Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
Schedule 14A Information
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant ý
Filed by a Party other than the Registrant ¨
Check the appropriate box:
|
| | | | |
¨ | | Preliminary Proxy Statement |
¨ | | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
ý | | Definitive Proxy Statement |
¨ | | Definitive Additional Materials |
¨ | | Soliciting Material Pursuant to §240.14a-12 |
Choice Hotels International, Inc. |
(Name of Registrant as Specified in Its Charter) |
|
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant) |
Payment of Filing Fee (Check the appropriate box):
|
| | | | | |
ý | No fee required. |
o | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
| | 1) | Title of each class of securities to which transaction applies: |
| | |
|
| | 2) | Aggregate number of securities to which transaction applies: |
| | |
|
| | 3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
| | |
|
| | 4) | Proposed maximum aggregate value of transaction: |
| | |
|
| | 5) | Total fee paid: |
o | Fee paid previously with preliminary materials. |
o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. |
| | 1) | Amount previously paid: |
| | |
|
| | 2) | Form, Schedule or Registration Statement No.: |
| | |
|
| | 3) | Filing Party: |
| | |
|
| | 4) | Date Filed: |
CHOICE HOTELS INTERNATIONAL, INC.
1 CHOICE HOTELS CIRCLE, SUITE 400
ROCKVILLE, MARYLAND 20850
NOTICE OF ANNUAL MEETING
TO BE HELD APRIL 19, 2019
To the shareholders of
CHOICE HOTELS INTERNATIONAL, INC.
You are cordially invited to attend the 2019 Annual Meeting of Shareholders (the "Annual Meeting") of Choice Hotels International, Inc., a Delaware corporation (the “Company”), to be held on April 19, 2019, at 9:00 a.m., Eastern Time at the Company's headquarters at 1 Choice Hotels Circle, Suite 400, Rockville, Maryland 20850, for the following purposes:
|
| |
1 | To elect the ten director nominees listed in the attached proxy statement to hold office for a term of one year ending at the 2020 Annual Meeting of Shareholders or until their successors are elected and qualified; |
2 | To hold an advisory vote to approve executive compensation; |
3 | To ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2019; and |
4 | To transact other business properly coming before the Annual Meeting. |
Shareholders who owned shares of the Company's common stock ("Common Stock") as of the close of business on the record date of February 21, 2019, are entitled to notice of, and to vote at, the Annual Meeting or any adjournment(s) or postponement(s) thereof. In order to have your shares represented at the meeting, you can vote your shares of Common Stock through any one of the following methods: (i) properly execute and return the enclosed proxy card; (ii) vote online; or (iii) vote by telephone.
A list of the Company’s shareholders will be available for inspection at the Annual Meeting and at the office of the Company located at 1 Choice Hotels Circle, Suite 400, Rockville, Maryland 20850, at least 10 days prior to the Annual Meeting.
|
| |
| By Order of the Board of Directors |
| |
| CHOICE HOTELS INTERNATIONAL, INC. |
| |
| Simone Wu Senior Vice President, General Counsel, Corporate Secretary & External Affairs
|
March 25, 2019
Rockville, Maryland
PLEASE READ THIS ENTIRE PROXY STATEMENT CAREFULLY AND SUBMIT YOUR
PROXY BY COMPLETING AND MAILING THE ENCLOSED
PROXY CARD OR PROVIDE YOUR VOTING INSTRUCTIONS BY TELEPHONE OR ONLINE.
CHOICE HOTELS INTERNATIONAL, INC.
1 CHOICE HOTELS CIRCLE, SUITE 400
ROCKVILLE, MARYLAND 20850
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
April 19, 2019
GENERAL INFORMATION
The Board of Directors (the “Board”) is soliciting your proxy for the 2019 Annual Meeting of Shareholders (the “Annual Meeting”). As a shareholder of Choice Hotels International, Inc., you have a right to vote on certain matters affecting the Company. This proxy statement discusses the proposals on which you are being asked to vote this year. Please read it carefully because it contains important information for you to consider when deciding how to vote. Your vote is important.
In this proxy statement, we refer to Choice Hotels International, Inc., as “Choice,” “Choice Hotels” or the “Company.”
The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 is being mailed with this proxy statement. The Annual Report on Form 10-K is not part of the proxy solicitation material.
The Board is sending proxy materials to you and all other shareholders on or about March 25, 2019. The Board is asking for you to vote your shares by completing and returning the proxy card, voting online or voting by telephone.
Shareholders who owned shares of the Company's common stock ("Common Stock") as of the close of business on February 21, 2019 are entitled to notice of, and to vote at, the Annual Meeting or any adjournment(s) or postponement(s) thereof. At the close of business on February 21, 2019, there were 55,653,557 outstanding shares of Common Stock.
Driving Directions to Choice’s Corporate Headquarters in Rockville, Maryland
GPS
For GPS driving directions, please use 1 Choice Hotels Circle, Suite 400, Rockville, Maryland 20850. For older GPS systems, please use 200 East Middle Lane, Rockville, Maryland, 20850, as our 1 Choice Hotels Circle, Suite 400, Rockville, Maryland 20850 address is not updated in all navigation systems. Choice is located on the corner of East Middle Lane and Hungerford Drive in Rockville, Maryland.
From Washington, DC and points south
Take the George Washington Memorial Parkway north to I-495 ramp towards Maryland. Continue on the I-270-Spur north toward Rockville/Frederick. Take the MD-189 exit 5 to Falls Road North/Rockville/Town Center. Keep right at the fork. This becomes Maryland Avenue. Turn right onto East Middle Lane. Choice is located on the corner of East Middle Lane and Hungerford Drive.
From Frederick, Maryland and points north
Take I-270 South towards Rockville. Bear right at I-270 Local south and head towards Shady Grove Road/Local Lanes. Take the MD-28 west exit 6-A toward Rockville Town Center. Turn left on West Montgomery Ave. Continue onto West Jefferson St. Turn Left on Maryland Avenue. Turn Right onto East Middle Lane. Choice is located on the corner of East Middle Lane and Hungerford Drive.
TABLE OF CONTENTS
PROXY SUMMARY
This summary highlights information contained elsewhere in this proxy statement. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting. For more complete information regarding the Company’s 2018 performance, please review the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
2019 Annual Meeting of Shareholders |
| |
Date and Time: | April 19, 2019, 9:00 a.m. Eastern Time |
Location: | 1 Choice Hotels Circle, Rockville, Maryland 20850 |
Record Date: | February 21, 2019 |
Voting: | Shareholders as of the record date are entitled to vote by internet at www.envisionreports.com/chh; by telephone at 1-800-652-8683; by completing and returning their proxy card or voting instruction card; or in person at the Annual Meeting. If you hold your stock in street name, please see "Questions and Answers" for more information about voting. |
Voting Matters and Board Recommendations |
| | |
| | Board Recommendation |
Proposal 1 | Election of Directors | FOR each nominee |
Proposal 2 | Advisory Approval of the Compensation of the Company's Named Executive Officers | FOR |
Proposal 3 | Ratification of Ernst & Young LLP as the Company's Independent Registered Public Accounting Firm | FOR |
Governance Highlights
|
|
The Company is committed to maintaining good corporate governance as a critical component of our success in driving sustained shareholder value. With a focus on serving the interests of shareholders, the Board collaborates with the Company's senior management and external advisors to remain abreast of and evaluate corporate governance trends and best practices. |
|
| |
þ Annual election of directors by majority vote | þ Independent Board committees - The Compensation and Management Development Committee, Audit Committee and Corporate Governance and Nominating Committee are made up entirely of independent directors
|
þ Separate positions for Chairman of the Board and CEO | þ Annual report of succession planning and management development by CEO
|
þ The independent directors of the Board meet regularly in executive session (four independent director executive sessions were held in 2018) | þ Annual assessment of Board and committee effectiveness by the Corporate Governance and Nominating Committee
|
þ Lead independent director - In addition to chairing the executive sessions, the lead independent director manages the Board’s review of the CEO’s performance, coordinates activities of the independent directors and performs any other duties assigned by the Board
| þ Hedging policy - The Company has a comprehensive insider trading policy and prohibits hedging by any Associates (employees, directors, contractor or consultants), other than Bainum family directors in relation to certain indirectly held shares |
þ Stock ownership and holding requirements - Directors and executive officers have robust stock ownership and holding requirements | þ Pledging policy - The Company prohibits any Associates, other than directors, from pledging shares
|
þ Clawback policy - Executives' incentives are subject to a clawback that applies in the event of certain financial restatements | þ Global hotline and web portal to encourage employees to report financial, ethics and employee relations issues |
þ Board governance training program
| þ Long-standing commitment to sustainability and environmentally friendly building and operating practices |
Directors
You are being asked to vote for ten directors from the nominees named in this proxy statement. Except for Mr. Stewart W. Bainum, Jr., Mr. Brian B. Bainum and Mr. Pacious, all nominees meet the New York Stock Exchange ("NYSE") listing standards for director independence.
|
| | | | | | | | |
Nominees* | | | | | | | | |
Name | Age | Director Since | Occupation | Independent | A | CMD | CGN | D** |
Barbara T. Alexander | 70 | 2012 | Independent Consultant, Former Senior Advisor for UBS | X | CH | | | M |
Brian B. Bainum*** | 34 | n/a | Independent Management Consultant, Investor | | | | | |
Stewart W. Bainum, Jr. | 72 | 1976, except 1996-1997 | Chairman of the Board, Investor | | | | | |
William L. Jews | 67 | 2000, except 2005-2006 | Former President and Chief Executive Officer, CareFirst, Inc. | X | | M | CH | M |
Monte J. M. Koch | 55 | 2014 | Partner, BDT & Company; Co- Founder, Ten-X | X | M | | M | |
Liza K. Landsman | 49 | 2014 | Partner, NEA Venture Capital, Former President, Jet.com | X | M | | | M |
Patrick S. Pacious | 53 | 2017 | President and Chief Executive Officer | | | | | |
Ervin R. Shames | 78 | 2002 | Lead Independent Director, Management Consultant, Former Chief Executive Officer of Borden, Inc. | X | M | CH | M | |
Maureen D. Sullivan | 37 | 2018 | Chief Operating Officer, Rent the Runway | X | | M | | |
John P. Tague | 56 | 2012 | Former President and Chief Executive Officer, Hertz Global Holdings, Inc. | X | M | M | | |
*A= Audit Committee, CMD = Compensation and Management Development Committee, CGN = Corporate Governance and Nominating
Committee, D = Diversity Committee, CH = Chair, M = Member
** Scott A. Renshler is Chair of the Diversity Committee until the Annual Meeting, when he will no longer be Chair, as he is not standing for re-election to the Board. As of the date of this filing, a new Chair has not been determined.
***Mr. Brian B. Bainum’s committee assignment(s) will be determined if he is elected to the Board.
Board Composition and Tenure
The Company is committed to a Board comprised of diverse individuals and diverse thought. Notably, the Board has three female directors, representing 30% of the Board seats.
The Company's Board has an average tenure of approximately 11 years as of December 31, 2018 (excluding Mr. Stewart W. Bainum, Jr., one of the largest shareholders of our Company, average tenure is approximately seven years). In addition, the Company's Board has shown a healthy degree of refreshment, adding six new directors in the prior seven years (five of whom are independent).
Corporate Social Responsibility
We strive to improve our communities and the world in which we live in, including through activities of the Company's foundation, the Choice Hotels International Foundation, through recycling and conservation promotion, and through ongoing corporate social responsibility efforts.
The mission of the Choice Hotels International Foundation is to enhance the communities in which Choice franchisees, associates and consumers live and serve through the power of human connection - enabling access to food, shelter and the tools for personal and professional advancement. To this end, Choice partners with Operation Homefront, a national nonprofit whose mission is to build strong, stable, and secure military and veteran families. In addition to making a financial commitment of $100,000 to Operation Homefront, the Company donated 20 million Choice Privileges loyalty points in 2018, equivalent to more than 2,000 room nights, to enable veterans and service members to connect with their families and friends.
The Company and its franchisees have also partnered with Boys and Girls Clubs nationwide, and specifically in the underserved Washington, DC and Phoenix, Arizona areas, to provide funding and volunteer hours. In 2018, the foundation gave $250,000 in funding and Choice Associates engaged with multiple clubs. Notably, Choice Associates in Phoenix participated in STEM initiatives designed to leverage the Choice Associates' technology skills to mentor these underprivileged youth, inspiring them to pursue an academic or career track in technology.
Choice Hotels also routinely mobilizes the generosity of Choice Privileges members to donate to assist in disaster relief efforts, contributing to the Red Cross nearly $121,000 in donated Choice Privileges points, as well as $100,000 from the Company in 2018.
The Company has a "Room to be Green" program for its franchisees, which has a multi-tiered approach to increased recycling and conservation. All franchisees participate in Room to be Green, which focuses on energy conservation via replacing light bulbs with CFL or LED lighting; water conservation via linen and towel reuse programs; waste reduction via recycling programs in all hotels; and smart, safe & sustainable product usage via replacement of styrofoam with sustainable alternatives.
The Company is committed to an inclusive corporate culture and is proud of being named as one of the Best Employers for Diversity by Forbes magazine. The Company has also received "Best Places to Work for People with Disabilities” with a top score in the 2018 Disability Equality Index, and “Best Places to Work for LGBTQ Equality” with a 100% Corporate Equality Index designation from the Human Rights Campaign in 2018.
2018 Business Performance Highlights |
| | |
Hotel Development | Shareholder Return and Financial | Operational |
The Company executed 756 franchise agreements, a 7% increase versus 2017. | Total revenues increased 11% in 2018 to $1 billion. | Domestic system-wide revenue per available room (RevPAR) increased 1.2% in 2018. |
Opened the 40th upscale Cambria location with 23 other Cambria hotels under active construction. | Operating income increased 10% in 2018 to $318.5. | Number of domestic and international franchised rooms increased 9.0% and 5.8% in 2018, respectively. |
Acquired WoodSpring Suites, an extended-stay lodging brand, adding 239 extended-stay hotels in 35 states to the Company's portfolio. | The Company paid cash dividends totaling approximately $49 million and repurchased approximately $149 million worth of shares in 2018. | Effective royalty rate increased 14 basis points in 2018.
|
Stock Performance Graph
|
|
This graph shows the cumulative total shareholder return for Choice’s Common Stock in each of the five years from December 31, 2013 to December 31, 2018. The graph also compares the cumulative total returns for the same five-year period with the NYSE Composite Index, the S&P Hotels, Resorts and Cruise Lines Index and our performance peer group of companies, weighted according to the respective peer’s stock market capitalization at the beginning of each annual period. The comparison assumes $100 was invested on December 31, 2013, in Choice stock, the NYSE Composite Index, the S&P Hotels, Resorts and Cruise Lines Index and Choice’s performance peer group and assumes that all dividends were reinvested. |
Five Years Ended December 31, 2018 (Initial Investment $100)
|
| | | | | | |
| Initial | 2014 | 2015 | 2016 | 2017 | 2018 |
Choice Hotels International, Inc. | 100.00 | 115.79 | 105.74 | 119.53 | 167.63 | 156.36 |
NYSE Composite | 100.00 | 106.75 | 102.38 | 114.61 | 136.07 | 123.89 |
S&P Hotels, Resorts & Cruise Lines | 100.00 | 124.06 | 128.85 | 138.54 | 206.55 | 169.24 |
Performance Peer Index (2018 Peer Group) | 100.00 | 117.13 | 120.13 | 131.26 | 161.53 | 152.59 |
Performance Peer Index - Boyd Gaming Corp., Domino's Pizza, Inc., Dunkin' Brands Group Inc., Expedia Inc., Host Hotels & Resorts Inc., Hyatt Hotels Corp., ILG, Inc., Intercontinental Hotels Group PLC, Marriott Vacations Worldwide Corp., Pinnacle Entertainment Inc., TripAdvisor Inc., Wyndham Worldwide Corp. (and given the transaction closed June 1, 2018, the successor company Wyndham Destinations from June 1 to December 31, 2018), the Wendy's Company and Vail Resorts, Inc.
2018 Compensation Highlights
|
|
Choice’s executive compensation program links a substantial portion of each executive’s total compensation opportunity to achievement against performance metrics we believe drive shareholder value. In rewarding executives, the Company intends to continue its practice of providing direct accountability for individual, shared and organizational results, ensuring that rewards are commensurate with each executive's contributions to the results delivered for shareholders. Our performance measurement framework for incentive based pay for our NEOs is summarized below. |
*Mr. Pepper's short-term incentive may be leveraged up or down by the Company's actual operating income achievement.
Our executive compensation programs are designed to align pay with performance and to align the economic interests of executives and shareholders. The charts below show the mix of targeted total direct compensation (“TDC”) (base salary, target annual incentive and target long-term incentive) for the CEO and other named executive officers ("NEOs") in 2018. Consistent with our pay-for-performance philosophy, the largest portion of compensation (approximately 82% for our CEO and on average 70% for our other NEOs) is variable or performance-based annual and long-term incentives.
