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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934

(Amendment No.      )

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 Pursuant to §240.14a-12

NETAPP, 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):

  

 

 

(4)

Proposed maximum aggregate value of transaction:

  

 

 

(5)

Total fee paid:

  

 

 

☐	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:

  

 

 

(2)

Form, Schedule or Registration Statement No.:

  

 

 

(3)

Filing Party:

  

 

 

(4)

Date Filed:

  

 

 

 

 

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NETAPP, INC.

495 East Java Drive

Sunnyvale, California 94089

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held Thursday, September 14, 2017

 

 

You are cordially invited to attend the Annual Meeting of Stockholders, and any adjournment, postponement or other delay thereof (the “Annual Meeting”), of NetApp, Inc., a Delaware corporation (“NetApp”), which will be held on Thursday, September 14, 2017 at 3:30 p.m. local time, at NetApp’s headquarters, 495 East Java Drive, Sunnyvale, California 94089. We are holding the Annual Meeting for the following purposes:

 

1.

To elect the following individuals to serve as members of the Board of Directors until the 2018 Annual Meeting of Stockholders or until their respective successors are duly elected and qualified: T. Michael Nevens, Alan L. Earhart, Gerald Held, Kathryn M. Hill, George Kurian, George T. Shaheen, Stephen M. Smith and Richard P. Wallace;

 

2.

To approve an amendment to NetApp’s Amended and Restated 1999 Stock Option Plan to increase the share reserve by an additional 8,500,000 shares of common stock;

 

3.

To approve an amendment to NetApp’s Employee Stock Purchase Plan to increase the share reserve by an additional 2,500,000 shares of common stock;

 

4.

To hold an advisory vote to approve Named Executive Officer compensation;

 

5.

To hold an advisory vote to approve the frequency of future advisory votes to approve Named Executive Officer compensation;

 

6.

To ratify the appointment of Deloitte & Touche LLP as NetApp’s independent registered public accounting firm for the fiscal year ending April 27, 2018;

 

7.

To consider and vote upon two proposals submitted by stockholders, if properly presented at the Annual Meeting; and

 

8.

To transact such other business as may properly come before the Annual Meeting.

The foregoing items of business are more fully described in the Proxy Statement that accompanies this Notice of Annual Meeting of Stockholders. The Board of Directors has fixed the close of business on July 17, 2017, as the record date for determining the stockholders entitled to notice of and to vote at the Annual Meeting.

In accordance with the rules and regulations of the Securities and Exchange Commission, we have elected to provide access to our proxy materials over the Internet. Accordingly, NetApp will mail, on or about July 26, 2017, a Notice of Internet Availability of Proxy Materials to its stockholders of record and beneficial owners. The Notice of Internet Availability of Proxy Materials will identify: (1) the website where our proxy materials will be made available; (2) the date, time and location of the Annual Meeting; (3) the matters to be acted upon at the Annual Meeting and the Board of Directors’ recommendation with regard to each matter; (4) a toll-free telephone number, an e-mail address, and a website where stockholders can request a paper or e-mail copy of the Proxy Statement, (together with a form of proxy) and our Annual Report on Form 10-K; (5) instructions on how to vote your shares by proxy; and (6) information on how to obtain directions to attend the Annual Meeting and vote in person by ballot. All proxy materials will be available free of charge.

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To assure your representation at the Annual Meeting, you are urged to cast your vote as instructed in the Notice of Internet Availability of Proxy Materials over the Internet or by telephone as promptly as possible. You may also request a paper proxy card to submit your vote by mail, if you prefer. Any stockholder of record attending the Annual Meeting may vote in person by ballot, even if such stockholder has previously voted over the Internet, voted by telephone or returned a signed proxy card. Any beneficial owner who is not a stockholder of record will be required to show a legal proxy from such stockholder’s bank, broker or other nominee in order to vote in person by ballot at the Annual Meeting.

Thank you for your interest in NetApp.

BY ORDER OF THE BOARD OF DIRECTORS,

 

 

Chief Executive Officer and President

Sunnyvale, California

August 1, 2017

YOUR VOTE IS EXTREMELY IMPORTANT. TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, YOU ARE URGED TO VOTE BY TELEPHONE OR OVER THE INTERNET AS PROMPTLY AS POSSIBLE. ALTERNATIVELY, YOU MAY REQUEST A PAPER PROXY CARD, WHICH YOU SHOULD SIGN, DATE AND RETURN BY MAIL.

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PROXY SUMMARY			1
Voting Matters and Recommendation			1
Fiscal 2017 Business Highlights			1
Corporate Governance and Executive Compensation			2
Director Nominees			2
Corporate Governance and Executive Compensation Highlights			2
GENERAL INFORMATION			4
Why am I receiving these materials?			4
Why did I receive a Notice in the mail regarding the Internet availability of proxy materials?			4
Who can vote at the Annual Meeting?			4
When and where will the Annual Meeting take place?			5
How do I gain admittance to the Annual Meeting?			5
How many shares must be present to hold the Annual Meeting?			5
How many shares of NetApp common stock are entitled to vote at the Annual Meeting?			5
Who will count the votes?			5
How many votes are required for each proposal?			5
How do I vote?			6
How can I change my vote or revoke my proxy?			6
What are abstentions and broker non-votes?			6
How many copies of the proxy materials will be delivered to stockholders sharing the same address?			7
Where may I obtain a copy of the Annual Report?			7
Who pays for the solicitation of proxies?			7
How and when may I submit proposals for consideration at next year’s Annual Meeting of Stockholders?			7
OUR BOARD OF DIRECTORS			9
CORPORATE GOVERNANCE			12
Summary			12
Board Leadership Structure			12
Corporate Governance Guidelines			12
Risk Oversight			12
Succession Planning			13
Independent Directors			13
Committees of the Board of Directors			13
Corporate Governance and Nominating Committee			13
Compensation Committee			14
Audit Committee			14
Director Selection			14
Meetings and Committees of our Board of Directors			15
Stockholder Meeting Attendance for Directors			17
Code of Conduct			17
Political Contributions Policy			17

 

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Personal Loans to Executive Officers and Directors			17
Stockholder Communications Policy			17
DIRECTOR COMPENSATION			18
Director Compensation Table			18
Summary of Director Compensation Policy			19
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT			21
Section 16(a) Beneficial Ownership Reporting Compliance			24
COMPENSATION DISCUSSION AND ANALYSIS			25
Business Overview and Program Highlights			25
Fiscal 2017 Company Performance			25
Fiscal 2017 Financial Performance			26
Fiscal 2017 Executive Compensation Principles			26
Alignment of Performance and Compensation			27
Element and Objectives of Executive Compensation			29
Adherence to Best Practices			30
Our Process for Determining and Administering Our Compensation Program			30
Factors in Determining Compensation			31
Say-on-Pay			31
Performance Assessment			32
Competitive Market Data			32
Pay Positioning			33
Components of Compensation			33
Base Salary			33
Executive ICP			33
Other Cash Incentives.			37
Long-Term Stock-Based Incentive Compensation.			37
PBRSUs.			37
Time-Based RSUs.			38
Stock Ownership Guidelines			39
Recovery of Incentive-Based Compensation			39
Anti-Hedging and Anti-Pledging Policies			40
Other Compensation for NEOs			40
Severance and Change of Control Arrangements			40
Perquisites			40
Other Benefits and Reimbursements			41
Tax Deductibility of Compensation			41
COMPENSATION COMMITTEE REPORT			42
EXECUTIVE COMPENSATION AND RELATED INFORMATION			43
Summary Compensation Table			43
Grants of Plan-Based Awards			45
Outstanding Equity Awards at Fiscal Year End			47

 

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Option Exercises and Stock Vested for Fiscal 2017			48
Nonqualified Deferred Compensation			48
Nonqualified Deferred Compensation for Fiscal 2017			49
Pension Benefits			49
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS			50
Potential Payments upon Termination or Change of Control			50
Change of Control Severance Agreements			50
Term of Change of Control Severance Agreement			50
Circumstances Triggering Payment under Change of Control Severance Agreement			50
Timing and Form of Severance Payments under Change of Control Severance Agreement			51
Severance Payments Under Change of Control Severance Agreement			51
Conditions to Receipt of Severance under Change of Control Severance Agreement			51
Excise Tax under Change of Control Severance Agreement			52
Definitions Contained in Change of Control Severance Agreement			52
PBRSUs			53
Executive Medical Retirement Plan			53
Estimated Payments Upon Termination of Employment and/or a Change of Control			54
Equity Compensation Plan Information			57
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION			58
CERTAIN TRANSACTIONS WITH RELATED PARTIES			58
AUDIT COMMITTEE REPORT			59
MANAGEMENT PROPOSALS			60
Proposal Number 1: Election of Directors			60
Proposal Number 2: Amendment to the Company’s Amended and Restated 1999 Stock Option Plan			61
Proposal Number 3: Amendment to the Company’s Employee Stock Purchase Plan			72
Proposal Number 4: Advisory Vote To Approve Named Executive Officer Compensation (“Say On Pay”)			78
Proposal Number 5: Advisory Vote on Frequency of “Say on Pay” Vote			80
Proposal Number 6: Ratification of Independent Registered Public Accounting Firm			81
STOCKHOLDER PROPOSALS			83
Proposal Number 7: Stockholder Proposal for an Annual Diversity Report			83
Proposal Number 8: Stockholder Proposal for Proxy Access			87
OTHER BUSINESS			89
Annex A			A-1
Non-GAAP Financial Measures			A-2
Appendix A			A-1
Appendix B			B-1

 

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This summary highlights information contained within this Proxy Statement. It does not contain all the information found in this Proxy Statement, and is qualified in its entirety by the remainder of this Proxy Statement. You should read the entire Proxy Statement carefully and consider all information before voting. Page references are supplied to help you find further information in this Proxy Statement.

Voting Matters and Recommendation

 

Voting Matter		Board Vote Recommendation		Page
Election of eight (8) director nominees		FOR each nominee		60
Approval of an amendment to NetApp’s Amended and Restated 1999 Stock Option Plan		FOR		61
Approval of an amendment to NetApp’s Employee Stock Purchase Plan		FOR		72
Advisory approval of our executive compensation		FOR		78
Advisory approval of the frequency of our advisory votes on our executive compensation		FOR EVERY YEAR		80
Ratification of appointment of independent registered public accounting firm		FOR		81
Stockholder proposal for an annual diversity report		AGAINST		83
Stockholder proposal for proxy access		NO RECOMMENDATION		87

 

In fiscal 2017, NetApp generated $5.5 billion in net revenues. GAAP net income for fiscal 2017 was $509 million, or $1.81 per share, ¹ and non-GAAP net income was $768 million, or $2.73 per share. ² Over the course of the year, we generated $986 million in cash flows from operations. We also returned approximately $913 million to stockholders, comprised of approximately $705 million through share repurchases and $208 million through dividends. Through share repurchases and dividends, we have returned approximately $5.5 billion to stockholders since May 2013.

 

¹ GAAP earnings per share is calculated using the diluted number of shares for the period presented. A reconciliation of non-GAAP to GAAP results can be found in Annex A.

² Non-GAAP earnings per share is calculated using the diluted number of shares for the period presented. A reconciliation of non-GAAP to GAAP results can be found in Annex A.

 

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In fiscal 2017, NetApp continued to advance its Data Fabric strategy. In a world where technology is changing our everyday lives, digital transformation tops the strategic agenda in most organizations. To successfully transform, data is becoming the lifeblood of an organization, seamlessly flowing through it to enable new customer touchpoints through technology, create innovative business opportunities and optimize operations. The NetApp Data Fabric simplifies and integrates data management across cloud and on-premises to accelerate digital transformation. The NetApp Data Fabric delivers consistent and integrated hybrid cloud data services for data visibility and insights, data access and control, and data protection and security. By coupling the strength of our Data Fabric strategy and the benefits we deliver to customers with a more efficient and agile business, we believe that we can generate long-term value for stockholders.

See also the “Fiscal 2017 Company Performance” and “Fiscal 2017 Financial Performance” sections within our “Compensation Discussion and Analysis” on page 25 of this Proxy Statement. Detailed information on our products and our financial performance can be found in our Annual Report on 10-K for the year ended April 28, 2017.

 

Director Nominees

 

Name of Nominee		Age		Director Since		Independent		NetApp Committee Memberships
T. Michael Nevens*		67		2009		Yes		Audit, Corporate Governance and Nominating (Chair)
Alan L. Earhart✓		73		2004		Yes		Audit (Chair), Corporate Governance and Nominating
Gerald Held		69		2009		Yes		Compensation
Kathryn M. Hill		60		2013		Yes		Audit
George Kurian		50		2015		No
George T. Shaheen		73		2004		Yes		Compensation
Stephen M. Smith		61		2016		Yes		Compensation
Richard P. Wallace		57		2011		Yes		Compensation

* Chairman of the Board

✓ Audit Committee Financial Expert

Corporate Governance and Executive Compensation Highlights

We are committed to good corporate governance, which promotes the long-term interests of our stockholders and strengthens our Board and management accountability. Our executive compensation program is designed to hold our executives accountable for results over the long term and reward them for consistently strong corporate performance. During fiscal 2017, we redesigned our cash incentive plan for our executives to include individual performance goals.

 

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Governance and executive compensation highlights include:

 

•

Other than the Chief Executive Officer, our Board comprises all independent directors (9 out of 10 directors);

 

•

Separation of the roles of Chairman and Chief Executive Officer;

 

•

Four new directors joined the Board in the last six years;

 

•

Majority voting in the uncontested election of directors;

 

•

Each director is required to submit an irrevocable, conditional resignation effective only upon both (1) the failure to receive the required vote for reelection and (2) our Board’s acceptance of such resignation;

 

•

Three active standing Board committees with 100% independent members;

 

•

Performance-based equity compensation;

 

•

Annual Say-on-Pay vote;

 

•

Director and executive stock ownership guidelines;

 

•

Anti-hedging and anti-pledging policies;

 

•

Compensation clawback policy;

 

•

Board involvement in setting longterm corporate strategy;

 

•

Board oversight of risk management;

 

•

Annual Board and Board committee self-evaluations;

 

•

Annual assessment of director compensation; and

 

•

Robust Code of Conduct.

For more information about our corporate governance practices, please refer to the information under “Corporate Governance” beginning on page 12 of this Proxy Statement. For more information about our executive compensation program, please refer to the information under “Compensation Discussion and Analysis” beginning on page 25 of this Proxy Statement.

Cautionary Statement Regarding Forward-Looking Statements

This Proxy Statement may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are all statements (and their underlying assumptions) included in this Proxy Statement that refer, directly or indirectly, to future events or outcomes and, as such, are inherently not factual, but rather reflect only our current projections for the future. Consequently, forward-looking statements usually include words such as “estimate,” “intend,” “plan,” “predict,” “seek,” “may,” “will,” “should,” “would,” “could,” “anticipate,” “expect,” “believe,” or similar words, in each case, intended to refer to future events or circumstances. Our future results may differ materially from our past results and from those projected in the forward-looking statements due to various uncertainties and risks, including, but not limited to, those described in Item 1A (Risk Factors) of Part I of our Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based upon information available to us at this time. These statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement. Actual results could vary from our forward-looking statements due to the factors described in our Annual Report on Form 10-K, as well as other important factors.

 

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PROXY STATEMENT

495 East Java Drive

Sunnyvale, California 94089

FOR THE ANNUAL MEETING OF STOCKHOLDERS OF

NETAPP, INC.

To Be Held Thursday, September 14, 2017

 

 

The Board of Directors of NetApp, Inc. (“Board” or “Board of Directors”) has made these materials available to you on the Internet or, upon your request, has delivered printed proxy materials to you in connection with the solicitation of proxies for use at our 2017 Annual Meeting of Stockholders, and any adjournment, postponement or other delay thereof (the “Annual Meeting”). NetApp, Inc., a Delaware corporation, is referred to in this Proxy Statement as the “Company,” “NetApp,” “we” or “our”. This Proxy Statement describes proposals on which you, as a stockholder, are being asked to vote. It also gives you information on these proposals, as well as other information, so that you can make an informed decision. As a stockholder, you are invited to attend the Annual Meeting and are requested to vote on the items of business described in this Proxy Statement.

 

In accordance with rules and regulations adopted by the Securities and Exchange Commission (the “SEC”), instead of mailing a printed copy of our proxy materials to each of our stockholders, we are furnishing proxy materials to our stockholders over the Internet. If you received a Notice of Internet Availability of Proxy Materials (the “Notice”) by mail, you will not receive a printed copy of the proxy materials. Instead, the Notice instructs you as to how you may access and review all of the information contained in the proxy materials. The Notice also instructs you as to how you may submit your proxy over the Internet or by telephone. If you received a Notice by mail and would like to receive a printed copy of our proxy materials, you should follow the instructions for requesting such materials included in the Notice.

 

Stockholders of record as of the close of business July 17, 2017 (the “Record Date”) are entitled to vote at the Annual Meeting. If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are considered, with respect to those shares of common stock, the stockholder of record. If your shares of

 

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common stock are held by a bank, broker or other nominee, you are considered the “beneficial owner” of those shares, which are held in “street name.” As the beneficial owner, you have the right to direct your bank, broker or other nominee how to vote your shares by following the voting instructions that your bank, broker or other nominee provides you. If you do not provide your bank, broker, or other nominee with instructions on how to vote your shares, your bank, broker or other nominee may not vote your shares with respect to any non-routine matters, but may, in its discretion, vote your shares with respect to routine matters. For more information on routine and non-routine matters, see “What are abstentions and broker non-votes?” below.

 

The Annual Meeting will be held on Thursday, September 14, 2017, at 3:30 p.m. local time at the Company’s headquarters at 495 East Java Drive, Sunnyvale, California 94089. You may contact the Company at (408) 822-6000 for directions to the Annual Meeting.

 

Each stockholder must present a valid picture identification, such as a driver’s license or passport, and proof of stock ownership as of the Record Date for entrance to the Annual Meeting. Stockholders holding shares of common stock in brokerage accounts through a bank, broker or other nominee may be required to show a brokerage or account statement reflecting their stock ownership. Cameras, recording devices and other electronic devices will not be permitted at the Annual Meeting.

 

To hold the meeting and conduct business, a majority of NetApp’s shares of common stock issued and outstanding and entitled to vote, in person or by proxy, at the Annual Meeting must be present in person or by proxy. This is called a quorum.

 

At the Annual Meeting, each holder of common stock is entitled to one vote for each share of common stock held by such stockholder on the Record Date. On the Record Date, the Company had 270,438,848 shares of common stock outstanding and entitled to vote at the Annual Meeting. No shares of the Company’s preferred stock were outstanding. There are no cumulative voting rights.

 

A representative of Broadridge Financial Solutions, Inc. will act as the inspector of elections and tabulate the votes.

 

For Proposal No. 1, a nominee for director will be elected to the Board if the number of votes cast “FOR” a nominee’s election exceed the number of votes cast “AGAINST” such nominee’s election. Approval of each of Proposal Nos. 2, 3, 4, 6, 7 and 8 requires the affirmative vote of a majority of the stock having voting power present in person or represented by proxy. For Proposal No. 5, the recommendation regarding the frequency of a say-on-pay advisory vote (every one, two or three years) will be determined based on a plurality of votes cast. This means that the option that receives the most affirmative votes of the votes cast will be deemed to be recommended by the stockholders. Voting results will be published in a Current Report on Form 8-K, which will be filed with the SEC within four business days of the Annual Meeting.

 

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The Company is offering stockholders of record four methods of voting: (1) you may vote by telephone; (2) you may vote over the Internet; (3) you may vote in person by ballot at the Annual Meeting; and (4) finally, you may request a proxy card from us and indicate your vote by signing and dating the card where indicated, and mailing or otherwise returning the card in the prepaid envelope provided.

If you submit a proxy card but do not specify your votes, your shares of common stock will be voted:

 

•

“FOR” the election of all of the nominees named in Proposal No. 1;

 

•

“FOR” Proposal Nos. 2, 3, 4 and 6;

 

•

“FOR” a frequency of “EVERY YEAR” in Proposal No. 5;

 

•

“AGAINST” Proposal No. 7; and

 

•

“ABSTAIN” on Proposal No. 8.

Uninstructed proxies will be voted in the proxy holder’s discretion as to any other matter that may properly come before the Annual Meeting.

If you hold your shares of common stock through a bank, broker or other nominee, you will receive a voting instruction form from your bank, broker or other nominee with instructions on how to vote. You will not be able to vote by ballot in person at the Annual Meeting unless you have previously obtained a legal proxy from your bank, broker or other nominee and present it with your ballot at the Annual Meeting. Please contact your bank, broker or other nominee for information on obtaining a legal proxy.

 

Any stockholder of record voting by proxy has the power to revoke a proxy at any time before the polls close at the Annual Meeting. You may revoke your proxy by filing with the Secretary of the Company an instrument of revocation or a duly executed proxy bearing a later date or by attending the Annual Meeting and voting in person by ballot. If you are the beneficial owner of your shares, you must contact the bank, broker or other nominee holding your shares and follow the instructions of such bank, broker or other nominee to revoke your proxy or change your vote.

 

Abstentions will be counted for the purposes of determining both (1) the presence or absence of a quorum for the transaction of business; and (2) the total number of shares entitled to vote in person or by proxy at the Annual Meeting with respect to a proposal. Accordingly, abstentions will have the same effect as a vote against a proposal, except with respect to Proposal Nos. 1 and 5, where they will have no effect.

A “broker non-vote” occurs when a bank, broker or other nominee holding shares for a beneficial owner does not vote on a particular proposal because the bank, broker or other nominee does not have discretionary voting power with respect to such proposal and has not received voting instructions from the beneficial owner. Broker non-votes will be counted for the purpose of determining the presence or absence of a quorum for the transaction of business, but will not be counted for the purpose of determining the number of votes cast on a proposal. Accordingly, a broker non-vote will make a quorum more readily attainable, but will not otherwise affect the outcome of the vote on a proposal.

If your shares are held in street name and you do not instruct your bank, broker or other nominee on how to vote your shares, your bank, broker or other nominee may, at its discretion, either leave your shares unvoted or vote your shares on routine matters, but is not permitted to vote your shares on non-routine matters. Proposal No. 6 is considered a routine matter. Proposal Nos. 1, 2, 3, 4, 5, 7 and 8 are considered non-routine matters.

 

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The SEC has adopted rules that permit companies and intermediaries, such as brokers, to satisfy delivery requirements for proxy materials with respect to two or more stockholders sharing the same address by delivering a single Proxy Statement addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially provides extra convenience for stockholders and cost savings for the Company. The Company and some banks and brokers household proxy materials unless contrary instructions have been received from one or more of the affected stockholders. If, at any time, you no longer wish to participate in householding and would prefer to receive a separate Proxy Statement, or if you are receiving multiple copies of the Proxy Statement and wish to receive only one, please (1) follow the instructions provided when you vote over the Internet; or (2) contact Broadridge Financial Solutions, Inc., either by calling toll free at (800) 542-1061 or by writing to Broadridge Financial Solutions, Inc., Householding Department, 51 Mercedes Way, Edgewood, New York 11717.

 

The Notice, this Proxy Statement and the Company’s Annual Report on Form 10-K for our fiscal year that ended on April 28, 2017 (the “Annual Report”) have been made available on our website. Our fiscal year is reported on a 52- or 53-week year that ends on the last Friday in April, and our fiscal 2017 began on April 30, 2016 and ended on April 28, 2017 (“fiscal 2017”). The Annual Report is not incorporated into this Proxy Statement and is not considered proxy soliciting material. The Annual Report is posted at the following website address: http://investors.netapp.com/annuals.cfm.

 

We will bear the cost of soliciting proxies. Copies of solicitation materials will be made available upon request to brokerage houses, fiduciaries, and custodians holding shares in their names that are beneficially owned by others to forward to such beneficial owners. The Company may reimburse such persons for their costs of forwarding the solicitation materials to such beneficial owners. The Company has retained AST Phoenix Advisors, a professional proxy solicitation firm, to assist in the solicitation of proxies from stockholders of the Company. AST Phoenix Advisors may solicit proxies by personal interview, mail, telephone, facsimile, email, or otherwise. The Company expects that it will pay AST Phoenix Advisors a customary fee, estimated to be approximately $10,000, plus reasonable out-of-pocket expenses incurred in the process of soliciting proxies. In addition, the original solicitation of proxies may be supplemented by solicitation by telephone, electronic communication or other means by directors, officers, employees or agents of the Company. No additional compensation will be paid to these individuals for any such services.

 

The Company’s stockholders may submit proposals for consideration at the 2018 Annual Meeting. Stockholders may also recommend candidates for election to our Board of Directors for the 2018 Annual Meeting (see “Corporate Governance — Director Selection”).

Pursuant to Rule 14a-8 under the Exchange Act, stockholder proposals may be included in our 2018 Proxy Statement. Any such stockholder proposals must be submitted in writing to the attention of the Corporate Secretary, NetApp, Inc., 495 East Java Drive, Sunnyvale, California 94089, no later than April 3, 2018, which is the date 120 calendar days prior to the first anniversary of the mailing date of this Proxy Statement.

Under the Company’s bylaws, a proposal that a stockholder intends to present for consideration at the 2018 Annual Meeting but does not seek to include in the Company’s proxy materials for the 2018 Annual Meeting (including the nomination of an individual to serve as a director) must be received by the Corporate Secretary (at the address specified in the preceding paragraph) not less than 120 calendar days prior to the date of the 2018 Annual Meeting. The stockholder’s submission must include the information specified in the Company’s bylaws.

 

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Stockholders interested in submitting such a proposal are advised to contact knowledgeable legal counsel with regard to the detailed requirements of applicable securities laws.

If a stockholder gives notice of a proposal or a nomination after the applicable deadline specified above, the notice will not be considered timely, and the stockholder will not be permitted to present the proposal or the nomination to the stockholders for a vote at the 2018 Annual Meeting.

