|RELIANCE STEEL & ALUMINUM CO filed this Form DEF 14A on 04/05/2019|
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
350 South Grand Avenue, Suite 5100
Los Angeles, California 90071
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 15, 2019
To the Stockholders of Reliance Steel & Aluminum Co.:
The 2019 Annual Meeting of Stockholders (the “Annual Meeting”) of Reliance Steel & Aluminum Co. (“Reliance” or “Company”) will be held on Wednesday, May 15, 2019, at 10:00 a.m., Pacific Daylight Time, at the Millennium Biltmore Los Angeles, 506 South Grand Avenue, Los Angeles, California 90071, for the following purposes:
These items of business are more fully described in the proxy statement accompanying this Notice of Annual Meeting to Stockholders (the “Notice”).
You are invited to attend the Annual Meeting. If you plan to attend the meeting, please see the instructions contained in the accompanying proxy statement.
Your vote is important. Whether or not you plan to attend the Annual Meeting, it is important that your shares be represented, and we hope you will vote as soon as possible.
Only stockholders of record at the close of business on March 25, 2019 are entitled to notice of, and to vote at, the Annual Meeting or any adjournments thereof. A list of these stockholders is available at the offices of the Company in Los Angeles, California.
To make it easier, you may vote on the Internet or by telephone. The instructions attached to this Notice describe how to use these convenient services. Even if you give your proxy, you have the right to vote in person if you attend the Annual Meeting.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
This Notice presents only an overview of the more complete proxy materials that are available to you on the Internet, if you have not received them by mail. We encourage you to access and review all of the important information contained in the proxy materials before voting. This proxy statement, an Annual Report to Stockholders, an Annual Report on Form 10-K and a proxy form for voting are available online at www.proxyvote.com by using the 12-digit control number provided to you. To receive a paper or e-mail copy of these documents, free of charge, you must request one. Please request a copy (1) online at www.proxyvote.com; (2) by email to email@example.com; or (3) by telephone at 1-800-579-1639. Please request your copy on or before May 1, 2019 to facilitate timely delivery.
Except as stated otherwise, none of the information on our website, Annual Report and stockholder letter constitute proxy-soliciting material.
This summary highlights information contained elsewhere in this proxy statement and in our Annual Report on Form 10-K for the year ended December 31, 2018. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting.
Your vote is very important. Reliance’s Board of Directors is requesting that you allow your common stock to be represented and voted at the Annual Meeting by the Company’s officers (proxies) named on the proxy card. The proxy statement is first being sent and made available to our stockholders on or about April 5, 2019.
Corporate Governance Highlights (see page 53)
Key Executive Compensation Practices
Board Nominees (see page 10)
Voting Matters and Recommendations
We are furnishing this proxy statement to the holders of our common stock in connection with the solicitation of proxies on behalf of our Board of Directors for use at the Annual Meeting to be held on Wednesday, May 15, 2019, at 10:00 a.m., Pacific Daylight Time, at the Millennium Biltmore Los Angeles, 506 South Grand Avenue, Los Angeles, California, 90071.
The Board of Directors selected Karla R. Lewis, our Senior Executive Vice President and Chief Financial Officer, and William A. Smith II, our Senior Vice President, General Counsel and Corporate Secretary, to be named as proxyholders to vote the shares of common stock represented by the proxies at the Annual Meeting. Reliance will pay the cost to solicit the proxies. The Board of Directors will solicit proxies by mail, by telephone, and electronically via the Internet. In addition, certain of our officers and agents may solicit proxies by telephone and personal interview (the cost of which will be nominal). We expect that banks, brokerage houses and other custodians, nominees and fiduciaries will forward soliciting material to beneficial owners and obtain authorizations to execute proxies. We will reimburse the reasonable out-of-pocket expenses they incur to forward our proxy materials. We have retained D.F. King & Co., Inc. (“D.F. King”) to assist in the distribution and solicitation of proxies. Based on our agreement with D.F. King, we anticipate paying fees of approximately $10,000, plus-out-of-pocket expenses, for these services. Your bank, broker or financial institution is not able to vote on your behalf for the election of directors or on any compensation issue unless you provide specific instructions by completing and returning a proxy or voting instruction form or by following instructions provided to you by your bank, broker or financial institution to vote your shares which often include instructions on how to vote your shares via telephone or the Internet. Voting your shares is important to ensure that you have a say in the governance of our Company.
We intend only the three matters described in this proxy statement to be presented at the Annual Meeting. We will also transact any other business as may properly come before the meeting or any adjournments thereof.
Unless you instruct us otherwise on the proxy, each proxy will be voted FOR the election of all of the nominees named herein as directors, FOR the approval of the compensation of the Company’s named executive officers, and FOR the ratification of KPMG LLP as our independent registered public accounting firm for 2019.
We intend to make this proxy statement and accompanying material available to each stockholder on the Internet beginning on or about April 5, 2019. An Annual Report, including a letter to the stockholders from the President and Chief Executive Officer and the Senior Executive Vice President and Chief Financial Officer, and an Annual Report on Form 10-K, also will be available electronically. Some stockholders will receive these materials by mail and other stockholders may request copies of these materials at no cost. The Annual Report and stockholder letter are not incorporated in, and are not a part of, this proxy statement and do not constitute proxy-soliciting material.
If you are a stockholder of record and execute a proxy or submit a proxy via the Internet or telephone, the proxy may be revoked at any time before it is voted:
In addition, prior to the deadline for Internet or telephone voting, you may change your vote using the Internet or telephone method, in which case only your latest Internet or telephone proxy submitted before the deadline will be counted.
If you hold your shares through a broker, bank, financial institution, or other nominee, then you are a beneficial holder, and you may change your vote by complying with the procedures contained in the voting instructions provided to you by your broker, bank, financial institution or other nominee.
The presence in person or by proxy of the holders of a majority of the shares entitled to vote at the meeting shall constitute a quorum for the transaction of business. Broker non-votes and abstentions are counted for purposes of determining whether a quorum is present. A broker non-vote occurs when a nominee holding shares for a beneficial owner (i.e., in “street name”) does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received instructions from the beneficial owner. We believe that nominees only have discretionary voting power with respect to the ballot item on the ratification of our independent registered public accounting firm.
Our only voting securities are shares of common stock, par value $0.001 per share. As of the record date of March 25, 2019, we had a total of 67,234,936 shares of common stock issued and outstanding, all of which may be voted at the Annual Meeting. Only holders of shares of record on our books at the close of business on the record date will be entitled to vote at the Annual Meeting.
The election of directors at the Annual Meeting will be uncontested. As a result, each nominee for election as a director at the Annual Meeting will only be elected if the votes cast “FOR” such nominee exceed the number of votes cast “AGAINST” such nominee, with abstentions and broker non-votes not counted as either votes “FOR” or “AGAINST” that nominee’s election. As required by the Company’s Bylaws, in the event that an incumbent director fails to receive a majority of votes cast in an uncontested election, such incumbent director is required to submit his or her resignation to the Board of Directors within ten calendar days of the date of the certification of the election results. Pursuant to the procedures set forth in the Bylaws, the Nominating and Corporate Governance Committee will make a recommendation to the Board of Directors within ten calendar days as to whether to accept or reject the resignation, or whether other action should be taken. The Board of Directors will then act on the resignation, taking into account the Nominating and Corporate Governance Committee’s recommendation, and the Company will publicly disclose such decision by the Board of Directors with respect to the director nominee. Each of the Nominating and Corporate Governance Committee, in making its recommendation, and the Board of Directors, in making its decision, may consider any factors and other information that they consider appropriate and relevant. A director who tenders his or her resignation is not permitted to participate in the recommendation of the Nominating and Corporate Governance Committee or the decision of the Board of Directors with respect to his or her resignation.