2018 Executive Compensation Summary |
|
Set forth below is the 2018 compensation for our NEOs: |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | | Salary ($) | | Bonus ($) | | Stock Awards ($) | | Option Awards ($) | | Non-Equity Incentive Plan Compensation ($) | | Change in Pension Value and Preferred Non-Qualified Deferred Compensation Earnings ($) | | All Other Compensation ($) | | Total ($) |
Patrick S. Pacious, President and Chief Executive Officer | | 925,000 |
| | — |
| | 2,254,695 |
| | 751,576 |
| | 1,730,906 |
| | 5,985 |
| | 88,694 |
| | 5,756,856 |
|
Dominic E. Dragisich, Chief Financial Officer | | 525,000 |
| | — |
| | 675,152 |
| | 225,014 |
| | 539,540 |
| | — |
| | 76,720 |
| | 2,041,426 |
|
David A. Pepper, Chief Development Officer | | 503,930 |
| | — |
| | 637,558 |
| | 212,519 |
| | 420,684 |
| | 107,150 |
| | 67,734 |
| | 1,949,575 |
|
Simone Wu, Senior Vice President, General Counsel, Corporate Secretary & External Affairs | | 484,423 |
| | — |
| | 442,572 |
| | 147,504 |
| | 297,669 |
| | — |
| | 52,148 |
| | 1,424,316 |
|
Patrick J. Cimerola, Chief Human Resources Officer | | 400,000 |
| | — |
| | 375,048 |
| | 125,002 |
| | 247,500 |
| | — |
| | 73,574 |
| | 1,221,124 |
|
*See the full Summary Compensation Table for the years ended December 31, 2018, 2017 and 2016 and related footnotes beginning on page 54.
Response to the 2018 Say on Pay Vote |
|
In 2018, 99% of votes cast were in favor of our compensation proposal. The Compensation and Management Development Committee considers the results of the advisory vote during its annual review of the total compensation provided to our NEOs and other executives. Given the significant level of shareholder support, the Committee concluded that our shareholders agree that our compensation program continues to provide a competitive pay-for-performance alignment that effectively incentivizes our NEOs to maximize shareholder value and encourages long-term retention. Accordingly, the Committee determined not to make significant changes in 2018 to the executive compensation program. The Committee engages in outreach with its largest shareholders each year regarding compensation as well as governance matters. This outreach utilizes investor conferences, in-person meetings at Company headquarters and telephone contact. The Committee will continue to consider the outcome of our say-on-pay votes and views of our shareholders when making future compensation decisions.
|
Changes to Executive Compensation Program in 2018
|
|
The Company has continued to limit executive perquisites outside of the Flexible Perquisites Plan. Effective January 1, 2018, the Company no longer reimburses the cost of executive physicals and Company paid life insurance for incoming executives.
|
Important Dates for 2020 Annual Meeting of Shareholders
|
|
Shareholder proposals submitted for inclusion in our 2020 proxy statement pursuant to SEC Rule 14a-8 must be received by November 25, 2019. |
Notice of shareholder proposals to nominate a person for election as a director or to introduce an item of business at the 2020 Annual Meeting of Shareholders outside Rule 14a-8 must be received no earlier than January 19, 2020 and no later than February 18, 2020. |
QUESTIONS AND ANSWERS
|
| |
Q. | Who can vote at the Annual Meeting? |
|
| |
A. | Shareholders who owned Common Stock as of the close of business on February 21, 2019 may attend and vote at the Annual Meeting. Each share of Common Stock is entitled to one vote. There were 55,653,557 shares of Common Stock outstanding on February 21, 2019. |
|
| |
Q. | Why am I receiving this proxy statement? |
|
| |
A. | This proxy statement describes proposals which are being submitted to shareholders. It gives you information on these proposals, as well as other information, so that you can make informed decisions. |
|
| |
Q. | What is the proxy card? |
|
| |
A. | The proxy card enables you to vote whether or not you attend the Annual Meeting. Even if you plan to attend the Annual Meeting, we encourage you to complete and return your proxy card before the meeting date in case your plans change. By completing and returning the proxy card, you are authorizing the designated proxies, Simone Wu (the Company's Senior Vice President, General Counsel, Corporate Secretary & External Affairs) and Dominic E. Dragisich (the Company's Chief Financial Officer) to vote your shares of Common Stock at the meeting, as you have instructed them on the proxy card, or in the absence of such instructions, in accordance with the recommendations of the Board. If a proposal is properly presented for a vote at the Annual Meeting that is not on the proxy card, Ms. Wu and Mr. Dragisich will vote your shares, under your proxy, at their discretion. |
|
| |
Q. | On what issues am I voting? |
|
| | |
A. | We are asking you to vote on: |
| l | Proposal 1 - The election of the ten director nominees named in this proxy statement. |
| l | Proposal 2 - An advisory vote to approve executive compensation. |
| l | Proposal 3 - The ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2019. |
|
| |
Q. | What is the difference between a record holder and a “street name” holder? |
|
| |
A. | If your shares of Common Stock are registered directly in your name, you are considered the holder of record with respect to those shares. If your shares of Common Stock are held in a brokerage account or by a bank, trust or other nominee, then the broker, bank, trust or other nominee is considered to be the holder of record with respect to those shares, while you are considered the beneficial owner of those shares. In that case, your shares are said to be held in “street name.” Street name holders generally cannot vote their shares directly and must instead instruct, or follow the procedures provided to you by, the broker, bank, trust or other nominee how to vote their shares using one of the methods described below. |
|
| |
A. | If you are a record holder: |
|
| |
| You may vote by mail: You may do this by completing and signing your proxy card and mailing it in the enclosed, prepaid and addressed envelope. |
|
| | |
| l | If you mark your voting instructions on the proxy card, your shares will be voted as you instruct. |
|
| | |
| l | If you sign, but do not mark your voting instructions on the proxy card, your shares will be voted in accordance with the Board's recommendations. |
|
| |
| You may vote by telephone: You may do this by calling toll-free 1-800-652-8683 and following the instructions. You will need your proxy card available if you vote by telephone. |
|
| |
| You may vote online: You may do this by accessing www.envisionreports.com/chh and following the instructions. You will need your proxy card available if you vote online. |
|
| |
| You may vote in person at the meeting: We will pass out written ballots to anyone who wants to vote at the meeting. However, if you hold your shares in street name, you must request a legal proxy from your broker in order to vote at the meeting. |
|
| |
| If you are a “street name” holder: |
|
| |
| If you hold your shares of Common Stock in street name, you must vote your shares through the procedures prescribed by your broker, bank, trust or other nominee. Your broker, bank, trust or other nominee has enclosed or otherwise provided a voting instruction card for you to use in directing the broker, bank, trust or other nominee how to vote your shares. In many cases, you may be permitted to submit your voting instructions online or by telephone. |
|
| |
Q. | What does it mean if I receive more than one proxy card or voting instruction form? |
|
| |
A. | It means that you have multiple accounts at the transfer agent or with brokerage firms. Please complete and return all proxy cards or voting instruction forms you may receive, or otherwise vote your shares online or by telephone as described herein or on the voting instruction form, to ensure that all of your shares are voted. |
|
| |
Q. | What if I change my mind after I vote? |
|
| |
A. | If you are a holder of record, you may revoke your proxy by any of the following means: |
|
| | |
| l | signing or submitting another proxy before the Annual Meeting as provided herein with a later date, |
| l | sending us a written notice of revocation, which must be received prior to the Annual Meeting at the following address: Corporate Secretary, Choice Hotels International, Inc., 1 Choice Hotels Circle, Suite 400, Rockville, Maryland 20850, or |
| l | voting in person at the meeting. |
|
| |
| If you are a street name holder, you may change your vote by complying with the procedures contained in the voting instructions provided to you by your broker, bank, trust or other nominee. |
|
| |
Q. | Will my shares be voted if I do not return my proxy card? |
|
| |
A. | If you are a record holder, your shares will not be voted. If you are a street name holder, your brokerage firm, under certain circumstances, may vote your shares. |
|
| |
| If you are a street name holder, brokerage firms have authority under the NYSE rules to vote customers’ shares on certain “routine” matters if the customer has not provided the brokerage firm with voting instructions within a certain period of time before the meeting. A brokerage firm cannot vote customers’ unvoted shares on non-routine matters. Only Proposal Three is considered a routine matter under the NYSE rules. |
|
| |
| Accordingly, if you do not instruct your brokerage firm how to vote your shares, your brokerage firm may not vote your shares on Proposals One or Two. Likewise, your brokerage firm may either: |
|
| | |
| l | vote your shares on Proposal Three and any other routine matters that are properly presented at the meeting, or |
| l | leave your shares unvoted as to Proposal Three and any other routine matters that are properly presented at the meeting. |
|
| |
| When a brokerage firm votes its customers’ unvoted shares on routine matters, these shares are counted to determine if a quorum exists to conduct business at the meeting. When a brokerage firm does not vote a customer’s unvoted shares, these shares are counted to determine if a quorum exists; however, they are not treated as voting on a matter. |
|
| |
| We encourage you to provide instructions to your brokerage firm. This ensures your shares will be voted at the meeting. |
|
| |
Q. | How many shares must be present to hold the meeting? |
|
| |
A. | To hold the meeting and conduct business, a majority of the Company’s outstanding shares of Common Stock as of the close of business on February 21, 2019 must be present in person or represented by proxy at the meeting. This is called a quorum. |
|
| |
| Shares are counted as present at the meeting if the shareholder either: |
|
| | |
| l | is present and votes in person at the meeting, or |
| l | has properly submitted a proxy card, or voted their shares by telephone or online. |
|
| |
Q. | What are my voting choices when voting on the election of directors? (Proposal 1) |
|
| |
A. | You may vote either “for” or “against” each nominee, or you may "abstain" from voting. |
|
| |
| If you give your proxy without voting instructions, your shares will be counted as a vote for each nominee. |
|
| |
Q. | How many votes must the nominees have to be elected as directors? |
|
| |
A. | Directors are elected by a majority of votes cast in person or by proxy at the meeting. Abstentions and broker non-votes are treated as not voting on the matter. |
|
| |
Q. | What happens if a nominee is unable to stand for election? |
|
| |
A. | The Board expects that each of the nominees will be available for election and willing to serve. If any nominee is unable to serve at the time the election occurs, the Board may reduce the number of directors or select a substitute nominee. In the latter case, if you have completed and returned your proxy card or voted by telephone or online, Simone Wu or Dominic E. Dragisich can vote your shares for a substitute nominee. They cannot vote for more than ten nominees. |
|
| |
Q. | What are my voting choices when voting to approve the advisory vote to approve executive compensation? (Proposal 2) |
|
| |
A. | You may vote either “for” or “against” the approval of the proposal, or you may “abstain” from voting. |
|
| |
| If you give your proxy without voting instructions, your shares will be voted for approval of executive compensation. |
|
| |
Q. | How many votes are needed to approve the advisory vote to approve executive compensation? |
|
| |
A. | The vote of a majority of the shares present in person or represented by proxy and voting on the matter is required to approve the proposal on executive compensation. The proposal is an advisory vote, which means that it is non-binding on the Company. However, the Compensation and Management Development Committee will take into account the outcome of the vote when considering future executive compensation decisions. Abstentions and broker non-votes are treated as not voting on the matter. |
|
| |
Q. | What are my voting choices when voting on the ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2019? (Proposal 3) |
|
| |
A. | You may vote either “for” or “against” the ratification, or you may “abstain” from voting. |
|
| |
| If you give your proxy without voting instructions, your shares will be voted for the ratification. |
|
| |
Q. | How many votes are needed to ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2019? |
|
| |
A. | The vote of a majority of the shares present in person or by proxy and voting on the matter is required to ratify the appointment of Ernst & Young LLP. Abstentions and broker non-votes are treated as not voting on the matter. |
|
| |
Q. | What happens if Ernst & Young LLP is not ratified as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2019? |
|
| |
A. | Although ratification is not required by our Bylaws or otherwise, the Board is submitting this proposal as a matter of good corporate practice. If the selection is not ratified, the Audit Committee will consider whether it is appropriate to select another independent registered accounting firm. Even if the selection is ratified, the Committee may select a different independent registered accounting firm at any time during the year if it determines that this would be in the best interests of the Company and our shareholders. |
|
| |
Q. | Is my vote kept confidential? |
|
| |
A. | Proxy cards, telephone and online voting reports, ballots and voting tabulations identifying shareholders are kept confidential and will not be disclosed by Choice Hotels except as required by law. |
|
| |
Q. | Where do I find voting results of the meeting? |
|
| |
A. | We will announce preliminary voting results at the Annual Meeting. We will publish the final results in a Form 8-K to be filed with the Securities and Exchange Commission (“SEC”) after the Annual Meeting. |
|
| |
Q. | How can I review the Company’s Annual Report on Form 10-K? |
|
| |
A. | The Company's Annual Report on Form 10-K, including the financial statements and the schedules thereto, is being mailed to you together with this proxy statement. You may also view the Form 10-K, as well as the Company’s proxy materials, on the website listed below. Click on the Investor Information link on the website. You may also view the Form 10-K through the SEC’s website at www.sec.gov. You may also obtain a copy of the Form 10-K free of charge by contacting the Company at (301) 592-5026. |
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDERS MEETING TO BE HELD ON APRIL 19, 2019.
|
| |
| The proxy statement and the Company’s Annual Report on Form 10-K are available at www.envisionreports.com/chh. |
PROPOSAL 1—ELECTION OF TEN DIRECTORS
Nomination
Ten directors are nominated for election at the 2019 Annual Meeting, to hold office until the 2020 Annual Meeting of Shareholders, or until their successors are elected and qualified.
The Company’s Restated Certificate of Incorporation provides that the number of directors must be at least three but not more than 12. The exact number of directors within that range is determined from time to time by the Board. On November 7, 2018, the Board expanded the number of directors to ten and appointed Maureen D. Sullivan to the Board. Ms. Sullivan was first identified as a director candidate by a third party search firm, and is standing for election as a director for the first time at the Annual Meeting.
All directors are elected annually by a majority vote, except in the case of a contested election, in which case directors are elected by a plurality vote.
The Board has nominated ten individuals to serve as directors: Barbara T. Alexander, Brian B. Bainum, Stewart W. Bainum, Jr., William L. Jews, Monte J. M. Koch, Liza K. Landsman, Patrick S. Pacious, Ervin R. Shames, Maureen D. Sullivan and John P. Tague. Scott A. Renschler is not standing for re-election to the Board.
Each of the nominees other than Mr. Brian B. Bainum is currently a member of our Board. Brian B. Bainum was introduced to the Board by Stewart W. Bainum, Jr. and has been a Board Observer since August, 2018. As a result of his interactions with the Board, the Corporate Governance and Nominating Committee recommended Brian B. Bainum as a nominee to the Board.
Family Relationships
The Chairman of the Board, Stewart W. Bainum, Jr., is the uncle of one of our nominees, Brian B. Bainum. Dr. Scott A. Renschler, who is not up for re-election, is the nephew of Mr. Stewart W. Bainum, Jr. and the cousin of Mr. Brian B. Bainum. Other than the family relationship between Mr. Stewart W. Bainum, Jr., Mr. Brian B. Bainum, and Dr. Scott A. Renschler, there are no other familial relationships among our directors or executive officers.
Director Nominee Information and Qualifications
The Board requires that its members possess the highest personal and professional integrity and be positioned to contribute to the Board’s effectiveness through their experience. The Board values diversity of viewpoint and opinion, and the Board has been, and continues to be, focused on diversity, including diversity of gender, race and ethnicity. The Board, and specifically the Corporate Governance and Nominating Committee, views diverse representation as the best way to represent the interests of all of our shareholders and maximize the Company's success.
The Board’s Corporate Governance and Nominating Committee regularly reviews the experience, qualifications, attributes and skills of each of the Board’s director nominees. The names of Choice's proposed director nominees, their respective ages, their positions with Choice, and other biographical information as of March 17, 2019, are set forth below.
Given Mr. Shames' contributions as a Board member, the Company provided Mr. Shames an age-related waiver to its Board retirement policy. The Board considers any age-related waivers on an annual basis. The Corporate Governance and Nominating Committee’s assessment of the qualifications of each Board member is also included below.
Board Recommendation
The Board recommends a vote FOR each of the director nominees.
CORPORATE GOVERNANCE
Board of Directors
The Board is responsible for overseeing the overall performance of the Company. Members of the Board are kept informed of the Company’s business primarily through discussions with the Chairman, the CEO and other members of the Company’s management, by reviewing materials provided to them and by participating in Board and committee meetings.
