to executive officers generally include a combination of performance share units, stock options and restricted stock/units. Retirement eligible executives, including the eligible named executive officers, receive restricted stock units instead of restricted stock because, unlike restricted stock units, restricted stock grants to a retirement eligible individual results in the early recognition of income even though the individual has not actually retired and received the stock subject to awards.
LTI Award Target Values
In determining the size of equity grants made to the named executive officers, the Committee uses the pay study provided by Meridian as a guide. The Committee then considers other important factors such as experience level and individual performance to approve the long-term incentive value to be granted to each named executive officer.
The following table shows the 2020 targeted economic value for the annual equity awards to the named executive officers.
Named Executive Officer
Targeted Economic Value for 2020 ($)
Gregg C. Sengstack
3,300,000
John J. Haines
1,000,000
Donald P. Kenney
800,000
DeLancey W. Davis
435,000
Jonathan M. Grandon
455,000
LTI Award Mix
Based on a review of market data and input from Meridian, the Committee determined to deliver the targeted economic value of long-term incentives to the named executive officers as follows: 40% in the form of stock options; 30% in the form of restricted stock (or restricted stock units); and 30% in the form of performance share units. All three long-term incentive components are used to align the interests of the named executive officers with those of shareholders. Stock options provide an element of risk to the executives in that value is created for the executive only when the stock price increases, while restricted stock and restricted stock units provide executives with outright value which supports their retention and helps manage the potential increased dilution that would result in using only options. Through the use of performance share units, the Committee can focus the executives on one or more select performance metrics deemed to be critical to driving Company performance and, in turn, increasing shareholder value.
Performance Share Units
The performance share units vest based solely on the aggregate change in the Company’s consolidated normalized EBITDA (adjusted for certain non-recurring items) relative to the aggregate change in the consolidated normalized EBITDA reported by companies in the S&P Small Cap 600® Industrials Index (adjusted for non-recurring items) over a three-year performance period. For purposes of determining this aggregate increase, a target dollar increase in adjusted operating income is established for the Company for each year of the three-year performance period based on the annual percentage increase of the S&P 600® Industrials Index adjusted operating income from the base year. The annual target amounts are then aggregated to calculate the cumulative three-year target dollar increase. The actual cumulative growth of the Company’s adjusted operating income (in dollars) over the performance period will be compared to the target level of cumulative growth in adjusted operating income based on the increases relative to the companies in the S&P Small Cap 600® Industrials Index over the performance period. The Committee believes that operating income is a relevant benchmark to gauge Company performance over time against a broad index of similarly situated manufacturing firms.
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For performance share units granted in 2020, the applicable performance period is January 1, 2020 through December 31, 2022. Performance share units will be earned based on the following:
Performance Level (1)
Aggregate Actual Change for Company Relative to Targeted Change
Number of Performance Share Units Earned (as a % of Target)
Below Threshold
<75%
0%
Threshold
75%
50%
Target
100%
100%
Maximum
125% (or more)
200%
(1)Performance between threshold and target, and target and maximum will be interpolated on a straight-line basis.
Earned performance share units will be paid out in shares of Company stock. Any dividends declared during the performance period will accrue and be paid out in cash at the end of the performance period based on the number of performance share units actually earned.
For additional information about the material terms of these awards, see the narrative disclosure under the Summary Compensation Table.
Performance Share Units Earned in Fiscal 2020
The three-year performance period for the performance share units awarded in 2018 ended on December 31, 2020. The base year for measuring the aggregate change in the consolidated normalized EBITDA for both the Company and the S&P 600® Industrials Index in each year of the performance period was 2017. The annual change in normalized EBITDA for each year in the performance period for the S&P 600® Industrials Index was 12.5%, -1.3% and 4.4%, which represents the respective annual target levels for the Company. The following table provides the threshold, target and maximum performance levels (based on the table above) for the performance period:
Year 1 Target
(Fiscal 2018)
Year 2 Target
(Fiscal 2019)
Year 3 Target
(Fiscal 2020)
Base Year Company Normalized EBITDA
Target Change in Normalized EBITDA (over Base Year)
Target Level of Normalized EBITDA for Relevant Period
$150.4 million
12.5% ($18.8 million)
$169.2 million
$150.4 million
11.1% ($16.6 million)
$167.0 million
$150.4 million
15.9% ($24 million)
$174.4 million
As a result, (i) the Company’s target level of aggregate adjusted operating income over the performance period was $510.6 million ($169.2 million + $167.0 million + $174.4 million) and (ii) the threshold level was calculated as $383.0 million (75% of target) and (iii) the maximum level was calculated as $638.3 million (125% of target). The Company’s actual aggregate consolidated normalized EBITDA for the performance period was $509.0 million, resulting in an estimated 99.7% attainment of target ($509.0 ÷ $510.6) and 99.4% of the targeted level of the performance share units were estimated to be earned.
LTI Award Grant Practices
Equity grants are typically made on an annual basis at the Committee’s meeting following the public release of the Company’s fiscal year-end results. Stock options are valued as of the date of grant using a modified Black-Scholes methodology. They have an exercise price equal to 100% of the fair market value of the Company’s common stock on the date of grant and vest ratably over three years. Restricted stock, restricted stock units and performance share units are valued based on the closing price of the Company’s common stock on the date of grant. The restricted stock and restricted stock units generally vest 100% on the third anniversary of the grant date. Performance share units are earned based on the level of
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performance attainment against the pre-established earnings goal (relative to the S&P Small Cap 600® Industrials Index) set by the Committee over a three-year performance period.
Stock Ownership Guidelines
The Company’s stock ownership guidelines for its executives and non-employee directors require executives and non-employee directors to maintain direct ownership in the Company’s common stock in amounts as follows:
•CEO: six times annual base salary;
•Corporate Vice Presidents: one times annual base salary; and
•Non-Employee Directors: five times annual retainer.
Executives and non-employee directors have five years from the date appointed to their position to comply with these guidelines. Stock options do not count toward these guidelines. All shares held directly or beneficially, including shares of restricted stock, restricted stock units, shares of stock acquired upon exercise of stock options and shares credited under the Retirement Program, count toward these guidelines. Performance share units do not count toward these guidelines until, and only to the extent, they are settled in actual shares. Until an executive attains the requisite stock ownership, the executive must retain 50% of all shares acquired under the Company’s compensation plans. All shares held directly or beneficially, including stock awards, shares acquired upon exercise of stock options and stock units credited under the Non-Employee Directors’ Compensation Plan, count toward these guidelines. Stock options do not count toward these guidelines. As of the end of 2020, all named executive officers and non-employee directors met their respective stock ownership requirements.
Incentive Compensation Recoupment Policy
The Company’s Incentive Compensation Recoupment Policy permits the Board to recoup from an executive cash or equity-based compensation granted on or after January 1, 2014 in the event that the executive engages in misconduct that results in a restatement of the Company’s financial statements or a material loss or damage to the Company. Recoupment covers any incentive compensation that is awarded or paid or that vests within 36 months following the occurrence of the misconduct. Misconduct includes an act of fraud, dishonesty or recklessness, the material breach of a fiduciary duty, a knowing material violation of a Company policy, or a knowing material violation of a confidentiality, non-solicitation or non-competition covenant.
Retirement Plans
The Company has various retirement plans in which certain of the named executive officers currently participate.
Pension Plan
Basic Retirement Portion
The Basic Retirement portion of the Pension Plan generally covers employees in the U.S. A participant retiring at age 65 is eligible to receive a monthly single life annuity equal to his credited service times a flat dollar amount ($25 for most U.S. salaried employees). Participants age 55 or older with 10 years of vesting service may retire prior to age 65 with a reduced benefit. Participants who were younger than 50 as of December 31, 2011 (which includes Mr. Davis) stopped accruing benefits as of such date, and participants 50 or older as of such date (which include Messrs. Sengstack and Kenney) accrued benefits until December 31, 2016. Mr. Haines and Mr. Grandon are not eligible to participate in this portion of the Pension Plan because they were hired after February 21, 2006 when it was closed to all new salaried employees.
Cash Balance Portion
The Cash Balance portion of the Pension Plan covers most salaried employees in the U.S. All participants stopped accruing benefits as of December 31, 2011. At termination of employment a participant is eligible to receive the amount credited to his account or a monthly single life annuity based on the amount credited to his account. The account consists of: (i) an opening balance for a participant at December 31, 1999 equal to the present value of the participant’s accrued benefit earned at December 31, 1999 under the applicable prior pension plan; (ii) annual Company contributions through 2011 ranging from 3% to 12% of a participant’s compensation and transitional credits for certain participants from 2000-2004 equal to 6% of compensation; and (iii) interest credits, which continue until distribution of the account, based on the 30-year Treasury rate (subject to a minimum of 4.5%). All named executive officers participate in the Cash Balance portion.
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Pension Restoration Plan
In order to provide eligible executives with the portion of their retirement benefits that cannot be paid under the tax- qualified Pension Plan due to IRS limits on compensation, the Company maintains the Pension Restoration Plan. All participants other than Mr. Sengstack (which include Messrs. Haines and Davis) stopped accruing benefits as of December 31, 2011, and effective as of January 1, 2012, their benefits were transferred to the Supplemental Retirement and Deferred Compensation Plan. Mr. Kenney and Mr. Grandon do not participate in the Pension Restoration Plan because it was frozen before Mr. Kenney became an executive officer and before Mr. Grandon was hired.
