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SCHEDULE 14A

(Rule 14a-101)

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Filed by the Registrant ☒

Filed by a party other than the Registrant ☐

Check the appropriate box:

 

Preliminary Proxy Statement
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material under §240.14a-12

J. C. Penney Company, Inc.

 

 

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

(1)    Title of each class of securities to which transaction applies:
(2)    Aggregate number of securities to which transaction applies:
(3)   

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

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Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

(1)    Amount Previously Paid:
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(4)    Date Filed:


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LOGO

NOTICE OF 2018 ANNUAL MEETING OF STOCKHOLDERS AND PROXY STATEMENT

 

 


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LOGO

April 9, 2018

Dear Stockholders:

On behalf of your Board of Directors, I want to take this opportunity to invite you to attend our 2018 Annual Meeting of Stockholders. The meeting will be held on Friday, May 25, 2018, at 10:00 A.M., local time, at the JCPenney Home Office, located at 6501 Legacy Drive, Plano, Texas 75024. We will be asking you to vote on and to support several proposals for our Company and it is important that your shares be represented. We urge you to vote your shares via the toll-free telephone number, over the Internet, or by mail, as provided in the enclosed materials.

Our strategic framework continues to be focused on private brands, omnichannel and increasing revenue per customer. We continue to believe that these three pillars provide the foundation for future growth at JCPenney. Under that framework, we have several key initiatives that give us confidence in our ability to achieve our 2018 financial objectives. First is beauty, which is one of the key components of our strategy, particularly with our best-in-class partnership with Sephora. We currently operate Sephora shops in nearly 75% of our stores and expect to open approximately 30 locations in 2018, bringing our total to approximately 670 Sephora shops.

Another key component of our beauty strategy is our salon business. Following a great year of positive sales growth in our salons, we are continuing our rebranding efforts to Salon by InStyle. In 2018, we plan to rebrand and remodel another 100 salons to Salon by InStyle. Fine jewelry is also a key component of our beauty strategy. Our jewelry business is bringing in a newer and younger customer and we believe JCPenney is the only retailer that can offer our customers a total beauty solution combining Sephora, salon and fine jewelry under the same roof. This unique beauty experience cannot be replicated online and magnifies the importance and relevance of our physical stores.

Our home refresh initiatives also continue to provide strong results. We believe we have an unprecedented growth opportunity in this area because over 70% of our customers are home owners and have developed a merchandising assortment including appliances, mattresses, furniture and simple home installs that will help us to compete more effectively in this category.

We also continue to enhance and strategically adjust our apparel offerings to better align with customer preferences. A strategic priority in 2018 will be our continued focus on improving our women’s apparel business, particularly active wear, dresses, contemporary, and casual sportswear. These categories offer JCPenney the greatest opportunity for growth in women’s. Across all apparel categories, special sizes remain a key focus as we leverage our big and tall and plus size businesses to continue to deliver an improved assortment.

We are committed to becoming a world-class omnichannel retailer. The transition from a company focused primarily on the brick and mortar business to a true omnichannel retailer is evidenced by the increase in our online SKU count by 50% in 2017, with plans to add additional SKUs in 2018. It is also evidenced by the transformation of our mobile app from a 1.5 star rated app with minimal reviews to an over 4.5 star rated app with over 150,000 reviews. Approximately 80% of our stores’ existing inventory is eligible for free same-day pickup and 100% of our brick and mortar store network is now being utilized to fulfill online orders.


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Our belief is that retailers who offer their customers the best in-store and online choices will win. We know we have additional work to do, but we’re encouraged by our progress as a company.

Thank you again for your support. We are excited about the initiatives underway at JCPenney and are optimistic about the prospects for our Company.

 

LOGO

Marvin R. Ellison

Chairman of the Board and Chief Executive Officer


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J. C. PENNEY COMPANY, INC.

6501 Legacy Drive

Plano, Texas 75024-3698

J. C. PENNEY COMPANY, INC.

Notice of 2018 Annual Meeting of Stockholders

 

Date and Time:   

Friday, May 25, 2018

10:00 A.M., local time

Place:   

JCPenney Home Office

6501 Legacy Drive

Plano, Texas 75024-3698

Business:   

1.  To elect eleven directors nominated by the Board of Directors for a one-year term as described in the accompanying proxy materials;

  

2.  To ratify the appointment of KPMG LLP as independent auditor for the fiscal year ending February 2, 2019;

  

3.  To approve the adoption of the J. C. Penney Company, Inc. 2018 Long-Term Incentive Plan;

  

4.  To hold an advisory vote on executive compensation; and

  

5.  To consider any other business properly brought before the meeting.

Record Date:    In order to vote, you must have been a stockholder at the close of business on March 26, 2018.
Voting By Proxy:    It is important that your shares be represented and voted at the meeting. If you received the proxy materials by mail, you can vote your shares by telephone, over the Internet, or by completing, signing, dating and returning your completed proxy card. If you received the proxy materials over the Internet, a proxy card was not sent to you, and you may vote your shares only by telephone or over the Internet. To vote by telephone or Internet, follow the instructions included in the Proxy Statement or on the Internet. You can revoke a proxy at any time prior to its exercise at the meeting by following the instructions in the Proxy Statement.

 

Important Notice Regarding the Availability of Proxy Materials for the 2018 Annual Meeting of Stockholders to be held on May 25, 2018.

The Notice of Annual Meeting, Proxy Statement and Annual Report on Form 10-K for the fiscal year ended February 3, 2018 are available at www.proxyvote.com.

 

LOGO

Salil R. Virkar, Secretary

Plano, Texas

April 9, 2018

YOUR VOTE IS IMPORTANT

PLEASE SIGN, DATE, & RETURN YOUR PROXY CARD OR

VOTE BY TELEPHONE OR INTERNET


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PROXY STATEMENT

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Corporate Governance

     1  

Governing Documents

     1  

Corporate Governance Guidelines

     2  

Board Leadership Structure

     2  

Board and Committee Self-Assessments

     3  

Board of Directors’ Role in Risk Oversight

     3  

Policies and Procedures with Respect to Related Person Transactions

     4  

Board Independence

     4  

Meeting Attendance

     5  

Executive Sessions

     5  

Communications with the Board of Directors

     6  

Communications with the Audit Committee

     6  

Board Diversity, Refreshment, Director Qualifications and Process for Nominations

     6  

Board Committees

     9  

Compensation Committee Interlocks and Insider Participation

     10  

Section 16(a) Beneficial Ownership Reporting Compliance

     11  

Beneficial Ownership of Common Stock

     12  

Proposal 1 – Election of Directors

     14  

Letter from Human Resources and Compensation Committee Chair

     21  

Compensation Discussion and Analysis

     23  

Summary Compensation Table

     45  

Grants of Plan-Based Awards for Fiscal 2017

     46  

Outstanding Equity Awards at Fiscal Year-End 2017

     47  

Option Exercises and Stock Vested for Fiscal 2017

     49  

Nonqualified Deferred Compensation for Fiscal 2017

     50  

Potential Payments and Benefits on Termination of Employment

     52  

CEO Pay Ratio

     59  

Director Compensation for Fiscal 2017

     60  

Audit Function

     63  

Report of the Audit Committee

     63  

Audit and Other Fees

     64  

Proposal 2 – Ratification of Appointment of Independent Auditor

     66  

Proposal 3 – Approval of 2018 Long-Term Incentive Plan

     67  

Equity Compensation Plan(s) Information

     74  

Proposal 4 – Advisory Vote on Executive Compensation

     75  

About the Annual Meeting

     76  

Other Business Matters

     80  

Stockholder Proxy Proposal Deadline

     80  

Stockholder Business – Annual Meeting

     80  

Annex A – 2018 Long-Term Incentive Plan

     A-1  


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2018 PROXY STATEMENT

This Proxy Statement and the accompanying materials are being sent to JCPenney stockholders beginning on or about April 10, 2018. In this Proxy Statement, you will find information on the matters to be presented at the 2018 Annual Meeting of Stockholders (the Annual Meeting) and information to assist you in voting your shares.

CORPORATE GOVERNANCE

More than 115 years ago, James Cash Penney founded JCPenney on the principle of the Golden Rule: treat others the way you would like to be treated. While JCPenney has gone through many changes throughout its history, the foundation built on honesty, trust and integrity has never wavered. Our corporate governance principles continue to reflect the highest ethical standards rooted in our rich heritage as we seek to achieve excellence in our work, products and services for our customers and our stockholders.

Our key corporate governance policies and practices include:

 

Stockholder Rights     Annual election of all directors
 

 

Majority vote standard in uncontested elections

 

 

Director resignation policy

 

 

No unequal voting rights

 

 

No supermajority vote requirements

 

 

3%/3 year proxy access bylaw

 

Board Structure and Practices     All directors are independent other than the CEO
    Diverse and experienced Board
    Lead Director with clearly defined responsibilities
    Independent directors regularly meet in executive sessions
    Annual Board and Committee self-assessments
    Annual evaluation of CEO
    Corporate governance guidelines
    Mandatory retirement age policy
    No significant related party transactions

Governing Documents

The key documents that make up our corporate governance framework are our:

 

    Corporate Governance Guidelines, including our:
    Standards for the Determination of Director Independence,
    Lead Independent Director Policy and
    Policy on Review and Consideration of Related Person Transactions;
    Restated Certificate of Incorporation, as amended;
    Bylaws, as amended;
    Audit Committee Charter;
    Finance and Planning Committee Charter;
    Corporate Governance Committee Charter;

 

 

 

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    Human Resources and Compensation Committee Charter;
    Statement of Business Ethics; and
    Standards and Procedures for Director Nominations.

You can access each of these documents on our website at www.jcpenney.com by clicking on “Investors,” then “Corporate Governance.” You can also obtain a free copy of any of these documents by sending a written request to JCPenney’s Corporate Secretary at P.O. Box 10001, Dallas, Texas 75301.

Corporate Governance Guidelines

Our Corporate Governance Guidelines (the Guidelines) set forth JCPenney’s primary principles and policies regarding corporate governance, which are the foundation of our commitment to best practices. The Guidelines are reviewed annually by the Corporate Governance Committee and the Board of Directors (the Board). The matters covered by the Guidelines include:

 

    director responsibilities;
    the size of the Board;
    director independence and minimum qualifications;
    factors to be considered in selecting candidates to serve on the Board;
    the Company’s voting standard for the election of directors;
    director resignations upon change of principal employment or personal circumstances;
    mandatory retirement age for directors;
    directors’ outside directorships and outside audit committee service;
    Board organization, including committees of the Board and the role and responsibilities of the lead independent director;
    policies relating to Board meetings;
    executive sessions for directors;
    ethical principles to be followed by directors;
    policies and procedures for reviewing related person transactions and conflicts of interest;
    claw-back policy on recovery of compensation in the event of a financial restatement;
    the Board’s access to management and independent advisors;
    stockholders’ and other interested parties’ communications to non-employee directors;
    director orientation and continuing education;
    prohibition of loans to directors and executive officers;
    stock ownership goals for directors and members of the Company’s senior management team;
    prohibition on hedging and pledging of Company stock;
    management succession and CEO evaluation; and
    annual self-assessments of the Board and each Board committee.

Board Leadership Structure

Marvin R. Ellison currently serves as both Chairman of the Board and Chief Executive Officer. The non-employee, independent directors of the Board have elected Ronald W. Tysoe, a non-employee, independent director, to serve as Lead Director pursuant to the Company’s Lead Independent Director Policy. Mr. Tysoe’s term expires at the earlier of the close of the 2019 Annual Meeting of Stockholders or at such time as he ceases to be a director, resigns as Lead Director or is replaced as Lead Director

 

 

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by a majority of the non-employee, independent directors. Specifically, the Company’s Lead Independent Director Policy provides that the Lead Director will:

 

    preside over regular executive sessions of the non-employee, independent members of the Board and at meetings of the Board in the absence of, or upon the request of, the Chairman;
    approve the scheduling of Board meetings as well as the agenda and materials for each Board meeting and executive session of the Board’s non-employee, independent directors;
    have the authority to call such other meetings of the non-employee, independent directors as he/she deems necessary;
    meet regularly with the Chairman and CEO and serve as a liaison and supplemental channel of communication between the non-employee, independent directors and the Chairman and CEO;
    communicate with stockholders as appropriate; and
    approve and coordinate the retention of advisors and consultants who report directly to the non-employee, independent members of the Board, except as otherwise required by applicable law or New York Stock Exchange (NYSE) listing standards.

The Board believes that the existence of a Lead Director with this scope of responsibilities supports strong corporate governance principles and effective oversight of management while providing the benefit of having the Company’s CEO also serve as Chairman of the Board. The Board believes that JCPenney’s current leadership structure is in the best interests of the Company and its stockholders because it enhances communication between the Board and management and allows Mr. Ellison to more effectively execute the Company’s strategic initiatives and business plans while ensuring that the appropriate level of independent oversight is applied to all management decisions.

Board and Committee Self-Assessments

Each year, the Board and the Board’s Audit, Corporate Governance, Finance and Planning, and Human Resources and Compensation Committees conduct self-assessments to evaluate their effectiveness and to identify opportunities for improvement. This self-assessment may be conducted in the form of written or oral questionnaires administered by Board members, management or third parties. Directors respond to questions designed to elicit information to be used in improving Board and committee effectiveness. Self-assessment topics generally include, among other matters, Board composition and structure, meeting topics and process, information flow, Board oversight of risk management and strategic planning, succession planning and access to management.

Director feedback solicited from the self-assessment process is discussed during Board executive sessions and, where appropriate, addressed with management. The Corporate Governance Committee oversees the development and administration of the self-assessment process, including determining the format. More recently, the Corporate Governance Committee has determined that written questionnaires are a highly effective method of conducting the self-assessments.

Board of Directors’ Role in Risk Oversight

The Board oversees an enterprise-wide approach to risk management, designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and to enhance stockholder value. A fundamental part of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks but also understanding what level of risk is appropriate for the company. The involvement of the full Board in reviewing the Company’s business strategy is an integral aspect of its assessment

 

 

 

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of management’s tolerance for risk and also its determination of what constitutes an appropriate level of risk for the Company. In addition to management’s discussion of risk with the full Board throughout the year, the independent directors also discuss risk management during their executive sessions without management present over which the Lead Director presides. The Board’s Committees also consider risk appropriate to their respective jurisdictions throughout the year.

Policies and Procedures with Respect to Related Person Transactions

The Board recognizes that related person transactions can present a heightened risk of conflicts of interest. Accordingly, as a general matter, our directors and executive officers are to avoid any activity, interest or relationship that would create, or might appear to others to create, a conflict with the interests of JCPenney. There were no related person transactions for the Company’s fiscal year ended February 3, 2018.

Our written Policy on Review and Consideration of Related Person Transactions (the RPT Policy) is included as Appendix C to the Guidelines. For purposes of Securities and Exchange Commission (SEC) rules as well as the RPT Policy, a “related person transaction” is any transaction in which the Company was, is or will be a participant and the amount involved exceeds $120,000 and in which any related person had, has or will have a direct or indirect material interest. The term “related person” means:

 

    any person who is, or at any time since the beginning of the Company’s last fiscal year was, a director or executive officer of the Company or a nominee to become a director of the Company,
    any person who is known to be the beneficial owner of more than 5% of any class of the Company’s voting securities and
    any immediate family member of any of the foregoing persons.

We review all relationships and transactions in which the Company and a related person are participants to determine whether such persons have a direct or indirect material interest. To identify potential related person transactions, we request certain information from our directors and executive officers. We then review the information provided for any related person transactions. The Corporate Governance Committee reviews and determines whether to approve or ratify any related person transaction that is required to be disclosed. Any member of the Corporate Governance Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction.

Board Independence

The Board reviews the independence of each non-employee director annually to confirm that the director continues to meet our standards as well as the requirements of the NYSE. No member of the Board will be considered independent unless the Board determines that he or she has no material relationship with the Company that would affect his or her independence and that he or she otherwise satisfies JCPenney’s director independence standards as well as all applicable laws, rules and regulations. Our “Standards for the Determination of Director Independence” are included as Appendix A to the Guidelines.

 

 

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The factors the Board considers in determining whether a director is independent include:

 

    Whether within the preceding three years,
    the director is or was an employee of JCPenney;
    a member of the director’s immediate family is or was an executive officer of JCPenney;
    the director or an immediate family member of the director received more than $120,000 per year in direct compensation from JCPenney (other than compensation for service as a director or pension or other forms of deferred compensation for prior service);
    the director or an immediate family member of the director was a partner or employee of JCPenney’s external auditor and personally worked on JCPenney’s audit within that time;
    the director or an immediate family member of the director is or was employed as an executive officer of another company where any of JCPenney’s present executive officers serve on the compensation committee of that company’s board of directors;
    the director or an immediate family member of the director is or was an employee or executive officer of another company that makes payments to, or receives payments from, JCPenney in excess of the greater of $1 million or 2% of that company’s consolidated gross revenues;
    Whether the director or an immediate family member of the director is a current partner of JCPenney’s external auditor;
    Whether the director is a current employee of JCPenney’s external auditor;
    Whether an immediate family member of the director is a current employee of JCPenney’s external auditor and personally works on JCPenney’s audit; and
    Whether the director serves as an officer, director or trustee of a charitable organization or as a member of that organization’s fund-raising entity or committee that received contributions from JCPenney in excess of the greater of $1 million or 2% of the charity’s gross revenues.

The Board has reviewed each director’s independence for fiscal 2018. Applying the standards listed above as well as the requirements of the NYSE, the Board has determined that each of the directors, except for Mr. Ellison, is independent.

Meeting Attendance

During fiscal 2017, the Board held seven meetings and committees of the Board held a total of 28 meetings. Each director serving during fiscal 2017 attended at least 75% of the total number of meetings of the Board and committees on which he or she served.

All directors are strongly encouraged to attend the Annual Meeting, but we do not have a formal attendance requirement. In 2017, eleven of the twelve then-serving members of the Board attended the Annual Meeting.

Executive Sessions

The non-employee, independent directors meet in executive session with no Company associates present as a part of each regularly scheduled Board meeting. The Company’s Lead Director, Ronald W. Tysoe, presides over these sessions.

 

 

 

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Communications with the Board of Directors

Any Company stockholder or other interested party who wishes to communicate with the Board or with an individual director may direct such communications by telephone to 1-800-527-0063, by facsimile to 972-431-1133, by email to jcpdirectors-sm@jcpenney.com, or by writing to:

Corporate Secretary

J. C. Penney Company, Inc.

P.O. Box 10001

Dallas, TX 75301

The communication must be clearly addressed to the Board of Directors or to a specific director(s). If a response is desired, the individual should also provide contact information such as name, address and telephone number.

All such communications will be reviewed initially by the Company’s Corporate Secretary and entered into a log for tracking purposes. The Board has asked the Corporate Secretary to forward to the appropriate director(s) all correspondence, except for items unrelated to the Board’s functions, business solicitations, advertisements and materials that are profane. The Corporate Secretary prepares a periodic summary report of all such communications for the Board.

Communications with the Audit Committee

Complaints and concerns relating to the Company’s accounting, internal accounting controls or auditing matters should be communicated to the Audit Committee of the Board. Any such communication may be made on an anonymous basis and may be reported to the Audit Committee through the Company’s Senior Vice President, Audit by calling 1-800-527-0063, by website at www.jcpline.com or by writing to:

Senior Vice President, Audit

J. C. Penney Company, Inc.

P.O. Box 250335

Plano, TX 75025-0335

All such concerns will be reviewed under the direction of the Audit Committee and oversight by the Senior Vice President, Audit, the General Counsel, or such other persons as the Audit Committee determines to be appropriate. Confidentiality is maintained to the fullest extent possible, consistent with the need to conduct an adequate review. Prompt and appropriate corrective action will be taken when and as deemed appropriate in the judgment of the Audit Committee. The Senior Vice President, Audit will prepare a periodic summary report of all such communications for the Audit Committee.

Board Diversity, Refreshment, Director Qualifications and Process for Nominations

JCPenney is committed to creating an inclusive work environment where everyone is respected and valued. A workforce that understands JCPenney’s diverse customer base helps ensure that the Company’s products, services and message are relevant in every community where the Company does business.

The Board’s philosophy on diversity mirrors the Company’s philosophy. In connection with the selection of nominees for director, the Corporate Governance Committee strives to identify and recruit high-caliber individuals whose diverse talents, perspectives, experiences and backgrounds would

 

 

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preserve and enhance the inclusive environment in which the Board currently functions. Additional information on the experiences and backgrounds of the director nominees can be found under “Proposal 1 - Election of Directors” beginning on page 14. The director nominees identified in this Proxy Statement reflect the importance of diversity to the Board.

The Board also aims to maintain an appropriate balance of tenure across our directors. In the last three years, the Board has appointed six new directors to the Board while seven directors have retired from or left the Board during the same period. Further, our Corporate Governance Guidelines provide that it is the Board’s policy that no individual who would be age 73 or older at the time of his or her election or re-election will be eligible to stand for election or re-election to the Board. The Board may waive the age limitation if it deems a waiver to be in the best interests of the Company and its stockholders.

The charts below reflect the gender composition and board tenure of the director nominees.

 

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  Average tenure: 5.7 years

As provided in the Guidelines, nominees for director, including those directors who are eligible to stand for re-election, are selected based on, among other things, consideration of the following factors:

 

    character and integrity;
    business and management experience;
    demonstrated competence in dealing with complex problems;
    familiarity with the Company’s business;
    diverse talents, backgrounds and perspectives;
    freedom from conflicts of interest;
    regulatory and stock exchange membership requirements for the Board;
    sufficient time to devote to the affairs of the Company; and
    reputation in the business community.

In considering whether to nominate directors who are eligible to stand for re-election, the Corporate Governance Committee also considers the quality of past director service, attendance at Board and committee meetings, compliance with the Guidelines (including satisfying the expectations for individual directors), as well as input from other Board members concerning the director’s performance and independence.

Although the Board retains ultimate responsibility for approving candidates for election, the Corporate Governance Committee conducts the initial screening and evaluation process. In doing so,

 

 

 

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the Corporate Governance Committee considers candidates recommended by directors and the Company’s management, as well as any recommendations from Company stockholders. Additionally, the Corporate Governance Committee takes into account the Board’s current composition and the capabilities and attributes of serving Board members, as well as additional capabilities and attributes considered necessary or desirable in light of existing Company needs and the goal of preserving and enhancing Board diversity. The Corporate Governance Committee periodically engages one or more search firms to assist in the identification and recruitment of director candidates.

To recommend a candidate for election to the Board, a stockholder must submit the following information to the Corporate Secretary of the Company at least 90 days in advance of the Annual Meeting:

 

    The stockholder’s name and address;
    A representation that the stockholder is a holder of record of JCPenney stock entitled to vote at the Annual Meeting and intends to appear in person or by proxy at the Annual Meeting;
    The name and address of the stockholder’s nominee for director;
    A description of any arrangements or understandings between the stockholder and the director nominee or any other person (naming such person(s)) relating to the election of the nominee to the Board;
    The biographical and other information about the nominee that would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC; and
    The nominee’s consent to serve on the Board.

In general, candidates recommended by stockholders will be evaluated under the same process as candidates recommended by existing directors, Company management or third-party search firms. However, the Corporate Governance Committee will additionally seek and consider information concerning the relationship between a stockholder’s recommended nominee and the stockholder to determine whether the nominee can effectively represent the interests of all stockholders. Also, except in unusual circumstances, the Corporate Governance Committee will not evaluate a stockholder-recommended candidate unless and until the stockholder advises that the potential candidate has indicated a willingness to serve as a director, to comply with the expectations and requirements for Board service and to provide all the information required to conduct an evaluation.

In addition, pursuant to the Company’s proxy access Bylaw, a stockholder, or a group of up to 20 stockholders, owning at least 3% of the Company’s outstanding common stock continuously for at least three years may nominate and include in the Company’s proxy materials for an annual meeting of stockholders a number of directors up to the greater of two directors and 20% of the Board, provided that the stockholder(s) and nominee(s) satisfy the Bylaw requirements.

A notice from an eligible stockholder under the Company’s proxy access Bylaw must be received by the Corporate Secretary of the Company no later than 120 days and no earlier than 150 days prior to the first anniversary of the date the Company’s definitive proxy statement was first sent to stockholders in connection with the previous year’s annual meeting of stockholders. If the date of the annual meeting of stockholders is more than 30 days before or after the anniversary of the preceding year’s annual meeting, the notice must be received no earlier than 150 days prior to such annual meeting and no later than the later of 120 days prior to such annual meeting or 10 days following the day on which public disclosure of the date of the annual meeting was first made. The notice must include certain information, representations and agreements required by Article III, Section 17 of the Company’s Bylaws, including information about the stockholder or group of stockholders and any proposed director nominee.

 

 

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Board Committees

 

BOARD COMMITTEES

The Board has four principal standing committees. Committee members consist entirely of non-employee directors and the Board has determined that each of the members of these committees is “independent,” as defined under our standards of independence and under NYSE listing standards. The following table reflects Committee membership as of April 2, 2018:

 

     Audit
Committee
   Corporate
Governance
Committee
   Finance and
Planning
Committee
   Human Resources
and Compensation
Committee

Paul J. Brown

         X    X

Amanda Ginsberg

      X       Chair

Wonya Y. Lucas

      X       X

B. Craig Owens

   Chair       X   

Lisa A. Payne

   X       X   

Debora A. Plunkett

   X    X      

Leonard H. Roberts

   X       X   

Javier G. Teruel

   X       Chair   

R. Gerald Turner

      X       X

Ronald W. Tysoe*

      Chair      

 

* Lead Independent Director

A copy of each Committee’s Charter is available at the Company’s website at www.jcpenney.com. Also available on the Company’s website are procedures for the confidential and anonymous reporting of matters relating to questionable accounting, internal accounting controls or auditing matters. For a discussion of the processes and procedures for determining executive and director compensation and the roles of management and compensation consultants in determining or recommending the amount or form of compensation, see “Compensation Discussion and Analysis” beginning on page 23 and “Director Compensation for Fiscal 2017” beginning on page 60. The mailing address for all of these committees is c/o Corporate Secretary, J. C. Penney Company, Inc., P.O. Box 10001, Dallas, Texas 75301.

 

Audit Committee    Meetings in Fiscal 2017: 7
Members*: B. Craig Owens** (Chair), Lisa A. Payne**, Debora A. Plunkett, Leonard H. Roberts**, Javier G. Teruel** (All Independent)

 

Primary Responsibilities

 

•  Selection and retention of the independent auditor for the annual audit of the Company’s consolidated financial statements

•  Approval of audit fees and non-audit services and fees paid to the independent auditor

•  Review the independent auditor’s strategy and plan, scope, audit results, performance and independence

•  Review internal audit reports on the adequacy of internal controls

•  Review the Company’s ethics program

•  Review the status of significant legal matters

•  Review the scope of the internal auditor’s plans and budget and results of its audits

•  Review the effectiveness of the Company’s program for correcting audit findings

•  Participate in the certification process relating to the filing of certain periodic reports pursuant to the Securities Exchange Act of 1934, as amended (Exchange Act)

 

  * The Board has determined that each member of this Committee is “financially literate” as defined by the NYSE.
  ** The Board has determined that each of these Committee members qualifies as an “audit committee financial expert” as defined by the SEC.