 

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The name, age and position of each of the Company’s directors as of August 1, 2017 are set forth in the table below. Except as described below, each director has been engaged in his or her principal occupation during the past five years. There are no family relationships among any of our directors or executive officers. Messrs. Allen and Wall will be retiring from the Board at the Annual Meeting and are not standing for election. The Board thanks them for their distinguished service to NetApp.

 

Name of Director		Age		Position		Director Since
T. Michael Nevens*		67		Chairman of the Board		2009
Jeffry R. Allen*		65		Director		2005
Alan L. Earhart*		73		Director		2004
Gerald Held*		69		Director		2009
Kathryn M. Hill*		60		Director		2013
George Kurian		50		Director		2015
George T. Shaheen*		73		Director		2004
Stephen M. Smith*		61		Director		2016
Robert T. Wall*		72		Director		1993
Richard P. Wallace*		57		Director		2011

*Denotes Independent Director

T. MICHAEL NEVENS has been a member of the Board since December 2009 and Chairman since June 2015. From April 2014 until becoming Chairman in June 2015, Mr. Nevens was the Company’s Lead Independent Director. Since May 2006, Mr. Nevens has been a senior advisor to Permira Funds, an international private equity fund. Prior to his position with Permira Funds, Mr. Nevens spent 23 years advising technology companies with McKinsey & Co., where he managed the firm’s Global High Tech Practice and chaired the firm’s IT vendor relations committee. Mr. Nevens currently serves on the board of Ciena Corporation. He also served on the board of Altera Corporation until its acquisition by Intel Corporation in December 2015, as well as the board of Borland Software Corporation from 2004 until 2009. Mr. Nevens has a B.S. degree in physics from the University of Notre Dame and M.S. degree in industrial administration from Purdue University.

Our Board selected Mr. Nevens to serve as a director because his experience in equity investments and advising various technology companies throughout the world led our Board to conclude that he would be a valuable member of our Board, particularly as the Company seeks to grow internationally. His experience on the boards of both public and private technology companies also provides significant value and adds to his diverse perspective.

ALAN L. EARHART has been a member of the Board since December 2004. From 1970 until his retirement in 2001, Mr. Earhart held several positions with Coopers & Lybrand and its successor, PricewaterhouseCoopers LLP, an accounting firm, including most recently as managing partner of PricewaterhouseCoopers’ Silicon Valley offices.

 

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Mr. Earhart currently serves on the board of directors of Brocade Communication Systems, Inc. and TiVo Corporation (formerly known as Rovi Corporation), both public technology companies, and is an independent consultant and retired partner of PricewaterhouseCoopers. He previously served on the board of directors of Monolithic Power Systems Inc. and Quantum Corporation. Mr. Earhart holds a B.S. degree in accounting from the University of Oregon.

Our Board selected Mr. Earhart to serve as a director because he brings to our Board a deep knowledge of financial and accounting issues. Through his work experience and service on the boards of several high technology public companies, Mr. Earhart has developed knowledge of the complex issues facing global companies today. In addition, Mr. Earhart qualifies as an “audit committee financial expert” under the rules and regulations of the SEC. Mr. Earhart is a skilled advisor who makes a strong contribution to the diversity of perspectives on our Board.

GERALD HELD has been a member of the Board since December 2009. Since 1999, Dr. Held has been the Chief Executive Officer of Held Consulting, LLC, a strategic consulting firm. From 2006 to 2010, he was the Executive Chairman of Vertica Systems, an analytic database company that was acquired by Hewlett-Packard Company. From 2002 to 2008, Dr. Held was on the board of Business Objects SA. He was also a founding director for Microplace, Inc., a microfinance marketplace that was acquired by eBay, Inc. and Chairman of Bella Pictures, Inc., which was acquired by CPI Corp. Dr. Held serves on the board of Informatica Corporation, a formerly public technology company, which was taken private by the Permira Funds and Canadian Pension Plan Investment Board. He also serves as chairman of the board of several private companies, including Tamr Inc., MemSQL Inc., and Madaket Inc. From 1976 to 1997, Dr. Held served in a variety of executive roles at Tandem Computers, Inc. and Oracle Corporation.

Our Board selected Mr. Held to serve as a director because he has over 40 years of experience in developing, managing and advising technology organizations. He also has experience leading organizations through periods of growth, including growing a startup company into a public company generating several billion dollars in annual revenue. In addition to his professional experience, Mr. Held has a strong technical background, including an M.S. degree in systems engineering from the University of Pennsylvania and a Ph.D. degree in computer science specializing in relational database technology from University of California, Berkeley.

KATHRYN M. HILL has been a member of the Board since September 2013. Ms. Hill served in a number of positions at Cisco Systems, Inc., a communications company, from 1997 to 2013, including, among others, Executive Advisor from 2011 to 2013, Senior Vice President, Development Strategy and Operations from 2009 to 2011, Senior Vice President, Access Networking and Services Group from 2008 to 2009 and Senior Vice President, Ethernet Systems and Wireless Technology Group from 2005 to 2008. Prior to Cisco, Ms. Hill had a number of engineering roles at various technology companies. Ms. Hill currently serves on the boards of Moody’s Corporation and Celanese Corporation. Ms. Hill received a B.S. degree in Computational Mathematics from Rochester Institute of Technology.

Our Board selected Ms. Hill to serve as a director because she has extensive experience in business management and leadership of engineering and operations. Ms. Hill also has experience leading global technology organizations. Our Board believes that this experience, as well as Ms. Hill’s service on the board of another public company, adds to our Board’s collective level of expertise, skills and qualifications.

GEORGE KURIAN has been a member of our Board since June 2015. Mr. Kurian was appointed as our Chief Executive Officer on June 1, 2015 and President on May 20, 2016. From September 2013 to May 2015, he was Executive Vice President of Product Operations, overseeing all aspects of technology strategy and product and solutions development across our product portfolio. Mr. Kurian joined NetApp in April 2011 as the Senior Vice President of the Storage Solutions Group and was appointed to Senior Vice President of the Data ONTAP group in December 2011. Prior to NetApp, from 2002 to 2011, Mr. Kurian held several positions at Cisco Systems, including most recently as Vice President and General Manager of the application networking and switching technology group. From 1999 to 2002, Mr. Kurian was the Vice President of product management and strategy at Akamai Technologies. Prior to that he was a management consultant with McKinsey and Company, and led software engineering and product management teams at Oracle Corporation. Mr. Kurian holds a BS degree in electrical engineering from Princeton University and an MBA from Stanford University.

 

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Our Board selected Mr. Kurian to serve as a director because, as the Company’s Chief Executive Officer, Mr. Kurian has direct day-to-day exposure to all aspects of our business. In addition, Mr. Kurian has extensive experience and knowledge of the Company and the industry. As a result of these and other factors, our Board believes that Mr. Kurian adds to our Board’s collective level of expertise, skills and qualifications.

GEORGE T. SHAHEEN has been a member of our Board since June 2004. From December 2006 until July 2009, he was the Chief Executive Officer and Chairman of the Board of Directors of Entity Labs, Ltd., a technology company in the data collection, storage and analytics space. Mr. Shaheen was the Chief Executive Officer of Siebel Systems, Inc., a customer relationship management software company, from April 2005 until the sale of the company in January 2006. From October 1999 to April 2001, he served as the Chief Executive Officer and Chairman of the Board of Webvan Group, Inc. Prior to joining Webvan Group, Inc., Mr. Shaheen was the Chief Executive Officer and Global Managing Partner of Andersen Consulting, which later became Accenture. Mr. Shaheen currently serves as Chairman of the Board of Korn/Ferry International. He also serves on the boards of 24/7 Customer, Inc., Green Dot Corporation and Marcus & Millichap Inc. He has served as an IT Governor of the World Economic Forum and as a member of the Board of Advisors for the Northwestern University Kellogg Graduate School of Management. He has also served on the Board of Trustees of Bradley University. Mr. Shaheen received a B.S. degree in business and an M.B.A. from Bradley University.

Our Board selected Mr. Shaheen to serve as a director because he has significant experience leading, managing and advising companies. Mr. Shaheen’s consulting background gives him keen insight into sales and the customer-based service aspect of the Company’s operations. In addition, Mr. Shaheen has expertise on compliance matters as a result of his service on the boards of several private and public technology companies, including service as a chairman and member of the audit and compensation committees of those boards.

STEPHEN M. SMITH has been a member of the Board since May 2016. Since 2007, Mr. Smith has served as the Chief Executive Officer, President and member of the board of directors of Equinix, Inc., a global interconnection and data center company. Prior to joining Equinix, Mr. Smith served as Senior Vice President at HP-Services, a business segment of Hewlett-Packard Co., from January 2005 to October 2006. From September 2003 to January 2005, Mr. Smith served as Vice-President of Global Professional and Managed Services at Lucent Technologies Inc., a communications solutions provider. Prior to joining Lucent Technologies, Mr. Smith spent 17 years with Electronic Data Systems Corporation (“EDS”), a business and technology solutions company, in a variety of positions, including Chief Sales Officer, President of EDS Asia-Pacific and President of EDS Western Region. Mr. Smith serves on the board of directors of F5 Networks, a public company, and, during the past five years, served as a director of the public company Volterra Semiconductor Corporation. Mr. Smith graduated from the U.S. Military Academy at West Point and holds a B.S. in Engineering.

Our Board selected Mr. Smith to serve as a director because of his executive leadership skills and management experience as a current chief executive officer of a publicly traded company, as well as because of his extensive career history in technology and critical infrastructure companies and his deep technology expertise. Mr. Smith brings a unique understanding of the evolution of IT impacting our customers and current technology trends, all of which qualify him to serve on our Board.

RICHARD P. WALLACE has been a member of the Board since March 2011. Mr. Wallace currently serves as the President and Chief Executive Officer of KLA-Tencor Corporation, a supplier of process control and yield management solutions for semiconductor and related microelectronics industries. He began his career at KLA Instruments in 1988 as an applications engineer and has held various general management positions throughout his 27-year tenure with the company. Mr. Wallace became the CEO of KLA-Tencor in January 2006. Mr. Wallace previously served as a member of the board of directors for Semiconductor Equipment and Materials International (SEMI), an industry trade association, and previously served as a member of the board of directors for Beckman Coulter from 2009 to 2011. Mr. Wallace earned his B.S. degree in electrical engineering from the University of Michigan and an M.S. degree in engineering management from Santa Clara University.

Our Board selected Mr. Wallace to serve as a director because of his experience as chief executive officer of a publicly traded high-technology company. He brings to the Board more than two decades of experience gained while working at a technology company that has experienced growth. Mr. Wallace offers a unique perspective and expertise that is relevant to leading and advising a growth company. His experience as a board member of another publicly traded company also provides important value and adds to his unique perspective.

 

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Our Board has adopted policies and procedures that our Board believes are in the best interests of the Company and its stockholders while being compliant with the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC and the NASDAQ Stock Market, LLC (“NASDAQ”).

Our Board leadership structure reflects our Company leadership needs and provides effective oversight of Company management and risk management. Nine of our ten directors are independent, including our Chairman of the Board. Within the last six years, the Company has added four new independent directors to our Board.

The operation and functions of the Board are governed by our Corporate Governance Guidelines. In addition, all of the Company’s directors, officers, and employees are subject to our Code of Conduct.

Further details on our governance practices are provided in the following sections.

 

Our Board does not view any particular leadership structure as preferred and routinely considers the appropriate leadership structure. This consideration includes the pros and cons of alternative leadership structures in light of the Company’s operating and governance environment at the time, with the goal of achieving the optimal model for Board leadership and effective oversight of management by our Board.

Our Board currently consists of ten directors, nine of whom are independent. Our only management director is Mr. Kurian, our Chief Executive Officer. Mr. Nevens, an independent director, holds the role of Chairman of the Board. The Board believes this structure benefits the Board and the Company by enabling the Chief Executive Officer to focus on operational and strategic matters while enabling the Chairman to focus on Board and governance matters, including, among other things, the creation of long-term stockholder value and long range strategic planning.

As described in more detail below, our Board of Directors has three standing committees, each of which is composed solely of independent directors and chaired by an independent director. Our Board delegates substantial responsibility to each Board committee, which regularly reports its activities and actions back to the Board. We believe that our independent Board committees and their respective chairs are an important aspect of our Board leadership structure.

 

Our Board has adopted a formal set of Corporate Governance Guidelines concerning various issues related to Board membership, structure, function and processes; Board committees; leadership development, including succession planning; oversight of risk management; and our ethics helpline. A copy of the Corporate Governance Guidelines is available on our website at http://investors.netapp.com/corporate-governance.cfm.

 

Our Board, as a whole and through its committees, has responsibility for the oversight of risk management. With the oversight of our Board, our executive officers are responsible for the day-to-day management of the material risks the Company faces. In its oversight role, our Board has the responsibility to satisfy itself that the risk management processes designed and implemented by our executive officers are adequate and functioning as designed. The involvement of our Board in setting our long-term business strategy is a key part of our Board’s oversight of risk management and allows our Board to assess and determine what constitutes an appropriate level of risk for the Company and review and consider management’s role in risk management. Our Board regularly receives updates from management and outside advisors regarding material risks the Company faces.

Each committee of our Board oversees specific aspects of risk management. For example, our Audit Committee oversees overall integrity of our financial statements, accounting and auditing matters and our compliance with

 

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legal, regulatory and public disclosure requirements; our Compensation Committee oversees the management risks associated with succession planning and the relationship between our compensation policies and programs; and our Corporate Governance and Nominating Committee oversees the management of risks associated with director independence, conflicts of interest, board composition and organization, and director succession planning. Our committees regularly report their findings to our Board.

Other than when our Board or a committee of our Board meets in executive session, senior management attends all meetings of our Board and its committees and is available to address questions raised by directors with respect to risk management and other matters.

 

The Board plans for succession to the position of CEO and other senior management positions to help ensure continuity of leadership. To assist the Board in this effort, the CEO provides the Board with an assessment of other executives and their potential as a suitable successor. The CEO also provides the Board with an assessment of individuals considered to be potential successors to certain other senior management positions. The Board discusses and evaluates these assessments, including in private sessions, and provides feedback to the CEO. Specifically, in February 2017, the Board, including Mr. Kurian, reviewed and assessed the Company’s executive-level talent, with a focus on their potential to deliver on the Company’s strategy and long-term plan, and discussed strategies for addressing gaps. Management is responsible for developing retention and development plans for potential successors and periodic progress reports and reviews are provided to the Board.

 

A majority of our Board is composed of “independent directors,” as defined in the applicable laws and regulations of the SEC and the Listing Rules of NASDAQ. The independent directors regularly meet in executive session, without management, as part of the normal agenda of our Board meetings. Our Chairman, Mr. Nevens, is a nonemployee director and is independent (as defined by the NASDAQ Listing Rules).

 

Our Board of Directors maintains three standing committees and has adopted a charter for each that meets applicable NASDAQ rules. Charters are reviewed by their respective committees annually and are available at http://investors.netapp.com/corporate-governance.cfm.

Corporate Governance and Nominating Committee

The responsibilities of the committee include:

 

•

Review of matters concerning corporate governance and providing recommendations to the Board

 

•

Review of composition of the Board of Directors and its committees and providing recommendations to the Board

 

•

Evaluation of the performance of the Board and director compensation

 

•

Review of conflicts of interest of members of the Board and corporate officers

 

•

Review and approval of related person transactions

 

•

Oversight and management of risks associated with director independence, conflicts of interest, board composition and organization, and director succession planning

All of the members of the Corporate Governance and Nominating Committee meet the applicable requirements for independence from Company management.

 

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Compensation Committee

The responsibilities of the committee include:

 

•

Review of the Company’s overall compensation and benefits philosophy and strategy and advising the Company’s management

 

•

Evaluation and approval of the compensation policies, plans and programs for our Chief Executive Officer, other executive officers and nonemployee directors, and determination of compensation in accordance with the Compensation Committee charter

 

•

Review and approval of our incentive compensation plans in accordance with the Compensation Committee charter

 

•

In accordance with NASDAQ rules, review and assessment of the independence of any compensation consultant, legal counsel or other advisor that provides advice to the Compensation Committee

All of the members of the Compensation Committee meet the applicable requirements for independence as defined by applicable NASDAQ and Internal Revenue Service rules.

Audit Committee

The responsibilities of the committee include:

 

•

Appointment, compensation, retention, termination and oversight of the work of the Company’s independent registered public accounting firm, Deloitte & Touche LLP, which reports directly to the Audit Committee

 

•

Oversight of the integrity of the Company’s financial statements and integrity of the Company’s internal controls

 

•

Oversight of the quality of the internal audit function of the Company, which reports directly to the Audit Committee

 

•

Establishment of policies and procedures that are consistent with the SEC and NASDAQ requirements for auditor independence

All of the members of the Audit Committee meet the applicable requirements for independence from Company management and requirements for financial literacy. Each member of the Audit Committee has the requisite financial management expertise.

 

Our Board has adopted guidelines for the identification, evaluation and nomination of candidates for director.

To assist with director nominations, our Board has assigned the Corporate Governance and Nominating Committee responsibility for reviewing and recommending nominees to our Board. Although there are no specific minimum qualifications for director nominees, the ideal candidate should have the highest professional and personal ethics and values, and broad experience at the policy-making level in business, government, education, technology, or public service. In evaluating the suitability of a particular director nominee, our Board considers a broad range of factors, including, without limitation, diversity of business experience, professional expertise, length of service, character, integrity, judgment, independence, diversity (including with respect to race and gender), age, skills, education, understanding of the Company’s business, and other commitments. In addition, our Corporate Governance and Nominating Committee may also consider such other factors as it may deem, from time to time, are in our and our stockholders’ best interests.

The Corporate Governance and Nominating Committee makes an effort to ensure that our Board’s composition reflects a broad diversity of experience, professions, skills, viewpoints, geographic representation, personal traits and backgrounds. Additionally, although we have no formal policy with respect to diversity, due to the global and

 

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complex nature of our business, our Board believes it is important to identify otherwise qualified candidates who would increase our Board’s racial, ethnic, gender and/or cultural diversity. No specific weights are assigned to particular criteria, and the Corporate Governance and Nominating Committee does not believe that any specific criterion is necessarily applicable to all prospective nominees. When the Corporate Governance and Nominating Committee reviews a potential new candidate, it looks specifically at the candidate’s qualifications in light of the needs of our Board at that time, given the then-current mix of director attributes. With respect to the nomination of continuing directors for re-election, each continuing director’s past contributions to our Board are also considered.

In the case of new director candidates, the Corporate Governance and Nominating Committee reviews whether the nominee is independent for NASDAQ purposes and recommends a determination to the Board, which determination is based upon applicable NASDAQ listing standards, applicable SEC rules and regulations and the advice of counsel, if necessary. The Corporate Governance and Nominating Committee generally relies on a variety of resources to compile a list of potential candidates, including, among other things and depending upon the circumstances, its network of contacts, searches of corporate, academic and government environments and resources, and, when appropriate, a professional search firm. We believe utilizing such a broad variety of resources furthers our Board’s goal of ensuring the identification and consideration of a diverse range of qualified candidates, including, without limitation, women and minority candidates. After considering the function and needs of our Board, the Corporate Governance and Nominating Committee conducts appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates. The Corporate Governance and Nominating Committee meets to discuss and consider such candidates’ qualifications and then selects a nominee for recommendation to our Board by majority vote.

If the Corporate Governance and Nominating Committee determines that it wants to identify new independent director candidates for Board membership, it is authorized to retain and to approve the fees of third-party executive search firms to help determine the skills and qualifications that would best complement our Board and identify prospective director nominees.

The Corporate Governance and Nominating Committee uses the same process for evaluating all nominees, regardless of the source of the nomination. In 2016, the Corporate Governance and Nominating Committee retained the services of an executive search firm to assist it in identifying new candidates to join the Board.

A stockholder who desires to recommend a candidate for election to our Board must direct the recommendation in writing to NetApp, Inc., 495 East Java Drive, Sunnyvale, California 94089, Attention: Corporate Secretary and must include the same information required by the Company’s bylaws in connection with the nomination of a director of our Board, including, without limitation, the candidate’s name; home and business contact information; detailed biographical data and qualifications; information regarding any relationships between the candidate and the Company within the last three years; evidence of the nominating person’s ownership of Company stock; and a written statement that, if nominated, such candidate will tender an irrevocable advance resignation in accordance with the Company’s Corporate Governance Guidelines.

 

Our Board held six meetings and also acted by written consent during fiscal 2017. During fiscal 2017, each member of our Board attended at least 78% of the aggregate of (1) the total number of meetings of our Board held during fiscal 2017; and (2) the total number of meetings held by all Board committees on which such director served, in each case covering the periods of fiscal 2017 during which such director served on our Board or such committees, as applicable. Four out of the ten directors then serving attended all meetings of our Board and all meetings of their respective committees during fiscal 2017.

There are no family relationships among executive officers, directors or nominees of the Company. Our Board currently has three standing committees, each of which is composed of entirely of independent directors, and each of which operates under a charter approved by our Board: the Audit Committee, the Corporate Governance and Nominating Committee, and the Compensation Committee.

 

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The members of the committees as of the date of this Proxy Statement are identified in the following table:

 

Director		Audit		Compensation		Corporate Governance and Nominating
T. Michael Nevens		☑				Chair
Jeffry R. Allen		☑
Alan L. Earhart		Chair				☑
Gerald Held				☑
Kathryn M. Hill		☑
George T. Shaheen				☑
Stephen M. Smith				☑
Robert T. Wall				Chair		☑
Richard P. Wallace				☑

All members of the Audit Committee are independent in accordance with the applicable laws and regulations of the SEC and the Listing Rules of NASDAQ. Our Board has determined that Messrs. Earhart and Allen each qualify as an “audit committee financial expert” under the rules and regulations of the SEC. The Audit Committee reviews, acts on and reports to our Board with respect to various auditing and accounting matters, including the selection of the Company’s independent registered public accounting firm, the scope of the annual audits, fees to be paid to the independent registered public accounting firm, the performance of the Company’s independent registered public accounting firm, the accounting practices of the Company and other such functions as detailed in the Audit Committee Charter, which can be found on the Company’s website at http://investors.netapp.com/corporate-governance.cfm. The Audit Committee held eleven meetings during fiscal 2017.

All members of the Compensation Committee are independent in accordance with the applicable laws and regulations of the SEC and the Listing Rules of NASDAQ, and qualify as an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code, as amended. The Compensation Committee establishes salaries, incentive compensation programs, and other forms of compensation for our officers and non-employee directors; creates the compensation guidelines under which management establishes salaries for non-officers and other employees of the Company; and administers the incentive compensation and benefit plans of the Company. In carrying out its responsibilities, the Compensation Committee reviews, at least annually, the compensation for the Chief Executive Officer, all executive vice presidents, all senior vice presidents and non-employee directors, the corporate goals relevant to compensation, and our executive and leadership development policies. The functions of the Compensation Committee are detailed in the Compensation Committee Charter, which can be found on the Company’s website at http://investors.netapp.com/corporate-governance.cfm. The Compensation Committee meets regularly with its outside advisors independently of management. The Compensation Committee held seven meetings during fiscal 2017.

All members of the Corporate Governance and Nominating Committee are independent in accordance with the applicable laws and regulations of the SEC and the Listing Rules of NASDAQ. The Corporate Governance and Nominating Committee evaluates and recommends to our Board candidates for Board membership and considers nominees recommended by stockholders who satisfy the conditions described above under “Corporate Governance — Director Selection.” The Corporate Governance and Nominating Committee also develops and recommends corporate governance policies and other governance guidelines and procedures to our Board. The functions of the Corporate Governance and Nominating Committee are detailed in the Corporate Governance and

 

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Nominating Committee Charter, which can be found on the Company’s website at http://investors.netapp.com/corporate-governance.cfm. The Corporate Governance and Nominating Committee held three meetings during fiscal 2017.

 

While we do not have a formal policy for director attendance at our annual meetings, historically they have been scheduled on the same day as a Board of Directors meeting and were attended by the directors. In 2016, all of the directors then serving attended the 2016 Annual Meeting of Stockholders (the “2016 Annual Meeting”) in person.

 

The Company has adopted a Code of Conduct that includes a conflict of interest policy that applies to all directors, officers and employees. All employees are required to affirm in writing their understanding and acceptance of the Code of Conduct.

The Code of Conduct is posted on the Company’s website at: http://investors.netapp.com/corporate-governance.cfm. The Company will post any amendments to or waivers of the provisions of the Code of Conduct on its website.

 

The Company’s Political Contributions Policy and its Code of Conduct prohibit political contributions of any kind, by or on behalf of the Company. Our Code of Conduct also requires advance approval of any donation of NetApp assets or funds. We believe this provides an additional measure of oversight in enforcing our policy against Company political contributions.

 

The Company does not provide personal loans or extend credit to any executive officer or director.

 

Stockholders may contact any of the Company’s directors by writing to them c/o NetApp, Inc., 495 East Java Drive, Sunnyvale, California 94089, Attn: Corporate Secretary. Employees and others who wish to contact our Board or any member of the Audit Committee to report questionable practices may do so anonymously by using this address and designating the communication as “confidential.”

 

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The Compensation Committee evaluates the compensation and form of compensation for nonemployee directors annually. As a part of this process, the Compensation Committee reviews general market data for director compensation as well as director compensation data from the Company’s peer group, including cash compensation, equity compensation and stock ownership requirements. Non-employee director compensation is periodically adjusted to maintain alignment with market and peer director pay practices. Nonemployee directors receive annual cash retainers as well as equity awards for their service on our Board. Details of the compensation are discussed in the narrative below. Employee directors do not receive any compensation for their services as members of our Board.

 

The table below summarizes the total compensation paid by the Company to our directors for fiscal 2017.