Retirement Program
The Retirement Program is a tax-qualified 401(k) plan that covers the majority of all U.S. employees, including the named executive officers. A participant can elect to defer 1-50% of his compensation, in accordance with the Retirement Program plan documents, up to a maximum in 2020 of $19,500, or $26,000 if age 50 or over, and the Company will make a matching contribution equal to 100% of the first 2% of the participant’s deferral contributions plus 50% of the next 3% of the participant’s deferral contributions, for a total of 3.5% of the participant’s compensation.
The Company also makes annual service-based contributions to most participants, ranging from 3% to 9% of a participant’s compensation, depending on his or her years of service with the Company (3% in the case of hourly employees). The service-based contribution generally is made to all employees. Compensation taken into account under the Retirement Program is limited by the Internal Revenue Code (the limit for 2020 was $285,000). The Retirement Program also holds employees’ accounts that were held in the Company’s Employee Stock Ownership Plan, which was merged into the Retirement Program in 2010.
Supplemental Retirement and Deferred Compensation Plan
The Company maintains the Supplemental Retirement and Deferred Compensation Plan (the “Supplemental Retirement Plan”), which provides an additional benefit to attract and retain key executives. The Supplemental Retirement Plan permits executive officers of the Company to elect each year to defer up to 90% of their bonus awards and up to 50% of their salary. Deferred amounts are credited to a bookkeeping account maintained on behalf of the participant.
The Company provides two types of contributions under the Supplemental Retirement Plan to the named executive officers other than Mr. Sengstack, who continues to participate in the Pension Restoration Plan. These contributions include: (i) the portion of the service- based contribution that could not be made under the Retirement Program due to IRS limitations; and (ii) a supplemental contribution of 2% to 4% of a participant’s compensation depending on years of service. In addition, participants who stopped accruing benefits under the Pension Restoration Plan (which includes Messrs. Haines and Davis) had their benefit transferred to the Supplemental Retirement Plan as of January 1, 2012. A participant’s deferral account, service contribution account and transferred Pension Restoration Account are credited with earnings and losses based on the investment funds made available under the Plan. Earnings on the supplemental contribution account will follow the methodology used in the now-frozen Cash Balance Plan, which credits earnings based on the 30-year Treasury rate, but not less than 4.5%.
A participant’s accounts under the Supplemental Retirement Plan generally will be distributed to him in the seventh month following termination of employment. No named executive officer elected to contribute to the Supplemental Retirement Plan in 2020, and Messrs. Haines, Kenney, Davis, and Grandon received Company contributions.
Perquisites, Other Personal Benefits, and Other Compensation
The Company generally does not provide the named executive officers with perquisites or other personal benefits such as Company vehicles, club memberships, financial planning assistance or tax preparation. The Company offers an executive annual physical program which is available to the named executive officers. The named executive officers other than Mr. Sengstack receive a Medicare tax reimbursement relating to the annual Company contributions in the Supplemental Retirement Plan.
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Employment Agreements
The Company has employment agreements with Messrs. Sengstack and Haines. The agreements are three-year agreements, which automatically extend for an additional year unless either party gives notice not to renew. The agreements provide the following:
•If the agreement is not renewed by the Company, and the executive terminates his employment, the executive is entitled to a payment equal to 12 months of salary and the target bonus, a bonus pro-rated for the time of employment in the current year, continued participation in the Company’s health and welfare plans for 12 months, a lump sum payment equal to the additional benefits that would have accrued under the Company’s retirement plans for 12 months, and immediate vesting of all stock options and pro-rata vesting of restricted stock, restricted stock units and performance share units (based on actual performance).
•If the executive’s employment is terminated prior to a change in control without cause by the Company or for good reason by the executive (as defined in the agreements), Mr. Haines is entitled to the same benefits as described above, and Mr. Sengstack is entitled to severance based on 18 months of continued salary, 1-1/2 times the target bonus, and 18 months of health and welfare plan coverage and retirement plan payment.
•If the executive’s employment is terminated without cause by the Company or for good reason by the executive within two years following a change in control of the Company, the executive is entitled to receive a payment equal to 36 months of continued salary, three times the target bonus (24 months of salary and two times bonus for Mr. Haines), a bonus pro- rated for the time of employment in the current year, continued participation in the Company’s health and welfare plans for 36 months (24 for Mr. Haines) and a lump sum payment equal to the additional benefits that would have been accrued under the Company’s retirement plans (other than the Pension Restoration Plan) for 36 months (24 months for Mr. Haines), and immediate vesting and cash-out of outstanding options and vesting of restricted stock, restricted stock units and performance share units (at target level). With respect to any 280G excise tax, each executive can elect to either (i) receive the full amount of severance benefits and be responsible for paying any excise tax or (ii) receive severance benefits that are reduced to the maximum amount that can be paid without triggering the excise tax.
The employment agreements contain a restrictive covenant that prohibits the executives from competing with the Company and soliciting the Company’s customers and employees for 24 months following termination.
Employment Security Agreements
The Company has entered into employment security agreements (“ESAs”) with Messrs. Kenney, Davis and Grandon, as well as certain other executives that provide benefits upon a change in control of the Company, in order to extend these benefits to some executives who are not party to employment agreements.
Each ESA provides that if within two years after a change in control the Company terminates the executive’s employment for any reason other than cause, or the executive terminates his employment with the Company for good reason (as defined in the ESA), the executive is entitled to the following:
•A lump sum payment equal to the sum of two times the executive’s base salary, a pro-rata portion of the executive’s target bonus for the current year (based on the termination date), and two times the executive’s target bonus for the current year;
•A lump sum payment equal to the increase in benefits under the Company’s tax-qualified and supplemental retirement plans that results from crediting the executive with additional service for 24 months;
•Immediate vesting of all stock-based awards and deemed satisfaction of performance goals at target levels;
•Continued coverage under the Company’s health and welfare plans for 24 months following termination; and
•12 months of executive outplacement services (not to exceed $50,000) with a professional outplacement firm selected by the Company.
The ESAs contain a restrictive covenant that prohibits the executive from soliciting employees of the Company for 18 months following termination.
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Executive Non-CIC Severance Plan
As described above, following a comprehensive review of Franklin Electric’s executive compensation plans in comparison to market practice in December 2020, the Committee approved the addition of the Executive Severance Policy, which provides non-CIC severance for executives (with the exception of the CEO and CFO, whose existing employment agreements include non-CIC severance benefits). Under the policy, if the executive’s employment is terminated by the Company without cause and prior to a change in control (as defined in the ESA), the executive is entitled to the following payments and benefits:
•A lump sum payment equal to the one and one-half times the sum of the annual base pay plus target bonus in the case of the Chief Executive Officer, and one times annual base pay plus target bonus for all other Executive Officers;
•A lump sum payment equal to a pro-rata portion of the Executive Officer’s annual bonus in effect on the employment termination date, based on the level of achievement of the Company’s performance goals, as approved by the Management Organization and Compensation Committee of the Board for the year in which the Executive’s termination of employment occurs;
•Accelerated vesting of stock-based awards not otherwise eligible for accelerated vesting under the terms of an applicable stock award agreement, and the removal of all restrictions on time-based awards of restricted stock or restricted stock units; and
•Accelerated vesting of any performance-based stock awards or units; and
•Payment of COBRA premiums until the eighteen-month anniversary, in the case of the Chief Executive Officer, or the one-year anniversary, in the case of all other Executive Officers, of the termination date.
Confidentiality and Non-Compete Agreements
Each named executive officer has signed a confidentiality and non-compete agreement with the Company. Under this agreement, they agree to maintain all confidential information of the Company, and for a period of 18 months after termination of employment from the Company they agree not to, directly or indirectly, participate in the design, development, manufacture, or distribution of electrical submersible motors or related products in competition with the Company. These agreements are in addition to the restrictive covenants set forth in the employment agreements and ESAs.
The Company determined that the employment agreements, ESA and Executive Severance Policy serve the Company’s goal of attracting and retaining key executives. By providing these agreements and policy the executives are able to remain focused on the best interests of the shareholders in the event of a potential change-in-control situation. Additionally, these agreements and policy provide benefits which strive to retain the executives during a transitional period.
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code as in effect prior to 2018 limited the deductibility for federal income tax purposes of executive compensation paid to the CEO and the three other most highly compensated officers other than the chief financial officer of a public company to $1,000,000 per year, but contained an exception for certain performance-based compensation. The Tax Cuts and Jobs Act of 2017 amended Section 162(m) to cover a public company’s chief financial officer and eliminate the performance-based exception, beginning in 2018. Accordingly, the annual cash incentive awards, stock options and performance shares granted in 2018 and later years will no longer qualify for this exception (base salary and time-based restricted stock/units by their nature have never qualified as performance-based compensation). In addition, compensation paid to a covered employee after termination of employment will also be subject to the million dollar limitation. Following the Tax Cuts and Jobs Act, the Committee may consider tax deductibility as a factor in determining executive compensation, but may also choose to structure its compensation arrangements in ways that do not maximize tax deductibility, to achieve its goal to provide a compensation program that appropriately attracts, retains and rewards the executive officers who are crucial to the Company’s success.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth compensation information for the Company’s Chief Executive Officer, Chief Financial Officer and the three other most highly compensated executive officers ("named executive officers") for the fiscal years ended December 31, 2020, December 31, 2019 and December 31, 2018.