 

 

 

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Table of Contents

Board Committees

 

 

 

Corporate Governance Committee

 

   Meetings in Fiscal 2017: 3
Members: Ronald W. Tysoe (Chair), Amanda Ginsberg, Wonya Y. Lucas, Debora A. Plunkett, R. Gerald Turner (All Independent)

 

Primary Responsibilities

 

•  Perform the functions of a nominating committee

•  Consider matters of corporate governance

•  Review developments in the governance area as they affect relations between the Company and its stockholders

•  Develop and recommend to the Board corporate governance principles and practices for the Company

•  Make recommendations to the Board with respect to the size, composition, organization and responsibilities of the Board and its directors

•  Make recommendations to the Board with respect to the qualifications of directors, candidates for election as directors, the compensation of directors, and annual independence determinations

•  Oversee the annual performance self-assessment process by the Board and each of the Audit, Corporate Governance, Finance and Planning, and Human Resources and Compensation Committees

 

Finance and Planning Committee

 

   Meetings in Fiscal 2017: 3

Members: Javier G. Teruel (Chair), Paul J. Brown, B. Craig Owens, Lisa A. Payne, Leonard H. Roberts (All Independent)

 

Primary Responsibilities

 

•  Review the Company’s financial policies

•  Review the Company’s financial strategies

•  Review the Company’s capital structure

 

Human Resources and Compensation Committee

 

   Meetings in Fiscal 2017: 6

Members: Amanda Ginsberg (Chair), Paul J. Brown, Wonya Y. Lucas, R. Gerald Turner (All Independent)

 

Primary Responsibilities

 

•  Review and administer the Company’s annual and long-term incentive compensation plans

•  Review the administration and operation of certain of the Company’s retirement and welfare plans

•  Set performance goals and objectives for the CEO

•  Evaluate the performance of the CEO in light of set performance goals and objectives

•  Take action or make recommendations with respect to the compensation of executive officers, including making a non-binding recommendation to the independent directors of the Board regarding the compensation level of the CEO

•  Review succession plans for key Company executives, including the CEO

•  Review the annual financial and investment performance results of the Company’s retirement and welfare plans, including the annual actuarial valuation reports applicable to such plans

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Human Resources and Compensation Committee determines compensation for officers of the Company at the level of Senior Vice President and above, other than the CEO. The compensation of the CEO is determined by all of the independent directors of the Board, taking into account the Human Resources and Compensation Committee’s recommendations.

 

 

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Table of Contents

Board Committees

 

The Human Resources and Compensation Committee is composed entirely of persons who are neither Company associates nor former or current officers of the Company. None of the independent directors of the Board are Company associates or former or current officers of the Company. There is not, nor was there during fiscal 2017, any compensation committee interlock or insider participation on the Human Resources and Compensation Committee or among the independent directors of the Board.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires JCPenney’s directors and officers and persons who beneficially own more than ten percent of a registered class of the Company’s equity securities to file initial reports of ownership and reports of changes in ownership with the SEC. The Company assists its directors and officers by monitoring transactions and completing and filing Section 16 reports on their behalf. We believe that all filing requirements were met during fiscal 2017.

 

 

 

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Table of Contents

Beneficial Ownership of Common Stock

 

BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table shows, as of March 26, 2018, the beneficial ownership of shares of JCPenney common stock by (a) each stockholder known to the Company to beneficially own more than 5% of JCPenney common stock, (b) each present director, all of whom are nominees for re-election at the Annual Meeting, (c) the five most highly compensated executive officers serving during the last fiscal year, one other executive officer serving during the last fiscal year who is also deemed to be a named executive officer and one former executive officer who is also deemed to be a named executive officer, and (d) all present directors and executive officers of the Company as a group. Beneficial ownership means that the individual has or shares voting power or investment power with respect to the shares of common stock or the individual has the right to acquire the shares of common stock within 60 days of March 26, 2018.

 

Name

   Number of shares
beneficially
owned
    Number of shares included in
previous column which the
individual or group has/have the
right to acquire within 60 days of
March 26, 2018
     Percent of
outstanding
common stock(1)
 

BlackRock, Inc.

     39,458,918 (2)         12.58

The Vanguard Group

     27,866,271 (3)         8.88

State Street Corporation

     24,048,449 (4)         7.66

Directors(5)

       

Paul J. Brown

     68,123       43,123            

Marvin R. Ellison

     2,814,785       911,826            

Amanda Ginsberg

     66,566       66,566            

Wonya Y. Lucas

     33,269       33,269            

B. Craig Owens

     81,345       81,345            

Lisa A. Payne

     55,452       55,452            

Debora A. Plunkett

     38,603       38,603            

Leonard H. Roberts

     150,582       132,544            

Javier G. Teruel

     532,324       118,282            

R. Gerald Turner(6)

     145,844       137,605            

Ronald W. Tysoe

     119,690       94,690            

Named Executive Officers(5)(7)

       

Jeffrey A. Davis

     50,000                  

Michael Amend(8)

     157,918       48,930            

Therace M. Risch

     80,079       46,086            

Michael Robbins

     50,086       46,086            

Andrew S. Drexler

     93,082       73,858            

Edward J. Record(9)

     319,598       96,022            

All present directors and executive officers as a group(10)

     4,750,801       2,119,037        1.51

 

* Less than 1%.
(1) Calculated based on Rule 13d-3(d)(1)(i) using the number of outstanding shares of common stock as of March 26, 2018.
(2) Based on information set forth in an Amendment No. 6 to Schedule 13G filed with the SEC on January 19, 2018 by BlackRock, Inc. reporting sole power to vote or direct the vote of 38,667,665 shares of JCPenney common stock and sole power to dispose or direct the disposition of 39,458,918 shares of JCPenney common stock. The address of BlackRock, Inc. is 55 East 52nd Street, New York, New York 10055.
(3) Based on information set forth in an Amendment No. 4 to Schedule 13G filed with the SEC on February 9, 2018 by The Vanguard Group reporting sole power to vote or direct the vote of 342,991 shares of JCPenney common stock, shared power to vote or direct the vote of 38,600 shares of JCPenney common stock, sole power to dispose or direct the disposition of 27,507,619 shares of JCPenney common stock and shared power to dispose or direct the disposition of 358,652 shares of JCPenney common stock. The address of The Vanguard Group is 100 Vanguard Boulevard, Malvern, Pennsylvania 19355.

 

 

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Beneficial Ownership of Common Stock

 

(4) Based on information set forth in a Schedule 13G filed with the SEC on February 14, 2018 by State Street Corporation reporting shared power to vote or direct the vote of 24,048,449 shares of JCPenney common stock and shared power to dispose or direct the disposition of 10,335,851 shares of JCPenney common stock, which includes 13,712,598 shares of JCPenney common stock held in trust under J. C. Penney Corporation, Inc.’s 401(k) plans. The address of State Street Corporation is State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111.
(5) Except as set forth in the footnotes below, each person has sole investment and voting power with respect to the common stock beneficially owned by such person. Includes only those stock options that are exercisable or become exercisable within 60 days of March 26, 2018. Does not include restricted stock units that will not vest within 60 days of March 26, 2018.
(6) Includes 1,742 shares of JCPenney common stock that Dr. Turner holds under the Company’s Dividend Reinvestment Plan with respect to which he shares voting and investment power.
(7) In addition to Mr. Ellison, who also serves as a director.
(8) Stock ownership for Mr. Amend reflects direct holdings as of March 16, 2018, the day on which he left the Company, along with stock options exercisable and restricted stock units that would vest within 60 days of such date.
(9) Stock ownership for Mr. Record reflects direct holdings as of July 11, 2017, the last day on which he served as an executive officer of the Company, along with stock options exercisable and restricted stock units that would vest within 60 days of such date.
(10) Excludes shares of Mr. Amend and Mr. Record, who no longer serve as executive officers of the Company.

 

 

 

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Table of Contents

Proposal 1 - Election of Directors

 

PROPOSAL 1 — ELECTION OF DIRECTORS

The terms of each of the Company’s current directors will expire at the 2018 Annual Meeting. Each of the current directors has been nominated by the Board to serve as a continuing director for a new one-year term expiring at the 2019 Annual Meeting of Stockholders. Each nominee elected as a director will continue in office until his or her successor has been elected and qualified, or until his or her earlier death, resignation or retirement. We are not aware of any reason why any of these nominees would not accept the nomination. However, if any of the nominees does not accept the nomination, or is otherwise unavailable for election, the persons designated as proxies will vote for any substitute nominee recommended by the Board. Proxies cannot be voted for a greater number of persons than the number of nominees named.

In determining whether to nominate each of the current directors for another term, the Board considered the factors discussed above in “Board Diversity, Refreshment, Director Qualifications and Process for Nominations” and concluded that each of the current directors standing for re-election possesses unique talents, backgrounds, perspectives, attributes and skills that will enable each of them to continue to provide valuable insights to Company management and play an important role in helping the Company achieve its long-term goals and objectives. As described below in the experience and qualifications of each of our director nominees, each nominee has achieved an extremely high level of success in his or her career. The chart below depicts the full range of skills, qualifications and expertise represented by the director nominees.

Range of Skills, Qualifications and Expertise Represented by Our Nominees

 

•  Retail Industry Experience

  

•  Audit/Financial Reporting

•  Customer Relations

  

•  Financial Management/Capital Markets

•  Human Resources and Compensation

  

•  Accounting/Tax

•  Global Operations Management

  

•  E-Commerce Experience

•  Executive Experience

  

•  Brand Management

•  Board Experience

  

•  Enterprise Risk Management

•  Corporate Governance

  

•  Strategic Planning

•  Public Company Board Service

  

•  Store Operations

•  Sales Experience

  

•  Merchandising

•  Logistics Management

  

•  Marketing

•  Consumer Industry Experience

  

•  Sourcing

•  Cybersecurity

  

•  Media Industry Experience

•  Crisis Management

  

•  Mergers & Acquisitions

•  Public Affairs

  

•  Real Estate Industry Experience

•  Academic Experience

  

•  Government/Political Experience

It is the Board’s policy that no individual who would be age 73 or older at the time of his or her election or re-election will be eligible to stand for election or re-election to the Board. The Board may waive the age limitation if it deems a waiver to be in the best interests of the Company and its stockholders. There is no family relationship between any director or executive officer of the Company.

The Board recommends a vote FOR each of the nominees for director.

 

 

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Proposal 1 - Election of Directors

 

Nominees for Director

 

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Paul J. Brown, 51 - Director of the Company since 2016.

Chief Executive Officer and Co-Founder, Inspire Brands, Inc.

Committees:  Finance and Planning, Human Resources and Compensation

 

Business Experience:  Chief Executive Officer and Co-Founder of Inspire Brands, Inc. (food industry) (formerly Arby’s Restaurant Group, Inc.) since 2013; President, Brands and Commercial Services of Hilton Worldwide (hospitality) from 2008 to 2013; President of Expedia North America and Expedia Inc. Partner Services Group (Internet-based travel reservations) from 2005 to 2008; Partner of McKinsey & Co. (consulting) from 2001 to 2005; Director of Lindblad Expedition Holdings, Inc. from 2015 to 2017; Director of H&R Block, Inc.

 

Qualifications:  Mr. Brown has extensive executive experience in consumer industries, including food, hospitality and travel, having served as CEO or as an executive of several major U.S. companies. He brings to the JCPenney Board significant operations, financial management, e-commerce, brand management and enterprise risk management experience. He also currently serves on the board of another publicly-traded company.

 

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Marvin R. Ellison, 53 - Director of the Company since 2014.

Chairman of the Board and Chief Executive Officer, J. C. Penney Company, Inc.

 

Business Experience:  Chairman of the Board since 2016, CEO since 2015 and President from 2014 to 2015 of JCPenney; Executive Vice President - U.S. Stores of The Home Depot, Inc. (home improvement retailer) from 2008 to 2014, with which he served in positions of increasing importance since 2002, including as President - Northern Division from 2006 to 2008, Senior Vice President - Logistics from 2005 to 2006, Vice President - Logistics from 2004 to 2005, and Vice President - Loss Prevention from 2002 to 2004; Target Corporation (retailer) from 1987 to 2002, with which he served in a variety of operational roles; Director of H&R Block, Inc. from 2011 to 2014; Director of FedEx Corporation; Director of the Retail Industry Leaders Association (RILA); Director of the National Retail Federation.

 

Qualifications:  Mr. Ellison has extensive experience in the retail industry, including executive experience with a major U.S. retailer. He brings considerable knowledge of operations and sales including experience managing a large network of stores and associates as well as insights and perspectives on managing global logistics networks. He also currently serves on the board of another publicly-traded company.

 

 

 

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Proposal 1 - Election of Directors

 

 

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Amanda Ginsberg, 48 - Director of the Company since 2015.

Chief Executive Officer and Director, Match Group, Inc.

Committees:  Corporate Governance, Human Resources and Compensation (Chair)

 

Business Experience:  Chief Executive Officer since January 2018 and Director since December 2017, Match Group, Inc. (Internet-based dating service); Chief Executive Officer of Match Group Americas from 2015 to 2017; Chief Executive Officer of The Princeton Review (test preparation and college admission services) from 2014 to 2015; Chief Executive Officer of Tutor.com (Internet-based on-demand instructional solutions) from 2013 to 2015; Chief Executive Officer from 2012 to 2013 and Senior Vice President and General Manager from 2008 to 2012 of Match.com (Internet-based dating service); Vice President and General Manager of Chemistry.com (Internet-based dating service) from 2006 to 2008; Director of Care.com, Inc. from 2012 to 2014.

 

Qualifications:  Ms. Ginsberg has extensive operational and senior management experience with consumer Internet companies, including service as Chief Executive Officer of a leading provider of Internet-based dating products, a leading test preparation company and a leading on-demand learning solutions company. She brings extensive knowledge of online consumer engagement to the JCPenney Board as well as considerable executive experience managing operations and strategic planning.

 

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Wonya Y. Lucas, 56 - Director of the Company since August 2017.
President and Chief Executive Officer, Public Broadcasting Atlanta
Committees:  Corporate Governance, Human Resources and Compensation

 

Business Experience:  President and Chief Executive Officer, Public Broadcasting Atlanta (media company) since 2015; President of Lucas Strategic Consultants LLC (media strategy consulting) from 2013 to 2015; President and Chief Executive Officer of TV One (television network) from 2011 to 2013; Executive Vice President and Chief Operating Officer, Discovery Channel and Science Channel, of Discovery Communications, Inc. (media company) from 2010 to 2011; Executive Vice President and Global Chief Marketing Officer of Discovery Communications, Inc. from 2008 to 2010; Executive Vice President, General Manager of The Weather Channel Companies (television network) from 2004 to 2008; Executive Vice President, Strategic Marketing, of The Weather Channel Companies from 2002 to 2004; Turner Broadcasting System, a division of Time Warner, Inc. (mass media company) from 1994 to 2002, with which she served in a variety of marketing and strategy roles.

 

Qualifications:  Ms. Lucas has more than 20 years of media and marketing experience, having served as Chief Marketing Officer of several well-known television networks and in multiple media and marketing roles with a large broadcasting network. She also has over 15 years of leadership and executive experience, having served as Chief Executive Officer of two media companies and in an executive role for two well-known television networks. With her background, Ms. Lucas bring extensive insights and perspectives on marketing, interfacing with media companies, and operations to the JCPenney Board.

 

 

 

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Proposal 1 - Election of Directors

 

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B. Craig Owens, 63 - Director of the Company since 2014.

Retired Chief Financial Officer and Chief Administrative Officer, Campbell Soup Company

Committees:  Audit (Chair), Finance and Planning

 

Business Experience:  Retired Senior Vice President, Chief Financial Officer and Chief Administrative Officer (2008 to 2014) of Campbell Soup Company; Executive Vice President and Chief Financial Officer of Delhaize Group (grocery retailer) from 2001 to 2008; served in various positions of increasing importance with The Coca-Cola Company (beverages) and its bottlers from 1981 to 2001; Director of Pall Corporation from 2011 to 2015; Director of Dean Foods Company; Director of AptarGroup, Inc.; Trustee of Washington and Lee University.

 

Qualifications:  Mr. Owens has extensive experience in the consumer food and beverage industries, including service as Chief Financial Officer of a leading publicly-traded consumer food company. He also has considerable knowledge of the retail industry, having served as Chief Financial Officer of a leading international grocery retailer. He brings significant financial expertise to the JCPenney Board including all aspects of financial reporting, accounting, corporate finance and capital markets, as well as considerable experience managing supply chain and information technology organizations. As a result of his executive experience, he also has a deep understanding of operations and strategic planning. He also currently serves on the boards of two other publicly-traded companies.

 

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Lisa A. Payne, 59 - Director of the Company since 2016.

Retired Vice Chairman and Chief Financial Officer, Taubman Centers, Inc.

Committees: Audit, Finance and Planning

 

Business Experience:  Chairman of the Board of Soave Enterprises, LLC (diversified management and investment company) and President of Soave Real Estate Group from 2016 to 2017; Retired Vice Chairman and Chief Financial Officer (2005 to 2016) of Taubman Centers, Inc. (real estate investment trust), where she held various positions since 1997, including Director from 1997 to 2016 and Executive Vice President and Chief Financial and Administrative Officer from 1997 to 2005; Vice President of Goldman, Sachs & Co. (finance) from 1996 to 1997, where she held various positions between 1986 and 1996; Director of Masco Corporation and Rockwell Automation, Inc.; Trustee of Munder Series Trust and Munder Series Trust, II from 2005 to 2014.

 

Qualifications:  Ms. Payne has extensive accounting and financial experience in the regional mall and real estate industries, including service as the Chief Financial Officer of a leading retail management and real estate development company. She also brings extensive corporate finance experience from her past experience as an investment banker with a leading investment banking firm. As a result of her executive experience, she also has a deep understanding of operations and strategic planning. Ms. Payne’s Board and Board committee experience also provides her with significant insight as to governance and compliance-related matters of public companies.

 

 

 

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Proposal 1 - Election of Directors

 

 

LOGO

  

Debora A. Plunkett, 58 - Director of the Company since March 2017.

Principal, Plunkett Associates LLC

Committees:  Audit, Corporate Governance

 

Business Experience:  Principal, Plunkett Associates LLC (cybersecurity consulting) since 2016; Senior Fellow, Harvard University since July 2017; Adjunct Professor, University of Maryland College Graduate School since 2014; Senior Advisor to the Director of the United States National Security Agency (NSA) from 2014 to 2016, with which she served in positions of increasing importance since 1984, including Director, Information Assurance Directorate, from 2010 to 2014, Deputy Director of Information Assurance from 2008 to 2010, and in various senior executive, supervisory and analytic roles from 1984 to 2008; Director, Office of Transnational Threats, United States National Security Council at the United States White House from 2000 to 2001.

 

Qualifications:  Ms. Plunkett has more than 30 years of cybersecurity experience, having served as a Director on the United States National Security Council of the White House and in multiple cybersecurity roles with the United States National Security Agency. In addition, her past experience provides her with perspective into the challenges of managing large, complex, multi-faceted organizations. Ms. Plunkett also brings to the Board a valuable and different perspective due to her extensive background in public policy.

 

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Leonard H. Roberts, 69 - Director of the Company since 2002.
Retired Chairman and Chief Executive Officer, RadioShack Corporation
Committees:  Audit, Finance and Planning

 

Business Experience:  Retired Chairman and Chief Executive Officer of RadioShack Corporation (consumer electronics), with which he served as Executive Chairman of the Board from 2005 to 2006, Chairman of the Board and Chief Executive Officer from 1999 to 2005, President from 1993 to 2000, and a Director from 1997 to 2006; Chairman and Chief Executive Officer of Shoney’s, Inc. (restaurants) from 1990 to 1993; President and Chief Executive Officer of Arby’s, Inc. (restaurants) from 1985 to 1990; Director of Rent-A-Center, Inc. from 2006 to 2017; Director of Tarrant County Safe City Commission; Director and Former Chairman of the Board of Directors of Texas Health Resources.

 

Qualifications:  Mr. Roberts has extensive executive and board experience in the retail industry, including service as the Chairman and as the CEO of a publicly-traded consumer electronics retailer and CEO positions with two restaurant operators. With this background, he has insights and perspectives on delivering merchandise and services to consumers, which he brings to the JCPenney Board. As a result of his extensive executive experience, he also brings financial expertise to the Board.

 

 

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Proposal 1 - Election of Directors

 

 

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Javier G. Teruel, 67 - Director of the Company since 2008.

Partner, Spectron Desarrollo, SC and Chairman, Alta Growth Capital

Committees:  Audit, Finance and Planning (Chair)

 

Business Experience:  Partner of Spectron Desarrollo, SC (investment management and consulting) since 2007; Chairman of Alta Growth Capital (private equity) since 2012; Retired Vice Chairman (2004 to 2007) of Colgate-Palmolive Company (consumer products), with which he served in positions of increasing importance since 1971, including as Executive Vice President responsible for Asia, Central Europe, Africa and Hill’s Pet Nutrition, Vice President of Body Care in Global Business Development in New York, President and General Manager of Colgate-Mexico, President of Colgate-Europe, and Chief Growth Officer responsible for the company’s growth functions; Director of Starbucks Corporation; Director of Nielsen Holdings.

 

Qualifications:  Mr. Teruel has extensive executive experience in the consumer products industry. He brings to the JCPenney Board considerable product development, merchandising and marketing skills and perspectives. His broad international experience also provides unique insights relevant to the Company’s product sourcing initiatives. Mr. Teruel brings the benefits of service on the boards of other publicly-traded companies to the JCPenney Board, including financial expertise resulting from his service as the former chair of the audit committee of one of the boards.

 

LOGO

  

R. Gerald Turner, 72 - Director of the Company since 1995.

President, Southern Methodist University

Committees:  Corporate Governance, Human Resources and Compensation

 

Business Experience:  President of Southern Methodist University since 1995; Chancellor of the University of Mississippi from 1984 to 1995; Co-Chairman, Knight Commission on Intercollegiate Athletics from 2005 to 2015; Director of Kronos Worldwide, Inc. and American Beacon Funds; Director of Methodist Hospital Foundation and the Salvation Army of Dallas.

 

Qualifications:  Dr. Turner’s extensive career in academia provides the Company with valuable insights and perspectives on communicating with younger customers and associates. He also brings experience and skills in human resources and management. Dr. Turner’s current experience as president of a leading university provides him with perspective into the challenges of managing complex, multi-faceted organizations. In addition, his service on the boards of other publicly-traded companies, including committee service, has given him insights and perspectives on governance and human resources and compensation which benefit the JCPenney Board.

 

 

 

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Proposal 1 - Election of Directors

 

 

LOGO

  

Ronald W. Tysoe, 64 - Director of the Company since 2013.

Former Vice Chairman of Finance and Real Estate, Federated Department Stores, Inc.

Committees:  Corporate Governance (Chair)

Lead Independent Director

 

Business Experience:  Vice Chairman of Finance and Real Estate of Federated Department Stores, Inc. (now Macy’s, Inc.) from 1990 to 2006 and Chief Financial Officer from 1990 to 1997; Senior Advisor of Perella Weinberg Partners LP (global, independent advisory and asset management firm) from 2006 to 2007; Director of Pzena Investment Management Inc. from 2008 to 2013; Director of Scripps Networks Interactive, Inc. from 2008 to 2018; Director of Canadian Imperial Bank of Commerce; Director of Cintas Corporation; Director of Taubman Centers, Inc.

 

Qualifications:  Mr. Tysoe has extensive experience in the retail industry, including executive and board experience with a major U.S. retailer. He provides valuable insights and perspectives to the Board as a result of his considerable financial and real estate experience. He also brings the benefits of service on the boards of other publicly-traded companies, including expertise in corporate strategy, compensation and corporate governance.

 

 

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Letter from Human Resources and Compensation Committee Chair

 

Dear Fellow Stockholders,

On behalf of the Human Resources and Compensation Committee of your Board, let me first thank you for your continued support. Our Committee is comprised solely of independent directors, and we take seriously our responsibilities to our stockholders. Our goal is to design pay programs that only provide significant rewards to executives when JCPenney successfully executes on its strategic priorities.

Our Environment and Leadership Transitions

As you are aware, the retail industry continues to undergo significant transformation. As we review JCPenney’s executive compensation program and make decisions regarding executive pay, we continue to be mindful of the dramatic changes occurring within the industry. We must also take into account changes in national economic conditions, particularly rising wages and low unemployment levels, as each contributes to the competitiveness of the executive talent market.

In 2017, JCPenney continued to make progress on its strategic initiatives and made changes to its leadership team to further that progress. To streamline decision-making and promote greater agility within the Company’s merchandise buying teams, the Company eliminated the position of Chief Merchant to better ensure the Company remains nimble and flexible amid the constant change and transformation in the retail environment. More recently, in March 2018, the Company further streamlined its organizational structure by consolidating the merchandise buying teams and stores organization under the leadership of the Company’s newly created position of Chief Customer Officer and consolidated the information technology and omnichannel functions under the newly created position of Chief Information/Digital Officer.

In addition, Jeffrey Davis joined the Company in July as Chief Financial Officer following the departure of Edward Record. Mr. Davis brings decades of finance, treasury and strategy experience from a host of leading companies. His expertise is a tremendous asset to JCPenney as it continues to differentiate its business in a competitive retail climate.

With these changes, we believe the Company has the right leadership team in place to successfully navigate JCPenney through its strategic initiatives.

Programs Designed to Compete for Talent

In order to attract and retain the appropriate leadership team, we need to provide pay opportunities commensurate with the market for executive talent. The following pages detail the Company’s executive compensation program, which we believe allows the Company to properly compete for talent and is strongly aligned with the long-term interests of investors as well as near-term business performance. In that regard, we note the following:

 

    Annual bonus payouts based only on financial goals.  Awards under the annual cash bonus plan for senior executives are based solely on financial performance. Bonus payments for 2017 could only be earned if sales, operating profit and gross margin results exceeded explicit, seasonally-based goals. We believe we have set challenging targets for the program and that the payouts under the program vary as intended based on the business results achieved.

 

 

 

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    Long-term performance awards tied to three year financial goals.  The vast majority of the Company’s long-term incentive program rewards only for longer-term performance. The 2017 performance-based restricted stock unit award pays out only if JCPenney achieves EBITDA results for fiscal 2019 (the final year of the program) that reflect a significant increase over the level achieved in fiscal 2016.

 

    Peer group and benchmarking.  We benchmark pay for executives against a carefully-constructed peer group limited to retailers. In selecting the peer group, the Committee places a high priority on industry and the similarity of business models and products sold, rather than strict size constraints that do not fully consider the magnitude and scope of JCPenney’s operations. To ensure objectivity as compensation levels are set, the Committee’s independent compensation consultant takes the lead in conducting any analyses used to establish competitive market pay levels for members of the senior leadership team.

 

    Retentive actions.  In March 2017, partly in light of the tightening executive labor market, the Company provided supplemental equity grants to several of its key senior leaders, excluding the CEO and CFO. These retention-focused awards were granted to reflect the critical nature of the leaders’ roles, particularly in the areas of omnichannel and information technology where high-quality leaders are often in demand, and to recognize their significant contributions in driving the Company’s strategies, as well as to better ensure that the Company retains these high-caliber executives over the longer term. These awards contained the same restrictive covenants as those included in the annual long-term equity incentive awards to executive officers, including non-competition and non-solicitation covenants.

Each year, we conduct a rigorous review of market practices to ensure the Company’s programs remain current and relevant. We also critique our incentive designs each year with the goal of identifying any changes that would better support our business and compensation objectives, both immediate and longer-term.

In Conclusion

We continue to be excited about the Company’s progress towards achieving its strategic priorities. At the same time, we are committed to doing all that we can to ensure we have the compensation programs in place to drive long-term stockholder value.

 

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Amanda Ginsberg

Chair, Human Resources and

Compensation Committee

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

Table of Contents

 

Executive Summary

     23  

2017 Say-on-Pay Vote and Stockholder Outreach

     28  

Establishing our Executive Compensation Program

     29  

Compensation of Our Named Executive Officers

     31  

Base Salary

     31  

Annual Cash Bonus Awards

     31  

Long-Term Incentive Awards

     34  

Other Compensation Program Elements

     39  

Equity Award Grant Policy

     42  

Tally Sheets

     42  

Stock Ownership Goals

     43  

Tax Implications of Our Compensation Policies

     43  

Claw-Back Policy

     43  

Prohibition on Hedging and Pledging of Company Stock

     44  

Executive Summary

Our compensation philosophy is integrated with JCPenney’s core values and business strategy. Our core values were first stated in The Penney Idea, which was adopted in 1913 and which includes the principle that we will “reward men and women in our organization through participation in what the business produces.” This principle endures today in our executive compensation policies that link pay for performance and align the pay of our named executive officers with the interests of our stockholders.

