|• 10-K/A • EX-31.C • EX-31.D • EX-32.C • EX-32.D • EX-99|
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1
For the Fiscal Year Ended January 1, 2012
For the transition period from to
Commission File Number: 001-32843
TIM HORTONS INC.
(Exact name of Registrant as specified in its charter)
Registrants telephone number, including area code 905-845-6511
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ¨.
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨.
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES x NO ¨.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x.
The aggregate market value of the common shares held by non-affiliates of the Registrant computed by reference to the price at which such shares were last sold, as of July 1, 2011, was Cdn.$7,681,493,043 (US$7,994,892,843).
Number of common shares outstanding as of February 21, 2012: 157,414,012
DOCUMENTS INCORPORATED BY REFERENCE:
Exhibit index on pages 79-83.
Tim Hortons Inc., a corporation incorporated under the Canada Business Corporations Act (the Company), qualifies as a foreign private issuer in the U.S. for purposes of the Securities Exchange Act of 1934, as amended (the Exchange Act). Although as a foreign private issuer the Company is no longer required to do so, the Company currently continues to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the Securities and Exchange Commission (SEC) instead of filing the reports available to foreign private issuers. The Company prepares and files a management proxy circular and related material under Canadian requirements. As the Companys management proxy circular is not filed pursuant to Regulation 14A, the Company may not incorporate by reference information required by Part III of its Form 10-K from its management proxy circular.
The Company filed its Annual Report on Form 10-K for the fiscal year ended January 1, 2012 (2011 Form 10-K) on February 28, 2012. In reliance upon and as permitted by Instruction G(3) to Form 10-K, the Company is filing this Amendment No. 1 on Form 10-K/A in order to include in the 2011 Form 10-K the Part III information not previously included in the 2011 Form 10-K.
No attempt has been made in this Amendment No. 1 on Form 10-K/A to modify or update the other disclosures presented in the 2011 Form 10-K. This Amendment No. 1 on Form 10-K/A does not reflect events occurring after the filing of the 2011 Form 10-K. Accordingly, this Amendment No. 1 on Form 10-K/A should be read in conjunction with the 2011 Form 10-K and the Companys other filings with the SEC.
In this Amendment No. 1 on Form 10-K/A, we also refer to Tim Hortons Inc. as Tim Hortons, we, us, our, our corporation, or the corporation. References to GAAP mean generally accepted accounting principles in the United States.
2011 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS
Directors of Registrant
The directors of the Company are as follows:
Catherine L. Williams (age 61; residence Calgary, Alberta, Canada) has notified the corporation that she will not stand for reelection due to conflicting business commitments. Ms. Williams will serve out her current term, which will end at the corporations annual and special meeting of shareholders to be held on May 10, 2012 (the Meeting). Ms. Williams has been a director since 2009. Ms. Williams has been a Managing Director of Options Capital Limited, a private investment company, since 2007. From 2003 to 2007, Ms. Williams was Chief Financial Officer for Shell Canada Limited, a subsidiary of Royal Dutch Shell. From 1984 to 2003, Ms. Williams held various positions with Shell Canada Limited, Shell Europe Oil Products, Shell Canada Oil Products and Shell International. Prior to 1984, Ms. Williams was a financial analyst for Nova Corporation and previously held various positions with the Bank of Canada. Ms. Williams currently serves as a director for Enbridge Inc., for which she is also a member of the Audit, Finance and Risk Committee and the Human Resource and Compensation Committee, of which she is Chair. In September 2009, she joined the Board of the Alberta Investment Management Corporation (AIMCO), an Alberta crown corporation which manages $70.7 billion in pensions, endowments and government funds. She is Chair of the AIMCO Audit Committee. In 2008, she served as a member of the Federal Government Advisory Panel on Canadas System of International Taxation. She is a graduate of the University of Western Ontario and Queens University.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act does not apply because we are a foreign private issuer under U.S. securities laws. Our officers and directors are required to file reports of equity ownership and changes of ownership with the Canadian Securities Administrators and do not file such reports under the Exchange Act.
Code of Ethics (Standards of Business Practices)
The Company has adopted a Code of Ethics, which we have designated as our Standards of Business Practices, that applies to all of our officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Standards of Business Practices is available on the Companys investor website at www.timhortons-invest.com.
The current members of the Audit Committee are Mr. Endres (Chair), Mses. Greene and Williams, and Messrs. Lees and Osborne, each of whom is independent under our Independence Requirements (as defined below under Item 13 Director Independence), which incorporate the listing standards of the New York Stock Exchange (NYSE) and the rules of the Canadian Securities Administrators. The Board of Directors has determined that all current Audit Committee members are financially literate and that Messrs. Endres and Osborne, and Ms. Williams, are audit committee financial experts, as such term is defined by applicable U.S. securities laws. Although Ms. Williams is currently a director and a member of the Audit Committee, she will not be standing for reelection at the Meeting. The Audit Committee met four times during 2011. Executive sessions comprised only of the independent directors who were members of the Audit Committee were held at each of those meetings.
As a foreign private issuer in the United States, we are deemed to comply with this Item if we provide information required by Items 6.B and 6.E.2 of Form 20-F, with more detailed information provided if otherwise made publicly available or required to be disclosed in Canada. We have provided information required by Items 6.B and 6.E.2 of Form 20-F in our management proxy circular related to the Meeting (the proxy circular) and have filed it through the Canadian System for Electronic Document Analysis and Retrieval (SEDAR), the Canadian equivalent of the SECs Next-Generation EDGAR system, at www.sedar.com. In addition, our proxy circular has been furnished to the SEC on Form 8-K. As a foreign private issuer in the U.S., we are not required to disclose executive compensation according to the requirements of Regulation S-K that apply to U.S. domestic issuers, and we are otherwise not required to adhere to the U.S. requirements relative to certain other proxy disclosures and requirements. Our executive compensation disclosure complies with Canadian requirements, which are, in most respects, substantially similar to the U.S. rules. We generally attempt to comply with the spirit of the U.S. proxy rules when possible and to the extent that they do not conflict, in whole or in part, with required Canadian corporate or securities requirements or disclosure, with the exception that we have determined to monitor and follow the development of say on pay practices in Canada and, therefore, have not adopted the U.S. say on pay advisory vote on executive compensation.
All dollar amounts included in this Item 11 are in Canadian dollars, unless otherwise expressly stated to be in U.S. dollars.
Human Resource and Compensation Committee
The current members of the Human Resource and Compensation Committee (the Compensation Committee) are Mr. Sales (Chair), Mses. Atkins and Greene, and Messrs. Iacobucci and Lederer, each of whom is independent under our Independence Requirements. Additionally, each director satisfies the requirements of non-employee directors under Rule 16b-3 of the Exchange Act and of outside directors under Section 162(m) of the Internal Revenue Code of 1986, as amended, as required by our Independence Requirements. The Compensation Committee met six times during 2011. As required by the Committees Charter, executive sessions comprised only of the independent directors who were members of the Compensation Committee were held at each of those 2011 meetings.
The Compensation Committee oversees and administers our executive compensation programs for our executive officers (designated as such by the Board) and for any other officers that report directly to the Chief Executive Officer (the CEO), and determines all elements of their compensation, other than for our Executive Chairman and CEO, for whom compensation amounts are determined by the Board upon recommendation from the Compensation Committee. This is consistent with the Committees accountability for review and approval, in advance, of any employment, change in control, or severance arrangements extended to any executive officers or officers that report directly to the CEO. The Committees recommendations regarding CEO and Executive Chairman compensation are made, as required by the Committees Charter, in executive session.
The Executive Chairman typically provides input to the Compensation Committee and Board regarding the CEOs performance and compensation, and the CEO provides input to the Compensation Committee regarding the performance and compensation for the remaining executive officers, other than the Executive Chairman. The Compensation Discussion and Analysis in this Form 10-K/A includes a description of the role that other members of our senior management play in determining executive compensation and a description of the services provided by the Compensation Committees independent compensation consultant, currently Mercer (Canada) Limited. The Compensation Committee is also responsible for the annual Compensation Committee Report to be included in our proxy circular and for making recommendations to the Board for the implementation of incentive compensation or bonus plans, equity-based plans, and other benefits, policies, and practices for our executive officers.
In order to carry out the responsibilities set forth above, the Compensation Committee:
The Compensation Committee also considers and reports at least annually to the Board on Board compensation matters, and periodically reviews the terms of, and monitors compliance on an annual basis with our stock ownership guidelines for directors and officers. The Compensation Committee may delegate its responsibilities to subcommittees if it determines such delegation would be in the best interest of our corporation. The Compensation Committee did not delegate any such duties in 2011. A more detailed narrative of the Compensation Committees processes and procedures for the consideration and determination of executive and director compensation is set forth below under Compensation Discussion and Analysis.
Succession Planning. The Boards most fundamental oversight responsibility is the selection, appointment, and continued evaluation of the Corporations CEO. The Board is supported in this endeavor by a comprehensive succession planning process and related management development programs. Such process and programs are overseen by the Compensation Committee on an annual basis.
On an annual basis, the Committee reviews the succession plans for each of the executive officer positions. The focus for the executive team discussion with the Committee is the identification of short- and long-term successors to the CEO role, and discussion of development plans for the executive team members as well as for their successors. Where no immediate successors are identified for executive officer roles, management and the Committee consider whether external candidates would be appropriate to fill any such positions.
Through this process, the Board is able to gain a thorough understanding of the potential for internal candidates to succeed the CEO role. Due to the active CEO search that commenced in May of 2011, which included an assessment and review of internal candidates as well as external candidates, the regular annual, succession planning activity was not undertaken in 2011. A CEO profile that describes the characteristics desired in the next CEO to address current and future needs of the corporation relating to strategy, operations, growth, opportunities and other considerations has been developed as a guide in the CEO search to evaluate potential candidates.
In addition to executive officer succession, the organization completes a review of succession plans for all officer-level, director-level and management-level roles on a biennial basis. Succession profiles for employees at these levels are
created and contain information regarding employment and education history, prior year performance, current development plans, succession potential and where applicable, readiness to assume a role at the next level of management. A thorough calibration within and across teams is conducted for each level of management. For reasons noted above, no succession planning activity was undertaken in 2011.
Leadership development has been a particular focus of the corporation for several years at all officer levels within the organization. Development plans for officers may include formal skill-development or leadership-development programs, coaching and mentoring, stretch assignments, or cross-functional project work, to prepare internal candidates for further advancement within the organization.
This focus supports the Boards commitment to solid succession management and development of the corporations high-potential talent.
Compensation CommitteeInterlocks and Insider Participation. There were no reportable interlocks or insider participation affecting the Compensation Committee during 2011. That is, none of the current members of the Compensation Committee are or have been officers or employees of our corporation or any of its subsidiaries; and, none of our executive officers served on the board of directors or compensation committee of another company or organization of which one of whose executive officers served on our corporations Board or Compensation Committee.
Compensation Committee Pre-Approval Policy. In May 2010, our Compensation Committee adopted a policy governing the pre-approval of independent compensation consultant services and fees, generally similar to the manner of operation of the policy governing the Audit Committees pre-approval of services and fees of the corporations independent auditor. The policy requires that, prior to the commencement of the succeeding year, the Committees independent consultant develop and provide to the Committee a project plan setting forth the known or anticipated services to be performed over the succeeding year, together with an estimate of the fees (expected budget) associated with such services. In addition, under the policy, the Compensation Committee approves the specific terms of the independent consultants engagement annually.
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in the proxy circular with management of our corporation and, based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the information set forth under Compensation Discussion and Analysis below be included in the proxy circular and in this Form 10-K/A to be filed on or about March 23, 2012, which will amend our corporations Form 10-K for the fiscal year ended January 1, 2012, filed with the SEC on February 28, 2012.