The affirmative vote of a majority of votes present in person or by proxy and entitled to vote on the matter is required to (i) approve, on a non-binding advisory basis, the compensation of the named executive officers; and (ii) ratify the engagement of KPMG LLP as our independent registered public accounting firm for 2019. Accordingly, abstentions will count as votes “AGAINST” such proposals. Broker non-votes will have no effect on Proposal Numbers 1 and 2. Because the ratification of the appointment of KPMG LLP (Proposal No. 3) is considered a “routine” proposal, a broker holding shares as the nominee for a beneficial owner may vote for the proposal without voting instructions and, accordingly, we do not expect there to be any broker non-votes on Proposal No. 3.
It is proposed that nine directors, seven of whom are independent directors, be elected to hold office until the 2020 annual meeting of stockholders and until their successors have been elected and qualified, subject to their earlier death, resignation or removal. Messrs. Mollins and Hannah are not considered independent directors because Mr. Mollins was our Chief Executive Officer until December 2018 and Mr. Hannah was an executive officer until August 2016.
The Nominating and Corporate Governance Committee has recommended to the Board of Directors, and the Board of Directors has approved, and recommends to the stockholders, the individuals named below as nominees for election to the Board:
The election of directors at the Annual Meeting will be uncontested. Accordingly, a majority of the votes cast is required for the election of directors at the 2019 Annual Meeting. Neither Reliance nor your bank, broker or financial institution is able to vote on your behalf for the election of directors unless you provide specific instructions by completing and returning a proxy or voting instruction form or you follow instructions provided to you by your bank, broker or financial institution, which often include instructions on how to vote your shares via telephone or the Internet.
Our Board of Directors currently has eleven members. Each of Thomas W. Gimbel and Douglas M. Hayes will retire from the Board of Directors effective at the 2019 Annual Meeting, at which time the size of the Board will be reduced to nine members. We expect each nominee for election as a director will serve if elected. If any nominee is not able to serve, proxies may be voted by the proxyholders for substitute nominees, unless the Board of Directors chooses to reduce the number of directors serving on the Board of Directors.
Certain information with respect to each nominee is set forth in “Management” below. See page 14.
The Board of Directors recommends that stockholders vote FOR the election of each nominee as a director. Unless otherwise indicated on your proxy, the proxyholders will vote your proxy FOR the election of all named nominees.
In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), we are asking our stockholders to approve, on an advisory, non-binding basis, the compensation of our named executive officers as disclosed in this proxy statement. It is Reliance’s current policy to provide our stockholders with an opportunity to approve the compensation of our named executive officers each year at the Annual Meeting. Accordingly, we anticipate that the next such vote will occur at the 2020 Annual Meeting of Stockholders.
In voting on this proposal, the Board of Directors encourages you to consider the detailed discussion of compensation matters in the Compensation Discussion and Analysis section, or CD&A, beginning on page 20.
The Board of Directors recommends that stockholders vote FOR the following resolution:
“RESOLVED, that the stockholders of Reliance Steel & Aluminum Co. approve, on an advisory basis, the compensation paid to Reliance Steel & Aluminum Co.’s named executive officers, as disclosed in the 2019 Proxy Statement pursuant to the Securities and Exchange Commission’s compensation disclosure rules, including the CD&A, the Summary Compensation Table and other compensation tables and the accompanying footnotes and narratives and any related material.”
Because your vote is advisory, it will not be binding upon the Board. However, the Board values our stockholders’ opinions and the Compensation Committee will take into account the outcome of the vote when considering future executive compensation decisions. The affirmative vote of a majority of votes present in person or by proxy and entitled to vote is required to approve this proposal.
Neither Reliance nor your bank, broker or financial institution is able to vote on your behalf to support the Company’s executive compensation unless you provide specific instructions by completing and returning a proxy or voting instruction form or you follow instructions provided to you by your bank, broker or financial institution, which often include instructions on how to vote your shares via telephone or the Internet.
The Board of Directors recommends a vote FOR the compensation of the Company’s named executive officers. Unless otherwise indicated on your proxy, the proxyholders will vote your proxy FOR the above resolution approving the compensation of our named executive officers.
KPMG LLP, our independent registered public accounting firm, billed us the fees set forth in the table below for services provided in the last two years.
Audit fees relate to services rendered in connection with the audit of our annual financial statements and internal control over financial reporting, quarterly review of financial statements, audit services provided in connection with statutory and regulatory filings and discussions surrounding the proper application of financial accounting and/or reporting standards.
Audit-related fees are those fees for services provided by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and not included as audit fees. Tax fees are fees and expenses for professional services rendered by KPMG LLP in connection with U.S. and foreign tax compliance and planning, and consultation and advice on tax examinations.
The Audit Committee approved all of these services in advance. The Audit Committee has adopted a Pre-Approval Policy that requires that the Audit Committee approve in advance the services to be provided, the terms of the engagement letter, and all associated fees set forth in such letter for the independent registered public accounting firm. In addition, the Audit Committee will review proposed audit, audit-related, tax and other services that management desires the independent registered public accounting firm to perform to ensure that such services and the proposed fees related to the services will not impair the independent registered public accounting firm’s independence and that such services and fees are consistent with the rules established by the Securities and Exchange Commission (“SEC”). Each quarter, the Chief Financial Officer of the Company reports to the Audit Committee which services, if any, were performed and the amount of any fees that were incurred. The Audit Committee has delegated to the Chair of the Audit Committee the authority to add to, amend or modify the list of services to be provided or the amount of fees to be paid; provided that the Chair will report any action taken to the Audit Committee at its next scheduled meeting and provided further that the fees involved are reasonably expected to be less than $100,000.
The Audit Committee selected KPMG LLP as the Company’s independent registered public accounting firm for 2019. KPMG LLP has served as the Company’s independent registered public accounting firm since 2008. The Board of Directors ratified this selection.
The Board of Directors believes there are significant benefits to having an independent registered public accounting firm with extensive history with the Company. These benefits include:
At the Annual Meeting, stockholders will be asked to ratify and approve this selection. We are not required to have the stockholders ratify the selection of KPMG LLP as our independent registered public accounting firm. Nevertheless we are presenting the selection of KPMG to our stockholders because we believe it is a good corporate practice. If the stockholders do not ratify the selection, the Audit Committee will reconsider whether or not to retain KPMG LLP, but may still retain the firm. Even if the selection is ratified, the Audit Committee, in its discretion, may change the appointment at any time during the year if it determines that such a change would be in the best interests of the Company and its stockholders.
A representative of KPMG LLP is expected to be present at the Annual Meeting, will have an opportunity to make a statement if he or she desires to do so, and will be available to respond to appropriate questions. The affirmative vote of a majority of shares present in person or by proxy and entitled to vote is required to ratify the selection of KPMG LLP as our independent registered public accounting firm for 2019. Because the ratification of the appointment of KPMG LLP is considered a “routine” proposal, a bank, broker or financial institution holding shares as the nominee for a beneficial owner may vote for the proposal without voting instructions and, accordingly, we do not expect there to be any broker non-votes on this proposal.