 

Name		Fees Earned or Paid in Cash ($)(1)				Restricted Stock Units ($)(2)				Option Awards ($)(3)				Nonequity Incentive Plan Compensation ($)				Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)				All Other Compensation ($)				Total ($)
T. Michael Nevens			180,000				249,976				—				—				—				—				429,976
Jeffry R. Allen			80,000				249,976				—				—				—				12,000	(4)			341,976
Alan L. Earhart			120,000				249,976				—				—				—				—				369,976
Gerald Held			75,000				249,976				—				—				—				—				324,976
Kathryn M. Hill			77,292				249,976				—				—				—				—				327,268
George T. Shaheen			75,000				249,976				—				—				—				—				324,976
Stephen M. Smith			68,810				374,973				—				—				—				—				443,783
Robert T. Wall			107,500				249,976				—				—				—				—				357,476
Richard P. Wallace			75,000				249,976				—				—				—				—				324,976
George Kurian (5)			—				—				—				—				—				—				—

 

 

 

(1)

The amounts in this column represent compensation that was earned in fiscal 2017. Our Board year does not correspond with our fiscal year. Our Board year begins on the date of each annual meeting and runs until the next annual meeting. Board fees are paid at the beginning of each quarter of the Board year. A portion of the fees earned during the first quarter of fiscal 2017 were paid in the last quarter of fiscal 2016 and are included in this table. A portion of the fees earned during the first quarter of fiscal 2018 were paid in the last quarter of fiscal 2017 and are not included in this table.

 

(2)

The amounts reported represent the grant date fair value of time-based restricted stock unit (“RSU”) awards to the director under the Company’s Amended and Restated 1999 Stock Option Plan and are computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (FASB ASC 718). Assumptions used in the valuations of these awards are included in Note 11 of the Annual Report. These amounts do not necessarily represent the actual value that may be realized by the nonemployee director.

 

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(3)	The table below sets forth the number of shares of common stock subject to outstanding options and RSUs (including RSUs for which the payout of shares has been deferred by such director) held by the nonemployee directors as of April 28, 2017:

 

Name		# of Outstanding Options (in Shares)				# of RSUs (in Shares)				Total Equity Awards Outstanding
T. Michael Nevens			42,831				7,132				49,963
Jeffry R. Allen			69,914				7,132				77,046
Alan L. Earhart			16,416				15,048				31,464
Gerald Held			46,916				39,158				86,074
Kathryn M. Hill			26,997				7,132				34,129
George T. Shaheen			56,916				23,826				80,742
Stephen M. Smith			—				7,132				7,132
Robert T. Wall			76,416				9,988				86,404
Richard P. Wallace			84,331				30,136				114,467

 

(4)	The amount represents a reimbursement for fees and taxes incurred by Mr. Allen as a result of an administrative error by a Company vendor that impacted his deferred compensation.

 

(5)

During fiscal 2017, Mr. Kurian served as our Chief Executive Officer, President and a member of the Board. Mr. Kurian did not receive any additional compensation for serving on our Board. For more information on Mr. Kurian’s compensation as our Chief Executive Officer and President, please see the “Executive Compensation and Related Information—Summary Compensation Table” below.

 

The following table sets forth a summary of our total compensation policy for our nonemployee directors as of the end of fiscal 2017:

 

Position		Annual Cash Retainer ($)				Equity Grants ($)
Board of Directors
Lead Independent Director/Chairman			135,000				250,000
Board Member (other than Lead Independent Director/Chairman)			60,000				250,000
Audit Committee
Chairperson			50,000				—
Member			20,000				—
Compensation Committee
Chairperson			37,500				—
Member			15,000				—
Corporate Governance and Nominating Committee
Chairperson			25,000				—
Member			10,000				—

In May 2016, in accordance with its annual practice, the Compensation Committee evaluated the compensation for nonemployee directors, including benchmarking the directors’ cash and equity compensation against our Compensation Practices Peer Group (as disclosed on page 38 of this Proxy Statement) modified to exclude Microsoft, IBM, Oracle, Hewlett-Packard, and CommVault, since each of these companies is substantially different in size from NetApp). The Committee determined, with the assistance of its independent advisor, that the total compensation for our nonemployee directors was within an acceptable competitive range, and that no changes to the compensation arrangements were warranted with commencement at the 2016 Annual Meeting.

Our nonemployee directors receive automatic annual equity grants under the Automatic Award Program of the 1999 Plan pursuant to an outside director compensation policy adopted by our Board and the Compensation Committee, which may be revised from time to time as our Board or the Compensation Committee deems appropriate. Starting in fiscal 2016, all nonemployee director automatic annual equity grants will be in the form of RSUs.

 

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Following the 2016 Annual Meeting of Stockholders, each of the individuals re-elected as a nonemployee director received a number of RSUs as indicated in the table below with respect to their automatic annual equity awards. Mr. Smith also received a grant in May of 2016 in connection with joining the Board.

 

Name		RSUs				Stock Option Grants (in Shares)		Stock Option Exercise Price ($)		Grant Date
T. Michael Nevens			7,132			—		—			September 15, 2016
Jeffry R. Allen			7,132			—		—			September 15, 2016
Alan L. Earhart			7,132			—		—			September 15, 2016
Gerald Held			7,132			—		—			September 15, 2016
Kathryn M. Hill			7,132			—		—			September 15, 2016
George T. Shaheen			7,132			—		—			September 15, 2016
Stephen M. Smith			4,898			—		—			May 25, 2016
Stephen M. Smith			7,132			—		—			September 15, 2016
Robert T. Wall			7,132			—		—			September 15, 2016
Richard P. Wallace			7,132			—		—			September 15, 2016

A newly elected or appointed nonemployee director receives a pro-rated grant of RSUs upon his or her first election or appointment to the Board with a value of $250,000 (if such election or appointment occurs before February of the applicable year) or with a value of $125,000 (if such election or appointment occurs after February of the applicable year).

Equity awards for nonemployee directors are represented as a dollar value. For these purposes, the value of any awards of RSUs will equal the product of (1) the fair market value of one share of common stock on the grant date of such award and (2) the aggregate number of RSUs. With respect to stock options, the value is determined by using the Black-Scholes option valuation methodology, or such other methodology our Board or the Compensation Committee may determine, on the grant date of the option.

Each nonemployee director is also eligible to receive an annual cash retainer for his or her Board and committee service, pursuant to the terms of the outside director compensation policy. The Compensation Committee has approved a deferral program for our nonemployee directors, which allows each nonemployee director to elect to defer the receipt of his or her annual cash retainer until a later date in accordance with applicable tax laws. Additionally, for any automatic equity grant in the form of RSUs, the director may be permitted to elect in accordance with federal tax laws when he or she will receive payout from his or her vested RSUs and defer income taxation until the award is paid. In connection with this deferral, a director may elect to receive payout within 30 days of the earliest of: (1) if the director so specifies, a specified date that is no earlier than January 1 of the second calendar year immediately following the date on which the RSUs vested; (2) the date the director ceases to serve as a director for any reason (in accordance with Section 409A of the Internal Revenue Code of 1986, as amended and the regulations thereunder); and (3) the date on which a Change of Control occurs. If the director does not specify a date per (1) above, then the RSUs shall be paid out upon the earlier to occur of (2) and (3) above. For the definition of “Change of Control”, please see “Termination of Employment and Change of Control Agreements – Definitions Contained in Change of Control Severance Agreement” below. An election to defer the payout of vested RSUs is not intended to increase the value of the payout to the nonemployee director, but rather to give the nonemployee director the flexibility to decide when he or she will be subject to taxation with respect to the award. Any election to defer payment of any vested RSUs will not alter the other terms of the award, including the vesting requirements.

 

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To the Company’s knowledge, the following table sets forth certain information regarding beneficial ownership of the Company’s common stock as of July 17, 2017 by (1) each person or entity who is known by the Company to own beneficially more than 5% of the Company’s common stock; (2) each of the Company’s directors and nominees for director; (3) each of the Company’s executive officers set forth in the Summary Compensation Table; and (4) all of the Company’s current directors and executive officers as a group.

Except as indicated, the address of the beneficial owners is c/o NetApp, Inc., 495 East Java Drive, Sunnyvale, California 94089. Information related to holders of more than 5% of the Company’s common stock was obtained from filings with the SEC pursuant to Sections 13(d) or 13(g) of the Exchange Act.

 

Name of Beneficial Owners		Number of Shares Beneficially Owned+				Percentage of Class(1)
PRIMECAP Management Company(2)			41,682,076				15.4	%
177 E. Colorado Blvd, 11th Floor Pasadena, CA 91105
The Vanguard Group(3)			26,111,177				9.7	%
100 Vanguard Boulevard Malvern, PA 19355
Dodge & Cox(4)			23,029,321				8.5	%
555 California Street, 40th Floor San Francisco, CA 94104
BlackRock, Inc.(5)			20,449,157				7.6	%
55 East 52nd Street New York, NY 10055
Vanguard Chester Funds — Vanguard Primecap Fund(6)			14,104,800				5.2	%
100 Vanguard Boulevard Malvern, PA 19355
Invesco Ltd.(7)			11,158,366				4.1	%
1555 Peachtree Street NE, Suite 1800 Atlanta, GA 30309
George Kurian(8)			307,598				*
Ronald J. Pasek(9)			16,341				*
Joel D. Reich(10)			62,180				*
Henri P. Richard(11)			21,764				*
Matthew K. Fawcett(12)			218,385				*
Jeffry R. Allen(13)			71,612				*
Alan L. Earhart(14)			37,153				*
Gerald Held(15)			86,333				*
Kathryn M. Hill(16)			47,757				*
T. Michael Nevens(17)			63,801				*
George T. Shaheen(18)			85,208				*
Stephen M. Smith(19)			12,030				*
Robert T. Wall(20)			122,452				*
Richard P. Wallace(21)			114,467				*
All current directors and executive officers as a group (14 persons)(22)			1,267,081				*

 

*

Less than 1%

 

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+

Pursuant to our outside director compensation policy, options to purchase shares of our common stock held by our nonemployee directors are early exercisable. Shares issued upon early exercise of stock options remain subject to the same vesting schedule applicable to the exercised stock options. If a nonemployee director ceases to provide services to us prior to the date on which all such shares have vested, we have a right to repurchase any unvested shares at the exercise price paid per share.

 

(1)

Percentage of Class is based on 270,438,848 shares of common stock outstanding on July 17, 2017. Shares of common stock subject to stock options and RSUs that are currently exercisable or will become exercisable or issuable within 60 days of July 17, 2017 are deemed outstanding for computing the percentage of the person or group holding such options and/or RSUs, but are not deemed outstanding for computing the percentage of any other person or group. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock.

 

(2)

Information concerning stock ownership was obtained from Amendment No. 3 to the Schedule 13G filed with the SEC on February 9, 2017 by PRIMECAP Management Company reported sole voting power with respect to 13,195,501 of such shares of common stock and sole dispositive power with respect to all 41,682,076 shares of common stock.

 

(3)

Information concerning stock ownership was obtained from Amendment No. 2 to the Schedule 13G filed with the SEC on February 10, 2017. The Vanguard Group reported sole voting power with respect to 443,377 of such shares of common stock and sole dispositive power with respect to 25,619,390 of such shares of common stock.

 

(4)

Information concerning stock ownership was obtained from Amendment No. 6 to the Schedule 13G filed with the SEC on March 20, 2017. Dodge & Cox reported sole voting power with respect to 21,612,121 of such shares of common stock and sole dispositive power with respect to 23,029,321 shares of common stock.

 

(5)

Information concerning stock ownership was obtained from Amendment No. 5 to the Schedule 13G filed with the SEC on January 25, 2017 by BlackRock Inc. BlackRock reported sole voting power with respect to 17,147,638 of such shares of common stock and sole dispositive power with respect to 20,391,698 shares of common stock.

 

(6)	Information concerning stock ownership was obtained from the Schedule 13G filed with the SEC on February 13, 2017 by Vanguard Chester Funds — Vanguard Primecap Fund. Vanguard Chester Funds — Vanguard Primecap Fund reported sole voting power with respect to 14,104,800 of such shares of common stock.

 

(7)	Information concerning stock ownership was obtained from the Schedule 13G filed with the SEC on February 1, 2017. Invesco Ltd. reported sole voting power with respect to 10,556,687 of such shares of common stock and sole dispositive power with respect to all 11,158,366 shares of common stock.

 

(8)	Consists of (i) 31,598 shares of common stock held of record by Mr. Kurian; and (ii) 276,000 shares of common stock issuable upon exercise of outstanding options exercisable within 60 days of July 17, 2017, of which 267,800 shares were fully vested as of such date.

 

(9)	Consists of 16,341 shares of common stock held of record by Mr. Pasek.

 

(10)	Consists of (i) 2,272 shares of common stock held of record by Mr. Reich; and (ii) 59,908 shares of common stock issuable to Mr. Reich upon exercise of outstanding stock options exercisable within 60 days of July 17, 2017, of which 58,166 shares were fully vested as of such date.

 

(11)	Consists of 21,764 shares of common stock held of record by Henri Richard and Gay Richard JTWROS.

 

(12)	Consists of (i) 2,117 shares of common stock held of record by Mr. Fawcett; and (ii) 216,268 shares of common stock issuable upon exercise of outstanding options exercisable within 60 days of July 17, 2017, of which 213,972 shares were fully vested as of such date.

 

(13)	Consists of (i) 14,566 shares of common stock held of record by Jeffry R. Allen and Teri Allen, as Trustees of the Jeffry and Teri Allen Revocable Trust dated 1/29/2002; (ii) 49,914 shares of common stock issuable

 

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upon exercise of outstanding options exercisable within 60 days of July 17, 2017, of which all were fully vested as of such date; and (iii) 7,132 shares of common stock issuable upon the vesting of RSUs within 60 days of July 17, 2017. Mr. Allen has shared voting and investment power with respect to the shares held of record by Jeffry R. Allen and Teri Allen, as Trustees of the Jeffry and Teri Allen Revocable Trust dated 1/29/2002.

 

(14)

Consists of (i) 5,689 shares of common stock held of record by Mr. Earhart; (ii) 16,416 shares of common stock issuable upon exercise of outstanding options exercisable within 60 days of July 17, 2017, all of which were fully vested as of such date; and (iii) 7,132 shares of common stock issuable upon the vesting of RSUs within 60 days of July 17, 2017; and (iv) 7,916 shares of common stock issuable upon the vesting of RSUs within 60 days of July 17, 2017 and for which payout has been deferred by Mr. Earhart. The RSUs for which Mr. Earhart has elected to defer payout shall be paid out within 30 days of the earlier of the date his service on the Board ceases for any reason or the date on which a Change of Control occurs. For the definition of “Change of Control” please see “Termination of Employment and Change of Control Agreements — Definitions Contained in Change of Control Severance Agreement” below.

 

(15)

Consists of (i) 259 shares of common stock held of record by Mr. Held; (ii) 46,916 shares of common stock issuable upon exercise of outstanding options exercisable within 60 days of July 17, 2017, of which all were fully vested as of such date; (iii) 7,132 shares of common stock issuable upon the vesting of RSUs within 60 days of July 17, 2017; and (iv) 32,026 shares of common stock issuable upon the vesting of RSUs within 60 days of July 17, 2017 and for which payout has been deferred by Mr. Held. The RSUs for which Mr. Held has elected to defer payout shall be paid out within 30 days of the earlier of the date his service on the Board ceases for any reason or the date on which a Change of Control occurs. For the definition of “Change of Control” please see “Termination of Employment and Change of Control Agreements — Definitions Contained in Change of Control Severance Agreement” below.

 

(16)

Consists of (i) 13,628 shares of common stock held of record by Kathryn Hill Trustee of the Kathryn Hill 2007 Trust U/A/D 1/10/2007 Reserve Account; (ii) 26,997 shares of common stock issuable upon exercise of outstanding options exercisable within 60 days of July 17, 2017, of which all were fully vested as of such date; and (iii) 7,132 shares of common stock issuable upon the vesting of RSUs within 60 days of July 17, 2017.

 

(17)

Consists of (i) 13,838 shares of common stock held of record by The Nevens Family 1997 Trust; (ii) 42,831 shares of common stock issuable to Mr. Nevens upon exercise of outstanding options exercisable within 60 days of July 17, 2017, of which all were fully vested as of such date; and (iii) 7,132 shares of common stock issuable upon the vesting of RSUs within 60 days of July 17, 2017.

 

(18)

Consists of (i) 4,466 shares of common stock held of record by George T. Shaheen and Darlene F. Shaheen, as Trustees to the Shaheen Revocable Trust U/A DTD 12/15/88; (ii) 16,694 shares of common stock issuable upon the payout of RSUs that are vested as of July 17, 2017 but for which Mr. Shaheen has elected to defer payout; (iii) 56,916 shares of common stock issuable upon exercise of outstanding options exercisable within 60 days of July 17, 2017, of which all were fully vested as of such date; and (iv) 7,132 shares of common stock issuable upon the vesting of RSUs within 60 days of July 17, 2017 for which Mr. Shaheen has elected to defer the release. The RSUs for which Mr. Shaheen has elected to defer payout shall be paid out within 30 days of the earlier of the date his service on the Board ceases for any reason or the date on which a Change of Control occurs. For the definition of “Change of Control” please see “Termination of Employment and Change of Control Agreements — Definitions Contained in Change of Control Severance Agreement” below. Mr. Shaheen has shared voting and investment power with respect to the shares held of record by George T. Shaheen and Darlene F. Shaheen, as Trustees to the Shaheen Revocable Trust U/A DTD 12/15/88.

 

(19)	Consists of (i) 4,898 shares of common stock held of record by the Stephen Smith & Sandra Smith Trust UAD 9/13/2019; and (ii) 7,132 shares of common stock issuable to Mr. Smith upon the vesting of RSUs within 60 days of July 17, 2017.

 

(20)	Consists of (i) 36,048 shares of common stock held of record by Mr. Wall; and (ii) 2,856 shares of common stock issuable upon the payout of RSUs that are vested as of July 17, 2017 but for which Mr. Wall has

 

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elected to defer payout; (iii) 76,416 shares of common stock issuable upon exercise of outstanding options exercisable within 60 days of July 17, 2017, of which all were fully vested as of such date; and (iv) 7,132 shares of common stock issuable upon the vesting of RSUs within 60 days of July 17, 2017 The RSUs for which Mr. Wall has elected to defer payout shall be paid out within 30 days of the earlier of the date his service on the Board ceases for any reason or the date on which a Change of Control occurs. For the definition of “Change of Control” please see “Termination of Employment and Change of Control Agreements — Definitions Contained in Change of Control Severance Agreement” below.

 

(21)

Consists of (i) 23,004 shares of common stock issuable to Mr. Wallace upon the payout of RSUs that are vested as of July 17, 2017 but for which Mr. Wallace has elected to defer payout; (ii) 84,331 shares of common stock issuable upon exercise of outstanding options exercisable within 60 days of July 17, 2017, of which all were fully vested as of such date; and (iii) 7,132 shares of common stock issuable upon the vesting of RSUs within 60 days of July 17, 2017. The RSUs for which Mr. Wallace has elected to defer payout shall be paid out within 30 days of the earlier of the date his service on the Board ceases for any reason or the date on which a Change of Control occurs. For the definition of “Change of Control” please see “Termination of Employment and Change of Control Agreements — Definitions Contained in Change of Control Severance Agreement” below.

 

(22)

Consists of (i) 167,484 shares of common stock held of record by our current directors and executive officers; (ii) 82,496 shares of common stock issuable upon the payout of RSUs that are vested as of July 17, 2017 but for which have been elected to be deferred for payout; (iii) 952,913 shares of common stock issuable upon the exercise of outstanding options held by our directors and exercisable within 60 days of July 17, 2017, of which 940,675 were fully vested as of such date; (iv) 57,056 shares of common stock issuable upon the vesting of RSUs within 60 days of July 17, 2017; and (v) 7,132 shares of common stock issuable to our directors upon the vesting of RSUs within 60 days of July 17, 2017 and for which payout has been deferred.

 

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers and persons who own more than 10% of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in their ownership of common stock and other equity securities of the Company. Executive officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

Based solely on the review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that during fiscal 2017, its executive officers, directors and greater than 10% stockholders complied with all Section 16 filing requirements.

 

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This Compensation Discussion and Analysis (“CD&A”) provides information on our executive compensation program and our compensation philosophy for our named executive officers (“NEOs”), who in fiscal 2017 were:

 

•

George Kurian, Chief Executive Officer and President

 

•

Ronald J. Pasek, Executive Vice President and Chief Financial Officer

 

•

Joel D. Reich, Executive Vice President, Product Operations

 

•

Henri Richard, Executive Vice President, Worldwide Field and Customer Operations

 

•

Matthew K. Fawcett, Senior Vice President, General Counsel and Secretary

The Board has delegated to the Compensation Committee sole authority and responsibility for establishing and overseeing salaries, incentive compensation programs, and other forms of compensation for our executive officers, general remuneration policies for the balance of our employee population and for overseeing and administering our equity incentive and benefits plans.

 

Fiscal 2017 Company Performance

In fiscal 2017, the Company continued its focus on pivoting to the growth areas of the markets while reducing the cost structure of the business. By innovating to redefine traditional markets, bring enterprise-grade technology to emerging areas of the market, and meet the evolving needs of our growing customer base, we are creating new opportunities for NetApp, gaining market share, and expanding our addressable market. This intense focus helped us to systematically improve our execution and drive efficiency through the business and, ultimately, meet or beat our corporate goals.

 

•

Our Strategic solutions, which represent our pivot to the growth areas of the market, are aligned to our customers’ top IT imperatives and position us to lead in the new era of IT. In fiscal 2017, these solutions grew to 66% of net product revenue and grew at a rate of 17% from fiscal 2016. As planned, headwinds from our Mature solutions lessened over the course of the year. The combination of these two dynamics yielded positive growth of product revenue for the year. Strategic solutions include Clustered ONTAP, branded E-Series, SolidFire, AltaVault and optional add-on software products. Mature solutions include 7-mode ONTAP, add-on hardware and related operating system (OS) software and original equipment manufacturers (OEM) products.

 

•

Our All-Flash Array business grew rapidly in fiscal 2017, outpacing the growth of the market. The annualized net revenue run rate of our All-Flash Array business was $1.7 billion, based on our Q4 fiscal 2017 results. We moved from the #5 position in the All-Flash Array market in calendar year 2015 to the #2 position in calendar year 2016, as measured by IDC.

 

•

Exiting fiscal 2017, the transition from our legacy 7-mode ONTAP operating system to Clustered ONTAP was largely behind us. Almost half of the systems and more than half of the capacity in our installed base are now running Clustered ONTAP. Additionally, 95% of the FAS systems shipped in Q4 fiscal 2017 were shipped with Clustered ONTAP.

 

•

Late in fiscal 2016, we acquired SolidFire, Inc., which enhanced our ability to deliver solutions for the Next-Generation Data Center. In fiscal 2017, SolidFire revenue performance was in line with the expectations we laid out at the time of acquisition and SolidFire was significantly less dilutive to our overall operating results than we expected. Additionally, in early fiscal 2018, we announced the development of a hyper-converged solution based on SolidFire innovation that is expected to be available in calendar Q4 2017.

 

•

In fiscal 2017, we took necessary actions to lower our cost structure and improve alignment of our resources to our strategy. We committed to reducing our cost structure across both cost of sales and operating expenses. We overachieved on this goal with an annualized net run rate savings of approximately $140 million versus our goal of $130 million.

 

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•

The combination of revenue improvement and cost rationalization enabled NetApp to improve Non-GAAP operating margin3 to 17.2% of revenue in fiscal 2017, from 13.5% of revenue in fiscal 2016. Additionally, we grew GAAP EPS by 134% and Non-GAAP EPS by 28% from fiscal 2016.

Our performance is reflected in our total stockholder return as shown in the table below:

 

Annualized Total Stockholder Return
		Year-Over-Year (%) Fiscal 2016 vs. Fiscal 2017		3-Year (%) Fiscal 2015 – Fiscal 2017
NetApp, Inc.		72%		16%
S&P 500 Information   Technology Index		35%		33%
S&P 500 Index		18%		18%

Fiscal 2017 Financial Performance

Below is a brief summary of our financial performance for fiscal 2017 compared to fiscal 2016:

 

Financial Performance		Fiscal 2016		Fiscal 2017		Change
Net revenues		$5.55 billion		$5.51 billion		-0.5%
Non-GAAP gross margin3		62.5%		62.3%		-0.2 p.p.
Non-GAAP operating margin3		13.5%		17.2%		3.7 p.p.
Cash flows from operations		$974 million		$986 million		1.2%

Additionally, during fiscal 2017, we continued our commitment to quarterly cash dividends of $0.19 per share and paid stockholders an aggregate of $208 million in cash dividends. We repurchased and retired 22 million shares of our common stock for an aggregate of $913 million, bringing our total cash returned to stockholders to approximately $1.12 billion in fiscal 2017. We closed fiscal 2017 with $4.92 billion in cash and short-term investments.

Fiscal 2017 Executive Compensation Principles

The Compensation Committee’s objectives for our executive compensation programs are:

 

•

Drive long-term stock price appreciation by linking a meaningful portion of executive compensation to financial and non-financial measures that will drive or reflect the creation of stockholder value;

 

•

Help recruit, reward and retain experienced and highly qualified executives given the competitive labor environment in which the Company competes for such talent; and

 

•

Motivate our executives to perform to the best of their abilities while holding them accountable for business results, particularly in their areas of their individual responsibility, and for obtaining those results ethically.

In accordance with our program objectives, the Compensation Committee took the following key actions with respect to executive compensation in fiscal 2017:

 

•

Executive Incentive Compensation Plan Redesign. Introduced an individual performance metric for cash awards under the Executive Incentive Compensation Plan to motivate the executives to achieve certain individual and Company priorities while also continuing to emphasize corporate revenue and operating profit;

 

3	A reconciliation of non-GAAP to GAAP results can be found in Annex A.

 

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•

Executive Cash Incentive Compensation Plan Payout. Approved awards from the Executive Incentive Compensation Plan to the NEOs ranging from 129% to 137% of target awards.