Human Resource and Compensation Committee
Wayne C. Sales, Chair
M. Shan Atkins
Moya M. Greene
The Hon. Frank Iacobucci
John A. Lederer
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis (CD&A) describes and explains our executive compensation philosophy, principles and programs for the named executive officers (NEOs) who include: the Executive Chairman, President and Chief Executive Officer (CEO); the Chief Financial Officer (CFO); the three next most highly compensated members of our executive management team; and our former President and CEO.
Our NEOs for 2011 are as follows:
Our executive compensation program is designed to reflect the Tim Hortons culture and consists of base salary, short-term cash incentives, long-term equity incentives and retirement benefits. Our compensation philosophy is to align the interests of our shareholders and executive officers by tying executive compensation to business performance, and to attract and retain high-performing executive officers.
Consistent with our pay-for-performance philosophy, base salaries are generally targeted at the 25th percentile of our selected comparator group and total compensation is targeted at the 75th percentile. The corporations short-term incentive and performance-conditioned restricted stock units (P+RSUs) continue to be based on annual targets, primarily because the corporations relatively short business cycle makes a shorter performance period more effective in linking compensation to performance.
2011 compensation for our NEOs was impacted by the following:
2012 compensation for our NEOs was based on the following:
On an annual basis, or otherwise more frequently as circumstances may require, the Compensation Committee considers whether our executive compensation programs create or incentivize any inappropriate risk-taking. Because annual performance-based incentives play a large role in our executive compensation programs, it is important that these incentives do not result in our NEOs taking actions that may conflict with the corporations long-term interests. No substantial changes occurred with respect to our compensation plans and programs during 2011 that impacted the
Committees risk assessment in a significant way and, in January 2012, the Committee concluded that our compensation programs continue to be designed and administered with the appropriate balance of risk and reward in relation to our overall business strategies and do not encourage executives to take unnecessary or excessive risks.
Key executive compensation information can be found under the following main headings:
The Compensation Committee has adopted a compensation philosophy that reflects the Tim Hortons culture and the most significant goals for our executive compensation programs. Our compensation philosophy also includes the Committees approach to, and analysis of, risks associated with our compensation programs.
The fundamental objectives of our compensation philosophy are as follows:
Under the current executive compensation programs, a substantial portion (over 70%) of our NEOs compensation is performance-based and not guaranteed (commonly referred to as pay-at-risk). Notwithstanding the competitive business conditions in 2011, our key financial performance objectives of EBIT and Net Income were exceeded, after adjusting for certain events that occurred in 2011 that were unexpected at the time the objectives were established (as previously described). The Compensation Committee also considered the substantial achievement of other, qualitative business objectives and goals set at the beginning of the year that are aligned with our four-year strategic plan and, therefore, are considered to be instrumental in driving our long-term success (for details refer to the Performance of Business Goals and Objectives section). As a result of this review, the Committee concluded that the interests of the executive team are closely aligned with the interests of our shareholders.
Although Mr. Schroeder has left the corporation, the tenure of the other NEOs continued to provide a high degree of stability within the Tim Hortons executive team. The current NEOs have a combined total of over 90 years of service with Tim Hortons and have held different positions and been promoted to increasing levels of responsibility over their
respective tenures. Based on the limited number of changes over an extended period of time, the Compensation Committee has concluded that the current executive compensation programs are an effective component of our talent retention efforts for our NEOs. However, as the Board of Directors searches for a new President and CEO, the Committee is mindful of maintaining stability within the executive team.
Based on our philosophy, the Compensation Committee uses the following principles to guide its executive compensation decisions:
The Compensation Committee is responsible for determining and making recommendations to the Board regarding executive compensation. The Committee oversees and administers the compensation programs for our executive officers, including the NEOs, and determines all elements of the compensation of the NEOs other than the Executive Chairman and CEO. The Committee provides compensation recommendations for the Executive Chairman and President and CEO, whose compensation is determined by the Board after its consideration of recommendations from the Committee. The Committee is also responsible for making recommendations to the Board for the implementation of annual incentive plans, long-term equity-based plans, and other benefits, policies and practices applicable to executive officers, and determining the appropriate comparator group(s) for benchmarking. In doing so, the Committee considers input from executive officers and other senior management members and, at the Committees discretion, independent advisors.
To meet these responsibilities, the Committee:
See Human Resource and Compensation Committee in this Form 10-K/A for additional information regarding the Compensation Committees responsibilities.
The following is an overview of the process by which the Committee receives relevant information and makes compensation determinations.
Executive Officers and Senior Management
Typically, the Executive Chairman provides input to the Compensation Committee regarding the performance and compensation of the CEO, and insight and input on all other significant compensation determinations that affect the NEOs, other executive officers, and the corporation at large. The Executive Chairman also shares his views on succession planning for the CEO role (and CEO direct-report roles) with the Committee.
The CEOs input is also critical due to the CEOs direct day-to-day involvement with the executive officers, as a result of which he is in the best position to assess their performance and achievement of business goals and objectives. The CEOs assessment includes an annual review of whether such officers may be short- or long-term successors to the CEO role and whether successors are available for direct-report roles to the respective executive officers. See Human Resource and Compensation Committee in this Form 10-K/A for additional details regarding the corporations succession planning process and programs.
The Senior Vice-President, Human Resources and other members of senior management provide input on compensation levels and mix, compensation policy, programs and administration as well as supporting analysis (e.g., tally sheets and other tools) utilized in setting compensation.
Independent Compensation Consultant
The Compensation Committee has the discretion to retain, at the corporations expense, independent consultants to assist the Committee. The Committee engaged Meridian Compensation Partners Inc. (Meridian), formerly Hewitt Associates (Hewitt), as its independent compensation consultant until August 2011. In 2011, the Committee conducted a search for a new independent compensation consultant and identified potential candidates for consideration. Following an interview and selection process, the Committee engaged Mercer (Canada) Limited (Mercer) effective August 2011 as its independent compensation consultant.
In their respective roles as independent compensation consultants, Meridian and Mercer provided the following services:
In the course of performing its services, the Committees independent consultant received instructions from, and consulted on a regular basis with, the Committee Chair and senior management, including members of our Human Resources department. While the Committee takes the information and advice provided by its independent compensation consultant into consideration, the Committee is ultimately responsible for its own decisions and recommendations to the Board.
None of our directors or NEOs has any affiliation or relationship with either Meridian or Mercer. During 2011, Meridian did not provide any services to the corporation (nor did Meridian receive any payments for services), other than those services provided directly to, or reviewed and approved by, the Compensation Committee.
The following table sets forth for 2011 and 2010, respectively: (i) the aggregate fees, before taxes, billed by Meridian for services related to determining compensation for any of the corporations directors and executive officers, and (ii) the aggregate fees billed for all other services provided by Meridian, or any of its affiliates:
The following table sets forth for 2011 and 2010, respectively: (i) the aggregate fees, before taxes, billed by Mercer for services related to determining compensation for any of the corporations directors and executive officers, and (ii) the aggregate fees billed for all other services provided by Mercer, or any of its affiliates:
The Committee has a pre-approval policy identifying the procedures for approving all services performed by the compensation consultant in advance, as well as the corresponding fees for such services, with the objective of confirming that such services would not impair the compensation consultants independence. The Committee has direct responsibility to retain, compensate and oversee the services performed by the consultant. With respect to the fees for other services provided to the corporation by Mercer, in evaluating any impact on Mercers independence, the Committee considered that the executive compensation consulting group of Mercer that provided services to the Committee is not influenced by nor has any of its compensation tied to the performance of the other business groups within Mercer that provided services to the corporation. The total fees for other services provided are an insignificant part of the total revenues earned by Mercer. In light of the foregoing policies and established practices, the Committee considers its compensation consultant to be fully independent of management of the corporation.
Compensation CommitteeRelevant Experience
Each member of the Compensation Committee is independent and has direct experience in executive compensation that is relevant to service on the Committee, as well as the skills and expertise that enable him or her to make decisions on the suitability of the corporations compensation policies and practices. Mr. Sales is the chairman of the compensation committee of Georgia Gulf Corporation and a member of the human resources committee of Discovery Air Inc, and was previously the CEO of Canadian Tire. Ms. Atkins is the chair of the compensation committee of The Pep BoysManny, Moe and Jack. Ms. Greene has financial expertise with respect to executive compensation and is a member of the corporations Audit Committee. In addition, in her capacity as CEO at the Royal Mail, Ms. Greene is responsible for making recommendations regarding the design and implementation of executive compensation programs. Mr. Iacobucci is the former chair of the salary & organization committee of Torstar Corporation. Mr. Lederer has had extensive senior management experience, including as chief executive officer of large public and private companies.
Benchmarking data has been used by the Compensation Committee as one of many tools to confirm whether our executive compensation is consistent with our compensation philosophy. In particular, the Committee assessed whether base salary levels generally align with the 25th percentile of the comparator group and total target compensation aligns
with the 75th percentile of the comparator group. The Committee considers the comparison of our compensation programs and respective pay levels to those of other similarly situated peer companies as an important factor in setting compensation for our executive officers for both general pay and performance-based pay levels. The Committees current intent is to conduct a comprehensive compensation benchmarking study for our executive officers every two or three years.
To assist in setting 2011 compensation for our executive officers, a comprehensive compensation study was undertaken in 2010 on our behalf by Meridian. The list of comparator companies was reviewed by the Compensation Committee and management against a list of selection criteria. Changes to the pool of comparator companies reviewed as part of the previous compensation study conducted in 2007 were made so that the pool for the 2010 study continued to represent the most appropriate and relevant comparators based on several factors such as size, operating scope, geographical reach and various financial considerations. For the 2010 study, the Committee attempted to include more companies in the food and beverage, retail and consumer product industries, to better reflect the types of companies with which the corporation competes for talent. Due to our size (i.e., revenues and headcount) relative to other food and beverage companies in Canada, there is a lack of directly comparable Canadian companies in our industry. As such, the final comparator group for the 2010 study also included companies from a broader general industry group. In addition, although the comparator group noted below contains retail organizations that are subsidiaries of U.S. or global companies, they were not generally included in comparing our NEOs compensation due to differences in external accountabilities and strategic responsibilities. They were, however, included in comparing our broader officer population.
The 2010 study supported the market norm of differentiating compensation based on the functional responsibility of the executive. The 2010 study also supported an increase in the percentage of pay-at-risk, primarily in long-term incentive pay, relative to the prior compensation study conducted in 2007. The Committees consideration of the 2010 study, along with other factors described below under Tools and Additional Factors Considered, resulted in several changes to executive compensation for 2011, as described under NEO Compensation Determinations for 2011 below.
Listed below is the Canadian comparator group used for the 2010 study. The Canadian comparator group was the primary market reference used by the Committee in making 2011 compensation determinations for our NEOs.
In addition to the Canadian market data for the 2010 study, the Compensation Committee also reviewed compensation data for a blended North American comparator group that was created by averaging the results of the Canadian comparator group and the U.S. comparator group set forth below. The blended North American data provided a secondary point of reference, primarily for operational roles, in light of our expanding U.S. presence and the growing need to recruit for senior executive talent on a North American basis. The U.S. data included more public companies from the food and beverage industry due to the more significant number of large quick service restaurant companies in the U.S. as compared to Canada.
In addition to benchmarking, the Compensation Committee also considered the following additional tools and factors when making compensation decisions.