In 2018, the Board held six meetings and each director attended at least 83% of all meetings of the Board and the standing committees of the Board on which he or she served. In 2018, all of the then current Board members attended the Annual Meeting. As stated in the Company's Corporate Governance Guidelines, the Company expects all directors to attend the Annual Meeting. The independent, non-management members of the Board are required to meet at least once a year in executive session without management. Mr. Shames, the lead independent director, chairs these meetings. Four such meetings were held in 2018.
The Board has adopted Corporate Governance Guidelines, a Corporate Ethics Policy and charters for each of its standing committees, including the Audit Committee, Compensation and Management Development Committee, Corporate Governance and Nominating Committee, and Diversity Committee, each of which is discussed further below. The Corporate Governance Guidelines, Corporate Ethics Policy and several of the Committee charters were updated in 2018. The Corporate Governance Guidelines, Corporate Ethics Policy and all standing committee charters are included in the investor relations section of the Company’s website at www.choicehotels.com.
Board Leadership Structure
The Board is led by the Chairman, Mr. Stewart W. Bainum, Jr. who has served in this role for more than 25 years. The benefits of Mr. Bainum’s leadership of the Board stem both from Mr. Bainum’s long-standing relationship and involvement with the Company, which provides a unique understanding of the Company’s culture and business, as well as his on-going role as the Board’s primary day-to-day contact with the Company’s senior management team, which ensures that a constant flow of Company-related information is available to the Board as a whole. This flow of communication enables Mr. Bainum to identify issues, proposals, strategies and other considerations for future Board discussions and informs his role as leader in many of the resulting discussions during Board meetings. Mr. Bainum also brings the perspective of a major shareholder to the Board.
The Company has elected to separate the positions of Chairman (held by Mr. Bainum) and CEO (held by Mr. Pacious). Although Mr. Pacious serves as a member of the Board, we believe that Mr. Bainum’s role as Chairman provides for a meaningful division of leadership between management and the Board.
In addition to this division of leadership between Chairman and Chief Executive Officer, leadership is further enhanced on the Board based on the Board’s annual election of a lead independent director. In light of the Company and Board leadership roles held by Mr. Bainum and Mr. Pacious, the Board believes that it is important to maintain a Board leadership position that is held by an independent director. Currently, Mr. Shames serves as the Board’s lead independent director. In his role as lead independent director, Mr. Shames serves as chairman of executive session meetings in which Mr. Bainum and Mr. Pacious (as well as Dr. Renschler) do not participate. Mr. Brian B. Bainum, if elected, will also not participate. The goal and purpose of these meetings chaired by Mr. Shames is to permit the non-management and independent members of the Board to freely discuss issues or concerns related to Company and Board performance, including issues or concerns related to Company or Board leadership. The Board meets regularly in executive session. Four such meetings were held in 2018. In addition to chairing the executive sessions, the lead independent director or his designee manages the Board’s review of the CEO’s performance, coordinates activities of the independent directors and performs any other duties assigned by the Board.
Board’s Role in Risk Oversight
The Board administers its risk oversight function through two primary mechanisms: (1) through the adoption and enforcement of Board policies and procedures intended to require the full Board to discuss, address and approve or disapprove certain items determined by their nature to involve various risks requiring Board consideration and (2) through the efforts of the Board’s Audit Committee, which focuses on the particular risks to the Company that arise out of financial reporting and other pertinent areas.
The Board’s primary role in risk oversight is to establish and maintain effective policies and procedures that serve to highlight or expose critical risks. The Board has adopted a set of Board policies applicable to various transactions involving the Company and its directors, officers and employees that the Board has determined are likely to involve a potentially higher degree of risk than ordinary course transactions and therefore are appropriately reviewable by the full Board. For these transactions, the Company is required to obtain Board approval, which provides the Board with an opportunity to discuss the transaction and attendant risk, prior to the transaction becoming binding on the Company. Those transactions requiring prior Board approval include transactions above certain limits, certain lending arrangements, certain litigation settlements, and certain related party transactions. In addition to the full Board’s role in risk oversight, different committees of the Board play a role in overseeing risks attendant to the committee’s particular area of focus. For instance, the Compensation and Management Development Committee assumes primary responsibility for risk oversight as it relates specifically to the Company’s compensation policies and practices and the Corporate Governance and Nominating Committee and Diversity Committee are empowered to raise risks or potential risks brought to such Committee’s attention to the full Board for discussion. In addition, as discussed below, the
Board’s Audit Committee has specific functions and responsibilities that generally relate to the risk oversight function, including risks relating to financial reporting compliance and cybersecurity.
The general functions of the Audit Committee are as set forth under the heading Committees of the Board – Audit Committee. As a result of the Audit Committee’s performance of these functions, it is often provided with access to reports and analysis (either internally generated or created by the Company’s independent registered public accounting firm) relating to issues or concerns that, because of the potential for exposure to risk, the Committee determines to be proper for additional review and discussion. Often, these discussions may remain within the Audit Committee, if, after discussions with the Company’s CEO, CFO, Chief Accounting Officer and other relevant Company employees, the result of the review is a determination by the Audit Committee that the identified potential for risk is being adequately addressed by the Company. In certain circumstances, the Audit Committee may determine (either initially after identification of the potential risk or after a preliminary review conducted by the Audit Committee) that certain risks or potential risks be referred to the full Board for discussion.
Director Independence
The Board currently has ten directors, a majority (seven) of whom the Board has determined to be “independent” under the listing standards of the NYSE. The independent directors are Barbara T. Alexander, William L. Jews, Monte J. M. Koch, Liza K. Landsman, Ervin R. Shames, Maureen D. Sullivan and John P. Tague.
In determining director “independence,” the Board applies the standards as set forth in the listing standards of the NYSE and additional independence standards adopted by our Board as follows:
| |
• | No director can be “independent” until five years following the termination or expiration of a director’s employment with the Company, rather than three years as currently required under the NYSE rules; |
| |
• | No director can be “independent” who is, or in the past five years has been, affiliated with or employed by a present or former outside auditor of the Company until five years after the end of either the affiliation or the auditing relationship, rather than three years as currently required under the NYSE rules; and |
| |
• | No director can be “independent” if he or she in the past five years has been part of an interlocking directorate, rather than three years as currently required under the NYSE rules. |
Corporate Governance Guidelines
The Corporate Governance Guidelines, adopted by the Board and updated in April 2018, are a set of principles that provide a framework for the Company’s corporate governance. The main tenets of the Guidelines are:
| |
• | Create value for shareholders by promoting their interests; |
| |
• | Focus on the future, formulate and evaluate corporate strategies; |
| |
• | Duty of loyalty to the Company by directors; |
| |
• | Annual CEO evaluation by independent directors; |
| |
• | Annual approval of three-year strategic plan and one-year operating plan or as the Board deems necessary in the event there are no material changes to the strategic and operating plans then in effect; |
| |
• | Annual assessment of Board and committee effectiveness by the Corporate Governance and Nominating Committee; |
| |
• | Directors are required to reach and maintain ownership of $300,000, increased effective April 19, 2019 to five times the then current standard annual cash retainer (currently $375,000) of Company stock within five years of election to the Board; |
| |
• | Directors attendance expectations; and |
| |
• | Annual report of succession planning and management development by Chief Executive Officer. |
Corporate Ethics Policy
The Board has established a Corporate Ethics Policy to aid each director, officer and employee of the Company (including the CEO, CFO and Chief Accounting Officer) and its subsidiaries in making ethical and legal decisions in his or her daily work. The Corporate Ethics Policy was updated in February 2018. To the extent approved or granted, the Company will post amendments to or waivers from the Corporate Ethics Policy (to the extent applicable to the CEO, CFO and Chief Accounting Officer) on the Company’s website.
Committees of the Board
The standing committees of the Board are the Audit Committee, the Compensation and Management Development Committee, the Corporate Governance and Nominating Committee and the Diversity Committee. The charters for each of these committees are included in the investor relations section of the Company’s website at www.choicehotels.com. All of the current members of each of the Audit Committee, Compensation and Management Development Committee and Corporate Governance and Nominating Committee are independent, as required by the committee charters and the current listing standards of the NYSE and the rules of the SEC, as applicable.
The following provides a description of certain functions, current membership and meeting information for each of the Board committees for 2018.
Compensation and Management Development Committee
Under the terms of its charter, as updated in April 2018, the Compensation and Management Development Committee discharges the Board’s responsibilities relating to compensation of the Company’s executives through the following functions, among others:
| |
• | Overseeing the administration of the Company’s equity compensation plans and authorizing equity awards thereunder; |
| |
• | Establishing and updating the “peer group” used to compare the Company’s compensation practices; |
| |
• | Reviewing and approving the compensation of executive officers, in light of shareholder “Say on Pay” results and other relevant factors; |
| |
• | Setting the compensation for the non-employee members of the Board; |
| |
• | Reviewing bonus and incentive plans, pensions and retirement; |
| |
• | Reviewing other employee benefit plans and programs; |
| |
• | Reviewing the Company’s succession plan and management development; |
| |
• | Self-evaluating annually; |
| |
• | Setting criteria and guidelines for performance of the CEO; |
| |
• | Assessing performance of the CEO against performance objectives; and |
| |
• | Reviewing and discussing the Company’s Compensation Discussion and Analysis and producing the annual Compensation and Management Development Committee report for the Company’s proxy statement. |
The Compensation and Management Development Committee discharges its responsibilities relating to executive management, talent development and succession planning of the Company’s executives by reviewing and discussing the Company’s management succession plan for the CEO and other key senior executives and by reviewing and discussing management development for key executives as part of the Company’s annual talent review process.
During 2018, at the direction of Mr. Shames, the Chairman of the Compensation and Management Development Committee, Mr. Pacious prepared and distributed to Committee members meeting agendas, consultant-provided compensation related information, and Company reports and data in preparation for Committee meetings. Mr. Cimerola, our Chief Human Resources Officer, assisted with preparation of the materials. In conjunction with the Compensation and Management Development Committee Chairman, Messrs. Pacious and Cimerola also prepared and presented specific compensation proposals to the Compensation and Management Development Committee, including Mr. Pacious' assessment of individual executive officer performance and recommended compensation amounts for each officer other than himself. See the Compensation Discussion and Analysis section below for more information on Mr. Pacious' role in recommending the compensation paid to our NEOs in 2018. None of our executive officers determined or recommended the amount or form of non-employee director compensation.
The Compensation and Management Development Committee has delegated limited authority to our Stock Compensation Committee, currently consisting of our CEO, to make equity awards to employees at the vice president level or lower solely for the purpose of promotion, retention, or new hire. No individual award may exceed $250,000 in value.
In accordance with its charter, the Compensation and Management Development Committee has the authority to retain, terminate and approve professional arrangements for outside compensation consultants to assist the Committee.
During 2018, the Compensation and Management Development Committee retained Mercer (US) Inc. (“Mercer”) a wholly-owned subsidiary of Marsh & McLennan Companies, Inc. ("MMC") to provide various compensation-related services and assistance. Mercer performed the following functions and services:
| |
• | Attended Committee meetings; |
| |
• | Provided independent advice to the Committee on current trends and best practices in compensation design and program alternatives and advised on plans or practices that may improve effectiveness of our compensation program; |
| |
• | Provided and discussed peer group and various survey data; and, based on this information, offered independent recommendations on CEO and NEO compensation; |
| |
• | Advised on CEO pay ratio and related calculations; |
| |
• | Reviewed the CD&A, compensation tables and other compensation-related disclosures in our proxy statements; |
| |
• | Offered recommendations, insights and perspectives on compensation related matters; |
| |
• | Evaluated and advised the Committee regarding enterprise and related risks associated with executive compensation components, plans and structures; and |
| |
• | Supported the Committee to ensure executive compensation programs are competitive and align the interests of our executives with those of our shareholders. |
In 2018, Mercer attended all Committee meetings in person or by telephone, including executive sessions as requested, and consulted frequently with the Committee Chairman between meetings. Mercer reviewed the CD&A and the executive compensation tables contained in this proxy statement.
The Company paid Mercer $228,639 in 2018 for services related to its engagement by the Compensation and Management Development Committee. See Compensation Discussion and Analysis below for additional information related to the role of Mercer in the Company’s 2018 executive compensation decisions.
The Committee has analyzed whether the work of Mercer as a compensation consultant has raised any conflict of interest, taking into consideration the following factors: (i) the provision of other services to the Company by Mercer or any of its affiliates; (ii) the amount of fees the Company paid to Mercer as a percentage of MMC’s total revenue; (iii) Mercer’s policies and procedures that are designed to prevent conflicts of interest; (iv) any business or personal relationship of Mercer or the individual compensation advisors employed by the firm with an executive officer of the Company; (v) any business or personal relationship of the individual compensation advisors with any member of the Committee; and (vi) any stock of the Company owned by Mercer or the individual compensation advisors whom it employs. The Committee has determined, based on its analysis of the above factors, that the work of Mercer and the individual compensation advisors employed by Mercer as compensation consultants to the Company has not created any conflict of interest.
In 2018, the Compensation and Management Development Committee met four times. The Chair of the Compensation and Management Development Committee was Ervin R. Shames and the other members were William L. Jews, Maureen D. Sullivan (appointed December 2018) and John P. Tague. The Board determined that each member of the Compensation and Management Development Committee was independent under the listing standards of the NYSE applicable to Compensation Committee members.
While the charter authorizes the Compensation and Management Development Committee to delegate its responsibilities to subcommittees, to date, the Committee has not delegated any of its responsibilities in this manner, other than its delegation to the Stock Compensation Committee to make equity awards to employees at the vice president level or lower solely for the purpose of promotion, retention, or new hire.
Compensation Committee Interlocks and Insider Participation
No member of our Compensation and Management Development Committee is an officer, former officer, or employee of the Company. During 2018, no member of the Compensation and Management Development Committee had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K. During 2018, no interlocking relationship existed between any of our executive officers or Compensation and Management Development Committee members, on the one hand, and the executive officers or Compensation Committee members of any other entity, on the other hand.
Audit Committee
Under the terms of its charter, as amended in April, 2018, the Audit Committee assists the Board to fulfill its oversight responsibilities with respect to the Company’s auditing, accounting and financial reporting processes generally. The Committee discharges these duties through the following functions, among others:
| |
• | Conferring separately with the Company’s independent registered public accounting firm and internal auditors regarding their responsibilities; |
| |
• | Reviewing reports of the Company’s independent registered public accounting firm and internal auditors and annual and quarterly reports for filing with the SEC; |
| |
• | Reviewing reports of the Company’s independent registered public accounting firm concerning financial reporting processes and internal controls, discussing these internal controls with and suggesting improvements to management; |
| |
• | Establishing and monitoring an anonymous complaint hotline and other complaints procedures regarding accounting and auditing matters; |
| |
• | Pre-approving all audit and non-audit services provided by the Company’s independent registered public accounting firm; |
| |
• | Self-evaluating annually; |
| |
• | Determining the selection, compensation and appointment of the Company’s independent registered public accounting firm and overseeing their work; |
| |
• | Reviewing the Company’s policies with respect to risk management; |
| |
• | Reviewing with the CEO, CFO or Chief Accounting Officer, the Company’s disclosure controls and procedures; and |
| |
• | Overseeing the Company's cyber security and data security practices and procedures. |
In 2018, the Audit Committee met eight times. Barbara T. Alexander served as Chair of the Committee. The other members of the Committee in 2018 were Ervin R. Shames, John P. Tague, Monte J. M. Koch and Liza K. Landsman. The Board has determined that Ms. Alexander, Mr. Tague and Mr. Koch are qualified as audit committee financial experts within the meaning of the SEC’s regulations. Furthermore, each member of the Committee has accounting and related financial management expertise within the meaning of the listing standards of the NYSE. In addition, the Board also determined that each member of the Audit Committee was independent under SEC rules and the listing standards of the NYSE applicable to Audit Committee members.
Corporate Governance and Nominating Committee
Under the terms of its charter, as updated in April 2018, the Corporate Governance and Nominating Committee identifies individuals qualified to become members of the Board; selects, or recommends that the Board selects, the director nominees for election or to fill vacancies; develops and recommends to the Board a set of Corporate Governance Guidelines applicable to the Company; and oversees the evaluation of the Board. The Committee also has the following functions, among others:
| |
• | Establishing criteria for Board membership; |
| |
• | Conducting the appropriate and necessary inquiries into the backgrounds and qualifications of proposed Board candidates; |
| |
• | Reviewing and making recommendations to the Board on the size and composition of the Board and its committees; |
| |
• | Reviewing and making recommendations to the Board with respect to directors, if any, who are unable to perform their duties; |
| |
• | Reviewing and making recommendations to the Board with respect to the retirement of directors; |
| |
• | Reviewing and making recommendations to the Board with respect to the Company’s policies regarding director or senior executive conflict of interest matters; |
| |
• | Monitoring and making recommendations to the Board concerning matters of corporate governance; and |
| |
• | Reviewing the outside board service by senior executives. |
In 2018, the Committee met four times. William L. Jews was the Chair of the Committee and the other members of the Committee were Ervin R. Shames and Monte J. M. Koch.