Name and Principal Position
Year
Salary
($)(1)
Bonus
($)(2)
Time-Based Stock Awards ($)(3)
Performance-Based Stock Awards
($)(3)(4)
Option Awards
($)(5)
Non-Equity Incentive Plan Compensation ($)(6)
Change in Pension
Value & Nonqualified Deferred Compensation Earnings
($)(7)
All Other Compensation ($)(8)
Total ($)
Gregg C. Sengstack, Chairperson & CEO
2020
824,404
—
989,992
989,992
1,320,000
916,373
875,333
37,823
5,953,917
2019
798,333
—
899,991
899,991
1,199,972
562,697
1,939,627
70,737
6,371,348
2018
764,583
—
825,004
825,004
1,100,145
764,466
773,167
50,907
5,103,276
John J. Haines, VP & CFO
2020
455,192
—
299,983
299,983
400,003
344,962
4,299
71,164
1,875,586
2019
441,040
—
250,482
250,482
333,992
211,865
4,889
76,678
1,569,428
2018
421,630
—
224,998
224,998
300,046
287,446
—
73,937
1,533,055
Donald P. Kenney, VP and President, Global Water
2020
428,731
—
239,974
239,974
319,993
333,695
42,706
91,783
1,696,856
2019
408,767
—
187,489
187,489
249,994
190,061
51,484
111,930
1,387,214
2018
385,440
—
150,012
150,012
200,031
362,434
—
90,935
1,338,864
DeLancey W. Davis, VP and President, Headwater Companies
2020
389,818
—
130,526
130,526
173,993
319,676
14,384
66,856
1,225,779
2019
379,962
—
127,475
127,475
169,993
121,996
13,872
74,827
1,015,600
Jonathan M. Grandon, VP, CAO, General Counsel and Corporate Secretary
2020
366,683
—
136,497
136,497
181,996
250,097
—
36,538
1,108,308
Dr. Paul N. Chhabra, VP Global Product Supply
2019
358,750
50,000
119,973
119,973
160,003
179,720
—
37,680
1,026,099
2018
260,032
50,000
305,020
204,990
139,317
188,218
—
22,286
1,169,863
Robert J. Stone, Senior VP and President, International Water Systems
2018
395,816
—
148,482
148,482
198,024
134,924
—
70,184
1,095,912
(1)Salary adjustments for 2020 were approved by the Committee to be effective June 1, 2020, but were not implemented due to COVID-19 except for Mr. Kenney, as disclosed in the "Compensation Discussion and Analysis" section of this Proxy Statement.
(2)Bonus for Dr. Chhabra, in 2019, represents a retention bonus and in 2018, represents a signing bonus in addition to relocation benefits.
(3)These amounts represent the grant date fair value, computed in accordance with FASB Codification Topic 718, of the restricted stock and performance share unit awards granted in 2020 to the named executive officers. The value of the performance share units is based upon the probable outcome of the performance conditions. See Note 14 of the Company's Annual Report to Shareholders for the fiscal year ending December 31, 2020 for a complete description of the assumptions used for these valuations.
(4)The grant date value of the performance shares granted in 2020, assuming the performance conditions were met at the maximum level, was: Mr. Sengstack: $1,979,984; Mr. Haines: $599,966; Mr. Kenney: $479,949; Mr. Davis: $261,052; and Mr. Grandon $272,994.
(5)These amounts represent the grant date fair value, computed in accordance with FASB Codification Topic 718, of the stock options granted to the named executive officers in 2020. See Note 14 of the Company's Annual Report to Shareholders for the fiscal year ending December 31, 2020 for a complete description of the assumptions used for these valuations.
(6)These amounts represent the bonuses paid to the named executive officers under the Company's performance-based Executive Officer Annual Incentive Cash Bonus Program. A description of this program can be found in the "Compensation Discussion and Analysis" section of this Proxy Statement.
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(7)These amounts represent the annual change in the present value of each named executive officer's benefits under the Company's defined benefit pension plans, which calculations use the same assumptions required to be used for financial reporting purposes. Benefits under the pension plans were frozen as of December 31, 2011 for most participants, including Messrs. Haines, Davis, and Grandon.
(8)These amounts for 2020 represent (i) Company contributions under the Retirement Program: Mr. Sengstack: $35,625; Mr. Haines: $24,225; Mr. Kenney: $35,625; Mr. Davis: $29,575; and Mr. Grandon $18,525; (ii) Company contributions under the Supplemental Retirement and Deferred Compensation Plan: Mr. Haines: $45,785; Mr. Kenney: $54,793; Mr. Davis: $36,350; and Mr. Grandon $17,524; (iii) a Medicare tax reimbursement related to the non-qualified retirement plans: Mr. Sengstack: $2,121; Mr. Haines: $1,076; Mr. Kenney: $1,288; Mr. Davis: $854; and Mr. Grandon: $412; and (iv) the Company's life insurance contributions of $78 for each named executive officer.
Restricted Stock/Restricted Stock Unit/Performance Stock Unit Awards
The 2020 restricted awards were granted on February 20, 2020 to Mr. Sengstack and the remaining Named Executive Officers. The awards consisted of 16,580 restricted stock units and 16,580 performance share units awarded to Mr. Sengstack; 5,024 restricted stock units and 5,024 performance share units awarded to Mr. Haines; 4,019 restricted stock units and 4,019 performance stock units awarded to Mr. Kenney; 2,186 restricted stock units and 2,186 performance stock units awarded to Mr. Davis; and 2,286 restricted stock awards and 2,286 performance stock units awarded to Mr. Grandon.
The 2019 restricted awards were granted on February 21, 2019 to Mr. Sengstack and the remaining Named Executive Officers. The awards consisted of 16,316 restricted stock units and 16,316 performance share units awarded to Mr. Sengstack; 4,541 restricted stock units and 4,541 performance share units awarded to Mr. Haines; 3,399 restricted stock units and 3,399 performance stock units awarded to Mr. Kenney; 2,311 restricted stock units and 2,311 performance stock units awarded to Mr. Davis; and 2,175 restricted stock awards and 2,175 performance stock units awarded to Dr. Chhabra.
The 2018 restricted awards were granted on February 22, 2018 to Messrs. Sengstack, Haines, Stone, and Kenney and on April 3, 2018 to Dr. Chhabra, respectively. The awards consisted of 20,497 restricted stock units and 20,497 performance share units awarded to Mr. Sengstack; 5,590 restricted stock units and 5,590 performance share units awarded to Mr. Haines; 3,689 restricted stock units and 3,689 performance share units awarded to Mr. Stone; 3,727 restricted stock units and 3,727 performance stock units awarded to Mr. Kenney; and 7,550 restricted stock awards and 5,074 performance stock units awarded to Dr. Chhabra.
Restricted stock and restricted stock unit awards vest on the third anniversary of the grant date for the 2020 and 2019 grants and on the fourth anniversary of the grant date for the 2018 grant. All grants are subject to accelerated pro rata vesting upon death, disability, or retirement and accelerated vesting on a change in control. Performance share units granted in 2020 vest at the end of the three-year performance period ending December 31, 2022, depending on the level of achievement of the performance goals (subject to pro rata vesting at the end of the performance period upon death, disability or retirement and accelerated vesting at target level upon a change in control). Dividends are paid on restricted stock awards and dividend equivalents are paid on restricted stock unit awards. Dividend equivalents are paid on performance share unit awards only to the extent the awards vest.
Option Awards
The 2020 grants to the named executive officers consisted of options for 84,453 shares to Mr. Sengstack; 25,592 shares to Mr. Haines; 20,473 shares to Mr. Kenney; 11,132 shares to Mr. Davis; and 11,644 shares to Mr. Grandon. These grants had an exercise price of $59.71.
The 2019 grants to the named executive officers consisted of options for 76,872 shares to Mr. Sengstack; 21,396 shares to Mr. Haines; 16,015 shares to Mr. Kenney; 10,890 shares to Mr. Davis; and 10,250 shares to Dr. Chhabra. These grants had an exercise price of $55.16.
The 2018 grants to the named executive officers consisted of options for 96,501 shares to Mr. Sengstack; 26,319 shares to Mr. Haines; 17,370 shares to Mr. Stone; 17,546 shares to Mr. Kenney; and 12,236 shares to Dr. Chhabra. These grants had an exercise price of $40.40 and $40.25 for Dr. Chhabra and the remaining named executive officers, respectively.
Stock options granted in 2020 and 2019 vest over three years at 33% per year, and stock options granted in 2018 vest over four years at 25% per year. All stock options are subject to accelerated vesting upon death, disability, retirement or a change in control) and expire after ten years.
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Change in Pension Value and Nonqualified Deferred Compensation Earnings
In connection with the redesign of the Company's retirement program, effective as of December 31, 2011, all named executive officers other than Messrs. Sengstack and Kenney stopped accruing benefits under the Pension Plan and/or the Pension Restoration Plan. Descriptions of these retirement plans, as in effect before and after December 31, 2011, and the level of participation by the named executive officers, can be found in the 2020 Pension Benefits Table and accompanying narrative included in this Proxy Statement.