Performance of Business Goals and Objectives
In February 2011, before making final compensation determinations, the Compensation Committee undertook a review of our performance compared to the internal financial targets under the short- and long-term incentive programs, as well as compared to other financial and non-financial business goals and objectives for 2010. The entire executive management team is collectively responsible for the achievement of the annual business goals and objectives and, before compensation decisions are made for the subsequent year, the Committee evaluates the performance of the executive officers against the prior-year objectives. Performance against qualitative goals and objectives may also impact compensation for the performance year to which they apply, based on the Committees ability to make special compensation awards and also to make adjustments to payouts under the short- and long-term incentive plans. In addition, in February 2011, the Committee reviewed our performance against a set of standard financial performance measures, such as revenues, same-store sales, operating income, and others, as compared to external quick service restaurants. Based on these reviews, the Committee concluded that our performance had remained strong in 2010, supporting the 2011 compensation determinations made in February 2011. The Committee undertook a review of internal financial and non-financial goals and objectives in February 2012 relative to 2011 performance, prior to making 2012 compensation determinations for the executive officers.
The tally sheets for each NEO provided by the Human Resources department are a valuable tool for the Compensation Committee on all aspects of proposed short- and long-term incentive compensation. The tally sheets set out each element of target compensation for the upcoming year, as well as targeted and actual compensation received for the previous five years. This includes the value of current and previous equity awards, the value of all retirement benefits, perquisites, and change in control benefits. The tally sheets enable the Committee to review all elements of NEO compensation independently to confirm alignment with our compensation philosophy and related guidelines. Tally sheets have also been utilized by the Committee in connection with change in control agreements and in connection with certain other compensation determinations, such as for special awards of restricted stock units and changes in retirement benefits.
Internal Pay Equity Analysis
The Compensation Committee believes that internal pay equity analysis is an important tool in assessing whether compensation delivered to the corporations executive officers is appropriate. Before setting compensation for executive officers, the Committee reviews an internal pay equity analysis illustrating the differential in targeted compensation between the CEO and the NEOs as a group for each of base salary, and short- and long-term incentive compensation targets to confirm that the differential is appropriate. The Committee also reviews an internal pay equity analysis of CEO compensation against the next highest paid officers at certain of our quick service restaurant competitors to consider our differential compared to those of the companies reviewed.
In February 2011, prior to setting 2011 compensation for the CEO, the Compensation Committee reviewed the internal pay equity differential between the CEO and the other executive officers when evaluating the increase to the CEOs target total compensation for 2011. At that time, the CEOs internal pay equity differential was 2.3 times that of the other NEOs. The Committee believed that this level of compensation differential was appropriate given the CEOs enhanced responsibility and accountability for our performance, the larger percentage of risk-based compensation included in the CEOs compensation package compared to the other NEOs, and because it continued to be consistent with external multiples and our general compensation principles. Internal pay equity analysis was also used in a similar manner for the setting of 2011 NEO compensation as in prior years.
Approach to Named Executive Officer Compensation
A fundamental feature of the compensation philosophy and design for our NEOs (excluding the CEO) for years prior to 2011 was that each NEO would receive substantially the same level of each element of total compensation. This approach was based on our belief that, regardless of the functional area of expertise of our NEOs, the role of each of these executives was equally critical to our strategic management and decision-making. Consistent with this approach, the NEOs were compensated as a team for the achievement of company performance objectives established by the Compensation Committee and the other business goals and objectives established annually by our CEO.
While the team approach and behavior is still considered key to our success, beginning in 2011, the NEO positions were individually benchmarked and the corporation began a gradual transition away from the team-based approach to compensation to setting compensation based on each individual role. Each NEO role has its own market comparators for base salary and short-and long-term incentive amounts. This approach to setting NEO target compensation is consistent with the results of the 2010 study, and with other roles within the corporation that are benchmarked to individual roles in the relevant market. While the executive management team is still collectively responsible for the achievement of annual business goals and objectives, each NEOs individual compensation is compared to external market data for that respective role, and the Compensation Committee may make adjustments that it determines to be appropriate, taking into consideration the role, experience and performance of the individual. Although this did not result in significant differentiation in compensation for each of the NEOs in 2011, nonetheless we believe this is the appropriate manner by which to set compensation levels going forward as we continue to benchmark our compensation against the external market.
Base salary, short-term incentives, long-term equity-based incentives and retirement benefits are the most significant elements of our executive compensation program and, on an aggregate basis, they are intended to substantially satisfy our programs overall objectives.
The charts below show the relative mix of the targeted executive compensation components for 2011, and the achievement of our objective to deliver pay-for-performance compensation by maintaining a substantial portion of executive pay-at-risk, with base pay representing a fairly low percentage of overall compensation. For a discussion of actual executive compensation delivered for 2011 and portion of pay-at-risk, see below under 2011 Compensation Program Details and Impact of 2011 Performance.
Before determining target compensation for 2011 for all of the NEOs, the Compensation Committee considered the corporations strong financial performance in 2010, the achievement of our other business goals and objectives, analysis derived from the tally sheets and internal pay equity review, as well as the results of the 2010 study. The Committee determined that targeting 2011 total target compensation for the NEOs at approximately the 75th percentile of the Canadian comparator group was supported by our historical strong performance and growth over several years. In addition, in February 2011, the Committee believed that establishing an EBIT performance objective for the short-term and long-term incentive programs representing significant growth for 2011 would require strong performance from all of our executives to meet the objective. Executive compensation discussed below represents amounts established in February 2011 based on the 2011 performance objectives.
Before setting 2011 target compensation for Mr. Schroeder, the corporations former President and CEO, the Compensation Committee reviewed the results of Mr. Schroeders 2010 performance evaluation, the corporations performance against 2010 financial and non-financial goals and objectives, the results of the 2010 study, and the corporations goals established for 2011. The Committee also considered that, as of the end of 2010, Mr. Schroeder assumed full responsibilities as CEO and Mr. House assumed solely Executive Chairman accountabilities. The 2010 study indicated that the 2010 targeted compensation level for Mr. Schroeder as CEO was significantly below our compensation philosophy and guidelines, and that the amount of his total compensation at-risk was also below market for CEOs, primarily with respect to long-term equity incentive compensation.
As a result, the following changes to the 2011 target compensation for Mr. Schroeder were approved by the Board: annual base salary was increased to $750,000 from $650,000; the annual incentive award opportunity under the EAPP increased to $1.0 million at target (from $900,000); and, the long-term incentive award opportunity increased to $2.0 million at target (from $1.4 million). Under this new arrangement, the total 2011 targeted compensation for the CEO was $3,750,000, of which 80% was at risk. The substantial increase took Mr. Schroeders compensation initially to the median of the Canadian comparator group reviewed as part of the 2010 study and approximately 18% below the 75th percentile. The majority of the increase (87.5%) was to be delivered in variable compensation, more heavily weighted to
long-term equity incentive compensation. These changes were intended to more closely align Mr. Schroeders compensation with the pay-at-risk profile of CEOs in the Canadian comparator group.
From an internal pay equity perspective, Mr. Schroeders 2011 target compensation was approximately 2.7 times that of the other NEOs (on average), which continued to be in line with internal pay equity multiples for external comparable companies.
As of May 24, 2011, Mr. Schroeder no longer served as President and CEO of the corporation. Following a further succession planning review, a subsequent transitional arrangement could not be reached and the corporation entered into a Separation Agreement and Final Release with Mr. Schroeder on June 2, 2011, effective May 31, 2011. The agreement provides Mr. Schroeder with severance of up to $5,750,000, which consists of (i) a lump sum payment of $2,250,000 that was paid in June 2011, and (ii) up to $3,500,000 payable in equal monthly installments over 24 months. In addition, under the agreement, Mr. Schroeder has agreed to provide consulting services to the corporation for a period of two years in exchange for the payment of $175,000 per year, payable in equal monthly installments. The factors considered by the Board of Directors in determining the severance amount included, among other things, Mr. Schroeders long service, over twenty years, as a senior executive of the corporation; the corporations strong financial performance over Mr. Schroeders three-year tenure as President and CEO; and, the various covenants and ongoing obligations of Mr. Schroeder set forth in the separation agreement.
Upon Mr. Schroeders departure in May 2011, Mr. House, the corporations Executive Chairman, was appointed to serve as President and CEO until a successor is appointed. In August 2011, the Board determined that for so long as Mr. House is serving as President and CEO, his compensation should be substantially similar to the compensation that Mr. Schroeder received as President and CEO prior to his departure from the corporation. Due to the expected short-term nature of Mr. Houses tenure as President and CEO at the time of his appointment, coupled with the fact that prior to his appointment as President and CEO, Mr. Houses compensation was structured to be more aligned with non-employee director compensation, the Board concluded that long-term compensation in the form of stock options with tandem SARs, which constituted part of Mr. Schroeders compensation, would not be appropriate for Mr. House. Given the foregoing, the following changes were made to Mr. Houses 2011 compensation, the main elements of which consist of base salary, short-term incentive, and long-term equity compensation.
The Board approved an increase in Mr. Houses compensation so that, effective May 24, 2011, Mr. Houses base salary was set at $750,000 (on an annualized basis), and he became eligible for a short-term incentive payout under the EAPP of $1.0 million at target, prorated for the period Mr. House served as President and CEO in 2011 and subject to the performance objectives under the EAPP. Mr. House was also eligible for a long-term equity incentive award in an aggregate amount of $2.0 million at target, prorated for the portion of the year Mr. House served as President and CEO in 2011, consisting of: (i) $1.0 million at target delivered through P+RSUs to be granted in 2012 after the end of the 2011 performance period; and (ii) $1.0 million delivered as time-vested RSUs, reduced in value by the May 2011 RSU award of $200,000 previously granted to Mr. House, also to be granted in 2012. The amount payable to Mr. House on account of P+RSUs was also dependent upon the extent to which the corporation achieved the 2011 EBIT performance objective established for the P+RSUs in February 2011.
On February 23, 2012, consistent with the Boards historical practice of making compensation decisions annually in February, and in recognition of the fact that, since May 2011, Mr. House assumed immediate accountability for the success of the corporation as its President and CEO and exhibited strong performance in that role, the Board approved a change to Mr. Houses 2011 compensation, such that the 2011 long-term equity incentive compensation described above ($2.0 million at target) would not be prorated. This means that Mr. House will receive the full (not prorated) long-term incentive award for the 2011 plan year, less the value of the $200,000 RSU award previously granted to him in his capacity as Executive Chairman. These equity awards were made on February 28, 2012.
The Committee felt it was appropriate to revisit the original determinations made in August 2011 to recognize that Mr. House has served as President and CEO longer than originally anticipated and, during this period, both his individual performance and corporate performance have been strong. The Committee also considered that the date of Mr. Houses
appointment on May 24, 2011 occurred just one week after the regular annual grant date of May 17, 2011. If Mr. House had been appointed as President and CEO prior to the grant date in 2011, the February 2012 awards would likely have been made on the appointment date (or regular annual grant date) and treated similarly to the awards made to the other NEOs in May 2011 (i.e., one-half reported as 2010 performance-based compensation and one-half reported as 2011 compensation). This treatment is consistent with the forward-looking nature of our long-term incentive awards (i.e., P+RSUs) and the Committees historical administrative practice that grant amounts reflect the amount of equity compensation established for the executive immediately prior to the grant date. As a result of the foregoing determination, a P+RSU award of $1,050,000, which will cliff vest 30 months after the date of grant, and a RSU award of $800,000 vesting over a 30-month period in three equal installments, were made to Mr. House in February 2012.
Mr. House also received a cash payment of $113,338 in lieu of a corporate contribution to the Executive Retirement Savings Plan, which was prorated for the portion of the year he served as President and CEO.