The Board of Directors recommends that stockholders vote FOR the ratification of the selection of KPMG LLP as our independent registered public accounting firm for 2019. Unless otherwise indicated on your proxy, the proxyholders will vote FOR the ratification of KPMG LLP as our independent registered public accounting firm for 2019.
The following table sets forth certain information regarding our directors and executive officers:
Sarah J. Anderson was appointed a director of Reliance in July 2012. Ms. Anderson retired from Ernst & Young LLP in June 2008 after more than 24 years with the firm, including as an assurance and advisory services partner from 1987 to 2008. Ms. Anderson is a certified public accountant (inactive) and is a member of the AICPA and the California Society of CPAs. Ms. Anderson was appointed by the Governor of California to the California Board of Accountancy for two four-year terms, which ended in 2015, and included tenure as president of the board. Ms. Anderson serves on the board of American States Water Company, a NYSE-listed public company, which has three principal business units: water and electric service, utility operations and contracted services, for which Ms. Anderson serves as the chair of the audit committee. Ms. Anderson also served on the board and as audit committee chair of Kaiser Ventures LLC (the reorganized successor to Kaiser Steel Corporation that filed for bankruptcy protection in 1987) until May 2013 when the company’s assets were transferred to a liquidating trust. Ms. Anderson serves on the audit committee of the Orange County Community Foundation and as an emeritus director of Pacific Symphony, a non-profit 501(c)(3) organization for which she served four years as chair of the board. Ms. Anderson also serves on the Board of Trustees of South Coast Repertory, a non-profit 501(c)(3) organization, where she is a member of the finance committee and the Vice President of Development. Ms. Anderson serves as Chair of our Audit Committee and as a member of our Nominating and Governance Committee. Ms. Anderson served as a member of our Compensation Committee
from January 1, 2016 through December 31, 2016. The Board of Directors has determined that Ms. Anderson is an independent director and that she qualifies as an audit committee financial expert.
Ms. Anderson brings extensive financial and accounting expertise and audit committee experience to our Board of Directors and Audit Committee. Ms. Anderson offers financial experience that enables her to understand and analyze accounting matters and to communicate well with both our internal and external auditors. She keeps abreast of current accounting and financial topics and is able to ask appropriate questions of management and auditors alike. Ms. Anderson has an understanding of tax, audit procedures, financial reporting requirements and risk identification and assessment issues and has knowledge of practices at other public companies in other industries through her work as an auditor and board member of another public company.
Karen W. Colonias was appointed a director of Reliance in October 2016. Ms. Colonias has been the President and Chief Executive Officer of Simpson Manufacturing Company Inc. (“SSD”), a NYSE-listed public company and manufacturer of building materials, since January 2012. Ms. Colonias has also served on SSD’s board of directors since 2013. From May 2009 to January 2012, Ms. Colonias served as SSD’s Chief Financial Officer, Treasurer and Secretary. Prior to that, Ms. Colonias was Vice President of SSD’s global structural product solutions subsidiary, Simpson Strong-Tie Company Inc. and, in that capacity, managed Simpson Strong-Tie’s manufacturing facility in Stockton, California from 2004 to 2009. From 1998 to 2009, as SSD’s Vice President of Engineering, Ms. Colonias was responsible for Simpson Strong-Tie’s research and development efforts. Ms. Colonias joined Simpson Strong-Tie in 1984 as an engineer in the research and development department, where she was responsible for the design and testing of new products and code development. Ms. Colonias serves as a member of our Audit Committee and our Compensation Committee. The Board of Directors has determined that Ms. Colonias is an independent director.
Ms. Colonias is experienced in strategic planning, mergers and acquisitions, facility and plant operations, international business and global finance. Based on her executive experience, including as the Chief Executive Officer of SSD, Ms. Colonias provides valuable insight on the management of the Company and its operations.
John G. Figueroa was appointed a director of Reliance in October 2010. From July 2014 to September 2018, Mr. Figueroa was the chief executive officer of Genoa Healthcare, the leading behavioral health specialty pharmacy in the United States. Mr. Figueroa has served as chairman of the board of directors of Apria Healthcare Group Inc., one of the nation's leading home healthcare companies, since November 2012 and also served as the company’s chief executive officer from November 2012 until January 2014. From January 2011 until June 2012, Mr. Figueroa served as a director and the chief executive officer of Omnicare, Inc., which was a public company during that time and a leading provider of pharmaceuticals to seniors. From 2006 to December 2010, Mr. Figueroa served as president of the U.S. Pharmaceutical Group of McKesson Corporation, the largest pharmaceuticals distributor in North America. Mr. Figueroa served in other senior management positions with McKesson Corporation from 1997 to 2006. Mr. Figueroa has served as an officer in the United States Army. Mr. Figueroa serves as Chair of our Compensation Committee and as a member of our Nominating and Governance Committee. The Board of Directors has determined that Mr. Figueroa is an independent director.
Mr. Figueroa has developed an expertise in distribution and supply chain management and operations. In August 2010, when he was president of the U.S. Pharmaceutical Group of McKesson, Mr. Figueroa was named the Supply Chain Executive of the Decade by the Global Supply Chain Leaders Group for making significant contributions to the advancement of supply chain management and maintaining sustainable, responsible business practices in global operations. Mr. Figueroa’s expertise allows him to assist management in increasing efficiency in and marketing for our distribution operations. Mr. Figueroa’s experience in the healthcare industry and mergers and acquisitions provides a different perspective and increased diversity on the Board of Directors.
David H. Hannah was appointed a director of Reliance in 1992. Mr. Hannah served as Chief Executive Officer of Reliance from January 1999 to May 2015, Chairman of the Board from October 2007 to May 2015, Executive Chairman of the Board from May 2015 to July 2016, and Chairman Emeritus from July 2016 until his retirement in August 2016. Mr. Hannah served as President of Reliance from November 1995 to January 2002. Prior to that, he was Executive Vice President and Chief Financial Officer from 1992 to 1995, Vice President and Chief Financial Officer from 1990 to 1992 and Vice President and Division Manager of the Company’s Los Angeles Reliance Steel Company division from 1989 to 1990. Mr. Hannah served as an officer of the Company from 1981 until his retirement in August 2016. For eight years before joining Reliance in 1981, Mr. Hannah was employed in various professional staff positions by Ernst & Whinney (a predecessor to Ernst & Young LLP, which was our independent registered public accounting firm through 2007).
As the former Chief Executive Officer of the Company, Mr. Hannah has an in-depth knowledge of the Company’s operations and its strategic vision. He developed and implemented the Company’s merger and acquisition growth strategy that has resulted in over 65 acquisitions since our initial public offering in September 1994. Mr. Hannah’s financial background and business management experience enabled him to assess and value potential acquisition target companies. Mr. Hannah is well respected within the metals service center industry. He has proven his ability to raise debt and equity capital for the Company and effectively led our management team for over 15 years. Mr. Hannah previously served as chairman of the board of directors of the Metals Service Center Institute. Since November 2014, Mr. Hannah has served as a director of Boise Cascade Company, a NYSE-listed public company, and serves on its compensation committee and corporate governance and nominating committee.