Leadership. Our named executive officers for the fiscal year ended February 3, 2018 are listed below.

 

            Name               Title
Marvin R. Ellison   Chairman of the Board and Chief Executive Officer
Jeffrey A. Davis   Executive Vice President and Chief Financial Officer
Michael Amend*   Executive Vice President, Omnichannel
Therace M. Risch   Executive Vice President and Chief Information/Digital Officer
Michael Robbins   Executive Vice President, Supply Chain
Andrew S. Drexler   Senior Vice President, Chief Accounting Officer and Controller

 

  * Mr. Amend left the Company on March 16, 2018.

On July 24, 2017, Jeffrey A. Davis succeeded Edward J. Record as Executive Vice President and Chief Financial Officer of the Company. Mr. Record stepped down from that position effective July 11, 2017. Andrew S. Drexler served as interim Chief Financial Officer of the Company from July 11, 2017 to July 23, 2017.

Business Performance. In fiscal 2017, the Company delivered increases in comparable store sales and adjusted earnings per share and was able to reduce a significant amount of outstanding debt. Fiscal 2017 was the second consecutive year of positive adjusted earnings per share. In addition, store

 

 

 

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closures during 2017 impacted total net sales, cost of goods sold and net income/loss. Specifically, for the 2017 fiscal year, the Company delivered the following results:

 

    Comparable store sales increase of 0.1% from the 2016 fiscal year;
    Total net sales of $12.51 billion, a 0.3% decrease compared to fiscal 2016;
    Reduction of outstanding debt levels by over $600 million;
    Over $200 million of free cash flow;
    Cost of goods sold, which excludes depreciation and amortization, of $8.17 billion, or 65.4% of sales, compared to $8.07 billion, or 64.3% of sales, in fiscal 2016;
    A reduction in selling, general and administrative expenses by $70 million to $3.47 billion, or 27.7% of sales, representing a 50 basis point decrease as a percentage of sales compared to fiscal 2016;
    Net loss of $116 million, or ($0.37) per share, compared to net income of $1 million, or $0.00 per share, in fiscal 2016;
    An increase in adjusted net income of $44 million to $68 million, or $0.22 per share, compared to adjusted net income of $24 million, or $0.08 per share, in fiscal 2016; and
    Adjusted EBITDA of $972 million, compared to $1.01 billion in fiscal 2016.

Please see pages 34-37 of the Company’s Annual Report on Form 10-K for a discussion of non-GAAP financial measures.

Components of 2017 Compensation and Alignment with Performance. The following table outlines the key components of our named executive officers’ 2017 compensation, and highlights the impact of our performance during this fiscal year on each element.

 

 

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Element   Key Characteristics   Link to Performance
Base Salary  

•  Fixed component payable in cash

 

•  Set based on responsibilities of the position with consideration of peer group and market survey data

 

•  Reflects individual experience, performance and tenure

 

•  Merit increases for select NEOs based on individual performance

Annual Bonus  

•  Performance-based cash program

 

•  Split into Spring and Fall performance periods weighted 40% and 60%, respectively, to reflect seasonal business cycle

 

•  For both periods, awards are tied to the following financial metrics:

 

—  Sales: 50%

 

—  Operating Profit: 25%

 

—  Gross Margin: 25%

 

•  Overall payouts earned by executive officers were 83.2% of target annual awards

 

•  For 2017, replaced gross profit return on inventory with gross margin and equally weighted operating profit and gross margin to better reflect efficiency initiatives and align with near-term objectives

Long-term Incentives

Performance-based

Restricted Stock

Units (PBRSUs)

 

•  Performance-based equity grants that focus on long-term value creation and growth strategy

 

•  Cover 3-year performance periods, and can be earned for achieving pre-set financial goals

 

—  2017 grants tied to adjusted EBITDA goal for fiscal 2019

 

—  2016 grants tied to adjusted EBITDA goal for fiscal 2018

 

—  2015 grants tied to adjusted EBITDA goals for each of 2015, 2016 and 2017

 

•  Shares earned are distributed at end of 3-year performance period

 

•  Payouts of 2016 and 2017 grants will be determined based on 2018 and 2019 results, respectively

 

 

•  Based on 2017 EBITDA, the 2017 portion of the 2015 grant was earned at 56.4% of target, reflecting the pay for performance aspect of the grant

     

Stock Options

 

•  Equity awards that only deliver value if stock price increases after the date of grant

 

•  Provides alignment with stockholder interests

 

•  Vest ratably over 3 years

 

•  Varies with stock price. At year end, 2017 grants were “underwater”

     

Time-based

Restricted Stock

Units (TBRSUs)

 

•  Equity awards that deliver value based on stock price

 

•  3-year cliff vesting promotes retention

 

•  Aligns economic interests of executives with stockholders

 

•  Year-end value was 40.6% lower than grant date value, commensurate with stock price decline during the year

 

 

 

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New Executive Officer Compensation. In connection with the commencement of Mr. Davis’ employment, we agreed to provide him with the following compensation:

 

    Base salary. 2017 annualized base salary of $700,000
    Annual bonus. Participation in the annual bonus program with a target annual bonus for 2017 equal to 75% of base salary, which was prorated to reflect his date of hire
    Cash bonus. A one-time cash signing bonus of $50,000
    Equity awards. Participation in the annual long-term equity incentive award program in a manner consistent with other senior executive officers
  2017 annual equity award having a $500,000 grant date value consisting of 50% PBRSUs, 25% TBRSUs and 25% stock options
  Planned equity dollar value of $1,000,000 for 2018

In connection with his election as interim Chief Financial Officer in July, Mr. Drexler received a one-time cash bonus of $50,000.

Pay Mix. The charts below show the Compensation Mix for fiscal 2017 for Mr. Ellison and the annualized Compensation Mix for our other named executive officers (other than Mr. Drexler) as a group. The charts illustrate our emphasis on performance-based “at risk” compensation, which for this purpose includes performance-based cash bonus, performance-based restricted stock units, and stock options. Specifically, in fiscal 2017, performance-based compensation comprised 71% of Mr. Ellison’s target annual pay and 57% of target annual pay for our other named executive officers. The charts below reflect 2017 target annual compensation: base salary, the target performance-based cash bonus opportunity and the dollar value of annual equity awards granted. The charts below do not reflect compensation provided in connection with commencement of employment and also do not include the value of one-time performance or retention awards.

 

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CEO Realizable Pay. The value of actual pay that can be realized can, and often does, differ substantially from the intended compensation values. To further demonstrate the link between CEO compensation and Company performance, the chart below compares Mr. Ellison’s 2015, 2016 and 2017 target compensation and realizable pay as of the end of fiscal 2017. As the chart illustrates, Mr. Ellison’s target compensation has not been increased during this 3-year period. When comparing the realizable pay amounts from 2015 and 2016 shown in the chart below to the realizable pay amounts for the same years as of the end of fiscal 2016, which were approximately $10.3 million and $5.2 million, respectively, realizable pay for the target compensation awarded in each of 2015 and 2016 decreased by at least 26%.

 

 

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(1) Target compensation includes base salary, the target annual cash bonus award value (including a supplemental one-time award in 2015) and the grant date value of long-term incentive awards.
(2) “Realizable” compensation includes base salary, the annual cash bonus amount earned and the fiscal 2017 year-end value of long-term incentive awards as follows: (a) the intrinsic value of stock options, (b) TBRSUs valued at year-end stock price and (c) PBRSUs valued at year-end stock price as follows: 2015 award valued at the earned amount, and 2016 and 2017 awards valued at target as performance results cannot yet be determined.

 

 

 

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Key Features of Our Executive Compensation Program. The Company’s executive compensation program includes key features that align the interests of the named executive officers with stockholders.

 

What We Do

 

  Majority of pay is based on Company financial performance and is not guaranteed

 

  Balance the focus of our short-term and long-term incentive programs by using different performance metrics for each plan

 

  Multiple long-term incentive vehicles link pay to internal performance goals and/or to external market performance

 

  Impose robust stock ownership guidelines, with holding requirement for CEO until guideline is met

 

  Have clawback policy for both cash and equity awards

 

  Impose stringent restrictive covenants on those who receive awards under our long-term incentive program

 

  Conduct annual risk assessment of executive pay programs

 

  Review tally sheets for executive officers

 

  Independent compensation consultant who reports only to the Human Resources and Compensation Committee

What We Don’t Do

 

û   No excise tax gross ups

 

û   No “single trigger” change in control plans

 

û   No hedging or pledging of Company stock

 

û   No stock options granted below fair market value

 

û   No option repricing without stockholder approval
 

 

2017 Say-on-Pay Vote and Stockholder Outreach

Approximately 91% of votes cast by the Company’s stockholders at the 2017 annual meeting were cast in favor of the Company’s executive compensation program. The Human Resources and Compensation Committee (the Committee) continues to evaluate the Company’s compensation programs in light of the Company’s evolving business circumstances, but made no specific changes given the high level of stockholder support for our existing programs. The Committee’s goal is to ensure the Company has the appropriate compensation programs in place to most effectively link pay-for-performance, to create stockholder value over the long-term, to be consistent with good governance practices, to attract and retain critical talent and to align with the Company’s business strategies.

Even though we received a high level of stockholder support at the 2017 annual meeting, we reached out to stockholders representing over 50% of our outstanding common stock to solicit feedback. We did not receive any feedback on our executive compensation program from such stockholders as a result of that outreach. We believe a continuing, constructive dialogue with our long-term stockholders on matters such as executive compensation and corporate governance matters will ensure that our programs remain aligned with their interests. We welcome stockholder feedback as a way to provide us with further insight and understanding of their views on our programs.

 

 

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Establishing Our Executive Compensation Program

Role of the Human Resources and Compensation Committee.  The Committee is responsible for establishing and implementing our executive compensation program. Each member of the Committee is independent under the listing standards of the New York Stock Exchange (NYSE).

The Committee determines compensation for officers of the Company at the level of Senior Vice President and above, other than the CEO. The compensation of the CEO is determined by all of the independent directors of the Board of Directors (the Board), taking into account the Committee’s recommendations.

As part of the Committee’s deliberations, the CEO makes compensation recommendations for the executive officers other than himself. The Committee considers these recommendations in making its determinations.

Role of Independent Compensation Consultant.  The Committee engages an independent consultant to assist in its deliberations and decision-making regarding executive compensation. The Committee’s consultant provides current market research and analyses against which executive compensation programs and proposals can be evaluated, including a review of competitive market trends and design practices, a review of the Company’s peer group, and market benchmarking for officers at the level of Senior Vice President and above. The independent consultant does not assist the Board on director compensation matters. The Committee has sole authority to retain and terminate its consultant and sole authority to approve the fees and other terms of the engagement of its consultant. The independent consultant reports directly to the Committee and does not work for the Company’s management in any capacity.

For fiscal 2017, the Committee retained Meridian Compensation Partners LLC (Meridian) as its independent consultant. In retaining Meridian as its consultant, the Committee considered all factors relevant to Meridian’s independence from management in accordance with the listing standards of the NYSE.

Role of Management.  Management makes recommendations to the Committee regarding the design and implementation of our executive compensation programs. Management works with its outside executive compensation consultant, Frederic W. Cook & Co., Inc. (FW Cook), in making recommendations that are consistent with the Company’s philosophy and objectives. The Committee may review data and analyses provided by management and its consultant. FW Cook does not work for the Committee or the Board in any capacity.

Role of Peer Companies and Benchmarking.  Understanding the competitive market for executive talent in our industry is critical to ensuring that we can attract and retain a strong leadership team. Accordingly, we benchmark the competitiveness of pay for our named executive officers, and for our various compensation programs in general, against the practices of a carefully-constructed and select group of retailers we view as our peers.

For 2017, the Committee selected the following companies as our benchmarking peers:

 

Ascena Retail Group, Inc.    L Brands, Inc.    Sears Holdings Corp.
Bed Bath & Beyond Inc.    Macy’s, Inc.    Staples, Inc.
Best Buy Co., Inc.    Nordstrom, Inc.    Target Corp.
Gap, Inc.    Office Depot, Inc.    TJX Companies, Inc.
Kohl’s Corp.    Ross Stores, Inc.   

 

 

 

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In selecting this peer group, the Committee focused on retailers with business characteristics similar to ours and that align with the Company’s strategic direction. In general, the peer group includes mall anchors, department stores and other retailers who offer the same or similar products in most cases, whose customers are influenced by similar broad economic trends in spending and whose operations are primarily domestic.

The Committee considers various size parameters in choosing the peer group. Although the focus is on peers with revenues, market cap and enterprise values that typically range between 0.33x-3.0x of ours, the current peer group deliberately includes a few companies outside this range because we view them as key competitors for executive talent. Further, although market cap is often cited in peer group selection, at present the Committee views enterprise value as more relevant in light of our current capital structure, with the result that a significant majority of the peers fell within the prescribed range of enterprise values.

The Committee reviews and approves the peer group each year, and in so doing considers information provided by the Committee’s independent consultant and management. For 2018, the Committee re-evaluated the composition of the peer group and determined that it continues to reflect our key competitors for executive talent. Based on this conclusion, the Committee determined that the peer group remains appropriate and that changes were not necessary.

We also review retail industry surveys to benchmark pay for executive officer positions for which proxy peer group data are not available. The Committee uses market data as one point of reference when making compensation decisions but also considers individual and Company performance as well as individual growth and experience relevant to the associate’s position.

For fiscal 2017, a key element of our compensation benchmarking philosophy was to target total direct compensation for our executive officers at or around the median percentile of the national market represented by our peer group and/or survey data for relevant positions. Where necessary, we may target total direct compensation above or below the median percentile to reflect role complexity, individuals’ experience in the role, internal equity, individual performance, and other factors deemed relevant by the Committee. Based on the compensation analysis reviewed by the Committee in late 2017, the total target direct compensation for our CEO fell below the median of the peer group.

Internal Pay Relationships.  Our compensation philosophy reflects the importance of offering a competitive target compensation package. In general, the differences in pay between the named executive officers relative to each other and to the CEO, as well as to non-managerial associates, are based on market differences for the particular job, job responsibilities and scope, and adjustments for individual experience and performance, rather than a pre-determined ratio or multiple.

Relationship of Executive Compensation to Risk.  In connection with fulfilling its responsibilities, the Committee considers whether the design of the Company’s executive compensation program encourages executives to engage in excessive risk-taking. The Committee reviews the overall program design, as well as the balance between short-term and long-term compensation, the metrics used to measure performance and the total award opportunity under the Company’s incentive compensation program, and other features designed to mitigate risk such as incentive caps, vesting requirements, stock ownership guidelines, the Company’s insider trading policy, the Company’s claw-back policy and the Company’s prohibition on hedging and pledging of Company securities by directors and senior management. Based on its review, the Committee believes that the Company’s executive compensation program is aligned with the interests of stockholders, appropriately rewards pay for performance and does not promote unnecessary or excessive risk.

 

 

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Compensation of Our Named Executive Officers

In 2017, our executive compensation program had three principal components:

 

    Base salary;
    Annual cash bonus awards; and
    Long-term equity incentive awards.

Consistent with our pay-for-performance philosophy, the majority of the compensation opportunity in fiscal 2017 for our named executive officers was linked to Company performance. We believe that our combination of annual cash bonus awards and long-term incentive awards strikes the appropriate balance between our near-term focus on Company performance and our long-term focus on stockholder value creation.

Base Salary.  We review base salaries annually, and focus on ensuring that they are competitive based on market data for comparable positions at companies in our peer group. Merit increases are intended to reward individual performance and ensure that the individual’s base salary remains competitive for the position and level of responsibility. Periodically, we also make adjustments to ensure that the salary for a key role remains competitive with the market.

Several of our named executive officers received merit increases at the beginning of fiscal 2017 to reward individual performance, as outlined below. The Summary Compensation Table presents the named executive officers’ actual salaries for 2017.

 

Name

   Prior Year
Base Salary
     Salary After
Adjustment
     Percentage
Change
   

Basis for Adjustment

Marvin R. Ellison

   $ 1,450,000      $ 1,450,000            No adjustment

Jeffrey A. Davis

          $ 700,000            Newly hired in July 2017

Michael Amend

   $ 600,000      $ 630,000        5.0   Merit increase

Therace M. Risch

   $ 600,000      $ 627,000        4.5   Merit increase

Michael Robbins

   $ 600,000      $ 612,000        2.0   Merit increase

Andrew S. Drexler

   $ 391,400      $ 401,185        2.5  

Merit increase

Since Mr. Davis joined the Company in July, his base salary was prorated for the portion of the fiscal year for which he was employed by the Company.

Annual Cash Bonus Awards.  Annual cash bonuses are determined and paid pursuant to the Management Incentive Compensation Program (MICP), which provides named executive officers as well as other management associates the opportunity to earn cash awards based on the achievement of specified Company goals. For fiscal 2017, the annual cash bonus was again split into a Spring performance period and a Fall performance period to better align with key near-term objectives and to reflect the volatility of the retail sector. The plans are structured as follows:

 

    The Spring period measured performance for the first and second fiscal quarters, and the Fall period measured performance for the third and fourth fiscal quarters.
    To align with the Company’s business cycle, the Spring and Fall performance periods accounted for 40% and 60%, respectively, of each named executive officer’s annual target bonus opportunity.
    To increase retention, payouts for the named executive officers for both performance periods are only made after the end of the fiscal year.

 

 

 

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The program structure provides each participant with an annual “target bonus opportunity” that is a percentage of the individual’s base pay. The range of potential payouts for each of the named executive officers is presented in the Grants of Plan-Based Awards Table.

The fiscal 2017 annual target bonus opportunity for each of our named executive officers is shown below. Targets for 2017 were at the same level as for the prior year (other than for Mr. Davis who joined the Company in July 2017). Mr. Davis’ annual target bonus opportunity was established when he joined the Company. Since Mr. Davis joined the Company after July 1, he was not eligible to receive an award for the Spring performance period of the annual cash bonus program.

 

Name

   Annual Target
Bonus Opportunity
(% of Salary)
 

Marvin R. Ellison

     175

Jeffrey A. Davis

     75

Michael Amend

     75

Therace M. Risch

     75

Michael Robbins

     75

Andrew S. Drexler

     50

For the named executive officers, both the Spring and Fall performance periods provided that awards could be earned based on performance against pre-established goals for the Company’s sales, operating profit and gross margin. The metrics were weighted as follows:

 

Metric

   Weighting  

Sales

     50

Operating Profit

     25

Gross Margin

     25

The Committee and, with respect to the CEO, the independent directors of the Board, selected these metrics to drive revenue growth, increases in market share and the development of new initiatives while also maintaining a focus on profitability. The weighting for the operating profit metric was decreased from 30% to 25% in 2017 and gross profit return on inventory (GPROI) was replaced with gross margin with a 25% weighting to increase focus on key efficiency initiatives. The weighting for the sales metric was unchanged from 2016 to reflect the emphasis on driving top line results. Results for each metric in the annual cash bonus program are measured separately.

For purposes of the bonus program, gross margin was determined by subtracting the cost of goods sold (exclusive of depreciation and amortization) for the applicable period from total net sales for the same period. Operating profit was defined as operating income/(loss) excluding qualified and supplemental pension expense, bonus and equity expense, real estate and other, and restructuring and management transition charges. The Committee and the independent directors chose to exclude those items because they are not directly related to the Company’s ongoing core business operations, which consist of selling merchandise and services to consumers through the Company’s department stores and website. In addition, qualified and supplemental pension plan expense are determined using numerous complex assumptions about changes in pension assets and liabilities that are subject to factors beyond the Company’s control, such as market volatility.

 

 

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Performance goals for each of the Spring and Fall plans were established at the beginning of the respective performance periods, taking into account both historical results and the Company’s plans at the beginning of each period as well as expectations in light of the then current business climate and the Company’s strategic initiatives. The target Operating Profit and Gross Margin goals for the 2017 Spring and Fall performance periods were set above the actual results achieved for the comparable periods in 2016. The target Sales goal for the 2017 Spring performance period was set below the target goal for the 2016 Spring period while the target Sales goal for the 2017 Fall performance period was set below the target goal and actual results for the 2016 Fall period, each as a result of store closures announced in early 2017.

At the end of each performance period, a payout factor ranging from 25% to 200% of the target bonus opportunity was calculated for each metric based on performance results achieved. For each component, no payout would occur for results below the threshold goal.

Spring Performance Period. The performance goals, potential payout levels and actual awards earned for the Spring performance period are indicated below. Based on the Company’s performance and the relative weightings of each of the performance metrics, each of the named executive officers (other than Mr. Davis) earned cash bonuses equal to 62.7% of their respective Spring performance period target opportunities. As previously stated, Mr. Davis was not eligible to receive an award for the Spring performance period because he joined the Company after July 1.

 

Performance Metric

   Weighting     Threshold
(25%)
     Target
(100%)
     Maximum
(200%)
     Actual      Payout %  

Sales ($ in millions)

     50   $ 5,533      $ 5,764      $ 5,994      $ 5,668        68.1

Operating Profit ($ in millions)

     25   $ 68      $ 168      $ 318      $ 94        44.5

Gross Margin ($ in millions)

     25   $ 1,895      $ 2,106      $ 2,317      $ 2,022        70.0

Cash Bonus earned as percent of Spring Bonus opportunity (40% weighting)

 

     62.7

Fall Performance Period. The performance goals, potential payout levels and actual awards earned for the Fall performance period are indicated below. Based on the Company’s performance and the relative weightings of each of the performance metrics, each of the named executive officers earned cash bonuses equal to 96.9% of their respective Fall performance period target opportunities. As shown below, the Company’s Sales performance for the Fall performance period exceeded the target Sales goal and the Company’s expectations due in part to adjustments in the Company’s strategy during the second half of the year, including additional focus on the Company’s beauty segment and home refresh initiatives as well as the launch of new categories for the holiday season. These strategy shifts ultimately led to an improvement in the Company’s Sales performance during the second half of the year.

 

Performance Metric

   Weighting     Threshold
(25%)
     Target
(100%)
     Maximum
(200%)
     Actual      Payout %  

Sales ($ in millions)

     50   $ 6,455      $ 6,723      $ 6,992      $ 6,838        142.5

Operating Profit ($ in millions)

     25   $ 307      $ 407      $ 557      $ 307        25.0

Gross Margin ($ in millions)

     25   $ 2,144      $ 2,382      $ 2,620      $ 2,310        77.5

Cash Bonus earned as percent of Fall Bonus opportunity (60% weighting)

 

     96.9

Note: For both the Spring and Fall plans, the payout percentage is interpolated on a straight-line basis for points in between the threshold and maximum goals.

 

 

 

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As a result of the Company’s full year performance and the relative weightings of each of the performance metrics, each of the named executive officers (other than Mr. Davis) earned cash bonuses equal to 83.2% of their respective annual cash bonus opportunities. The total annual cash bonus payouts for 2017 for each of the named executive officers are reflected in the Summary Compensation Table under the column “Non-Equity Incentive Plan Compensation.”

Long-Term Incentive Awards.  For fiscal 2017, the annual long-term incentive awards to our named executive officers were made under the 2016 Long-Term Incentive Plan (the 2016 Plan). The 2016 Plan provided equity-based awards to eligible associates, including the named executive officers, other Company officers and senior management associates. Generally, whether an associate is granted an award and the size of the award granted are functions of the associate’s position, performance and potential.

The potential number of shares used for annual long-term incentive awards for each participant was based on a predefined intended “equity dollar value” for the participant. The intended equity dollar value is determined by position and expected future contributions, taking into consideration competitive market data for comparable positions at companies in our peer group and the Company’s overall equity plan budget for the year. The actual equity dollar value of the award granted to each eligible associate can be higher or lower than the associate’s intended equity dollar value based on the associate’s performance and potential.

For fiscal 2017, we again granted long-term incentive awards to the named executive officers that included performance-based restricted stock units, time-based restricted stock units and non-qualified stock options in the following mix:

 

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The Committee and, with respect to the CEO, the independent directors of the Board, believed this mix best balanced our dual goals of ensuring that executives maintain a long-term focus on stockholder value creation and retaining key leaders.

 

 

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The table below sets forth the 2017 equity dollar values of the annual long-term incentive awards granted to the named executive officers. Three of our named executive officers received annual awards with equity dollar values that were higher than their equity dollar values in 2016 in recognition of their individual contributions in 2016, as outlined below.

 

Name

  Equity Dollar
Value of
Performance-
Based Restricted
Stock Units
    Equity
Dollar
Value of
Stock
Options
    Equity Dollar
Value of
Time-Based
Restricted
Stock Units
    Total
Equity
Dollar
Value
    Percentage
Change
from 2016
   

Basis for
Increase

Marvin R. Ellison

  $ 3,500,000     $ 1,750,000     $ 1,750,000     $ 7,000,000           No increase

Jeffrey A. Davis

  $ 250,000     $ 125,000     $ 125,000     $ 500,000           Newly hired in July 2017

Michael Amend

  $ 450,000     $ 225,000     $ 225,000     $ 900,000       28.6   Reward individual performance

Therace M. Risch

  $ 400,000     $ 200,000     $ 200,000     $ 800,000       14.3   Reward individual performance

Michael Robbins

  $ 400,000     $ 200,000     $ 200,000     $ 800,000       14.3   Reward individual performance

Andrew S. Drexler

  $ 175,000     $ 87,500     $ 87,500     $ 350,000           No increase

Mr. Davis’ total equity dollar value in 2017 reflected his tenure with the Company during the fiscal year. For 2018, his total equity dollar value is $1,000,000. The grant date fair value of each award is presented in the Grants of Plan-Based Awards Table.

The following paragraphs describe each type of award in greater detail.

Performance-Based Restricted Stock Units.  To determine the number of performance-based restricted stock units granted to each named executive officer, we divided the dollar value allocated to these awards by the closing share price of our common stock on the date of grant. The actual awards earned can vary above or below the target award based on the extent to which the Company achieves the performance measure goal established for the program.

Performance with respect to these awards will be measured by reference to the Company’s adjusted EBITDA for fiscal 2019. The Committee and the independent directors of the Board chose adjusted EBITDA as the performance measure for the performance-based restricted stock unit awards to align with the Company’s long-term EBITDA goals and to drive profitable growth.

Adjusted EBITDA is defined for this purpose as earnings before interest, taxes, depreciation and amortization, excluding qualified and supplemental pension plan expense, bonus and equity expense, real estate and other, and restructuring and management transition charges. The Committee and the independent directors chose to exclude those items because they are not directly related to the Company’s ongoing core business operations, which consist of selling merchandise and services to consumers through the Company’s department stores and website. In addition, qualified and supplemental pension plan expense are determined using numerous complex assumptions about changes in pension assets and liabilities that are subject to factors beyond the Company’s control, such as market volatility.

 

 

 

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The adjusted EBITDA goal for fiscal 2019 was set at the beginning of fiscal 2017, is viewed as challenging to achieve and requires significant overall growth over the level achieved in fiscal 2016. The Committee views the adjusted EBITDA target for fiscal 2019 as inherently equivalent to a cumulative three-year metric because to achieve this goal the Company must deliver strong results and make significant progress towards the goal in each of the intervening fiscal years.

At the end of fiscal 2019, the percentage of the target award earned will be determined pursuant to the payout matrix established for the program. The payout matrix sets forth a range of payout percentages relative to the Company’s actual results for the performance period. The payout percentages under the payout matrix range from 25% to 200% of the target award with a 100% payout for achieving the target performance goal. No payout will occur for results below the threshold goal. The range of potential payouts is presented in the Grants of Plan-Based Awards Table.

Earned units will vest on the third anniversary of the date of grant provided that the participant remains continuously employed with the Company through that date.

Stock Options.  The stock options awarded to the named executive officers vest ratably (one-third per year) over a three-year period provided that the participant remains continuously employed with the Company during that time.