During the 2011 fiscal year, prior to May 24, 2011, Mr. House served in the role of Executive Chairman solely, and in that capacity provided leadership to the Board of Directors and played a role in developing and analyzing key strategic initiatives, building and maintaining relationships with our key stakeholders, as well as leading our Board of Directors and other accountabilities. As Executive Chairman, Mr. House also provided insight regarding succession planning for the CEO and other NEOs. In February 2011, Mr. Houses compensation in this role was established to be more aligned with non-employee director compensation, as opposed to executive officer compensation, in part as a result of the end of the transition in roles with Mr. Schroeder. As such, his base salary was set at $300,000 (a reduction from $350,000) and he received time-vested RSUs (not performance-based) valued at $200,000. The latter is a reduction from long-term incentive compensation targeted in 2010 in the aggregate of $350,000. Upon his appointment as President and CEO in May 2011, Mr. Houses compensation as Executive Chairman ceased and he received the compensation as President and CEO noted above.
As noted above, in previous years, the Compensation Committee believed that a team approach to compensation for the NEOs was appropriate. However, given that one of the fundamental objectives of our compensation philosophy is that executive compensation programs support our ability to attract and retain high performing executive officers by aligning executive pay with market data for each individual role, commencing in 2011, the Committee reviewed the total target compensation for each NEO, as compared to companies in the relevant comparator groups reviewed as part of the 2010 study, as well as considered the individuals role, experience and performance to determine the appropriate compensation for each executive. As a result, in 2011, the corporation began a gradual transition away from team-based compensation. In order to align 2011 compensation for the other NEOs with these changes to our compensation principles, some adjustments were made to compensation for certain of our NEOs.
Before determining 2011 compensation for the NEOs (other than the Executive Chairman and CEO), the Committee considered the corporations strong financial performance in 2010, the achievement of our other business goals and objectives, and current trends and initiatives in executive compensation. See 2011 Compensation Program Details and Impact of 2011 Performance below for more details on NEO compensation in 2011.
The specific changes to the 2011 target compensation of Ms. Devine, which reflected her market position primarily against the Canadian comparator group due to the nature of her role, were as follows: annual base salary of $400,000 (representing an increase of $16,500); annual short-term incentive award opportunity under the EAPP of $500,000 at target (the same as 2010); and, long-term incentive award opportunity under the 2006 Stock Incentive Plan of $600,000 at target (representing an increase of $186,918). Under this new arrangement, the total 2011 targeted compensation for Ms. Devine was $1,500,000, of which approximately 73% was at risk.
The Compensation Committee determined that the compensation of both of our Chief Operations Officers should be the same given the nature of the roles and similarity of responsibilities and accountabilities. The specific changes to the
2011 target compensation for both Mr. Clanachan and Mr. Walton, which reflected the market position against the blended North American comparator group to include companies that most closely match the role, were as follows: annual base salary of $400,000 (representing an increase of $16,500); annual short-term incentive award opportunity under the EAPP of $500,000 at target (the same as 2010); and, long-term incentive award opportunity under the 2006 Stock Incentive Plan of $500,000 at target (representing an increase of $86,918). Under this new arrangement, the total 2011 targeted compensation for both Mr. Clanachan and Mr. Walton was $1,400,000, of which approximately 71% was at risk.
In February 2011, it was determined that the 2011 target compensation of Mr. Moir, which reflected his market position primarily against the Canadian comparator group due to the nature of his role, would remain unchanged from 2010. However, in August 2011 the Committee further considered the contributions of Mr. Moir, including his long tenure and significant experience, among other considerations, and believed it was in the best interest of the corporation that his base salary and equity incentive compensation be increased to the levels of Messrs. Clanachan and Walton. As a result, annual base salary was increased from $383,500 to $400,000; annual short-term incentive award opportunity under the EAPP remained at $500,000 at target; and, a long-term incentive award opportunity under the 2006 Stock Incentive Plan was increased from $413,082 to $500,000 at target. The total 2011 targeted compensation for Mr. Moir was $1,400,000, of which approximately 71% was at risk.
Performance-based or variable pay delivered through our EAPP and P+RSU programs constitutes the substantial majority of compensation for our NEOs. The determination of actual EAPP payouts and P+RSUs awards is made by comparing actual EBIT and Net Income performance (as may be adjusted) against payout curves that have a range of established payouts from minimum to maximum levels, as set forth below in 2011 Compensation Program Details and Impact of 2011 Performance. We also consider options/SARs awarded to our executives to be at risk depending on performance, although we do not have performance pre-conditions attached to our annual option/SAR awards.
As noted above under General Compensation Principles and Guidelines, our executive compensation philosophy provides, as a guideline, that base salaries for the corporations executive officers will be set at approximately the 25th percentile of the applicable comparator group. In 2011, we maintained the base salaries of the NEOs at approximately the 25th percentile of base salaries of the average comparable executive officer positions of companies reviewed as part of the 2010 study. In addition, each individuals role, experience and performance were taken into consideration when establishing base salaries for 2011. Setting base salaries at the 25th percentile is consistent with our philosophy of weighting compensation heavily towards performance-based awards, such that the level of total compensation is based on the corporations performance, while also providing our executives with a stable source of annual income.
The Committee set the following 2011 base salaries for our NEOs.
Short-Term Incentives (or Annual Cash Bonus)the Executive Annual Performance Plan
Our short-term (annual) incentive compensation program for executive officers is known as the Executive Annual Performance Plan (EAPP). Awards under the EAPP are at risk because the corporation must achieve annual financial performance objectives established by the Compensation Committee in order for the executive officers to receive any payments under the EAPP. The Committee believes that the annual cash incentive award should constitute a substantial portion of executive compensation to support our pay-for-performance philosophy and because our business tends to work on shorter performance cycles, thus making annual incentive awards effective at matching compensation to our performance. Additionally, given the relatively low level of our executive base salaries, we believe that strong short-term cash incentive compensation assists us to retain, motivate, and attract talented executives.
The two performance objectives for EAPP are operating income, or EBIT, as to 75% of the award, and Net Income, as to 25% of the award. The Compensation Committee believes that EBIT best reflects the financial health and performance of our business and also is a key performance measure used by other quick service restaurant companies, which allows for general comparability of performance. The Committee also believes that Net Income is an appropriate measure as it reflects overall earnings performance and requires management to be responsible for, and manage every line item on, our Consolidated Statement of Operations. Additionally, in making its decision regarding the appropriate performance objectives, the Committee also considered the following factors relative to EBIT and Net Income:
The Committee reviews the corporations performance objectives annually and intends to look at the performance objectives during 2012 in the context of any overall changes to compensation plans and programs. Each year, the Compensation Committee establishes a payout curve with target, threshold, and maximum amounts, and incremental amounts between the threshold and maximum amounts, for the EBIT and Net Income performance objectives. Payouts range along the curve depending upon the corporations financial performance against the targets, with payouts corresponding to incremental performance above or below target performance. In 2011, the payout curve was changed to a linear (formulaic) scale from a step scale to better match corporate performance with the final payout, subject to the following threshold/minimum and maximum payouts. The EBIT payout curve that applied to the short-term incentive program also applied to the long-term P+RSU program.
The following table sets forth the 2011 performance objectives, actual EBIT and Net Income performance (as adjusted) and resulting EAPP payout:
The following table sets forth target and actual payouts under the EAPP made to the NEOs for 2011 performance:
Achievement of EBIT Performance Objective. As described herein, EBIT performance is the primary driver of performance-based compensation under the EAPP and P+RSU programs. For the five years prior to and including 2011, we generally met the target amounts for EBIT performance, as may have been adjusted in accordance with the terms of the EAPP, but we did not achieve the maximum objectives. Between 2007 and 2011, inclusive, our EBIT performance ranged from 95.9% to 101.7% of target.
Achievement of Net Income Performance Objective. Net Income is the secondary driver of performance-based compensation under the EAPP program. For the five years prior to and including 2011, we generally met the target amounts for Net Income performance, as may have been adjusted in accordance with the terms of the EAPP, but we did not achieve the maximum objectives. Between 2007 and 2011, inclusive, our Net Income performance ranged from 99.4% to 102.2% of target.
The Compensation Committee believes that the EAPP effectively continues to deliver short-term incentive compensation in a manner consistent with our compensation philosophy. See below under Named Executive Officer CompensationAlignment to Corporate Performance (Pay-for-Performance Linkage).
The Committee may make adjustments to awards in the event actual performance goals are not met. If warranted, the Committee may increase or reduce the size of the payout and also has the discretion not to award a payout. The Committee considers the use of discretion to be a factor that mitigates the risk of unintended consequences of executive compensation determinations made earlier in the performance year.
Consistent with our compensation philosophy, equity-based incentive compensation granted under our 2006 Stock Incentive Plan constitutes the largest part of the CEOs total compensation and a significant portion of the total compensation for our executive officers. Our equity incentive awards are generally intended to accomplish the following main objectives:
Currently, our equity incentive compensation consists of performance-conditioned restricted stock units (P+RSUs) and stock options with tandem stock appreciation rights (SARs). The P+RSUs and options/SARs each represent 50% of the total value of the target equity incentive awards. This mix strengthens the link between pay and performance and, therefore, is more consistent with our compensation philosophy and more effectively aligns our executives interests with those of our shareholders than reliance on just one type of equity award. This is aligned with market practice on the average mix of long-term incentive compensation at TSX60 companies. The Compensation Committee believes that the use of these types of awards supports our executive retention objective by providing both mid-term (P+RSUs) and long-term (options/SARs) incentives.
Both the P+RSUs and options/SARs grants are based on specific dollar values. The actual number of P+RSUs granted is determined by dividing the dollar value of the award by the closing price of our common shares on the Toronto Stock Exchange (the TSX) on the trading day immediately preceding the grant date. The number of options/SARs to be granted is determined by dividing the dollar value of the award by the option value calculated using the Black-Scholes valuation methodology. The Compensation Committee believes that a value-based approach to equity incentive grants is more appropriate than a fixed-number grant because the initial dollar value of the P+RSUs and options/SARs is fixed on the date of grant and, therefore, the number of P+RSUs or options/SARs awarded is equal to the amount of compensation the Committee had determined to award on the grant date. Previous grants of P+RSUs and options/SARs are not taken into account when awarding new grants. For additional detail, see Notes (2) and (3) of the Summary Compensation Table under Executive and Director Compensation.
The annual level of P+RSUs awarded is dependent upon the achievement of performance targets in the fiscal year prior to the year of grant. Upon the performance conditions being met, P+RSUs are awarded as standard, time-vested restricted stock units which vest in 30 months (i.e., cliff vest) and have dividend equivalent rights (DERs). No DERs accrue during the performance period for P+RSUs. DERs begin to accrue only after the performance condition is satisfied and P+RSUs are granted.
In February of each year, the Compensation Committee sets the performance objectives for the P+RSUs to be granted in the following year. Based on the same factors considered in establishing the performance measures for the EAPP, the Committee considers operating income, or EBIT, as to 100% of the award, to be the most appropriate performance objective for the P+RSU grants. The level of P+RSUs granted is based on a one-year performance target, rather than multiple year targets, primarily because our relatively short business cycle makes a shorter performance period more effective in linking compensation to performance. Because the P+RSUs cliff vest, they also have a strong retention component. See below for a discussion of (i) the relevant payout curve for the P+RSU program, and (ii) the achievement of the EBIT performance objective for purposes of P+RSU awards.
The Committees established administrative practice is that P+RSU awards are backward-looking in terms of the corporations performance target, which is applied to the original grant amount determined at the time the performance target is set. However, P+RSUs are forward-looking in that they have a 30-month cliff vesting schedule, which, absent certain exceptions, effectively requires a forward service period of 30 months prior to vesting and settlement. Based on these considerations, the actual grant reflects the amount of equity compensation established for the executive immediately prior to the grant date. This includes the impact of any adjustments to equity incentive compensation (upward or downward) that occurred after the end of the prior-year performance period.