Mark V. Kaminski was appointed a director of Reliance in November 2004. Mr. Kaminski was elected our non-executive Chairman of the Board in July 2016, after having served as our Lead Director since January 2015. Mr. Kaminski serves as a director, executive chairman and a member of the audit, nominating and governance, and compensation committees of Graniterock, a privately-held company that provides products to the construction industry, and during 2012 served as chief executive officer of Graniterock. Mr. Kaminski was president and chief executive officer and a director of Commonwealth Industries Inc. (now Aleris International, Inc.), a manufacturer of aluminum products, from 1991 until his retirement in June 2004. Mr. Kaminski had served in other capacities with Commonwealth Industries Inc. since 1987. Mr. Kaminski also served as a member of our Compensation Committee and our Nominating and Governance Committee until 2019 and serves as a member of our Audit Committee. From October 2010 to January 2015, Mr. Kaminski was the chairman of the Compensation Committee. From 2006 to 2010 he was Chairman of the Nominating and Governance Committee. The Board of Directors has determined that Mr. Kaminski is an independent director.
Based on his experience as executive chairman of Graniterock and as president and chief executive officer of Commonwealth Industries Inc., where he grew sales from $240 million to $2.5 billion, Mr. Kaminski offers valuable insight in the management of the Company and its growth. During his over 40-year career in the metals and mining industry and as the former chief executive officer of an aluminum producer, he has developed strong contacts with aluminum suppliers and peer companies that are aluminum distributors. Because of his manufacturing background, Mr. Kaminski is also able to provide guidance on improving and maintaining the Company’s excellent operational efficiency and safety performance.
Robert A. McEvoy was appointed to the Board of Directors in October 2015. Mr. McEvoy has a wealth of knowledge of the metals industry, mergers and acquisitions, corporate finance, and equity portfolio management. Mr. McEvoy retired from The Goldman Sachs Group, Inc., a multinational investment bank and financial services company, in April 2014 after nine years with the firm. As a managing director at Goldman Sachs, Mr. McEvoy was a portfolio manager focused on the materials and industrials sectors. From 1989 to 2001, Mr. McEvoy held various positions with the investment banking firms of DLJ and Credit Suisse First Boston. Mr. McEvoy serves as a member of our Compensation Committee and Nominating and Governance Committee. The Board of Directors has determined that Mr. McEvoy is an independent director.
Mr. McEvoy’s investment banking and equity investment background, including his particular focus on the metals and mining industry and prior investment banking and analyst experience covering Reliance, enables him to assist the Board and the Company with the benefit of his knowledge of our Company, our industry and competitors, capital markets and financing strategies. Mr. McEvoy’s experience as an investor provides the Board and management perspective on the landscape in which Reliance competes for capital. Mr. McEvoy’s investment banking experience offers insight and experience in evaluating merger and acquisition opportunities. Mr. McEvoy’s historical knowledge of Reliance and the global metals industry as a former analyst covering Reliance and other metals companies affords him a unique perspective and understanding of our business.
Gregg J. Mollins was appointed a director of Reliance in September 1997 and also serves as Senior Advisor to the Chief Executive Officer. Mr. Mollins was President and Chief Executive Officer from May 2015 to December 2018. Mr. Mollins became President in 2002 and served as Chief Operating Officer from May 1994 to May 2015. Mr. Mollins was Executive Vice President from November 1995 to January 2002. He also served as Vice President and Chief Operating Officer from 1994 to 1995 and as Vice President from 1992 to 1994. Mr. Mollins joined Reliance in 1986 as Division Manager of the former Santa Clara division, following ten years with certain of our competitors in various sales and sales management positions.
Mr. Mollins has spent his entire career in the metals service center industry and has been exposed to every operational area of the business. As our former President and Chief Executive Officer, he offers in-depth industry expertise and has developed extensive contacts in the metals service center industry and with mills and other suppliers.
Andrew G. Sharkey, III was appointed a director of Reliance in July 2007. Mr. Sharkey served as president and chief executive officer of the American Iron and Steel Institute from 1993 until his retirement in October 2008. From 1978 to 1993, Mr. Sharkey was president, executive vice president and director of education for the Steel Service Center Institute (currently the Metals Service Center Institute), which represents the metals service center industry as well as steel suppliers and mills. Mr. Sharkey serves as a member of our Nominating and Governance Committee and our Compensation Committee. Mr. Sharkey previously served as a member of our Audit Committee and the Chair of our Nominating and Governance Committee. From February 2009 through December 2013, Mr. Sharkey also served as a director and a member of the compensation committee and the governance and nominating committee of General Moly, Inc., a publicly traded company with securities listed on the NYSE American. The Board of Directors has determined that Mr. Sharkey is an independent director.
Mr. Sharkey has a strong knowledge of the metals industry and, as the former president of the Steel Service Center Institute, and as the former president and chief executive officer of the American Iron and Steel Institute has extensive knowledge of steel suppliers and our peer companies and potential acquisition targets that operate in the steel distribution industry, as well as familiarity with the management teams and owners of these companies. Mr. Sharkey understands the factors that impact pricing and demand, as well as market factors that impact mills and how they will ultimately impact metals service centers. Mr. Sharkey’s experience offers a perspective of the global market and insight into steel trade issues.
Douglas W. Stotlar was appointed a director of Reliance in October 2016. Mr. Stotlar served as President, Chief Executive Officer and Director of Con-way Inc., a transportation and logistics company (previously known as CNF Inc.) from April 2005 until October 2015. He served as President and Chief Executive Officer of Con-way Transportation Services Inc., a regional trucking enterprise (“CTS”) and a subsidiary of Con-way Inc., from 2004 until 2005. Mr. Stotlar also served as CTS' Executive Vice President and Chief Operating Officer from 2002 until 2004, and as CTS' Executive Vice President of Operations from 1997 until 2002. He served as Vice President at large and was a member of the executive committee of the American Trucking Association and as a director for the Detroit branch of the Federal Reserve Bank of Chicago from December 2014 until December 2016. Mr. Stotlar currently serves as a director at AECOM, a NYSE-listed public
company, and LSC Communications, Inc. (“LSC”), also a NYSE-listed public company. Mr. Stotlar serves on the strategy, risk and safety committee and the audit committee of AECOM and on the audit and compensation committees of LSC. Mr. Stotlar serves as a member of our Audit Committee and as the Chair of our Nominating and Governance Committee. Mr. Stotlar previously served as a member of our Compensation Committee. The Board of Directors has determined that Mr. Stotlar is an independent director.
Mr. Stotlar brings substantial knowledge of the logistics industry, which is important in our business. In addition, Mr. Stotlar’s prior experience as a chief executive officer of a public company provides insight on stockholder relations and management matters. In addition, Mr. Stotlar's experience on boards of other public companies positions him well to serve as a member of our Audit Committee and as Chair of our Nominating and Governance Committee.
James D. Hoffman became President and Chief Executive Officer in January 2019. From March 2016 until his promotion to Chief Executive Officer, Mr. Hoffman served as our Executive Vice President and Chief Operating Officer. Mr. Hoffman served as the Company's Executive Vice President, Operations since May 2015, and as Senior Vice President, Operations since 2008. Mr. Hoffman served as executive vice president and chief operating officer of our subsidiary, Earle M. Jorgensen Company (“EMJ”), from April 2006 to September 2008. Mr. Hoffman was appointed executive vice president of EMJ in 2006, having been a vice president of EMJ since 1996.