Diversity Committee
Under the terms of its charter, the Diversity Committee seeks to assist and advise management in developing a workplace culture that values working with diverse groups of people, offering diversity of thought and perspective. The Committee goals reach beyond the workplace culture, also focusing on diverse franchise development, diverse sourcing, inclusive advertising and inclusive community involvement. The Committee seeks to achieve its goals through the following functions, among others:
| |
• | Review and evaluate diversity efforts in workforce development, franchise development, vendor relations, marketing and philanthropy; |
| |
• | Review the efforts by management to increase the diversity of the Company's workforce, including at management levels; and |
| |
• | Reporting to the Board on diversity matters. |
In 2018, the Committee met two times. Scott A. Renschler was the Chair of the Committee and the other members of the Committee were Barbara T. Alexander, William L. Jews and Liza K. Landsman.
Contacting the Board of Directors
Shareholders or other interested parties may contact an individual director, the lead independent director of the Board, or the independent directors as a group by mail at the following address:
|
| | |
| Mail: | Choice Hotels International, Inc. |
| | 1 Choice Hotels Circle, Suite 400 |
| | Rockville, Maryland 20850 |
| | Attn: Board of Directors |
Each communication should specify the applicable addressee or addressees to be contacted, as well as the general topic of the communication. The Company will initially receive and process communications before forwarding them to the addressee. The Company generally will not forward to the directors a shareholder communication that it determines to be primarily commercial in nature or relates to an improper or irrelevant topic, or that requests general information about the Company.
Consideration of Director Candidates
The Corporate Governance and Nominating Committee administers the process for nominating candidates to serve on the Company’s Board. The Committee recommends candidates for consideration by the Board as a whole, which is responsible for appointing candidates to fill any vacancy that may be created between meetings of the shareholders and for nominating candidates to be considered for election by shareholders at the Company’s Annual Meeting.
The Board has established selection criteria to be applied by the Corporate Governance and Nominating Committee and by the full Board in evaluating candidates for election to the Board. These criteria include: (i) independence, (ii) integrity, (iii) experience and sound judgment in areas relevant to the Company’s business, (iv) a proven record of accomplishment, (v) willingness to speak one’s mind, (vi) the ability to commit sufficient time to Board responsibilities, (vii) the ability to challenge and stimulate management and (viii) belief in and passion for the Company’s mission and vision. The Committee also periodically reviews with the Board the appropriate skills and characteristics required of Board members in the context of the current membership of the Board. This assessment includes considerations such as diversity, age and functional skills in relation to the perceived needs of the Board from time to time.
The Corporate Governance and Nominating Committee uses a variety of methods to identify potential nominees for election to the Board, including consideration of candidates recommended by directors, officers or shareholders of the Company. When reviewing and recommending candidates to join the Board, the Corporate Governance and Nominating Committee considers how each prospective new member’s unique background, experience and expertise will add to the Board’s overall perspective and ability to govern the Company. While the Committee has not established any formal diversity policy to be used to identify director nominees, the Committee recognizes that a current strength of the Board stems from the diversity of perspective and understanding that arises from discussions involving individuals of diverse background and experience. When assessing a Board candidate’s background and experience, the Committee takes into consideration all relevant components, including, but not limited to, a candidate’s gender and cultural and ethnic status. The Committee may also use one or more professional search firms or other advisors to assist the Committee in identifying candidates for election to the Board.
The Corporate Governance and Nominating Committee will consider director candidates recommended by shareholders and evaluate them using the same criteria as applied to candidates identified through other means, as set forth above. Shareholders seeking to recommend a prospective candidate for the Committee’s consideration should submit the candidate’s name and qualifications, including the candidate’s consent to serve as a director of the Company if nominated by the Committee and so elected by mail to: Corporate Secretary, Choice Hotels International, Inc., 1 Choice Hotels Circle, Suite 400, Rockville, Maryland 20850.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table shows how much Common Stock is beneficially owned by (i) each director or nominee of the Company, (ii) each of the Company’s NEOs, (iii) all executive officers, directors and nominees of the Company as a group and (iv) all persons who are known to own beneficially more than 5% of the Company’s Common Stock, as of February 21, 2019 (unless otherwise noted). Unless otherwise specified, the address for each such person as of February 21, 2019, was 1 Choice Hotels Circle, Suite 400, Rockville, Maryland 20850.
|
| | | | | | | | | | | |
Name of Beneficial Owner | Common Stock Beneficially Owned(1) | | Right to Acquire(2) | | Unvested Restricted Stock(3) | | Percentage of Shares Outstanding(4) | |
Stewart W. Bainum, Jr. | 12,520,568 |
| (5)(6) | — |
| | — |
| | 22.5 | %(5)(6) |
Brian B. Bainum | — |
| (5)(17) | — |
| | — |
| | * | (5)(17) |
Barbara T. Alexander | 20,176 |
| | — |
| | 3,765 |
| | * | |
William L. Jews | 35,706 |
| | — |
| | 3,765 |
| | * | |
Monte J. M. Koch | 6,756 |
| | — |
| | 3,765 |
| | * | |
Liza K. Landsman | 4,855 |
| | — |
| | 3,765 |
| | * | |
Patrick S. Pacious | 107,415 |
| | 202,475 |
| | 19,952 |
| | * | |
Scott A. Renschler | 312,594 |
| (5)(7) | — |
| | 3,765 |
| | * | |
Ervin R. Shames | 68,396 |
| | — |
| | 3,765 |
| | * | |
Maureen D. Sullivan | — |
| | — |
| | — |
| | * | |
John P. Tague | 21,809 |
| | — |
| | 3,765 |
| | * | |
Patrick J. Cimerola | 12,680 |
| | 70,268 |
| | 8,173 |
| | * | |
Dominic E. Dragisich | 328 |
| | 10,093 |
| | 10,994 |
| | * | |
David A. Pepper | 80,692 |
| | 99,264 |
| | 7,172 |
| | * | |
Simone Wu | 21,487 |
| | 67,191 |
| | 4,972 |
| | * | |
All Directors and Executive Officers as a Group (18 persons) | 13,263,511 |
| | 480,755 |
| | 98,432 |
| | 24.9 | % |
Principal Shareholders | | | | | | | | |
Barbara J. Bainum | 10,181,924 |
| (5)(8) | — |
| | — |
| | 18.23 | % (5)(8) |
Bruce D. Bainum | 11,104,132 |
| (5)(9) | — |
| | — |
| | 19.95 | % (5)(9) |
Roberta D. Bainum | 10,897,786 |
| (5)(10) | — |
| | — |
| | 19.58 | % (5)(10) |
Realty Investment Company, Inc. | 6,821,574 |
| (5)(14) | — |
| | — |
| | 12.26 | % (5)(14) |
Ronald Baron | 4,877,416 |
| (11) | — |
| | — |
| | 8.71 | % (11) |
The Vanguard Group | 2,948,889 |
| (12) | — |
| | — |
| | 5.26 | % (12) |
Wellington Group Holdings LLP
| 3,306,801 |
| (13) | — |
| | — |
| | 5.91 | % (13) |
Eaton Vance Management | 3,375,535 |
| (15) | | | | | 6.02 | %(15) |
Christine A. Shreve | 4,389,654 |
| (5)(16) | — |
| | — |
| | 7.89 | %(5)(16) |
|
| |
1 | Includes shares: (i) for which the named person has sole voting and investment power and (ii) for which the named person has shared voting and investment power. Does not include: (i) shares that may be acquired through stock option exercises within 60 days or (ii) unvested restricted stock holdings which the holder maintains voting rights, each of which is set out in a separate column. |
|
| |
2 | Shares that can be acquired through stock option exercises within 60 days of February 21, 2019. |
|
| |
3 | Shares for which the holder maintains voting rights, but are subject to a vesting schedule, forfeiture risk and other restrictions. |
|
| |
4 | For each beneficial owner, ownership percentage is based on (i) the sum of the number of shares listed under each of the column headings Common Stock Beneficially Owned, Right to Acquire and Unvested Restricted Stock and (ii) 55,653,557 shares outstanding on February 21, 2019. |
|
| |
5 | Because of SEC reporting rules, shares held by Realty Investment Company, Inc. (“Realty”), a real estate management and investment company, and certain Bainum and Renschler family entities are attributed to Realty, Christine A. Shreve and more than one of the Bainums and Renschlers included in this table because Realty, Ms. Shreve and such named Bainums and Renschlers have shared voting or dispositive control. As of February 21, 2019, Realty, Ms. Shreve and members of the Bainum and Renschler families (including various partnerships, corporations and trusts established by members of the Bainum and Renschler families) in the aggregate have the right to vote 21,702,537 shares, approximately 39% of the shares of Common Stock outstanding as of February 21, 2019.
|
|
| |
6 | Includes 1,000,222 shares owned by the Stewart W. Bainum, Jr. Declaration of Trust of which Mr. Bainum, Jr. is the beneficiary and co-trustee. Also includes 1,417,056 shares owned by Leeds Creek Holdings, LLC whose only member is Mr. Bainum, Jr.’s trust; 978,482 shares owned by Mid Pines Associates Limited Partnership (“Mid Pines”), in which Mr. Bainum, Jr.’s trust is managing general partner and has shared voting authority; 6,821,574 shares owned by Realty in which Mr. Bainum, Jr.’s trust owns voting stock and has shared voting authority; 205,983 shares owned by the Foundation for the Greatest Good, a private foundation whose principal sponsor is Mr. Bainum, Jr.; and 2,097,251 shares owned by the Jane Bainum Declaration of Trust ("Jane Trust"), a trust for the benefit of his mother for which Mr. Bainum, Jr. is a co-trustee and has shared voting authority.
|
|
| |
7 | Includes 151,628 shares owned by the Scott Renschler Declaration of Trust, of which Dr. Renschler is the sole trustee and beneficiary; 120,849 shares owned by the BBB Trust J, a trust for the benefit of Dr. Renschler’s cousins for which he serves as trustee; and 7,296 shares owned by trusts for the benefit of Dr. Renschler's nephew and nieces for which Dr. Renschler is trustee. Also includes 32,821 shares Dr. Renschler is entitled to under the Company’s non-employee director plan. |
|
| |
8 | Includes 1,030,836 shares owned by the Barbara Bainum Declaration of Trust of which Ms. Bainum is the sole trustee and beneficiary. Also includes 1,175,000 shares owned by Shadow Holdings, LLC for which she shares voting authority and whose sole members are Ms. Bainum and trusts for her benefit; 978,482 shares owned by Mid Pines, in which Ms. Bainum’s trust is a general partner and has shared voting authority; 6,821,574 shares owned by Realty, in which Ms. Bainum’s trust owns voting stock and has shared voting authority; and 163,000 shares owned by The Mental Wellness Foundation, Inc., a private foundation whose principal sponsor is Ms. Bainum. Also includes 13,032 shares owned by trusts for the benefit of Ms. Bainum’s nephews for which Ms. Bainum is the trustee. Ms. Bainum’s address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759.
|
|
| |
9 | Includes 1,393,067 shares owned by the Bruce Bainum Declaration of Trust of which Dr. Bainum is the sole trustee and beneficiary. Also includes 1,685,061 shares owned by Posadas Holdings, LLC for which he shares voting authority and whose sole members are Dr. Bainum, and various trusts for either his benefit or the benefit of his wife or adult children; 978,482 shares owned by Mid Pines, in which Dr. Bainum’s trust is a general partner and has shared voting authority; 6,821,574 shares owned by Realty, in which Dr. Bainum’s trust owns voting stock and has shared voting authority; 219,353 shares owned by Three Graces Foundation, Inc., a private foundation whose principal sponsor is Dr. Bainum; and 6,595 shares owned by a trust for the benefit of certain of Dr. Bainum's descendants for which Dr. Bainum is the trustee. Dr. Bainum’s address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759.
|
|
| |
10 | Includes 1,354,105 shares owned by the Roberta Bainum Declaration of Trust of which Ms. Bainum is the sole trustee and beneficiary. Also includes 1,520,625 shares owned by Sweetwater Holdings, LLC for which she shares voting authority and whose sole members are Ms. Bainum and various trusts for either her benefit or the benefit of her adult children; 978,482 shares owned by Mid Pines, in which Ms. Bainum’s trust is a general partner and has shared voting authority; 223,000 shares owned by Trisons Foundation inc., a private foundation whose principal sponsor is Ms. Bainum; and 6,821,574 shares owned by Realty, in which Ms. Bainum’s trust owns voting stock and has shared voting authority. Ms. Bainum’s address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759.
|
|
| |
11 | The Company is relying on the Schedule 13G/A, filed on February 13, 2019, by Baron Capital Group, Inc. (“BCG”), BAMCO, Inc., Baron Capital Management, Inc. (“BCM”), Ronald Baron and Baron Growth Fund (“BGF”). According to this filing, BCG beneficially owns 4,843,916 shares, BAMCO, Inc. beneficially owns 4,552,817 shares, BCM beneficially owns 291,099 shares, Ronald Baron beneficially owns 4,877,416 shares and BGF beneficially owns 3,000,000 shares. These reporting persons disclaim beneficial ownership to the extent these shares are held by their investment advisory clients and not directly by the reporting persons. The address for the reporting persons is 767 Fifth Avenue, 49th Floor, New York, New York 10153. |
|
| |
12 | The Company is relying on the Schedule 13G, filed on February 11, 2019, by The Vanguard Group. According to this filing, The Vanguard Group beneficially owns 2,948,889 shares. These reporting persons disclaim beneficial ownership to the extent these shares are held by their investment advisory clients and not directly by the reporting persons. The address for the reporting persons is 100 Vanguard Blvd., Malvern, PA 19355. |
|
| |
13 | The Company is relying on the Schedule 13G, filed on February 12, 2019, by Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP, Wellington Management Company LLP and Wellington Group Holdings, LLP ("Wellington"). According to this filing, Wellington beneficially owns 3,306,801 shares. These reporting persons disclaim beneficial ownership to the extent these shares are held by their investment advisory clients and not directly by the reporting persons. The address for the reporting persons is 280 Congress Street, Boston, MA 02210. |
|
| |
14 | Realty is controlled and owned by members of the Bainum family, including Stewart W. Bainum, Jr., Scott Renschler, Barbara Bainum, Bruce Bainum and Roberta Bainum. Realty’s address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759. Christine A. Shreve is an officer and director of Realty. |
|
| |
15 | The Company is relying on the Schedule 13G, filed on February 14, 2019, by Eaton Vance Management ("EVM"). According to this filing, EVM beneficially owns 3,375,535 shares. These reporting persons disclaim beneficial ownership to the extent these shares are held by their investment advisory clients and not directly by the reporting persons. The address for the reporting persons is 2 International Place Boston, MA 02110.
|
|
| |
16 | Includes 2,800 shares owned by Ms. Shreve jointly with her husband; 1,175,000 shares owned by Shadow Holdings, LLC, an LLC whose sole members are Barbara Bainum and trusts for her benefit, for which Ms. Shreve is manager and has shared voting authority; 1,685,061 shares owned by Posadas Holdings, LLC, an LLC whose sole members are Bruce Bainum and various trusts for either his benefit or the benefit of his wife or adult children for which Ms. Shreve is manager and has shared voting authority; 1,520,625 shares owned by Sweetwater Holdings, LLC, an LLC whose sole members are Roberta Bainum and various trusts for either her benefit or the benefit of her adult children for which Ms. Shreve is manager and has shared voting authority; and 6,168 shares owned by trusts for the benefit of Renschler family members for which Ms. Shreve is the trustee. Ms. Shreve’s address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759.
|
|
| |
17 | Brian B. Bainum has an interest in certain Bainum family trusts and other entities formed for his benefit and the benefit of his relatives, including his siblings and their descendants. These trusts and entities hold a total of 511,773 shares. Mr. Bainum has no voting or investment power over these entities. Mr. Bainum’s address is 8171 Maple Lawn Blvd., #375, Fulton, Maryland 20759. |
Dear Choice Hotels Shareholders:
In 2018, Choice invested in current brands, launched and acquired new brands, and further enhanced our business-delivery capabilities. We are building the business for the future by adding brands like WoodSpring Suites and Clarion Pointe. We exceeded the top end of full year guidance for EPS and have the largest domestic pipeline in the Company's history. As we celebrate our strong 2018 results, we also look forward to celebrating Choice's 80th anniversary in 2019.