The following table sets forth the 2011 performance objectives, actual EBIT performance (as adjusted) and resulting P+RSU award:
Based on the foregoing, the following table sets forth the actual P+RSU awards to be granted to the NEOs in May 2012, based on 2011 performance:
Stock options with tandem SARs are designed to reward our executive officers for increases in our stock price over long periods of time. Issuing options with tandem SARs provides the option holder with the choice of receiving either our common shares (by exercising the option) or cash (by exercising the SAR), in each case with the value dependent upon the price of our common shares at the time of exercise. Upon the exercise of options, the related SARs are surrendered to the corporation and cancelled to the extent of the number of options exercised. Upon the exercise of SARs, the related options are surrendered to the corporation and cancelled to the extent of the number of SARs exercised. The options/SARs vest in equal proportions over three years and expire after seven years; however, the term is shortened upon death, disability, retirement, or termination. Additionally, because of their completely forward-looking nature, they may provide longer-term incentives in years when our performance results in lower (or no) short-term cash incentive or P+RSU awards.
Options/SARs represent alignment with shareholder interests as they have no value if our share price does not increase (unlike RSUs and P+RSUs), but will increase (or decrease) in value directly in relation to increases (or decreases) in our share price during the exercise period.
All equity awards are made in accordance with our equity grant and settlement policy. Refer to the Governance Policies and Related Items section of this CD&A for additional details regarding this policy.
Included in the table below are the value of the 2011 option/SAR awards made to the NEOs in May 2011. Option/SAR awards to be granted to the NEOs in May 2012 will be based on the equity incentive values for 2012 compensation established in February 2012 and will be as set forth in the table below.
Our retirement plans are designed to provide a competitive level of retirement savings to executive officers and to reward them for continued service with us. The retirement program for our executive officers consists of our defined contribution pension plan (the DCPP), which covers all full-time employees, and our Personal Supplemental Executive Retirement Savings Plan (the Savings Plan), which covers executive officers and certain other members of senior management.
Defined Contribution Pension Plan
All of our Canadian employees, including executive officers, are required to participate in our Canadian DCPP after they have completed 12 months of continuous service with us. Employees are required to contribute to the DCPP an amount
equal to 2% of base salary, and we contribute an amount equal to 5% of base salary. Participants may also make voluntary additional contributions, which we will match up to a maximum of an additional 1% of base salary. All contributions made under the DCPP are subject to legislated maximum limits (for 2011, $22,970 per individual in the aggregate for both employer and employee contributions). Although a participants contribution to the DCPP vests upon enrolment, company contributions to the DCPP do not vest until the participant has participated in the DCPP for two years. Vested amounts may be withdrawn prior to retirement if the employee ceases to be employed by us and otherwise in accordance with Canadian laws and regulations governing the DCPP.
Personal Supplemental Executive Retirement Savings Plan
The purpose of the Savings Plan is to provide participants with additional compensation, which the participants will direct to be held and invested in accordance with the terms of the Savings Plan. Only individuals who are below 69 years of age are eligible to receive additional compensation under the Savings Plan. Participants who have more than three years of service with us are considered vested participants.
Under the Savings Plan, vested participants must direct us to pay compensation received under the Savings Plan to: (i) a non-registered account, (ii) a Tax Free Savings Account (TFSA), or (iii) a Registered Retirement Savings Plan (RRSP). These accounts are administered by a third-party financial institution, and the amounts held in such accounts are invested in permitted investments at the direction of the respective participant. As a result, the design of the Savings Plan allows the participants to achieve certain tax efficiencies as well as control the investments of their funds. The corporation and participants will agree to pay to, or transfer amounts out of, the vested account upon the occurrence of specified events, including termination, disability or death of a participant, or in certain other circumstances.
After the completion of the plan year, the corporation will make contributions to the Savings Plan at a rate of 12% of earnings (base salary and annual incentive paid during the plan year), less DCPP contributions from the corporation. The contribution rate was selected based on data provided by pension specialists at Hewitt who, based on general industry design considerations, confirmed that 12% was a market competitive contribution rate for these types of programs. All annual payments made to participants under the Savings Plan will be subject to applicable tax withholdings, unless directed to an RRSP. Also, all income earned on permitted investments, other than in an RRSP or TFSA, will be taxable annually to the participant.
Until vesting occurs, the Savings Plan contributions will accrue in notional accounts for the respective executives. Vesting occurs once a participant has completed three years of service, or earlier if: a participant dies, becomes disabled, is terminated after the age of 65, a change of control occurs, or in certain other circumstances, including as otherwise determined by the Committee. All of our NEOs are fully vested in the Savings Plan, having met the three-year service requirement.
We use limited amounts of executive benefits and perquisites to provide our NEOs with a competitive total compensation package that allows them to focus on their daily responsibilities and the achievement of the corporations objectives. The perquisites provided to executive officers consist of executive medical benefits, life and accidental death and dismemberment insurance premiums, use of a company car, and personal use of our corporations airplane in limited circumstances. The value of these benefits, except for the medical benefits, is included as taxable income to the executive. The Compensation Committee does not believe that perquisites and other benefits should represent a significant portion of the compensation package of the executive officers. The amounts reported for perquisites represent the aggregate incremental cost of providing the benefit and not the value of the benefit to the recipient. See the Summary Compensation Table under Executive and Director Compensation for additional information regarding the perquisites we provide to our NEOs.
We have a policy limiting the personal use of our aircraft by executive officers and directors to the following circumstances: (i) the spouse or partner and other family members (as well as other officers and/or employees) may accompany an executive officer or director who is traveling on our aircraft for a business purpose, if space permits; and (ii) the executive officers, spouses or partners, and other family members, may use the aircraft in the event of medical emergencies or other extreme hardships.
Before determining target compensation for 2012 for all of the NEOs, the Compensation Committee considered the corporations strong financial performance in 2011, the achievement of our other business goals and objectives, analysis derived from the tally sheets and internal pay equity review, and increases in base salaries made to other employees of the corporation generally.
Paul D. House joined the corporation as Vice-President of Marketing in 1985 and occupied various senior management positions leading to his appointment in January 1993 as Chief Operating Officer. He then became President and Chief Operating Officer in 1995, and CEO in November 2005. Mr. House was named Chairman of the Board in February 2007. He was a director on the Wendys Board from 1998 through February 2007. Mr. House is a member of the Board of Directors of the Tim Horton Childrens Foundation and serves on the Board of Trustees of Brock University, as well as the Advisory Board for Brock University Business School. Mr. House joined Dairy Queen® Canada in 1972 and held various management positions with that company, including Vice-President of Canadian Operations, responsible for the business in Canada. Mr. House holds a B.A. in Economics from McMaster University. On March 1, 2008, Mr. House became Executive Chairman of the corporations Board of Directors. Effective as of May 24, 2011, Mr. House was appointed to serve as the President and Chief Executive Officer of the Company.
In recognition of Mr. Houses effective leadership, the strengthening of the corporations competitive position, the creation of a strong foundation for future growth opportunities, and his demonstration of an extremely high level of commitment to employees, restaurant owners and the communities in which we operate, the Board has approved the following compensation for 2012. Effective as of February 26, 2012, Mr. House will receive a base salary of $772,500 (representing a 3% increase from current base salary of $750,000) for the portion of the year he serves as President and CEO plus any transition period necessary to integrate a potential new President and CEO into the role and the corporation. Mr. House will be eligible for a performance-based short-term incentive award under the corporations EAPP of $1,000,000 at target performance (no change from 2011 level), provided that the short-term incentive payout will be prorated to the period during which Mr. House serves as President and CEO during 2012, including any transition period as mentioned above. The amount payable to Mr. House under the EAPP will be dependent upon the extent to which the corporation achieves EBIT and Net Income performance objectives established for the EAPP in February 2012. Mr. House will be eligible for a long-term incentive award in May 2012 in an aggregate amount of $2,050,000 under the corporations 2006 Stock Incentive Plan, consisting of: (i) $1,050,000 delivered through P+RSUs, adjusted by the 2011 performance factor of 105%, which will cliff vest 30 months after the date of grant; and (ii) $1,000,000 delivered as time-vested RSUs, vesting over a 30-month period in three equal installments.
The following outlines the changes to Mr. Houses target total direct compensation as President and CEO for 2012:
Compensation for the other NEOs will remain the same in 2012 as was in place for 2011, with the exception of increases to base salaries of 3%. Keeping the short-term and long-term equity incentive targets the same for 2012 takes into consideration the significant change to the long term incentive target made in 2011 and that benchmarking will be done every two to three years. The following outlines the changes to target total direct compensation for 2012, along with target total direct compensation for the prior two years.
Ms. Devine, Chief Financial Officer (CFO)
Cynthia J. Devine joined the corporation in 2003 as Senior Vice President of Finance and Chief Financial Officer, responsible for overseeing accounting, financial reporting, investor relations, financial planning and analysis, treasury, internal audit, tax and information systems for the corporation. She was promoted to Executive Vice President of Finance and Chief Financial Officer in April 2005. As of May 1, 2008, Ms. Devine was appointed as Chief Financial Officer and assumed additional accountability for the corporations manufacturing operations and vertical integration strategy. These manufacturing operations include Maidstone Coffee, Fruition, Fruits and Fills, a fondant and fills facility, and the coffee plant in Hamilton, Ontario. Prior to joining the corporation, Ms. Devine served as Senior Vice President, Finance for Maple Leaf Foods®, a large Canadian food processing corporation, and from 1999 to 2001, held the position of Chief Financial Officer for Pepsi-Cola® Canada. Ms. Devine, a Canadian Chartered Accountant, holds an Honours Business Administration degree from the University of Western Ontario. Ms. Devine is a member of the Board of Directors of ING Direct® Canada. In August 2011, Ms. Devine was elected as a Fellow of the Canadian Institute of Chartered Accountants for contributions to the Chartered Accountant profession.
The following outlines the changes to Ms. Devines target total direct compensation for 2012:
Mr. Clanachan, Chief Operations Officer (COO), United States and International
David F. Clanachan joined the corporation in 1992 and held various positions in the Operations Department until he was promoted to the position of Vice President, OperationsWestern Ontario in 1997. Prior to that time, he was a Director of Operations for an international food corporation, with approximately 12 years of experience in the industry. In August 2001, he was promoted to the position of Executive Vice President of Training, Operations Standards and Research & Development. As of May 1, 2008, Mr. Clanachan was appointed as Chief Operations Officer, United States and International. Mr. Clanachan directly oversees operations, restaurant development and growth strategy for the U.S. segment, as well as the international operations and growth strategy. Mr. Clanachan holds a Bachelor of Commerce degree from the University of Windsor. Mr. Clanachan serves on the School of Hospitality and Tourism, Management Policy Advisory Board for the University of Guelph and as a director of the Canadian Hospitality Foundation.
The following outlines the changes to Mr. Clanachans target total direct compensation for 2012:
Mr. Moir, Chief Brand and Marketing Officer
William A. Moir joined the corporation in 1990 as Vice President of Marketing, and was promoted to Executive Vice President of Marketing in 1997. As of May 1, 2008, Mr. Moir was appointed as Chief Brand and Marketing Officer, and
as the President of the Tim Horton Childrens Foundation and assumed responsibility for research and development, aligning product research and innovation programs with the corporations brand and marketing activities. Prior to joining the corporation, Mr. Moir gained extensive marketing management experience, holding key positions with K-Tel®, Shell Oil® and Labatt Breweries®. He is a director and past Chairman of the Coffee Association of Canada, a director of The Trillium Health Centre Foundation, a director of the Baycrest Foundation, as well as the President of and a member of the Board of Directors of the Tim Horton Childrens Foundation. Mr. Moir holds an Honours Business degree from the University of Manitoba.