The stock options are intended to align the participants’ interests with those of our stockholders and have an exercise price equal to the closing price of Company common stock on the date of grant. Accordingly, they have value to the recipient only if the market price of the common stock at the time of exercise is above the option exercise price. They cannot be exercised more than ten years after the date of grant.

To determine the number of stock options granted to each of the named executive officers, we divided the dollar value allocated to these awards by the fair value of the stock option on the date of grant. The fair value was calculated pursuant to a binomial lattice model, which is the same model used for purposes of measuring compensation expense for stock options in the Company’s financial statements.

Time-Based Restricted Stock Units.  Each time-based restricted stock unit represents the right to receive one share of our common stock on the vesting date. The units vest in full on the third anniversary of the grant date provided the participant remains continuously employed with the Company until that time. These units have value in all market conditions; thus they provide a strong retention mechanism. Since the ultimate value of the award depends on the market value of our common stock on the vesting date, the interests of participants are also aligned with stockholders.

To determine the number of time-based restricted stock units granted to each of the named executive officers, we divided the dollar value allocated to these awards by the closing share price of our common stock on the date of grant.

Restrictive Covenants.  By accepting any long-term incentive awards, each named executive officer agrees to comply with the following restrictive covenants:

 

    Obligation not to disclose confidential or proprietary information of the Company;
    Obligation to refrain from activities designed to influence or persuade any person not to do business or to reduce its business with the Company;

 

 

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    Obligation to refrain from attempting to influence or persuade any of the Company’s employees to leave their employment with the Company and to refrain from directly or indirectly soliciting or hiring employees of the Company; and
    Obligation not to undertake work for a competing business.

Each of the above restrictive covenants continues for 18 months, or 12 months in the case of Mr. Drexler, following termination of employment if the named executive officer voluntarily terminates employment with the Company or is involuntarily terminated other than for cause, except for the obligation not to disclose confidential or proprietary information, which continues indefinitely following any termination of employment.

2015 Performance-Based Restricted Stock Unit Awards Earned.  In 2015, the Company granted performance-based restricted stock units to our executive officers at the time. Of our current named executive officers, only Mr. Ellison received the 2015 award. The performance-based restricted stock units could be earned only to the extent we achieved performance goals for adjusted EBITDA for each of three one-year performance periods.

Fiscal 2017 was the third and final performance cycle of the award. As previously disclosed, the Committee and the independent directors of the Board chose adjusted EBITDA as the performance measure for the performance-based restricted stock unit awards.

Adjusted EBITDA is defined for this purpose as earnings before interest, taxes, depreciation and amortization, excluding qualified pension expense, bonus expense, real estate and other, net gains on the sale of non-operating assets, asset impairments, the effect of reclassifications of certain expenses, and restructuring and management transition charges. The Committee and the independent directors chose to exclude those items because they are not directly related to the Company’s ongoing core business operations, which consist of selling merchandise and services to consumers through the Company’s department stores and website. In addition, qualified pension expense is determined using numerous complex assumptions about changes in pension assets and liabilities that are subject to factors beyond the Company’s control, such as market volatility.

The performance goals for the 2017 performance cycle were set at the beginning of fiscal 2017 pursuant to a formula that was pre-determined at the beginning of fiscal 2015, which was the first performance cycle. Under the pre-determined formula, the 2017 performance target was set at 124% of the Company’s adjusted EBITDA performance for the prior year. Below are the range of 2017 performance goals, related payout factors and 2017 actual performance for the 2015 performance-based restricted stock unit awards.

 

Performance Metric

   Threshold
(25%)
     Target
(100%)
     Maximum
(200%)
     Actual      Payout %  

2017 Adjusted EBITDA ($ in millions)

   $ 715      $ 1,191      $ 1,489      $ 914        56.4

Note: The payout percentage is interpolated on a straight-line basis for points in between the threshold and maximum goals.

At the end of the performance cycle, the percentage of the target award earned was determined pursuant to the payout matrix established for the awards. Based on the Company’s performance in fiscal 2017, Mr. Ellison earned 56.4% of his target performance-based restricted stock unit award for the 2017 performance cycle.

 

 

 

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In total, based on the Company’s performance in each of the three performance cycles (fiscal 2015 through fiscal 2017), Mr. Ellison earned 127.9% of his total 2015 target performance-based restricted stock unit award. The earned units vested on the third anniversary of the date of grant.

Supplemental Awards.  The Committee believes that the retention of key executives is critical to the Company’s future success. In February 2017, the Committee approved supplemental grants of time-based restricted stock units to Ms. Risch, Mr. Amend and Mr. Robbins. These retention-focused awards were granted in March 2017, at the time of the annual long-term incentive award grants, to reflect the critical nature of their roles and to recognize their significant contributions to date in driving the Company’s strategy to transform its omnichannel capabilities, as well as to better ensure that we would retain these high-caliber executives over the longer term. In the Committee’s view, each of these talented executives possessed unique skills and experience that were necessary to implement the strategies that we had put in place to drive growth and transform the enterprise.

Each award had an equity dollar value of $800,000, which was determined after taking into consideration competitive market data for comparable positions at companies in our peer group, the value of each executive’s then existing equity holdings and the Company’s overall equity plan budget for the year. The Committee chose to use time-based restricted stock units for these awards because the units have value in all market conditions; thus they would provide a strong retention mechanism. Since the ultimate value of the award depends on the market value of our common stock on the vesting date, the interests of participants would also be aligned with stockholders.

To maximize the retention goal for the supplemental time-based restricted stock unit awards, each of these awards vest in full only upon the third anniversary of the grant date provided the participant remains continuously employed with the Company until that time. Each time-based restricted stock unit represents the right to receive one share of our common stock on the vesting date. To determine the number of time-based restricted stock units granted, we divided the dollar value for these awards by the closing share price of our common stock on the date of grant.

For equity awards outstanding for each of the named executive officers as of the end of fiscal 2017, see the Outstanding Equity Awards at Fiscal Year-End Table. Actual awards vesting or exercised during the fiscal year are presented in the Option Exercises and Stock Vested Table.

 

 

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2018 Awards.  For fiscal 2018, the Committee and, with respect to the CEO, the independent directors of the Board, chose to modify the mix of long-term incentive awards granted to the named executive officers to further strengthen the link between those awards and the Company’s long-term performance as well as provide an additional retention incentive to key leaders. As a result, the long-term incentive awards granted to the named executive officers in fiscal 2018 included performance-based restricted stock units, time-based restricted stock units and performance-based cash awards in the following mix:

 

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Performance-based cash awards replaced non-qualified stock options in 2018. This new vehicle is a cash-based award requiring the achievement of pre-established free cash flow goals over a cumulative three-year period through the end of fiscal 2020.

This long-term incentive award mix structure is weighted 75% to performance.

Other Compensation Program Elements

In addition to the three principal components of our compensation program, we also offer the following to our named executive officers, to help us attract and retain the most talented individuals:

 

    Retirement benefits;
    Health and welfare benefits, including medical and dental benefits, paid time off, and group term life insurance benefits;
    Termination arrangements; and
    Perquisites.

Retirement Benefits.  As with the principal components of our compensation program, our retirement benefits are intended to provide an industry competitive level of benefits.

The principal retirement benefits that we currently offer to our associates, including our named executive officers, are through our defined contribution 401(k) plan (Savings Plan) and our non-qualified defined contribution plan (Mirror Savings Plan). Both the Savings Plan and Mirror Savings Plan offer eligible associates the opportunity to defer a portion of their base salary and annual cash bonus compensation as a means of saving for retirement.

 

 

 

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The Savings Plan also includes a Company matching contribution feature of 100% per dollar deferred up to a maximum of 5% of deferrals. The Mirror Savings Plan has a similar feature with respect to compensation in excess of the Internal Revenue Code (the Code) compensation limit for qualified plans.

The Mirror Savings Plan is discussed in more detail in the narrative following the Nonqualified Deferred Compensation Table.

Health and Welfare Benefits.  Our named executive officers are entitled to participate in active associates’ health and welfare benefit plans, including paid time off, medical, dental, group term life insurance and disability insurance, on the same terms and conditions as those made available to associates generally. We provide these benefits as part of a competitive package of health and welfare benefits.

Termination Arrangements.  In order to attract top retail talent, we recognize the need to provide protection to our executives in the event of involuntary termination of employment without cause or voluntary termination for good reason or following a change in control of the Company. Accordingly, we have put in place separate arrangements consisting of individual Executive Termination Pay Agreements for our CEO and Executive Vice Presidents, individual Termination Pay Agreements for our Senior Vice Presidents, and a Change in Control Plan to address termination situations not precipitated by the conduct of the named executive officer.

The termination pay agreements provide severance benefits to the executive in exchange for the executive’s agreement to comply with certain restrictive covenants. The benefits payable under the termination pay agreements are not available if the executive receives the benefits under the Change in Control Plan.

Change in Control Plan.  The Company has in place a Change in Control Plan (the CIC Plan) that provides benefits if the executive’s employment is involuntarily terminated within two years following a change in control of the Company. The CIC Plan further provides that cash severance benefits will not exceed 2.99 times the sum of base salary and target bonus (the severance benefits limitation).

Ms. Risch and Messrs. Ellison, Davis and Robbins participate in the CIC Plan. Mr. Amend also participated in the CIC Plan.

The CIC Plan does not provide for the payment of excise tax gross-ups to named executive officers. The CIC Plan and the termination pay agreements are described in more detail in “Potential Payments and Benefits on Termination of Employment” beginning on page 52.

Perquisites.  We provide certain additional benefits to enable our executives to devote their energy and attention to the Company.

Company Aircraft.  For security purposes, the Board requires the CEO to participate in a Key Associate Protection Program (the KAPP), which is intended to safeguard the CEO and members of his immediate family. The KAPP is a program approved by the Board as a result of recommendations contained in an independent, third-party security study. As part of the KAPP, the CEO is required to use Company aircraft for all business and personal travel. In view of the KAPP requirement to use Company aircraft, Mr. Ellison is party to an aircraft time sharing agreement with the Company which requires him to reimburse the Company for any personal use of the corporate aircraft in excess of $150,000 during each fiscal year.

 

 

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The Company does not generally make Company aircraft available for non-Company business use by Company associates, other than to the CEO as recommended by the KAPP. However, in an emergency and/or other unusual circumstance, a Company associate may be permitted to travel on the Company aircraft for personal reasons, provided the travel is approved by the CEO or by the member of the management team with immediate management responsibility for the Aviation Department. Income is imputed to associates, including the CEO, for personal use of Company aircraft in accordance with IRS regulations. The Company does not provide a tax gross-up with respect to such imputed income.

For total compensation purposes, we calculate the aggregate incremental cost to the Company of personal use of the Company aircraft by determining the incremental nautical miles flown, including any “deadhead” legs, and multiplying that number by the cost to the Company per nautical mile. These amounts, exclusive of any amounts reimbursed by Mr. Ellison pursuant to the aircraft time sharing agreement discussed above, are reflected as All Other Compensation in the Summary Compensation Table below. The amount reflected for total compensation purposes is often higher than the amount imputed to associates under IRS regulations.

A nautical mile is a unit of length used for maritime and aviation purposes. The cost per nautical mile excludes fixed costs which do not change based on usage, such as pilots’ or other associates’ salaries, purchase costs of the aircraft, or non-trip-related hangar expenses. It is derived from the aircraft’s variable operating costs, which include:

 

    Aircraft fuel expenses;
    Supplies and catering;
    Crew travel expenses;
    Landing and parking expenses; and
    Aircraft maintenance and external labor.

Annual Health Exam.  In fiscal 2017, the named executive officers were eligible to receive an allowance of up to $5,000 each calendar year for an annual health exam. The Company does not provide a tax gross-up on this benefit. We value the benefit based on the actual charges incurred by the Company for the services provided, which is reflected as All Other Compensation in the Summary Compensation Table below.

Relocation.  The Company provides tiered relocation benefits to all associates based on the associate’s position within the organization. At the commencement of his employment with the Company, Mr. Davis did not maintain a residence near the Company’s Home Office in Texas. The Company provided relocation benefits to him for his commuting and temporary housing expenses consistent with Company policy for his position. We value the benefits based on the actual charges incurred by the Company for the benefits provided reduced by the amount of charges permitted under the Company’s policy for the lowest level of benefits provided under the policy. These amounts are reflected as All Other Compensation in the Summary Compensation Table below.

 

 

 

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Equity Award Grant Policy

The Committee has adopted a Policy Statement which sets forth its practices regarding the timing of, and approval process for, equity awards. In certain cases, the Committee may waive such policy. The following table sets forth the current Policy Statement.

 

Grant

  

Grant Date

Annual Grant

   Third full trading date following the later of (i) public disclosure of the Company’s financial results for the fiscal year prior to the Committee’s approval or (ii) the Committee’s approval.

Off-cycle grants other than to new hires

   Tenth full trading date of the calendar month if the promotion or award is effective or approved by the seventh trading day of the month; otherwise, tenth full trading date of the following calendar month.

Off-cycle grants for new hires

  

For Senior Vice Presidents and above, third full trading date following the date of hire.

 

For all other associates, tenth full trading date of the calendar month if the date of hire is on or before the seventh trading day of the month; otherwise, tenth full trading date of the following calendar month.

The Committee also adheres to the following approval policies in making equity awards to associates:

 

    Equity awards to the CEO must be approved by the independent directors of the Board.
    Equity awards to executive officers other than the CEO, including new hires, must be approved by the Committee.
    The aggregate annual grant of equity awards to associates must be approved by the Committee.
    Authority has been delegated by the Committee to the CEO and/or the Executive Vice President, Human Resources to approve (i) equity awards to new hires who are not executive officers and (ii)  off-cycle equity awards to associates who are not executive officers.

Tally Sheets

In 2017, the Committee reviewed tally sheets for our named executive officers and for select other executives. These tally sheets provide a comprehensive view of target, actual and contingent executive compensation payouts under a variety of termination and performance scenarios. The tally sheets allow the Committee to understand the cumulative effect of prior pay decisions and stock performance, as well as the retentive ability of existing long-term incentives, severance and change in control arrangements. The tally sheets are intended to facilitate the Committee’s understanding of the nature and amounts of total compensation under our executive compensation program and to assist the Committee in its overall evaluation of our program.

 

 

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Stock Ownership Goals

The Company strives to align pay with the long-term interests of stockholders. The Board has adopted formal stock ownership goals for senior executives of the Company. The stock ownership goals specify that, within a five-year period, executives should hold an amount of Company stock having a value of:

 

Role

   Stock Ownership Requirement  

Chief Executive Officer

     6x base salary  

Executive Vice President

     3x base salary  

Senior Vice President

     1x base salary  

In addition to directly owned stock, shares held in Company qualified and non-qualified savings plans and unvested time-based restricted stock units are included in calculating ownership levels. Unexercised stock options do not count toward the ownership goals. The stock ownership goals also specify that the CEO should retain at least 50% of net shares received pursuant to an equity award payout or exercise if the CEO is below the above-described ownership goal at the time of receipt. All of the current named executive officers have met or are on track to meet these goals.

Tax Implications of Our Compensation Policies

Section 162(m) of the Code places a limit of $1,000,000 on the amount of compensation that we may deduct in any given year with respect to the CEO and certain of our other most highly paid executive officers. For fiscal 2017, there is an exception to the $1,000,000 limitation for performance-based compensation meeting certain requirements. Our fiscal 2017 stock option and performance-based restricted stock unit awards were designed to generally be performance-based compensation meeting those requirements. Since those awards were granted at the beginning of fiscal 2017, we expect that they will be fully deductible. Similarly, our fiscal 2017 performance-based cash bonus compensation awards are also expected to be fully deductible. Our annual base salary and time-based restricted stock units are generally subject to the Section 162(m) deduction limitations.

Beginning with fiscal 2018, the exception for performance-based compensation has been eliminated. To maintain flexibility in compensating executive officers in view of the overall objectives of our compensation program, the Committee has reserved the right to grant compensation that is not tax deductible should it determine that doing so will better meet the Company’s objectives.

Claw-Back Policy

One of the objectives of our compensation program is to make a substantial portion of compensation dependent on the Company’s overall financial performance. In the event of a financial restatement arising out of the willful actions, including without limitation, fraud or intentional misconduct, or the gross negligence of any participant in the Company’s compensation plans or programs, it is the Board’s policy that the Committee shall have the authority to determine the appropriate action to take. The compensation plans or programs covered under this policy include, without limitation, cash bonus and stock incentive plans, welfare plans or deferred compensation plans. The Committee’s actions under the policy may include requiring relinquishment (claw-back) of previously awarded equity-based incentive compensation and/or repayment of previously paid cash compensation to a participant under such plans and programs.

 

 

 

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Prohibition on Hedging and Pledging of Company Stock

The Board considers it inappropriate for directors or executive officers to enter into speculative transactions in Company securities. The Company’s Corporate Governance Guidelines prohibit directors and senior management from engaging in short sales, options trading or other similar derivative transactions in Company securities, or hedging or monetization transactions, such as zero-cost collars and forward sale contracts, in which the individual continues to own the underlying security without the full risks and rewards of ownership. In addition, the Company’s directors and senior management may not purchase Company securities on margin, hold Company shares in a margin account or pledge Company shares as collateral for a loan because a margin sale or foreclosure sale may occur at a time when such director or officer is prohibited from trading under the Company’s insider trading policy.

REPORT OF THE HUMAN RESOURCES AND COMPENSATION COMMITTEE

The Human Resources and Compensation Committee of the Board assists the Board in discharging the Board’s responsibilities relating to compensation of the Company’s executives, reviews plans and proposals on management succession and major organizational or structural changes, and oversees the administration, financial and investment performance and operation of the Company’s retirement and welfare plans. Each member of the Committee is considered independent for purposes of applicable NYSE listing standards as well as the Standards for Determination of Director Independence. You can learn more about the Committee’s purpose, responsibilities, composition and other details by reading the Human Resources and Compensation Committee’s charter, which is available online at www.jcpenney.com.

The Human Resources and Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed the same with management. Based on our review and discussions with management, we recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the 2017 fiscal year and the Company’s 2018 Proxy Statement. This report is submitted by the following independent directors, who comprise the Human Resources and Compensation Committee:

 

Amanda Ginsberg, Chair    Wonya Y. Lucas
Paul J. Brown    R. Gerald Turner

 

 

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SUMMARY COMPENSATION TABLE

 

Name and Principal Position

  Year     Salary
($)
    Bonus
($)
    Stock
Awards
($)(1)
    Option
Awards
($)(1)
    Non-Equity
Incentive Plan
Compensation
($)(2)
    All Other
Compensation
($)(3)
    Total
($)
 

Marvin R. Ellison

    2017       1,450,000       0       5,249,997       1,750,001       2,111,073       257,264 (4)      10,818,335  

Chairman of the Board and

    2016       1,446,667       0       5,249,996       1,750,000       614,177       309,986       9,370,826  

Chief Executive Officer

    2015       1,350,000       0       5,062,497       1,687,499       3,572,655       379,786       12,052,437  

Jeffrey A. Davis*

    2017       365,909       50,000       375,001       124,999       305,156       53,317 (5)      1,274,382  

Executive Vice President and Chief Financial Officer

               

Michael Amend**

    2017       625,000       0       1,474,999       225,001       393,096       47,378 (6)      2,765,474  

Executive Vice President,

               

Omnichannel

               

Therace M. Risch

    2017       622,500       0       1,399,998       199,999       391,225       30,265 (7)      2,643,987  

Executive Vice President

    2016       600,000       0       525,003       175,000       108,918       13,156       1,422,077  

and Chief Information/

    2015       90,909       500,000       700,001       0       120,031       23,100       1,434,041  

Digital Officer

               

Michael Robbins

    2017       610,000       0       1,399,998       199,999       381,865       41,048 (8)      2,632,910  

Executive Vice President,

               

Supply Chain

               

Andrew S. Drexler*

    2017       399,554       50,000       262,496       87,499       166,883       20,828 (9)      987,260  

Senior Vice President,

               

Chief Accounting Officer and Controller

               

Edward J. Record*

    2017       442,193       0       750,000       249,999       0       2,730,568 (10)      4,172,760  

Former Executive Vice

    2016       812,000       0       1,124,997       375,000       149,581       67,189       2,528,767  

President and Chief

    2015       785,833       0       1,545,003       375,000       932,124       24,813       3,662,773  

Financial Officer

               

 

* Mr. Record stepped down from his position as Executive Vice President and Chief Financial Officer of the Company effective July 11, 2017. Mr. Drexler served as interim Chief Financial Officer of the Company from July 11, 2017 to July 23, 2017. Mr. Davis joined the Company on July 24, 2017.
** Mr. Amend left the Company on March 16, 2018.
(1) See Note 2 to the Consolidated Financial Statements of J. C. Penney Company, Inc. and subsidiaries, as included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2018, for a discussion of the assumptions underlying the valuation of stock options. The value of stock awards is calculated in accordance with FASB ASC Topic 718 and applicable FASB guidance. The values of the performance-based restricted stock unit awards are based upon the probable outcome of the performance goals as of the grant date consistent with the estimate of aggregate compensation cost to be recognized over the service period determined as of the grant date under FASB ASC Topic 718, excluding the effect of estimated forfeitures. That value is the same as the value calculated assuming the target level of performance under the award. The values of the performance-based restricted stock unit awards as of the grant date, assuming that the maximum level of the performance goals will be achieved, are as follows: Mr. Ellison - $6,999,996; Mr. Davis - $500,002; Mr. Amend - $899,996; Ms. Risch - $799,998; Mr. Robbins - $799,998; Mr. Drexler - $349,995; and Mr. Record - $1,000,005.
(2) The amounts shown in this column reflect payments made under the MICP.
(3) For a discussion of the valuation of perquisites, see “Compensation Discussion and Analysis - Other Compensation Program Elements.”
(4) The amount shown in this column for Mr. Ellison includes Company contributions or allocations to Mr. Ellison’s accounts in the Savings Plan and Mirror Savings Plan for fiscal 2017 of $18,517 and $95,003, respectively. The amount further includes the value of the following perquisites received by Mr. Ellison during fiscal 2017: personal use of corporate aircraft, $139,612; annual health exam, $3,241; and security services, $891. For security purposes, the CEO participates in a Key Associate Protection Program, which requires that he use Company aircraft for all business and personal travel. Income is imputed for personal use of Company aircraft. The Company does not provide a tax gross-up with respect to such imputed income.
(5) The amount shown in this column for Mr. Davis reflects the value of the following perquisites received by Mr. Davis during fiscal 2017: relocation, $15,660; amounts paid in respect of taxes imputed to Mr. Davis with respect to relocation expenses, $11,275; and personal use of corporate aircraft, $26,382.
(6) The amount shown in this column for Mr. Amend includes Company contributions or allocations to Mr. Amend’s accounts in the Savings Plan and Mirror Savings Plan for fiscal 2017 of $18,875 and $23,071, respectively. The amount further includes the value of the following perquisite received by Mr. Amend during fiscal 2017: annual health exam, $5,432.
(7) The amount shown in this column for Ms. Risch includes Company contributions or allocations to Ms. Risch’s account in the Savings Plan for fiscal 2017 of $14,863. The amount further includes the value of the following perquisites received by Ms. Risch during fiscal 2017: personal use of corporate aircraft, $12,402; and annual health exam, $3,000.
(8) The amount shown in this column for Mr. Robbins includes Company contributions or allocations to Mr. Robbins’ accounts in the Savings Plan and Mirror Savings Plan for fiscal 2017 of $18,800 and $22,248, respectively.
(9) The amount shown in this column for Mr. Drexler includes Company contributions or allocations to Mr. Drexler’s account in the Savings Plan for fiscal 2017 of $16,461. The amount further includes the value of the following perquisite received by Mr. Drexler during fiscal 2017: annual health exam, $4,367.
(10) The amount shown in this column for Mr. Record includes Company contributions or allocations to Mr. Record’s accounts in the Savings Plan and Mirror Savings Plan for fiscal 2017 of $16,788 and $47,850, respectively. The amount shown also includes the value of the lump sum cash severance payment under the Executive Termination Pay Agreement that Mr. Record entered into in connection with the commencement of his employment.

 

 

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Table of Contents

Grants of Plan-Based Awards

 

GRANTS OF PLAN-BASED AWARDS FOR FISCAL 2017

 

Name

  Grant
Date(1)
    Date of
Committee
Approval
    Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards
    Estimated Future Payouts
Under Equity
Incentive Plan Awards(2)
    All
Other
Stock
Awards:
Number of
Shares of
Stock  or
Units
(#)(3)
    All
Other
Option
Awards:
Number  of
Securities
Underlying
Options
(#)(4)
    Exercise
or Base
Price of
Option
Awards
($/share)
    Grant
Date Fair
Value of
Stock
and
Options
Awards
($)(5)
 
      Thres -
hold
($)
    Target
($)
    Maximum
($)
    Thres -
hold
(#)
    Target
(#)
    Maximum
(#)
         

Marvin R. Ellison

    3/6/2017       3/1/2017             146,812       587,248       1,174,496             3,499,998  

Chairman of the Board and Chief Executive Officer

    3/6/2017       3/1/2017                     597,270       5.96       1,750,001  
    3/6/2017       3/1/2017                   293,624           1,749,999  
    N/A (6)        253,750       1,015,000       2,030,000                
    N/A (7)        380,625       1,522,500       3,045,000                

Jeffrey A. Davis

    7/27/2017       7/20/2017             11,323       45,290       90,580             250,001  

Executive Vice President

and Chief Financial Officer

    7/27/2017       7/20/2017                     46,125       5.52       124,999  
    7/27/2017       7/20/2017                   22,645           125,000  
    N/A (7)        78,750       315,000       630,000                

Michael Amend

    3/6/2017       3/1/2017             18,876       75,503       151,006             449,998  

Executive Vice President,

Omnichannel

    3/6/2017       3/1/2017                     76,792       5.96       225,001  
    3/6/2017       3/1/2017                   171,980           1,025,001  
    N/A (6)        47,250       189,000       378,000                
    N/A (7)        70,875       283,500       567,000                

Therace M. Risch

    3/6/2017       3/1/2017             16,779       67,114       134,228             399,999  

Executive Vice

President and Chief

Information/Digital Officer

    3/6/2017       3/1/2017                     68,259       5.96       199,999  
    3/6/2017       3/1/2017                   167,785           999,999  
    N/A (6)        47,025       188,100       376,200                
    N/A (7)        70,538       282,150       564,300                

Michael Robbins

    3/6/2017       3/1/2017             16,779       67,114       134,228             399,999  

Executive Vice President,

Supply Chain

    3/6/2017       3/1/2017                     68,259       5.96       199,999  
    3/6/2017       3/1/2017                   167,785           999,999  
    N/A (6)        45,900       183,600       367,200                
    N/A (7)        68,850       275,400       550,800                

Andrew S. Drexler

    3/6/2017       3/1/2017             7,341       29,362       58,724             174,998  

Senior Vice President, Chief Accounting Officer and Controller

    3/6/2017       3/1/2017                     29,863       5.96       87,499  
    3/6/2017       3/1/2017                   14,681           87,499  
    N/A (6)        20,059       80,237       160,474                
    N/A (7)        30,089       120,356       240,711                

Edward J. Record

    3/6/2017       3/1/2017             20,973       83,893       167,786             500,002  

Former Executive Vice President and Chief Financial Officer

    3/6/2017       3/1/2017                     85,324       5.96       249,999  
    3/6/2017       3/1/2017                   41,946           249,998  
    N/A (6)        61,800       247,200       494,400                

 

(1) The Committee has adopted a policy regarding the grant date for annual grants of equity awards to associates. For fiscal 2017, the policy stated that the grant date for annual grants of equity awards to associates was the third full trading date following approval of the grant by the Committee. See “Equity Award Grant Policy” on page 42 for information on the Committee’s policy regarding the grant date for off-cycle equity awards.
(2) Grants of performance-based restricted stock units under the Company’s 2016 Long-Term Incentive Plan.
(3) Grants of time-based restricted stock units under the Company’s 2016 Long-Term Incentive Plan.
(4) Grants of stock options under the Company’s 2016 Long-Term Incentive Plan.
(5) The grant date value is calculated in accordance with applicable FASB guidance.
(6) Grant of award for the Spring performance period under the MICP.
(7) Grant of award for the Fall performance period under the MICP.