Consistent with our pay-for-performance philosophy, the year's successes are reflected in our executive pay component results and the compensation decisions for our Named Executive Officers ("NEOs") as follows:
| |
• | Franchise agreements representing 7,021 hotels open and 1,082 hotels under construction, awaiting conversion or approved for development as of December 31, 2018, with 569,108 rooms and 87,061 rooms, respectively, in 50 states, the District of Columbia and more than 40 countries and territories outside the United States |
| |
• | Short-term incentives on average paid out at 124.3% of target based primarily on performance at the following percentages of target for all NEOs other than Mr. Pepper: operating income: 135%, market share: 80%, and “likelihood to recommend”: 87.5% (Mr. Pepper's compensation is highly focused on the number of awarded franchise agreements due to his development role) |
| |
• | Long-term incentive performance was over-delivered upon with cumulative EPS above the three-year EPS target |
| |
• | 756 domestic franchise agreements were awarded in 2018, with 737 agreements related to Mr. Pepper's 2018 goal to execute 749 agreements |
Each year, we hold a shareholder advisory vote on our executive pay program and reach out to our largest shareholders to understand their perspectives and concerns. In 2018, 99% of shareholder votes cast were in favor of the "Say on Pay" proposal.
In further support of our pay-for-performance philosophy and alignment with shareholder interests, the Company maintains the following pay and governance practices:
| |
• | A significant majority of pay is performance-based or variable (approximately 82% for the CEO and 70% for the other executives) |
| |
• | Pay is aligned with the market of peer group companies in the hospitality industry and companies with franchise business models |
| |
• | 50% of annual long-term incentive awards for all NEOs were made up of performance-vested restricted stock units ("PVRSUs") |
| |
• | Pay design features are aimed at risk mitigation and ensuring that pay plans do not create material risks |
| |
• | Our clawback policy requires recoupment of bonus and long-term incentive compensation paid in the event of certain subsequently restated financials |
| |
• | Guidelines require stock ownership by executives at a targeted multiple of pay |
| |
• | Policies generally restrict hedging and pledging |
| |
• | Pay plans include best practice provisions, such as: |
| |
◦ | No excise tax gross-ups on severance and change-in-control benefits |
| |
◦ | No single-trigger vesting of equity awards on a change in control |
| |
◦ | Dividends are paid on PVRSUs only to the extent the awards vest |
| |
• | An Independent Compensation and Management Development Committee makes pay decisions and is advised by an independent compensation consultant |
We value feedback from our shareholders, and we continue to consider shareholder input and market best practices as we design and review our executive pay program to ensure it is appropriate for Choice Hotels and our long-term strategy, and is in the best interests of shareholders.
Yours sincerely,
Ervin R. Shames
Chair, Compensation and Management Development Committee
Lead Independent Director
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis ("CD&A") describes our executive compensation philosophy, summarizes the principles of our executive compensation program and analyzes our pay decisions for 2018. It also provides context for the data we present in the compensation tables below.
For purposes of this CD&A and the compensation tables, our NEOs for 2018 are:
|
| | | |
Name | | Title | |
Patrick S. Pacious | | President and Chief Executive Officer ("CEO") |
Dominic E. Dragisich | | Chief Financial Officer ("CFO") |
David A. Pepper | | Chief Development Officer ("CDO") |
Simone Wu | | Senior Vice President, General Counsel, Corporate Secretary & External Affairs |
Patrick J. Cimerola | | Chief Human Resources Officer ("CHRO") |
Choice is committed to delivering shareholder value. The core principle of our executive compensation program is pay for performance, which guides our executive compensation decisions. Choice uses a combination of fixed and variable compensation to incentivize and reward strong performance and to align the interests of our executives with those of the Company’s shareholders. This executive summary provides an overview of our governance practices, 2018 Company performance, pay-for-performance alignment, incentive compensation framework, targeted total direct compensation, and say-on-pay feedback from shareholders.
Pay and Governance Practices
The Company has the following pay and governance practices that reinforce the soundness of our compensation programs:
2018 Company Performance
The Company delivered strong financial and operational performance in 2018. We believe our pay-for-performance philosophy, key strategic efforts and the economic environment were primary drivers of our success. Our performance reflects the strength of our executive team and employees and their ability to successfully manage a complex and dynamic business.
Compensation-Related Performance in 2018
Our focus on key brand and operational initiatives within the 2018 business environment enabled us to achieve the following performance goals that were specifically linked to executive compensation:
| |
• | Operating Income: Achieved operating income of $318.5 million ($322 million as adjusted by the Compensation Committee (the "Committee") for certain items as discussed on page 42), significantly exceeding our 2018 corporate operating income target. |
| |
• | Market Share: Achieved 101 basis points ahead of the industry, against a goal of 154 basis points above industry average. |
| |
• | Likelihood-to-Recommend (LTR): Achieved a score of 8.27 - 8.62 against the LTR goal of 8.28 - 8.66. |
| |
• | Franchise Contract Value and Executed Franchise Contracts (in relation to Mr. Pepper's compensation): Exceeded our target franchise contract value at 108% against our 2018 franchise contract value goal and achieved 737 executed domestic franchise contracts against our 2018 goal of 749 contracts. Franchise contract value reflects investment in the Choice pipeline and is a positive indicator for our franchises and our shareholders. |
As a result, short-term incentive payouts to our NEOs, other than Mr. Pepper, were in aggregate 124.3% above target, based on a weighting of 70% - 80% for operating income achievement being significantly above target, and with a weighting of 20% - 30% for market share and LTR achievement being below target. Mr. Pepper's short-term incentive payout exceeded the target for franchise contract value and achieved 98% of the goal for the number of executed franchise contracts. See “Short-Term Incentive Compensation” below for more details.
CEO Compensation and Pay-for-Performance Alignment
Each year, the Committee evaluates our CEO’s compensation relative to Company performance. The following graph shows the relationship of our CEO’s realizable pay (including actual total cash compensation and the realizable value of equity awards granted during the three-year period valued at December 31, 2018) and our cumulative shareholder return for the last three years relative to our 2018 peer group companies (see "Compensation Competitive Analysis" below). As illustrated, total shareholder return ("TSR") and the Company's CEO pay are aligned relative to the peer group. Since Mr. Pacious became our CEO during the three-year period, for purposes of this chart, the Company’s CEO compensation is calculated based on the compensation paid to our former CEO for 2016, the annualized compensation paid to our current CEO for 2017 and the compensation paid to our current CEO for 2018.
*The Cumulative Total Shareholder Return numbers assume that the value of the investment in the Company's Common Stock was $100 on December 31, 2015 and track the investment through December 31, 2018.
**Based on availability of information, the above chart uses the time period of 2016 – 2018 for TSR and Choice CEO compensation and 2015 – 2017 for peer group compensation.
*** Due to the acquisition of Pinnacle Entertainment Inc. ("Pinnacle") by Penn National Gaming, Inc. in October of 2018, current TSR data for Pinnacle is unavailable, and thus excluded from this analysis.
****Due to the acquisition of ILG, LLC, as successor to ILG, Inc., formerly known as Interval Leisure Group, Inc. ("ILG") by Marriott Vacations Worldwide Corporation in September of 2018, current TSR data for ILG is unavailable, and thus excluded from this analysis.
The Committee also assesses the pay positioning of our NEOs as a whole. We have found that the NEO pay rankings align with our one- and three-year TSR percentile rankings among our 2018 peer group as set forth below.
|
| | | | |
Performance Period | | Choice TSR Performance | | Choice’s TSR Percentile Rank Among 2018 Peer Group |
One-Year | | -7% | | 52% |
Three-Year | | 48% | | 59% |
2018 Incentive Compensation Framework
Choice’s executive compensation program links a substantial portion of each executive’s total compensation opportunity to achievement of performance metrics we believe drive shareholder value. In rewarding executives, the Company provides direct accountability for individual, shared and organizational results, ensuring that rewards are commensurate with each executive's contributions to shareholder value. Our performance measurement framework for incentive based pay for our NEOs is summarized below.
*Mr. Pepper's short-term incentive may be leveraged up or down by the Company's actual operating income achievement.
2018 Targeted Total Direct Compensation Mix
The charts below show the mix of targeted total direct compensation (“TDC”) (base salary, target annual incentive and target long-term incentive) for the CEO and other NEOs in 2018. Consistent with our pay-for-performance philosophy, the largest portion of compensation (approximately 82%) for our CEO, and on average 70% for our other NEOs is variable or performance-based annual and long-term incentives.
2018 Targeted Total Direct Compensation
Based on market data and advice from its independent compensation consultant, Mercer, the Committee determined that the appropriate targeted TDC for our CEO in 2018 was $5,318,750. The individual components of the targeted TDC and actual results are broken out in the chart below.
|
| | | | | | | |
CEO Total Direct Compensation | | | |
| Target | | Actual |
Salary | $ | 925,000 |
| | $ | 925,000 |
|
Annual Incentive | $ | 1,387,500 |
| | $ | 1,730,906 |
|
Long-Term Incentive | $ | 3,006,250 |
| | $ | 3,006,271 |
|
Total | $ | 5,318,750 |
| | $ | 5,662,177 |
|
Say-on-Pay Feedback from Shareholders
We conduct an annual shareholder advisory vote on the compensation of our executive officers. In 2018, 99% of votes cast were in favor of this proposal. In addition, in 2017, 94% of votes were cast in favor of an annual frequency for say-on-pay voting, and the Company will continue holding annual advisory votes on compensation.
The Committee considers the results of the advisory vote during its annual review of executive compensation. Given the significant level of shareholder support, the Committee concluded that our compensation program continues to provide pay-for-performance alignment and market
competitive pay that incentivizes our NEOs to maximize shareholder value and encourages long-term retention.
The Company reaches out to its largest shareholders each year regarding Company performance and results, as well as governance matters. The Committee will continue to consider the outcome of our say-on-pay votes and our shareholder views when making future NEO compensation decisions.
|
|
COMPENSATION PHILOSOPHY AND OBJECTIVES |
Compensation Philosophy
Our executive compensation program and pay decisions are based on the following philosophy established by the Committee:
|
|
Emphasize pay for performance, pay competitively to attract and retain the best talent and drive long-term shareholder value creation. |
| |
• | Emphasize Pay for Performance by aligning incentives with short- and long-term strategic objectives. We reward executives who achieve or exceed Company and individual objectives that are designed to drive the organization to execute on our strategy and deliver value to shareholders. |
| |
• | Pay Competitively by ensuring TDC for each executive is aligned with the appropriate competitive market. The compensation opportunity is designed to be competitive with other corporations of similar complexity and global scale in terms of system-wide revenue and market capitalization. Because the executive team is responsible for managing in an extensive system-wide gross room revenue and rapidly changing distribution and e-business environment, paying competitively to similarly complex organizations is of critical importance to recruiting and retaining strong talent. |
| |
• | Drive Long-Term Shareholder Value by linking executive pay opportunity to the Company's share value. This fosters the long-term focus required for premier performance in the hospitality industry and encourages continued investment in growth. The Company believes that shareholder value will increase through continued growth in the core business, investments in growth opportunities beyond the core, optimization of balance sheet debt levels and risk-adjusted returns of excess capital to shareholders. The execution of this strategy will be achieved through Choice's strong cultural values which drive results through leadership, performance excellence and enterprise-wide accountability. |
Compensation Objectives
The Committee considers the following objectives in making compensation decisions for our NEOs and other executives:
|
| |
Objective | Description |
Pay for Performance | Link pay through short- and long-term incentives to corporate, team and individual performance to encourage and reward excellence and outcomes that further the Company's results and enhance shareholder value |
Encourage Growth | Encourage the exploration of opportunities in business areas that are complementary to our core hotel franchising business, leverage core competencies and / or add to our franchising business model |
Competitive Pay | Assure that compensation relates to performance relative to companies of similar complexity and global scale in terms of system-wide gross room revenue and market capitalization to provide effective incentives and encourage retention |
Shareholder Alignment | Align the interests of executives with those of our shareholders through grants of equity-based compensation that, coupled with our stock ownership requirements, encourage significant ongoing equity ownership |
Long-Term Focus | Foster long-term focus and continued investment in growth required for premier performance in the hospitality industry through equity incentives that vest over time |
Internal Pay Equity | Consider internal pay equity so that the relationship between internal executive pay levels is appropriate |
Recruitment and Retention | Enable the recruitment and retention of highly qualified executives able to excel within a complex organization that manages extensive system-wide gross room revenues in a rapidly changing, disruptive distribution environment |
|
|
COMPENSATION COMPETITIVE ANALYSIS |
The Committee considers many factors in determining NEO compensation, including the following:
| |
• | Company culture and philosophy |
| |
• | Historical performance of the individual and executive team |
| |
• | Importance of the executive’s role in the execution of the Company’s short- and long-term strategic objectives |
| |
• | Executive compensation market trends of peer companies in the hospitality, franchise and other related market sectors. |
The Committee reviews competitive market data of companies with which we compete in business and/or for talent. Specifically, the Committee reviews data from companies with the following characteristics:
1. Revenue comparability (considering franchise system-wide gross room revenue)
2. Business complexity
3. Franchising focus
4. Technology focus
Utilizing fiscal year 2017 data, the 25th to 75th percentile revenue range for our peer group is $1.56 billion to $4.69
billion. Utilizing March 2018 data, the market capitalization range for the 25th to 75th percentile of our peer group is $3.83 billion to $11.53 billion. Choice Hotels franchise system revenue for purposes of the executive compensation market assessment reflects a blend of generally accepted accounting principles ("GAAP") revenue and franchise system-wide revenue, and is at the 54% rank in the peer group. Choice's market capitalization is at the 41% rank in the peer group.
Choice's peer group is developed to support Choice Hotels' unique business model and objectives, recognizing that its GAAP revenue is not indicative of the breadth of executive responsibilities due to its franchise business model.
Technology focus is particularly relevant to our Company as we seek to drive business through our distribution channels thus strengthening our propriety contribution and the value of our brands. This market data gives the Committee insight into the range of compensation in the competitive market and a general understanding of marketplace compensation practices and policies. However, the Committee does not use comparative market data to “benchmark” the amount of total compensation or any specific element of compensation for our executives.
2018 Peer Group
Choice reevaluates its peer group annually with Mercer's assistance. The Committee believes that the peer group, consisting of a diverse set of companies, including those with a technology focus, suitably matches the Company's increasingly complex business model and business mix, and exemplifies the incentives that the Company plans to use in driving future performance outcomes. Information from the peer group is used as a general reference in evaluating the Company's compensation practices.
*Wyndham Worldwide closed a transaction spinning off Wyndham Hotels & Resorts (WH) on June 1, 2018. Wyndham Worldwide is now Wyndham Destinations (WYND). For the purposes of 2018 compensation decisions, Wyndham Worldwide was a member of the Company's peer group.
**Domino's Pizza and ILG were added to the peer group for 2018 compensation decisions.
|
|
2018 COMPENSATION PROGRAM |
The Company’s executive compensation program consists of four primary components: base salary; short-term cash incentives; long-term equity incentives; and perquisites and other benefits. The table below summarizes the elements of our incentive compensation program.
|
| | |
Incentive Program | Description | Key Features |
Short-Term Incentive (Cash) | Motivates and rewards executives for achievement of Company annual financial and operational goals and/or other strategic objectives measured over the fiscal year. | Cash incentive based on achieving annual operating income, market share, LTR and individual performance goals for NEOs other than Mr. Pepper. Total potential payout ranges from 0% - 200% of target. |
Long-Term Incentive (Equity) | Through a variety of equity vehicles, creates linkage to share value appreciation and alignment with shareholders.
Motivates and rewards executives for sustaining long-term financial and operational performance that increases the value of our brands and shareholder value.
Encourages retention through multi-year overlapping vesting periods.
Share ownership and holding requirements align the financial interests of our executives with the financial interests of our shareholders.
| Grants may vary from annual guidelines based on several factors including, among other things, individual performance, retention, competitive market, and strategic alignment.
PVRSUs: PVRSU grants focus executives on achieving specific targeted objectives. PVRSUs are payable in stock and generally vest based on the achievement of performance goals over a 3-year period.
RSs: Service-based Restricted Stock (“RS”) generally vests 25% per year over 4 years.
Stock Options: Option awards vest ratably over 4 years and expire 7 years from the grant date. The exercise price is equal to the closing price of Choice Common Stock on the date of grant.
|
Base Salary
We believe the primary purpose of base salaries is to provide a level of fixed compensation that is competitive to attract and retain highly qualified executives. The table below reflects the change in each NEO’s salary from 2017 to 2018:
|
| | | | | | | | | |
NEO | | Base Salary as of 12/31/17 ($) | | Base Salary as of 12/31/18 ($) | | % Increase |
Pacious | | 925,000 |
| | 925,000 |
| | — | % |
Dragisich | | 400,000 |
| | 530,000 |
| | 32.5 | % |
Pepper | | 503,930 |
| | 503,930 |
| | — | % |
Wu | | 470,000 |
| | 485,000 |
| | 3.2 | % |
Cimerola | | 400,000 |
| | 400,000 |
| | — | % |
The Committee believes that these increases reflect the competitive environment for executive talent. In the case of Mr. Dragisich, the increase places him at the desired positioning relative to the market given tenure and performance.
Short-Term Incentive Compensation
The Company previously established the Choice Hotels International, Inc. Executive Incentive Compensation Plan (the “EICP”), an umbrella plan establishing the maximum performance-based incentive payout. The Company's Management Incentive Plan (“MIP”) is a cash bonus program through which operating and individual objectives are set.