Karla R. Lewis became Senior Executive Vice President in May 2015, Executive Vice President in January 2002 and was appointed Assistant Corporate Secretary in 2007. Mrs. Lewis continues as our Chief Financial Officer, having served as Senior Vice President and Chief Financial Officer since February 2000. Mrs. Lewis served as Vice President and Chief Financial Officer from 1999 to 2000 and was Vice President and Controller from 1995 to 1999. Mrs. Lewis served as Corporate Controller from 1992 to 1995. For four years prior to joining Reliance, Mrs. Lewis, a certified public accountant (inactive), was employed by Ernst & Young LLP in various professional staff positions. Mrs. Lewis also serves as a member of the board of directors and treasurer of the Metals Service Center Institute.
William K. Sales, Jr. became Executive Vice President, Operations in May 2015. From 2002 until his promotion to his current position, Mr. Sales served as Senior Vice President, Operations. Mr. Sales joined Reliance as Vice President, Non-Ferrous Operations in September 1997. From 1981 to 1997, Mr. Sales served in various sales and management positions with Kaiser Aluminum & Chemical Corp. (now DCO Management, LLC, a subsidiary of Kaiser Aluminum Corporation), a producer of aluminum products and a supplier of Reliance. Mr. Sales is a member of the board of the Metals Service Center Institute and formerly served as the chair of its aluminum products division council.
Jeffrey W. Durham became Senior Vice President, Operations in January 2019. From 2014 until he joined Reliance, Mr. Durham was Vice President, Merchandising at EMJ. Mr. Durham joined EMJ in 1985 and has held various leadership roles in sales, general management and purchasing, and was also responsible for the opening of EMJ's Malaysia operation.
Stephen P. Koch became Senior Vice President, Operations in April 2010. From July 2007 until he joined Reliance, Mr. Koch was president of Chapel Steel Corp., a subsidiary of Reliance. Prior to that he held the positions of executive vice president of Chapel Steel Corp. from 2005 to June 2007, and vice president of Chapel Steel Corp. from 1995 to 2005 and had previously served as sales manager of Chapel Steel Corp.
Michael P. Shanley was appointed Senior Vice President, Operations in April 2015. Mr. Shanley was president of Liebovich Bros., Inc., a subsidiary of Reliance, since September 2009, having been vice president and general manager of Hagerty Steel and Aluminum, a division of Liebovich Bros., from January 2005 to
September 2009. Mr. Shanley joined Liebovich Bros. in 1978 and held various sales and management positions prior to 2005.
William A. Smith II was appointed Senior Vice President, General Counsel and Corporate Secretary in May 2015, having served as Vice President, General Counsel and Corporate Secretary since May 2013. From August 2009 to May 2013, Mr. Smith served as senior vice president, chief legal officer and secretary of Metals USA Holdings Corp., a publicly traded metals service center business acquired by Reliance in April 2013. From June 2005 to August 2008, Mr. Smith served as senior vice president, general counsel and secretary of Cross Match Technologies, Inc. and also as director of corporate development from September 2006 to August 2008. Prior to that, he was a partner in the corporate and securities practice group of the international law firm DLA Piper, where he practiced corporate law, including mergers and acquisitions.
Other Corporate Officers
In addition, the following Reliance officers are expected to make significant contributions to our operations:
Arthur Ajemyan became Vice President, Corporate Controller in May 2014, having been promoted from Corporate Controller, a position which he had held since August 2012. From 2005 to 2012, Mr. Ajemyan held various positions in the accounting and finance department at Reliance, including Group Controller and Director of Financial Reporting. Prior to joining Reliance, Mr. Ajemyan, a certified public accountant, held various professional staff and manager positions at PricewaterhouseCoopers, LLP from 1998 to 2005.
Brenda S. Miyamoto became Vice President, Corporate Initiatives in August 2012, having been promoted from Vice President, Corporate Controller, a position which she had held since May 2007. Prior to that time, Ms. Miyamoto served as Corporate Controller from January 2004 until August 2012 and Group Controller from December 2001 to January 2004. For six years prior to joining Reliance, Ms. Miyamoto, a certified public accountant (inactive), was employed by Ernst & Young LLP in various professional staff and manager positions.
Donald J. Prebola became Vice President, Health, Safety & Human Resources in June 2015, having served as Vice President, Human Resources since August 2011. Mr. Prebola served as Senior Vice President, Operations of our subsidiary, Infra-Metals Co., from 2008 to July 2011. Prior to that he had served as Co-General Manager of Infra-Metals Co. since 1990.
John A. Shatkus became Vice President, Internal Audit in August 2012, having been promoted from Director, Internal Audit, a position which he had held since May 2005. Prior to joining Reliance, Mr. Shatkus was Audit Manager at Sempra Energy and held various management positions at Sempra Energy over a 20-year period, including Regulatory Affairs Manager and Accounting Manager. Mr. Shatkus is a certified public accountant.
Silva Yeghyayan became Vice President, Tax in August 2012, having been promoted from Director, Tax, a position which she had held since October 2005. Ms. Yeghyayan is a certified public accountant and was a tax consultant from April 2004 until joining Reliance in 2005. Ms. Yeghyayan was Senior Tax Manager at Grant Thornton LLP from 2000 to 2004, and held various professional staff and manager positions at Arthur Andersen LLP from 1989 to 2000.
This Compensation Discussion and Analysis describes our executive compensation philosophy and program and how it applies to our executive officers, including our named executive officers identified below (whom we sometimes refer to collectively as our “NEOs”).
Excellent operational execution coupled with continued growth and a positive pricing environment throughout 2018 delivered record net sales, gross profit, pretax income and earnings per diluted share. 2018 financial highlights included:
Our record earnings, driven by higher average selling prices and shipment levels, along with our strong gross profit margin and effective working capital generated cash flow from operations of $664.6 million. We used our strong operating cash flow to further grow the Company in 2018 by completing three acquisitions and purchasing the remaining 40% noncontrolling interest of our toll processing joint venture in Mexico and investing $239.9 million in capital expenditures, while also returning value to our stockholders with $145.3 million of cash dividends and a record $484.9 million of share repurchases.
We believe the compensation of our NEOs in 2018 was aligned with our performance. Payments to the NEOs under our 2018 Annual Cash Incentive Plan were above target, consistent with management’s delivery of industry-leading operating results and record net sales, gross profit, pretax income and earnings per diluted share.
Our executive compensation program is designed to reward the Company’s executive officers for strong operational and financial performance, attract and retain key executive talent, and align compensation with the long-term interests of our stockholders. We structure our executive officers’ target total direct compensation to be competitive with the median compensation paid by companies with whom we may compete for executive talent, including those in our executive compensation peer group. We link a majority of our executives’ compensation to Company performance to drive our financial and operating performance and increase stockholder value. We believe that this pay-for-performance philosophy has been instrumental to our success.
We manage our business with the long-term objective of creating and maximizing value for our stockholders. Our pay-for-performance philosophy is aligned with and supports this objective.