2020 Grant of Plan Based Awards Table
The following table sets forth the plan-based grants made during the fiscal year ended December 31, 2020.
Name
Grant Date
Estimated Possible Payouts Under Non-Equity Incentive Plan Awards(1)
Estimated Possible Payouts Under Equity Incentive Plan Awards(2)
All Other Stock Awards: Number of Shares of Stock or Units (#)(3)
All Other Option Awards: Number of Securities Underlying Options (#)
Exercise or Base Price of Option Awards
($/sh)(4)
Grant Date Fair Value of Stock and Option Awards
($)(5)
Threshold ($)
Target ($)
Maximum ($)
Threshold (#)
Target (#)
Maximum (#)
Gregg C. Sengstack
2/20/2020
299,259
906,844
1,813,688
2/20/2020
8,290
16,580
33,160
2/20/2020
16,580
84,453
59.71
3,299,984
John J. Haines
2/20/2020
112,660
341,394
682,788
2/20/2020
2,512
5,024
10,048
2/20/2020
5,024
25,592
59.71
999,969
Donald P. Kenney
2/20/2020
106,111
321,548
643,096
2/20/2020
2,010
4,019
8,038
2/20/2020
4,019
20,473
59.71
799,942
DeLancey W. Davis
2/20/2020
96,480
292,364
584,728
2/20/2020
1,093
2,186
4,372
2/20/2020
2,186
11,132
59.71
435,045
Jonathan M. Grandon
2/20/2020
81,679
247,511
495,022
2/20/2020
1,143
2,286
4,572
2/20/2020
2,286
11,644
59.71
454,990
(1)The amounts in these columns reflect estimated possible payouts for 2020 and were established under the Executive Officer Annual Incentive Bonus Program. The estimated payouts shown in the Table were based on performance in 2020, which has now occurred. Thus, the amounts shown in “threshold”, “target”, and “maximum” columns reflect the range of potential payouts when the performance goals were set in early 2020. Actual amounts paid for 2020 are reflected in the Summary Compensation Table. A description of this program can be found in the “Compensation Discussion and Analysis” section of this Proxy Statement.
(2)The amounts in these columns reflect the estimated possible payouts of shares of common stock that may be issued pursuant to the settlement of performance share units that were granted in 2020. Vesting occurs at the end of the three-year performance period (December 31, 2022), depending on the level of attainment of the performance goals. A pro rata portion is paid at the end of the performance period in the event of the executive's death, disability or retirement, and vesting is accelerated at target level upon a change in control. Dividend equivalents are paid to the extent the performance share units vest. A description of the performance share units can be found in the "Compensation, Discussion, and Analysis" section of this Proxy Statement.
(3)Restricted stock units were granted to Messrs. Sengstack, Haines, Kenney, and Davis because they are retirement eligible or will become retirement eligible within the vesting period, and restricted stock was granted to Mr. Grandon. The awards vest three years from the grant date if they are still employed with the Company on such date. Vesting is accelerated upon a change in control of the Company and a pro rata portion is accelerated upon death, disability or retirement.
(4)The exercise price for grants of stock options is determined using the closing price of the Company’s common stock on the date of grant. The option grants expire after ten years and vest over three years, at 33% per year. Vesting is accelerated upon a change in control of the Company, death, disability or retirement.
(5)The grant date fair value of the target performance share units, restricted stock, restricted stock units and option awards shown in the above table was computed in accordance with FASB Codification Topic 718.
34
2020 Outstanding Equity Awards at Fiscal Year-End Table
The following table sets forth the outstanding equity awards as of December 31, 2020.
Name
Option Awards(1)
Stock Awards
Number of Securities Underlying Unexercised Options (#) Exercisable
Number of Securities Underlying Unexercised Options (#) Unexercisable
Option Exercise price ($/sh)
Option Expiration Date
Number of Shares or Units of Stock That Have Not Vested (#)
Market Value of Shares or Units of Stock That Have Not Vested
($)(7)
Equity Incentive Plan Awards: Number of Unearned Shares, Units, or Other Rights That Have Not Vested (#)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights That Have Not Vested
(1)Each option grant has a ten-year term and vests pro rata over three or four years beginning on the first anniversary of the grant date. Vesting is accelerated upon death, disability, retirement or a change in control of the Company. Exercise prices are determined using the closing price of the Company’s Common Stock on the date of grant.
(2)Of Mr. Sengstack's restricted awards, 16,580 shares vest after three years on February 20, 2023, 16,316 shares vest after three years on February 21, 2022, 20,497 shares vest after four years on February 22, 2022, and 15,349 shares vest after four years on February 24, 2021.
(3)Of Mr. Haines's restricted awards, 5,024 shares vest after three years on February 20, 2023, 4,541 shares vest after three years on February 21, 2022, 5,590 shares vest after four years on February 22, 2022, and 4,870 shares vest after four years on February 23, 2021.
(4)Of Mr. Kenney's restricted awards, 4,019 shares vest after three years on February 20, 2023, 3,399 shares vest after three years on February 21, 2022, 3,727 shares vest after four years on February 22, 2022, and 5,945 shares vest after four years on February 23, 2021.
(5)Of Mr. Davis's restricted awards, 2,186 shares vest after three years on February 20, 2023, 2,311 shares vest after three years on February 21, 2022, 3,086 shares vest after four years on February 22, 2022, and 2,858 shares vest after four years on February 23, 2021.
(6)Of Mr. Grandon's restricted awards, 2,286 shares vest after three years on February 20, 2023, 2,366 shares vest after three years on February 21, 2022, 3,071 shares vest after four years of February 22, 2022, and 2,773 shares vest after four years on February 23, 2021.
(7)The market value of the stock and stock unit awards was determined using the closing price of the Company’s common stock on December 31, 2020 ($69.21 per share).
(8)Of Mr. Sengstack’s target performance share awards, 16,580 will vest at the end of the performance period that ends on December 31, 2022 and 16,316 will vest at the end of the performance period that ends on December 31, 2021.
(9)Of Mr. Haines’s target performance share awards, 5,024 will vest at the end of the performance period that ends on December 31, 2022 and 4,541 will vest at the end of the performance period that ends on December 31, 2021.
35
(10)Of Mr. Kenney's target performance share awards, 4,019 will vest at the end of the performance period that ends on December 31, 2022 and 3,399 will vest at the end of the performance period that ends on December 31, 2021.
(11)Of Mr. Davis's target performance share awards, 2,186 will vest at the end of the performance period that ends on December 31, 2022 and 2,311 will vest at the end of the performance period that ends on December 31, 2021.
(12)Of Mr. Grandon's target performance share awards, 2,286 will vest at the end of the performance period that ends on December 31, 2022 and 2,366 will vest at the end of the performance period that ends on December 31, 2021.
2020 Option Exercises and Stock Vested Table
The following table sets forth the exercised options and vested awards for the fiscal year ended December 31, 2020.
Name
Option Awards
Stock Awards
Number of Shares Acquired on Exercise (#)
Value Realized on Exercise
($)(1)
Number of Shares Acquired on Vesting (#)(2)
Value Realized on Vesting
($)(3)
Gregg C. Sengstack
21,460
756,787
39,459
2,479,418
John J. Haines
20,052
716,442
11,539
719,790
Donald P. Kenney
2,334
96,932
5,923
380,673
DeLancey W. Davis
15,550
249,114
7,090
437,709
Jonathan M. Grandon
—
—
7,053
445,909
(1)Represents the difference between the closing price of the stock on the date of exercise and the exercise price, multiplied by the number of shares covered by the options.
(2)Includes shares based on estimated release of performance share units earned in 2020 as follows: Mr. Sengstack, 20,374; Mr. Haines, 5,556; Mr. Kenney, 3,705; Mr. Davis, 3,067; and Mr. Grandon, 3,053. See the "Compensation Discussion & Analysis" section for further information.
(3)Represents the value realized by multiplying the closing price of the stock on the date of vesting by the number of shares that vested. Includes vesting of restricted stock/units granted in 2016 and performance share awards granted in 2018. See the "Compensation Discussion & Analysis" section for a discussion of this vesting.
Pay Ratio Disclosure
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, the Company is providing the following information about the relationship of the median of the annual total compensation of Company employees and the annual total compensation of Mr. Sengstack:
For 2020, the median of the annual total compensation of all employees of the Company (other than Mr. Sengstack), was $17,649 and the annual total compensation of Mr. Sengstack was $5,953,917. The identified median employee is a production assembly worker employed in the Company’s manufacturing facility in South Africa. The median employee’s base compensation and benefits were converted from South African Rand to United States Dollars using the exchange rate in effect on December 31, 2020.
Based on this information, for 2020 the ratio of the median of the annual total compensation of all employees to the annual total compensation of Mr. Sengstack was 1 to 337. This ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of SEC Regulation S-K.
To determine the median of the annual compensation of all employees, to identify the median employee and to determine the annual total compensation of the median employee and Mr. Sengstack, the Company used the following material assumptions, adjustments, and estimates:
•As of December 31, 2020, the Company’s employee population consisted of approximately 5,116 individuals working at the Company and its wholly-owned subsidiaries. This population consisted of full-time, part-time, and temporary employees.