Short-Term Incentive Target Opportunities
Under these plans, each NEO has a target incentive opportunity equal to a percentage of the NEO’s base salary. The target percentage remained the same compared to 2017 for all NEOs other than Mr. Dragisich. For Mr. Dragisich, the percentage change (from 70% to 80%) places him at the desired positioning relative to the market given tenure and performance. Due to the nature of Mr. Pepper's development role, his short-term incentive compensation is highly focused on the number of awarded franchise agreements, with a maximum payout of $1.2 million (238% of target).
The threshold, target and maximum incentive levels for each of the NEOs for 2018 were:
Bonus as a Percentage of Salary
|
| | | | | | | | | |
NEO | | Threshold | | Target | | Maximum |
Pacious | | 75.0 | % | | 150.0 | % | | 300.0 | % |
Dragisich | | 40.0 | % | | 80.0 | % | | 160.0 | % |
Pepper | | 48.4 | % | | 65.0 | % | | 238.1 | % |
Wu | | 25.0 | % | | 50.0 | % | | 100.0 | % |
Cimerola | | 25.0 | % | | 50.0 | % | | 100.0 | % |
Short-Term Incentive Performance Goals
|
| |
Performance Metric | Why Metric is Used |
Operating Income | Heightens the focus on driving profitable operational revenue growth. |
Market Share | Measures how the Company is performing against competitors in growing our system size as well as our growth relative to our competitive index. Increasing market share drives financial performance. |
Likelihood to Recommend (LTR) | Demonstrates value to our customers and allows us to demonstrate the value proposition of our brands to our franchisees to sell more franchises. |
Individual Performance | Allows us to measure performance against strategic goals and departmental objectives of the executive and the executive's team. |
Executed Franchise Agreements | Measures growth of the Choice system size and market share.
|
Franchise Contract Value | Drives the value to the Company over the term of each new franchise contract which impacts operating income today and in the future. |
|
| | | | | | |
Performance Metric Weightings |
NEO | Operating Income | Market Share | Likelihood to Recommend (LTR) | Individual Performance | Executed Franchise Agreements | Franchise Contract Value |
Pacious | 80% | 10% | 10% | | | |
Dragisich | 70% | 10% | 10% | 10% | | |
Pepper | | | | | 70% | 30% |
Wu | 70% | 10% | 10% | 10% | | |
Cimerola | 70% | 10% | 10% | 10% | | |
Operating Income
Mr. Pacious recommended, and the Committee approved, operating income of $310.3 million as a performance metric target for the 2018 MIP. Recommended target excluded the impact of the Company's marketing and reservation system activities as these activities are contractually required to break even over the long-term. The 2018 MIP was structured to fund the bonus pool at the target bonus level for each NEO upon achievement of the operating income target for the year and to pay a corresponding percentage of the target incentive for operating income performance above or below the target. For purposes of our incentive compensation, operating income is calculated in accordance with GAAP, then adjusted by the Committee based on approved exceptions, as noted below.
Because the operating income objective was the most heavily weighted factor for determining the actual MIP payout (except for Mr. Pepper), the level of achievement against the operating income target relative to the NEO's target incentive opportunity was the primary driver of their annual incentive payout for the year. This is true for all NEOs other than Mr. Pepper, whose MIP payout is based primarily on the number of executed franchise contracts and the cumulative franchise contract value of these contracts, leveraged by operating income results.
Operating Income Results
The Company achieved operating income of $318.5 million in 2018. Under the MIP, operating income achievement may be adjusted at the discretion of the Committee for certain non-recurring items. After the adjustments discussed below, operating income for purposes of determining 2018 MIP payouts was $322.0 million. The resulting payout was 135% of the target.
Operating Income Adjustments
The Committee approved adjustments in calculating operating income for the purposes of the 2018 MIP. Operating income was decreased (i) related to mark-to-market gains from non-qualified deferred compensation plan assets resulting from financial market performance outside of management's control ($1.1 million), (ii) surpluses generated from the Company's marketing and reservation system activities which were not contemplated in the approved operating income target since the activities are designed to break even over the long-term ($9.4 million), and (iii) a gain on the sale of a parcel of real estate ($0.1 million).
Operating income was increased (i) related to the WoodSpring transaction and transition costs not contemplated in the approved operating income target ($6.2 million), (ii) by an impairment to goodwill related to the Company's operations that provide Software as a Service ("SaaS") technology solutions to vacation-rental management companies ($4.3 million), (iii) by a loan impairment ($2.8 million) and (iv) by restructuring / severance charges ($0.9 million).
The net effect of the operating income adjustments increased operating income by $3.5 million for 2018 MIP purposes.
Market Share and LTR
For 2018, the NEOs (other than Mr. Pepper as discussed below) and other senior executives received two shared performance objectives associated with goals related to the Company’s market share and LTR ratings of the Company’s hotel portfolio. These objectives were also used in prior years and are a reflection of overall performance of the Company. Mr. Pacious's performance objectives for 2018 consisted exclusively of the executive team’s shared objectives. For the other NEOs (other than Mr. Pepper), the shared objectives were accompanied by specific individual or department objectives.
For 2018 annual incentive payments, the shared objectives related to:
| |
• | Market share: Market share achievement was measured versus the projected total lodging industry supply growth. |
| |
• | LTR: LTR for equity brands was measured as the average ratings provided on the 10-point scale via the Guest Insight Systems survey administered by a third-party vendor. |
Operating Income, Market Share and LTR Performance in 2018
|
| | | | | | |
Criteria | | Operating Income | | Market Share* | | Likelihood to Recommend (LTR)** |
Target | | $310.3 M | | Grow domestic unit market share by 154 basis points in comparison to industry growth | | 8.28 - 8.66 |
Actual | | $322.0 M as adjusted | | 2.18% net unit growth for Choice vs. 1.17% net unit growth for the U.S.*** | | 8.27 - 8.62 |
Achievement | | 104% | | +101 basis points ahead of the industry | | Below plan |
Payout Percentage | | 135% | | 80% | | 87.5% |
*To arrive at market share for the Company and industry, Choice calculates the net number of hotel properties added to the Choice Hotels system at year-end 2018 compared to the total number of units at year-end 2017 as reported in the Choice Hotels Inns & Operating Report and the total number of open hotel units in the U.S. at year-end December 2018 versus the reported number of open units at year-end December 2017 as measured by the third-party firm Smith Travel Research.
**Overall LTR range includes separate ranges for equity and prestige brand groups.
***Choice net unit growth percentage excludes WoodSpring Suites.
Individual / Department Performance
For Mr. Dragisich, Ms. Wu and Mr. Cimerola, a component of their short-term payout reflects individual and / or department objectives and their short-term incentive may be adjusted based on an assessment of their performance against pre-determined individual and / or department objectives. These performance objectives, where applicable, are based in part on a qualitative evaluation of performance, but also include quantifiable measures such as RevPAR (revenue per available room) improvement, CRS (central reservation system) contribution, Choice Privileges contribution, corporate room nights, or other relevant measures.
Performance objectives are determined at the beginning of the year based on the role of the individual in the organization. Mr. Pacious assesses performance against objectives and assigns payouts for this component of Mr. Dragisich's, Ms. Wu's and Mr. Cimerola's compensation.
For Ms. Wu, objectives focused on the successful execution and support of the WoodSpring Suites acquisition, government affairs and industry association outreach, public relations and external communications, and procurement, were met and exceeded.
For Mr. Cimerola, objectives focused on executing our employee value proposition, enhancing our culture of inclusion and diversity, and optimizing talent to deliver our strategic goals including the successful integration of our WoodSpring Suites acquisition, were met and exceeded.
For Mr. Dragisich objectives focused on driving transformation of the finance organization, overseeing the development of the Company's growth initiatives, delivering the successful WoodSpring Suites integration, and leading public financial communication strategy, were met and exceeded.
Short-Term Incentive Payouts
The following table details the weightings and 2018 payouts attributed to each performance measure for each NEO.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
NEO | | Operating Income ($) | | Market Share ($) | | Likelihood to Recommend (LTR) ($) | | Individual /Department Objectives ($) | | Franchise Agreements / Franchise Contract Value ($) |
Pacious | | 80% | | 1,498,500 |
| | 10% | | 111,000 |
| | 10% | | 121,406 |
| | —% | | — |
| | —% | | — |
Dragisich | | 70% | | 400,680 |
| | 10% | | 33,920 |
| | 10% | | 37,100 |
| | 10% | | 67,840 |
| | —% | | — |
Pepper * | | —% | | | | —% | | | | —% | | | | —% | | | | 100% | | 407,051 |
Wu | | 70% | | 229,163 |
| | 10% | | 19,400 |
| | 10% | | 21,219 |
| | 10% | | 27,888 |
| | —% | | — |
Cimerola | | 70% | | 189,000 |
| | 10% | | 16,000 |
| | 10% | | 17,500 |
| | 10% | | 25,000 |
| | | | |
* Mr. Pepper's short-term incentive payout was 70% weighted based on achievement of executed franchise sales contracts in 2018; subject to operating income leverage up to the target incentive opportunity; and 30% weighted based on franchise contract values; see further description below.
Franchise Agreements and Franchise Contract Value - Pepper
Mr. Pepper is covered under an Executive Sales MIP intended to drive high-value franchise contract sales. The plan was designed to deliver his target MIP payment (65% of base salary) upon achievement of a targeted number of executed franchise agreements (70% of total target MIP) and aggregate franchise contract value (30% of total target MIP). The executed franchise agreement portion of the target payout is increased or decreased based on brand achievement. The amount payable under the MIP is leveraged to increase performance payout for results above the sales targets and decrease payout for results below the sales targets. The target payout may be further adjusted up or down based on overall Company operating income performance, similar to the other executive officers.
The Company is not disclosing 2019 targets for executed franchise agreements and cumulative franchise contract value because we believe such disclosure would cause us competitive harm. As a franchise company focused on growing our brands in a very competitive market, revealing targets and comparing them year over year would give competitors great insight into the Company’s growth strategy.
During 2018, the development team, under the leadership of Mr. Pepper, delivered 737 executed "domestic" franchise agreements generally covering the U.S., the Caribbean, and for certain brands, Canada, against a goal of 749 executed contracts. Further, within the franchise agreement goal, Mr. Pepper had minimum goals for certain Choice brands. Mr. Pepper over delivered on total franchise contract value at 108% against our 2018 plan franchise contract value goal. Mr. Pepper's actual incentive is also leveraged based on the Company's operating income performance (135%). Based on overall achievement, Mr. Pepper earned a total short-term incentive payment of $407,051 or 124% of his target MIP payout.
Long-Term Incentive Compensation
Long-term equity incentive compensation is the largest component of total compensation for our NEOs. Linking the greatest portion of total compensation to long-term objectives aligns executives’ interests with the interests of shareholders. Also, the Committee believes this strategy focuses executives on addressing the potential risks facing the business through managing with a long-term perspective. To strengthen the tie between executive compensation and the Company’s performance, each executive’s targeted and actual pay mix may vary by position, with the positions that have a greater impact on performance / operations generally having more pay at risk in the form of long-term incentives.
Long-Term Incentive Target Opportunity
For all NEOs the Committee approved awards of performance-based restricted stock units ("PVRSUs"), stock options and service-based restricted stock, at 50%, 25% and 25% of the total value of the grant, respectively. This mix provides 75% performance-based alignment through PVRSUs and stock options. The RS ensures that 25% of the award is focused on retention.
Equity Grant Policies
The value of the long-term incentive opportunity granted to each NEO in 2018 was determined based on an established multiple of the NEO’s base salary or on a fixed amount. Within the established target range, discretion is applied by Mr. Pacious and the Committee to determine the value of the equity award to be granted. Each NEO’s target range was established based on the criticality of the role within the organization in achieving the long-term strategic plan of the organization and the competitive market.
For Mr. Pacious and Mr. Dragisich, the target range grant value is a multiple of base salary. For Mr. Pepper, Ms. Wu and Mr. Cimerola, the target grant value has been de-coupled from base salary and is expressed as a fixed amount. This de-coupling isolates the target grant value from the effect of base pay increases. The following table sets forth the equity award grant value and base salary for each NEO as of December 31, 2018:
|
| | | | | | | | |
NEO | | Base Salary | | Target Range Grant Value Multiple as a Percentage of Base Salary or Fixed Amount Minimum / Target / Maximum | | 2018 Equity Award Grant Date Fair Value | | 2018 Equity Award Grant Date Fair Value as a Percentage of Base Salary |
Pacious | | $925,000 | | 260% - 390% | | $3,006,271 | | 325% |
Dragisich | | $530,000 | | 150% - 180% | | $900,166 | | 170% |
Pepper* | | $503,930 | | $680,000 / $850,000 / $1,020,000 | | $850,077 | | --- |
Wu* | | $485,000 | | $472,000 / $590,000 / $708,000 | | $590,076 | | --- |
Cimerola* | | $400,000 | | $400,000 / $500,000 / $600,000 | | $500,050 | | --- |
* The LTI target is expressed explicitly as a dollar value and represents a de-coupling from base salary.
Long-Term Incentive Grant
After reviewing the target range or fixed target amount for each executive (other than himself), Mr. Pacious recommended that each of the other NEOs should receive 2018 equity awards valued at or above the fixed target amount or the midpoint level of the range of potential grant values. He recommended this to achieve the targeted level of total compensation and align the leadership team's interests with long-term growth.
The following chart shows the actual PVRSUs, stock options and RS granted to each NEO as part of the Company’s annual equity grant process:
|
| | | | | | | | | | | | | | | | | | | | | |
Name | | # of Options | | # of PVRSU | | # of Restricted Stock | | |
| Grant Based on Black Scholes of | | Grant Based on FMV of | | Grant Based on FMV of | | TOTAL GRANT* |
| $16.27 | | $81.55 | | $81.55 | | |
| | | | | | | Value ($) |
| Shares | | Value ($) | | Shares | | Value ($) | | Shares | | Value ($) | |
Patrick S. Pacious | | 46,194 |
| | 751,576 |
| | 18,432 |
| | 1,503,130 |
| | 9,216 |
| | 751,565 |
| | 3,006,271 |
|
Dominic E. Dragisich | | 13,830 |
| | 225,014 |
| | 5,519 |
| | 450,074 |
| | 2,760 |
| | 225,078 |
| | 900,166 |
|
David A. Pepper | | 13,062 |
| | 212,519 |
| | 5,212 |
| | 425,039 |
| | 2,606 |
| | 212,519 |
| | 850,077 |
|
Simone Wu | | 9,066 |
| | 147,504 |
| | 3,618 |
| | 295,048 |
| | 1,809 |
| | 147,524 |
| | 590,076 |
|
Patrick J. Cimerola | | 7,683 |
| | 125,002 |
| | 3,066 |
| | 250,032 |
| | 1,533 |
| | 125,016 |
| | 500,050 |
|
*For additional information on equity award values for each NEO in 2018, see the Grants of Plan-Based Awards Table.
The number of shares subject to the stock option portion of the equity award granted to each officer is based on the Black-Scholes option-pricing model. See the preamble to the Grants of Plan-Based Awards Table for more information on how the Company determines the actual number of shares subject to each type of equity award.
Completed PVRSU Grants
PVRSUs Vested in 2019
2016-2018 PVRSUs
PVRSUs granted in February 2016 to all NEOs (other than Mr. Dragisich, who was not an employee of the Company at the time of the grant) paid out above target as a result of exceeding cumulative EPS goals for the performance period 2016 - 2018. The cumulative EPS target for the February 2016 grants was $8.44 for the performance period 2016 - 2018.
The approved three-year cumulative EPS as adjusted by the Committee applicable to the PVRSUs granted in February 2016 was $8.56, reflecting 101.4% of target and a payout of 105% of target. The awards for Mr. Pacious, Mr. Pepper, Ms. Wu, and Mr. Cimerola vested on February 26, 2019.
Mr. Pacious also received a PVRSU grant in May 2016. The Pacious May 2016 grant provided that 100% of the shares granted would vest in two equal tranches if the EPS threshold of $7.60 was met for the performance period 2016 - 2018. Given the applicable three-year cumulative EPS was $8.56, Mr. Pacious' award vested 50% on January 1, 2019 and will vest 50% on January 1, 2020.
EPS Adjustments - 2016-2018 PVRSU Period
The Committee approved adjustments in calculating EPS for the performance period 2016-2018 for the purposes of the LTIP. EPS for the performance period was decreased by (i) the impact of tax reform on the corporate statutory rate ($32 million), (ii) the impact of the adoption of revenue recognition standard ASC 606 ($6.6 million), (iii) SkyTouch unplanned surpluses ($7.4 million) and (iv) impairment of leasehold intangibles ($0.7 million).