The following outlines the changes to Mr. Moirs target total direct compensation for 2012:
Mr. Walton, Chief Operations Officer (COO), Canada
Roland M. Walton joined the corporation in 1997 as Executive Vice President of Operations, responsible for operations in both Canada and the U.S. As of May 1, 2008, Mr. Walton was appointed as Chief Operations Officer, Canada. Mr. Walton directly oversees operations, restaurant development and growth strategy for the Canadian segment and also assumed responsibility for operations standards and training for the Tim Hortons brand. His restaurant industry experience includes Wendys Canada, Pizza Hut® Canada and Pizza Hut USA. In 1995, Mr. Walton held the position of Division Vice President for Pizza Hut USAs Central Division. Mr. Walton holds a Bachelor of Commerce degree from the University of Guelph.
The following outlines the changes to Mr. Waltons target total direct compensation for 2012:
In September 2006, the Compensation Committee requested that Hewitt review market practices and general industry precedents to determine whether the change in control agreements that our executive officers had when the corporation was owned by Wendys International, Inc. were consistent with current market practice. Based on Hewitts review and recommendations, the Committee recommended that our Board adopt change in control agreements for each of the NEOs containing provisions the Committee believed, based on the information provided by Hewitt, were consistent with typical benefits offered under change in control agreements by general industry companies.
Change in control agreements are provided to our NEOs to facilitate the stability of our leadership during the course of a change in control transaction, which is a time of increased uncertainty for our NEOs and other employees. The benefits are intended to allow these officers to make reasonable decisions about potential changes in ownership that are in the best interests of our shareholders. Change in control transactions frequently result in job losses to executive officers and, therefore, the Compensation Committee believes that appropriate change in control benefits encourage the ongoing
commitment of executive officers to the best interests of shareholders during such times. As mentioned above, these benefits also help to ensure stability and continuity of management as the change in control transaction is implemented and beyond. Furthermore, based on Hewitts review and recommendations, the Committee believed that these types of change in control benefits are typical for large public companies and are, therefore, intended to provide our NEOs with benefits similar to those obtainable at comparable companies, which serves to further our objective of attracting and retaining high-performing talent. Other than these change in control agreements, and as provided under the terms of the 2006 Stock Incentive Plan, we do not have any individual agreements with our NEOs that guarantee continued employment or that establish payments on termination of employment.
In December 2009, the Board adopted new change in control agreements with the following provisions:
The corporations change in control agreement with Mr. House previously provided for a change in control payment of three times cash compensation, plus certain additional benefits for a period of three years following a termination of employment. With a view to aligning to market practice and the other NEOs, Mr. Houses change in control agreement was amended, in March 2012, to decrease his change in control payment from three times to two times cash compensation, and to reduce his entitlement to additional benefits from three years to two years.
In February 2010, Mr. House and Mr. Schroeder each entered into post-employment covenant agreements containing non-compete, non-solicitation, confidentiality, and related covenants. The change in control agreement for each of Mr. House and Mr. Schroeder was amended to incorporate these additional covenants as well. Following the termination of his employment with the corporation, Mr. Schroeder agreed under his Separation Agreement and Final Release to extend the term of various covenants and obligations under his existing post-employment covenant agreement.
Share Ownership Policy for Executive Officers
In January 2009, the Compensation Committee reviewed our share ownership guidelines for our officers to confirm they remained appropriate in light of market trends and best practices. The share ownership guidelines, which were established after consideration of data provided by Hewitt describing the stock ownership guidelines of Canadian retail (and other) companies and certain U.S. peer companies, were established and are maintained because we believe that share ownership further aligns the goals and interests of all of our officers, particularly our NEOs, with those of our shareholders. As indicated in the table below, the guidelines require our executives to accumulate and hold shares (including vested, but unexercised options) equal to a multiple of their base salaries. The guidelines also provide that disciplinary action may be taken in the event a NEO does not achieve compliance with the guidelines within four years from the date of hire.
The stock ownership guidelines do not apply to officers who are within five years of a planned retirement as we do not currently impose hold to or through retirement under our guidelines. However, RSUs and options/SARs continue to vest in accordance with their normal vesting schedules, such that vesting of these awards does not accelerate upon retirement. Our share ownership guidelines also strictly prohibit our officers from entering into any transaction that would operate as a hedge against an officers share ownership position. Compliance with the guidelines is reviewed by the Compensation Committee annually.
In January 2012, the Committee reviewed the degree to which individuals have satisfied the applicable ownership guidelines as well as the applicable guideline for each executive level. As of the end of 2011, all of our NEOs were in compliance with our stock ownership guidelines. The following table indicates NEO holdings as compared to the share ownership guidelines.
On an annual basis, or otherwise more frequently as circumstances require, the Compensation Committee considers whether our executive compensation programs create or incentivize any inappropriate risk-taking. Because annual performance-based incentives play a large role in our executive compensation programs, it is important that these incentives do not result in our NEOs taking actions that may conflict with the corporations long-term interests. No substantial changes occurred with respect to our compensation plans and programs during 2011 that impacted the Committees risk assessment in a significant way and, in January 2012, the Committee concluded that our compensation programs continue to be designed and administered with the appropriate balance of risk and reward in relation to our overall business strategies, and do not encourage executives to take unnecessary or excessive risks. In making this determination, the Committee considered the following key elements of our existing compensation programs.
Performance Objectives and Committee Review
In connection with the adoption of the annual target performance objectives for 2011 and 2012, the Committee considered the extent to which annual performance metrics as opposed to multi-year targets, could potentially incentivize unnecessary or inappropriate risk-taking or short-term decision-making. The Committee concluded that the absence of multiple-year performance objectives did not lead to the assumption of undue risk. The potential for short-term decisions to drive excessive compensation is limited because the performance awards are subject to caps or maximum amounts of compensation that can be received in the event the corporations performance exceeds established performance targets. This minimizes any incentive to enter into large transactions for the purpose of attempting to generate substantial short-term gains. In addition, consistent declines in budgeted target growth due to short-term decision-making also would be visible to the Committee and Board through the annual budget review and establishment of annual performance objectives. Therefore, short-term decisions resulting in increased compensation in the current year would impact the budget and performance objectives for the following year.
In addition, the Committee retains discretion to make adjustments to minimize the impact of extraordinary events or circumstances so that the compensation paid to executives more closely matches underlying operating performance. For example, in 2011 the Committee considered the net impact of the Separation Agreement with our former President and Chief Executive Officer, which included severance charges, advisory fees and other related costs and expenses, on
compensation. The Committee made adjustments to minimize the net impact of these changes on compensation because the Committee believed it was appropriate to do so given the relative magnitude of the changes, the extraordinary nature of the agreement (which was unrelated to underlying operating performance), and the inability of executives to control the occurrence of the changes. The Committees ability to review the amount of performance awards and the underlying factors driving the amount of such awards prior to payment thereof, as was done in 2011, acts as another means by which risks inherent in the design of compensation plans are mitigated.
Also, as mentioned above, annual EBIT performance is the objective that determines incentive payments for our employees at-large (including our executive officers) and has been for a number of years. Over this time period, our financial performance has been strong, and the Committee has therefore concluded that EBIT has been an effective performance objective which has not led to imprudent management practices. This consistent approach reflects our commitment to discouraging inappropriate risk-taking at all levels within the organization.
Other Factors Mitigating Risk in Compensation Programs
In addition to the metrics selected for performance-based compensation, discussed above, the Committee believes that certain of our other tools and policies mitigate an incentive to take excessive risks by limiting the amount of benefit that could be obtained by executives through undue focus on short-term results and/or through excessive risk-taking. These tools and policies include:
Recoupment or Clawback Policy
In February 2009, the Compensation Committee adopted the Recoupment Policy Relating to Performance-Based Compensation (Recoupment Policy). The Recoupment Policy provides that if our consolidated financial statements are required to be restated for any reason other than a change in accounting policy with retroactive effect, our Board of Directors will review all performance-based compensation awarded to or earned by our senior executives (and certain other employees) for all fiscal periods materially affected by the restatement, provided that the Recoupment Policy shall
apply to all such compensation awarded or paid on or after February 19, 2009. If the Board determines that performance-based compensation was paid based on the achievement of financial results that were subsequently corrected as part of a restatement, and a lower incentive payment or award would have been made based on the restated financial results, then the Board will, to the extent permitted by applicable law, seek recoupment from those subject to the Recoupment Policy. Recoupment will be sought for the extent of such performance-based compensation as the Board deems appropriate, after a review of all relevant facts and circumstances.
Equity Grant and Settlement Policy
The Compensation Committee has adopted an equity grant and settlement policy to reflect best practices and confirm internal policies and procedures. This policy provides for, among other things, specific parameters that apply to all grants and settlements of equity compensation awards, as well as hedging activities undertaken by the corporation at the time of the award and/or settlement thereof. The general purpose of the policy is that no exercise price, settlement value, or grant-date value of any equity award made by the corporation and, that no entry into or settlement of hedging transactions in connection with such equity awards, is subject to, or at risk of, any manipulation by any director or member of management. This policy is also intended to avoid using a stock price for determination of equity grants or settlement amounts on a date when we are arguably in possession of material, undisclosed information that is not reflected in the market price of our common shares. Otherwise, grants would not be reflective of our intent to assign an appropriate value-based award. In furtherance of the policy, specific practices were adopted and must be followed when grants and settlements of equity-based awards are made and when hedging activities by the corporation are undertaken in connection therewith. In particular, the Committee believes that establishing fixed grant and settlement dates, as well as establishing hedging practices, in advance to the extent possible, will maintain the integrity of the award, settlement, and hedging process. Accordingly, grant and settlement dates of equity-based compensation awards to non-employee directors and employees are predetermined, as set forth in the policy, as are the dates of corresponding hedging activities. In addition, certain other administrative and internal control measures were confirmed as part of the adoption of the policy, including an override by the Committee if certain events or circumstances should occur or arise.
Tax Treatment of Certain Equity Compensation
Pursuant to the 2006 Stock Incentive Plan, the corporation currently awards equity-based incentive compensation to certain employees, including our NEOs, in the form of stock options with tandem SARs. The employee can exercise the stock option to receive common shares or exercise the SAR and receive a cash payment, in each case with the value dependent upon the price of our common shares at the time of exercise. In Canada, the cash payment upon exercise of the SAR is taxable income to the employee. Prior to 2010, Canadian tax rules permitted Canadian employees to claim a stock option deduction equal to 50% of this income inclusion and also permitted the Canadian employer to claim a tax deduction for the cash payments made. Changes to the applicable Canadian tax legislation in 2010 provided that either the Canadian employer or the Canadian employee may claim a deduction for cash payments arising on the exercise of the SAR feature, but not both. In each of 2010 and 2011, the corporation made annual elections to forgo its corporate tax deduction in Canada to enable Canadian employees to receive favorable tax treatment on an exercise of the SAR feature in those years.
As a foreign private issuer in the U.S., we are not required to disclose executive compensation according to the requirements of Regulation S-K that apply to U.S. domestic issuers, and we are otherwise not required to adhere to the U.S. requirements relative to certain other proxy disclosures and requirements. Therefore, our executive compensation and other proxy disclosures will be in compliance with Canadian requirements, which are, in most respects, substantially similar to the U.S. rules. We do generally attempt to comply with the spirit of the U.S. executive compensation and other proxy rules when possible and to the extent that they do not conflict, in whole or in part, with required Canadian corporate or securities requirements or disclosure, with the exception that we have determined to monitor and follow the development of say on pay practices in Canada and, therefore, we did not adopt the U.S. say on pay advisory vote on executive compensation under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The following graph compares the corporations cumulative total shareholder return on the TSX and NYSE over the five years ended December 30, 2011 of the common shares of the corporation, against the cumulative total return of the S&P/TSX Composite Index, S&P/TSX Consumer Discretionary Index, and S&P 500 (assuming a $100 investment was made on December 29, 2006 and the reinvestment of dividends at the closing price on the dividend payment date). The information provided under the heading Performance Graph shall not be considered filed for purposes of Section 18 of the Exchange Act or incorporated by reference in any filing under the Securities Act or the Exchange Act.