 

•

Long-term Stock Based Incentive Compensation. Approved, shortly after the end of fiscal 2017, (1) the attainment of 103% of the target number of Performance-Based RSUs (“PBRSUs”) by Messrs. Reich and Fawcett for the performance period beginning on April 27, 2015 and ending on April 28, 2017, based on the Company’s total stockholder return (“TSR”) exceeding the benchmark over that period by 0.2% and (2) the attainment of 110% of target number of PBRSUs by Mr. Kurian for the performance period beginning on June 1, 2015 ending on April 28, 2017, based on the Company’s TSR exceeding the benchmark over that period by 3.0%. The difference in performance periods is due to Mr. Kurian’s promotion to CEO in June 2015. Messrs. Pasek and Richard did not receive PBRSUs in 2015 because they were not employees at that time.

The Compensation Committee believes that through these actions, the relationship between pay and performance and the alignment between executive and stockholder interests were further strengthened.

Alignment of Performance and Compensation

As evidenced by the actions described above, the Compensation Committee has a strong commitment to aligning performance and compensation. As such, each year, the Compensation Committee, on behalf of the full Board, requests that Farient Advisors LLC (“Farient”), our independent compensation consultant, evaluate the relationship between our executive compensation and our financial and stockholder return performance. In addition to conducting quantitative analyses commonly relied upon by independent proxy governance organizations to test the alignment of our CEO’s pay and performance, Farient uses its proprietary pay for performance alignment model to test whether the Company’s Performance-Adjusted Compensation^TM (PAC^TM) was: (1) reasonable in comparison to the Company’s revenue size and the Compensation Peer Group (described below) that are significantly different in size as described in the “Competitive Market Data” section below), and (2) sensitive to the Company’s TSR over time. PAC includes our then serving CEO’s salary, actual annual incentive compensation, the performance-adjusted value of long-term incentives, averaged over 3-year rolling periods, and the value of other compensation, as reported in the Summary Compensation Table. Performance is defined as TSR, averaged over the same 3-year rolling periods. Each data point on the chart below, which is adjusted for inflation and the Company’s size, represents PAC over a three-year period and TSR for the same 3-year period.

 

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As indicated by the chart below, the Compensation Committee concluded there was a strong relationship between our CEO’s PAC and the Company’s performance. This is because our CEO’s PAC generally fluctuates with performance, recognizing that there is some variation in the pattern of pay since not all pay elements are directly dependent upon TSR. Moreover, the Compensation Committee determined that our CEO’s PAC was reasonable because it generally fell below the upper boundary of a competitive pay range that our consultant deemed to be acceptable based on the Company’s size, Compensation Peer Group PAC levels, and performance. Farient’s assessment considers the pay to the individual serving as CEO, not specific individuals, so in this case, the chart below reflects the pay to Thomas Georgens, our former CEO, and George Kurian, our current CEO, for the three-year period ending in fiscal 2017.

 

 

Based on its review of Farient’s analyses, the Compensation Committee satisfied itself as to the coherence and integrity of our executive pay system because the Company’s pay practices move in concert with the Company’s performance.

The link between Company performance, the performance of our stock, and compensation for our NEOs is illustrated by the following charts, which show the portion of the major elements of the fiscal 2017 compensation for our NEOs disclosed in the Summary Compensation Table below.

 

 

As these charts illustrate, most of Mr. Kurian’s and the other NEOs’ total compensation is performance-based, meaning that the actual value realized is subject to the Company’s short-term financial performance or long-term stock price performance. By linking more of our NEOs’ total compensation to performance, the Company emphasizes variable pay, which is consistent with the Company’s pay-for-performance philosophy.

 

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NetApp uses a number of pay elements to achieve the pay and performance alignment shown above. The following table describes the elements of our fiscal 2017 executive compensation program and the objectives for each element.

 

Type		Element		Key Characteristics		Objective		How We Determine Amount
Fixed		Base Salary		Fixed, regular cash compensation		Designed to promote excellence in the day-to-day management and operation of our business		Qualifications and experience, scope of responsibilities, future potential, past performance, and tenure
Variable		Executive Incentive Compensation Plan		Cash incentive tied to annual operational performance metrics		Aligns executive compensation to our annual performance and creates accountability for NEOs to enhance the value of the Company and drive strategic objectives		Based on achievement of 2017 operating profit, revenue and individual performance metrics   Targets based on competitive market data and CEO recommendations
Other		Other Cash Incentives		Discretionary bonus		Discretionary bonuses are not typically granted; only used to reward extraordinary effort or special event that is not captured by other payments under the Executive Compensation Plan		Based on the Compensation Committee’s discretion
Fixed		Time-Based RSUs		Vest annually in equal installments		Promotes retention while aligning the ultimate award value directly with changes in our stock price over the vesting period		Competitive market data and CEO recommendations
Variable		PBRSUs		50% of PBRSUs vest after a 2-year performance period and 50% vest after a 3-year performance period, based on relative TSR performance		Provides strong alignment between the interests of the NEOs and the stockholders		Based on the relative performance of our TSR compared to the S&P 1500 Technology Hardware and Equipment Index during 2- and 3- year performance periods

 

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As noted above, the Compensation Committee seeks to ensure that total compensation is weighted toward variable, performance-based compensation. In addition, we adhere to the following best practices for our executive compensation programs and policies:

 

•

No Pension or SERPs. We do not provide our NEOs with a defined benefit pension plan or any supplemental executive retirement plans. Our employees, including NEOs, are able to participate in our 401(k) plan and our senior executives are able to participate in our nonqualified deferred compensation program.

 

•

No Individual Executive Contracts. We do not have separate employment contracts with our NEOs other than offer letters that set forth the basic terms of employment.

 

•

Double Trigger Change of Control Severance Agreements. Our change of control severance agreements provide severance payments and accelerated vesting of equity awards only on a “double trigger” basis; that is, the change of control severance agreements provide for severance payments and accelerated vesting of equity awards only if the Company terminates the individual’s employment without “Cause” or if the individual resigns for “Good Reason” (as such terms are defined in the agreements) and such termination or resignation occurs on or within 24 months after a change of control of the Company.

 

•

No Tax Gross-Ups on Change of Control. Tax gross-ups are not provided to our NEOs on change of control severance payments.

 

•

Clawback Policy. We have a clawback, or recoupment, policy that covers all elements of our Executive Compensation Plan.

 

•

Ownership Guidelines. Equity compensation encourages our directors and executives to have an owner’s perspective in managing the Company. To extend and maintain that ownership perspective over time, the Company has established stock ownership guidelines for the Company’s directors, CEO, and all Executive Vice Presidents (discussed further below in “Stock Ownership Guidelines”).

 

•

Risk Oversight. The Compensation Committee oversees and evaluates the design and implementation of the incentives and risks associated with our compensation policies and practices.

 

•

Independent Compensation Consultant. The Compensation Committee’s compensation consultant provides services only for the Compensation Committee and does not provide any other services to the Company.

 

•

No dividends paid on unvested shares. The Company does not pay dividends or dividend equivalents prior to the vesting of shares.

The Compensation Committee believes that the programs and policies described above demonstrate our commitment to an effective pay-for-performance executive compensation program in fiscal 2017. For more information, please see the discussion below.

 

The Compensation Committee determines and approves the principal components of compensation for our NEOs on an annual basis, typically shortly after the beginning of the applicable fiscal year. At the outset of each fiscal year, the Compensation Committee establishes a formal planning calendar to ensure a consistent and deliberative approach to its executive compensation decisions, including scheduling its process for evaluating competitive market data, reviewing compensation strategy and ensuring that its pay programs support the business strategy, approving executive pay actions, administering executive incentive plans, and reporting outcomes to stockholders.

In making its decisions regarding compensation, the Compensation Committee obtains Farient’s advice and counsel. In fiscal 2017, Farient provided information and guidance on our compensation strategy, peer group, competitive pay levels and pay practices, mix of short and long-term compensation, investor trends, alignment

 

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between our executive pay and performance, design of our incentive plans, including performance measures and goals used in our Incentive Compensation Plan, disclosures to our stockholders, our annual compensation risk assessment, and Board compensation. Farient also provided advice on key talent development processes, including top management evaluation. Farient did not provide any services to the Company other than those requested and approved by the Compensation Committee. The Compensation Committee assessed the independence of Farient pursuant to SEC rules and concluded that no conflict of interest exists that would prevent Farient from independently representing the Compensation Committee.

The Compensation Committee also solicits the input from our CEO regarding the salary, incentive compensation and equity-based compensation to be paid to those executives reporting to him, including all of the NEOs other than himself. As part of the annual review process, our CEO provides recommendations for the executives consistent with our pay-for-performance philosophy. His recommendations are based on his assessment of each NEO’s contributions to overall Company performance. With respect to compensation for our CEO, the Chair of the Compensation Committee solicits input from our CEO and the Board of Directors as to their perspectives of the CEO’s and the Company’s performance, and from Farient regarding CEO compensation relative to the market and Company performance. The Compensation Committee deliberates and makes decisions on our CEO’s compensation without the CEO present.

The Compensation Committee established an equity subcommittee. This subcommittee is currently comprised of our CEO and the Executive Vice President of Human Resources. The subcommittee may award equity to employees who hold positions at the Vice President level or below according to equity grant guidelines established by the Compensation Committee each year, and provided that the equity subcommittee may not grant awards in excess of the pool authorized by the Compensation Committee.

 

The primary factors that the Compensation Committee takes into consideration in establishing the principal components of compensation for our NEOs are discussed below. While these are typically the considerations upon which the Compensation Committee bases its compensation decisions for our NEOs, the Compensation Committee may, at its discretion, apply entirely different factors, such as different measures of financial performance, for future fiscal years.

We do not have either a policy or a practice in place to grant equity awards that are timed to precede or follow the release or withholding of material nonpublic information.

Say-on-Pay

NetApp values the input of our stockholders on our compensation programs. We hold an advisory vote on executive compensation on an annual basis. We also regularly communicate with our stockholders to better understand their opinions on governance issues, including compensation. Our stockholders will have the opportunity once again at this year’s Annual Meeting to endorse our executive compensation program through the stockholder advisory vote to approve executive compensation (commonly known as a “say-on-pay” vote) included as Proposal No. 4 in this Proxy Statement. Last year, over 98% of the stockholder votes cast on this proposal (excluding broker non-votes) were voted in favor of our executive compensation proposal. The Compensation Committee believes that the result of this vote affirms our stockholders’ support for our approach to executive compensation. Last year’s stockholder vote on executive compensation occurred in September 2016, while the Compensation Committee’s consideration of fiscal 2017 executive compensation occurred earlier in 2016, with compensation for most elements established by June 2016. As a result, the Compensation Committee did not set or change fiscal 2017 executive compensation directly as a result of last year’s stockholder vote. However, deliberations of fiscal 2017 compensation did consider stockholder views on performance-based equity compensation. The Compensation Committee expects to continue to consider input from stockholders and the outcome of our annual say-on-pay votes when making future executive compensation decisions. We encourage you to review this CD&A, together with the compensation tables that follow, prior to casting your advisory vote on the “say-on-pay” proposal.

 

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Performance Assessment

After each fiscal year, executives in senior vice president positions and above perform an evaluation of their organization’s performance and their own individual performance for the prior year and how that performance contributed to the Company’s performance. Our CEO uses these assessments as one of the factors, along with the others described below, in making his recommendations to the Compensation Committee regarding executive equity and salaries for the following fiscal year. Likewise, as noted above, our CEO typically performs a similar self-assessment and communicates this to the Chairman of our Compensation Committee near the end of the fiscal year. In addition, the Compensation Committee also reviews feedback from the CEO’s direct reports and a performance assessment from the Board.

Competitive Market Data

In order to establish the market rate of pay for NEOs (including in connection with the hire of new NEOs), the Compensation Committee reviews data from a targeted peer group of similarly situated technology companies. To determine the appropriate peer group, the Compensation Committee considers companies that are similar in one or more of the following criteria: revenue, number of employees, market capitalization and other comparable business considerations such as a change in industry dynamics (including mergers and acquisitions). In addition to focusing on our direct product line competitors, we consider other companies with whom we compete for talent in our various markets for which data is available.

For fiscal 2017, the Compensation Committee reviewed the Company’s compensation peer group used to benchmark compensation of our NEOs, as well as our broader executive population, with assistance and guidance from Farient. In particular, the Compensation Committee focused on a set of technology companies where the median revenue of the group approximates NetApp’s revenue.

The fiscal 2017 “Compensation Peer Group” consisted of:

 

Adobe Systems Inc. Alphabet Inc. Apple Inc. Applied Materials Inc. Broadcom Corporation Brocade Communications Systems, Inc. CA Technologies Cisco Systems, Inc. Citrix Systems, Inc. CommVault Systems, Inc. eBay Inc. EMC Corporation Hewlett-Packard Enterprise Company		Hitachi Data Systems Intel Corporation International Business Machines Corp. Intuit Inc. Juniper Networks, Inc. KLA-Tencor Corp. Lexmark International Inc. Logitech International Microsoft Corporation NVIDIA Corporation Oracle Corp. QLogic Corp. QUALCOMM Incorporated		Red Hat, Inc. Salesforce.com SanDisk Corp. SAP AG Seagate Technology Silicon Graphics International Symantec Corporation Teradata Corporation VMware, Inc. Western Digital Corp. Xilinx, Inc. Yahoo! Inc.

 

In addition, with Farient’s assistance and guidance, the Compensation Committee identified a more targeted list of sixteen companies in the storage and enterprise solutions markets to assess pay practices (for example, the use of equity incentives, performance measures, and goal setting) and to supplement our compensation benchmarking of specific NEO compensation. The fiscal 2017 “Compensation Practices Peers” consisted of the following companies:

 

Brocade Communications Systems, Inc. CA Technologies Citrix Systems, Inc. CommVault Systems, Inc. EMC Corporation		Hewlett-Packard Enterprise Company International Business Machines Corp. Juniper Networks, Inc. Microsoft Corporation Oracle Corp.		QUALCOMM Incorporated Red Hat, Inc. SanDisk Corp. Symantec Corporation Teradata Corporation VMware, Inc.

 

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The Compensation Committee has established a pay positioning philosophy that considers the highly competitive market for talent in which we participate and the relatively aggressive incentive goals for our organization. As a starting point, the Compensation Committee looked at the NEO’s current compensation and the ranges of base salary, target annual cash incentive and equity compensation at the 25th, 50th, and 75th percentiles within the Compensation Peer Group. The Committee then applied its judgment in determining proper levels of each component of compensation for NEOs. The end result for fiscal 2017 was a total compensation package for NEOs targeted at between the 50^th and 65^th percentile for total compensation relative to the Compensation Peer Group and the actual total compensation received by the NEOs approximated the median.

A majority of each NEO’s total compensation is performance-based, meaning that the actual value realized is subject to short-term financial performance, individual performance, and long-term stock price performance. Target pay positioning may vary by individual based on a wide range of considerations, including each executive’s role, skills, and overall impact on the management and strategic development of the Company.

 

Base Salary

Salaries for NEOs are set so that total short-term cash compensation (salary plus target annual cash incentive) is between the 50^th and 65th percentile relative to the Compensation Peer Group. Using this range ensures that the Company’s salaries are competitive with the companies for which we compete for talent, but also permits the Compensation Committee to use its judgment in gauging competitiveness.

In fiscal 2017, the Compensation Committee adjusted Mr. Kurian’s base salary to reflect his experience and contributions as CEO and the competitive pay position to the market. In addition, Mr. Reich received an increase in recognition of his contributions, expanded role leading both Product and Manufacturing Operations and the competitive pay position to the market. Mr. Fawcett received a modest salary increase to reflect his contributions and tenure in his current role.

 

Name		Fiscal 2016 Base Salary		Fiscal 2017 Base Salary		Percentage Increase
George Kurian		$800,000		$875,000		9%
Ronald J. Pasek		$550,000		$550,000		0%
Joel D. Reich		$425,000		$475,000		12%
Henri Richard		N/A(1)		$550,000		N/A
Matthew K. Fawcett		$480,000		$500,000		4%

 

(1)	Mr. Richard began employment at NetApp at the beginning of fiscal 2017.

Executive ICP

The Compensation Committee annually approves metrics and goals for our Executive Compensation Plan (“Executive ICP”) with payment of incentives, if any, shortly following the end of the fiscal year. Target ICP awards for NEOs are set so that target total short-term cash compensation (salary plus target ICP award) is between the 50th and 65th percentile relative to the Compensation Peer Group. For fiscal 2017, our NEOs’ target total short-term cash compensation was positioned at approximately the median relative to the Compensation Peer Group.

 

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In fiscal 2017, the Compensation Committee increased Mr. Kurian’s target cash incentive award by 10 percentage points to 160% in recognition of his experience and contributions as CEO and the competitive pay position to the market.

 

Name		Fiscal 2016 Target ICP Award % of Salary		Fiscal 2017 Target ICP Award % of Salary				Percentage Increase
George Kurian		150%(1)			160	%		10%
Ronald J. Pasek		N/A(2)			110	%		N/A
Joel D. Reich		110%			110	%		0%
Henri Richard		N/A(2)			110	%		N/A
Matthew K. Fawcett		80%			80	%		0%

 

(1)

Prior to his promotion to CEO, Mr. Kurian’s target award equaled 110% of his base salary for fiscal 2016. In connection with his promotion, Mr. Kurian received an additional target award equal to 40% of his base salary, which was intended to provide a total target award equal to 150% during the period in which he served as CEO.

 

(2)	Messrs. Pasek and Richard were not eligible to participate in the Executive ICP in fiscal 2016.

In fiscal 2017, the Compensation Committee amended the Executive ICP framework whereby the cash awards under the plan were tied to both Company and individual performance goals. The Compensation Committee believes that an incentive plan tied to operational and individual performance metrics drives accountability by our NEOs to achieve objectives that are important for ultimately driving stock price performance. To earn any award under the Executive ICP for fiscal 2017, NetApp was required to achieve a threshold goal of $449 million in operating profit. If the threshold goal was not achieved, none of the participants in the Executive ICP were eligible to earn any incentive cash compensation. If NetApp achieved the operating profit threshold, each participant was eligible to earn a maximum award of 200% of such participant’s target award. The Compensation Committee could, in its discretion, reduce the actual award earned by each participant in accordance with achievement by the Company of revenue and operating profit goals (“Financial Goals”) and achievement by the NEO of an individual Management Business Objectives (“MBOs”) tied to the Company’s strategic business objectives, as further described below. The Compensation Committee determined awards to each executive, before any further discretion is applied, by weighting Financial Goals 75% and MBOs 25%. This plan was designed to, among other things, satisfy the requirements for 162(m) deductibility of executive compensation expenses.

Financial Goals

With regards to the Financial Goals, the Compensation Committee believes that the continued use of revenue as a performance measure for fiscal 2017 encouraged growth and the creation of stockholder value. The continued use of operating profit encouraged our effective management of Company resources and the creation of stockholder value. Moreover, these measures are intended to reflect the Company’s business strategy, which includes making tradeoffs between operating profit and revenue growth, encouraging executives to make balanced decisions intended to benefit the Company as a whole, while mitigating the potential for executives taking undue risks.

Prior to or shortly after the beginning of each fiscal year, including fiscal 2017, the Company presents to the Board an annual operating plan (or “AOP”) that includes a measure of non-GAAP income from operations (or “operating profit”, as described below) and revenue. The AOP is derived from results of the prior year as well as the Company’s expectations for its performance relative to its strategy, the Company’s competitors and the overall market for the upcoming year. The AOP then is reviewed and approved by the Board of Directors. The target operating profit and revenue goals for the incentive compensation plan for fiscal 2017 were set at the expected level of achievement of the AOP.

The measure of non-GAAP operating profit is derived from net revenues from our products and services and the costs related to the generation of those revenues, such as cost of revenue, sales and marketing, research and development, and general and administrative expenses. Non-GAAP operating profit for fiscal 2017, both on an actual and target basis, excluded items that we believe are not reflective of our short-term operating performance,

 

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such as amortization of intangible assets, stock-based compensation expense, acquisition-related income and expenses, restructuring charges and gains on the sale of or losses on impairments of assets. We publicly disclose a detailed reconciliation of GAAP to non-GAAP net income and operating profit, along with other statement of operations items, on a regular basis with the Company’s quarterly earnings announcements.

For fiscal 2017, the 75% of the Executive ICP based on Financial Goals was calculated based on the Company’s achievement of revenue and operating profit versus targets, with revenue weighted at 1/3rd and operating profit weighted at 2/3rds. In establishing our operating profit and revenue goals, we set the targets shown in the chart below. (†)

 

		Fiscal 2017 Revenue Goals ($MMs) (1/3 weighting)		% of Target Goal		% of Target Award		Fiscal 2017 Operating Profit Goals ($MMs) (2/3 weighting)		% of Target Goal		% of Target Award
Maximum		$6,190		110%		200%		$988		110%		200%
Target		$5,627		100%		100%		$898		100%		100%
Threshold		$4,783		85%		25%		$718		80%		20%
<Threshold		<$4,783		<85%		0%		<$718		<80%		0%
Fiscal 2017 Achievement		$5,519		98%		90%		$950		106%		158%

 

(†)	Amount of awards determined by interpolating for performance between discrete points shown in the table.

Once the Executive ICP pool was determined, the Compensation Committee allocated the pool and calculated the actual awards for each executive based on achievement by the Company of the revenue and operating profit goals, which were weighted 25% and 50% respectively, and achievement by the executive of their MBO, which was weighted 25%.

For fiscal 2017, the Company achieved 106% of our annual target operating profit goal, translating into 158% of the target award, and 98% of our annual target revenue goal, translating into 90% of the target award. Based on the translation of performance relative to target goals for the blend of revenue and operating profit into a percent of target awards, the Executive ICP pool was funded at 135% of target.

 

 

 

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Individual MBOs

For fiscal 2017, the 25% of the award based on individual performance was measured by the achievement of an executive’s individual MBO, each of which was designed to help achieve the Company’s strategic objectives and drive individual accountability. The MBOs for the NEOs related to the Company’s strategic objectives within the following categories: (1) Grow the top line; (2) Transformation: Improve efficiency and effectiveness; and (3) Develop team.

At the end of fiscal 2017, Mr. Kurian reviewed with each NEO the NEO’s MBO’s achievement for the period and then determined each NEO’s individual rating on a scale of 1 to 5. Based on Mr. Kurian’s determination of the NEO’s rating, Mr. Kurian then recommended to the Compensation Committee a payout percentage on between 0% and 200%, for each NEO in accordance with the chart below. After reviewing Mr. Kurian’s assessment and recommendation, the Compensation Committee determined and approved the payout percentage. For Mr. Kurian, the Compensation Committee, in consultation with Mr. Kurian, determined Mr. Kurian’s MBOs. At the end of fiscal 2017, Mr. Kurian submitted the self-assessment to the Compensation Committee. After reviewing Mr. Kurian’s self-assessment and making its own evaluation of Mr. Kurian’s performance after consulting with the Board, the Compensation Committee determined and then approved Mr. Kurian’s payout amount in accordance with the chart below. In assessing Mr. Kurian’s achievements and approving his compensation, the Compensation Committee considered his achievements within a broader set of expectations including strategic leadership, organizational quality and effectiveness, management abilities, and responsiveness to economic conditions.

 

MBO Achievement		5 – Unsatisfactory		4 – Needs Improvement		3 – Meets Expectations		2 – Exceeds Expectations		1 – Significantly Exceeds Expectations
Payout Percentage		0% – 40%		41% – 80%		81% – 120%		121% – 160%		161% – 200%

Based on the level of performance described above on both the Company and individual performance metrics for fiscal 2017, the incentive compensation payouts to the NEOs under the Executive ICP were as follows.

 

Name		Target Award				Target Corporate Financial Award				Corporate Financial Award as a % of Target (Weighted 75%)		Target Individual MBO				Individual MBO Award as a % of Target (Weighted 25%)				Actual Corporate Financial Award				Actual Individual MBO Award				Fiscal 2017 Executive ICP				Actual Award as a % of Target Award
George Kurian			$1,400,000				$1,050,000			135%			$350,000				143%				$1,420,650				$500,000	(1)			$1,920,650			137%
Ronald J. Pasek			$605,000				$453,750			135%			$151,250				120%				$613,924				$181,500	(2)			$795,424			131%
Joel D. Reich			$522,500				$391,875			135%			$130,625				110%				$530,207				$143,688	(3)			$673,894			129%
Henri Richard			$584,058				$438,043			135%			$146,014				115%				$592,673				$167,917	(4)			$760,589			130%
Matthew K. Fawcett			$400,000				$300,000			135%			$100,000				110%				$405,900				$110,000	(5)			$515,900			129%

 

(1)	Represents the actual MBO award paid to Mr. Kurian who built a strong leadership team, drove the company to exceed its goals for organizational transformation, delivered solid financial results in fiscal 2017, and has positioned the Company for growth.

 

(2)	Represents the actual MBO award paid to Mr. Pasek who drove financial discipline and efficiency within the Company that enhanced the Company’s standing with investors and analysts.

 

(3)	Represents the actual MBO award paid to Mr. Reich who continued to demonstrate strong leadership in our core business and delivered new world class innovations that position our Company to further penetrate new and existing markets.

 

(4)	Represents the actual MBO award paid to Mr. Richard who created a sales culture with a renewed sense of urgency, and re-aligned the organization to achieve the Company’s revenue plan.

 

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(5)	Represents the actual MBO award paid to Mr. Fawcett who drove the adoption of a global shared services model, innovated legal services at the Company and transformed our enterprise intellectual property strategy.

Other Cash Incentives

The Compensation Committee retains authority to pay additional discretionary bonuses outside the Executive ICP if warranted. For fiscal 2017, the Compensation Committee elected to award a one-time signing bonus in the amount of $400,000 to Mr. Richard in connection with the commencement of his employment with the Company. This signing bonus is subject to forfeiture and repayment if Mr. Richard voluntarily terminates his employment within two years of his employment start date.

Long-Term Stock-Based Incentive Compensation

The grant of equity awards to our NEOs is designed to align their interests with those of the stockholders and provide them with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business.