EPS for the performance period was increased (i) related to restructuring and severance charges ($11.8 million), (ii) by the impact of tax legislation on deferred tax balances ($40.9 million), (iii) impairment of goodwill related to the Company’s operations that provide Software as a Service (“SaaS”) technology solutions to vacation-rental management companies ($4.3 million), (iv) by loan impairments ($1.8 million), (v) by loss on extinguishment of debt ($0.07 million) and (vi) by M&A due diligence in excess of the $1 million annual cap ($3.4 million).
The net effect of the EPS adjustments was $0.28 per share, increasing the PVRSU achievement and payout.
2015-2017 Pepper PVRSU
The Company granted a PVRSU in May 2015 to Mr. Pepper in connection with his promotion to Chief Development Officer. Over the performance period 2015 - 2017, Mr. Pepper achieved 1,979 executed franchise agreements against a target of 1,900 executed agreements, resulting in at target performance. This PVRSU grant was vested at 100% on January 2, 2019.
For all PVRSUs vested in 2019, dividends were paid out in cash at the end of the performance period based on the percent achievement.
PVRSUs Vested in 2018
2015-2017 PVRSUs
PVRSUs granted in February 2015 to all NEOs, other than Mr. Dragisich, paid out at target as a result of meeting cumulative EPS goals for the performance period 2015 - 2017. The cumulative EPS target was $7.64 for the performance period 2015 - 2017.
The approved three-year cumulative EPS as adjusted by the Committee applicable to these PVRSUs was $7.67, reflecting 100.3% of target and a payout of 100% of target. These awards vested on February 27, 2018.
EPS Adjustments - 2015-2017 PVRSU Period
The Committee approved adjustments in calculating EPS for the performance period 2015-2017 for the purposes of the LTIP. EPS for the performance period was decreased by the impairment of leasehold intangibles ($0.7 million).
EPS for the performance period was increased (i) related to restructuring and severance charges ($11.9 million), (ii) by the impact of tax legislation on deferred tax balances ($40.0 million), (iii) by the loss on extinguishment of debt ($0.2 million) and (iv) by M&A due diligence in excess of the $1 million annual cap ($3.3 million).
The net effect of the EPS adjustments was $0.97 per share, increasing the PVRSU achievement and payout.
For all PVRSUs vested in 2018, dividends were paid out in cash at the end of the performance period based on the percent achievement.
Outstanding PVRSU Grants
For PVRSUs awarded under the LTIP, performance achievement levels relative to threshold, target and maximum are established at the beginning of the performance period, as well as the corresponding percentage of the target grant that will be earned at each achievement level. As a result, the number of PVRSUs that actually vest during any performance period may range from 0% to 200% of the initial grant, based on cumulative EPS performance as compared to targeted EPS for the period as well as certain other measures. The chart below provides the performance achievement levels and the corresponding vesting percent at that achievement level.
|
| | | | | | | | |
Criteria | | Below Threshold | | Threshold | | Target | | Maximum |
Performance Achievement | | <90% | | 90% | | 100% | | 120% |
Corresponding Vesting Result | | 0% | | 50% | | 100% | | 200% |
The Company is not disclosing the EPS performance targets for outstanding PVRSU grants because we believe such disclosure would cause us competitive harm. As a franchise company focused on growing our brands in a very competitive market, revealing targets and comparing them year over year would give competitors great insight into the Company’s growth strategy.
2018-2020 PVRSUs
The February 2018 PVRSUs granted to all NEOs cover the three-year performance period 2018 - 2020 and will vest, if earned, on March 2, 2021.
2017-2019 PVRSUs
The February 2017 PVRSUs granted to all NEOs cover the three-year performance period 2017 - 2019 and will vest, if earned, on February 24, 2020.
Mr. Dragisich's March 2017 $250,000 PVRSU grant is based on the three year performance period of 2017 through 2019 and will vest, if earned, on March 6, 2020. This strategic stretch objective PVRSU grant focused on three-year, long-term strategic and finance goals and objectives.
Mr. Pepper's February 2017 $250,000 PVRSU grant is based on the three-year performance period 2017 - 2019 and will vest, if earned, on February 24, 2020. This strategic stretch objective PVRSU grant focused on three-year, long-term strategic and finance goals and objectives.
Mr. Pacious' September 2017 $219,790 PVRSU grant is based on the two-and-one-half-year performance period July 2017 - December 2019 and will vest, if earned, on January 1, 2020. This PVRSU grant served to raise Mr. Pacious' compensation in connection with his promotion to CEO.
PVRSU targets are set after evaluating the Company's business plan and anticipated market performance. Given historical data, we expect the achievement of the targets related to each of these outstanding PVRSU grants to be as difficult as the achievement of the 2016 through 2018 EPS target.
|
|
OTHER BENEFIT PROGRAMS AND POLICIES
|
Other Executive Benefits
Perquisite Allowance
The Company maintains a Flexible Perquisites Plan to enhance our ability to recruit and retain key executives. The plan design and prevalence of benefits are reviewed annually against our peer group and are consistent with market practice within the peer group.
Under the Company’s Flexible Perquisites Plan, each NEO and certain other executives are eligible to receive an aggregate amount that may be used by the executive officer for reimbursement for any of the following benefits: financial and estate planning, legal services, supplemental life insurance premiums, club membership dues, certain health care and fitness expenses and child care expenses. The reimbursement amount for each NEO is based on the executive’s title, role within the organization and scope of responsibilities. These reimbursements represent taxable income to the executive. The executive is responsible for paying any associated tax on amounts reimbursed under the Flexible Perquisites Plan and no tax gross-up is provided. If an executive incurs reimbursable costs that are less than the aggregate reimbursable amount, any remaining allowance is forfeited and cannot be carried forward to the next year. We believe the Company's cost to provide this Plan is minimal compared to the recruitment and retention value the program offers in competing for talent.
In 2018, the aggregate amount of reimbursement available to each NEO under the Flexible Perquisites Plan was as set forth below. For actual amounts reimbursed to each NEO, see the All Other Compensation column of the Summary Compensation Table.
|
| |
Pacious | $31,800 |
Dragisich | $15,000 |
Pepper | $15,000 |
Wu | $15,000 |
Cimerola | $15,000 |
Stay at Choice and Other Benefits
Through the Stay at Choice program, the Company seeks to further our senior executives' use of our hotels when traveling. The Company offers officers and directors reimbursements for nightly room charges when staying at the Company’s franchised properties for travel outside of express business purposes. There is no limit on an executive’s use of this plan during the year as they are a valuable source of input and feedback with regard to the value and consistency of our product. The program also encourages an important connection with franchisees. The Company pays the tax and gross-up associated with reimbursements under the Stay at Choice program.
The Company has historically reimbursed certain executives for the cost associated with an annual executive physical and an executive individual life insurance policy with coverage in the amount of $1,000,000. Premiums on the life insurance policy are added to each executive’s taxable income for the year. Effective January 1, 2018, the Company eliminated these perquisites for incoming executives. Although new executives may utilize their Flexible Perquisites Plan for the purposes of an annual executive physical and / or an executive individual life insurance policy, the Flexible Perquisite Plan aggregate amounts have not been increased to cover the elimination of these benefits.
For the aggregate cost to the Company of each of the perquisites or other benefits described above, see the All Other Compensation column of the Summary Compensation Table.
Non-Qualified Deferred Compensation Plan
NEOs are eligible to defer their base salary, annual cash incentive and long-term incentive plan distribution. Deferrals are always 100% vested. The non-qualified plan provides the NEOs with a long-term capital accumulation opportunity through a range of investment opportunities designed to comply with section 409A of the Internal Revenue Code (the "Code").
We provide the non-qualified plans due to the regulatory limits on the amount of compensation that can be contributed to qualified retirement plans in any given year.
The earnings on two NEOs' accounts are reported in the Summary Compensation Table as they represent earnings on amounts that have been grandfathered under a prior deferred compensation plan. These amounts are categorized as guaranteed preferential earnings to the
applicable NEOs. The two executives are the only individuals remaining in the relevant deferred compensation plan.
For more information on these plans, see the All Other Compensation column of the Summary Compensation Table below, and the Non-Qualified Deferred Compensation Table below.
Executive Share Ownership and Holding Requirements
Our Executive Share Ownership Guidelines are intended to align the interests and actions of executives with the interests of shareholders and promote our longstanding commitment to sound corporate governance.
Under the guidelines, each NEO must attain ownership of qualifying shares with a market value equal to a multiple of the executive’s then-current base salary within five years after first becoming a covered executive.
Effective January 1, 2018, new guidelines were implemented that:
1. Increased the required ownership from a multiple of 2 to a multiple of 3 times base salary for Mr. Pepper, Ms. Wu and Mr. Cimerola.
2. Expanded the number of executives covered under this guideline. It now includes all Section 16 officers and all other direct reports of the CEO.
3. Removed performance vested restricted stock and PVRSUs from counting towards satisfying the ownership requirement.
As of December 31, 2018, each NEO, except for Mr. Dragisich, holds more than the required shares. Mr. Dragisich is within the five-year grace period to meet his requirement.
The chart below details the required market value for each category of executive officer: |
| | | |
NEO | | Required Ownership as a Multiple of Salary | Actual Ownership as a Multiple of Salary |
Pacious | | 5.0x | 9.9x |
Dragisich | | 3.0x | 1.5x |
Pepper | | 3.0x | 11.2x |
Wu | | 3.0x | 3.9x |
Cimerola | | 3.0x | 3.7x |
Stock ownership counting toward satisfaction of the guidelines includes:
| |
• | Stock purchased on the open market; |
| |
• | Stock obtained through stock option exercises; |
| |
• | Time-based restricted stock issued by Choice, as long as the stock is continuously held; and |
| |
• | Stock beneficially owned in trust or by immediate family members residing in the same household. |
If an executive does not attain the ownership levels within the five-year period, and thereafter maintain the ownership levels, the Committee may:
| |
• | Require that the transfer or payout of up to 50% of the executive’s MIP be paid in the form of Choice stock and/or adjust the amount or composition of any future cash or equity compensation; |
| |
• | Restrict the executive from selling or otherwise disposing of Choice stock; |
| |
• | Forego the future grant of any equity awards to the executive; or |
| |
• | Take any other actions reasonably designed to assist or enable the executive to satisfy the guidelines. |
In addition, the NEOs must meet specified exemption criteria or obtain permission before selling stock that would result in their holdings dropping below the guideline requirements.
Hedging and Pledging Transactions
In February 2017, the Board amended the Company’s Insider Trading Policy to prohibit all Associates (which includes all NEOs and other Choice employees, directors, contract staff and consultants) from engaging in hedging transactions involving Company stock, such as prepaid variable forwards, equity swaps, collars and exchange funds.
In December 2017, the Board further updated the Insider Trading Policy to prohibit all Associates, other than directors, from holding shares in a margin account or pledging shares as collateral for a loan.
In connection with the hedging policy, there is a limited exception for certain shares owned by directors who are members of the Bainum family - the Company’s founding family who currently collectively beneficially own approximately 39% of the Company’s outstanding shares. The exception provides that Choice securities indirectly
held by a director who is a Bainum family member are not subject to the hedging policy as long as the relevant Choice securities (1) were not received as compensation by an individual director and (2) are held by an entity in which the Bainum family director does not own a majority of the overall economic interest.
In approving the limited exceptions to the hedging and pledging policies, the Board took into account the purpose of the Insider Trading Policy (which includes the hedging and pledging policies), namely, to govern actions of the Company employees, officers and directors, while recognizing the multiple existing ownership structures and vehicles (such as holding companies and trusts) pursuant to which one or more members of the Bainum family, the significant majority of whom are not directors of the Company, indirectly own shares of the Company.
Directors are permitted to pledge Company shares only with Company approval. No directors currently pledge Company shares. The possibility of approval is intended primarily to recognize that the Bainum family directors hold
significant personal wealth in Choice stock and the long-term interests of the Company are served by their long-term view tied to their holdings.
Executive Compensation Recovery "Clawback" Policy
The Company's Recoupment Policy (the “Clawback Policy”) gives the Committee the right to require the Company’s senior executives, including the NEOs, to pay back previously distributed incentive compensation in the event
that the Company materially restates its financial results as a consequence of significant noncompliance with financial reporting requirements.
Severance and Change in Control Arrangements
All provisions granting severance payments upon termination following a change in control were adopted to ensure that the executives will not be tempted to act in their own interests rather than the interests of the Company’s shareholders in the event the Company is considering a change in control transaction. Executives may lose their ability to influence the Company’s performance after a change in control, and may not be in a position to earn incentive awards or vest in equity awards, and thus might be biased against such a transaction. The Committee believes the severance provisions ensure executives who are unexpectedly terminated for reasons outside of their control are appropriately compensated for a limited period of time following termination.
Each of the NEOs is entitled to receive various payments and continued benefits upon certain triggering termination events. For each of Messrs. Pacious, Dragisich and Cimerola and Ms. Wu, they are set forth in a non-competition, non-solicitation and severance benefit agreement. For Mr. Pepper, these arrangements are prescribed by the Choice Hotels International Severance Benefit Plan that is generally applicable to all of the Company’s employees who do not otherwise have an employment agreement or severance agreement with the Company.
The terms of the severance provisions and benefits in each of these agreements and the Choice Severance Benefit Plan were based on what the Committee believed was competitive with market at the time of adoption.
The Company and each of Messrs. Pacious, Dragisich and Cimerola and Ms. Wu are parties to an executive non-competition, non-solicitation and severance benefit agreement. The Committee believes that the severance, non-competition and non-solicitation provisions are typical within the hospitality and franchise industry and are reasonable and enforceable.
Mr. Pacious's agreement provides for, in the event of termination without cause or constructive termination, a lump-sum payment of 200% of his base salary and bonus opportunity and up to two years of termination benefits. Mr. Pacious's agreement further provides for, upon termination following a change in control (based on a “double trigger”), a lump-sum payment of 250% of his base salary plus 250% of his annual bonus.
Each of Mr. Dragisich's, Mr. Cimerola's and Ms. Wu's agreements provide for 70 weeks of severance and termination benefits in the event of termination without cause or constructive termination, or for severance payments upon termination of the executive following a change in control (based on a “double trigger”) equal to a lump sum payment of 200% of the executive's base salary plus 200% of the executive's annual bonus.
These agreements do not provide for gross-up payments for excise tax.
For Mr. Pepper, the Choice Severance Benefit Plan provides him with 70 weeks of severance, where the termination is not in connection with a change in control. For a termination following a change in control, the plan provides for severance payments equal to 200% of his base salary plus 200% of his annual bonus.
For a more detailed discussion of the arrangements applicable to each NEO, including an estimated quantification of the benefits payable to each officer assuming a termination event as of December 31, 2018, see the Potential Payments Upon Termination or Change of Control section below.
Compensation Risk Mitigation
In 2018, the Committee reviewed the Company’s incentive plans, compensation programs and practices, and the processes for implementing these programs for our NEOs and other employees to determine whether these compensation policies and practices could create risks that are reasonably likely to have a material adverse effect on the Company. In conducting this review, the Committee considered analysis performed by Mercer, an independent compensation consulting firm, with regard to the Company’s compensation policies and practices.
The factors considered by the Committee include:
| |
• | the general design philosophy of our compensation policies and practices for employees whose behavior would be most affected by the incentives, as such policies and practices relate to or affect risk taking by employees on our behalf, and the manner of their implementation; |
| |
• | our risk assessment and incentive considerations in structuring our compensation policies and practices or in awarding and paying compensation; |
| |
• | how our compensation policies and practices relate to the realization of risks resulting from the |
actions of employees in both the short and long term;
| |
• | our policies regarding adjustments to our compensation programs and practices to address changes in our risk profile; and |
| |
• | material adjustments, if any, that we have made to our compensation policies and practices as a result of changes in our risk profile. |
The Company fosters a culture of compliance and the Committee believes that it has mitigated unnecessary risk taking in both the design of the compensation plans and the controls placed upon them because (i) the performance goals relate directly to the business plan approved by the Board, (ii) the Company has ownership requirements, restrictions on hedging, restrictions on pledging of securities and a clawback policy and (iii) there is an appropriate balance between our annual incentives and long-term incentives, with a particular emphasis on long-term value creation for our executives that aligns with shareholder value creation.
Based on this review, the Committee determined that the risks arising from the Company’s compensation practices and policies are not reasonably likely to have a material adverse effect on the Company.
|
|
COMPENSATION DECISION-MAKING PROCESS
|
Role of the Compensation and Management Development Committee
The Committee establishes the Company’s compensation principles that guide the design of compensation plans and programs for our executive officers. The Committee is charged with setting the compensation of the Company's executive officers and implementing our compensation program. In carrying out its responsibilities, the Committee endeavors to achieve and maintain an executive compensation package that is both fair and competitive in furtherance of the Company’s goals, including increasing shareholder value. The Committee also monitors executive development and succession planning, and conducts an extensive talent review.