Consistent with our past practice, the Compensation Committee evaluates performance by reviewing:
The Compensation Committee has linked a majority of our executives’ total direct compensation directly to the achievement of specific, pre-established Company performance targets. In 2018, approximately 74% of our former CEO’s and 60% of our other NEOs’ target total direct compensation was tied to performance targets.
The following table highlights our financial and operating results in 2018 compared to 2017:
We continued to execute our balanced capital allocation in 2018 using cash flow from operations to fund our growth activities by making three strategic acquisitions and purchasing the remaining 40% noncontrolling interest of our toll processing joint venture in Mexico, investing in organic growth, and returning value to our stockholders through increased dividend payments and stock repurchases. In February 2018, we increased our quarterly dividend by 11.1% to $0.50 per share from $0.45 per share. We paid a total of $145.3 million in dividends to our stockholders in 2018. In February 2019, the Company increased the quarterly dividend by 10.0% to $0.55 per share. Since 2012, the Company’s quarterly dividend has more than tripled from $0.15 to $0.55 per share. We have increased our dividend 26 times since our 1994 IPO and have paid regular quarterly dividends to our stockholders for 59 consecutive years.
During 2018, we repurchased approximately 6.1 million shares of our common stock at an average cost of $79.94 per share, for a record total of $484.9 million. On October 23, 2018, our Board of Directors amended our share repurchase plan, increasing the total authorized number of shares available to be repurchased by 5.0 million and extending the duration of the plan through December 31, 2021. As of December 31, 2018, we had authorization under the plan to purchase approximately 7.0 million shares, or about 11% of our then outstanding shares. The Company expects to continue opportunistically repurchasing shares of its common stock in the future.
See “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on February 27, 2019 for a more detailed discussion of our results of operations in 2018 compared to 2017 and our financial condition.
We provide our stockholders with the opportunity to cast an annual advisory vote to approve compensation of our NEOs. In 2018, our stockholders overwhelmingly approved, on a non-binding, advisory basis, the
compensation of our NEOs, indicating support for our compensation policies with over 99.1% of the votes cast in favor of such compensation. The Compensation Committee considered the favorable advisory vote as support for its belief that the Company’s pay-for-performance policy operates as it was designed to do, aligning the interests of our executive officers and stockholders and driving the NEOs’ performance to enhance long-term stockholder value and achieve Company objectives. The Compensation Committee will continue to consider the outcome of the annual advisory vote to approve compensation when making future compensation decisions for the NEOs.
Mr. Mollins stepped down as President and CEO effective December 31, 2018. As a result of a strategic, deliberate and well-executed long-term succession planning process, the Company’s Board of Directors unanimously elected Mr. Hoffman to succeed Mr. Mollins as President and CEO effective January 1, 2019. Concurrent with Mr. Hoffman's promotion, Mr. Mollins transitioned to the role of Senior Advisor to the CEO, which position he will hold until his retirement from the Company on December 31, 2019.
In connection with his promotion, Mr. Hoffman's base salary was increased to $1,075,000 effective January 1, 2019. Mr. Hoffman will continue to receive an annual non-equity incentive plan award with a target award of 150% of his base salary and equity compensation awards as determined by the Compensation Committee from time to time.
As Senior Advisor to the CEO, Mr. Mollins will receive a base salary of $1,075,000 effective January 1, 2019. Mr. Mollins will also be eligible to receive an annual non-equity incentive plan award with a target award of 150% of his base salary in 2019.
In connection with the succession plan, the Compensation Committee increased Mrs. Lewis' base salary to $900,000 effective January 1, 2019. Mrs. Lewis’ salary increase was made in recognition of her performance and value to the Company and to encourage her retention. Mrs. Lewis will also continue to receive an annual non-equity incentive plan award with a target award of 150% of her base salary and equity compensation awards as determined by the Compensation Committee from time to time.
Our compensation program is designed and managed to align executive compensation with Company performance, to motivate our executives to deliver financial and operating results that create value for our stockholders and to attract and retain key executive talent. While the Compensation Committee has structured individual pay elements to vary from market medians, it aims for our NEOs total compensation to approximate the median when performance targets are achieved. We believe it is important that our executive compensation program:
The Company enjoys a team-oriented corporate culture and rewards the entire team of executives and corporate officers for their collaborative effort that is reflected in the Company's industry leading performance. Attracting and retaining a team of outstanding executive officers with complementary skills and expertise has proven successful for the Company's growth, both organically and through acquisitions, and for maintaining the Company's profitable financial performance, each of which enhances stockholder value. In order to promote our team culture, the Compensation Committee considers internal pay equity when setting compensation levels for our executives. This team approach is best illustrated by our annual cash incentive award program in which all NEOs have the same target annual cash incentive award opportunity (150% of their respective base salaries) based on the same performance objectives. Moreover, equity awards for NEOs are also fairly comparable, with the exception of the CEO.
A summary of the main elements of our executive compensation program is set forth below:
We compensate our executive officers by using a balanced combination of the elements described above that vary by:
We believe this balanced mixture supports our compensation objectives, including the retention of our key executives, and emphasizes pay-for-performance. The Compensation Committee has designed the overall program to ensure that a majority of our executive compensation is at risk and weighted towards Company performance, annual and long-term incentives and stock price appreciation. Although a large portion of our NEOs’ compensation is tied to Company performance, the Compensation Committee has no pre-determined mix or allocation among the various elements. The following chart illustrates the targeted allocation of the principal compensation components for our NEOs in 2018. The percentages reflect 2018 salaries, target annual cash incentive compensation and the aggregate grant date fair values of restricted stock units granted in 2018.
The Compensation Committee, which is comprised entirely of independent directors, oversees our executive compensation program in concert with all of the Company’s independent directors. Compensation for the NEOs is subject to final approval by the independent directors of the Board upon recommendation of the Compensation Committee.
At the request of the independent directors, our CEO annually provides a review and evaluation of each of the executive officers, including the NEOs (other than himself), identifying accomplishments in the past year, achievement of objectives and results, executive development and proposed objectives for the coming year. This information, along with other data including the Company’s financial results and achievements, is reviewed and discussed by the Compensation Committee and the independent directors.
The Compensation Committee incorporates the CEO’s review into its analysis of the NEOs’ total compensation and its consideration of the appropriate mix and structure of the elements of the NEOs’ total compensation. The achievement of the Company’s goals and objectives (including management development, safety performance, working capital management, and capital allocation) in the past year, as well as the proposed objectives for the coming year, are also considered in the determination of the type, form and total amount of compensation for the CEO. The Compensation Committee also reviews data provided by its independent compensation consultant and discusses that data with senior management. Although the base salaries, annual cash incentive awards and long-term incentive awards are considered at different times throughout the year, the Compensation Committee analyzes the proposed total compensation package (or the total of base salary, annual cash incentive and long-term incentives) before making any recommendations regarding individual elements of compensation. The Compensation Committee formulates preliminary recommendations on the amount and type of compensation to be paid to the CEO and the other NEOs. The Compensation Committee then discusses with the CEO its preliminary recommendations with respect to the NEOs (other than himself). The Compensation Committee then presents final recommendations to the independent directors in executive session. The independent directors make the final determination of and approve the compensation paid to the CEO and the other NEOs.