 

 

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Table of Contents

Outstanding Equity Awards at Fiscal Year-End

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2017

 

    Option Awards     Stock Awards  

Name

  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
    Equity Incentive
Plan Awards:
Number  of
Securities
Underlying
Unexercised
Unearned
Options (#)
    Option
Exercise
Price ($)
    Option
Expiration
Date
    Number
of

Shares or
Units of
Stock
That
Have

Not
Vested (#)
    Market
Value of

Shares or
Units of
Stock That
Have Not
Vested ($)(1)
    Equity
Incentive
Plan
Awards:
Number

of
Unearned
Shares,
Units  or

Other
Rights

That
Have
Not
Vested
(#)(2)
    Equity
Incentive
Plan
Awards:
Market or

Payout
Value of

Unearned
Shares,
Units  or

Other
Rights

That
Have Not
Vested ($)(1)
 

Marvin R. Ellison

                 

Chairman of the Board and Chief Executive Officer

                 

2015

    319,602       159,801 (3)      0       7.77       3/18/2025       772,875 (4)      2,735,978       0       0  

2016

    116,666       233,334 (5)      0       10.84       3/2/2026       161,439 (6)      571,494       80,719 (7)      285,745  

2017

    0       597,270 (8)      0       5.96       3/5/2027       293,624 (9)      1,039,429       146,812 (10)      519,714  

Jeffrey A. Davis

                 

Executive Vice President and Chief Financial Officer

                 

2017

    0       46,125 (11)      0       5.52       7/26/2027       22,645 (12)      80,163       11,323 (13)      40,083  

Michael Amend

                 

Executive Vice President, Omnichannel

                 

2015

    0       0       0       N/A       N/A       151,699 (14)      537,014       0       0  

2016

    11,666       23,334 (5)      0       10.84       3/2/2026       16,144 (6)      57,150       8,072 (7)      28,575  

2017

    0       76,792 (8)      0       5.96       3/5/2027       171,980 (9)      608,809       18,876 (10)      66,821  

Therace M. Risch

                 

Executive Vice President and Chief Information/Digital Officer

                 

2015

    0       0       0       N/A       N/A       46,792 (15)      165,644       0       0  

2016

    11,666       23,334 (5)      0       10.84       3/2/2026       16,144 (6)      57,150       8,072 (7)      28,575  

2017

    0       68,259 (8)      0       5.96       3/5/2027       167,785 (9)      593,959       16,779 (10)      59,398  

Michael Robbins

                 

Executive Vice President, Supply Chain

                 

2015

    0       0       0       N/A       N/A       33,647 (16)      119,110       0       0  

2016

    11,666       23,334 (5)      0       10.84       3/2/2026       16,144 (6)      57,150       8,072 (7)      28,575  

2017

    0       68,259 (8)      0       5.96       3/5/2027       167,785 (9)      593,959       16,779 (10)      59,398  

Andrew S. Drexler

                 

Senior Vice President, Chief Accounting Officer and Controller

                 

2015

    52,238       26,120 (17)      0       8.35       6/10/2025       10,479 (18)      37,096       0       0  

2016

    5,833       11,667 (5)      0       10.84       3/2/2026       8,072 (6)      28,575       4,036 (7)      14,287  

2017

    0       29,863 (8)      0       5.96       3/5/2027       14,681 (9)      51,971       7,341 (10)      25,987  

Edward J. Record

                 

Former Executive Vice President and Chief Financial Officer

                 

2014

    0       0       184,729 (19)      8.97       3/27/2024       0       0       0       0  

2015

    0       0       0       N/A       N/A       115,927 (4)      410,382       0       0  

2016

    0       0       0       N/A       N/A       0       0       8,649 (7)      30,617  

2017

    0       0       0       N/A       N/A       0       0       3,496 (10)      12,376  

 

(1) Based on the closing market price of Company common stock on February 2, 2018, which was $3.54.
(2) The reported number of units assumes achievement of the threshold level of performance, in accordance with SEC requirements. The number of units earned can increase or decrease based on the Company’s achievement of the performance measure.
(3) Stock options that vest on March 19, 2018.
(4) Restricted stock units that vest on March 19, 2018.
(5) Stock options that vest one-half on March 3, 2018 and March 3, 2019.
(6) Restricted stock units that vest on March 3, 2019.

 

 

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Outstanding Equity Awards at Fiscal Year-End

 

(7) Performance-based restricted stock units that vest on March 3, 2019 if the performance measure is achieved.
(8) Stock options that vest one-third on March 6, 2018, March 6, 2019 and March 6, 2020.
(9) Restricted stock units that vest on March 6, 2020.
(10) Performance-based restricted stock units that vest on March 6, 2020 if the performance measure is achieved.
(11) Stock options that vest one-third on July 27, 2018, July 27, 2019 and July 27, 2020.
(12) Restricted stock units that vest on July 27, 2020.
(13) Performance-based restricted stock units that vest on July 27, 2020 if the performance measure is achieved.
(14) Restricted stock units that vest one-half on August 7, 2018 and August 7, 2019.
(15) Restricted stock units that vest one-half on December 10, 2018 and December 10, 2019.
(16) Restricted stock units that vest on November 17, 2018.
(17) Stock options that vest on June 11, 2018.
(18) Restricted stock units that vest on June 11, 2018.
(19) Performance-contingent stock options that vest upon achievement of the performance measure.

 

 

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Table of Contents

Option Exercises and Stock Vested

 

OPTION EXERCISES AND STOCK VESTED FOR FISCAL 2017

 

     Option Awards      Stock Awards  

Name

   Number of
Shares
Acquired on
Exercise (#)
     Value Realized
on
Exercise ($)
     Number of
Shares
Acquired on
Vesting (#)
    Value Realized
on
Vesting ($)
 

Marvin R. Ellison

     0        0        688,706 (1)      2,265,843 (2) 

Chairman of the Board and

          

Chief Executive Officer

          

Jeffrey A. Davis

     0        0        0       0  

Executive Vice President and

          

Chief Financial Officer

          

Michael Amend

     0        0        75,850 (3)      408,832 (4) 

Executive Vice President,

          

Omnichannel

          

Therace M. Risch

     0        0        23,396 (5)      75,335 (6) 

Executive Vice President and

          

Chief Information/Digital

          

Officer

          

Michael Robbins

     0        0        0       0  

Executive Vice President,

          

Supply Chain

          

Andrew S. Drexler

     0        0        10,479 (7)      51,033 (8) 

Senior Vice President, Chief

          

Accounting Officer and

          

Controller

          

Edward J. Record

     0        0        18,018 (9)      107,928 (10) 

Former Executive Vice

           83,612 (11)      467,391 (12) 

President and Chief

           74,655 (13)      340,427 (14) 

Financial Officer

           38,878 (15)      211,496 (16) 
           7,507 (15)      40,838 (16) 
           17,297 (17)      94,096 (16) 
           6,991 (18)      38,031 (16) 

 

  (1) Represents portion of 2014 time-based restricted stock unit equity inducement award that vested on November 17, 2017. The equity inducement award was granted in relinquishment of certain benefits and compensation provided by Mr. Ellison’s previous employer and as an inducement to join the Company.
  (2) Based on the closing market price of JCPenney common stock on November 17, 2017, which was $3.29.
  (3) Represents portion of 2015 time-based restricted stock unit equity inducement award that vested on August 7, 2017. The equity inducement award was granted in relinquishment of certain benefits and compensation provided by Mr. Amend’s previous employer and as an inducement to join the Company.
  (4) Based on the closing market price of JCPenney common stock on August 7, 2017, which was $5.39.
  (5) Represents portion of 2015 time-based restricted stock unit equity inducement award that vested on December 10, 2017. The equity inducement award was granted in relinquishment of certain benefits and compensation provided by Ms. Risch’s previous employer and as an inducement to join the Company.
  (6) Based on the closing market price of JCPenney common stock on December 8, 2017, which was $3.22.
  (7) Represents portion of 2015 time-based restricted stock unit equity inducement award that vested on June 11, 2017. The equity inducement award was granted in relinquishment of certain benefits and compensation provided by Mr. Drexler’s previous employer and as an inducement to join the Company.
  (8) Based on the closing market price of JCPenney common stock on June 9, 2017, which was $4.87.
  (9) Represents portion of 2015 time-based restricted stock unit award that vested on March 19, 2017.
  (10) Based on the closing market price of JCPenney common stock on March 17, 2017, which was $5.99.
  (11) Represents 2014 time-based restricted stock unit award that vested on March 27, 2017.
  (12) Based on the closing market price of JCPenney common stock on March 27, 2017, which was $5.59.
  (13) Represents portion of 2014 time-based restricted stock unit equity inducement award that vested on May 20, 2017. The equity inducement award was granted in relinquishment of certain benefits and compensation provided by Mr. Record’s previous employer and as an inducement to join the Company.
  (14) Based on the closing market price of JCPenney common stock on May 19, 2017, which was $4.56.
  (15) Represents portion of 2015 time-based restricted stock unit award that vested on August 6, 2017.
  (16) Based on the closing market price of JCPenney common stock on August 4, 2017, which was $5.44.
  (17) Represents portion of 2016 time-based restricted stock unit award that vested on August 6, 2017.
  (18) Represents portion of 2017 time-based restricted stock unit award that vested on August 6, 2017.

 

 

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Nonqualified Deferred Compensation

 

NONQUALIFIED DEFERRED COMPENSATION FOR FISCAL 2017

 

Name

   Executive
Contributions
in last FY
($)(1)
     Registrant
Contributions
in last FY
($)(2)
     Aggregate
Earnings
in last FY
($)(3)
     Aggregate
Withdrawals/
Distributions

($)
     Aggregate
Balance
at last FYE
($)(4)
 

Marvin R. Ellison

     0        95,003        15,824                        0        110,827  

Jeffrey A. Davis

     8,758        0        329        0        9,086  

Michael Amend

     23,071        23,071        5,097        0        51,239  

Therace M. Risch

     0        0        0        0        0  

Michael Robbins

     22,248        22,248        7,355        0        88,084  

Andrew S. Drexler

     0        0        3,278        0        23,434  

Edward J. Record

     29,326        47,850        96,493        0        541,052  

 

(1) The amounts shown are included in the salary and incentive compensation numbers shown in the Summary Compensation Table.
(2) The amounts shown are included in the All Other Compensation numbers shown in the Summary Compensation Table.
(3) These amounts are not included in the Summary Compensation Table since they do not constitute above market interest or preferential earnings.
(4) The balance reported includes named executive officer contributions to the Mirror Savings Plan; these amounts were included in the Summary Compensation Table as salary and incentive compensation in the fiscal year earned. Company contributions to the Mirror Savings Plan were included in the All Other Compensation column of the Summary Compensation Table in the fiscal year paid.

Mirror Savings PlanThe Mirror Savings Plan is a non-qualified defined contribution plan which provides eligible associates the opportunity to defer a portion of their base salary and incentive compensation exceeding the Code compensation limit as a means of saving for retirement.

Accordingly, eligible associates earning more than the Code compensation limit ($270,000 for 2017 and $275,000 for 2018) may defer up to 75% of their compensation above the limit through the Mirror Savings Plan.

The Mirror Savings Plan includes a Company match feature of 100% per dollar deferred up to a maximum of 5% of deferrals on compensation over the Code compensation limit. This matching contribution is credited each pay period. The Company may make additional discretionary matching contributions. Participants vest in the Mirror Savings Plan Company matching contribution and related investment earnings as follows:

 

    For contributions made for plan years 2016 and earlier, participants become 100% vested in the match after three years of service; and
    For contributions made for plan years 2017 and after, participants are 100% vested in the match immediately.

For plan years 2016 and earlier, the Mirror Savings Plan included a non-contributory retirement account in which eligible participants received a Company contribution in an amount equal to 2% of the participant’s compensation in excess of the Code compensation limit after one year of service. Participating associates are fully vested in this Company contribution after three years. Beginning with plan year 2017, the retirement account provision of the Mirror Savings Plan was discontinued.

Generally, all unvested Company matching contributions are forfeited when the participant terminates employment. The Mirror Savings Plan provides that all matching contributions are immediately vested and non-forfeitable if a participant terminates employment due to:

 

    Retirement at age 65,
    Qualifying for permanent and total disability while working for the Company,
    The work unit or type of work the associate was doing being discontinued (as determined by the Company), or
    Death.

 

 

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Nonqualified Deferred Compensation

 

Deferrals and Company matching contributions are credited to the participant’s Mirror Savings Plan account and invested according to the participant’s investment elections. Earnings on the balance in the participant’s Mirror Savings Plan accounts are based on hypothetical investments in the same funds offered under the Savings Plan. Participants can change their investment elections daily.

Generally, a Mirror Savings Plan participant can only receive a distribution following an unforeseen emergency event (as defined under the Code), a change in control, or termination of employment. The only form of payment under the Mirror Savings Plan is a five year annual installment option. No withdrawals or distributions were taken during the year by any of the named executive officers.

 

 

 

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Potential Payments and Benefits on Termination of Employment

 

POTENTIAL PAYMENTS AND BENEFITS ON TERMINATION OF EMPLOYMENT

Under our compensation program, described above in “Compensation Discussion and Analysis,” payments and the provision of benefits can be triggered by the termination of an associate’s employment. These payments and benefits may vary depending on the reason for termination as described below.

Except as described below, in the event of an associate’s voluntary termination or the termination of an associate’s employment for cause, the associate is only entitled to receive payments for accrued base salary and vacation through the date of termination and any amounts payable under the terms of the Mirror Savings Plan regardless of whether or not the termination follows a change in control of the Company.

In the event that an associate’s termination is the result of retirement, death or permanent disability, the associate is entitled to additional payments and benefits, regardless of whether or not the termination follows a change in control of the Company.

In the event that an associate is involuntarily terminated without cause, the associate is entitled to additional payments and benefits, which may vary depending on whether or not the termination follows a change in control of the Company. If an associate terminates employment with good reason following a change in control of the Company or, in the case of Mr. Ellison, if he voluntarily terminates employment with good reason at any time, the associate is also entitled to additional payments and benefits.

Termination without a Change in Control

In an effort to attract the best people, the Company offers its CEO and each of its Executive Vice Presidents the right to enter into an Executive Termination Pay Agreement with the Company and each of its Senior Vice Presidents the right to enter into a Termination Pay Agreement with the Company. We refer to the Executive Termination Pay Agreements and the Termination Pay Agreements collectively as the TPAs. The forms of the agreements were reviewed by the Committee’s independent consultant and approved by the Committee. The TPAs are intended to provide the executive with severance benefits in exchange for the executive’s agreement to comply with certain restrictive covenants. The benefits payable under these agreements are not available if the executive receives the benefits under the CIC Plan, which is described later in this section.

The primary purpose of the TPAs is to provide for severance benefits in the event of involuntary termination of the executive’s employment without cause. For purposes of the TPAs entered into by the CEO and Executive Vice Presidents, cause includes:

 

    An intentional act of fraud, embezzlement, theft or other material violation of law;
    Intentional damage to the Company’s assets;
    Intentional disclosure of confidential information in violation of the Company’s policies;
    Material breach of the executive’s obligations under the TPA;
    Breach of the executive’s duty of loyalty to the Company;
    Failure of the executive to substantially perform the duties of his or her job (other than as a result of physical or mental incapacity); or
    Intentional breach of Company policies or willful misconduct by the executive that is in either case materially injurious to the Company.

For purposes of the TPAs entered into by Senior Vice Presidents, cause includes:

 

    Failure of the executive to substantially perform the duties of his or her job;
    Failure or refusal of the executive to perform specific directives of the Board or the Company that are consistent with the scope and nature of his or her duties;

 

 

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Potential Payments and Benefits on Termination of Employment

 

    Conviction of a felony;
    Breach of the executive’s fiduciary duties to the Company;
    Violation of the Company’s Statement of Business Ethics;
    Any act or omission that results in assessment of a criminal penalty against the Company;
    Violation of an applicable law or regulation;
    Any act or omission that adversely affects or could reasonably be expected to adversely affect the Company’s reputation; or
    Willful misconduct, gross negligence or any act of dishonesty or disloyalty.

Under the TPAs, if an executive is involuntarily terminated without cause or, in the case of Mr. Ellison, voluntarily terminates employment for good reason, he or she will receive the benefits set forth in the table immediately below. The standard forms of TPAs were revised in December 2015. The table below sets forth the benefits to be received by an executive based on the form of TPA to which he or she is a party.

 

Benefits

  

Form of TPA prior to December 2015

  

Form of TPA after December 2015

Lump sum payment for unpaid salary and vacation

   Accrued base salary and earned but unused paid time off through termination date    Same
Payment for base salary and annual cash incentive*    Lump sum equal to annualized base salary plus target annual cash incentive compensation (at 100% of the target incentive opportunity in effect at the time of termination) with respect to a period of (a) 24 months for Mr. Ellison, (b) 18 months following termination if the executive is an Executive Vice President or higher, or (c) 12 months following termination if the executive is a Senior Vice President    Equal monthly installments during the severance period
Lump sum payment for current year annual cash incentive*    Average of actual incentive compensation payments for the 3 prior fiscal years or, if the associate has been employed for less than 3 fiscal years at the time of termination, the average of the actual payments for the fiscal years, or portion thereof, that the associate has been employed    Executive’s actual annual cash incentive compensation payable for the fiscal year of termination prorated for the period of service during the fiscal year
Payment of insurance premiums*    Lump sum payment for Company-paid portion of premiums toward medical, dental and life insurance coverages for 24 months for Mr. Ellison, 18 months for Executive Vice Presidents and 12 months for Senior Vice Presidents, grossed-up for federal income taxes    Continuation of payments by Company for its portion of premiums for medical and dental insurance coverage if executive elects continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (COBRA)
Lump sum payment for outplacement and financial counseling services*    $25,000 for CEO and Executive Vice Presidents; $15,000 for Senior Vice Presidents    Same
Vesting of equity awards granted in connection with commencement of employment*    Immediate vesting    Same
Vesting of other equity awards*    Immediate vesting of pro-rated portion reflecting length of employment    Same

 

* Conditioned on execution of a release and expiration of the revocation period under the release, but payable no later than two and one-half months after the year of termination.

 

 

 

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Potential Payments and Benefits on Termination of Employment

 

As noted above, Mr. Ellison’s Executive Termination Pay Agreement also provides the above-described benefits if he voluntarily terminates employment with the Company for good reason. For purposes of Mr. Ellison’s Executive Termination Pay Agreement, good reason consists of:

 

    A reduction in base salary or target annual cash incentive opportunity;
    Involuntary relocation of more than 50 miles;
    A materially adverse change in the executive’s duties or responsibilities;
    The Company’s failure to nominate Mr. Ellison for election to the Board; or
    Failure to make any material payments when due.

For Mr. Ellison to receive benefits under his Executive Termination Pay Agreement in connection with a termination for good reason, he must terminate employment within 180 days of the date the good reason event occurred. Notice of a good reason event must be provided to the Company within 30 days of the event and the Company must be given a 30-day opportunity to correct the situation.

In addition to providing severance payments in the event of an involuntary termination without cause, the TPAs also include certain limited benefits in the event of death or termination due to permanent disability. In such case, the executive will receive a lump sum cash payment as soon as practicable after termination equal to prorated annual incentive compensation for service during the year at 100% of the executive’s target incentive compensation opportunity.

By entering into a TPA, the executive agrees to the following restrictive covenants:

 

    Obligation not to disclose confidential or proprietary information of the Company, which continues indefinitely following termination of employment;
    Obligation to refrain from activities designed to influence or persuade any person not to do business or to reduce its business with the Company, which continues for the applicable severance period following termination of employment;
    Obligation to refrain from attempting to influence or persuade any of the Company’s employees to leave their employment with the Company and to refrain from directly or indirectly soliciting or hiring employees of the Company, which continues for the applicable severance period following termination of employment; and
    Obligation not to undertake work for a competing business, which continues for the applicable severance period following termination of employment.

The standard forms of TPAs used by the Company prior to December 2015 provided that the noncompetition covenant may be waived by the executive; however, he or she must then forego any severance benefits available under the TPA. Beginning with the forms of TPAs as revised in December 2015, the restrictive covenants also extend to a voluntary termination of employment in addition to involuntary separation without cause. In the event the executive breaches any of the covenants listed above, the Company will not be obligated to make any further payments under the agreement and may seek to recover damages from the executive.

Mr. Amend had an Executive Termination Pay Agreement in the form used by the Company prior to December 2015. Mr. Drexler has a Termination Pay Agreement in the form used by the Company prior to December 2015. Ms. Risch, Mr. Davis and Mr. Robbins have Executive Termination Pay Agreements as revised in December 2015. Mr. Ellison is party to a separate Executive Termination Pay Agreement that provides the benefits described in the table above for TPAs in the form used prior to December 2015.

 

 

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Potential Payments and Benefits on Termination of Employment

 

Mr. Record was a party to an Executive Termination Pay Agreement in the form used prior to December 2015. The amount paid to Mr. Record under the terms of his TPA is reflected as All Other Compensation in the Summary Compensation Table. In addition, Mr. Record’s equity awards vested in accordance with his TPA. The vested equity awards are reflected in the Option Exercises and Stock Vested for Fiscal 2017 Table.

Change in Control; Termination Following a Change in Control

Each of Ms. Risch and Messrs. Ellison, Davis and Robbins participate in the Company’s CIC Plan. Mr. Amend also participated in the CIC Plan. None of our named executive officers are entitled to a tax gross-up payment in respect of any excise taxes imposed on the benefits payable under the CIC Plan.

The CIC Plan provides benefits to the Company’s executives if their employment is terminated as a result of an involuntary separation from service by the Company other than for cause within two years of the occurrence of a change in control of the Company. The CIC Plan also provides benefits to an executive if the executive terminates employment with the Company for Good Reason following a change of control. Good Reason consists of:

 

    A material reduction in the executive’s base salary or target annual cash incentive opportunity;
    Involuntary relocation of more than 50 miles;
    A materially adverse change in the executive’s duties or responsibilities;
    A material diminution in the budget over which the executive has responsibility;
    A material adverse change in the executive’s supervisor’s duties or responsibilities, including a change in the supervisor to whom the executive is required to report; or
    Failure of the Company to continue a material benefit or a material reduction in the benefits in which the executive participated prior to the occurrence of the change in control, unless replaced by a substantially equivalent benefit.

For an executive to receive benefits under the CIC Plan, a Good Reason event with respect to such executive must occur within two years of the occurrence of a change in control of the Company, and if the Good Reason event is not cured by the Company following timely notice of the event by the executive, the executive must terminate employment within the later of (i) two years of the change in control or (ii) 180 days of the date the Good Reason event occurred.

Notice of a Good Reason event must be provided to the Company within 90 days of the event and the Company must be given a 30-day opportunity to correct the situation without having to pay benefits under the CIC Plan.

Change in control is defined as:

 

    the acquisition by any person, entity or group of 30% or more of the Company’s outstanding common stock;
    the replacement of a majority of the Board;
    a reorganization, merger or consolidation, or the sale of all or substantially all of the Company’s assets, subject to certain exceptions; or
    a complete liquidation or dissolution of the Company.

For purposes of the CIC Plan, cause includes the failure of the executive to substantially perform the duties of his or her job, failure of the executive to follow Company policy, engagement by the executive in illegal conduct, or gross misconduct injurious to the Company.

 

 

 

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Potential Payments and Benefits on Termination of Employment

 

For the named executive officers (other than Mr. Drexler), the CIC Plan entitles them to receive cash severance of 2.99 times annualized base salary plus target annual cash incentive opportunity (at 100%) at the time of termination.

In addition to the cash severance payments, all participants in the CIC Plan are entitled to receive the following at the time of termination:

 

    Accrued base salary and pay in respect of earned but unused paid time off through the date of termination;
    With respect to annual incentive compensation:
    the average of the participant’s actual annual incentive compensation payments under the MICP for the three fiscal years prior to the fiscal year of termination; or
    if termination occurs on the last day of the fiscal year, the actual annual cash incentive compensation, if greater;
    A lump sum payment in respect of additional paid time off, if any, under the Company’s paid time off policies;
    A lump sum payment representing the incremental value of additional years of Company matching contributions credited to the executive (equal to the executive’s cash severance multiple) with respect to the Mirror Savings Plan, to the extent the executive participates in that plan;
    A lump sum payment representing the Company-financed portion of the premium toward medical, dental and life insurance coverages for the number of years equal to the applicable cash severance multiple for the executive, grossed-up for federal income taxes; and
    A lump sum payment of $25,000 toward outplacement and financial counseling services, and, to the extent applicable and allowable by law, reimbursement of legal fees and expenses incurred in defense of the executive’s rights under the plan.

Additionally, participants in the CIC Plan are eligible for up to one year of additional age and service credit for purposes of determining retiree eligibility under the Company’s medical, dental, life insurance, and lifetime discount programs.

In addition to the benefits provided by the CIC Plan, some of the Company’s other plans and programs, such as the Company’s equity compensation plans, also include specific benefits payable to associates in the event of a change in control of the Company. The Company’s 2012 Long-Term Incentive Plan, 2014 Long-Term Incentive Plan and 2016 Long-Term Incentive Plan provide that vesting of outstanding equity awards is accelerated if the participant’s employment is terminated as a result of an involuntary separation from service by the Company other than for Cause within two years of the occurrence of a change in control of the Company.

For purposes of these plans, a change of control is defined as:

 

    the acquisition by a person or group of more than 50% of the total voting power of the Company’s common stock;
    the acquisition by a person or a group within a twelve-month period of 30% of the total voting power of the Company’s common stock or the replacement of a majority of the Board within a twelve-month period unless approved by a majority of the Board; or
    the acquisition by a person or group of 40% or more of the assets of the Company.

 

 

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Potential Payments and Benefits on Termination of Employment

 

The plans also provide for vesting acceleration of outstanding awards if the participant terminates employment with the Company for Good Reason within two years of the occurrence of a change in control of the Company. The definition of Good Reason under these plans is the same as the definition under the CIC Plan.

 

 

 

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Potential Payments and Benefits on Termination of Employment

 

In order to describe the payments and benefits that are triggered for each termination event for each of the Company’s named executive officers, we have created the table below estimating the payments and benefits that would be paid to each of our named executive officers under each applicable element of our compensation program. The table assumes that the named executive officer’s employment terminated on February 2, 2018, which was the last business day of the Company’s last completed fiscal year.