•As permitted under SEC rules, the employee population was adjusted to exclude 189 non-U.S. employees (or approximately 3.7% of the employee population) working in India. The Company excluded these employees because the complex compensation structure for employees in India, which includes a number of social and economic benefits commonly provided to such employees, is not easily comparable to that of employees in other jurisdictions. Additionally, 505 employees (or approximately 9.9% of the employee population) who were hired during 2020, but
36
who were not employed for a full year, were excluded. Based on the exclusion of these employees, the adjusted employee population was 4,422 employees.
•Each employee’s base salary was determined using fiscal year 2020 payroll records and the median employee was identified from the adjusted employee population based on these records.
In accordance with the SEC rules, the median employee’s annual total compensation was calculated as follows:
$17,649, which represents the amount of such employee’s compensation for fiscal year 2020 that would have been reported in the Summary Compensation Table in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K if the employee was a named executive officer for 2020.
In accordance with the SEC rules, the annual total compensation of Mr. Sengstack is equal to $5,953,917 , which represents the amount reported in the “Total” column of the Summary Compensation Table beginning on page 32.
2020 Pension Benefits Table
The following table sets forth (i) the years of service currently credited to each named executive officer under the Company’s pension plans and (ii) the present value of the accumulated benefit payable under each pension plan to each of the named executive officers upon retirement.
Named Executive Officer
Plan Name(1)
Number of Years of Credited Service #
Present Value of Accumulated Benefit
($)(2)(3)(4)
Payments During Last Fiscal Year ($)
Gregg C. Sengstack
Basic Retirement Portion Cash Balance Portion Pension Restoration Plan
28.0 23.1 32.1
$141,421 $636,481 $8,957,628
$0 $0 $0
John J. Haines
Cash Balance Portion
4.0
$51,449
$0
Donald P. Kenney
Basic Retirement Portion Cash Balance Portion
25.5 20.8
$108,259 $460,208
$0 $0
DeLancey W. Davis
Basic Retirement Portion Cash Balance Portion
6.6 7.0
$25,242 $106,863
$0 $0
Jonathan M. Grandon
N/A
N/A
N/A
N/A
(1)As of December 31, 2011, the Basic Retirement Plan and Cash Balance Pension Plan were merged and renamed the Pension Plan.
(2)As of December 31, 2011, the named executive officers stopped accruing benefits under all plans except for Mr. Sengstack, who continues to accrue benefits under the Basic Retirement portion of the Pension Plan and the Pension Restoration Plan.
(3)The amounts in this column are based on a retirement age of 65 for Messrs. Haines, Kenney, and Davis. For Mr. Sengstack, retirement age is 62 for the Basic Retirement portion of the Pension Plan and the Pension Restoration Plan, and age 65 for the Cash Balance portion of the Pension Plan.
(4)Mr. Grandon is ineligible for the Basic Retirement Portion, Cash Balance Portion, and the Pension Restoration Plan.
Pension Plan
In 2011, the Company implemented a redesign of its retirement program. Its two tax-qualified defined benefit pension plans, the Basic Retirement Plan and the Cash Balance Pension Plan, were merged into a single plan called the Pension Plan. As discussed below, as of December 31, 2011, benefit accruals under the Basic Retirement portion of the Pension Plan ceased for all participants younger than age 50 and benefit accruals under the Cash Balance portion of the Pension Plan ceased for all participants. In addition, benefits under the non-qualified Pension Restoration Plan ceased for all participants other than Mr. Sengstack. Participants will instead receive additional benefits under the Company’s defined contribution plans (see the discussion in the Compensation Discussion and Analysis and in the 2020 Nonqualified Deferred Compensation Table and narrative in this Proxy Statement).
Basic Retirement Plan
The Basic Retirement portion of the Pension Plan covers most U.S. employees of the Company and its affiliates, including the named executive officers, who were hired before February 21, 2006. The Basic Retirement Plan provides each eligible named executive officer with a monthly single life annuity commencing at normal retirement age (age 65) equal to the number of years of credited service times $25. Participants are eligible to receive benefits after completing five years of vesting service. Participants who terminate employment after age 55 with 10 years of vesting service are eligible to receive early retirement benefits that are reduced to reflect commencement prior to age 65. Participants who terminate employment on or
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after age 62 with 25 years of vesting service are eligible to receive early retirement benefits that are unreduced for commencement prior to age 65. Participants with five years of vesting service who terminate employment and are not eligible to receive early retirement benefits are eligible for benefits commencing at age 65. Mr. Sengstack and Mr. Kenney are currently eligible for early retirement benefits. Mr. Haines is not eligible to participate in the Plan because he was hired after February 21, 2006.
The benefit formula calculates the benefit payable in a single life annuity form, which is the normal form of benefit for unmarried participants. The normal form of benefit payment for married participants is a 50% joint and survivor annuity. Participants, with spousal consent, if applicable, can waive the normal form and elect to have benefits paid in various annuity forms, which are the actuarially equivalent of the single life annuity form.
The Basic Retirement Plan was amended in 2011 to provide that participants younger than age 50 as of December 31, 2011 (which includes Mr. Davis) stopped earning benefits as of such date, and participants 50 or older as of December 31, 2011 (which includes Messrs. Sengstack and Kenney) stopped earning benefits on December 31, 2016 (or if earlier, their termination of employment).
Cash Balance Pension Plan
The Cash Balance portion of the Pension Plan is a tax-qualified pension plan that covers most U.S. employees of the Company and its affiliates who are classified as "exempt" and who are not covered by a collective bargaining agreement, which includes each named executive officer. As of December 31, 2011, the Plan was closed to new participants and all participants stopped accruing further benefits. An account is maintained for each participant under the Plan, which consists of (i) an opening account balance equal to the then present value of the participant's accrued benefit, if any, earned as of December 31, 1999 under one of the Company's prior pension plans; (ii) annual contributions made by the Company as of the end of each calendar year through 2011 that ranged from 3% to 12% of the participant's compensation (based on the participant's credited service); (iii) annual transitional credits made by the Company from 2000-2004 equal to 6% of compensation of each participant whose age and years of vesting service as of December 31, 1999 totaled 45 or more; and (iv) until distribution of the account, annual interest credits made by the Company as of the end of each calendar year, based on the 30-year Treasury security rate for the November preceding each such year (subject to a minimum interest rate of 4.5%). Compensation included wages subject to withholding, excluding income recognized in connection with the Company's stock based plans, reimbursements or other expense allowances, fringe benefits, moving expenses, deferred compensation, and welfare benefits (as limited by applicable Internal Revenue Code limits).
Participants are eligible to receive benefits after completing three years of service. They can elect to receive their benefits upon termination of employment or they can defer receipt of benefits until age 65. Any accounts remaining in the Cash Balance Plan will continue to be credited with interest until the account is paid. The normal form of benefit payment for unmarried participants is a single life annuity, and the normal form of benefit payment for married participants is a 50% joint and survivor annuity. Participants, with spousal consent, if applicable, can waive the normal form and elect to have benefits paid in various annuity forms, which are the actuarially equivalent of the normal form, or in a lump sum.
Pension Restoration Plan
The Pension Restoration Plan is an unfunded, non-qualified pension plan that is intended to provide an employee with the portion of his benefits that cannot be paid under the Pension Plan or the Contributory Retirement Plan (the predecessor to the Cash Balance portion of the Pension Plan) due to Internal Revenue Code limitations on the amount of compensation that can be taken into account in determining benefits under, and the amount of benefits that can be paid from, tax-qualified pension plans.
The benefits of Mr. Sengstack are based on the formula in effect under the Contributory Retirement Plan on December 31, 1999, but without regard to the Internal Revenue Code limits. This formula is based on the employee's credited service and final three-year average compensation, with an offset for benefits provided by the Basic Retirement portion of the Pension Plan, the Cash Balance portion of the Pension Plan and Social Security. There is a minimum benefit whereby if the monthly benefit amount paid to the employee under the Pension Plan, Pension Restoration Plan and Social Security is less than a designated percentage of the employee's three-year final average compensation, the difference is paid from the Pension Restoration Plan. The current designated percentage (which is based on years of service at retirement) for Mr. Sengstack is 50% (assuming retirement at age 62).
The benefits of Messrs. Haines and Davis were determined by applying the formula in the Cash Balance portion of the Pension Plan for all eligible compensation (including compensation in excess of the Code limits), offset for the benefits
38
provided by the Cash Balance portion of the Pension Plan. All participants other than Mr. Sengstack stopped earning benefits as of December 31, 2011 and instead participate in the Supplemental Retirement and Deferred Compensation Plan, under which they receive additional Company contributions. The value of their frozen benefit under the Pension Restoration Plan was transferred to the Supplemental Retirement and Deferred Compensation Plan as of January 1, 2012.