Equity award guidelines for our NEOs are targeted, on average, at the 50^th percentile relative to the Compensation Peer Group. The size of the actual equity grant to each NEO is designed to create a meaningful opportunity for stock ownership and is based on a number of factors, which include the NEO’s current position with the Company, their strategic importance to the Company, the NEO’s current level of performance, the NEO’s potential for future responsibility and promotion over time, and the remaining share reserve under the Company’s equity plan. The Compensation Committee, however, does not place any particular weight on any one individual factor and does not strictly adhere to any specific guidelines in making its determinations.

In fiscal 2017, the Compensation Committee granted PBRSUs and RSUs to all of our NEOs. In accordance with our principles of linking pay to performance, the target mix of equity awards to the CEO is 75% PBRSUs and 25% RSUs. For other NEOs, the target mix of equity awards is 60% PBRSUs and 40% RSUs. We believe that this mix of performance-based versus time-based awards for these executives appropriately reflects their relative impact upon, and accountability for, our stock price performance over time.

PBRSUs

The PBRSUs granted in fiscal 2017 allow the recipient to earn a variable number of shares of our common stock based on the relative performance of our TSR compared to the median TSR of companies listed in the S&P 1500 Composite Technology Hardware and Equipment Index (“Hardware and Equipment Index”), comprised of 83 companies at the beginning of the performance period.

The PBRSUs have the following features:

 

•

The number of earned PBRSUs will be determined based on the Company’s TSR measured against the TSR of the companies listed in the Hardware and Equipment Index during separate two-year and three-year performance periods. At the end of each performance period, our TSR is compared to the median TSR of the companies listed in the Hardware and Equipment Index at the end of the applicable performance period, and the actual award amount is determined according to the relevant payout schedule. See the table below for a description of how achievement of the PBRSU awards is calculated.

 

•

50% of the total number of PBRSUs may be earned and issued at the end of a two-year performance period and 50% of the total number of PBRSUs may be earned and issued at the end of a three-year performance period.

 

•

The PBRSUs will not vest until the completion of the applicable performance period, and vesting is subject to continued service through the vesting date, which is the last day of each performance period.

The Compensation Committee selected TSR because it believes that TSR is an important indicator of the Company’s performance and provides strong alignment between the interests of the NEOs and the stockholders. Separate performance periods help to moderate volatility and encourage and reward sustained and continuous

 

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growth which aligns the interests of the NEOs and our stockholders. The Hardware and Equipment Index was selected to measure performance because it represents the broader market against which we compete for talent and represents the broad range of our business operations while also being objectively determinable.

The number of earned PBRSUs will depend upon the percentage of achievement of our TSR against the median TSR of the companies listed in the Hardware and Equipment Index as follows:

 

Relative Company TSR performance less median TSR of companies listed in the Hardware and Equipment Index (1)		% of Target Number of PBRSUs Earned (2)
³+30%		200%
0%		100%
-20%		50%
<-20%		0%

 

(1)

Performance is measured at the end of two-year and three-year performance periods with 50% of the total number of PBRSUs eligible to be earned during each performance period. The median for the Hardware and Equipment Index is determined based on the TSR data for the companies in the index as of the end of the performance period.

 

(2)	The percentage earned is interpolated for performance between discrete points.

The actual award amount is paid following the completion of the applicable performance period.

The performance period for the executives PBRSUs commenced on April 30, 2016 and will conclude at the end of our fiscal 2018 and fiscal 2019, respectively. As a result, the PBRSUs granted in fiscal 2017 were not eligible to vest in fiscal 2017.

The performance period for the PBRSUs granted in fiscal 2016 with a 2-year vesting period ended as of April 28, 2017. The Compensation Committee certified the performance and vesting for the NEOs, other than Messrs. Pasek and Richard, who were not Company employees in 2015, as follows:

 

Name		Target Number of PBRSUs		PBRSUs Vested		Relative TSR %		% of Target Vested
George Kurian		85,750		94,325		3.0%		110%
Joel D. Reich		18,850		19,476		0.2%		103%
Matthew K. Fawcett		20,300		20,975		0.2%		103%

The performance period for Messrs. Reich’s and Fawcett’s vested PBRSUs began on April 27, 2015 and ended on April 28, 2017, whereas the performance period for Mr. Kurian’s vested PBRSUs for the performance period began on June 1, 2015 and ended on April 28, 2017, due to Mr. Kurian’s promotion to CEO in June 2015.

Time-Based RSUs

Time-based RSUs allow the recipient to earn a fixed number of shares of our common stock for their continued service to the Company. Recognizing that a large portion of the NEOs’ equity compensation is at risk through the PBRSU program discussed above, the Compensation Committee also grants time-based RSUs to promote retention while aligning the ultimate award value directly with changes in our stock price over the vesting period. The RSUs vest in equal annual installments on each annual anniversary of the grant date beginning on the first anniversary of the grant date, subject to continued service through the applicable vesting date. The mix of PBRSUs versus RSUs will be reviewed by the Compensation Committee annually and may fluctuate from year to year.

 

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The following chart shows the grants of PBRSUs and RSUs to our NEOs in fiscal 2017. In addition to the annual grants, the following chart also reflects a grant of 64,129 RSUs to Mr. Pasek and a grant of 53,213 RSUs to Mr. Richard, which were made in connection with the commencement of each officer’s employment with the Company.

 

Name		Target Number of PBRSUs		Maximum Number PBRSUs (1)		RSUs
George Kurian		175,000		350,000		58,300
Ronald J. Pasek		47,965		95,930		96,438
Joel D. Reich		54,000		108,000		36,000
Henri Richard		90,945		181,890		113,843
Matthew K. Fawcett		39,000		78,000		26,000

 

(1)	This is based on a 200% maximum number of PBRSUs relative to target, per the terms of the award.

 

The Board believes that stock ownership by the Company’s directors and executives helps to align the interests of the Company’s directors and executives with the interests of the Company’s stockholders. To extend and maintain that ownership perspective over time, the Company has established the following minimum share ownership guidelines for the Company’s directors, CEO, and Executive Vice Presidents:

 

Position		Guideline as a Multiple of Salary/Cash Board Retainer
Independent Directors		5x
CEO		5x
EVPs		2x

The Company’s executives have five years from the adoption date of these stock ownership guidelines in fiscal year 2013 to meet these guidelines. The stock ownership guideline for directors was increased in May 2017 from three times their cash retainer to five times their cash retainer, and the directors have until May 2022 to meet the new guideline. Newly appointed directors and executives have five years from the time they are elected, appointed, hired, or promoted, as the case may be, to meet these guidelines. Once achieved, ownership at the guideline amount must be maintained. All of the directors and executives were in compliance with the then-current guidelines as of the end of fiscal 2017.

 

At the recommendation of the Compensation Committee, the Board adopted a policy that gives the Board discretion to require that designated Company employees, including the NEOs and all persons holding the position of Executive Vice President and Senior Vice President, repay cash incentive or equity compensation to the Company if the Board determines that the individual’s actions caused or partially caused the Company to materially restate all or a portion of its financial statements on which such compensation was calculated. Such determination must be made by the Board within three years of the date of filing of the applicable financial statements. The Compensation Committee believes that the Company’s clawback policy is in keeping with good standards of corporate governance and mitigates the potential for excessive risk taking by Company executives. The SEC is expected to adopt regulations requiring national listing exchanges to enact listing standards governing policies providing for the recovery of incentive based compensation, and the Company will revise and update its clawback policy within the time periods necessary to comply with such listing standards.

 

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Our Board has adopted a policy prohibiting all employees, including the NEOs and members of the Board, from engaging in any hedging transactions with respect to any equity securities of the Company held by them, which includes the purchase of any financial instrument (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) designed to hedge or offset any decrease in the market value of such equity securities. In addition, under the Company’s Insider Trading Policy, employees of the Company, including the NEOs, and members of the Board are prohibited from pledging the Company’s securities as collateral for a loan.

 

Severance and Change of Control Arrangements

The Compensation Committee maintains change of control severance agreements for its key senior executives to: (1) assure we will have the continued dedication and objectivity of our senior executives, notwithstanding the possibility of a change of control of the Company, thereby aligning the interests of these key senior executives with those of the stockholders in connection with potentially advantageous offers to acquire the Company; and (2) create a total executive compensation plan that was competitive with our peer group. The Compensation Committee from time to time determines which key senior executives will receive a change of control severance agreement. Individuals are selected as needed to support the above outlined objectives.

The terms of the individual Change of Control Severance Agreements are described in further detail in the section below titled “Potential Payments upon Termination or Change in Control.” The Compensation Committee believes that these change of control severance agreements satisfy the objectives above and ensure that key executives are focused on the Company’s goals and objectives, as well as the interests of our stockholders, rather than any negative personal consequences that may arise as a result of a change of control.

Effective June 22, 2016, the Company entered into Change of Control Severance Agreements with each of our NEOs, which superseded their existing Change of Control Severance Agreements, as amended. Please see “Termination of Employment and Change of Control Agreements – Change of Control Severance Agreements” below for further information on the new Change of Control Agreements.

Perquisites

Certain of our executives at the Executive Vice President level and above are eligible to participate in the Company’s Executive Retirement Medical Plan, which upon retirement provides a health reimbursement account to reimburse eligible retired executives for premiums paid for individual insurance covering the retiree and any eligible dependents for the period from January 1, 2017 through December 31, 2019. On or after December 31, 2019 but ending on December 31, 2021, participants in the Executive Retirement Medical Plan will be eligible to receive a taxable lump sum cash payment equal to two years of projected health care costs, or a prorated portion thereof, pursuant to the methodology set forth in the Executive Retirement Medical Plan. The Executive Retirement Medical Plan terminates on December 31, 2019. The Executive Retirement Medical Plan was adopted by the Company as a method to retain the defined group of executives. In fiscal 2016, the Compensation Committee froze eligibility under the Executive Retirement Medical Plan, limiting eligibility to those executives who were eligible for participation based on their respective Company positions as of November 12, 2015; participation in the plan is not offered to Company executives who were not eligible for the plan on that date. Mr. Kurian and Mr. Reich will be eligible to receive benefits under the Executive Retirement Medical Plan as well as a lump sum payment (or pro-rata portion) if they retire prior to 2019 or 2021, as applicable. Our NEOs are also entitled to a preventative care medical benefit of up to $2,500 per calendar year not available to nonexecutives. The Compensation Committee approved the use of a car service by Mr. Kurian for travel between his residence and the office in an amount of up to $40,000 per year so that he can conduct business during his commute. In fiscal 2017, the expense for Mr. Kurian’s car service was $19,911. The Compensation Committee also approved payment by the Company of rental expenses for Mr. Reich for a residence and rental furniture in Sunnyvale, California, along with a gross-up for associated taxes. Although Mr. Reich is based on the Company’s Waltham, Massachusetts office, his position requires frequent travel to the Company’s headquarters in Sunnyvale. In fiscal 2017, the Company paid $136,639 for Mr. Reich’s housing related expenses.

 

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Other Benefits and Reimbursements

NEOs are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life and accidental death and dismemberment insurance, our 401(k) plan and our nonqualified deferred compensation program. Effective January 1, 2015, we match 100% of the first 2% of eligible earnings contributed to our 401(k) plan, and match 50% of the next 4% of eligible earnings contributed, up to a maximum of $6,000 per calendar year. Under the Company’s nonqualified deferred compensation program (discussed in further detail below), participating employees (including the NEOs) may defer a percentage of their compensation. The program permits contributions on a tax deferred basis in excess of IRS limits imposed on 401(k) plans as permitted and in compliance with Internal Revenue Code Section 409A. The only additional retirement benefits (other than the 401(k) plan) that we offer to certain of our NEOs are those under the Executive Retirement Medical Plan discussed above.

 

Section 162(m) of the Code generally disallows a tax deduction to publicly held companies for compensation paid to certain executive officers to the extent that compensation exceeds $1 million per officer in any year. The Company generally seeks to maximize the deductibility for tax purposes of all elements of compensation. Our 1999 Plan is structured so that any compensation recognized by an executive officer in connection with the exercise of his or her outstanding options under the plan will qualify as performance-based compensation and will not be subject to the $1 million limitation. In addition, our 1999 Plan allowed our Compensation Committee to structure the PBRSUs as performance-based compensation under Section 162(m), and our Executive Compensation Plan allows us to structure our cash incentives that are paid thereunder to qualify for a deduction under Section 162(m). The Compensation Committee, however, periodically reviews applicable tax provisions, such as Section 162(m), and may revise compensation plans from time to time to comply with their rules and to maximize deductibility.

 

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The information contained in the following Compensation Committee Report shall not be deemed to be soliciting material or to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference in such filing.

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based upon such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

Submitted by the Compensation Committee of the Board of Directors:

Robert T. Wall, Chairman

Gerald Held

George T. Shaheen

Stephen M. Smith

Richard P. Wallace

 

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The table below summarizes the compensation information for the NEOs for fiscal 2017, fiscal 2016, and fiscal 2015.

 

Name and Principal Position		Year				Salary ($)(1)				Bonus ($)(2)				Stock Awards ($)(3)				Option Awards ($)(3)				Non-Equity Incentive Plan Compensation ($)(4)				Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)				All Other Compensation ($)(5)				Total ($)
George Kurian			2017				875,000				—				6,179,678				—				1,920,650				—				29,913				9,005,241
Chief Executive Officer and President(6)			2016				786,538				44,990				8,196,616				—				477,366				—				8,813				9,514,323
			2015				480,000				—				1,855,845				1,320,490				353,760				—				7,635				4,017,730
Ronald J. Pasek			2017				550,000				—				3,458,446				—				795,424				—				17,418				4,821,288
Executive Vice President and Chief Financial Officer(7)			2016				31,731				—				—				—				—				—				208				31,939
Joel D. Reich			2017				475,000				—				2,324,632				—				673,894				—				147,656				3,621,182
Executive Vice President, Product Operations(8)			2016				419,454				24,202				2,243,252				—				180,589				—				10,967				2,878,463
Henri P. Richard			2017				530,962				400,000				5,154,717				—				760,589				—				17,277				6,863,545
Executive Vice President, Worldwide Field and Customer Operations(9)
Matthew K. Fawcett			2017				500,000				—				1,678,901				—				515,900				—				8,017				2,702,818
Senior Vice President, General Counsel and Secretary(10)			2016				489,231				20,529				2,539,327				—				153,186				—				7,716				3,202,989
			2015				465,000				—				1,485,375				452,481				249,240				—				7,536				2,659,632

 

(1)	Our fiscal 2017 was a 52-week year. Fiscal 2016 was a 53-week year and therefore the salary for 2016 contains an extra week of pay. Fiscal 2015 was a 52-week year.

 

(2)

Amounts shown for fiscal 2016 represent a one-time discretionary bonus approved by the Compensation Committee in recognition of the recipient’s successful execution and completion of the acquisition of SolidFire, Inc. and the integration of the SolidFire, Inc. business into the Company. Amount shown for Mr. Richard in fiscal 2017 represents a one-time signing bonus in connection with the commencement of his employment with the Company.

 

(3)

Amounts shown represent the aggregate grant date fair value as calculated for financial statement reporting purposes in accordance with FASB ASC 718 for RSUs, PBRSUs and stock option awards, as applicable, granted in fiscal 2017, fiscal 2016, and fiscal 2015. The estimated fair value of PBRSUs, which were first granted in fiscal 2016, is calculated based on the Monte Carlo simulation method at the date of grant. This estimated fair value for PBRSUs is different from (and lower than) the maximum value of PBRSUs set forth above. These amounts do not necessarily represent actual value that may be realized by the NEOs. Assumptions used in the valuations of these awards are included in Note 11 of the Annual Report.

 

(4)	Amounts shown include the portion of cash compensation deferred at the respective NEO’s election under the Company’s 401(k) plan and/or nonqualified deferred compensation plan, as applicable.

 

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(5)	All Other Compensation Table

 

Name		Year				401(k) ($) (A)				Life Insurance Coverage ($) (B)				Other ($)				Total ($)
George Kurian			2017				6,000				4,002				19,911	(C)			29,913
			2016				6,000				2,813				—				8,813
			2015				6,000				1,635				—				7,635
Ronald J. Pasek			2017				12,000				5,418				—				17,418
			2016				—				208				—				208
Joel D. Reich			2017				6,433				4,584				136,639	(D)			147,656
			2016				6,915				4,052				—				10,967
Henri P. Richard			2017				10,064				7,213				—				17,277
Matthew K. Fawcett			2017				6,000				2,017				—				8,017
			2016				6,046				1,670				—				7,716
			2015				5,954				1,582				—				7,536

 

(A)

Amounts shown represent Company’s matching contributions under the tax-qualified 401(k) plan.

 

(B)

Amounts shown represent the imputed income of term life insurance coverage in excess of $50,000.

 

(C)

Amounts shown represent the use of a car service between Mr. Kurian’s residence and the office so that he may conduct business during his commute.

 

(D)

Amounts shown represent rental expenses for a residence and rental furniture in Sunnyvale, along with a gross-up on the taxes on those benefits.

 

(6)

Mr. Kurian became our CEO in June 2015. He previously served as our Executive Vice President of Product Operations, and first became an NEO effective September 20, 2013. Mr. Kurian received 137% of his eligible earnings for fiscal 2017, 60.7 % of his eligible earnings for fiscal 2016, and 73.7% of his eligible earnings for fiscal 2015.

 

(7)	Mr. Pasek received 131% of his eligible earnings for fiscal 2017. Mr. Pasek became our Executive Vice President and Chief Financial Officer in March 2016.

 

(8)	Mr. Reich received 129% of his eligible earnings for fiscal 2017, and 43.1% of his eligible earnings for fiscal 2016. He first became a NEO effective June 2015.

 

(9)	Mr. Richard received 130% of his eligible earnings for fiscal 2017. Mr. Richard became our Executive Vice President, Worldwide Field and Customer Operations in May 2016.

 

(10)	Mr. Fawcett received 129% of his eligible earnings for fiscal 2017, 31.3% of his eligible earnings for fiscal 2016, and 53.6% of his eligible earnings for fiscal 2015.

 

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The table below summarizes information concerning all plan-based awards granted to the NEOs during fiscal 2017, which ended on April 28, 2017.

 

						Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1)												Estimated Future Payouts Under Equity Incentive Plan Awards(2)												All Other Stock Awards: Number of Shares of Stock or Units (#)(3)				Grant Date Fair Value of Stock Awards ($)(4)(5)
Name		Grant Date				Threshold ($)				Target ($)				Maximum ($)				Threshold (#)				Target (#)				Maximum (#)
George Kurian			06/01/16				—				—				—				—				—				—				58,300				1,352,303
			06/01/16				—				—				—				43,750				87,500				175,000				—				2,394,875
			06/01/16				—				—				—				43,750				87,500				175,000				—				2,432,500
							303,333				1,400,000				2,800,000
Ronald J. Pasek			05/16/16				—				—				—				—				—				—				64,129				1,385,905
			06/01/16				—				—				—				—				—				—				32,309				749,427
			06/01/16				—				—				—				11,992				23,983				47,966				—				656,415
			06/01/16				—				—				—				11,991				23,982				47,964				—				666,700
							131,083,				605,000				1,210,000
Joel D. Reich			06/01/16				—				—				—				—				—				—				36,000				835,042
			06/01/16				—				—				—				13,500				27,000				54,000				—				750,600
			06/01/16				—				—				—				13,500				27,000				54,000				—				738,990
							113,208				522,500				1,045,000
Henri P. Richard			06/01/16				—				—				—				—				—				—				60,630				1,406,349
			06/15/16				—				—				—				—				—				—				53,213				1,239,650
			06/01/16				—				—				—				22,736				45,472				90,944				—				1,264,122
			06/01/16				—				—				—				22,737				45,473				90,946				—				1,244,596
							126,544				584,048				1,168,116
Matthew K. Fawcett			06/01/16				—				—				—				—				—				—				26,000				603,086
			06/01/16				—				—				—				9,750				19,500				39,000				—				533,715
			06/01/16				—				—				—				9,750				19,500				39,000				—				542,100
							86,667				400,000				800,000

 

(1)

Amounts shown in these columns represent the range of possible cash payouts for each NEO under the Company’s Executive Compensation Plan, as determined by the Compensation Committee in May 2016. Please see the discussion in the “Executive Compensation Plan” section of the “Compensation Discussion and Analysis” above.

 

(2)

Represents awards of PBRSUs granted under the Stock Issuance Program of the 1999 Plan. Each PBRSU has performance-based vesting criteria (in addition to the service based vesting criteria) such that the PBRSU cliff-vests at the end of either an approximate two year or three year performance period, which began on the date specified in the grant agreement and ends the last day of fiscal 2018 or 2019, respectively. The number of shares of common stock that will be issued to settle the PBRSUs at the end of the applicable performance and service period will range from 0% to 200% of a target number of shares originally granted, and will depend upon our TSR as compared to an index TSR (each expressed as a growth rate percentage) calculated as of the applicable period end date. For additional information regarding the specific terms of the PBRSUs granted to our NEOs in fiscal 2017, see the discussion of “PBRSUs” in the “Compensation Discussion and Analysis” above. Upon vesting, each PBRSU automatically converts into one share of Company common stock, and does not have an exercise price or expiration date.

 

(3)

The RSUs were granted under the Stock Issuance Program of the 1999 Plan. Each award vests as to 25% of the shares beginning on the first anniversary of the grant date and 25% on each of the next three anniversaries of the grant date, subject to the NEO’s continuous service with the Company on each such date.

 

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(4)

The amounts shown represent the aggregate grant date fair value as calculated for financial statement reporting purposes in accordance with FASB ASC 718 for RSUs and PBRSUs, as applicable, granted in fiscal 2017. The estimated fair value of PBRSUs is calculated based on Monte Carlo simulation method at the date on which the PBRSUs are granted. This estimated fair value for PBRSUs is different from (and lower than) the maximum value of PBRSUs set forth below. These amounts do not necessarily represent actual value that may be realized by the NEOs. Assumptions used in the valuations of these awards are included in Note 11 of the Annual Report.

 

(5)

The ratio of the number of shares subject to the target PBRSU awards and the RSUs awards is consistent with the mix of PBRSUs to RSUs described in the CD&A (that is, 75%/25% for our CEO and 60%/40% for our other NEOs), but the grant date fair values do not match these ratios. This discrepancy is a function of how values are calculated for financial statement reporting purposes in accordance with FASB ASC 718.

 

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The following table sets forth information regarding stock options and stock awards held by the NEOs as of April 28, 2017.

 

						Option Awards																				Stock Awards
		Grant Date				Number of Securities Underlying Unexercised Options (#)								Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)				Option Exercise Price ($)				Option Expiration Date				Number of Shares or Units of Stock That Have  Not Vested (#)				Market Value of Shares or Units of Stock That Have  Not Vested ($)				Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)				Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
						Exercisable				Unexercisable
George Kurian			04/15/2011	(1)			75,000				—				—				48.56				04/14/2018				5,425				216,186				—				—
			06/03/2013	(2)(3)			33,637				1,463				—				37.64				06/02/2020				3,000				119,550				—				—
			10/15/2013	(2)(4)			32,250				3,750				—				40.70				10/14/2020				26,550				1,058,018				—				—
			06/03/2014	(2)(3)			113,900				46,900				—				36.59				06/02/2021				32,175				1,282,174				—				—
			08/03/2015	(2)			—				—				—				—				—				32,175				1,282,174				—				—
			08/03/2015	(2)			—				—				—				—				—				58,300				2,323,255				—				—
			08/03/2015	(5)			—				—				—				—				—				—				—				64,300				2,562,355
			08/03/2015	(5)			—				—				—				—				—				—				—				21,450				854,783
			06/01/2016	(5)			—				—				—				—				—				—				—				87,500				3,486,875
			06/01/2016	(5)			—				—				—				—				—				—				—				87,500				3,486,875
Ronald J. Pasek			05/16/2016	(2)			—				—				—				—				—				64,129				2,555,541				—				—
			06/01/2016	(2)			—				—				—				—				—				32,309				1,287,514				—				—
			06/01/2016	(5)			—				—				—				—				—				—				—				23,982				955,683
			06/01/2016	(5)			—				—				—				—				—				—				—				23,983				955,723
Joel D. Reich			06/01/2011	(1)			10,000				—				—				53.22				05/31/2018				—				—				—				—
			06/03/2013	(2)(3)			13,800				600				—				37.64				06/02/2020				1,200				47,820				—				—
			11/15/2013	(2)(3)			21,354				3,646				—				41.42				11/14/2020				2,083				83,008				—				—
			06/03/2014	(2)(3)			9,800				4,900				—				36.59				06/02/2021				6,500				259,025				—				—
			06/23/2015	(2)			—				—				—				—				—				8,550				340,718				—				—
			06/23/2015	(2)			—				—				—				—				—				10,275				409,459				—				—
			06/23/2015	(5)			—				—				—				—				—				—				—				8,550				340,718
			06/23/2015	(5)			—				—				—				—				—				—				—				10,300				410,455
			06/01/2016	(2)			—				—				—				—				—				36,000				1,434,600				—				—
			06/01/2016	(5)			—				—				—				—				—				—				—				27,000				1,075,950
			06/01/2016	(5)			—				—				—				—				—				—				—				27,000				1,075,950
Henri P. Richard			06/01/2016	(2)			—				—				—				—				—				60,630				2,416,106				—				—
			06/15/2016	(5)			—				—				—				—				—				53,213				2,120,538				—				—
			06/01/2016	(5)			—				—				—				—				—				—				—				45,472				1,812,059
			06/01/2016	(5)			—				—				—				—				—				—				—				45,473				1,812,099
Matthew K. Fawcett			09/15/2010	(1)			75,000				—				—				49.30				09/14/2017				—				—				—				—
			06/01/2011	(1)			21,500				—				—				53.22				05/31/2018				—				—				—				—
			06/03/2013	(2)(3)			71,875				3,125				—				37.64				06/02/2020				6,250				249,063				—				—
			06/03/2014	(2)(3)			39,029				16,071				—				36.59				06/02/2021				21,250				846,813				—				—
			06/23/2015	(2)			—				—				—				—				—				14,550				579,818				—				—
			06/23/2015	(2)			—				—				—				—				—				8,550				340,718				—				—
			06/23/2015	(5)			—				—				—				—				—												14,600				581,810
			06/23/2015	(5)			—				—				—				—				—												5,700				227,145
			06/01/2016	(2)			—				—				—				—				—				26,000				1,036,100				—				—
			06/01/2016	(5)			—				—				—				—				—				—				—				19,500				777,075
			06/01/2016	(5)			—				—				—				—				—				—				—				19,500				777,075

 

(1)	All shares subject to the option are fully vested.