Total Shareholder Return
As set forth in the graph above, in our last five fiscal years, the corporations share price on the TSX has increased 55.7% assuming the reinvestment of dividends. During this period, aggregate NEO compensation as reflected in the Summary Compensation Table has not significantly increased, ranging from between $10.2 million to $12.0 million (including the impact of the 2011 long-term incentive awards delivered in 2012 for Mr. House), which provides substantial support for our pay-for-performance philosophy. In 2008, the application of our pay-for-performance philosophy was also demonstrated as total compensation delivered to the NEOs was impacted by lower-than-target EAPP payouts (at 80% of target) and no P+RSU grant in 2009 due to not achieving the performance objectives set for 2008. This coincides with and aligns to the drop in cumulative total shareholder return value during 2008 outlined in the graph above. Over 2010 and 2011, our financial performance, after excluding certain significant events, was strong, which was reflected in the improvement of the corporations share price over this period. The majority of our performance-based compensation (EAPP payouts (75%) and P+RSUs (100%)) during this period was based on our operating income, or EBIT, performance. As such, we have provided below a comparison of aggregate NEO compensation to the corporations EBIT performance.
Operating Income (EBIT) Performance
The following graph compares aggregate annual compensation paid to our NEOs from fiscal 2007 to fiscal 2011 to actual EBIT as reported in our Form 10-K for the fiscal year ended January 1, 2012, under Selected Financial Data. As outlined on the graph, aggregate NEO compensation has remained relatively flat over this period while reported EBIT has steadily increased. The increase in EBIT in fiscal 2010 reflects the impact of the gain on the sale of our 50% joint venture interest in Maidstone Bakeries which was excluded from compensation determinations for our NEOs. During the past five years, Reported EBIT has increased by 23.9%, while aggregate NEO compensation as a percentage of reported EBIT, has remained relatively flat from 2.2% in 2007 to 2.1% in 2011. We believe that these results, coupled with the analysis discussed above with respect to total shareholder return, support that EBIT as a performance objective is effective in delivering compensation to our executives over time in a manner consistent with our pay-for-performance philosophy and in a manner that represents alignment with long-term shareholder value.
Reconciliation of Adjusted 2011 Operating Income Attributable to Tim Hortons Inc.
and Adjusted 2011 Net Income Attributable to Tim Hortons Inc., Non-GAAP Financial Measures
Adjusted operating income (EBIT) attributable to Tim Hortons Inc. and adjusted Net Income attributable to Tim Hortons Inc. are non-GAAP measures used for compensation determinations (see table below). EBIT or operating income attributable to Tim Hortons Inc. excludes operating income attributable to noncontrolling interests. Prior to the adoption of a new accounting standard at the beginning of the first quarter of 2010, operating income was, for the most part, unaffected by noncontrolling interests, which is not the case post-adoption. This new accounting standard requires the consolidation of variable interest entities of which we are considered to be the primary beneficiary and we believe should not be included in determining corporate performance for compensation purposes.
Adjusted operating income attributable to Tim Hortons Inc. excludes operating income attributable to noncontrolling interests, as described above, and costs relating to the CEO separation. This includes severance charges, advisory fees, CEO search fees, and other related costs and expenses. These expenses were offset in part by a reduction in compensation expense because we no longer paid Mr. House as Executive Chairman after his appointment as President and CEO.
Adjusted Net Income attributable to Tim Hortons Inc. for compensation determinations excludes the impact of costs relating to the CEO separation on a tax-adjusted basis and a tax adjustment representing lower tax expenses and charges than originally budgeted. The exclusion of the tax adjustment had a negative (lower) impact on executive compensation.
Management believes that adjusted operating income attributable to Tim Hortons Inc. and adjusted Net Income attributable to Tim Hortons Inc. provide important information for comparison purposes to prior periods and for purposes of evaluating the corporations operating income performance without the effects of significant items, noted above, which have a disproportionate impact on the overall performance of our consolidated business.
These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. The corporations use of the terms adjusted operating income and adjusted net income for compensation determinations may differ from similar measures reported by other companies.
For compensation purposes, the adjusted measures more closely reflect our operating performance to which the corporation seeks to align executive compensation. That is, the adjusted measures remove what we consider to be disproportional impacts of unusual, non-operating transactions on the overall performance of our corporations business and, therefore, on executive compensation that is based on the corporations financial results.
Reconciliation of 2011 Adjusted Operating Income (EBIT) Attributable to Tim Hortons Inc.
and 2011 Adjusted Net Income Attributable to Tim Hortons Inc. (Non-GAAP Measures)
The following table lists all elements of compensation directly or indirectly awarded to, earned by, or paid or payable by the corporation to each NEO for the fiscal years ended 2011, 2010 and 2009.
The following table lists all option-based or share-based awards outstanding as of January 1, 2012 that have been made to the NEOs of the corporation.
The following table lists, with respect to each NEO, the value of all option-based and share-based awards that have vested, and all non-equity incentive plan compensation earned, during the fiscal year ended January 1, 2012.
The table below shows the accumulated value at the beginning and end of the fiscal year ended January 1, 2012 for each NEO participating in the corporations defined contribution pension plan (DCPP). Contributions for the personal supplemental executive retirement savings plan, the Savings Plan, are not included in this table, but are described below and reported in the Summary Compensation Table under the heading All Other Compensation.
For additional information on the DCPP, see Compensation Discussion and AnalysisRetirement Benefits.
As described in the Compensation Discussion and AnalysisRetirement Benefits section, effective January 1, 2009, our Board approved the Personal Supplemental Executive Retirement Savings Plan (Savings Plan) for our NEOs. After each plan year we contribute to the Savings Plan an amount (expressed as a percentage of base salary and annual cash bonus received by a participant during the year) for each participant who was actively employed by us on December 31 and was less than 69 years old. The participants in the Savings Plan are not permitted to make contributions to the plan. All NEOs in the Savings Plan are fully vested. Contributions made by the corporation to the NEOs accounts under the Savings Plan are directed to a vested account, and the amounts held in such accounts will be invested in permitted investments at the direction of the respective participant.
The table below shows the accumulated value at the beginning and end of the fiscal year ended January 1, 2012 for each NEO participating in the Savings Plan.
The 2006 Stock Incentive Plan is an omnibus plan that is designed to allow us to compensate employees in a variety of ways through a broad range of equity-based awards. The 2006 Stock Incentive Plan authorizes the issuance of up to 2,900,000 common shares (or 1.5% of our issued and outstanding common shares at inception of the 2006 Stock Incentive Plan) pursuant to awards of restricted stock, stock units, stock options, stock appreciation rights, performance shares, performance units, dividend equivalent rights, and share awards. As of January 1, 2012, there were outstanding equity awards covering 1,487,757 common shares, which represent less than 1% of our issued and outstanding common shares on that date. The 2006 Stock Incentive Plan provides that the maximum number of common shares for which awards may be granted to any participant in any calendar year may not exceed 250,000 for performance shares and 250,000 for options and stock appreciation rights, collectively. The value of performance units that any participant may receive in any year may not exceed U.S.$4,000,000. There are no comparable limits applicable to RSU (including P+RSU) grants. The 2006 Stock Incentive Plan provides that the number of shares issuable to all insiders (as defined in the TSX Company Manual), on an aggregate basis, at any time under all security-based compensation arrangements, may not exceed 10% of our issued and outstanding common shares.
The corporations practice has been to deliver common shares purchased through the facilities of the TSX to grantees upon the exercise of their equity awards, which does not have a dilutive effect on shareholders. Since the public company reorganization in 2009, no common shares have been issued from treasury to settle equity awards issued under the 2006 Stock Incentive Plan. Should the corporation alter its current practice such that common shares are issued from treasury upon a grantees exercise or settlement of outstanding equity awards issued under the 2006 Stock Incentive Plan, then a maximum of 2,147,703 common shares (representing 1.37% of our issued and outstanding common shares as at March 13, 2012) may be issued in the future, of which 1,453,496 common shares (representing 0.93% of our issued and outstanding common shares as at March 13, 2012) may be issued pursuant to currently outstanding equity awards.
Under the 2006 Stock Incentive Plan, awards that are subject to vesting or performance conditions are not transferable until they have vested or until the performance conditions have been satisfied, as applicable; however, they become fully vested upon the grantees death or disability (as defined under the 2006 Stock Incentive Plan). Furthermore, options/SARs are not transferable and are only exercisable by the grantee during his or her lifetime or by his or her estate or legal representative following the death or disability of the grantee, unless otherwise provided for in a separate agreement or at the determination of the Compensation Committee. Except in the case of the retirement, death or disability of a grantee, or upon termination of a grantees employment in connection with the sale of a subsidiary, unvested awards will be immediately forfeited and any vested options/SARs will be exercisable for 90 days following termination, subject to extension until the next trading window during which the grantee could trade in our securities, if the expiration of the 90-day period occurs outside of a trading window.
Equity Compensation Plan Information
The following table sets forth, as of the end of the corporations last fiscal year: (a) the number of securities that could be issued upon exercise of all outstanding options/SARs and vesting of all outstanding RSUs under the corporations equity compensation plans, (b) the weighted average exercise price of outstanding options/SARs under such plans, and (c) the number of securities remaining available for future issuance under such plans, excluding securities that could be issued upon the exercise of outstanding options/SARs or the settlement of outstanding RSUs.
Equity Compensation Plan Information
Before making annual equity awards, the Compensation Committee considers the impact of the new awards on such factors as dilution and overhang, as well as the burn rate of annual grants against the number of total common shares outstanding. As set forth in the table below, management considers that the corporations dilution, overhang, and burn rates are low by industry standards.
The corporation has entered into award agreements in connection with each of its RSUs (including P+RSUs) and option/SAR awards. The corporation may amend the terms of these arrangements, and the corporation may amend the terms of the 2006 Stock Incentive Plan (except as may otherwise be provided by applicable tax and regulatory requirements, including stock exchange requirements), as the Board sees fit without shareholder approval; provided, however that the following amendments to the 2006 Stock Incentive Plan or outstanding equity awards would require the approval of both the Board and the corporations shareholders as described in Section 22 of the 2006 Stock Incentive Plan: (i) an increase in the maximum number of common shares that may be made the subject of awards under the plan, including option-based awards; (ii) any adjustment (other than in connection with a stock dividend, recapitalization or other transaction where an adjustment is permitted or required under the terms of the 2006 Stock Incentive Plan) or amendment that reduces or would have the effect of reducing the exercise price of an option or SAR previously granted under the 2006 Stock Incentive Plan, whether through amendment, cancellation or replacement grants, or other means; (iii) an increase in the express limits on certain awards that may be made to participants under the 2006 Stock Incentive Plan; and, (iv) an extension of the term of an outstanding option or SAR beyond the expiration date thereof, except as expressly set forth in the 2006 Stock Incentive Plan for certain awards that expire outside of an established trading window. In addition to the foregoing, no change to an outstanding award under the 2006 Stock Incentive Plan that will impair the rights of the grantee may be made without the consent of the grantee. No amendments to security-based arrangements were entered into with any NEO during 2011.
As described under Compensation Discussion and AnalysisWritten Change in Control (Employment) Agreements and Post-Employment Covenants, other than the change in control agreements with our NEOs and the Separation Agreement and Final Release with Mr. Schroeder (discussed below), we do not have any employment or other agreements or arrangements that provide for payments to be made to the officers following a termination of employment, and we do not have a formal severance policy for the NEOs. However, the NEOs will receive certain benefits under our compensation plans and programs upon termination of employment, including in connection with a change in control, as described below. We would also be required to pay severance in accordance with applicable law upon termination of a NEOs employment without cause.