 

    Base
Salary
($)
    Annual
Cash
Incentive

($)
    Restricted
Stock

($)
    Mirror
Savings
Plan

($)
    Other
($)(1)
    Excise
Tax
Cutback
($)
    Total
($)
 

Marvin R. Ellison

             

Involuntary Termination without Change in Control

    2,900,000       7,168,416       4,708,153       110,827       244,880       0       15,132,276  

Involuntary Termination with Change in Control

    4,335,500       9,698,198       7,568,747       110,827       270,903       0       21,984,175  

Death

    0       2,537,500       4,708,153       110,827       167,308       0       7,523,788  

Permanent Disability

    0       2,537,500       4,708,153       110,827       167,308       0       7,523,788  

Good Reason without Change in Control

    2,900,000       7,168,416       4,708,153       110,827       244,880       0       15,132,276  

Good Reason After Change in Control

    4,335,500       9,698,198       7,568,747       110,827       270,903       0       21,984,175  

Jeffrey A. Davis

             

Involuntary Termination without Change in Control

    1,050,000       1,092,656       46,762       9,086       80,261       0       2,278,765  

Involuntary Termination with Change in Control

    2,093,000       1,874,906       240,490       9,086       127,021       0       4,344,503  

Death

    0       525,000       46,762       9,086       33,654       0       614,502  

Permanent Disability

    0       525,000       46,762       9,086       33,654       0       614,502  

Good Reason After Change in Control

    2,093,000       1,874,906       240,490       9,086       127,021       0       4,344,503  

Michael Amend

             

Involuntary Termination without Change in Control

    945,000       996,120       914,246       51,239       109,862       0       3,016,467  

Involuntary Termination with Change in Control

    1,883,700       1,805,871       1,584,554       51,239       146,020       (598,066     4,873,318  

Death

    0       472,500       511,485       51,239       48,462       0       1,083,686  

Permanent Disability

    0       472,500       511,485       51,239       48,462       0       1,083,686  

Good Reason After Change in Control

    1,883,700       1,805,871       1,584,554       51,239       146,020       (598,066     4,873,318  

Therace M. Risch

             

Involuntary Termination without Change in Control

    940,500       1,096,600       529,264       0       43,972       0       2,610,336  

Involuntary Termination with Change in Control

    1,874,730       1,797,272       1,168,635       0       64,153       0       4,904,790  

Death

    0       470,250       377,425       0       9,646       0       857,321  

Permanent Disability

    0       470,250       377,425       0       9,646       0       857,321  

Good Reason After Change in Control

    1,874,730       1,797,272       1,168,635       0       64,153       0       4,904,790  

Michael Robbins

             

Involuntary Termination without Change in Control

    918,000       1,070,365       482,730       88,084       117,175       0       2,676,354  

Involuntary Termination with Change in Control

    1,829,880       1,754,275       1,122,102       88,084       163,830       0       4,958,171  

Death

    0       459,000       452,953       88,084       70,615       0       1,070,652  

Permanent Disability

    0       459,000       452,953       88,084       70,615       0       1,070,652  

Good Reason After Change in Control

    1,829,880       1,754,275       1,122,102       88,084       163,830       0       4,958,171  

Andrew S. Drexler

             

Involuntary Termination

    401,185       401,185       127,139       23,434       65,175       0       1,018,118  

Death

    0       200,593       139,504       23,434       27,774       0       391,305  

Permanent Disability

    0       200,593       139,504       23,434       27,774       0       391,305  

 

(1) The amounts shown in this column include amounts payable with respect to health and life insurance, financial counseling and outplacement, and vacation, as applicable.

 

 

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CEO Pay Ratio

 

CEO PAY RATIO

As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act), we are providing the following information about the relationship of the median annual total compensation of our associates and the annual total compensation of Marvin Ellison, our Chairman of the Board and Chief Executive Officer.

As one of the largest department store and e-commerce retailers in the United States, including operating 872 department stores in 49 states and Puerto Rico as of February 3, 2018, our associate population consists of a significant number of part-time associates, many of which are also compensated on an hourly basis. Approximately 93% of our associates are compensated on an hourly basis and part-time associates represent approximately 65% of our total workforce. Accordingly, our median associate in fiscal 2017 was determined to be a part-time hourly associate.

For fiscal 2017:

 

    the median of the annual total compensation of all associates of the Company (other than our CEO) was $14,366; and
    the annual total compensation of our CEO was $10,818,335.

Based on this information, for fiscal 2017, the ratio of the annual total compensation of our CEO to the median of the annual total compensation of all associates was 753 to 1.

To calculate this ratio, we determined that, as of February 3, 2018, our associate population consisted of approximately 98,700 individuals, with approximately 99% of these individuals located in the United States and approximately 1% located outside the United States. This population consisted of our full-time, part-time, and temporary associates as of such date.

Our associate population, after taking into consideration the adjustments permitted by SEC rules (as described below), consisted of approximately 97,700 individuals. As permitted by SEC rules, we have chosen to exclude all of the associates who are employed outside of the United States from the determination of the median associate. The jurisdictions from which we have excluded associates and the approximate number of associates excluded from each jurisdiction are: Bangladesh (21), China (203), Guatemala (11), India (640), Indonesia (8), Pakistan (17), South Korea (41), Taiwan (48) and Vietnam (15).

To identify the median associate from our associate population, we analyzed the amount of salary, wages and tips of our associates as reflected in our payroll records as reported to the Internal Revenue Service on Form W-2 for the 2017 calendar year. We also annualized the compensation for permanent associates who joined the Company, or were on an unpaid leave of absence for any period of time, after January 1, 2017. We did not perform any full-time equivalency adjustments for part-time associates.

Using this compensation measure, which was consistently applied to all of the associates included in the relevant population, we determined that the median associate was a part-time hourly associate. Once we identified our median associate, we combined all of the elements of such associate’s compensation for fiscal 2017 in accordance with the SEC’s rules, resulting in annual total compensation of $14,366. With respect to the annual total compensation of our CEO, we used the amount reported in the “Total” column of our 2017 Summary Compensation Table included in this Proxy Statement.

 

 

 

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CEO Pay Ratio

 

Because the SEC rules for identifying the median of the annual total compensation of our associates and calculating the pay ratio based on that median allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their employee populations and compensation practices, the pay ratio reported by other companies may not be comparable to the pay ratio for our Company, as other companies are headquartered in different locations, have different employee populations and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their pay ratios.

DIRECTOR COMPENSATION FOR FISCAL 2017

 

Name

   Fees Earned
or Paid
in Cash ($)
     Stock Awards
($)(1)
     Option
Awards
($)
     All Other
Compensation
($)(2)
     Total
($)
 

Colleen C. Barrett(3)

     23,750        0        0        0        23,750  

Paul J. Brown(4)

     80,000        150,000        0        10,000        240,000  

Amanda Ginsberg(5)

     100,000        150,000        0        0        250,000  

Wonya Y. Lucas(6)

     43,478        118,770        0        8,301        170,549  

B. Craig Owens(7)

     100,000        150,000        0        10,000        260,000  

Lisa A. Payne(8)

     80,000        150,000        0        10,000        240,000  

Debora A. Plunkett(9)

     80,000        187,816        0        10,000        277,816  

J. Paul Raines(10)

     9        234,991        0        0        235,000  

Leonard H. Roberts(11)

     80,000        150,000        0        10,000        240,000  

Javier G. Teruel(12)

     8        223,617        0        0        223,625  

R. Gerald Turner(13)

     85,000        150,000        0        10,000        245,000  

Ronald W. Tysoe(14)

     126,250        150,000        0        3,700        279,950  

 

(1) Each non-employee director receives an annual stock grant consisting of a number of restricted stock units having a market value nearest to $150,000. For fiscal 2017, the number of units was determined by dividing $150,000 by the closing price of Company common stock on the date of grant (rounded to the nearest whole unit). The amounts shown in this column include the fair value of the annual stock award for fiscal 2017, which was based on the closing price of JCPenney common stock on the date of grant, which was $4.65. The date of grant of the annual stock grant to non-employee directors is the third trading date following the Company’s Annual Meeting of Stockholders.
(2) Includes the value of Company matching contributions under the Directors’ Matching Fund. Under this program, directors may request the Company to match dollar-for-dollar their personal charitable contributions up to $10,000 per fiscal year.
(3) Ms. Barrett had 94,609 stock awards, consisting of 90,527 restricted stock unit awards and 4,082 restricted stock awards, outstanding as of May 19, 2017, the day on which she retired from the Board.
(4) Mr. Brown had 43,123 restricted stock unit awards outstanding as of February 3, 2018.
(5) Ms. Ginsberg had 66,566 restricted stock unit awards outstanding as of February 3, 2018.
(6) Ms. Lucas had 33,269 restricted stock unit awards outstanding as of February 3, 2018. Ms. Lucas became a director on August 16, 2017 and received an award of restricted stock units that represented a pro-rata amount of the 2017 annual equity award using the closing price of JCPenney common stock on the date of grant, which was $3.57.
(7) Mr. Owens had 81,345 restricted stock unit awards outstanding as of February 3, 2018.
(8) Ms. Payne had 55,452 restricted stock unit awards outstanding as of February 3, 2018.
(9) Ms. Plunkett had 38,603 restricted stock unit awards outstanding as of February 3, 2018. Ms. Plunkett became a director on March 1, 2017 and received an award of restricted stock units that represented a pro-rata amount of the 2016 annual equity award using the closing price of JCPenney common stock on the date of grant, which was $5.96.
(10) During fiscal 2017, Mr. Raines elected to receive 100 percent of his cash retainers in shares of Company common stock. The amount shown in the Stock Awards column includes the fair value of stock received in lieu of cash. Fractional shares were paid out in cash. Mr. Raines had 55,452 restricted stock unit awards outstanding as of January 24, 2018, the day on which he resigned from the Board.
(11) Mr. Roberts had 132,544 stock awards, consisting of 122,785 restricted stock unit awards and 9,759 restricted stock awards, outstanding as of February 3, 2018.
(12) Mr. Teruel has elected to receive 100 percent of his cash retainers in shares of Company common stock. The amount shown in the Stock Awards column includes the fair value of stock received in lieu of cash. Fractional shares are paid out in cash. Mr. Teruel had 118,282 restricted stock unit awards outstanding as of February 3, 2018.
(13) Dr. Turner had 137,605 stock awards, consisting of 122,785 restricted stock unit awards, 13,220 restricted stock awards and 1,600 option awards, outstanding as of February 3, 2018.
(14) Mr. Tysoe had 94,690 restricted stock unit awards outstanding as of February 3, 2018.

Cash Retainers and Stock Award

Directors who are Company associates do not receive directors’ fees. The Corporate Governance Committee has the responsibility for recommending to the Board the appropriate compensation for non-employee directors. In recommending the appropriate compensation for non-employee directors,

 

 

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Director Compensation

 

the Corporate Governance Committee benchmarks the compensation for our non-employee directors against the practices of the Company’s retail-focused peer group. Recommendations to modify non-employee director compensation take into account the results of such benchmarking.

For 2017, the annual compensation arrangements for non-employee directors included the following, to the extent applicable:

 

    An annual cash retainer of $80,000;
    An annual award of restricted stock units with a market value at the time of grant of $150,000;
    An annual cash retainer of $20,000 for the chairs of the Audit Committee and the Human Resources and Compensation Committee;
    An annual cash retainer of $15,000 for the chairs of the Corporate Governance Committee and the Finance and Planning Committee;
    An annual cash retainer of $30,000 for the Lead Independent Director;
    An annual cash retainer of $100,000 for a Non-Executive Chairman of the Board; and
    An annual cash retainer of $5,000 for directors who are Representatives under an Indemnification Trust Agreement among the Company, its wholly owned subsidiary, J. C. Penney Corporation, Inc., and SunTrust Bank, as trustee (currently Directors Ginsberg and Turner).

Director compensation covers the period from June 1 to May 31 following the election of directors at the annual meeting in May. The cash retainers are payable quarterly. Non-employee directors are reimbursed for expenses incurred for attending any meeting which they attend in their official capacities as directors.

Director equity awards granted prior to 2017 do not vest until the director’s service ends. Beginning with the 2017 annual restricted stock unit grant for non-employee directors, each non-employee director may elect (i) to have their equity award vest on the first anniversary of the date of grant, (ii) to have their equity award vest when the director’s service ends or (iii) to have a portion of the award vest on the first anniversary of the date of grant with the remaining portion vesting when the director’s service ends. Non-employee directors may not transfer, sell, assign or otherwise dispose of any shares of common stock received in connection with an annual equity award while serving as a director, except for a sale in limited circumstances where necessary for the non-employee director to pay any income taxes arising in connection with the annual equity award.

The Board has adopted formal stock ownership goals for non-employee directors of the Company. The stock ownership goals specify that, within a four-year period from the date of election to the Board, non-employee directors should hold an amount of Company stock having a value of at least three times the annual retainer. All of the current non-employee directors have met or are on track to meet that goal.

Election to Receive Common Stock; Deferral

Directors may elect to receive all or a portion of their cash retainers in Company common stock. One director has currently elected to receive all or part of his cash retainers in Company common stock. A director may also elect to defer payment of all or part of their cash retainers under the terms of a deferred compensation plan for directors. No current director has elected such deferral.

Directors’ Charitable Award Program

The Directors’ Charitable Award Program was frozen by the Board in 2000. Only one of the current directors participates in the program. The Charitable Award Program was designed to acknowledge the

 

 

 

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service of directors and to recognize the mutual interest of directors and the Company in supporting worthy charitable and educational institutions. Pursuant to the Charitable Award Program, the Company has purchased joint life insurance policies on groups of directors (in the event of an uneven number of directors, a single life policy was purchased). Each group generally consists of two directors with the Company named as the beneficiary of each joint life policy. With respect to each group, the Company will receive a $1,000,000 death benefit upon the death of the second director of the group. The Company in turn has informally agreed to donate a total of $1,000,000 to one or more charitable organizations as recommended by the individual directors. The Company will donate $500,000 upon the earlier of (i) five years after the date of death of the first director of the group to die or (ii) the death of the second director of the group. The Company will donate an additional $500,000 upon the death of the second director of the group. Because all charitable deductions accrue solely to the Company, the individual directors derive no financial benefits from this program.

Directors’ Matching Fund

Members of the Board may be involved with charitable organizations to which they provide support in the form of personal charitable contributions. As with the Charitable Award Program, the Company has established the Directors’ Matching Fund to benefit and recognize the mutual interest of directors and the Company in supporting worthy charitable and educational institutions. Under the Directors’ Matching Fund, directors may request the Company to match dollar-for-dollar their personal charitable contributions up to $10,000 per fiscal year. All or part of the matching contributions may be allocated to one or several organizations that have been determined to be charitable organizations under Section 501(c)(3) of the Code or that are a political subdivision of the state. Matches may only be made on personal gifts that have been paid within that fiscal year, not pledged.

 

 

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Audit Function

 

AUDIT FUNCTION

Report of the Audit Committee

Composition and Qualifications

The Audit Committee of the Board is composed of five independent directors and operates under a written charter, in accordance with applicable rules of the SEC and the NYSE. The Corporate Governance Committee and the full Board considers membership for the Audit Committee annually. The current members of the Audit Committee are Lisa A. Payne, Debora A. Plunkett, Leonard H. Roberts, Javier G. Teruel and B. Craig Owens, who serves as its Chair. The Board of Directors has determined that each member is “financially literate” and that each of Ms. Payne and Messrs. Owens, Roberts and Teruel qualifies as an “audit committee financial expert,” as those terms are defined by the NYSE and the SEC.

Purpose

The purpose of the Audit Committee is to assist the Board in monitoring: (i) the Company’s accounting and financial reporting processes, including internal control over financial reporting; (ii) the Company’s compliance with legal and regulatory requirements; (iii) the independence and qualifications of the Company’s independent auditor; and (iv) the performance of the Company’s internal auditors and independent auditor.

Responsibilities

Management is responsible for maintaining adequate internal control over financial reporting. KPMG LLP is responsible for expressing opinions on the conformity of the Company’s audited consolidated financial statements with U.S. generally accepted accounting principles and on the effectiveness of the Company’s internal control over financial reporting. The Audit Committee’s responsibility is to monitor and oversee these processes. The Audit Committee is also solely responsible for the selection and termination of the Company’s independent auditor, including the approval of audit fees and non-audit services provided by and fees paid to the independent auditor.

In evaluating and selecting the Company’s independent auditor, the Audit Committee considers, among other things, historical and recent performance of the current independent auditor, an analysis of known significant legal or regulatory proceedings related to the independent auditor, external data on audit quality and performance, including Public Company Accounting Oversight Board (PCAOB) reports, industry experience, audit fee revenues, independent auditor capabilities and audit approach, and the independence and tenure of the independent auditor.

Review of Financial Information

In this context, the Audit Committee has met and held discussions with management of the Company, who represented to the Audit Committee that the Company’s audited consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles. The Audit Committee has reviewed and discussed the audited consolidated financial statements, management’s assessment of the effectiveness of the Company’s internal control over financial reporting, and KPMG LLP’s evaluation of the Company’s internal control over financial reporting with both management and the independent auditor.

 

 

 

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The Audit Committee also discussed with the independent auditor the matters required to be discussed by Auditing Standard No. 1301 (Communications with Audit Committees). The Audit Committee has received the written disclosures and the letter from the independent auditor required by applicable requirements of the PCAOB regarding the independent auditor’s communications with the Audit Committee concerning independence, and the Audit Committee discussed with the independent auditor its independence, including the extent to which the independent auditor provides non-audit services to the Company. The Audit Committee also participated in the certification process relating to the filing of certain reports pursuant to the Exchange Act.

Inclusion of Consolidated Financial Statements in Form 10-K

Based on the review and discussions referred to above, the Audit Committee recommended to the Board that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended February 3, 2018 for filing with the SEC.

Independent Auditor

The Audit Committee also recommends that the Company’s stockholders ratify KPMG LLP as the Company’s independent auditor for the 2018 fiscal year.

Audit Committee

 

B. Craig Owens, Chair    Leonard H. Roberts
Lisa A. Payne    Javier G. Teruel
Debora A. Plunkett   

Audit and Other Fees

The following table presents fees for professional services rendered by KPMG LLP:

 

     Fiscal 2016      Fiscal 2017  

Audit Fees(1)

   $ 3,266,920      $ 3,423,600  

Audit-Related Fees(2)

     184,000        90,000  

Total Audit and Audit-Related Fees

   $ 3,450,920      $ 3,513,600  

Tax Fees

     

Tax Compliance Fees(3)

   $ 8,000      $ 16,240  

Tax Planning and Advice Fees(4)

     60,000         

All Other Fees

   $      $  

Total Fees(5)

   $ 3,518,920      $ 3,529,840  

 

(1) Audit fees include fees for the audits of the Company’s annual consolidated financial statements, for professional services rendered for the audits of internal control over financial reporting, for quarterly reviews, for review of SEC filings, for statutory audits and other related matters.
(2) Audit-related fees in fiscal 2016 were for the audit of financial statements of a related entity and for financial due diligence services in connection with potential corporate transactions. Audit-related fees in fiscal 2017 were for the audit of financial statements of a related entity and for consultation regarding adoption of new financial accounting standards.
(3) Tax compliance fees consist of fees for services related to international tax matters and transfer pricing.

 

 

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Audit Function

 

(4) Tax planning and advice fees were for tax due diligence services in connection with potential corporate transactions.
(5) All fees were pre-approved by the Audit Committee.

Audit Committee’s Pre-Approval Policies and Procedures

The Audit Committee must approve any fee for services to be performed by the Company’s independent auditor in advance of the service being performed. For proposed projects using the services of the Company’s independent auditor that are expected to cost over $200,000, or 5% of the auditor’s fee for the preceding year, whichever is lower, the Audit Committee will be provided information to review and must approve each project prior to commencement of any work. For proposed projects using the services of the Company’s independent auditor that are expected to cost less than $200,000, or 5% of the auditor’s fee for the preceding year, whichever is lower, the Audit Committee will be asked to review and approve a maximum amount for certain services, which may include services in any one or more of the following categories: (a) audit fees; (b) audit-related fees; (c) tax fees; and (d) all other fees for any services allowed to be performed by the independent auditor. If additional amounts are needed, the Audit Committee must approve the increased amounts prior to the previously approved maximum being reached and before the work may continue. Approval by the Audit Committee may be made at its regularly scheduled meetings or otherwise, including by telephonic or other electronic communications. The Company will report the status of the various types of approved services and fees, and cumulative amounts paid and owed, to the Audit Committee on a periodic basis as appropriate.

 

 

 

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Proposal 2 - Ratification of Appointment of Independent Auditor

 

PROPOSAL 2 — RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR

KPMG LLP, independent certified public accountants, member of the SEC Practice Section of the AICPA Division for CPA firms, and registrant with the PCAOB, has been the auditor of the Company’s consolidated financial statements since 1916. Its appointment as the Company’s independent auditor for the fiscal year ending February 2, 2019 has been approved by the Audit Committee of the Board. The Audit Committee believes this appointment is in the best interests of the Company and its stockholders. Stockholder ratification of such appointment is requested.

It is anticipated that a representative of KPMG LLP will attend the meeting, will be available to respond to appropriate questions, and will have an opportunity to make a statement should he or she so desire.

The Board recommends a vote FOR the ratification of the appointment of KPMG LLP.

 

 

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Proposal 3 - Approval of 2018 Long-Term Incentive Plan

 

PROPOSAL 3 — APPROVAL OF 2018 LONG-TERM INCENTIVE PLAN

Introduction

The Board has adopted, subject to stockholder approval, the J. C. Penney Company, Inc. 2018 Long-Term Incentive Plan, to be effective May 25, 2018 (the 2018 Plan). The principal features of the 2018 Plan are summarized below, but such description is qualified in its entirety by reference to the full text of the 2018 Plan which is included as Annex A to this Proxy Statement. All capitalized terms not defined in this Proposal 3 will have the meanings set forth in Annex A to this Proxy Statement.

The 2018 Plan is intended to provide long-term incentives to associates and non-associate directors of the Company in order to align the interests of such associates and non-associate directors with those of the Company’s stockholders, to motivate associates to achieve business objectives promoting the long-term growth, profitability and success of the Company, and to assist the Company in retaining and attracting the best associates and non-associate directors.

The 2018 Plan will be administered by, or under the direction of, a committee of the Board constituted in such a manner as to comply at all times with Rule 16b-3 or any successor rule promulgated by the SEC under the Exchange Act, as in effect from time to time. The Board has designated the Human Resources and Compensation Committee of the Board as the plan committee (the Plan Committee).

The 2018 Plan allows for grants of stock options, stock appreciation rights (SARs) and stock awards (collectively, Equity Awards) and cash incentive awards (together with Equity Awards, collectively, Awards) to associate participants and Equity Awards to non-associate director participants. Under the 2018 Plan, Awards to associate participants may be subject to conditions such as continued employment, qualifying termination, passage of time and/or satisfaction of performance criteria as specified in the 2018 Plan or set by the Plan Committee.

The Board recommends a vote FOR the proposal to approve the 2018 Plan.

Principal Features of the 2018 Plan

General. The principal features of the 2018 Plan are:

 

    Fungible share design in which each stock option and SAR will count as one share issued and each stock award, including restricted stock and restricted stock units, will count as 1.63 shares issued;
    Reserves a total of 17,239,263 shares of common stock, or 28,100,000 options, for use under the 2018 Plan;
    Minimum one-year vesting for Equity Awards, except in certain limited situations;
    Annual limit on Equity Awards granted to each non-associate director of $500,000 based on grant date fair value;
    Performance Awards are to be tied to Performance Goals to be set by the Plan Committee;
    Independent administration of the 2018 Plan by the Plan Committee;
    Limits Incentive Stock Options (ISOs) to no more than 28,100,000 options;
    Limits performance-based cash incentive awards to any participant in any calendar year to the product of $2,000,000 and the number of years in the performance cycle of the award;
    Limits stock option and SAR awards to any one participant to no more than 4,000,000 options during any fiscal year;

 

 

 

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    Limits performance-based Equity Awards to any one participant to no more than 3,000,000 shares during any fiscal year;
    Provides that shares subject to Awards under the 2018 Plan or under prior plans that are cancelled or forfeited, or terminate, lapse or expire for any reason, or settle without delivery of the shares of common stock underlying such Award, may again be available for issuance;
    Prohibits repricing, exchange and buyout of stock options and SARs without prior stockholder approval;
    Stock option and SAR terms may not exceed 10 years from the date of grant, except in certain limited circumstances; and
    Prohibits payouts of dividend or dividend equivalents on unvested Equity Awards.

Associate Participants

General. Associate participants in the 2018 Plan are generally to be selected management employees of the Company and its subsidiaries as determined by the Plan Committee. Currently, it is anticipated that approximately 500 associates will be eligible to participate.

Stock Options. Option grants will generally be made in amounts based on an associate participant’s position, responsibilities or salary and such other factors as the Plan Committee may deem relevant. An associate participant may receive one or more option grants and may receive Non-Qualified Stock Options (NSOs) and ISOs, as determined by the Plan Committee. The Plan Committee may determine any other terms, conditions or restrictions relating to option grants as it may deem appropriate, subject to certain restrictions set forth in the 2018 Plan.

Price. The option price under each option may not be less than 100% of the fair market value of JCPenney common stock on the date of grant, which is the closing price of JCPenney common stock on the NYSE on the applicable date. The closing price of JCPenney common stock on March 26, 2018, as reported on the NYSE, was $2.95 per share. The exercise price of the shares as to which a Stock Option is exercised may be paid in cash, with shares of JCPenney common stock already owned by the associate or through withholding of shares that would otherwise be received as a result of the Stock Option exercise, except as otherwise set forth in the Award Notice or Award Agreement pertaining to the Stock Option.

Stock Awards. The Plan Committee may award shares of common stock or stock units to such associate participants and on such bases as it may determine. The Plan Committee may determine the types of awards made, the number of shares, and any other terms, conditions or restrictions relating to the awards, as it may deem appropriate.

Stock Appreciation Rights. SARs may be granted to such associate participants and on such terms and conditions as the Plan Committee may determine and may be granted independently or in tandem with related awards or options, either concurrently with or after the related award or option date. A SAR will generally entitle an associate participant to receive the number of shares of JCPenney common stock equal in value to the excess of the fair market value of each share of JCPenney common stock covered by the SAR on the date of exercise over the exercise price of the SAR, but may, at the discretion of the Plan Committee, be settled in cash.

Cash Incentive Awards. The Plan Committee may also grant cash incentive awards to such associate participants on such terms and conditions as it may determine. Cash incentive awards are annual or long-term performance-based awards expressed in U.S. dollars.

 

 

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Performance-Based Awards. Any Award granted pursuant to the 2018 Plan may be made in the form of a performance-based Award. Performance-based Awards are made based on the measurement of performance against certain Performance Goals over a Performance Period. The Plan Committee may use one or more of several business criteria for the purpose of establishing a Performance Goal, including:

Earnings Per Share;

Total Stockholder Return;

Operating Income;

Net Income;

Cash Flow;

Gross Profit;

Gross Profit Return on Investment (or Inventory);

Return on Equity;

Return on Capital;

Sales;

Revenues;

Gross Margin;

Gross Margin Return on Investment (or Inventory);

Earnings Before Interest, Taxes, Depreciation and Amortization;

Earnings Before Interest and Taxes; and

Operating Profit.

The Plan Committee may establish any special adjustments in calculating whether Performance Goals have been met including taking into consideration the effect of any event not directly related to the operations of the Company or not within the reasonable control of management. A performance-based cash incentive award may not have a Performance Period of less than one year.

Terms of Options and SARs. An option or SAR granted under the 2018 Plan will become exercisable on such terms and at such times as the Plan Committee may determine. In the event of employment termination due to death, disability, retirement or other circumstances, as deemed appropriate by the Plan Committee, the 2018 Plan authorizes post-termination exercise periods, but not beyond the options’ or SARs’ original expiration date. In no event may an ISO be exercised more than 10 years after its grant date. Generally, an NSO and a SAR may not be exercised more than 10 years after its grant date, or such shorter time period as determined by the Plan Committee.

Transferability. No unearned Stock Award or vested or unvested Stock Option, or any portion thereof, may be assigned or transferred except by will or the laws of descent or distribution, or by such other means as the Plan Committee, in its discretion, may approve. No Stock Option or SAR shall be exercisable during the associate participant’s lifetime except by the associate participant or the associate participant’s guardian or legal representative, or other third party, as the Plan Committee may determine.

Deferral. Unless specifically provided for in the Award Notice or Award Agreement or unless the Plan Committee otherwise determines, no Equity Award shall provide any feature for the deferral of compensation as defined by Treasury Regulation section 1.409A-1(b). Any deferral will be for such period and in accordance with the terms and conditions as the Plan Committee may determine and must be in compliance with Section 409A of the Internal Revenue Code, as in effect from time to time (the Code). The terms and conditions applicable to such deferral and the terms and conditions evidencing compliance with Code Section 409A shall be set forth in the Award Notice or Award Agreement or the Plan Committee’s determinations. The method of payment for, and type and

 

 

 

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character of, any Award may not be altered by any deferral unless specifically permitted under Code Section 409A and the Treasury Regulations thereunder.