To ensure that the NEOs and our other executive officers are compensated in a manner consistent with our strategy, competitive market practices, sound corporate governance principles and stockholder interests, the Compensation Committee regularly evaluates our executive compensation program. When doing so, the Committee considers the needs of the business, peer practices, external trends and the results of our annual say-on-pay vote. The Committee also seeks advice from its independent compensation consultant and senior management.
The Compensation Committee annually engages an independent compensation consultant to assist it in connection with the review and evaluation of the total compensation package provided to the NEOs and the individual elements of the package. In 2018, the Compensation Committee engaged Pay Governance. Pay Governance reports directly to the Compensation Committee and neither it nor any of its affiliates provided any services to the Company, other than the services to the Compensation Committee with respect to executive compensation and the Nominating and Governance Committee with respect to biennial reviews of our director compensation, which the Board believes is consistent with the independence of the consultant. The Compensation Committee conducted an assessment of Pay Governance’s independence, taking into account the factors specified in the NYSE listing standards and information provided by Pay Governance, and based on that assessment, determined that Pay Governance is independent.
When making decisions regarding the compensation of our NEOs, the Compensation Committee considers information from a variety of sources. The Compensation Committee analyzes both the individual elements and the total compensation package for each of the NEOs.
Together with its independent compensation consultant, the Compensation Committee reviews our financial statements and compares our financial results (including stock performance) with those of our executive compensation peer group and our industry peer group, as well as general factors specifically impacting the metals industry, and compares compensation information for our NEOs with that available for comparable executives. In determining each executive’s total compensation package, the Compensation Committee considers both qualitative and quantitative criteria, as well as the CEO’s recommendations and performance evaluations and historical compensation records of the Company. Although a large portion of compensation is based upon performance, the Compensation Committee has no pre-determined mix or allocation among the various elements.
The Compensation Committee annually reviews and, as appropriate, revises the executive compensation peer group in an effort to assure the group continues to reflect any changes in the Company’s business, strategy and size as measured by revenue, market capitalization and other factors. The Compensation Committee also considers additional factors such as the Company’s stock performance as compared with standard indices, such as the S&P 500, as well as our industry peer group. The Compensation Committee reviews the amount of equity awards and common stock actually held by each NEO, and recognizes that the NEOs are directly impacted by the Company’s stock price and, accordingly, their interest in the Company’s performance and the impact it has on the market value of the stock is closely aligned with that of the Company’s stockholders.
The combination of these analyses helps the Compensation Committee assess how our NEOs are compensated compared to their peers ‒ both in terms of individual components and total compensation, the reasonableness of the Company’s incentive plan goals, the alignment of pay and performance, the potential need for recalibration of the Company’s pay and incentive goals, and the actual elements of NEO compensation.
There are no public companies in the metals service center industry that are comparable to the Company in terms of size, stock market capitalization, complexity and performance. Accordingly, in considering executive compensation for 2018, as in prior years, the Compensation Committee and the independent compensation consultant used the executive compensation peer group.
The Compensation Committee, with assistance from the independent compensation consultant, annually reviews specific criteria and recommendations regarding companies to add or remove from the peer group to ensure that the companies in the peer group remain relevant and provide meaningful compensation comparisons.
Our peer group remained unchanged in 2018 and consisted of the twenty (20) public companies listed below. This executive compensation peer group includes a limited number of companies in the metals processing and distribution industry and also includes industrial and manufacturing companies of comparable size in terms of revenues and/or stock market capitalization and complexity. The executive compensation peer group has been constructed, in part, such that the Company’s revenues, market cap, enterprise value and invested capital are generally in the middle of the range with the executive peer group companies. However,
the industrial and manufacturing companies in this peer group are not impacted at all, or to a lesser degree than Reliance, by fluctuations in metal pricing.
Based on information provided by the independent compensation consultant, the Compensation Committee found in 2018 that the target total direct compensation of our former CEO and former COO approximated the median of the chief executive officers and chief operating officers in our executive compensation peer group, and the target total direct compensation of our other NEOs (excluding the CEO and COO) approximated the 70th percentile of the comparable executive officers in our executive compensation peer group in 2017 (the most recent full year available).
The Compensation Committee broadly considers internal pay equity when setting compensation levels for our executives in order to foster a team culture among the executive officers. Our executive compensation program uses the same compensation components for our NEOs, with a few exceptions. Our CEO receives (and our former CEO received) 80% of his long-term equity incentive award in performance-based restricted stock units and the remaining 20% in service-based restricted stock units, while the other NEOs receive 60% of their long-term equity incentive award in performance-based restricted stock units and the remaining 40% in service-based restricted stock units. In 2019, our CFO (“Chief Financial Officer”) received 80% of her long-term equity incentive award in performance-based restricted stock units and the remaining 20% in service-based restricted stock units in recognition of her performance and value to the Company and to encourage her retention. Our annual cash incentive award program provides all NEOs with the same target annual cash incentive award opportunity of 150% of their respective base salaries based on identical performance objectives.
The base salary payable to each of our NEOs is the minimum compensation that such executive receives in any year. Base salaries reflect the individual skills, experience and roles and responsibilities of the executive officer within the Company.
The Compensation Committee uses pretax income margin as the metric for measuring the Company’s financial performance under the annual cash incentive plan. The Compensation Committee selected pretax income margin because it is the primary metric used in the Company’s corporate and operational decision-making, including capital allocation. The Compensation Committee believes that pretax income margin is a good metric for purposes of the annual cash incentive plan as it incentivizes our management to increase our long-term profitability and efficiency.
In concert with the Company’s compensation philosophy of overweighting performance-based pay, our NEOs have annual cash incentive opportunities that may result in higher cash payments than those for comparable officers within our executive compensation peer group, but such awards are only payable if the Company meets demanding objectives. This structure currently results in total cash compensation near the median for our CEO compared to the chief executives of companies in our executive compensation peer group and total cash compensation above the median for our other NEOs compared to similar executives of companies in our executive compensation peer group.
As in past years, each NEO has a 2019 target annual cash incentive award of 150% of base salary. The target award of 150% will be earned if 2019 pretax income margin is 5.75%, which would place the Company in approximately the 50th percentile of pretax income margin performance in its executive compensation peer group. No payment will be made if pretax income margin is less than 3%, which would place the Company in the 35th percentile) of pretax income margin performance in its executive compensation peer group. The maximum award of 300% will be earned if pretax income margin equals or exceeds 8.5%, which would place the Company in the 65th percentile of pretax income margin performance in its executive compensation peer group, which has not been achieved since 2008. In the five-year period from January 1, 2014 through December 31, 2018, the Company achieved pretax income margin less than the threshold zero times, equal to or above the threshold but less than target 2 times, equal to or above target but less than the maximum 3 times, and equal to
or exceeding the maximum zero times. Accordingly, the Committee believes these pretax income margin goals are appropriately demanding from the perspectives of both the stockholders and the executives.
Awards are calculated on a sliding scale. If the Company achieves a pretax income margin within the range of 3.00% and 8.50%, then mathematical interpolation shall be used to determine the actual incentive award.
When analyzing the actual and potential payouts under the Company’s annual cash incentive plan, especially its maximum incentive awards and resulting cash compensation levels, the Committee found the plan supported its pay-for-performance principles in 2018. Pretax income margin (as calculated per the terms of the plan) for 2018 was 7.5% which was the highest since 2008 and resulted in a payout under the plan equal to 245% of each NEO’s year-end base salary.