 

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(2)	For these awards, 1/4th of the RSU shares awarded on the grant date vest over four years on each anniversary of the grant date, subject to continued service on each applicable vesting date.

 

(3)	For this option, 1/48th of the shares subject to the option vest monthly in equal installments over four years measured from the grant date, subject to continued service through each applicable vesting date.

 

(4)

For this option, 1/4th of the shares subject to the option vested on the one-year anniversary of the vesting commencement date. Thereafter, 1/48th of the shares subject to the option vest monthly in equal installments over 36 months, subject to continued service through each applicable vesting date.

 

(5)

These awards are PBRSUs. The number of shares and value of the shares reported in the table is the target amount as of April 28, 2017. Up to an additional 100% of the target amount may be earned, depending on the relative performance of our TSR compared to the median TSR of the companies listed in the Hardware and Equipment Index.

 

The following table provides information regarding options and stock awards exercised and vested, respectively, and the value realized for each of the NEOs during fiscal 2017.

 

		Option Awards								Stock Awards
Name		Number of Shares Acquired on Exercise (#)				Value Realized on Exercise ($)(1)				Number of Shares Acquired on Vesting (#)				Value Realized on Vesting ($)(2)
George Kurian			32,500				176,595				145,175	(3)			3,305,706
Ronald J. Pasek			—				—				—				—
Joel D. Reich			12,209				78,144				33,484	(4)			900,196
Henri P. Richard			—				—				—				—
Matthew K. Fawcett			25,000				250,250				49,500	(5)		$	1,227,061

 

(1)

Represents the product obtained by multiplying (1) the number of shares of the Company’s common stock issued upon the exercise of stock options; by (2) the excess of the closing price of the Company’s common stock on the NASDAQ Global Select Market on the exercise date over the exercise price per share.

 

(2)	Represents the product obtained by multiplying (1) the number of shares of the Company’s common stock issued upon the vesting of RSUs; by (2) the closing price of the Company’s common stock on the NASDAQ Global Select Market on the vesting date.

 

(3)	Of this amount, 66,660 shares were withheld by the Company to satisfy tax withholding requirements.

 

(4)	Of this amount, 10,929 shares were withheld by the Company to satisfy tax withholding requirements.

 

(5)	Of this amount, 18,947 shares were withheld by the Company to satisfy tax withholding requirements.

 

Under the Company’s Deferred Compensation Plan, key employees, including the NEOs, may defer from 1% to 100% of the compensation they receive. The Deferred Compensation Plan allows contributions on a tax deferred basis in excess of IRS limits imposed on 401(k) plans as permitted and in compliance with Internal Revenue Code Section 409A. Eligible employees may defer an elected percentage of eligible earnings that include base salary, sales incentive compensation, and Company incentive compensation. Eligible employees are director level and higher employees who are on the U.S. payroll. Elections made under the Deferred Compensation Plan are irrevocable for the period (plan year) to which they apply, and cannot be changed or terminated. If no new election is made for a subsequent plan year, the election will be 0%. Previous elections do not carry forward.

 

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Interest (earnings) is not calculated by the Company or related to the Company’s earnings in the last fiscal year. Instead, deferrals are placed (at the participant’s direction) into a variety of publicly traded mutual funds administered through Fidelity Investments. The mutual funds available mirror those in our 401(k) plan. Available mutual funds are selected and monitored by the 401(k) Committee, which is comprised of a group of executives (none of whom are NEOs), with input from an outside investment advisor as well as Fidelity Investment Advisors. Participants are permitted to make changes to their investment choices (but not their deferral percentages) at any time, but always within the family of publicly traded mutual funds. Neither common stock of the Company nor securities of any other issuers are included among the investment choices. However, it is possible that common stock of the Company may compose a portion of the portfolio of investments held by these mutual funds.

At the time of initial election, the participant must also elect a distribution option. Distribution options include a Separation Account (paid six months after termination of employment) or an In-Service Account (paid at a specified fixed future date). Participants are not permitted to change the timing of a Separation Account. In-Service Account distributions begin on January 15 of the specified year, and deferrals must be at least two years old before distribution can begin. Participants are permitted to delay the timing of an In-Service Account, but any such modification to timing must delay the distribution for at least five years.

The following table represents the executive contributions, earnings and account balances for the NEOs in the Deferred Compensation Plan.

Nonqualified Deferred Compensation for Fiscal 2017

 

Name		Executive Contributions in Last Fiscal Year ($)				Company Contributions in Last Fiscal Year ($)(1)				Aggregate Earnings in Last Fiscal Year ($)(2)				Aggregate Withdrawals/ Distributions ($)				Aggregate Balance at Last Fiscal Year End ($)
George Kurian			—				—				—				—				—
Ronald J. Pasek			188,635				—				3,140				—				191,775
Joel D. Reich			—				—				—				—				—
Henri P. Richard			63,462				—				4,369				—				67,831
Matthew K. Fawcett			8,654				—				202				—				8,856

 

(1)	The Company does not make contributions to the Deferred Compensation Plan.

 

(2)

The amounts in this column correspond to a composite of the actual market earnings on a group of investment funds selected by the applicable NEO for purposes of tracking the notional investment return on his account balance for fiscal 2017. No portion of the reported amount was “above market” or “preferential.” Accordingly, amounts reported in the aggregate earnings column are not reported in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column of the Summary Compensation Table.

 

The Company does not provide pension benefits or a defined contribution plan to the NEOs other than the tax-qualified 401(k) plan.

 

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Change of Control Severance Agreements

On June 22, 2016, the Company entered into Change of Control Severance Agreements (the “Change of Control Agreements”) with key senior executives, including Messrs. Kurian, Pasek, Reich, Richard and Fawcett, which superseded the prior change of control severance agreements with the NEOs.

The Compensation Committee believes these agreements are necessary for us to retain key senior executives in the event of an acquisition of the Company. In approving the agreements, the Compensation Committee’s objectives were to (1) assure we would have the continued dedication and objectivity of our senior executives, notwithstanding the possibility of a change of control of the Company, thereby aligning the interests of these key senior executives with those of the stockholders in connection with potentially advantageous offers to acquire the Company; and (2) create a total executive compensation plan that is competitive with our Compensation Peer Group.

Term of Change of Control Severance Agreement

Each Change of Control Agreement has a term of three years. If a Change of Control (as defined below) occurs at any time during the term of the agreement, the term of the Change of Control Agreement will extend automatically for 24 months following the effective date of the Change of Control. If a senior executive becomes entitled to severance benefits pursuant to his or her Change of Control Agreement, the Change of Control Agreement will not terminate until all of obligations of the Change of Control Agreement have been satisfied.

Circumstances Triggering Payment under Change of Control Severance Agreement

Each Change of Control Severance Agreement provides that if the Company terminates a senior executive’s employment without Cause (as defined below) or if the senior executive resigns for Good Reason (as defined below), and such termination or resignation occurs on or within 24 months after a Change of Control, the senior executive will receive certain benefits (as described below). The senior executive will not be entitled to any benefits, compensation or other payments or rights upon his or her termination following a Change of Control other than as set forth in his or her Change of Control Severance Agreement.

If the senior executive voluntarily terminates his or her employment with the Company (other than for Good Reason during the period that is on or within 24 months after a Change of Control), or if the Company terminates the senior executive’s employment for Cause, then the senior executive will not be entitled to receive severance or benefits except for those (if any) provided in the Company’s existing severance and benefits plans and practices or pursuant to other written agreements with the Company.

If the Company terminates the senior executive’s employment as a result of the senior executive’s disability, or if the senior executive’s employment terminates due to his or her death, then the senior executive will not be entitled to receive severance or benefits, except for those (if any) provided in the Company’s existing severance and benefits plans and practices or pursuant to other written agreements with the Company.

If the senior executive voluntarily terminates his or her employment and such termination is for Good Reason, or if the Company terminates the senior executive’s employment without Cause, and in either event such termination does not occur on or within 24 months after a Change of Control, then the senior executive will not be entitled to receive severance or benefits except for those (if any) as provided in the Company’s existing severance and benefits plans and practices or pursuant to other written agreements with the Company.

The Company has general severance guidelines applicable to all employees, including the NEOs, providing for additional months of pay and welfare benefits based on years of service, plus periods of access to a career center and office resources, one-on-one coaching, and access to an online jobs database, but payment of any severance

 

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and other benefits pursuant to the guidelines is discretionary. For NEOs, these severance guidelines provide for up to twelve months salary and continuation of welfare benefits and payment of prorated non-equity incentive plan benefits. However, if the senior executive is eligible to receive any payments under his or her Change of Control Severance Agreement, the senior executive will not be eligible to receive any payments or benefits pursuant to any Company severance plan, policy, guidelines or other arrangement.

Timing and Form of Severance Payments under Change of Control Severance Agreement

Unless otherwise required by Section 409A of the Internal Revenue Code, any severance payments to be made pursuant to the Change of Control Severance Agreement will be paid in a lump sum as soon as practicable following the senior executive’s termination date. No severance or other benefits will be paid or provided until a separation agreement and release of claims between the senior executive and the Company becomes effective. If the senior executive should die before all of the severance has been paid, any unpaid amounts will be paid in a lump-sum payment to the senior executive’s designated beneficiary.

Severance Payments Under Change of Control Severance Agreement

If the Company terminates a senior executive’s employment without Cause or if the senior executive resigns for Good Reason and such termination occurs on or within 24 months after a Change of Control, the senior executive will receive the following benefits:

 

•

The sum of (1) 150% (200% in the case of Mr. Kurian) of the senior executive’s annual base salary as in effect immediately prior to the senior executive’s termination date or (if greater) at the level in effect immediately prior to the Change of Control; and (2) 150% (200% in the case of Mr. Kurian) of the senior executive’s target annual bonus in effect immediately prior to the senior executive’s termination date or (if greater) at the level in effect immediately prior to the Change of Control;

 

•

All accrued but unpaid vacation, expense reimbursements, wages, and other benefits due to the senior executive under any Company plan or policy (except that a senior executive will not be eligible to receive any benefits under any Company severance plan, policy or other arrangement);

 

•

Accelerated vesting of the senior executive’s outstanding equity awards as follows:

 

•

Equity awards subject to time-based vesting will vest as to that portion of the award that would have vested through the 48-month period following the applicable senior executive’s termination date had the senior executive remained employed through such period. Additionally, the senior executive will be entitled to accelerated vesting as to an additional 100% of the then unvested portion of all of his or her outstanding equity awards that are scheduled to vest pursuant to performance-based criteria, if any, unless otherwise provided in the applicable award agreement governing the equity award.

 

•

Each senior executive will have one year following the date of his or her termination in which to exercise any outstanding stock options or other similar rights to acquire Company stock (but such post termination exercise period will not extend beyond the original maximum term of the award).

 

•

If the senior executive elects continuation coverage pursuant to COBRA for himself or herself and his or her eligible dependents, the Company will reimburse the senior executive for the COBRA premiums for such coverage until the earlier of (1) 18 months (24 months in the case of Mr. Kurian); or (2) the date upon which the senior executive and/or the senior executive’s eligible dependents are covered under similar plans.

Conditions to Receipt of Severance under Change of Control Severance Agreement

The senior executive’s receipt of any payments or benefits under the Change of Control Severance Agreement will be subject to the senior executive continuing to comply with the terms of any confidential information agreement entered into between the senior executive and the Company and complying with the provisions of the Change of Control Severance Agreement. Additionally, the receipt of any severance payment under the Change of Control

 

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Severance Agreement is conditioned on the senior executive signing and not revoking a separation agreement and release of claims with the Company, with such release to be effective no later than March 15 of the year following the year in which the termination occurs.

Excise Tax under Change of Control Severance Agreement

In the event that the severance payments and other benefits payable to the senior executive pursuant to his or her Change of Control Severance Agreement constitute “parachute payments” under Section 280G of the U.S. tax code and would be subject to the applicable excise tax, then the senior executive’s severance benefits will be either (1) delivered in full; or (2) delivered to such lesser extent which would result in no portion of such benefits being subject to the excise tax, whichever results in the receipt by the senior executive on an after-tax basis of the greatest amount of benefits. To the extent the senior executive’s severance benefits are delivered in full, the Company will not provide the senior executive any tax gross-up to cover the cost of any excise tax.

Definitions Contained in Change of Control Severance Agreement

Each Change of Control Severance Agreement defines “Cause” as: (1) the senior executive’s continued intentional and demonstrable failure to perform his or her duties customarily associated with his or her position (other than any such failure resulting from the senior executive’s mental or physical disability) after the senior executive has received a written demand of performance from the Company and the senior executive has failed to cure such nonperformance within 30 days after receiving such notice; (2) the senior executive’s conviction of, or plea of nolo contendere to, a felony that the Board of Directors reasonably believes has had or will have a material detrimental effect on the Company’s reputation or business; or (3) the senior executive’s commission of an act of fraud, embezzlement, misappropriation, willful misconduct, or breach of fiduciary duty against, and causing material harm to, the Company.

Each Change of Control Severance Agreement defines “Change of Control” as any of the following events: (1) a change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group (either, a “Person”), acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutes more than 50% of the total voting power of the stock of the Company, except that any change in the ownership of the stock of the Company as a result of a private financing of the Company that is approved by the Board of Directors will not be considered a Change of Control; (2) a change in the effective control of the Company which occurs on the date that a majority of the members of the Board of Directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election; or (3) a change in the ownership of a substantial portion of the Company’s assets which occurs on the date that any Person acquires (or has acquired during the 12 month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than 50% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. Notwithstanding the foregoing provisions of this definition, a transaction will not be deemed a Change of Control unless the transaction qualifies as a change of control event within the meaning of Section 409A of the Internal Revenue Code.

Mr. Kurian’s Change of Control Severance Agreement defines “Good Reason” as his termination of employment within 90 days following the expiration of any cure period following the occurrence of any of the following, without his consent: (1) a material reduction of his authority or responsibilities, provided that a reduction of authority or responsibilities that occurs as a direct consequence of a Change of Control and the Company becoming part of larger entity will not be considered a material reduction of Mr. Kurian’s authority or responsibilities; and any change which results in Mr. Kurian ceasing to have the same functional supervisory authority and responsibility following a Change of Control or a change in Mr. Kurian reporting position so that he no longer directly reports to the Chief Executive Officer or Board of Directors of the parent entity following a Change of Control will constitute a material reduction of his authority or responsibilities; (2) a material reduction in his base salary or target annual incentive (“Base Compensation”), unless the Company also similarly reduces the Base Compensation of all other employees of the Company; (3) a material change in the geographic location at

 

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which he must perform services; (4) any purported termination of his employment for “Cause” without first satisfying the procedural protections set forth in his agreement; or (5) the failure of the Company to obtain the assumption of the agreement by a successor and/or acquirer and an agreement that he will retain substantially similar responsibilities in the acquirer or the merged or surviving company as he had prior to the transaction.

The Change of Control Severance Agreement for each of the other senior executives, including the other NEOs, defines “Good Reason” as the termination of employment within 90 days following the occurrence of any of the following, without the senior executive’s consent: (1) a material reduction of the senior executive’s authority or responsibilities, relative to the senior executive’s authority or responsibilities in effect immediately prior to such reduction, or a change in the senior executive’s reporting position such that the senior executive no longer reports directly to the officer position or its functional equivalent to which the senior executive was reporting immediately prior to such change in reporting position (unless the senior executive is reporting to the comparable officer position of the parent corporation in a group of controlled corporations following a Change of Control); (2) a material reduction in the senior executive’s base salary or target annual incentive (“Base Compensation”), unless the Company also similarly reduces the Base Compensation of all other employees of the Company with positions, duties and responsibilities comparable to the senior executive’s; (3) a material change in the geographic location at which the senior executive must perform services; (4) any purported termination of the senior executive’s employment for “Cause” without first satisfying the procedural protections set forth in his or her agreement; or (5) the failure of the Company to obtain the assumption of the agreement by a successor and/or acquirer and an agreement that the senior executive will retain substantially similar responsibilities in the acquirer or the merged or surviving company as he or she had prior to the transaction.

PBRSUs

In the event of a change of control of the Company prior to the expiration of the applicable two or three-year performance period for a PBRSU grant, the relative performance of the Company’s TSR using the per share value of the Company’s common stock payable to stockholders in connection with the change of control will be measured against the median TSR of the companies listed in the Hardware and Equipment Index for the same period to determine the number of shares that vest at the end of the applicable performance period based on the payout schedule described in the “PBRSUs” section of the “Compensation Discussion & Analysis” of this proxy (such vesting, the “Change of Control Vesting”), subject to continuous service by the NEO through the end of the performance period. If the NEO is terminated without “Cause” or resigns for “Good Reason” (each as defined in the NEO’s Change of Control Agreement) prior to the first anniversary (and, in the case of Mr. Kurian, the second anniversary) of the Change of Control, the vesting of the PBRSUs will accelerate upon the date on which the NEO is terminated or resigns and the number of PBRSUs that vest will be determined in accordance with the Change of Control Vesting. If the NEO’s employment terminates due to the NEO’s death or permanent disability (a “Qualifying Termination), then the measurement period for TSR shall terminate on the date of the Qualifying Termination and the number of PBRSUs that vest (measured based on the actual performance of the Company’s TSR against the median TSR of the companies listed in the Hardware and Equipment Index) will be prorated based the percentage of time worked during the applicable performance period. In the event of the voluntary termination of employment by the NEO either (a) after reaching 62 years of age or (b) on or after reaching 55 years of age following a minimum of ten (10) years of continuous service to the Company of its subsidiaries, the NEO’s PBRSUs will remain outstanding through the applicable performance period and the number of PBRSUs that vest will be prorated will be prorated based the percentage of time worked during the applicable performance period.

 

The Company adopted the Executive Medical Retirement Plan (the “Medical Plan”) in 2005 as a way to enhance its ability to retain its senior executives. As a result of changes in market compensation practices and changes in the healthcare market, the Medical Plan was closed to new participants in November 2015 and in November 2016 the plan design was amended to reduce costs to the Company. The Medical Plan will terminate on December 31, 2019. To participate in the Medical Plan, individuals must have been in the position of CEO or Executive Vice President as of November 12, 2015 and also meet certain age and service requirements as of the date of retirement. As

 

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amended, the Medical Plan provides a health reimbursement account to reimburse eligible retired executives for premiums paid for individual insurance covering the retiree and any eligible dependents for the period from January 1, 2017 through December 31, 2019. On or after December 31, 2019 but ending on December 31, 2021, participants in the Medical Plan will be eligible to receive a taxable lump sum cash payment equal to two years of projected health care costs, or a prorated portion thereof, pursuant to the methodology set forth in the Medical Plan.

Currently the only NEOs who could qualify to participate in the Medical Plan are Messrs. Kurian and Reich. They will only receive benefits outlined in the Medical Plan if they were to retire prior to December 31, 2021 and have met all Medical Plan Requirements.

Assuming our NEOs retired from their employment on April 28, 2017, the last day of our fiscal year, satisfied the age and service requirements, and were otherwise eligible to receive benefits under the Medical Plan, the present value of the benefits the NEOs would have been entitled to receive are $193,000 for Mr. Reich. Mr. Kurian has not yet met the age and service requirements.

Note that these amounts represent the present value of benefits to be received based on certain actuarial assumptions and it is likely that actual costs will differ from the assumptions utilized and scenarios presented.

 

The following table provides information concerning the estimated payments and benefits that would be provided in the circumstances described above for each of the named executive officers serving as of the end of fiscal 2017 pursuant to the Change of Control Severance Agreements in effect at that time. Payments and benefits are estimated assuming that the triggering event took place on the last business day of fiscal 2017 (April 28, 2017), and the price per share of the Company’s common stock is the closing price of the NASDAQ Global Select Market as of that date of $39.85. There can be no assurance that a triggering event would produce the same or similar results as those estimated below if such event occurs on any other date or at any other price, or if any other assumption used to estimate potential payments and benefits is not correct. Due to the number of factors that affect the nature and amount of any potential payments of benefits, any actual payments and benefits may be different.

 

				Potential Payments Upon
				Involuntary Termination Other Than For Cause								Voluntary Termination For Good Reason
Name		Type of Benefit		Prior to Change of Control ($)				On or Within 24 Months Following Change of Control ($)				Prior to Change of Control ($)				On or Within 24 Months Following Change of Control ($)
George Kurian		Cash severance payments			—				4,550,000	(1)			—				4,550,000	(1)
		Vesting acceleration of time-based equity (2)			—				6,437,483	(3)			—				6,437,483	(3)
		Vesting acceleration of PBRSUs			5,702,176	(4)			17,706,351	(3)(5)			5,702,176	(4)			17,706,351	(3)(5)
		Continued coverage of employee benefits (6)			—				47,900				—				47,900
		Total termination benefits			5,702,176				28,741,734				5,702,176				28,741,734
		Total previously vested equity value			445,652				445,652				445,652				445,652
		Full “walk away” value			6,147,828				29,187,386				6,147,801				29,187,386

 

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				Potential Payments Upon
				Involuntary Termination Other Than For Cause								Voluntary Termination For Good Reason
Name		Type of Benefit		Prior to Change of Control ($)				On or Within 24 Months Following Change of Control ($)				Prior to Change of Control ($)				On or Within 24 Months Following Change of Control ($)
Ronald J. Pasek		Cash severance payments			—				1,732,500	(7)			—				1,732,500	(7)
		Vesting acceleration of time-based equity (2)			—				1,921,527	(3)			—				1,921,527	(3)
		Vesting acceleration of PBRSUs			1,592,805	(4)			3,822,811	(3)(5)			1,592,805	(4)			3,822,811	(3)(5)
		Continued coverage of employee benefits (8)			—				36,100				—				36,100
		Total termination benefits			1,592,805				7,512,938				1,592,805				7,512,938
		Total previously vested equity value			—				—				—				—
		Full “walk away” value			1,592,805				7,512,938				1,592,805				7,512,938
Joel D. Reich		Cash severance payments			—				1,496,250	(7)			—				1,496,250	(7)
		Vesting acceleration of time-based equity (2)			—				1,607,280	(3)			—				1,607,280	(3)
		Vesting acceleration of PBRSUs			2,310,543	(4)			5,054,973	(3)(5)			2,310,543	(4)			5,054,973	(3)(5)
		Continued coverage of employee benefits (8)(9)			—				26,900				—				26,900
		Total termination benefits			2,310,543				8,185,403				2,310,543				8,185,403
		Total previously vested equity value			79,746				79,746				79,746				79,746
		Full “walk away” value			2,390,289				8,265,149				2,390,289				8,265,149
Henri P. Richard		Cash severance payments			—				1,701,087	(7)			—				1,701,087	(7)
		Vesting acceleration of time-based equity (2)			—				3,328,591	(3)			—				3,328,591	(3)
		Vesting acceleration of PBRSUs			3,020,112	(4)			7,248,317	(3)(5)			3,020,112	(4)			7,248,317	(3)(5)
		Continued coverage of employee benefits (8)			—				26,900				—				26,900
		Total termination benefits			3,020,112				12,304,895				3,020,112				12,304,895
		Total previously vested equity value			—				—				—				—
		Full “walk away” value			3,020,112				12,304,895				3,020,112				12,304,895

 

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				Potential Payments Upon
				Involuntary Termination Other Than For Cause								Voluntary Termination For Good Reason
Name		Type of Benefit		Prior to Change of Control ($)				On or Within 24 Months Following Change of Control ($)				Prior to Change of Control ($)				On or Within 24 Months Following Change of Control ($)
Matthew K. Fawcett		Cash severance payments			—				1,350,000	(7)			—				1,350,000	(7)
		Vesting acceleration of time-based equity (2)			—				2,286,913	(3)			—				2,286,913	(3)
		Vesting acceleration of PBRSUs			1,852,188	(4)			3,917,255	(3)(5)			1,852,188	(4)			3,917,255	(3)(5)
		Continued coverage of employee benefits (8)			—				37,100				—				37,100
		Total termination benefits			1,852,188				7,591,268				1,852,188				7,591,268
		Total previously vested equity value			286,078				286,078				286,078				286,078
		Full “walk away” value			2,138,266				7,877,346				2,138,266				7,877,346

 

(1)	Pursuant to the applicable terms of Mr. Kurian’s Change of Control Severance Agreement, as amended, in effect on April 28, 2017, this amount represents the sum of 200% of the Mr. Kurian’s annual base salary and 200% of Mr. Kurian’s target annual bonus.

 

(2)

Reflects the aggregate value of unvested option grants with exercise prices less than or equal to $39.85, the closing price of our common stock on the NASDAQ Global Select Market on April 28, 2017, and other equity awards. For unvested option grants with exercise prices less than or equal to $39.85, aggregate market value is determined by multiplying (1) the number of shares subject to such options as of April 28, 2017; by (2) the difference between $39.85 and the exercise price of such options. Does not reflect any dollar value associated with the acceleration of options with exercise prices in excess of $39.85. For unvested RSUs, aggregate market value is determined by multiplying (1) the number of shares subject to such awards as of April 28, 2017; by (2) $39.85. If there is no amount listed in this row, all of the senior executive’s unvested outstanding options have an exercise price in excess of $39.85 and the individual does not hold any unvested restricted stock and/or RSUs.