Term of Plan. The 2018 Plan will terminate on May 31, 2023. After this date, no Awards may be made under the 2018 Plan.

Change in Control. Upon an involuntary termination of an associate participant’s employment within two years following a Change in Control, the associate participant shall have the right to exercise any and all Stock Options and SARs held by such associate participant, and all Stock Awards held by such associate participant shall immediately vest, be deemed to have been earned, and any Performance Goal for the then applicable Performance Period met, on such terms and conditions as may be determined by the Plan Committee at the time of the grant or award. The Plan Committee has the discretion on a Change in Control to terminate the 2018 Plan and distribute amounts that were vested as of the effective date of the Change in Control within 12 months of the Change in Control event.

Federal Income Tax Consequences

The following discussion summarizes the United States federal income tax consequences under current federal tax law generally arising with respect to awards granted under the 2018 Plan. This summary is not intended to be exhaustive and the exact tax consequences to any participant will depend on various factors and the participant’s particular circumstances. This summary is based on present laws, regulations and interpretations and is not a complete description of federal tax consequences. This summary of federal tax consequences may change in the event of a change in the Code or regulations thereunder or interpretations thereof. We urge participants in the 2018 Plan to consult their tax advisors with respect to any state, local and foreign tax considerations or particular federal tax implications of awards made under the 2018 Plan prior to taking action with respect to an award. The 2018 Plan is not intended to be a “qualified plan” under Section 401(a) of the Code.

Non-Qualified Stock Options. An associate participant will not be subject to tax at the time an NSO is granted, and no tax deduction is then available to the Company. On the exercise of an NSO, the associate participant will realize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the shares acquired on the date of exercise. The Company will generally be entitled to deduct an amount equal to the ordinary income realized by the associate participant in the Company’s tax year in which the associate participant realizes the ordinary income. On disposition of shares acquired on exercise, appreciation or depreciation after the date of exercise will generally be treated by the associate participant as a capital gain or loss, as applicable.

Incentive Stock Options. An associate participant will not be subject to regular income tax at the time an ISO is granted or exercised, and no tax deduction is then available to the Company; however, the associate participant may be subject to the alternative minimum tax (AMT) on the excess of the fair market value of the shares received on exercise of the ISO (the ISO Shares) over the exercise price. On disposition of ISO Shares, the associate participant will generally recognize capital gain or loss in an amount equal to the difference between the exercise price and the sale price, as long as the participant has not disposed of the shares within two years after the date of grant or within one year after the date of exercise (a disqualifying disposition) and has been employed by the Company or a subsidiary at all times from the grant date until the date three months before the date of exercise (one year in the case of disability).

If the associate participant disposes of ISO Shares in a disqualifying disposition, the participant will recognize ordinary income equal to the excess of the fair market value of the ISO Shares on the date the ISO is exercised over the exercise price with any remaining gain or loss being treated as capital

 

 

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gain or loss, respectively. The Company is not entitled to a tax deduction on either the exercise of an ISO or on the disposition of ISO Shares, except to the extent that the participant recognizes ordinary income on disposition of the shares. If in the event an option intended to be an ISO fails to qualify as an ISO, for example if the associate participant does not satisfy both the employment requirements in connection with the exercise of the ISO and the holding period requirement, the ISO will be taxed as an NSO as described above.

Payment of the Exercise Price with Stock. If an associate participant surrenders common stock that the associate participant already owns as payment for the exercise price of a stock option, the associate participant will not recognize gain or loss as a result of the surrender, except under certain circumstances related to the surrender of ISO Shares for which the holding period requirement has not been satisfied. A number of shares received on exercise of the option equal to the number of shares surrendered will have a tax basis equal to the tax basis of the surrendered shares. The holding period for those shares will include the holding period for the shares surrendered. The remaining shares received will have a basis equal to the amount includible in the associate participant’s taxable income on receipt of such shares. The associate participant’s holding period for the remaining shares will commence on the date of exercise.

Stock Awards. An associate participant will be taxed on the fair market value of the shares of common stock in the taxable year in which the grant occurs, unless the underlying shares are substantially nonvested (i.e. both nontransferable and subject to a substantial risk of forfeiture). An associate participant who wishes to recognize income with respect to substantially non-vested shares in the taxable year in which the grant occurs may, however, do so by making a special election, a so-called Section 83(b) Election, to pay tax in the year the grant is made.

An associate participant who is subject to Section 16(b) of the Exchange Act who receives stock will recognize ordinary income equal to the fair market value of the shares of stock received at the later of (i) the applicable date, or (ii) the earlier of: (a) the date on which the shares are transferable, or (b) the date on which the restrictions lapse, unless the associate participant makes a Section 83(b) Election to report the fair market value of such shares received as ordinary income in the taxable year of receipt. The Company may deduct an amount equal to the income recognized by the associate participant, provided that the associate participant is a covered employee under Section 162(m) of the Code and the associate participant’s compensation is within the statutory limitations of Section 162(m) of the Code.

On the sale or disposition of shares of stock, an associate participant will recognize taxable income equal to the difference between the amount realized by the associate participant on the disposition of the stock and the associate participant’s basis in the stock. The basis of the restricted shares will be equal to the fair market value of the shares of stock on the date the associate participant recognizes ordinary income as described above. The gain or loss will be taxable to the associate participant as a capital gain or deductible by the associate participant as a capital loss (either short-term or long-term, depending on the holding period of the stock), provided that the associate participant held the stock as a capital asset.

Restricted Stock Unit Awards. An associate participant will not be subject to tax at the time a restricted stock unit is granted, and no tax deduction is then available to the Company. On vesting of the restricted stock unit, an associate participant will generally realize ordinary income equal to the value of the shares of common stock or cash received. The basis of any shares delivered in payment for restricted stock units will be equal to the fair market value of the shares on the date the associate participant recognizes ordinary income as described above. The Company will deduct an amount equal

 

 

 

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to the income recognized by the associate participant, provided that the associate participant is a covered employee under Section 162(m) of the Code and the associate participant’s compensation is within the statutory limitations of Section 162(m) of the Code.

Stock Appreciation Rights and Other Stock-Based Awards. An associate participant will not be subject to tax at the time a SAR is granted, and no tax deduction is then available to the Company. On exercise of a SAR, the associate participant will generally realize ordinary income equal to the value of the shares of common stock or cash received. The Company will deduct an amount equal to the income recognized by the associate participant, provided that the associate participant is a covered employee under Section 162(m) of the Code and the associate participant’s compensation is within the statutory limitations of Section 162(m) of the Code.

Section 162(m) of the Code

Section 162(m) of the Code generally disallows a public company’s tax deduction for compensation paid to its covered employees as defined in Section 162(m) of the Code to the extent such compensation exceeds $1,000,000 in any tax year. While the Company understands that Awards will generally be subject to the deduction limitations of Section 162(m), the Company reserves the right to make grants that are not tax deductible, and the Company’s tax deductions for those grants may be limited or eliminated as a result of the application of Section 162(m).

Section 409A of the Code

For associate participants who are “key employees,” as defined in Section 409A of the Code and regulations promulgated under that Section, distributions of certain deferral amounts may occur no earlier than six months following the key employee’s separation from service from the Company. It is the intent of the Company that no Awards under the 2018 Plan be subject to Section 409A of the Code unless and to the extent that the Plan Committee specifically determines otherwise.

The terms and conditions of any Award that the Plan Committee determines will be subject to Section 409A will be set forth in the applicable Award Notice or Award Agreement and will be designed to comply in all respects with Section 409A. If the Award fails to comply with the applicable requirements of Section 409A, the deferred compensation for the year in which the failure to comply with Section 409A occurs and for all preceding taxable years under the Award and any other plan or arrangement required to be aggregated with the Award may be includible in the participant’s gross income for the taxable year in which the failure occurs, to the extent such amounts are not subject to a substantial risk of forfeiture and have not previously been included in the participant’s gross income. The amounts so included are also subject to an additional income tax equal to twenty percent of the amount required to be included in gross income and to interest equal to the underpayment rate specified by the IRS plus one percentage point, on the underpayments of income tax that are deemed to have occurred because the compensation was not included in income for the taxable year when it was first deferred, or if later, when the compensation was no longer subject to a substantial risk of forfeiture.

Non-Associate Director Participants

General. Each director who is presently not an employee of the Company (Non-Associate Director) will generally be awarded an annual Equity Award in an amount which the Board determines and pursuant to such terms, conditions and restrictions as determined by the Board. Annual Equity Awards granted to each Non-Associate Director may not exceed $500,000 based on grant date fair value.

 

 

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Proposal 3 - Approval of 2018 Long-Term Incentive Plan

 

Currently, there are ten Non-Associate Directors eligible to participate in the 2018 Plan. An initial grant will also automatically be granted to each new Non-Associate Director participant on his or her first being elected as a director in a pro rata amount of the annual Equity Award for that year, based on the date of election.

Non-Transferability. A Non-Associate Director participant may not transfer, sell, assign, pledge or otherwise encumber or dispose of any shares of common stock received in connection with an annual Equity Award while serving as a director, except for a sale only in limited circumstances where necessary for the Non-Associate Director to pay any federal, state or local income taxes arising in connection with the Award.

Federal Income Tax Consequences. The federal income tax implications for Non-Associate Director participants are substantially similar to those for associate participants, except that Non-Associate Director participants may not receive ISOs or cash incentive awards. Any election to defer compensation and any election to defer distributions will be made in compliance with Section 409A of the Code, if applicable.

Miscellaneous

The Board may amend the 2018 Plan from time to time as it deems advisable and may terminate the 2018 Plan at any time. Amendments to increase the total number of shares of the common stock reserved under the 2018 Plan or that otherwise constitute material changes to the 2018 Plan under applicable tax or securities laws or the listing standards of the NYSE require stockholder approval. Except as otherwise provided in or permitted by the 2018 Plan or by the terms, if any, of an Award under the 2018 Plan, no termination or amendment of the 2018 Plan or change in the terms of an outstanding Award may adversely affect the rights of the holder of any Award without the consent of the holder. If the 2018 Plan is approved by stockholders, no further awards will be granted under any prior plan after the effective date of the 2018 Plan.

 

 

 

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Equity Compensation Plan(s) Information

 

EQUITY COMPENSATION PLAN(S) INFORMATION

The following table shows the number of options and other awards outstanding as of February 3, 2018 under the 2016 Plan and other outstanding equity compensation plans, as well as the number of shares remaining available for grant under the 2016 Plan.

 

Plan Category

   Number of
securities to
be issued
upon exercise
of outstanding
options,
warrants  and
rights
(a)
    Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
(b)
    Number of
securities
remaining
available for
future
issuance
under  equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
 

Equity compensation plans approved by security holders

     23,345,067 (1)    $ 13.60 (2)      12,749,199 (3) 

Equity compensation plans not approved by security holders

     88,837 (4)    $ 8.35 (5)       
  

 

 

   

 

 

   

 

 

 

Total

     23,433,904     $ 13.57 (6)      12,749,199  
  

 

 

   

 

 

   

 

 

 

 

(1) Includes 9,148,405 restricted stock units.
(2) Represents the weighted average exercise price of outstanding stock options only. The weighted average remaining term is 5.5 years.
(3) At the May 20, 2016 Annual Meeting of Stockholders, our stockholders approved the 2016 Plan, which has a fungible share design in which each stock option will count as one share issued and each stock award will count as 1.6 shares issued. The 2016 Plan reserved 12,250,000 shares or 19,600,000 options for issuance to associates and non-employee directors. In addition, shares underlying any outstanding stock award or stock option grant from prior plans that are canceled prior to vesting or exercise become available for use under the 2016 plan. No shares remain available for future issuance from prior plans.
(4) On June 11, 2015, the Company made an inducement equity award of 78,358 stock options and 31,437 restricted stock units to our Chief Accounting Officer, Andrew S. Drexler, which vested one-third on June 11, 2016 and June 11, 2017 and will vest one-third on June 11, 2018.
(5) Represents the weighted average exercise price of outstanding stock options only. The weighted average remaining term is 7.4 years.
(6) Represents the weighted average exercise price of outstanding stock options only. The weighted average remaining term is 5.5 years.

On March 7, 2018, the Company made an annual grant of restricted stock unit awards covering 5,020,194 shares of common stock under the 2016 Plan.

 

 

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Proposal 4 - Advisory Vote on Compensation of our Named Executive Officers

 

PROPOSAL 4 — ADVISORY VOTE ON COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS

The Human Resources and Compensation Committee of the Board is responsible for establishing and implementing our executive compensation program. The Human Resources and Compensation Committee determines compensation for each named executive officer other than the CEO. The compensation of the CEO is determined by all of the independent directors of the Board, taking into account the Human Resources and Compensation Committee’s recommendations. Our executive compensation program is designed to link pay to Company performance and align the pay of our named executive officers with the interests of our stockholders. Stockholders are encouraged to read the “Compensation Discussion and Analysis” section for a more detailed discussion of how the Company’s compensation program reflects our overall philosophy and objectives.

As required by Section 14A of the Exchange Act and pursuant to the Dodd-Frank Act, we are asking stockholders to vote on the following resolution:

RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation of the named executive officers described in this Proxy Statement in the Compensation Discussion and Analysis section and the tabular disclosure regarding named executive officer compensation together with the accompanying narrative disclosure, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission.

As an advisory vote, this proposal is non-binding. Although the vote is non-binding, the Board values the opinions of the Company’s stockholders and will take into account the outcome of the vote when considering future compensation decisions. At the 2017 Annual Meeting of Stockholders, the Board recommended, and the stockholders approved, holding an annual vote on the compensation of our named executive officers.

The Board recommends a vote FOR the approval of the compensation of the named executive officers.

 

 

 

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About the Annual Meeting

 

ABOUT THE ANNUAL MEETING

Who is soliciting my vote?

JCPenney’s Board is soliciting your vote at the 2018 Annual Meeting of Stockholders.

What will I be voting on?

You will be voting on:

 

    Election of eleven directors nominated by the Board;
    Ratification of the appointment of KPMG LLP as JCPenney’s independent auditor for the fiscal year ending February 2, 2019;
    Approval of the J. C. Penney Company, Inc. 2018 Long-Term Incentive Plan;
    Advisory vote on executive compensation; and
    Any other business that may properly come before the meeting.

What are the Board of Directors’ voting recommendations?

The Board recommends that you vote your shares “For” each of the Board’s nominees for director, “For” the ratification of the appointment of KPMG LLP as independent auditor for the fiscal year ending February 2, 2019, “For” the approval of the J. C. Penney Company, Inc. 2018 Long-Term Incentive Plan and “For” the approval of our executive compensation in connection with the advisory vote on executive compensation.

Who is entitled to vote?

All stockholders who owned JCPenney common stock at the close of business on the record date, March 26, 2018, are entitled to attend and vote at the Annual Meeting.

How many votes do I have?

You will have one vote for every share of JCPenney common stock you owned on the record date.

How many votes can be cast by all stockholders?

Each share of JCPenney common stock is entitled to one vote. There is no cumulative voting. On March 26, 2018, JCPenney had 313,751,874 shares of common stock outstanding and entitled to vote.

How many shares must be present to hold the Annual Meeting?

A majority of the outstanding shares of JCPenney common stock as of the record date, or 156,875,938 shares, must be present at the Annual Meeting in order to hold the meeting and conduct business. This is called a quorum.

Shares are counted as present at the Annual Meeting if stockholders are present and vote in person or a proxy card has been properly submitted by or on behalf of a stockholder. Abstentions and broker non-votes are counted for purposes of determining the presence of a quorum.

 

 

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About the Annual Meeting

 

How many votes are required to elect directors and adopt the other proposals?

You may vote “For” or “Against” with respect to the election of directors. Our Bylaws provide that in a non-contested election, each director must be elected by the affirmative vote of the majority of the votes cast with respect to that director’s election. Accordingly, abstentions and broker non-votes will have no effect on the election of a director. Any director nominee who is an incumbent director and is not re-elected must promptly tender his or her resignation, and the Board, excluding the director who tenders his or her resignation, must promptly decide whether to accept or reject the resignation.

Ratification of the appointment of KPMG LLP as JCPenney’s independent auditor requires the affirmative vote of a majority of the shares of JCPenney common stock present in person or by proxy that are entitled to vote on such matter. If you abstain from voting on this matter, your shares will be counted as present for purposes of establishing a quorum, and the abstention will have the same effect as a vote against the proposal. Broker non-votes will also have the same effect as a vote against the proposal.

Approval of the J. C. Penney Company, Inc. 2018 Long-Term Incentive Plan and approval of our executive compensation in connection with the advisory vote on executive compensation requires the affirmative vote of a majority of the shares of JCPenney common stock present in person or by proxy that are entitled to vote on each such matter. If you abstain from voting on either of these matters, your shares will be counted as present for purposes of establishing a quorum, and the abstention will have the same effect as a vote against the particular proposal. Broker non-votes are not entitled to be cast for these matters and accordingly will have no effect on the approval of these matters.

Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materials instead of a full set of proxy materials?

In accordance with rules adopted by the SEC, rather than mailing a printed copy of our proxy materials to each stockholder of record, we may send some or all of our stockholders a Notice of Internet Availability of Proxy Materials (the Notice), which indicates how our stockholders may:

 

    access their proxy materials and vote their proxies over the Internet;
    make a one-time request to receive a printed set of proxy materials by mail; or
    make a permanent election to receive all of their proxy materials in printed form by mail or electronically by email.

How can I get electronic access to the proxy materials?

The Notice provides you with instructions regarding how to:

 

    view our proxy materials for the Annual Meeting over the Internet; and
    instruct us to send our future proxy materials to you electronically by email instead of sending you printed copies by mail.

Choosing to receive your future proxy materials by email will save us the cost of printing and mailing documents to you and will reduce the impact of our annual meetings of stockholders on the environment. If you choose to receive future proxy materials by email, you will receive an email next year with instructions containing a link to those materials and a link to the proxy voting site. Your election to receive proxy materials by email will remain in effect until you terminate it. Our Annual Report on Form 10-K accompanies these proxy materials but is not considered part of the proxy soliciting materials.

 

 

 

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About the Annual Meeting

 

How do I vote?

You can vote either in person at the Annual Meeting or by proxy whether or not you attend the Annual Meeting. To obtain directions to attend the Annual Meeting and vote in person, please call 972-431-1000. You can vote by proxy in three ways:

 

    by mail – If you received your proxy materials by mail, you can vote by mail by using the enclosed proxy card;
    by telephone – In the United States and Canada, you can vote by telephone by following the instructions on the Internet or on your proxy card if you received your materials by mail; or
    by Internet – You can vote by Internet by following the instructions on the Notice or on your proxy card if you received your materials by mail.

If you vote by proxy, your shares will be voted at the Annual Meeting in the manner you indicate. If you sign your proxy card, but do not specify how you want your shares to be voted, they will be voted as the Board recommends.

How do I attend the Annual Meeting?

Admission to the Annual Meeting is limited to JCPenney stockholders or their proxy holders. Each stockholder will be asked to present proof of stock ownership and a valid, government-issued photo identification, such as a driver’s license, before being admitted to the Annual Meeting. Proof of stock ownership may consist of the top portion of the proxy card or if shares are held in the name of a broker, bank or other nominee, an account statement or letter from the nominee indicating that the individual beneficially owned shares of JCPenney common stock on March 26, 2018, the record date for the Annual Meeting.

Can I change my vote after I execute my proxy?

You can revoke a proxy at any time prior to its exercise at the Annual Meeting. You can send in a new proxy card with a later date if you received your proxy materials by mail, or cast a new vote by telephone or Internet, or send a written notice of revocation to JCPenney’s Corporate Secretary at the address on the first page of this Proxy Statement. If you attend the Annual Meeting and want to vote in person, you can request that any previously submitted proxy not be used.

How do I vote my shares of JCPenney common stock in the 401(k) Savings Plans?

If you are a participant in the J. C. Penney Corporation, Inc. Savings, Profit-Sharing and Stock Ownership Plan (the Traditional Plan) or the J. C. Penney Corporation, Inc. Safe Harbor 401(k) Savings Plan (the Safe Harbor Plan), you will receive a separate voting instruction card for the shares allocated to your account in the Traditional Plan or the Safe Harbor Plan. This voting instruction card will allow you to instruct State Street Bank and Trust Company, as trustee for the Traditional Plan and the Safe Harbor Plan, how to vote your shares. If you do not vote your shares in the Traditional Plan or the Safe Harbor Plan, State Street Bank and Trust Company will vote them in the same proportion as those shares for which it has received voting instructions.

 

 

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About the Annual Meeting

 

Will my vote be kept confidential?

Yes. JCPenney’s policy is that all proxy or voting instruction cards, ballots and vote tabulations which identify the vote of an individual stockholder are to be kept secret. Your vote will only be disclosed:

 

    to allow the independent election inspectors to certify the results of the vote;
    if JCPenney is legally required to disclose your vote or is defending or asserting claims in a lawsuit;
    if there is a proxy contest involving JCPenney; or
    if you make a written comment on your proxy or voting instruction card or ballot.

Who pays for this proxy solicitation?

JCPenney does. In addition to soliciting proxies by mail, JCPenney may solicit proxies by telephone, personal contact and electronic means. No director, officer or employee of JCPenney will be specially compensated for these activities. JCPenney has hired Morrow Sodali LLC, a proxy solicitation firm, to assist in soliciting proxies for an estimated fee of $12,000 plus reimbursement for reasonable expenses.

JCPenney will also reimburse brokers, fiduciaries and custodians for their costs in forwarding proxy materials to beneficial owners of JCPenney common stock.

Could other matters be decided at the Annual Meeting?

We do not know of any other matters that will be considered at the Annual Meeting. If any matter other than those described in this Proxy Statement arises at the Annual Meeting, the proxies will be voted at the discretion of the proxy holder.

 

 

 

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Other Business Matters

 

OTHER BUSINESS MATTERS

Stockholder Proxy Proposal Inclusion Deadline

Under the rules of the SEC, the date by which proposals of stockholders intended to be presented at the 2019 Annual Meeting of Stockholders (other than proxy access director nominations) must be received by the Company for inclusion in its proxy statement and form of proxy relating to that meeting is December 10, 2018.

Deadline for Proxy Access Director Nominations

Under the Company’s Bylaws, notice of a proxy access director nomination for the 2019 Annual Meeting of Stockholders must be received by the Company for inclusion in its proxy statement and form of proxy relating to that meeting no earlier than November 11, 2018 and no later than December 11, 2018.

Stockholder Business — Annual Meeting

Stockholders who wish to introduce an item of business at an annual meeting of stockholders may do so in accordance with JCPenney’s Bylaw procedures. These procedures provide, generally, that stockholders desiring to bring a proper subject of business before the meeting, must do so by a written notice timely received (not later than 90 days in advance of such meeting) by the Corporate Secretary of the Company. Any notice of intent to introduce an item of business at an annual meeting of stockholders must contain the name and address of the stockholder, a representation that the stockholder is a holder of record of JCPenney stock entitled to vote at the meeting and that the stockholder intends to appear in person or by proxy at the meeting. Notice of an item of business shall include a brief description of the proposed business and the reasons for conducting such business at the meeting as well as any material interest of the stockholder in such business.

The chair of the annual meeting may refuse to allow the transaction of any business not presented in compliance with the foregoing procedures.

Timing

It is currently expected that the 2019 Annual Meeting of Stockholders will be held on or about May 24, 2019, in which event any advance notice of nominations for directors and items of business (other than proposals intended to be included in the proxy statement and form of proxy, including proxy access director nominations) must be given by stockholders and received by the Secretary of the Company by February 23, 2019. The Company does, however, retain the right to change the date of the 2019 Annual Meeting of Stockholders as it, in its sole discretion, may determine. Notice of any change will be furnished to stockholders prior to the expiration of the 90-day advance notice period referred to above. Copies of the Company’s Bylaws are available on our website at www.jcpenney.com or you may request a copy from the Corporate Secretary of the Company.

 

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Annex A - 2018 Long-Term Incentive Plan

 

ANNEX A

2018 J. C. PENNEY COMPANY, INC.

LONG-TERM INCENTIVE PLAN

ARTICLE I

PURPOSE OF PLAN

The purpose of this 2018 Long-Term Incentive Plan is to provide long-term incentives to associates and non-associate directors of J. C. Penney Company, Inc., its subsidiaries and affiliates, or any unit thereof, in order to align the interests of such associates and non-associate directors with those of the Company’s stockholders, to motivate associates to achieve business objectives promoting the long-term growth, profitability and success of the Company, and to assist the Company in retaining and attracting the best associates and non-associate directors in retail.

ARTICLE II

DEFINITIONS

“Associate” means any person who is employed, within the meaning of section 3401 of the Code, by the Company or a Subsidiary.

“Award” means an Equity Award or a Cash Incentive Award.

“Award Notice” means the notice of an Award to a Participant in such form and delivered by such means as the Committee or its designee may establish from time to time that sets out the terms of the grant of the Award, including any amendment thereto. Each Award Notice will be subject to the terms of the Plan.

“Beneficiary” means the beneficiary designated by a Participant, in a manner authorized by the Committee or its designee, to exercise the rights of the Participant in the event of the Participant’s death. In the absence of an effective designation by a Participant, the Beneficiary will be the Participant’s estate.

“Board” means the Board of Directors of the Company.

“Cash Incentive Awards” shall mean annual or long-term Performance Awards issued pursuant to the requirements of Article VIII that are expressed in U. S. currency.

“Cause” means (i) “cause,” or “summary dismissal” as the case may be, as that term may be defined in any written agreement between a Participant and the Company or a Subsidiary that may at any time be in effect, (ii) in the absence of a definition in a then-effective agreement between a Participant and the Company or a Subsidiary (as determined by the Committee), “cause” as that term may be defined in any Award Notice under the Plan, or (iii) in the absence of a definition in a then-effective agreement between a Participant and the Company or a Subsidiary (as determined by the Committee), or any Award Notice under the Plan, termination of a Participant’s employment with the Company or a Subsidiary on the occurrence of one or more of the following events:

 

  (a) The Participant’s failure to substantially perform such Participant’s duties with the Company or any Subsidiary as determined by the Board or the Company;

 

 

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Annex A - 2018 Long-Term Incentive Plan

 

 

  (b) The Participant’s willful failure or refusal to perform specific directives of the Board, the Company, or any Subsidiary, which directives are consistent with the scope and nature of the Participant’s duties and responsibilities;

 

  (c) The Participant’s conviction of a felony; or

 

  (d) A breach of the Participant’s fiduciary duty to the Company or any Subsidiary or any act or omission of the Participant that (A) constitutes a violation of the Company’s Statement of Business ethics, (B) results in the assessment of a criminal penalty against the Company, (C) is otherwise in violation of any federal, state, local or foreign law or regulation (other than traffic violations and other similar misdemeanors), (D) adversely affects or could reasonably be expected to adversely affect the business reputation of the Company, or (E) otherwise constitutes willful misconduct, gross negligence, or any act of dishonesty or disloyalty.

“Code” means the Internal Revenue Code of 1986, as amended, and rules and regulations thereunder, as now in force or as hereafter amended.

“Committee” means a committee appointed by the Board in accordance with the by-laws of the Company and the Charter for the Human Resources and Compensation Committee of the Board, or any committee of the Board that replaces the Human Resources and Compensation Committee. The Committee will consist of at least three Directors who (i) satisfy any applicable standards of independence under the federal securities and tax laws and the listing standards of the New York Stock Exchange (“NYSE”) or any other national securities exchange on which the Common Stock is listed as in effect from time, and (ii) qualify as “non-employee directors” within the meaning of Rule 16b-3. If at any time no Committee will be in office, then the functions of the Committee specified in the Plan will be exercised by the members of the Board that otherwise satisfy the requirements to be a member of the Committee.

“Common Stock” means common stock, $0.50 par value per share, of the Company, or any security issued in substitution, exchange or in lieu therefore.

“Company” means J. C. Penney Company, Inc., a Delaware corporation, and any successor thereof.

“Corporation” means J. C. Penney Corporation, Inc., a Delaware corporation, and any successor thereof.