The benefit accrued under the Pension Restoration Plan is paid upon termination of employment as follows: (i) if the lump sum value is less than $1,000,000, it will be paid in a lump sum within 90 days following termination; (ii) if the lump sum value is more than $1,000,000 but less than $2,000,000, one-half of the benefit will be paid within 90 days following termination, the remaining benefit will be paid as a single life annuity over the first 12 months following termination, and the benefit remaining at the end of the 12-month period will be paid in a lump sum on the first anniversary of termination; (iii) if the lump sum value is $2,000,000 or more, one-third will be paid within 90 days following termination, the remaining benefit will be paid as a single life annuity over the first 12 months following termination, one-half of the benefit remaining at the end of the 12-month period will be paid in a lump sum on the first anniversary of termination, the remaining benefit will be paid as a single life annuity over the second 12-month period following termination and the benefit remaining at the end of the second 12-month period will be paid in a lump sum on the second anniversary of termination. If the participant is deemed to be a “key employee” as defined in Section 409A of the Internal Revenue Code, any distribution that is payable due to termination of employment will be delayed for six months following the date of such termination. Notwithstanding the foregoing, upon a change in control of the Company, all participants become fully vested in their benefits, all benefits will be paid in a lump sum within 60 days after the change in control and active participants will have three years of additional age and service credits in determining benefits.
Pension Plan Assumptions
The assumptions used in calculating the present value of the accumulated pension benefits are set forth in Note 7 of the audited financial statements contained in the Company's Annual Report to Shareholders for the year ended December 31, 2020. The Company does not grant additional years of credited service under its pension plans.
2020 Nonqualified Deferred Compensation
The following table sets forth (i) the contributions made by each named executive officer and the Company in fiscal 2020, (ii) the earnings on the account balances as of December 31, 2020 and (iii) the account balances as of December 31, 2020 under the Company’s Supplemental Retirement and Deferred Compensation Plan.
Name
Executive Contribution in Last Fiscal Year
($)(1)
Company Contribution in Last Fiscal Year ($)(2)
Aggregate
Earnings in Last Fiscal Year
($)(3)
Aggregate Withdrawals/ Distributions ($)
Aggregate Balance at Last Fiscal
Year End
($)(4)(5)
Gregg C. Sengstack
—
—
125,585
—
798,545
John J. Haines
—
45,785
31,689
—
495,323
Donald P. Kenney
—
54,793
10,610
—
410,514
DeLancey W. Davis
—
36,350
12,173
—
403,496
Jonathan M. Grandon
—
17,524
8,223
—
74,303
(1)This amount is reported in the "Salary" column of the Summary Compensation table in this Proxy Statement.
(2)The Company contributions are reflected in the "All Other Compensation" column of the Summary Compensation table of this Proxy Statement.
(3)The earnings reported in this column are not included in the Summary Compensation table.
(4)The aggregate balance reflects amounts previously reported in the Summary Compensation table except for the following earnings: Mr. Sengstack: $450,716; Mr. Haines: $120,338; Mr Kenney: $32,106; Mr. Davis: $51,348; and Mr. Grandon: $13,036.
(5)For Messrs. Haines and Davis, the aggregate balances also include the cash balance accounts under the Pension Restoration Plan that were transferred to this Plan as of January 1, 2012: Mr. Haines: $18,714; and Mr. Davis: $34,477.
The Supplemental Retirement and Deferred Compensation Plan permits executive officers of the Company to elect each year to defer up to 90% of their bonus awards and up to 50% of their salary. Deferred amounts are credited to a notional account maintained on behalf of the participant, which is adjusted for earnings and losses based on investment funds made available by the Management Organization and Compensation Committee.
Beginning in 2012, the Company provides two types of contributions to participants who do not continue to accrue benefits under the Pension Restoration Plan. The Company provides the portion of the service-based contribution that could not be made under the Retirement Program due to IRS limitations (the service-based contribution ranges from 3% to 9% of a
39
participant’s compensation depending on years of service). The Company also provides a supplemental contribution of 2% to 4% of a participant’s total compensation depending on years of service. In addition, participants who stopped accruing benefits under the Pension Restoration Plan had their benefit transferred to the Plan as of January 1, 2012. A participant’s deferral account, service contribution account and transferred Pension Restoration Plan account will be credited with earnings and losses based on the investment funds made available by the Management Organization and Compensation Committee. Earnings on the supplemental contribution account will follow the methodology used in the now-frozen Cash Balance portion of the Pension Plan, which credits earnings based on the 30-year Treasury rate, but not less than 4.5%.
A participant’s accounts under the Plan will generally be distributed to him as soon as practicable after the first of the month following termination of employment (provided that distribution to a “key employee” as defined in Section 409A of the Internal Revenue Code will be deferred for six months). The Named Executive Officers did not contribute to the plan in 2020, although Messrs. Haines, Kenney, Davis, and Grandon received Company contributions.
Potential Payments upon Termination or Change in Control of the Company
The Company provides benefits to certain of the named executive officers upon certain terminations of employment from the Company. These benefits are in addition to the benefits to which the executives would be entitled upon a termination of employment generally (i.e., vested retirement benefits accrued as of the date of termination, stock-based awards that are vested as of the date of termination and the right to elect continued health coverage pursuant to COBRA). The incremental benefits payable to the executives are described as follows:
Employment Agreements
The employment agreements of Messrs. Sengstack and Haines have three-year terms that automatically renew for an additional year unless either party provides advance written notice of an election not to extend the term. The agreements provide the following severance benefits under the described termination scenarios:
•Termination – Nonrenewal of Employment Agreement. If the executive terminates his employment at any time during the term of the agreement after receipt of notice from the Company of its decision to not extend the term, he is entitled to (i) an immediate payment equal to a pro rata portion of the target bonus paid for the year of termination (or, in the case of Mr. Sengstack, later payment of a pro rata portion of the bonus payable for the year of termination), (ii) an immediate payment equal to 12 months of his then current salary and one times the target bonus for the year of termination, (iii) immediate vesting of all outstanding stock options, immediate pro rata vesting of time-based restricted stock and units, and pro rata vesting of performance-based restricted stock and units at the end of the performance period based on actual performance, (iv) continued participation in the Company’s health and welfare plans for 12 months, and (v) a lump sum payment equal to the benefits that would have accrued under the Company's retirement plans for 12 months.
•Termination – Prior to a Change in Control. If a Change in Control of the Company (as defined in the agreements) has not occurred and the executive’s employment is terminated by the Company for other than “Good Cause” or the executive terminates his employment for “Good Reason,” he is entitled to (i) an immediate payment equal to a pro rata portion of the target bonus paid for the year of termination (or, in the case of Mr. Sengstack, later payment of pro rata portion of the bonus payable for the year of termination), (ii) an immediate payment equal to 18 months of his then current salary and one and one-half times the target bonus for the year of termination (12 months and one times the target bonus for Mr. Haines), (iii) immediate vesting of all outstanding stock options, immediate pro rata vesting of time-based restricted stock and units and pro rata vesting of performance-based restricted stock and units at the end of the performance period based on actual performance, (iv) continued participation in the Company’s health and welfare plans for the applicable severance period, and (v) a lump sum payment equal to the benefits that would have been earned under the Company's retirement plans during the applicable severance period.
•Termination – Following a Change in Control. If following a Change in Control of the Company (as defined in the agreements) the executive’s employment is terminated within two years of the Change in Control by the Company for other than “Good Cause” or by the executive for “Good Reason”, he is entitled to an immediate payment equal to (i) a pro rata portion of the target bonus paid for the year of termination, (ii) an immediate payment equal to 36 months of his then current salary and three times the target bonus for the year of termination (24 months and two times the target bonus for Mr. Haines), (iii) immediate vesting and cash out of all outstanding stock options and immediate vesting of all other restricted stock and units (with performance-based awards vesting at target level), (iv) continued participation in the Company’s health and welfare plans for the applicable
40
severance period, and (v) a lump sum payment equal to the benefits that would have accrued under the Company's retirement plans (other than the Pension Restoration Plan) during the applicable service period. With respect to any excise tax, each executive can elect to either (i) receive the full amount of severance benefits and be responsible for paying any excise tax or (ii) receive severance benefits that are reduced to the maximum amount that can be paid without triggering the excise tax.
The employment agreements contain a restrictive covenant that prohibits the executives from competing with the Company and soliciting the Company's customers and employees for 24 months following termination. The agreements provide that an amount of severance equal to one times salary and one times the prior year's bonus serves as consideration for this restrictive covenant as well as the separate confidentiality and non-compete agreement each executive has executed.
For purposes of the employment agreements:
•“Good Cause” means the executive’s death or disability, his fraud, misappropriation of, or intentional material damage to the property or business of the Company, his commission of a felony likely to result in material harm or injury to the Company, or his willful and continued material failure to perform his obligations.
•“Good Reason” exists if (a) there is a change in the executive’s title or a significant change in the nature or the scope of his authority, (b) there is a reduction in the executive’s salary or retirement benefits or a material reduction in the executive’s compensation and benefits in the aggregate, (c) the Company changes the principal location in which the executive is required to perform services to more than fifty miles away, (d) the executive reasonably determines that, as a result of a change in circumstances significantly affecting his position, he is unable to exercise the authority or duties attached to his positions, or (e) any purchaser of substantially all of the assets of the Company declines to assume the obligations under the employment agreement.