As part of its responsibility and oversight, the Committee reviews corporate goals and objectives relevant to CEO compensation, evaluates performance in light of these goals and objectives, and recommends CEO compensation
based on this evaluation to the Board for approval. With regard to the other NEOs, the Committee reviews and approves changes to base salary, annual and long-term incentive plan performance targets and the achievement against those goals, and equity-based compensation design, delivery and value. In addition, the Committee reviews and approves all compensation-related agreements, including employment agreements, severance and change-of-control arrangements and any other special supplemental compensation and/or benefits for executive officers, except for the CEO for which the Committee makes a recommendation to the Board for approval. The Committee also engages in an annual risk assessment related to the Company's compensation programs and practices.
Role of the Independent Compensation Consultant
The Committee has authority to retain outside compensation consultants and advisors to assist the Committee. The Committee is directly responsible for the appointment, compensation and oversight of the Compensation Consultant. The Compensation Consultant reports directly to the Committee and pursuant to the Committee's instructions, works with management to compile information and gain an understanding of the
Company and any issues for consideration by the Committee.
The Committee currently retains Mercer to review market trends and advise the Committee regarding executive compensation matters. For a full description of Mercer's role in advising the Committee, see Committees of the Board above.
Role of Management
In conjunction with the Committee Chairman, management prepares and presents specific compensation proposals to the Committee for consideration as follows:
| |
• | The CEO may make recommendations to the Committee with regard to the assessment of individual executive officer performance (other than his own) and corresponding compensation actions. |
| |
• | The CEO and Chief Human Resources Officer may make recommendations with regard to compensation, including incentive and other benefits plan design and delivery. |
| |
• | The CEO and Chief Human Resources Officer may make recommendations with regard to financial and non-financial targets under our annual incentive plan and our PVRSU awards. |
At the direction of the Chairman of the Committee, management prepares and distributes to Committee members agendas, meeting materials and Company data in preparation for Committee meetings. The NEOs do not play a role in their own individual compensation determinations, other than discussing individual performance objectives with the CEO.
BOARD COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
Recommendation
The Compensation and Management Development Committee of the Company has reviewed and discussed the foregoing Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based upon such review and discussions, the Compensation and Management Development Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Company’s proxy statement.
THE COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE
Ervin R. Shames, Chairman
William L. Jews
Maureen D. Sullivan
John P. Tague
SUMMARY COMPENSATION TABLE
The following table summarizes total compensation paid or earned by each of the Named Executive Officers for the years ended December 31, 2018, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | Year | | Salary(1) ($) | | Bonus ($) | | Stock Awards(2) ($) | | Option Awards(3) ($) | | Non-Equity Incentive Plan Compensation(4)($) | | Change in Pension Value and Preferred Non-Qualified Deferred Compensation Earnings(5) ($) | | All Other Compensation (6) ($) | | Total ($) |
Patrick S. Pacious | 2018 | | 925,000 |
| | — |
| | 2,254,695 |
| | 751,576 |
| | 1,730,906 |
| | 5,985 |
| | 88,694 |
| | 5,756,856 |
|
President and Chief Executive Officer | 2017 | | 793,269 |
| | — |
| | 1,595,437 |
| | 531,698 |
| | 961,210 |
| | 5,037 |
| | 117,414 |
| | 4,004,065 |
|
2016 | | 662,531 |
| | — |
| | 2,625,106 |
| | 625,007 |
| | 707,327 |
| | 6,304 |
| | 128,958 |
| | 4,755,233 |
|
Dominic E. Dragisich (7) | 2018 | | 525,000 |
| | — |
| | 675,152 |
| | 225,014 |
| | 539,540 |
| | — |
| | 76,720 |
| | 2,041,426 |
|
Chief Financial Officer | 2017 | | 312,308 |
| | — |
| | 1,100,144 |
| | 150,008 |
| | 285,600 |
| | — |
| | 46,160 |
| | 1,894,220 |
|
| | | | | | | | | | | | | | | | |
David A. Pepper | 2018 | | 503,930 |
| | — |
| | 637,558 |
| | 212,519 |
| | 420,684 |
| | 107,150 |
| | 67,734 |
| | 1,949,575 |
|
Chief Development Officer | 2017 | | 502,801 |
| | — |
| | 817,053 |
| | 188,956 |
| | 593,652 |
| | 90,162 |
| | 100,341 |
| | 2,292,965 |
|
2016 | | 488,154 |
| | — |
| | 356,002 |
| | 356,004 |
| | 379,346 |
| | 112,847 |
| | 62,659 |
| | 1,755,012 |
|
Simone Wu | 2018 | | 484,423 |
| | — |
| | 442,572 |
| | 147,504 |
| | 297,669 |
| | — |
| | 52,148 |
| | 1,424,316 |
|
Senior Vice President, General Counsel, Corporate Secretary & External Affairs | 2017 | | 466,539 |
| | — |
| | 440,682 |
| | 146,863 |
| | 239,008 |
| | — |
| | 62,632 |
| | 1,355,724 |
|
2016 | | 422,308 |
| | — |
| | 195,044 |
| | 195,002 |
| | 224,485 |
| | — |
| | 53,036 |
| | 1,089,875 |
|
Patrick J. Cimerola (7) | 2018 | | 400,000 |
| | — |
| | 375,048 |
| | 125,002 |
| | 247,500 |
| | — |
| | 73,574 |
| | 1,221,124 |
|
Chief Human Resources Officer | 2017 | | 396,154 |
| | — |
| | 490,111 |
| | 79,990 |
| | 203,232 |
| | — |
| | 70,876 |
| | 1,240,363 |
|
| | | | | | | | | | | | | | | | |
| |
(1) | Values reflect base salary actually received by each NEO in the years presented, which depending on the position of pay periods within a calendar year, may not equal a NEO’s stated annual salary. |
| |
(2) | For each of the NEOs, amounts shown in the Stock Awards column for 2016, 2017 and 2018 include the grant date fair values for RS and PVRSUs. |
The values included for PVRSUs are based on the probable outcome of the performance goals on the grant date (100% of the performance target), computed in accordance with FASB ASC Topic 718. Assumptions used to calculate fair value for Stock and Option Awards for 2018 are discussed in Note 17 to the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. The actual value realized by each individual with respect to PVRSU awards will depend on the Company’s actual performance relative to the performance goals, with vesting of actual shares ranging from 0% to 200% for PVRSUs based on actual performance against the performance target established at the time of grant.
The grant date fair value based on the probable outcome for the 2018 PVRSU awards was $1,503,130 for Mr. Pacious, $450,074 for Mr. Dragisich, $425,039 for Mr. Pepper, $295,048 for Ms. Wu and $250,032 for Mr. Cimerola. The grant date fair value based on the maximum outcome for the 2018 PVRSU awards was $3,006,260 for Mr. Pacious, $900,148 for Mr. Dragisich, $850,078 for Mr. Pepper, $590,096 for Ms. Wu and $500,064 for Mr. Cimerola.
The grant date fair value based on the probable outcome for the 2017 PVRSU awards was $1,063,584 for Mr. Pacious, $550,103 for Mr. Dragisich, $628,051 for Mr. Pepper, $293,788 for Ms. Wu and $160,023 for Mr. Cimerola. The grant date fair value based on the maximum outcome for the 2017 PVRSU awards was $2,127,168 for Mr. Pacious, $1,100,206 for Mr. Dragisich, $1,256,102 for Mr. Pepper, $587,576 for Ms. Wu and $320,046 for Mr. Cimerola.
The grant date fair value based on the probable outcome for the 2016 PVRSU awards was $2,312,562 for Mr. Pacious, $178,001 for Mr. Pepper and $97,522 for Ms. Wu. The grant date fair value based on the maximum outcome for the 2016 PVRSU awards was $4,625,124 for Mr. Pacious, $356,002 for Mr. Pepper and $195,044 for Ms. Wu. Mr. Dragisich and Mr. Cimerola were not NEOs in 2016.
| |
(3) | The amounts shown under the Option Awards column for 2018 , 2017 and 2016, are valued based on the grant date fair value using the Black-Scholes Option Pricing model. |
| |
(4) | Values reflect the cash awards earned by each of the NEO under the 2018 Management Incentive Plan. For a discussion of the performance targets under the 2018 Management Incentive Plan, see the description under the heading Short-Term Incentives above. For a discussion of the potential amounts payable to each NEO under the 2018 Management Incentive Plan, see the Grants of Plan-Based Awards for 2018 table below. |
Mr. Pepper's 2018 MIP amount includes $13,633 in contingent payments earned by him for completing certain outstanding items associated with 2 of the franchise agreements executed in 2017 and 2016. Furthermore, Mr. Pepper’s 2018 amount does not include payment of $2,143 that is pending for 7 of the executed franchise agreements that are subject to satisfying certain outstanding items with them during 2019.
The 2017 and 2016 amounts for Mr. Pepper includes $8,219 and $13,200, respectively, in contingent payments earned by him for satisfying certain outstanding items associated with franchise agreements executed in the previous years.
| |
(5) | Values reflect the preferential earnings on non-qualified deferred compensation under the Executive Deferred Compensation Plan (“EDCP”). The values reported are based on the excess of the return on amounts credited to accounts in the EDCP at the annually designated rate of return over 120% of the applicable federal long-term rate. |
| |
(6) | See the All Other Compensation table below for additional information on the amounts included for each NEO in the 2018 All Other Compensation column. |
| |
(7) | Mr. Dragisich and Mr. Cimerola were not NEOs in 2016. |
ALL OTHER COMPENSATION
The following table illustrates the components of the 2018 All Other Compensation column in the Summary Compensation Table above:
|
| | | | | | | | | | | | | | | |
| | Company EDCP/Non- Qualified Match ($) | | Company 401(k) Match ($) | | Other Benefits(a) ($) | | Tax Payments(b) ($) | | Total ($) |
Pacious | | 55,500 |
| | 11,000 |
| | 19,738 |
| | 2,456 |
| | 88,694 |
|
Dragisich | | 28,375 |
| | 11,000 |
| | 30,882 |
| | 6,463 |
| | 76,720 |
|
Pepper | | 27,817 |
| | 11,000 |
| | 23,490 |
| | 5,427 |
| | 67,734 |
|
Wu | | 25,332 |
| | 11,000 |
| | 15,182 |
| | 634 |
| | 52,148 |
|
Cimerola | | 19,000 |
| | 11,000 |
| | 31,135 |
| | 12,439 |
| | 73,574 |
|
| |
(a) | Benefits in this column include the following amounts or types of compensation: |
| |
• | reimbursement for personal stays during 2018 under our Stay at Choice program, which was $1,501 for Mr. Pacious; $13,167 for Mr. Dragisich; $4,958 for Mr. Pepper; $1,678 for Ms. Wu and $13,830 for Mr. Cimerola (Amounts do not necessarily reflect how often an NEO stays at Choice properties as the policy applies only for personal stays, in addition, some NEOs may not submit every personal stay for reimbursement under the Stay at Choice program.); |
| |
• | reimbursement of club dues incurred in 2018 under the Flexible Perquisites Program, which was $10,508 for Mr. Pacious; $10,933 for Mr. Dragisich; $12,100 for Mr. Pepper; $6,265 for Ms. Wu and $7,116 for Mr. Cimerola; |
| |
• | reimbursement of financial and tax planning services and legal expenses incurred during 2018 under the Flexible Perquisites Program, which was $1,150 for Mr. Pacious; $4,068 for Mr. Dragisich; $2,900 for Mr. Pepper; $2,852 for Ms. Wu and $4,184 for Mr. Cimerola; |
| |
• | reimbursement of health and wellness expenses incurred during 2018 under the Flexible Perquisites Program, which was $1,440 for Mr. Pacious; $2,088 for Ms. Wu and $3,700 for Mr. Cimerola; |
| |
• | value of spousal travel flights to the February 2018 Board meeting and a November 2018 business trip for Mr. Pacious, which was $1,993, and value of a spousal travel flight to the February 2018 Board meeting, which was $1,489 for Mr. Dragisich and $1,489 for Mr. Pepper (Infrequently, spouses and guests of executives ride along on the Company aircraft when the aircraft is already going to a specific destination for a business purpose. This use has minimal cost to the Company and, where applicable, a nominal amount is included in the All Other Compensation table. Where applicable, income is imputed to the NEO for income tax purposes and in certain circumstances, tax reimbursement is provided.); and |
| |
• | group term life insurance premiums paid by Choice on behalf of each NEO. |
For the purpose of business entertainment, the Company has season tickets to certain sporting events or other cultural activities. When these tickets are not used for business entertainment, they may be available to NEOs and other personnel. No compensation value for such tickets is included in the table above.
| |
(b) | Represents amounts paid during 2018 with respect to reimbursement for payment of taxes i) under our Stay at Choice program which provides reimbursements to senior executives when staying at Choice Hotels properties for purposes other than business, and ii) for spousal travel related to the February 2018 Board meeting, which was $1,223 for Mr. Pacious, $641 for Mr. Dragisich and $1,391 for Mr. Pepper. |
GRANTS OF PLAN-BASED AWARDS FOR 2018
The Compensation and Management Development Committee determines the aggregate equity value to be awarded to each NEO annually as discussed above in Compensation Discussion and Analysis, under the heading Long-Term Incentives. In 2018, the aggregate annual equity value (excluding extraordinary performance grants, employment and retention related grants and similar grants made outside of the annual process) for each of the NEOs was divided into awards of approximately one-quarter stock options, one-quarter service-based restricted stock (“RS”) and one-half as performance vested restricted stock units (“PVRSU”). For options granted to these NEOs, the value of the aggregate equity grant to be delivered as options is divided by the Black-Scholes value on the date of grant to determine the number of shares to be granted. For example, as discussed above in Compensation Discussion and Analysis, Ms. Wu's long-term equity grant value on February 23, 2018 was 121.7% of her base salary, or $590,076. Approximately one-quarter of this value, or $147,504 was granted as stock options. The Black-Scholes value was $16.27. Thus, the number of shares subject to Ms. Wu's option grant on February 23, 2018 was determined as follows: $147,504/$16.27 = 9,066 shares. The value of the aggregate equity grant to be delivered as RS and PVRSUs ($442,572) was divided by the closing price of Choice’s Common Stock on the date of grant, or $81.55. Thus, Ms. Wu's stock grant was determined as follows: $442,572/$81.55 = 5,427 shares, consisting of 1,809 RS and 3,618 PVRSUs.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name | Grant Date | Estimated Future Payouts Under Non-Equity(1) Incentive Plan Awards | | Estimated Future Payouts Under Equity Incentive Plan Awards(2) | | All Other Stock Awards: Number of Shares of Stock or Units (#)(3) | | All Other Option Awards: Number of Securities Underlying Options (#)(4) | | Exercise Price of Option Awards ($)(5) | | Grant Date Fair Value of Stock and Option Awards ($) |
Threshold ($) | | Target ($) | | Maximum ($) | | Threshold (#) | | Target (#) | | Maximum (#) | |
Pacious | | 693,750 |
| | 1,387,500 |
| | 2,775,000 |
| | | | | | | | | | | | | | |
| 2/23/2018 | | | | | | | 9,216 |
| | 18,432 |
| | 36,864 |
| | | | | | | | 1,503,130 |
|
| 2/23/2018 | | | | | | | | | | | | | 9,216 |
| | | | | | 751,565 |
|
| 2/23/2018 | | | | | | | | | | | | | | | 46,194 |
| | 81.55 |
| | 751,576 |
|
Dragisich | | 212,000 |
| | 424,000 |
| | 848,000 |
| | | | | | | | | | | | | | |
| 2/23/2018 | | | | | | | 2,760 |
| | 5,519 |
| | 11,038 |
| | | | | | | | 450,074 |
|
| 2/23/2018 | | | | | | | | | | | | | 2,760 |
| | | | | | 225,078 |
|
| 2/23/2018 | | | | | | | | | | | | | | | 13,830 |
| |
| | 225,014 |
|
Pepper | | 243,902 |
| | 327,555 |
| | 1,199,857 |
| | | | | | | | | | | | | | |
| 2/23/2018 | | | | | | | 2,606 |
| | 5,212 |
| | 10,424 |
| | | | | | | | 425,039 |
|
| 2/23/2018 | | | | | | | | | | | | | 2,606 |
| | | | | | 212,519 |
|
| 2/23/2018 | | | | | | | | | | | | | | | 13,062 |
| | 81.55 |
| | 212,519 |
|
Wu | | 121,250 |
| | 242,500 |
| | 485,000 |
| | | | | | | | | | | | | | |
| 2/23/2018 | | | | | | | 1,809 |
| | 3,618 |
| | 7,236 |
| | | | | | | | 295,048 |
|
| 2/23/2018 | | | | | | | | | | | | | 1,809 |
| | | | | | 147,524 |
|
| 2/23/2018 | | | | | | | | | | | | | | | 9,066 |
| | 81.55 |
| | 147,504 |
|
Cimerola | | 100,000 |
| | 200,000 |
| | 400,000 |
| | |