“Date of Grant” means the “date of grant” specified in the Award Notice with respect to an Equity Award, which will be a date not prior to the date on which the Committee takes all actions necessary to grant the Equity Award.

“Director” means a member of the Board.

“Disability” means for any Award subject to section 409A of the Code, “Disability” as defined in section 409A(a)(2)(C) of the Code. For any Award not subject to section 409A of the Code, “Disability” means disability as defined in any then effective long-term disability plan maintained by the Company that covers such person, or if such a plan does not exist at any relevant time, “Disability” means the permanent and total disability of a person within the meaning of section 22(e)(3) of the Code. For purposes of determining the time during which an Incentive Stock Option may be exercised under the terms of an Award Notice, “Disability” means the permanent and total disability of a person within the meaning of section 22(e)(3) of the Code. Section 22(e)(3) of the Code provides that an individual is totally and permanently disabled if he is unable to engage in any substantial gainful activity by reason

 

 

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Annex A - 2018 Long-Term Incentive Plan

 

of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months.

“Employment” means that the provision of services to the Company or a Subsidiary in any capacity as an Associate is not interrupted or terminated. Except as otherwise provided in a particular Award Notice, service will not be considered interrupted or terminated for this purpose in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Subsidiary, or any successor, in any capacity as Associate, or (iii) any change in status as long as the individual remains in the service of the Company or any Subsidiary in any capacity as Associate. An approved leave of absence will include sick leave, military leave, or any other authorized personal leave. For purposes of each Incentive Stock Option, if any leave exceeds ninety (90) days, and re-employment upon expiration of such leave is not guaranteed by statute or contract, then the Incentive Stock Option will be treated as a Non-Qualified Stock Option on the day that is three (3) months and one (1) day following the expiration of such ninety (90) day period.

“Equity Award” means a Stock Option, Stock Appreciation Right, or Stock Award.

“Exchange Act” means the Securities Exchange Act of 1934, as amended and in effect from time to time, and the regulations promulgated thereunder. Reference in the Plan to any section of the Exchange Act will be deemed to include any amendments or successor provisions to such section and any rules and regulations relating to such section.

“Fair Market Value” means, as of any date, the closing price on such date as reported in the composite transaction table covering transactions of NYSE listed securities, or if such Exchange is closed, or if the Common Stock does not trade on such date, the closing price reported in the composite transaction table on the last trading date immediately preceding such date, or such other amount as the Committee may ascertain reasonably to represent such fair market value; provided, however, that such determination will be in accordance with the requirements of Treasury Regulation section 1.409A-1(b)(5)(iv), or its successor.

“Incentive Stock Option” means a Stock Option that satisfies the requirements of section 422 of the Code.

“Non-Associate Director” means a member of the Board who is not an Associate.

“Non-Qualified Stock Option” means a Stock Option that is not intended to qualify as an Incentive Stock Option (including, without limitation, any Stock Option to purchase Common Stock originally designated as or intended to qualify as an Incentive Stock Option but which does not (for whatever reason) qualify as an Incentive Stock Option).

“Participant” means an Associate or a Director who has been granted and holds an Award.

“Performance Award” means an Award granted under this Plan of Common Stock, rights based upon, payable in or otherwise related to shares of Common Stock (including Restricted Stock), Restricted Stock Units or cash, as the Committee may determine, at the end of a specified Performance Period based on the attainment of one or more Performance Goals.

 

 

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“Performance Measure” means any of the following business criteria that may be used by the Company in establishing a Performance Goal:

 

  (a) Earnings Per Share;

 

  (b) Total Stockholder Return;

 

  (c) Operating Income;

 

  (d) Net Income;

 

  (e) Cash Flow;

 

  (f) Gross Profit;

 

  (g) Gross Profit Return on Investment;

 

  (h) Return on Equity;

 

  (i) Return on Capital;

 

  (j) Sales;

 

  (k) Revenues;

 

  (l) Gross Margin;

 

  (m) Gross Margin Return on Investment (or Inventory);

 

  (n) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA);

 

  (o) Earnings Before Interest and Taxes (EBIT); or

 

  (p) Operating Profit.

“Performance Goal” means any goal established by the Committee or its designee that must be satisfied before a Performance Award will be payable, in whole or in part, to a recipient of the Award.

“Performance Period” means with respect to a Performance Award the period established by the Committee or its designee at the time the Award is granted, or at any time thereafter, during which the performance of the Company, a Subsidiary, or any Associate Participant is measured for the purpose of determining whether and to what extent the Performance Award’s Performance Goal has been achieved.

“Plan” means this 2018 Long-Term Incentive Plan as it may be amended from time to time.

“Prior Plan” means any equity compensation or long-term incentive compensation plan or program previously established and maintained by the Company.

“Restricted Stock” means any shares of Common Stock granted as an Equity Award that is subject to restrictions or a substantial risk of forfeiture.

“Restricted Stock Unit” means an Equity Award that represents an unsecured promise by the Company to issue a share of Common Stock, or, at the discretion of the Committee or is designee, cash equal to the value of a share of Common Stock, subject to restrictions or a substantial risk of forfeiture.

“Retirement” means, unless otherwise provided in a particular Award Notice or specified in Determinations adopted by the Committee, an Associate’s termination of Employment with the

 

 

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Annex A - 2018 Long-Term Incentive Plan

 

Company or any of its Subsidiaries other than for Cause on or after the date the employee attains age 55 with at least 15 years of service, or on or after the employee attains age 60 with at least 10 years of service.

“Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor rule promulgated by the SEC under the Exchange Act.

“SEC” means the Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended and in effect from time to time, and the regulations promulgated thereunder. Reference in the Plan to any section of the Securities Act will be deemed to include any amendments or successor provisions to such section and any rules and regulations relating to such section.

“Separation Pay Plan” means the J. C. Penney Corporation, Inc. Separation Pay Plan, as such plan may be amended from time to time, and any successor plan or program that replaces the plan.

“Stock Appreciation Right” means a right to receive, on exercise of that right, an amount, in shares of Common Stock, or, at the discretion of the Committee or is designee, cash equal to the value of such shares of Common Stock, equal to the difference between the Fair Market Value of a share of Common Stock as of the date of exercise of the Stock Appreciation Right and the Fair Market Value of a share of Common Stock as determined under Section 6.3(a).

“Stock Award” means an award of shares of Common Stock, Restricted Stock, or a Restricted Stock Unit.

“Stock Option” means a right to purchase from the Company at any time not more than ten years following the Date of Grant, one share of Common Stock for an exercise price not less than the Fair Market Value of a share of Common Stock on the Date of Grant, subject to such terms and conditions established under Section 6.1 hereof. Stock Options may either be Incentive Stock Options or Non-Qualified Stock Options.

“Subsidiary” means any corporation or other entity (other than the Company) in an unbroken chain of corporations or entities beginning with the Company, in which each of the corporations or entities other than the last corporation or other entity in the unbroken chain owns stock or other voting securities constituting fifty percent or more of the total combined voting power in one of the other corporations or entities in such chain as determined at the point in time when reference is made to such Subsidiary in this Plan.

“Trading Date” means a day on which the Company’s Common Stock trades on the NYSE.

ARTICLE III

SHARES SUBJECT TO THE PLAN

3.1 Shares Available for Awards. Subject to the provisions of this Article 3.1, and adjustment as provided in Section 12.7, the maximum number of shares of Common Stock available for Awards under the Plan is 28,100,000 shares of Common Stock, less 1 share of Common Stock for every one (1) share that was subject to an option or stock appreciation right granted after February 3, 2018 and prior to the effective date of the Plan under any Prior Plan, and 1.6 shares of Common Stock for every

 

 

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1 share that was subject to an award other than an option or stock appreciation right granted after February 3, 2018 and prior to the effective date of the Plan under any Prior Plan. The aggregate number of shares of Common Stock available for Awards under the Plan will be reduced by 1 share of Common Stock for each share subject to a Stock Option or a Stock Appreciation Right and 1.63 shares of Common Stock for each share subject to a Stock Award. The shares of Common Stock available for delivery under this Plan may consist of Common Stock held in treasury, authorized but unissued shares of Common Stock, or shares of Common Stock purchased or held by the Company or a Subsidiary for purposes of the Plan, or shares available from the Prior Plan, or any combination thereof. After the effective date of the Plan, no other awards may be granted under any Prior Plan.

3.2 Shares Again Available. If (i) any shares of Common Stock subject to an Award are forfeited or cancelled, or any such Award terminates, lapses, or expires, is settled without full delivery of the shares of Common Stock underlying the Award, or (ii) after February 3, 2018, any shares of Common Stock subject to an award under any Prior Plan are forfeited or cancelled, or any such award terminates, lapses, or expires, is settled without full delivery of the shares of Common Stock underlying the award, then in each such case the shares of Common Stock subject to such Award or award under any Prior Plan will, to the extent of any such forfeiture, termination, lapse, cancellation, or expiration be added to the shares available for issuance under the Plan. In the event that withholding tax liabilities arising from an Award other than an Option or Stock Appreciation Right or, after February 3, 2018, an award other than an option or stock appreciation right under any Prior Plan are satisfied by the tendering of shares (either actually or by attestation) or by the withholding of shares by the Company, the shares so tendered or withheld shall be added to the shares available for Awards under the Plan. Each share of Common Stock that again becomes available for an Award as provided in this Section 3.2 will increase the total number of shares of Common Stock available for Awards under Section 3.1 by (i) 1 share of Common Stock if that share of Common Stock was subject to a Stock Option or Stock Appreciation Right under the Plan or a stock option or stock appreciation right under a Prior Plan, and (ii) 1.63 shares of Common Stock if that share of Common Stock was subject to a Stock Award or a stock award under a Prior Plan. Notwithstanding the foregoing, shares of Common Stock (a) tendered by a Participant or withheld by the Company in payment of the exercise price of an Option, or after February 3, 2018, an option under any Prior Plan, (b) not issued on the net settlement or net exercise of Stock Appreciation Rights, or after February 3, 2018, stock appreciation rights under any Prior Plan, (c) delivered by a Participant or withheld by the Company to pay withholding taxes related to Options or Stock Appreciation Rights or, after February 3, 2018, options or stock appreciation rights under a Prior Plan, or (d) reacquired by the Company on the open market or otherwise using cash proceeds from the exercise of Options or, after February 3, 2018, options under any Prior Plan, will not again become available for issuance and will not be added to the shares authorized for grant under the Plan. For the avoidance of doubt, Option reloading is not permitted under the Plan.

Shares of Common stock issued in connection with Awards that are assumed, converted or substituted pursuant to an event described in Section 12.8 or assumed or issued in substitution of awards to employees of companies acquired by the Company will not reduce the maximum limitation specified in Section 3.1 (nor shall shares subject to a substitute award be added to the shares available for Awards under the Plan as provided above). Further, where the number of shares of Common stock subject to an Award is variable on the Date of Grant, the number of shares to be counted against the shares authorized under the Plan prior to earning the Award will be the maximum number of shares that could be received under the Award.

 

 

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3.3 Individual Award Limitations on Equity Awards. Subject to the provisions of Sections 12.7 and 12.8, the following individual Award limits will apply:

 

  (a) During the term of the Plan, the maximum number of shares of Common Stock available for grant as Incentive Stock Options under the Plan will not exceed the maximum number of shares of Common Stock available for Awards under the Plan as provided in Section 3.1.

 

  (b) During any fiscal year no Participant will be granted Stock Option and Stock Appreciation Right Awards for collectively more than 4,000,000 shares of Common Stock, and Performance Awards with a payout, at maximum, of more than 3,000,000 shares of Common Stock.

ARTICLE IV

ADMINISTRATION

The Plan will be administered by, or under the direction of the Committee. The Committee will administer the Plan so as to comply at all times with the Exchange Act and the Code, as applicable, and will otherwise have plenary authority to interpret the Plan and to make all determinations specified in or permitted by the Plan or deemed necessary or desirable for its administration or for the conduct of the Committee’s business (“Determinations”). All interpretations and Determinations of the Committee may be made on an individual or group basis, and will be final, conclusive, and binding on all interested parties. The Committee may delegate, to the fullest extent permitted by law, its responsibilities under the Plan to persons other than its members, subject to such terms and conditions as it may determine, other than the making of grants and awards under the Plan to individuals subject to Section 16 of the Exchange Act. With respect to Participants subject to Section 16 of the Exchange Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of the Plan or any action by the Committee or its delegate fails to so comply, such provision or action will, without further action by any person, be deemed to be automatically amended to the extent necessary to effect compliance with Rule 16b-3, provided; however, that if such provision or action cannot be amended to effect such compliance, such provision or action will be deemed null and void, to the extent permitted by law and deemed advisable by the relevant authority. Each Award to a Participant subject to Section 16 of the Exchange Act under this Plan will be deemed issued subject to the foregoing qualification. Further, except as otherwise specifically provided in an Award Notice or Determinations, Awards under this Plan are generally intended to be exempt from Section 409A of the Code and the Plan will be interpreted accordingly.

ARTICLE V

ELIGIBILITY

Under the Plan: (i) Awards may be made to such Associates, including officers and Associate Directors of the Company, as the Committee may determine; and (ii) Equity Awards will be made pursuant to Article X below to individuals who serve as Non-Associate Directors of the Company (including any former Associate Participant). In determining the Associate Participants who are to receive Awards and the number of shares covered by any Equity Award, the Committee may take into account the nature of the services rendered by the Associate Participants, their contributions to the Company’s success, their position levels and salaries, and such other factors as the Committee, in its discretion, may consider relevant in light of the purposes of the Plan.

 

 

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ARTICLE VI

STOCK OPTIONS AND

STOCK APPRECIATION RIGHTS

6.1 Terms and Conditions of Stock Options. The Committee may grant Stock Options alone or in addition to other Awards granted under this Plan to any Associate Participant. The Committee will determine (i) whether each Stock Option will be granted as an Incentive Stock Option or a Non-Qualified Stock Option, and (ii) the provisions, terms and conditions of each Stock Option including, but not limited to, the vesting schedule, the number of shares of Common Stock subject to the Stock Option, the exercise price of the Stock Option, the period during which the Stock Option may be exercised, repurchase provisions, forfeiture provisions, methods for payment of the exercise price of the Stock Option, acceleration of vesting, if any, in connection with certain termination events, and all other terms and conditions of the Stock Option, subject to the following:

 

  (a) Form of Stock Option Grant. Each Stock Option granted under the Plan will be evidenced by an Award Notice (which need not be the same for each recipient of a Stock Option Award) that is not inconsistent with the Plan, including any provisions that may be necessary to assure that any Stock Option that is intended to be an Incentive Stock Option will comply with section 422 of the Code. The Award Notice evidencing the Stock Option grant will be delivered to the recipient with a copy of the Plan, and other relevant Stock Option documents, within a reasonable time after the Date of Grant.

 

  (b) Exercise Period. Unless a shorter period is otherwise provided in an Award Notice, each Stock Option will expire and all rights to purchase shares of Common Stock thereunder will cease ten years after the Date of Grant.

 

  (c) Exercise Price and Terms. The exercise price of a Stock Option will be not less than 100% of the Fair Market Value of a share of the Common Stock on the Date of Grant of the Stock Option and during its term the Stock Option will be exercisable only on the event or events determined by the Committee and set forth in the Award Notice.

 

  (d)

Limitations on Incentive Stock Options. The aggregate Fair Market Value (determined as of the Date of Grant of a Stock Option) of Common Stock that any Associate is first eligible to purchase during any calendar year by exercise of Incentive Stock Options granted under the Plan and by exercise of incentive stock options (within the meaning of section 422 of the Code) granted under any other incentive stock option plan of the Company or a Subsidiary will not exceed $100,000. If the Fair Market Value of stock with respect to which all incentive stock options described in the preceding sentence held by any one Participant are exercisable for the first time by such Participant during any calendar year exceeds $100,000, the Stock Options that are intended to be Incentive Stock Options on the Date of Grant thereof for the first $100,000 worth of shares of Common Stock to become exercisable in such year will be considered to constitute incentive stock options within the meaning of section 422 of the Code and the Stock Options that are intended to be Incentive Stock Options on the Date of Grant thereof for the shares of Common Stock in the amount in excess of $100,000 that become exercisable in that calendar year will be treated as Non-Qualified Stock Options. If an Incentive Stock Option is granted to an Associate that owns more than 10% of the total combined voting power of all classes of stock of the Company (i) the exercise price of the Incentive Stock Option will not be less than 110% of the Fair Market Value of a share of the Common Stock on the Date of Grant of the Incentive Stock Option, and (ii) the Incentive Stock Option will expire and all rights to purchase shares of Common Stock thereunder will cease five years after the Date of Grant. If the Code or the Treasury regulations promulgated thereunder are amended after the effective date of the Plan to provide for a different rules

 

 

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  and/or limits governing Incentive Stock Options than those described in this Section 6.1(d), such different rules and/or limit will be incorporated herein and will apply to any Incentive Stock Options granted after the effective date of such amendment.

 

  (e) Dividend and Dividend Equivalents. No grant of a Stock Option may provide for dividends, dividend equivalents, or other similar distributions to be paid in connection with the exercise of the Stock Option.

 

  (f) Extension of the Term of a Stock Option. Notwithstanding any other provision of this Plan to the contrary, if, by its terms, a Stock Option, other than an Incentive Stock Option, would expire when trading in shares of Common Stock is otherwise prohibited by law or by the Company’s insider trading policy, as such may be amended from time to time, the term of the Stock Option will be automatically extended until the close of trading on the 30th Trading Date following the expiration of any such prohibition.

 

  (g) Vesting Period. The Committee will determine the types of Stock Options made and any terms and conditions relating to the Stock Options as it considers appropriate, including any vesting conditions necessary to comply with the laws of the State of Delaware. Notwithstanding the foregoing, no portion of a Stock Option may be scheduled to vest in less than one year from the date of grant, provided; however, that up to five percent (5%) of the shares available for award may be granted as Stock Options that vest in whole in less than one year in connection with limited situations such as new hires, Retirements, and similar situations.

6.2 Exercise of Stock Options.

 

  (a) Notice. Stock Options may be exercised only by delivery to the Company, or its designee, of notice, in such form as is permitted by the Committee or its designee, stating the number of shares of Common Stock being purchased, the method of payment, and such other matters as may be considered appropriate by the Company in connection with the issuance of shares of Common Stock upon exercise of the Stock Option, together with payment in full of the exercise price for the number of shares of Common Stock being purchased.    The effective date of exercise of a Stock Option (which in no event, may be beyond the expiration date of the Stock Option) will be, unless otherwise provided in Determinations adopted by the Committee:

 

  (i) in connection with a sell order for the underlying stock that is a “Sell-to-Cover Order,” a “Same-Day-Sale Exercise Order,” a Limit Order, a “Good-till” Cancelled Order or the like, the date on which such sell order is actually executed.

 

  (ii) in connection with an “Exercise and Hold” (cash exercise) transaction, the date the requisite funds are received by the Company at its home office in Plano, Texas or such other location as the Company may designate, or by a third party duly designated by the Company at the offices of such third party, in the manner determined by the Chief Executive Officer or the Chief Talent Officer, or their respective successors by title or office.

 

   

Provided, however, that if the date of exercise, as otherwise determined pursuant to this Section 6.2(a), including any Determinations adopted by the Committee, is not a Trading Date, the date of exercise will be deemed to be the next Trading Date. Further, if an exercise instruction is received after the close of the NYSE on a particular day, it will be deemed received as of the opening of the next Trading Date. If a Stock Option is granted in tandem with any other Equity Award, there will be surrendered and cancelled from the related Equity Award at the time of exercise of the Stock Option, in lieu of exercise

 

 

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  pursuant to the related Equity Award, that number of shares of Common Stock as equals the number of shares of Common Stock as to which the tandem Stock Option will have been exercised.

 

  (b) Early Exercise. An Award Notice may, but need not, include a provision that permits the Participant to elect at any time while an Associate, to exercise all or any part of the Stock Option before full vesting of the Stock Option, subject to the provisions of Section 6.1(g). Any unvested shares of Common Stock received pursuant to such exercise may be subject to a repurchase right in favor of the Company or a Subsidiary or to any other restriction the Committee determines to be appropriate.

 

  (c) Payment. Payment equal to the aggregate exercise price for the shares subject to a Stock Option and for which notice of exercise has been provided by an Associate Participant, including an Associate Participant that has terminated Employment, to the Company, along with any applicable withholding taxes as described in Section 12.11, will be tendered in full, with the notice of exercise, in cash (by check) or, unless otherwise prohibited in a specific Award Notice or by law or applicable regulation, by:

 

  (i) the actual or constructive transfer to the Company of nonforfeitable, non-restricted shares of Common Stock that have been owned by the Participant for more than six months, or such shorter time as may be permitted by applicable law, prior to the date of exercise;

 

  (ii) using the net proceeds (after paying all selling fees) from the sale of some (the “Sell-to-Cover Exercise Method”) or all (the “Same-Day-Sale Exercise Method”), of the shares of Common Stock received on the exercise of the Stock Option, or from any arrangement pursuant to which an Associate Participant, including those Associate Participants who have terminated Employment, irrevocably instructs a broker-dealer to sell a sufficient portion of such shares to pay the exercise price and any withholding obligation, as described in Section 12.11, and related fees thereon and deliver the sale proceeds directly to the Company. The value of the shares of Common Stock used in payment of the exercise price under the Sell-to-Cover Exercise Method or the Same-Day-Sale Exercise Method will be the price at which the Common Stock was sold by the broker-dealer functioning under the Sell-to-Cover Exercise Method or the Same-Day-Sale Exercise Method on the effective date of exercise as described in Section 6.2(a). The amount of the proceeds to be delivered to the Company by the broker-dealer functioning under the Sell-to-Cover Exercise Method or the Same-Day-Sale Exercise Method will be credited to the Common Stock account of the Company as consideration for the shares of Common Stock to be issued in accordance with the Sell-to-Cover Exercise or the Same-Day-Sale Exercise Method;

 

  (iii) by surrender for cancellation of shares of Common Stock at the Fair Market Value per share at the time of exercise under a “net exercise” arrangement; provided, however, that use of a “net exercise” arrangement cannot result in the Stock Option being settled either in whole or in part for cash payable to the Associate Participant;

 

  (iv) in accordance with such other procedures or in such other forms as the Committee will from time to time determine; or

 

  (v) any combination of the above.

On payment of all amounts due from the Participant, the Company will cause certificates for the Common Stock then being purchased to be delivered as directed by the Associate Participant (or the person exercising the Associate Participant’s Stock Option in the event of his death) at its principal business office promptly after the Exercise Date. If the Associate

 

 

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Participant has exercised an Incentive Stock Option, the Company may at its option retain physical possession of the certificate evidencing the shares acquired upon exercise until the expiration of the holding periods described in section 422(a)(1) of the Code. The obligation of the Company to deliver shares of Common Stock will, however, be subject to the condition that if at any time the Committee will determine in its discretion that the listing, registration or qualification of the Stock Option or the Common Stock upon any securities exchange or inter-dealer quotation system or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the Stock Option or the issuance or purchase of shares of Common Stock thereunder, the Stock Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval will have been effected or obtained free of any conditions not acceptable to the Committee.

 

6.3 Acquisitions and Other Transactions. The Committee may, from time to time, assume outstanding options or stock appreciation rights granted by another entity, whether in connection with an acquisition of such other entity or otherwise, by either (i) granting a Stock Option or Stock Appreciation Right, as applicable, under the Plan in replacement of or in substitution for the option or stock appreciation right assumed by the Company, or (ii) treating the assumed option or stock appreciation right as if it had been granted under the Plan if the terms of such assumed option could be applied to a Stock Option or Stock Appreciation Right, as applicable, granted under the Plan. Such assumption will be permissible if the holder of the assumed option would have been eligible to be granted a Stock Option or Stock Appreciation right, as applicable, hereunder if the other entity had applied the rules of this Plan to such grant. The Committee also may grant Stock Options or Stock Appreciation Rights under the Plan in settlement of or substitution for outstanding options or stock appreciation rights, or obligations to grant future options in connection with the Company’s or a Subsidiary’s acquiring another entity, an interest in another entity or an additional interest in a Subsidiary whether by merger, stock purchase, asset purchase or other form of transaction. Notwithstanding the foregoing provisions of Sections 6.1 or 6.4(c), in the case of a Stock Option or Stock Appreciation Right issued or assumed pursuant to this Section 6.1(e), the exercise price for the Stock Option or Stock Appreciation Right will be determined in accordance with the principles of Sections 424(a) and 409A of the Code, and the Treasury regulations promulgated thereunder.

Additionally, in the event that a company acquired by the Company or any Subsidiary or with which the Company or any Subsidiary combines has shares available under a pre-existing plan approved by stockholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to the holders of common stock of the entities party to such acquisition or combination) may be used for Awards under the Plan and shall not reduce the shares authorized for grant under the Plan (and shares subject to such Awards shall not be added to the shares available for Awards under the Plan); provided that Awards using such available shares shall not be made after the date awards or grants could have been made under the terms of the pre-existing plan, absent the acquisition or combination, and shall only be made to individuals who were not Associates or Directors prior to such acquisition or combination.

 

6.4

Terms and Conditions of Stock Appreciation Rights. The Committee may grant Stock Appreciation Rights alone or in tandem with other Awards granted under this Plan to any Associate. The Committee will determine the provisions, terms and conditions of each Stock Appreciation Right including, but not limited to, the vesting schedule, the number of shares of Common Stock subject to the Stock Appreciation Right, the exercise price of the Stock

 

 

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  Appreciation Right, the period during which the Stock Appreciation Right may be exercised, repurchase provisions, forfeiture provisions, acceleration of vesting, if any, in connection with certain termination events, and all other terms and conditions of the Stock Appreciation Right, subject to the following:

 

  (a) Form of Stock Appreciation Right. Each Stock Appreciation Right granted under the Plan will be evidenced by an Award Notice (which need not be the same for each recipient of a Stock Appreciation Right) that is not inconsistent with the Plan. The award Notice evidencing the Stock Appreciation Right grant will be delivered to the recipient with a copy of the Plan, and other relevant Stock Appreciation Right documents, within a reasonable time after the Date of Grant.

 

  (b) Exercise Period. Unless a shorter period is otherwise provided in an Award Notice, each Stock Appreciation Right will expire and all rights thereunder will cease ten years after the Date of Grant.

 

  (c) Exercise Price and Terms. The exercise price of a Stock Appreciation Right will be not less than 100% of the Fair Market Value of a share of the Common Stock on the Date of Grant of the Stock Appreciation Right and during its term the Stock Appreciation Right will be exercisable only on the events determined by the Committee and set forth in the Award Notice.

 

  (d) Dividend and Dividend Equivalents. No grant of a Stock Appreciation Right may provide for dividends, dividend equivalents, or other similar distributions to be paid in connection with the exercise of the Stock Appreciation Right.

 

  (e) Exercise. The grant of the Stock Appreciation Right will provide that the holder will be paid for the value of the Stock Appreciation Right in shares of Common Stock or, at the discretion of the Committee or is designee, cash. In the event of the exercise of a Stock Appreciation Right, the holder of the Stock Appreciation Right will receive that number of shares of Common Stock, or, at the discretion of the Committee or is designee, cash equal to the value of such shares of Common Stock having an aggregate Fair Market Value on the date of exercise equal to the value obtained by multiplying (i) either (A) in the case of a Stock Appreciation Right issued in tandem with a Stock Option, the difference between the Fair Market Value of a share of Common Stock on the date of exercise over the exercise price per share of the related Stock Option, or (B) in the case of a stand-alone Stock Appreciation Right, the difference between the Fair Market Value of a share of Common Stock on the date of exercise over the Fair Market Value of a share of Common Stock on the Date of Grant of the Stock Appreciation Right by (ii) the number of shares of Common Stock with respect to which the Stock Appreciation Right is exercised. Notwithstanding the foregoing, the Committee, in its sole discretion, may place a ceiling on the amount payable upon exercise of a Stock Apprec