Employment Security Agreements
Certain executives, including Messrs. Kenny, Davis, and Grandon, are parties to employment security agreements (ESA) with the Company that provide benefits upon a Change in Control (as defined in the ESA). Each ESA provides that if within two years after a Change in Control the Company terminates the executive’s employment for any reason other than “Good Cause”, or the executive terminates his employment with the Company for “Good Reason” (as defined in the ESA), the executive is entitled to the following:
•a lump sum payment equal to the sum of two times the executive’s base salary, a pro-rata portion of the executive’s target bonus for the current year (based on the termination date), and two times the executive’s target bonus for the current year;
•a lump sum payment equal to the increase in benefits under the Company’s tax-qualified and supplemental retirement plans that results from crediting the executive with additional service for 24 months;
•immediate vesting of all stock-based awards and deemed satisfaction of all performance-based awards at target level;
•continued coverage under the Company’s health and welfare plans for 24 months following termination;
•12 months of executive outplacement services (not to exceed $50,000) with a professional outplacement firm selected by the Company; and
•with respect to any excise tax, each executive can elect to either receive the full amount of severance benefits and be responsible for paying any excise tax, or receive severance benefits that are reduced to the maximum amount that can be paid without triggering the excise tax.
For purposes of the ESAs:
•“Good Cause” means the executive’s intentional and material misappropriation of, or damage to, the property or business of the Company, his conviction of a criminal violation involving fraud or dishonesty or of a felony that causes material harm or injury to the Company, or his willful and continuous failure to perform his obligations under the ESA that is not cured.
•“Good Reason” means a material reduction in the executive’s salary or retirement benefits or a material reduction in his compensation and benefits in the aggregate, or any purchaser of substantially all of the assets of the Company declines to assume all of the Company’s obligations under the ESA.
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The ESAs contain a restrictive covenant that prohibits the executive from soliciting employees of the Company for 18 months following termination. The agreements provide that an amount of severance equal to one times salary and one times the prior year’s bonus serves as consideration for this restrictive covenant as well as the separate confidentiality and non-compete agreement each executive has executed.
Pension Restoration Plan
The Pension Restoration Plan, in which Mr. Sengstack participates, provides that upon a Change in Control of the Company (as defined in the Plan), (i) all participants will become 100% vested in their benefits, which will be paid in an immediate lump sum within 60 days, and (ii) active participants will have three years of additional credit for age and service in determining their benefits under the Plan.
Stock Plan
Awards under the Company's stock plans fully vest, and performance measures are deemed met at the target level, upon a Change in Control (as defined in the applicable stock plan) of the Company. Stock Option Agreements provide for full vesting upon a termination of employment due to death, disability or retirement. Restricted Stock Agreements and the Restricted Stock Unit Agreements provide for pro-rata vesting upon termination of employment due to death, disability or retirement. Performance Share Unit Agreements provide for pro-rata vesting at the end of the performance period upon termination due to death, disability or retirement.
The tables set forth below quantify the additional benefits described above that would be paid to each named executive officer pursuant to the arrangements described above under the following termination scenarios: assuming a non-renewal of the employment agreement, termination of employment and/or change in control occurred on December 31, 2020.
Termination – Nonrenewal of Employment Agreement
Name
Salary
($)(1)
Non-Equity Plan Compensation
($)(2)
Accelerated Vesting of Options
($)(3)(6)
Accelerated Vesting of Restricted Stock/Units/Performance Share Units
($)(4)(6)
Additional Retirement Plan Credits
($)
Continued Benefit Plan Coverage
($)
Gregg C. Sengstack
815,000
1,823,217
3,382,097
4,201,255
4,040,946
17,601
John J. Haines
450,000
682,788
975,807
1,221,279
119,296
17,601
Donald P. Kenney
—
—
—
—
—
—
DeLancey W. Davis
—
—
—
—
—
—
Jonathan M. Grandon
—
—
—
—
—
—
Termination – No Change in Control
Name
Salary
($)(1)
Non-Equity Plan Compensation
($)(2)
Accelerated Vesting of Options
($)(3)(6)
Accelerated Vesting of Restricted Stock/Units/Performance Share Units
($)(4)(6)
Additional Retirement Plan Credits
($)
Continued Benefit Plan Coverage
($)
Gregg C. Sengstack
1,222,500
2,276,639
3,382,097
4,201,255
4,061,035
26,402
John J. Haines
450,000
682,788
975,807
1,221,279
119,296
17,601
Donald P. Kenney
—
—
—
—
—
—
DeLancey W. Davis
—
—
—
—
—
—
Jonathan M. Grandon
—
—
—
—
—
—
42
Termination – Change in Control
Name
Salary
($)(1)
Non-Equity Plan Compensation
($)(2)
Accelerated Vesting of Options
($)(3)
Accelerated Vesting of Restricted Stock/Units/Performance Share Units
($)(4)
Additional Retirement Plan Credits ($)
Continued Benefit Plan Coverage
($)
Outplacement Services
($)
Forfeiture
($)(5)
Gregg C. Sengstack
2,445,000
3,627,376
3,382,097
7,034,366
4,687,722
52,804
—
—
John J. Haines
900,000
1,024,182
975,807
2,047,924
245,942
35,202
—
—
Donald P. Kenney
860,000
964,644
658,170
1,696,199
308,958
30,205
50,000
(63,563)
DeLancey W. Davis
770,000
877,089
506,866
1,033,859
218,063
31,174
50,000
—
Jonathan M. Grandon
725,000
747,653
510,443
1,048,393
114,536
35,202
50,000
—
(1)Based on salary rate effective June 1, 2020 for Mr. Kenney. All other named executives' salary rates were effective June 1, 2019 as no increases were implemented in 2020 due to COVID-19 as disclosed in the "Compensation Discussion and Analysis" section of this Proxy Statement.
(2)Reflects target annual bonus based on salary rates effective during 2020 and actual bonus payments to Mr. Sengstack in the case of termination due to nonrenewal of agreement or prior to a change in control.
(3)Based on the difference between the exercise price of the unvested stock options multiplied by $69.21, the closing price of the stock on December 31, 2020.
(4)Based on the unvested awards (the target number in the case of performance-based awards) multiplied by the $69.21 closing price of the stock on December 31, 2020.
(5)The employment agreements give the executive the choice of receiving full benefits or having them reduced so as not to trigger the excise tax. The severance benefits of the named executive officers other than Mr. Sengstack; Mr. Kenney; and Mr. Grandon was below the amount that would trigger the excise tax. Messrs. Sengstack and Grandon's benefits exceeded the triggering amount and receipt of full benefits with payment of the excise tax resulted in a better after-tax situation than forfeiture of benefits in excess of the triggering amount. However, under the "net-better" provision Mr. Kenney would prefer to forfeit payments to avoid the excise tax.
(6)Stock Plan Agreements provide for full vesting of Options and pro-rata vesting of Restricted Stock Units upon termination due to death, disability, or retirement. As of December 31, 2020 Messrs. Sengstack, Haines, Kenney, and Davis are retirement eligible.
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DIRECTOR COMPENSATION
Compensation for non-employee directors is determined by the Board of Directors, upon recommendation of the Corporate Governance Committee. Management makes recommendations to the Corporate Governance Committee with respect to non-employee director compensation. The Management Organization and Compensation Committee, pursuant to the Company’s Stock Plan, makes the actual stock-based award. Director Compensation is determined by compiling the compensation data for each of the Peer Group companies listed in the Compensation Discussion and Analysis and comparing such compensation to the current pay for the Company’s directors.
The following table sets forth the compensation received by the Company’s non-employee directors for the year ended December 31, 2020.
Name
Fees Earned or Paid in Cash
($)(1)
Stock Awards
($)(2)
Option Awards
($)(3)
All Other Compensation
($)
Total
($)
David T. Brown
109,500
120,000
—
—
229,500
Victor D. Grizzle
120,625
168,000
—
—
288,625
Renee J. Peterson
97,500
120,000
—
—
217,500
Jennifer L. Sherman
96,000
120,000
—
—
216,000
David M. Wathen
96,000
120,000
—
—
216,000
Thomas R. VerHage
87,500
120,000
—
—
207,500
(1)Fees deferred into the Non-Employee Directors’ Deferred Compensation Plan were: Ms. Peterson $97,500, Ms. Sherman $96,000, and Mr. VerHage $87,500.
(2)The amounts in this column are the grant date fair values of the stock awards granted to the non-employee directors, computed in accordance with FASB Codification Topic 718. Each director received an award of 2,522 shares, and Messrs. Brown, Grizzle, and VerHage and Mses. Peterson and Sherman elected to defer their stock awards into the Non-Employee Directors’ Deferred Compensation Plan. Mr. Grizzle also received an award of 806 shares when he joined the board in January 2020 and elected to defer his stock award into the Non-Employee Directors' Deferred Compensation Plan.
(3)No options were granted to non-employee directors in 2020 and no non-employee director holds any outstanding options.
Retainer and Fees
Non-employee directors are paid an annual retainer of $75,000. The Audit Committee Chairperson receives an additional fee of $22,500 and Audit Committee members receive an additional fee of $12,500. The Governance Committee Chairperson and Compensation Committee Chairperson each receive an additional fee of $15,000, and members of each committee receive an additional fee of $6,000. The Lead Independent Director receives an additional fee of $22,500. Directors who are employees of the Company receive no additional compensation for serving on the Board or Board committees during their employment.
Stock Awards
On May 7, 2020, each non-employee director received an award of 2,522 shares of the Company’s common stock, which vested immediately upon grant and had a market value of $120,000 on the date of grant.