 

(3)

Pursuant to the applicable terms of the Change of Control Severance Agreement in effect on April 28, 2017, equity awards that are subject to time-based vesting will vest as to that portion of the award that would have vested through the 48-month period following the senior executive’s termination date had the senior executive remained employed through such period. Additionally, the senior executive will be entitled to accelerated vesting as to an additional 100% of the then-unvested portion of all of his outstanding equity awards that are scheduled to vest pursuant to performance-based criteria, unless otherwise provided in the applicable award agreement governing the equity award. Under the terms of the grant agreements for the PBRSUs, the performance period for the grant is deemed to end upon a change of control of the Company and the Company’s TSR is measured against the median TSR of the companies listed in the Hardware and Equipment Index and the actual award amount.

 

(4)

Pursuant to the terms of the grant agreement for the PBRSUs, if the senior executive’s employment terminates due to the his or her death or permanent disability (a “Qualifying Termination”), then the measurement period for TSR shall terminate on the date of the Qualifying Termination and the number of PBRSUs that vest (measured based on the actual performance of the Company’s TSR against the median TSR of the companies listed in the Hardware and Equipment Index) will be prorated based the percentage of time worked during the applicable performance period.

 

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(5)

Pursuant to the terms of the grant agreement for the PBRSUs, the vesting of the PBRSUs will accelerate upon the date on which the senior executive is terminated or resigns and the number of PBRSUs that vest will be determined in accordance with the Change of Control Vesting. For purposes of this table, the closing price of the Company’s common stock on April 28, 2017 ($39.85) is used as the per share value of the Company’s common stock payable to stockholders in connection with the change of control.

 

(6)

Pursuant to the applicable terms of the Change of Control Severance Agreement in effect on April 28, 2017, if Mr. Kurian continuation coverage pursuant to COBRA for himself and his eligible dependents, the Company will reimburse the senior executive for the COBRA premiums for such coverage until the earlier of (1) 24 months; or (2) the date upon which Mr. Kurian and/or his eligible dependents are covered under similar plans.

 

(7)	Pursuant to the applicable terms of the Change of Control Severance Agreement in effect on April 28, 2017, this amount represents the sum of 150% of the senior executive’s annual base salary and 150% of the senior executive’s target annual bonus.

 

(8)

Pursuant to the applicable terms of the Change of Control Severance Agreement in effect on April 28, 2017, if the senior executive elects continuation coverage pursuant to COBRA for the senior executive and his or her eligible dependents, the Company will reimburse the senior executive for the COBRA premiums for such coverage until the earlier of (1) 18 months; or (2) the date upon which the senior executive and/or his or her eligible dependents are covered under similar plans.

 

(9)	Assumes that Mr. Reich elects to continue coverage of employee benefits under COBRA, and does not continue coverage under the Medical Plan. Please see the section entitled “Executive Medical Retirement Plan” for further information on the value of benefits provided through the Medical Plan.

 

The following table provides information as of April 28, 2017 with respect to the shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans. The table does not include information with respect to shares subject to outstanding options and awards granted under equity compensation plans assumed by the Company in connection with mergers and acquisitions of the companies that originally granted those options and awards. Footnote 5 to the table sets forth the total number of shares of common stock issuable upon the exercise of those assumed options and awards as of April 28, 2017 and the weighted-average exercise price.

 

		A				B				C
		Number of Securities to be Issued upon Exercise of Outstanding Options, RSU and PBRSU Awards (#)(2)				Weighted- Average Exercise Price of Outstanding Options ($)(3)				Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (#) (Excluding Securities Reflected in Column A)(4)
Equity compensation plans approved by stockholders(1)			13,946,032			$	42.53				44,592,815
Equity compensation plans not approved by stockholders(5)			—				—				—
Total(6)			13,946,032			$	42.53				44,592,815

 

(1)	The category consists of the Company’s Amended and Restated 1995 Stock Incentive Plan, the 1999 Plan and the Purchase Plan.

 

(2)

Includes 3,265,289 shares of common stock issuable upon exercise of outstanding options, 9,092,923 shares of common stock issuable upon vesting and payout of shares subject to outstanding RSU awards and 1,587,820 shares of common stock issuable upon vesting and payout of shares subject to PBRSU awards, assuming the maximum number of shares vest. Excludes purchase rights accruing under the Company’s

 

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Purchase Plan. The Purchase Plan was approved by the stockholders in connection with the initial public offering of the Company’s common stock. Under the Purchase Plan, each eligible employee may purchase up to 1,500 shares of common stock at semiannual intervals on the last business day of May and November of each year at a purchase price per share equal to 85% of the lower of (1) the closing selling price per share of common stock on the employee’s entry date into the two-year offering period in which that semiannual purchase date occurs; or (2) the closing selling price per share on the semiannual purchase date.

 

(3)	Column B does not take into account shares issuable upon the vesting of outstanding RSUs and PBRSUs, which have no exercise price.

 

(4)

Includes (1) 21,346,996 shares of common stock available for issuance under the 1999 Plan; and (2) 9,299,787 shares available for issuance under the Purchase Plan. As of July 17, 2017, 14,329,099 shares were available for issuance under the 1999 Plan. As of July 17, 2017, 7,370,232 shares are available under the Purchase Plan.

 

(5)

The table does not include information for equity compensation plans assumed by the Company in connection with mergers and acquisitions of the companies that originally established those plans. As of April 28, 2017, there were a total of 1,183,034 shares subject to outstanding awards under all equity compensation plans assumed by the Company in connection with mergers and acquisitions, of which 748,806 shares were subject to outstanding option awards and 434,228 shares were subject to outstanding full value awards. The outstanding stock options had a weighted-average exercise price of $6.27 per share and a weighted-average remaining term of 7.32 years as of such date. No additional awards may be made under those assumed plans.

 

(6)

As of April 28, 2017, there were a total of 15,129,066 shares subject to outstanding awards under all of the Company’s equity compensation plans, including equity compensation plans assumed by the Company in connection with mergers and acquisitions, of which 4,014,095 shares were subject to outstanding option awards and 11,114,971 shares were subject to outstanding full value awards. The outstanding stock options had a weighted-average exercise price of $35.76 per share and a weighted-average remaining term of 3.25 years as of such date. As of July 17, 2017, there were a total of 15,105,221 shares subject to outstanding awards under all of the Company’s equity compensation plans, including equity compensation plans assumed by the Company in connection with mergers and acquisitions, of which 3,668,614 shares were subject to outstanding option awards and 11,436,607 shares were subject to full value awards. The outstanding stock options had a weighted-average exercise price of $36.6556 and a weighted-average remaining term of 2.96 years as of such date.

 

During fiscal 2017, Messrs. Wall, Held, Shaheen, Smith and Wallace and Ms. Hill served on the Compensation Committee. None of these individuals was at any time during fiscal 2017, or at any other time, an officer or employee of the Company. No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board or Compensation Committee.

 

Our Corporate Governance and Nominating Committee is responsible for the review, approval, and ratification of transactions with related persons. Specifically, the Corporate Governance and Nominating Committee has the authority to:

 

•

Consider questions of possible conflicts of interest of members of our Board and corporate officers;

 

•

Review actual and potential conflicts of interest of members of our Board and corporate officers, and clear any involvement of such persons in matters that may involve a conflict of interest;

 

•

Establish policies and procedures for the review and approval of “related person transactions,” as defined in applicable SEC rules;

 

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•

Conduct ongoing reviews of potential related person transactions; and

 

•

Review and approve all related person transactions.

Pursuant to the SEC’s rules and regulations, “related persons” include, but are not limited to, the Company’s directors, executive officers, and beneficial owners of more than 5% of the Company’s outstanding common stock. If the determination is made that a related person has a material interest in any Company transaction, then the Corporate Governance and Nominating Committee, consisting of all independent directors, is responsible for reviewing and approving or ratifying it. An approved transaction would be disclosed in accordance with the SEC rules if required. If the related person at issue is a director of the Company, or a family member of a director, then that director would not participate in those discussions.

 

The information contained in the following Audit Committee Report shall not be deemed to be soliciting material or to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference in such filing.

The Audit Committee has reviewed and discussed the Company’s consolidated financial statements with management and Deloitte & Touche LLP, the Company’s independent registered public accounting firm (“Deloitte & Touche”). The Audit Committee has discussed with Deloitte & Touche the matters required to be discussed by Statement of Auditing Standards 1301 adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding “Communications with Audit Committees,” and Rule 2-07 of SEC Regulation S-X.

The Audit Committee has received and reviewed the written disclosures and the letter from Deloitte & Touche required by the applicable requirements of the PCAOB regarding the independent auditor’s communications with the Audit Committee concerning independence, and has discussed with Deloitte & Touche its independence.

Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the Company’s audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 28, 2017, as filed with the SEC on June 20, 2017.

Submitted by the Audit Committee

of the Board of Directors:

Alan L. Earhart, Chairman

Jeffry R. Allen

Kathryn M. Hill

T. Michael Nevens

 

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PROPOSAL NUMBER 1:

ELECTION OF DIRECTORS

Introduction

At the Annual Meeting, eight (8) directors will be elected to serve until the 2018 Annual Meeting or until successors for such directors are elected and qualified, or until the death, resignation or removal of such directors.

The Board has nominated for re-election eight (8) of the Company’s current directors, as listed below:

 

T. Michael Nevens		George Kurian
Alan L. Earhart		George T. Shaheen
Gerald Held		Stephen M. Smith
Kathryn M. Hill		Richard P. Wallace

Each person nominated has consented to being named in this Proxy Statement and has agreed to serve as a director, if elected. The Board has no reason to believe that any nominee will be unavailable or will decline to serve as a director. In the event, however, that any nominee is unable or declines to serve as a director, the proxies will be voted for any nominee who is designated by our Board to fill the vacancy and following appropriate disclosure of the identity of that individual. The proxies solicited by this Proxy Statement may not be voted for more than eight (8) nominees.

Information Regarding the Nominees

Information regarding the qualifications and experience of each of the nominees may be found in the section of this proxy titled “Our Board of Directors.”

Vote Required

In an uncontested election of directors, to be elected to our Board, each nominee must receive the affirmative vote of shares representing a majority of the votes cast, meaning that the number of votes “FOR” such nominee must exceed the number of votes “AGAINST” such nominee. Under our Corporate Governance Guidelines, each director is required to submit in advance an irrevocable, conditional resignation that will be effective only upon both (1) the failure to receive the required vote at the next stockholders’ meeting at which the director faces reelection; and (2) our Board’s acceptance of such resignation. If an incumbent director fails to receive the required vote for reelection, the Corporate Governance and Nominating Committee will act to determine whether to accept the director’s irrevocable, conditional resignation and will submit its recommendation to our Board for consideration.

Recommendation of the Board

Our Board of Directors Unanimously Recommends That Stockholders

Vote FOR Proposal Number 1

 

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PROPOSAL NUMBER 2:

AMENDMENT TO THE COMPANY’S AMENDED AND RESTATED 1999 STOCK OPTION PLAN

Introduction

We are asking our stockholders to approve an amendment to the Company’s Amended and Restated 1999 Stock Option Plan (the “1999 Plan”) to increase the number of shares that may be issued thereunder by 8,500,000. The Company’s CEO, in consultation with the Chair of the Compensation Committee, pursuant to authority delegated by the Board, has approved the increase in the number of shares reserved for issuance under the 1999 Plan, subject to approval from stockholders at the Annual Meeting. The Company’s NEOs and directors have an interest in this Proposal Number 2 due to their participation in the 1999 Plan.

The 1999 Plan is intended to increase incentives and to encourage stock ownership on the part of eligible employees, nonemployee directors and consultants who provide significant services to the Company and its affiliates. The Company believes strongly that the approval of this amendment to the 1999 Plan will enable the Company to continue to use the 1999 Plan to achieve our goals in attracting and retaining our most valuable asset: our employees. Offering a broad-based equity compensation program is vital to attracting and retaining highly skilled people in our industry. The Company believes that employees who have a stake in the future success of our business become highly motivated to achieve our long-term business goals and increase stockholder value. Our employees’ innovation and productivity are critical to our success in a highly competitive and fast-paced industry. The 1999 Plan is designed to assist in recruiting, motivating and retaining talented employees who help us achieve our business goals, including creating long-term value for stockholders.

Following review and deliberation by both our Board and the Compensation Committee and pursuant to final authority delegated by our Board, the Company’s CEO, in consultation with the Chair of the Compensation Committee approved the increase to the number of shares reserved for issuance under the 1999 Plan. In determining the number of shares reserved for issuance under the 1999 Plan, our Board, Compensation Committee and CEO considered a number of factors, including:

 

•

Historical Grant Practices. We considered the historical numbers of equity awards that the Company has granted in the past three years. Our three-year burn rate, which we define as the number of options plus adjusted RSUs (adjusted consistent with the ISS volatility multiplier) subject to equity awards granted in a year divided by the weighted average shares of common stock outstanding for that fiscal year is 5.1%.

 

•

Historical Share Grant and Delivery/Vesting Table. The table below is provided to highlight the timing of both the issuance and delivery of PBRSUs and time-based RSUs and the issuance and exercise of options under all of the Company’s equity plans. Generally, all RSUs and options issued to the Company’s employees have time-vesting requirements. Performance-based issuances are granted upon the achievement of Company performance goals and are delivered after the satisfaction of additional time-vesting requirements. The Company believes this additional disclosure is important to evaluate the dilutive impact of its equity compensation programs.

 

		Shares Granted (#)												Shares Delivered/Vested/Exercised (#)
		2015				2016				2017				2015				2016				2017
Options(1)			2,181,586				0				0				4,616,594				1,354,292				1,690,465
PBRSUs(2)			—				1,124,400				1,107,820				—				—				131,073
RSUs(3)			6,533,895				5,649,443				4,847,177				3,189,018				3,373,323				3,157,616
Total (PBRSUs and RSUs)			6,533,895				6,773,843				5,954,997				3,189,018				3,373,323				4,979,154

 

(1)	Reflects options granted and options exercised during the past three fiscal years.

 

(2)	Units become eligible to vest upon achievement of Company performance goals within specified time periods.

 

(3)	Units subject to time vesting requirements.

 

•

Forecasted Grant Practices. For fiscal 2018, we currently forecast granting full value awards (in the form of RSUs) and PBRSUs covering 4,200,000 shares, which is equal to 1.6% of our common stock outstanding as of

 

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July 17, 2017. We also forecast cancellation of options and forfeitures of RSUs and PBRSUs of approximately 2,600,000 shares over this period, based on our projections. If our expectation for cancellations is accurate, our net grants (grants less cancellations) for fiscal 2018 would be approximately 1,600,000 shares, or approximately 0.6% of our common stock outstanding as of July 17, 2017. If approved, the amendment to the 1999 Plan would increase the number of shares issuable under the 1999 Plan by an additional 8,500,000 shares, bringing the total number of shares available for future grants to 22,829,099 shares as of July 17, 2017, assuming that the additional 8,500,000 shares were available for grant on that date. We believe, and the Board, Compensation Committee and CEO considered, that this expected forecast will provide us with a share reserve that will allow us to make equity awards for expected new hires, focal awards, any special retention needs and employee growth through any opportunistic acquisitions or hiring for fiscal 2018. On behalf of our Board, the Compensation Committee expects that the total available shares for issuance under the 1999 Plan (as proposed to be amended) should be sufficient to cover the Company’s projected equity awards for the current, as well as into the following, fiscal year. Consistent with its practice in prior years, the Company anticipates making future requests for additional increases in the share reserve on an annual basis so that stockholders can routinely evaluate the 1999 Plan’s continued effectiveness. However, circumstances such as a change in business conditions, our compensation programs, or our strategy could alter this projection and our expectations.

 

•

Awards Outstanding Under Existing Grants and Dilutive Impact. As of July 17, 2017, we have outstanding stock options covering approximately 3,668,614 shares, approximately 8,917,987 unvested RSUs and approximately 2,518,620 unvested PBRSUs, assuming that the maximum number of granted PBRSUs vest. On behalf of our Board, our CEO and Chairman of the Compensation Committee evaluated the value of available awards (adjusted for the relative dilutive cost of stock options vs. full value shares), based on outstanding awards under the 1999 Plan as a percentage of the Company’s market capitalization, and determined that authorizing 8,500,000 additional shares for issuance under the 1999 Plan, in addition to shares remaining available for issuance under the 1999 Plan, was reasonable relative to accepted technology industry norms of value transfer. Accordingly, the approximately 15,105,221 shares subject to outstanding awards (commonly referred to as the “overhang”) represent approximately 5.6% of our outstanding shares as of July 17, 2017, and the total of approximately 22,829,099 shares that would be available for issuance if Proposal Number 2 is approved would represent an additional 8.44% of our outstanding shares. Based on this analysis, the Compensation Committee concluded that the total overhang percentage was within the 50th and 75th percentile of its Pay Practices Peer group (modified to exclude Microsoft, IBM, Oracle, Hewlett-Packard and CommVault, since each of these companies is substantially different in size from NetApp) and would not result in excessive overhang for stockholders.

Current Awards Outstanding

Set forth below is information regarding shares currently outstanding under all of the Company’s equity compensation plans, including the 1999 Plan and equity compensation plans assumed by the Company in connection with mergers and acquisitions.

 

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Selected Data as of July 17, 2017
Number of shares subject to outstanding awards under all of the Company’s equity compensation plans, including equity compensation plans assumed by the Company in connection with mergers and acquisitions(1)			15,105,221
Number of shares subject to outstanding options			3,668,614
Weighted average exercise price of outstanding options		$	36.6556
Weighted average remaining term of outstanding options (in years)			2.96
Number of shares subject to outstanding RSUs			8,917,987
Number of shares subject to outstanding PBRSUs (assuming maximum vest)			2,518,620
Shares remaining for grant under the 1999 Plan (before Proposal No. 2 is approved)			14,329,099
Shares remaining for grant under the 1999 Plan (assuming this Proposal No. 2 is approved)			22,829,099
Shares remaining for grant under all other equity compensation plans			0

 

(1)

Does not include shares of common stock reserved for issuance under the Company’s Employee Stock Purchase Plan. See Proposal No. 3 for additional information regarding these shares. Under the 1999 Plan, shares subject to full value awards granted on or after the 2013 Annual Meeting will count against the share reserve as two shares for every one share subject to such an award. To the extent that a share that was subject to an award that counted as two shares against the 1999 Plan reserve is returned to the 1999 Plan, then the 1999 Plan reserve will be credited with two shares that will thereafter be available for issuance under the 1999 Plan.

Description of the 1999 Plan

The following paragraphs provide a summary of the principal features of the 1999 Plan and its operation. The 1999 Plan is set forth in its entirety and is attached as Appendix A to this Proxy Statement with the SEC. The following summary is qualified in its entirety by reference to the complete text of the 1999 Plan.

The 1999 Plan is divided into five separate equity programs:

 

1.

Discretionary Option Grant Program. Under the Discretionary Option Grant Program, the Plan Administrator (as defined below) is able to grant options to purchase shares of stock at an exercise price not less than the fair market value of those shares on the grant date.

 

2.

Stock Appreciation Rights Program. Under the Stock Appreciation Rights Program, the Plan Administrator is able to grant stock appreciation rights that will allow individuals to receive the appreciation in share price between the date of grant and the exercise date for shares subject to the award.

 

3.

Stock Issuance Program. Under the Stock Issuance Program, the Plan Administrator is able to make direct issuances of shares of stock either through the issuance (or promise to issue) or immediate purchase of such shares or as a bonus for services rendered by participants on such terms as the Plan Administrator deems appropriate. In addition, the Plan Administrator is able to make grants of RSUs on such terms as the Plan Administrator deems appropriate.

 

4.

Performance Share and Performance Unit Program. Under the Performance Share and Performance Unit Program, the Plan Administrator is able to grant performance shares and performance units, which are awards that will result in a payment to a participant only if the performance goals or other vesting criteria established by the Plan Administrator are achieved or the awards otherwise vest.

 

5.

Automatic Award Program. Under the Automatic Award Program, nonemployee directors automatically receive award grants at periodic intervals to purchase or receive shares of stock.

 

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Administration of the 1999 Plan

The Compensation Committee of the Board administers the 1999 Plan (in this role, the “Plan Administrator”). The members of the Compensation Committee qualify as nonemployee directors under Rule 16b-3 of the Exchange Act and as outside directors under Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”), such that the Company can receive a federal tax deduction for certain compensation paid under the 1999 Plan.

Subject to the terms of the 1999 Plan, the Plan Administrator has the sole discretion to select the employees, consultants, nonemployee directors and other independent advisors who will receive awards, determine the terms and conditions of awards (for example, the exercise price and vesting schedule), and interpret the provisions of the 1999 Plan and outstanding awards; provided, however, that the Company is unable (without the approval of stockholders) to reduce the exercise price of any outstanding stock options or stock appreciation rights granted under the 1999 Plan or cancel any outstanding stock options or stock appreciation rights and immediately replace them with new stock options or stock appreciation rights with a lower exercise price, awards of a different type, and/or cash. Administration of the Automatic Award Program is self-executing in accordance with the terms of the program, but the Plan Administrator has discretion to revise the amount or type of award made under the program on a prospective basis. Subject to the terms of our Compensation Committee charter, the Compensation Committee may delegate any part of its authority and powers under the 1999 Plan to a subcommittee. This subcommittee is currently comprised of our CEO and the Company’s Executive Vice President of Human Resources. The subcommittee may award equity to employees who hold positions at the Vice President level or below according to equity grant guidelines established by the Compensation Committee each year, and provided that the equity subcommittee may not grant awards in excess of the pool authorized by the Compensation Committee. Only the Compensation Committee itself can make awards to participants who are subject to Section 16(b) of the Exchange Act (such officers are referred to herein as “executive officers”).

Shares Subject to the 1999 Plan

If Proposal Number 2 is approved, a total of 157,180,429 shares will be reserved for issuance under the 1999 Plan. As of July 17, 2017, (1) 13,892,119 shares were subject to outstanding awards granted under the 1999 Plan, of which 3,041,312 shares were subject to option awards, 8,332,187 shares were subject to full value RSU awards and 2,518,620 shares were subject to PBRSUs, assuming that the maximum number of granted PBRSUs vest; and (2) 14,329,099 shares remained available for any new awards to be granted in the future. Shares subject to full value awards granted on or after the 2013 Annual Meeting will count against the share reserve as two shares for every one share subject to such an award. To the extent that a share that was subject to an award that counted as two shares against the 1999 Plan reserve pursuant to the preceding sentence is returned to the 1999 Plan, the 1999 Plan reserve will be credited with two shares that will thereafter be available for issuance under the 1999 Plan. If the exercise price of an award under the 1999 Plan is paid with shares, or if shares otherwise issuable under the 1999 Plan are withheld by the Company to satisfy any withholding taxes incurred in connection with the exercise of an award or the vesting or disposition of exercised shares or stock issuances under the 1999 Plan, then the number of shares available for issuance under the 1999 Plan will be reduced by the gross number of shares for which the award is exercised or the gross number of exercised shares or stock issuances which vest, and not by the net number of shares issued to the holder of such award or exercised shares or stock issuances. With respect to stock appreciation rights, all of the shares covered by the award (that is, shares actually issued pursuant to a stock appreciation right, as well as the shares of common stock that represent payment of the exercise price) will cease to be available under the 1999 Plan. The 1999 Plan and applicable law prohibits the Company from adding shares that have been repurchased by the Company using stock option exercise proceeds to the number of shares available for issuance under the 1999 Plan without stockholder approval. As of July 17, 2017, the outstanding option awards have a weighted-average exercise price of $42.8513 per share and a weighted-average remaining term of 2.13 years. The closing price of our common stock was $43.62 on July 17, 2017.

If an award expires or is cancelled without having been fully exercised or vested, the unvested or cancelled shares generally will be returned to the available pool of shares reserved for issuance under the 1999 Plan. Also, in the event any change is made to our common stock issuable under the 1999 Plan by reason of any stock split, stock dividend, recapitalization, combination of shares, merger, reorganization, consolidation, recapitalization, exchange

 

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of shares, or other change in capitalization of the Company affecting the common stock as a class without the Company’s receipt of consideration, appropriate adjustments will be made to (1) the maximum number and/or class of securities issuable under the 1999 Plan; (2) the maximum number, value and/or class of securities for which any one individual may be granted stock options, stock appreciation rights, stock issuances, RSUs, or performance shares or performance units under the 1999 Plan per calendar year; (3) the class, value and/or number of securities and the purchase price per share in effect under each outstanding award; and (4) the class, value and/or number of securities for which automatic awards are to be subsequently made under the Automatic Award Program. The Plan Administrator will make adjustments to outstanding awards to prevent the dilution or enlargement of benefits intended to be provided thereunder.

Eligibility

All of our employees (including employees of any parent or subsidiary, our Chief Executive Officer and the three most highly compensated officers), our nonemployee members of the Board and any consultants and other independent advisors who provide services to the Company (or any parent or subsidiary of the Company) are eligible to receive awards under the 1999 Plan. However, the Company does not currently grant equity awards to its consultants or other independent advisors who provide services to the Company. No nonemployee member of the Board participating in the Discretionary Option Grant, Stock Appreciation Rights, Stock Issuance and Performance Share and Performance Unit Programs may be granted, in any calendar year of the Company, awards (whether settled in cash or stock) with a grant date fair value (determined in accordance with U.S. generally accepted accounting principles) of more than $1,000,000. For purposes of clarification, this limitation only applies to awards granted under the Discretionary Option Grant, Stock Appreciation Rights, Stock Issuance and Performance Share and Performance Unit Programs and does not apply to the value of awards nonemployee Board members may receive under the Automatic Award Program. No nonemployee member of the Board participating in the Automatic Award Program may be granted, in any calendar year, awards (whether settled in cash or stock) with a grant date fair value (determined in accordance with U.S. generally accepted accounting principles) of more than $1,000,000.

As of July 17, 2017, approximately 10,150 employees and 9 nonemployee Board members were eligible to participate in the 1999 Plan.

Discretionary Option Grant Program

A stock option is the right to acquire shares at a fixed exercise price for a fixed period of time. Under the Discretionary Option Grant Program, the Plan Administrator may grant nonstatutory stock options and/or incentive stock options (which entitle the recipients, but not the Company, to more favorable tax treatment). The Plan Administrator will determine the number of shares covered by each option, but during any calendar year and subject to the provisions of the 1999 Plan, no participant may be granted options and/or stock appreciation rights covering more than 3,000,000 shares in the aggregate.