Pretax income of 8.5% would have produced cash compensation levels equal to the executive compensation peer group’s 90th percentile. However, these pay levels are hypothetical and would only have been supported by pretax income margin of at least 8.5%, which would position NEO pay in the peer group’s 90th percentile results for the past year as well as the prior three, five, seven and ten years. Further, the Company has not achieved this level of pretax income margin since 2008. In other words, management could have earned maximum levels of pay only by delivering exceptional results.
The Compensation Committee recommends grants of equity awards for NEOs, but the independent directors approve all such grants. The Compensation Committee considers the recommendations of our CEO with respect to any grants of equity awards to the NEOs (other than himself) and other executive officers, as well as to corporate officers and other key employees.
In making its recommendations to the independent directors, the Compensation Committee considers the position of the NEO, his or her importance to the Company’s results and operations, his or her individual performance, the equity awards previously granted to that individual, the terms and market value of the equity grant, the total value of the equity grant and the relative number of such recommended grants among the various individuals then under consideration for grants, as well as the potential dilution and the related expense as a percentage of pretax income. The Committee also considers market data for executives in comparable positions within our executive compensation peer group.
Eighty percent (80%) of our former CEO’s restricted stock unit awards and sixty percent (60%) of the other NEOs’ restricted stock unit awards granted in 2018 will vest if, after a three-year period that expires on December 31, 2020, the Company achieves a ROA result within a specified range. The remaining twenty percent (20%) of the former CEO’s restricted stock unit awards granted in 2018 and forty percent (40%) of the other NEOs’ restricted stock unit awards will vest on December 1, 2020 subject only to the individuals’ continued service through such date. The allocation of performance-based and service-based awards is intended to balance performance and retention objectives. In striking the appropriate balance, the Compensation Committee sought to design a policy that incentivizes strong performance while also strengthening the retention aspects of the long-term equity awards since the Company does not maintain employment agreements with its executive officers. The restricted stock units will be forfeited if the ROA results are not achieved, or the individual voluntarily leaves the Company or is terminated for cause. The award agreements for the restricted stock units provide for prorated vesting if an individual terminates (i) due to a qualifying retirement, death or disability or (ii) without cause following a change in control.
The 2018 performance-based awards will vest when the Company achieves a ROA result within a specified range over the three-year performance period ending December 31, 2020. ROA for the performance period is calculated as the average of the annual ROA (operating income for the year (as adjusted for certain non-recurring items) divided by the average total assets for the year) for each of the three years in the performance period. Mathematical interpolation is applied to determine the actual incentive award if the calculated ROA result is within the specified range.
During the 10-year period from January 1, 2009 through December 31, 2018, the Company has achieved ROA below the threshold of performance zero times; between the threshold and target five times; between the target and maximum 5 times; and in excess of the maximum zero times. As with the Company’s pretax income margin goals, the Committee believes these historical results indicate its long-term performance goals are reasonably demanding.
Results for the performance-based equity awards granted in 2016 were determined in the first quarter of 2019 and 130% of the target number of awards vested.
SERP. In 1996, the Company adopted a SERP to provide post-retirement benefits to certain of our executive officers and other key employees and also to provide for a pre-retirement death benefit. The SERP was amended and restated effective as of January 1, 2009 and it was frozen to new participants. One of the primary objectives of the amendment was to shift the risk of the performance of the individual’s retirement plan investments from the Company to the participants. The 2009 amendment and restatement eliminated the offsets to the SERP benefit and reduced the benefit amount to 38% of the average of the participant’s highest five years total cash compensation during the final ten years of employment (from 50% less offsets for the value of the Company contributions to the Reliance Steel & Aluminum Co. Master 401(k) Plan (the “401(k) Plan”) and ESOP plan as well as social security benefits). The amendment also brought the SERP into compliance with Rule 409A under the Internal Revenue Code, among other things. The new benefit formula was intended to provide participants with approximately the same benefits that they would have received under the calculation required by the SERP but shifted investment risk from the Company to the participants. Mrs. Lewis, Mr. Mollins, and Mr. Sales are the only NEOs that participate in the SERP. Messrs. Hoffman and Shanley are not participants in the SERP.
Deferred Compensation Plan. We also adopted the Reliance Deferred Compensation Plan effective December 1, 2008 (the “Deferred Compensation Plan”) to provide supplemental retirement benefits to certain key employees as well as to combine and replace certain deferred compensation plans and supplemental executive retirement plans that existed at certain companies at the time we acquired them. The Deferred Compensation Plan does not provide for any minimum or guaranteed rate of return.
The Deferred Compensation Plan was amended and restated effective January 1, 2013 to allow all corporate officers and subsidiary officers to participate. Messrs. Hoffman and Shanley are the only NEOs receiving Company contributions under the Deferred Compensation Plan at this time. Mr. Hoffman was previously a participant in a subsidiary plan that was replaced by the Deferred Compensation Plan. In addition, as a former employee of Earle M. Jorgensen Company, a wholly-owned subsidiary of Reliance, Mr. Hoffman is entitled to receive the cash equivalent of 3,647.24 shares of Reliance common stock totaling $259,574 as of December 31, 2018 under the Earle M. Jorgensen Company Supplemental Bonus Plan. The Compensation Committee considers the SERP benefits and any benefits under the Reliance Deferred Compensation Plan in its analysis of each of the NEOs’ total compensation. In comparing the values of the SERP and Deferred Compensation Plan against the retirement benefits offered at companies in the Company’s executive compensation peer group, the Compensation Committee found that the values of these benefits are competitive for the NEOs.
Limited Perquisites. Perquisites provided by the Company are limited in both type and monetary value. The Company reimburses our NEOs for certain memberships used primarily for business purposes. In connection with his promotion to CEO, the Company expects to reimburse Mr. Hoffman approximately $75,000 for certain relocation and housing expenses.
Other Benefits. Other than the SERP and deferred compensation plans described above, the NEOs participate in the Company’s health, welfare, retirement and other plans, such as the ESOP, on the same basis as these benefits are generally available to all eligible employees. Employees hired on or after January 1, 2017 are not eligible to participate in the ESOP and the Company ceased making annual contributions to the ESOP after the 2018 plan year.
We do not have individual employment agreements that provide change in control or severance benefits to any of the NEOs. We have been successful in attracting and retaining an experienced and effective management team without the use of such agreements. Most of our executives have been with Reliance for many years and have built their careers at Reliance. On average, our NEOs have more than 18 years’ tenure with Reliance and over 36 years of industry experience. Generally, if an employee ceases to be employed at the Company before his or her RSUs vest, these units will expire on the date the employee is terminated unless the termination is due to death, disability, retirement or a change in control. If employment is terminated due to death, disability, or qualifying retirement (meaning the officer is at least 62 years of age with at least 10 years of consecutive service) during the year, the executive (or beneficiary) remains eligible to receive a pro-rated payout based on the number of days employed during the vesting period.
The following table and discussion set forth the estimated incremental value that would have been transferred to each NEO under various scenarios relating to a termination of employment if such termination had occurred on December 31, 2018. The actual amounts that would be paid to any NEO upon termination of employment can only be determined at the time of an actual termination of employment and would vary from those listed below.