Former President and CEO Mr. Donald B. Schroeder
As of May 24, 2011, Mr. Schroeder no longer served as President and CEO of the corporation. In May 2011, following a further succession planning review, a subsequent transitional arrangement could not be reached and the corporation entered into a separation agreement with Mr. Schroeder. The corporation and Mr. Schroeder entered into a Separation Agreement and Final Release (the Separation Agreement) on June 2, 2011, effective May 31, 2011. The Separation Agreement provides Mr. Schroeder with severance of up to $5.75 million, consisting of: (i) a lump sum payment of $2.25 million, payable within three weeks of the effective date of termination; and (ii) up to $3.5 million, payable in equal monthly installments over 24 months. In addition, under the agreement, Mr. Schroeder has agreed to provide consulting services to the corporation for a period of two years in exchange for the payment of $175,000 per year, payable in equal monthly installments. As of the date of Mr. Schroeders departure from the corporation, Mr. Schroeder was retirement-eligible under the 2006 Stock Incentive Plan. As a result, all of Mr. Schroeders outstanding, unvested P+RSUs and options/SARs will continue to vest in accordance with the original vesting schedule. Mr. Schroeder is also fully vested in the DCPP and the Savings Plan. In addition to the foregoing, Mr. Schroeder will be entitled to certain health and dental benefits until June 1, 2013. Mr. Schroeder has also agreed to various covenants under the Separation Agreement for the benefit of the corporation, including covenants relating to co-operation and confidentiality. He has also agreed to extend the term of various covenants and obligations under his existing post-employment covenant agreement, which include non-competition, non-solicitation, non-disparagement and others.
2006 Stock Incentive Plan
The 2006 Stock Incentive Plan contains provisions concerning the treatment of awards upon termination of employment, including a change in control, which apply unless the Compensation Committee determines otherwise in a separate agreement with the NEO. These provisions are as follows:
Under the EAPP, absent a change in control (see below), annual cash incentives are not payable unless the NEO is employed by us on the date that the payment is made (usually in February of each year). However, subject to the Compensation Committees discretion, if the executive officers employment is terminated by reason of death, disability, or retirement after the executive reaches the age of 60 with ten years of continuous service with us prior to the end of the year for which the incentive is to be paid, he or she may be entitled to a pro rata portion (or 100%, if termination occurs after the end of the year) of the cash incentive otherwise payable for that year, when paid.
The EAPP provides that, upon the occurrence of a change in control of our corporation, the cash incentive payable to each NEO in the year of the change in control will be the greatest of: (i) the cash incentive payment received by the executive officer in the fiscal year prior to the year in which the change in control occurs, (ii) the cash incentive that would be payable in the year of the change in control assuming that the target level of performance was obtained, and (iii) the cash incentive that would be payable in the year of the change in control based on our corporations actual performance for that year through the date of the change in control. The definition of change in control in the EAPP (see below) is substantially the same as in our change in control agreements. For executive officers whose employment is terminated without cause or by the officer for good reason in connection with a change in control, the cash incentives under the EAPP will be paid as if they had remained employed through the usual payment date under the EAPP. The definitions of cause and good reason in the EAPP are similar to those in our change in control agreements. Any payments made under the EAPP as a result of a change in control will reduce the amount payable under the NEOs change in control agreement as short-term incentive compensation for the year in which termination occurs.
The Compensation Committee believes the approach to setting minimum guaranteed EAPP payments in the event of a change in control (as described above) is appropriate because change in control transactions can result in increased costs to us, which might adversely affect our financial results and thus the awards that would otherwise be payable to the officers under the EAPP, regardless of our business performance. The Committee believes that such factors should not adversely affect cash incentive payments to be paid in the year of the change in control. See EAPP Payout in Note (1) to the Payments Following a Termination of Employment table below for quantification of these payments, which will be the same as those provided under the change in control agreements (but not duplicated) in the year in which termination occurs.
Personal Supplemental Executive Retirement Savings Plan
Absent a change in control and the occurrence of certain other events, distributions under the Savings Plan may be made after vested participants retire from employment after: (i) having attained age 60 and completed at least ten years of service, or (ii) having attained age 65. Participants are also entitled to receive distributions under the plan (after vesting requirements have been met) if: (i) their employment is terminated for any reason, (ii) they die or become disabled, (iii) they are terminated after a change in control, or (iv) other circumstances designated by the Compensation Committee have occurred. Under the Savings Plan, participants become 100% vested in benefits accrued to them if there is a change in control, which is defined somewhat differently in the Savings Plan than under the change in control agreements. However, similar to the change in control agreements, payments under the Savings Plan are not triggered unless an executives employment is terminated following a change in control (i.e., a double trigger). Additionally, under both the EAPP and the Savings Plan, if a NEOs employment is terminated without cause prior to a change in control but the executive officer can reasonably demonstrate that the termination: (i) was at the request of a third party who had indicated an intention or taken steps reasonably calculated to effect a change in control, or (ii) otherwise arose in connection with, or in anticipation of, a change in control, the termination will be treated as if it occurred after a change in control, if a change in control actually occurs.
Under the Savings Plan, a change in control means:
Notwithstanding the foregoing, the following events are deemed not to constitute a change in control under the Savings Plan:
Payments Following a Termination of Employment
The following table sets forth the aggregate amounts our NEOs (other than Mr. Schroeder) would have received upon a termination of employment if such termination occurred on January 1, 2012. References to Termination for Cause or Without Cause in the table below are actions that may be taken by the corporation. References to Termination for Good Reason in the table below are actions that may be taken by the NEOs. See the definitions, and certain related implications, provided after the table below for additional information. As of May 24, 2011, Mr. Schroeder no longer served as President and CEO. For a description of the aggregate amount Mr. Schroeder received upon termination of his employment, see Termination and Change in Control Benefits above.
As noted above, under applicable law, we may be required to pay severance to executives upon a termination by us without cause, in addition to the amounts set forth in the table below. These amounts would be negotiated on a case-by-case basis and would vary depending upon the executives tenure, date of separation from service with us, and other factors. As such, we have not attempted to quantify those amounts.
Termination without good reason by a NEO may include retirement or resignation. NEOs who are retirement-eligible, however, may be able to receive EAPP awards if the Compensation Committee approves.
Applicable Definitions and Certain Implications
Under our change in control agreements, a change in control is defined as the occurrence of any of the following events:
Mr. Clanachans change in control agreement was amended effective January 1, 2009 for compliance with the requirements of Section 409A of the Internal Revenue Code, if and only to the extent applicable. As a result, to the extent Section 409A applies, the definition of change in control in Mr. Clanachans agreement deviates in certain respects from the definition set forth above.
Termination Without Cause or For Good Reason
Under the change in control agreements, a NEO will receive the benefits noted in the above table if we (or a successor corporation) terminate the officers employment without cause or if the officer terminates his or her employment with us (or a successor corporation) for good reason. Good reason means the occurrence after a change in control of any of the following events or conditions:
Termination For Cause
If a NEO is terminated for cause at any time, the officer will receive only his or her base salary and accrued vacation pay to the termination date, plus any other benefits or compensation that have been earned or become payable prior to that date.
Under the change in control agreements, cause means that the executive officer:
A NEOs action or failure to act will be willful if the officer acts (or fails to act) without good faith and without a reasonable belief that the action or failure to act was in our best interest.
Payments Upon Death
If a NEO dies during the two years following a change in control, the officers beneficiaries will be entitled to receive his or her base salary and accrued vacation pay through the date of death, plus any other benefits or compensation that have been earned or become payable prior to that date. The NEOs beneficiaries would also be entitled to receive a pro rata portion of any cash incentives or other incentive awards the executive officer would have received if he or she had continued employment until the end of the year, payable at the same time such cash incentives or awards are payable to other employees.
The change in control agreements also contain non-competition covenants for the term of the NEOs employment with us and further impose confidentiality obligations on the NEOs both during and after termination of their employment. The NEOs will also be required to pre-clear with us any trades in our securities for one year after termination of their employment to ensure compliance with our insider trading policies and applicable law. The Executive Chairman and President and CEO, Mr. House, has also entered into a post-employment covenant agreement. See Compensation Discussion and AnalysisWritten Change in Control (Employment) and Post-Employment Covenants for additional details.
Following the termination of his employment with the corporation, Mr. Schroeder agreed to various covenants under the Separation Agreement for the benefit of the corporation, including covenants relating to co-operation, confidentiality, non-disparagement and non-solicitation. He also agreed to extend the term of various covenants and obligations under his existing post-employment covenant agreement.
The Board has approved a compensation program for our directors that rewards directors, through retainers and meeting fees, for the time and effort they are expected to spend on company matters. Additionally, it places a significant emphasis on aligning the interests of directors with the interests of our shareholders by requiring compliance with stock ownership guidelines and providing that two-thirds of the directors annual retainer be paid in equity, until such stock ownership guidelines are achieved.
Under our director compensation program, during 2011, all of our directors received: an annual cash retainer of $30,000 and an additional $60,000 annual retainer that must be taken as equity until the director stock ownership guidelines are satisfied; Committee retainers; and, meeting fees. The Committee retainer is $3,000 per year for serving as a member of a Committee, other than as Chair.
In early 2011, the Compensation Committee reviewed the results of a director compensation study conducted by Meridian, the Compensation Committees independent compensation consultant. The results of the director compensation study indicated that the overall level of compensation for directors was generally competitive and appropriate; however, it also showed upward adjustments for Committee Chairs were warranted. Based on the compensation study and other considerations, commencing in 2011, the Audit Committee Chair and Compensation Committee Chair retainer fees were increased to $15,000 per year and $12,000 per year, respectively, and the retainer for the Chair of the Nominating and Corporate Governance Committee (the Nominating Committee), when not also serving as Lead Director, was increased to $8,000 per year. The increases were determined appropriate in order to better align compensation with the market data and to take into account factors such as the relative workload of each role, and the increasing complexity of subject matter of respective Committees. A narrowing of the differential between the Compensation Committee and Audit Committee Chair fees was approved due to the increased complexity regarding governance and disclosure requirements for compensation committees.
In addition to the foregoing adjustments for Committee Chairs, the Board increased the annual retainer for the Lead Director, who also serves as the Chair of the Nominating Committee, to $108,000 per year. The 2011 compensation adjustment was based on the increased workload and relative contribution of the Lead Director over time since his appointment in February 2007, with particular emphasis on and consideration of Board leadership of succession planning, oversight of strategic and business planning, and significant direct involvement with senior members of management.
Until our stock ownership guidelines are achieved, directors must receive their annual equity retainer ($60,000) in deferred stock units (DSUs) granted pursuant to our Non-Employee Director Deferred Stock Unit Plan. DSUs are notional shares that track the value of our common shares and are settled in cash based on the value of our common shares on the TSX upon the directors separation of service with us. Dividend equivalent rights accompany the DSUs. DERs represent the right to receive an amount of additional DSUs equal to the cash dividends that would be paid if the DSUs held by a director were common shares. Directors may elect to receive their Board retainers, Committee retainers and meeting fees (and, after stock ownership guidelines are achieved, their equity retainer) in cash, DSUs, or a combination of both.
The following table sets forth the compensation paid to or earned by the independent members of the Board for the fiscal year ended January 1, 2012. All of the share-based awards represent DSUs which vest upon grant, but do not settle until a directors separation from service with us.
The fees noted above and the DERs represent all payments to our directors in 2011, other than reasonable expense reimbursements. We did not provide for any amounts to be set aside as reti