The exercise price of each option is set by the Plan Administrator, but cannot be less than 100% of the fair market value of the shares covered by the option on the date of grant. The exercise price of an incentive stock option must be at least 110% of fair market value if on the grant date the participant owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its subsidiaries.

An option granted under the Discretionary Option Grant Program cannot be exercised until it becomes vested. The Plan Administrator establishes the vesting schedule of each option at the time of grant. Options become exercisable at the times and on the terms established by the Plan Administrator. To the extent that the aggregate fair market value of the shares (determined on the grant date) covered by incentive stock options that first become exercisable by any participant during any calendar year is greater than $100,000, the excess above $100,000 will be treated as a nonstatutory stock option. Options granted under the 1999 Plan expire at the times established by the Plan Administrator, but not later than seven years after the grant date.

 

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Stock Appreciation Rights Program

A stock appreciation right is the right to receive the appreciation in fair market value between the date of grant and exercise date, for shares subject to the award. We can pay the appreciation in either cash or shares. Stock appreciation rights will become exercisable at the times and on the terms established by the Plan Administrator, subject to the terms of the 1999 Plan. Subject to the provisions of the 1999 Plan, no participant will be granted stock appreciation rights and/or options covering more than 3,000,000 shares in the aggregate during any calendar year. The exercise price of each stock appreciation right is set by the Plan Administrator, but cannot be less than 100% of the fair market value of the shares covered by the award on the date of grant. A stock appreciation right granted under the 1999 Plan cannot be exercised until it becomes vested. The Plan Administrator establishes the vesting schedule of each stock appreciation right at the time of grant. Stock appreciation rights granted under the 1999 Plan expire at the times established by the Plan Administrator, but not later than seven years after the grant date.

Stock Issuance Program

Stock issuances are awards where shares are or will be issued to a participant and the participant’s right to retain or receive such shares will vest in accordance with the terms and conditions established by the Plan Administrator. RSUs (restricted stock units) are awards that will result in a payment to a participant only if the performance goals or other vesting criteria established by the Plan Administrator are achieved or the awards otherwise vest. The number of shares covered by a stock issuance award or restricted stock unit awards will be determined by the Plan Administrator. During any calendar year and subject to the provisions of the 1999 Plan, no participant is able to receive awards granted under the Stock Issuance Program covering more than 1,000,000 shares.

In determining whether an award should be made and/or the vesting schedule for any such award, the Plan Administrator may impose whatever conditions to vesting as it determines to be appropriate. For example, the Plan Administrator may determine to make an award only if the participant satisfies performance goals established by the Plan Administrator.

Performance Share and Performance Unit Program

Performance shares and performance units are awards that will result in a payment to a participant only if the performance goals or other vesting criteria established by the Plan Administrator are achieved or the awards otherwise vest. The Plan Administrator will establish organizational goals, individual performance goals, or other vesting criteria at its discretion, which, depending on the extent to which they are met, will determine the number and/or the value of performance units and performance shares to be paid to participants. Subject to the provisions of the 1999 Plan, during any calendar year, no participant is able to receive performance units with an initial value greater than $5,000,000, and no participant is able to receive more than 1,000,000 performance shares during any calendar year. Performance units will have an initial dollar value established by the Plan Administrator prior to the grant date. Performance shares have an initial value equal to the fair market value of a share on the grant date.

Performance Goals

The Plan Administrator (at its discretion) may make performance goals applicable to a participant with respect to an award intended to qualify as “performance-based compensation” under Section 162(m). At the Plan Administrator’s discretion, one or more of the following performance goals may apply: annual revenue, cash position, earnings per share, EBIT, EBITDA, free cash flow, individual objectives, net income, operating cash flow, operating income, operating profit, return on assets, return on capital, return on equity, return on sales, and total stockholder return, in each case as defined in the 1999 Plan. The Plan Administrator may utilize other performance criteria for awards not intended to qualify as “performance-based compensation” under Section 162(m).

 

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Automatic Award Program

The terms of the 1999 Plan provide that our nonemployee directors will automatically receive equity grants pursuant to a compensation policy adopted by the Board or the Compensation Committee. These grants may be revised from time to time as the Board or the Compensation Committee deems appropriate. Notwithstanding the foregoing, no nonemployee director participating in the Automatic Award Program may be granted, in any calendar year of the Company, awards (whether settled in cash or stock) with a grant date fair value (determined in accordance with U.S. generally accepted accounting principles) of more than $1,000,000. Starting in fiscal 2016, the automatic equity grants to nonemployee directors will be in the form of RSUs. Subject to the provisions of the 1999 Plan, nonemployee directors are also eligible to receive discretionary awards pursuant to the other equity programs under the 1999 Plan. The Board or the Compensation Committee, in their respective discretion, may change and otherwise revise the terms of awards granted pursuant to the compensation policy for awards granted on or after the date they make the change.

Pursuant to the terms of the outside director compensation policy adopted by the Board and the Compensation Committee, our nonemployee directors are eligible to receive an automatic annual equity award equal in value to $250,000 under the Automatic Award Program of the 1999 Plan, which may be revised from time to time as our Board or the Compensation Committee deems appropriate, subject to the provisions of the 1999 Plan. All automatic equity grants to nonemployee directors will be in the form of RSUs. A newly elected or appointed director receives a pro-rated grant upon his or her first election or appointment to the Board with a value of $250,000 (if such election or appointment occurs before February of the applicable year) or with a value of $125,000 (if such election or appointment occurs after February of the applicable year). Equity awards for nonemployee directors are represented as a dollar value rather than a fixed number of shares. For these purposes, the value of any awards of RSUs will equal the product of (1) the fair market value of one share of common stock on the grant date of such award; and (2) the aggregate number of RSUs. With respect to stock options, the value is determined by using the Black-Scholes option valuation methodology, or such other methodology our Board or the Compensation Committee may determine, on the grant date of the option.

The exercise price of each option granted to a nonemployee director is equal to 100% of the fair market value of the shares covered by the option on the date of grant. The shares subject to each nonstatutory stock option granted pursuant to an initial award are scheduled to vest over four years, with five-elevenths of such shares vesting upon the nonemployee director’s completion of one year of Board service measured from the option grant date and the remaining balance vesting in three equal annual installments over the three year period measured from the first anniversary of the option grant date (assuming that he or she remains a nonemployee director on each scheduled vesting date). The shares subject to each nonstatutory stock option granted pursuant to an annual award shall become 100% vested on the day preceding the next annual stockholders meeting following the grant date, subject to the nonemployee director’s continued service on such date. An option granted under the compensation policy is immediately exercisable. However, any shares purchased under the option program are subject to repurchase by the Company if the nonemployee director ceases service on the Board prior to vesting. If a nonemployee director terminates his or her service on the Board due to death or disability, his or her options would immediately vest.

Options granted to nonemployee directors generally expire no later than seven years after the date of grant. If a nonemployee director terminates his or her service on the Board prior to an option’s normal expiration date, the option will remain exercisable for 12 months to the extent it has vested. However, the option may not be exercised later than the original expiration date.

RSUs granted under the compensation policy shall have a value equal to the fair market value of the shares on the grant date. RSUs granted pursuant to an initial award vest over four years, with 5/11ths of the RSUs vesting upon the completion of the nonemployee director’s first year of service on the Board measured from the RSU grant date and the remaining balance of RSUs vesting in three equal annual installments over the three year period measured from the first anniversary of the RSU grant date (assuming that he or she remains a nonemployee director on each scheduled vesting date). All RSUs granted pursuant to an annual award become 100% vested on the day preceding the next annual stockholders meeting following the grant date, subject to the nonemployee director’s continued service on such date. If a nonemployee director terminates his or her service on the Board due to death or disability, 100% of his or her unvested RSUs would immediately vest. Additionally, the Board (or its authorized

 

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designee) may provide that holders of RSUs granted pursuant to the compensation policy be permitted to defer the delivery of the proceeds from vested RSUs to the extent that such deferral satisfies the requirements of the U.S. tax code.

Awards to be Granted to Certain Individuals and Groups

The number of awards that an employee, nonemployee director, or consultant may receive under the 1999 Plan is at the discretion of the Plan Administrator and therefore cannot be determined in advance. The following table sets forth (1) the aggregate number of shares subject to awards of RSUs granted under the 1999 Plan during fiscal 2017; (2) the aggregate number of shares subject to awards of PBRSUs granted under the 1999 Plan during fiscal 2017, using the maximum vesting of 200% of target shares that could be earned if the highest level of performance is attained. At 100% target vesting, the shares reflected in the table would decrease by 50%; and (3) the total number of shares subject to awards under the 1999 Plan during fiscal 2017, assuming maximum vesting of 200% target for PBRSUs. The Company did not grant options during fiscal 2017.

 

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AMENDED PLAN BENEFITS

1999 Plan

 

Name of Individual or Group and Position		Number of RSUs Granted				Number of PBRSUs Granted(1)		Total(1)
George Kurian			58,300			350,000			408,300
Chief Executive Officer and President
Ronald J. Pasek			96,438			95,930			192,368
Executive Vice-President and Chief Financial Officer
Joel D. Reich			36,000			108,000			144,000
Executive Vice President, Product Operations
Henri P. Richard			56,922			181,890			295,733
Executive Vice President, Worldwide Field and Customer Operations
Matthew K. Fawcett			26,000			78,000			104,000
Senior Vice President, General Counsel and Secretary
T. Michael Nevens			7,132			—			7,132
Chairman of the Board
Jeffry R. Allen			7,132			—			7,132
Director
Alan L. Earhart			7,132			—			7,132
Director
Gerald Held			7,132			—			7,132
Director
Kathryn M. Hill			7,132			—			7,132
Director
George T. Shaheen			7,132			—			7,132
Director
Stephen M. Smith			12,030			—			12,030
Director
Robert T. Wall			7,132			—			7,132
Director
Richard P. Wallace			7,132			—			7,132
Director
All current executive officers, as a group (5 persons)			330,581			813,820			1,144,401
All current directors who are not executive officers, as a group (9 persons)			69,086			—			69,082
All employees, including current officers who are not executive officers, as a group (4,018 persons)			4,516,596			294,000			4,810,596

 

(1)	Assumes maximum vesting of 200% of target shares that could be earned if the highest level of performance is attained. At 100% target vesting, the shares reflected in the table would decrease by 50%.

Limited Transferability of Awards

Options granted under the 1999 Plan generally may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the applicable laws of descent and distribution. However,

 

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participants may, in a manner specified by the Plan Administrator, transfer nonstatutory stock options (1) to a member of the participant’s family; (2) to a trust or other entity for the sole benefit of the participant and/or a member of his or her family; or (3) to a former spouse pursuant to a domestic relations order.

Federal Tax Aspects

The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers and the Company of awards granted under the 1999 Plan. Tax consequences for any particular individual may be different.

Nonstatutory Stock Options

No taxable income is reportable when a nonstatutory stock option is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the excess of the fair market value (on the exercise date) of the shares purchased over the exercise price of the option. Any taxable income recognized in connection with an option exercise by an employee of the Company is subject to tax withholding by the Company. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.

As a result of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the Treasury regulations promulgated thereunder (“Section 409A”), nonstatutory stock options granted with an exercise price below the fair market value of the underlying stock or with a deferral feature may be taxable to the recipient in the year of vesting in an amount equal to the difference between the then fair market value of the underlying stock and the exercise price of such awards and may be subject to an additional 20% tax plus penalties and interest. In addition, certain states, such as California, have adopted similar tax provisions, and as a result, failure to comply with such similar provisions may result in an additional tax.

Incentive Stock Options

No taxable income is reportable when an incentive stock option is granted or exercised (except for purposes of the alternative minimum tax, in which case taxation is the same as for nonstatutory stock options). If the participant exercises the option and then later sells or otherwise disposes of the shares more than two years after the grant date and more than one year after the exercise date, the difference between the sale price and the exercise price will be taxed as capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the shares before the end of the two year or one year holding periods described above, he or she generally will have ordinary income at the time of the sale equal to the fair market value of the shares on the exercise date (or the sale price, if less) minus the exercise price of the option.

Stock Appreciation Rights

No taxable income is reportable when a stock appreciation right is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the amount of cash received and the fair market value of any shares received. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.

As a result of Section 409A, however, stock appreciation rights granted with an exercise price below the fair market value of the underlying stock or with a deferral feature may be taxable to the recipient in the year of vesting in an amount equal to the difference between the then fair market value of the underlying stock and the exercise price of such options and may be subject to an additional 20% tax plus penalties and interest. In addition, certain states, such as California, have adopted similar tax provisions, and as a result, failure to comply with such similar provisions may result in an additional tax.

Stock Issuance, Restricted Stock Units, Performance Units and Performance Shares

A participant generally will not have taxable income at the time an award of stock, RSUs, performance shares or performance units is granted. Instead, he or she will recognize ordinary income in the first taxable year in which his

 

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or her interest in the shares underlying the award becomes either (1) freely transferable; or (2) no longer subject to substantial risk of forfeiture. However, the recipient of an award of restricted stock may elect to recognize income at the time he or she receives the award in an amount equal to the fair market value of the shares underlying the award (less any cash paid for the shares) on the date the award is granted and the recipient of an RSU granted pursuant to the Annual Award Program may be permitted to elect in accordance with federal tax laws when he or she will receive the payout from his or her earned RSUs and defer income taxation until the award is paid.

Tax Effect for the Company

The Company generally will be entitled to a tax deduction in connection with an award under the 1999 Plan in an amount equal to the ordinary income realized by a participant and at the time the participant recognizes such income (for example, the exercise of a nonstatutory stock option). Special rules limit the deductibility of compensation paid to our Chief Executive Officer and to certain other of our most highly compensated executive officers. Under Section 162(m) of the Code, the annual compensation paid to any of these specified executive officers will be deductible only to the extent that it does not exceed $1,000,000. However, the Company can preserve the deductibility of certain compensation in excess of $1,000,000 if the conditions of Section 162(m) are met. These conditions include stockholder approval of the 1999 Plan, setting limits on the number of awards that any individual may receive and for awards other than stock options, establishing performance criteria that must be met before the award actually will vest or be paid. The 1999 Plan has been designed to permit the Plan Administrator to grant awards that qualify as performance-based compensation for purposes of satisfying the conditions of Section 162(m), thereby permitting the Company to continue to receive a federal income tax deduction in connection with such awards. However, the Plan Administrator may determine that it is in the best interest of the Company and its stockholders to structure awards under the 1999 Plan that do not satisfy the conditions of Section 162(m), which could cause the Company to forgo a potential federal income tax deduction.

Amendment and Termination of the Plan

The Board or the Primary Committee (as defined in the 1999 Plan) generally may amend or terminate the 1999 Plan at any time and for any reason, subject to stockholder approval, if applicable.

Summary

The 1999 Plan is designed to assist us in recruiting, motivating and retaining talented employees who help us achieve our business goals, including creating long-term value for stockholders. We strongly believe that the amendment to the 1999 Plan to increase the number of shares we can use to grant awards is essential for us to compete for talent in the very competitive labor markets in which we operate.

Vote Required

The affirmative vote of a majority of the stock having voting power present in person or represented by proxy is required to approve this Proposal Number 2. Unless you indicate otherwise, your proxy will be voted “FOR” the proposal.

Recommendation of the Board

Our Board of Directors Unanimously Recommends That Stockholders

Vote FOR Proposal Number 2

 

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PROPOSAL NUMBER 3:

AMENDMENT TO THE COMPANY’S EMPLOYEE STOCK PURCHASE PLAN

Introduction

The Company is asking the stockholders to approve an amendment to the Company’s Employee Stock Purchase Plan (the “Purchase Plan”) to increase the number of shares authorized for issuance under the Purchase Plan by an additional 2,500,000 shares. The requested increase of 2,500,000 shares represents approximately 1% of the outstanding shares of Company’s common stock as of July 17, 2017. The Company’s NEOs have an interest in this Proposal Number 3 due to their ability to participate in the Purchase Plan.

We are asking our stockholders to increase the number of shares authorized for issuance under the Purchase Plan to ensure that the Company can maintain a sufficient reserve of shares of the Company’s common stock available under the Purchase Plan. A sufficient reserve will ensure that the Purchase Plan continues to provide eligible employees of the Company and its participating affiliates (whether now existing or subsequently established) with the opportunity to purchase shares at semiannual intervals through their accumulated periodic payroll deductions.

The Purchase Plan was adopted by our Board on September 26, 1995 and became effective on November 20, 1995, in connection with the Company’s initial public offering of its common stock.

The terms and provisions of the Purchase Plan, as most recently amended, are summarized below. This summary, however, does not purport to be a complete description of the Purchase Plan. The Purchase Plan is set forth in its entirety and is attached as Appendix B to this Proxy Statement. The following summary is qualified in its entirety by reference to the complete text of the Purchase Plan. Any stockholder may obtain a copy of the actual plan document by making a written request to the Corporate Secretary at the Company’s principal offices in Sunnyvale, California.

In considering its recommendation to amend the Purchase Plan to reserve an additional 2,500,000 shares for issuance, our Board considered the historical number of shares purchased under the Purchase Plan in the past three years. In fiscal 2015, fiscal 2016 and fiscal 2017, the number of shares purchased under the Purchase Plan was 3,419,774 shares, 3,431,126 shares and 3,707,555 shares, respectively. The actual number of shares that will be purchased under the Purchase Plan in any given year will depend on a number of factors, including the number of participants, the participants’ participation rates and our stock price. Based on usage in fiscal 2017, an additional 2,500,000 shares would meet our needs for three years. The Board also considered management’s recommendation as to the amount of the increase and its expectation for the number of employees who will participate in the Purchase Plan.

Description of the Purchase Plan

The Purchase Plan is administered by the Compensation Committee of our Board, serving as the plan administrator (the “Plan Administrator”). As Plan Administrator, such committee has full authority to adopt administrative rules and procedures and to interpret the provisions of the Purchase Plan.

Share Reserve

If Proposal Number 3 is approved, the maximum number of shares reserved for issuance over the term of the Purchase Plan will be 63,700,000 shares. As of July 17, 2017, 53,829,768 shares had been issued under the Purchase Plan, and 7,370,232 shares were available for future issuance. The closing price of our common stock was $43.62 on July 17, 2017.

The shares issuable under the Purchase Plan may be made available from authorized but unissued shares or from shares of common stock reacquired by the Company, including shares purchased on the open market.

In the event that any change is made to the outstanding common stock (whether by reason of any stock split, stock dividend, recapitalization, exchange or combination of shares or other change affecting the outstanding common stock as a class without the Company’s receipt of consideration), appropriate adjustments will be made to (1) the maximum number and class of securities issuable under the Purchase Plan; (2) the maximum number and class of

 

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securities purchasable per participant on any one semiannual purchase date; (3) the maximum number and class of shares purchasable in total by all participants on any one purchase date (if applicable); and (4) the number and class of securities subject to each outstanding purchase right and the purchase price per share in effect thereunder. Such adjustments will be designed to preclude any dilution or enlargement of benefits under the Purchase Plan or the outstanding purchase rights thereunder.

Offering Period and Purchase Rights

Shares are offered under the Purchase Plan through a series of overlapping offering periods, each not to exceed 24 months in duration. Such offering periods will begin on the first business day of June and on the first business day of December of each year during the term of the Purchase Plan. Accordingly, two separate offering periods will begin in each calendar year.

Each offering period will consist of a series of one or more successive purchase intervals. Purchase intervals will run from the first business day in June to the last business day in November each year and from the first business day in December each year to the last business day in May in the immediately succeeding year. Accordingly, shares will be purchased on the last business day in May and November each year with the payroll deductions collected from the participants for the purchase interval ending with each such semiannual purchase date.

If the fair market value per share of common stock on any semiannual purchase date within a particular offering period is less than the fair market value per share of common stock on the start date of that offering period, then the participants in that offering period will automatically be transferred from that offering period after the semiannual purchase of shares on their behalf and enrolled in the new offering period, which begins on the next business day following such purchase date.

Eligibility and Participation

Any individual who is employed on a basis under which he or she is regularly expected to work for more than 20 hours per week for more than five months per calendar year in the employ of the Company or any participating parent or subsidiary corporation (including any corporation which subsequently becomes such at any time during the term of the Purchase Plan), or any lesser number of hours per week and/or number of months in any calendar year established by the Plan Administrator in accordance with applicable law and the provisions of the Purchase Plan, is eligible to participate in the Purchase Plan.

An individual who is an eligible employee on the start date of any offering period may join that offering period, subject to certain enrollment timing restrictions contained in the Purchase Plan, by properly electing to participate in the offering period pursuant to procedures established by the Plan Administrator in accordance with the terms of the Purchase Plan. However, no employee may participate in more than one offering period at a time.

As of July 17, 2017, approximately 10,150 employees, including 5 of our current NEOs, were eligible to participate in the Purchase Plan.

Purchase Price

The purchase price of the shares purchased on behalf of each participant on each semiannual purchase date will be equal to 85% of the lower of (1) the fair market value per share on the start date of the offering period in which the participant is enrolled; or (2) the fair market value on the semiannual purchase date.

The fair market value per share on any particular date under the Purchase Plan will be deemed to be equal to the closing selling price per share on such date reported on the NASDAQ Global Select Market. On July 17, 2017, the closing selling price per share of the Company’s common stock on the NASDAQ Global Select Market was $43.62.

Payroll Deductions and Stock Purchases

Each participant may authorize periodic payroll deductions in any multiple of 1% up to a maximum of 10% of his or her total cash earnings (generally base salary, bonuses, overtime pay and commissions) to be applied to the

 

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acquisition of shares at semiannual intervals. Accordingly, on each semiannual purchase date (the last business day in May and November each year), the accumulated payroll deductions of each participant will automatically be applied to the purchase of whole shares at the purchase price in effect for the participant for that purchase date. Any payroll deductions not applied to the purchase of shares on the purchase date shall be promptly refunded to the participant after the purchase date.

Special Limitations

The Purchase Plan imposes certain limitations upon a participant’s rights to acquire common stock, including the following limitations:

 

•

Purchase rights granted to a participant may not permit such individual to purchase more than $25,000 worth of shares (valued at the time each purchase right is granted) for each calendar year those purchase rights are outstanding.

 

•

Purchase rights may not be granted to any individual if such individual would, immediately after the grant, own or hold outstanding options or other rights to purchase stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any of its affiliates.

 

•

No participant may purchase more than 1,500 shares on any one purchase date.

The Plan Administrator will have the discretionary authority to increase, decrease, or implement the per participant and any total participant limitations prior to the start date of any new offering period under the Purchase Plan.

Withdrawal Rights and Termination of Employment

The participant may withdraw from the Purchase Plan at any time on or before the seventh business day prior to the next scheduled purchase date (subject to the Plan Administrator’s authority to designate a different withdrawal date in accordance with the provisions of the Purchase Plan, subject to any laws of the applicable jurisdiction), and upon such timely withdrawal, his or her accumulated payroll deductions will be promptly refunded.

Upon the participant’s cessation of employment or loss of eligible employee status, payroll deductions will automatically cease. Any payroll deductions which the participant may have made for the semiannual period in which such cessation of employment or loss of eligibility occurs will be promptly refunded.

Stockholder Rights

No participant will have any stockholder rights with respect to the shares covered by his or her purchase rights until the shares are actually purchased on the participant’s behalf. No adjustment will be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase.

Assignability

Purchase rights are not assignable or transferable by the participant and may be exercised only by the participant.

Change of Control

In the event a change of control occurs, all outstanding purchase rights will automatically be exercised immediately prior to the effective date of such change of control. The purchase price in effect for each participant will be equal to 85% of the lower of (1) the fair market value per share on the start date of the offering period in which the participant is enrolled at the time the change of control occurs; or (2) the fair market value per share immediately prior to the effective date of such change of control.

A change of control will be deemed to occur if (1) the Company is acquired through a merger or consolidation in which more than 50% of the Company’s outstanding voting stock is transferred to a person or persons different

 

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from those who held stock immediately prior to such transaction; (2) the Company sells, transfers or disposes of all or substantially all of its assets; or (3) any person or related group of persons acquires ownership of securities representing more than 50% of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders.

Share Proration

Should the total number of shares to be purchased pursuant to outstanding purchase rights on any particular date exceed either (1) the maximum number of shares purchasable in total by all participants on any one purchase date (if applicable); or (2) the number of shares then available for issuance under the Purchase Plan, then the Plan Administrator will make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis. In such an event, the Plan Administrator will refund the accumulated payroll deductions of each participant, to the extent such deductions are in excess of the purchase price payable for the shares prorated to such individual.

Amendment and Termination

The Purchase Plan will terminate upon the earliest of (1) the date on which all shares available for issuance thereunder are sold pursuant to exercised purchase rights; or (2) the date on which all purchase rights are exercised in connection with a change of control.

Our Board may at any time alter, amend, suspend or discontinue the Purchase Plan and will seek stockholder approval of any changes to the extent necessary to comply with the Internal Revenue Code or other applicable law, regulation or stock exchange rule.

Plan Benefits

The table below shows, as to the NEOs and specified groups, the number of shares purchased under the Purchase Plan during fiscal 2017, together with the value of those shares as of the date of purchase.

 

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Participation in the Purchase Plan

Participation in the Purchase Plan is voluntary and dependent on each eligible employee’s election to participate and his or her determination as to the level of payroll deductions. Accordingly, future purchases under the Purchase Plan are not determinable. Nonemployee directors are not eligible to participate in the Purchase Plan. The following table sets forth certain information regarding shares purchased under the Purchase Plan during the last fiscal year for each of the NEOs, for all current executive officers as a group, and for all other employees who participated in the Purchase Plan as a group:

AMENDED PLAN BENEFITS

Employee Stock Purchase Plan

 

Name and Position		Number of Purchased Shares				Dollar Value of Purchased Shares ($)(1)
George Kurian			0				0
Chief Executive Officer and President			</