Deferred Compensation
Non-employee directors may participate in the Non-Employee Directors’ Deferred Compensation Plan (the “Deferred Compensation Plan”). Under the Deferred Compensation Plan, each non-employee director may elect to defer, for each calendar year, all or a portion of their annual retainer, fees or stock award. The non-employee director may elect to receive such deferred compensation in a lump sum payment or in equal monthly or annual installments beginning on a date of their choosing, provided such date is at least one year after the deferral election is made. At the time the director makes the deferral election, they must elect to have the deferred retainer and fees either (i) credited with interest on a monthly basis at the rate in effect for the Wells Fargo Stable Return fund or (ii) converted into stock units, with credits equal to the cash that would have
44
been paid had the units been actual shares of common stock owned by the director. Deferred stock awards will also be converted into stock units and credited with dividends.
Stock Ownership Guidelines
The Company's stock ownership guidelines for the non-employee directors require them to maintain direct ownership in the Company’s common stock with a value equal to five times their annual retainer. An individual has five years to comply with these guidelines. All shares held directly or beneficially, including stock awards, shares acquired upon exercise of stock options and stock units credited under the Non-Employee Directors’ Compensation Plan, count toward these guidelines. Stock options do not count toward these guidelines. All non-employee directors either meet or exceed these guidelines.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER
EQUITY COMPENSATION PLANS
The following table sets forth information about the Company’s equity compensation plans as of March 1, 2021.
Plan Category
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants & Rights
Weighted-Average Exercise Price of Outstanding Options, Warrants & Rights ($)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (b))
Equity Compensation Plans Approved by Security Holders(1)
1,361,313
45.95
1,018,901(2)
Equity Compensation Plans Not Approved by Security Holders(3)
279,718
n/a
178,542
(1)This Plan category includes the following plans: Franklin Electric 2012 Stock Plan (30,326 shares remain available for issuance) and Franklin Electric 2017 Stock Plan (988,575 shares remain available for issuance). As of March 1, 2021 (i) outstanding stock options had a weighted average exercise price of $45.95 and a weighted average remaining term of 6.12 years and (ii) there were 381,312 granted but unvested restricted stock awards/units.
(2)Amount of shares remaining available for future issuance assumes a 100% target payout for outstanding performance-based share units. Pursuant to the terms of the performance-based share units, actual payout can range from 0% to 200%.
(3)This Plan category consists of the Non-Employee Directors’ Deferred Compensation Plan, adopted in 2000 and described above under the caption Director Compensation. The information included in this column represents shares underlying stock units, payable on a one-for-one basis, credited to the directors’ respective stock unit accounts as of March 1, 2021. Non-employee directors may elect to receive the distribution of stock units in cash or in shares of the Company’s common stock.
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AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors, which is composed solely of independent directors, is responsible, under guidelines established in the Audit Committee Charter (a copy of which is available on the Company's website at www.franklin-electric.com under “Governance”) for overseeing the risk management of the Company, accounting and financial reporting processes of the Company and the audits of the financial statements by reviewing: (i) the quality and integrity of the consolidated financial statements prepared by management; (ii) the performance of the internal audit function; and (iii) the qualifications, independence and performance of the Company's independent registered public accounting firm.
In accordance with SEC rules the Audit Committee of the Company states that:
•The Audit Committee has reviewed and discussed with management and Deloitte & Touche LLP, the Company's independent registered public accounting firm, the Company's audited financial statements for the fiscal year ended December 31, 2020.
•The Audit Committee discussed with Deloitte & Touche LLP, the Company's independent registered public accounting firm, the matters required to be discussed by Auditing Standard No. 16, Communications with Audit Committees, as adopted by the PCAOB.
•The Audit Committee has received the written disclosures and the letter from Deloitte & Touche LLP required by the applicable independence rules of the PCAOB, and has discussed with Deloitte & Touche LLP the independent registered public accounting firm's independence.
Based upon the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for filing with the SEC.
This report is submitted on behalf of all of the members of the Audit Committee:
Renee J. Peterson (Chairperson)
Victor D. Grizzle
Thomas R. VerHage
46
PROPOSAL 2: RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP
AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FOR THE 2021 FISCAL YEAR
The Audit Committee has appointed the firm of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the 2021 fiscal year. Although shareholder ratification is not legally required, the Audit Committee believes it advisable to submit its decision to the shareholders. If the shareholders fail to ratify Deloitte & Touche LLP as the Company’s independent registered public accounting firm, the Audit Committee will reassess its appointment. Deloitte & Touche LLP has acted as independent auditors for the Company since 1988.
Representatives of Deloitte & Touche LLP are expected to be present at the Annual Meeting with the opportunity to make a statement if they desire to do so, and to be available to respond to questions relating to their examination of the Company's financial statements.
The affirmative vote of the holders of a majority of the votes cast at the Annual Meeting is required to approve the ratification of the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the 2021 fiscal year.
Audit Fees
The aggregate fees for professional services rendered by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, “Deloitte”) for the audit of the Company’s annual financial statements and the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q were $2,231,545 and $2,290,957, respectively, for the fiscal years ended December 31, 2020 and December 31, 2019.
Audit-Related Fees
The fees for professional services rendered by Deloitte for certain other attestation services were $2,217 and $7,444, respectively, for the fiscal years ended December 31, 2020 and December 31, 2019.
Tax Fees
The fees for tax services rendered by Deloitte were $19,925 and $21,591, respectively, for the fiscal years ended December 31, 2020 and December 31, 2019.
Audit Committee Pre-Approval Policy
The Audit Committee has adopted a Pre-Approval Policy for Audit, Audit-Related, and Non-Audit Services. The Audit Committee has delegated to the Audit Committee Chairperson the authority to pre-approve services not prohibited by law up to a maximum of $10,000 individually or $50,000 in the aggregate, provided that the Audit Committee Chairperson shall report any decisions to pre-approve services to the full Audit Committee at its next meeting. For the fiscal year ended December 31, 2020, the company did not pay any fees for services pursuant to the exceptions to the pre-approval requirements set forth in 17 CFR 210.2-01 (c)(7)(i)(C).
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE 2021 FISCAL YEAR.
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PROPOSAL 3: ADVISORY VOTE ON EXECUTIVE COMPENSATION
Pursuant to Section 14A of the Exchange Act, the Company is required to submit to shareholders a resolution subject to an advisory vote to approve the compensation of the Company’s named executive officers. At the 2020 Annual Meeting of Shareholders, a majority of the Shareholders advised that the Board conduct the vote annually, and the Board so decided. The next such vote will occur at the 2021 Annual Meeting of Shareholders.
The Company’s goal for its executive compensation program is to attract, motivate and retain a talented and creative team of executives who will provide leadership for the Company’s success. The Company seeks to accomplish this goal in a way that rewards performance and is aligned with its shareholders’ long-term interests. The Company believes that its executive compensation program, which emphasizes a performance-based cash incentive and long-term equity awards, satisfies this goal and is strongly aligned with the interests of its shareholders.
The Compensation Discussion and Analysis, beginning on page 17 of this Proxy Statement, describes the Company’s executive compensation program and the decisions made by the Management Organization and Compensation Committee in 2020 in more detail. The Company believes the compensation program for the named executive officers is instrumental in helping the Company achieve its strong financial performance.
The Company requests shareholder approval of the following resolution:
RESOLVED, that the compensation paid to the Company’s named executive officers as disclosed pursuant to Item 402 of Regulation S-K including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED.
As an advisory vote, this proposal is not binding upon the Company. However, the Management Organization and Compensation Committee, which is responsible for designing and administering the Company’s executive compensation program, will carefully consider the outcome of the vote when making future compensation decisions for named executive officers.
Vote Required for Approval
Approval of Proposal No. 3 requires the affirmative vote of a majority of the shares present or represented by proxy and voting at the Annual Meeting on this proposal.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE EXECUTIVE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS, AS DISCLOSED IN THIS PROXY STATEMENT.
48
SHAREHOLDER PROPOSALS
November 19, 2021 is the date by which proposals of shareholders intended to be presented at the next Annual Meeting must be received by the Company to be considered for the inclusion in the Company's proxy statement for the 2021 Annual Meeting. Also, other proposals intended to be presented at the next Annual Meeting but not included in the Company’s proxy statement must be received by the Company no later than February 7, 2022 to be considered for presentation at that meeting. Such shareholder’s notice shall set forth: (A) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the Company’s books, and of such beneficial owner and (ii) the class and number of shares of the Company which are owned beneficially and of record by such shareholder and such beneficial owner.
ANNUAL REPORT ON FORM 10-K
The Company will provide a copy of its Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 2020, including the exhibits thereto, free of charge to any shareholder requesting a copy in writing. Inquiries should be directed to: Corporate Secretary, Franklin Electric Co., Inc., 9255 Coverdale Road, Fort Wayne, Indiana 46809. The report, which is also the Company’s Annual Report to Shareholders, may also be accessed through the investor relations menu on the Company’s website, www.franklin-electric.com.
OTHER BUSINESS
Management has no knowledge of any other matters to be presented for action by the shareholders at the 2020 Annual Meeting. The enclosed proxy gives discretionary authority to the persons designated as proxies therein to vote on any additional matters that should properly and lawfully be presented.
By order of the Board of Directors
Dated: March 19, 2021
Jonathan M. Grandon
Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary
